Commvault Systems Inc (CVLT) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CommVault's, fiscal fourth quarter, and fiscal 2013, year-end earnings call.

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

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

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

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal fourth quarter -- 2013, and fiscal 2013 year-end 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 the question and answer session at the end of the call, that relate to future results and projections are forward-looking statements within the meaning of Private Securities Litigation and 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 8-K filing.

The press release is also available on our investor relations website.

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

The reconciliation between the non-GAAP and GAAP measures can be found 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, Mr. Bob Hammer.

Thank you, Michael.

Good morning, everyone, and thanks for joining our fiscal fourth quarter, and 2013 year-end earnings call.

CommVault had an outstanding Q4 with strong performance in all aspects of our business, and strong growth both domestically and internationally.

For the year, we achieved record revenue, operating profit, EPS and cash flows.

I am pleased that we met or beat our planned objectives for our fiscal year 2013, and as expected delivered solid double-digit revenue and earnings growth for the full fiscal year.

We also exited FY '13 with good visibility going into fiscal 2014.

Let me briefly summarize our Q4 and full year fiscal 2013 financial results.

For the quarter, total revenues were $138.3 million, up 21% year-over-year, and up 8% sequentially.

Sulfur revenue was $72.1 million and grew 23% year-over-year, and 9% sequentially.

Services revenue was $66.1 million, and grew 20% year-over-year and 6% sequentially.

From an earnings perspective for the quarter, operating income or EBIT was $31.8 million, up 50% year-over-year, and 7% sequentially.

EBIT margins were 23%.

Diluted earnings per share were $0.41.

For fiscal 2013, total revenues grew by 22%, software revenue grew by 25%, EBIT grew 53%, and we expanded EBIT margins by 470 basis points.

We generated approximately $42.9 million of cash flow from operations during the quarter, and approximately $112.7 million for the year.

We finished fiscal 2013 in a very strong financial position with over $435 million of cash and short-term investments, and no debt.

During the quarter we successfully launched Soppana 10, which has further strengthened our competitive position and our core data management business, and it's opening up new market and distribution opportunities.

I will speak more about Soppana 10 later in the call.

Let me spend a minute speaking about the macroeconomic environment.

Term macroeconomic indicators point to a generally lackluster global economy, continuing through the first half of calendar 2013, with modest improvements expected in the second half.

Recent PMIs from the US, EMEA and China have been trending downward.

The broader economic slowdown appears to be having some negative impact on the tech sector.

Specifically there have been some recent earnings reports and outlooks from some leading tech companies, that indicate a softening of corporate IT spending on large enterprise deals.

We are assuming slow industry growth in the current quarter, with moderate improvement in the second half of calendar 2013 for both the US and APAC.

We expect the European economy to remain sluggish throughout the calendar year.

We do have concerns that the Spring swoon slowdown in demand that has been seen by others in the industry could impact us.

As a result, we are taking extra steps in the near term, to ensure we can achieve our financial objectives throughout FY '14.

This includes a sharp focus on building sales funnels, and insuring the quality of those funnels.

Despite our concerns, we still expect to continue to significantly outpace the growth of the market, and pick up market share.

I will now address our current outlook.

As a reminder we had an excellent FY '13, in which total revenues grew 22% year-over-year, license revenues grew 25% year-over-year, and non-GAAP EBIT increased 53% year-over-year.

Importantly, we exited FY '13 with solid visibility going into fiscal 2014.

For FY '14 we expect to achieve strong double-digit revenue and EBIT growth.

While we expect to have strong earnings growth in FY '14 we will not be able to repeat the 470 basis point operating margin expansion we achieved in FY '13.

Earnings growth will have to come primarily from revenue growth, since we will have higher operating expenses tied to the substantial investments we are making to achieve our longer term $1 billion plan objectives.

Brian will discuss some of these investments later on in the call.

While we had a strong Q4, I would like to add the following words of caution regarding our future outlook.

We are entering our fiscal '14 with increased risk tied to the apparent near term slowdown in tech spending, in addition to our normal Q1 challenges due to seasonality.

Our ability to grow becomes more dependent on not just big deals, but a steady flow of large, multiple seven figure deals, which have quarterly revenue and earnings risks, due to their timing.

As has been reported by a number of our competitors, this segment of the market has definitely seen some softening.

While our EMEA organization had a good year-over-year revenue growth in FY '13, we continue to be concerned about the European IT spending outlook.

And fourth, 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 investments to increase share in our core data management business in FY '14, and building the necessary foundation for growth for FY '15 and beyond, and other data related market segments such as mobile computing, archiving, operations from management, and business intelligence analytics.

In broad scope, our outlook for FY '14 includes earnings risks related to the macroeconomic environment, and our increasing investment in operating expenses across all segments of the business.

As a consequence there could be as significant negative impact to our earnings if we miss our revenue targets.

Given the current uncertainties, we have taken the necessary actions to mitigate our earnings risk by more tightly controlling the rate of growth of our spending.

We believe we have done this in a way that will not jeopardize our ability to execute our key short and long term strategic and tactical objectives.

For FY 2014, we believe we will be able to achieve our revenue and earnings growth plans, due to the increased competitive position and customer value with Soppana 10, added sales capacity, improved service capabilities, with continued solid execution from our sales force.

While there could be some upside to the Q1 and full year, FY '14 street consensus revenue growth rates, we believe they are reasonable given the current macro concerns.

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

In summary, the Company had another very solid quarter and fiscal year, achieving record revenue, operating profit, EPS and cash flows.

We are well positioned to execute our FY '14 plan, with our strong array of products, field and services capabilities, and good visibility.

We are prudently making the required investments to ensure we can continue to outpace the market in growth and profitability, over the medium to long term, which Brian will outline.

As noted earlier, there are short term revenue and earnings risks related to this strategy, given the softening macroeconomic environment, but we believe we have made the right investment decisions in order to maximize longer term shareholder value.

I will now turn the call over to Brian.

Thanks, Bob, and good morning, everyone.

I'll now cover some key financial highlights from both the fourth quarter, and full fiscal year 2013.

Total revenues for the quarter were $138.3 million, representing an increase of 21% over the prior year period, and 8% sequentially.

For the full fiscal year, total revenues were $495.9 million, representing an increase of 22% over fiscal 2012.

Software revenue for the full fiscal year, was $251.5 million, representing an increase of 25% over FY '12.

Our FY '13 software revenue was primarily driven on the strength of enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter.

Enterprise deals were 57% of license revenue in FY '13, representing an increase of $37 million, or 35% over the prior year.

In addition, the number of enterprise transactions increased by 23% in fiscal year 2013.

The average enterprise deal size was approximately $266,000 for the full fiscal year, versus $241,000 in fiscal year 2012.

For the quarter, we reported software revenue of $72.1 million, which was up by 23%, or $13.4 million over the prior year period.

Revenue from enterprise deals increased by 27% over the prior year period, and 5% sequentially.

The number of enterprise deals increased 10% year-over-year and 1% sequentially.

Our average enterprise deal size was approximately $272,000 during the current quarter, compared to $235,000 in the prior year period.

During Q4, our growth was driven by strong demand for virtualization, source side de-duplication, and snap-based modern data protection solutions.

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

Capacity based license sales represent 73% of our Q4 software revenue, and 69% of our full year software revenue.

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

For the quarter, software revenues derived from indirect distribution channels, increased 36% over the prior year period, and represented 92% of software revenues.

For the year, software revenue from indirect distribution channels increased 31%, and represented 89% of software revenue.

Our direct revenue represented the balance and declined 11% during FY '13.

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

Revenue mix for the year was 51% software, and 49% services, and for fiscal Q4 the revenue mix was 52% software, and 48% services.

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

Services revenue for the fiscal year was $244.3 million, an increase of 19% year-over-year.

Services revenue for Q4 was $66.1 million, an increase of 20% year-over-year, and 6% sequentially.

Let me now discuss the US and international split for total revenues.

During FY '13, revenue from our US operations generated 58% of total revenue, resulting in a 16% increase over FY '12.

While revenue from our international operations accounted for 42% of total revenue, resulting in an increase of 31% over fiscal year 2012.

For the quarter, revenue from US operations generated 55% of total revenues, resulting in a 9% year-over-year increase, while revenue from international operations generated the balance, resulting in a 41% year-over-year increase.

Geographically, we had strong growth in the Americas, particularly in Canada and Mexico, as well as Europe and Asia.

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

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

For the quarter, total revenue through Arrow comprised approximately 32% of total revenue, growing 64% year-over-year, and 27% sequentially.

In addition to our traditional distribution partners, we continue to add new strategic managed service providers or MSPs, who use our products as the engine for them to provide data and information management services to their customers.

MSPs are becoming a meaningful revenue stream for CommVault.

We expect these types of relationships to continue to evolve as an important part of our business.

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

Total quarterly Dell revenues grew 8% sequentially, and were flat year-over-year.

Over the past year, we have successfully shifted most of our SMB business to non-Dell distribution partners.

As a result, the majority of the revenue that is still transacted through Dell, comes from add-on purchases from our existing install base, and from new enterprise orders where our sales force is directly involved, and where we have unique product advantages.

Our strategy of focusing our efforts with Dell, only in the enterprise segment, has worked well for both CommVault and Dell.

However, we believe Dell's current storage strategy is now primarily focused on the SMB segment of the market, with their own intellectual property.

Therefore, we are taking proactive steps to broaden our distribution in the enterprise segment.

Over time, it is likely that these actions will lead to the decline of our percentage of total revenues transacted through Dell.

Please note, however, from quarter to quarter there will likely be some fluctuations in the amount of revenue transacted through Dell, due to the timing of large enterprise deals that are currently in the pipeline.

We added approximately 450 new customers in the quarter.

Our historical customer count now totals approximately 18,200 customers.

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

Gross margins were 87.3% for the quarter, and 87.1% for the year.

Now moving on to operating expenses and EBIT margin.

Total operating expenses were $87.6 million for the quarter, up approximately 13% year-over-year and 8% sequentially.

Non-GAAP operating margins were 23% for the quarter, resulting in operating income or EBIT of $31.8 million.

On a year-over-year basis Q4 EBIT increased by 50%.

Q4 EBIT margins increased by 450 basis points year-over-year, and decreased 30 basis points sequentially.

For the full fiscal year, EBIT margins increased by 470 basis points.

Sales and marketing expenses as a percentage of total revenues decreased from 51% in FY '12 to 47% in FY '13.

Our FY '13 operating margins clearly benefited from the sales segmentation strategy that we implemented at the beginning of fiscal 2013.

We added 82 employees in fiscal Q4, which was a record quarter for us in terms of net headcount additions.

We ended the fiscal year with 1,740 employees, up from 1,658 at the end of December, and up from 1,437 employees at the end of March 2012.

This net increase of 303 employees for the full fiscal year, represents 21% year-over-year growth.

The vast majority of these headcount additions were customer facing sales and technical overlay teams, in addition to customer support.

To take advantage of the opportunity-rich situation that Bob mentioned, we expect to continue to add heads at a prudent pace.

Net income for the quarter was $20.2 million, and EPS was $0.41 based on a diluted weighted average share count of approximately 49.1 million shares.

For the year, net income was $71.9 million, and EPS was $1.49, based on a diluted weighted average share count of approximately 48.3 million shares, and applying a 37% pro forma tax rate for FY '13, versus a 36% pro forma tax rate used in FY '12.

On a year-over-year and sequential constant currency basis, foreign currency movements did not have a material impact on either Q4 revenues, or earnings per share.

I would now like to spend a few minutes discussing our operating expense investments for Q1, and full year fiscal 2014.

In Q1, FY '14, we will have increased spending related to the recruitment of sales and front end technical support teams, as well as our global sales kickoff event.

We're also strengthening our position in the mid market with new products and enhancing our support and services capabilities, which require additional investments over the next couple of quarters.

We expect to make significant additional investments around Soppana 10, including training, market awareness, and expanded distribution, that will enhance our leadership position in the market.

As we have previously stated, our planned additions to sales, services and support headcount are critical in order for us to achieve our targeted FY '15 and FY '16 growth rates.

We need to make these investments in fiscal 2014 to impact future years.

Please keep in mind that a typical sales rep takes about a year to become fully productive, so in the short-term as we continue to hire, they will have a negative impact on short-term margins.

Let me now speak to current street consensus.

As Bob indicated, we are comfortable with the current street consensus revenue and EBIT growth rates for fiscal 2014.

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

However, we expect fiscal 2014 operating margin expansion to be muted, due to our fiscal 2013 over achievement, as well as the fact that we're making significant strategic investments that enhance both our short and long term growth opportunities.

We currently expect operating margins to be flat to slightly up in FY '14, within a range of 0 basis points to 25 basis points expansion.

We would like you to keep in mind, however that our fiscal Q1 is usually our most challenging quarter.

Typically, our revenues are flat to down, and our EBIT margins decline from Q4 levels.

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

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

Let me now comment on tax rates and share counts.

The Company is planning to use a pro forma tax rate of 37% for fiscal 2014, which is the same pro forma rate used for fiscal 2013.

Our GAAP tax rate for fiscal 2013 was 35%, and our cash tax rate was 12%.

We expect our cash tax rate to remain lower than our GAAP tax rate for fiscal 2014, and to be in the low to mid 20% range.

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

For fiscal 2014, we anticipate that our diluted weighted average share count will be approximately 50 million to 51 million shares.

I will conclude the financial highlights with a few comments about our balance sheet and cash flows.

As of March 31, our cash and short-term investments balance was approximately $436 million, up 10% from the end of December.

Cash flow from operations was $42.9 million.

Free cash flow which we defined as cash flow from operations, less capital expenditures not related to the new headquarters, was $39.1 million which is an increase of 36% over the prior year quarter, and an increase of 50% sequentially.

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

During FY '13 we expended approximately $9.2 million on the land purchase, and initial construction costs for our new campus headquarters.

Of which approximately $7.7 million was in Q4.

As of March 31, 2013, our deferred revenue balance was approximately $184.3 million, which is an increase of $36.9 million or 25% over the prior year period, and up $22.6 million or 14% sequentially.

The increase in deferred revenue is primarily due to strong maintenance support renewals, which is typical in our fiscal fourth quarter.

Lastly for the quarter, our days sales outstanding or DSO, was 51 days which is flat sequentially and down from 53 days in the prior year quarter.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Bob?

Thank you, Brian.

I want to wrap up the call with a brief commentary about why we are succeeding, our strategic direction, and the status of Soppana 10.

So let's first review the major reasons why we have succeeded consistently, producing such strong financial results relative to others in our industry.

One, there's been high market demand for big data software solutions to solve problems related to data growth, complexity and cost reduction.

Secondly, we continue to technically outpace the competition with innovative high value solutions and support.

We have had outstanding sales force execution that increased enterprise sales by 35% year-over-year, and lastly our relentless focus on providing the best-in-class value and services to our customers (inaudible).

So where are we going?

As I said on previous earnings calls, we are driving towards our $1 billion planned goals by one -- strengthening our technology and market position in our core data management market; increasing distribution leverage in the enterprise, MSPs and the SMB segment of the market; significantly expanding our total addressable market; and establishing our position as a technology leader in the broader, all things data market segments, including mobile and analytics; and lastly, establishing our leadership position for comprehensive services and support for both the data management and all things data market segments.

We are building on our strengths and expanding into closely linked high growth data related market opportunities.

Our core data management business will provide the growth foundation, as we build positions in other higher growth data related areas.

We have the markets, the products and a very strong organizational foundation.

The key to achieving our financial objectives is execution, to make sure this happens, we have established a series of key initiatives to raise the execution -- to raise execution to the next level across all Company functions.

Now let me spend a minute on Soppana 10.

We publicly launched Soppana 10, our largest software release to date on February 25.

Soppana 10 is the only software platform in the industry, that has a single technical foundation that can provide industry leading solutions for both the existing and emerging customer requirements for data management, mobile computing, infrastructure management and business intelligence.

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

The launch of Soppana 10 has been very successful, to date the release has been of high quality and stability.

We are pleased that more customers have purchased Soppana 10, as compared to Soppana 9, at the same point of time during their respective release cycles.

As a reminder, Soppana 10 will be released in a series of sub releases, each of which will add substantial new functionality for both the enterprise and mid market.

Please note that the current release of Soppana 10 is clearly focused on the enterprise.

We expect mid market focus Soppana 10 products for our customers and channel partners to be released later on this calendar year.

Soppana 10 software dramatically reduces the cost, time and risk associated with protecting, recovering, finding and accessing data across the enterprise, regardless of where it resides, and with complete flexibility to deal with on premise data centers, the cloud, remote or branch offices, and desktops, laptops and mobile -- or mobile devices.

Soppana software provides multiple options for data protection and recovery, it has broad capabilities to manage the content of data for compliance, regulatory, or business value creation.

With Soppana 10, all the data that is protected becomes an asset instead of a management burden, by securely opening it up for self-service access through a single searchable index, or for new uses such as analytics or operations management.

I'm not going to detail all of the many transformative fundamental innovations of Soppana 10, but will highlight some of the key technology advances that are gaining traction with large enterprise customers.

Soppana 10 has fourth generation deduplication, building on our history of innovation in both source side and target dedupe, the fourth generation of deduplication in Soppana 10 allows the users to scale from small individual nodes, up to extra large multi-node deduplication databases by introducing parallel deduplication which is unmatched in the industry.

Our content store, is a secure, open information repository for all snapshot, backup, and archive data.

It can be used to solve one of the fundamental big data problems which is how to connect and manage all of the various disconnected data silos inside an enterprise, and connect to data silos outside the enterprise.

These silos can reside in the data center, in a remote office, in the cloud, or on a mobile device.

It offers massive scalability, a single management framework, and embedded intelligence about stored data.

All data within the content store is deduplicated, encrypted for security, and placed on the most cost optimized tier of storage.

Automated work flows can be used to connect data to silos outside the enterprise.

Content store is the foundation of our all things data strategy, which includes comprehensive monitored data management, compliance, mobile, business analytics and operations management.

I want to talk about our mobile strategy.

CommVault Edge is a complete enterprise class mobile -- has the complete enterprise class mobile capability.

Data can be securely accessed through a web portal, and Apps for Smartphones and tablets.

CommVault Edge has the capability to deliver efficient, centralized, deduped data protection, and provides workers any time, any device access to their personal data from the cloud.

It also provides the controls needed for faster and more cost effective search and need discovery.

Workflow management is another area that's gotten a lot of attention from our customers.

It's one of the standout features in the automation area.

-- Let's try that one again.

One of the standout new features in the automation area is the new work phone management system that allows customers to processors to be defined and run automatically, eliminating manual task, standardizing operations, and improving performance.

This is a key area of new opportunity with enterprise customers who can eliminate hard dollar costs from operations for these new features.

It is important to emphasize that license revenues generated from Soppana 10, and our core data management market, will continue to be the primary driver of FY '14 license revenue growth.

Soppana 10 will significantly enhance our industry leading value proposition in our core business, and enable us to begin to penetrate other data related market segments.

We believe there will be substantial growth in other data related market segments such as mobile and analytics post FY '14.

Going forward, the industry is going through and will continue to go through a rapid series of technological changes.

We foresee many changes in technology, and a specific new customer requirements which result from those changes.

We have defined where we need to go in order for us to stay in front as the innovative leader with our all things data strategy.

As such we have developed a deep Soppana 10 plus pipeline, as well as post Soppana 10 pipeline.

We'll provide more details on this at the appropriate time.

In closing, we had an outstanding Q4 and fiscal 2013, achieving record revenues and earnings.

We have established a firm foundation for fiscal '14, despite the lingering macroeconomic concerns.

Soppana 10 was successfully brought to the market with the most comprehensive launch in our history.

We enter FY 2014 in a much stronger competitive position than ever before in our Company's history.

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

I would like to take this time to thank the entire CommVault team, our customers, and our partners for another record year.

We are excited about our future potential, and are confident in our ability to create both short and long term shareholder value.

I will now turn the call back to Michael.

Thanks, Bob.

Operator can we please open the call for questions?

(Operator Instructions)

Joel Fishbein, Lazard.

Good morning, guys and congrats on a very strong quarter.

It's a nice breath of fresh air in this very terrible environment.

Couple questions, Bob.

Just on the -- if you could comment at all on mega deals or multi petabyte deals that you're seeing or have seen over the past several months, and also maybe if you could give us a couple, maybe a little bit of flavor around Soppana 10 and some of the customer features that are getting some of the early adopters most excited about, that would be very helpful?

So what we said is that our revenue earnings growth is highly dependent on these large deals, Joel.

I said on the call that our visibility is good going in, which it is, going into the Q1.

So the key is can we sustain and build enough of a funnel in these big deals for the balance of FY '14, given the weak macroeconomic environment.

And I just raised the issue as a caution, that we're concerned about it and we just have a lot of focus on making sure that we can continue to build sufficient funnel to hit -- achieve our objectives for the balance of '14.

So it has not become an issue, we're certainly concerned about it, and we are very focused on it.

Just in terms of Soppana 10, you just talk about any of the early customer feedback, and I know you said it got off to a very strong start, but anything specific around 10 that customers are most interested or drivers there?

So let me be clear, any new customer is shipped Soppana 10, and we're starting the 25th of February, so all our new customers are getting Soppana 10.

And in regard to -- what I mentioned was that Soppana 10 dramatically strengthens our position in our core data management business, so it's not just the newer opportunities in mobile and analytics and compliance, but it's our core.

And it ties the things I just say on the call, we've dramatically scaled out our deduplication capability.

So we basically have global parallel dedupe which nobody else in the market has.

It's the most cost effective and a high performance dedupe capability in the industry, and it's intelligent.

Meaning it's not just ones and zeros, we index the object and make sure that index is consistent with the version of the application throughout the data life cycle.

So that's also a major advantage for us, relative to things like dedupe compliances.

Second, our ability to use snap, our snap management and replication capability is really outstanding.

Our ability to consolidate back up and archive into a single copy which we call one-pass, is a major advantage for us.

It has got major performance and cost advantages, so when we work with a customer and they've got different -- hardware from different hardware vendors and we can put a consistent management structure on top of that, build a universal virtual data repository across an enterprise, those are major advantages for our customers that translate into dramatic cost reductions in a much higher operational efficiency and reliability.

And a lot less support issues, so that's just in our core business and clearly, customers looking forward.

One of the other issues that is resonating really well with very large customers, is our ability to automate all processes, as I mentioned on the call with our work flow capability, so any process can be automated, and that's particularly important for your big MSPs or your customers that have large shared services environments.

And then you get into the content store which enables us to develop capability for analytics, or enables customers to establish broad mobile capability for the user.

So the users can get easy access and secure access from any device.

And get access to the data whether it resides in the cloud, desktop or on a server, so those are key advantages that we have that nobody else in the market has, so just in general, Joel, the Soppana 10 has gotten really good reception.

The products been very stable.

We've done more training both for existing sales and systems people as well as our partners on Soppana 10 than any other release we've had.

So in general, its been very successful.

The other point I made on the call which I think everybody needs to understand is that the near term revenue, most of the revenue is going to come from our core data management business, and we're going to take market share and continue to take market share in that segment.

But we're confident now that over the next several years that we'll be able to build a significant revenue base in these other market segments like mobile, like analytics and like operations management.

Aaron Rakers, Stifel Nicolaus.

First, Bob its been a little more than two years since you've introduced your capacity based licensing.

Obviously that's going extremely well.

I'm interested if you have any kind of updated thoughts or comments around the recurring revenue nature of the annuity nature of that?

What kind of renewal rates look like, what you've been seeing, I think last quarter you alluded to maybe sharing a little bit more in that front.

I'd be interested in how you're thinking about that through 2014?

Well the renewal annuity of revenue coming off our capacity base license sales has been very strong.

We haven't publicly defined what that number is yet because we want a little bit more history, but it is at the higher end of our expectations in terms of what the annuity stream looks like.

And if it continues at these rates and we can substantiate that it will continue, then I think we will provide some more color on it.

And then the follow-up question, I think as we evolve and you get into some of these larger deals, one of the areas that we've heard you talk about investments into is kind of the professional services side.

So I'm interested how you're thinking about that as we progress through fiscal 2014, and maybe in that context how we should think about that flowing through the margin line particularly gross margin on the services segment given that it would appear that you expect to see some kind of a mix shift within that services category over the next couple years?

So number one, Aaron our investment in services is strategic, being if we don't have goals that should be whatever the number is $100 million with X operating margins in so many years.

But the key is whether it's in MSPs or major enterprised accounts without key strategic services up front, it is very difficult to make sure that you define and understand what a customer wants, make sure that a solution is properly architected, implemented, and supported without comprehensive services.

We found that our partners, and they're good partners don't have the full complement of skills to do that.

So we are building the skill sets and the processes and the capabilities so we can work with our partners to insure that our customers are getting optimum value for the investments that they make whether it's CommVault or CommVault and combined with its other partners.

There is no other way to do this without having those capabilities, and we have found and believe there's nobody in the market that does this really well.

So we're making the investments to make sure that, that happens.

Well, I'll let Al jump in because Al has been the orchestrator of all this, and he started working on these concepts and issues going back several years ago, and he and his team are making a lot of progress.

Al?

Yes, just a couple of extra comments, Aaron.

Thanks, Bob.

One, we tend to be enterprise focused as we try to do this, as the complexity goes up, obviously you need the strong methodologies, the strong processes, the practices, the service products if you will, and of course the up-to-date trained talent on it.

So those are kind of the key components of it all.

I also think lastly as Bob's point on not a lot of people do it well, do it in our case is our definition of the market which nobody else has.

We link all these use cases together from better back up, all the way through using the data in an analytics and search kind of context.

So there aren't a lot of people out there familiar with not only these different use cases but particularly as they're combined into best practice data management.

Thanks, Al and to answer your other question on margins, we believe we will still achieve our operating margin objectives which we basically said would be somewhere in the mid-20%s at the point in time we hit $1 billion, in fact I've said, $1 billion and 25% operating margin, so it's still achievable, at the same time we're making these very substantial investments in services.

Eric Martinuzzi, Lake Street Capital.

Thanks, and congratulations as well on the good execution there in Q4.

Specifically want to dive into what you referred to as the spring swoon, Bob.

You typically talk pretty cautiously, you never want to over promise, but I was just wondering did you do anything differently?

You talked about a sharp focus on the sales funnel.

Did you do anything differently entering the year than maybe in past years?

Yes, it is different.

What we're seeing and hearing from competitors there's enough data out there to say that we shouldn't do things, this is not business as usual, and that we should increase our focus on our funnel building, and close rates and make sure that we have the added capability to make sure we hit our numbers.

So the other thing we've done is, even though we're investing heavily, we are making sure we make those investments in a way that doesn't over extend themselves here, given the uncertainty, without making -- making sure we control it in a way that we still hit our near and long term strategic objectives, but be a little bit extra cautious on how we manage our operating expenses.

So the answer is yes, it is different than in prior quarters, and it may prove to be overly cautious, but we think it's the prudent thing to do.

Both on the sales side and the managing of our operating expenses, operating expense growth.

Okay, and then just vertically, anything you can tell us one month into the quarter versus the March quarter itself, if the vertical outliers both to the good or the weak, if those persist here as we enter the New Year?

Too early to tell.

Okay, thanks.

Aaron Schwartz, Jefferies.

Bob, you spoke about most of the new customers coming on to Soppana 9, but I was wondering if you could touch on the install base.

Have you seen upgrades from prior versions and has that primarily been from version 8 or 9 and I'm just wondering from version 8 if they are not on the capacity base license what the trend line looks like there and is they are an ASP uplift on the core data management component?

It's too early Aaron, in our -- when we release a product, we release it in a controlled way for a quarter or two, and we don't allow customer led upgrades until we are absolutely sure everything is buttoned up, that's the same with 10, so we haven't opened up our customer led upgrades yet.

Should happen relatively in the near future, but this has worked extremely well for us.

You very rarely hear a lot of noise about CommVault's releases, and one of them is we try to get them to be extremely high quality when we release them, and then we rapidly make any changes so that when we have automated customer lift that those customers are not going to run into any issues.

So just a little bit early to answer those questions, but right now we're feeling really good about them.

Okay and then second question if I could, you talked a couple calls now about the opportunity with your MSP partner base and the focus there, can you just walk through how the structure of those contracts would look?

Are those capacity based deals as well, and then are you levered to the data growth of the customers of the MSP, or can you just walk through how those would work?

Thanks.

They are capacity based.

They are -- we have a fair amount of subscription based licensing coming out of that segment, and they're perpetual.

So they are all three and yes, the growth of business within those MSPs are clearly tied to the volume and data growth.

So it provides, if you add up the capacity base and subscription which is the vast majority of our license revenue from that sector of the market, it provides them a pretty good additional annuity for us, as the MSP portion of our business grows.

Michael Turits, Raymond James.

One about revenue, one about OpEx.

First on the revenue side, you commented you're comfortable with growth rates up to the full year.

The street was kind of seasonally down for the first fiscal, first quarter of just 2%.

Wondering if you were comfortable with that revenue -- seasonal revenue growth rate decline that the street was modeling?

And second I just wanted to get into OpEx if I could, and you had 21% growth in headcount for this year.

Does that suggest that you're going to start to accelerate the OpEx growth rate into next year so that's higher than '13 as well?

I'll let Brian answer that for you.

Yes, with that much headcount growth we do expect our operating expense investments to most likely be at a higher rate.

We're still comfortable though with top line growth and bottom line growth that's out there from a consensus basis.

And from a Q4 to Q1 seasonality, we do typically see a decline in revenues and EBIT and EBIT dollars and margin.

The street was just at only 2% down, and given the tough environment 2% down sequentially in terms of revenue growth.

I was wondering if you're comfortable with that?

Yes, at this point, Michael, we are comfortable with that.

I think that's a reasonable number at this time of the quarter.

Okay, great guys.

Thanks very much.

Andrew Nowinski, Piper Jaffray.

Okay, good morning and congratulations on the great quarter guys.

Maybe just a few questions here.

First, with regard to Arrow do you think you're getting a share shift within Arrow is that what drove the strong results there this quarter?

Well I'll let Brian comment a little bit further, but we have had very, very strong results from Arrow in general, and from some of the customers that sit under Arrow like CDW.

Some of that has come from what Brian mentioned that going back about a year ago, we shifted all -- for all practical purposes all of our SMB business from Dell to other channels, and Arrow has picked up all of that slack plus some.

So they've executed really well for us.

That partnership has clearly strengthened and within the Arrow mix itself in terms of CommVault's business I think you'll have to ask them, but clearly they have been a really good distribution partner for us, and it's more than offset our SMB move out of Dell beginning about a year ago.

Yes, after those comments and also from an enterprise perspective as well, we also see some pretty good performance out of Arrow.

Okay then just my follow-up question.

Regarding capital allocation can you talk about your appetite for share repurchases and what you are thinking in regard to FY '14?

Thanks.

It is what it has always been.

If we see a sharp correction in the market, we are prepared to go in and opportunistically acquire more shares.

Brent Bracelin, Pacific Crest Securities.

One for Brian and one for Bob.

Brian starting with you.

If you look at the average deal size pretty healthy uptick in the quarter it looks like 16% growth.

What drove that in the quarter, was it data volume growth based on your [capacity] customers, was it just mix to large deals?

Are you seeing higher uptake of add-on's, help me to understand what drove the ASP increase this quarter?

So that's going to balance from quarter to quarter for sure.

As we do mega deals, and certainly seven figure type deals and six figure type deals, large six figure deals, it's going to bounce around.

It's primarily driven not necessarily by volume, it was more just average deal size.

I wouldn't say there was any particular thing that was driving it other than just increased capacity sales and increased growth.

Okay, sounds like more of a mix large deal mix then.

And then Bob, obviously question for you here.

EMC making kind of big splash here around soft and defined storage, and unveiled Viper, this storage controller, it's more of an orchestration tool.

I guess my question is, is what's your view on this whole move software defined storage trend out there?

I'd love to get your view around customer appetite for storage software, is it changing, are you looking at customers that have an increased interest in using software based replication, software based dedupe, any view there would be helpful?

We believe in general that the move towards virtualization in the compute layer which we have certainly seen already, virtualization in the network layer and virtualization of storage layer will occur over time, from a number of vendors, and clearly EMC will be one of the leaders in this move to virtualization.

It will occur, this is a situation that will occur over time, and there will be many versions of it.

I think we understand it really well, and have a strong product road map which will intersect with it, so that at the end of the day CommVault will still be able to manage across all these different versions of compute network and storage.

Whether they be virtual or not, and I'm going to let Al open up here, but clearly the scenario we're well versed in, and we are way, way ahead of the game in terms of our product pipeline and our ability to deal with this.

Al?

Yes, Brent and just a couple, those are real good comments, a couple added points to your list of questions there, one on replication.

Yes that's something I'm and the Company's very interested in doing, particularly a software approach to it.

We feel strongly about the merits of doing it, and that being said we are working with our key partners, integrating their replication schemes as well, but that's going to be a key push.

I think it's important in this environment but as you know, we feel really strongly about the right way to manage data starts with understanding what the data is, and most replication environments out there are ones and zeros movements, and copies on that.

And in terms of dedupe I think you mentioned that in there somewhere.

That's table stakes anymore, almost every software solution out there in our opinion must have it and it must scale well and it must be done extremely well.

Thanks Al, again this is evolution that will take many forms and take many years to evolve, and given leaders like EMC, these new technologies will begin to be adopted in the market, and we're well prepared to provide our customers for solutions across those new technologies as they become available.

(Operator Instructions)

Glenn Hanus, Needham.

Can you comment on the federal usually healthy vertical for you, just given what's going on out there, could you comment on how you did in the quarter and your outlook for FY '14?

Yes, I'd say we did okay, given the environment Glenn in federal.

Outlook looks okay.

Certainly sequester has taken some of the edge off our numbers but they still look good, but it is also an area of uncertainty, but I think we can manage our way through it and maybe even our pipeline and opportunity.

And again, that's an area with some very large deals so you might see some spikes here and there Glenn as they come in, and when and if some of those come in, we'll comment on them in terms of whether they are a spike or a trend.

Robert Breza, RBC Capital Markets.

Bob, I was wondering you talk a lot about the customer funnel and building that funnel.

As you look at FY '14, can you kind of comment on how much bigger that funnel is compared to the start of FY '13?

Is it up order of magnitude or just any kind of color into how big that funnel is?

Thanks.

I won't comment on that.

All I'll say is that given in an uncertain environment, the funnels have to be larger than in a normal environment, otherwise your risks go up in achieving your numbers.

And so we need to have significantly higher funnel growth in our anticipated revenue growth targets, to make sure that we're comfortable, so that's where the focus is.

In other words we need to raise the bar given the uncertainty out there.

Ryan Bergan, Craig-Hallum.

Just wanted to address the Dell relationship.

Year over year that was flat growth I'm just wondering if that was a product of sounds like you were actively moving SMB deals away from Dell into other channels.

Just wondering can you talk about the flat growth there at Dell, and kind of what your enterprise customers are saying about Dell's move into pushing more of their own IP?

So Ryan, we do not operate on hope.

We operate on plans that we can execute, and there's a lot of uncertainty at Dell so we moved clearly we moved revenue from the SMB segment from Dell to others.

Given the uncertainty that's sitting at Dell, it would be prudent for us to do the same thing in the enterprise, and that's what we're doing.

That's what Brian mentioned, so we're taking very clear, direct action, over time to move more of our enterprise revenue that's currently at Dell, into other distribution partners, because of the uncertainty.

And we can't, you can't work with a partner when there is that much uncertainty sitting out there, so we're doing that.

We'll continue to work with the Dell field where it's mutual advantages, but strategically we're clearly placing our bets on longer term, on other partners who are again very, very focused on the enterprise and Dell clearly isn't, and they're strategy fits what they are trying to do as a company, and we have to act in our own best interest here.

Srini Nandury, Summit Research.

As you look at your sales and marketing investments throughout the world, how do you prioritize where to invest because Asia is growing much faster than US and Europe?

Good question.

So there's a couple areas that we have added structure.

One was MSP, so there's a focused new structure within CommVault and is focused on the MSP market, and we've just added a lot of investment in Asia, Srini.

We just brought in somebody new to run Asia as our VP, so the VP of Asia by the way moved in to take the MSP role, and he had a good track record there and he's taken the broader MSP role, and then Rick Tyler who ran our central region in the US, just moved over to take our Asian region which is now expanded, we included so it's now China and India come under our APAC umbrella.

We've been adding resources in there, some of our -- we've had some people move from the US, and from our EMEA operations into our APAC operation.

We've made substantial new expanded investments and new leaders in Japan, so it is a major area of focus for us and we are making the appropriate investments to make sure we're going to be successful both in the short and long term in Asia.

Phil Winslow, Credit Suisse.

Most of my questions been asked but just wanted to focus in on the competitive landscape a little bit.

Just curious if you saw any sort of changes this quarter or the past couple quarters of with your typical competitors?

Thanks.

We haven't seen from IBM or EMC, I don't think we've seen any change, I think in Symantec's case I think they are a more focused company.

Technically, we haven't seen a lot of change there, but I think from management they seem to have their act together better.

From a market standpoint, you still see from Symantec in particular, extremely aggressive pricing, they try to protect their installed base.

I'd say those are the major changes out there.

Michael Turits, Raymond James.

Just a little bit more on OpEx.

As you look into the first quarter, historically sometimes you've been up, on a dollar basis in OpEx 4Q to 1Q sometimes you've been down.

Given the sort of countervailing needs to both invest for opportunities and the environment, should we think of this as $1 up in terms of OpEx going into next quarter?

Yes.

We could see it, depending on where our revenue is and commissions, it could go either way.

Well that helps, great, thanks guys.

It's one of those it could be flat or up or it could be flat and down.

So we over achieve on revenue it will go up, and if we don't it will go down.

How's that?

That's a little better.

Much appreciated, great quarter guys, thanks.

You want to bet that it goes up.

But we can't guarantee that yet.

Right, thanks.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.

Thank you.

Thank you.