Commvault Systems Inc (CVLT) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to CommVault's third 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.

Thanks for dialing in today for our fiscal third quarter 2013 earnings call.

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

Before we begin, I'd like to remind everyone that statements made during this call, including in the Q&A session at the end of the call that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

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

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

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

The press release is also available on our IR website.

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

The reconciliation between the non-GAAP and GAAP measures can be found in Table 4 accompanying the press release and posted on our website.

This conference call is also being recorded for replay and is being webcast.

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

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

Thanks, Mike.

Good morning everyone and thanks for joining our fiscal third quarter 2013 earnings call.

We had another very solid quarter, setting records for revenues and earnings.

We had a strong quarter in all aspects of our business, and in all geographies.

In addition, we have established good visibility entering into our Q4.

Our positive results are a validation of our unique ability to address the changing data and information management needs of large commercial and government enterprises, as well as leading managed service providers.

Let me briefly summarize our Q3 FY '13 financial results.

Total revenues were $128.1 million, up 24% year-over-year, and up 8% sequentially.

Software revenue was $65.9 million, and grew 28% year-over-year, and 11% sequentially.

Services revenue was $62.2 million and grew 19% year-over-year, and 6% sequentially.

From an earnings perspective, operating income, or EBIT, was $29.8 million, up 52% year-over-year.

EBIT margins were 23.3%, and diluted earnings per share for the quarter were $0.39.

We generated $27.5 million of cash flow from operations during the quarter.

Let me talk about our growth drivers.

Our 28% year-over-year license revenue growth for the quarter was primarily due to our ability with Simpana 9 to better meet the needs of large commercial government and enterprise customers for implementing global shared service models; Outstanding sales execution; contribution from large managed service providers; highly differentiated support and services; and increased market awareness and industry recognition.

It's important to note that license revenues generated from Simpana 9 in our core data management market will continue to be the primary driver of FY '13 Q4 growth and FY '14 license revenue growth.

Simpana 10, which I will talk about in a little more detail later, will significantly enhance Simpana 9's industry leading value proposition in our core business and enable us to begin to penetrate other data-related market segments.

Let me spend a minute speaking about the macroeconomic environment.

Current macroeconomic indicators point to a generally lackluster global economy in the first half of calendar 2013, and improvement is expected in the second half.

Specifically, we are assuming the following -- the European economy will remain weak; the US economy will be slow in the first half of the year, even though there is continuing underlying improvement; and we expect to see improvements in the Asian economy, particularly in China.

In addition, we believe continuing uncertainty will have a negative impact on capital spending in both the US and in Europe.

In contrast to the lackluster macro environment, we continue to see good underlying demand for our products across all geographies and vertical market segments.

While we know we are not immune to the broader macroeconomic uncertainty, and remain focused on the possibility of the slowdown.

We also expect to see cutbacks in the US Federal spending this quarter.

Now, let me address our current outlook.

We had an excellent first nine months of FY '13, which revenues grew 22% year-over-year.

License revenues grew 25% and non-GAAP EBIT increased 55%, year-over-year.

As of today, we have seen limited negative impact to our business from the macroeconomic environment.

Our visibility going to Q4 remain solid.

We are focused on building our funnels for Q1 and Q2 FY '14 and ensuring the quality of those funnels to mitigate any potential economic headwinds.

In addition, we are accelerating our investment in sales capacity.

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 multi-million dollar deals.

The continuing uncertainty will have a negative impact on capital spending in the US, particularly in spending by the US government.

While CommVault EMEA had good year-over-year revenue growth in Q3, we assume the outlook for IT spending in Europe will be weak.

We are in an opportunity-rich situation and are increasing spending across the Company to take full advantage of the many opportunities before us.

This includes increasing share in our core data management business in FY '14 and building the necessary foundations for growth for FY '15 and beyond in other data-related market segments such as mobile, computing, operations management, and business intelligence and analytics.

With that said, we believe the current FY '13 consensus growth rates for revenue is reasonable.

Brian will discuss our operating margin guidance later in the call.

For FY '14, we believe we will be able to achieve solid double-digit revenue and EBIT growth, as our forecast and visibility look promising.

This is being driven by strong market traction with Simpana 9 and we expect increased customer value and competitive differentiation with the launch of Simpana 10, good sales execution, significantly add sales capacity and broaden distribution.

In summary, the Company had another very solid quarter and is in good position to successfully achieve our objectives for fiscal 2013.

We have also established a solid foundation of growth for FY '14.

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

We are well on track in establishing the product distribution services, support and marketing foundations to enable us to achieve our $1 billion plan revenue objectives, as well as achieve our mid-20%s operating margin objective over the next few years.

I will now turn the call over to Brian.

Thanks, Bob.

Good morning everyone.

I will now cover some key financial highlights for the third quarter of fiscal year 2013.

Total revenues for the quarter were $128.1 million, representing an increase of 24% over the prior year period, and 8% sequentially.

For the quarter, we reported software revenue of $65.9 million, which was up 28%, or $14.5 million over the prior-year period.

Software revenue represented 51% of our total revenues for the current quarter, compared to 50% in the prior-year period.

Our higher software revenue was derived from a record number of enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter.

Enterprise deals were 58% of license revenue in the quarter, representing year-over-year growth of 59% and 17%, sequentially.

The number of enterprise deals grew by 64% year-over-year, and 10% sequentially.

Our average enterprise deal size was approximately $260,000 during the current quarter, compared to $247,000 in the prior quarter.

For the first nine months of fiscal year 2013, the dollar value of enterprise software transactions increased by 39% year-over-year.

Enterprise deal flow momentum and funnel growth continued to be strong, entering our fiscal Q4.

During Q3, our growth was driven by strong demand for virtualization, source side deduplication, and Snap-based modern data protection solutions.

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

In fact, about 70% of our software revenue in the current quarter was comprised of capacity-based licensing models.

We expect that capacity-based licenses will continue to account for the majority of our software revenue for the foreseeable future.

From a services revenue perspective, our maintenance attach rates and renewal rates remain very strong.

Services revenue for Q3 was $62.2 million, an increase of 19% year-over-year, and 6% sequentially.

For the quarter, revenue from US operations generated 58% of total revenues, resulting in an 18% year-over-year increase, while revenue from international operations generated the balance, resulting in a 32% year-over-year increase.

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

Software revenues derived from our indirect distribution channels increased 26% over the prior-year period and represented 86% of software revenue.

Our direct revenue grew 40% year-over-year, and represented the balance of software revenue.

Please remember, most sizable deals are driven by our direct sales force, even though they are transacted through the channel.

Many of our global resellers and strategic partners had strong growth.

We saw very good performance through Arrow, our largest US distributor.

For the quarter, total revenue through Arrow comprised approximately 28% of total revenue, growing 27% year-over-year, and 3% sequentially.

We also saw continued strong growth from our managed service provider, or MSP partners.

Sales through our Dell relationships accounted for approximately 19% of total revenues for the quarter.

Total quarterly Dell revenues grew 2% year-over-year and declined 4% sequentially.

The majority of our Dell revenues continue to come from our enterprise installed base, where our sales force is directly involved.

We will continue to partner with Dell in the enterprise segment of the market, where we have highly differentiated, innovative solutions based on our unique software platform.

Please note, from quarter-to-quarter, there will likely be fluctuations in the amount of revenue transacted through Dell due to the timing of large enterprise deals.

However, over time, our percentage of total revenues transacted through Dell will likely decline as we broaden our other distribution channels.

We added approximately 485 new customers in the quarter.

Our historical customer count now totals approximately 17,700 customers.

Approximately two-thirds of our quarterly software revenue comes from our existing installed base, which combined with our capacity-based licensing model, provides a very strong engine for future growth.

Gross margins were 87.4% for the quarter, compared to 87% in the prior-year period.

Now, moving onto operating expenses and EBIT margin expansion.

Total operating expenses were $80.9 million for the quarter, up approximately 17% year-over-year, and 11% sequentially.

Sales and marketing expenses as a percentage of total revenues decreased to 47% in the current quarter, which was down from 51% in the prior-year period.

Non-GAAP operating margins were 23.3% for the quarter, resulting in operating income, or EBIT of $29.8 million.

On a year-over-year basis, Q3 EBIT increased by 52%.

Q3 EBIT margins increased by 430 basis points, year-over-year, and decreased 110 basis points, sequentially.

Our operating margins continue to benefit from the sales segmentation strategy that we implemented at the beginning of fiscal 2013.

Net income for the quarter was $19 million, and EPS was $0.39 per share, based on a diluted weighted average share count of approximately 48.6 million shares.

On a sequential and year-over-year constant currency basis, there was minimal foreign exchange impact on EPS.

I would now like to spend a few minutes discussing our operating expense investments for the remainder of fiscal 2013.

It is our intention to increase the rate of our operating expense investments in Q4, to position the Company for solid growth in fiscal 2014.

These investments will include sales reps, sales engineers, and professional services.

We added 76 employees in fiscal Q3, which was a record quarter for us in terms of net headcount additions.

We ended fiscal Q3 with 1,658 employees, up from 1,582 at the end of September.

We expect that our field resources and support headcount additions will increase at a higher pace in fiscal Q4, as compared to the past few quarters.

In addition, we expect to introduce our next software release, Simpana 10, in fiscal Q4 and such a release will require significant investments in training, market awareness, and expanded distribution.

I would like to highlight one additional 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 reached the FICA limit well before the end of the calendar year.

This year, we expect our FICA expense in Q4 to be approximately $1.5 million to $2 million higher than Q3.

I will now address the current Street consensus revenue growth rates and our anticipated EBIT margin improvement for fiscal 2013 and 2014.

As Bob indicated, we're comfortable with the current Street consensus revenue growth rates for fiscal 2013, due to the overachievement of forecasted EBIT margin in the first nine months of fiscal 2013 and lower than planned investment levels.

We now believe we can improve operating margins for fiscal 2013 by 375 basis points.

For fiscal 2014, we believe we can, again, deliver very solid double-digit revenue and EBIT growth.

However, we expect fiscal 2014 operating margin improvement to be muted, due to our fiscal 2013 overachievement, as well as the fact that we're making significant strategic investments that enhance both our short- and long-term growth opportunities, and advance our leadership position in the market.

While we believe we could deliver margin expansion in fiscal 2014, we expect operating margins to be flat to slightly up.

We expect to accelerate our rate of investments in fiscal 2014, but still anticipate strong above industry EBIT growth in absolute numbers.

We will provide more specifics on FY '14 during our Q4 FY '13 earnings call.

In summary, we remain committed to our $1 billion revenue plan with operating margins in the mid-20%s over the next few years.

Let me now comment on tax rates and share counts.

We will continue to use a pro forma tax rate of 37% for fiscal 2013 and plan to use the same rate for fiscal 2014.

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

The cash tax rate for fiscal 2013 is estimated to be in the range of 14% to 18%.

We expect our cash tax rate to remain lower than our GAAP tax rate for fiscal 2014.

For fiscal 2013, we anticipate that our diluted weighted average share count will be approximately 48.1 million to 48.4 million shares.

For fiscal 2014, we anticipate that our diluted weighted average share count will be approximately 50.3 million to 51.3 million shares.

Now, moving onto our balance sheet and cash flows.

As of December 31, our cash and short-term investments balance was $397.2 million, up 12% from the end of September.

Cash flow from operations was $27.5 million.

Free cash flow, which we define as cash flow from operations less capital expenditures, was $25.2 million, which is a decrease of 4% over the prior-year quarter, and an increase of 11% sequentially.

The decrease over the prior-year quarter is a result of mainly changes in accounts receivable and deferred revenue.

The sequential increase in free cash flow is a result of changes in working capital on the balance sheet as well as higher operating income and revenue.

As of December 31, 2012, our deferred revenue balance was approximately $161.6 million, which is an increase of $30.9 million, or 24% over the prior-year period, and up $7 million, or 5% sequentially.

As our fiscal Q4 is typically a significant quarter for us in terms of maintenance support renewals, we would expect sequential deferred revenue growth to accelerate operating cash flows in the fourth quarter.

For the quarter, our day sales outstanding, or DSO, was 51 days, which is up from 49 days in the prior quarter and down from 59 days in the prior-year quarter.

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

Lastly, before I turn the call back over to Bob, I would like to briefly update you on the status of our new campus headquarters.

Based on our current growth rates, we expect to run out of space in our current leased facility within about two years, which prompted the need to strategically plan for the future.

As such, we are pleased to report that yesterday, we closed on the purchase of a 55-acre parcel of land located about five miles from our current headquarters.

We are in the process of completing the design of the new campus headquarters, which will be completed in phases.

We would expect to complete phase one of the project in about two years.

Our early estimate of the cost of the phase one build-out, including the land purchase, building, and campus infrastructure, is approximately $125 million to $135 million.

We expect the cost per square foot of the new headquarters to be comparable to what we pay for our leased facility today.

We will use our existing cash and future operating cash flows to fund this project.

There are a number of significant benefits associated with this strategic investment, some of which include -- much better customer-facing capabilities with an executive briefing center; as well as world-class customer support, and training centers; higher employee productivity and retention; and an improved ability to recruit.

The development of the new headquarters is making a very strong statement to our large enterprise accounts and key partners that we are building the Company for the long term.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Bob?

Thank you, Brian.

I will wrap up this call with a brief overview of our strategy, the dynamics of the market, and lastly, provide a brief perspective of Simpana 10.

We are planning to formally launch Simpana 10 on February 25, 2013, and will begin shipping this quarter.

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

First and foremost, CommVault is a data-focused Company.

We focus on providing solutions for customers, data and information management needs.

The demand driver for our business is the growth and complexity of managing data, which has been growing about 50% annually.

The majority of our license revenue growth has been derived from our core data, protection and data management business.

It's important to note, as I discussed earlier, that in FY '14, most of our growth will come from our core business.

We will continue to drive solid growth from our core data management business on our way to $1 billion in revenue.

However, we are making substantial investments across the Company to ensure that we will also drive meaningful revenue growth in FY '15 and beyond, from other data-related market segments, including regulatory and compliance, mobile computing, business analytics, and operations management.

Simpana 10 will play a significant role, not only in our ability to increase our share in our core data management market, but also penetrate the other data-related market segments that I just mentioned.

Simpana 10 is not just another innovative CommVault release.

It is an industry-changing, breakthrough product and includes innovations that will impact the way data is stored, managed, accessed, the way operations are managed, and the unique way business insight can be extracted from data.

Let we spend a minute on the market.

The needs of the market are in rapid transition.

Customers require innovative new technologies to deal with the sheer volume of data, the diversity of data sources to manage, and the longer-term retention requirements primarily tied to the host of new privacy legislations.

Innovations are also required to provide new ways of managing data in more complex, higher scale, and dynamic IT infrastructures, the cloud, mobile devices, and large-shared service environments.

Additionally, there are increasing requirements for sophisticated analytics to make sense of all the data that companies are creating.

Put all the demand for innovations together, and now you have the basis for discontinuities in technology innovation across a broad spectrum of IT.

CommVault has been and will continue to be a disruptive leader in bringing innovative technologies to market.

We are the only Company with a fully-integrated, seamless software platform that can holistically deal with the significant changing needs of the market.

Our current software platform release of Simpana 9 has established a strong leading position in the market due to its scalability, flexibility, reliability, and cost-effectiveness.

With our Simpana 10 release, we will take innovation in the market to a whole new level by radically changing the way data is moved, retained, stored, archived, recovered, shared and analyzed.

More specifically, as I mentioned last quarter, with Simpana 10, we plan to bring to market significant enhancements and new product capabilities to our Simpana software platform, which include next-generation data management and protection, to reduce cost, improve performance, recovery, scale and security, next generation innovative archiving, new automation capabilities for shared service environments for both private and public clouds, including automated workflows; comprehensive reporting and monitoring of IT infrastructures; advanced ways to deliver end user products and services; innovative new services; transforming the management of mobile devices, enabling any time, anywhere, a secure access and search of data through the user's mobile technology; cost-effective ways of securing, protecting and sharing files in the cloud across all devices; next-generation capabilities to more easily enable better decision-making, including a secure virtual repository for all data.

Lastly, new analytical solutions tied to unique ways to converge different types of data and sources of data.

These new products and services have the potential of significantly increasing our value and relevance to our customers and partners, increasing CommVault's differentiation versus our competitors.

Over the next three years, we believe that Simpana 10 has the potential to expand our addressable market by 60%.

We will provide a lot more detail on Simpana 10 on February 25.

In closing, we had another solid quarter.

We believe the combination of our technology leadership, enterprise selling capability, and continued third-party recognition as the industry's innovative leader, will enable us to outpace the industry in growth, and achieve our Q4 FY '13 financial targets, as well as our FY '14 plan.

We are making excellent progress in building the necessary foundation to achieve our longer-term $1 billion revenue plan objective.

We believe Simpana 10 is our landmark platform that will completely change the game in data management and protection, next generation archiving, mobile and business analytics.

We are excited and looking forward to its introduction in the market over the next few weeks.

I will now turn the call back to Michael.

Thanks Bob.

Before the operator opens up lines for questions, I would like to highlight that Al Bunte will be speaking at the Stifel Nicolaus 2013 Annual Technology Conference in San Francisco, California on February 6, at 4.30 PM Eastern Time.

Details on a live webcast will be 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)

Joel Fishbein, Lazard.

In terms of the off-balance-sheet backlog, can you give us any color there?

Obviously, you're building a strong pipeline.

I liked the commentary there, but any specifics around that would be very helpful.

Then I have one follow-up.

Our visibility, Joel, increased quarter-on-quarter.

We've got visibility going into fiscal Q4.

Okay.

Then just one more in terms of government.

Although you had a lot of cautionary comments regarding the spending there, which I think is fairly high-profiled in the marketplace, CommVault specifically is well-positioned to help and a lot of government deployments.

Can you just talk about, instead of just the near term, but over the long term, what the opportunity is in that government to help them with their data management needs?

I will talk about the US government and governments in general.

Many of the governments around the world are beginning to develop and deploy very broad shared services models, where different functions and different departments in the government use the same IT infrastructure.

CommVault is significantly involved in both the US government and major projects and other governments overseas.

We believe that, that represents a very significant potential for us going forward.

We will see positive results from that in both the near, medium, and long term.

Jason Ader, William Blair.

Bob, if you could just follow-up on the Federal question?

Could you give us a sense of how the Federal business did, maybe sequentially, year-on-year?

Then also, any specific color you can give on the MSP business in terms of percentage of sales coming now from MSPs and how that business grew, both sequentially and year-over-year, as well?

Thank you.

The US Federal government, year over year, declined slightly.

How it was really due to timing of some major deals that we had a very strong Q3 FY '12.

So, I wouldn't read anything into it because I think we are extremely well-positioned in our Federal business over the next few years.

MSP business was very strong.

We continue to take a large share in that business.

It was up substantially and we are very pleased with the result there.

We believe, going forward, that, as I said earlier, that the MSP segment of the market will be a primary driver of our license revenue growth going forward.

Any idea how big that is as a percentage of sales right now?

I think I said before, that, from a license revenue standpoint, it's approaching 10%.

We don't report segments until they approach 10% of total revenue.

So, we expect that the MSP will exceed 10% of our license revenue some time in fiscal '14.

Okay.

Real quick on the last thing.

Just on the enterprise deal sizes, obviously, they've been getting larger.

Could you just give us any color on the high seven-figure, maybe even eight-figure deals that you guys are starting to win or have in the pipeline?

Is that a substantial change versus a year or two ago in terms of those high seven-figure approaching eight-figure deals?

There's a discontinuity in the curve.

It's up dramatically.

We have moved from -- typically these larger deals for us were in the high terabyte range.

Now, we are seeing deals in -- that have the potential of 20-some petabyte's, 50-some petabyte's.

So the deal size has gotten -- has grown dramatically in the past 12 months at the high end.

That is mainly due to two reasons.

One is, the move to shared service environments and big enterprises and governments, and the growth of large MSPs.

Aaron Rakers, Stifel Nicolaus.

First, if I look at your strong momentum on the enterprise side, what I am interested in is actually the SMB side of the business; it looks like it was about 2% growth by my math.

Just curious where you guys stand.

I think you launched the IntelliSnap product back in late October, you implemented some segmentations in the sales force.

Can you talk a little bit about what's going on in the SMB segment and how we should think about that growing going forward?

Sure, Aaron.

So number one, we are basically over-achieving our objectives.

We had -- in the enterprise, we've had a major focus on the enterprise, as you know, for about four or five years.

We haven't had that focus in the SMB.

So we made a number of organizational changes about a year ago.

We have renewed focus on SMB, both from a distribution standpoint and product standpoint.

So, I would say over the next fiscal year, give us through fiscal '14, I think by the end of fiscal '14, we will have significant strength in our position in the SM -- across the higher end of the SMB market, as well.

Okay.

Then as a follow-up, maybe we could talk a little bit about your distribution relationships.

Obviously, Dell is coming off a little bit.

Can you talk -- update us on some of the competition versus cooperation that you have within EMC?

And then also, you haven't wanted to talk about it yet, but any changes, any thoughts on what's going on at NetApp at this point?

Thank you.

I will just take it in a broader context.

Clearly, in general, we are forming our distribution capability.

In the enterprise, if you look at what is going on in the shared services consolidations, and our ability to move into new market segments with Simpana 10, including mobile and analytics, we are shifting our focus and broadening our distribution to include a lot more of the systems integrator's.

So, the mix of our distribution is going to shift towards the SIs, in contrast to what we are doing with some of our hardware partners.

We will continue to partner, but we are a much broader Company, today, so that it -- we've got the opportunity to grow in distribution.

Again in the enterprise, as I mentioned earlier, we are doing a lot of work to strengthen our position in the mid-market with our resellers and distributors.

So, in general, we are going through another significant upgrade and expansion of our distribution capability over the next several years.

We are absolutely confident that it's going to help us sustain very high revenue and earnings growth,

Then a final question for me, for double-digit revenue growth looking into fiscal '14, what's your assumption of capturing or addressing that incremental expansion of the TAM by 60%?

Is that a full fiscal '14 story?

Or is that rolled through the model as we progress through that year?

That's it.

Thanks.

Yes, it's pretty clear, and the point is, is that the majority of the growth that's going to come from our core business in '14, based on the core value proposition of Simpana 9. Now Simpana 10 dramatically enhances that, but that's our core revenue driver.

We are in a unique position that we've opened up many new opportunities and have the luxury of investing heavily and expanding our business into other data-related market segments.

That investment, and that's foundational, will be laid in FY '14.

We'll start to have some material impact to our revenue and earnings growth in FY '15, '16, and beyond.

Alex Kurtz, Sterne Agee.

A clarification and a question.

Just on the guidance, looking into this print, you guys were tracking towards about 18% to 19% growth.

You obviously beat audit consensus on December.

So should we still expect sequential growth, obviously into your fiscal fourth quarter because that would put you above where consensus was before the print?

Sequentially on revenue, you're saying?

Yes.

You could -- that is safe to assume that we would be, yes, sequentially up.

Okay.

Thanks.

And then, Bob, just a follow-up on Aaron's question around Dell.

It looks like maybe you are tracking towards maybe around 8% to 10% growth for fiscal '13 around their contribution.

Is high single-digit the right place to think about Dell's contribution going forward?

Or is it -- is the relationship changing so much it's hard to tell at this point what it could be next year?

It will grow next year, because of our strength in the enterprise and working with Dell in strong enterprise accounts.

But clearly, Dell will become less relevant to us over time.

Eric Martinuzzi, Lake Street.

Congratulations on the strong execution in December.

The capacity-based pricing, I imagine given the data growth, that some of your larger customers has got to become -- let's just characterize it as an awkward conversation.

Can you talk a little bit about the process that you are going through as people get into either new services or start to need greater capacity?

How you're handling those pricing negotiations?

I'm not sure I understand the question.

The discussion we're having with our major accounts is, right now, is not awkward at all, from a strategic standpoint, because they're all -- the data growth issue has consequences.

One, they don't have -- they can't use the traditional method to protect it, because they don't have enough time to hit a backup window.

After they back it up, they can't find it.

They're having a lot of difficulty meeting the new regulations tied to privacy.

In addition to that, they don't have the skilled labor to manage it and the ability to manage it is becoming cost prohibitive.

So, all these major enterprise customers have only one choice and that's to completely re-engineer and re-architect the way they protect, store, and manage data.

Since we have the best technology in the market to solve those problems, those are happy discussions.

Our whole model is based on providing our customers with big returns on the money they invest with us, both from a product and services standpoint.

So we sell on value and we are solving some really critical problems, very cost effectively and provide very high returns on the money that customers invest with us.

So it's not awkward at all.

Okay.

So it's positioning as a TCO discussion for the account manager and the account.

TCO is critical, but the other point is, customer's are in situations where the technology doesn't work.

So, I have one customer, and we went through this.

This is the last few weeks, a significant enterprise account.

The CIO said to me -- Bob, to be blunt, the TCO is icing on the cake.

Because if I can't meet my regulatory requirements, and I can't protect my data, I'm in real trouble.

So I need to solve my core, basic, fundamental problems first.

It's great that you can provide me fundamentally a basically 50% savings over what I'm doing today.

But that's my second priority.

That's not the case with all customers, but I'm just telling you, this situation has now gone from nice-to-have to critical for these major accounts.

Aaron Schwartz, Jefferies.

I had a question on some of the reinvestment commentary you made.

You talked a lot about the sales distribution going forward.

But the question I had is, you also talked about expanding to a lot of new ancillary markets.

If we look at your development expense, it's quite low relative to the benchmark as a percent of revenue.

Should we expect a shift here over the next couple of years as maybe a little bit more leverage on the sales line and a little bit more expense on the development line as you get into some of these newer markets?

It's about the opposite.

We're very efficient in development on a relative basis.

So the biggest expense is occurring in sales.

It's just capacity.

Services, our whole professional services model is shifting.

So we are becoming a much more comprehensive provider of unique consulting and advisory service to our customers.

We had to expand our product management functions so we can manage and focus on these new market segments.

Our support model has changed.

So if you look at the expenditure, it's in marketing, sales, services, support, more so than it is in [desk].

Okay.

Given what you said there as well as the maybe change in distribution with greater contribution from SI partners, so it sounds like they will do some of the consulting and services but you will still take a lot of that on as well?

Well, the point is, that -- the answer is yes.

But, understand that there are very few organizations that really understand comprehensive data models.

We had to develop the expertise and the processes and the tools in order to properly architect, implement, and support these broader, new IT environments tied to the management use of data.

So, if we develop the skills, the practices, and the comprehensive -- from a personnel standpoint, we've got the -- enough of the skills on the ground, globally.

Then we can educate our partners and back them up as they go in and provide services to their customers.

So, CommVault is taking a lead, both in the processes, the architectures, the tool-set's and understanding.

We are passing that along to our various partners, so they can also provide leverage and provide those same services to the broader marketplace.

Michael Turits, Raymond James.

Very strong quarter.

Just a couple of questions here.

One, with Simpana 9, it was a fairly rapid transition to higher growth rates as people started to adopt that.

It sounds like you're just -- caution us that it might take a little bit longer with Simpana 10.

Obviously, it's very ambitious in terms of the expansion of the scope of market.

Can you walk through that a little bit what the differences are, how that adoption rate might be different?

Then the follow-up question, on professional services, it sounds like that will be muted, too.

Can you give us some sense of how much of your services are now [pressured] and how much that might increase as we transition?

So, the uptake on Simpana 9 was tied to enhancements in our core market.

As I mentioned on the call, Simpana 10 significantly increases our value proposition to our customers and differentiation to our competitors in our core market.

So it solidifies and enables us to sustain high growth rate in our core data protection and information management markets as it exists today.

When we start to expand to new market segments, analytics, mobile, operations management, those are -- we've got to build those franchises; those don't happen very quickly.

So, what I indicated on the call is, we are making very significant investments in FY '14 to build a foundation -- for us to build businesses in those new market segments.

But that transition will occur over the next several years.

Now, we've built our $1 billion plan model.

I can tell you that we're highly confident we're going to hit that over the next few years.

The majority of our business, when we hit the $1 billion, will still be from our core business.

But, there will be a substantial, on top of it, it will be a substantial contribution from some of these new market segments.

As we move to $2 billion, and we have laid out a broad outline of what that looks like, these new segments will outpace the growth of our core.

So, the -- as I mentioned on the call, we are in an opportunity-rich environment here.

So the key for us is to maintain focus and make sure that we have absolutely executable plans tied to all our key initiatives, both in our core and our ability to extend the business to related data market segments.

Andrew Nowinski, Piper Jaffray.

Andrew, your line is now open for question.

If your phone is on mute, please un-mute it.

Sorry.

Thanks, good morning.

So as a follow-up to Michael's questions, do you have customers that have already started beta testing Simpana 10?

When you look back at the launch of 8 and 9, do you have any idea what percentage of existing customers had upgraded to the new version in the quarter it was launched?

Thanks.

Yes, we have beta tested Simpana 10.

It will be full [GA] and full ship mode starting late February.

So, we're very confident about the stability and quality and functionality of Simpana 10.

In regard to the uptick, turn to -- we don't publish what those are.

But round numbers, more than half our customers are on 9 today, round numbers.

What we expect, as we go through the summer, that the vast majority of all accounts, new accounts, will be shipping Simpana 10.

Over time, our existing account base will transition to Simpana 10 over the next few years.

So this -- we are extremely confident about the product and, again, the ability to enhance our position in our core business and provide some really unique, innovative solutions to some of these other market segments.

But, we're, again, we are in a fortunate position we can manage the transition to 10 in a way that enables us to keep our good, solid foundation and extend it over time and maintain good solid revenue and earnings growth.

Okay, very good, Bob.

Just one more quick question into EMC noted yesterday, it hit a $1 billion annual run rate with Isilon and Avamar.

It sounds like, I just want to expand well beyond the media and life sciences market.

So I'm just wondering if you are -- could talk about whether or not you are also entering any new verticals in your partnerships with EMC given your historically high attach rate to Isilon.

Thanks a lot.

Yes, we don't have any formal partnership with EMC's Isilon but it's a very good product.

We are well integrated with that product in many different verticals, and expect to continue to partner with the Isilon team as we build out our platform.

Greg Dunham, Goldman Sachs.

Wanted just a clarification on how much of the incremental spend in sales and marketing is related to Simpana 10 in FY '14 versus just growing the core?

Then, a separate question.

You were pretty cautionary about Europe, but your international business, at 32% growth, is continuing to outpace the US.

Is there anything you see going forward that gives you pause about the international region or is that general macro commentary?

Thanks.

Well, we have a new management team in Europe.

To be frank, they've been hitting the cover off the ball, and probably will continue to hit the cover off the ball.

But the cautionary tale there is Spain just reported a quarter where they had 1.8% decrease in their economy.

So, the question is, can we continue to achieve these really good, solid results in the face of some of the European economies which are in depression areas.

But, so far, we've seen really good execution from the team and the outlook continues to be pretty good.

So, we have seen significant improvement in our execution with the change of management of our European business.

Okay.

Quickly on the level of spend, Simpana 10-related versus just growth in the core?

There will be a significant, incremental spend for Simpana 10 and its extensions in FY '14.

Glenn Hanus, Needham.

A quick follow-up question on the guidance.

Revenues, just looking at the consensus, $130 million-ish for March, a slight uptick historically.

You are obviously coming off a very strong out-performance here.

The slight uptick implied in your guide, is that just your normal, conservative guidance?

Or, there's some, perhaps the Federal or some vertical marketer's or some other thing in particular that gives to little more cautious guidance that way?

Thanks.

We are always prudent in our guidance, Glenn.

As I always said, that's the way the math works.

But, yes, prudency is always the appropriate response.

Okay.

It sounds like your overall tone on the macro is fairly similar to last quarter, where you said you're not immune, but you're not really being impacted yet.

Is that status quo from last quarter's commentary there?

Is that fair?

This is fair, Glenn.

Rajesh Ghai, Craig-Hallum.

Congratulations on the continuing momentum.

A couple of questions on Simpana 10, if I may.

Bob, how do estimate the [middle] TAM expansion that we've discussed in the past about 30%, 40% increase in TAM.

What metrics are you specifically using to estimate that.

Secondly, with the new functionality and features coming out of Simpana 10, how many of those features would be available to the installed base as part of maintenance?

How -- what percentage -- or if you can give us some metric on how much of the new function and features would entail new licenses?

Thank you.

On the TAM, we can take it offline.

But, we have a lot of -- one, we are really clear -- I wasn't as clear on the last earnings call.

But over the next three years, three years out, TAM expands 60% and we've a lot of detail on that and we can provide it to you offline, Rajesh.

The one thing to understand, is we look at this market different than most analysts and our competitors.

Because we have a platform that cuts across a lot of different market segments.

So, the way we view it and the way we determine TAM is unique.

In regard to the features that customers will get in an upgrade, any core feature on backup, archive -- if they bought it already, it will be upgraded.

But Simpana 10 includes many, many new features and technologies and extensions.

Those will -- customers will have to pay for those increased products or functionality.

We are also going to make it easier for customers to buy 10 with some quite unique updated pricing models as well.

Great.

Thank you.

Congratulations, again.

(Operator Instructions)

Brian Freed, Wunderlich Securities.

Just a couple housekeeping items as we work down the line.

First on your tax rate.

I think you guided for a consistent tax rate.

Can you talk about if there's any impact from the R&D tax credits that might provide a benefit for you guys?

Secondly, as we look at the guidance for the full-year operating margin, the 375 basis points year-over-year, it implies about a $5 million sequential increase in your spend.

You talked about $2 million from the FICA.

But am I in the ballpark in that upward spend in OpEx as you launch Simpana 10?

Yes, I'll just take those in order, I guess.

With respect to the tax rate, since that was passed in early January, it will be Q4 event for us.

We can expect to recognize approximately 2.5% to 3% benefit in Q4; that's baked into our non-GAAP pro forma tax rate of 37% that we stated.

Also, just keep in mind, our cash tax rate is probably the more important metric.

That's going to be in the 14% to 18% range for the fiscal year.

Then with respect to the uptick in the operating expense line, that is correct.

We do expect it to go up for a number of reasons, some which is FICA, some which is version 10.

We are coming off of record hiring quarter in fiscal Q3 and we anticipate to accelerate those investments in fiscal Q4.

Okay.

So, would it be reasonable to think the tax rate in Q4 might be something more in the range of 34% or 35%?

It almost doesn't matter.

That's why we use the pro forma tax rate of 37%.

The GAAP tax rate really isn't relevant for us.

(multiple speakers)

Robert Breza, RBC Capital Markets.

Maybe just a housekeeping question, Bob, for you.

You mentioned two-thirds of the revenue is really coming from the installed base.

Is there a way you can help us understand how much of that is coming from the capacity-based model, as customers are increasing capacity.

You mentioned the 50% growth rate in data.

But also, as we look at Simpana 10 and taking new products within that installed base, just trying to understand the level in differentiation.

Thanks.

That's a good question.

One, the additions, or the annuity that's coming off of the capacity-based licensing models is exceeding expectations.

We're not publishing the number, but it's certainly at the very high end of what we thought it was going to be.

If we have enough history, where it's absolutely predictable, we may communicate that.

But it is a surprisingly strong renewal rate coming off of those capacity pricing models.

So, I'm really happy about that.

So if you look at the business, you've got annuity coming off maintenance and now you've got a pretty strong annuity coming off of our capacity-based licensing model.

So, there's an underlying foundation to our revenue base now, that we didn't have a few years ago.

Any color around new products and what that -- how that drives the existing installed base?

Thanks.

Yes, the new products, that is helping to drive the renewals of the capacity-based licensing model.

Because if you've got a new customer, let's say they installed data protection and then they want to add, let's say, archiving to that, they are going to come back and purchase additional licenses.

As we move into mobile and some of these other functions, probably the same phenomenon will occur.

Our operations management, that's where we are offering customers some very unique capabilities at high payback, and where there's a very large customer need.

I will let Al comment a little bit on this, because he's been the architect.

He and the team and -- we always focus on developing technologies that have real value to our customers.

Al, you may want to expand on this a bit.

Tied to, again, the pricing model, where you're going is, as Bob said, and one of the guys asked earlier on CLAs, one of the things the market really likes is we make a simple way to buy a platform.

It's just measured with a capacity meter, is the way I put it.

So, as you get all these other data management capabilities in there, it's our intent is to get more data under management, so to speak, and provide a lot more use case to that data, way beyond just backup and recovery, I guess is the point.

So there's lots of things in 10, as Bob talked about, that move down that [track] of expanded functionality in the data management space.

He also commented in the core, that we focus primarily on scale and automation.

That translates every time on the customer side, again, the comment Bob made, the big thing on the customer side, that directly translates into better cost performance, and better administration performance, or more productivity.

So easier to manage, less resources to manage it and less infrastructure needed per terabyte, if you will, going forward.

So all those things are really implicit and part of the v10 basket of functionality.

Thank you.

This concludes our question-and-answer session of today's call.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.