Commvault Systems Inc (CVLT) 2010 Q2 法說會逐字稿

Good morning, everyone.

I am pleased to report that total revenues for Q2 were $66.7 million.

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

This compares favorably to a 48% software and a 52% services mix in Q1.

The shift in the revenue mix is the result of the sequential software growth which will provide CommVault with a strong maintenance revenue stream going forward.

Software revenues for the quarter were $33.5 million, a decrease of 5% year-over-year, and an increase of 15% sequentially.

Services revenue was $33.1 million for the quarter, an increase of 18% year-over-year and 6% sequentially.

Continued strong growth in our services revenue is a clear indication that our customers value the highly differentiated customer support provided by CommVault.

Also, we continue to experience very high maintenance attach rates and renewal rates.

Our renewals are strong because customers want the upgrade path that comes with an active maintenance agreement.

Consequently, deferred revenue continues to grow on our balance sheet which I will address later in my remarks.

Revenue from US operations generated 65% of total revenues, resulting in a 13% year over year increase, while revenue from international operations generated 35% of our total revenues resulting in a 7% year over year decrease.

Sales through both our OEM and S&P relationships with Dell accounted for approximately 24% of total revenue for Q2.

Total quarterly Dell revenues were up 3% year-over-year and 12% sequentially.

Sales to the federal -- sales to the US Federal Government were approximately 11% for the six months ended September 30th, 2009, which is up from about 9% for the comparable six-month period in the prior year.

Leverage from the channel organization increased this quarter as well, particularly in the United States.

Channel revenue increased to 84% of software revenue, which is up from 81% in both the prior quarter and the prior fiscal year.

In addition, total revenue to Arrow's ATI division increased approximately 41% year-over-year.

On a year-over-year constant currency basis foreign currency movements negatively impact our second quarter revenue by approximately 3% while impacting expenses by about the same amount.

Therefore, on a constant currency basis, our total revenues actually increased approximately 8% year-over-year with a minimum impact on EPS and margins.

Gross margins were 86.7% for the current quarter versus 86.3% in Q1.

The relatively small sequential increase in gross margins is primarily a result of revenue mix.

Total operating expenses were $45.6 million for the quarter, up approximately 3% over the prior year period and 9% sequentially.

Sales and marketing expenses increased $1.3 million or 4% over the prior year quarter.

The year-over-year increase in sales and marketing expenses is due to additional sales capacity, and also during the quarter, we continued to control marketing related spending.

Research and development expenses increased by about $70,000 in the quarter, or 1% over the prior year period.

G&A expenses decreased by $70,000 or a decline of 1% over the prior year period.

We added 23 employees during the quarter, bringing total worldwide headcount to 1,081 at the end of September.

The majority of these hires were to fill vacant sales positions with experienced Enterprise sales reps.

We also added headcount in technical services as well as R&D.

With regard to sales, headcount -- with regard to sales headcount, we will continue to prudently add sales reps in order to ensure that we have sufficient sales capacity in place to achieve our fiscal year 2011 top-line growth target.

Non-GAAP operating margins were 17% for the quarter, resulting in non-GAAP operating income of $11.3 million.

The EBIT expansion was approximately 50 basis points over the comparable prior year period and 150 basis points over the prior quarter.

The non-GAAP net income for the quarter was $7.8 million or $0.17 per diluted share, based on a diluted weighted average share count of approximately 44.7 million shares.

As a reminder, our non-GAAP net income for fiscal 2010 will be based on a 32% pro forma tax rate which compares to a 30% pro forma tax rate that was used in fiscal year 2009.

For fiscal year 2011, the company is planning to use a pro forma tax rate of 34%.

The cash tax rate for the quarter was approximately 10%, and we estimate the cash tax rate for fiscal 2010 will continue to be in the teens.

Over time, our cash tax rate will approach our long-term terminal GAAP tax rate which we anticipate to be in the mid-30s within a few years.

However, we have recorded on our balance sheet approximately $44 million of deferred tax assets that will be used to mitigate cash taxes over the next year or so.

As of September 30th, our cash balance was $132.5 million.

This is up approximately 11% or $13 million higher than $119.2 million at the end of June.

Cash flow from operations was approximately $10.6 million in Q2.

Free cash flow which we define as cash flow from operations, less capital expenditures, was $9.7 million for the current quarter.

Our DSO for Q2 was 63 days.

This is down from 66 days in Q1, mainly due to higher revenue and better linearity in the software revenue during the quarter.

And finally, deferred revenue increased $5.5 million or approximately 8% sequentially over the prior quarter and 22% over the prior year period.

As of September 30th, 2009, the company's deferred revenue balance was approximately $78.6 million, which is an increase of over $14 million from the September 2008 balance sheet amount.

That concludes my prepared remarks.

I will now turn the call back over to Bob.

Thank you.

I understand that nobody heard my prepared remarks, so I will repeat them and then go into summary.

I apologize for that.

Some technical difficulties from our operator.

So some of the key points that I pointed out were that we had very strong second quarter results, with an 11% sequential growth in revenues and 150 basis points sequential improvement in operating margins.

We had both record revenues and record non-GAAP operating income.

For the quarter, on revenues which were $67.7 million, they were up 5% on a year-over-year basis, but they grew 11% sequentially.

Our software revenue grew 11% sequentially, and -- excuse me, software revenue grew 15% sequentially and services revenue increased 6%.

Non-GAAP operating income was a record $11.3 million, up 9% year-over-year versus EBIT of $10.4 million in Q2 2009.

Keeping in mind that last year's fiscal Q2 '09 was the highest revenue quarter in our history, we were pleased to be able to grow revenues compared to that period while also improving EBIT margin.

Our second quarter FY 10 results validate the underlying strength of the business and our continuing ability to increase market share.

The quarter also saw strong execution from our sales teams in penetrating large Enterprise account.

We have clearly established a world-class Enterprise sales force whose capability is reflected in our improved large deal stats.

Enterprise deals, which we define as deals over 100,000, represented 51% of license revenue in the quarter, up from 40% in Q1.

This represented a 45% sequential growth.

The average order size of Enterprise deals improved 24% from Q1 to $270,000.

In the United States our federal team had a very strong quarter.

US Government business represented 11% of our total revenue for the first six months of FY 10.

We added approximately 300 new customers in the quarter.

Our customer base now totals approximately 11,000.

Growth of our customer base is important as it affects both short term and long-term revenue growth, as approximately 60% of our licensed revenue comes from our installed base.

It is also important to note that large Enterprise accounts produce a significantly higher amount of our add-on business versus SMB accounts.

Our business growth -- in addition to the strong penetration of Enterprise accounts, our business growth in the quarter was driven by the following factors.

Good underlying demand from customers wanting to reduce costs and improve operational efficiency, and very strong adoption of the Simpana 8 platform including outstanding demand for ADIM, or non backup products

Let me just spend a second on underlying market demand.

In this economic environment, companies are more focused on cost reduction and improving operational efficiency.

Many of the larger companies now have the willingness and the budget capability to invest in order to achieve those objectives.

As a result, we are seeing an increase in big deal opportunities at major Enterprise accounts.

In order to achieve their cost reduction and efficiency objectives many customers are consolidating and simplifying their IT infrastructures by reducing the number of vendors and products by replacing disparate applications with more comprehensive solutions.

They are also deploying new technologies to reduce costs, such as de-duplication and virtualization, as well as to improve operational efficiency through more automation.

Furthermore, and just as important, they are eliminating vendors who have relatively high maintenance costs and product that are not meeting their needs such as poor scalable and reliability and/or have poor support.

The market is voting that Simpana is the best technology to accomplish all of those objectives.

Our Simpana platform enables customers to consolidate the number of products required, is much more automated, has leading de-duplication and virtualization functionality, and requires much less IT infrastructure investment and labor.

CommVault continues to improve it's reputation for providing outstanding support for our products.

For example, I met recently with a CIO of a very large international company who replaced a competitive product with CommVault's Simpana.

He shared with me that by deploying Simpana he was able to achieve significant cost savings in conjunction with his global data management consolidation, and centralized IT project, cost savings that were well recognized by his CEO.

He also appreciated the improved reliability and support over the product we replaced.

In addition, he said, deploying Simpana enabled him to consolidate his data management into one global function and move their day-to-day operations management to a much lower cost single location.

Let me talk a second about the strong adoption of Simpana 8.

The adoption of Simpana 8 continues to exceed our expectations.

The fundamental advantage of Simpana 8 that it is the only singular data and information management platform on the market.

It has outstanding scalability and flexibility and includes a series of best in class data and information management products.

With Simpana 8 we win new business in head to head competitions because we are able to reduce our customers' costs and improve their operational efficiency.

In particular, we had strong demand for de-duplication, virtualization and archiving software products in the quarter.

De-duplication continues to have a material positive impact on license revenues.

As of the end of September approximately 600 customers have purchased our de-duplication solutions.

The market is positively responding to our comprehensive holistic (inaudible) approach to data reduction versus specialized de-duplication hardware appliances and point level de-dup sulfur solutions.

Simpana is more cost effective and scalable than the specialized de-duplication hardware and software offered by our competitors.

In addition a significant portion of our customers have purchased our de-duplication product due to its ability to seamlessly de-dup the physical tape without having to un-de-dup it which is something our competitors' products cannot do.

This feature significantly reduces the operational costs of long-term data retention in terms of media, drives, data recovery and handling costs.

Sales of our non backup or advanced data and information management products represented 41% of our software revenue during Q2 compared to 32% in Q1 and 30% in the prior year quarter.

Sales from our advanced data and information management ADIM product grew 28% year over year and 47% sequentially.

Large deals are contributing to a significant portion of the growth in our ADM products.

More customers are purchasing a higher percentage of multiple elements of our Simpana platform, especially in deals over $100,000.

This is continued validation that our major Enterprise customers see much more value in our singular platform solution versus multiple point products.

The strong quarterly stats on ADIM products Enterprise deals make it clear that CommVault has established itself as a strong competitor in the Enterprise data and information management segments of the market.

I want to spend a minute talking about our business fundamentals and our controlled growth strategy.

We are making the required investments to ensure that we can continue to outpace the market in growth and profitability over the long term.

After having effectively implemented our recession action plan that I spoke about last call, resulted in solid margin expansion, we are prudently investing to position the company for sustained growth through our next fiscal year by 11.

Specifically, it is our intention to improve operating margins while achieving above-average revenue growth rates.

As you may recall, the key objectives of recession action plan that we began implementing in Q4 FY '09 were to improve operating margins as well as to improve our ability to grow over the short and long term.

Part of that action plan called for replacing and reallocating resources throughout the organization in order to get more firepower on the front line.

In doing this we replaced a fair number of sales people and (inaudible) with more experienced Enterprise sales teams in order to better position us for solid double digit growth in the second half of FY 10.

We have essentially completed this process and as of the end of Q2 we had a record number of mature sales in SE teams in the field.

This combined with higher overall sales productivity will help us achieve our stated objective of solid double-digit growth in the second half of FY 10 as well as position us to achieve solid double-digit growth and improve operating margins in FY 11.

I'm confident that we are making the right investments to position the company to successfully achieve our longer term strategic objectives.

Now I want to spend a minute on IT spending and the macro environment.

The economic environment in the September quarter improved over the June quarter but by no means have we returned to pre recession IT spending levels.

During the September quarter we saw continued stabilization of both the economy and IT buying patterns particularly in the US and Asia.

We do, however, continue to see pockets of weak IT spend in Europe.

We believe it will take some time for IT demand to reach pre-recessionary levels.

In regard to CommVault, Q2 started positively in July and ended with good sales momentum in September.

We also established good large deal visibility for Q3.

As I mentioned previously, CommVault sales momentum in Q2 was driven in large part from larger companies who are capable and willing to make major investments in driving down costs and improving operational efficiency.

We expect strong Enterprise demand to continue.

We are forecasting potential improvements in SMB demand.

As a result of those improvements and underlying demand, we remain cautiously optimistic that we can meet our revenue and profitability objectives for the balance of the fiscal year.

However, we will not be providing detailed guidance at this time because of the continued uncertainties in the economic environment.

Since Lou already talked I'll now spend a few minutes talking about our future direction.

We plan on staying focused and enhancing our positions in both our core data management and information manage businesses.

In addition, we'll extend both businesses into practical cloud computing solutions.

We are committed to increasing shareholder value by continuing to deliver well above industry average revenue and earnings growth.

Achieving this objective requires that we consistently deliver innovative highly differentiated value in our core product and support, increase our Enterprise sales force capacity and productivity (inaudible) penetration, in major enterprise account, and continue to build (inaudible) with the network, and lastly, expand our available market with new products and new market opportunities like cloud computing.

As I mentioned earlier, we are currently making the necessary investments and are required to ensure that we can successfully execute both long-term and near-term strategic objectives.

Major investments in the near term will be made in sales capacity.

We will, however, continue to invest in (inaudible) marketing.

I want to spend a minute on our Enterprise sales teams.

It is important to note that a key factor driving the increasing market adoption of Simpana is the increasing strength of our Enterprise sales teams around the globe.

This includes field technical support, professional services and marketing support.

Our Enterprise sales teams have become a major company asset and we are investing now to ensure that we'll have sufficient sales capacity in place at the necessary sales productivity levels to achieve our FY 11 financial objectives.

We also are investing now to ensure we will continue to increase our highly differentiated competitive product advantages.

At the present time our growth plan continues to be all organic.

We are confident that with the next release of Simpana, we will increase our competitive advantages in our core data management business, significantly enhance our ability to build a successful high-growth information management business and uniquely extend both businesses into cloud computing.

We anticipate that our next release in Simpana when and if available will include the following: significant enhancements to a data management capability including unique ways to move, search, and mine data in the data center or remote locations, enhance our enhancements to de-duplication capability , the ability to manage CommVault data in private or public clouds,and the ability to manage other vendors' data in the cloud.

Number two, (inaudible) enhancements to our information management capabilities include enhancements to e-mail archiving, eDiscovery and compliance solutions, improved search functions and analytics.

The ability to uniquely manage information management solutions in cloud environments and a highly unique scalable (inaudible) object store that can store and retrieve objects or files without having to go through a traditional storage file system.

We are making excellent progress on this release and expect to hit our internal release date targets.

As a reminder the development release and timing of any features and functionality remain at our sole discretion.

In summary, we have outpaced the market in regards to revenue and profitability growth over the first half of FY 10.

We have positioned the company to achieve solid double-digit growth for the second half of FY 10.

We have defined a comprehensive long-term strategy whose objectives are to strengthen our position in our core businesses.

We are now executing that strategy in order to build a strong foundation to meet our FY 11 goals.

In addition, we believe that with our next product release we will be well positioned and move into the high opportunity areas and new addressable markets in cloud computing.

Our controlled growth objective is to continue to outpace the market in revenue growth of the industry while improving operational -- operating leverage.

I will now turn the call back to

Thanks, Bob.

Before we open up the lines for your questions, I would like to highlight an upcoming Investor Relations event.

I will be speaking at the Lazard Capital Markets Technology Media Best Ideas Investor Day in San Francisco, California on November 5th, 2009 at 4:00 p.m.

eastern time.

The presentation will be available live on our IR website and will be archived for 90 days.

Can we please open up the lines for questions.

(Operator Instructions) Our first question comes from the line of [Aaron Rakers from Stifel Nicolaus].

Thanks, guys.

Congratulations on the good quarter.

I guess the first question for me, Bob, again, I think I asked it the same last quarter, the decision not to provide guidance at this point, can you walk us through your thinking there, especially in the context of what you said around double-digit growth and what sounds to be a pretty positive commentary around the pipeline or funnel that you're seeing right now?

What concerns you?

What are you seeing out there that continues to drive you not to provide guidance?

As you know, Aaron, if you look at the fundamentals of the underlying economy, you get underneath it with continued credit contraction, high unemployment, and this is global, there's concerns that this thing turns the other way.

Given that uncertainty, it just doesn't make sense for us to provide guidance.

Clearly, take my remarks as stated, that we had a very strong Q2, and we see good visibility in large deals going into Q3, and we're certainly well positioned in regards to sales capacity, product and support going forward.

So the fundamentals are very strong, but we're still operating in a very uncertain environment, and CommVault continues to defy the laws of physics here in terms of outperforming the market, and there's underlying macro concerns.

So given that we're not providing guidance.

Fair enough.

Couple other questions if I can.

I guess on the large deal flow, 50% of your revenue this last quarter, a huge jump up.

I think last year you had a similar trend in the September quarter.

So do you expect that trend to continue in the 50 plus percent range or continue to increase, or is there a seasonal aspect to that?

The final question, for me would be why the tax rate increase as we look into next year.

is that conservatism, or is there something else underlying that?

I'll answer the question on the large deals and Lou will answer the question on tax.

There's quite bit of difference between -- it's not a seasonal trend.

The only seasonality, Q2, typically coming off a weak Q1.

We really didn't after weak Q1.

We bounced back pretty well in Q1 from the recessionary trough in Q4 FY '09.

In Q2 -- in Q2 FY '09, as I mentioned going back a year, we had a very unusual relatively small number of very large transactions that skewed the number.

So we had this record quarter based on a very few transactions.

In Q2, FY 10, the Enterprise -- the larger deals were much broader based around the globe.

As we look going forward, our funnel is much broader based.

So it's quite bit different.

We clearly are seeing more visibility to the extremely large deals coming into our funnel.

So it's quite a bit different.

The question always is, when you see a large deal funnel like that, is how well do we execute and see some lumpiness in closure.

It's very different this year from last year.

Great.

Tax rate?

Yes, I think we've been fairly consistent in saying that we would ramp our tax rate over time.

We used 28, then we ramped to the 30, now 3 2.

I think we see it leveling off in the 34 range.

So I think we've been consistent with that.

We have a very comprehensive tax planning strategy, but candidly, in this environment, we don't know what regulatory changes will be made, both in the US and globally.

So we wanted to, while not providing guidance, we wanted to provide some direction on where we think the tax rate will be, and we will model -- we will use 34% next fiscal year versus 32% this year.

Fair enough.

Thanks guys, congratulations again.

Thanks.

Your next question comes from [Robert Breza from RBC].

Please proceed.

Hi.

Good morning.

Thanks for taking my questions.

Nice quarter.

Bob, you talked about a lot in the prepared remarks about the sales force, the improvements you're making there, and then recently in the last question you commend about large deal pipeline and some potential for lumpiness.

So my question being is, what controls have you or your executive management team kind of put in place to help manage the execution here with large deals, your pipeline filling up here, and is that part of the reason maybe you're not giving guidance, you want to see those controls and see how that develops here over the next quarter or two?

Just comments around the pipeline and what you're seeing in the sales force.

I think it might be a little more helpful for people.

It is not a control issue.

The fact that -- and we've been working on this now for a couple years.

It's getting very effective sales management, sales -- mature sales reps have been selling Enterprise deals, outstanding SE support, and marketing support to penetrate large accounts.

As an organization, both from a material level, in terms of being able to execute and penetrate a large account, and terms of scale, we've just gotten much, much better over time.

The US sales force going back now, almost two years, Ron Miller began a lot of restructuring to structure that sales force to be more effective in selling the Enterprise, and those -- all those initiatives have been really, really successful.

Steven Rose in EMEA, wherever you go around the globe now, whether you're in Australia, or you go to China, or you're in UK or Northern Europe, these teams look the same.

They're very experienced, very mature, capable teams to penetrate the Enterprise.

If you look at that time combination of that capability with increasing differentiation and breadth of our product line, we're becoming more and more successful in penetrating large accounts .

And the way to start to minimize some of the lumpiness is more of those large deals you have in your pipeline, it increases your odds of achieving your revenue and profitability objectives.

The other point on that is, there are two key factors that drive your top and bottom line.

One is your -- your ability to -- the number of mature reps who can execute and the productivity of those reps.

If you look at those two numbers and all the things that tie into them, you drive better than average industry performance.

That's what's going on with CommVault We're now in position where we have established a really good global enterprise sales force, improving sales

Maybe just one follow-up, Bob, for you.

I know you guys have clearly gone to market with McAfee from a partner perspective.

Any update there would be helpful as well.

Thank you.

It's a go to market strategy, and there are accounts in the pipeline, and we are making progress.

Thank you.

Nice quarter.

Your next question comes from [Michael Turits from Raymond James.] Please proceed.

Hey, guys.

Last quarter you gave us a little feel for what your expectations were for seasonality and sequential trends in license.

Any thought on that over the next two quarters?

Our goals always are to increase revenues and profitability sequentially.

Those are our goals.

Not our guidance, but those are our internal goals.

So do you anticipate seasonality looking similar to prior years, or historical patterns?

In this environment, I think you've got to take historical out of the equation.

And, Bob, you had a very big jump in your non backup, your ADIM and stuff this year-- this quarter.

Can you break out which were the biggest contributors to that?

De-duplication, archiving, virtualization were the three biggest.

Thanks very much, Bob.

Your next question comes from [Rajesh Ghai from ThinkEquity].

Please proceed.

Good morning and congratulations on the strong quarter again.

I had a question on pipeline and closure rates.

Can you provide a quantitative comparison of pipeline and closures rates at this current time and at the same time in the September quarter on both the Enterprise vertical and the federal vertical?

They both went up.

Can you provide a quantitative number?

No.

They both -- on a relative basis, pipeline is up, closure rates are up, on a relative basis.

Okay, great.

You talk about double-digit growth, Bob, are you talking on year on year on the second half or are you talking of second half versus first half?

Year on year.

Year on year, okay.

And one last question on the sales and marketing spend.

Sales and marketing as a percentage of revenue was up sequentially.

The question is, what are your plans for spending in the second half of this year and when do we start seeing operating leverage on that line?

Well, you're seeing operating leverage now.

Obviously we achieved it in the quarter.

What I said, is we clearly-- our internal object are to have well above average revenue growth with increasing operating leverage.

Those are our internal objectives.

But, and everybody needs to understand, we are a high touch model.

The reason this company is doing so well, as I just mentioned is because our Enterprise sales force and when I said Enterprise sales force, that's sales, SEs, marketing support, (inaudible) field technical support.

It's not an inexpensive model.

It's an outstanding model because it gives us much more control of our own destiny and enables to us provide much more support it of our distribution channels.

But it is a high investment model.

It will always be a high investment model, and for us to achieve above industry average growth rates, we have to invest to do that.

It doesn't mean we won't achieve operating leverage.

But those investments need to be made in order to achieve these well above average growth rates.

Sure, thank you.

Your next question comes from Jason Noland of Robert Baird.

Please proceed.

Sure, thank you.

Al, just sequentially into FQ3 on the OpEx line should we expect a slight trend upward there?

Yes.

Okay, thank you.

And then, Bob, a couple questions.

First, on the enterprise deals that you're seeing better close rates in, is that typically a part of a larger project, such as server virtualization or the like?

Yes.

Server virtual -- consolidation of virtualization is a big catalyst in this market for those companies who are trying to drive down costs and improve efficiency.

So it's a catalyst in the market.

The closed -- has nothing to do with close rates.

The close rate issue is how effective are we in articulating our value proposition and penetrating our account and increasing our win rate versus competition.

That's where the increased close rates come from.

But the reason we're doing relatively well is because we have a focus on that particular aspect of the market, and we have the capability to execute.

Last question for me on Dell, it looks like it was a record quarter from a Dell prospective by our math maybe just an update there or is it just business as usual?

No, both Dell and CommVault are doing a lot of work together.

That is a strategic relationship.

It does work.

Both companies are really working hard, both in near and long term, so there's a lot of effort both sides to enable us to achieve our financial targets there.-- there's a lot of cooperation going on between CommVault and Dell, continued collaboration.

Thank you, gentlemen.

Your next question comes from [David Bayer from Cantor Fitzgerald.] Please proceed.

Thank you for taking the call.

Some of the questions that I would have had have already been addressed, so I appreciate that.

Two questions.

One sort of a caretaking question.

The non caretaking question is, as you invest to grow your Enterprise business and roll out Simpana 9, I'm just sort of curious if you could sort of bound for us how you think the operating margins for the company will grow over time.

My sense is that it would be very, very moderate rate of growth given the level of investment that you're making and given the investments that we saw in the sales force last quarter.

So maybe if you could elaborate.

Then on the more mundane side, it looks like there were some adjustments in noncash charges in the quarter, including it looks like you got caught up, among many other good companies with this e-trade accounting issue.

Can you talk through the magnitude of that and when the restated information will be available?

All the information basically is available.

We provided it in the press release.

On E trade.

But he will give you more color.

Yes, we unfortunately did get caught up in that issue.

And your first question was on the operating margin?

We've said this for a long time, our intent is to over time bringing operating margins into the low 20s.

We just haven't said when, but clearly in our internal plans we plan to incrementally move operating margins up and we expect over time this company-- if we're growing at a fast rate, we still believe we can get the company into the low 20s and operating margins.

That's our realistic objective, but yes, we will move them up incrementally.

So I'll address the stock comp, for those who may not be familiar, just a minute on the background.

CommVault, like other companies, we use a third-party provider to calculate our stock comp expense in accordance with current accounting guidelines.

We became aware of a programming error which we've analyzed and have disclosed that error.

It is not material.

It does not affect cash.

It doesn't affect non-GAAP results.

It has to do with GAAP accounting.

The magnitude of it was a couple hundred thousand dollars a year under statement of stock comp expense going back to 2007.

We have booked that charge this quarter.

We've disclosed it.

We've analyzed the impact on it.

We don't believe it is material.

We do not believe we need to restate, given the size of it.

So it's out there, and the timing of the expense would have been accurate over time, but the way the error occurred is that it under reported stock comp expense in those years, but over time it would have had the total correct.

We've just fixed the accounting so that the correct expense is recorded, that should have been recorded in those particular years.

I hope that's clear.

If anybody wants additional color on it I would be happy to provide it.

Got another question, operator?

And your next question comes from Brian Freed from Morgan Keegan.

Please proceed.

Good morning, thanks for taking my call.

Real quick, as you look at your number of sales reps, can you give us any metrics on kind of the historic numbers of quota carrying reps and what your kind of sales efficiency is in terms of revenue per sales guy and the trends you see in that?

We don't give out those numbers.

I can tell you that in terms of -- we spend an enormous amount of time on that issue, understanding it, driving it, both from a productivity standpoint and our improvement in training in building those sales teams.

And that's showing up in our numbers.

Could you provide any kind of qualitative color in terms of are you seeing improved efficiency in sales reps or do you feel like you have good firepower to grow without a lot of addition?

The answer is we are seeing improved efficiency.

We will continue to drive improved efficiency.

And the way we build our models, and we've built our FY 11 plans, we build the models relatively conservatively to hit the numbers, but our Dell productivity objectives are pretty aggressive.

So we're work on both.

Okay, great.

Lastly, several quarters ago you mentioned a large federal deal that was in the pipeline.

Does that remain in the pipeline?

Yes.

None of that revenue was in Q2.

It is a real deal.

It is in the pipeline and we expect to see some revenue from that deal before the end of this fiscal year.

Great, thanks.

And your next question comes from [Peter Bussi from GNT Securities].

Please proceed

Great.

Good morning.

Thanks for taking my call.

Just had a question You're mentioning better visibility in Q3 and a lot of this seems to be driven by large Enterprise.

I'm wondering if you could just comment on what you're seeing in terms of visibility in the SMB stage and maybe a little commentary on what you are seeing in terms of uptick and non backup (inaudible) as well.

Thank you.

Yes.

The SMB is mixed.

Some economies, some international accounts, like SMB is pretty weak.

Overshadowed by our extraordinary growth in the Enterprise.

Some other areas we're starting to see some -- I think we'll see some improvement in the US in SMB, for example, in the Q3 quarter.

A couple of overseas economies you get into Asia Pac.

Those economies are seeing an improvement.

So in some areas we will see some SMB improvement.

We're clearly still focused on it, by the way.

and we're still investing there and we're trying to position ourselves so as SMB does improve we can see some good growth in SMB as well in terms of just what we're doing, in terms of our internal initiatives.

Thank you.

Your next question comes from Derek Bingham from Goldman Sachs.

Please proceed.

Hi, everyone.

Following on a little on Michael's seasonality question, in very rough terms, I think in normal years, December been up a little bit sequentially Is there any reason not to expect at least some level of sequential growth in December on the license line?

Our objective, Derek, is to increase-- our internal objective is to have some sequential growth in the December quarter in license revenue.

Okay, great.

And then when you added a little over 20 net heads in September.

Can you give some characterization relative to September's adds, what kind of headcount addition acceleration you'd expect in December?

It will accelerate relative to Q 2.

We are investing now to make sure that we have a solid FY 11, so, you will see some acceleration in headcount additions in Q3.

Got it.

On your SMB comment before, Bob, I mean, granted that it is a smaller part of your business these days, but were there particular data points that you've seen thus far into the December quarter that give you that view, or could you talk about what you're seeing so far that makes you confident that you are going to see some improvement in December?

I just -- we're not giving -- on a relative basis we are definitely seeing an improvement in SMB.

It's early in the quarter.

So I would track that but clearly the US and SMB business should be better than last quarter.

We've got some hard data that suggests there's a trend there.

We've seen some evidence in certain of the European economies that are still weak, that it's going to remain weak.

But overall I think you'll see some improvement in SMB in our license revenue growth in the December quarter.

Okay.

Thank you very much.

Your next question comes from [Rob Owens from Pacific Crest].

Please proceed.

Good morning.

Just wondering if you can give a little color on the strong deferred revenue results.

Is there any deferred product shipments or is it all maintenance billed?

For the most part it is maintenance.

As I said in my comments it's a reflection of the strong maintenance that's attached to the new software deals as well as continued high maintenance renewals and very satisfied customer base with our support.

Great, thank you.

Your next question comes from [Richard Sherman from MKM Partners].

Please proceed.

Good afternoon.

My question is about deal sizes and the improvement that you saw on the Enterprise side.

The deal size is starting to move up here.

You're commenting that Enterprises have firmed.

Was there some particular strength in closure rates of your longer tailed deals, maybe some of the deals that you've been working on for two, three, four quarters maybe that helped stimulate this up side here on the license revenue in the September quarter?

I'm talking large six-figure type of transactions.

Hey, Rich, the answer is some of it was that, but, I'd say the majority of it was deals that we had brought into the pipeline that were relatively new, including getting into these seven-figure kind of deals.

So it's a combination of -- in other words, it wasn't -- the vast majority of it wasn't pent up demand, if that's what you're thinking.

The vast majority, large deals that we've been moving into the pipeline and have been able to successfully execute on.

Okay, I guess that goes to your comment earlier about pretty balanced transaction flow.

As we think about business going forward, what are the sales cycles look like now versus maybe a quarter or two ago?

Have you seen a shorter sales cycle now, given the strength of your hiring on the sales side and given your competitive positioning in the market?

Are you seeing a shortening of that sales cycle here as we get towards the tail end of this recession?

I'd say we're seeing a shortening relative to the bottom of the recession, but they are still longer than a pre recession sales cycle.

Okay, good.

Those are my questions, thank you, Bob.

Sir, you have no further questions at this time.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.