Commvault Systems Inc (CVLT) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to CommVault's fiscal third quarter 2009 conference call.

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

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

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

Michael Picariello, Director of Investor Relations.

Please go ahead, sir.

Good afternoon.

Thanks for dialing in today.

With me on the call 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 expectations.

Actual results may differ materially due to a number of risks and uncertainties, which are discussed in our SEC filings and in the cautionary 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 circumstances.

Our earning press release was issued over the wire services after the market closed today and has also been furnished to the SEC as an 8-K filing.

The press release is also available on our IR 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 the table accompanying the press release and posted on our website.

This conference call is also being recorded for replay and is being webcast.

An archive of today's webcast will be available on our website following the call.

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

Thanks, Michael.

Welcome everyone, and thanks for joining our fiscal third quarter 2009 earnings call.

For the quarter, we achieved revenues of $60.1 million, up 19% on a year-over-year basis versus $50.3 million in fiscal Q3 2008.

Software license revenue grew on a year-over-year basis by 16% while our services businesses grew 23% year-over-year.

For the quarter, non-GAAP operating income or EBIT was $9.1 million, up 5% year-over-year versus EBIT of $8.6 million in fiscal Q3 2008.

Non-GAAP earnings per share for the quarter was $0.15.

We are certainly not happy with these results.

The results were especially disappointing since the underlying business was strong.

We had solid funnel growth, new accounts increased from 274 in fiscal Q2 '09 to 433 in fiscal Q3 '09, confirming our VAR channels were strong.

The primary issue that negatively affected our revenue was big deal slippage at the end of the quarter from the government sector in the US and several large deals in EMEA.

We also saw a negative impact from a more challenging economic environment with accounts taking longer to get approval on capital requests, deal shrinkage, some deal cancellations and negative impact on revenues from foreign exchange.

Based on early information from various industry sources, we estimate that the industry year-over-year growth rate for the December quarter was only about 3% compared to about an average of 12% for the past few years.

Funnel growth in Q3, especially our big deal funnel, continued to be strong with our funnels continuing to increase at significant rates.

However, we saw lower funnel close rates at the end of the quarter as a result of the economy.

While we did anticipate that we would see lower close rates and therefore, had added additional sales capacity to compensate, the actual close rate was lower than what we expected.

We believe we now have enough sales capacity in place to sustain relatively high growth rates with current close rate assumptions.

So far this quarter, funnel growth is doing well.

Our total fiscal Q4 2009 funnel was strong and in particular our big deal funnel is strong.

This includes some deals that did not close in Q3 and a large number of new enterprise deals that are expected to close in Q4.

We continue to compete successfully and pick up market share from our largest competitors in the enterprise market.

In the major deals that we have competed in, in Q3 and Q4, we have not seen our customers reluctant to switch because of current economic conditions.

We are competing in an environment where enterprises are challenging their IT organizations to do more with less or to accomplish objectives by doing nothing.

But this is not new to CommVault.

We have effectively competed for years in the mature backup market, where we have to displace an existing competitor who often gives away their software for free.

In that kind of competitive environment we have always been able to provide a compelling ROI value proposition which enables customers to do more with less.

Most of our major account wins have been based on that selling proposition.

For example, in Q3 a CIO of a multibillion-dollar company informed CommVault that their IT department had been challenged to do more with less budget.

After we helped them through the ROI business case for our backup software and identified areas from which the CEO could pull other budget dollars from, not only did we win the high six-figure dollar deal, but we expect to save the company 55% in data managed expense over the next three years.

Not to mention we expect an ROI to break even in nine months.

That particular customer is now looking at our additional features in Simpana 8, specifically dedupe, so they can save even more money over the next three years.

In addition to a strong selling proposition, our channel effectiveness has improved particularly in the US.

This is the result of moving to Arrow's ATI division and a much improved US channel organization and a much more channel friendly US sales force.

Our overall global channel effectiveness is evidenced by our ability to continue to add a significant amount of new customers to our base.

As I mentioned earlier, we added 433 new customers in the quarter.

As usual, the new customer additions do not include a large number of small orders from new OEM customers who register through the internet.

Our customer base now totals 9,700.

With a strong distribution foundation in place, we'll be able to launch Simpana 8.0, which was publicly announced on January 26th, much more aggressively and effectively.

Al and I will discuss Simpana 8.0 in more detail during the call.

Turning now to update our strategic partnerships.

Primarily I'll talk about Dell.

Sales through both our OEM and S&P relationships with Dell accounted for approximately 20% of total revenues for fiscal Q3 2009.

Total quarterly Dell revenues were up 6% year-over-year.

In Q3, Dell started to ship the new integrated backup-to-disk appliance powered by Simpana 7.0.

This offering is built on the new Dell PowerVault DL2000 and is customer installable, an integrated software and hardware solution, which includes built-in deduplication and remote office replication.

One of our competitors also offers an appliance through Dell, but theirs does not include built-in deduplication and remote office replication.

The competitor's product is geared towards the lower end of the market.

Our product is focused on the higher end of the SMB market where our revenue per unit is much higher.

We are clearly pleased with the results to date on the revenue derived from the DL2000.

We expect revenue from this offering to accelerate in FY 2010.

Our other key strategic partnership with HDF network appliance at MacAfee continued to progress well.

In Q3 '09 approximately 39% of our software revenue came from deals over $100,000 compared to 33% in the third quarter of last year.

The dollar volume of deals over $100,000 grew 36% year-over-year.

Our average deal size for deals greater than $100,000 was approximately $250,000.

As we have previously stated, there are going to be some quarterly fluctuations in the number of deals over $100,000, especially with longer sales cycles.

Since the release of Simpana 7.0, enterprise deals have grown at an average year-on-year rate of 60% quarterly.

In deals over $100,000, sales of our NDM products represented approximately 28% of the sales in the third quarter, compared to 33% of the sales in the third quarter of fiscal 2008.

Let me now provide some color on how Simpana 7.0 is doing with deal stats before speaking about Simpana 8.0.

For the fiscal Q3 2009 sales of our advanced data and information management products, or ADIM, grew 11% year-over-year.

This growth rate was negatively affected in the quarter by lower portion of big deals in Q3 relative to Q2.

Typically big deals carry a much higher percentage of ADIM product revenue.

ADIM products represented 25% of software revenue versus 26% in Q3 of last year.

Archiving, single instancing and search functionality continue to be the key drivers for the growth of these products.

Sales of our non-backup product has been growing at an average year-over-year rate of 82% quarterly since the release of 7.0.

Currently approximately 55% of our entire installed base is using Simpana 7.0.

Now I'm going to talk for a minute on Simpana 8.0.

Simpana 8.0 is the biggest software release in CommVault's history.

The objective of this release was to significantly increase our value proposition for our customers and expand our differentiation from our competitors.

The results of beta testing confirmed that we have met the high end of expectations for this release.

In addition, we were able to get the release out early.

We believe the release of Simpana 8.0 significantly increases our value proposition relative to any competitor, in regard to helping our customers drive cost down and improve operational efficiency.

Specifically with Simpana 8.0 we are able to bring to market leading edge, end to end block level deduplication that is unmatched by any competitor.

Next generation snapshot based data protection and significant enhancements to our virtualization archiving compliance and information management solutions.

These innovations enable a user to dedupe data across all tiers of storage, including tape, which can reduce a users tape drives as much as 50% and reduce offline tape storage as much as 90% and enables users to eliminate their backup windows, provide leading solutions for virtualized environments and archive, preserve and search information seamlessly for eDiscovery.

In summary, we have seen storage cost savings by as much as 40% from customers in our beta program and from a singular platform that no other vendor can match.

At a training session in the UK last week, one reseller called the release game changing.

In summary, we expect that our ability to pick up market share will accelerate with Simpana 8.0 as customers understand the increased ROI potential of Simpana 8.0's functionality.

We are already seeing Simpana 8.0 drive funnel growth, especially from the new deduplication functionality.

Al will speak further about Simpana 8.0 later in the call.

I want to talk about continuing our investment to drive long-term growth.

We are realistic about the recessionary state of the global economy and have taken the necessary steps to control spending in certain areas.

However, CommVault will continue to be a visionary in the industry and is making the required investments to ensure that we enhance CommVault's position as the leading innovator of data and information management technologies and services.

Specifically, we have just completed a comprehensive strategic planning process to define our longer term vision for the company.

The objective of this process was to ensure we would sustain high long-term growth, strengthen our position in our current markets and open up major new market opportunities.

Our R&D team is already working on the release after Simpana 8.0, which will form the foundation for our broad strategic direction.

You may have seen in this week's issue of Business Week where CommVault was noted as a top R&D pick, stating those companies that increase R&D spend during a recession have a history of accelerating growth versus competitors in the recoveries that follow.

We know we will come out of this recession in a stronger competitive position as a result of our continued investment in innovation.

I'll talk a second about fiscal 2010.

We will not comment on fiscal 2010 guidance until next quarter's earnings call in May, however, we are taking a number of actions which we believe will enable us to achieve reasonably good growth in fiscal year 2010.

These actions include having enough sales capacity in place to achieve a high growth rate with lower close rates.

That capacity fundamental is in place as we speak today.

Early marketing and sales effort aimed at bringing Simpana 8.0 into the market on a fast ramp, for example, Simpana 8.0 was made available to our channel last week versus waiting for the first service pack as we did for Simpana 7.0.

And increasing our channel leverage through our mass of distributors and our VAR channels.

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 third quarter, along with providing guidance for the rest of fiscal year 2009.

I'll start with revenues.

Total revenues for Q3 were $60.1 million, an increase of 19% year-over-year and a decrease of 5% sequentially.

Software revenues were $31.3 million, an increase of 16% year-over-year and a decrease of 11% sequentially.

Approximately two-thirds of our software revenue continues to come from our installed base, with the rest from new customers.

Services revenue were $28.7 million, an increase of 23% year-over-year and 2% sequentially.

Our maintenance attach rates continue to be strong and in line with historical levels, however we are seeing less growth in our deferred revenue balance as a result of foreign exchange and fewer multiple year maintenance deals.

In addition we have seen some delay in customer renewals, which did impact the quarter slightly, but most of those customers renewed in January.

Our maintenance renewal rates continue to be strong, but more resources are being dedicated to those renewals in order to ensure that our renewal rates remain high in the current economic environment.

We also believe that our track record in support, plus the release of Simpana 8.0 will mitigate some of the potential downward pressure caused by the current economic environment.

The revenue mix for the quarter was 52% software and 48% services.

We anticipate the split for the year to be 54% software and 46% services.

International operations generated 38% of our total revenues in the quarter and the United States generated 62%.

International revenue was up 18% year-over-year in Q3 fiscal 2009.

US revenue was up 15% year-over-year in Q3 of fiscal 2009.

We continue to face headwinds with the foreign exchange impact caused by extraordinary movement in global currency rates.

I will address the foreign exchange impact of our international operations later in my remarks.

Gross margins were 87.1% for the quarter.

Gross margins on our software revenue were 98.3% in the current quarter versus 97.6% for the prior year quarter.

The gross margin for services revenue was 74.8% in the current quarter versus 73.1% in the comparable prior year period.

Now moving on to operating expenses.

Total operating expenses were $42.3 million for the quarter, up approximately 24% year-over-year, while down approximately 4% sequentially.

The year-over-year increase in expenses is largely due to increased sales capacity and our investment in delivering our latest release of Simpana 8.0.

That not withstanding, we have reduced our headcount additions in Q3 to bring our operating expense growth rate down.

This downward trend in headcount additions will continue in Q4.

Sales and marketing expenses increased by $8 million or 36% over the prior year period.

Approximately two-thirds of this increase was related to higher headcount and increased commissions on higher year-over-year revenue.

The rest of the increase was primarily due to higher travel and related expenses associated with higher headcount and funnel build opportunities.

Research and development spending increased by about $800,000 in the quarter or 12% over the prior year period.

We will continue to invest in our R&D efforts.

G&A expenses decreased by $400,000 or 8% over the prior year period.

This decrease is primarily due to foreign currency transaction gains recognized in G&A during Q3 2009 related to certain US dollar denominated assets recorded on the balance sheet of our foreign operations.

We added 45 employees during the quarter, bringing total worldwide headcount to 1,046 at the end of December.

The headcount increases were primarily in sales and technical services.

Non-GAAP operating margins were 15.1% for the quarter, resulting in non-GAAP operating income of $9.1 million.

This represents EBIT growth of approximately 5% year-over-year.

The non-GAAP net income for the quarter was approximately $6.6 million and non-GAAP EPS was $0.15 per share based on a diluted weighted average share count of approximately 43.1 million shares.

Now I'll talk about cash flows.

Cash flow from operations was approximately $8.4 million in Q3, down approximately 36% over the prior year quarter, primarily due to negative changes in working capital.

Cash flow from operations for the first three quarters of fiscal 2009 was $36.6 million versus $23.4 million for the comparable prior year period, which represents an increase of 57%.

Free cash flow, which we define as cash flow from operations less capital expenditures, came in at $7.7 million for the quarter, down approximately 35% over the comparable prior year quarter.

Through the first three quarters of fiscal 2009, free cash flow was $33.2 million, an increase of 64% over the same period a year ago.

As of December 31st our cash balance was $100.8 million, down from $101.3 million at the end of September, primarily due to our stock repurchase program and I have a few comments on that.

During the quarter we repurchased approximately 490,000 shares of common stock, totaling approximately $4.8 million, but from a cash perspective we dispersed about $7.8 million.

Under the current program to date we have now purchased approximately $40.2 million of CommVault stock since February 2008 when the repurchase program was announced.

This represents a stock repurchase of approximately 2.9 million shares or roughly 6.5% of our shares outstanding as of when we started the stock repurchase plan.

We are authorized to repurchase an additional $39.8 million under this existing repurchase program.

While we intend to be opportunistic with our stock repurchases, we will likely conserve cash in the short-term due to the current economic uncertainty.

Our DSO was 62 days.

This is up from 56 days in the prior quarter and up from 60 days in Q3 2008, due to a more back ended quarter in Q3 2009.

Deferred revenue increased approximately $1.3 million or 2% sequentially over the prior quarter.

This is lower than historical sequential increases, primarily because of foreign exchange and the reasons I stated earlier related to maintenance growth.

On a constant currency basis, deferred revenue would have increased by approximately $3 million or 5%.

Capital spending was approximately $700,000 in Q3.

Our current estimate for fiscal year 2009 capital spending is between $4.4 million and $5.0 million.

Now I'll spend a few minutes on foreign currency.

As I previously mentioned, our international revenue was 38% of our total revenue in Q3.

Our expenses and our revenues overseas are somewhat naturally hedged, because we generally price and invoice in local currency and customers generally pay in local currency.

If foreign currencies are weakening, causing our revenue to decrease, then our expenses generally decrease on as relative basis as well.

During the third quarter the US dollar strengthened significantly against most of the major currencies.

As a result, our Q3 growth on a reported basis is lower than our growth on a constant currency basis, when comparing against both prior year and prior quarter.

Specifically on a year-over-year constant currency basis, foreign currency movements negatively impacted our third quarter revenues by approximately 6% while positively impacting expenses by about the same amount.

Therefore, on a constant currency basis, our total revenues actually increased approximately 26% year-over-year, while EPS was minimally impacted compared to the prior year quarter.

In addition, on a quarter-over-quarter sequential constant currency basis, foreign currency movements negatively impacted revenues by approximately 6%.

Therefore on a constant currency basis, our total revenues actually increased approximately 1% sequentially compared to our reported sequential revenue decrease of 5%.

Now a few comments on taxes and then I'll address the guidance.

We are using a non-GAAP pro forma tax rate of 30% during fiscal year 2009, compared to a 28% non-GAAP tax rate in fiscal year 2008.

We believe that the use of a non-GAAP pro forma rate is a useful measure to compare operating results on a consistent basis over multiple periods, without the impact of significant variations.

Our GAAP tax rate for the past few years has varied greatly by quarter, while our cash tax rate has remained relatively low.

The cash tax rate in Q3 was approximately 13%, while the GAAP tax rate was approximately 40%, which was down from 43% in Q3 of 2009.

We continue to implement worldwide tax planning strategies that we anticipate will bring the long-term terminal GAAP rate within the range of 30% to 32%.

We estimate that the cash tax rate for the full fiscal year 2009 will be approximately 10% to 15%.

This is primarily because we have recorded on our balance sheet approximately $49.8 million of deferred tax assets that will be used to mitigate cash taxes over the next year.

Over time, our cash tax rate will approach our long-term terminal GAAP tax rate.

Now for guidance, we anticipate fiscal year 2009 revenues to be in the range of $241 million to $245 million, the midpoint of which represents revenue growth of 23% year-over-year.

Based on this revenue level, we are expecting fiscal year 2009 non-GAAP gross margins to be approximately 87.2%.

We are guiding to a non-GAAP EBIT margin range of 14.2% to 15.2% for the year.

Using the midpoint of our guidance, this represents EBIT growth of approximately 9% year-over-year.

Using a share count of approximately 43.8 million to 44.2 million shares, excluding any potential stock repurchases and applying a pro forma tax rate of 30% for the full year, we are expecting non-GAAP earnings per share to be in the range of $0.57 to $0.62 per share.

The non-GAAP guidance excludes approximately $0.17 to $0.19 per share related to the effects of stock based compensation expense under FAS 123R which is net of non-GAAP income tax expense of approximately $0.08 per share.

That concludes my prepared remarks.

I will now turn the call over to Al Bunte, our Chief Operating Officer.

Al?

Thank you, Lou.

CommVault's largest software release to date, Simpana 8.0, is the result of 18 months of development and includes over 300 enhancements and 140 newly added product features.

To help you appreciate the level of technical innovation in Simpana 8.0, I will tell you that we filed over 50 US patent applications related to this release.

Simpana 8.0 continues to build on the core value proposition that has driven our success to date, building on the success of our unique singular information management approach, this release helps companies manage larger amounts of data, enhance operational efficiencies and implement significant cost saving strategies.

There are several areas of enhancements with Simpana 8.0 that I would like to highlight.

First areas are global embedded data deduplication.

To control costs, companies are looking for innovative ways to manage double or triple digit data growth rates.

The rapid growth in the dedupe market is noted as one of the top IT priorities for 2010 to help address this challenge.

In Simpana 8.0 we introduced a software based global deduplication that extends through all tiers of storage, including the first to offer dedupe to tape copies.

The benefits of our unique approach are dramatic.

Due to the end to end approach of this feature, we offer significant infrastructure and storage cost advantages, as well as operational advantages such as recovery performance.

Being a software based solution allows our customers a broad choice of hardware for not only the initial copy, but subsequent copies in storage tiers as well.

Since Simpana dedupe preserves the data dedupe and extends the tape copies under typical retention strategies, customers can dramatically slash the number of physical tapes and also tapes being sent to offsite archives and the number of tape drives needed.

Because CommVault integrated dedupe intelligence directly into our data movement layers, we are able to minimize the impact on the network, maximize compression ratios and recovery speeds.

We're excited that dedupe will take out budget costs from day one and ultimately accelerate Simpana adoption.

The second area we'll talk about in general is smarter data management.

Today's dilemma of managing data growth is compounded by increasingly complex infrastructure and customer demands for better SLAs.

Two recent studies from Gartner and TheInfoPro both suggest that re-architecting data management solutions are a priority for IT organizations in 2009.

In Simpana 8.0 we introduced a host of features meant to address these challenges, which changed the landscape on how data is managed.

Our new Snap Backup feature integrates with leading hardware based snapshots including EMC and NetApp, to create recovery ready backup and archives directly from a snapshot.

These can be extended and moved to other tiers of storage, including tape.

For our customers this means we can virtually eliminate the need for operational backup windows, freeing up valuable server resources and providing more granularity in recovery times, while protecting the investment in array-based snapshots.

Managing the VM sprawl has presented numerous data management challenges for many of our companies.

Our new Universal Virtual Agent gives our customers comprehensive control over all aspects of data management operations in virtual environments for both Microsoft Hyper-V and VMware.

This includes data protection, archive, replication and reporting, all integrated to deliver a complete virtualization solution managed from a single console.

Mission critical data has rapidly moved to the edge of the network; from remote offices to the mobile worker, valuable information needs to be managed, protected and discovered.

Simpana 8.0 offers a new lightweight, low-impact, mobile laptop agent that creates backup and archive copies directly into the corporate data center and managed seamlessly under the Simpana singular platform.

Not only is the data now easily protected and managed, but also discoverable for litigation support.

Feedback from Simpana 8.0 beta customers has been overwhelmingly positive.

We've proven that switching to Simpana will deliver immediate capital and operating IT budget reductions, significantly increase operational performance and simplify data management.

For example, one of our beta customers is a global manufacturer of food products with approximately $2 billion in annual revenues.

This customer was able to eliminate the complex cocktail of five standalone data management products and all associated hardware, consumables and management costs, by moving to Simpana.

The Director of IT had a number of projects underway for space archiving, SharePoint backup, data dedupe, exchange message recovery and email archiving.

After deploying Simpana 7.0 late last year, he was able to collapse the projects and accomplish 100% of his goals with a singular management platform, eliminating a myriad of point products, complexity and cost.

In addition, their primary storage was near capacity and with Simpana they were able to reclaim space and delay purchase of additional storage by 20 to 24 months.

Their testing of Simpana 8.0's dedupe and virtual server management features alone are expected to save an additional $1 million in the first year, on top of the savings that they have enjoyed from deploying Simpana 7.0.

This is accomplished by better utilization of current storage hardware, avoiding the purchase of various toolkits and reducing the amount of disk and tape needed to keep backup and archive copies by approximately 90%.

Building on the strengths and advanced features we delivered in Simpana 7.0, we believe that Simpana 8.0 takes our innovation one step further.

Now let me turn the call back over to Bob.

Thanks very much, Al.

To summarize my comments, I was not satisfied with our overall Q3 results that fell short of our expectations.

In addition as I mentioned, we're seeing deal size reductions and deal cancellations as a result of the economy.

We have tried to anticipate all these factors in our guidance.

I'll talk about guidance for a second.

Even with strong funnels and the release of Simpana 8.0, we cannot ignore the fact that forecasting revenues and earnings has become more uncertain as a result of the current economic conditions.

This unpredictability and uncertainty is why we have revised our guidance down from previous estimates and why we widened the range.

On the flip side, all the elements of the business are executing well and we are seeing excellent business activity, funnel growth and our ability to compete is as strong as it's ever been, due to our improved technology and distribution positions.

Simpana 8.0 came to the market ahead of our expectations and we are very confident that the depth and breadth of innovations that this release brings, will significantly strengthen our competitive position.

We now have a much stronger global distribution in place and as a result are well positioned to bring Simpana 8.0 to the market faster, more effectively than any release in our history.

A major factor contributing to our improved distribution was the very successful sales and channel restructuring in the US that occurred over the past year.

We will have sufficient global sales capacity in place April 1st to achieve relatively high growth rates in fiscal 2010, with lower close rate assumptions.

In the near-term, our sales funnel continues to grow in both enterprise and SMB, even in the face of the current economic headwinds.

In summary, the foundations we have built for our business in regards to product, support and distribution relative to competition, are the strongest they've been in our history.

As a result, we believe we are positioned to continue to pick up substantial market share in the near term.

In addition, our strong financial position enables us to strengthen the long-term position of the company and we have defined a comprehensive long-term strategy that we are now executing.

We are in a strange position of delivering less than satisfactory financial results while having strength in every element of our business, including continued solid funnel growth.

There is no woe is me from our sales in our weekly revenue calls.

Our sales force and channel partners are still very positive.

But, and it is a big but -- but we're dealing with more uncertainty than we would like in predicting our revenue growth.

On balance I feel as confident about the business as any time in our history and know we have lots of ways to successfully navigate our way through the challenging current economy.

I will now turn the call back over to Michael.

Thanks, Bob.

Can we please open up the lines for questions now?

(OPERATOR INSTRUCTIONS) Robert Breza of RBC Capital Markets.

Bob, maybe just a quick question, as you look at what happened in the final few days of the quarter and big deals slipping, do you think the fact that -- did you see some deals delayed because of the new product coming in, Simpana 8.0, was that a factor?

And then maybe just a follow-up housekeeping question, as you think about headcount you said you added 45 in the quarter.

Do you think net heads get added in Q4 here or how should we think about headcount this quarter?

Thanks.

Sure Rob.

You are right in the slip was in the final hours of the quarter.

In addition to that we had deals as large as eight-figure deals that kind of got -- and it had nothing to do with the economy.

This is government deals -- that's kind of broken into pieces for reasons completely unrelated to the economy.

As far as Simpana 8.0, I really don't believe we saw delays from Simpana 8.0.

In fact underneath we're seeing clearly the opposite.

We actually shipped a couple of orders late in December on Simpana 8.0 and the response on Simpana 8.0, as Al mentioned, has been really overwhelmingly, extremely positive and we're seeing substantial funnel growth as we speak, as far as Simpana 8.0 is concerned.

As far as headcount, no, you will see headcount grow in Q4 maybe a little bit less, but somewhat similar to what we did in Q3.

But on balance, our headcount growth in the last half of FY '09 is substantially lower than it was in the first half of FY '09.

But the important thing -- the things that we invested in clearly, we wanted to make sure, because we knew that we'd have this tremendous impact of Simpana 8.0 in our market, that when we had sales and distribution capacity in place to maximize the impact of the launch and have substantial marketing support behind that.

So, we made those investments to make sure that launch would go exceptionally well.

In addition, we clearly are focusing on success for FY '10 and wanted to make sure we have enough sales capacity in FY '10 to hit a relatively solid number for FY '10 growth.

In addition to that, the important strategy we talked about for the long-term growth of the company, is quite compelling and we wanted to make sure that the release after Simpana 8.0 is part of the foundation for sustained growth over the next five years.

So, those investments are being made.

Sure.

Maybe as a quick follow-up, Bob, did you see any of those slipped deals close already this quarter?

Some closed and we expect the vast majority of those deals to close in Q4, some will flop over to Q1, but the vast majority will close in Q4.

Rajesh Ghai with ThinkEquity Partners.

A couple of questions on the guidance.

If you look at the guidance being provided for the full year, you still have a sequential increase of 2.6 to about 6 million sequentially in the fourth quarter.

I'm just curious what gives you the confidence in the uncertain environment that we are facing for that sequential increase?

Well, our funnel is very, very substantial, Rajesh.

I mean, we've got this enormous funnel and we keep lowering our close rates on that funnel, and you know, given where the funnel is, that a lot of these deals are in final closing stage, we think our guidance is reasonable.

But as I said, we're dealing with an environment that is uncertain and I can't tell you with absolute confidence that we've nailed it.

I can say under normal circumstances we would have met our original guidance, given the funnel we've seen.

But we're dealing with an environment that none of us have seen before and we're just giving you the best judgment that we have.

You know, we had a choice of giving no guidance and we didn't think that was right either.

So what I'm telling you is we saw very substantial funnel growth in this current quarter over last quarter, and we're taking that growth and lower close rates and we think those numbers are reasonable, and that's the best judgment I can give you.

And again, as I mentioned on the call, when I do revenue calls as far as deals coming into the funnel, new accounts, competitive wins, you wouldn't know there was a recession going on.

But at the end of the day it's where do you close at the end of the quarter and clearly we didn't hit our mark last quarter.

But the underlying fundamentals of the business look really good.

(OPERATOR INSTRUCTIONS) Steve Koenig of KeyBanc Capital Markets.

I'm wondering about the large government deal which was chunked up and it sounds like part of that closed in the quarter, would you expect remaining chunks of the deal to close within the next quarter or two quarters or is that a longer-term process?

As it turns out, Steve, none of it closed.

And it had to do with the prime contractor's execution with the government.

It had nothing to do with CommVault.

So we expect some of it to close in the fourth quarter.

We expect a fairly large chunk of it to close in FY '10 and some of it to actually slip into FY '11, the way the government is communicating to us on it now.

David Bayer with Cantor Fitzgerald.

The question has to do with Simpana 8.0 and I think you mentioned that the channel might be working with it before you get the first slipstream update, so maybe you can talk a little bit more about how that would work?

And I guess in general what I'm hearing from the channel is that in general they've been sort of conditioned to wait until the first service pack, so maybe a few thoughts on that?

We did it for two reasons, David.

One is the quality of this release is extremely high, so it's a very solid release.

And working with our beta customers, the demand for some of these key features, like deduplication, wide global deduplication and our virtualization solution and next generation backup, were so high, we felt that we could manage the channel early and this release is going into the channel.

I mean, in the US it is in the channel as we speak and we're bringing it through the channel in our international markets quite rapidly here over the next few weeks.

So, it's there.

It's ready to go and we got way ahead on our training schedules, so our channel is being trained.

We did a real tight knit job at training our internal staff early and a lot more effectively and we're ready to go.

Garrett Becker of Bank of America/Merrill Lynch.

Maybe I could just go back to Rob's original question on headcount.

I know you don't want to guide to FY '10, but the sales headcount growth was still pretty strong in the back half and you mentioned that a lot of that was just to ramp-up and get ready for 8.0.

So I guess I'm wondering, are you essentially done in terms of building the sales force and how should we think about that going beyond Q4?

Should we see a fairly decent drop-off in the hiring rate?

Well Garrett, the answer is, again, we're planning for success, not failure here, so we've put enough capacity in to do fairly high growth in FY '10.

So as far as the FY '10 investment, for all practical purposes that capacity is in place.

But the company doesn't stop in FY '10.

We've got to invest in FY '10 for FY '11.

So the FY '10 investment, yes, that investment has been made and I think those of you who have been close to the company know we ramped up the US sales force, and not only is the capacity in place, but many of those reps now are coming into full productivity and maturity and that's also helping us.

So, to answer your question, for FY '10 the investment has been made, but we will make investments in FY '10 for FY '11.

Derek Bingham from Goldman Sachs.

This is Fred Grieb for Derek.

What type of impact do you guys think that Simpana 8.0 will have on deal sizes in the coming year?

Well, we know it's going to go up, because we're seeing it as we speak.

And I won't give you a number, but it looks like it's quite substantial.

But until we have some history, I can't tell you.

But it's quite gratifying to see what's going on in our current deal flow.

(OPERATOR INSTRUCTIONS) Phil Winslow of Credit Suisse.

Hi, this is Dennis for Phil.

Can you discuss what specifically you're seeing in buying patterns with small to midsize businesses compared to large enterprises?

Any difference there in the current environment?

I think it's similar.

I think everybody is scrubbing budgets and being a lot more selective.

But just in general from a funnel standpoint, we are seeing an increase in our midsize deal flow as a result of our improved channel effectiveness.

I'm showing no further questions at this time.

Thanks very much.

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