Commvault Systems Inc (CVLT) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to CommVault's first fiscal quarter 2013 earnings call.

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

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

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Michael Picariello, Director of Investor Relations.

Please go ahead, sir.

Good morning.

Thank you for dial in today for our fiscal first quarter 2013 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 statements made during this call, including the question-and-answer session at the end of the call, that relate to future results and projections, are forward-look 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 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 earlier today and is also been referred 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 web-cast.

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

I will turn the call to our CEO and President, Bob Hammer.

Thanks, Mike.

Good morning, everyone, and thanks for joining our fiscal 2013 earnings conference call.

I am pleased that we had a solid start to fiscal 2013.

This is especially gratifying since Q1 is typically our most challenge quarter, and comes after a very strong Q4 fiscal year '12.

CommVault had good results in all key aspects of our business and across all geographies.

Our positive Q1 results are indicative of continuing good underlying demand and the strength of our products, services, and distributions.

This positive momentum is continuing into Q2.

Let me briefly summarize our financial results.

For the quarter, total revenues were $111.3 million, up 22% year-over-year, and down 2% sequentially.

Software revenue was $52.2 million, and grew 24% year-over-year, and was down 8% sequentially.

License revenue growth in Q1 was driven primarily by our continued success in penetrating large enterprise accounts globally.

We'd also had excellent results from our services and support organizations.

Services revenue was $57 million and grew 19% year-over-year, and 3% sequentially.

For the quarter, non-GAAP operating income, EBIT, was a record $22.6 million, up 49% year-over-year, non-GAAP EBIT margins were 20.3%.

Non-GAAP diluted earnings per share for the quarter were $0.30.

Please note that, given the economic uncertainty, we prudently controlled our planned spending during the quarter, which contributed to our over achieving our forecast at EBIT margin goal.

However, we will continue to make the proper investments in order to achieve our future revenue and earnings growth objectives.

Let me spend a minute speaking about the macro environment.

At the present time, we continue to see good underlying demand for our products across all geographies, vertical market segments, and distribution channels.

We're not naive about the current economic climate and are well aware of the uncertainty of future demand.

However, with the exception of a few minor issues, we have not yet seen any material slowdown in the demand or buying patterns for our solutions.

Please note, our quarter started well and ended well.

We continue to significantly outpace the growth of the market and pick up market share.

Our overall funnel and big deal pipeline growth indicate healthy demand for our products across most geographies.

The competitive strength of our technology services and support, in combination with our sales force and key distribution partners, have thus far enabled us to navigate well through the current economic slowdown.

We do anticipate that IT spending will continue to come under a negative pressure for the remainder of calendar 2012 and we assume the fight for the same budget dollar will ultimately get tougher.

However, a primary value of our software is significant cost reduction, versus competitive solutions, as well as helping to solve key regulatory requirements and compliance problems.

Those objectives remain high priorities for both companies and governments when considering data and information management solutions.

We have good visibility going into the remainder of our Q2.

Given our positive near-term and fiscal year '13 outlook, we will continue to have strong hiring in Q2.

I want to talk a little bit about our Gartner Magic Quadrant position.

I'm happy to say that CommVault once again earned the strongest position in the leadership quadrant of the coveted 2012 Gartner Magic Quadrant for Enterprise Backup-Recovery Software.

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

I encourage you to review the report available through our website at www.CommVault.com.

In its latest report, Gartner states that, by 2015, at least 25% of large enterprises will have given up on conventional backup recovery software and employ snapshot and replication techniques instead.

And by 2016, once organizations will change backup vendors due to frustration over cost complexity and-or capability.

Gartner also states that organizations are increasingly making their backup product selection from vendors that offer expanded protection capabilities and techniques, in addition to traditional tape-based backup software.

CommVault anticipated these custom needs and built capabilities into Simpana that enable customers to extend the value of existing hardware investments through industry leading integration and innovation.

Specifically, CommVault's IntelliSnap provides hardware snapshot management without custom scripting or solutions, and the new Simpana OnePass feature is the industry's first converged processor backup archiving and reporting.

Awards and recognition from respected independent third parties such as Gartner have clearly raised our stature in the industry and is positively impacting our ability to penetrate the market.

We remain the only company in the industry with a singular fully integrated platform that is more cost effective, reliable, functional, scalable, and more automated than any of our competitors.

Please note, however, that we never rest on our laurels and will continue to push boundaries of industry leading solutions.

I will elaborate on our strategic objectives and product visions later on in the quarter.

Let's talk about our penetration of the Enterprise.

There is no question that our execution in the Enterprise segment of the market has improved since we made the sales force segmentation transition two years ago, and we successfully completed an enhancement to that segmentation in Q1.

Enterprise deals in Q1, which we define as deals over $100,000 in software revenue, represented 56% of license revenue, and grew 32% year-over-year.

Enterprise deal (inaudible) on our growth continued to be encouraging.

These stats validate the fact we are continuing to gain strength in the Enterprise segment, despite both competitive and macro economic concerns.

For the remainder of fiscal year '13, we will continue to work on optimizing our relationships with our current key distribution partners, develop other meaningful distribution channels and partners, and continue to build out our direct sales force.

As we have clearly stated in the past, our CommVault Enterprise sales force is a primary driver of license revenue growth.

Now, I want to comment on our Dell relationship.

Sales through our Dell relationship accounted for approximately 20% -- 2% of total revenues for the quarter.

Total quarterly Dell revenues grew 27% year-over-year and declined 10% sequentially.

Please note, the majority of Dell revenues come from our install base and in Enterprise accounts where sales force has heavy, hands-on involvement.

I will briefly comment on Dell's recent acquisition since it is clear from some recent reports that the positioning of Dell's technology versus CommVault is not fully understood by all those following the Company.

Dell's recent acquisitions are a good fit for them in their current market segments and channels.

Dell, as we stated on the last earnings call, will very aggressively market their newly acquired products and will be some overlap.

Please note, we can and will effectively manage that overlap.

As stated on last quarter's earnings call, we will continue to work diligent with Dell and the Enterprise segment of the market where we have highly differentiated, innovative solutions based on our unique software platform.

Through joint cooperation, we will provide meaningful data and information management solutions for our mutual customers.

Let me comment on our new headquarters.

As I mentioned last quarter, we are in the process of purchasing a piece of land close to our current headquarters.

This property is well-suited to build a new corporate headquarters and has room for future expansion.

We have not yet completed the land purchase transaction yet, but expect to do so by the end of the current calendar year.

In the meantime, we have begun work on the design of the site and the design of the headquarters building.

As we get further along, I will update you on the potential timing and estimated capital expenditure of the project.

At this point, it's still too early in that process to provide details.

I will say we expect to run out of space in our current facility within three years.

We also believe, given our strong cash flow and low returns on our cash balance, that the investment in a new facility would be a good use of cash.

I will now address our current Outlook.

Enterprise deal full momentum and funnel growth continue to track well and we have good visibility to our current quarter forecast.

The fact that we had a solid Q1 provides that foundation for the remainder of fiscal 2013.

We continue to believe we will be able to achieve solid double-digit revenue and EBIT growth for fiscal 2013.

While we had a good Q1, and have good momentum entering Q2, I would like to add the following words of caution regarding future Outlook.

Major third-party analysts continue to forecast lower tech spending in calendar 2012 versus 2011.

Again, as said earlier, although we haven't seen it yet, applied for budget money will likely become harder as the year comes on.

As we are in an election year, there's additional uncertainty in the public sector and we are particularly cautious as the US Federal Government remains a significant vertical force.

While our media operations had a good year-over-year revenue growth in Q1, we continue to be concerned about the European IT spending outlook, effective of the EMEA economy are currently in recessions.

In addition, there's earnings risk related to our decision to increase investment and operating expenses across all segments of the business and if we miss our revenue targets, it would be a negative impact to earnings.

In summary, the Company had another solid quarter and has established a good foundation of fiscal 2013.

We believe we are well-positioned once again to achieve well-above industry average revenue growth rates and improve operating margins driven by strong market traction with Simpana, continued increases in sales affecting this in capacity and broaden distribution in fiscal 2013.

On a separate note, and before I turn the call over to Lou, I want to spend a minute on the divergence of views about CommVault in the industry.

One of the reasons that the views on CommVault differs is because this is a very complex industry to understand with rapid changes in both technology and in the competitive landscape.

The current economy creates more uncertainty.

We know, given the pace of change, that it is difficult for people on the outside to see what we see or have the comprehensive understanding of our value to our customers or our competitive differentiators.

We always try to deliver sufficient information to provide a clear perspective to what is driving our revenue and earnings growth and any potential threats to our near-term or longer-term growth trajectories.

At the end of the day, we will let our strong financial results and consistent track record of innovation validate what we are saying.

For example, we have consistently communicated that our financial objectives has been and are to deliver well-above industry average revenue and earnings growth rates while improving our operating margins.

We have obviously accomplished those objectives over the as six years with compounded annual revenue growth of 25% and compounded EBIT growth of 37%.

Going forward, we have a clear path to well above industry average financial performance, which I will overview after Lou's comments.

I will now turn the call over to Lou.

Thanks, Bob, and good morning, everyone.

I will cover some key financial highlights first quarter fiscal year 2013.

Total revenues for the quarter were $111.3 million, representing an increase of 22% over the prior-year period.

We reported software revenue of $54.2 million over the quarter, which was up by 24%, or $10.4 million over the prior-year period.

Software revenue represented 49% of our total revenues for the current quarter, compared to 48% in the prior-year period.

The increase in software revenue is primarily due to higher software revenue derived from our international operations, which increased 55% over the prior-year period.

The growth in international software revenue is primarily due to increased sales in Europe, Australia, and Canada.

Software revenue from Enterprise transactions represented 56% of software revenue in the current quarter, versus 52% in the prior-year period.

This increase was driven by more million-dollar-deals in Q1.

Software revenue from deals higher than $100,000 increased by 32% over the prior-year period and was down 5% from the prior quarter.

The number of Enterprise software deals higher than $100,000 increased 24% year-over-year, and declined 23% sequentially.

Our average Enterprise deal size was approximately $288,000 during the current quarter, compared to $269,000 in the prior year period, and $235,000 the prior quarter.

During Q1, the strength of our business was driven by strong demand for virtualization, source ID duplication, and snapped-based modern data protection solutions.

We continue to see an increased demand for our capacity-based licensing models, which makes it much easier for our customers to purchase multiple elements of the Simpana platform.

Approximately two-thirds of our software revenue in the current quarter was comprised of capacity-base licensing models.

Services revenue for Q1 was $57 million, an increase of 19% year-over-year and 3% sequentially.

For the quarter revenue from US operations generated 57% of total revenue, resulting in a 13% year-over-year increase, while revenue from international operations generated a balance resulting in a 35% year-over-year increase.

Our US Federal Government business was strong and grew approximately 31% year-over-year and 45% sequentially, representing 8% of total revenue for the quarter.

In addition to US Federal Government business being strong, we had a very strong quarter in Financial Services.

Software derived from indirect distribution channels increased 39% over the prior-year period.

The increase in software from indirect distribution channels is primarily due to higher dollar value Enterprise deals in our international locations.

However, most sizable deals, regardless of geography, are driven by our direct sales force, even though they are transacted through the channel.

For the quarter, total revenue through Arrow contributed approximately 27% of total revenue, growing 29% year-over-year and 11% sequentially.

We added over 400 new customers in the quarter.

Our historical customer count now totals approximately 16,600 customers.

As a reminder, approximately two-thirds of our quarterly software revenue comes from our existing installed base.

Gross margins were 86.4% for the quarter, compared to 87% in the prior-year period.

The decline in gross margins is primarily the result of increased costs due to the expansion of our world-wide customer support operations.

Total operating expenses were $72.4 million for the quarter, up approximately 14% year-over-year and down 6% sequentially.

Sales and marketing expenses, as a percentage of total revenues, decreased to 48% in the current quarter from 51% in the prior-year period and 52% in the prior quarter.

The sequential decrease in sales and marketing expenses is mostly due to higher compensation in Q4 associated with sales reps attaining higher commissions on over-quota attainment, which typically occurs in the fourth quarter of most fiscal years.

Non-GAAP operating margins were 20.3% for the quarter, resulting in operating income of $22.6 million.

Q1 EBIT increased by 370 basis points year-over-year, and 180 basis points sequentially.

The combination of lower overall costs associated with our sales (inaudible) strategy implemented in Q1, as well as our controlled spend, due to general macroeconomic concerns, resulted in a better-than-anticipated operating margin improvement.

In Q2, we will invest in customer-facing sales and technical resources as we continue to penetrate the enterprise segment of the market.

For the remainder of fiscal 2013, we expect to continue to make investments that will help us to deliver solid double-digit revenue and earnings growth.

With this in mind, we expect to improve fiscal year 2013 operating margins by approximately 100 basis points.

We ended the quarter with 1,508 employees, up from 1,437 at the end of March.

In Q2, we expect that our field resources and support hires will increase at a similar pace to the prior quarter and our development hires will increase at a higher pace in Q2 versus Q1.

Net income for the quarter was $14.4 million, and earnings per share was $0.30 per share based on diluted weighted average share count of approximately 47.6 million shares.

On a year-over-year constant currency basis, foreign currency movements had a negative impact on earnings per share of approximately $0.02.

On a sequential constant currency basis, there was a negative impact on earnings per share of approximately $0.01.

We will continue to use a pro forma tax rate of 37% for fiscal year 2013, which is higher than the 36% rate we use in fiscal 2012.

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

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

For fiscal year 2013, we anticipate that our diluted weighted average share count will be approximately 1.1 million to 1.6 million shares higher than the fiscal 2012 diluted share count.

As of June 30, our cash and short-term investment balance was $320.1 million, up 7% at the end of fiscal 2012.

For the quarter just ended, cash flow from operations was $17.9 million.

Free cash flow, which we define as cash flow from operations less capital expenditures, was $16.2 million, which is a decrease of 45% over the prior-year quarter and 43% sequentially.

The decrease in free cash flow is a result of changes in working capital on the balance sheet.

In particular, approximately 75% of the year-over-year decrease in Q1 operating cash flow was due to large payouts related to record Q4 fiscal 2012 commissions and year-end bonuses, as well as an additional pay period in the current quarter, versus the prior-year quarter based on timing of our biweekly pay schedule.

As of June 30, 2012, the Company's deferred revenue balance was approximately $144 million, which is an increase of $25.9 million, or 22% over the prior-year period and down 2% sequentially.

The sequential decrease in deferred revenue is due to a combination of a negative foreign exchange impact and a higher balance of deferred software that was on the balance sheet at the end of March and was subsequently recognized as revenue in Q1.

Please remember, typically our deferred revenue balance is comprised mostly of deferred maintenance.

For the quarter, our DSO was 51 days, which is down from 53 days in the prior quarter, and down from 67 days in the prior-year period.

The lower DSO was primarily due to improved linearity in the quarter.

That concludes the financial highlights.

I will turn the call back over to Bob.

Thank you.

Thank you, Lou.

I will now spend a few minutes talking about our strategic objectives, some new product visions, and product functionalities that we are planning to bring to market in late 2012 and early 2013.

Please note, the development and timing of any release, as well as any of its features or functionality, remain at our sole discretion.

As I stated earlier, our financial objectives have been, and are, to deliver well-above industry average revenue and earnings growth rates, while improving operating margins.

As we have stated in the past, operating a margin improvement will come primarily from increasing sales productivity.

However, revenue growth will come from delivering innovative data and information management products and services.

CommVault's mission has always been to provide innovation, innovative solutions, that both provide the most value to and increase our relevance to our customers by solving a broader scope of data and information management problems.

Our goal is also to provide the most comprehensive services in the industry and industry's best support.

Additionally, we always make sure we're highly differentiated from our competition with significant advantages in regard to cost, functionality, performance, scale, and reliability.

Looking forward, we believe there will be major changes in technology and customer requirements over the next several years.

These changes will impact how solutions are delivered, implemented, and supported that will result in dramatic changes to the competitor landscape.

We have a good track record in staying way out in front of changing market requirements and our competitor's products and services.

We continue to stay in the forefront as a leading innovator in the industry.

CommVault is not the Company we were three years ago and will not look -- and we will look quite a bit different three years from now.

We have a very deep, broad pipeline of new products, services, and innovations.

We are currently developing next generation solutions for data management to reduce cost, improve performance, recovery scale, and security; next-generation innovative archiving; the convergence of the IT infrastructure; shared services environments; cloud infrastructures; the management of IT operations; advanced ways to deliver products and services; a series of new, innovative services; the management of data at the edge, which includes laptops, mobile devices, with any time, anywhere secure access of data; easily and cost effective securing ways of protecting and ensuring clouds in the cloud; next generation decision-making capabilities; and an analytic solutions tied to the convergence of data types and sources.

I want to confirm that, over the next three to nine months, we plan to bring to market significant enhancements and new product capabilities to our software platform.

So we're not just talking about ideas and concepts.

We will bring new products and solutions to market in the very near term.

These include enhancements to Simpana, which we will release this fall, and the possibility of a significant new release beginning the first part of calendar 2013.

These enhancements will include enhancements to Simpana software's data management capabilities that address issues related to the scale of data, management of smart mobile devices, document sharing, and secure cloud repositories.

Any new innovative solutions related to IT infrastructure management, unique cloud-based service capabilities, and innovative business intelligence solutions, in both real time and historical data.

We will provide specific solutions for each segment of the market, including small, medium, and large enterprises.

We are very excited about the breadth and depth of our new technologies we plan to bring to market, which have the potential to increase our value and relevance to our customers and partners, increase differentiation versus our competitors, and significantly expand our addressable market.

They will also provide opportunities for new routes to market.

In closing, we had a solid FY '13 Q1 in revenue and earnings growth, which established a good foundation for the balance of FY '13.

Q2 is off to a good start.

We are consistently gaining market share because of our increasing product differentiation, improved sales effectiveness, distribution leverage, and broad brand recognition.

We will continue to invest in our Enterprise selling capabilities and expand our distribution reach throughout FY '13.

We have a well-defined strategic product and services vision.

We believe this has the potential to significantly improve our competitive position and expand our addressable market.

Our very substantial new product and services pipeline will extend through FY '14.

Please note, most of the innovations that are currently in our product pipeline will be in beta this quarter.

We expect to continue to outpace the industry in growth and hit our FY '13 financial targets.

We are excited about FY '13, our future potential, and are confident in our ability to continue to grow the Company at double-digit growth rates.

I will now turn the call back to Michael.

Thanks, Bob.

Before we open the line for questions, I would like to highlight that we will be hosting our annual stockholders meeting on Wednesday, August, 22, at 9 AM, eastern time, at our Headquarters in Ocean Port, New Jersey.

Details and a live webcast are available on the IR section of our website.

Operator, can we please open the line for questions?

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

At this time, we have a question from Joel Fishbein from Lazard.

Please go ahead.

Joel?

Sir, please check to see if your line is muted.

Sorry, guys.

Strong metrics across the board, congrats.

Only question investors may not understand is the deferred revenue, which was $144 million.

And there may be some suspicion that you pulled in business at the end of the quarter, but it was up 22% year-over-year, and included a $2 million FX headwind, as you guys had said.

Can you just discuss the impact of capacity-based pricing and seasonality as it relates to the deferred revenue line?

So, the first issue, Joel, is the deferred revenue issue is a timing issue, which Lou can clarify in a minute, again, had nothing to do with pulling revenue into the quarter.

I think the most important point to focus on is that we had a solid Q4, we had a solid Q1, and we have good momentum going into Q2 with significant increases in our current pipeline.

So, I wouldn't read anything significant into that deferred revenue line other than some timing issues.

Lou, could you just clarify?

Just remember that deferred revenue consists mainly of maintenance agreements, maintenance contracts, so, the ability to pull revenue in from that is just nonexistent.

A couple of points -- one is, at the end of Q4, we had a higher software deferred revenue component.

We usually don't have a lot of deferred software on the balance sheet, but at the end of Q4, if you look back several quarters, we did have a couple of large deals that we did -- were able to bill and cleaned up in Q1.

So, that's part of it.

The other piece of it is, at the end of the quarter, we were affected slightly by FX.

So, if you take the combination of foreign exchange movements and the unusual circumstances where we had a little bit more deferred software on the balance sheet at the end of Q4, while we reported a 2% decline, under a normalized situation we would have reported about a 2% increase.

So, again, the ability to pull in revenue from the deferred revenue in our -- in this Company -- is really nonexistent because most of it is deferred maintenance.

Great, thanks for that clarification.

One more for you, Bob.

You're on a basically a $500 million run rate right now.

You said publicly that you would like to build the Company -- your goal is to build the Company to $1 billion or greater in revenue.

Is there anything that you're seeing out there that would change that view?

No.

Right now we are still running ahead of that plan, and we're in the process of raising that target.

We're actually in the process of raising the bar because we think we have sustainability to continue to grow the Company through that $1 billion.

Great, thank you so much.

Thank you.

Our next question comes from Jason Ader from William Blair.

Please go ahead.

Yes, thank you.

Hello, guys.

Just a clarification first, and then a question.

Bob, are you saying on the guidance that you're still comfortable with the street consensus?

That's the clarification.

Yes, we are comfortable with the street consensus.

Okay.

And then, on the question -- Lou, I just wanted to have you elaborate a little bit from -- some granularity.

Could you give us the size of the software deferred revenue that came off the balance sheet, and how much it is currently, exiting fiscal Q1?

Yes, so, the current deferred software piece is very, very small.

It's been the smallest amount in several quarters.

Again, we usually don't have a high software component.

The piece at the end of Q4 was approximately $4 million, and it's down to less than $1 million now.

So, there was about a $3 million swing.

That's in total.

That's with FX -- I mean, the point, Jason, it's not relevant to our hitting our Q2 numbers, and that's just timing, and that number will bounce around in different quarters.

So, understand the concern about it, but I can tell you, as far as our ability to achieve, one, what we did in Q1, or what we're going to achieve in Q2, that is not a significant factor.

The more important factor is how we're doing -- how we're starting off Q2, and how fast is our pipeline growing.

And just in a clarification on that, Lou, what would drive software revenue to not be recognized immediately?

I guess I don't remember that happening with you guys before.

Is it something (multiple speakers) [acceptance] clause or something?

It always happens, Jason.

It just depends on size and scope.

And as we get -- this is Bob -- and as we get into the Enterprise and deals get bigger, they get more lumpy.

Over time, you're going to see puts and takes on that number as we go out.

And, yes, it could be acceptance clause, it could be -- I mean, we have a very, very conservative revenue recognition policy.

Remember --

-- and if it's not all checked, it doesn't get recognized.

It's very clear.

It's either revenue or it's not.

There aren't gray areas here, and if it's not, it doesn't get into revenue, and vice versa.

That's what Lou was saying is -- we have no choice.

If it's revenue, it comes into revenue, and if it's not, it's not.

The other important point is that not everything that we're working on is on the balance sheet, so this is just timing.

At any point in time we're working on lots of Enterprise deals, and they're not always on the balance sheet.

The fact that it's on the balance sheet meant that we were able to bill it.

So, don't read too much into that number because we're working on multiple, many, many other Enterprise deals that never show up on the balance sheet until we take the revenue.

What Lou is saying is that product could be shipped and not show up on the balance sheet because it's not revenue.

So, that number is going to bounce around.

Just being as clear and as forceful as we can, guys, that from a relevance standpoint, in terms of what we achieved last quarter and what we're going to achieve this quarter, that is not a significant issue.

Would you say this is an anomaly, though, Bob, or should we expect this kind of --?

Well, I think it was a little bit bigger this quarter than -- because we had a couple of deals, but it will happen again.

Because I can tell you, I know we have closed some very, very large deals, many multi-million-dollar deals that are not showing up anywhere.

Right now, they are off balance sheet because they don't meet our revenue standards.

And when they show up, they may pop up on our balance sheet, and we're not going to recognize them.

So, you're going to see more of those swings in deferred, and this is all because of us being successful versus a problem.

All right, thank you, guys.

And, by the way, it helps our visibility, right, as we get more and more of these things, we have increased visibility in terms of our ability to achieve numbers.

Thank you.

Our next question comes from Aaron Schwartz from Jefferies.

Please go ahead.

Good morning.

Bob, you talked about, maybe a little hesitation in terms of the timing of the reinvestment here, but certainly you were upfront about wanting to get back in front of that.

Can you maybe talk about what's changed?

It doesn't seem like you have any more comfort in maybe the macro backdrop relative to 90 days ago.

Was it really just putting up a solid Q1 to get back on the reinvestments, or can you just walk through the timing of that and what's changed?

Well, I mean, don't forget, we had a very strong hiring quarter in Q1.

We plan to hire more, and if that's your question.

And as things start -- when all the macro indicators started to go south, we just pulled it back a little bit until we saw what was going on.

In fact, it turned out that we had, as it turns out, we had good solid underlying demand, and we have seen a nice, what I call, significant increase in our funnel.

And so, we just turned the spigot on again.

We'll always monitor that, even though we had a really good strength of the business, we -- Al has got a good hand on the stick, and we have a lot of metrics here, and we'll throttle it up and back, depending on what we see.

So, we're just being a little extra cautious, and it turns out we were wrong.

So, we overshot, in other words.

We overshot our bottom line target a bit.

Okay.

And maybe just a follow-up question, specifically the sales and marketing, you got a lot more leverage out of that line here.

Can you walk through it?

I think the goal of some of the sales segmentation you made in the quarter was to increase the leverage there.

How much of that contributed to the sales and marketing number?

And then also related to that, given the deferred license mechanics you just talked to, was some of the comp on those deals maybe taken in Q4, but some of the license was showing up here in Q1?

So, that's where it distorts just a 90-day look at the license, and the sales and marketing figure?

Yes, you got that exactly correct.

If you wanted to split it, you had a big comp component in Q4 that showed up in Q1, meaning that the Q4 comp on a relative basis with the kickers and everything else, our sales comp expense was significantly higher in Q4 than it was in Q1.

So, that's one part of the quarter-on-quarter variance.

And the other was, yes, we had a good impact from our sales segmentation strategy, and had a real impact to our operating margins.

Great, thanks for taking my questions.

Thank you.

Our next question comes from Greg Dunham from Goldman Sachs.

Please go ahead.

Hi, yes, I want to switch gears a little bit to the Enterprise business, which is up 32% year-over-year, and had, according to my math, the highest ASP in the last couple of years.

And this is a Q1, so, was there anything unusual in terms of an unusually large deal in the quarter?

That would be the first question.

And then, the second question would be -- when you think forward about the composition of the pipeline and the seasonality of the business, would you think, as you move up in the Enterprise, that you are going to have bigger Q4s and more step down than Q1, as most Enterprise software companies do?

Thanks.

The first question, Greg, is that we had a higher number of seven-figure deals in the quarter -- quite a bit higher than normal, and that number is going to bounce around.

I can tell you that our seven-figure deal pipeline, at this point, looks very strong on a relative basis.

And regard to timing, if you're thinking about calendar Q4, I think we'll -- my judgment is that we'll see our normal seasonality, which is -- we have very strong Q4, lighter Q1, we build in Q2, Q3, and we end up with a solid Q4.

I think that is the most likely scenario as we go through FY '13.

Thank you.

By the way, Greg, just a little anecdote -- I think your analysis of the Company was pretty much spot-on in terms of getting a good perspective on the Company and what's -- in regard to our position and competitive position, and what is driving our revenue and earnings growth.

Thank you.

Thank you.

Our next question comes from Glenn Hanus from Needham.

Please go ahead.

Good morning, guys.

Just first a quick clarification -- when you said you're comfortable with the street consensus, did you mean the fiscal second quarter, as well as the fiscal year, or were you just commenting on the fiscal quarter?

Could you just clarify that first?

Both, Glenn.

Okay.

Could you comment a little more on -- great performance in Europe despite macro headwinds, and then the US looked relatively a little bit weaker for you, the non-Federal US a little bit weaker for you.

Can you comment on what the dynamics were that were driving those two results?

I think the biggest issue, which you guys don't see, is that -- just on a relative basis, our European team had a good solid quarter, and their outlook looks reasonable going forward, as well.

I think the biggest factor in the US was just timing.

We did a lot of -- we took a lot of guys out of the field for training, so, just their time in the market was less.

I would expect our underlying demand and outlook for the US looks quite good, so, I think that was just an aberration of Q1 versus anything fundamental.

The underlying demand for the US still looks quite good.

And sales cycles -- some people have talked about lengthening sales cycles.

Are you seeing that kind of dynamic in your business?

It doesn't seem to be impacting you, if you are.

Yes, I said, Glenn, we see it a little bit at the margin, but in general, no, which may be a little bit surprising, but we just haven't seen a lot of what I call significant stretch-outs.

It's been -- I would say reasonably normal at the moment.

And lastly, maybe if you could comment a little more on what you're seeing from one or two of the competitors.

EMC has their network [e-rate] out, which is a more integrated product with some of their other, the Avamar and some of the other products there.

Dell has the BakBone and the vRanger, as well as AppAssure.

Can you comment on the competitors coming out with these various things, and whether you feel that's more of a competitive headwind or not?

I think I made my comment on Dell.

We operate -- our focus and segmentation relative to Dell, I am 100% confident we will achieve our objectives there.

I'll just leave it at that.

I think Dell's products fit their segments, and we'll do well in terms of what we're trying to achieve in the market.

Relative to the EMC comment on network [ray-ot], I don't see a significant change there.

I will comment just in general that if you look around the market, and you'll say -- which competitors seem to have a reasonably good handle on the market?

I think in general, EMC has done a good job.

In the storage market, obviously, they've got a good, solid track record.

On the flip side, we are very confident we can continue to compete against EMC, and I'm confident we'll continue to increase our differentiation versus the EMC solution.

We look at EMC as a good, solid competitor, but we seem to do well against them in the marketplace.

And Symantec with a new appliance out -- can you comment on any changes you feel with Symantec?

We continue to take share from Symantec, and we'll continue to take share from Symantec.

All right.

Thank you.

Our next question comes from Aaron Rakers from Stifel Nicolaus.

Please go ahead.

Yes, thanks, guys, and also my congratulations.

I didn't hear it brought up, so I'll ask about the NetApp relationship, where you stand today, how that is anticipated to progress, or any update on that front?

And I do have a follow-up.

I said I wouldn't comment on that, Aaron, until we had significant revenue, but I will say that we are making progress, and that's all I'm going to say about it.

Okay.

And then, as far as the product cycle stuff, Bob, you had mentioned that you're poised to do some enhancements to the Simpana platform over the coming months.

Can you talk a little bit about -- you also referenced the fact that you would have more significant possible enhancement looking into early 2013?

Is there still a little bit of a debate on the timing of that?

Is that set in stone that we see the next architectural refresh of the Simpana platform going into the first half of 2013?

I think what I said in my comments is our confidence in the timing that relates -- tied to our internal objectives is extremely high.

The guys have done an awesome job of hitting or beating every milestone they've had, and at the same time, increasing scope.

So, our dev and test teams have done an awesome job, and everything that I mentioned on the call will be in beta this quarter.

So, we're in really good shape regarding our product pipeline.

Perfect.

Thanks.

Thank you.

Our next question comes from Alex Kurtz from Sterne Agee.

Thanks for taking the question.

Bob, could you get into more detail around why financials was so strong in the quarter?

Maybe when Geos were strong for financials, and how that's progressing into the second quarter?

Sure.

Kudos, by the way, for doing a really nice job in summarizing, and providing a pretty good -- I call it -- balanced perspective on the Company.

Nice piece of work there.

Just repeat your question again for me?

Sorry.

The financial vertical (multiple speakers) and how it's progressing, and why it was so strong in the quarter?

We have done an increasingly good job of penetrating very, very large financial institutions, and bringing in seven-figure deals or eight-figure deals or eight-figure opportunities, where we have become the standard in those institutions for data and information management.

And that trend continues to accelerate, so, we've had some really good success in displacing some of our major competitors in the financial services sector of the market.

So, that hasn't changed directionally going into the second quarter?

No.

Okay.

Just a follow-up on Glenn's question on EMC -- seeing any kind of change in their competitive tactics, either in the mid marker or Enterprise around data domain or Avamar -- has that remained in check, or has there been any changes from your perspective?

What I said earlier -- we respect EMC.

They're tough competitors, on the one hand.

And on the other hand, they're partners of ours, in the sense that we integrate really well with a lot of their hardware solutions, like VNX and Isilon.

They are standard solutions in the market.

They have been very cooperative with us in terms of enabling us to integrate it and provide some great solutions to our mutual customers.

So, yes, they're very competitive.

They're extremely professional in what they do.

They generally have a good strategic vision in terms of where things are going.

But on the other hand, we have been able to beat them a lot on head-to-head competition because of things I said earlier.

Our solutions are much more cost-effective because we have the -- in terms of some of the things we have done with our single platform, they're more scalable.

Our reliability is higher because we're not dealing with a bunch -- we have a platform.

They have a bunch of, what I call, piece parts.

It's more difficult for them to implement a solution.

We can support it better.

We're more flexible.

We unify backup, archiving, mobile data in and out of the cloud a lot more effectively than an EMC can do it, as good as they are.

So, that, from a competitive standpoint, we have been quite successful, and from a partnering standpoint, we have been successful.

So, pretty interesting dynamic there.

Thank you.

Our next question comes from Michael Turits from Raymond James.

Please go ahead.

Solid quarter in a really tough environment.

Couple questions.

First, just on fed -- I would assume that you feel, from your comments, you feel pretty confident on them going into the fed fiscal fourth quarter in September.

Any thoughts post what could be -- sounds like for you a decent fed budget flush on how the outlook would be for fed and for fed spending will be post their fiscal fourth quarter close?

Yes, Michael, I still think it's uncertain.

I mean, as well as we're doing, and we're doing really well, I think the whole fed spending environment is uncertain.

Even at the end of Q2, we can't predict it that accurately.

Fortunately, we have a lot of other segments of the market, so, from a standpoint of our hitting numbers, we've got our risks covered quite well.

But I'd say it's very unpredictable.

And I would assume it will get tougher going forward rather than easier, in the fed sector.

Now, that being said, we are in some very large opportunities within fed that can mitigate that, and if those come to pass and they get budgeted, we still could do quite well.

Great.

Just first on OpEx -- you said it'll come back.

You were at about a $79 million, $80 million rate before, which is where we thought you might come in for this quarter.

Any just general thoughts on how that OpEx -- that's on OpEx -- might look going in -- non-GAAP OpEx -- how that might look going into the next quarter, too?

Should we think of that as coming back to that $80 million range?

Well, we haven't given specific quarterly guidance, but I'll say this -- commission rates are going to be higher.

So, just on commissions, OpEx spending will go up.

We're continuing to hire, so, OpEx will go up.

And quarter-over-quarter, you will see a reasonably significant increase.

On the other hand, assuming we hit all of our objectives, I think, on balance, we will do well relative to consensus.

I think consensus is reasonable, and I think we've got some opportunities to bring in another solid quarter here.

Thank you.

Our next question comes from Robert Breza from RBC Capital Markets.

Please go ahead.

Just a couple of clarifying questions.

Well, first of all, nice quarter.

Lou, maybe for you, headcount is roughly up 70 headcount overall.

You talked about increasing certain segments, but can you talk to us -- do you expect to increase at a similar pace in terms of the 70 headcount, or should we expect more?

Well, I said we would increase the sales and marketing primarily at rates similar; I didn't say how much.

And I did point out in my comments that on the development side, that would be up over the Q1.

So, at the end of the day, we should be -- we'll be higher than that number, but a lot of those dev hires will come in our India operation where we hire predominantly fresh-outs, and we rotate them through our system here.

So, dev headcount will be up, and sales and marketing will be fairly consistent to what you saw this quarter.

Okay.

And I guess, given all the new product road maps that you talked about, in terms of security, archiving, analytics, cloud sharing, Bob, how do you think about headcount trendings for the rest of the year?

Do you think it will be a measured pace here, or are you going to be back-end loading the year?

I mean, obviously those products are in development that you said will be released this quarter, but just as you think about planning really more or less for next year, in terms of headcount, how do we think about that trending for the rest of the year?

The point is -- that code is in beta.

That code is written, so it's all the testing and all the expense tied to all the go-to-market activities tied to that release.

The additional headcount we're hiring now is tied to some things we want to do in the future.

Other than what Lou said, it's every second quarter we have a pretty high headcount increase from college graduates coming out of India.

But it should be pretty steady, at a pretty good clip right through the fiscal year into next year, as long as we continue to hit our financial objectives.

Okay.

Bob, maybe just kind of a clarifying question.

You talk about Enterprise being 56% of software revenue.

What is large Enterprise in total revenue as a percentage just roughly, and just within a range would be helpful.

I'm going to guess it's going to be similar or maybe a little bit less, since the maintenance charges in Enterprise are slightly less than they are in the non-Enterprise segment of the market.

So, just figure, whatever it is in Enterprise, knock it down 1 point or 2, and that's probably what it is in total revenue.

Thank you.

Our next question comes from Phil Winslow from Credit Suisse.

Please go ahead.

Hi, guys, most of my questions have been asked, but maybe a little bit more color on -- obviously, you talked about seeing strength in large enterprises and larger deals.

Just curious what you're seeing in the mid market, and also just maybe, do you see any distinction between US versus international there?

Thanks.

In the mid market, one, our growth is -- the mid market has been okay.

We've seen, if you do the math, the mid market is still growing in the high teens versus the Enterprise, which has grown in the 30%s.

And I mentioned on the call that we are developing some products that have a broader range of appeal from a high SMB on up, in terms of our ability to penetrate a broad range in the market.

So, I think we will continue to do relatively well in the mid market in terms of product services and distribution.

But to get these really significant increases of growth relative to the market, that will come from our Enterprise segmentation focus.

Thank you.

Our next question comes from Ryan Bergan from Craig-Hallum Capital.

Please go ahead.

Thank you.

Just wondering if you can elaborate further, give some more color on your expected plans to either expand or add new distribution relationships back half of this year, or remainder of this year?

And whether or not they're going to be more focused on distribution or OEM, and if it's more likely to come from existing partners or if you're going to be adding new partners?

We are working on some significant new partner relationships that may have OEM components to it, as well as resale.

Those are moving along, and as we go out over the next several years, I think you'll see a significant change in our routes to market and whole distribution ecosystem as we broaden out the Company, and we start to get into analytics and some of the business intelligence aspects of what we do.

That's going to start to change the complexity of our whole distribution ecosystem.

That will be an evolving change.

It will start, say, certainly over the next 12 months.

It will take us probably several years to change it significantly, but it will change.

So, in the near-term, yes, there are some new partners that we are -- clearly that will come into play here, and have some significance as we move through this fiscal year and next.

And we'll, I'd say, significantly broaden out our whole route to market distribution ecosystem.

You'll see some pretty significant changes over the next 12 months.

And beyond cash use for the new headquarters, land, and building the structure, what are your cash plans for the time being?

Share buyback and our headquarters building are where we're focused.

If you think about -- this is really important -- the Company and its opportunity, to continue to grow the Company, through our own innovation here.

We've got a lot to do just on execution on -- the opportunities we have in front of us.

So, that I don't see us being -- doesn't mean we won't be acquisitive, but I think we want to keep focused and see if we can continue to sustain significant financial results over the next -- about as far out as you can see.

So, I think we have a lot of opportunity to do that.

From a cash standpoint, it's going to be mainly focused on the new headquarters and stock buybacks.

Thank you.

Our next question comes from Rob Owens from Pacific Crest.

Please go ahead.

Just one more quick one on the government -- the 31% growth year-over-year, was curious if that was big-deal driven or velocity driven, and how much, if you can attribute -- what came from civilian and what came from defense?

Thanks.

Good point, Rob.

Off the top of my head, on the civilian versus defense, I don't have it, but I think it was balanced would be my guess.

I don't know if any of the guys here in the room -- I really don't have a good answer for you.

I'll tell you that the growth in Federal was, again, pretty well balanced.

There are large deals, but there wasn't one big deal.

It was a number of them across a number of different government agencies.

So, I'd say pretty gratifying, in terms of what our fed team is doing.

And, as I mentioned earlier, there's some very, very large opportunities, not only for our Federal government, but governments around the world as they go to these consolidated shared services environments.

And we're in a really good position to lead, again, not only in our Federal government, but we know we're going to be the standard in a number of Federal governments around the world.

Have you seen success or any notable international governments at this point, Bob?

Yes, we have.

We've won them.

They're starting to contribute to revenue, and there's a fair amount more in the pipeline.

But that 8% number that you reported, that was a US Federal number?

Correct.

Yes.

Just to broaden out the perspective, our MSP, Managed Service Business, it is not more than 10% of revenue, so we don't report it.

It is a significant component of our revenue growth; you just don't see it, but it's [growing] very, very substantially across the globe.

Thank you.

(Operator Instructions) At this time we have a question from Brian Freed with Wunderlich Securities.

Please go ahead.

Hello, guys.

Two quick clarifications.

First, on the about $4 million of deferred software revenue, what was the geographic mix of that, specifically --.

I'm not going to comment on it, Brian.

Next question?

Okay, and then second, you mentioned you had confidence in consensus.

Was that a full confidence in full-year or the current quarterlies?

Both.

Okay.

Thank you.

Thank you.

Our next question comes from Michael Turits from Raymond James.

Please go ahead.

Thanks for the follow-up.

This is a question on FX.

Lou, what was the year-over-year FX impact on revenue, and what was the quarter-over-quarter FX impact on deferred revenue, whether you want to give dollars or percent?

Well, total revenue, it was -- we were affected by about 3 percentage points.

And for the quarter, I don't have that one handy.

I can get you that offline.

So, it's 3 percentage points total revenue year-over-year, right?

Yes.

And then, my question was, what was the sequential, or quarter-over-quarter, impact on deferred revenue from FX?

I think one caller said $2 million -- (multiple speakers)

-- about 2%.

FX was about 2%.

2% impact sequentially on deferred?

Yes.

Thank you.

Thank you.

This concludes the question-and-answer session.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.