Commvault Systems Inc (CVLT) 2008 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the CommVault Fiscal Second 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 instructions 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 are Bob Hammer, Chairman, President and Chief Executive Officer, Al Bunte, Chief Operating Officer, and Brian Carolan, Vice President of Finance and Chief Accounting Officer. Lou Miceli, our Chief Financial Officer will not be joining the call today as he has the flu.

As a reminder, CommVault is a March 31 year end company and therefore we are reporting our second quarter of fiscal 2008 results today. Before we begin, I'd 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 risk and uncertainties which are discussed in our SEC filings and in the cautionary statement contained in our press release and on our Web site.

The Company undertakes no responsibility to update the information in this conference call under any circumstances. Our earnings press release was issued today over the wire services after market close and it also has been furnished to the SEC as an 8K filing. The press release is also available on our Web site at www.commvault.com in the Investor Relations section under SEC filings.

On this conference call we will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found in Table 4 accompanying the press release and posted on our Web site.

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

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

Thanks Michael. I would also like to welcome everyone to our Second Fiscal Quarter of 2008 Earnings Call.

We had another record quarter as we continued to make progress in achieving our long term strategy for the Company. I am very pleased with our team's ability to execute our operating plan and deliver solid September quarter results.

The performance for the quarter was driven by strong demand for our core backup and emerging non backup products. For the quarter, we achieved revenues of $47.4 million, up 29% on a year over year basis versus a $36.6 million fiscal Q2 2007.

Software revenue grew on a year over year basis by 31% while our services business grew 27% year over year. For the quarter, non-GAAP operating income, or EBIT, was $7 million, up 32% year over year versus EBIT of $5.3 million for the same period a year ago. Non-GAAP net income was $5.7 million for the quarter and non-GAAP earnings per share was $0.12 for the quarter.

We had a very successful launch of our Simpana 7.0 products suite. The launch exceeded our expectations in all areas. With Simpana 7.0 customers able to leverage features such as Smart Client backup technology, enterprise wide search and discovery, single instance store, also called SIS, high performance content indexing, data classification, expanding archiving, security, and encryption capabilities.

Our VP of Finance, Brian Carolan, will provide more details on the quarter financial results along with our fiscal 2008 guidance later in the call. Let me address deal stats first.

We added 249 new customers in the quarter. As usual, these statistics do not include a large number of small orders from new OEM customers who have registered through the internet. Our customer base now totals approximately 6,900 customers. We had solid growth across both our core backup products as well as our emerging products. For fiscal Q2 2008, sales of non-core backup or emerging products, increased to approximately 23% of software revenue versus 15% in Q1 2008. We are getting better market acceptance of emerging products that are available in Simpana 7.0 such as archiving, replication including continuous data replicator, SIS or single instancing, resource management, content indexing, and enterprise wide search and discovery.

We continue to sell a much higher percentage of emerging products in our larger deals versus our smaller deals. As an example of the emerging products market acceptance, our largest deal in the quarter was with an existing customer who bought a large percentage of emerging products. The make up of this deal and the fact that the emerging products comprise such a large portion of this deal gives us good insight into how well these additional emerging products are being received in the market as well as the traction they are gaining.

As we continue to make significant progress in expanding our market positions in both core backup, and emerging products in fiscal 08, 2008, we expect the percentage of emerging product sales to increase as a percentage of total revenue over the medium to long term. However, we still expect that this percentage will continue to fluctuate quarter to quarter in the short term.

While we are extremely excited about Simpana 7.0 and its set of new product features we are also excited about the positive impact Simpana 7.0 can and is having on our core data protection business. We believe Simpana 7.0 will provide efficiencies to the management of data that no competitor can match even as some of them attempt to release the next generation products. In this regard, we also saw a very positive market response to Simpana support of the new 64-bit architectures particularly in support of Microsoft's new SharePoint release which requires 64-bit support.

Simpana 7.0 is being adopted on a broad basis and is increasing our emerging product sales as well as increasing the number of deals over $100,000.00. In the second quarter of fiscal 2008, approximately 37% of our software revenue came from deals over $100,000.00 which is a record for us as a public company compared to 26% of the software revenue generated from deals over $100,000.00 in the first fiscal quarter of fiscal 2008. Both the dollar and the number of large deals were up sharply.

We also saw in the quarter an increase in our visibility to big deals. Please note that the variability in the size and number of larger deals will continue to cause quarter to quarter fluctuations in a large deal revenue percentage. We continue to anticipate that about a third of our software revenue in the medium term could come from deals greater than $100,000.00.

I'm now going to talk about channel relationships, in particular Dell and Hitachi Data Systems. We had a record quarter with sales from Dell as our partnership with Dell continues to grow stronger and expand. CommVault sales with both OEM and S&P as relates just with Dell accounted for about 28% of total revenues for the second quarter of fiscal 2008, the breakout being 7% OEM and 21% S&P compared to 22% of total revenues for the first quarter of 2008 which were 8% OEM and 14% S&P. While the percentage of revenue associated with Dell's S&P has grown considerably in this quarter there were some large deals transacted through Dell with existing customers that raised the percentage of revenue associated with Dell.

In addition to some large deals, the Dell revenue stream represents hundreds of underlying end user transactions which demonstrates our strong partnership with Dell not only in the enterprise accounts but also in the small to medium business segment of the market.

As we announced two weeks ago, we renewed our existing OEM agreement with Dell and amended it to include almost the entire CommVault Simpana 7.0 suite. Together we now offer customers expanded options for data protection, replication, and archive including single instance store, optimized 64-bit integration, and support for the latest Microsoft advanced platform capabilities as well as the ability to discover enterprise information across all tiers of storage. Additionally, we have worked with Dell to enhance CommVault Galaxy 6, [inaudible] 7.0 for the small to medium business users wanting enterprise features in a simplified, affordable package.

We are seeing significant traction globally across all lines of business and storage hardware and believe our relationship with Dell is strong and will continue to grow and account for a significant part of our revenue. However, we also expect Dell revenues to continue to fluctuate quarter to quarter.

Moving on to Hitachi Data Systems, our partnership and business with HDS continues to develop. As we announced a couple of weeks ago we have added Simpana 7.0 software suite of products to our OEM agreement with HDS. Under the agreement, HDS which co-brands CommVault's data management software, is now selling Simpana 7.0 across all of Hitachi Data Systems' worldwide market segments. CommVault's 7.0 is designed to seamlessly interoperate with Hitachi's line of mid range storage systems and enterprise storage platforms. We see good traction in EMEA with HDS and we continue to invest time and effort in growing the North American opportunities we have with HDS.

Now I want to spend a few minutes giving you some more details about our release of the Simpana 7.0 software suite and Service Pack 1 along with the overall upgrade cycle. Simpana 7.0 is the largest release in CommVault's history and provides major enhancements to data protection, archiving, and replication solutions. Building on the success of our unique, singular approach to data management, this release enhances the way companies store, manage, and discover information across all tiers of storage by bringing together data management features with enterprise wide search and discovery.

As we had previously planned, we released Simpana 7.0 to the market in a controlled or phased process. By releasing Simpana in a phased manner we were able to evaluate early customer experiences and validate our own testing procedures. We are extremely happy with the performance results and customer reaction to the new products. Simpana 7.0 was tested much longer than any of our other releases and has gone through a very rigorous test cycle and has proven to be solid and reliable in the market. Customers continue to be surprised on how broad and deep this release is. They're really enthusiastic about it as evidenced by the large number of Simpana orders we received in the quarter.

With the recent release of Service Pack 1, Simpana is now available to all new and existing customers as well as to our sales channel partners. As I mentioned previously, Dell and HDS are also now offering almost the full suite of Simpana. Please note that even with our successful launch, Simpana still represents a major product line transition for our customers and partners as a new product line was just released in the channel and our OEM partners, we still need to manage and monitor that transition.

Although Simpana 7.0 was not available to the channel in the quarter we shipped hundreds of orders of the new product and to date have just under 300 very successful installs. This gives us confidence about both the market acceptance, the quality, stability, and reliability of this release. We also have spent a lot of time and effort to make sure that the upgrade cycle for Simpana is much more simple, robust, and reliable relative to our competition. We believe it will be easier for new customers to switch to Simpana than it will be for that customer to upgrade to some of the new releases that have just been announced in the market by our competitors. We believe Simpana 7.0 has without a doubt increased our competitive differentiation in the marketplace. As a direct result, we will continue to aggressively invest in sales and distribution in order to meet our FY 2008 and FY 2009 revenue and profitability objectives.

I will now turn the call over to Brian Carolan who will provide more details about our quarterly results as well as our guidance.

Brian?

Thanks Bob and good afternoon everyone. As a reminder, I will be referring to mostly non-GAAP results. Consistent with prior earnings calls, references to non-GAAP results take into considerations few adjustments. These non-GAAP adjustments are as follows -- we use an implied income tax rate of 28% on the adjusted non-GAAP pre-tax income. That excludes stock based compensation and the excess FICA expenses associated with stock option exercises. A full reconciliation of GAAP results to non-GAAP results can be found on Table 4 to our press release.

So let's review revenues first. Total revenues increased 29% year over year and 8% sequentially over the prior quarter. Software revenues increased 31% year over year and 10% sequentially. Services revenue increased 27% year over year and 5% sequentially. The services revenue growth rate was negatively impacted by lower utilization in professional services due in part to increased training for Simpana 7.0. Approximately 2/3 of our software revenue continues to come from our installed base with the rest coming from new customers. In addition, detach rates and renewal rates for maintenance contracts in the quarter were consistent with historical levels and we continue to see growth opportunities in services revenue.

Software revenue generated through direct distribution channels was approximately 17% of our total software revenue. This is down from 24% in the prior year quarter and down from 24% in the first quarter of fiscal year 2008. The reason for the shift is that a few very large deals came in through some of our channel partners during the quarter. Additionally, this quarter was the second full quarter of sales activity through Arrow.

The revenue mix for the quarter was 56% software and 44% services which is a very slight shift from 55% software and 45% services for the prior year period. We don't anticipate this mix will vary much more than a percentage point or two for the remainder of fiscal 2008.

Geographically, the United States operations generated 67% of our total revenues in the quarter with operations in the rest of the world generating the remaining 33%. This split is in line with our expectations and we anticipate that the U.S. portion of our mix will decrease slightly to about 65% over the next few quarters as we continue to build out our worldwide sales channels and gain momentum internationally.

Now moving to gross margins for the quarter, gross margins were 87.1% which is slightly higher than we expected primarily due to an increase in services revenue gross margin and under absorption of costs due to under utilization in professional services. The gross margin for services revenue was 73.2% in the current quarter versus 70.6% in the comparable prior year period due to a higher mix of maintenance contracts and a lower mix of professional services revenue. The slightly lower professional services mix is, as I noted a moment ago, due to a higher portion of training time needed to support the release of Simpana 7.0. For the full fiscal year, we expect our overall gross margins to be in the range of 86% to 86.3% allowing for a change in mix between services and/or software sold.

Turning now to individual operating expense lines, total operating expenses for the quarter were $33.5 million. Sales and marketing expenses increased $6.4 million or 41% over the prior year quarter. Approximately 2/3 of this increase was related to employee compensation which includes higher headcount costs as well as higher commissions on record breaking revenues. The rest of the increase was due to higher travel and related expenses associated with the Simpana 7.0 release. This increase is consistent with our plans to strengthen our position in the market and position us for growth in fiscal year 2009.

R&D spending increased by about $400,000.00 in the quarter or 7% over the prior year period. The increase was primarily due to higher employee compensation. We continue to leverage our investments in R&D by expanding our Hyderabad, India location. We now have 85 total employees in India with the majority of these being in R&D.

G&A expenses increased by $1.3 million in the quarter which is a 32% increase over the prior year period. This increase was the result of higher headcount needed to support the expansion of operations on a worldwide basis. Public company costs such as accounting and compliance represented $400,000.00 of this year over year increase. Our total worldwide headcount increased by seven people from 783 at the end of June to 790 at the end of September.

Moving on to operating margins, operating margins were 14.8% for the quarter resulting in non-GAAP operating income of $7 million. This represents EBIT growth of approximately 32% year over year. As we have indicated previously we have stepped up our spending and distribution in order to meet our growth targets for fiscal year 2008 and beyond. We have added additional sales representatives and field technical personnel in the first two quarters of fiscal 2008 and will continue to do so for the remainder of this fiscal year in order to support our go to market initiatives and distribution leverage surrounding Simpana 7.0.

The non-GAAP net income was $5.7 million and non-GAAP EPS was $0.12 per share based on a diluted weighted average share count of 45.7 million shares. I would like to point out that our prior year non-GAAP EPS was also $0.12 per share but based on a lower diluted weighted average share count, 38.9 million shares, along with a lower pro forma tax rate of 25%.

Now turning to the balance sheet and cash flow statement, as of September 30th our cash balance was $79.2 million, up approximately 12.3% from $70.5 million as of June 30, 2007. Cash flow from operations was approximately $4.5 million in Q2 '08 compared to $7.1 million in Q2 '07. Free cash flow which we define as cash flow from operations less capital expenditures came in at $3.8 million for the current quarter. This is down year over year due to changes in working capital mainly due to higher accounts receivable balances caused by a higher percentage of indirect revenues over the prior year.

Our DSO was 55 days which is within the range of our historic average although up from 46 days in the same period a year ago. This increase is primarily due to, as I just mentioned, higher accounts receivable balances caused by a higher percentage of indirect revenues over the prior year. We anticipate that our DSO will continue to be in the range of the high 40s to the mid to high 50s for the foreseeable future.

Deferred revenue increased $3.5 million or approximately 8% sequentially over the prior quarter. As a reminder, deferred revenue is comprised of mostly 12 month maintenance contract and professional services. Again, we believe that this increase is an indication of our strong services business and increased software sales.

Cap-ex was approximately $637,000.00 in the second quarter. Our current estimate for fiscal year 2008 remains between $4 million and $4.5 million.

Now turning to taxes including our GAAP and non-GAAP tax rates, our non-GAAP net income and EPS contains a pro forma effective tax rate of 28%. For fiscal 2008 we continue to estimate that the GAAP tax rate will be in the range of approximately 32% to 34%. Currently, we continue to implement tax planning measures that are expected to reduce the long term terminal rate to within a range of 28% to 32% over the next few years. For fiscal 2008 we will measure ourselves to a non-GAAP pro forma tax rate of 28% in order to properly reflect the gradual increase to our long term terminal rate which we feel is the prudent thing to do. Our estimate for the actual cash tax rate for fiscal year 2008 is in the mid to high single digit range based on current assumptions. 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 United States we believe we have sufficient operating losses and tax credits to offset taxable income for the next two to three fiscal years. As a result, our cash tax rate should continue to be substantially lower than both the GAAP and non-GAAP tax rates.

Now I'd like to spend a few minutes addressing guidance. For the 12 months ending March 31, 2008 we are raising our revenue guidance slightly. Revenue is now expected to be in the range of $194 million to $196 million. Non-GAAP diluted earnings per share is expected to be in the range of $0.57 to $0.59 per share using a projected fully diluted share count of approximately 45.6 to 46.3 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 86% and 86.3%. During the remainder of fiscal 2008 we will continue to invest in sales and R&D as well as incur public company compliance costs associated with Sarbanes Oxley. We will continue to aggressively invest in our sales and distribution channel in order to meet our fiscal 2008 and fiscal 2009 revenue and profitability objectives as well as increase our market share. We also believe that we can incrementally increase our operating margins as we grow the top line. We are expecting non-GAAP operating margins to be between 17.2% and 17.7%. Our long term operating margin goal continues to be in the low to mid 20s. 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 back over to Bob for closing remarks. Bob?

Thank you very much Brian. In summary, in Simpana 7.0 we merged data management with search and discovery. In the process we control the flow of all the data, enable the intelligent management of all the copies, index and classify the content, and manage the flow of information from a single platform in a single MetaStore. We believe we're the only company in the market that has taken a holistic, enterprise wide information-centric view of solving problems related to data and information. All our major competitors have taken a more infrastructure oriented approach to data related problems. We strongly believe our approach and our products will get much easier and less costly to manage data in the enterprise. We believe our strong big deal performance in Q2 and our increasing visibility to big deals is a validation of our approach to the market. We are the only company that has developed a single platform that encompasses all the core leading data management technologies and has established the foundation of a singular information management platform.

This platform enables us to lower the total cost of ownership and provides unique value, higher reliability, and better support to our customers and it is the reason we are winning an increasing number of larger deals. This unique approach to the market will also enable us to continue to develop broader avenues of distribution and to continue to bring additional innovative solutions to the market.

We are very satisfied with the Simpana 7.0 launch. The market's reaction to Simpana has exceeded our expectations. This acceptance of Simpana has reinforced our strategy to continue to focus on investing for long term growth and profitability. With two solid quarters behind us we should be well positioned for the balance of fiscal 2008 and into fiscal 2009.

And with that, I'd 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 two upcoming Investor events.

Bob will be speaking at the JPMorgan Small Mid Cap Conference in Boston, Massachusetts on Tuesday, November 6, 2007 at 11:00 am eastern time. In addition, he will be speaking at the Goldman Sachs and Company Software Retreat in New York City on Wednesday, November 7, 2007 at 1:15 pm eastern time. His presentations at each conference will be available live on our Web site and will also be archived for 90 days for replay at www.commvault.com in the Investor Relations section.

We now open up the lines for questions please.

Thank you sir. Ladies and gentlemen at this time we will begin the question and answer session. If you would like to ask a question please do so by pressing the * key followed by the digit 1 on your touchtone telephone. We will pause just a moment to allow everyone an opportunity to signal.

Our first question is from Aaron Schwartz with JPMorgan. Please proceed.

Good afternoon. I had a question on the Simpana release given your comments about the phased release throughout the quarter. Would you characterize the quarter as, or are you being somewhat constrained through the quarter, could you help us out maybe with what you saw in the quarter relative to pipeline levels and potential demand going into the back half of the year?

Yes Aaron, we saw a, what I would describe as a very significant increase in what we call visibility. Clearly the largest increase we've seen in pipeline build in our history on a relative basis so we're really pleased with that.

Okay and then shifting gears to the partner side, can you provide an update with the channel build through Arrow in terms of operations, if things there have changed at all and then also on the partner front through the Arrow channel.

We definitely saw an increase in revenue quarter on quarter through the Arrow channel as well as -- we don't give the stats on this but we did sign up quite a few new partners through the Arrow channel and we are looking now to actually, with Arrow, to increase -- now that we have a pretty good foundation built, we'll be doing some things to improve our leverage through that channel as we move into the latter half of this fiscal year.

Okay and then shifting to the balance sheet, understanding what you said about the revenue mix in the quarter going indirect, was there anything associated with the Simpana release in terms of timing through the quarter that would have aided in that increase in receivables that would reverse next quarter?

Clearly as I think most everybody knows, we didn't communicate very much about Simpana on the details until July when we announced the release and I think in general that announcement kind of shocked our, certainly our installed base in a positive way. They I think were really surprised on how big and broad and how much additional functionality and products were added to the release. So that number one, it certainly impacted increasing the funnel and since we released it in July, it took everybody maybe a month to get an understanding of what this was so you saw some back ended revenue as a result of that. On the other hand Aaron, there was a material revenue impact of Simpana in the quarter. In other words, a lot of customers ordered Simpana faster than we would have thought for a new release, certainly faster than any prior release in our history.

Okay, so is it fair to say the quarter was a little more back end loaded than what you would have thought because of the Simpana release and the collection should smooth out over time as you get more into the release?

In theory and with higher visibility, that should happen, yeah.

Okay great, thanks for taking my questions.

Your next question is from Tom Curlin with Royal Bank of Canada. Please proceed.

Just to be clear on the Simpana release, I think you said you did not release that to the channel, right? So you sold it indirect I guess through partners like Dell but not through the, what you call the channel. Is that right?

We didn't release it to the channel, on the OEM channel, Tom, until mid October so any deals that went through the channel were kind of one off deals that we moved through the channel. So we did move some but they were generally our deals that we, that were transacted through the channel.

Okay, so the back end loaded Simpana aspect was more direct generated, maybe occasionally booked through the channel, but direct generated then in the quarter?

Yeah, there was very little Simpana leverage through the channel. I think we said all along that that's what we were going to do and I think the right expectation from channel leverage would be our Q4 not even our Q3 because we just released it in October and now we're going through an education process with the channel.

So you weren't really even I guess taking orders or building backlog, with channel partners just doing order taking on the direct side?

Primarily but there was, what I was saying earlier Tom, is that typically when we release a new release even our installed base waits awhile before they order. They'll wait for Service Pack 1. In this case we saw a much sharper uptick because certainly our installed base wanted the product sooner than we expected and those orders, even though we hadn't authorized the channel to sell those orders, a lot of them were processed through the channel.

Okay and then the percentage of revenue through Dell was up and you mentioned some large deals through Dell. How do we think about both of those concepts? First, Dell has been, what is it, roughly 18, 20% of revenue, much higher this quarter. Will that -- do you expect that to continue? And then secondly, do you expect to continue doing some large deals through Dell?

I think the Dell percentage was unusually high due to some of these transactions. Some customers for various reasons want to transact through Dell because of relationships they've had so clearly in the quarter there were some deals that were certainly much larger than we normally would see and they went through Dell. I don't think -- I think the trend is up on larger deals with Dell but I think the quarter to quarter variance wont' be as high, if that makes sense.

Okay and then was there Simpana in the Dell piece then and maybe in some of the large deals?

Not in the particular, some of the deals that really changed the percentages but yes, there was some Simpana transacted through Dell on what we said, on a one off basis and that's why the S&P percentage was so high because a lot of the OEM deals which had normally gone through OEM actually went through S&P because we supplied them Simpana through S&P because we hadn't released the OEM CD through Dell yet so there was a shift in mix between the OEM part of the Dell channel and the S&P as a result of that. And as a result of that, the OEM channel part of Dell was somewhat constrained.

And then finally, just on the competitive front, are you seeing 6.5 now frequently in engagements or sparsely? To what degree do you see that product fully available and are you competing against it in most deals?

We don't see very much of 6.5 surprisingly enough and where we have seen it, we've been really successful in competing against it.

Do you have an expectation for when you'll start to see it more frequently?

We would assume over time we'd see it more and more but clearly at this moment we don't see a lot of 6.5 pressure anywhere. We see it but it's not very pervasive anywhere, globally where we compete.

Okay, thank you very much.

Your next question comes from the line of Derek Bingham with Goldman Sachs. Please proceed.

Hi, congratulations on the quarter. First, I just want to make sure I heard right. You said you've had 300 successful installs so far with Simpana 7.0. Is that right?

As of yesterday that is correct, Derek.

And where would you expect that to get through next year as a percentage of your installed base? Right now I guess out of a 6,000 base it's something like 5%. Where does that go next year in a typical product cycle or in this one in particular?

This one is very different than typical. I'm going to guess that it's going to be and Al Bunte can chime in on this, but I would guess it's going to be 80% for the year.

Okay great and then have there been any -- of the new features that you've released in 7.0 have there been any particular that have really stood out so far in terms of being in high demand or getting a high attach rate?

Yes, our combination of archive backup which nobody else can do, seamless archive backup capability, our single instancing, our remote office which is typically our CDR or our continuous data replication products are clearly significant. We're also seeing an uptick in our reporting capability, our QSM, was also very strong in the quarter.

Okay and then on those new features --

And one other point, Derek. Al just reminded me. We're seeing a very strong uptick on the Microsoft side because we're one of the few companies that has kind of a best in class product that supports 64-bit particularly for SharePoint and Exchange.

Okay, got it. Just on those features you mentioned that are really strong for you right now, do they tend to be Greenfield as in the customer doesn't have those features yet or are you maybe replacing something that they already have and you have a slicker solution and they'd rather be integrated?

It's both. In the archiving it's definitely both.

Okay, thanks very much.

Okay.

Your next question comes from the line of Brent Bracelin of Pacific Crest Securities. Please proceed.

Thank you. I have actually a follow up question on the modules. Obviously I saw a spike in the non-core kind of back up biz to 23%. How much of that increase would you attribute to Dell reselling those modules versus just the mix shift to large deals versus a higher attach rate of modules sold and tied to Simpana? How should we kind of think about that number going forward? Was it kind of a one quarter blip but the trend is still higher or are there reasons to believe that will continue to go from here?

So clearly the biggest impact is -- when you see a very, a much higher percentage of larger deals, there is going to always be a much higher attach rate of the non backup product, Brent, so that is the primary driver and in this particular court had nothing to do with Dell. This was mainly big deals, mainly direct deals that were transacted through Dell and impacted that number and if we look at our funnel and visibility going forward, just in terms of our visibility to larger deals, that is definitely increasing and all those deals have a high percentage of non backup product attached to them. As far as the trend line, I think you had a -- clearly this was a spike up because of just the large big deal mix in the quarter but generally we are really confident now that in general this percentage will increase over time. Whether it's this percent next quarter or not, I'm not sure but we're really confident about our catch right here and our acceptance of these non-core products particularly with the advances we made with Simpana 7.0 so 7.0 is, to answer your question, is fully going to be a, help accelerate the market acceptance of those products.

Okay and then I wanted to follow up on your comment that you expect to potentially have 80% of your installed base upgraded to Simpana within the year. How does that compare to kind of what you thought maybe three months ago, six months ago, before the release of Simpana? Is that a higher number? Just trying to gauge the magnitude of interest that you're seeing relative to kind of what you expected three or six months ago.

This is certainly a qualitative judgment here because I don't, I can't back this number up but I'm guessing that we saw 2x, at least 2x the increase in Simpana revenue on our installed base than we expected in the prior quarter.

That's exactly what I would say.

And then would that also tie to the pipeline? Are you seeing a 2x increase in the pipeline as well relative to the Simpana expectations?

The pipeline is actually growing faster than that on the larger deals and in the aggregate.

Okay, that's fair and then my last question is really about kind of seasonality in December. I know you guys don't guide on a quarterly basis but how should we think about December seasonality relative to your fiscal year end, and in the March timeframe?

Can't comment on that but clearly if you look at our guidance we certainly expect some small growth in the second half.

Okay fair enough, I'll cede the floor.

Your next question comes from the line of Tim Klassel of Thomas Weisel Partners. Please proceed, sir.

Yes, I'd like to throw out my congratulations as well. I wanted to sort of focus in a little bit on how it's changing the sales process out there. First on a metric side, if you're going into a Greenfield opportunity, how much larger is a Simpana deal relative to a prior Galaxy deal if you will?

I think the way to describe this Tim, is we've seen a very, very significant uptake in our visibility to large deals and I think that's a combination of what we did in 6.1 and clearly the additional functionality and new products of Simpana. We've been working at this for a long time but this summer it, we saw a very significant increase in that visibility so I would say that Simpana 7.0, again it's early, certainly hasn't materially impacted our visibility to these larger deals. Now we've got to make sure we can realize that in revenue but clearly the visibility is there.

Okay good and just to talk about the back end weighting in the quarter, this is a good thing obviously that you're getting much larger deals but they also have a tendency to be a little bit more back end weighted in the quarters. Do you think potentially the sort of jump in DSOs might be something permanent as Simpana, you know, larger deals become more of the norm with the Simpana release?

I would hope not on the DSO side but you're hitting a point. Clearly as that percentage goes up and you see these very significant deals, we're talking about deals over $100,000.00 but we're also talking about visibility to deals over $1 million so those can have pretty big swings, depending where they fall and since we're seeing more of them and they're larger, in future quarters that could impact where revenue falls. It's a really good thing over the long term and yeah, it may have some short term impact but we'll have to see how that plays out but it's clearly a positive thing not a negative thing.

Sure and then sort of one final one, training the channel in on Simpana since they've got so many more features to sell, how far along are you in that process and what should we be thinking going forward as you roll out future releases? How long does it take to get the channel in tune with these new features?

Not only the channel but our own sales force. It's a very big challenge because it's new features and new products and when you're throwing in now the concept of universal search and some of this information management functionality that we're putting in, it's very complex and I think will take us longer and it will be more difficult and we're going to be doing some things with the channel to make that simpler going forward and we'll talk about that probably in the next earnings call but it is clearly a real challenge. I mean, it's good news, bad news here. We have a tremendous amount of differentiation and value add but that means that the education process is a lot more difficult. It's early. I think it'll take us a couple quarters to really get the channel, at least to get the channel education. That's why I said a year ago that we expected the big uptick to be in our Q4 in FY09. We happen to be seeing some of that a little earlier than we expected but that doesn't mean that the educational challenges aren't difficult and complex.

Okay great, good enough, thank you.

Your next question comes from the line of Phil Winslow with Credit Suisse. Please proceed, sir.

Hi guys, good quarter. Most of my questions have been asked on just the revenue side but just wanted to touch a minute on the expense front. You guys talked about your long term model being low to mid 20s. As we transition with the Simpana release here over the next 12, 18 months, how do you prioritize spend there relative to revenue growth and where should we see the incremental investment come whereas maybe some of the incremental investments start to slow down?

Just as a side to the way we run the Company, Al Bunte who is our COO, runs a very structured, I'll call it "sophisticated," operations review every month and we are very granular as to where our investments are and how they tie to returns so I'm going to let Al give you a perspective on that.

Yeah Phil, I think we'll continue to invest on the distribution front and there we go through a lot of sophisticated analysis on that as Bob mentioned, particularly around productivities. We look at different channel mixes. We look at different geographies, territories, the maturity of the reps out in the field, etcetera, through a whole long list of them and again, a good share of our investment strategy going forward over the next two quarters is going to stay in that arena. So the point is it's sales and marketing number one and number two, we're trying to do it as smart as we can.

Great. Thanks guys.

Again ladies and gentlemen, if you'd like to ask a question press *1.

Your next question is from the line of Jason Noland with Robert W. Baird. Please proceed.

Thanks, I'm on for Dan Renouard. Bob, just a big picture question first. Are server virtualization or de-duplication impacting your business at all?

Absolutely. I mean, that's a major shift in the enterprise and the way we look at it Jason, is you've got virtualized servers. You've got a virtualized infrastructure layer. You've got virtualized storage and what we've been trying to do is holistically virtualize the data across applications and infrastructure and being able to manage these virtual nodes in a much easier, seamless way. So it's got a big impact in the type of solutions we provide to the market today and it's fortunate we've got an architecture and platform that differentiates in the market because [inaudible] have a singular platform.

Are you seeing benefits from partnering with some of those other providers?

We've always had strong partnerships with VMware. We've had some discussions with Peter Levine at [inaudible] and so we'll continue to do that. We have, as you know, we still have a strong partnership with Microsoft so we are heavily involved in that. We will continue to, we are investing in some interesting technologies there some of which we have today, providing to market as part of Simpana 7.0 and we're going to be doing some very unique things going forward with 8.0 in the virtualization area. Certainly as far as our single instancing and de-duplication capability, we've got an outstanding value proposition tied to it and we're seeing really solid traction in the market. It's got a very high payoff and it doesn't require -- where we are really unique is one, it's extremely effective and doesn't require high investments in either the server or storage or network infrastructure to implement it.

Okay, on Service Pack 1, was there a pause at all in front of the release of SP1? It doesn't really seem like there was.

No, there wasn't. We had solid momentum and growing momentum all the way through in Service Pack 1 which came out actually a little earlier than our original target date, not a lot but a little earlier, enabled us to get our channel on board and on selling Simpana so again, that was as planned and slightly earlier than targeted.

Okay and then last question on sales and marketing expense, could you talk a little bit about seasonality there given the campaign around Simpana 7.0 and training for your sales force and for the channel?

Clearly we made a lot of investments in our Q1 some of which were carried over into Q2 so our year on year numbers were, in sales and marketing, were basically up 40% year on year so we clearly made the investments. The heavy training investment, most of that is behind us but that will continue. That will continue almost for another year and as Al mentioned, we will continue to invest in headcount as we go forward particularly to make sure that we are in position for FY09 so even though the heavy investment let's say, from professional services is behind us which allows our PS utilization rate to increase and improve, the growth in services more closely aligned to historical. We will continue to invest heavily on the distribution side of the business.

Thanks guys.

Your next question comes from the line of Brian Freed with Morgan Keegan. Please proceed.

Hey guys, thanks for taking my call. A couple quick things, I think you talked about the percentage of deals over $100K but can you talk about the number of deals in kind of an absolute number and also did you have any deals over $1 million in the quarter?

We had some extremely large -- we don't give that stat out Brian, but we had some very, very large deals.

Okay.

And the number, we don't give the stat out on the number but it was up significantly versus the prior quarter. So the dollars were up. The top end was up and the number was up.

Okay and the second question I have relates to upgrading from Kinetic to Simpana. For an existing customer who say, backup, what is the incremental revenue opportunity for you guys when you upgrade them to Simpana?

Brian, that could range a lot and I'm not sure if we track that totally but it could range from double or tripling the amount of revenue that we've had to date to maybe 20 or 30%. It's very dependent not so much on the product but on their environment, their configurations, what's going on in their environment in terms of data growth, how much they're virtualizing the infrastructure, etcetera.

But clearly there is high interest in not just upgrading say, a Galaxy backup to a Simpana backup. When they upgrade, they're upgrading to a more comprehensive solution which requires additional products and functionality of the suite.

If you have Galaxy backup and you only upgrade to Simpana backup, is there a cost to the customer to do that or do you need --?

No, it's free.

Okay, alright, and then the third question, you talked about the large direct deals that were contracted through Dell. Given that that's a bit of an anomaly, can you talk a little bit about revenue recognition through Dell versus direct and did that have any play into why those were directed that way?

No, it had no play at all. These were mainly due to customer preference where they had large contracts with Dell and it was just easier to go through that procurement because they had, basically their whole procurement process with Dell was established and it was just easier for the customer to transact that way.

Alrighty, thanks very much.

Your final question comes from the line of Gabe Lowy of Collins Stewart. Please proceed.

Thank you. Good afternoon gentlemen, congratulations. A couple of quick ones here, or hopefully quick -- first, either Bob or Al, do you think any of the DTL vendors that are adding more functionality to the platforms looking to compete with your core backup solution, from that angle, do you think they have the pieces to put together to be able to offer the type of rich functionality that you do today with 7.0?

I'll answer in general. Al can do a deeper dive. The way we look at the market, Gabe, is that when you look at data protection, that functionality comes from software. It comes from a lot of different hardware sources including VTLs and some functionality comes from the virtualized server environment so when we look at the market, what we want to do at CommVault is capture as much of that data center dollar related to data and information management as we can. So we just don't look at software vendors. We look at the solutions in total and we try to build differentiation across all that so that we can sustain our growth rate. And by the way, we're really confident we can do that in the aggregate and I'll let Al do a little deeper dive on the VPL side.

Yeah Gabe, I think I would add to what Bob said in a couple areas. One, we really focus on operational efficiencies and by that I mean in any given night in some of these large environments we're moving actually hundreds of terabytes of data. A simple hardware centric solution is not going to be effective in that kind of efficiencies. Two, in terms of just having disk look like tape, we spent a lot of time on all of our disk based solutions, anything from a virtualized environment to our SIS kind of capabilities and we feel real strongly about any of those kind of solutions albeit it most of them are software but obviously the benefit as Bob talked about, or the obvious benefit is it spans across any kind of hardware environment let alone any kind of platform environment. So we feel pretty strongly about it from those perspectives.

It's not only in Simpana 7.0, Gabe. As we look forward you'll find us to continue to innovate and provide some very unique solutions in and around the area you just described.

Thank you. I'm sure you will. Two other quickies, is there any news yet on the Bull partnership front and then the second one, even though you folks signed a, some type of partnership with Riverbed I believe just not that long ago, is that something that can blossom into another driver for you either a channel driver or doing joint type of calls where the technologies blend well together?

I'll answer the Bull and I'll let Al answer the Riverbed. Bull is launched. We didn't project material revenue from them, or a lot of revenue, this fiscal year although we're going to start to see some, Gabe. I think the major Bull revenue impact will be in FY09. The way they're tracking, we've got that built into our FY09 plan. We think they'll achieve the kind of forecast we had built into that plan.

On Riverbed, Gabe, the real answer is we don't know in terms of what the upside or the opportunity is there but from a general standpoint it tends to be very synergistic with our remote branch office solution sets particularly around CDR, tends to map very closely to wide area optimization appliances that guys like Riverbed are putting out there so we think we're kind of in the same place at the same time in terms of market opportunity and they're a terrific company and we think it'll be positive.

Thank you very much, continued success.

Thank you, Gabe.

Thanks, Gabe.

This concludes the question and answer session of today's call as well as today's presentation. We thank you for participating and you may now disconnect.