Commvault Systems Inc (CVLT) 2012 Q2 法說會逐字稿

Good morning, ladies and gentleman.

Welcome to CommVault's fiscal second-quarter 2012 earnings call.

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

Following the 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 second-quarter 2012 earnings call.

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

Al Bunte, our Chief Operating Officer, will not be joining the call today, as he normally does.

He is currently out of the country, meeting with customers and closing deals.

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 Securities Litigation Reform Act of 1995 and are based on our current expectations.

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

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

Our earnings press release was issued over the wire services about an hour 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 on 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, Bob Hammer.

Thanks, Michael.

Good morning, everyone, and thanks for joining our fiscal second-quarter 2012 earnings call.

We had another very solid quarter.

This is the fifth quarter in a row where we seen good revenue and earnings momentum.

We expect this good momentum to continue into the second half of fiscal 2012.

Let me start by summarizing our financial results.

For the quarter, total revenues were a record $97.5 million, up 30% year over year and up 6% sequentially.

Software revenue grew 34% year over year and 9% sequentially.

We also had solid results from our services and support organizations, which grew 26% year over year and 4% sequentially.

For the quarter, non-GAAP operating income, or EBIT, was $17.7 million, up 37% year over year.

EBIT margins were 18.2%.

Non-GAAP diluted earnings per share for the quarter was $0.24.

During the quarter, we continued to make investments to ensure our future growth, as well as achieve solid year-on-year earnings growth.

Our 30% year-over-year revenue growth in the second quarter was primarily due to the combination of good overall market demand and continued strong reception of our Simpana 9 software, strong sales execution in major enterprise accounts, increased distribution leverage, increased brand awareness based on our best-in-class ratings by respected third-party analysts such as Gartner, and the move to a global sales organization driving improved focus and consistency.

We saw strong growth in the Americas, Europe, and in our federal markets in the Americas.

Let me talk about our share repurchases for a second.

Being confident about our near- and long-term prospects, we purchased approximately 1.3 million shares at a cost of approximately $46 million during Q2.

In addition, our Board of Directors recently approved an additional $50 million to be used for share repurchases, bringing the total amount available for future share repurchases to $52.8 million through March 2013.

Now let me spend a few minutes commenting on the market reception to Simpana 9.

The major drivers of our business include the massive growth of data, virtualization, cloud computing, compliance, and, now, social networking and smart devices.

The key for our customers is to provide data and information management solutions that work, are automated, highly reliable, flexible, adaptable, supportable, and cost-effective versus alternative solutions.

Those are the attributes that separate CommVault Simpana 9 from the rest of the industry.

Competitors have tried to copy our messaging.

They have claimed they can do what CommVault does, but, at the end of the day, they cannot.

With head-to-head detailed comparisons at the customer level, they just cannot match our products, our economic value proposition, or our support.

That is why Simpana 9 continues to be adopted at well-above industry average growth rates.

I want to share with you an example of a recent Simpana 9 win by a focused enterprise sales team, and why this enterprise customer chose CommVault, particularly as they began migrating data to the cloud.

This deal was a high [6-figure] deal in license revenue.

The customers is a large, well-known consumer electronics company who was reengineering their data protection solutions and decided to standardize on CommVault to replace 3 competitive solutions that were unreliable and were becoming cost-prohibitive to the business.

The existing solutions, as well as new competing bids, could not meet the customer's broad data management needs, which included migration to the cloud.

In fact, the customer felt the proposed competitive hardware solutions made migrating to the cloud cost prohibitive.

In addition, competitive -- competitor deduplication software solutions were tested to the cloud and they simply did not work.

The following advantages of Simpana were essential to the implementation of the cloud strategy.

Simpana did not require an additional hardware appliance to move deduplicated data to the cloud.

We are able to dedupe directly to the cloud without rehydration into an appliance, so this means less steps and less hardware costs.

We were able to work in a heterogeneous storage environment and our functionality is able to easily interface with multiple cloud vendors.

CommVault's unified management solution has allowed the customer to meet both the strategic and business objectives for data protection, cloud-enablement, and disaster recovery business continuity initiatives, which included reducing costs, complexity and risk while improving reliability, recoverability of data, and operational efficiencies.

The customer estimates that, over a 4-month period, our solution already has demonstrated an ROI of 30%.

This win is an excellent example of our focused enterprise go-to market strategy.

So, let me talk about our enterprise account focus.

Our enterprise account focus continues to drive growth.

Enterprise deals, which we define as deals over $100,000 in software revenue, were 55% of license revenue in the quarter, representing a 54% year-over-year growth.

Sequentially, enterprise deals grew 14%.

The number of enterprise deals grew by 75% year over year and 48% sequentially.

As a result of the increased volume of transactions over $100,000, our average enterprise deal size was approximately $200,008 during the quarter compared to $230,000 in the prior-year period, and $269,000 in Q1 FY 2012.

Enterprise deal [flow] and funnel growth continued to be strong.

These stats validate the fact that we are continuing to gain market share in the enterprise segment.

Our worldwide sales organization is focusing on continued improvement by better aligning our sales and marketing strategies and improving our enterprise selling effectiveness, strategic partner engagement, channel leverage, and strategic professional services.

These initiatives are clearly helping to improve our growth rates.

Now, let me talk a little bit about distribution.

We achieved very good leverage from our distribution partners last quarter.

Revenues from Arrow and Hitachi data systems were strong.

Dell had a good quarter year over year and was up substantially quarter over quarter.

We see increased momentum from Dell in the near term, and are developing new solutions with Dell to drive longer-term growth.

Many of our resellers and strategic partners, like Forsyth in the enterprise and CDW in the SMB segment, also had strong growth.

We are also seeing good solid growth from our international partnerships.

As expected, we did not see revenue contributions from either NetApp or Fujitsu.

However, both companies are building good pipelines, and we will start to see some contributions from these partnerships beginning in our current quarter, our Q3.

We are making good progress with both of these partnerships, and I am confident they will have a positive impact on our FY '13 growth.

Now, let me spend a minute on product mix.

Sales of our non-back-up, or ADIM, products represented 45% of software revenue during Q2, compared to 44% in Q1 and 40% in the prior-year quarter.

Sales from our ADIM products grew 49% year over year, our core back-up business grew 24% year over year.

I realize that investors look to our core back-up versus ADIM stats to get a better understanding of what drives our licensed revenue growth.

However, as I have said previously, the traditional back-up function is disappearing and being transcended by more advanced data management functions like snap and replication combined with a host of other technologies.

In addition, when we sell our platform through a capacity license, these different functionalities are bundled into one capacity-based price.

Demand for our capacity-based licensing models continues to increase and now represents a majority of our license revenue.

As a result, the ADIM statistics become less meaningful.

With that said, we realize we need to provide our investors with some indication of where our growth is coming from.

Going forward, it is our intention to talk specifically about where the growth is coming from and move away from providing ADIM or core back-up stats due to the reasons I just outlined.

For example, during Q2, the strength of the business was driven by strong demand for virtualization solutions, deduplication, SnapProtect base-data management solutions, archiving, and search.

Now, let me spend a minute on outlook.

Let me address our current outlook for FY '12.

We have an excellent first 6 months of FY '12, in which total revenues grew 34% year on year, and EBIT increased 61% year on year.

The first-half results provide a strong foundation for us to build on for both the second half of FY '12, as well as for FY '13.

We have had strong funnel growth and have good forecasts going into the second half.

In addition, we believe the combination of the increase in the number of experienced enterprise reps, a higher overall sales productivity, and broader distribution leverage will help us achieve our stated FY 2012 financial objectives.

We believe we will be able to achieve solid double-digit revenue and EBIT growth in FY '12, as our forecast and visibility for the second half of the fiscal year look promising.

We have not seen any negative impact to our business from the macroeconomic environment -- our funnels continue to grow at the required rates and we have increasing visibility to our forecast.

However, I want our investors to be aware that our fiscal second-half year-on-year comparable growth rates will be more difficult than the comparable growth rates for the first half of the fiscal year.

As a result, the year-on-year growth rates and revenues in EBIT for the second half of the fiscal year will probably decrease on a relative basis.

That being said, while we believe that our business fundamentals are strong, and while we could see upside to the current fiscal 2012 street consensus for total revenue and EBIT, I need to emphasize the following words of caution.

We continue to have quarterly revenue and earnings risk due to the timing of very large deals, there remains global macroeconomic uncertainty with indecision around IT budgets for calendar 2012 -- in particular, we continue to be cautious on Europe, given the uncertain economic environment and some of the sovereign nation concerns that exist there.

We are anticipating that we will see some type of economic downturn in the first half of calendar 2012 that could negatively impact IT spending, although we have not seen it yet.

While the new distribution partnerships that we announced in the spring have great potential, there is uncertainty regarding the timing and potential impact of these new distribution opportunities.

In Q2, for example, there were no revenue contributions from our new strategic partners, specifically NetApp and Fujitsu.

We are continuing to invest in those partnerships.

In summary, the Company had a solid first half of its fiscal year, and is in good position to successfully achieve our annual objectives for fiscal 2012.

We have also established a solid foundation for growth in FY '13.

We are prudently making the required investments to ensure that we can continue to outpace the market in growth and profitability over the medium to long term.

In addition, we have broadened the vision of the Company to include a substantial pipeline of new products and functionalities in order to enhance our technology leadership and enable us to achieve our billion-dollar plan objectives over the next several years.

I will briefly discuss our broader vision after Lou's comments.

I will now turn the call over to Lou.

Thanks, Bob.

Good morning, everyone.

I will cover some key financial highlights for the second quarter of fiscal year 2012.

Total revenue for Q2 was $97.5 million, an increase of 30% year over year and 6% sequentially.

During Q2, revenue from US operations generated approximately 61% of total revenues, resulting in a 28% year-over-year increase, while revenue from international operations generated 39% of total revenues, resulting in a 32% year-over-year increase.

As Bob noted, there remains some pockets of macro weakness in certain international geographies, but we were able to over-achieve in certain international locations and were pleased with the consolidated results.

On a year-over-year constant currency basis, foreign currency movements had a positive impact on earnings per share of approximately $0.01.

On a sequential constant currency basis, there was minimal impact on earnings per share.

The revenue mix for the quarter was 49% software and 51% services.

In the prior-year period, the mix was 48% software and 52% services.

For the quarter, we reported software revenue of $47.8 million, which was up by $12.1 million over the prior-year period, primarily driven by enterprise transactions.

For the 6 months ended September 30, 2011, the number of enterprise software transactions increased by 69% over the comparable 6-month period.

In addition, our SMB business grew 23% over the first half of fiscal year 2012, compared to the same period in the prior year, primarily on the strength of our global SMB channel partners.

Our maintenance attach rates and renewal rates remain strong.

Services revenue for Q2 was $49.6 million, an increase of 26% year over year.

For the first 6 months of fiscal 2012, total revenue grew 34% versus 12% during the first 6 months of fiscal 2011.

Software revenue growth was 43% versus 2%, and services revenue growth was 26% versus 21% during the comparable 6-month period.

Software revenue derived from indirect distribution channels represented 88% of software revenue, which increased by $12.4 million, or 41% year over year, and $7.7 million, or 22% sequentially.

Please keep in mind that our direct sales organization is a strategic overlay to our channel partners, and we will continue to invest in our direct sales force, which is essential to achieving our growth targets.

Sales through our Dell relationships accounted for approximately 22% of total revenues for the quarter.

Total quarterly Dell revenues grew 12% year over year and 11% sequentially.

Total revenue through Arrow contributed approximately 27% of total revenue, compared to 24% in the prior-year period, representing increases of approximately 46% year over year and 13% sequentially.

Arrow is an important distribution partner and we anticipate continued strong contribution going forward.

Gross margins were 86.7% for the quarter, compared to 87.4% in the prior-year period.

The decrease in gross margin was primarily due to higher costs associated with the upgrade and expansion of our worldwide customer support operations, as well as a higher percentage of revenue being derived from professional services engagements.

Total operating expenses were $65.7 million for the quarter, up approximately 4% sequentially and 26% year over year.

We added 43 people during the quarter, ending Q2 with 1,371 employees.

Operating margins were 18.2% for the quarter, resulting in operating income of $17.7 million; on a year-over-year basis, Q2 EBIT increased by 37%.

We remain committed to improving operating margins in fiscal year 2012.

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

We are now forecasting that EBIT margins most likely will expand in fiscal year 2012 by 75 to 100 basis points.

For the first 6 months of fiscal 2012, operating income grew 61%, compared to being down 1% during the first 6 months of fiscal 2011.

EBIT margins for the first 6 months of fiscal year 2012 were 17.4% versus 14.5% during the first 6 months of fiscal 2011.

Net income for the quarter was $11.4 million and diluted earnings per share was $0.24 per share, based on a diluted weighted average share count of approximately 46.9 million shares, and a 36% pro forma tax rate for Q2 of fiscal year 2012 versus a 34% pro forma tax rate used in the prior year.

For fiscal year 2013, the Company is planning to use a pro forma tax rate of 38%.

We anticipate that our diluted weighted average share count for fiscal year 2012 will be between 700,000 to 1 million shares higher than the FY 2011 diluted share count.

We estimate the cash tax rate for fiscal 2012 will be approximately 25%.

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

Our cash tax rate will approach our long-term terminal GAAP tax rate over the next 1 to 2 fiscal years.

As of September 30, our cash and short-term investments balance was $219.9 million.

For Q2, cash flow from operations was $11.1 million.

Free cash flow, which we define as cash flow from operations less capital expenditures, was $9.7 million for the quarter, which is an increase of 49% over the prior-year quarter and a 67% decrease sequentially.

This sequential decrease in cash flow is primarily tied to changes in working capital and, more specifically, accounts receivable balances.

For the quarter, our DSO was 61 days, which is down from 67 days in Q1 of fiscal 2012, mainly due to better linearity and higher revenues.

For the first 6 months of fiscal 2012, free cash flow grew 81%, as compared to relatively flat growth during the first 6 months of fiscal 2011.

Because of our strong cash balance, we elected to terminate our credit facility on October 12, 2011, which allowed us to borrow up to $30 million.

Since we have announced our buyback program in February of 2008, we have purchased approximately 13% of our own stock using approximately $117 million of cash generated from operations.

As Bob mentioned, we are currently authorized to repurchase an additional $52.8 million of stock under this existing program through March 31 of 2013.

With the remaining balance, we will continue to be opportunistic in our stock buyback program.

Finally, as of September 30, 2011, the Company's deferred revenue balance was approximately $124.4 million, which is an increase of approximately $26.7 million, or 27%, over the prior year, and up 5% sequentially.

That concludes my remarks, I will now turn the call back over to Bob.

Thank you.

Thank you, Lou.

I'm now going to spend an extra few minutes today talking about the market in general and CommVault's vision to significantly extend the Simpana platform to meet the emerging needs of the market.

One of the key strengths of CommVault has been our ability to see out into the future, figure out our customers' future needs, define leading-edge solutions, and then consistently execute and bring those unique solutions to market.

As you all know, we live in a rapidly expanding and changing digital universe, currently driven by many factors.

Data growth is outstripping the ability to manage or access it.

Data that used to be created in controlled corporate IT environments, like self-contained data centers and IT-certified computers, is now being generated on consumer devices, networks, and repositories outside the control of traditional -- outside the traditional IT department.

Once text-based, today's data largely consists of massive amounts of unstructured content, including image, video and audio files.

Fast-growing corners of the digital universe also include data related to digital TV, surveillance cameras, sensor-based applications, and social networks.

The exploding digital universe is taking its toll, challenging already overburdened IT organizations and infrastructures.

The explosion of data is outstripping IT organizations' ability to ingest, store, and manage it.

More importantly, customers are lacking the tools to make sense of that data so that they can manage their businesses with greater intelligence and efficiency.

The massive growth and complexity of data is causing companies to reengineer their IT infrastructures to ensure they can cost-effectively meet the data management requirements.

In addition, there is an emerging need to bring smart devices and data stored in cloud-based repositories under corporate IT control.

We see it as our mission at CommVault to develop a comprehensive, intelligent management framework around this new emerging digital information universe.

This intelligent management framework would enable our customers to holistically, seamlessly, securely, and cost-effectively manage data for today's key data management functions like data protection, disaster recovery, universal secure access, content search, compliance and regulatory and government requirements from any place, at any time, by anyone.

In addition, we are focusing on the consumerization of IT by developing solutions to help ensure that a company's information does not enter the public domain by accident or malicious intent; enable IT organizations to support users' choice of personal devices; and put the user in the center of the new mobile universe and create the ability of those users to easily and securely share documents across various devices.

Developing enterprise data into one universal virtual digital archive is one of the key new technologies of our vision, which also includes simplifying and reducing the cost of management of data by converging the back-up and archiving of data no matter where that data is or what device it is on; fully index and track all data and all repositories, whether in private or public clouds, in data centers, remote sites, on laptops or desktops, or on smart devices; and create one universal digital archive for search, regulatory compliance and data recovery.

Our universal digital archive concept is a critical element of our vision since it would enable companies to have a highly-scalable, flexible visual infrastructure, which would be capable of easily integrating and organizing all corporate data.

It would enable companies to more easily collect and integrate data across all technical and departmental silos.

That, in turn, would enable them to drive more value from the data for better, more timely decision-making for competitive advantage and business growth.

It is also our goal to minimize resource constraints in terms of budget, staff, and physical limitations of storage servers and networks.

And, lastly, individual corporate users would have one place to see and recover all their secured data across all operating systems, applications, devices and repositories.

We believe that without a next generation intelligent management framework, the future of managing data would get more difficult and costly, since enterprises would be substituting or adding new sets of disconnected information silos to the already-siloed information that customers have today.

CommVault is in the best position to realize this vision with our one single data and information software platform, our unique architecture, and our comprehensive singular indexing and cataloging capabilities.

It sounds very ambitious, and it is.

However, we are confident that we can deliver on our vision over the next few years.

In fact, we expect that many of the key components of our vision will be delivered over the next year and a half.

In discussing this with one of our strategic partners recently, he said to me that CommVault Simpana is the IT cookie dough that holds all the chocolate chips together.

Yes -- and, over time, we will keep adding more dough to hold more chocolate chips.

Let me now discuss one of the just-released emerging building blocks of our vision, which is mobile computing, or managing data at the edge.

In today's mobile work environments, it is likely that desktops and laptops may hold up to 50% of a corporation's information assets.

Recent research from the Enterprise Strategy Group reveals that end-point devices, or data-at-the-edge devices, between desktops and laptop PCs are often under-protected and are not being backed up regularly, reliably, or securely.

As a result, companies have significant compliance risk or are burdened with expensive, resource-intensive data restoration to meet litigation or compliance requirements.

The Simpana edge-data protection solution for laptops and desktops, which we introduced last quarter, meets these challenges with features that reliably protect, improve data availability, simplify management, and reduce costs, while exceeding most requirements for security and compliance.

In addition, we have enabled the user to securely restore the information directly without burdening IT administrators.

This solution is automated and highly scalable.

In fact, we are in the process of rolling out the solution with a customer to over 20,000 devices globally.

CommVault is addressing the issue associated with managing data at the edge in a holistic manner.

In the not-too-distant future, we will bring other data-at-the-edge solutions to market, we will extend the management of the edge to personal devices that are generally outside the control of corporate IT, like tablets and smartphones.

In addition, we are working on ways to manage data from those devices to ensure sensitive corporate data is not transmitted to unsecured public data repositories, and to make sure data from those devices can be centrally stored, protected, and archived to meet e-discovery or compliance requirements.

We are also working to enable users to easily share data across mobile -- multiple devices.

Let me spend a minute on the near-term building blocks of our broader vision.

In the very near future, we intend to extend our platform with enhanced products for next generation archiving, as well as products that make it easier for IT administrators to manage their data-related IT infrastructure, issues through our first operations management offering.

We also intend to expand our capability to virtualized environments, share point and our cloud-based capabilities as well.

In brief, our vision is to significantly extend the Simpana platform to handle the dramatic changes taking place in regard to the unprecedented growth and complexity of data, virtualization, the cloud, smart devices, social networking, and rapid access to intelligent information for better, more timely decision-making.

We are excited about turning our vision into reality, and bringing new innovative solutions to the market.

Stay tuned, it will be an exciting ride with CommVault into the new digital universe.

In summary, we had an outstanding Q2 2012, achieving record revenues for the fifth straight quarter, while making key investments in order for us to achieve our target numbers for the balance of FY '12 and for FY '13.

In addition, we were able to significantly improve shareholder value with opportunistic stock repurchases of approximately $46 million.

We believe we have developed and have the capability to execute a broader vision for the Company, which will enhance our leading technology position in the industry, provide the foundation for well-above-industry average growth rates in revenues and profitability, and provide the foundation to help us achieve our billion-dollar plan objectives.

We see good growth for the second half of the fiscal year, but want you to be aware of the more difficult year-over-year comps.

We have not seen any impact from the macroeconomic conditions, but note that it creates uncertainty.

We are excited about our short- and long-term product visions and look forward to discussing new products as they come to market.

I will now turn the call back to Michael.

Thank you.

Operator, can we please open the line for questions?

Thank you.

(Operator Instructions) Joel Fishbein, Lazard Capital.

2 questions actually, first on the vendor consolidation.

Bob, when you talked about this high-profile, 6-figure deal and it was a vendor consolidation 3-1, can you give us some color on who you are displacing?

That would be helpful.

I think in general the largest displations are basically Symantec and IBM, in general.

In terms of our competition, when we see competition at an enterprise account, it is typically either Symantec, IBM, or EMC.

Second thing is on the margins, obviously you outperformed on the margin side, and I know Lou gave us a little color in EBIT margins, but in terms of operating margins, is 18% your new base?

Is that how we should be thinking about it?

Or should we see fluctuation just in general?

You are seeing great revenue leverage that's dropping down.

How should we think about that?

I think we are going to raise our targets for the year.

I think Lou said to 75 to 100 basis points.

So the issue is clearly, we see increasing momentum in the business, we have a big opportunity in front of us and we are very successful in broadening the vision of the Company.

So we want to make sure we continue to invest for sustained long-term growth and balance that against increased operating margin leverage.

I think 75 to100 is a reasonable number over FY 2011 at this point in time.

Follow-up in terms of the desktop product, which obviously you talked about 1 really interesting deployment that you are doing right now.

Is the pipeline building for the edge device product, obviously it's a big problem for a lot of enterprises.

The answer is yes.

That particular customer, it was our first GA customer, and we kept it pretty contained up until now.

The product is clearly well-complete and meeting all the key requirements there.

So the answer is it is absolutely building.

The other important point, Joel, as part of that product, there are a lot of new technologies.

Within that product, it is network-aware, so it knows whether it's on LAN, WAN, or Wi-fi, it's firewall-aware, it puts the console in the hands of the user for the first time, so the user can gain access to his data or store data.

It's all automated.

It enables all those devices not only to be backed-up but to be archived and content-searched.

There is a lot of fundamental technology in that product that we are going to use to extend to it the broader marketplace.

Jason Ader, William Blair.

Yes, thanks guys.

Bob, I wanted to ask you about specific new solutions out there in the back-up market like Veeam, that are tailored to virtualized environments.

Are you seeing competition from those types of products and how would you rate your product today on virtualization fluency?

Veeam has done very well in the SMB part of the market.

It's a relatively simple solution, but it works well.

CommVault's solution fundamentally is a lot broader, much more capable than Veeam, but we have historically not focused on that side of the market.

But given our capabilities to do that, I think you will see us move more aggressively.

We have been very enterprised focus, but we also have very good capability to move into the let's call it the higher end of the SMB segment of the market.

I think you will see us move there as well over the next year.

So bottom line, we have a very strong capability in virtualization, and have been ranked number 1 by most of the analysts in terms of our virtualization capability.

Okay, thanks.

And just unrelated follow-up.

I jumped on the call late, and didn't hear if you had made any comments on the NetApp OEM agreement, what are your thoughts there in terms of how it's ramping with the sales force at NetApp, and what's some of the early feedback from the field?

We didn't have any revenue last quarter.

I'm extremely confident about the 2 companies, that relationship and it's ability to be very significant for CommVault in the future.

We will see contribution from that app starting in the December quarter and building quite well from there.

I'd say the relationship is in really good shape and we're continuing to work together to expand it as well.

Material contribution by Q4 you think, or maybe even next quarter or this current quarter?

Well, material to us is 10%, certainly not going to see anything like that.

But I think in our FY 2013, I think we will see substantial contribution from our NetApp partnership.

Glenn Hanus, Needham.

Good morning, guys, and congrats.

Could you comment at all on sequential growth in the December quarter, normally it's about 5%, I think, we are in the models.

Is that a little too aggressive for how you are sensing the market, or are you reasonably comfortable with that?

I am not going to give you that kind of guidance.

I think there will be sequential growth, and what I said in my remarks is that our funnels are up, our visibility is up and our forecasts look good.

Any thoughts about, with the possible constraints of drives come the March quarter, supply, obviously you are on the software side and not so directly impacted, but if there were some drive constraints throughout the industry come the March quarter, how should we think about that in terms of headwind come the March quarter?

I think the conventional wisdom, the high end of the market, the supply should be adequate.

That's conventional wisdom.

That the lower end of the market would get starved more than the high end, it's always possible, Jason, but right now we have pretty good visibility into the March quarter, and we are not seeing it.

Is it possible?

Yes.

But we are not seeing it.

Again, as we analyze it a little bit more as this thing evolves, I think we will see the lower end get starved more than the high end.

The drives that are going to the higher end of the market have more of a margins.

So it would be common sense that that's where the vendors would push their product.

Michael Turits, Raymond James.

Hi, guys.

Strong quarter.

As you look into next year, sounds like there is a lot of investment and a lot of new products in the pipe.

Should we continue to think of there being material margin expansion next year?

We've said 75 to 100 basis points for FY 2012, and our objective, as we've said all along, is to progress and hit that 25% operating margin number.

FY 2013 is along the path, so, yes, you will see operating margin expansion in FY 2013, we are definitely planning for it.

Mechanical question, Lou, what was the FX impact on revenue year-over-year in the quarter?

Year-over-year, for 6 months it was about 4%, 30 would have been 26%, and for the quarter it was 6% versus 7%.

So it was 6 points of tailwind to revenue?

For the year.

4 points for the year.

For the quarter, for this current quarter?

For the current quarter?

We reported 6%, on a constant currency basis it would have been 7%.

Eric Martinuzzi, Craig-Hallum.

You had a little bit of caution in you commentary around EU, you said you were anticipating some type of economic downturn.

Just curious as to where that's coming from.

Is that feed back from your install base, is that just macro headlines you're wary of?

It's macro headlines.

As I said, we are not seeing that in our pipelines, our visibility, or from our customers.

I'm just cautious about the macro environment and we're just paying attention to it, but we haven't seen it yet.

1 more if I might, the NTAP relationship versus your own SnapProtect pipeline, is there any risk here where you maybe actually overlapping your own direct effort or is this NTAP all incremental?

It's not all incremental, but net-net it should be very incremental.

Gary Spivac, Noble Financial Group.

Yes, thank you and also congratulations on the quarter.

I guess as a housekeeping item, Bob, the average deal size, did you say $208,000, in the quarter?

Yes, because the number of deals over $100,000 exploded on us, pulled the ASP down.

But I wouldn't read too much into that because can I tell you that our pipeline across on multi-million dollars deals look really good.

That's all good news.

Yet the stat is down but the overall penetration in the enterprise is extremely encouraging.

Should we read into that there were a number of 5-figure deals that just ticked up over $100,000, bringing the average down?

Yes.

A lot of them are more than $100K.

But, yes, we're talking a lot of deals.

On the competitive environment, you touched on it a little bit but I wanted to address pricing, specifically how Symantec is competing on price and is that continuing, what are you seeing?

Yes, it continues.

They are extremely aggressive, to the point of being ridiculous when we show up.

It happens alot.

We sell on value, not on price.

Our win rate against Symantec is very high, but they are continuing to aggressively price when CommVault is one of the competitors.

If I could sneak one more in there, how much did government provide a tailwind in the quarter?

We had a very good quarter from our Federal Group, and it was 9%.

Aaron Rakers, Stifel Nicolaus.

Thanks, guys, and also very good quarter.

First question on the relationships that you guys have.

Bob, correct me if I'm wrong, but back in early June you had made a comment that maybe some initial revenue from NetApp would show up in a September quarter.

Has anything changed in that relationship that's pushed it out a little bit?

Or how do we think about that ramp, is it related to a new operating system?

Just trying to look for color on that.

With that, how do we think about the recent announcement with Dell and SnapProtect and how that might be incrementally added to the model or additive to the model going forward?

I would say the NetApp relationship got off to a little slower start, but it's very firm and very solid.

So I think we will see that accelerate well.

We are working on broadening the relationship with NetApp, so I think we are feeling really good about that relationship.

There is a lot of field engagement, a lot of pipeline, globally.

So I think at the end of the day we are all going to be really happy about that.

The SnapProtect with Dell, we just added SnapProtect the Compellent and Dell is doing quite well with the Compellent in the market, and it's going to have a positive impact on our revenue through the Dell channel.

No question about it.

We are working on a number of other initiatives with Dell as well.

To follow-up, take another stab at the operating margin discussion.

Bob over the last 2 years you've had up to 100 basis points of operating benefit, sequentially, fiscal 2Q to fiscal 3Q, I'm not going to ask you to give a specific number, but is there investment changes that are taking place this year that would change that type of seasonal uptick that we've seen in the past?

Or is it kind of steady-as-she-goes and conservatism on your part?

We were a little conservative in the summer, we are actually stepping it up right now as we move in to FY 2013, and with the confidence we have in, not only our distribution and our sales execution, but this broader pipeline of products coming out, we are definitely investing to position the Company for future growth.

Those investments includes the whole front-end of the enterprise, whether it's solution architects or technical account managers and the whole field management aspect to help our enterprise reps and our customers to find better solutions.

So that investment is going on, we're expanding support.

We've got to back that investment up with increased investment in marketing.

Because of the significant opportunity that's in front of us right now, we are going to have to step up our investment in DEV a little bit.

They've been outstanding, but there's so much opportunity out there that I think we will step that up a bit.

All that being said, we will do that within the constraint of trying to significantly improve our operating margins, and I think we can do both.

Just to be clear, you would expect a higher sequential growth rate on an absolute basis in OpEx relative than what we saw in the prior 2 years?

You are incrementally investing more relative to what we have done in the past.

That is plan, whether it ends up that way or not.

It may not end up that way, Aaron.

I'm not sure we can ramp that fast.

Aaron Schwartz, Jefferies.

Good morning.

Maybe a related question, but you've seen the number of enterprise deals it seems like grow a lot faster than headcount.

I know we don't get sales head count, but how much more productivity can you get out of your current sales organization?

And then a follow-on, as you look at your fiscal 2013 revenue model, I know you are not guiding to that, but where are you in terms of sales capacity?

Do you have a lot of additions to do in the second half or do you think you have the right amount of sales resources here?

We have enough resources to achieve our let's call it first-half FY 2013, but we've got to invest now the second half.

In regard to productivity, we've seen substantial increase in sales force productivity.

There is still a large opportunity to increase sales force productivity further.

We have a whole series of initiatives that are in motion today to increase our sales force productivity.

There is still a lot of potential there.

As much progress as we've made, there's still a lot of potential there.

If you look at it on the aggregate, CommVault is still spending 50% of its sales dollar on sales and marketing, and if you look at that number over the next few years, we still think we can make a major dent in reducing that number on a relative basis, which would improve operating margins.

That's where the operating margin improvement is going to come from, is spending less per sales dollar on sales and marketing.

And we are doing that through increase productivity and improvements.

We have plans, very definitive plans, to achieve those objectives.

Last year you made significant enhancements or changes to your sales model, both on the commercial side and federal side.

If you look into next year, I know there is annual changes you make in your sales model, but how do you characterize the model next year?

Should it be steady as it's been this year as execution has been very good, or do you anticipate another round of model changes to your sales model.

As I said last earnings call, we are always making changes and we will be making a number of significant changes again, we are making them now and as we go into 2013 to be much more focused and aligned to these different market segments, which is going to improve our overall productivity and effectiveness.

The whole team is really confident in what we are doing here, so it's definitely not steady-as-she-goes.

Last question if I could, on the talk on the endpoint product, in terms of how you're pricing that in distribution, is that the same capacity-based license model or is there some sort of per-device pricing, or how do you monetize that?

And then a follow-on to that, does that require different types of partner distribution to see good penetration or the penetration you want around the endpoint products?

The current product does not require additional distribution.

As we expand it, the answer would be, yes, we would have to expand our distribution partnerships.

In regard to pricing, yes it is bundled as part of our capacity-based pricing.

It is also priced on a per-unit basis as well.

We have both models.

Brian Freed, Wunderlich Securities.

1 clarification and then a question.

First on NetApp, you mentioned there was no revenue from NetApp in the quarter, but if I recall the product has been available for about a full quarter within NetApp.

Can you give us any color in terms of how the revenue recognition works on this?

Is there a lag between sales and [REV-rack]?

Yes, there is a 1-month lag.

We know there is revenue, it just hasn't been recognized.

Secondly, when you look at the competitive landscape, VMware has been enhancing the replication and business continuance functionality of Site Recovery Manager over the last couple of years, you still have a pretty significant functional GAAP given your search and index, et cetera.

But what do you see in terms of the future level of competition between yourselves and VMware and how do you look to stay ahead?

I'm not worried about it all.

As they add functionality, we embrace it.

Don't forget, VMware doesn't have the enterprise.

They have pieces of it.

You have got Xen, you've got Hyper-V, if you are looking at an enterprise customer, which is where we're primarily focused, and you want to manage the data, you've got to manage it across all those environments.

And more importantly, at the end of the day, as I mentioned in my remarks, the value has got to move to the archives.

Because all that data over time has got to be fully indexed, secured and be able to be content-searched across all your different silos.

That's the only way to get affective compliance, for example, that's the only way you can get really good effective business value creation.

Whether it's Microsoft or it's Citrex Xen or it's VMware, we use those tools underlying our platform, those are enablers to us.

As they increase functionality, we just embrace them.

They are solving part of the problem, we're solving the whole problem, if you want to think about it that way.

We look at them as a strategic partner and enabler, not as a competitive threat.

Philip Winslow, Credit Suisse.

Hi, guys.

Good quarter.

Most of my questions have been asked.

In terms of verticals, you mentioned the government vertical briefly.

Just wanted to get a sense what you are seeing from others verticals out there in terms of strength or weakness versus what you've seen in prior quarters.

Thanks.

Government in general, that is not only federal but state, municipal and governments internationally, are strong, even in countries that are weak.

Data is still growing and these governments are spending money on managing data.

The other thing that's going on globally is a lot of the governments are trying to get centralized control of their data, so there's a lot of reengineering taking place.

I'd say number 1, real big opportunity in governments globally.

Healthcare remains strong globally, we've got a really good, solid healthcare vertical.

Manufacturing is strong depending on what industries you are focused on.

The consumer-related companies are weaker, although our demand seems to be holding up pretty good from those companies.

In general, if we look at our verticals, other than I would say some weakness in some financial sectors, the verticals in general for us are pretty strong across the board, and even in financials because we are taking a lot of market share.

We've got a good pipeline of opportunity in the financial community on a global basis as well.

For our business, fortunately we are in one of those sweet spots right now where there is good overall demand across most sectors.

Shebly Seyrafi, FBN Securities.

Yes, thank you very much.

So your gross margin in services declined a bit, you talked about 2 reasons, professional services increasing as a percentage of the mix and the cost of upgrading service centers.

Now that you are done upgrading, do you expect that GAAP service gross margins of 74.9% to rebound to this over-76% level of the prior few quarters?

You might see some incremental, Shebly, but I don't think so.

We've really beefed up those support centers.

What we are doing is getting improved productivity from those teams.

In addition, as we move to more and more, I call it strategic professional services, those are not high-margin businesses.

I don't expect a lot of margin improvement at all.

I think it's going to be pretty flat in the services sector.

Last 1 for me, your DSO did tick up about 5 days sequentially, can you talk about the linearity during the quarter?

Yes, I will talk about linearity and Lou can talk about DSO.

Linearity fully has improved for CommVault over the last few quarters, and it continues to improve.

When I talk about visibility, I'm really talking abut linearity.

Lou, you can answer.

No, you may have misunderstood.

The DSO did not tick up sequentially, it went down.

It went from 67 days to 61 days.

Your AR was $69 million, right, from $59 million?

We can talk about this offline, but that's my calculation right now, up 5 days.

We can go through it with you offline.

Let's do that, thank you.

James Gilman, Capstone Investments.

Thank you, good morning.

Wanted to follow up on the US Federal -- 2 years ago, you commented 11%, today, if I heard correctly, 9%.

Is it roughly in that range year-over-year?

Then the other thing is, maybe from sequentially here, how is the contribution from the federal government?

James, I've commented the last 3 quarters that we've had relatively weak Federal team, that we reorganized it.

So our Federal revenues, we're not doing very well, and this new team has executed extremely well and had a great quarter.

The other thing is, you mentioned headlines about the concerns with the economies worldwide.

Government is a big part of your business, but you also indicate that you think there is an area of strength there.

With the governments having some debt challenges, can you help reconcile how you think that in the future there could be strength there, yet there could be some pull-back in the government budgets.

I think it's easy to reconcile.

Governments are pulling back, but they're also trying to save money.

So when their data is growing -- so you've got data growth growing unabated in the government sector as well as the private sector; and 2, we enable governments to save a lot of money.

Come and solve core problems, whether it's compliance or regulatory or data protection, and save substantial amounts of money versus their current options.

You put those 2 together, even though you've got a weak government, there is opportunity.

And the third one I mentioned, which is happening in a number of governments around the globe, and we want some of these opportunities, where they are consolidating on a solution.

They're moving to cloud-based managed-services-type models, and there's a big opportunity in that around the world.

So, yes, you've got governments almost across the board are deleveraging, and except for the US, and one of these days maybe we will figure that out as well, but most governments are cutting spending, but they're also spending money to save money.

We are one of those fortunate technologies that enable them to do that.

Ladies and gentlemen, with no further questions in the queue, this concludes today's question-and-answer session.

We would like to thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect, have a good day.