Commvault Systems Inc (CVLT) 2009 Q4 法說會逐字稿

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

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

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

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

Michael Picariello, Director of Investor Relations.

Please go ahead, sir.

Good afternoon.

Thanks for dialing in today for our fiscal fourth quarter and 2009 year-end earnings call.

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 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 circumstance.

Our earnings 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.

A reconciliation between the non-GAAP and GAAP measures can be found in the accompanying 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 fourth quarter and 2009 year-end earnings call.

As you have already seen in our press release this was a challenging quarter for us.

The economic environment was particularly difficult, especially in enterprise accounts.

The negative impact from the recession affected our business in a number of ways; customers froze budgets, customers reduced their budgets, capital budget processes were extended, and we saw more pricing pressure from both customers and competitors.

While I'm not happy with the quarterly results, I continue to be encouraged by the progress we have made in managing the business and positioning ourselves for long-term success.

Our results for the fiscal year were solid and we continue to make progress in virtually all operational areas of the business.

The latest version of our software, Simpana 8, has shown excellent traction in the marketplace since its January 26 release and has exceeded our own expectations in terms of quality and customer acceptance.

Its leading edge features including end-to-end block level deduplication and next-generation snapshot-based data protection are unmatched in the industry.

Our strategic partnerships and distribution channels continue to mature, and we have several exciting initiatives underway that will you be hearing more about in the near future.

Lastly, we have worked hard to bring our operating expenses in line with current levels of the business while increasing investments on key strategic initiatives.

I will highlight each of these in greater detail for you in a moment and then Lou will provide more quarterly statistics later on in the call.

For the quarter, revenues were 56.1 million, down 1% on a year-over-year basis, versus 56.6 million in fiscal Q4 2008.

Software revenue declined on a year-over-year basis by 12% while our services business grew by 13% year-over-year.

For the year, revenues were 234.5 million, up 18% on a year-over-year basis, versus 198.3 million for fiscal 2008.

Software revenue grew on a year-over-year basis by 12%, while our services business grew 26% year-over-year.

For the year, non-GAAP operating income or EBIT was 32.1 million, down 2% year-over-year, versus EBIT of 32.8 million in fiscal 2008.

Non-GAAP earnings per share for fiscal 2009 was $0.53, versus $0.57 for fiscal 2008.

Recently, it appears that the psychology of the market has turned more positive as customer buying patterns and budget constraints seem to be improving, including our US federal business.

Many of our larger deals that were locked up have now been moved into procurement and some have closed.

In addition, new deals are now moving through the sales process on a more regular basis and our SMB channel deals have significantly increased.

Software license revenue and funnel growth in April and early May, particularly for large enterprise accounts, have definitely improved over the same period in January and February.

In addition, we are seeing a significant increase in new distribution and strategic partnering opportunities.

However, the environment is still tough and it is too early to tell whether we are seeing the beginning of a meaningful sustained recovery.

We are seeing across the board strong traction with Simpana 8.

Simpana 8 was released on January 26 to our field sales forces and most of our channel partners globally.

Our OEM partners are releasing Simpana 8 in May.

As you know, Simpana 8 is the only pure singular data and information management platform in the industry.

As the management of data and information becomes more complex, the cost benefits and operational efficiencies of a single platform become relatively more advantageous.

We believe the release of Simpana 8 has significantly increased our value proposition relative to any competitor.

This latest release continues to help our customers by reducing storage costs by as much as 40% in a relatively short period of time.

With Simpana 8 we have brought to market end-to-end block level deduplication that is unmatched by any competitor.

In addition, other equally compelling functions in Simpana 8 include next-generation snapshot-based data protection along with significant enhancements to our virtualization, archiving, compliance and information management solutions.

Simpana 8 has met or exceeded all of our expectations.

Simpana 8 is the highest quality release in our history as evidenced by the lower proportion of technical issues.

We've also deployed Simpana 8 at several hundred customers already, which is significantly higher than the number of deployments of our product version Simpana 7 at the same point in its release cycle.

The first phase of the launch of Simpana 8 was focused on data deduplication and virtualization data management products, and a number of customers that purchased these products also exceeded our internal goals.

By the end of the quarter, we had sold block level dedup to well over 100 customers which had a material Q4 license revenue impact.

Many of these accounts are fully installed and referenceable.

I expect that dedup will continue to be a driver of our business, and based on customer response so far, I'm encouraged that the opportunities that this can open up for us.

Let's talk a minute about strategic partners.

Our distribution channels remain strong.

Key partnerships continue to strengthen, and we're working to add new strategic partnerships.

Sales with both our OEM and SMP relationships with Dell accounted for approximately 24% of total revenues for fiscal Q4.

Total quarterly Dell revenues were up 2% year -on-year.

We continue to broaden our relationship with Dell both in the short and the long term.

We will have more to say about this later on in Q1.

Our partnership with HCS is expected to strengthen in fiscal 2010, and our relationship with McAfee continues to progress well.

McAfee and CommVault have a common competitor and I believe by working together we will be able to achieve some compelling results.

I hope to have quite a bit more to say about this during the quarter and on our next earnings call.

Now let me talk about a number of actions we have taken in order to improve near-term and long-term performance.

Specifically, these include; one, bringing our operating expenses in line with the current levels of the business while increasing investment in key strategic areas.

Our objective was to both improve operating margins in the June quarter and for the balance of FY 10.

And also to position us for solid double-digit earnings growth as a macro economic conditions improve.

We're also in a process of reallocating resources throughout the organization and increasing the number of sales reps.

We expect these changes to improve sales productivity by replacing less productive resources and shifting resources to focus on higher potential near-term markets.

These actions, together with more targeted marketing efforts, should enable us to more effectively drive both near-term and longer-term license revenue growth.

We have already seen some positive effects from these actions, including an uptick in funnel growth that has rebounded from the Q4 2009 levels.

We also have reacted quickly to customer budget constraints.

We're doing this by providing more flexible pricing and payment models which allows our customers to more quickly realize the return on their investment.

And lastly, with all these initiatives underway, we remain committed to delivering the most innovative, high value-add solutions to the market.

We realize that our commitment to staying ahead of our competition in terms of namely customers to reduce costs, improve operational efficiency, and more easily extract and manage information have been key factors in our success to date.

I'm proud of our innovative history and I can assure you that we'll remain focused on continuing to deliver evolutionary and revolutionary new products and services to the market.

When we're able to share with you the increased depth and breadth of the next release of Simpana, I can promise that we will continue to distance ourselves from our competition with innovative high-value solutions.

I want to spend a minute on our business fundamentals.

In spite of the results from Q4, we're confident that all of our key business fundamentals are solid, and we will be able to continue to pick up market share in fiscal 2010.

There remains strong market needs for innovative data and information management solutions.

We have the leading products to meet those needs.

We have the only singular enterprise data and information management platform that is the most effective way for companies to reduce costs and handle the increased scale and complexity issues of today's major corporate environments.

In addition, we have outstanding global customer support plus an expanded and strengthened global distribution network.

We have a very strong balance sheet, and we generate a significant amount of cash from operations which we believe are more than sufficient to continue funding all of our long-term growth initiatives which continue to be 100% organic.

Although we are encouraged by the improving psychology of the market, and early Q1 results, we're certainly more cautious than we have been in the past.

We believe that although the economy is improving, we are likely to remain in a tough economic environment for the foreseeable future.

All this results in a high degree of uncertainty which will only be resolved by our ability to achieve results over time.

Our first objective is to deliver an improved Q1, which will set the foundation for FY10.

Our internal plan for FY10 calls for solid double-digit revenue growth with improved operating margins.

However, given the uncertainties that remain, we will not be providing guidance at this time.

Our objective would be to provide guidance based on our Q1 results and the firming up of our promising Q2 outlook.

I will now turn the call over to Lou, who will provide more details about our quarterly results.

Lou.

Thanks, Bob, and good afternoon, everyone.

I will cover some key financial highlights for the fourth quarter and the full fiscal year.

During fiscal 2009, we increased total revenue by 18% over the prior year period.

However, while revenue increased, our EBIT decreased by 2% compared to the prior fiscal year.

Revenue in the second half of fiscal 2009 grew 9% over the second half of fiscal 2008.

This compared to revenue growth of 29% in the first six months of fiscal 2009, over the first six months of fiscal 2008.

During the fourth quarter, we added 310 new customers which increased our total customer count to slightly over 10,000 as of March 31 which was a key milestone for the Company.

Total revenues for Q4 were 56.1 million, a decrease of 1% year-over-year and a decrease of 7%, sequentially.

The revenue mix for the quarter was 49% software and 51% services.

During Q4, revenue derived within the United States generated 62% of our total revenues resulting in a 1% decrease year-over-year while revenue from international operations generated 38% of our total revenues, resulting in relatively flat revenues year-over-year.

On a year-over-year basis, movements in currency rates resulted in lower US dollar growth than what we achieved during the fourth quarter in local currency growth.

I will cover the foreign exchange impact in more detail later in my remarks.

Software revenues for the quarter were 27.5 million, a decrease of 12% both year-over-year and sequentially.

These decreases in Q4 were primarily driven by lower revenue from deals greater than $100,000, which we refer to as enterprise deals.

In Q4, approximately 38% of our software revenue came from enterprise deals.

This compares to 41% in the fourth quarter of last fiscal year.

On average, enterprise deal size was approximately 200,000 during the current quarter, compared to 250,000 in the prior-year quarter.

As Bob mentioned earlier, the deal size reduction was primarily a result of customer budget cuts and greater pricing pressure.

From a product perspective, sales of our advanced data and information management products, or ADIM, represented 30% of software revenue during Q4, compared to 25% in Q3 and 28% in the prior-year quarter.

Deduplication, virtualization, archiving and search functionality were the key drivers for the growth of these products.

Sales from our ADIM products have been growing at an average year-over-year rate of 69% since the release of Simpana 7 in July of 2007.

The ADIM component of enterprise deals accounted for 38% in the current quarter, compared to 28% in Q3 and 35% in the prior-year quarter.

Services revenue was 28.7 million for the quarter, an increase of 13% year-over-year and flat sequentially.

Our maintenance renewal rates continue to be strong despite the macro environment.

However, we are seeing more contract renewals slip than we have in the past, and a few customers are electing to go with reduced coverage due to limited budgets.

We believe that the release of Simpana 8 will help maintain our high attach rates on renewals into the foreseeable future.

For the year, total revenues were 234.5 million, an increase of 18% year-over-year.

Revenue from the US was 61% of total revenue, resulting in a 13% increase over fiscal year 2008, while revenue from international operations were 39% of total revenue, resulting in an increase of 28% over fiscal 2008.

The growth in our international revenue is primarily due to increases in Europe, Canada, Australia, and Asia.

For fiscal 2009, software revenues were 121.7 million, an increase of 12% year-over-year.

The 12% increase in software revenue was primarily driven by more revenue from enterprise deals which increased by 28% in fiscal 2009.

As a result, enterprise deals represented approximately 40% of fiscal 2009 software revenue, versus approximately 35% in the prior-year period.

Services revenue for fiscal 2009 were 112.8 million, an increase of 26% year-over-year.

The increase in services revenue was primarily due to a 31% increase in revenue from customer support agreements.

Gross margins were 86.9% for the quarter, and 87.1% for the year.

Gross margins in the prior fiscal year were 86.5%.

Now on to operating expenses.

Total operating expenses were 42.5 million for the quarter, up approximately 14% over the prior-year period, and up approximately 1% sequentially.

In Q4, sales and marketing expenses increased by 4.7 million, or 19% over the prior-year quarter.

The year-over-year increase in sales and marketing expenses is largely due to increased sales capacity and our investments in bringing Simpana 8 to market.

However, our Q4 sales and marketing headcount additions are significantly less than prior quarters.

This action was intended to bring our operating expense growth rate down and keep it relatively flat in the near term without sacrificing our strategic initiatives.

Research and development expenses increased by 800,000 in the quarter, or 12% over the prior-year period.

G&A expenses decreased by 400,000, or a decline of 7% over the prior-year period.

This decrease is due to tighter expense control and movements in foreign currency exchange rates as a result of the strengthening of the US dollar against most major currencies.

We added 24 employees during the quarter bringing total worldwide headcount to 1,070 at the end of March.

The headcount increases were primarily in sales and R&D.

Subsequently to year-end we did eliminate a number of positions throughout the Company.

However, as Bob commented, we are reallocating some additional resources to sales.

Non-GAAP operating margins were 9.6 for the quarter - - 9.6% for the quarter, resulting in non-GAAP operating income of 5.4 million.

For fiscal 2009, non-GAAP operating margins were 13.7%, resulting in non-GAAP operating income of 32.1 million.

This represents EBIT contraction of approximately 2% year-over-year for the full fiscal year and a 280 basis point decrease on full year EBIT margin.

The non-GAAP net income for the quarter was 3.8 million and non-GAAP EPS was $0.09 per share, based on a diluted weighted average share count of approximately 43.4 million shares.

For the year net income was 23.5 million, and non-GAAP EPS was $0.53 per share based on a diluted weighted average share count of approximately 44 million shares.

Now on to cash and cash flows.

As of March 31our cash balance was 105.2 million, up approximately 4% from 100.8 million at the end of fiscal Q3.

Cash flow from operations was approximately 6.5 million in Q 4, and approximately 43.1 million for fiscal year 2009.

Free cash flow, which we define as cash flow from operations, less capital expenditures, was 5.3 million for the quarter and 38.6 million for the full year, which was an increase of 28% over the prior year.

We did not repurchase any common stock during the quarter.

However, we are still authorized to repurchase an additional 39.8 million under this existing repurchase program.

Our board of directors has extended the stock repurchase program until March 31, 2010.

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

Our DSO was 69 days, this is up from 62 days in the prior quarter and is the result of a more back-ended quarter.

Deferred revenue increased 3.5 million, or approximately 5% sequentially over the prior quarter.

Turning now to foreign currency.

During the second half of fiscal 2009, the US dollar strengthened against most of the major currencies.

As a result, our Q4 growth on a reported basis is lower than our growth on a constant currency basis when comparing against the prior year.

Specifically, on a year-over-year constant currency basis, foreign currency movements negatively impacted our fourth quarter revenues by approximately 9% while positively impacting expenses by about the same amount.

Therefore, on a constant currency basis, our total revenues actually increased approximately 8% year-over-year while EPS was minimally impacted compared to the prior-year quarter.

For the full year, foreign currency movements negatively impacted fiscal 2009 revenues by approximately 3%.

Therefore, on a constant currency basis, our total revenues actually increased approximately 21% compared to fiscal 2008.

And finally, a few words on taxes.

For fiscal year 2010, our non-GAAP net income will be based on a 32% pro forma tax rate compared to a 30% non-GAAP tax rate used in fiscal 2009.

The cash tax rate in fiscal 2009 was approximately 13%, while the GAAP tax rate was approximately 44%.

We estimate that the cash tax rate in fiscal year 2010 will be in the mid to high teens.

We have recorded on our balance sheet approximately $47 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.

The Company continues to implement tax planning measures that are expected to keep the long-term terminal tax rate in the low to mid-30's over the next few years.

That concludes my prepared remarks.

I will now turn the call back over to Bob for summary comments.

Thank you, Bob.

Thanks, Lou.

Before we wrap up and take some questions, let me comment briefly about some market trends we are seeing and how we are responding to them.

There are a number of trends in the market that are accelerating as a result of the recession.

Most of these trends I will comment about today are focused on IT capital cost reduction, IT expense cost, and headcount reduction, and improved operational efficiency.

These trends include deduplication, server virtualization, managed services, cloud computing, and capacity on demand.

CommVault's value proposition has always been centered on delivering technologies to reduce IT capital and expense costs while at the same time improving operational efficiencies versus competitive solutions.

With Simpana 8, our value propositions have improved.

We now have the industry leading products in deduplication, virtualized server environment and operational reporting.

We have seen a sharp up tick in demand in all three of those areas, including wins in Q4, and early wins in Q1.

Solutions for managed services and cloud computing share the same common objectives of simply and easily managing issues related to massive scale and increasing complexity.

With regard to managed services, we have won a significant number of accounts who use our products as the engine for them to provide data and information management services to their customers.

We are seeing accelerated interest from managed service providers with the market for these services increasing.

As a result of the success we are having in growing our managed service provider installed base, the market is also becoming more aware of our capability to enable them to lower costs and increase operational efficiency, especially across large-scale deployments.

We have also seen many of our regular customers and managed service provider customers interested in the various implementations of cloud computing.

That interest is again centered on capital and expense cost reductions.

Storage clouds represent a natural target for our current Simpana 8 platform.

Everyone is now beginning to realize that although there are many tools to manage the different versions of the cloud, there is no universal automated platform to manage internal and external clouds in a large global enterprise.

We believe CommVault has that platform.

We have been working on several very advanced and innovative concepts that enable Simpana to be the first fully automated platform to deal with the key aspect of cloud computing.

We will bring forward those advanced cloud related innovations in our next release which we plan to deliver along with new advances in data management and archiving solutions.

I believe that CommVault is the right Company with the right product and services to make a promise of a singular universal automated data and information management solution a reality.

We are doing it today, and we're making great progress on addressing our customers' future data information management challenges.

We offer the best product and services available, and Simpana 8 is just the latest in a line of industry-leading innovations that stretch back more than 10 years.

Our strategic partnerships and distribution channels continue to strengthen, and we have taken the necessary steps to manage the business from a cost and productivity standpoint as well.

CommVault continues to be well positioned in the near term to return to an attractive growth rate as we emerge from this recession.

We have a highly motivated workforce that is committed to achieving financial results and delivering value to our customers and partners.

In summary, we are strengthening our ability to execute in the near term and we believe that we're very well positioned for the longer term as our strategies clearly align with the trends that we are seeing develop.

I will now turn the call back to Michael.

Thanks, Bob.

Operator, can we please open the call up for questions now.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

(Operator Instructions).

We will pause just a moment to allow everyone an opportunity to signal.

Please limit to one question and one follow-up.

Your first question will come from the like of Michael Turits with Raymond James.

Go ahead please.

This is John [Door] for Michael.

I know you guys aren't providing next quarter guidance but can you maybe talk a little bit more about what you're seeing out in the pipeline and maybe an idea of where revenues can go from here?

Well, I think I mentioned, John, that we've seen a pretty good shift to the positive in the market.

As I mentioned, we've seen a number of these larger deals move into procurement, including old ones and some new deals.

Our channel, at the SMB side has picked up pretty significantly, and we're off to a much stronger start than we did in our last quarter.

It looks very positive, but at the end of the day, we didn't want to provide, given what happened last quarter, we didn't want to provide guidance on this until we actually delivered a strong Q1.

So it's - - until we get there, there's uncertainty attached to it.

But clearly we're in a much different, more positive environment than we were at the bottom of the recession.

I think the issue with it I see is that in that January, February, March timeframe, when nobody knew where the bottom was, this market quit for us anyway - - clearly locked up in a lot of these major accounts and it wasn't an execution issue.

The competitive aspect, I thought, there was some of that, but I thought that was relatively minor.

It was more the lock-up of the market and that appears to have changed.

Do you think we'll see normal seasonality, in Q1, or could it be a flat year - - in revenue?

I don't think there's anything normal about this environment.

I mean last quarter it was a typically strong quarter for us.

We had a weak quarter, and Q1 is typically weaker than Q4, and now we're seeing a lot of strength in Q1, but we haven't delivered it yet.

So I don't think you can - - I don't think normal seasonality applies at the moment.

I think it's just looking at what revenue - - what revenues have we closed to date, and what do we see in front of us, and how quickly are these deals moving through the funnel.

And certainly more revenue has closed and more deals are moving through the funnel earlier.

And we're seeing improvement in our overall funnel, and we just to have see how those things translate at the end of the quarter.

Okay.

Thanks.

Your next question comes from the line of Rajesh Ghai with Thinkequity.

Please proceed.

Yes.

Good afternoon.

My question really is about your sales structure.

You mentioned that you made some changes in the sales organization.

Just wondering how you plan to improve your sales going forward, and how that relates to the new product release and how you are going to take it to market.

Really two questions here.

So number one, what we did is we did take some sales people out.

And we took what we thought were the lower productivity individuals.

So we made some cuts, and we're immediately adding those back.

Some of them we're backfilling, and some we're putting in what I called markets that have higher near-term potential.

So we're investing in markets that we already have traction in and good distribution of management structures, versus making investments in some of the longer term - - geographical initiatives that we've had.

So near-term net net we took some people out, and certainly by mid - - let's call it July sometime, the net result should be net additions to our sales force globally.

And on - - so the second question is on Simpana 8, which I mentioned earlier has had very good traction in the market.

So the first wave of focus was really on deduplication, as I mentioned, and virtualization.

As we move into this quarter, we're focusing on our snap-back of product, and our archiving product, so we're moving into a second wave here.

So it's snap-back up, [lock top] production and our content director and archive product is where we're focused on training our sales force this quarter.

Thank you.

Your next question comes from the line of Steve Koenig with Keybanc Capital Markets.

Please proceed.

Hi, guys.

Can you hear me okay?

Yes, Steve, we can hear you.

All right.

Thanks.

I would like to ask you about your internal plans for double-digit growth.

How do you do that, and how soon do you think you'll see that?

And if you don't get there, given the uncertainties in the economy, what adjustments will you make to get to better margins than you would have otherwise?

The objective, Steve, was to absolutely flatten out our op expense growth.

So if you look at - - if you look at the December quarter and the March quarter, they were relatively flat.

And we can keep them flat, depending on how we see revenue develop.

So our objective is to come off of Q1 with a strong quarter.

But given the uncertainties and the results we've had last quarter, tied to the recession, we didn't think it would be prudent to put those kind of numbers on the table until we delivered them.

But our internal objective is to - - to have substantial improvement in both revenues and operating and EBIT in Q1.

That's our internal objective.

And if you do that, will you - - will you look to then begin growing your OpEx line, sequentially, potentially?

If we do that and we see a strong growth in funnel for Q2, which is September, which we're just starting to form now, we will be very selective or careful in our op expense growth until we see a sustained recovery.

Okay, great, thanks a lot.

Your next question comes from the line of Tim Klasell with Thomas Weisel Partners.

Go ahead please.

Yes, good afternoon.

You guys spoke a lot about the broader markets, but - - and I think Bob made a brief comment on the federal vertical.

But did you see any differences amongst the various verticals that you addressed?

We have this huge federal pipeline, and best we can tell, Tim, none of that has gone away, and we've added to the.

How about closing?

Our close rate, I mean, federal was weak last quarter.

That's in the March quarter.

It looks like it's going to be much improved in the June quarter, some of these deals are coming through now.

But it was clearly locked up for us.

And some of it may be deal specific, I don't know, but federal had a weak March quarter.

How about any other verticals?

Can you have any commentary about that?

No, I mean, beyond that, I'd say it was almost across the board.

And as we come out of this, we're seeing - - if you look at what's going on here in Q1, we're seeing strength in financial vertical looks pretty good to us.

A lot of reasonably good bank deals in our bank deal funnel is improving, financials.

So the recovery that we're seeing is across almost - - we're not big automotive, but even one of our automotive accounts - - we haven't closed this one but - - seems to be seeing some improvement.

Probably it's not Chrysler or GM.

But right now the recovery that we're seeing is pretty strong across the board.

And our federal - - we expect federal to have a reasonably good quarter this quarter and accelerate into the September quarter.

Okay.

And then you sort of mentioned briefly on the maintenance that people maybe were taking less coverage.

Is that a coverage maintenance on the number of devices that they are having maintenance for, or are they dropping from premium support to standard?

Some of is it premium to standard, and it's not a huge number, but we did notice that that is occurring.

One final one for you, Lou.

Hang on, Tim.

The biggest issue with maintenance is tied to our license revenue growth.

That is the biggest issue that's affecting the growth of maintenance.

What Lou was talking about, we did see - - I call it marginal decrease in growth of maintenance tied to - - I call it recessionary effects.

But the biggest issue is license revenue growth and there's a lag to that - - in our maintenance number lags about a year.

So if you want to focus on it, focus on license revenue growth.

Okay, one final one.

Lou, FX impact - - what should we be thinking about, at least on a percentage basis, for maybe the first half, which I think is when you are probably the most exposed, of fiscal 2010?

I don't know, I was going to ask you the same question.

If the currency stays at the same rate.

The spot rate today.

Well, so there's a natural hedge in terms of that it will have a minimal impact on EPS, so the revenue - -

You might see it slightly improve on the top, offset by higher operating expense, Tim.

This is Bob, and I think we're going to see - - may not be in the next quarter or two, but I mean, clearly with our current level of deficit spending here, and increasing debt, the dollar's got to get hit here at some point.

All right, that's all I got.

Thanks, guys.

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

Go ahead please.

Hi, guys.

Thanks a lot.

I guess a couple, well a few questions from me as well.

First of all, can you help us understand one of the commentary that you had made was that did you see incremental competitive pricing dynamics play out in the quarter.

I would love it if would you explain that a little bit more necessarily what you've seen competitively change over the last few months with the current environment that we're dealing with.

Sure.

So in that March quarter, obviously with IT spending down, any deal that hit the street became much competitive.

We're trying to get a hold of as much of the IT spend dollars I could.

So the competition was from both hardware and software competitors.

People were trying to roll bundle deals together at that cost pricing pressure.

The most aggressive one out there that we see is our biggest competitor, Symantec, who has publicly stated they have killed CommVault campaigns and killed CommVault in the cradle and they've set up - - competitive CommVault pricing desks.

But there's nothing new there, and it's just that we did see a bit of that.

And typically, we have'nt responded to those kinds of things.

But I can tell you now, going into Q1, we want to see it less or we've gotten a lot more aggressive in our response.

So we're not seeing is as much of an impact of that.

But Symantec was clearly the one that was the most aggressive in the market, because they can't compete against us on value.

The only thing they can compete against is on price.

And Bob, I appreciate that.

And two other questions for me.

- - I guess as people try and understand the story in the Simpana 8 ramp, I know you guys talk about it exceeding your plans internally.

But I think as an investor, I'd love to - - if you could quantify, either be it the deduplication product, and what you are seeing from that ramp perspective, or even Simpana 8 as a percentage of your license revenue, or upgraded as a percentage of your install base I think would be very helpful.

- - as we try evaluate that product ramp going forward.

Yes.

We haven't given out that stat but I can tell you - - the dedup revenue alone was material, even though the numbers were poor, the dedup revenue alone was material to our number in Q4, in the March quarter.

And Simpana 8 in total was very significant to our number in Q4, much more than we would have expected.

So given any normal environment that would have been additive in this current environment - - and the lock-up of the market - - it was significant at the percent of our revenue, but our revenue was down.

Okay.

And then final thing for me.

Bob, as we move forward - - as you look to invest, versus top-line growth.

I would love to understand what your long-term vision is in terms of - - how do you want to run this model in terms of - - where you necessarily want to get to - - longer-term with regard to the operating margin in a ConnVault story.

It hasn't changed.

We want to get back into that 20% operating margin as quickly as we can with high growth rates.

That's what we're trying to do.

So what I was saying earlier, we set ourselves up in Q1 to do two things.

One, to get back on the revenue growth curve, and some of that was market dependent and the market is helping us here as is Simpana 8.

And two, was to flatten out our operating expense growth.

So the combination of higher revenues and flat operating expenses would drop to the bottom and would drop in the June quarter.

The reason we haven't given guidance is given all the uncertainty and everything else, we wanted to deliver it before we talked about it too much.

So that's our objective.

It's not to to wait two years to make that happen.

We're going to start that process this quarter.

Your next question comes from the line of Gabe Lowy with Noble Research.

Go ahead please.

Thanks.

Good afternoon, gentlemen.

Hi, Gabe.

Question, Bob.

Over the last few quarters, there were a lot of Symantec installed base that was coming up for renewal.

Maybe you can reconcile a little bit about what's happening with those.

Are they renewing just at cut rate prices so that Symantec can keep holding on to those accounts.

Or are they they just delaying a repurchase or doing a temporary extension of their existing contract.

How does that play into what's going on out there in terms of the jump ball for some of those deals?

Well, I mean, I'm not sure that - - that Symantec has a continual upgrade of their - - maintenance renewals in their account base.

Clearly, last quarter that locked up more than normal.

It's now opening up again, pretty well, by the way, Gabe.

But when that whole market locked up, those kind of deals locked up on us.

Some of them held - - some held postponed.

I can't comment about the boarder.

But, at the margin, the competitive losses tied to those kinds of things were relatively small compared to the impact of the - - I call it, the general lock-up of the economy.

And as we move out of this thing, those opportunities seem to be opening up again for us.

Just to be a little more specific - - I'm not asking you right.

What I'm trying to get at is - - let's say somewhere in the March quarter, one of those three-year deals is coming up for expiration.

Your sales team or channel partners or both have been working on that account because you know where all the bodies are buried - -

No, we don't.

I would say we know a relatively small percentage of where those bodies are buried given Symantec's install base.

Okay.

But what happens to the customers where the contract is coming up for renewal, right.

And that customer is doing an eval and maybe they're looking at 8.0.

They don't extend their contract while the eval is going on, do they.

Or can they get an extension without making another full commitment to Symantec for the duration of another three.

In other words, the customer has to make a decision because their contract is expiring.

Typically, they don't extend.

Sometimes they do, but typically they don't.

If you want to get a clarifier.

But I'm just telling you, that was not - - the issue more was that those kind of discussions with customers locked up for a period of time in Q4.

And it seems that's opening up again pretty rapidly for us.

And, yes, Symantec will do anything and everything to protect their installed base.

They'll sell software for nothing.

They'll discount maintenance.

So - - it depends on the account, and it depends on the geographic area.

But they are vulnerable to CommVault, and they're doing what they think is appropriate to protect their base.

But - - I'm really confident on our ability to continue to erode Symantec's base based on value.

And I mentioned earlier that customers, most customers will look at long-term value.

Last quarter, when everything was locked up, you didn't see as much of that.

Now customers are being a lot more thoughtful and thinking through what's the long-term strategy and what's the impact and what's the best way to manage their business from a data and information management standpoint.

And we're - - we have a receptive audience out there.

Last question.

In March, Tivoli rolled out 6.0 of their software platform, which included native deduplication in it, and then also rolled out three separate dedup appliances, which is an extension of their Diligent acquisition last year.

Have you seen either anything of them on the software renewals with the dedup or the appliances out in the marketplace?

I haven't.

Al may want to comment on this, but I haven't seen it.

And I can tell you that there are some really large IBM accounts that are running into scale and operational issues as a result of that architecture, and we're getting phone calls that have nothing to do with dedup, but just in general - - is not very effective in some of those environments.

But on the dedup side, we've seen almost no pressure, and, I don't know, Al, do you have anything?

You pretty well hit it.

I think - - maybe the only thing I would add is, we've seen, Gabe, virtualized environments particularly are looking for strong DR solution sets or extension software suite.

And if they're using TSM, they seem to be particularly vulnerable, based on the way the system is architected and the strong reliance on scripted routines.

Thank you.

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

Please proceed.

Thank you.

A question first on the revenue commentary for fiscal 2010.

What's the mix expectation between software and services?

About 60/40.

55/45.

Similar.

Similar to what we saw in fiscal 2009?

Yes.

Okay.

So you would expect software license revenue to grow in fiscal 2010?

Oh, yes.

Okay.

And then kind of the same question on the OEM side.

Dell specifically, that was a pretty good quarter.

It's been choppy here over the last few quarters, of course, but would you expect Dell to outpace non Dell revenue?

Not in the near term.

I think we'll do well with Dell this quarter.

I think you'll see our Dell revenue growth accelerate, and we'll have more to say about that in a week or so, and you'll see why.

But I'm not sure it will outpace our other in- license revenue growth, but I expect our Dell license revenue growth to improve.

Okay.

Now I may have missed it, but the direct versus indirect software license split for the quarter?

Let's see.

Pull that up here.

We don't have that.

We'll get that to you, Jayson.

Okay.

And then last question for me, Bob.

You had several hundred people step into V8.0, I think you said.

What would the expectation be now for the next couple, three quarters on adoption of Simpana 8?

I will answer.

Al is very involved in this on some detailed launch.

Again, it continues to exceed all our internal projections across the board.

Given what we're seeing in early Q1, I expect it to be significantly above what we saw in Q4.

Al, you want to comment?

Yes, I think it will continue to increase there, Jayson.

I think the significant things on our end now as we get into our service packs 1's and 2's, even SP2 in this quarter, that usually triggers more activity on the enterprise front.

That's a good point that Al just mentioned.

We released SP1 at the end of the quarter, and our OEM partners don't - - you release off that release.

So our OEM partners are going from the market starting now.

The HDS announcement went out yesterday and you'll see Dell announcement in the near term.

And on the SP1 and 2, you will see a lot more upgrades and acceleration, just due to those service pack releases.

We're feeling really good about Simpana 8, guys.

Makes sense.

Thanks, guys.

The split, Jayson, was 79 indirect and 21 direct.

Thanks, Lou.

Next question comes from the line of Brian Freed with Morgan, Keegan.

Go ahead please.

Hi, guys.

I was wondering if you guys could talk about - - it seems like the pause in Simpana 8.0 was a little bit larger than expected and had a greater than expected impact on your revenue this quarter.

Can you talk about what you did during the quarter and how that transition was and kind of if that led to your greater than expected shortfall?

Thanks.

Al is going to take this because he ran the program.

I think what we did was we launched the product, and we launched it fairly early in the quarter.

And probably what was somewhat unique over past releases was we focused on just a couple of key features or solution sets with the release, that being dedup and virtualization for what I call the first wave.

And we also then did that across almost all of our channels in direct.

And - - when we talk about launch, that means primarily training programs around how you position it, how you sell it, how you price it, how you configure it, what the competitive advantages are, et cetera.

So but again, I think the unique thing was the focus on feature sets and/or solution sets.

Have you guys entered what you would consider the next wave at this point?

We're just starting it.

Okay, thank you.

Your next question comes from the line of David Bayer with Cantor Fitzgerald.

Please proceed.

Hi there.

Thank you for taking the question.

I have two questions for you.

The first is, can you give us a little bit more sort of thinking on the staff reductions that you implied you had.

What percentage of reductions were there roughly and are there any charges for it that we should be aware of?

And then did you sort of maybe reduce some nonperformings so you could add new ones?

Help us understand that a little better, then I have a follow-up question.

No, we haven't given out the stats, but the objective was to keep our operating expenses flat.

So the net-net charges and everything, the objective was to keep our op expenses relatively flat for the near term.

As far as the number of heads, we took out quite a few people.

We're replacing some of those people in the positions they were in, and we are redeploying some other positions, I call it non sales rep related positions, and replacing them with sales reps in higher potential markets.

So at the end of the day, we will have a more productive sales force, both from the standpoint of headcount and the standpoint - - from the standpoint of which markets they're positioned in.

Okay.

And then there was some discussion in your introductory remarks that competitive pressures impacted you in two ways, it seemed.

One is, sounds like that customers gave you push-back on pricing.

Sounds like they were shopping around for deals from other people, then coming back to you.

And also, sounds like just in general the customers give you push-back on pricing.

Can you just give us some thinking on price per license roughly how much it decreased in the quarter?

I have the sense it was down 5% to 10%.

We gave you the stat, but I believe on our large account.

I'll verify this in a second here, But I think it decreased from $250 - - $250,000 in Q4, to $200,000 in Q1.

So it was a pretty substantial change.

And what's also interesting about that stat is that our deals that had dedup were about 50% higher than comparable deals, so you get some sense of what was going on here.

A lot of that seems to have flushed out of the market.

We'll see as we get to the end of the quarter.

We're just not seeing that kind - - what I was saying earlier, most customers are now back to focusing on a little bit longer term return on their investment and improving their operational efficiencies and taking a little bit longer view here in terms of cost reduction versus trying to accomplish that in 60 days.

The other thing that I mentioned that we've done is made it easier for customers to get a high return by deploying platform by using more flexible pricing model.

So I think we got hit with that.

I think we've responded really well, both from a competitor standpoint and a customer standpoint, and have taken a lot of that pressure off for the near term.

I emphasize that because clearly we've seen this improvement, and I don't know next week if we don't see something else.

But we've had a couple of months here of improvement.

We just to have see if we can sustain is it.

I appreciate what you're saying.

The guess the reason that I asked the question the way I did, is that I did not want to just make the conclusion that pricing was down almost 20% from that 250,000 to 200,000 on the enterprise deal size, because I assume there was maybe smaller, in terms of licenses, maybe less seats, or whatever.

That's why I asked the question.

No question, because customers, we had very - - very good question.

Yes, our mix included a lot less larger deals, and that also pushed the average ASP down.

So wasn't just pricing pressure, although that was part of it, but our ASP was down because we didn't have nearly as many large deals in the mix.

And the scope of the deals.

And the scope of the deals were pulled back.

Okay, thank you.

Your next question comes from Rob Owens with Pacific Crest.

Please proceed.

Good afternoon.

Thanks.

With your focus on operating costs and keeping those down, what revenue threshold do you need to hit to get your goal of 20%?

Well, we didn't say we were going to do 20% in Q1.

We just said that's our long-term goal.

Sure.

How should we think about how sales and marketing scales along with - - I'm assuming in order to hit 20% you are going to have to see increased revenue.

So how should we think about how sales and marketing scales with license revenue growth?

Well, I mean, what we're trying to do is obviously - - last year we invested heavy for basically trying to hit 30% top-line growth, and I think I said this before.

We had the Simpana 8 launch, and we said we'd continue to do that until something radically changed.

Well, it did, as we started to get into right around mid-February, and we immediately moved and said this model is not working, and started to pull it back.

And so our objective was clearly to have our operating - - our revenue growth significantly outpace our growth in operating expenses over time, 20%, versus the reverse happened last year when our operating expense growth significantly outpaced our revenue growth and we had the opposite impact.

So we're trying to flip that around for FY10 and continue to do that over next couple years and hit our target.

Okay.

And then I apologize if I missed this, but given the weak license growth you saw in the quarter, can you explain what drove the sequential increase in deferred?

Also some of your commentary around how some of your customers were opting for lower maintenance programs.

The deferred was up nice, sequentially.

The deferred was up nice.

It frankly would have been up a little higher, there was some FX impact.

Clearly the shortfall in license revenue directly impact the maintenance stream.

And there were some contracts that I said slipped.

But the nice thing about our model is that eventually those customers do renew, so even if a maintenance contract does not renew on time, we do see some of those come back.

So deferred was up, but not up as much as we would have expected.

So your international deferred does set in local currencies?

Yes.

It does have an FX impact?

Okay.

Last question, again, I apologize if I missed this.

Did you suggest the pro forma tax rate should be 32% for this year?

Yes.

2008 for 2010, 32%, yes.

Great.

Thank you very much.

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

Please proceed.

Hi.

This is [Jeter Jones] on behalf of Derek Bingham.

Just a couple of questions.

You told that the funnel had contracted in the fourth quarter.

How about the closure rates and what about the closure rates up to May, as you have seen right now?

The funnel didn't contract, per say.

The growth drastically slowed, but it actually didn't contract on us.

And the close rates, obviously in Q4, were a lot lower than our low end of our internal predictions.

As we're getting into the first part of this quarter, obviously, our close rates were a lot higher.

But at the end of the day, as far as meaningful number, we've got to see what it looks like at the end of the quarter.

That's number that's going to have meaning to everybody.

And all I'm saying is we're very encouraged so far, but we need to get to the end of June and have a relatively high close rate and make sure it's the same, then we'll both know.

Okay.

Then just one more question.

Regarding the buying patterns of your smaller customers, were they much more inflated or did they have a greater impact on your revenues?

Just went through this stat today.

The first six weeks of Q1 are - - our buying was almost 2 X above what it was in Q4.

So we've seen - - this is in Americas now.

I just looked at the stats this morning.

Whether that's sustainable or not, whether we see that globally throughout the quarter, I don't know, but it's up pretty significantly.

That's why I was saying our channel, when I look at the fundamentals after last quarter, everything looked - - all the fundamentals looked good and our numbers were bad.

And the only way you validate that those fundamentals mean something is because did they turn into revenue and profits, and we're seeing some improvement here early in the quarter.

But I'll reiterate, it's early, but clearly we're seeing some improvement.

Okay, thanks.

There are no further questions.

I would like to thank everyone for their participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.