Commvault Systems Inc (CVLT) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CommVault fiscal third 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 introductions, I would like to send the call over to Mr.

Michael Picariello, Director of Investor Relations.

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal third quarter 2010 earnings call.

With me on the call are Bob Hammer, Chairman President and Chief Executive Officer, Al Bunte, Chief Operating Officer, Lou Miceli, Chief Financial Officer.

Before we begin, I would like to remind everyone that statements made during this call including the question and answer session at the end of the call, (inaudible) the future projections (inaudible) 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 on this conference call under any circumstance.

Our earnings press release was issued over the wire services earlier this morning, and also has been furnished to the SEC as an 8K filing.

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

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

The reconciliation between the non-GAAP and GAAP measures can be found on Table 4 accompanying the press release and posted on the 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 Chief Executive Officer and President, Mr.

Bob Hammer.

Thanks, Michael, and good morning.

Thanks for joining our third quarter FY 2010 earnings call.

We achieved FY 2010 results which were highlighted by an 18% growth in revenues and a 298 basis point improvement in operating margins year-over-year.

Our Q3 revenue growth was primarily driven by continued success in penetrating large enterprise accounts Simpana 8 Data Management Solutions.

In addition, we achieved excellent results from our services and support organizations.

We continued to pickup market share and outpace the growth of the market in this recessionary economic environment.

This is due to the highly differentiated value and quality of our Simpana platform, combined with solid execution from our sales, team, and distribution partners.

With Simpana 8, we could do business in head to head competition unless we were able to reduce our customer's costs, improve reliability and operational efficiency, and provide much better customer support.

This was reinforced by the announcement yesterday from "Storage" magazine, and searchstorage.

com, that CommVault won the gold medal which is the top award for 2009 backup disaster recovery software and services product of the year for our Simpana 8 Suite.

This prestigious award, judged by a panel that includes end users and industry analysts, and which confirms many of the things that we hear every day from our customers.

One of the judges said it is best when describing Simpana, an incredibly functional product that integrates more into one product that most vendors even offer as separate products.

On the information management side, the Simpana Software Suite received top honors as the gold award winner, (indiscernible) discovery services preservation category in the 7th Annual Law Technology News awards.

In addition, for those of you who didn't see it, we were named by "Fortune" magazine in December, as one of the top nine site companies to invest in over the next ten years, due to our ability to help companies securely manage and use their data whether for strategic reasons or compliance regulations.

Let me now briefly summarize our Q3 FY 2010 financial results.

For the quarter, total revenues were $70.7 million, up 18% year-over-year, and up 6% sequentially.

Software revenue grew 12% year-over-year, and 5% sequentially, while services grew 24% year-over-year, and 7% sequentially.

For the quarter, non-GAAP operating income or EBIT was a record $12.8 million, up 41% year-over-year versus EBIT of $9.1 million in fiscal Q3 2009.

EBIT margins were 18%, which is a 100 point basis point sequential improvement in operating margins, and a 290 basis point year-over-year improvement.

Non-GAAP earnings per share for the quarter was $0.19.

We continued to generate a large amount of cash, cash and short-term investments balance increase $16.2 million to $148.6 million at quarter end.

We generate $11 million in free cash flow for the quarter, and $33 million for the first three quarters of FY 2010.

Contributing to our record top line results were strong execution from our sales teams and penetrating large enterprise accounts.

Enterprise deals which we define as deals over $100,000 of software represented 45% of license revenue in the quarter, up from 39% in Q3 last year.

This represented a 29% year-over-year growth.

The average order size and enterprise deals in Q3 was $233,000, which is down from $270,000 in the prior quarter.

While average enterprise work size was down from the last quarter, the number of deals over $100,000 increased 8% over Q2, and 33% over prior year Q3.

Our SMB business grew 2% year-over-year, and 17% sequentially, primarily due to the strength of our global SMB channel partners.

Our third quarter results validate the underlying strength of the business, the Simpana platform, and our continuing ability to increase CommVault's market share.

Furthermore the results validated our controlled growth strategy of making the required investments to ensure that we can continue to outpace the market in growth and profitability over the short and long term.

We remain committed to our strategy, improving operating margins while achieving above industry average revenue growth.

I would like to cover a few additional items today.

Starting with the market adoption of Simpana 8, and the reasons we believe we have seen adoption rates that are outpacing the industry.

I will then discuss IT spending, and the macro economy, which we believe continues to marginally improve.

And once Lou has finished providing some more financial details for you, I will make some closing remarks both from what we see down the road both from our product and industry standpoint including our recent announcement on cloud computing.

Now let me spending a few minutes commenting on the market adoption of Simpana 8.

Simpana 8 continues to be adopted at a rapid rate, surpasses any of our previous releases.

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

During the quarter, we had strong demand for our D-duplication, virtualization and replication software products in the quarter.

As part of a more comprehensive data management solution, D-duplication continues to have a material positive impact on license revenues.

As of the end of December, approximately 900 customers have purchased our D-duplication solutions.

Simpana is simply the most cost effective and scalable and specialized D-duplication hardware and software offered by our competitors.

Sales of our backup or advanced data information management products -- or excuse me, sales of our non-backup or advanced information management products represented 38% of software revenue during Q3, compared to 41% in Q2, and 25% in the prior year quarter.

Sales from our advanced data information management or ADIM products grew 71% year-over-year.

Our core backup grew 11% sequentially, although a decline, 7% year-over-year, superseded by CommVault's more advanced data management solutions.

It is important to note that the main reasons CommVault's above industry average growth rate is due to the comprehensive data and information management solutions that can be delivered to our customers by utilizing the depth and breath of our best in class products and functionality.

Although historically we have reported ADIM, the core backup stats, we now manage the company through two lines of businesses, data management, and information management.

Backup is a product within our data management line of business.

On a data management side, our Simpana platform produces and manages all of the many data management copies, which include, backup, recovery, snapshots, replicas, point in time, long term retention, retention and archival.

The backup copy is important copy that all companies should have a part of data management solution.

But for most companies is only one part of a more comprehensive data management solution.

In addition to our leading data management capability we enable customers and create value from the storage data by providing comprehensive information management solutions which include the ability to index the content, classify, tag, automate work loads, and present the information in ways that employees can more quickly and easily meet compliance, legal, or regulatory requirements or make better business decisions.

We believe we are the only company in the market that has taken a holistic enterprise-wide information-centric view of solving problems related to data and information.

And as such as we consider ourselves a data and information management company.

In addition to our cloud announcement on Monday, we now can (indiscernable) and securely extend all of the Simpana functionality into practical cloud computing solutions, which I'll go into in more detail later in the call.

As an example, I want to share with you a Simpana customer win, and why they chose CommVault over two major competitors.

A leading global services company had several major pain points, with their existing data managing solution including poor backup reliability, resulting in a success rate of only 50%, the cost and difficulty of managing data which was growing at 33%, the need to archive detailed transactions for tracking purposes over a long period of time, slow responsiveness and poor support from their current vendor, and no detailed visibility or easy access to their data.

These pain points combined with their desire to re-engineer and virtualize their server and data management environment presented an ideal opportunity for us to help solve their current problems, reduce IT cost, and setup a scalable platform for long-term growth.

The Simpana 8 solution included backup and recovery, archiving, search, replication, and D-duplication for their end-to-end data and information management.

The customer projects a three-year savings of $4 million from their IT budget, representing an 8 to 10 X return on their initial spend.

By utilizing Simpana 8, they now have standardized single-management platform that will enable them to handle the data growth expectations, eliminate the use of tape for long-term retention and improve operational efficiency from their existing hardware.

They also now have access to our world class support organization.

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

We saw moderate improvement of IT buying patterns, particularly in the US during the December quarter.

Certain areas in the (inaudible) remain weak We have seen continued incremental improvements in the economic environment each quarter and in each quarter of our fiscal year with December being marginally improved over the September quarter.

We did not participate in, nor did we see a calendar Q4 budget flush.

Our December quarter ended with good sales momentum, and we continued to pick up global market share from our larger competitors in the enterprise segment of the market.

Our large deal funnel continues to build, and our visibility continues to improve.

We would again expect to achieve sequential quarter on quarter improvement in revenue and earnings.

Now let me spend a few minutes speaking about guidance.

We have decided that we will not be providing detailed guidance for revenue and earnings per share for the balance of FY 2010, and for FY 2011.

We will continue to provide current business and industry perspectives, but prefer to focus our forward-looking statements on long term company specific and industry drivers.

Although we are committed to management business, in the short, and medium term, we believe the long-term focus is more appropriate for a company growing at the high revenue and earnings growth rates, in order to deliver high shareholder value both in the short and long term.

We are making the required investments to ensure that we can continue to outpace the market in growth and profitability, specifically it is our intention to improve operating margins while achieving above-industry average growth rates.

We believe we are well positioned for solid double-digit year-over-year growth in Q4 FY 2010.

The combination of the increase in both the number of experienced enterprise sales reps, along with higher overall sales rep productivity will help us achieve our stated FY 2010 financial objectives as well as position us to achieve solid double-digit growth and improve operating margins in FY 2011.

Our goal remains to achieve operating margins in the low to mid-20s over the next several years.

Our Board of Directors has approved the extension of our share repurchase program for another year to March 31, 2011.

We currently have just under $40 million remaining under this program.

We intend to be opportunistic in making additional repurchases.

I will talk about our next software release later in the call, but I will now turn the call over to Lou.

Thanks, Bob.

And good morning.

I am pleased to report that total revenues increased by $10.6 million, or 18% over the prior-year period.

For the quarter ended December 31st, 2009, we've achieved total revenue of $70.7 million, which was split evenly between software and services.

This 50/50 split is consistent with the prior quarter.

Software revenues for the quarter were $35.2 million, an increase of 12% year-over-year, and 5% sequentially.

As Bob noted, the overall increase in software revenue was primarily due to a higher number of enterprise transactions.

Software revenue derived from the US increased by 16% compared to the prior-year period, and software derived from international locations increased by 7% over the comparable prior-year period.

The growth in our international locations is primarily due to increases in Australia, Canada, and Mexico.

The European market continues to be a challenging economic environment.

And the software revenue mix for the current quarter was derived from 60% in the US, and 40% from international locations.

Our US Federal government business declined in Q3 versus the strong Federal government business we saw in Q2, which was tied to the Federal government September 30th year end.

As a result, on a sequential basis, the software growth in the US decreased by 3%, while our international business increased by 21%.

Our US government business remains a strong vertical for us, representing 10% of our total revenue for the first nine months of fiscal 2010, versus 8% for the first nine months of fiscal 2009.

We anticipate some improvement in the government business in our Q4, as a result of the conversion of a strong US government funnel.

Services revenue was $35.5 million for the quarter, an increase of 24% year-over-year, and 7% sequentially.

We continue to experience very high maintenance attach rates and renewal rates, which is an indication that customers value our best-in-class customer support.

As a result of our strong maintenance attach and renewal rates, deferred revenue continues to grow on the balance sheet.

I will provide additional information on increases to deferred revenue later in my comments.

Total revenue from the US operations generated 62% of total revenues, resulting in a 17% year-over-year increase, while revenue from international operations generated 38% of our total revenues, resulting in a 19% year-over-year increase.

Sales through our relationships with Dell accounted for approximately 27% of total revenues for Q3.

Total quarterly Dell revenues were up 58% year-over-year, and 23% sequentially.

Some of the quarter's largest deals went through Dell, which contributed to the significant year-over-year increase.

We had good leverage from the channel organization this quarter as channel revenue increased to 89% of software revenue, which is up from 84% in Q2 of fiscal 2010, and 76% in Q3 of fiscal 2009.

In addition, total revenue through Arrow's Enterprise Computing Solutions Division, increased by approximately 23% year-over-year, and decreased 10% sequentially mainly due to the Federal business.

We added approximately 360 new customers in the quarter.

Our customer base now totals approximately 11,500.

Continued growth of our customer base is very important as roughly 60% of our license revenue comes from our install base each quarter.

Gross margins were 87.3% for the current quarter, versus 86.7% in Q2.

The sequential increase in gross margin is primarily a result of the revenue mix within our services line.

Now moving on to operating expenses.

Total operating expenses were $48.1 million for the quarter, up approximately 14% over the prior-year period, and 5% sequentially.

I will take this opportunity to point out that our employer-related payroll tax expense is always the lowest in the quarter just ended.

This is because many of our employees meet the FICA limit early in our third quarter.

FICA and other employer imposed payroll taxes start again in the US on January 1st.

So you can expect to see our operating expenses increase in fiscal Q4 for this payroll expense.

Plus, we will continue to make investments this quarter to hit our fiscal 2011 objectives.

Sales and marketing expenses increased $3.4 million, or 11% 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 $1 million in the quarter, or 14% over the prior-year period.

This is primarily due to additional R&D hires in both the US and India, as well as some additional R&D legal fees for the ongoing development of our extensive patent portfolio.

G&A expenses increased by $1.4 million, or an increase of 29% over the prior-year period.

The majority of this increase is due to the foreign exchange impact on the remeasurement of certain balance sheet accounts over the prior year.

Without the foreign exchange variance, the increase in G&A on a year-over-year basis is only 4%.

We added 47 employees during the quarter, bringing total worldwide headcount to 1,128 at the end of December.

The majority of these new hires were in R&D and sales.

With regard to sales headcount, it is our intention to prudently add sales reps to order to ensure that we have sufficient sales capacity in place to achieve our fiscal 2011 top-line growth targets that Bob previously referenced.

Non-GAAP operating margins were 18% for the quarter, resulting in non-GAAP operating income of $12.8 million.

EBIT expansion was approximately 290 basis points over the comparable prior-year period, and 100 basis points over the prior quarter.

On a year-over-year basis, EBIT increased by 41%.

Non-GAAP net income for the quarter was $8.7 million, or $0.19 per diluted share, based on a diluted weighted average share count of approximately 45.5 million shares.

This share count is approximately 800,000 shares higher than the prior quarter, and approximately 2.4 million shares higher than Q3 of the prior year.

We anticipate that our diluted weighted average share count for Q4 and for fiscal year 2011 will increase at rates similar to those over the past four quarters.

Now a few comments on the impact of foreign currency.

On a year-over-year constant currency basis, foreign currency movement positively will impacted our third quarter revenues by approximately 5%, while impacting expenses by about the same amount, with no impact on earnings per share.

Sequentially, foreign currency movements positively impacted our third quarter revenues by approximately 1%, while impacting expenses by about the same amount with no impact on earnings per share.

Now turning to taxes, as a reminder our non-GAAP net income for fiscal Q4 for 2010 will be based on a 32% pro forma tax rate for fiscal year 2011.

The Company is planning to use a pro forma tax rate of 34%.

The cash tax rate for the quarter just ended was approximately 9%.

And we estimate the cash tax rate for fiscal 2010 will continue to be in the range of 10% to 15%.

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 $43.2 million of deferred tax assets that will be used to mitigate cash taxes over the next year.

As of December 31st, our cash and short-term investments balance was $148.6 million, of which $4.3 million is invested in fully insured certificates of deposit.

The cash balance including short-term investments is up approximately 12%, or $16 million from $132.5 million at the end of September.

As a result of a continuing decline in interest rates, we generated only $59,000 of net interest income for the quarter.

We do not anticipate that our interest income will improve much for the foreseeable future beyond increases attributable to higher cash balances.

Cash flow from operations was approximately $11.5 million in Q3.

Free cash flow, which we define as cash flow from operations less capital expenditures, was $11 million for the current quarter.

Our DSO for Q3 was 65 days.

This is up slightly from 63 days in Q2, mainly due to changes in working capital primarily an increase in accounts receivable due to the linearity of the quarter.

Deferred revenue increased $4.5 million, or approximately 6% sequentially over the prior quarter.

And 27% over the prior-year period.

As of December 31st, 2009, the Company's deferred revenue balance was approximately $83.1 million, which is an increase of over $17.5 million from the December 2008 balance sheet amount.

That concludes my remarks.

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

Thank you.

Thanks, Lou.

Before we take some questions let me provide a more detailed perspective on why we achieve high customer satisfaction rates in today's complex IT environments.

Spend a few moments on our recent announcement on cloud computing, and update you on the progress of our next-generation technologies that are planned in our next major software release.

Our value propositions are translating into very high customer satisfaction ratings.

This is in contrast to the high degree of customer dissatisfaction in the market with competing data and information products, and the high degree of dissatisfaction of support of those products.

We believe the reason for our high satisfaction ratings is that CommVault has been better able to manage the increasing complexity and exponential increases in scale in today's IT environments.

In addition, we believe that our singular platform enables us to provide much better support in highly complex environments than our competitors who are required to support multiple products with disparate software architectures to solve customer's data and information management requirements.

The added complexity in today's IT environments is the result of a host of new technologies introduced to the data center over the past several years, including virtualization, replication, deduplication, snaps, search, encryption, and storage tiering.

The main issue is that it has become increasingly difficult to manage data in today's complex environment with separate hardware and software products which act independently of each other, and many of which are built on architectures not designed for today's complexity and scale.

The trend to cloud storage will add additional complexity.

This week we announced Simpana functionally can now be seamlessly and easily and security extended into the cloud with one single highly scalable platform.

We are now shipping an integrated cloud storage connector (indiscernible) which will enable customers to move on premise backup and archive data security, reliably and transparently in and out of private and public cloud storage without the addition of costly, desperate cloud gateway appliances or complex scripting.

In addition, this will allow seamless integration between Simpana and trusted service providers, including Amazon S3, EMC Atmos, Iron Mountain's Archive Services Platform, Microsoft Azer, and Nirvonic SDN.

Enterprises can take full advantage of Simpana's software unique singular architecture to leverage optional embedded data deduplication and encryption, to further reduce data management cost, and secure the delivery of data stored in the cloud.

By expending Simpana software security, reliably, and transparently to the cloud, CommVault is taking a leadership role in helping our customers fully embrace a cloud storage model to lower their hardware capital expenditures, and pay for storage capacity as they need it.

I will now update you on the progress of the next-generation technologies we are planning in our next major software release.

As a reminder, Simpana 8 was released in January 2009, and we typically have major releases about every 18 months.

The new release is currently in the first phase of beta testing and it is performing exceptionally well.

We are meeting or exceeding all of our major mile stones regarding this release.

Assuming our development efforts stay on track, we will provide more details of our next-generation product launch later in this calendar year.

We expect the next release to increase our highly differentiated value propositions in the market.

Consistent with our long-term track record of innovation, the next release of Simpana is a designed to bring to market new high-impact technologies to make it much easier to deal with the increasing complexity and scale of today's IT environments.

Our objectives for the next release are as follows; to offer unique ways to move, search, and mine data, either in the data center, remote locations, or in the cloud; To improve our techniques for reducing the amount of data moved or stores, with significant enhancements to our D-duplication and advanced replication techniques; To provide significant improvements to our information management solutions including email archiving, E-discovery, and compliance solutions; To offer enhancements to security and better access of data; To improve search functions and analytics; and finally to offer comprehensive, innovative ways to seamlessly manage data in public and private clouds; We are confident that with our next release of Simpana, and we will increase advantages and our core data management business, significantly enhance our ability to build a successful high-growth information management business, and uniquely extend both of those businesses into cloud computing.

Our objective is to have Simpana become the first comprehensive enterprise class, fully automated data and information management platform to deal with the key aspects of cloud computing, including advanced object stores.

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

In summary, we are outpaced the market in regards to revenue and profitability growth over the first three quarters of FY 2010.

The foundations we have built for our business in regard to product, support, distribution, relative to the competition are the strongest they have been in our history.

As a result we are in a good solid position to execute our FY 11 plan, which is to continue outpace the industry in growth while increasing our operating leverage to cash flow.

In addition, we have defined comprehensive long term strategies whose objectives are to strengthen our position and our core business as well as to enable us to move into high opportunity areas and new (indiscernible) markets to our next product release.

I will now turn the call back to Michael.

Thank you.

Thanks Bob.

Operator, can we please open the lines for questions.

(Operator Instructions).

And please stand by for your first question.

As a courtesy please limit yourself to one question and one follow-up.

Our first question comes from the line of Aaron Rakers, with Stifel Nicolaus.

Please proceed.

Thanks, guys, and congratulations.

I have a question and a follow-up.

On the question side, Bob, I understand that you not giving guidance or official guidance at this point.

However, when I look back, closure rates, pipeline, everything sounds generally positive.

When I look back prior to March of 2009, and look at your typical seasonal patterns for the March quarter, it looks like revenue has historically been up somewhere between 11% and 12% sequentially.

My question is is there something that keeps us from thinking fiscal fourth quarter we can't see that type of seasonal trend?

And then, again, I have follow up.

Yes, we're not giving a specific number.

By what I said in the call, we do expect improvement sequentially.

In between the Q3 and Q4 quarters.

I'll mention one specific thing that was mentioned by Lou in his remarks, and that was we had a very strong Q2 growth in our US government business.

It was relatively weaker in Q3, and we expect it to be relatively stronger in Q4.

And we also expect an improvement in our international business in Q4 as well.

So on that basis, we expect to be able to achieve as we said, good solid double-digit earnings and revenue growth and sequential improvement from Q3 to Q4.

Fair enough.

And the follow-up question is Dell at 27% of revenue, very strong sequential increase from Dell.

Maybe you can help us understand that.

Is that the realization of some of the DL 2,000 product that we're seeing, or is there something else going on there?

And does that trend continue here as we move forward?

Thank you.

That's a good question, Aaron.

The DL 2,000 did do significantly better, but the major reason that the sequential numbers were up was due to a number of large deals that went through the Dell channel, and I wouldn't call that a long-term trend, it was just a circumstance where four or five very large deals went through that channel, and whether that occurres again in Q4 or not, I can't say at this point.

Okay.

Thank you.

Our next question comes from the line of Robert Retha with RBC Capital Markets.

Please proceed.

Hi, thanks for taking my questions.

Maybe Lou -- or maybe talk a little bit about the operating margin improvements you expect to meet next year.

Obviously with the channel partner success you are having there, on a relative basis should we see more improvement on the sales and marketing line, in terms of a percentage of sales improvements?

Or how should we think about the operating margin improvement going into next year?

Thanks?

Yes, I mean that's the line we get the majority of the improvement on.

I'll just make the comment, Rob, that we have done pretty well this.

But our internal objectives are quite aggressive in terms of what we're trying to achieve in terms of growth as well as profitability.

But it's a control growth strategy.

So, for investing a relatively high amount, let's say in sales and marketing, the improvements in our operating margin are modest, but we are committed to do both, and that's difficult.

So specifically we are investing significantly.

I think you'll see more of that investment show up in Q4 than it showed up in Q3.

To achieve relatively high growth rates, but at the same time, I would say, provide modest improvements in operating leverage as we go.

And we like to get over that -- as I said, we like to get over that 20% mark over the next few years.

Perfect.

Thank you very much.

Our next question comes from the line of Rajesh Ghai with ThinkEquity.

Please proceed.

Yes, congratulations from my side.

If I look at your (inaudible) revenue as opposed to your sales for fiscal 2009, for fiscal 2010, and compared to fiscal 2009, I notice that there's about a 5% to 10% improvement.

Is that attributable to D-dupe, and (inaudible) backup?

And I just want to understand as the data center refresh picks up, at least (inaudible) on the refresh side, if that happens, does that -- does the presentation of your (inaudible) revenue kind of go up a because of the backup coming a part (inaudible) going forward?

No, question.

Rajesh.

The two major drivers in our growth, they are the major -- not the only ones, fortunately we have a lot of drivers.

But the two major ones are D-duplication and virtualization.

As we look forward, what I was mentioning in our next generation technologies, we're emerging advanced data movement, very significant advancements in D-duplication, significant changes in our virtualization technology, to deal with those trends in the industry.

So the answer is yes, we could expected those technologies to continue to be significant drivers of our revenue growth over the next few years.

And talking with the cloud announcement that you made earlier this week, you talked about the ability to move in and out of the cloud.

Does that include the ability to move data index by your competitor's products also?

Or is that coming down the pike in your next release?

It's coming down the pike.

Okay.

Great.

Thank you.

Our next question comes from the line of Brian Freed with Morgan Keegan.

Please proceed.

Good morning.

Thanks for taking my call.

Back in September when you guys renegotiated your Dell contract, and I was wondering if this contributed to the services growth in the quarter, or the generally strong Dell growth?

And as kind of a follow-up to that, can you talk a little bit about the change in structure, whether it was positive or negative for you guys?

And also if you get a royalty based on the value of Dell maintenance or a rev-rec maintenance?

Okay.

That was a mouthful.

So the answer is the Dell impact on maintenance, it's just relative to the revenue we derive from Dell.

On a relative basis, the increase in maintenance is due to our increase in license revenue growth.

So think 99% of it is increase in license revenue growth.

The Dell portion of that goes up, then proportionately it would impact our services line.

So the answer is the renewal of the Dell agreement, it's important to the company because it's strategic.

And we view that relationship as strategic over the long term.

But no, on a year-over-year base, you can say had little or no impact to the improvement in our services line.

Okay.

And from a rev-rec standpoint, when Dell sells a maintenance contract, do you get a royalty or a ratable revenue stream?

No, we get a percentage of our revenue when their sell, we get as part of that contract, we get a certain percent of the license revenue becomes part of our maintenance stream.

Okay.

Thanks.

Our next question comes from the line of Derrick Bingham with Goldman Sachs please proceed.

Hey, everybody.

My first question is on seven-figure deals in the quarter.

You had mentioned that the average large deal size I think was down a little bit.

So I was just curious kind of what the color was on that?

Yes, Derek that was mainly due to lower big deals from the US government.

And you'll probably see that churn as a result.

I'll make a comment on deals and average pricing.

We're seeing -- and we have for a long time, but we're seeing very aggressive pricing, and we had through the whole quarter from SammanTech (inaudible) extremely aggressive and very disorganized.

There's no consistently to it.

You'll see China where it will be give, they'll drop the price 90%, 95%, and throw maintenance in.

India is a little different.

Germany is a little different.

UK is probably out of its mind in terms of controlling its pricing.

So, it's very scattered and disorganized.

But very aggressive.

From EMC, we see aggressive pricing, but it's clearly, I would call it aggressive and organized, because it's very targeted to CommVault particularly in the D-dupe situation.

So just a little color for you and competitive dynamics on pricing.

Appreciate it.

SMB, can you tell me how much is that recovery lagging the enterprise right now from what you can see so far this year?

It is definitely lagging, but it improved significantly in Q3, and that was gratifying to see.

We saw improvement on the SMB line, and we expect it to continue to marginally improve.

And that's clearly an indication that you are seeing some underlying what I call macro improvement in the environment because it is starting to impact the SMB sector.

Great.

You had said that you added somewhere, roughly 50 heads in the quarter.

Looking to the coming couple of quarters, is that ballpark the kind of pace you are going to stay on for hiring?

Yes, you may see it tick up a little higher than that, but that's close to the number, but I would say that and marginally higher than that.

Derek, particularly on the sales line.

Okay.

Thanks very much.

Our next question comes from the line of Glenn Havis with Needham & Company.

Please proceed.

Good morning, and congratulations on your quarter.

Could you maybe just comment a little further, Bob and others, from a competitive standpoint, I guess SammanTech now has released both their new versions, the Net Backup and Backup Exec.

Are you seeing that out on the market?

Any comments or thoughts on competing against the new release?

We haven't seen much.

We expect to see it this quarter, Glenn, and I would say knowing what we know about it, which is still a little bit limited, but our initial thoughts are we're excited that they are in the market.

Meaning we are very confident we will be successful in competing against those technologies.

And if I could squeeze one more in, you mentioned the international business picking up this quarter.

Are you seeing signs of some improvement in Europe, or is that more the other countries?

No.

We're seeing some, we expect to see some improvements in Europe.

Mainly due to some very large, the teams over there have been quite successful in bringing some very large deal opportunity us to, which are coming to fruition.

So, yes, the macro environment is improving, and our very large deal flow is also improving in that sector.

Thank you.

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

Please proceed.

Hi, guys.

Michael Turits.

Two questions.

One, the current (inaudible) head count additions that Derrick suggested, does that sort of put you on track to add -- looks like almost twice as many heads next year as this year.

Could it be that much?

Or are you really going to pick up hiring that much in 2011?

Well, it's going to be a lot higher because during the slowdown in the first half of calendar 2009, we cut heads and held expenses tight for a couple of quarters.

And now we will be consistently adding people throughout 2010.

So, yes,headcount additions in 2010 calendar will be substantially higher than they were in calendar 2009.

Okay.

And then you talked about virtualization as a driver.

Can you just describe a little bit how that directly impacts revenues?

In other words, are you seeing people saying we're going to completely restructure our storage and data management, architecture, and we're going to do a forklift and go to CommVault.

Or are there specific incremental products that people are buying from you to facilitate backup of virtual servers?

How does the revenue growth really work?

Well, it's both.

But the biggest issue, and we have been saying this for several years now, but clearly, there is a re-engineering of the IT infrastructures and data centers.

And virtualization plays a key roll in that.

So when companies start to look at global re-engineering, not just re-engineering -- a data center, which they do.

But typically more and more companies are look at re-engineering their IT infrastructures globally.

They start to look at what technologies better enable them-to-achieve those objectives.

So you take, that's a trend that is going to continue for certainly the next several years.

Secondly, as I said in my remarks, there is a very, very high dissatisfaction with some of the current vendors in the current environments.

And they look to upgrade, saying if I have trouble with these technologies in my current environment, why don't I look to see if there are other available technologies that can help me, and it really re-engineered IT infrastructure.

And that opens lots of doors for CommVault, because as I said we're having great success in these very large enterprise, restructurings, better than any of our competitors.

Our customer sat ratings are significantly higher than anybody in the market.

And it's due to the fact that we have this singular platform, which is now on it's 20-plus major release.

So the quality and consistency across all of the products is higher than anybody else's.

We have to support a platform, not five or six.

And when you go to deploy many products to solve the same problem, common sense will tell you you just have a lot more support issues with the product.

They don't talk each other.

And that makes the support of customer's environment a lot more complicated.

In addition, a lot of the competitors are running in, as the scale of these environments is, as you know, is growing dramatically, a lot of our competitors are running in to scale problems with their older architectures.

And that adds to customer dissatisfaction.

And there's your driver of CommVault, what you just describes, Michael is the key reason this company is doing so well.

And now you add cloud, and that adds an additional complexity to an environment.

Okay.

Bob, thanks very much.

Our next question comes from the line of Jason Nolan with RW Baird and Company.

Thanks, good morning.

A question on the next release.

I know it's still early given year end data.

But Bob, are there any features that stand out here at this point?

Well, it's the largest release in our history bar none.

Simpana 8 was a major release.

This is a significantly larger release.

And when we talk about significant changes in the way data is moved, it's not trivial changes here.

So the merging of what I call the next-generation data mover, significantly enhancements.

Our D-dupe is doing extremely well in the market, but we're going to take that up a level.

So that it can be in terms of enabling us to manage data in and out of clouds and in and out of remote locations in a much more comprehensive way than we do today.

And we're the best at it today.

And we talked earlier about significant enhancements to our virtualization technologies.

So you start to put all of those together and think of them as each of these are super technologies as part of the platform.

But we think they'll be deployed holistically in these big environments.

You start to pull all of that together, it's a significant improvement versus what we have today.

And then on the information management side, I talked about improvements in search and data classification, and securitization, and improvements in our presentation layers.

These aren't just improvements.

The objective was to get CommVault to be best in class across the board from a product standpoint, and certainly from a platform standpoint on the information management side and enable companies to completely automate these different information management functions in a singular work flow.

So it's not a trivial improvement on the information management side either.

So that's significant.

And then on the cloud computing side, we're doing our next generation of cloud computing enhancement.

So they are all quite significant across the board.

And so far, as we mentioned, first phase of beta started, and we're getting, I would say better than expected results from the customer base and from the beta.

So we're real confident that this is going to help us continue to enhance our position in the industry.

Just to follow-up there on the hosted service provider opportunity, how deep of relationship do you need with that community?

Does it go beyond just a connector, I guess?

Yes, there's two things, the answer is yes.

Downstream you can put the smarts of our technology into their clouds, versus just connecting data.

So you start to manage both the data information with our partners into the clouds.

And the other thing we didn't talk about a lot, but we're winning a lot of MSPs, using our technology as well.

In fact, over the last quarter, this quarter, we're signing some really significant contracts in that area.

And then we'll be working with the SAS customers as well to provide a much better data and information management capability for the SAS providers.

So all three, hosted, SAS, MSPs is certainly a core part of our strategy.

Okay.

Thanks, Bob.

Good quarter.

Our next question comes from the line of Rob Owens with Pacific Crest.

Please proceed.

Great.

Thank you, and good morning.

Wanted to focus a little bit on new customer acquisition.

I think you said the number was 360 for the quarter.

Can you give me a little more color on why that is down sequentially and year-over-year, and how we should think about that number?

Well, I mean, we don't focus on whether it's down or up.

I mean it's really --

Well, hold on.

I was certainly up sequentially quarter-over-quarter.

I'm not sure what it was last year.

And my guess is the metric we used, I think substantively it was probably up year-over-year.

I would have to get back to you, Rob, on the detail there.

But from what I know that's probably an improvement in customer debts.

Well, we moved more enterprise.

Yes.

Al just pointed out, yes, our whole focus here is in the enterprise, which is up dramatically year-over-year.

Okay.

And what percentage of customers have upgraded to Simpana 8 at this point?

Do you have a rough sense?

We don't publish that, but qualitatively it has been the fastest uptake of any release in our history.

Okay.

And then lastly on the cloud initiative, what percentage of your customers are interested in looking at cloud-based storage for their information.

Can you just give a rough sense at this point as you are out in the market talking to people?

I'm going to guess 40%, 50% maybe higher are interested.

The question is they have never had technology like Simpana that would enable an easy deployment where you can get a clear idea of payback, and make sure that the data is secured.

And can be easily retrieved, and you can manage it as a seamless tier storage.

So we're early on in the evolution of cloud computing.

We think that the majority of our revenue will probably come from enterprises, utilizing private clouds with public clouds being a secondary source of revenue, but this is an evolution, Rob, and it's going to happen over time.

I'll tell you this, though, it is helping us win big accounts, because they know now that they have a vendor that can provide them almost an infinite number of alternatives to infinite cloud computing even though they don't have a specific plan into it.

It is clearly helping us in the market.

And when you mentioned the security of cloud storage information, is that something incremental that you guys are expected to provide?

Is that something we should see out of the cloud service provider over time?

No.

No.

It has got to come from both, but we provide, we have all of these, securitizations, we have layers of it built in to our product line that determines who has access to the data, that's number 1.

And two, question can do something nobody else can, which is really critical.

And that is we can encrypt in a D-duplicated form to the cloud and provide securitization on that encrypted data.

And nobody else can do that, and that's really important.

Great.

Why is it important?

Because you want to reduce your footprint, to reduce your cost to move the data to the cloud.

And then in its encrypted form, somebody has got to manage the key and access rights to get that data back in a seamless way.

And we do that.

It's very significant.

Great.

Thanks, Bob.

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

Please proceed.

Yes, good morning, guys.

Nice quarter.

Question for you around the channel.

Obviously that's an important part of driving margins north, but as your product gets broader and deeper, does it get a little bit overwhelming for the channel?

And do you think you there might be a need in the future to have, let's say a channel product and then maybe a more enhanced product for the direct sales.

Or what is your thinking around that?

We have a very broad, deep suite at the enterprise level.

There are very few channel partners, Tim, that can communicate clearly what the value proposition of our platform, and that requires our teams.

So our sales, our SMEs, our solution architects to work with the customer to find a solution.

But we're committed to the channel.

Over 85% of our revenue went through channel last quarter, because in other words Dell or HDS, our major (inaudible) are committed to bring them in and build our channel, but it requires and I have said this all along, that without a very experienced overlay sales force, enterprise sales force, we would not sell to the enterprise.

Our channel partners are not capable of doing it and articulating.

Just too much knowledge, and we're moving too fast to transfer all of that information.

On the SMB side, it's the same product, we're just bundling it with simple skews, and simple pricing, and simple messaging to make it easier for the SMB channel partners to market the product.

But it's the same platform.

It's just bundled differently, priced differently, but sending messages to their ability to sell in to that segment of the market.

So sorted of just more the bundling strategy then?

Yes, it's not a different product it's just a (inaudible) Yes.

Okay.

And then just a housekeeping question for Lou, or for anybody.

Your short-term defers have had been growing very nicely along with your maintenance revenue.

But the long term has been sort of flattish.

Is there anything going on there?

Or is it just you're not pushing the longer-term contracts, or maybe you can help clarify that for us.

Probably a good observation.

I think a year or two ago we probably had more customers who were willing to give us two and three-year maintenance renewals, perhaps because they had the funds, and they wanted to commit them.

But that is probably the main reason.

I wouldn't read too much into it.

Other than perhaps the economy, where people are not willing to part with two or three years of worth cash tied to a maintenance contract.

Okay.

Great.

Thanks a lot.

(Operator instructions).

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

Please proceed.

Yes, thank for the follow up.

I guess just one quick question.

In the past you've talked about the McAfee relationship.

Bob, make you can give us an update on where that is.

And whether we've started to see that really pull you into incremental engagements, it seems probably, most notably on the enterprise side .

Well, both companies are I would say highly committed to it.

I was on the phone with some of their senior execs last week, and they have us kind of at the top of the pile of their partners in the enterprise.

The number of what I call deal registrations is very high.

In terms of revenue, again, I think it's the second half of this calendar year before we start to see revenue from that.

But it is relationship that both companies are committed to, both on the go-to-market side, and we're working together with them to see what additional things we can do on technology integration as well.

Great.

Thank you.

Our next question comes from the line of Phil Winslow with Credit Suisse.

Please proceed.

Hi, guys.

Most of my questions have been asked but wanted to focus on the headcount growth that you all are expecting in the coming fiscal year?

Where do we expect that to be?

Prefocus Sales, marketing, and R&D?

And is there any geography in particular that you would expect the sales and marketing to come in or maybe a segment?

Thanks.

Well, it's going to be I would say pretty evenly split between the Americas and our other international business, because the US business is growing at a pretty high pace.

We are committed to expanding if the Middle East, India, China, the Far East, Russia, there are other investments going in these other areas as well, Phil.

In regards to the amounts, since we don't provide guidance, it's pretty simple, if you think.

I'll exaggerate the point if you think we're going grow 50%, we're going to add a few points less than that in adds to get productivity.

If we're going to grow 10%, we're going to add a few less points than 10%.

So pick your number, in terms where you think the trajectory is and that will give you an idea of what our adds are going to like from a percentage basis.

Got it.

Thanks, guys.

Our next question comes from the line of Glenn Havis with Needham & Company.

Please proceed.

Just to follow-up on the service.

You mentioned strength there, and mix.

Can you just give a little more color on was it just the maintenance contract renewals or were there some professional services, and your outlook on the service line?

That was primarily coming out of maintenance but also services also improved.

The maintenance line is driven by two things.

Software revenue growth, which improved and we're starting to see that.

Because there's about a four-quarter lag on that, and we're starting to see some improvement there.

And a really good job by the teams on getting very high maintenance renewals, which is the two primary drivers there.

A good management of the maintenance renewal process, plus providing outstanding support, and providing innovative products as people want their maintenance contract to have the new technologies available to them.

So across the board, we have done a good job there.

And we're working very hard to improve the growth of our professional services as well.

But the impact of the PS line is relatively smaller than the impact of the maintenance stream.

Thank you.

This concludes our question-and-answer session.

I would like to thank you for your participation on today's conference.

This concludes the presentation.

You may disconnect at this time.

Good day.

Thank you.