Commvault Systems Inc (CVLT) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CommVault fiscal second quarter 2011 earnings call.

(Operator Instructions).

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

Michael Picariello, Director of Investor Relations.

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal second quarter 2011 earnings call.

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

Before we begin, I'd like to remind everyone that statements made during this call, including in a question and answer call at the end of the call, that relate to future results and projections and 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 statements contained in our press release and our website.

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

Our earnings press release was issued over the wire services about an hour ago, and it also has been furnished to the SEC as an 8-K filing.

The press release is available on our Investor Relations website.

On this conference call we will provide nonGAAP financial results.

The reconciliation between the nonGAAP and GAAP measures can be found in table four accompanying the press release and posted on our web site.

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

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

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

Bob Hammer.

Thanks, Michael.

And good morning.

Thanks for joining our second quarter FY 2011 earnings call.

Let me briefly summarize our Q2 2011 financial results.

For the quarter, total revenues were a record $75.2 million, up 13% year-over-year, and up 13% sequentially.

Software revenue grew 7% year-over-year and 20% sequentially, while services grew 19% year-over-year, and 4% sequentially.

We achieved excellent results from our services and support organizations.

For the quarter, nonGAAP operating income or EBIT was $12.9 million, up 14% year-over-year versus EBIT of $11.3 million in fiscal Q2 2010.

EBIT margins were 17.1%, which is a 560 basis point sequential improvement in operating margins over the prior quarter, and up slightly 17% in fiscal Q2 2010.

NonGAAP diluted earnings per share for the quarter was $0.19.

After a disappointing Q1, we rebounded in Q2 with record revenues, which reaffirms the underlying strength of the business.

Quarterly license revenue results were material impacted by a sharp increase of revenue from enterprise accounts, and by sales of Simpana 9.

Sales through enterprise accounts increased 36% from Q1 and were 48% of license revenues versus 44% of license revenue in Q1 2011.

Simpana 9 got off to a very strong start in the quarter, and accounted for approximately 13% of our recognized software revenue in Q2.

Simpana 9 has strengthened our competitive position across the board, and is opening up new market and distribution opportunities.

Simpana 9 is also helping us build our sales funnel, particularly our large deal funnel.

In addition, effective in Q3 of 2011, all of our OEM partners are now selling Simpana 9, that's Q3 2010 calendar.

I will speak more about Simpana 9 later in the call.

On another note, I mentioned during last quarter's earnings call that we expected the majority of the deals that slipped in the last 30 days of Q1 to close in Q2.

That was not the case.

Many of the deals did close, but not the majority.

However, a majority of the Q1 slippage should be closed over the next two quarters.

I want to update you on the named account reorganization of the US sales force.

Reorganization of the sales force in Americas in Q1 FY 2011, a segment that our sales force between major named accounts and two smaller enterprise accounts, was a key initiative in our strategy to improve our market penetration through an increased awareness and access.

For example, one of the largest deals this quarter was from an enterprise account rep.

A recent win, a global defense security and aerospace company, replaced a major competitor's data management software, along with another major competitor's area appliance-based deduplication product with most of the products of the Simpana suite.

This deal was part of a massive data center consolidation project.

Competitors simply could not compete effectively with the Simpana platform.

We became their trusted advisor, and were able to sell a full enterprise-wide deployment.

The named accounts strategy is a global initiative, and we are now beginning to experience the benefits of that change.

In Q2, we saw a substantial improvement in the enterprise account sector, as well as an increase in our enterprise funnel.

We are clearly seeing steady progress from our segmentation approach, but it will still take a few more quarters for to us get the full benefits of that change.

I want to talk about distribution and new strategic partnering opportunities.

In order for to us achieve our internal aggressive revenue rate and market penetration objective, we must significantly expand our distribution base beyond our current model.

Our current distribution model is adding highly skilled enterprise sales teams, adding strategic OEM partners, major distributors, resellers and systems integrators is working, and is fundamentally sound.

We continue to add sales reps and strengthen our relationships with key partners, expand our base of distributors and channel partners, and grow our network to reach new geographies.

For example, we recently announced that CommVault signed a mass distribution agreement with Hitachi to market and sell Simpana 9 software and support services to enterprise customers and resellers in Japan.

The agreement with Hitachi will enable CommVault to establish a strong position in the Japanese market, which is a new market for CommVault.

As we announced on last month's earnings call, we have signed an agreement with one other new distribution partner, and are actively involved in deal negotiations with that partner.

In Q2, that partner had a strong initial quarter.

We'll publicly announce this partnership at the appropriate time.

In addition to our traditional distribution partner, we'll continue to add new specific managed service providers, who use our product as the engine for them to provide data and information management services to their customers.

Managed service providers are quickly becoming a meaningful revenue stream for CommVault.

We are completing discussions with other major managed service providers, and expect these types of relationships to continue to evolve as an important segment of our business.

CommVault deepened its cloud storage footprint across the industry, with an expansion of its initial partnership with Rackspace to deliver a cloud-enabled disaster recovery service.

We also announced a new partnership with cloud platform developer, Mezeo, to simplify and speed cloud service deployments.

Building further on the cloud opportunity and extending our capabilities to existing partners, we also announced a new cloud enabled appliance with Dell which enabled their customers to extend the Dell PowerVault DL to the cloud.

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

We added approximately 350 new customers in the quarter.

Our customer base now totals 13,000.

We believe that our current base of expanding distribution will enable us to achieve solid double digit revenue and earnings growth.

However, our goal is to accelerate the pace of our distribution expansion, in order to meet our more aggressive internal growth objectives.

Fortunately, we may now have the opportunity to accelerate the pace of our distribution expansion, due to the unique functionality of Simpana 9.

Simpana 9 has opened up distribution opportunities for key industry vendors due to issues stemming from their customers or from competitive pressures that Simpana 9 can resolve.

Customers are putting pressure on them to deliver solutions that deal more effectively with the growth of virtualized server environments and move to the cloud, and massive scale of data to be managed.

In addition, the competitive environment for many industry vendors has become much more intense.

As a consequence of customer and competitive pressures, there is an increased urgency for industry vendors to meet the new needs of the market.

CommVault with it's Simpana 9 platform has the technology to solve both the customer and competitive issues, and provide the necessary solutions that other competitors do not have.

Let me talk about our continuing investments to drive long-term growth.

We remain committed to our strategy for above industry revenue growth rates.

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

Our objective for the fiscal year 2011 calls for solid double digit revenue growth in the second half of FY 2011 with improved operating margins.

Although we had a strong Q2, we still have work to do to achieve our full-year objectives, due to our poor Q1 performance.

We will continue to manage operating expenses, while increasing investments on key strategic initiatives, along with appropriate investments that will enable us to achieve solid growth in fiscal years, completing this fiscal year and in fiscal 2012.

While we are committed to improving operating margins in the near term, we're going to take advantage of the unique position we're currently in with Simpana 9, and make the investments to expand distribution.

Especially investments related to adding new distribution partnerships, that can have an impact to our FY 2012 and FY 2015 growth rates.

I am confident we are making the right investments to position the Company to successfully achieve our long-term strategic objectives.

For the first six months of FY 2011, we have grown the top line by 12%.

We believe we can accelerate this growth in the second half of fiscal 2011.

However, we remain cautious at this time, and we believe that the current fiscal 2011 street consensus for total revenue and profitability are reasonable.

I will now turn the call over to Lou.

Good morning, everyone.

I will cover some key financial highlights for the second quarter of fiscal 2011.

Total revenues for Q2 were $75.2 million, an increase of 13% year-over-year, and 13% sequentially.

During Q2, revenue from US operations generated approximately 60% of total revenues, resulting in an 8% year-over-year increase, while revenue from international operations generated 38% of our total revenues, resulting in a 22% year-over-year increase.

On both the year-over-year and sequential constant currency basis, foreign currency movements did not have any material impact on Q2 revenues or earnings per share.

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

Software revenue for the quarter was $35.8 million, an increase of 7% year-over-year and 26% sequentially.

During the quarter, we saw strong execution, and continued improvement from our sales teams in penetrating large enterprise accounts.

Enterprise deals, which we define as deals over $100,000 represented 48% of licensed revenue in the current quarter, which is up from 44% in Q1.

This represented 36% sequential growth.

Our average enterprise deal size was approximately $230,000 during the current quarter, which compares to $270,000 in the prior year quarter, and $250,000 in Q1.

While the average enterprise order size was down from both the prior year quarter and last quarter, the number of enterprise deals increased by 17% over the prior year period, and 45% over the prior quarter.

Our SMB business grew 19% sequentially, primarily due to the strength of our global SMB channel partners.

Sales of our advanced data and information management products or ADIM represented 40% of software.

Software revenue during Q2 compared to 34% in Q1, and 41% in the prior year period.

Sales from our ADIM products grew 5% year-over-year, and 52% sequentially.

Deduplication and virtualization remained the key drivers of the growth for Simpana.

Sales through our Dell relationships accounted for approximately 25% of total revenues for the quarter.

Total quarterly Dell revenues were up 19% year-over-year, and 10% sequentially.

Total revenue through Arrow increased by approximately 1% year-over-year, and 18% sequentially contributing approximately 24% of total revenue, compared to 27% in the prior year period.

Our US government business represented 11% of our total revenue for the current quarter, versus 15% in the prior year period.

Our US Government business remains a strong vertical for us, and we expect good results from our federal vertical in the second half of fiscal 2011.

Services revenue was $39.5 million for the quarter, an increase of 19% year-over-year and 4% sequentially.

We continue to have both high attach rates, and strong renewal rates on our maintenance agreements.

Gross margins were 87.4% for the quarter.

The sequential increase in gross margin is primarily the result of higher software revenue.

Total operating expenses were $52 million for the quarter, up approximately 14% over the prior year period, and up approximately 7% sequentially.

Sales and marketing expenses increased $4.5 million, or 14% over the prior year quarter.

The year-over-year increase in sales and marketing expenses is primarily due to additional sales capacity, sales support, and higher commissions on higher revenue.

Research and development expenses increased by about $800,000 in the quarter, or 11% over the prior year period.

This increase is primarily due to increased R&D head count in both India and the United States.

G&A expenses increased by $1.1 million or by 18% over the prior year period, related to increased head count.

In addition, a quarter of this increase is due to the foreign exchange impact on the remeasurement of certain balance sheet accounts.

During the quarter, we added 21 employees ending with 1,212 employees, which is up from 1,191 at the end of June.

The majority of our new hires in the quarter were sales reps and pre-sales system engineers.

NonGAAP operating margins were 17.1% for the quarter, resulting in nonGAAP operating income of $12.9 million.

On a year-over-year basis, EBIT increased by 14%.

The nonGAAP net income for the quarter was $8.6 million or $0.19 per diluted share, based on a diluted weighted average share count of approximately 45.7 million shares.

As a reminder, our nonGAAP net income for fiscal year 2011 is based on a 34% pro forma tax rate.

For fiscal year 2012, the Company is planning to use a pro forma tax rate of 36%.

The cash tax rate for the quarter just ended was approximately 10%.

And we estimate the cash tax rate for fiscal 2011 will continue to be in the range of 10% to 15%.

We expect that our cash tax rate will remain lower than our GAAP tax rate for fiscal 2011 and fiscal 2012.

Our cash tax rate will approach our long-term terminal GAAP tax rate over next two fiscal years.

In the quarter, certain senior executives, directors and employees have in the aggregate, exercised approximately 254,000 options, which were approaching the end of their ten-year life.

Certain executive officers, directors and employees of CommVault still hold approximately 268,000 outstanding stock options with a weighted average exercise price of $6.25 that will reach the end of their ten-year terms in the next 12 months.

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

As of September 30th, our cash and short-term investments balance was $178.8 million dollars, representing $3.91 of cash per diluted share.

For Q2, cash flow from operations was $7.5 million.

Free cash flow, which we define as cash flow from operations less capital expenditures was $6.5 million for the quarter, which is a decrease of 33% over the prior year quarter.

The decrease in cash flow is the result of changes in working capital on the balance sheet, mainly lower accounts receivable from the results of Q1.

During the quarter, we repurchased approximately 933,000 shares of common stock, totaling approximately $18.6 million dollars under our share repurchase program.

We are currently authorized to repurchase an additional $48.3 million of stock under this existing program through March 31, 2012.

Since we announced our buyback program in February 2008, we have purchased approximately 10% of our stock using approximately $72 million of cash generated from operations.

As I said, we have $48.3 million remaining, and we will continue to be opportunistic in our stock buyback program.

For the quarter, our DSO was 60 days, which was down from 72 days in the prior quarter, which is due to higher revenue and related working capital changes.

And finally, as of September 30, 2010, the Company's deferred revenue balance was approximately $97.7 million dollars, which is an increase of approximately $19 million or 24% over the prior year, and up 6% over the prior quarter.

That concludes my remarks.

I will now turn the call back over to Bob.

Thank you.

Thank you, Lou.

I want to wrap up with additional commentary on Simpana 9.

We publicly launched Simpana 9 on October 5th, CommVault's largest software release to date.

Simpana 9 is a result of almost two years of development, and includes over 500 enhancements.

CommVault's singular platform approach to managing data and information enables massive amounts of data to be indexed and moved in record time, maximize utilization of storage resources resulting in cost reduction, globalize data security, a single repository of virtual content, and seamless movement and management of data to the cloud, which can be easily and quickly recovered from anywhere to anywhere.

The key differentiators of Simpana 9 for data management that are unmatched in the industry is the combination of very high scale virtual server automation, holistic global snap and replication capability, and source ID deduplication.

This combination includes snap protected technology, which enables customers to move data off the primary layer very quickly, efficiently, with very high scalability.

Snap Protect automatically detects and protects virtual machines, slashing backup windows from hours to minutes with industry-leading scalability, capable of protecting hundreds of machines in minutes and scaling to thousands, comprehensive application in content for indexing of the data, the most modern comprehensive and scalable approach for deduplication for efficient data reduction, movement and recovery across the network to any device and to any tier of storage including the cloud.

And finally, superior recoverability, any object can be restored directly from any device, in any tier of storage, including the cloud.

There is no other vender that can replicate Simpana 9's holistic management functionality.

CommVault has advanced snap and replication technology to a new level well beyond competitive offerings.

For those of you who may not understand snap and replication technology, it has become the standard way to create a copy data for protection purposes, and is typically purchased together with disk hardware from a specific disk vendor, specific disk hardware vendor.

Existing snap and replication technology is limited to a single vendor's hardware.

This is frustrating for customers who are demanding more data management functionality, and need a way to manage snap and replicate copies across disk hardware.

CommVault has developed technology to both solve the key customer issues with snap and replication technology, and to add a lot of value on top of existing disk storage hardware capabilities.

These developments unique to Simpana 9 functionality, include hardware agnostic life cycle control and management of snapshots, full application view of the data, fully indexed application consistent backup copies for long-term retention created directly from snaps, granular object recovery of application data.

Storage utilization can be maximized in moving data seamlessly between different hardware platforms.

And finally, content can be indexed for search related to compliance records -- records of government.

I would now like to spend a minute on Simpana 9's information management capabilities.

One of the leading industry analysts recently commented on Simpana 9, that information government is becoming a front and center issue, especially as enterprises need more cohesive strategies for addressing compliance.

E-discovery and content management deployment, the ability to consolidate data access and management through a single point of control is crucial to providing a level of detail and maximize the value of corporate data.

Simpana 9 addresses information government by extending automatic content based classification, analytics, and shared work flow capabilities into a new web desktop console, that puts relevant secure online, near line, and offline information directly into the hands of the business users.

This powerful functionality provides the essential tools to achieve into information government, that lowers risks while improving operational efficiencies and business agility.

And finally, we have made it easier to switch to SImpana from other major data management vendors.

One of our challenges historically, has been to convince companies to rip out their legacy backup systems, and replace them with Simpana.

With Simpana 9, we can monitor, understand, and report on your legacy environment, so that when you're ready to transition, we've got the information we need to automatically install our software on hundreds of clients in hours, rather than days.

Simpana 9 can scale to meet the needs of any global enterprise.

In addition, as discussed earlier, new distribution opportunities have opened up for CommVault as a result of the introduction of Simpana 9, and the confluence of events types of changes of customer requirements in the more intense competitive environment.

Simpana 9 is a game changer and a landmark product.

Simpana 9 is uniquely aligned with the IT transformations we are seeing today.

We're excited that it's been launched, and are gratified about the strong initial market reception.

There is no other vender that can replicate Simpana 9 holistic data management functionality.

In summary, we were able to rebound sharply in Q2 from Q1, and achieve record revenues.

Simpana 9 was brought to market ahead of schedule with the most comprehensive launch in our history.

Our second quarter results validate the underlying strength of our business.

Our global demand remains solid, and our global pipeline growth is accelerating helped by the launch of Simpana 9 and better enterprise focus.

We continue to expand our global distribution capabilities which is also being aided by the launch of Simpana 9.

We are committed to increasing CommVault's market share and improving our rates of growth and profitability.

As such, we are taking advantage of some major new distribution opportunities by making the necessary near term investments, which can have a material impact on our long-term growth rates.

I will now turn the call over to Michael.

Operator, can we please open the lines for questions?

(Operator Instructions).

Our first question comes from the line of Joel Fishbein with Lazard Capital.

Please proceed.

Good morning, guys.

Just a couple things.

Bo, could you clarify your comments about distribution.

I thought at one point in the call, you said that Simpana 9 was hurting your ability to get distribution partners, but I might have misheard you.

Could you give us, just clarify, what you were referring to there?

No, the point, Joel, was Simpana 9 is helping us expand distribution, right across the board.

We're seeing major opportunities to open up with systems integrators.

We are seeing opportunities open up with the large integrators and large resellers that we didn't have before.

And we're seeing new opportunities open with hardware vendors as well.

So across the board globally, we're seeing an acceleration in discussions.

And some of them have come to pass, as a result of Simpana 9's capabilities.

Okay.

And can you talk about any specific success stories that you had with Simpana 9, maybe competitive displacements that have happened, referenceable ones that you've got out there?

I don't have any, but I can just -- I'll make a general comment.

Clearly, in what I said in my comments, in virtual server environments, combined with our ability to move the -- our new snap and replication technology and global dedup, has made it a lot easier for us to compete against major hardware vendors, who have dedup appliances, for example, and [disper] products in the enterprise, and it's helped us significantly increase our win rate, and open up opportunities in that segment of the market.

Okay.

Then the last thing is, can you just clarify your comments about -- I know you don't give specific guidance, but you said you expect to accelerate your growth from these levels, and then the street numbers are for single digit growth for the back half of the year.

Can you just clarify that?

That'd be great.

Well, I think that's a prudent guidance.

What we said we expect to have double digit growth in the second half.

But I think where the street guidance is, is a prudent way to look at the Company right now.

Okay.

Great.

Thank you.

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

Please proceed.

Hi, good morning, Bob.

Just a quick question, and a slight follow-up from Joel's question.

I was wondering if you could help us understand the distribution model you are making in some of the investments you're making.

You talked about,, Dell being 25%, Arrow 24%.

So maybe you can just help us understand maybe where the model is today between OEM direct MSP, the channel, and how the investments you're making, and how we should expect that maybe to shift over the next 12, 18, 24 months?

That would be helpful.

Yes, what I said, Rob, when opportunities open up with the big system integrators, you have to put resources on those.

And these are pretty significant opportunities, so you should see a shift to more opportunities within systems integrators moving our product.

Some of the larger enterprise resellers that we have had, I would say relatively poor traction, are increasing traction with us or putting resources on that.

And there's some opportunities opening up in the hardware vendor community as well.

So in balance, I think you will see a shift -- the concentration of distribution will broaden out over the next 24 months.

Maybe just as a follow-up, Bob.

When you look at the -- you talked about in your prepared remarks about not all of the deals closing.

Can you kind of help us, either qualitative or quantitatively, was it greater than 50%?

I'm just kind of curious to see.

It was, as I had said in my Q1 remarks, that we expected the majority of the deals to close and it didn't, so under 50% closed in the quarter.

We -- at the end of the day, we expect somewhere in the high 90s, all those deals that slipped in Q1 to close.

But it's just taken longer than we said.

We expect the majority of those to close sometime in the second half.

Great.

Okay.

Thank you very much.

Our next question comes from the line of Eric Martinuzzi with Craig-Hallum.

Please proceed.

Thanks, and nice rebound in the business there.

My question has to do with your new distribution partner.

You has mentioned that Dell was 25% of your business in Q2.

Given, I guess, the size of the partner, or at least kind of the tech household name that I'm anticipating, what preparations have you made with Dell?

It sounds like this might be a Dell competitor that you would --

No, no.

That particular one that I mentioned that we signed is -- I would call that just additive.

It's a really good, solid partner, and they did contribute revenue in Q2.

But there was no implication, that there's a partner the size of Dell in any deal that we have signed.

And my comments were pretty broad in that we've got -- certainly not only discussions, but we have traction with some of the major systems integrators that we didn't have before.

We're clearly are getting much more traction with some of the large reseller integrator type company that we didn't have before.

There are some new opportunities with some additional hardware partners.

We've been very open with Dell, in terms of what our strategies are, and that we're broadening our distribution base of the business.

So there should be no surprise there.

Okay.

So more like a disintegrator reseller type relation?

Well, I'm saying in combination of all three of those that there were opportunities.

Some were already done, and starting to have an impact.

And then some opportunities will open up for us in the future that will have a positive impact.

My point was we want to get back to more internally to a lot more aggressive growth rates.

And to do that, we've got to continue to focus on expanding our distribution rate -- just the rate of increase in our distribution capability, and Simpana 9 is helping us accelerate that.

That was the point of my comments.

Thank you.

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

Please proceed.

Yes, one question and a follow up as well.

So on the first question, Bob, I'd like to go back to a prior question on how kind of the street set up looks to be in the back half of the year.

I think in the past, you've talked about 100 to 150 bases points of leverage, to be realized in operating margin line this year relative to fiscal 2010.

So is that still the target or given your commentary, with regard to incremental investments for top line growth?

I think in the past, we've talked about kind of $350 million kind of annualized top line revenue rate to be north of a 20% Op margin.

Is that still in place, and then again a follow-up?

Yes, that is still in place.

So what we said, is when we get to about a $350 million run rate, we should be around 20% operating margins that is still in place.

We just have a short term opportunity to kind of accelerate it, and accelerate our rate of growth, and position us for really strong second half of 2011, but really position us for a really strong FY 2012.

And we are taking advantage of that right now.

We're getting -- these are slight movements.

It will increase the rate of spending to make sure that we take advantage of that, the opportunity we have in front of us.

So just to be clear, you're supportive of 100 to 150 operation points of expansion in Op margin this year?

No.

That's not what I said.

Oh, okay, and --

Let me be really clear.

What I said is, your question was at $350 million run rate, is 20% still a target?

My answer was yes.

Okay.

The other comment I made was, use your street consensus as a prudent guide, to where you ought to guide for the second half of the year.

And I -- I'll stand by those statements.

Now our internal goals may be a little bit higher than that, but I think prudency would dictate that that's what you should be looking at.

Okay.

Fair enough.

And the follow up would be -- is on the deal slippage.

Was there any common verticals, dynamics involved in those deals that didn't necessarily close, the majority of the deals that didn't close, that are now anticipated to close over the next two?

No.

There's nothing -- nothing common.

It was just -- certainly a lot less than we had anticipated.

And fortunately , we're still able to put up a good number.

And the other fortunate part is a very, very, very high percentage of those deals will close in the fiscal

Okay.

Thank you.

Our next question comes from the line of Jason Ader of William Baird.

Please proceed.

Yes.

Thanks.

Bob, not to beat a dead horse here, but I wanted to ask you.

So about the, second half, just real quick, if you were to hit the street number, it would be a deceleration in year-over-year revenue growth for Q2 for the last quarters of the fiscal year.

So I think, just to be sure, what you're saying is that you would be disappointed with that type of scenario,that correct?

Yes.

Okay.

But yet you still want people to set the bar there for now?

Correct.

Okay.

Then the second question I had was just on the capacity based pricing.

My understanding is that you extended that to your entire customer base with Simpana 9.

Could you talk about ,maybe anecdotally, what kind of impact that's been having with the sales force and the customer base?

Yes.

It's been very significant.

I'm going let Al take that question.

We're really pleased with it, as we put it out there for the first two quarters.

And we then with the introduction of nine, moved it available across the board for channel partners in all sectors of the market.

We've seen really good response to it so far.

So is that -- should we expect that the percentage of AIDM, as a percentage of your total software business will go up, over time as a result, just because -- with the capacity based pricing, you'll have more ability to bundle, or more success bundling?

Yes, I mean --

Probably --

It'll trend up.

The other thing that a point of clarification.

In Simpana 9 has an automated fuel gauge built in, both from the auditable standpoint, both for the customer and ourselves.

So as the customer uses that capacity base, the software's basically telling them what the percent utilization is, gives them plenty of warning to add new capacity.

And it's all auditable.

So it's from a revenue recognition standpoint, making it a lot easier both for us and the customer, to manage a capacity-based pricing model.

And that is what enabled us to move it out, across the board to all our distribution channels.

Okay, and then kind of last question just on that is, is there a connection between the capacity-based pricing and the number of enterprise deals being larger?

Yes.

Okay.

All right.

Thank you.

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

Please proceed.

Yes, thanks, and congratulations on the strong rebound.

Just wanted to understand the state of readiness, as far as the sales force and the channel, as it relates to the new product launch Simpana 9?

And if you could compare it with previous product launches, and also talk about any learnings from previous launches you have been using for here?

I'm going to open up, and I'm going to turn this over to Al, because he and Dave West orchestrated it.

It was a significant improvement over anything we've ever have done before.

The validation of that is, pre-launch, 13% of our license revenue was Simpana 9.

In Q2, an official launch didn't occur until October 5th.

So we met at GA earlier, but Al can give you a summary on what he did, and he and Dave did to -- significantly improve the launch of this product versus any other one we've done in our history.

Rajesh, we focused on knowledge transfer, is really the issue.

And is all about training both our internal resources and our channel partners.

And we started with both the technical side of both our field and the channel side.

Got out early, spent a lot of time with them, made sure they understood the core elements of the release, the core technologies, what the impacts were, and then rotated up to the sales guys later in the process.

As you know, in our sales force, they're all paired with a system engineer and a sales guy.

So, you know, these teams were pretty prepared as we got to RTM and GA at the product.

So it was comprehensive.

It was focused.

We spent a lot of time on the content, and again the knowledge transfer was the core element that we're trying to do.

And some of you are aware, we did a virtual launch.

We did a virtual trade show which helped, clearly get and articulate the value of Simpana 9, and that certainly helped it.

Dave West orchestrated.

Great.

On the US governmental vertical appears as if it's down in overall revenues, as well as sales, and what is traditionally been a strong federal quarter show up.

Just want to understand what the dynamics were.

I understand you said, you expect federal business to be strong in the second half of the year.

Is that something that is new that's going on over there, and how does it help you?

I mean, Rajesh, you got it exactly correct.

That vertical was down year-over-year, considerably down.

Work the math.

It wasn't awful, but it certainly didn't have the strong impact it had in Q2 FY 2010.

On the other hand, the outlook for the business going forward for the second half definitely looks stronger in the second half of FY 2011 versus FY 2010.

So the fundamental strength of the business looks really good.

But clearly Q2, was somewhat disappointing.

One last question on Simpana 9, you mentioned that the rip and replace was the big stumbling block, as far as growing faster for CommVault in the past.

You have addressed that by improving the ease of transition from competitor products to CommVault and Simpana 9.

Can you talk about any early signs that you may have seen in your business so far, the 30% revenue that you saw in Q2, or in the pipeline, that this new feature is actually indeed helping you win new customers?

Any metrics that you could provide would be very helpful?

.

I'm just going to call it at the help at the margin.

What's really driving the Simpana 9 impact in the market is the combination I talked to you about.

And that's our automation in managing virtualized servers, and the scalability of the functionality in that area.

Just changing the whole data movement using, really sophisticated snap and replication technology, in conjunction with global deduplication.

That's what's turning heads with our customers.

And then you add to that, that now we make it easier for them to automate the transition.

And we're seeing a real good acceleration in our win rate.

Win rate's probably not the right answer.

Acceleration in our funnel, and ability to accelerate -- our ability to actually get deals closed is improving, as a result of that differentiation of that functionally versus competitive offering.

It's clearly helping us out there.

All right.

Thank you.

Our next question comes from the line Glenn Hanus of Needham.

Please proceed.

Hi, most have been asked and answered.

Could you talk about just you -- sort of Europe versus APAC and United States, the -- just recent trends you're seeing.

I think last quarter, Europe was a little bit on the softer side for you coming out of it.

You could characterize what you're seeing by region right now?

Sure, Glenn.

In Europe, Europe had a very, very strong quarter of --massive rebound from last quarter.

I'd say things are okay over there.

I think we'll see good, steady progress.

But the US market seems to be a little bit more robust than Europe.

So I think we'll see continuing good, steady progress in the US, both from the standpoint of the economy and to the segmentation approach.

It's clearly working for us, and the organization has settled down.

We had a relatively weak quarter, not in China.

China was strong, but our APAC, and the out-calls, or CommVault related issues.

That should bounce back nicely in the second half of FY 2011.

So in summary, European economy is a little bit lackluster.

Germany is a little stronger.

We're seeing -- what I didn't mention, we're seeing some really good progress in the Middle East, Russia, some of these new emerging markets.

We're definitely seeing acceleration in growth there.

I think we'll do fine,in Europe, but the economic environment is -- relatively slow growth there.

The US is, suprisingly good.

It's a good, solid market for to us compete in, and we'll see accelerating growth in Asia going forward.

Could you talk a little bit more deeply about your penetration into service providers?

You mentioned that becoming a more important vertical, I guess, you had announcement with Rackspace there.

Could you give some more similar color by different types of service providers than you're targeting there?

Well, the cloud providers, companies like -- which just opened up Rackspace in the clouds, companies like British Telecom, Atos Origin, a big cloud provider that utilizes CommVault.

There are a couple others that we haven't announced that are big, large telcos that we've won, and are using our product as some other large telcos that are actually in the market with our product, but not announced.

And the dealers are earning, but they're selling our product.

In tandem with that, we're making a lot of progress with some of these big systems integrators where's we've never had a position before.

And those are opening up.

Al may want to comment without giving a name, but he just met with a very large SI here about a week ago, and he could give you a little bit more color on that.

Yes, I think, Glenn, as Bob was going, we're seeing a lot of interest in people using our software as a service out there, kind of that definition of the cloud.

And that was close to the kind of things I was seeing recently, as well as we've been focused on for a while using the cloud as a tier of storage that fits very nicely in our use cases, particularly archival or remote data movement.

Both sides of that has really picked up.

Okay.

Thank you.

Our next question comes from the line of Aaron Schwartz with MKM Partners.

Please proceed.

Good morning.

Just had a follow-up question on the -- your incremental distribution here.

Are these agreements just very new to you, to where you don't have a great feel in terms of the timing from a reinvestment, and also the revenue benefit going forward?

Or are you just holding back a little more and aren't at liberty to share the details in terms of the timing perspective right now?

I think both, Aaron.

Some are new.

And we're clearly starting to see impact from them.

But I call them incremental.

Some of these deals are more than incremental, and it's too soon to talk about them.

So it's the combination of all that.

So that was my point.

We're seeing this across the board.

Look at big systems integrators, one of the larger integrative resellers in the market where we had no traction is really accelerating with CommVault, and bringing us into a lot of large enterprise deals.

And we're starting to see that globally.

There are a number of other -- I call them material systems integrator kind of deals -- that are potential deals that are in discussion.

And there's downstream, there's some opportunities to expand our footprint with different companies in the hardware environment.

And more than one.

So it's a broad-based opportunity for us, and we focused on it and make the right investments, and bring those in.

Establishing that expanded distribution footprint can result in accelerated growth that's sustainable over a long period of time.

And we want to take advantage of that opportunity that's opened up for us here.

Okay.

And then switching to the direct side of the business, can you just update us on where you are with your sales hiring plans for this year, sort of being at the mid-point of your year?

Are you more than halfway done there or do you still have a lot to go?

I think the way I would describe it now, we're more on a steady, we will continue to hire on a steady basis all the way through instead of doing this in spots.

I think you could assume we will continue to invest every quarter, in expanding our sales capability globally.

Okay.

And last question for me.

This is probably for Lou.

The deferred revenue -- the difference on the balance sheet in cash flow, is that all currency?

Yes.

Okay.

Terrific.

Thanks for taking my questions.

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

Please proceed.

Hi, guys.

It's [Gonzol Kevanogi] here on behalf of Derek Bingham.

Thanks for taking my question.

I just wanted to clarify first on the outlook, are you guys saying you're not -- you don't expect any margin expansion from fiscal 2011 from fiscal 2010 on a nonGAAP basis?

I'm saying that's what street consensus it S.

And that's the -- that's a prudent way to look at the Company at this point in time.

Okay.

Great.

That's helpful.

Just on the deal that slips from Q1, and it sounds like the majority during closing Q2, on the call last time you guys mentioned that those deals were in the size of $100,000 to $400,00 roughly.

Of those that didn't close, is there any kind of trend there?

Is it the bigger deals that didn't close, that will close later down the road?

Well, you can assume that somewhere -- well over 90% will close in this fiscal year.

It has no trend, no similar bigger deals are closing.

Some smaller ones, but no, it's -- so the answer is -- there's no pattern to that.

But my point was, I made a comment, and it didn't happen, and I'm just clarifying it.

Okay.

Great.

Thanks so much.

Next question comes from the line of Gary Spivek from Nobel Financial Group.

Please proceed.

Thanks for taking my question.

Obviously, you had a nice rebound from that Q1, and the large deals in that quarter.

I'd like to ask you about is coming into this quarter, the six figure pipeline, did you see anything similar, where you had deals that you thought would close in the quarter that slipped?

Obviously Simpana 9 was a great positive, but if you can sift through that, and give us color on those dynamics, it would be helpful.

That's a good question.

The answer is, yes, actually the amount of deals that slipped in Q2, are higher than those that slipped in Q1.

You look at the numbers, the difference is pipe was bigger, and we just had a really good solid quarter in terms of ability to generate revenue.

I think if you want to look at a trend, you may want to pay attention to that one, because a lot of those deals are going to help us in Q3.

And our pipe -- our pipe is accelerating right now.

And so we got a little bit of wind to our back at the moment and we just see if we can sustain that.

Bob, would it be fair to look at a larger pipeline, but potentially longer sales cycles?

No.

This is anecdotal, because I don't have the data, but I would say our sales cycles with Nine are shrinking slightly.

That is the way I would look at it because deals are coming into the pipe fairly quickly, and they're closing quickly, and corporately.

But I just don't have the hard data to support that.

We do detailed revenue calls on all deals over $100,000 every week.

I can tell you, I mean, the numbers are a lot bigger than they were a quarter ago.

Thanks.

And finally Simpana 9, with the expansion of functionality in the product roll out, do you actually expand your competitive environment?

Do you add any competitors?

I'm not sure you add, but certainly in the information management arena, you have a much broader capability to keep in that segment of the market.

And if you look at the data management side, when you start to deal with really sophisticated snap and replications technology, we add a lot of value to the existing hardware platforms that really helps us in the market from a competitive differentiation standpoint.

You can think of that's as more competition, but we're actually adding value to those competitors, in the sense we can become more friendly.

But we're not detracting from them, we're helping them, these hardware vendors succeed with their customers.

Thank you very much.

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

Please proceed.

Hi, Bob.

Michael.

A few questions.

First, you talked about increased competitive and customer pressures, I was wondering if you could elaborate on those.

Then I had a follow-up.

What I was referring to was specifically related to hardware vendors in the market are seeing their customers, the array guys are getting pressure to supply more functionality on top of their snap and replication technology.

Customers are saying, gee, can't you move it between different vendors?

It's not indexed, you can't get objects.

I mean it's very powerful technology, but it's got it's limitations and customers are pushing these guys for increased functionality.

In addition, the competition between the vendors in the market has done up, so the customers want more functionality.

And then the competition between the different vendors has increased.

So each of the competitors in the market is looking for ways to improve the competitive position, and do a better job in supporting their customer needs and requirements.

Bob, I know it's kind of a long ways out, put this has not been a year of margin expansions for a number of reasons.

So in general, think of fiscal 2012 as a year of normal trend of margin expansion?

Yes.

Great.

Thanks very much, Bob.

We dug ourselves a hole in Q1.

It's just been hard to dig out.

We're coming out really fast but given that fact, made FY 2011 more difficult to achieve margin expansion.

Yes, you should assume in FY 2012, we could get on a more normal track if we sustain the kind of trajectory we are on right now.

Thanks again.

Our next question comes from the line of James Gilman with Capstone Investment.

Please proceed.

Good morning, and congratulations on the rebound from the first quarter.

A couple questions here.

First is, and I'm not sure whether Lou or Bob, you want to answer this.

It's reference to the F X.

I know you mentioned year-over-year flat, but I want to get the impact on the top line from a sequential basis.

We can see on the cash flow statement, and comparing the cash flow to the balance sheet I know there was some.

And I know there was volatility from 1Q to your second Q in your FX rates.

Can you give me an idea on what the -- how that second quarter versus the first quarter?

Well, I said the impact on the bottom line was negligible as I said.

But, I mean, clearly you have the hedge on the revenue side, so revenues were up slightly, and expenses were up, so impact on the bottom line was minimal.

Okay.

In reference to government, I know Bob, I think you commented that you expect a -- to strengthen in the second half.

Being that today is election day, there's a lot of focus on reigning in the budget, the federal government budget.

Also, data points I have indicate that the government accounts are expected to have budgets contract given the change over possible to Congress.

What leads to you believe the government business will be better in the future than necessarily in the quarter?

I'm talking about the second half of 2011, for 2012 we will have to see.

Most of the things we're forecasting are budgeted programs where the money is there.

So a reasonable expectation is that we should have a -- on a relative basis, a stronger second half of our government business in FY 2011 than we did in FY 2010.

Okay.

Thank you very much for taking my questions.

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

Please proceed.

Hi, this is Dennis in for Phil Winslow.

Most of our questions have been answered.

But can you comment on the competitive environment and whether you're seeing any changes in terms of pricing?

Thanks.

Again.

I think Simpana just helped us almost across the board versus any competitor.

From a pricing aggressive standpoint, there's still a lot of pricing aggressiveness in the market that we've commented on in the past.

The biggest weapon against CommVault is price.

Symantec uses it.

EMC uses it.

I don't think there's been a big change quarter-on-quarter.

And we wouldn't expect that to abate.

And we still need to -- what I call -- sell effectively against free.

Because free is not free, when you look at a total value proposition.

Okay.

Thanks.

I have no further questions at this time.

This concludes the call.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone may now disconnect, and have a great day.