Commvault Systems Inc (CVLT) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the CommVault's fiscal fourth quarter and fiscal 2010 year end Earnings Conference Call.

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

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

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

Michael Picariello, Director of Investor Relations.

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal fourth quarter 2010 and 2010 year end earnings call.

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

Before we begin, I would like to remind everyone that statements made during this call including the question-and-answer session at the end of the call that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

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

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

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

The press release is also available on our IR website.

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

The reconciliation between the non-GAAP and GAAP measures can be found in table four accompanying the press release and posted on our website.

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

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

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

Bob Hammer.

Thanks, Michael.

Welcome, everyone.

Thanks for joining our fiscal fourth quarter and 2010 year end earnings call.

I'm pleased that we ended the fiscal year with strong results.

Our fourth quarter FY10 results were highlighted by record software and services revenues totaling $73.4 million, record operating income of $13.9 million and record free cash flow generation of $21.2 million.

We exited fiscal 2010 in a very strong financial position with $174.6 million of cash in short term investments on the balance sheet while $3.88 of cash per diluted share.

For the year, revenues were $271 million, up 16% on the year-over-year basis versus $234.5 million in fiscal 2009.

Operating income was $47.3 million, up 47% year-over-year.

Earnings per share for fiscal 2010 was $0.72 versus $0.53 for fiscal 2009, representing a 35% year on year growth.

In addition, of deferred revenue increased to $92.3 million, an increase of 33% year on year.

For the quarter, total revenues were up 31% year on year and up 4% sequentially.

Operating income or EBIT was a record $13.9 million, up 158% year-over-year.

EBIT margins were 18.9%, which is a 90 point sequential improvement and a 930 basis point year-over-year improvement.

Earnings per share for the quarter were $0.21.

For the quarter, we had strong license revenue growth from both the US and our international operations.

The US license revenue grew 29% year on year and international was up 39% year on year.

License revenue growth in Q4 was driven primarily by continued success in penetrating large enterprise accounts on a global basis.

We also had excellent results from our services and support organizations which grew 28% year on year.

Enterprise deals which we define as deals over $100,000 in software revenue represented 51% of licensed revenue in the quarter, up from 38% in Q4 of last year.

This represented a 78% year-over-year growth.

Sequentially, enterprise deals grew 18%.

For the full year enterprise deals represented 47% of license revenues which is 40% of FY2009, representing a 29% year-over-year growth.

We lead our competition with innovative solutions and our customers continue to realize greater savings in operational efficiencies as a result of our holistic approach to data and information management.

Our value proposition is more compelling to customers today than it has ever been which is validated by our FY10 results and I'm encouraged by the continuing improvements in the global economic environment.

Let me spend a few minutes commenting on our product metrics and our Deduplication solution.

Sales of our advanced data and information management or ADIM products represented 43% of our software revenue during Q4 compared to 38% in Q3 and 30% in the prior year quarter.

Sales from our ADIM products grew 91% year-over-year.

License revenue from our core back-up grew 9%.

Our growth rates have consistently exceeded the industry growth rates.

I'll provide a perspective as to why later on in the call.

We had strong demand for our Deduplication virtualization and archiving software modules in the quarter with Deduplication having a material positive impact on license revenues.

Simpana is simply more cost effective and scalable than the specialized Deduplication hardware and software offered by our competitors.

One of our recent wins of the North American unit, at one of the world's leading apparel companies recently replaced a Deduplication hardware appliance with our Simpana Deduplication solution.

They told us the major reason they switched is that our Dedup solution was more cost effective scalable than their old appliance-based approach.

To stay with their old vendor would have required a major forklift upgrade just to get enough Dedup capacity to meet their current needs.

This would not have taken into account any future data growth including additional needs from a recently completed acquisition.

On top of this, the three-year cost of the proposed appliance was twice the cost of the CommVault solution.

By choosing and utilizing CommVault's software solution over their existing appliance-based approach, they now have a Deduplication solution as part of a comprehensive data and information management platform that will enable them to handle their current needs including data growth, expectations and to improve their operational efficiency.

As a customer found out, a Dedup solution that just sits behind an outdated data management system does not solve the fundamental data and information management problems.

It just puts a short term band-aid on them.

Now, I want to spend a few minutes on our -- about our distribution channels including Dell.

Our distribution and reseller channels remain strong.

For the quarter sales through our channels improved significantly increasing 42% year-over-year.

The addition of new channel and strategic distribution partnerships are helping to improve our sales productivity and to diversify our channel revenue concentration.

In addition to our traditional distribution partners, we have added new strategic managed service providers who have traditionally serviced SMB customers but are beginning to target enterprise customers as well.

Solutions for managed services are a component of cloud computing and enable customers to store and manage data without having to purchase their own IT infrastructure.

We have won a significant number of major MSP accounts including the recently-announced deal with British Telecom who will use our product as the engine for them to provide data and information management services to their customers.

Let me talk for a minute on Dell.

Sales through our relationship with Dell accounted for approximately 23% of revenues for the quarter ended March 31, 2010.

Total quarterly Dell revenues were up 23% year-over-year while down 13% sequentially.

The sequential decline is due to the fact that some of the last quarter's largest megadeals went through Dell which contributed to the significant Dell concentration of revenue, which was 27% in Q3.

For the full year, Dell represented 24% of revenue up from 23% in FY2009.

We have a strong relationship with Dell and expect our relationship to continue to strengthen.

We have recently added the ability to manage snap copies on Dell's EqualLogics platform and are working with Dell on other strategic Dell-branded projects.

We expect to have a robust growth from our Dell relationship in FY'11.

Let me spend a minute on the current macroenvironment, the outlook for the market over the next year and the current perspective on CommVault.

Demand for our products has improved but we're still operating in a difficult macroenvironment.

The markets in the US and Asia appear to be improving more quickly than the European markets.

However, closing cycles are still long and closing processes are more complex and more difficult than they were at pre-recession.

As a result, close rates are still below pre-recessionary levels.

Most analysts indicated that the data management market shrunk in calendar 2009 by about 1% and is forecasted to grow from 4% to 6% in calendar 2010.

The information management market shrunk in 2009 by 3% and is forecasted to grow from 5% to 9% in 2010.

With these historical and protected growth rates in the data and information market, let me explain why CommVault has outpaced the growth of the markets by approximately 4X over the past several years and why we consistently grew revenues over the past four quarters through the worst recession in recent history.

Later on, I'll describe why we believe our ability to continue to outpace the market will increase over the next 24 months.

The short answer is -- technology changes in the IT infrastructure and increased regulations have resulted in more and more companies who are dissatisfied with their current solutions and are looking for better ways to [manafit] data and information.

CommVault's Simpana platform is a much better way.

Radical changes in the IT infrastructure have continued throughout the recession driven by virtualized services, converged networks, virtualized storage and cloud computing.

In addition, compliance and regulatory requirements and risk mitigation demands are increasing and have driven the need for effective long-term archival solutions and the need for discovery including easy and secure access to data.

Data growth has also continued unabated through the recession.

While data growth has continued, the growth of storage capacity, to store and manage that data has not kept pace and the availability of skilled IT resources is in short supply for most companies.

The changing industry dynamics combined with the recession are causing more companies to take a completely fresh look at how they solve their data and information management problems.

These companies are asking questions like -- how do I dramatically reduce my cost?

How do I reduce my need for staff IT labor resources?

How do I automate and manage data in multiple locations?

How do I ensure my data is protected and can be easily retrieved in case of disaster?

How do I globally protect my data?

How do I meet my regulatory and compliance requirements by being able to search data easily across many different vendor storage hardware devices including the 60% of data that resides outside the data center on laptops and in the cloud?

The size and complexity of these issues demand that companies solve their data and information management problems holistically on an enterprise-wide basis.

The current competitive enterprise products have outdated architectures which are not optimized to work well in today's modern IT environments.

Customers are telling us they have multiple problems with competitor's solutions including issues with scalability, flexibility, deployment, configuration and data access.

As a result, their support and administrative issues have escalated, costs have increased and they're not able to easily accomplish many of the key data and information management objectives.

In contrast, the CommVault Simpana platform is at the forefront of enabling companies to solve these problems globally.

Simpana is the world's only singular highly automated data and information management platform.

It enables customers to employ a lot less labor to manage and update their systems and requires much less storage.

It is highly scalable, very flexible, works seamlessly with virtualized server environments, modern networks and works heterogeneously across all storage environments including a cloud.

It is much easier to install and manage than competing systems.

In addition to having a fully integrated platform, it certainly helps our value proposition to have leading edge functionality in key areas like Deduplication, virtualization, archiving, search, data protection and encryption, cloud computing and reporting.

Add to this our world class support and professional service capabilities and it is easy to see why customers are choosing CommVault.

Providing best-in-class support is as important as our products and the vast majority of our customers rank our performance in the highest customer satisfaction category, which is very satisfactory.

High customer satisfaction ratings along with the high competitive switch rate are good indications that our customers trust CommVault to solve their data and information management problems.

To date, over 12,000 customers have chosen CommVault versus competitive solutions.

As one of our new major European customers said, "We looked at them all, Simpana was the only one to fully integrate all data management functions on a single platform.

If we didn't have this, we couldn't consolidate and virtualize our infrastructure across five continents." Another customer who recently selected CommVault from among many competitors said, "Today, it is not just solving a technical problem.

There are lots of ways to do that.

But if you can't solve my business problem and reduce my cost, move on.

CommVault was the last one standing by a long shot."

The following is a good example of an enterprise customer who was dissatisfied with one of our major competitor's solutions and chose Simpana 8.

A division of a multibillion dollar leading global professional services company was facing an upgrade cycle from the current data management vendor.

They had several major pain points for their existing product and called it non-innovative.

The upgrade cycle allowed CommVault the opportunity to bid on the deal.

The Simpana 8 solution included back-up and recovery, data replication and Deduplication.

From a technical standpoint, the customer noted that compared to their current vendor's newest product, Simpana 8 had superior architectural design, better overall performance, ready ease of use and those data management products were on one platform with common services.

The singular platform meant their installs, upgrades and service backs replied only once which dramatically reduced administration time.

From a financial standpoint, it was a lot less expensive to switch to Simpana 8 than to upgrade to the newer product version from their existing vendor.

The customer projects that over the next several years, our solution will be 60% less expensive than the competitor.

It also means they won't have to pay a high maintenance bill for a product that doesn't meet their needs.

With CommVault Simpana, the customer now has a scalable platform with increased reliability and a significantly reduced data footprint.

So, let me summarize why we have consistently grown faster than the industry over the past several years.

We believe, and the market is validating, that CommVault has the best highly differentiated solutions to address data and information management problems in today's rapidly changing IT infrastructure and regulatory environments.

Our solutions enable customers to reduce costs, improve operational efficiency and derive more value from their stored data.

Our capabilities to serve our markets have increased -- number two, as our capabilities to service our markets have increased significantly on a relative basis versus our competition as we have continued to invest in distribution and support at a high level throughout the recession.

Number three, we have innovated much faster than our key competitors to meet emerging market needs.

This is because we have been better able to anticipate those needs and two, all of our products developed in house on one singular platform and we have a very efficient, highly skilled development organization.

After Lou's comments, I'll discuss our ability to outpace the market in revenue growth and profitability in FY11 and FY12 including our product direction and what we're doing to strengthen our distribution capabilities.

Before I turn the call over to Lou, let me address our current guidance.

We did not provide guidance for the past year.

A year ago, I said our objective would be to achieve solid double digit revenue and earnings growth in FY10.

Our numbers speak for themselves.

We achieved those objectives.

We prefer to focus our forward-looking statements on long-term Company specific industry drivers while providing current industry and business perspectives.

Therefore, we will not be providing detailed guidance for revenue and earnings per share for FY2011.

We'll provide some color into specific income statement items such as margins, interest expense, tax rate and share count during his comments.

We believe again we're positioned to achieve solid double digit revenue and earnings growth and improved operating margins in FY2011 driven by strong market traction with Simpana 8, continued increases in sales capacity, broadened channel distribution, geographic expansion and a new platform release which is slated for introduction in the late summer or early fall.

We are reconfirming our commitment to improve operating margins while achieving well above industry average revenue growth rates.

We're confident in our ability to achieve our planned revenue and earnings growth objectives for FY11.

However, we would like you to keep in mind that our fiscal Q1 -- the quarter ending in June -- is typically our weakest quarter with earnings typically being light to down during our March quarter.

I'll now turn the call over to Lou.

Thanks, Bob.

Good morning.

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

During fiscal 2010, we increased total revenues by 16% over the prior year period while improving EBIT margins year-over-year by 370 basis points, generating approximately $57 million of cash flow from operations.

For the quarter ended March 31, 2010, total revenues were $73.4 million, an increase of 31% year-over-year and 4% sequentially.

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

For the year, software revenue was $134.5 million, an increase of 11% year-over-year.

The increase in software revenue was primarily driven by more enterprise deals which increased by 33% in fiscal 2010.

As a result, enterprise deals represented approximately 47% of fiscal 2010 software revenue versus 40% in the prior year period.

Software revenue for the quarter was $36.7 million, an increase of 33% year-over-year and 4% sequentially.

The overall increase in software revenue was primarily due to a higher number of enterprise transactions.

In Q4, approximately 51% of our software revenue came from enterprise deals compared to 38% in the prior year period.

The software revenue generated from deals greater than $100,000 increased by 78% year-over-year.

Our average enterprise deal size was approximately $218,000 during the current quarter, compared to $203,000 in the prior year quarter.

Services revenue for fiscal 2010 was $136.5 million, an increase of 21% year-over-year.

For the quarter, services revenue was $36.8 million, an increase of 28% year-over-year and 4% sequentially.

We continue to experience very high maintenance attach rates and renewal rates for our best-in-class support.

As a result of our strong maintenance attach and renewal rates, deferred revenue continues to grow on our balance sheet and is currently at a record high.

For the year, revenue from the US generated 62% of total revenue, resulting in an 18% increase over fiscal 2009 while revenue from international operations accounted for 38% of total revenue resulting in an increase of 11% over fiscal 2009.

The growth from international revenue is primarily due to strong results in Australia, China, Latin America and Canada.

For the quarter, revenue from the US operations generated 60% of total revenues resulting in a 25% year-over-year increase while revenue from international operations generated the balance resulting in a 40% year-over-year increase.

The European macroenvironment seems to be recovering but there remains some pockets of weakness in certain international geographies.

Total revenue through Arrow's Enterprise Computing Solutions Division increased by approximately 50% year-over-year and 11% sequentially contributing 24% of total revenue.

Sales to the US Federal Government were approximately 9% for fiscal year 2010 versus 8% in fiscal 2009 with a year-over-year growth rate of 34%.

On a year-over-year constant currency basis, foreign currency movements positively impacted our fourth quarter revenues by approximately 6% while favorably impacting EPS by $0.02 Sequentially, foreign currency movements negatively impacted our fourth quarter revenues by approximately 1% while negatively impacting EPS by an immaterial amount.

Gross margins were 87.6% for the quarter and 87% for the year.

Gross margins in the prior fiscal year were 87.1%.

Moving on to operating expenses, total operating expenses were $49.6 million for the quarter, up approximately 17% over the prior year period and 3% sequentially.

Sales and marketing expenses increased $5 million or 17% over the prior year quarter.

The year-over-year increase in sales and marketing expenses is a result of higher commissions on record revenue as well as the investment in additional sales capacity to meet our fiscal year 2011 revenue objectives.

R&D expenses increased by about $1 million in the quarter or 15% over the prior year period.

G&A expenses increased by approximately $1 million or an increase of 19% over the prior year period.

We added 26 employees during the quarter, bringing total worldwide head count to 1,154 at the end of March.

The majority of these hires were in sales and technical support and services.

Operating margins were 18.9% for the quarter resulting in operating income of $13.9 million.

The EBIT margin expansion was 930 base points over the comparable prior year period and 90 basis points over the prior quarter.

On a year-over-year basis, Q4 EBIT increased by 158%.

For the full year, EBIT margin improved by 370 basis points.

Our goal is to increase fiscal 2011 EBIT margins by 100 to 150 basis points and our goal remains to achieve operating margins in the low to mid-20s over the next several years.

Net income for the quarter was $9.5 million and EPS was $0.21 per share, based on a diluted weighted average share count of approximately 45.9 million shares.

For the year, net income was $32.3 million and EPS was $0.72 per share, based on a diluted weighted average share count of approximately 45 million shares.

The Q4 share count is approximately 450,000 shares higher than the prior quarter and approximately 2.5 million shares higher than Q4 of the prior year.

We anticipate that our diluted weighted average share count for fiscal 2011 will increase sequentially at an average rate that is comparable to the past four quarters.

In the prior 12 months, certain of our senior executives have, in the aggregate, exercised and sold approximately 219,000 options which were approaching the end of their ten-year life.

Certain executive officers, directors and employees of CommVault still hold approximately 800,000 outstanding stock options with a weighted average exercise price of $6.15 per share.

That will reach the end of their ten-year term in the next 12 months.

We expect that all of these stock options will be exercised prior to their expiration date.

As of March 31st, our cash and short-term investments balance was $174.6 million of which $5 million is invested in fully-insured certificates of deposit.

Cash balance including short-term investments is up approximately 17% or $26 million from $148.6 million at the end of December.

For Q4, cash flow from operations was approximately $22.2 million, free cash flow which we define as cash flow from operations less capital expenditures was $21.2 million and the current -- for the current quarter -- and $53.9 million for the full fiscal year which is an increase of 40% over the prior year.

From January 1,2010 through yesterday, we repurchased 310,000 shares of common stock for approximately $6.2 million under our share repurchase program.

We are authorized to repurchase an additional $33.6 million under this existing program.

We believe our stock is currently undervalued and we will continue to be active in our stock buyback program.

As a result of the continuing decline in interest rates, we generated only $63,000 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.

For the quarter, our DSO was 69 days.

This is consistent with the prior year period but up from 65 days in Q3, mainly due to linearity of the quarter.

As of March 31, 2010, the Company's deferred revenue balance was approximately $92 million which is an increase of approximately $23 million or 33% over the prior year and an increase of approximately $9 million or 11% sequentially.

Historically, our fourth quarter has the highest sequential increase in deferred revenue.

We would expect Q1 to be more of a normalized increase in deferred revenue.

And finally, a few comments on taxes.

Historically, our cash tax rate has been significantly lower than our GAAP tax rate due to NOLs.

As a result, the cash tax rate for fiscal 2010 was approximately 10% and we estimate the cash tax rate for fiscal 2011 will be in the mid to high teens.

We anticipate that our cash tax rate will remain lower than our GAAP tax rate for the next 12 months to 24 months.

For fiscal 2010, we used a 32% non-GAAP tax rate and for fiscal 2011, we'll use a non-GAAP tax rate of 34%.

We currently expect our long-term terminal GAAP and cash tax rates to be in the mid 30% range over the next few years.

As a result, we will gradually increase our non-GAAP tax rate as it approaches our anticipated long-term terminal GAAP and cash tax rates.

That concludes my prepared remarks.

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

Thank you.

Thanks, Lou.

I will now discuss how we're positioning CommVault to achieve strong financial performance in FY11 and FY12 including our product direction and what we're doing to strengthen our distribution capabilities.

Let me first discuss the macro IT environment, how it is changing customer needs and why CommVault is in a unique position to meet those needs.

Significant industry change is driven by the need to dramatically increase scalability, the proliferation of virtual service and storage, the advent of smart -- to very smart -- networks, the emergence of cloud computing, increased regulatory compliance requirements driving the need for next generation archiving, e-discovery and search, increased demands for solutions that reduce costs and improve operational efficiencies, and the increasing IT infrastructure complexity and the relative unavailability of skilled IT labor.

More and more customers have come to the conclusion that their current vendor's data and information management solutions are not meeting their needs and are actively looking for new solutions that are more suited for today's IT infrastructure and regulatory environment.

The bottom line is that industry change is in our favor since there is an increased need for a scalable, comprehensive, enterprise-wide data and information management solution that adds value to and manages data across different vendor storage systems.

Customers are also looking for solutions that are highly scalable and are flexible enough to meet future needs.

Our singular, highly scalable flexible comprehensive data and information management platform is simply the best platform to meet the growing needs of the market.

As a result, we believe we're in the strongest competitive position we've ever been in.

Our objective is to build on our strong competitive position and strengthen it further by continuing to improve our ability to execute our plans by -- one, investing in our global sales capacity at a much faster pace than the market growth.

Two, broadening and deepening our global distribution by adding new distribution partners, resellers and strategic distribution partners at both the enterprise and SMB market segments.

As you may have seen from this morning's announcement, we're adding Avnet as a distributor partner in the US, Canada and Mexico to complement our Arrow relationship.

Number three, broadening our vertical and target marketing expertise to better address vertical markets like healthcare and government and improving our ability to address the information management market, cloud computing and managed service providers.

Four, enhancement of our support and professional services capabilities.

Five, continuing to strengthen our technology leadership -- Simpana 8 has had great success in the market.

We believe our next release will again increase our value to our customers and expand our competitive differentiation in our core data protection and information management markets.

It will also establish the foundation for us to enter into significant new markets.

Our development teams are executing extremely well and, as a result, our next major leap is on or ahead of our internal schedule.

This release will be the largest release in the history of the Company.

So far, the reception and feedback from our beta customers has been outstanding.

Please note the development and timing of the release as well as any of its features or functionality remain at our sole discretion.

Our objective with our next release is to dramatically enhance our leading technology positions in both data and information management.

As a reminder, our data management solutions include not only traditional back-up and recovery but also new innovations in Deduplication, data movement, virtualization, snap-based back-ups and enterprise reporting.

Our information management innovations are primarily in the areas of archiving, e-discovery, records management, governance and compliance.

Our data management objectives for our next release include our third generation Deduplication solution which will be well beyond anything available in the market in both scale and functionality and provide for both integrated source and target capability.

Two, much more comprehensive scalable and automated ways to manage data and virtualize server environments.

Three, next generation snap copy management to seamlessly and more intelligently manage snaps across the whole enterprise environment.

Four, our second generation cloud computing capabilities including direct Dedup to cloud storage and object-based content store and the ability of bringing CommVault data information management capability to clouds offered by many more lab providers.

Number five, adding the capabilities to manage -- begin managing non-CommVault managed data.

And six, significant increase scalability of the whole platform.

Our information management objective for the next release is to establish a clear leadership role by introducing a next generation console user interface search and analytics, improvements in e-mail archiving, e-discovery and compliance, integrated work flow capabilities.

And four, innovative data mining capabilities including the ability to data mine non-CommVault managed data.

In summary, we have expanding market opportunities, industry changes in our favor, we are in the strongest competitive position in our history.

We have a well-defined long-term strategy and are increasing our ability to execute that strategy.

And we are positioned to achieve solid double digit growth in revenues and both profitability in both FY11 and FY12.

That all being said, we are very focused on achieving our near-term revenue and profitability objectives.

Thank you, let me now turn the call back over to Michael.

Operator, can we please open the line for questions?

Thank you, sir.

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

(Operator Instructions) Your first question comes from the line of Aaron Rakers with stifel.

Thanks, guys.

Congratulations on the quarter.

Three questions if I can.

First question, Bob, you had talked about deal closure rates still not back to pre-downturn levels.

You also saw a DSO that increased a little bit.

We've seen some of your peers talk about deal pushouts at the end of the quarter.

The first question would be did you see any of that or maybe following on that, when do you believe or do you believe that deal closure rates get back to normalized or pre-downturn levels?

We're still seeing a significant amount of -- as you call them, deal pushouts.

But clearly, the closing cycles are a lot longer.

That means you have to have a much larger funnel in order to hit numbers because deals do get pushed out.

And sometimes it takes another two or three quarters before you close them.

The only way you can hit your numbers is to have very large funnels.

When things get back to normal, I think it is certainly not next year.

I don't see the market becoming a normal market in 2010.

Maybe 2011 or 2012, I don't know.

But it is certainly not in the near term.

Okay.

Two other questions.

The Avnet relationship announced today, can you help us understand how quickly that ramps or any thoughts of how we should think about that incrementally from a revenue standpoint?

Clearly, it strengthens -- it is a significant strengthening of our ability to distribute in the North American markets and Mexico.

But the resellers will sign up with either Avnet or Arrow within the next couple of weeks.

I think the execution of that agreement will happen quickly.

Avnet is well-positioned to support us in the market.

As far as revenue implications, obviously they're positive.

It will certainly help us achieve our internal objectives which I described as solid double digit revenue growth in this fiscal year.

So, it will be a major benefit to us.

And we also have an objective to not have our distribution as concentrated as it is and that will help us as well.

Final question, Bob.

There has been a lot of talk about EMC and Dell's recent Deduplication relationship.

Can you help us understand a little bit in the context of how meaningful maybe that DL2100 product has been or maybe immaterial for that matter?

Immaterial.

Fair enough.

Thanks.

Your next question comes from the line of Mr.

Robert Breza with RBC Capital Markets.

Hi, good morning, guys.

This is actually Matt Hedberg sitting in for Rob.

First off, fantastic quarter.

Really nice to see in definitely a choppy market here.

Bob, question for you.

You talked about a bigger funnel.

Clearly, the deferred revenue, the bookings, accelerating faster than revenue would indicate that.

Can you give us a sense or based off of that funnel, what percentage of the funnel will come from existing customers versus new organic customers?

About two-thirds.

Just round numbers.

60%, two-thirds come from existing.

30%, a third come from new.

Okay.

In terms of that pipeline and obviously it seems like it is getting stronger, is there a way to help us think about it almost like a coverage ratio of pipeline over quota?

How does that look on a year-over-year basis?

We don't discuss that but you need very high coverage ratios in this market.

To hit your numbers.

And when they slip below levels, it makes it more difficult.

There's no way around it because you cannot predict -- Aaron made the point that deals slip.

And they do.

We see it every quarter.

So, if you don't have enough coverage, you're not hitting your numbers.

Then, from a geographic basis, can you give us a little sense for EMEA.

Maybe geographically, how was the UK, how was Germany?

Maybe a little more granularity in Europe?

EMEA had a great quarter in general.

Across many geographies.

The UK had an awesome -- very strong quarter.

Northern Europe had a very strong quarter.

The whole team down in the pack room led by our team in Australia had a very strong quarter.

So, those three areas were the strongest.

But in general, it was a significant turnaround in our international operations this quarter.

That's great.

And then one last one if I could.

The SMB spacing, obviously that has been lagging the enterprise recovery here.

Can you give us a sense for how the SMB did this quarter?

Well, it did better.

We did see improved growth and we also, as a Company, are putting a lot more emphasis on a relative basis on SMB going into FY11.

I think it will take another three, four quarters.

Avnet is a good example of that.

But, we're definitely -- we will have a more focused approach to our SMB business as well as still staying very focused in our enterprise segment of the market.

Great.

Nice quarter.

Your next question comes from the line of Glenn Hanus with Needham.

Good morning, nice quarter.

Seasonality, could you maybe comment on how that should unfold this year.

You mentioned EPS your normal seasonality, could you comment a little bit more from a revenue perspective as we go through the year?

Typically, Q1, Glenn, is our weakest quarter.

Particularly in regard to earnings because we are now investing not only for late FY11 but we are investing to hit our FY12 targets as well.

And so from a revenue standpoint, I think it will definitely be the weakest quarter of the year.

Q2 is the strong government quarter.

So, you'll see a strong Q2 quarter.

Q3 will exceed Q2 and Q4 will exceed Q3.

Okay, great.

Could you give us an update on maybe just give us some color around your sales force and sales effort build-out.

In the past there has been some turnover and you obviously grew at this quarter.

How do you feel about the skill set and where you're at?

I'm really encouraged by our sales force globally.

Clearly, the strongest it has ever been.

We're attracting the best-of-the-best talent in the industry.

We built out our management teams across the board, our field engineering support teams have been built out globally.

We have more focus in these sale teams meaning we're now focused both on enterprise and SMB.

So, we made changes in our structures and our compensation.

So, we address more effectively both segments of those markets.

We're getting more vertical expertise as I discussed in terms of overlay of those sales teams to be more effective.

So, in general, we now have a really good enterprise class worldwide sales force and we're strengthening it significant in almost any aspect that you can think of right now.

We're in a really good position.

I've got high degree of confidence in our ability of our sales teams to execute.

And that's a major area for additional head count expansion this year?

We're recruiting actively.

We have recruited and we'll continue actively in that area.

We're adding a lot of additional head count in sales and marketing in particular.

Maybe lastly, would you give us an update on your cloud storage connector, how that's rolled out and in the past, you've given some Dedup metrics -- I think you had 900 last quarter.

Any updates there?

Well, Dedup, we said our ADIM and Dedup as part of that was up 91% year-over-year.

So that gives you some idea of the strength of our Dedup capability.

It is very -- on Dedup, we're doing extremely well.

Our loss rates in Dedup are -- I won't say de minimis but in terms of deals, when we compete, they're very low to any competition -- hardware or software.

On Dedup, what I mentioned in the call was by adding significant scalability, functionality, performance in our next turn, we're strong now and I think there will be no close second from our technology standpoint.

We're well positioned to deliver it in the market.

So, we're really strong there.

On the -- from a cloud standpoint, our -- we've got -- in many areas of focus -- but the primary one is to take our cloud capability and manage it within the MS -- managed service provider community.

We've had great success there.

I've mentioned British Telecom that we've won.

Some other large telecom companies and there will be some additional announcements coming up.

We've had real good success rate in the managed service provider community.

And in our broader [crop] connector, working with companies like Iron Mountain and [Nirvonics].

So, we're making progress in that area as well.

Cloud is a tier of storage.

It can be delivered either from the amount of service perspective or it can be managed as a tier of storage as part of an overall storage strategy.

It clearly --

Should I cut his line?

What happened?

Operator?

Are you still there?

Glenn Hanus is still here, I heard somebody say something on the line though.

I'm not sure what that was all about.

Just in summary, we've got a lot of traction on the MSP side.

We're bidding on traction.

Using the cloud as a tier of storage in the enterprise.

And what I was saying is there's no doubt that cloud is going to become a key component of any storage strategy going forward.

Okay, great.

Thank you.

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

Good morning.

It is [Gonzal Kevanogy] here on behalf of Derek Bingham.

I wanted to touch base first on the enterprise deals.

Was there any shift there?

I guess, for example, was international driving that more or another reseller since there was a record quarter for you?

No.

The US enterprise sales in America was very strong and enterprise sales in EMEA was very strong.

It was across the board.

It wasn't concentrated in -- it was a very broad-based sale among many accounts.

It wasn't concentrated in just a few accounts.

It was a broad-based achievement.

Great.

And then on the bigger deals, the enterprise deals, can you give a little bit of color on if those -- the size if they're getting bigger, the high end deals.

The average, Lou mentioned the average ASP in that sector went from $203,000 to $218,000 year-over-year.

But yes, we're clearly focused on bringing in let's say greater than $500,000 or $1 million deals.

Into closure.

And we're having success there.

Okay.

And is that normal for you to have -- I think maybe I'm wrong but the $203,000, that was the lowest of the four quarters.

Is that typical for you in March?

That was a year ago.

Last quarter, we did $218,000.

I'm saying was this quarter's ASPs, was that at the lowest in the fiscal year?

It bounces.

You have like our Q2, you have your big government quarter, you'll see that number.

It's choppy because you've got some more seven figure deals in.

It will skew the number in any given quarter.

Okay.

And then in terms of pricing pressure, and with Symantec now being -- their NetBackup and BackUp Exec being out there for a little bit over a quarter now -- have you seen that impact anything?

Well, I've said this in past earnings calls.

We see a lot of pricing pressure.

Both from Symantec and from EMC.

They target CommVault and their major weapon is price.

And, we have to sell on our value.

Yes, we're continuing to see pricing pressure from our major competitors but in spite of all of that, over time, our ASPs continuing to go up.

Okay, and just one last one.

You added 26 employees this quarter.

I believe last quarter, it was closer to 50.

It looks like the environment is getting better overall for you -- or your view of it is at least getting better.

Is there a reason next quarter you would add less than 26.

Can you give us a little bit of color on how you are thinking of ramping up this year?

I think you'll see a lot more than 26 in the June quarter.

Was that because the talent wasn't out there?

Seems like you were looking to hire closer to 50 this quarter and it came out to 25?

No, we do -- we always to our normal polling of the organization towards the end of the year -- we're always trying to strengthen it with better performers.

So, it is more of that than -- so that number you see is a net number.

It wasn't an indicator of the environment.

You seem like you fell pretty good.

We are hiring aggressively, you'll see a much bigger number than Q1.

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

Just a couple of mechanical questions.

First of all, the 6% FX tailwind, that was just the euro change, right?

The impact on your revenues wasn't a full 6%, was it?

Well, you're talking about the year over year number.

Consolidated numbers.

The euros, the british pound, it is everything.

Okay.

But, you had less revenue, international exposure.

The full impact, was it fully a 6% impact to you or less once you take out the non-international.

6% impact.

Yes.

For the year.

Negative 1% of revenue for the quarter.

Then just on the cash taxes, it sounds that you go up this year in terms of cash taxes and then are you fully cash tax in 2012?

No.

Oh, you mean In 2012?

Calendar 2012?

Fiscal '12.

It depends on our earnings.

Just a clarification on that.

It looks like you pull in your cash flow statements, some of the cash savings down out of cash flow from ops and down to cash flow from financing but there is still some -- but you aren't fully taxed in cash flow from comps.

We have NOLs, we pay minimal cash taxes right now, it's less than 10%.

We said next year, it will go in the high teens, it will be significantly below the effective tax rate over time.

Great.

Thanks a lot, guys.

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

Good morning, everybody.

Longer term question here.

As the enterprise continues to grow and you get into larger and larger organizations, what -- how should we think about your growth rates?

Because those sales cycles take longer.

They're obviously more complex sales and more complex displacements.

Do you think that's a little bit of a headwind, obviously you'll still outgrow the market.

But how do you think about that going forward and how should we think about that?

That's not a headwind.

It's a tailwind.

Okay.

It is a tailwind.

Absolutely.

Just you're able to close the deals just as quick as you're able to close something --

No.

Tim, you've got more sales capacity.

You're going after bigger deals.

And it drives your sales productivity and your incremental ASP -- it's a tailwind.

This is a -- historically, you have been very adverse to acquisitions.

And just wanted to revisit that, to get an update.

In this interest rate environment and in an improving macro -- hopefully improving macro -- have you re-thought that at all?

Is there any change there or is it the status quo?

Our strategic plans, we talked in previous earnings calls about a $500 million plan.

We're going to supplant that with a $1 billion plan.

At the moment, that $1 billion plan will not have any acquisitions in it.

But the Company's getting to a size now where we might take a little broader look at the Company as we go forward.

And so we won't dismiss it.

In the past, we basically dismissed it.

I think as we go forward -- as we put our strategy together for the next 12 months, I think we'll take a little bit broader look at what we can do with the Company.

And that may come into play.

It is not today.

And it's not in our plans today, but that could change.

(Operator Instructions) Your next question comes from the line of Gary Spivak with Noble Financial.

Thank you for taking my call.

I have a question on linearity.

You mentioned it had an impact on DSOs this quarter.

What was linearity throughout the quarter?

What was it relative to historical norms and then what are your expectations for Q1?

It was a hockey stick quarter.

Obviously that's why our DSOs went up.

The quality of our receivables was really high.

We always like to improve our linearity.

I would say it is probably going to be skewed again.

If we say 20, 30, 50, is that --

We don't discuss that.

But clearly, we typically have back-ended quarters, some are more back-ended than others.

The gratifying thing is our sales team's ability to execute are really outstanding.

We consistently hit numbers as a result of that.

But none of our quarters -- our track record is awesome but none of these quarters is easy.

Right.

Okay.

And you mentioned trying to attack different and new verticals.

Can you give a long-range plan on how you see the vertical breakdown with potential new verticals?

Well, two things.

There are new verticals and there are complete new businesses.

New verticals -- I meant just in terms of focus were healthcare, and government -- that I mentioned in the call.

But we're also -- Mr.

Bunte is sitting to my right -- is developing technology so we can enter a third major market which we will discuss later on this calendar year.

We'll be in a major market with technology that is fully integrated with Simpana platform.

We think it is exciting.

We'll open up another major opportunity for the Company.

We'll talk about a couple of quarters from now.

Great.

Thank you very much.

Ladies and gentlemen, this concludes your question-and-answer session for today's conference call.

We thank you for your participation.

Thank you.