Commvault Systems Inc (CVLT) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CommVault fiscal first quarter 2009.

At this time, all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question and answer session.

At this time for opening remarks and introductions, I would like to turn the call over to Mr.

Mike 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 would like to remind everyone that statements made during this call including in the question and answer session at the end of the call, that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are based on our current expectation.

Actual results may differ materially due to a number of risks and uncertainties, which are discussed in our SEC filings, and in the cautionary statement contained in our press release, and on our website.

The Company under takes no responsibility to update the information in this conference call under any circumstances.

Our earning press release was issued today over the wire service after the market closed, and it 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 nonGAAP financial results.

The reconciliation between the nonGAAP and GAAP measures can be found on Table 4 accompanying the press release and posted on the our website.

This 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.

Welcome everyone, and thanks for joining us for our fiscal first quarter earnings call.

For the quarter we achieved revenues of $55 million, up 25% on a year-over-year basis, versus $44 million in fiscal Q1 2008.

Software revenue grew on a year-over-year basis by 15%, while our services business grew 37% year-over-year.

For the quarter, nonGAAP operating income or EBIT was $7.2 million, up 16% year-over-year, versus EBIT of $6.2 million in fiscal Q1 2008.

NonGAAP EPS for the quarter was $0.12.

Lou Miceli will provide more details on the financial results, along with the updated guidance later on in the call.

As you are already aware from our press release, the results for the quarter are lower than our historical growth rate, and below our expectations.

The biggest issue that negatively impacted the quarter was the timing of deal flow with several large deals moving into Q2.

In contrast our overall sales funnel increased significantly from it's previous high in Q4 FY '08 and our enterprise deal funnel was also very strong, but we also had very good visibility of our large enterprise deal funnel going into Q3.

We had a strong July which validated the underlying strength of the business.

In fact the dollar volume of enterprise orders received so far in the quarter were over 85% of the dollar volume of enterprise orders recognized in all of Q1 '09.

The growth in the overall funnel big deal pipeline in July orders, indicate healthy demand for our products across all geographies.

In summary, we have increasing visibility early in Q2.

We continue to see very little negative impact from the current economy.

As a result of our confidence in the underlying strength of the business, we are reaffirming and modestly raising our guidance for FY '09.

In addition, due to the uncertainties in the equity markets and the macro environment, we feel that it is prudent to provide quarterly guidance for the remainder of this fiscal year, when conditions become more stable, we will reevaluate our position on providing quarterly guidance.

We will provide both Q2 and updated fiscal 2009 guidance later on in the call.

Now I will address specific Simpana and enterprise deal stats.

As a result of the deal slippage we believe that the Simpana revenue percentages and the enterprise deals stats are not indicative of the underlying strength of the business.

We added 326 new customers in the quarter.

As usual the new customer additions did not include a large number of small orders from OEM customers who registered through the Internet.

Our customer base now totals approximately 8,500.

Let's talk about Simpana.

For fiscal Q1 2009 sales of our advanced data and information management products or ADIM, these are products which do not include backup products, represented 27% of software revenues versus 15% in Q1 of last year.

Archiving, single instancing, replication and search functionality, are key drivers of the growth for these products.

Enterprise deals carry a much higher percentage of advanced data and information management products.

ADIM product sales were up 109% in Q1 FY '09 from Q1 FY '08.

As I previously mentioned, we clearly see our business moving into a broadband heterogeneous data management business, where backup is only one of the functions our products address.

In fact as I have also mentioned before, our next-generation data management technology will shift the data management burden further away from traditional backup.

The demand for our Simpana 7.0 software suite remains strong.

Currently just over 40% of our entire installed base, has either upgraded to, or has purchased the Simpana suite.

Let's talk about enterprise deals.

In the first quarter of fiscal 2009, approximately 29% of our software revenue came from deals over 100,000, compared to 26% in the first quarter last year, and down from 41% in the fourth quarter of fiscal 2008.

The dollar volume in deals over 100,000 grew 30% year-over-year.

The increasing competitive advantage of our unified suite of products leveraged from our strategic distribution partners and increased market awareness has contributed to the year-over-year increase in enterprise deals.

In addition our expanded sales force in the U.S.

is making progress reaching full productivity levels, and our global sales force continues to drive larger deal volume, which we believe has increased our visibility into Q2.

Deals over 100,000 sales of our advanced data information management products represented approximately 38% of the sales in the first quarter, compared to 17% of the sales in the first quarter of fiscal 2008.

Moving on to international growth.

International operations generated 41% of our total revenues in the quarter, with the United States operations generating 59%.

International revenue was up 40% in Q1 FY '09 versus the same quarter a year ago.

We continue to expand our international distribution with strong growth in Europe, Canada, and Australia.

We anticipate that our international expansion will continue to be a major contributor to our growth, as we are getting solid distribution leverage internationally.

Moving on to Dell and HDS.

Sales through both our OEM and SMP relationship with Dell accounted for approximately 21% of total revenues for Q1 2009.

Total Dell revenues were up 21% over the same quarter last year.

We feel that our relationship with Dell is as strong as it has ever been, and look forward to announcing new strategic initiatives with Dell during fiscal 2009.

HDS, while we do not disclose HDS revenue as it is less than 10% of total revenue, we continue to see significant year-over-year increase in Hitachi license revenue in international markets.

We believe that this relationship will continue to be a meaningful partnership, which will contribute to our overall success.

Let's talk about our stock repurchase program.

Given the underlying fundamentals for the business, and our confidence in achieving our full year operating plan, our Board of Directors has decided to do double the side of our stock repurchase program.

The Board had previously approved a stock repurchase program of 40 million, that they have now increased to 80 million.

In order to keep a strong cash balance while accelerating our stock repurchase program the Company has opened a $40 million credit facility with Wells Fargo, which we currently intend to use exclusively for stock repurchases.

I will now turn the call over to Lou who will provide more details about our quarterly results, as well as our FY 2009 guidance.

Lou?

Thanks, Bob, and good afternoon everyone.

I will cover the financial highlights for the first quarter, along with updating our FY 2009 guidance.

I will begin with revenues.

For the first quarter total revenues were $55 million, an increase of 25% year-over-year, and a decrease of 3% sequentially.

Software revenues were $27.7 million, an increase of 15% year-over-year, and a decrease of 12% sequentially.

Services revenue was $27.3 million, an increase of 37% year-over-year, and 8% sequentially.

The overall sequential decline in software revenue for the quarter was driven by lower software revenue in the U.S., as a result of lower volume of enterprise deals in the quarter, which was caused by a few deals slipping into Q2.

While we expected the quarter to be flat to slightly up, we are still confident with our ability to hit our Q2 and full year revenue growth targets, which I will address when I cover guidance.

For the quarter, the growth of software revenue internationally was 36%, and in the U.S.

it was 1% over the prior year period.

Software revenue generated through indirect distribution channels was approximately 84% of software revenue for the quarter, compared to 76% in the prior year period.

The shift towards higher indirect revenue is the result of an increase in software revenue from our international operations, which is sold mostly through indirect channels, and a shift in the United States to indirect distribution channels, being driven predominantly through our growing relationship with Arrow's ATI division.

Approximately 19% of revenue for the current quarter was sold through our distribution agreement with Arrow, compared to 8% in the prior year period.

While we continue to invest in both our channel distribution and our direct sales force, we expect to see a continuing trend of increasing revenue sold through indirect channels.

The revenue mix for the quarter was 50% software and 50% services.

While this is not in-line with our historical levels we still anticipate the split for the year to be 55% software and 45% services.

We continue to see growth opportunities in our services revenue, which is supported by the increases to deferred revenue on the balance sheet.

Our maintenance attach rates continues to remain very high, and our renewal rates remain very strong on a worldwide basis.

Gross margins were 86.3% for the quarter.

Gross margins on our software revenue were 97.5% in the current quarter, versus 98.1% for the prior year quarter.

Gross margin for service revenue was 75% in the current quarter, versus 70.9% in the comparable prior year period, due to a higher mix of maintenance contracts relative to professional services.

Now moving on to operating expenses.

Total operating expenses were $39.4 million for the quarter, sales and marketing expenses increased by 6.1 million, or 30% over the prior year period.

Approximately two-thirds of this increase was related to employee compensation, which includes the additions of new employees, as well as increased commissions on higher revenue.

The rest of the increase was primarily due to higher travel and other related expenses.

R&D spending increased by about $900,000 in the quarter, or 15% over the prior year period.

We continue to leverage our investments in R&D by expanding our Hyderabad India location.

G&A expenses increased by $1.6 million, or 35% over the prior year period.

This increase primarily relates to higher headcount, higher public company costs, as well as higher legal expenses.

We added 67 employees during the quarter, bringing total worldwide headcount to 933 at the end of June.

The headcount increases were primarily in sales, customer service, and support.

NonGAAP operating margins were 13.1% for the quarter, resulting in nonGAAP operating income of 7.2 million.

This represents EBIT growth of approximately 16% year-over-year.

The nonGAAP net income for the quarter was approximately 5.5 million, and nonGAAP EPS was $0.12 per share, based on a diluted weighted-average share count of approximately 44.9 million shares.

Now moving to the balance sheet.

Cash flow from operations was approximately 14.1 million in Q1, up 141% over the prior year quarter, due to changes in Accounts receivable balances.

Free cash flow which we define as cash flow from operations less Capital Expenditures, came in at 12.5 million for the quarter, up 171% over the comparable prior year quarter.

As of June our cash balance was $98.2 million, up approximately 7% from $91.7 million at the end of March.

During the quarter we repurchased approximately 684,000 shares of our common stock for approximately $11.4 million, of which 7.8 million was paid for as of June 30, 2008.

Under the current program we now have purchased approximately 26.4 million of combo of stock in the last two quarters.

We are also announcing an increase to the stock repurchase program of an additional $40 million, increasing the total stock repurchase program to $80 million, which means that we have 53.6 million remaining to spend on future potential stock repurchases through August 2009.

In order to maintain our liquidity position while accelerating our stock repurchase program we have opened a credit facility, under which we can borrow up to $40 million at favorable interest rates.

Borrowings under this facility can be used to repurchase our common stock under the repurchase program, or to provide for working capital, and/or general corporate purposes.

However, we currently intend to use this facility exclusively for stock repurchases.

We believe our stock is currently undervalued, and we will continue to be active in our stock repurchase program.

Our DSO was 69 days.

This is up from 63 days in the prior quarter, and is primarily due to lower revenue on higher average Accounts Receivable balances.

Deferred revenue increased $3 million, or approximately 5% sequentially over the prior quarter.

Capital spending was approximately 1.6 million in the first quarter.

Our current estimate for FY 2009 capital spending is between 5 million and $5.5 million.

Now on to taxes.

The company used a nonGAAP pro forma tax rate of 30% for Q1 2009, compared to 28% in Q1 2008.

The GAAP tax rate for Q1 2009, was 32%, and we currently estimate that our fiscal year 2009 GAAP tax rate will be in the rate of 30 to 32%, based on our current assumptions.

The cash tax rate was less than 10% for the quarter.

Our cash tax rate in the U.S.

will remain lower than the GAAP and pro forma nonGAAP rate for the foreseeable future, mainly due to the deferred tax assets that we currently have on our balance sheet.

However , in most foreign locations where we are profitable, we do not have any NOL carry-forward.

As a result, we currently expect that our 2009 cash tax rate will be in the low-teens.

The Company continues to implement tax planning measures that are expected to keep the long-term terminal tax rate to within a range of 30% to 32% over the next few years.

Now I will move on to guidance.

As Bob previously mentioned, we providing Q2 guidance, and updating our fiscal 2009 guidance.

For the three months ending September 30, 2008, our total revenue guidance is $63 million, which represents revenue growth of 33% year-over-year, and 15% sequential growth.

Based on this revenue level we are expecting Q2 2009, nonGAAP gross margins to be approximately 87%.

We are also expecting nonGAAP EBIT margin of 16.5% for the quarter.

Based on this guidance, our total revenue growth for the six-month period would be 29%, and EBIT growth would be 33%.

While we intend to be active with the remainder of our stock repurchase program, we did not take into consideration any stock repurchases in our EPS calculations.

Using a share count of approximately 44.6 million and applying a pro forma tax rate of 30% for the quarter, we are expecting nonGAAP EPS to be $0.17 for the second quarter of fiscal year 2009.

The quarterly nonGAAP guidance excludes approximately $0.04 per share, related to the effects of stock-based compensation expense under FAS 123R, which is net of nonGAAP income tax expense of approximately $0.02 per share.

Now for the full year guidance.

As a result of our confidence in Q2 and our outlook for the balance of fiscal year 2009, we are also raising our guidance for fiscal 2009.

We anticipate fiscal year 2009 revenues to be approximately 250 million, which represents revenue growth of 26% year-over-year.

Based on this revenue level, we are expecting fiscal year 2009 nonGAAP gross margins to be 86.7%.

We continue to expect that we will improve nonGAAP operating margins by about 150 basis points above fiscal year 2008 levels, for a nonGAAP EBIT margin of 18%.

Using a share count of approximately 44.5 million to 45.5 million shares, and applying a pro forma tax rate of 30% for the full year, we are expecting nonGAAP EPS to be in the range of $0.72 to $0.74 per share.

Our guidance includes an interest income rate assumption of 2% to 2.5% on expected cash balances, but does not include any potential interest expense from our credit facility.

The nonGAAP guidance excludes approximately $0.16 to $0.18 per share, related to the effects of stock-based compensation expense under FAS 123R, which is net of nonGAAP income tax expense of approximately $0.07 per share.

That concludes my prepared remarks, and with that let me turn the call back over to

Thank you, Lou.

As I mentioned at the start of the call, our Q1 growth rate was negatively impacted by the timing of the closing of several large deals.

The fundamentals of our business remain strong.

Our funnel growth and strong start to the Q2 quarter, gives us confidence we will be at or ahead of our expectations come mid-year.

In addition, we believe our fully staffed sales force and the strength of our expanding distribution, will enable us to meet our revised upward guidance for the balance of fiscal 2009.

I would like to talk about distribution.

We have made excellent progress in bringing the U.S.

sales force up to full staffing levels that are required to hit our growth targets.

We are making progress in expanding our relationship with Arrow.

We are in execution mode with our new European distributor, Magirus.

We are in the process of expanding our relationship with Avnet in EMEA.

We continue to make substantial progress in broadening our geographic coverage, including discussions with other strategic global partners.

We have signed an amendment to our existing OEM and resale agreement with HDS, which should enable us to increase our effectiveness through HDS.

And last week [Down Cobble] signed a three-year agreement aimed at broadening distribution of CommVault's Simpana software and services through Dell software and peripheral channels on a worldwide base, with CommVault, Dell will offer it's customers a full spectrum of data information management solutions that reduced costs and complexity for Dell and their customers.

We are also making progress on additional avenues of distribution which we are forecasting to have completed and in place in our fiscal fourth quarter.

In summary, we are continuing to broaden our global distribution reach, in order to meet our near term and longer term growth objectives.

I would like to talk now about innovation and future product direction.

Let me spend a few minutes updating you on our progress on our next-generation technologies.

As I have mentioned before, we have been investing substantial amounts to ensure that we increase our highly differentiated value proposition in the market.

Our next Simpana release will be by far the largest release in our history.

Typically we introduce a new release about every 18 months.

Considering we released Simpana 7.0 in July of 2007, our next major release is on-track, and we are looking forward to some new product announcements later in our fiscal year.

Our internal testing on our upcoming release confirms our belief that this release will enhance our competitive position in our core data management market, open up new market opportunities, and broaden our position in information management.

As I have mentioned previously the release will include the following, breakthrough new ways to manage Data Protection, significant innovations for block level reduplication, next-generation automated records management, better ways to manage workstations and laptops, better ways to manage the growth of databases, enhanced data management and personalized server environments, and next-generation technology for the management of tape.

In summary, these products and a strong distribution engine behind them, I am confident about the core strength of the business, including the growth of our ADM products.

I was not satisfied with our overall Q1 results, although I was pleased with the growth of our international operations, and the significant growth of our global funnel.

I am very encouraged with the strong start to Q2, both domestically and internationally, including the number and size of large enterprise deals won, and that are in our funnel.

As discussed we are making excellent progress in broadening and strengthening our global distribution capability, we are also really excited about the depth and breath of innovations and our next software release.

We believe we are the best positioned company to meet the current and future needs of the industry, which is why we have raised our annual guidance for 2009, and doubled our stock repurchase program.

With that, I would like to turn the call back to Michael who will open it up for Q&A.

Michael.

Thanks, Bob.

Before we open the lines to your questions, I would like to highlight a few upcoming Investor Relations events.

Al will be speaking at the 2008 Pacific Crest Technology Leadership Forum in Vail, Colorado, tomorrow, August 5th, at 1:00 p.m.

Eastern Time.

In addition, he will be speaking at the 2008 North American Technology Conference hosted by RBC Capital Markets in San Francisco on August 7th at 2:00 p.m.

Eastern Time.

Al's presentations will be available live on our Investor Relations website, and will also be archived for 90 days.

Finally, we will be hosting our Annual Stockholders Meeting on Wednesday, August 27, at 1:00 p.m.

Eastern Time in Eatontown, New Jersey.

Details and a live webcast are available on the Investor Relations section of our website.

Can we please open up for questions, now?

Thank you, sir.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Tim Klasell with Thomas Weisel Partners.

Good afternoon, everybody.

A question that comes top of my mind here, some of the large deals that stretched out a little bit, have they already closed in this quarter?

Some of them have, Tim.

When I am talking about large deals, we typically talk about deals over 100,000.

But there are quite a few deals that are well north of 1 million.

And we have booked, we have strong bookings in that category already in Q2.

Okay.

Very good.

And as we sort of think about CommVault overall, as you begin to add more and more high level products, and the deals are getting larger, should we be thinking differently about the amplitude of the seasonality, versus what we have seen historically from Commvault?

If it wasn't for the results this quarter I would say no.

but some of these deals, we talk about deals over 1 million, Tim, and now we are talking about deals in the millions, these are in the 3 to 5 million 1-shot deals that are first orders.

Some of these deals are extremely large and we have many more deals over 1 million in the funnel, and a few of those slip, and it can skew the numbers and make things look differently than they really are.

So hopefully given the breath and depth of the distribution, the basic catch-up on our hiring that we can minimize what happened this quarter.

But the point is for the year, our overall outlook for the business hasn't changed.

It is just unfortunate we had the result we had this quarter, but it was really unfortunate, given the underlying strength of the business.

One final question here.

On your biggest competitor out there put up some pretty good numbers on their storage management business.

Has there been anything changed out there in the competitive landscape?

No, I mean our competitive win rate against Symantec, and against the other major competitors has not changed one iota.

We have said in the past that the win rate, once it ends up, and the deal enters our funnel is approximately 90%, and that has not changed at all and I congratulate Symantec on their numbers, but that had number to do with CommVault, as far as our win rate relative to Symantec.

Very good, thank you.

Your next question comes from the line of Aaron Rakers with Wachovia.

Please proceed.

Thank you for taking the question.

A couple questions as well.

I guess going back to the deal slippage, Bob, could you say if it weren't for maybe, throw a number out there, a couple, four, five large deals that had slipped, would you had basically hit the expectations that you had guided to for the year, or for the quarter?

We would have exceeded those expectations.

What I am trying to understand is that if you have a funnel build, and it sounds like there are larger deals north of $1 million that are taking a little bit longer just to effectively close, how do we get comfort that that won't be the case this quarter here, as we come up into the final couples of weeks of September?

There is a big difference is that as we speak, as I mentioned in my earnings overview, that we have already closed 85% of the number we closed all of last quarter.

In other words, what I referenced is we have in our hand orders that that are in our hand that equal 85% of the numbers that we booked in Q1 already.

So we will exceed all of what we booked in Q1 in the very near future here on deals over 100,000.

Over 100,000, okay.

And maybe if I could shift gears, one thing that was mentioned that is new in my opinion is the signing of the three-year relationship with Dell.

Maybe you could elaborate on that a little bit?

And also maybe talk a little bit about what you are doing to expand the relationship with Arrow?

Okay.

On Dell we have always had an SMP contract with Dell that we sold globally.

It didn't include all our products, and it didn't include all of their verticals.

And this includes all of CommVault, Simpana in all of Dell's verticals.

So it basically augments our OEM relationship, and there is more to come on Dell.

We are doing some other things with Dell.

So it was a win/win expansion of our Dell relationship.

On Arrow, I guess post Symantec and Arrow parting ways, I guess?

As we mentioned in the past we moved from one Arrow division to their ATI division, which is a much more solutions-oriented division.

And we are training their technical people now, and will have the sales people trained.

And then on Symantec, they are focusing on CommVault and putting a lot of people on training, to be a lot more effective with our value-added resellers.

Final question if I may, can you break down how significant maintenance is within the services line?

We typically have not, I guess you know from past history what that was, but we have not disclosed that number publicly.

Fair enough.

Your next question comes from the line of Tom Curlin with RBC, please proceed.

Hey, good afternoon.

Looking at some of these larger deals, do you think that part of what is happening here is a learning curve for the sales force, in terms of getting deals of this size done, or maybe the amount of friction that you see competitively, as you win deals of this size?

I would have to think that you are showing up more on the radar screen of competitors, if you are heading into the 3 to $5 million kind of deal size range?

Yes, Tom, almost all the once that slipped had nothing to do with competition.

They were procurement kind of related.

In almost all cases, not all, but they were mainly deals that we thought would close, that we had sufficient time in the closing process of these deals done, and for one reason or another they got stuck, and came out on the other end of the quarter.

And it was just kind of luck of the draw, and really unfortunate given the strength of our funnel.

As we entered this quarter in fact going to the end, we were feeling really good here not only about Q1 but Q2, the funnel is big, we have all of these big deals, we were probably going to overachieve the number and we didn't.

But I would say in the vast majority of the cases it had nothing to do with competition in the category, but stuff happens.

Fortunately the vast, vast majority of those would be in, either are in our hands, or will be in our hands in Q2.

Can you talk about the mix of these deals?

Are these broad Simpana full suite --?

These are broad Simpana full suite deals, you bet.

And big.

I mean some of them are extremely large.

Any particular verticals that might be new to you as a result of the traction?

They are still horizontal, but we are seeing globally by the way a lot of deals in the government sector.

Okay.

All right.

Thank you very much.

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

Hi, my first question, of the 85% of the enterprise volume from last quarter that you have closed already, how much of that, is it safe to say that almost all of that were deals that you were expecting to close last quarter?

Yes.

You mentioned the dollar volume of large deals was up strongly, up 30%.

I was curious on the smaller more transactional deals, how did those grow?

They exceeded our forecast, the smaller deals.

This was a large deal issue clearly.

I mean, it wasn't the small deals.

That was surprisingly strong and in addition to that, the amount of ADIM in those smaller deals was also surprisingly strong, given the fact that our enterprise deals were off, we were surprised that our ADIM sales as a percent of revenue were so high, and it grew 109% year-on-year.

And the transactional trends so far that you are seeing in this quarter so far, how are those holding up?

I just got off a revenue call, I mean that is why we raised guidance.

We wouldn't have raised guidance, our criteria to raise guidance for the quarter and the year was that just to validate what we thought, in terms of what slipped and the size of the funnel, what came into the funnel, and what was on-track to close in Q2.

So we are feeling really good at the moment.

But at the end of the day it is what is booked, what gets in here is orders, and what gets booked by finance is going to determine it, but right now we are feeling good not only about the quarter, but the visibility of some of these really large deals going on into Q3 and Q4 are coming in very strongly also.

I am talking about deals not only over 100,000, we are talking about deals well over 1 million.

Got it.

Okay.

Thank you very much.

Your next question comes from the line of Aaron Schwartz with JPMorgan, please proceed.

Good afternoon.

I had a question on the deals that didn't close in the quarter.

Should we read anything into that in terms of you being disciplined around pricing, in terms of maybe not discount to go close deals in a quarter, or was that purely a procurement deal that was just out of your hands?

It wasn't pricing, Aaron.

We are disciplined.

We are maintaining our discipline.

We didn't try to move things by significant discounting.

In almost every case these were the closing process, a procurement issue.

Of which I won't, but some of the, it is going to sounds really silly as to why some multi-million dollar deals didn't close but they didn't, on just things that happened in the procurement process.

So it had nothing to do with pricing.

If we look at the full year guidance you raised that number.

Can you talk about the close rate assumptions there?

Is it a stable close rate assumption, and you just have a larger pipeline at this point, or did you actually change the close rate assumption, because you have more traction with some of the sales investments that you have made in recent periods?

We assumed a more normal close rate than we had last quarter, because last quarter was unusual.

And I mean the raising guidance clearly ties to our visibility.

And the visibility when you are closing seven-figure deals, they cover a lot of territory.

And the funnel of those kind of deals is the highest it has ever been in our history, and we have good visibility to them, and that gives us more confidence in validating, not only the funnel itself, but raising our guidance.

Okay.

And then lastly for me on the expense side it sounds like you are done with sort of the catch-up hiring in the Americas, if that's the right term for it.

Is this the expense that you had in Q1, is that sort of the normal run rate we should look at outside of additional commissions, or will you continue to add internationally, are there going to continue to be hires that we should think about when modeling the sales and marketing out?

As I mentioned in the call, to date we have not seen an impact on our revenue or funnel build from the economy, in the last quarter.

It doesn't mean that we won't given the uncertainties we see out there, but to date that hasn't impacted us.

We are extremely confident about where we are, as far as competing technically against our major competition.

We have got a really significant new release coming out, that we are now confident about what it is, and when it is going to come out.

We are expanding distribution, and we are opening up more markets.

And we are seeing on a relative basis, our ability to compete in general is going up.

Given that, we are continuing to invest as I mentioned in the past for the long-term sustainable growth for the Company, and we are continuing to make those investments.

Okay.

That is helpful.

Thanks for taking my questions.

Your next question comes from the line of Michael Turits with Raymond James.

Hi guys.

Were there any other deals that slipped, did any of the customers mention budget issues there in any way?

Yes, I mean some of them were, one was a budget issue, because someone took the money out of the wrong bucket, and it had to be re-bucketed.

But most of them which may sound silly, but when you take a multiple seven-figure deal, and it is in the wrong deal, and it costs you a few weeks, it has an impact.

There are budget issues out there, but at the end of the day there is enough money in our funnel and deal closings, for us to hit our numbers.

And we haven't seen, there has been some, I call 'at the margin' issues related to budget, but those issues really didn't impact our results.

And then as you move to larger deals, is it just a question that now you need to maybe readjust what you think is a typical sales cycle, to incorporate longer larger deal procurement types?

We try to do that in our forecasting, but to be honest with you, we had so much coverage going through this quarter that we still felt, way into the quarter, just because of the breath and depth of our coverage relative to our number, that we were going to comfortably meet or exceed that number, and we didn't.

I don't know what to say.

It was just clearly surprising and unfortunate, but that is what it was.

And then these deals came in.

So I would say that our guidance for Q2 has taken into account, that we have enough coverage to hit that guidance.

Last question, I think you said around 60 to 67 headcount adds this quarter.

Last year you added about 140.

Are you still on, do you think you are going to do roughly the same amount?

You doubled last quarter's add.

Will that trail off, or will we ends up going well above last year's headcount adds?

We are planning on being a little above last year's headcount.

Obviously as you saw, we added 67 last quarter.

That was a strong hiring quarter for us on a net basis.

For the year we are anticipate we will be ahead of last year.

But a little bit, not significantly?

I would say modestly.

Okay.

Thanks.

Appreciate it.

Your next question comes from the line of Jayson Noland with Robert Baird, please proceed.

Thank you.

On the large deals you are seeing in the pipeline, $1 million more, 3 to 5 million, are they rip and replace deals, taking out a competitors product?

And what would you say is the driver of these deals?

Is it a re-architect type of thing with VMware, or what is going on?

I would say and Al can join in in a second, I would say in almost all cases, not all, there has been rearchitect, and in almost all cases there is a fairly large element of rip and replace.

I don't know if you want to add to that, Al.

I agree with that, Bob.

Most of them are rip and replace.

It is hitting the typical dynamics that we see out there, in terms of guys are rearchitecting based on server consolidation, some virtualization.

Usually there is a need to hit better recovery SLAs out there.

And again the underlying dynamic is based on data growth.

So fairly typical but we have definitely seen it in these bigger deals.

I will also mention that we are seeing in a number of cases, competitors running into scale issues, either on the front end or the back end, meaning having scale issues tied to data management, you can call them backup windows, and on the other side, difficulty in recovery, and we are also another major motivator is support and reliability of managing these disparate platforms, relative to our single platform.

Are you guys targeting larger enterprises, or are OEMs taking you in?

Well, clearly we have been as a company, we have been on what I call a student body right for now about three years, to target the whole company has been, we engineered to focus on the enterprise with our overlay sales force, and our partners are taking us in.

So it is a combination of both of those.

One last question for me, maybe Bob if you can talk about the software as a service opportunity a little bit for the long-term?

Well, it hasn't shown up as a number that is greater than 10% of our revenues, but underlying that is a strong growth driver.

I don't know the exact number of accounts now that use our platform as their SAP engine, but it is certainly pretty substantial, and it is a major growth driver for us,and I think everyone knows that it comes like Rackspace and Sentra, I think [Lesorgin] use CommVault as their engine.

So we are winning quarter-on-quarter, we are bringing more and more customers in, who are using our platform for SAP.

It is a major growth engine for us, and I will just let Al spend a second on some of the underlying technologies, that enable to us compete really effectively against our competition in this area.

Al, you may want to take two seconds here.

I think probably number one it was just a large operations in big scale.

As you guys know, most of these managed services are planned offerings out there, have thousands and thousands of customers, and therefore servers or applications to try and manage here.

And I think a number of things we do there is really not only competitive, but vastly superior.

So then it gets into a number of things of how we move data, how we move data over networks, all of the capabilities and advantages we have in that arena.

And probably lastly and big operational authority in management.

A number of things in our suite work really, really well in these large operations.

Thanks, guys.

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

Good afternoon.

Just a couple quick questions.

One, can you comment on the traction you saw with Sun in the quarter?

I would say Brian, it is spotty.

We are getting Sun orders in now this quarter.

In certain markets we have traction, in others we don't.

But again there are orders coming into our funnel and closing, but it is at this time I would call it spotty.

Okay.

And then secondly, you mentioned block level reduplication is something that is a forthcoming focus of yours.

Is that something that we would expect to see integrated as a feature of Simpana, or would it be something that could appear as a standalone appliance?

It is clearly integrated and yes, it could be used as a standalone appliance in both cases.

On the integration side, we are unique in that our reduplication technology carries with it all of the basic function of Simpana, you can encrypt it, you can search it, you can archive it, you can move it to tape.

So it is clearly and it scales much higher than the existing hardware technology that is out there, and is a lot less costly.

So it is clearly, reduplication is a function that has high value to the customers, and we have fully integrated that function into our Simpana platform.

And, yes, Commvault is not going to get into the appliance business, but I think I mentioned in the past, that we do have partners that are going to be using our code for appliances in general, and more to come on that subject when these technologies, or these products begin to hit the market.

Great.

Thanks.

Your next question comes from the line of Steve Koenig with KeyBanc Capital Markets, please proceed.

Hi, guys, thanks.

Wanted to just get a housekeeping question out of the way.

Did you say that ADIM was 27% of software revenues?

Did I hear that right?

I believe that is the right number, Brian.

It was 27% this quarter, down from 28% last quarter.

And up from 15% in Q1 FY '08.

Okay.

On the Simpana product cycle, how should we think about that, as we move into the back half of the fiscal year?

Should we expect that software revenue growth would decelerate as the product cycle gets a little older?

And what did you assume in guidance in terms of the new product, and how do you manage that product transition, so as not to disrupt your fiscal year end?

We did the same thing with Simpana 7.0.

And it really didn't, we managed that really well with our customers.

And our customers can always buy, when we automatically upgrade them to the core features that are in the product base they buy today, and they can purchase new products at a price, when we come out with a price book.

So we don't anticipate a disruption in that regard.

But I mean we feel that it is very manageable.

And obviously if we are coming out with this product some time in our late Q3, Q4, that typically we don't plan for a big revenue from a planning guidance standpoint, we don't assume a lot of revenue from new products until into the next fiscal year, which would be our FY '10.

Okay.

We are really confident about what we have.

We are well enough down the development process, obviously if we are this far down you pretty much know what you got, and this release by the way is significantly larger than our last release.

The last release was the largest in our history, and had [thousands] of new lines of code, and this release is significantly larger than our previous release.

Okay.

Regarding the Q2 here, is it possible to expect that linearity would be normal in the Q2, or should we think, should we expect the quarter should be much more front end loaded, given that you probably had some large deals close here, given the stats that you cited?

We wouldn't have raised guidance unless it was a lot more front end loaded.

Okay, that is fair.

Lastly on just a question or two about Symantec here.

They look like they are now growing faster than the market.

I guess the overall question is, if Symantec is able to stabilize their share, and you continue to grow yours this fast, and now that it appears that NetBack is maybe a more stable product than it used to be and has better disk space backup, how has your positioning change when you go up against Symantec?

All I can say is our new big deal funnel is growing, and our guidance that we just gave you our growth prospects seem to be strong, and Symantec has some very large accounts they seem to be very successful.

In spite of that.

Okay.

Thanks a lot.

Your next question comes from the line of [Gabe Lowrey with Lowrey] Research.

Please proceed.

Good afternoon, gentlemen.

Bob, can you shed a little light on some of those seven figure deals that are in the funnel that have closed, in terms of the geo-mix on that, and whenever some of those came through partner or direct?

Just in general, Gabe, it is global.

What we are seeing this quarter is a lot stronger U.S., than what you will see in those seven figure deals is deals in the U.S.

and globally.

And since a much larger part of our revenue now is coming through distribution.

I think that will show up in our numbers, that our distribution is working, and we are working with partners on a number of those large deals.

Would any of those touch into the, let's call it emerging markets?

You mean like--

China, India?

Not in Q2.

But a lot of them will come from international revenue.

Okay.

Thank you.

Your next question comes from the line of Philip Winslow with Credit Suisse.

Please proceed.

Hi, guys.

Most of my questions have been asked.

Just wanted to do dig a little bit into your expectations for operating expense growth.

You guys talk about a full year nonGAAP EBIT margin of close to 18%, but 16.5 for Q2.

You guys are kind of guiding reasonably flattish, or actually up I will call it 30 to 50 bips year-over-year in the first half, but the second half I would actually have to take it up close to 20% to get to your full year, or call it 19 to 20%.

How should we expect expenses to sort of moderate in the second half?

Is there anything going on in Q2 that is not going to continue in the second half?

I just in general, I understand where you are going on this.

Obviously we are continuing to invest, and if you just work your model backwards, and I think you will find the answer.

But we are just giving guidance on Q2 and the fiscal year.

We are not going to get into the quarterly numbers on operating expenses for Q3 and Q4.

And I guess at a higher level, where should we expect for the majority of the focus to go between sales and marketing, R&D and G&A, and maybe --?

Clearly we are clearly, the bulk of the investment is going to be on sales and marketing and support.

They go hand in hand, because you put sales people out there, you have to put your support infrastructure in place, both field support and corporate support.

And we are expanding marketing worldwide to support our distribution in a broader distribution model, so that is where the bulk of the investment is.

Where we continue to invest in, obviously we have a major release coming out, and we are defining the releases after that, we are right down the path on the next couple of releases.

So that will continue, there are a lot of things we can do to innovate, and create value for our customers, and continue to expand in our available market.

So we will continue to do that as well.

But on a percentage basis the bulk of the near term investment will be in sales, marketing and support.

Got it.

All right.

Thanks, guys.

Your next question comes from the line of Walter Pritchard with Cowen.

Please proceed.

Most of my questions have been asked and answered as well.

The last one around seasonality of the business, I wonder how have the different seasonality that you experienced in the first half of the year, impact what you might expect in the second half, particularly as it relates to your general pattern of the September quarter being stronger than the December quarter, and then seeing a pretty strong uplift in March?

Typically, I think we have said in the past, Q1 is, if you go back five years, we had a number of quarters like this that are flat to down, and a prior couple of fiscal years our Q1 was slightly up.

And that is, if you look at the underlying business, this quarter should have been slightly up and it wasn't.

But our Q2 I am not sure you can go by past dynamic, because we are seeing a different dynamic of the business.

We are seeing the company shift to much larger enterprise deals, we talked a lot about that during the call.

We are seeing a significant product line shift.

We said our ADIM products were up over 100% versus last year.

And we are seeing distribution at the lower end being affected.

So I am not sure it's normal seasonality, but more tied to the dynamic of the growth of the Company.

And the wildcard is, that we haven't seen yet, is do we see any negative impact from this economy globally.

Thanks a lot.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.