Commvault Systems Inc (CVLT) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the CommVault's Fiscal Third Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for our Q&A 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 are Bob Hammer, Chairman, President and Chief Executive Officer; Al Bunte, Chief Operating Officer; and, Lou Miceli, Chief Financial Officer.

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 risks and uncertainties which are discussed in our SEC filings and the cautionary statement contained in our press release and on our website. The Company undertakes no responsibility to update the information in this conference call under any circumstance.

Our earnings press release was issued today over the wire services after the market closed and has also been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website. On this conference call, we will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found in Table 4 accompanying the press release, which is also 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 and President, Bob Hammer.

Thanks, Michael. I would also like to welcome everyone to our third fiscal quarter of 2008 earnings conference call. We had another record quarter as we continue to make progress in achieving our long term strategy for the Company. We had strong performance from our international operations and we made excellent progress in increasing our market penetration of our non-backup or emerging products. In addition, we recently launched our first SaaS offering which we call Remote Operations Management Service, or ROMS for short, which I will talk about later in the call.

The demand for our Simpana 7.0 software suite remains very strong and it has fully helped us accelerate the growth of our emerging products as well as strengthen our position in our core data protection business. Specifically, we have seen strong demand for archiving, single instancing, data classification, and search. We continue to outperform our competition and increase our market share.

For the quarter, we achieved revenues of $50.3 million, up 31% on a year-on-year basis, versus $38.3 million in fiscal Q3 2007. Software revenue grew on a year-on-year basis by 28% while our services business grew 36% year-over-year. For the quarter, non-GAAP operating income, or EBIT, was $8.6 million, up 51% year-over-year versus EBIT of $5.7 million for the same period a year ago. Non-GAAP net income was $6.9 million for the quarter and non-GAAP earnings per share was $0.15 for the quarter.

Our CFO, Lou Miceli, will provide more details on the quarterly financial results later in the call. I will address deal stats first. We added 389 new customers in the quarter. As usual, new customer adds do not include a large number of small orders from new OEM customers who registered through the Internet. Our customer base now totals approximately 7,500, which does include the OEM customers who registered through the Internet.

We had solid growth across both our backup products, as well as accelerating sales in our emerging products. For Q3 2008, sales of non-core backup, or emerging products, increased to approximately 26% of software revenue versus 23% in Q2 '08 and versus 16% in Q3 of last year. Growth in sales of our emerging products have been primarily driven by new components of our Simpana 7.0 software suite, including single instancing, advanced archiving, enterprise wide search and discovery and data classification.

As we continue to make significant progress in expanding our market positions of both core backup and emerging products in fiscal 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.

We see broader deployment of our full suite of products in larger deals. In deals over $100,000, sales of our emerging products represent approximately 33% of the sale. This is continued validation that our customers like our singular approach to the market and is a significant part of the growth and sales of our emerging products. Our customers are purchasing multiple elements of the Simpana suite.

Our singular approach to the market is resonating with our customers and with experts in the industry. The judges at SearchStorage.com announced this morning that our Simpana 7.0 software suite received the Gold 2007 Product of the Year Award for backup and disaster recovery software.

The quote from the Search.Storage announcement is as follows -- "Simpana is at the vanguard of the long awaited consolidation of data protection apps and folds backup, archiving, replication, including CDP, D2, search and data management reporting, into a single package."

In the third quarter of fiscal 2008, approximately 33% of our software revenues came from deals over $100,000 compared to 37% of software revenue generated from deals over $100,000 in the second quarter of fiscal 2008 and compared to 30% in the third quarter of last year.

Although deals over $100,000 as a percentage of revenue declined sequentially, there were actually a material higher number of deals greater than $100,000 than last quarter. The number of deals greater than $100,000 were up 47% in Q3, FY '08 versus same quarter a year ago. We continue to see an increase in our visibility to big deals as we continue to take market share. We continue also to anticipate that about a third of our software revenue in the medium-term could come from deals greater than $100,000.

I'll now address geographic revenues. On a geographic front, the United States operations generated 63% of our total revenues in the quarter with operations from the rest of the world generating the remaining 37%. We continue to expand our international distribution with strong growth in Europe, Australia, and Asia. Revenue from foreign locations was up 86% in Q3 FY '08 versus same quarter a year ago. We continue to be successful in broadening our distribution reach and have recently announced a new resale agreement with Sun which I'll talk about in a few minutes.

Let's talk about channel relationships and distribution. We continue to have strength across all of our distribution channels with good contributions from our OEM partners, resellers and systems integrators. We continue to build out and strengthen our distribution channels as this is key to our growth strategy.

Talk about Dell. Sales through both our OEM and SMP relationship with Dell accounted for approximately 23% of total revenues in the third quarter of fiscal '08, with the breakout being 6% OEM and 17% SMP. We continue to see strength through multiple sales segments within Dell globally. We are seeing significant traction globally across all lines of business and storage hardware. Our partnership with Dell continues to grow stronger. We continue to make progress in discussions with Dell regarding expansion of our relationship.

Regarding HDS, we saw a significant increase in license revenue from Q3 FY'07, particularly in international markets. Our relationship and business with Hitachi Data Systems continues to develop as we refine our distribution strategy and improve our business execution.

Sun. As you have recently seen in our recent announcement a week ago, we have entered into a formal worldwide resell agreement with Sun Microsystems. We expect this relationship to provide us access to Sun accounts and customers interested in running Microsoft Exchange and Sharepoint and those looking to upgrade the Sun 64-bit hardware.

We are aggressively working on the launch process which is expected to begin this month. The program includes Microsoft's longstanding support for Microsoft and for the CommVault-Sun relationship.

In regard to Bull. Back in the spring we announced the signing of an OEM agreement with Bull that will enable Bull to market and sell Bull-branded versions of CommVault's full Simpana software suite through its channels worldwide. Bull is taking a very structured approach and investing in the necessary resources to make these products successful in the market. The Bull funnel is developing well and we are confident Bull will meet our FY '09 goals for revenue generated by Bull.

Arrow -- as you know, about a year ago, we signed a wide-ranging distribution with Arrow covering our North American commercial markets. In July 2007, we amended our agreement with Arrow to include our U.S. Federal Government market. Many of our North American resellers have been transitioned to Arrow throughout fiscal 2007 and fiscal 2008. We generated approximately 11% of our total revenue through Arrow in the nine months ended December 31, 2007.

I'm going to talk about SaaS. We see software-as-a-service as an area for strong growth potential and will continue to invest in both technology and distribution in this space. You may have seen our recently announced ROMS service which we will believe is the most sophisticated subscription-based automated support service in the industry and this was launched in our current quarter.

In addition, we have established a good foundation with many customers using our software to deliver SaaS data management solutions. Two of our largest customers in this space are Incentra and Rackspace and we have been delighted with the success we have had with both of these companies.

Several weeks ago we announced that we had expanded our relationship with Incentra Solutions for SaaS offerings in North America and Europe, announcing a three-year extension to our existing agreement. Incentra has been using CommVault as the foundation for the Company's SaaS offerings over the past five years.

Let me just talk a little bit about CommVault's current position. A market's buying pattern for our solutions continues to remain robust. While we are not naive to the current economic climate, we have not seen a slow down. We believe we have strengthened our foundation for growth going into FY '09. All the key elements are in place for us to execute and achieve our FY '09 objectives. This includes, one, our strong product line. We have established momentum in the market with Simpana 7.0 which has significantly strengthened our competitive position in the market.

New products are contributing to growth. We have been successful in broadening the Company's product offerings beyond traditional back up. We moved into FY '09 with a solid momentum in our emerging product lines. We have strengthened distribution globally. International expansion is a major contributor to growth. We have strong sales and systems engineering teams in all our key markets. We have successfully added 3-tier distribution. We're getting solid distribution leverage internationally from our existing strategic distribution partners, Dell and HDS. We have added two new strategic partners in Bull and Sun.

We have established positions in many new international markets such as China, Singapore, Latin America, South Africa, and the Middle East, among others. We have best-in-class support. We have distanced ourselves from our competition in regards to support. We have further strengthened our support position with the launch of our first automated support service offering ROMS.

We have a clear, defined vision. We believe that our relative competitive position has improved. We believe we have gotten stronger and our major competition is not moving as fast as we are. We have a well-defined vision going forward and are making good progress in bringing new technology and products to markets beyond Simpana 7.0.

At the present time, we see strong demand across all vertical sectors of the market and across all geographies. We are well aware that the current economic climate has added a lot of uncertainty about future demand. We know that text spending usually lags in economic downturn and we will continue to watch the situation closely.

Given the strength of our current position, confidence in our vision and many opportunities to invest our growth, we think it is prudent to increase our near-term spending in sales and marketing more than previously planned in order to maximize long term shareholder value. Specifically, we will be relatively more aggressive in the near term in hiring sales representatives, particularly in the United States, where we have fallen behind in our recruiting goals. We are doing this with the knowledge of the risk associated with the current economic climate.

As you may have seen, we started to advertise again in the key industry publications, as we just recently launched our Switch campaign which you can also see on our website. Other than the Simpana launch this past summer, we have not historically spent money on advertising. As we go after bigger enterprise deals, we have found that we need to spend more on our sales and marketing initiatives than previously thought.

The market's reaction to Simpana has exceeded our expectations. This acceptance of Simpana has reinforced our decision to continue to focus on investing for long term growth. We believe we are in a very good position to continue to take market share and we want to make the necessary investments to ensure that that happens. We will continue to aggressively invest in sales and distribution in order to meet our FY '09 revenue and growth objectives. In addition, we will continue to invest strongly in our R&D as we develop our next generation portfolio of products.

Our operating margin growth may be slightly impacted in the short to medium term, as a result of our more aggressive investment and hiring strategy, but we believe now is the time to put added emphasis on growth. This will enable us to continue to build our infrastructure in preparation for significant future product releases.

After Lou's comments, I will speak briefly about our new ROMS service and about the future product direction of the Company. I will now turn the call over to Lou who will provide more details about our quarterly results as well as our FY 2008 guidance. Lou?

Thanks, Bob, and good afternoon, everyone. As Michael mentioned, I will be referring to mostly non-GAAP numbers. A full reconciliation of GAAP to non-GAAP results can be found on Table Four to our press release.

Let me begin with the review of revenues. Total revenues increased 31% year-over-year and 6% sequentially over the prior quarter. Software revenues increased 28% year-over-year and 2% sequentially. Approximately two-thirds of our software revenue continues to come from our installed base with the rest from new customers.

Services revenue increased 36% year-over-year and 12% sequentially. The higher services revenue growth was favorably impacted by higher utilization of professional services, due in part to increased implementation of Simpana 7.0. The rate of maintenance renewals continues to be very high on a worldwide basis, largely due to the Company's reputation of outstanding support and, consequently, we continue to see growth opportunities in services revenue.

The revenue mix for the quarter was 54% software and 46% services, which is a slight shift from 55% and 45% for the prior year period. The overall growth in software revenue was driven by three primary factors -- a higher volume of purchases from both new and existing customers; significant growth in our international operations; and a higher volume of sales greater than $100,000.

Specifically for the nine months ended 12/31/07, the growth in software in foreign locations was 73% and in the U.S. it was 11%. In addition, the number of software transactions greater than $100,000 was up by 38% over the prior year with a significant amount of transactions over $100,000 occurring in the U.S.

Software revenue generated through indirect distribution channels was approximately 80% for the nine months ended 12/31/07 and approximately 70% for the prior year period. The increase in software generated through indirect channels is a result of both an increase in software revenue from international operations and a shift to indirect distribution channels in the U.S.

The shift to indirect distribution channels in the U.S. is sometimes driven by customer purchasing preferences, which may cause this statistic to fluctuate from time to time without any significance. We will continue to invest heavily in both direct and indirect channels. However, we anticipate that the amount of revenue generated through indirect distribution over the long term will continue to be significant and this will require highly skilled CommVault sales and field engineer teams working with our indirect partners for the larger enterprise transactions.

Now on to gross margins. For the quarter, gross margins were 86.3% which is up from 85.4% in Q3 fiscal year 2007. Gross margin for services revenue was 73.1% in the current quarter versus 70.5% in the comparable prior year period due to a stronger mix of maintenance contracts and lower professional services.

Gross margins on our software revenue were 97.6% in the current quarter versus 97.5% in the prior year quarter. Total operating expenses for the quarter were $34 million. Sales and marketing expenses increased $5.6 million, or 34% over the prior year quarter. Approximately 75% of this increase was related to employee compensation which includes higher head count costs as well as higher commissions on record revenues.

The rest of the increase can be attributed to higher travel and related expenses, additional advertising and slightly higher rent associated with geographic expansion. 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 $800,000 in the quarter, or 14% over the prior year period. The increase was primarily due to higher employee compensation associated with increased headcount. We continue to leverage our investments in R&D by expanding our Hyderabad, India, location. We now have 90 employees in India, with the majority of these being in R&D.

Our Simpana 7.0 product significantly expands and builds on our previous kinetics platform. We believe we are creating competitive differentiation in the marketplace. We anticipate that our investments in R&D will produce future products that will keep us competitive, and, as a result, we expect to continue to invest heavily in R&D.

G&A expenses increased by $1.3 million in the quarter which was 32% over the prior year period. This increase is primarily the result of higher head count needed to support the expansion of operations on a worldwide basis as well as an increase for international tax planning fees. Our total worldwide headcount increased by 43 people, from 790 at the end of September, to 833 at the end of December. The head count increases were primarily in sales and marketing, technical services, customer support and R&D.

Non-GAAP operating margins were 17.1% for the quarter, resulting in non-GAAP operating income of $8.6 million. This represents EBIT growth of approximately 51% year-over-year. The non-GAAP net income was $6.9 million and non-GAAP EPS was $0.15 per share, based on a diluted weighted average share count of approximately 46.1 million shares.

Now moving to the balance sheet and cash flow statement. As of December 31, our cash balance was $95.1 million, up approximately 20% from $79.2 million as of September 30th. Cash flow from operations was approximately $13.1 million in the current quarter, compared to $8.7 million in the comparable prior year quarter. Free cash flow, which we define as cash flow from operations less capital expenditures, came in at $11.9 million for the current quarter, compared to $7.8 million in the comparable prior year quarter. Cash flow from operations was strong, due to positive changes in working capital.

Our DSO was 60 days which is higher than historic averages. This is up from 55 days in the prior quarter, and is a result of several factors -- higher accounts receivable balances caused by a higher percentage of indirect revenue; higher maintenance support billings in the quarter; increased international revenues; and also, more deals over $100,000. Enterprise deals typically close later in the quarter, thereby resulting in higher DSOs.

Deferred revenue increased $4.3 million, or approximately 9% sequentially over the prior quarter. Deferred revenue is comprised of mostly 12-month maintenance contracts and professional services. This increase is an indication of our strong services business and increased software sales from our growing installed base of approximately 7,500 customers.

Capital spending was approximately $1.2 million in the third quarter. Our current estimate for fiscal year 2008 remains between $4.2 million and $4.4 million.

Now on to taxes. You will note that for the quarter, we recognized a GAAP benefit of approximately $900,000 on the tax line. This benefit is primarily the result of a $2.4 million reversal of a deferred income tax valuation allowance that we maintained in certain international jurisdictions. This one time GAAP adjustment has been included as a pro forma adjustment on Table Four of our press release.

Excluding the impact of this one time benefit, we estimate that our fiscal 2008 GAAP tax rate will be in the range of approximately 31% to 33%. 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 the quarter, our non-GAAP income and EPS contains a pro forma effective tax rate of 28%, which we will maintain for the remainder of fiscal 2008 on a non-GAAP basis. Our estimate of the actual cash tax rate for fiscal year 2008 is approximately 10% 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 net operating losses and tax credits to offset taxable income for the next two fiscal years. Consequently, our cash tax rate should continue to be substantially lower than both the GAAP and non-GAAP tax rates. Over the next two years, our cash tax rate will approach our GAAP tax rate. Now moving on to fiscal year 2008 guidance.

For the 12 months ended March 31, 2008, revenue is expected to be in the range of $195 million to $196 million. Using the mid-point of our guidance, this represents revenue growth of 29.4% year-over-year. We are expecting fiscal year 2008 non-GAAP gross margins to be between 86% and 86.3%.

As Bob mentioned earlier, because of the validated market acceptance of Simpana 7.0, strong growth in emerging products, as well as solid acceptance of our products internationally, we are increasing our near term spending in sales and marketing beyond previously planned levels, in order to maximize long term shareholder value. We will invest aggressively in sales and marketing in order to meet our fiscal year 2008 and fiscal year 2009 revenue objectives.

We still believe that we can incrementally increase our operating margins as we grow the top line; however, we are reinvesting more aggressively in order to strengthen our position for long term growth and increase our market share in both our core and emerging products.

We are now expecting non-GAAP operating margins to be between 16.7% and 17%. Using the mid-point of our guidance, this represents EBIT growth of approximately 45% year-over-year. Our long term operating margin goal continues to be in the low to mid 20s. We are lowering our non-GAAP diluted earnings per share, which is now expected to be in the range of $0.56 to $0.58 per share, using a projected fully diluted share count of approximately 45.5 to 46 million shares and applying a pro forma tax rate of 28% for the full year.

The non-GAAP EPS guidance excludes approximately $0.12 to $0.14 per share related to the effects of stock-based compensation expense under FAS 123-R which is net of non-GAAP income tax expense of approximately $0.05 per share. We will provide our fiscal year 2009 guidance on our next call, which we anticipate will occur in mid-May due to our March 31 fiscal year end. That concludes my prepared remarks. Let me turn the call back over to Bob. Bob?

Thank you, Lou. I would like to spend a few minutes on a brief summary of our newly announced ROMS service and a perspective of our future product direction.

ROMS, which we believe is the most sophisticated subscription-based automated support service in the industry, was launched in our current quarter. This new service, which was two years in the making, provides our customers with an automated interface that gives them a real time view of their storage and data environment and enables real time identification of problems, their root cause and cures. ROMS offers comprehensive on-demand reporting and monitoring capabilities for data management, access and protection technologies.

Through a user-friendly intuitive web dashboard, our customers can access and track real time alert, trend and storage usage reports anytime, anywhere. ROMS integration will enable customers to dramatically reduce both operational costs and system downtime.

ROMS enables reduction of personnel expenses associated with data management activities by allowing customers to offload that responsibility to CommVault's ROMS systems personnel. We expect that time to resolution for issues affecting monitored systems will be greatly reduced, as ROMS provides CommVault support with all the necessary information to address alerts as they occur.

We believe that Simpana 7.0 and ROMS enables the best value proposition to the customers in this industry. I just want to take a minute about future direction and we'll talk more about this as time goes on. This is beyond Simpana 7.0.

Going forward, we have focused our product development efforts on areas that we believe will provide significant additional high value add to our customers. These include innovative new ways to manage data protection, innovations in single instancing and de-duplication, next generated automated records management, better ways to manage workstations and laptops, better ways to manage the growth in databases, and enhanced data management capabilities for virtualized environments.

We are confident we can add value in each of the areas mentioned and believe our future developments will help ensure that we remain the leading innovator in broad-based data and information management software technologies and services. We are very confident about our future and our ability to create long-term shareholder value. We are generating a significant amount of cash and had approximately $95 million of cash on hand on our balance sheet as of December 31, 2007.

We feel the best use for a portion of our cash is to buy back some our outstanding stock. That is why our Board of Directors has just approved a repurchase program, authorizing the Company to repurchase up to $40 million of common stock over the next 12 months. We will be opportunistic with the buy-back, subject to market conditions, and will keep you informed of our progress each quarter.

Finally, I would like to announce that Al Bunte has been appointed to our Board of Directors at their meeting last week. Al has served as our Executive Vice President and Chief Operating Officer since October, 2003 and served as our Senior Vice President from December 1999 until October, 2003.

During his tenure with CommVault, Al has provided outstanding senior management leadership in many areas of the Company, including strategy, product development, marketing, and support. He has been particularly effective in ensuring that the Company is consistently innovative and his appointment to the Board is well deserved. And with that, I'd like to turn the call back to Michael, who will open it up for Q&A. Thank you.

Thanks, Bob. Before we open up the lines for your questions, I would like to highlight a few upcoming investor relation events. Al will be speaking at the Goldman Sachs Technology Investment Symposium in Las Vegas on February 26, 2008. Either Bob or Al will present at the Small Midcap Miniconference sponsored by Wachovia in Park City, Utah on March 13th-14th, 2008.

Both Bob and Al's respective presentations at each conference will be available live on our investor relations website and will also be archived for 90 days. Can we please open up the call for questions?

Thank you very much, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. (OPERATOR INSTRUCTIONS). We will take our first question from the line of Tom Curlin of RBC. Please proceed.

Hey, good afternoon, and congratulations on another strong quarter.

Thanks, Tom.

Thanks, Tom.

The -- you have not provided any guidance yet for fiscal '09, that's correct, right?

That's correct, Tom.

Just given the comments on investments, should we assume that - how do we think about the trajectory of operating expenses relative to revenue for fiscal '09? I realize you may not be willing to provide specifics, but there's definitely language in your prepared comments that would suggest those growth rates are perhaps converging or, at least, will be closer to each other than they were in '08. So how should we think about the trend? Do you think op ex will grow roughly as fast as revenue in '09?

Well, the issue we're facing, Tom, which is kind of a -- it's a positive issue, is that, as I mentioned in the call, the Simpana acceptance to the market, has been, has exceeded expectations almost across the board. So we're really confident about the pipe, not only on core, but in our emerging products, and this is global. So we're confident about that.

Our distribution network is as strong as it's ever been in the sense that not only our channel partners, but our CommVault teams globally have all been upgraded to sell a high end solution sell so we've got a really strong foundation there.

And the basic fundamental demand appears to us globally to be very strong. So, given that, we feel it would be prudent to increase spending and emphasize a little bit more on the growth side than optimizing our operating income. It doesn't mean we won't see operating income accretion, because we probably will, but we're working through that right now. So we just see more opportunity than we thought and we think it prudent that we kind of re-look at the strategy and take advantage of the growth opportunity in front of us a little bit more than we had originally anticipated.

And when you say operating income accretion, you're speaking on a percentage margin basis?

Yes, on a percentage margin basis.

So it's, I guess, possible, to - I guess a possible scenario would be the operating margin for fiscal '09 would be similar to fiscal '08 but --

That would be -- at this time -- and don't hold me to this, but that -- we're not giving any guidance there -- that should be the worst case in terms of what we're going to suggest, but we haven't locked it down.

Okay. And, then, just on competition in the quarter. Symantec has a new version of NetBackup out. Have you seen any unusual behavior from them on the pricing front or bundling tactics? You know, just what's the latest, I guess, specifics on --

Well, in general, we continue to increasingly take share from Symantec and we haven't seen any let up in our ability to beat them either in the major accounts or in the mid market. We just haven't seen any material change that we could see yet. It doesn't mean we won't, but we haven't seen that.

In regard to pricing, clearly when they see us in a major account that they think is strategic, they will get extremely aggressive, meaning they will take software down to zero -- we've seen that. We've seen them take software down to zero and discount maintenance to keep us out of an account. And some of those accounts we won anyway. But they will get what I call paranoically aggressive when they see us coming in their strategic areas.

Are you seeing more of that, just because that's a major change, even for an existing NetBackup customer, right, to do that upgrade, so I would imagine there is -- there are more deals where things have opened up, right?

There are more deals where things have opened up, that is correct.

But with that, are you seeing them be -- I guess, even more aggressive or a greater mix of deals where they are very aggressive in your pipeline?

Well, in the past, we used to see them drop software prices down 75% or 50%. This is the first time we've seen a few deals where they've actually dropped it to zero.

Okay. And then, finally, on the Sun agreement. Can you elaborate a little bit on the nature of the product, how your value will be packaged through that channel, from a product perspective, and then just from a go to market -- how you view it, large enterprise versus mid enterprise. How does the go to market look?

Well let me comment at the 100,000 foot level. Clearly when Sun decided to bring - decides to support Microsoft's 64-bit architecture and operating system, they were looking to provide a data management capability along with that, both from the server and storage side. If you read their press releases, they make statements like "It's not all about the storage. It's all about the data." Which is similar to our perspective on the market.

So both Sun and Microsoft, given that perspective, were looking for a best in class partner here and both Sun and with Microsoft's strong support, suggested that that partnership be consummated with CommVault. And clearly this announcement was focused on some key areas, and those were Exchange and SharePoint.

Now you know, Tom, Sun covers both the enterprise and SMB markets, so it's just too early to tell where we're going to see the traction, but I think they have trained a lot of their people on it. It will launch in mid-February and when we get a little bit further down the road maybe we can give you a bit more color as to where we're seeing the traction on it. But I think all three companies are quite optimistic that this is going to be quite successful.

Okay. Thank you very much.

Thanks, Tom.

Thank you very much sir. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Derek Bingham of Goldman Sachs. Please proceed.

Hi, guys, this is Fred Grieb for Derek.

Hello, Fred.

Hey. Are there any verticals where you're seeing particular strength or weakness, perhaps like financial services or government?

We're seeing very strong strength in government globally, and surprisingly enough, our strength in the financial services market relative to where we've been, has been strong. Across the board, including the United States. So we have not seen any drop in demand in the financial sector from our customer base, yet.

Great. One follow up. The Simpana upgrade cycle. Can you quantify how that's impacting ASPs or deal sizes at all?

Well we don't -- there is a base stat in our Q and that is -- it is impacting more the number of deals we're getting over $100,000. And I just mentioned in my summary that in deals over $100,000, that 33% of the revenue in those deals is coming from products other than backup. If you look at ASP, it isn't meaningful, because it's spread over a large number of accounts and you don't see it, so we don't look at that stat. But -- you'll see from our Q that deals over $100,000, the average ASP there is $200,000.

Okay, great. Thanks a lot.

Thank you very much, sir. And ladies and gentlemen, our next question comes from the line of Aaron Schwartz of JPMorgan. Please proceed.

Good afternoon. Last quarter you had mentioned that you had seen little leverage from the OEMs in the quarter because they were still onboarding with Simpana. I was wondering, one, could you provide an update on that and then two, did that have an impact in the quarter? I know Dell can be sort of up and down and maybe last quarter was the anomaly on the upside, but it did look like it was maybe a little lower than expectations this quarter.

Well, you know Dell has got a staggered quarter, Aaron, so you won't see the Dell impact until Q4. Right?

Okay.

Most of the Dell revenue last quarter was -- didn't include the upgrade. So the first impact you'll see from Dell is going to be in the March quarter.

So you would expect that to be strong in the March quarter relative to the quarter you just printed?

You will certainly see a lot more Simpana 7.0 from Dell in the March quarter than in the December quarter.

Okay. I'm just trying to reconcile some of your comments. It sounded like you were pleased with the large deal flow. You gave a lot of the metrics around the larger transactions and it seemed like Dell was more the volume based deals in- just given the seasonality of December and where you're at in the product cycle, I think some expectations were for a little better license growth in the quarter. I'm just wondering if maybe the volume business in Dell has been pushed out a quarter, or I'm just sort of trying to reconcile all of those comments.

No. No, the issue, and I've said this -- in case you didn't catch it between the lines, I'll say it a little bit more clearly. If you look at our international revenues, we're up substantially, right, 86% year on year. And that's because we invested heavily in feet on the street internationally and didn't invest as heavily domestically. We're going to kind of turn that around here near term, though. So that is more relevant to top line growth than any other stat that you got.

Okay.

We've got the product, we've got the demand. We're doing well versus the competition, etc. It really comes down to this whole investment strategy of ours and we're addressing that, trying to be more effective and more consistent about it.

Okay. So it seems like you're still optimistic about the pipeline. So you're just trying to invest more to maybe see better execution in terms of the pipeline to dollars.

That is exactly correct.

Okay. And then just to follow up on all of the subscription based announcements you had in the quarter and some of your comments, how do you actually envision that impacting the model longer-term in terms of what will be, maybe higher deferral rates around product sales for that?

Well that's a good question. We're seeing it now where it's -- it's a subscription based model, but the revenue from those deals is recognized in the current quarter. In other words, over time, those subscriptions build up and they get recognized on a quarterly basis, so it's not that deferred is growing, it's just that our subscription based revenue as a percent of total license revenue is growing. So it's not going into deferred.

Okay. And then, lastly, the question I had is -- in terms of your partnership with Microsoft. I know it's been an active partnership and nothing had been formal. But with the acquisition of Fast, does that change anything there in terms of potential working tighter with Microsoft?

Well, it's got the potential to do that, yes.

Okay. Well, thanks for taking my questions.

You're welcome.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Brent Bracelin of Pacific Crest Securities. Please proceed.

Thank you. Bob, first question, really -- obviously there are a lot of concerns around the demand environment. Could you just compare, contrast your order pipeline today versus kind of three months ago, going into last quarter?

Going into the December quarter or going into the March quarter?

Compare it today versus three months ago.

It's significantly higher.

As you -- okay, a follow up to that would be -- as you look at the large deals, you did see kind of a slight down-tick arguably from an abnormally high level last quarter. Did you see any sort of large deals slip out of December? Large deals are always are tough to predict when they close, but could you comment a little bit upon how your visibility in those large deal kind of pipeline?

Well we certainly had visibility to more large deals than we closed. So the answer is yes, but we saw some, but not for any other -- there's no trend reason. It's just we did see some of that.

Okay. And then another follow up here for me. As you look at kind of the timing around kind of - making some accelerated investments in marketing and sales today, clearly you saw momentum internationally. How do you know the slow down in the U.S. isn't kind of economic driven versus kind of a sales and marketing issue?

Because we look at sales force productivity and the numbers for sales force productivity were right on target last quarter. It's just numbers. In other words, we weren't seeing budgets cut or anything else. Your sales productivity number is going to tell you pretty much what's going on.

Okay.

We slice that a number of different ways. We got a really good handle on that.

Perfect. Thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Aaron Rakers of Wachovia Securities. Please proceed.

Yes, thanks, guys. A couple of question for myself as well. I guess the first one I want to go back to the comment about behind the goals in terms of recruiting for the Company. Can you wrap some color around that specifically as it references to the sales force. What's your targets in terms of sales force additions, and then kind of segue that into what you typically see in terms of productivity ramps for new hires in that sales force.

We don't give out those numbers, Aaron, but clearly we wanted to be further ahead in the U.S. than we were on the recruiting side. And there are a couple of factors - there are lots of reasons -- no excuses for that, but we had this massive product launch. And in addition to that, as part of that product launch, in several regions globally and domestically, we did some fairly significant retooling to prepare those areas to sell a much broader enterprise suite. So we were extremely successful on the retooling side. We're exactly where we want to be.

From a numbers standpoint domestically, we didn't hit the target we wanted. We just have a lot more focus on it and trying to get, in terms of our internal processes, to deliver that in an effective way. We're spending some extra time and attention there.

And in terms of productivity, as you look to incrementally add more people, how do we think about the [re-ramp] of new hires coming on?

I'll let Al answer that because he deals - we review that really in-depth detail every 30 days and Al runs those models, so he can answer that for you.

Okay, Aaron. It's, as Bob says, we look at it and slice it a number of different ways, so it makes a big difference between a guy going into an existing - what we call an existing territory versus a brand new territory or even a country. But, in general, when you average that all out, it's two to three quarters for a sales team to get up to speed from minimal productivity to our full levels of productivity.

Okay. And then the second question or topic would be - you talked about Symantec becoming it sounds like incrementally more competitive in the market. Can you talk about others out there in the market, namely EMC? Is that the low hanging fruit for you? Has there been any change on the competitive landscape on that front?

We don't see EMC very much. We see Avamar on occasion but in a big enterprise, data management, information management deal, we don't see them as a significant competitor. It's mainly Symantec, or IBM.

Okay. And when do you expect - I know you mentioned the launch of Sun in the mid-February time frame. Clearly there's a training cycle that has to take place. Is it more of a second half '08 when we start to see a revenue contribution, or is it even a calendar 2009 when we think you start to see some material revenue from the Sun relationship?

I can tell you from a planning point of view it would be later in 2008, but we could get surprised here. It could be significantly better, but typically CommVault, whether it's a new product, a new relationship, we don't forecast a lot of major up-ticks early until we can validate it. So kind of our internal planning it's quite conservative there but I think the relationship has got a lot of potential.

And then final thing for me. Last quarter you gave a little bit of flavor around what you were seeing in terms of the installed base upgrading to the Simpana 7.0 platform. An update on that front. Where that currently stands and when you expect to see that hit the 80+% mark would be helpful.

Yes, I think I stretched that one a little bit, Aaron. But clearly our installs - not what's been purchased, but our installs of Simpana 7.0 are now well north of 1,000 installs, so we are really confident about where this product is and its ability to produce the desired results.

So the major constraint about how many (inaudible) really ties to our services organizations' ability to upgrade people fast enough. So we're as happy about that as we can be and these upgrades have gone exceptionally well so we're really happy about all that. The quality level of 7.0 is the best -- from our internal stats -- the best release we've ever had and it was, as you know, our largest release. So we're really happy about that as well.

And the final thing for me. You mentioned earlier -- I'll take a stab at this -- your pipeline sounds like it's pretty healthy going into the quarter. When you compare that relative to your sequential revenue growth, have you seen your pipeline grow substantially more than your sequential revenue growth? Any kind of flavor you can give on that front? And I'll end there. Thanks.

On a relative basis, relative to our expected results, our pipeline in the March quarter is higher than in the December quarter.

Fair enough. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Tim Klasell, Thomas Weisel Partners. Please proceed.

Hi, how are you doing? It's [Mark Griffin] stepping in for Tim.

Hi, Mark, how are you?

Good. How are you guys doing?

Good.

Not to beat a dead horse. But just one question on the increased S&M. Have you started the hiring already? Have we come to some kind of percentage, like we've got a third of the guys already on the books or something like that?

We have definitely started.

Definitely started?

We still have a fair way to go. But we have definitely started.

Okay. Well we'll just kind of -- that kind of will be killed. Can you enlighten us a little bit more on the Hitachi relationship? You kind of breezed through that one. You kind of just said it was going well and I'm just wondering if you can give --

Well the numbers year-on-year on a percentage are up substantially.

They're up substantially?

It is still very choppy, meaning there's certain areas which have been consistent with what I've said in the past. There's certain international areas that are going really well. We've won a lot - a number of large deals. And there's some very large deals in the pipeline going forward with Hitachi. But it's not a -- what I'd say -- a global well oiled machine, like a Dell, at this point.

Okay. Sounds good. That's it for me. I appreciate it.

Okay.

Thank you very much, sir. And ladies and gentlemen, our next question will come from the line of Phil Winslow, Credit Suisse. Please proceed.

Yes, this is Dennis Simpson in for Phil.

Hi, Dennis.

Just real quick, on the Simpana line, can you talk about which modules are showing the most strength?

Yes, I think we said in the call, if I pick them up, they were signal instancing, archiving -- it's very large; data classification and search are the major ones.

Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Dan Renouard of Robert Baird. Please proceed.

Thanks. Most of my questions have been answered, but can you guys just talk about the hiring environment? Has that changed at all, and are most of your hires coming from competitors or are you guys typically training on your own? Maybe you could just enlighten us a little bit on that front. Thanks.

Yes, Dan. We're just -- what we've found -- is that we need a special skill set and a special set of experience to succeed with the breadth and depth of our software suite. Particularly as we focus on the enterprise, which requires really sophisticated solution selling.

So we're very selective in the process and the environment right now -- I'd say it seems to be a little bit easier internationally than it is domestically, but if I had to put a trend on it, it's probably getting a little easier than a little harder. Where may be a year ago it was probably harder versus easier.

Dan Renouard. Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, our next question comes from the line of Steve Koenig of KeyBanc Capital Markets. Please proceed.

Hi, guys. Thanks for taking the question.

All right, Steve.

Just wondering about -- kind of a little color on the composition of revenue growth going forward here. Your services revenue accelerated nicely as you utilized some of the new hires that you made in the first half in consulting. Should we expect, as we get through Q4 here, and into next year, that consulting is going to continue to sustain these kinds of utilizations and that the mix should shift a little bit more towards consulting?

And therefore, on the software revenue line, you've kind of been flirting with 30% growth there. But should we count on that 30% coming into fruition here or is that -- should the mix kind of be where it was this quarter?

This quarter -- what I said last quarter was that we were down in the September quarter -- we were down sequentially in services, mainly because we had taken a lot of the -- our field engineering force and they were focused on training for Simpana 7.0. So we lost a lot of utilization. We expected that to come back strongly in the December quarter and it did. So you saw sort of a spike up as a result of that.

Without giving guidance on this, Steve, but going forward, if you look at the fundamental strength of the Company, those -- the services and license revenues should be pretty much in sync over time, unless we step it up like with things like ROMS where you may get some increased leverage. But fundamentally, if you look at where's our growth coming from, we have accelerated growth -- clearly, if you work the numbers, in products other than backup and recovery.

There's no reason, given where we are in backup and recovery, that we shouldn't see reasonably strong growth there, and we have strong growth internationally on top of all that. And we're adding distribution. So the fundamentals are in place for us to sustain a good solid growth rate, both in services and in license revenue. We just have to translate that to guidance and we'll always be prudent in our guidance.

So is it reasonable for us to expect that, given the lag time between hiring and making reps productive, that the - any acceleration there would be more of a - more around the second half and the release of further product functionality?

We don't need additional products to drive growth.

Okay.

The additional functionality really will impact FY '10. We have sufficient products in our pipeline to sustain or build growth for FY '09.

Okay. But it's reasonable for us to think it will take a couple of quarters to make the reps productive?

Yes, any new reps that we bring in -- it will take a couple of quarters to get productive.

Okay. Thanks a lot.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). At this time we have no further questions in queue. We'd like to thank you very much for your participation in today's conference. This concludes your conference for today and you may now disconnect.

Thank you.

Have a good day. Thank you.