Commvault Systems Inc (CVLT) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to CommVault's Fiscal First Quarter 2010 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 introduction, 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 First Quarter 2010 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'd like to remind everyone that statements made during this call, including in the question-and-answer session at the end of the call, that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

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

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

Our earnings press release was issued over the wire services after the market closed today.

And it has also been furnished to the SEC as an 8-K filing.

The press release is also available on our Investor Relations website.

On this conference call we provide non-GAAP financial results.

Reconciliations between the non-GAAP and GAAP measures can be found in Table IV 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 First Quarter 2010 Earnings Call.

We achieved a solid first quarter FY10 which is highlighted by a 10% growth in revenues, and a 240 basis point improvement in operating margin.

Our Q1 revenue growth was driven by more enterprise deals, solid federal government business, high demand for our deduplication and virtualization products, and excellent results from our services organization.

Our ability to outpace the market and pick up market share in a challenging environment is a direct result of the highly differentiated quality and value of our Simpana platform combined with a solid execution from a sales [execution] partner.

Let me briefly summarize our Q1 2010 financial results.

For the quarter, total revenues were $60.2 million, up 10% on a year-on-year basis versus $55 million in fiscal Q1 2009.

Software revenue increased on a year-over-year basis by 5%, while our Services business grew 14% year-over-year.

For the quarter, non-GAAP operating income, or EBIT, was $9.3 million up 30% year-over-year versus EBIT of $7.2 million in fiscal Q1 2009.

Non-GAAP earnings per share for the quarter was, $0.15 versus $0.12 for the prior year quarter.

In order to achieve our full year FY10 financial objectives we knew we needed to deliver a solid Q1 and build sufficient sales pipeline in order to deliver a good Q2.

We accomplished both of those objectives.

Update on the IT spending environment, the economic environment in the June quarter definitely improved over the March quarter.

During the June quarter, particularly in the US, we saw the economy stabilize and more normal IT buying patterns start to return.

We saw very little of the flight to safety and the pervasive budget constraints that we saw in the March quarter.

We also saw a much less irrational price competition.

Our June quarter started positively and ended with good sales momentum which carried into the first month of Q2.

We continue to compete successfully with, and pick up market share, from a larger competitor in the enterprise segment of the market.

We are seeing an uptick in IT spend, particularly in the United States.

We are also seeing our large deal funnel continuing to build.

Larger deals are starting to move through the sales process in a more predictable basis.

The US federal spending has become more normal due to the passage of the budget and the transition to the new administration.

As a result, we had a nice uptick in our federal government business in Q1.

We are cautiously optimistic that we will continue to see improvement in the overall market, but understand that we are still operating in a challenging economic environment.

I'll talk to you a little bit about Simpana 8.

The demand for Simpana 8, our singular data and information management platform, is excellent and continues to exceed our expectation.

The adoption of Simpana 8 has accelerated due to the strong demand for deduplication, as well as our virtualization data management products.

Deduplication had a material impact on Q1 license revenues.

As of the end of June we had sold block-level deduplication to just under 400 customers.

We believe Simpana software delivers the industry's first and only true end-to-end data reduction capability that is unmatched by any competitor.

Our end-to-end approach catalogues the data at the source, and enables our customers to compress, archive and apply other data reduction techniques before the data is moved over the network for deduplication.

Simpana 8s holistic approach to deduplication extends across all tiers of secondary storage including tape.

It is the most cost effective and scalable.

It is more cost effective and scalable than specialized deduplication hardware and software offered by our competitors.

Our end-to-end approach also results in faster network transfers, shorter back-up windows, faster recoveries and more efficient utilization of secondary storage infrastructure.

These key product advantages allow our customers to reduce the amount of disk tape used for backup and archive copies by up to 90%.

In addition, data can be selectively encrypted for offsite storage.

The market is positively responding to our holistic end-to-end approach to data reduction versus specialized hardware appliances.

For example, we have heard from customers, and potential customers, that the reason for choosing CommVault versus hardware appliances include an excellent performance, better cost savings, increased scalability, reduced power consumption and ability to dedupe to tape, which hardware appliances cannot provide.

Specifically, one customer at a larger government agency that we had heard from, estimates that by employing CommVaults deduplication, they can reduce storage consumption by approximately 75% for one year, reduce tape consumption by about 50% and eliminate incremental tape drive purchases for six months.

As for our virtualization solution, our single platform approach, combined with Simpana 8s unique support of both VMware and Microsoft's Hyper-V virtualized environment, has put us in a position as the vendor of choice.

As a result, we have seen a significant acceleration of our sales in this market.

Moving on to strategic partners, we made continued progress in strengthening and broadening our distribution channels.

We strengthened our relationships with key partners, expanded our base of distributors and channel partners, and have grown our network to reach new geographies.

This quarter, all of our OEM partners are selling Simpana 8.

Sales through both our OEM and SMB relationship with Dell, accounted for approximately 23% of total revenue for fiscal Q1 2010.

Total quarterly Dell revenues were up 17% year-over-year.

Our partnership with Dell was recently expanded with a release in May of Dell's PowerVault DL2000.

And we continue to build our strategic partnership with HDS across all geographies.

Our relationship with McAfee continues to progress well under a new worldwide teaming agreement and technological collaboration announced in June.

Simpana 8 is now integrated with McAfee's [ePO] management console which will enable customers to determine if their data is protected successfully.

Both companies are aligning their respective sales teams to capitalize on the market opportunity where enterprise customers have a need for both data management and security software solutions.

We believe the combination of the best in class security offering, with the best in class data management offering, will offer a compelling data proposition to enterprise customers versus our competitors.

We expect McAfee related revenue to ramp in the second half of FY10.

We are working on other strategic partnership opportunities which we will announce once they become finalized at some point later this fiscal year.

Our overall global distribution effectiveness is evident by our ability to continue to add a significant amount of new customers.

We added approximately 300 new customers in the quarter.

Our customer base now totals approximately 10,500.

Let me talk to you a little bit about the recession action plans that we initiated last quarter.

The recession plans initiated in Q4 '09, and that I outlined on our last earnings call, of holding expenses flat while achieving double digit top line growth in order to dramatically improve operating margins and earnings, clearly worked.

These actions specifically included reducing our operating expenses in non-strategic areas in order to bring them in line with current levels of the business, so we would improve Q1 as well a fiscal 2010 operating margins.

Two, replacing and reallocating resources throughout the organization in order to get more firepower on the frontline.

In doing this reallocation, we replaced a fair number of sales people and [SEs] with higher impact individuals in order to better position us for solid double digit growth in the second half of FY10.

Our plan is to encompass this growth objective by having a record number of sales and SE teams in the field by the end of Q2 combined with higher overall sales productivity.

And three, we needed to react quickly to customer budget constraints by providing more flexible pricing and payment models which would allow our customers to move to more quickly realize a return on their investment.

So far, our actions have worked.

We see new demand continuing to build in the quarter, which reinforces our perspective that when presented with a compelling value proposition, companies will spend money in order to reduce costs and improve operational efficiencies.

In summary, our Q1 key achievements are as follows.

We delivered a good quarter, a good top and bottom line results, and in not only a tough economic environment, but what is also traditionally our most challenging quarter.

We achieved great traction and a high adoption rate on Simpana 8, especially deduplication and virtualization, which accounted for a material portion of our license revenue during this first full quarter of availability.

Block-level deduplication in particular, has solid traction with sales of just under 400 customers since Simpana 8s release on January 26, 2009.

We continue to strengthen and broaden our distribution channels and strategic partnerships.

We successfully executed our recession action plans resulting in solid margin expansion.

We positioned the Company to achieve its Q2 objectives and we made outstanding progress on our next Simpana release, as well as our [cloud computing] strategy, which I will talk about later in the call.

Let me talk a little bit about business fundamentals.

We believe we can still achieve relatively high growth rates which will have to come from continuing market share gain.

Our internal goals for the full fiscal year 2010 call for solid double digit revenue growth in the second half of the fiscal year, with improved operating margins.

Please note, that while we have gotten off to a good start in our Q1 and our sales momentum has continued into Q2, with good July license revenue bookings, we still have work to do.

We will continue to manage operating expenses while increasing investments on key strategic initiatives along with appropriate investments that will enable us to achieve solid growth in fiscal year 2011.

I want to add a few words of caution.

Although we are seeing improving economic conditions, especially in the United States, we are likely to remain in a difficult economic environment with constrained IT spending for the foreseeable future.

We do assume that IT spending will improve over time, but the uncertainties do remain.

Given the continued uncertainties, we will not be providing guidance at this time.

Our current thinking would be to revisit providing guidance based on our first half results, as well as a state of broader macro environment.

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 am pleased to report that total revenues for Q1 were $60.2 million, an increase of 10% year-over-year and 7% sequentially.

During Q1, revenue from US operations generated 64% of total revenues, resulting in a 19% year-over-year increase, while revenue from international operations generated 36% of our total revenues resulting in a 4% year-over-year decrease.

On a constant currently basis, total revenues from international operations actually increased 11% year-over-year.

Overall, the US dollar was significantly stronger in the first quarter of fiscal 2010, compared to the first quarter of fiscal 2009.

As a result, on a year-over-year constant currency basis, foreign currency movement negatively impacted our first quarter revenues by approximately 7%, while positively impacting expenses by about the same amount.

As a result, earnings per share were minimally impacted by foreign exchange during the quarter.

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

We expect the revenue mix to be weighted more toward software in Q2.

Software revenues for the quarter were $29.1 million, an increase of 5% year-over-year and 6% sequentially.

In Q1, approximately 40% of software revenue came from deals greater than $100,000, which we refer to as enterprise deals.

This compares to 29% in the prior year period.

Our average enterprise deal size was approximately $220,000 during the current quarter compared to $200,000 in the prior year quarter.

This increase in average deal size was attributable to the continued traction we are seeing with Simpana 8 on a global basis.

From a product perspective, sales of our advanced data and information management products, or ADIM, represented 32% of Software revenue during Q1 compared to 30% in Q4 and 27% in the prior year quarter.

As a result, sales from ADIM products grew 24% year-over-year and 13% sequentially.

de-duplication and virtualization are the key drivers for the growth of Simpana 8.

Services revenue was $31.1 million for the quarter, an increase of 14% year-over-year and 9% sequentially.

The growth in our Services revenue was primarily due to higher revenue from new customer support agreements and renewal agreements.

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

Gross margins were 86.3% for the quarter, flat from Q1 last year, but down sequentially from 86.9%.

The relatively small sequential decrease in gross margin is primarily a result of revenue weighted more towards services for the quarter.

Now a few comments on operating expenses.

Total operating expenses were 41.8 million for the quarter, up approximately 6% over the prior year period and down approximately 2% sequentially.

In Q1, sales and marketing expenses increased $2.6 million or 10% over the prior year quarter.

The year-over-year increase in sales and marketing expenses is primarily due to additional sales capacity and higher commissions as a result of increased revenue.

Also we reduced marketing related spending for the quarter, to bring the operating expense growth rate down.

However, we did initiate more targeted marketing efforts around Simpana 8 that have been very cost effective.

We believe that the investments made in sales and marketing over the past few quarters positions us to achieve solid double-digit growth in the second half of fiscal 2010.

Research and development expenses increased by about $62,000 in the quarter, or 1%, over the prior year period.

G&A expenses decreased by $250,000, or a decline of 4% over the prior year period.

This decrease is primarily due to tighter expense control and lower legal fees.

We ended the quarter with 1,058 employees, down from 1,070 employees at the end of March.

Non-GAAP operating margins were 15.5% for the quarter, resulting in non-GAAP operating income of $9.3 million.

This represents EBIT expansion on both a year-over-year basis and sequentially.

EBIT expansion was approximately 240 basis points over the comparable prior year period and 590 basis points over the prior quarter.

The non-GAAP net income for the quarter was $6.4 million, or $0.15 per diluted share, based on a diluted weighted average share count of approximately 43.8 million.

Now a few comments on the tax rate for the quarter and the current fiscal year.

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

The cash tax rate for the quarter just ended was approximately 14% and we estimate the cash rate for fiscal 2010 will be in the mid to high teens.

However, the GAAP tax rate for the quarter was approximately 60%, primarily because it includes a non-cash charge to income tax expense of approximately $900,000 to write off a deferred tax asset that was incorrectly recorded in fiscal '08.

This GAAP correction is not material to any prior fiscal period and is not expected to be material to our estimated fiscal 2010 GAAP financial position or results of operations on a GAAP basis.

And most importantly, this GAAP tax entry has zero impact on the non-GAAP financial results for any prior period as well as this quarter or any future period.

I also want to emphasize that we have recorded, on our balance sheet, approximately $45 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, which we anticipate to be in the low to mid-30s within a few years.

Moving now to cash and cash flows.

As of June 30th, our cash balance was $119.2 million, up approximately 13% from $105.2 million at the end of fiscal 2009.

Cash flow from operations was approximately $13 million in Q1.

Free cash flow, which we define as cash flow from operations plus capital expenditures, was $12 million for the current quarter, which is a slight decrease from approximately -- of approximately 4% compared to the prior year period.

The decrease is primarily due to changes in working capital during the quarter, compared to the prior year period.

We did not repurchase any common stock during the current quarter, however we are still authorized to repurchase an additional $39.8 million under our existing repurchase program, which is in place through March 31st, 2010.

Our existing $40 million credit facility expired on July 9th because no amounts were borrowed during the initial 12 months of the credit facility.

However, we entered into an amended and restated credit facility in which we can borrow up to $30 million over a new three-year period.

This new facility remains with the same financial institution where we had the prior credit facility and is in place through July 2012.

There have been no borrowings under this new revolving credit facility to date.

Our DSO for Q1 was 66 days.

This is down from 69 days in Q4 of fiscal 2009.

Mainly due to strong collection efforts and the timing of sales during the quarter.

And finally, deferred revenue increased 4 million, or approximately 6% sequentially, over the prior quarter and 17% over the prior year period.

The growth in deferred revenue and services revenue is additional validation that customers want the Simpana 8 upgrade benefits that come with an active maintenance agreement.

Also on a constant currency basis, the year-over-year growth in deferred revenue was 23% versus the reported growth of 17%.

That concludes my prepared remarks.

I will now turn the call back over to Bob.

Thank you.

Thanks, Lou.

Before we wrap up and take some questions, let me comment about what's driving change in the industry and our vision ahead.

The industry is going through accelerating change as a result of the introduction of new technologies, changing competitive dynamics through industry consolidation and the recession, which is focusing customers to be much more cost conscious.

These changes are impacting the way customers purchase and deploy information management solutions.

The amount of data to be managed is still growing at a significant rate and we expect this to continue unabated for the foreseeable future.

The ability to manage that data is becoming more complex due to changing IT infrastructures, massive increases in scale and rapidly changing requirements, including the desire to extract increasing amounts of information on the stored data.

New disruptive technologies, such as virtualization, de-duplication and cloud computing solve critical problems, however, in the aggregate, they create more complexity as customers transition to these new technologies in combination with their legacy IT infrastructures, further compounding the data management challenges are the increasingly -- increasing business requirements to address regulatory issues related to governance, risk, compliance and litigation-driven e-discovery needs.

Today, customers are increasingly demanding solutions that take the cost and complexity out of managing data and information.

This includes an accelerating interest in cloud computing.

Cloud computing can enable significant capital and expense cost reduction, while increasing resource flexibility.

We are already seeing many of our regular customers and managed service provider customers actively exploring the various implementations of cloud computing.

We believe cloud computing in its various forms represent a major new long-term trend in the way that applications are delivered, data is stored and that information is retrieved.

We expect most customers to deploy cloud computing in hybrid environments that include internal clouds, external clouds and traditional data centers.

We believe as a result of our Simpana singular data and information management platform that we are in a unique position to enhance and extend the value of our Simpana data and information solutions by developing innovation industry-leading ways to manage data and information in the cloud.

We are already well down the path in developing several highly advanced and innovative concepts that will enable our customers to seamlessly manage their data and information in the most effective and efficient manner across both traditional and cloud configurations.

We believe Simpana will be the first fully automated platform to deal with the key aspects of cloud computing, including advanced object storage.

In addition to extending the Simpana platform into the cloud, we are continuing to pursue an aggressive product development program and data and information management, including new innovations in de-duplication, data movement, virtualization, archiving, e-discovery, records management, governance and compliance.

I believe that the changes occurring in the market represent a significant increase in the market opportunity for CommVault.

We have the industry's only data and information management platform that enables a more simple, cost effective solution to dealing with new disruptive technologies, such as de-duplication, virtualization and cloud computing.

In addition, our data and information management platform includes innovative solutions to issues related to archiving, e-discovery, compliance and governance.

Furthermore, we have an expanding global distribution and support capabilities, which enable us to quickly bring new solutions to market.

In summary, we have the wherewithal to continue to be a disruptive force in the industry.

We have built a strong business foundation and have taken the necessary actions to position the company for sustained long-term growth.

I am confident we can continue to outpace the industry in growth, while increasing our profitability and cash flow.

I will now turn the call back to Michael.

Thanks, Bob.

Operator, can we please open the line for questions.

(Operator Instructions)

And the first question comes from the line of Aaron Rakers from Stifel Nicolaus.

Please proceed.

Yes, thanks, guys.

And congratulations on the quarter.

I've got one question and one follow-up.

The first question, Bob, I think last quarter, when you guys had reported, you had indicated that it would be your plan to provide guidance coming out of your June quarter results.

Assuming that we saw a firming up of the outlook, it sounds like everything you had said, points that you are seeing some firming up.

So I'm just trying to understand, was there something that changed to -- was there something that changed in your decision process of giving guidance and why we shouldn't read into why you might not be giving guidance for the current quarter.

A fair comment, Aaron.

I mean, clearly, we saw good sales momentum through the quarter and I think carry it into Q2.

On the other hand, there is still a lot of uncertainty there.

As well as we did, we still saw a fair amount of deal deferrals.

Except the difference was, we had a massive funnel and we've had to close a lot of deals.

So given the fact that some uncertainty still remained, and the other issue is that we -- we're doing really well on the enterprise segment of the market with some very large deals, we felt it would be prudent just to get another quarter under our belt and then see where things are.

But you are correct.

I mean, we did achieve what we thought -- more than achieved what we thought we could achieve in Q1 and well we're just being prudent as a company here.

Okay.

Fair enough.

The follow-up question is obviously you guys executed very well on the non-GAAP EBIT margin line.

And I'm just wondering, as we progress here, going forward, is there kind of a thought process of where you want to manage that to relative to the 15.5% you just reported over the next couple of quarters?

Are we kind of thinking that we're going to hold expenses flat at current levels?

Just any help on that front would be helpful.

Yes, I mean, clearly, we would like to improve our operating margins.

That's our goal.

[Approximate] current levels.

Now we have some challenges.

We have -- what we can see is that there's quite a big growth opportunity in front of us here, more so than we would have thought a quarter ago.

So what we're trying to do is manage the growth and op expense and not leave a big growth opportunity on the table.

So it's a challenge for us.

And -- but our objective is to do that, is to keep the operating expense low.

It won't be flat.

But keep the operating growth below the growth in operating margins so that we can get margin expansion.

That is the objective.

And as I said in the call, the goal is the goal that we had in the subcomp in Q2, we're -- we started off Q2 well and we could have a nice quarter this quarter.

But I think everybody needs to look at the numbers in terms of what we did last year.

But clearly we can see our ability to achieve solid double-digit growth in the second half of the fiscal year and make sure that that growth in op expenses stays below our growth in -- stays below our growth in operating margins.

So I mean, to get -- to keep our growth and op expenses below our revenue growth, so we can see operating margin expansion.

I understand.

Congrats.

It's a great quarter.

Thanks.

And the next question comes from the line of Rajesh Ghai from ThinkEquity.

Please proceed.

Thanks.

Good afternoon.

Congratulation on the turnaround.

I just had a question on de-dupe and Simpana 8.

Do you sense that the pickup of Simpana 8 has been impacted somewhat by the fact that deploying target based de-dupe is less destructive than a project that involves the replacement of backup software with source- based de-duplication, as what you have?

And also, if you can comment on whether you expect -- whether you expect to see any shift in customer preferences or location of de-dupe, once IT spending returns for customers going to investment mode?

No, I think what I said on the call, Rajesh, is that the end-to-end approach, which we can manage either from source or target, one, we can manage the data reduction, with things like archiving early in the process, before we go into de-duplication.

And then we can move it to all tiers of storage and move it to tape.

In addition to that, we can add selective functionality, like encryption, on selected volumes of data, which you cannot do with an appliance.

So at the end of the day, using our technique, versus an appliance, it -- one, we're a lot more cost effective than an appliance.

I mean, significantly more cost effective.

Two, we scale a lot better.

And we're more flexible in deployment because we have one platform that can manage both the data center and the remote office.

So the answer is absolutely not.

I mean, that's how we're going to compete, is on the value proposition of what we bring to market.

And we will continue to enhance that value proposition as we move into our next release and as we move these solutions into the cloud.

Yes, but my question really was if -- once IT spending returns, does that value proposition become stronger?

Do you think that customers are going to be more interested in more investment more than -- more to keep the lights on, more than they are right now?

I think that -- I think for a lot of the deals that we're doing, it's more than keep the lights on.

We're seeing some real long-term strategic IT investments coming into our funnel.

So I would say we see more than -- more of that than just to keep the lights on mode as we speak.

And our total value proposition is being received very well out there today.

Okay.

And the second half double-digit growth that you've talked about, what gives you confidence that those rates will kind of improve in order to get that number?

Thanks.

Well, the confidence is we've just got to continue to do it.

But now we've done it through the June quarter and through July and if we continue to execute through Q2, that's going to give us another data point and we have more confidence in our ability to achieve that objective.

Okay.

Thanks.

Congrats again.

Thanks.

And the next question comes from the line of Brian Freed.

Please proceed.

Hey.

Good afternoon.

Good quarter.

A real quick question.

About two quarters ago, you mentioned a very large deal in the federal space.

I wondered if that deal had closed or if it was still stuck in procurement issues?

Well, in general, federal's doing really well, Brian.

I've seen a good significant uptick in our Federal business and that has continued into Q2.

That particular deal is still in a federal black hole.

They do expect it to come out, but we have -- we don't have it in our forecasts at this time.

Okay.

Great.

Thank you.

And the next question comes from the line of Jason Nolan from Robert Baird.

Please proceed.

Yes.

Thank you.

I believe Lou said that software would become a larger percentage of revenue moving into FQ2.

So with that, is it fair to assume that software revenue would trend up sequentially?

Yes, on a quarter-over-quarter basis, that is correct.

Okay, and then, Bob, I believe OEMs just saw Simpana 8 in May, and, does it take a while for OEMs to digest what they have, and get it out to the market, or are we still seeing, just some very early traction there?

We're seeing early traction, but I think investors should focus on that our ability to -- our distribution model today is so broad, that we have really strengthened our non-OEM distribution channels.

Not that it's not Dell and HR aren't very important to us, they are, but we have a much better capability today to achieve our revenue growth through different channels, through multiple channel alternatives that we didn't have a year ago.

Okay, thanks.

Yes, that's the strategy and that's working for us.

That makes sense.

Last question from me, on your comments around the Cloud and expansion into the cloud.

What's that require from CommVaults from a strategic relationship standpoint?

Do you need hosted service providers on board to execute that strategy?

Yes, I mean it's just -- it requires a significant build of an ecosystem, both, you know, from managed service providers, your cloud hosting providers, like your Amazons.

Other strategic Cloud providers and then one other category that's very significant in addition to that, we are building some unique capability in object stores, and that requires building up an ecosystem on the application side with the system integrators o the partnering execution part of that strategy and building that ecosystem is a key component of that strategy that we have to develop and execute.

Thank you.

And the next question comes from the line of [Robert Ouisa], from RBC Capital Markets.

Please proceed.

Hey, guys, this is actually Matt Vanderheide, sitting in for Rob.

Great quarter.

You guys, it sounds like international is lagging a little bit here.

I guess, still showed good growth on a currency basis.

Is there anything that you guys see over there, you know, that gives you more encouragement in the back half, so I guess the question is, is there anything you guys need to do specifically or is it just wait for that environment to firm up a bit?

No, last quarter a lot of our restructuring and alignment took place in our international market, where we took some resources out, reallocated them to areas that have higher potential.

So that's all been done, or pretty much done by now.

So we did that, in terms of focus.

We are seeing improvement now, like Germany, Northern Europe, Australia, some of these economies are, we're seeing some improvement from where they were back in the March quarter, where other economies, like the UK, which is still having difficulty.

Spain's still having difficulty, so it's a mixed bag, but in the aggregate, we are seeing improvement in our international business.

Great, and then circling back on the McAfee partnership, Bob, you mentioned you expected it to ramp on the second half of this fiscal year.

Is -- the integration with IPO is there.

Is there anything else that still needs to be done from your side, or is it, at this point, it's just about closing deals from a joint perspective?

It's, you know, it's getting those real good alignments between the McAfee organization and CommVault.

We know who the enemy is, we know how to go out and execute, and it's building the field relationships and the targets to go out and execute in the field.

And that just takes some time, but we expect that to ramp, you know, those relationships to be built relatively quickly, and our ability to execute, and you know, achieve our revenue targets both with McAfee.

And with CommVault, I have confidence we can achieve our mutual objectives in that marketplace.

And you've got, again, you've got two really outstanding technologies, got the best security platform and the best data management platform and you've got two really great sales forces that know how to execute, and we are really confident that that combination will prevail, versus the major competitor we're going after in that market.

Good to hear, and again, congrats on the quarter.

And the next question comes from the line of David Bayer, please proceed.

Thanks for taking the call, and I'll also add my congratulations.

So a couple of questions for you.

One is more (inaudible).

I think we've addressed it a little bit, but I just wanted to get a little more clarification.

It seems like the upside, at least on my model was in services, and were you as successful in signing more contracts, or just, some color there would be helpful.

And then the other thing I'm sort of curious about, is your thoughts on the fact that Data Domain is no longer a separate entity.

What changes do you potentially see in the marketplace, and related 5o Data Domain, do you have any thoughts on their differences in marketing the amount of data reduction that they sort of see on average, versus what you see.

You seem to be a little bit more conservative than they were, and I'm sort of curious on your thoughts there.

Yes, This is Lou Miceli, I'll address the services question.

We continue to see, you know, a strong, very high attach rate on our maintenance contracts around the globe.

We saw that in Europe as well as the US.

I believe the release of Simpana 8, has allowed us to continue to maintain that high attach rate and renewal rate, and in addition to that, we did well with our professional services organization.

Those revenues were up as well.

So overall, it's just high attach rates, on new business, and high renewal rates.

So I think that addresses your services question, and I'll let Bob address the Data Domain question.

So, in the broader context, EMC owning Data Domain, look, EMC is a formidable competitor in storage, right?

They are the 800 pound gorilla there, they've got good distribution and good support, and a big footprint in the data center.

Data Domain is the best in class deduplication appliance.

You put those two together and you've got a formidable competitor that you cannot ignore.

From a value proposition, in terms of how we position against that combined competition, we are confident from a value proposition that we've got, you know, an outstanding solution.

I'm going to let Al Bunte, who is our COO, and CTO expand on that comment.

Al, why don't you take it?

Yes, I think also David, it reiterates many comments Bob made, but it starts with the problem our customers are asking us to solve, is, better data protection solutions, and it's usually around reliability and recovery SLAs, which implies you need to move into more of a disk based storage environment for moving that backup data to.

Over time, again, as you know, people have reduced that effective cost of that disk storage, by using deduplication techniques.

We think, in terms of offering great data management solutions.

Now I have to provide deduplication capabilities, but a whole host of other operational automation features sets, which, again, if you look, like Bob said, at a broader value proposition, we think we have a superior offering there, so that's what we'll keep doing.

And then, the --.

And by the way, Dave, just as a note, you know, for all practical purposes, you know, we've won almost every deal we've competed against Data Domain in the market.

Not ever deal, but I mean, our win rate, against that is very high.

And the ultimate vote is the customer.

Right, when you get invited in, you win, which is important.

Obviously, you know, it seems you don't get invited into everything they're seeing, but they're bigger in that particular segment so that's understood.

They claim a much greater level of data reduction, using their technology than you claim.

Is that just that you're being conservative, or are you counting things differently, or do you have any thoughts there?

I think we're comparable.

I'm not sure where you're picking up the part that we're being conservative, but from the data points I've seen in real life, we are very comparable on compression.

But again, it's usually a matter of broader criteria there, in terms of cost reductions, availability, recovery capabilities, and the key, again, as Bob talked about, the ability to move into other tiers of storage, particularly tape environments.

Yes, again what we're saying, apples to apples on value, whether it's performance, cost, flexibility, scalability, so on, you know, walking down the criteria.

No, on those values, we have not lost a major deal.

Great, thank you very much.

Okay, bye.

And the next question comes from the line of Tim Klasell, from TWP.

Please proceed.

And the next question comes from the line of Rob Owens from Pacific Crest Securities.

Please proceed.

Thanks for taking my question.

Relative to services, how much of your services in the quarter was pro services?

And any reason we think that it could tick down sequentially, or would we expect it to be up?

No, we don't disclose what percent is professional services, and I would expect that, you know, we continue to do well both in professional services, and with our maintenance agreement.

Okay, great.

Both sectors did well.

Yes, qualitatively, both sectors did well.

Great, and then you highlighted your share gains in the quarter, if you're taking share, why do you think there's less irrational price competition this quarter, as compared to last quarter?

In the March quarter, Rob, it was, as I said, that was a very unusual quarter, with everything locked up, and there was a lot of, I'd say pervasive, aggressive price competition.

It doesn't mean it's gone away, but you know, Symantec in particular, get quite aggressive in price cutting.

You know, which they've been doing for the last five years again.

So what we saw less of it in general than we saw in the March quarter, and we're also, we got out in front of it in terms of how we react to it, and how we manage that to our sales process.

So part of it is that we've seen less of it, and part of it is I think we've done a better job in managing against that kind of competition.

You'd have to talk to Symantec in particular and ask they why they backed off.

Maybe it was the change of CEO over there.

Okay, great, thanks.

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

Please proceed.

Hi, this is [Geo] on behalf of Derek.

Just a couple of questions.

Firstly regarding your separate enterprise seemed better in the quarter.

Could you give some coloring to small and medium business system, please?

How did they do?

Are they funding in a similar pattern?

Also, I might have missed this, but did close rate improve, or is it just because you had a larger funnel?

Both, close rates improved, and we had a larger funnel.

So in the enterprise, we clearly have seen, I'd say, you know, a more normal IT spending pattern.

Two, you know, we've been working really hard globally on focusing, you know, getting the right sales teams in place and focusing our efforts on the enterprise.

And you know, with a more normal buying pattern.

Combined with an increased differentiation and buy proposition of Simpana 8, we're getting into more enterprise deals, we're winning them.

And you know, I would say impacting our revenue, and that trend is, you know, continuing from the depth of recession.

I think we see that's a continuing trend and the strength of the company and its growth, more dependent on the enterprise.

We're more focused on the enterprise, and we're seeing more growth there.

The SMB segment of the market, has flagged for two reasons.

Because I think it's slower, number one, and number two, we don't have as much focus.

It doesn't mean we don't have any focus, but we've seen less.

We have less focus there.

I think you'll start to see the SMB portion of the market come back, because we do have some strength and channel there, and we are seeing that and so I think you'll see a combination of better performance in SMB, as well as strength in the enterprise going forward.

That's a trend we're seeing.

We've just got to see if that trend continues.

Okay, thanks.

The next question comes from the line of [Michael Trudies], from Raymond James.

Please proceed.

Hey, guys, this is John Dorris for Michael.

Now that you guys have seen the macro environment stabilize, talk about maybe your hiring plans for fiscal 2010, and if you added anybody in the current quarter?

Yes, I mean, what I said was, what we did is, we reduced head count in Q1, by taking out a layer of lower performing individuals, primarily in sales and marketing.

And (inaudible) and then we are backfilling and replacing those, reallocating those resources in other areas, primarily backfilling those resources with stronger individuals.

And by the end of the 2Q quarter, we expect to have a record number of sales and SE teams in the field so that will position us for growth in Q3, and Q4.

In order for us to hit our FY11 objectives, we're now working on FY11 execution, we need to continue to add sales and SE resources and marketing resources, in order to hit those objectives.

In addition to what I said earlier, we're trying to manage the addition of those resources at a rate that keeps our operating expense growth below our revenue growth in order to increase our operating margins going through the balance of FY10, and into FY11.

It's a difficult challenge, because we do see growth opportunity in front of us, but we want to make sure we also sustain improvement in our operating.

Now, in the non-core products, you guys have been growing that pretty nicely.

Is there enough demand out there, we'd see that actually pop, or would you have to stay around one third of revenue?

It will increase.

And the next question comes from the line of Aaron Schwartz from Robert W.

Baird & Co.

Please proceed.

Good afternoon.

Bob, to get to the growth rate you talked about in the back half of the year, are you assuming improving close rates on the enterprise deals, or is it more a function of just your larger, I guess, sales force, or more people on the front line sales force being productive?

It's mainly more people on the front line, with some modest improvement in sales productivity.

So it's a combination of numbers, and improving productivity.

And the way you get improving productivity, is you get into more, larger, enterprise deals which should enable you to be more productive, across the enterprise here.

Okay and it sounds like, and I just want to clarify, but it sounds like you're still a little hesitant to give the guidance, because there's still a lot of uncertainty on close rates for large deals.

Is that fair?

Well, you know, we had, we were in the depth of recession in March.

We came out quite nicely in June, that's sustaining, but we'd like to give, you know, a little more data point under our belts here, to make sure that we're not missing something, and we can sustain this, and see, you know, and clearly execute this new FY10, and then I think we provide you guys some guidance.

So we're just being cautious.

Okay, Bob, you also mentioned more flexible pricing, and maybe a change in payment model.

Did that have any impact on the maintenance in the quarter, or is that more so on the license side?

In the aggregate, that hasn't impacted us yet, but going forward I think you'll see some significant impacts on that.

Either, you get some more capacity based on pricing models, you'll see some shift to, it's a more subscription-like model, which has got pluses and minuses.

I think, if you can transition to it well, it's got a lot of plusses.

You know, you have an underlying annuity stream, in your services stream today, then you add an increasing annuity stream, called capacity basis subscription license revenue, which is a combination of all that.

And then you're building special licenses on top of that.

So the model, over time, should get more predictable and we're in a good position, you know, with our platform, to provide, you know, large enterprises with this type of pricing model, which has got a lot of advantages for the buyer here.

Okay, and last question from me, and Lou, this is probably for you, but you obviously had strong performance on the services line.

You spoke about, I guess the increase in constant currency deferred but it seemed like on the cash flow statement, cash flow was actually down, year-over-year, so I was just wondering if you could help me substantiate that.

On a quarter-over-quarter basis, deferred was up 6%, and on year-over-year basis, it was up 17%.

What I said was, on a constant currency basis, it would have been, year-over-year growth would have been 23%.

The sequential growth would have been less than 6% on a quarter-over-quarter basis, but on a year-over-year basis, it was higher than 17%.

That's the point I was trying to make.

Okay, I guess I was just using the changing deferred on the cash flow statement as a proxy for constant currency growth, and it looked like it was down year-over-year.

No, no, you can't do it that way.

So what would be the difference between the change on deferred in the cash flow statement, and the balance sheet, if it's not currency?

Yes, this is different.

It's a difference in the average rate, versus the spot rate, so if you want to take it off line, we can -- we're reconcile it for you.

Sure, sounds good.

Thanks for taking my questions.

Okay.

(Operator Instructions)

And the next question comes from the line of Walter Pritchard from Cowen & Company.

Please proceed.

Hi, I'm wondering if you could quantify, just year-over-year, it sounds like you gave us some color around the sales adds, and moving more into the front lines.

I was wondering if you could quantify the year-over-year increase in productive reps or whatever metric you use to quantify internally, you know, the sales force power that you have out in the field.

We haven't given out those stats, Walter but you have two things going on.

One is the number of productive reps you have in your pool, which, in fact is going up.

And the hires we made last year, become more mature, come into the higher productive area.

And then you've got the total number of teams in the field.

So what's going on underneath is the number of mature reps is going up, even though we had to cut the sales force back early in Q1, and what I said was, to all practical purposes, we basically back filled those, and by the end of this quarter, we'll have increased the total number of reps at the end of Q2, so that it will be higher than the total number we had in March, and then we'll start building it from there.

Got you, and then just on the product side, so you've been shipping this appliance, I believe at Dell, Just wondering what kind of traction you've seen from that?

It's a little bit different form factor than you've been shipping previously there, and through the channels.

They just released it in June, and so it's too early to tell.

Okay, thanks for taking my questions.

Okay, Operator, thanks.

That's it, thank you very much.

My pleasure.

This concludes the presentation for today, ladies and gentlemen, you may now disconnect.

Have a wonderful day.