Commvault Systems Inc (CVLT) 2011 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to CommVault fiscal third-quarter 2011 earnings call.

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

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

At this time, for opening remarks and introductions, I would like to 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 third-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 the Q&A session at the end of the call that relate to future results and projections are forward-looking statements in 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 for 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 on this conference call under any circumstance.

Our earnings press release was issued over the wire services about 45 minutes ago and has also been furnished to the SEC as an 8-K filing.

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

On this conference call, we will 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 is being webcast.

An archive of today's webcast will be available on our website for replay and I will now turn the call over to our CEO and President, Mr.

Bob Hammer.

Thanks Michael, and good morning.

Thanks for joining our third quarter fiscal year '11 earnings call.

We had a solid quarter across all geographies, setting records for both revenue and earnings.

Let me briefly summarize our Q3 2011 financial results.

For the quarter, total revenues were a record $83.6 million, up 18% year-over-year and up 11% sequentially.

Software revenue grew 19% year-over-year, and 17% sequentially, while services grew 18% year-over-year and 6% sequentially.

For the quarter, non- GAAP operating income or EBIT was $15 million, up 18% year-over-year versus EBIT of $12.8 million in fiscal Q3 2010.

EBIT margins were 18%, non-GAAP diluted earnings per share for the quarter was $0.22.

We ended December in a very strong cash position, and our deferred revenue surpassed the $100 million milestone.

These are solid results, and I'm pleased with the way the quarter finished.

The positive results in Q3 were primarily due to the following three key factors -- very strong market reception to Simpana 9, which was publicly launched during the quarter, accelerating enterprise sales, and improving macroeconomic conditions.Let me first talk to you about the strong traction we are seeing with Simpana 9, and then I will address these success of our sales segmentation strategy that we launched in Q1 fiscal year '11.

After Lou's comments, I will discuss our perspectives on the market, and expanding our distribution opportunities.

We publicly launched Simpana 9 on October 5, with the most comprehensive launch in CommVault's history.

What makes Simpana 9 so fundamentally different and frankly unmatched in the industry is the automated combination of a very high scale virtual server automation, sophisticated heterogeneous management of snap and replication copies and industry-leading global source de-duplication.

Simpana 9 is a key part of a technological sea change in the industry driven by server virtualization, the cloud new disk technology and high-speed networks.

Simpana 9 is the leading product for today's new modern management of data and information environments.

Let me discuss a few of the key elements of the Simpana 9 modern data management platform and why customers are choosing Simpana 9 as their preferred solution and why analyst are recognizing it as the leading technology in the industry.

Let me talk about global management across all hardware environments.

Simpana's comprehensive management layer automated by a unique policy engine is necessary to drive selected sets of data based on policies through different tiers of storage.

The same engine enforces retention policies, security, controls data access rights, and metadata of the cataloging of all enterprise data.

Included in the Simpana software code is the ability to manage any job and all events as well as a comprehensive reporting of the data, service, networks and storage.

The second area I would like to discuss is Simpana's automated high scale virtualized server management.

Managing data in large-scale virtual server environments is much more complex and dynamic than managing data on physical servers.

Specifically, it requires the simultaneous automated management of vast amounts of data coming off dynamically occurring virtual servers for many different applications running on different operating systems and stored in different types of storage environments, including a cloud.

Now let's talk about Simpana's singular global cataloging or indexing of the data across the enterprise.This includes a full index of data objects by applications such as files, messages and documents, each linked to how each is stored within the storage tiers.

An effective data management system must also fully catalog the data and have the quick -- have the ability to quickly move the data off the primary storage layer, then dupe the data and move it efficiently across the network into any tier of storage including the cloud.

Lastly, let's talk about Simpana's best ability to recover data.

Fast, easy, secure recovery of data is critical.

That means that data management software must include comprehensive access rights, enable an approved user to directly restore any object of data from any device and any tier of storage, including a cloud.

We believe Simpana 9 is the unsurpassed leading platform for modern data and information management.

This is being validated by the accelerated growth of our license revenues.

The technological sea change I mentioned earlier presents a major opportunity for those vendors who provide leading-edge solutions to meet the challenging new needs of the market.

One of the industry analysts said it best when describing Simpana 9 and I quote, "with its new Simpana release, CommVault is breaking barriers with improved scalability, increased levels of protection, faster recovery, in greater efficiency for managing physical and virtual server environments.

With new licensing options, the migration enablement, CommVault is also making it more feasible for organizations to replace inefficient [point] solutions with Simpana 9 and realize a lower overhead and increased efficiency benefits CIOs care about most."

The most important though, the value of Simpana 9 comes from those who vote with their wallets.

The following example is from a million-dollar deal we closed in Q3.

This recent win, a leading manufacturer of electronic information technology products for consumer and professional markets replaced a major competitor's backup software, along with their appliance-based de-duplication product with most of the products of the Simpana suite.

This deal is part of a massive data center consolidation project, in which the customer was looking to deploy one strategic unified platform versus point products, simplify data management complexity, reduce the risk of data loss, improve recoverability and reliability, and reduce costs by minimizing IT spend while meeting compliance objectives.

Existing competitor products as well as competing bid simply could not compete technically with the Simpana platform, nor with Simpana's TCO benefit.

This seven-figure deal was enabled to our unsurpassed leading platform for data and information management as well as our enterprise account focus.

In addition, the customers expected to save approximately $4 million or 4X return on their initial spend.

We continue to be pleased with the feedback we receive from customers, the feedback is echoed by another industry analyst who cites Simpana's unmatched performance characteristics in both physical and virtual server environments, and that is Gartner.

Let me talk about Gartner's recently released, "Gartner's Magic Quadrant." This includes -- this recognition from Gartner, which came from their release last week of their Magic Quadrant for enterprise disk space backup and recovery.

In that release, Gartner addresses the broad transformation taking place in the industry.

According to the report, enterprises are architectng their backup infrastructures and switching backup recovery providers because the approaches of the past no longer suffice in meeting their current much less future recovery requirements.

Enterprises are seeking a new breed of data protection, one that fully leverages disk space solutions including replication, snapshots, de-duplication, and server virtualization backup.

Support for larger workloads, new data types, and cloud-based recovery will continue to drive the convergence of technologies that can dramatically improve backup and recovery.

I am happy to say that CommVault earned the strongest position in the leadership quadrant at the coveted Gartner Magic Quadrant.

This further validates our leadership position while reinforcing Simpana as the best choice for the evolving enterprise IT demand.

I encourage you to review the report available through our website at www.CommVault.com.Guided by our solving forward vision, we are committed to being the innovative leader in the market.

We are stepping up the pace to bring innovative technology to market to solve new challenges facing our customers and managing data and information.

I will now comment on enterprise sales.

We are clearly seeing the success of the sales force reorganization into an enterprise account-focused organization that we implemented earlier this fiscal year.

Enterprise deals, which we define as software deals over $100,000, represented 48% of license revenue in the current quarter, which is up from 45% in Q3 of fiscal 2010.

This represents 27% year-on-year growth, the number of enterprise deals surged, increasing by 35% over the prior year period and 24% over the prior quarter.

We are also seeing strong 7 figure deal flow and funnel growth.Our data also shows we win a majority of the enterprise deals we compete for when we are involved in the deal early enough to communicate the full economic and operational advantages of our singular Simpana platform.

Our sales force reorganization and move to the enterprise puts us in front of customers who are at the forefront of technology use, not because they want to be, but because they have to be.

These customers have critical new requirements that cannot be optimally met with competitors' legacy technologies or coupled together with point solutions.

These customers demand business partners who share and enable their vision and who could add measurable value to their own business models.

These customers are not easily convinced.

Their level of diligence is more comprehensive than we have seen in the past.

They are looking for the substance behind the slideware.

They are looking for solutions like Simpana, that can offer tangible benefits to their organizations.

They're looking for a Company like CommVault that can offer a proven exceptional support.

Customers are telling us the reason they choose CommVault is because the Simpana software addresses their most critical data and information business challenges.

Our products are unmatched in terms of cost reduction, functionality, scalability, and reliability, equally important [against] consistently radar support services as the best in the industry.

The results of this past quarter are certainly encouraging, and we believe a sign of good things to come.

However, I believe we have not yet seen the full benefits of our focus on the enterprise.

Having started this fiscal year with performance that did not meet my or our shareholders' expectations, our performance this quarter was particularly satisfying.

Back in early August, you will recall I said I believe this was a one quarter event due to some internal issues, that the underlying strength of the business was good.

And that I believe CommVault was in a unique position to address the needs of the market.

I also said that our sales segmentation strategy was the right thing to do to strengthen our penetration into the enterprise.

I am glad we've been able to validate those comments with our results over the past two quarters.

However, as we enter the final quarter of fiscal year 2011, we still have much to do to continue to meet our goals.

Our performance this quarter indicates we are focused on the right areas and that we are in the optimal position to accomplish our key objectives going forward.

Despite the fact that our current rate of growth continuously outpaces the market, we believe we are underperforming the potential CommVault has in this market.

The biggest reason is distribution.

We've been focused on this issue, and we are definitely making progress in forwarding our distribution base and distribution leverage.

As I said previously, in order for us to achieve our internal revenue growth rate and market penetration objectives, we must significantly expand our distribution base beyond our current model.

That includes continuing to hire and build our enterprise sales force, and provide resources to our expanding distribution partner base.

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

I am confident that the additional distribution opportunities we are developing have a high probability of improving the rate of our license revenue growth in fiscal year '12 through fiscal year '15.

However, the opportunity to accelerate the expansion of distribution should require some investment, and that will come at the expense of some near-term operating margin growth.

We are prepared to sacrifice some short-term margin expansion for long-term shareholder value.

These investments will enable us to more quickly achieve our longer term objectives of $1 billion in revenues and operating margins in the mid-20's.

We have made this decision to modestly increase our distribution base on the successful launch of our Simpana 9 release, increasing opportunities to add significant new strategic partners, opportunities to expand our addressable markets in the short-term with new organic products, expanding our opportunities in the information management space, our accelerating growth rate over the past two quarters, increasing demand and penetration in the enterprise, and the confidence we have in our long-term vision and strategy.

Now let me talk about outlook.

For the first nine months of fiscal year '11, we have grown the top line by 14%, we believe we have the funnel to have a solid Q4 fiscal year '11, and we have an optimistic outlook for fiscal year '12.

However, we remain cautious at this time due to the timing of certain large deals, some lingering international uncertainty in Q4 '11 as well as the uncertainty regarding the timing of the impact of new distribution opportunities, which I will speak about later in the call.

We believe the current fiscal 2011 (street) consensus for total revenue and profitability are reasonable, even with my operating margin comments factored in.

We are still committed to improving operating margins in the near term.

Our internal objectives for full fiscal year 2012 call for solid double digit revenue growth, with improved operating margins.

It is important to note that even with additional near-term investments, we believe we can still increase operating leverage in fiscal 2012 by approximately 50 basis points to 75 basis points over our anticipated fiscal 2011 results.

There is potential to do better than that, with a prudent perspective on the future outlook would be advisable at this time.

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

I will now turn the call over to Lou.

Thanks Bob, and good morning everyone.

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

Total revenue for Q3 was $83.6 million, an increase of 18% year-over-year and 11% sequentially.

During Q3, revenue from US operations generated approximately 60% of total revenues resulting in a 16% year-over-year increase while revenue from international operations generated 40% of total revenues, resulting in a 22% year-over-year increase.

On a year-over-year and sequential constant currency basis, foreign currency movements did not have any material impact on Q3 revenues or earnings per share.

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

Software revenue for the quarter was $41.8 million, an increase of 19% year-over-year and 17% sequentially.

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

As Bob mentioned, our software deals over $100,000 increased by 35% over the prior year period, and 24% over the prior quarter.

As a result of the increased volume of transactions over $100,000, our average enterprise deal size was approximately $219,000 during the current quarter, compared to $233,000 in the prior year period.

In addition, our SMB business grew 15% sequentially, primarily on the strength of our global SMB channel partners.

Sales of our Advanced Data and Information Management products, or ADIM, represented 44% of software revenue during Q3 compared to 40% in Q2 and 38% in the prior year period.

Sales from our ADIM products grew 37% year-over-year and 27% sequentially.

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

We're also seeing increased demand for our capacity-based licensing models, which has a direct correlation to the underlying volume of data under management.

Sales to our Dell relationships accounted for approximately 20% of total revenues for the quarter.

Total quarterly Dell revenues were down 13% year-over-year and 10% sequentially.

Total revenue through Arrow increased by approximately 42% year-over-year, and 28% sequentially contributing approximately 27% of total revenue compared to 23% in the prior year period.

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

As a result, on a sequential basis, the US federal business declined 36% but grew 16% year-over-year.

Our US government business remains a strong vertical for us, representing 7% of our total revenue for the quarter.

Services revenue was $41.9 million for the quarter, an increase of 18% year-over-year and 6% sequentially.

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

We added approximately 400 new customers in the quarter, and our customer base now totals approximately 13,500.

Gross margins were 88% for the quarter, a sequential increase in gross margin is primarily a result of higher software revenue.

Total operating expenses were $57.6 million for the quarter, up approximately 11% sequentially and 20% year-over-year.

Sales and marketing expenses increased by $8.1 million or 24% over the prior year period, and $4.9 million over the prior quarter or 13% sequentially.

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

In addition, we incurred marketing expenses in the current quarter related to the Simpana 9 launch which we did not have in the prior quarter.

R&D expenses increased by approximately $900,000 over the prior year period or about 11% as well as 11% sequentially.

This increase in R&D spending is primarily tied to increased headcount.

G&A expenses increased by approximately $500,000 or 9% over the prior year period related to increased headcount.

G&A expenses decreased by 3% compared to the prior quarter due to lower professional fees and currency re-measurement gains.

We ended the quarter with 1,236 employees, up from 1,212 at the end of September.

Non-GAAP operating margins were 18% for the quarter, resulting in non-GAAP operating income of $15 million.

On a year-over-year basis, EBIT increased by 18%.

Non-GAAP net income for the quarter was $10 million or $0.22 per diluted share, based on diluted weighted average share count of approximately 46.2 million shares.

The cash tax rate for the quarter just ended was approximately 8% and we estimate the cash tax rate for fiscal 2011 will be in the range of 10% to 15%.

We expect our cash tax rate to remain lower than our GAAP tax rate through fiscal 2012.

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

As a reminder, the Company is planning to use a pro forma tax rate of 36% for fiscal 2012.

For the current fiscal year, we're using a pro forma tax rate of 34%.

In the first nine months of fiscal 2011, certain senior executives, directors and employees have in the aggregate exercised approximately 805,000 options because they were approaching the end of their ten-year life.

As of December 31, our cash and short-term investments balance was $193.5 million representing $4.19 of cash per diluted share.

For the quarter just ended, cash flow from operations was $10 million.

Free cash flow, which we define as cash flow from operations less capital expenditures, was $8.8 million which is a decrease of 20% over the prior year quarter.

The decrease in free cash flow is a result of changes in working capital on the balance sheet, mainly a significant increase in accounts receivable.

For the quarter, our DSO was 65 days which is up from 60 days in the prior quarter, mainly due to linearity.

As of December 31, 2010, the Company's deferred revenue balance was approximately $103.2 million, which is an increase of $20.1 million or 24% over the prior year period and up 6% sequentially over the prior quarter.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Thank you Lou.

I would like to make a few comments on the market in general and our opportunity to accelerate our growth to increased distribution leverage.

Let me talk about the market.

We are clearly seeing a continual improvement in the economic climate for our product and services.

The activity level for sales opportunities particularly in large enterprise accounts is increasing.

Data, in all its forms, is growing rapidly as is regulations tied to maintaining and archiving that data.

The need to find new and better ways to manage data has become an imperative for most enterprises.

New distribution opportunities are opening up for CommVault as a result of the introduction of Simpana 9 and the confluence of events tied to changes in customer requirements.

As I said earlier, Simpana 9 is a game changer and a landmark product.

Simpana 9 is uniquely aligned with IT transformations we are seeing today and the strong initial market reception illustrates this.

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

The other dynamic that is working in our favor is industry consolidation.

Industry consolidation combined with the need for modern data management has changed the competitive landscape in regard to both technological and company-specific competition.

In order to compete more effectively with the major industry consolidators, particularly EMC and IBM, certain other competitors are broadening their data and information management offerings.

CommVault is in a very strong position to enable them to achieve that objective.

Interestingly, our new potential partners are planning to bring their own unique solutions to market in combination with CommVault and if that were to happen, it would improve the rate of market penetration of the CommVault platform.

I am confident new distribution leverage will happen, and help us achieve our fiscal year '12 growth objectives.

This includes expanding our base of distributors and channel partners, while expanding into new geographies.

This expansion also includes traditional distribution partners, managed service providers, as well as strategic OEM partners.

This also includes other opportunities with our existing distribution partners such as Dell and HDS.

In summary, we are committed to increasing CommVault's market share and improving our rates of growth and profitability, and we are taking advantage of some of the new major distribution opportunities by making the necessary near-term investments which can have a material impact on our longer term growth rates.

We are confident about our future and our ability to create long-term shareholder value.

We believe we have established a solid foundation for growth heading into Q4 '11, and for fiscal year '12.

We believe we are the best positioned Company to meet the current and future needs of the industry, as a market leader which was reinforced by Gartner's recently released Magic Quadrant.

We are in a good solid position to execute our fiscal year '12 plan which is to continue to outpace the industry and growth while increasing our operating leverage and cash flow.

I will now turn the call back to Michael.

Thanks Bob.

Before we begin with the Q&A session, I would like to let you know about two upcoming investor relation events.On February 10, Bob Hammer will be speaking at the Stifel Nicolaus Weisel Technology, Communications & Internet conference in San Francisco.

And on February 15, Al Bunte will address investors at the Goldman Sachs Technology & Internet Conference, also in San Francisco.

For a complete list of all our IR-related events, please visit our events calendar on the Investor Relations website.

Operator, can we now open up the line for questions?

(Operator Instructions) Joel Fishbein with Lazard Capital Markets.

Good morning guys and great execution.

I just have two quick questions.

First, on the capacity based pricing, is that what is impacting the cash flow?

Is that while cash flow is a little lighter than we would've liked to have seen?

If you look at our increase in receivables, Joel, and plus the cash flow is really high if you look at the balance sheet.

I guess I just want to know to what impact is capacity based pricing is having on that higher accounts receivable or not.

No, it was just linearity in the quarter.

CLAs are clearly helping us accelerate our revenue, in turn is also helping us build an annuity stream going forward.

I feel like pricing is a major benefit all the way around including cash flow.

Great.

Other question is just around distribution Bob, I heard your comments, I just wanted to see if you could give us any more specifics around ways in which you are increasing distribution.

Arrow was phenomenal this quarter, and would love to see if -- whether we see more OEM deals or more specifics around that would be very helpful.

In Q3, what you did see is that our resellers that sit under our distributors like Arrow so Arrow's is a distributor.

Underneath that are many, many retailers.

And we have increased our reseller base, particularly in the enterprise.

So some of the larger resellers in that space, which have been traditional resellers for companies like Symantec are now reselling CommVault, and you're seeing the leverage.

In addition, accounts that would've traditionally gone through Dell are being picked up by our stronger reseller base.

So that's why you're seeing the Arrow revenue increase substantially and Dell decrease.

And yes, there are clearly -- you will see in the future, there are opportunities on the OEM side as well for broader strategic partnerships, which will happen in fiscal year '12.

Great, thank you.

Jason Ader with William Blair & Company.

I just wanted to clarify something, Bob, that you mentioned from the press please.

You said you are confident in double digit revenue in earnings growth for fiscal '11, and if I do the math, you would have to be $0.27 non-GAAP EPS in Q4 to get to 10% annual growth in earnings --

That's not right, Jason, your math is wrong.

We know what those numbers are, and it is not $0.27, I am telling you.

And yes, the answer is we are -- our objective is to deliver for the fiscal year double digit revenue and earnings growth, and EBIT growth.

And it doesn't equate to $0.27 a share.

We can take that offline and go through the math with you.

All right, and then secondly, on Q1 what's the norm -- how should we be thinking about the normal seasonality on the revenue side for Q1?

Hopefully it won't be like last year.

We all say flat to down.

Flat to down.

Okay, thanks.

Eric Martinuzzi with Craig-Hallum Capital Group.

Follow-up question on the guidance.

You talked about the comfort level with the Street projections.

With that, I've got a $302 million number for Street projections for 2011, given the nine months, that would say sequential down roughly $77 million for Q4.

Is my math wrong there?

No, your math is not wrong, Eric.

All right, and then a question on the distribution -- the success these partners are having with the large enterprise.

One of the things that Simpana 9 gave us was the SAP and the enhancements.

I'm wondering was that one of the key drivers of the large enterprise success that you guys saw in the December quarter?

I think we will see that, but no, that wasn't one of the major drivers in Q3.

The major drivers were clearly a combination of our virtual server automation, our ability to manage Snap and replicate copies, combined with source side dedu and competing particularly against companies like EMC and IBM.

That has enabled us to break into some really, very large accounts as you saw (inaudible) because the benefits of that versus competing offerings, are you've got -- certainly the major TCO benefit, ability to recover data.

Using that methodology is a lot better because you can recover any object directly from any tier of storage.

And we can manage heterogeneously across the different storage platforms.

So we are able to manage environments, including IBM and EMC and HP and NetApp, et cetera, seamlessly and it will automate that so you're just not managing a given hardware storage silo.

That's a major benefit to our customers, and it also allows you to seamlessly manage (inaudible) premise and into the cloud as a seamless offering.

The other thing we are starting to see traction on is we are offering some really comprehensive new technology to manage desktops and laptops at the edge.

That's also helping drive revenue.

Thank you.

Robert Breza with RBC Capital Markets.

Robert, your line is open.

Operator, if we can go to the next call.

Brian Freed with Wunderlich Securities.

Good morning, good quarter guys.

Couple quick questions on the partners' side.

You guys have announced the distribution relationship with Avnet.

Can you comment about how that's ramping relative to expectations, and also if you can give any color on HDS' contributions in the quarter?

We'll take HDS first.

HDS had a very strong quarter for us, both quarter-on-quarter and year-over-year.

Opportunities from HDS definitely increasing.

So that relationship is clearly working well for us.

In regard to Avnet, we have Avnet in the US and Avnet over in EMEA.

The EMEA Avnet group is doing really well.

And the relationship we publicly announced with Avnet in the US is clearly progressing, I'd say below expectations.

But I think the outlook still looks good for building that Avnet distribution channel.

Okay, thanks.

Aaron Rakers with the Stifel Nicolaus.

Congratulations on the quarter.

Bob, last quarter and the quarter before, you talked about deal slippage and the fact that a lot of those deals hadn't closed and that they would close over the next two quarters.

Can you update us there of what you saw this last quarter, are there still deals in the pipeline that have been slipped from earlier this year?

Yes.

It's a law of diminishing return, because just the momentum we have, the deals have slipped in Q1, a lot of them closed in Q3 and yes, there are some still left in Q4, but I'd say that's not -- in looking forward in terms of what's driving our growth, I think that will be a relatively small factor going forward, Aaron.

Okay, fair enough.

And then the follow-up for me would be when you guys look pre-downturn for the March quarter historically, you have grown 11% or 12% sequentially.

It sounds like you want to temper that expectation a bit, but with the macro environment improving, obviously a solid product cycle, what's different relative to the historical seasonality for this March quarter.

On top of that, are you guys also trying to signal a little bit of pulling back on that 20% of margin at $350 million of annualized revenue, given the near term investments?

So let's talk about Q4.

I know we are just being cautious, I'd say the number one area of caution is that we are -- a lot of our growth now is being driven by seven-figure deals which we haven't seen before.

It's lumpy as Al Bunte would say, and there are a lot of them.

As they come in, we could do better than what we are suggesting I think.

Given that, that's relatively new for us, I think we would suggest prudency at this point.

And that's all that is, Aaron.The fundamentals look really good, regarding that 20% at $350 million, give or take a little bit -- so the issues are we have a chance of getting our growth rate back to levels that live up to what I would call our potential in this market.

It's going to take a little bit of near-term investment, so I don't want to back off the $350 million at 20%, but give or take a little bit at the end of the day, I think you will see well above 20% operating margins for this Company.

We clearly have -- a few years ago, I talked about $500 billion target.

That's clearly in sight now.

We know exactly how to get there and we have put together $1 billion plan that's basically $1 billion and mid-20% operating margins.

I think we have been doing this for a long time, and our confidence in achieving both of those milestones are high.

Great, thanks Bob.

Congratulations again.

Michael Turits with Raymond James.

Can you talk a little bit about how the revenue opportunities from Simpana 9, especially around deduplication, are flowing into the upside?

Obviously, the strong products -- I think, what you're winning incremental deals, but how is it driving ASPs or can you quantify in any sense how Simpana 9 is getting an uplift?

I'm going to let Al talk a little bit here, too.

It's a combination of -- clearly source IP dupe is critical but deduplication on its own is not the issue, Michael.It's the combination of being able to manage data coming off these -- [particularly] in large scale environments.

The ability to deal holistically with virtualized server environments, the ability to move that data and fully catalog it.

So what I was talking about on the call, it's not just moving ones and zeros off that primarily layer, which would typically be done within a storage array.

But being able to be completely application aware and fully index that data in the form of a Snap and replicated copy.

So it's fully catalogued, high (inaudible) application.

When I mean catalog, we understand all the objects tied to a given application all the way down through the tiers of storage, and then as you move it off the primarily layer, you are compressing it and deduping it so you can efficiently move it either down tiers of storage or you can move efficiently to the clouds.

So it's that combination that is driving the business.

I'll will let Al put a little bit more color on this.

I think I'll just add one other thing Michael, is with this form of deduplication, we can dedupe from anything to anything.

Meaning in this case, our secondary copies, so it's just not coming up primary going up to a secondary copy, is now our disk copy is going out to either take copies or cloud copies for longer-term retention can be deduped as well.

That's had a dramatic impact on even our DR capabilities.

So, in terms of impact on ASP, I don't know if I could -- if I would I don't think I would but I don't think I could either in terms of quantifying the ASP impact because the other thing, a good share of customers that bought the combination, as Bob talked about, the snapshot protection and virtualized environments and dedupe probably did it through CLA capabilities.

And it gets murky because now you're moving to a terabyte pricing model.

Lou, did I get that number wrong, with the average enterprise deal down in size year-over-year?

I just wanted to true that up.

It was down and what Lou was talking about is that the number was up dramatically.

So when you average the number of deals over $100,000, the ASP in that pool was down year-over-year -- excuse me, quarter-on-quarter due to quantity and not so much because our million dollar deals which you don't report underneath that were basically at record levels.

Got it, thanks very much guys.

Glenn Hanus with Needham & Co.

Good morning and congrats on your quarter.

Can you talk a little bit about penetration into the service provider space?

I think you've mentioned it was less than 10% of your revenues recently.

How do you see that trending over the next couple of years, and if you talk about servicing the SMB accounts through that means as opposed to directly through distributors and just thoughts about how that all works?

Okay, let's talk about it, Glenn, going from a macro standpoint.

So the SMB market is going through a massive transformation, mainly due -- companies buying their applications through cloud providers like Salesforce.com and many of the smaller companies are now looking particularly for backup and archiving moving those functions to managed service providers.

So that traditional market is clearly shifting.

So from a CommVault perspective, and this has been going on for years here including companies like Rackspace to a customer of ours that we have been a strong participant in the MSP market.

It's a very large area of growth for us, we are continuing to penetrate some really big MSP providers globally including the telcos.

And we see that as a major area of growth for the Company, certainly over the next five years.

Now, we haven't, by the way, given up on the SMB market but clearly, we will use some more creative ways through only through MSP but more creative ways to work through our distribution partners to penetrate that segment of the market.

And you'll see us do things over the next few quarters to validate that.

Thank you.

Rajesh Ghai with Thinkequity.

Thanks and congratulations from my side, too.

Just a question on the sales and marketing line that was up $4.5 million.

How much would you attribute that to launch activities related to Simpana 9, and how much of it would be sales hiring?

Going forward how do you see that line trending as in Q4 and related to the comment about I heard 400 basis points expansion of operating margin in 2012.

Where would the leverage come from if you are going to expand distribution --

What we said in 2012 was 50 basis points to 75 basis points.

Okay, sorry about that.

It would be nice to do 400.

So, last quarter it was due primarily to commissions on record revenues, there was a lot of spend tied to the Simpana 9 launch activity, and there was hiring as well in that sector.

So, we had unusually high spend in Q3.

Over time, the operating margin leverage has got to come from sales and marketing over time.

How much will one-time launch activity expense?

We haven't announced that, but it was substantial.

Okay.

How do you see that line trending in Q4?

As a percent of revenue, it should be lower.

Okay great.

And just following up on the managed service provider question, obviously that's -- that vertical's seeing a lot of growth and just wanted to understand what business licensing your software is to that vertical was.

Was that capacity-based or was it customer based and how do expect that to -- revenue streams to scale over time?

Well it's a combination of the [perpetual].

It will trend almost exclusively to capacity-based and subscription-based models.

So going forward, almost 100% of those deals will be capacity-based or subscription-based.

And last quarter, we saw the same.

One last question for me, did you mention sales on existing customers and sales on the channel during the prepared remarks?

I didn't get that.

We didn't, but we can get you that stat.

Give us a second here.

Two-thirds, one-third.

Round numbers, 16% existing, 40% new.

All right, thank you so much.

Derek Bingham with Goldman Sachs.

Just one question on March revenues.

I know you're trying to stay prudent in your guidance, could you give some color on your March pipeline in terms of relative to what you would typically see going into a fiscal year end?

Is it pretty normal?

Yes, Derek, it's definitely a normal Q4 pipe.

Okay.

And then on the shape of spending, it sounds like you have still got pretty robust targets for what you can do in earnings for your fiscal fourth quarter.

Just wanted to see if I could get a little more color on the shape of your investment trajectory in terms of is that going to accelerate over the March quarter and the June quarter for example, in terms of OpEx growing sequentially or just in those two quarters or any other color you can give on your spending plans near term?

It's going to grow sequentially but it's not going to grow sequentially as much as it did between Q2 and Q3.

Okay.

And would you expect that to continue to grow into the beginning of fiscal year '12 into June?

Yes.

Okay.

Thank you.

(Operator Instructions) Aaron Schwartz with KLM Partners.

Good morning.

Bob, you had mentioned that in the context of your investment you're looking to step up the pace of new technologies and given the reinvestment outlook in your cash balance, have you at all changed your views on organic growth versus inorganic growth moving forward?

No, our billion dollar plan at the moment is 100% organic.

The accelerated pace -- I'm going to let Al talk in a moment is due to as efficient as we've been, we are getting more efficient in our ability to bring code to market, and Al, who drives our strategic efforts in that area is just coming up with a lot more ideas faster.

I'll let him spend a minute on that.

I think the point is we are going to keep innovating and investing in R&D pretty aggressively and I want to make the point even with the strong leadership position in the Gartner Quadrant, that shouldn't be signaled as we are going to rest on our laurels.

We are real aggressive going forward across a number of market segments, it's always really difficult task to deal with this 40% to 60% increase in data each year.

There's a number of vertical places we think a lot of our suite and a lot of our product and technologies would be a nice fit.

Bob has indicated before there are some new market opportunities that we are looking at.

So it's existing market expansion, it's correlated or related market expansion in terms of our capability and solution fit and it's expanding markets, so we're pretty busy on development and product technology front.

You will see a lot of new technology coming from CommVault organically over the next 12 months.

Okay terrific, and just a quick follow-up for me, within the services revenue, I know a bulk of that is maintenance based, but you don't always provide the mix but as you continue to get enterprise deals and larger deals, would you expect a mix shift there or would you look to push off a lot of the professional services to your partners?

No -- excuse me, yes you will see over time a mix shift with a higher percent of PS to maintenance from CommVault as well as expansion within our partner base.

We believe to build really [satisfy] our enterprise accounts that what we call internal strategic PS is absolutely critical.

Once we build that internally, we can more effectively train our partners to provide some of the services so you will see both.

But from a CommVault standpoint, you're correct.

This will happen over the next couple three years, you will see some shift in mix with a heavier emphasis on PS growth versus maintenance growth.

Okay and is there any chance you can provide what the pure maintenance was in the quarter?

We don't typically comment on that.

Okay.

Terrific, thanks for taking my questions.

Gary Spivak with Noble Financial Group.

Thank you for taking my question.

Bob, in Q1 obviously there were a lot of large deals that slipped and then even though a lot closed in Q2 you indicated a lot had slipped, I was just curious how that dynamic played out in Q3, and what role will it have in Q4?

It had a minimal impact on Q3, and should have a minimal impact on Q4.

So I guess the number of deals that you anticipated to close in Q3, was that to your expectations or still large deal slippage going on?

No, we have -- the momentum in all geographies in all sectors were so strong that the slipped deals became a much less important factor.

Broader momentum on new accounts and quite frankly, we have some really good momentum from our existing account base.

So it's not, what I would call, relevant factor.

Certainly in Q1, it didn't happen.

But going forward, I would (inaudible).

Okay thank you.

Phil Winslow with Credit Suisse.

Hi this is Chloe Wayne on for Phil Winslow.

You talked about the improved macro environment you saw in the third quarter, could you talk about any differences across geographies that you saw or any geographies that led the way or lagged behind?

Thanks.

US was strong, China was very strong, Asia, the APJ region was strong, China was strong, Germany was very strong, Northern Europe was good, UK was light.

Great, thanks very much.

James Gilman with Capstone Investments.

First question is a follow-up to last quarter.

You may recall, Bob, that I had asked about the government business and that the -- had not produced the results year-over-year that you anticipated given the fiscal year for the government closing during the quarter.

If I heard correctly, you anticipated that the government business for the second half of this year would have been better, and what I'm hearing though is that government continued to fall off.

What are your expectations around the government vertical going forward?

Good question, James.

Yes, I would say that it increased 16% year-over-year, and from an internal CommVault standpoint, it was okay but it certainly wasn't what I would call a good result.

I think Q4 will be okay.

But for us, and some of this is internal and some of this is external, where a year ago government was our top growth sector, I don't think it will be a top growth going into fiscal year '12.

That being said, there are a number of areas that (inaudible) the government is going through major [data] consolidation we are involved in some of those projects as the lead, so over time now there could be some real opportunity there.

We will step up our investment in spite of all that in the government sector, going into fiscal year '12 and over time we still think it will be a good solid market for us.

Okay.

And my second question is a follow-up to some of the previous questions around investments.

You used the word term investments to the business, you mentioned also short-term impact.

Just a little bit -- maybe give us some color here around one, what your definition of short-term, and two, maybe these investments maybe in headcount, additions, some ballpark numbers there, a range of what we are looking at?

That does it for me, thank you.

I will frame it, in the past we talked about 200 basis point increase year-over-year.

Operating margins, we would drop that to 50 basis points to 75 basis points.

That gives you the range of investment.

We will do that certainly through the first half of fiscal year '12.

I think as you get to the latter part of fiscal year '12 and '13, we should see the expansion of operating margins could accelerate.

But let's say beyond the first fiscal year '12, we could see some acceleration of that operating margin improvement.

Thank you.

Rob Owens with Pacific Crest.

Just around the fourth quarter maybe a little bit more color, on the services line historically, that's been flat to up as you enter your fiscal Q4.

Should we expect that same type of trend this year?

Yes.

So at the revenue level that you implied through your guidance, wouldn't that mean that license revenue is down on a year-over-year basis, and then the second part of that where I am a little confused is you did say OpEx would grow sequentially and I think your bottom line guidance implies some margin expansion.

So if revenues are down, operating expenses are up sequentially, how do we get a little bit of margin leverage?

Thanks.

Good questions Rob.

Our internal models to call for some margin expansion so it's got to be a combination of how much we grow OpEx obviously, and exactly what we get out of the top line.

But we stick by our statement that we believe we can achieve, at the end of the day, double-digit revenue and operating margin growth.

It's going to be a little tight, not so easy but clearly we are driving for that objective.

And your math is correct, we understand the math.

Okay great, thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.

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