Commvault Systems Inc (CVLT) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to CommVault's fiscal fourth-quarter and fiscal 2011 year-end 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 fourth-quarter 2011 and 2011 year-end earnings call.

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

Before we begin I'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 within the meaning of the Private Security Litigation Reform Act of 1995 and are based on current expectations.

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

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

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

The press release is also available on our IR website.

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

The reconciliation between the non-GAAP and GAAP measures can be found in table 4 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 following the call.

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

Bob Hammer.

Good morning, everyone.

Thanks for joining our fiscal fourth-quarter and 2011 year-end earnings call.

I am pleased that we ended our fiscal year with record results and met our objectives of delivering double digit revenue and non-GAAP EBIT growth for the full fiscal year.

Our solid finish to fiscal 2011 validated the underlying strength of our business.

We are entering fiscal 2012 with excellent momentum.

Let me briefly summarize our financial results.

For the quarter, total revenues were a record $89.6 million, up 22% year-over-year and up 7% sequentially.

Software revenue grew 20% year-over-year and 5% sequentially while services grew 24% year-over-year and 9% sequentially.

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

US license revenue grew 18% year-over-year and international was up 22% year-over-year.

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

We also had excellent results from our services and support organizations which grew 24% year-over-year.

For the quarter, non-GAAP operating income, or EBIT, was a record $17.4 million, up 25% year-over-year versus EBIT of $13.9 million in fiscal Q4 2010.

EBIT margins were 19.4%.

Non-GAAP diluted earnings per share for the quarter was $0.25.

We exited fiscal 2011 in a very strong financial position with $218.3 million of cash and short-term investments and no debt.

For the full fiscal year, our total revenue was $314.8 million, an increase of 16% over the prior period.

Operating income was $52.9 million, up 12% year-over-year.

The solid results in Q4 were due primarily to the combination of three major factors.

One, good market conditions combined with an exceptionally strong market reception to Simpana 9.

Two, the ability of our enterprise sales force to penetrate major enterprise accounts.

And, three, industry recognition from respected third party partners including Gartner's Magic Quadrant for backup and recovery.

Let me talk about the market conditions.

Market growth is being driven by the increasing growth of data and fundamental changes in the way data is stored and managed.

These fundamental changes are taking place throughout the enterprise, in the data center, in remote offices and in the cloud.

They are driving companies to replace legacy backup and recovery solutions with modern data management solutions.

As a result of our leading modern data management technology position, we are displacing legacy incumbents at an accelerating rate.

Our market penetration is also being helped by improved distribution leverage which I will discuss in more detail after Lou's comments.

Let me talk about our enterprise account focus which is clearly working.

It is crystal clear now that the enterprise account focus sales reorganization we implemented in Q1 FY11 was the right move at the right time.

The following stats validate its success.

Enterprise deals, which we define as deals over $100,000 in software revenue, were at 51% of license revenue in the quarter representing a 21% year-over-year growth.

Sequentially, enterprise deals grew 12%.

For the full year, enterprise deals represented 48% of license revenue, representing 14% year-over-year growth.

Enterprise deal flow momentum and funnel growth has continued into Q1 FY12.

The first five weeks of FY12 are relatively much stronger than the first five weeks of FY11.

However we still have lots of work to do to fully develop our enterprise sales capability in combination with our expanded enterprise distribution partner opportunities.

Now let me spend a minute on industry recognition.

Simpana 9 is acknowledged by many in the industry as the leading modern data and information management technology platform.

During the last six months we have received recognition as a leading technology company in our targeted markets from well-respected third party organizations.

This includes Gartner's Magic Quadrant for enterprise, backup and recovery, Info-tech's Vendor Landscape for backup and recovery, and DCIG for virtualization.

The common themes for each of these industry analysts and positioning CommVault in the leading positions were clear vision, leading innovation, outstanding customer support, and consistent execution on our vision.

This recognition from respected independent third parties has clearly raised our stature in the industry and is positively impacting our ability to penetrate the market.

Leads are way up, hits to our website are way up, and we are being called unsolicited into major new opportunities.

Additionally, CommVault champions and key deals are finding it much easier to justify their CommVault decisions, and new major enterprise partners are seeking us out.

Now I'm going to turn to our outlook.

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

Although we did not provide guidance for the past year, I said a year ago our objective would be to achieve solid double digit revenue and earnings growth in FY11.

We achieved our objective in spite of a difficult first quarter.

Revenues grew 16% year-over-year and EBIT grew 12% year-over-year.

Software revenue in Q4 was 55% higher than in Q1 FY11.

We are not providing specific guidance for FY12; however we are confident we can achieve solid double digit revenue and EBIT growth in FY12.

Lou will provide some color into specific income statement items such as EBIT, tax rate, and share count for FY12 during his comments.

As I have previously stated, we prefer to focus our forward-looking statements on long term Company-specific and industry drivers while providing current industry and business perspectives.

To reinforce what I've said in the past, our longer-term objective is to achieve $1 billion in revenues and mid 20%s for non-GAAP operating margins.

We have developed a plan to achieve those objectives over the next several years.

For FY12, we believe we are well positioned to achieve solid double digit revenue and EBIT growth and improved operating margins driven by strong market traction with Simpana 9, continued increases in sales capacity, and broadened distribution.

At the same time, we are reconfirming our commitment to improve operating margins for the year while achieving well above industry average revenue growth rates.

However, we would like you to keep in mind that our fiscal Q1, the quarter ending in June is typically our most challenging quarter.

Typically our revenues are flat to down and our operating expenses increase which negatively impacts earnings.

In FY12, we have higher than normal increases in Q1 expenses in order to support our new distribution partnerships and expanding market opportunities.

So in summary, we remain cautious at this time for a few reasons.

We have quarterly revenue and earnings risks due to the timing of very large deals.

There is uncertainty regarding the timing of potential impact of new distribution opportunities, and there remain some pockets of weakness in certain international geographies.

We believe the current fiscal '12 street, in particular Q1 consensus for total revenue and operating profits, are reasonable.

I am highly confident that we are positioning the Company to successfully achieve both our short-term and longer-term strategic objectives.

I will now turn the call over to Lou.

Thanks, Bob, and good morning, everyone.

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

We ended fiscal year 2011 with software revenue of $149.8 million, primarily driven on the strength of enterprise transactions.

During fiscal year 2011, enterprise software sales accounted for 48% of software revenue.

This was an increase of $9 million or 14% over the prior year.

In addition, the number of enterprise transactions increased by 18% in fiscal year 2011.

Software revenue derived from indirect distribution channels increased by $12.2 million in fiscal year 2011.

This increase is primarily due to software sold through distribution in our foreign locations.

In Q4, the software revenue generated from enterprise transactions increased by 21% over the prior year period.

The average enterprise transaction was approximately $219,000 during the current quarter and $226,000 for the full fiscal year.

Services revenue for fiscal 2011 was $165 million, an increase of 21% year-over-year.

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

For the year, revenue from the US generated 61% of total revenue resulting in a 13% increase over fiscal year 2010, while revenue from international operations generated 39% of total revenue, resulting in an increase of 22% over fiscal 2010.

For the quarter, revenue from US operations generated 58% of total revenues, resulting in an 18% year-over-year increase, while revenue from international operations generated the balance, resulting in a 27% year-over-year increase.

The growth from international revenue is primarily due to strong results in certain regions of Europe, Australia and Canada.

The European macro environment seems to be recovering but there remain some pockets of weakness in certain international geographies.

Sales of our advanced data and information management products, or ADIM, represented 45% of software revenue during Q4 compared to 44% in Q3 and 43% in the prior-year period.

Sales from our ADIM products grew 25% year-over-year and 8% sequentially.

De-duplication and virtualization remain the key drivers for the growth of Simpana.

We continue to see an increased demand for our capacity-based licensing models which has a direct correlation to the underlying volume of data under management.

During Q4, a significant portion of our software revenue was licensed and priced based on our capacity models.

Sales through our Dell relationships accounted for approximately 21% of total revenues for the quarter.

Total quarterly Dell revenues grew 15% year-over-year and 14% sequentially.

Total revenue through Arrow increased by approximately 29% year-over-year and 1% sequentially, contributing approximately 26% of total revenue compared to 24% in the prior-year period.

Gross margins were 86.9% for the quarter compared to 87.6% in the prior-year period.

For the year, gross margins were 87.1% compared to 87% in the prior fiscal year.

Any change in gross margins is primarily the result of the software and services mix.

The operating expenses were $59.5 million for the quarter, up approximately 3% sequentially and 20% year-over-year.

Sales and marketing expenses increased by $7.8 million or 22% over the prior-year period, and $800,000 over the prior quarter or 2% sequentially.

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

R&D expenses increased by approximately $1 million or 12% over the prior-year period and $400,000 over the prior quarter or 4% sequentially.

The year-over-year increase in R&D spending is primarily tied to increased headcount.

G&A expenses increased by approximately $1.1 million or 18% over the prior-year period, and $800,000 over the prior quarter or 11% sequentially.

The increases in G&A are primarily due to increased headcount and professional fees, as well as the foreign exchange impact on the remeasurement of certain balance sheet accounts.

Non-GAAP operating margins were 19.4% for the quarter, resulting in operating income of $17.4 million.

EBIT margin expansion was 50 basis points over the comparable prior-year period and 140 basis points over the prior quarter.

On a year-over-year basis, Q4 EBIT increased by 25%.

For the full year, EBIT margins declined by 60 basis points, primarily due to our poor results in Q1 of this fiscal year.

We remain committed to improving operating margins in the near term.

Our goal is to increase fiscal year 2012 EBIT margins by 50 to 75 basis points.

Additionally, our long-term goal remains to achieve operating margin in the low to mid 20%s over the next several years.

Net income for the quarter was $11.6 million and EPS was $0.25 per share based on a diluted weighted average share count of approximately 46.8 million shares.

For the year, net income was $35.3 million and EPS was $0.76 per share based on a diluted weighted average share count of approximately 46.3 million shares and a 34% pro forma tax rate used in fiscal 2011 versus a 32% pro forma tax rate used in fiscal 2010.

The Q4 share count is approximately 550,000 shares higher than the prior quarter and approximately 800,000 shares higher than Q4 of the prior year.

We anticipate that our diluted weighted average share count for fiscal year 2012 will increase sequentially at an average rate that is comparable to the past two quarters or approximately 500,000 per quarter.

During fiscal 2011, certain senior executives, directors and employees have in the aggregate exercised approximately 867,000 options because they were approaching the end of their 10-year life.

The cash tax rate for fiscal year 2011 was approximately 7%.

We estimate the cash tax rate for fiscal 2012 to be in the range of 15% to 25%.

We anticipate that our cash tax rate will remain lower than our GAAP tax rate in fiscal year 2012.

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

As a reminder, the Company is planning to use a pro forma tax rate of 36% for fiscal year 2012 compared to a 34% tax rate used in fiscal year 2011.

As of March 31, our cash and short-term investments balance was $218.3 million.

For the quarter just ended, cash flow from operations was $19 million.

Free cash flow, which we define as cash flow from operations less capital expenditures, was $18.1 million, which is a decrease of 14% 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 70 days which is up from 65 days in the prior quarter and 69 days in the prior-year quarter, mainly due to linearity.

As of March 31, 2011, the Company's deferred revenue balance was approximately $112.9 million which is an increase of $20.7 million or 22% over the prior-year period and up 9% sequentially over the prior quarter.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Thank you.

Thank you, Lou.

I would like now to take a few minutes to talk about distribution.

One of CommVault's biggest strategic issues over the past several years has been to increase distribution leverage.

I'm happy to say that we have made a lot of progress on this issue over the past six months and have now established a broad distribution foundation that has the potential to increase our revenue earnings growth over the next several years.

The broad distribution foundation is the result of our improved global enterprise selling capability, including bringing global staffing to target levels.

Increased leverage from new and existing major hardware partners' strategic agreements that include but are not limited to our existing deals with Dell, HDS, Hitachi, and a new OEM deal we recently signed with Fujitsu; three, much better traction with the high end systems integrators, resellers and systems integrators; and, four, increased industry awareness as a result of recognition of our innovation and service from third parties such as Gartner.

Let me talk about the Fujitsu OEM deal for a minute.

CommVault has entered a worldwide OEM agreement with Fujitsu.

It includes all geographies except Japan.

We are currently engaging with teams at the local level internationally and will be extending this to the US.

Under the terms of the agreement, Fujitsu will offer Simpana with Fujitsu's optimized backup and archiving targets ETERNUS CS High End and ETERNUS CS 800, plus Fujitsu ETERNUS DX series disk storage systems.

I want to talk now about industry dynamics.

What industry competitive and CommVault specific dynamics have enabled us to improve our distribution leverage.

The reasons for our improved position in the industry are the result of seismic shifts in technology and the competitive landscape that has put CommVault in a very unique position with customers, competitors, and potential strategic partners.

The combination of big data, server virtualization, cloud computing, and the need for next generation archiving have broken the traditional data management solutions.

As a result, customers can no longer sit and do nothing.

They need to change their storage and data management infrastructures to solve today's data-related problems.

They are much more open to alternative solutions such as CommVault's.

CommVault has vaulted ahead of both the hardware and software competition because of the ability of Simpana 9 to deal with the scale issues of big data, including advanced snap-and-replication management and global de-duplication, automating the management of virtualized servers, managing data to the cloud, and providing advanced archiving.

The other important technical advantage of CommVault is that CommVault provides a comprehensive management layer that can manage all the different applications' data across different storage and network infrastructures over the life of the data.

With regard to hardware competition, many customers are not satisfied with hardware providers who try to solve data and information management problems with solutions that require separate disparate products which do not fully and comprehensively solve their complex data and information management problems.

As a result, key storage hardware providers have been motivated to team up with CommVault to provide their customers with industry-leading data and information management solutions.

Each of these partners is developing their own solutions in combination with Simpana to address specific segments of the market, further strengthening their own and CommVault's competitive position and reach.

Additionally, by partnering and working with CommVault, our hardware partners are strengthening their competitive positions versus their largest competitors.

We believe that the combination of our technology leadership, enterprise selling capability, broader third party industry recognition, and significant new strategic distribution partners is helping us to solve our fundamental distribution leverage issues.

In addition, we are working on other new partnership opportunities in addition to Fujitsu, which we will announce when they become finalized at some point later this fiscal year.

In summary, we had a very solid Q4, achieving record revenues and earnings.

We are having continued success penetrating major enterprises with our named account strategy.

We are honored to be recognized in the number 1 position in the Gartner Magic Quadrant for enterprise disk space backup and recovery.

We completed another major strategic partnership with the signing of the global deal with Fujitsu.

We enter FY12 with much higher visibility, a much stronger funnel, and a much stronger competitive position than we had a year ago.

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

We are in a good position to achieve our FY12 objectives.

I will now turn the call back to Michael.

Thank you.

Thanks, Bob.

Operator, can we please open the line for questions?

(Operator Instructions) Joel Fishbein with Lazard Capital Markets.

Good morning, guys.

Just a couple of quick ones.

Number one, nice results.

The second question I had for you, or this question I had for you, is on, it looks like there was a major contract in the quarter; deferred revenue was up nicely.

Were there any very large deals that you had?

That's the first one.

No, Joel.

We had a number of large deals but there was no overriding large deal that changed our numbers.

All right.

Second one is, Bob, on the distribution side, the one that you didn't mention on the call but HP is talking about the relationship with CommVault.

You guys have held some seminars; they are talking about reselling.

Is there any reason why you're not talking about the HPDS distribution?

And can you, if you can talk about it, could you give us some color around that?

HP announced that in EMEA that we had signed an agreement with a relatively small division of HP.

And they are partnering with CommVault to sell a combination of CommVault Simpana, and HP storage including 3PAR and their X9000.

Okay.

Is there a chance that that goes more global or can you give us any color on that?

I have no clue, Joel.

We started that relationship and the answer is I really don't know.

Jason Ader with William Blair.

Yes, thank you.

Bob, I was looking at the Q1 consensus and I know you said you're comfortable with consensus which seems to be what you guys say on every call.

But the consensus has the revenue down about 10% sequentially.

And a year ago, you were down 10% sequentially when you had a very large problem.

So it seems like down 10% sequentially would be worst case scenario.

Is that the wrong way of thinking about it?

Yes, I think it's a good way of thinking about it.

Okay.

And then could you comment at all on backlog?

I don't know if you guys normally do but your comments on visibility and funnel, I don't know if it's firm backlog but were you able to go a little slower at the end of the quarter?

I know normally you guys have so much business coming in at the very end and you have to fight to the finish to get to where you want to be and it's pretty typical.

Were you able to maybe go a little bit slower and have more business for Q1 this time around?

I said on the call, Jason, that we entered FY12 with very strong momentum.

So that would indicate that we certainly entered the quarter in a much stronger position than we normally would.

Aaron Rakers Stifel Nicolaus.

Yes, thanks for letting me ask a question, and then also congratulations on the quarter.

First question for me, Bob, when you look at your average enterprise deal size, I think it was basically sequentially flat this quarter.

Can you talk about how we should think about the trajectory of that business, that piece of your business here going forward?

And whether or not we're really at an inflection point as far as the Company's ability to even drive a more significant increase in the average deal size here as we go forward?

I.e., I'm just trying to gauge how much success you guys are having in what seems to be a growing pipeline of very large deal opportunities.

Number one, we had a record number of enterprise deals.

Same as we did -- we had a record number of enterprise deals in Q3.

And we exceeded that quite well in Q4.

So what I said last quarter was that the Company might be in an inflection point and if we hit four quarters in a row, I'd say we would all know that.

So now we've hit two quarters in a row and let's see how we do over the next couple quarters.

But the answer is yes, that there is a potential -- I'll just say potential -- that the Company is at an interesting inflection point in its history but we have got to validate that with results.

Okay.

And then the second question and I do have one other.

When you talk about opportunities, first of all, distribution opportunities that are expected to be announced here later this year, is that distribution opportunities in plural?

And are you referencing later this year as being calendar 2011 or is that later this year fiscal 2012?

It's calendar.

It would probably be sooner rather than later.

And yes, there's more than one opportunity, but they could be interesting in terms of the ability to help the Company improve distribution leverage.

What we'll probably do is have a separate call on that at the appropriate time.

And then final question for me is -- Bob, just when you think about how you look at the Street, and I know you guys have been fairly consistent as far as providing commentary around outlook, is there something that you're looking at from the Company where you're positioned that keeps you at some point in the future of giving definitive guidance as far as top line/bottom line expectations quarter by quarter?

We could change our perspective on it.

I think to your point, Aaron, the Company is at an interesting juncture in its history.

And I think if we can validate what that trajectory is and get consistency on it and provide some guidance that's a little bit more granular at that particular time, I think we would do that.

Eric Martinuzzi with Craig-Hallum.

Thanks.

A year ago you guys were looking out to new investments with the pending launch of Simpana 9.

It did weigh on your operating expenses both on the development side as well as the sales and marketing.

Curious to know what new initiatives you have for 2012, things that might also weigh on op expenses.

As I said in the call, we clearly are investing this quarter relatively heavily tied to one, the success of Simpana 9, and clear new distribution opportunities we have.

And that includes our own sales force which is executing really well.

So given that, given the outlook, given the strength of the market and expanded distribution, we clearly are making investments early in the fiscal year.

In addition, the Company is still on a very aggressive innovation path and we will introduce some new technologies and present new businesses some time later in the fiscal year and we're investing ahead of that, as well.

As far as where headcount finished up the year and where you expect it over the coming 12 months, where do those numbers come in?

We finished at I think 1,253, is that right?

1,268.

And we don't comment on where that's going.

Obviously if we're going to improve operating margins, as Lou said, 50 to 75 basis points, our investment in people is going to have to be somewhat lower than our expected growth in operating margins.

Rajesh Ghai with ThinkEquity.

Yes, thanks.

Bob, you mentioned that industry recognition had helped you get some unsolicited requests from prospects, and also helped you expand your partnerships.

I notice that has resulted in an improvement in sales productivity as reflected in operating leverage that you saw in the quarter in the sales and marketing line.

Do you expect this leverage to be sustained in fiscal '12 as you can continue to ramp your investments and distribution, and you also see top-line growth?

So if you achieve your double digit top line growth, how many points of leverage do you expect on the sales and marketing line?

Well, basically, the total leverage we're talking about is 50 to 75 basis points and most of that's coming out of sales and marketing.

And, yes, we do expect continued distribution leverage from third party recognition throughout fiscal '12.

Okay, and cloud based backup, how has that revenue ramped over the past two quarters since the launch of Simpana 9?

Obviously, you mentioned the growth of the ADM revenue was really a function of de-duplication and virtualization.

Wasn't cloud backup a factor so far?

And you mentioned capacity-based pricing was a significant portion of your revenue.

Just curious, as that continues to ramp, does that give you more operating leverage going forward?

I can say that every major deal we're in, cloud computing is an element of it.

Whether they are going to deploy right away or not, having the capability, the broad capability, to manage, and whether it's private or public cloud environments, it's critical.

It's a critical area of functionality.

In addition to that, what we're selling today is modern data protection.

And by that we mean a very comprehensive management layer across the enterprise, the ability to index at the application layer, the ability to move data effectively using advanced techniques like snap-and-replication, and the ability to store data in a virtual enterprise-wide archive.

That's what customers are buying.

And when you talk about ADIM and back up, all those concepts basically have evaporated now because you're selling that in a comprehensive capacity base, licensing model.

And the old ways of us describing the business basically have no relevance, or very little relevance going forward here.

So when we talk about modern data protection, which includes the ability to manage in the cloud, that's basically what we are selling today.

So one clarification, is the cloud-based backup included in ADIM or not?

Cloud-based backup is -- forget ADIM for a second.

Just take that whole nomenclature.

What I'm saying is just forget about it because that functionality is built into our platform and is sold as part of a modern data management solution.

Okay.

And I missed the Dell contribution.

How much was that?

And how much of your recognized revenue was from Fujitsu?

That's it.

Congratulations on a strong quarter.

Dell was 15% and Fujitsu was just announced.

21%.

Excuse me, it was 15% year-over-year, 21% -- sorry -- for the quarter.

Glenn Hanus with Needham & Company.

Good morning and congrats to you guys.

In your prepared comment, Bob, you briefly said you have work, lots of progress, but work to do yet in the enterprise sales force.

Were you referring there just to the expansion or of certain productivity elements?

Or maybe you could expand on that comment.

Yes, Glenn.

Yes, it refers to -- our sales force is operating extremely well right now globally.

We're just taking that, our effectiveness up to a whole other level in terms of where we want to go with it, in terms of some very aggressive stretch market penetration and productivity objectives.

And there's a lot of initiatives going on within the Company in order for us to achieve those kind of objectives.

And I think you've said at some recent conferences that the new distribution partner should, we would see it more in the revenues, the September quarter was a good time frame to think about some acceleration from that or achievement from that.

Is that still how we should think about it?

Yes, I think you'll see, the way we would look at it internally, we'll see some positive impact from those new partnerships in the September quarter and really start accelerating in the December and March quarters.

So I think that is still accurate.

And I think your penetration of MSPs, Service Providers, you are close to around 10% of revenues.

Maybe you could comment on is that where that stands and how is that channel doing for leveraging your SMB opportunity?

We're having, I'd say, really outstanding success in those areas with our existing account base there.

We're adding a lot of new accounts and several very, very large new major opportunities that are progressing at a pretty good pace here.

So it doesn't represent 10% of revenues yet but it's a very high growth component.

It will certainly help us in the SMB, and a number of these partners of ours are starting to begin to focus on the enterprise, as well.

Could you comment on what you're seeing federal and Asia?

On Asia, our Asia business just for two reasons.

One, because we are becoming more effective and we see strength in Australia and Singapore.

We've got a new operation in Japan which was obviously affected by the recent events there.

Our China operation is moving along solidly.

So I'd say Asia, we're extremely well positioned in Asia.

And your second question, I'm sorry, Glenn?

What you're seeing in the federal sector.

The federal space.

There's enough spend there.

We are doing some of our own, I'd say, refocusing of our federal effort and it's doing okay.

I suspect our federal contribution in FY12 will be quite good and quite a bit better than FY11 in spite of the cutback in federal spending.

Robert Breza with RBC Capital Markets.

Hi.

First of all, nice quarter.

Bob, I was wondering if you could talk about the capacity-based licensing model and where you think that might be for 2012 or maybe where we exit 2012 at, from a fiscal perspective.

And then as you're looking at these distribution, bringing on all these distribution partners, can you help us understand where you think cash flow will be?

Will it be in that double digit range?

Should it track EBIT?

I'm just thinking you might have to invest a little bit more in working capital so I'd like to get your color or comments around that.

Cash flow will track EBIT.

There's no additional working capital investment.

There's expense investment but there's no additional working capital investment.

And the capacity model will be the vast majority of the model that we sell.

Michael Turits with Raymond James.

Hi guys.

Two quick questions.

One on expenses.

Outside of last year in first quarter, you were down like $2 million or so, and actually up like $2 million or so in OpEx each 1Q.

So a little stronger than that.

So if I think in the $4 million or $5 million range is that order of magnitude?

It certainly will be stronger than in past years, Michael, for sure, because we are investing and we just see real opportunity to start off the year extremely strongly and position the Company for a really solid FY12.

Okay.

And then I just wanted to drill down a little bit on Rob's question on cash flow.

First of all, I know you take excess tax benefits from stock-based comp down to cash flow from ops, but you said you're going to have an increase in the cash tax rate.

So will that have no net impact, therefore, on cash flow from ops next year?

Well it will have a -- the increased real effective tax rate is going to have an impact on your net cash flow from an operating cash flow standpoint.

I think we'll do quite a bit better than we did in FY11 because I think we'll do a lot better in Q1 to start off the year.

So, rule of thumb, we should see the same growth rate in your cash flow as you saw in operating income into next year?

Yes.

Our operating cash flow -- our cash flow should mirror our EBIT.

It's going to track it very closely to EBIT.

Gary Spivak with Noble Financial.

Hi, thank you, and I echo the congratulations on the quarter.

A couple questions, Bob.

I want to ask about the large deal composition for Q1.

I know that was an issue a year ago.

I wanted to know what you built into expectations for that.

It sounds like the pipeline is pretty good but have you discounted that in your expectations?

We always caution everybody on Q1 but since we entered the quarter, as I said, with a lot better momentum, this fiscal Q1 versus last, I think we'll have a reasonable Q1.

I think our confidence level is a lot higher in terms of the actual result versus a year ago.

So I'm feeling reasonably good on our ability to close out the major accounts we need to close for this fiscal quarter.

Let me ask it another way.

If you get a similar close rate on large deals as you did in the year-ago quarter, have you built that in or would that result in-- ?

If we had a similar close rate that we had a year ago, I don't think we would be very happy.

Okay.

On the sequential decline that you're expecting in Q1, is that primarily or entirely in software?

Should we see something relatively flat in services?

All I said was I didn't predict it.

I just said typically we are flat to down.

I didn't actually predict what we would do in the quarter.

Okay.

And typically, services would be a flatter trajectory than software from Q4 to Q1?

Services actually -- they could be flat to down, they could be up.

Okay.

And then finally on the competitive front, who are you seeing yourself primarily gaining share?

Any changes there?

Primarily Symantec and IBM.

Brian Freed with Wunderlich Securities.

Good morning.

A couple of quick questions.

First, just for clarification and a reminder, when you say several years to reach $1 billion, as I recall that's something in the range of 3 to 10 historically?

That's what they [will] report from Bloomberg.

That was not my comment but that was hers.

So what would you define as several?

I don't want to go there but I can tell you we have a clearly executable plan and let's call it in a reasonable time frame that we believe we can achieve that objective.

And we're very confident that we can do it.

And it's all organic growth, that does not include any acquisition.

Okay.

My second question, as you look at the ADIM segment, it seems to be tracking with your overall revenue.

Yet, if you look at some of the other vendors who have appliance-sized ADIM functionality, particularly de-duplication, it seems to be growing faster than your overall revenue.

Can you talk about why or why not you would pursue or not pursue an appliance strategy at some point going forward?

Because appliances do not make any sense, if you start to think about -- let me just describe this to you.

When you manage data, you got to index it from an application.

So you've got an object.

And then you, right off the primary layer, you de-dup it, and then you move it, and then you've got to put it in an archive.

And the archive has got to be indexed.

And it makes no sense at all to put the appliance on the apps end of the process and stick it in a box that is non-indexed.

You basically end up with an expensive archive that has very little value attached to it because you can't easily recover the data or the object very easily, and you certainly can't get to the content.

So the whole concept, in a CommVault context, of an appliance just does not make any sense.

Now, flipping that around, where you have companies like a Dell, who has taken the CommVault technology and basically built the whole platform into that appliance, that makes sense because now you can deploy a fully complementary modern data management solution in a very effective piece of technology.

So what I'm basically saying, our philosophy on how data is managed in very large scale within the enterprise is quite a bit different from almost all our major competitors.

And it's one of the reasons we're gaining so much traction on the market because our whole approach and technology platform is radically different.

Okay, thank you.

And then my last question relates to tax planning.

Your tax rate creeping up again this year.

Can you talk a little bit about what you've pondered or if you've pondered any move to domicile IP in international locales and take advantage of better tax--

I'll answer that.

Yes, that clearly makes a lot of sense, Brian, theoretically.

And the time for us to have done that would have been early in our -- as we started the Company.

But this was a buyout and in the early days we had $100 million of liability, no income, and we didn't have the cash and the wherewithal to establish that at a time when it was affordable.

And now it's just not very affordable and not a very good use of our cash.

So, unfortunately, we're going to be faced with paying a higher tax rate than some others who were able to establish that capability early on in the formation of their companies.

Rob Owens with Pacific Crest.

Great.

Thank you very much.

With the shift to large enterprise deals, is this more normal linearity that we should see and we'll see that reflected in DSOs over the next couple quarters?

Because I think you had a record number of large deals in December, record number of large deals in March, and we saw a bit of a stretch in DSO.

Might see it if we can work -- DSO is clearly a function of deal flow through the quarter, linearity.

And if we succeed in improving linearity, in theory, our DSO should come down because the quality of our receivables is extremely high.

And then second, with the increase in deferred, is that all maintenance or is there some deferred product or services in there?

For the most part, Rob, that is all services for the most part.

Very little software in that number.

Okay, great.

And then on the services margins, was there anything unusual in particular, not the overall gross margin but the services margin, which I think was down 200 basis points sequentially despite a pretty significant ramp.

Remember, services is a combination of professional services and support.

So there was a mix, a little bit more weighted towards professional services than usual.

And then lastly, given your comments around market conditions, Simpana 9 and all this increased distribution ramping, any reason why we might not see revenue accelerate on a year-over-year basis?

I think it's possible but we just need to demonstrate that and not talk about it.

(Operator Instructions) Derek Bingham with Goldman Sachs.

Hi, everybody.

Just a couple quick ones.

First on Fujitsu, I was wondering if you could give us a little bit of context in the sense of how it compares maybe with HDS in terms of the size of that hardware franchise and its distribution footprint.

Or is there some other way to think about the potential impact versus what you've already got in place?

In certain areas, like Germany, they are very, very strong.

And the odds are, it will help us significantly in certain regions in the world and particularly in EMEA.

They're not as strong, for example, in the US or some other areas.

But in certain pockets, they've got a very big global comprehensive franchise, both on the hardware side and also on the systems integration side.

So it's got the potential to be a significant contributor over the next several years.

But, I think like any of these agreements, they take time to get started and implemented and really have an impact.

But I think both companies have the right idea.

We're highly committed to building with Fujitsu and I think there's a real opportunity there.

Okay, great.

And then my only other question was, I was wondering if you could, a little bit more explicitly, delineate what the professional services and maintenance mix was in the quarter, just for thinking about go-forward?

We don't typically disclose that, Derek.

The professional services was a little bit higher than usual this quarter.

We've been saying, Derek, over time the services would be a higher component of the mix.

I think we're certainly starting to invest and build that in a much more comprehensive way for a number of reasons.

One, the opportunity is there.

Two, our customers.

You get into these large accounts, we become the strategic advisor and they want our services and solution capability to be front and center.

And we're making the appropriate investments there.

It helps support our larger strategic partners and systems integrators.

So, again, it will be a gradual increase but clearly, we are committed to it and we'll be increasing our investment in that area.

And it will become, over time, clearly will become a larger part of the mix.

Ladies and gentlemen, that does conclude the Q&A portion of our call, which also closes out the conference.

Thank you for your participation.

You may now disconnect.

Have a great day.