Commvault Systems Inc (CVLT) 2012 Q3 法說會逐字稿

Welcome to the CommVault fiscal third-quarter 2012 earnings conference call.

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

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

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

Michael Picariello, Director of Investor Relations.

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal third-quarter 2012 earnings call.

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

Before we begin, I would like to remind everyone that statements made during this call, including 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 [MD&A] statement contained in our press release and on our website.

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

Our earnings press release was issued over the wire services earlier today and is also has been furnished to the SEC as an 8-K filing.

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

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

The reconciliation between the non-GAAP and GAAP measures can be found 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.

Thanks for joining our third-quarter FY '12 earnings call.

We had a strong quarter in all aspects of our Business.

We set records from both revenue and earnings and we topped the $100 million in quarterly revenues for the first time.

Let me briefly summarize Q3 FY '12 financial results.

For the quarter, total revenues were a record $103.6 million, up 24% year-over-year, and up 6% sequentially.

Software revenue grew 23% year-over-year and 8% sequentially, while Services grew 25% year-over-year and 5% sequentially.

Geographically, we had strong growth in the Americas, Europe, and China.

For the quarter, non-GAAP operating income, or EBIT, was $19.6 million, up 31% year-over-year.

EBIT margins were 19%.

Non-GAAP diluted earnings per share for the quarter was $0.27.

For the first nine months of fiscal '12, we grew top line by 30%, and we achieved solid EBIT expansion of 220 basis points.

We generated over $27 million of cash flow from operations during the quarter, and approximately $70 million for the first nine months.

The positive results for the first nine months of fiscal '12 have been primarily due to the combination of the following key factors.

Simpana 9 software significantly increased our technology differentiation, versus all key competitors.

Improved sales execution in major enterprise accounts, increased brand awareness aided by CommVault's industry-leading position by respect to third parties such as Gartner, and increased distribution leverage from both our strategic and reseller partners, and improved execution in all segments by a globally re-aligned sales force.

I'm going to talk about and spend a minute on enterprise accounts.

Enterprise deals, which we define as deals over $100,000 in software or 47% of licensed revenue in the quarter, representing 20% year-over-year growth.

Our average enterprise deal size was approximately $269,000 during the current quarter compared to $219,000 in the prior year period, and $208,000 in Q2 FY '12.

Enterprise deal flow momentum and funnel growth continue to be strong, which helped improve our visibility into Q4 fiscal '12.

For the first nine months of fiscal '12, the dollar value of enterprise software transactions increased by 48% over the comparable nine-month period in the prior year.

In addition to Simpana 9, improved enterprise account penetration was due to better execution from our enterprise sales teams, increased contribution from our strategic distribution partners, improving distribution in channel partner effectiveness, and more effective marketing and branding.

The enterprise segment strategy that we deployed in our early FY '11 is working and is validated by solid results over the past few quarters.

We will continue to aggressively invest in customer facing sales and technical resources, as we continue to penetrate this segment of the market.

I will talk more about Simpana 9 after Lou's comments, but the following example provides a good overview on why customers are choosing CommVault.

This customer is a large government agency and this was a seven-figure deal.

They chose CommVault because they were able to deploy one strategic unit by platform versus multiple point products, reduce costs by minimizing IT spend while meeting compliance objectives with our embedded archiving and search capabilities, more effectively manage scale to meet current and future needs, and reduce staff to a single person, who is able to manage very complex environments with Simpana's comprehensive management console.

The customers expect to save approximately $4 million, or 3X return on their initial purchase of Simpana and that does not include the additional labor they would have to hire with our key competitor's solutions.

I will now spend a minute on product mix.

As I indicated last quarter, we will no longer provide backup versus advanced data and information management, or ADIM, statistics.

As the traditional backup function is disappearing and being replaced by more advanced data management functions, like snap and replication, source-side deduplication and archiving.

In addition, approximately two-thirds of our license sales are now sold as a capacity-based platform sale and continue to increase as this licensing model resonates with customers.

When we sell our platform through a capacity license, different Simpana functionalities are bundled into one capacity-based price.

This pricing model makes it much easier for customers to buy our unique Simpana platform as they factor in our increasing market share gains.

However, the sale of such bundled products under a capacity licensing arrangement makes a distinction between backup versus ADIM stats no longer relevant.

During Q3, the strength of our Business was driven by strong demand for the following Simpana functionalities, virtualization solutions, source-side deduplication, snap protected and management solutions, and archiving.

I will now address our current outlook.

We have seen limited 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 current core forecast.

At the present time, we see good demand across all vertical sectors of the market and across all geographies.

However, we are well aware that the current economic climate has added a lot of uncertainty about future demand.

While we have strong, consistent growth in revenue and earnings, I would like to add the following words of caution regarding our future outlook.

We continue to have quarterly revenue and earnings risk due to the timing of very large seven-figure deals.

There remains global macroeconomic uncertainty with indecision around IT budgets for calendar 2012.

Almost all the analysts are forecasting lower spending in tech versus a year ago.

We will continue to watch IT spending closely.

We had a particularly strong quarter contribution from the federal government in Q3, which is historically something we do not see in the quarter following the federal government year end.

And lastly, while EMEA had good year-over-year revenue growth in Q3, we continue to be cautious on the European economic IT spending outlook, as well as potential negative revenue impact from further weakness within the euro zone.

We will accelerate spending going into Q4 FY '12 and FY '13 in order to take advantage of our unique position in the industry to pick up additional market share.

In spite of the significant increase in spending, we still believe we can improve operating margins by approximately 100 basis points in FY '12.

For FY '13, we believe we are well positioned to achieve above industry average revenue growth rates and improved operating margins driven by strong market traction with Simpana 9, continued increases in sales effectiveness, added sales capacity, as well as broadened distribution.

We believe we will be able to achieve solid-digit revenue and EBIT growth in FY '13 as our forecast and visibility look promising.

In summary, the Company had another solid quarter and is in good position to successfully achieve our annual objectives for fiscal FY '12.

We are establishing a solid foundation for growth in FY '13.

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

The acceleration of revenues, earnings, and visibility over the past several quarters has enabled us to achieve our FY '12 financial objectives and increase the probability of achieving our objectives for FY '13.

I will now turn the call over to Lou.

Thanks, Bob.

And good morning, everyone.

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

Total revenue for Q3 was $103.6 million, an increase of 24% year-over-year, and 6% sequentially.

During Q3, revenue from US operations generated approximately 61% of total revenues, resulting in a 26% year-over-year increase, while revenue from international operations generated 39% of total revenues, resulting in a 21% year-over-year increase.

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

The revenue mix for the quarter was 50% Software and 50% Services.

In the prior year period, the mix was also split evenly.

For the quarter, we reported Software revenue of $51.4 million, which was up by 23%, or $9.7 million over the prior year period.

As Bob mentioned, our Software revenue from deals over $100,000 increased by 20% over the prior year period, and declined 8% over the prior quarter.

The number of enterprise software deals over $100,000 declined 2% year-over-year, and 29% sequentially.

However, our average enterprise deal size was approximately $269,000 during the current quarter compared to $219,000 in the prior year period, and $208,000 in the prior quarter.

This increase in the average deal size was driven by more deals greater than $1 million as compared to last quarter, as well as strong growth in high six-figure deals.

In addition, our SMB business grew 26% sequentially, primarily on the strength of our global SMB channel partners, dedicated inside sales teams, and some new specialized pricing bundles for the SMB market.

Services revenue for Q3 was $52.2 million, an increase of 25% year-over-year, and 5% sequentially.

Software revenue derived from indirect distribution channels represented 88% of Software revenue, which increased by $10 million, or 29% year-over-year, and $2.8 million, or 7% 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, including Dell Services accounted for approximately 23% of total revenues for the quarter.

Total quarterly Dell revenues grew 40% year-over-year and 12% sequentially.

Total revenue through Arrow contributed approximately 27% of total revenue, growing 22% year-over-year, and 6% sequentially.

Revenue contributions from our OEM agreements with NetApp and Fujitsu were in line with current-quarter expectations.

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

As a result, on a sequential basis, the US federal business declined 12%, but grew 44% year-over-year.

Our US government business remains a strong vertical for us, representing 8% of our total revenue for the quarter.

We added over 400 new customers in the quarter.

Our historical customer count now totals approximately 15,600.

Gross margins were 87% for the quarter, relatively flat sequentially.

Total operating expenses were $69.4 million for the quarter, up approximately 6% sequentially, and 21% year-over-year.

Sales and marketing expenses increased by $10.7 million, or 26% over the prior-year quarter, and $3.6 million, or 7% sequentially.

The increase in sales and marketing expenses is primarily due to higher commissions on record revenue and investments made in field sales and field technical resources.

We ended the quarter with 1,389 employees, up from 1,371 at the end of September.

We expect the number of head count adds in Q4 to be substantially higher than the heads added in Q3, as we continue to build out our sales and support organizations to meet our growth targets for fiscal year 2013.

Non-GAAP operating margins were 19% for the quarter, resulting in non-GAAP operating income of $19.6 million.

On a year-over-year basis, EBIT increased by 31%.

For the full fiscal-year 2012, we anticipate that our margins will improve by approximately 100 basis points over fiscal year 2011.

I would like to highlight one key spending increase in Q4.

Historically, we see a large sequential increase in employer-paid FICA expense in Q4 because many of our employees in the US reach the FICA limit well before the end of the calendar year.

This year, we expect our FICA expense in Q4 to be approximately $1.2 million higher than Q3.

For fiscal-year 2013, we expect to improve operating margins by approximately 75 to 100 basis points.

While we believe we could deliver greater margin expansion in fiscal year 2013, we are making strategic investments that enhance both our short- and long-term growth opportunities and advance our leadership position in the market.

As I said earlier, our head count adds in Q4 will be substantially higher than Q3, and we will invest heavily in the beginning of fiscal year 2013 on front-end technical support teams, as well as more sales professionals, as we are a high-touch sales model and we cannot successfully penetrate the enterprise segment of the market without these teams.

The non-GAAP net income for the quarter was $12.7 million, or $0.27 per diluted share, based on a diluted weighted average share count of approximately 46.8 million shares, and a 36% pro forma tax rate for Q3 of fiscal 2012 versus a 34% pro forma tax rate used in the prior year.

We anticipate that our annual average diluted shares will be between 46.8 million and 47.3 million for fiscal year 2012.

For fiscal 2013, we anticipate that our diluted weighted average share count will be approximately 1.7 million to 2.2 million shares higher than the fiscal 2012 diluted share count.

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

For the current fiscal year, we are using a pro forma tax rate of 36%.

We anticipate that the cash tax rate for fiscal year 2012 will be in the range of 20% to 25%.

We expect our cash tax rate to remain lower than our GAAP tax rate through fiscal 2013.

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

As of December 31, our cash and short-term investment balance was $257.2 million.

For the quarter just ended, cash flow from operations was $27.7 million.

Free cash flow, which we define as cash flow from operations less capital expenditures, was $26.2 million for the quarter, which is an increase of approximately 198% over the prior-year quarter, and an increase of approximately 171% sequentially.

For the quarter, our DSO was 59 days, which is down from 61 days in the prior quarter, mainly due to better linearity.

As of December 31, 2011, the Company's deferred revenue balance was approximately $130.8 million, which is an increase of $27.6 million, or 26% over the prior-year period, and up 5% sequentially over the prior quarter.

That concludes my financial highlights.

I will now turn the call back over to Bob.

Thank you, Lou.

I want to spend a few minutes discussing the new Simpana 9 innovations that were announced in our press release this morning.

I will also discuss more broadly our customers' key IT data and information challenges and why we are best positioned to address those challenges.

As part of our Simpana 9 press release, we announced an exciting industry first, Simpana OnePass.

Our new Simpana OnePass converges backup, archive, analytics, and deduplication into a single process, reducing combined operation time by more than 50% compared to traditional methods.

Simpana OnePass also enables customers to reduce data management costs, reduce business and compliance risk, and more easily extract data for better decision making with anywhere, any-time information access.

We also announced in the press release that Simpana SnapProtect now delivers the industry's broadest hardware snap integration which protects customers' existing SAN environments, eliminates the backup window, accelerates recovery, and reduces cost.

Our new Simpana Edge Protection protects data on laptops, desktops, with embedded source-side deduplication for optimized efficiency.

There are many other enhancements in this press release, including significant improvements in managing data in virtualized cloud and SharePoint environments.

Please note we will provide a lot more detail on these and many other enhancements to Simpana 9 at our Solve Forward 2012 virtual trade show beginning at 11.00 Eastern time today on our website.

Our objective with Simpana 9 is to provide solutions to solve the critical solutions of our customers.

Those issues include -- data continues to grow at faster rates than systems or budgets can support; keeping up with rapidly changing infrastructures, including virtualization, data center consolidation, new storage networks, and the cloud; demands for better scalability and performance; edge devices, including laptops and tablets are proliferating and that IT is mandated to support and ensure proper controls are in place to protect data on these critical corporate assets; assessing the mission-critical data that now resides in the data center, the cloud, and edge devices; figuring out how to support increasing regulatory compliance and eDiscovery requirements; and extracting data and use analytics for better decision-making.

Compounding all of those issues is the need to reduce infrastructure, administrative, and operational costs.

Our competitors are trying to provide solutions to the same issues, but are addressing the market in a very different way.

They offer a myriad of disparate point products that have proven to be very costly, less reliable, and more difficult to support.

In addition, each product has its own interface, catalog, and associated hardware.

The data stored on those products are siloed, making it more difficult to access and search data for compliance, regulatory, legal, and decision making.

We believe we are doing a better job solving our customers' challenges because we're able to solve their problems globally and holistically across all IT environments with one single platform that is ultimately less expensive, provides more functionality, is more reliable, and is much easier to support.

Not only do we have the most comprehensive platform in the industry, customers confirm that we also have the best in class products as part of that platform, and unrivaled customer support and services as well.

Clearly, CommVault is distancing itself from its competitors and doing a better job in meeting enterprise data and information management challenges.

Our results are a good indication of this.

Our objectives are to continue to increase our lead in innovation, with both products and services, expand into new markets, broaden and increase the effectiveness of our distribution, and improve our execution across the enterprise.

Let me spend another minute on OnePass and our new Content Store data repository.

As I mentioned, earlier CommVault's new Simpana OnePass is a very exciting industry-first innovation that converges backup, archive, analytics, and deduplication into a single process.

This is important because the merger of backup and archive makes it much simpler for administrators to establish automated policies that exactly match business and regulatory requirements, and be assured that those policies are carried out.

The initial release is targeted to Windows file systems.

We expect to deliver OnePass for other file systems and applications at a later date.

The other exciting key element of our OnePass innovation is Content Store.

With Content Store, customers will be able to store data from a multitude of locations and sources into a single enterprise-wide repository.

In summary, Content Store is an intelligent virtual repository that provides an efficient and scalable foundation for eDiscovery, retention, and decision making.

The key benefits of OnePass and Content Store are compelling.

They will enable our customers to lower costs by reducing the number of copies to be managed and applying deduplication at the source, simplify the management of data into a single set of unified policies, dramatically reduce the backup window by moving the data only once with SnapProtect, and using Content Store for regulatory and compliance and to enable more intelligent, timely decision making.

CommVault will continue to be a visionary in the industry, guided by our Solving Forward philosophy, we are committed to being the innovative leader in the market.

In this regard, in addition to the Simpana 9 enhancements announced today, we have the strongest product pipeline in our history.

In closing, we believe CommVault's financial performance relative to its peers has improved due to accelerating product innovation and increasing technology differentiation, better sales execution, increased brand recognition, and improved distribution.

We have also been able to achieve good operating margin improvement and increase shareholder value.

Our objective this quarter is to meet our quarterly goals and establish good momentum going into FY '13.

We are making all the necessary investments to strongly position the Company for the longer term.

We are currently tracking ahead of our schedule to achieve our $1 billion plan objective.

We are accelerating product and services innovations, continuing to prove sales effectiveness, distribution leverage, and broader brand recognition.

I am highly confident that we will continue to lead the industry in revenues and earning growth.

I will now turn the call back over to Michael.

Thanks, Bob.

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

(Operator Instructions)

Joel Fishbein, Lazard Capital.

Congrats on a wonderful quarter.

I just have a couple clarifying questions -- one clarifying question and then one follow-up.

Bob, I just want to reconcile what you said about margins.

It's clear that you guys want to reinvest in growth.

And in fiscal '11, you did roughly 17% operating margins, and you're on track to do 18%, roughly 18%.

I just want to make sure that I understand in terms of what you're saying about your Q4, are you planning on being down sequentially in terms of operating margins because of reinvestment, or how should we think about Q4 which has usually been a strong operating margin quarter for you?

As Lou said, we could do better, but we are significantly making major investments this quarter.

You're going to see it show up in our head count.

We could do better.

We think the prudent thing to do is provide approximately 100 point guide of operating margin improvement for Q4.

So that would imply that we could be down quarter-on-quarter.

Okay.

Down quarter-on-quarter on Q4, but up -- it will be up 100 basis points for the year?

That's correct.

Okay.

I just want to make sure.

Second thing, $257 million in cash didn't buy back any stock, what are your thoughts there in terms of use of cash and how much cash do you need to use to run the Business?

Well, we don't need very much cash to run the Business obviously, but we've got -- we're always opportunistic in our buyback approach and we continue to be opportunistic in that regard.

We also have for the future, we have some other ideas on where to deploy cash and when those firm up, I'll discuss those further.

Does that mean that you may turn to M&A now for, to enhance growth?

No.

Okay.

The $1 billion plan is clearly at this point all organic and as I mentioned in my earnings comments, we are ahead of schedule to achieve that objective and our attention -- that's why we're making these big investments now, because I think we can stay ahead of schedule hitting that critical objective.

Great.

And then the follow-up is just in terms of any more color on some of your partnerships that you have?

Lou made some comments about NetApp and Fujitsu, but love to get any more color that you can give in terms of how they're helping you expand your distribution and hit that $1 billion target?

Well, what I'll say first off is that our current enterprise sales execution and our current distribution capability is clearly providing above-target level results without those two additional partnerships, which is really gratifying.

Fujitsu clearly is right on track, or maybe a little bit ahead of their schedule.

NetApp hit its objectives for the quarter, but over the longer term, it's slightly behind schedule, but we expect to see a significant step up from NetApp in the March quarter.

Okay, great.

Thank you so much.

Eric Martinuzzi, Craig-Hallum.

You broke up on the growth outlook commentary.

Were you saying double-digit for FY '13?

Was that correct, Bob?

Correct.

Okay, and just given where we've -- if I could follow up or bring it back to the current year, if I look at the organic growth, it's been very impressive for the nine months.

We're a little over 30% and our street consensus number's, about 16%, 17% for Q4.

Is there any reason at least top line why that -- maybe I should ask it a different way.

What's your comfort level with the street revenue estimate for your March quarter?

We are comfortable with the street estimate for our March quarter.

Thank you.

Jason Ader, William Blair.

I guess just on that last point, Bob, the last two fiscal years you saw sequential growth in Q4 actually below sequential growth in Q3 and I was wondering if you could comment on that and whether that's sort of a new pattern or just nothing too, no pattern to speak of.

And then secondly, just on the new Simpana capabilities announced, do you think that this could slow down the sales cycle at all because there's so much new that you guys have just made available and customers need to evaluate it, or do you view it as not missing a beat?

On the second point, we won't miss a beat and it will clearly help us achieve our FY '13 objectives, because these are substantial improvements to the platform and we can talk about that a little bit more later.

As far as the Q3 to Q4, I mean, the issue is -- these are just comp issues.

Year-on-year comparative issues, as I said last quarter, the comps are tougher, and we had a very strong Q4 a year ago.

So that's all it is.

But the underlying strength of the Business is definitely improved.

I guess my question is, would you normally expect Q4 to see the largest sequential growth in your fiscal year?

Is that -- I mean, I guess that was the way it was prerecession if I look at the numbers.

But the last two fiscal years --

I think we're achieving more consistent quarter-over-quarter growth rates.

So I don't think the prior patterns are -- historical patterns may not be as relevant through the year -- are able to hit our targets and you can see it in our DSO with higher visibility going into the next quarter.

Okay, thanks.

Robert Breza, RBC Capital Markets.

Congratulations on the quarter.

Bob, I was wondering if you could talk a little bit more about the investments you're making here in Q4.

You talked about increasing the high-touch sales force.

Do you also plan to make additional distribution expansion such as the NetApp relationship, Fujitsu, et cetera, when might we expect to see some of those announcements?

The key investments are in our field sales capacity, and we are making -- and Al can talk about this here in a second.

I'll let him comment on it.

We are making significant investments in our field-facing technical resources, and this includes our technical account management, solution architects, those types of investments are critical for us to penetrate larger and larger enterprises globally.

And Al's had an initiative here.

We are executing it.

I'll let Al comment on it for a second.

Yes, what Bob said is quite accurate.

Of course, again, we're trying to focus our investments on the technical side of the equation, particularly field-facing or customer-facing type of resources out there, and that includes the continuum of early presales guys, solution architect as Bob mentioned, even our professional services organization, and there we are also beefing up our capabilities around enterprise offering.

So it's a stream of resources and head count fields that we are focused on for this quarter.

Maybe as a follow-up Al, when you look at the capacity that you're adding, I was wondering if you could kind of talk to us quantitatively about the capacity you're adding versus, or as well as the productivity improvements you're seeing over the distribution.

That would be helpful.

Thanks.

Well, I could, but I won't.

We normally don't talk about those things, Rob.

But you're right on the money.

We think, particularly in the enterprise environment, these types of resources are critical to not only customer success and customer satisfaction, but our productivity, if that makes sense to you.

And I mean it starts right from these POCs out there.

They are complex.

They are demanding.

And you need to have a strong contingent of technical resources right on hand there.

So that's where the focus is going and that's where the investments are going.

You're right on one thing, Rob, and that is we have beat our internal productivity targets.

So we're ahead of our objectives in that regard.

And that comes from more effective execution from our sales force and much better distribution leverage, not only in the enterprise, but as Lou mentioned, we have gotten, now had really good success in the SMB market through inside sales, better distribution leverage, and Al and the team have worked on doing a much better job of bundling products and pricing for that segment of the market.

So when you see well above 20% growth in SMB combined with the strength of our enterprise, that provides a lot of balance across the whole spectrum of customers and for data and information management.

Rajesh Ghai, ThinkEquity.

Congratulations on the strong quarter.

Couple of questions on your capacity licensing model, if I may.

Based on your experience over the past year and quarter since you launched Simpana 9, can you tell us what percentage deals are now involved with new pricing model and how soon are typically customers come back to augment capacity, the original capacity that they bought and how much has that addition typically been?

Yes, as Lou said, or I said, it's approximately two-thirds of our license revenue was capacity-based.

And that has been increasing quarter-over-quarter.

And the renewal on that, I don't think we have enough data yet to say what that's going to look like, but clearly customers are starting to add additional capacity from their original capacity-based licensing deals.

And yes, it's still a little bit too early for us to comment on what that annuity is going to look like.

On average, how soon are they coming back and typically how much extra is that augmentation typically?

Can you give us some ball park numbers?

Well it's like Bob said Rajesh it's too early to say.

Averages don't mean much, but, again, it's positive there, from what we've seen early on.

Sure, and you typically have an 18-month development cycle, so we just put the release, the next major release around April 2012 timeframe.

So given that you just announced some product announcements this morning related to Simpana 9, is that major cycle the one that you're announcing today, or is there going to be something that's going to come out in April?

I think what you're seeing Rajesh -- good question.

We are on a much, we are on an accelerated release cycle.

So we take Simpana 9, we released it.

Then as a series of interim releases between the Simpana 9 and our next major platform release.

And we'll have, we'll continue to release additional enhancements to 9 throughout 2012 calendar.

I would say that we are on track to probably release the next major platform a little bit earlier than the April timeframe you suggested and it will be significant.

Does that pose any risk to the current quarter if you have a major release come out in the fourth quarter?

No.

We have never, we have managed that really well in our 12-year history and now we've got I don't know how many, 30 major releases out there.

We've never had a negative impact from our release ever.

Great.

Thank you so much.

Aaron Rakers, Stifel Nicolaus.

Congratulations on the quarter.

First, I just want to understand one thing that was brought up earlier.

Lou, you had mentioned about the FICA tax rate, or tax implication.

Can you remind me again what that was?

And I believe when you add non-GAAP to numbers, if that's included in what you back out from a non-GAAP operating margin basis, or put another way, if I heard you right, looks like that adds about a percentage point to the non-GAAP gross margin.

I just want to understand how to think about that in the context of what that would therefore then imply.

You're telling us on a non-adjusted non-FICA-impacted operating margin.

I was talking about GAAP numbers.

I was talking about increases to our operating expenses.

We have US employees who reached the FICA limit early in the year.

So what happens in the fourth quarter of January through March is the FICA comes back.

So that's going to add to our operating expenses incrementally over Q3, roughly $1.2 million.

And so that is not the FICA expense that's backed out of the non-GAAP number?

That FICA expense is just related to stock option exercises and has to do with the FAS 123R expense.

Okay.

Okay.

And then as a follow-up, clearly you guys have a lot of traction on the enterprise deals and you're getting into larger deals.

But one of the metrics you threw out there was a down enterprise number of deals, down I think 2% and 20%, or something like that sequentially.

Were there deals in the pipeline that it all kind of pushed out at the end of the quarter, or can you give any context around that decline in the number of deals that you saw this last quarter?

I think what we said Aaron is our visibility improved which basically implies that we have a strong pipeline of large deals going into Q4.

Okay.

Thank you.

Michael Turits, Raymond James.

Back on the seasonality question, typically in the last couple quarters, you've done kind of mid-single digits, 5%-ish license growth into the fourth quarter.

Is there any reason why, whether it's because of the strong federal quarter or something else that we wouldn't see that typical kind of seasonality this quarter?

I think what we said, Michael, is that we're comfortable with street consensus at this point.

And on the Services side, is there any reason why you should start to see better seasonality there in fourth quarter?

In other words, are you starting to see maybe more coterminous and early in the quarter renewals that would make that a stronger seasonal or quarter-over-quarter rate in that fourth quarter?

I don't think so.

The issue is we grow as a Company, your seven-figure deals for example have a lower maintenance rate as a percent of sale attached to them, so you've got -- obviously that whole differed and maintenance growth rate has been going up dramatically, because we got very high license revenue growth.

But no, I wouldn't apply that you get a kick although it's possible if we have really, really good linearity you might see some improvement there.

Okay, and then the last question, when you say other uses of cash, not buybacks, not M&A.

What you've used cash for in the past so I would assume is more related to the channel.

Anything you can tell us about what we should expect?

Is there another -- is your idea to make another big investment in the channel partnership that would require some cash?

No, no.

No.

But, but we do have some opportunities for additional channel leverage besides the ones that we have today.

So we may be able to talk about it on the next couple quarters.

Glenn Hanus, Needham.

Congrats.

Lou, maybe you could spend a minute on the R&D investments in the near term here.

Are you also accelerating that?

And can you talk to the extent you're willing, a little bit more about the pipeline and what kinds of capabilities to expect from you as you roll out further enhancements to Simpana 9 and then Simpana 10?

Right.

The reason I didn't mention those things on this call was that I just didn't want to confuse the message with the R2 release today.

We will comment a lot more on those in our next earnings call.

I'll tell you that Al and the team have done an awesome job here of accelerating innovation.

I'll just leave it at that.

But on a relative basis, our pipeline of innovation is up substantially, and Al is increasing investment in dev to accommodate that.

I don't know if you want to just give a broad commentary on where we're going on data information management in terms of scale or something, areas that we are focusing on.

Yes, Glenn, Bob's right.

We're cranking up our investment a little bit more in R&D.

Our overriding objective going forward is to put distance between us and our competitors.

I mean, myself, my dev teams, product teams, that's our objective.

Again, as Bob is alluding, we're seeing a lot of opportunities particularly around the dynamics.

Bob talked about if you have this continuing march of data growth out there, and so a lot of things we do are focused on scale and performance.

You're also seeing an increasing need and awareness and openness to be able to use that data, so ideas around analytics and access to that information are all driving parts of our innovations and product and technology sets going forward.

On a broad basis, that's what we're doing and that's what we're trying to do.

Thank you.

Brian Freed, Wunderlich Securities.

I wanted to get a little bit more clarification around your guidance.

You guys have expressed comfort with consensus, which is about $105 million and as I tried to apply the 100 point gross margin improvement for the year, that implies about 180 basis points sequential decline in Q4, about $2.9 million in incremental OpEx and an EPS of $0.24, consensus is $0.27.

Am I applying that all right?

I think your math is correct.

Okay.

Aaron Schwartz, Jefferies.

I don't know if this is for Bob or Al, but you guys are talking more about analytics and intelligent decision making and solutions in that area.

As you move forward with this, do you think you need to sell to different folks within the enterprise and broaden those relationships, or will you still sell to the same relationships that you have?

Yes, so the key, if you think about it conceptually, first you got to get data off the front end.

As Al said, you got this massive scale.

You got to find ways to get data off efficiently and so when we talked about SnapProtect and then combining the archive function with backup and then moving it into a universal repository, that's your foundation for any, I would call it information-based applications.

And it's unique in the industry in terms of scale, performance, the ability to do it efficiently from a cost standpoint.

And then as Al mentioned, you got to get the data back in a very efficient way.

And those innovations that we talked about this morning are dramatic improvements of what's traditionally been used in the industry.

Once you've got it, you've got self-control of the content, now you've got a repository where you can put analytics and start to provide vertical solutions to solve real business problems within the enterprise in addition to your compliance, legal, and E-Discovery requirements.

So the answer is yes.

Once you start to move into vertical and the solutions, you're now starting to sell to other functions within the enterprise, absolutely, which implies new channels, new overlays, verticalization, as the Company over the next few years transitions to that type of value-add, lot of implications to that.

The good news is that our underlying business is strong and we have built a foundation from which to transition the Company over the next three to five years to much higher value-added, higher-growth segments of the market in a way that nobody else can do.

Okay.

That's helpful.

And then, Lou, on the cash flow the collections were extremely good in the quarter, you talked about the linearity.

Was there anything -- did you guys just have very large transaction early on in the quarter?

Is there any more color you can provide on the strong collections?

It's better linearity and good collections.

It wasn't just a few transactions.

It was across the board, better linearity.

Okay, and one more for me, if I could.

But a few people have asked about the cash.

Maybe I'll try a different angle here, but should we expect any sizable cash outlay for either headquarter expansion or something in that context as you continue to hire?

We are clearly running out of space here, and we do have to do something about it, and that's one of the areas we are exploring, which is a new headquarters.

But that's in an exploratory phase.

But at the growth rate -- if you think about where we are today, let's call it a, consensus, around a $400 million Company going to a $1 billion.

When you get there, and it's going to happen in the relatively near future, then we got to do something about our headquarters.

Gary Spivak, Noble Financial Group.

Congratulations on the good quarter.

Most of my questions have been answered.

But I wanted to ask, Bob, to the extent that there are disruptions in supply for disk drives and storage manufacturers, how do we think of that as exposure for you?

And how much is sold alongside storage, and is it actually a positive benefit in that if prices need to now get by with more with what they have?

Yes, it's both.

Enterprise always has to get by with, has to get by with less.

So that's -- every enterprise is looking to reduce costs and reduce their spend on storage.

So that is an underlying demand requirement in the industry.

In regards to disk drive shortages, last quarter we saw none.

There are some of the historic vendors that are seeing some disruption in disk supply.

It has minimal or no impact on us, but it's not zero.

There are some of the storage suppliers that have seen some disruption in supply, but it hasn't affected our ability to hit our objectives.

I think we have one more quarter of that and then I think we're over it.

Okay, thank you.

(Operator Instructions)

Rob Owens, Pacific Crest Securities.

Could you guys give us a little more color on the formation of the ECS practice and should we view this as just a normal evolution of the Business, or has to do more with the increased complexity around Simpana 9 and some of the new functionality, or has a lack of pro services been a gaining factor in your opinion in driving license growth?

I guess secondarily as you look out over the next couple years, how much should professional services contribute to revenue?

I guess there are several questions in there.

Around the enterprise consulting services that we've put out there, I think that's primarily a response to more and more activity in the enterprise segment.

We wanted to improve our products, products being defined as services offerings here in that environment, get more consultive, get more architectural, get more trusted advisor-like in our capabilities there.

We have the talent.

We just needed to develop the programs.

I wouldn't say -- I wouldn't necessarily agree with your comment that we've had a lack of PS offerings in the past, or that it's impacted or held down any of our growth.

Again, it's more a function of the focus into enterprise environments, and we think we're well positioned to take advantage of our position and our capabilities.

I would add Al's done a lot of work on just the process of insuring that our customers have the right solutions to find, implement it, and manage in a most effective way.

And that requires I would say significant upgrades to the resources we apply whether it's solution architects or technical account managers and the way of the process they are deployed.

So Al and the team has done a lot of work on this over the past 12 months to understand and determine what's required and then develop and implement a strategy, which we're executing right now.

In addition, we have seen a large acceleration in our penetration of enterprise accounts, and as Al mentioned, with that acceleration, you got to add the resources to make sure that we can service these accounts in the proper way, from an upfront design of the right solution to solve their core enterprise and data and information management problems.

Just in terms of overall revenue contribution, is the expectation over the next few years this will remain small, or could we see this be a 10% type revenue item two years out?

It could be, it could be a 10% revenue item two years out.

Great.

Thank you.

Joel Fishbein, Lazard.

Sorry, I know you thought you were done with me, but I just have a quick follow-up, because I think there's a little bit of confusion over the EPS guide and I was hoping that you might be able to help me out.

I know you don't give specific guidance, but I think one of the analysts asked you a question about his math and whether the math is right.

But I've done the math a little bit differently and I can -- staying in line with your comments, I can still be at $0.27 for 4Q and I want to make sure that my math's okay as well.

Yes, I mean I think what we're saying, Joel, is that I -- the 100-basis point guidance implies a sequential down.

As Lou said, we could do better, but we are making big investments and we think it's a prudent guide.

I don't know if that's helpful for you.

Right.

But again, I just want -- not to beat a dead horse, but your year-over-year revenue growth assumptions by the street are roughly 18% year-over-year in Q4.

You've always done better in Q4.

I know you had -- you're running up against tougher comps.

And that implies that even if you take the, the numbers, the operating -- you spend more money, it's tough to spend that much money in a quarter, but even if you do ramp up to spending, that even with the lower operating margin, higher revenue, that you're still going to be flat to up on an EPS basis.

I think we would -- the implication is flat to down, not flat to up in terms of the math.

Okay, thank you.

At this time, we have no further questions.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.