Commvault Systems Inc (CVLT) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to CommVault's first fiscal quarter 2014 earnings call.

(Operator Instructions).

At this time for opening remarks and introduction 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 first quarter 2014.

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 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 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 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 four 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.

Thank you, Mike.

Good morning, everyone and thanks for joining our fiscal first quarter 2014 earnings call.

I am pleased that we had a good start to fiscal 201 with solid Q1 financial results.

Let me briefly summarize our Q1 financial result.

For the quarter total revenues $134.4 million up 21% year-over-year and down 3% sequentially.

Software revenue was $65.3 million s and grew 20% year-over-year and down 9% sequential sequentially.

Services revenue was $69.1 million and grew 21% year-over-year and down 5% sequentially.

And from an earning perspective for the quarter operating income or EBIT was $31.3 million up 38% year-over-year and down 1% sequentially.

EBIT margins were 23.3%, diluted earnings per share were $0.40.

We generated approximately $24.6 million of the cash flow from operations during Q1 exiting the quarter with approximately $459 million of cash and no debt.

I want to spend a minute on some key awards and recognition.

We had strong third party validation of CommVault's technology leadership position with Simpana 10 from two of the industries leading analyst Gartner and Forrester.

For the third year in a row CommVault earned the strongest position in the leadership quadrant of the prestigious 2013 Magic Quadrant for Enterprise Backup and Recovery Software.

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

Gartner states that the industry continues to undergo significantly change as organizations embrace new technologies and techniques and has customers showing willingness to augment or switch out legacy vendors and backup technics.

According to the report between 2012 and 2016 one-third of organizations will change backup vendors due to frustration over cost, complexity and/or capability.

In addition, Gartner states that by 2016 at least 20% of large enterprises will abandoned backup recovery solutions using a traditional methodology and adopt those that employ only snapshot and replication techniques, that is up from less than 7% today.

CommVault take advantage of those trends.

Earlier this month CommVault was also named the top ranked leader in the Forrester Wave Enterprise Backup and Recovery Software Q2 2013.

According to Forrester CommVault excels with an integrated platform.

CommVault's primary strategy centers on providing a single platform for backup, recovery, continuity, archive and other data management protection strategies.

The areas of strength for CommVault included deduplication capabilities and cloud-target integrations, as well as hypervisor and application capabilitiesIn the report we also received high markets for professional services and consulting practice.

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

All of us at CommVault are very proud of receiving these awards from two of the most respected independent analysis firms in our industry and what these reports say about our products and services.

I encourage you to review both reports which are available on our website.

Now I will talk about the macro environment.

We were all aware of the weakness in the global economy in the first half of calendar 2013.

We are assuming only modest improvements in the second half.

The U.S. economy should improve as a result of less physical drag and improving underlying fundamentals.

The Europe recession is moderating and the U.K. and Japan and Canadian economies are improving; however, China and India are seeing slower growth.

Some leading industry analysis are forecasting IT spending to remain lackluster in the 2% range.

We are assuming overall market demand for our software and services will marginally increase in the second half of the year.

The key customer needs that are driving demand remain intact.

They are related to cost, scale, server virtualization, cloud, mobile devises, regulatory requirements, analytics and better operations management tools.

We believe competition within the industry is likely to increase from both existing and new competitors.

I will now address our current outlook.

I mentioned last quarter that we were concerned about a weakening economic as a result we were putting more focus on sales funnel building and the quality of those funnels particularly our large deal flow funnel.

Additionally we were also taking prudent actions to control operating expenses.

Those extra efforts have paid off in Q1 with strong year-on-year earnings growth and very good funnel build in Q1 especially in big deal funnel growth.

Despite our good funnel build in Q1, funnel build and validation of the quality of our funnels remain a key area of focus for us.

We went enter Q2 with good visibility to our current quarter Q2 forecast.

The fact that we had a solid Q1 provides a foundation for the remainder of fiscal 2014.

We continue to believe we will be able to achieve solid double-digit revenue and EBIT growth in fiscal 2014.

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

We have good traction with Simpana 10 and we are making progress in expanding our distribution footprint with traditional distribution and reseller channels managed service providers and certain strategic hardware partners.

I will provide more color on Simpana 10 later on in the call.

Where there could be upside to the full FY 2014 street consensus revenue growth rates and EBIT growth we believe they are reasonable at current levels due to the following; our ability to grow becomes more dependent on not just big deals but a steady flow of $500,000 and $1 million plus deals, which have quarterly revenue and earnings risk due to their timing.

We are particularly cautious about U.S. FederalGovernment spending due to current sequestration constraints.

The Federal Government is a major vertical market and our fiscal Q2 is the U.S. Feds year end.

We continue to be concerned about European IT spending outlook as sectors of the economy are currently in recession.

And lastly major third party analysts continue to forecast moderate tech spending for the remainder of calendar 2013.

The flight for budget money will likely remain tough as the year goes on.

In summary, CommVault had another quarter of revenues and earnings growth and has established a good foundation for the balance of fiscal 2014.

We believe we are well positioned once again to achieve well above industry average revenue and earnings growth rate driven by strong market traction with Simpana 10, continuing increases in sales effectiveness and capacity and broaden distribution in 2014.

I will now turn the call over to Brian.

Thanks, Bob and good morning everyone.

I will now cover some key financial highlights for the first quarter of fiscal year 2014.

Total revenues for the quarter were $134.4 million representing an increase of 21% over the prior year period.

We reported softer revenue of $65.3 million for the quarter which was up by 20% or $11.1 million over the prior year period.

During Q1 our software 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 has a direct correlation to the underlying volume of data under management.

Capacity based license sales represented 74% of our Q1 software revenue, which was up from 73% in Q4 FY 2013 and 66% in the prior year period.

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 22% over the prior year period and represented 89% of software revenue.

Our direct revenue represented the balance and increased 6% over the prior year period.

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

Let me know comment on enterprise deal mix.

Software revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, increased by 18% over the prior year period and declined 12% sequentially.

Enterprise deals represented approximately 55% of software revenue . The number of enterprise deals increased 27% year-over-year and declined 11% sequentially.

Our average enterprise deal size was approximately $268,000 during the current quarter compared to $288,000 in the prior year period and $272,000 in Q4 FY 2013.

Software revenue from non enterprise deals increased 24% over the prior year period and decreased 6% sequentially.

The revenue mix for Q1 FY 2014 was 49% software and 51% services.

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

Service revenue for Q1 was $69.1 million an increase of 21% year-over-year and 5% sequentially.

Let me now comment on the U.S. versus International revenue mix.

For the quarter revenue from U.S. operation generating 62% of total revenues resulting in a 30% year-over-year increase.

While revenue from International operations generated the balance resulting in a 9% year-over-year increase.

Geographically we had strong growth in the U.S. as well as parts of Europe and Asia.

On a year-over-year and sequential constant currency basis foreign currency movements did not have a material impact on either Q1 revenues or earnings per share.

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

We saw very good performance through Arrow our largest U.S. distributor.

For the quarter total revenue through Arrow comprised approximately 29% of total revenue growing 31% year-over-year and decreasing 12% sequentially.

Sales through our Dell relationships accounted for approximately 20% of total revenues for the quarter.

Total quarterly Dell revenues grew 13% year-over-year and 2% sequentially.

Over the past 12 to 15 months we have successfully shifted most of our SMB business to non Dell distribution partners.

As a result the majority of the remaining revenue that is still transacted through Dell comes from maintenance support contracts and add on software license 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.

As noted on prior earnings call we have also taken proactive steps to broaden our distribution through non Dell partners 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.

In summary, we remain confident in our ability to continue to achieve solid double-digit revenue growth during FY 2014 despite the continued shift away from Dell distribution.

We added approximately 340 new customers in the quarter.

Our historically customer count now totals approximately 18,600 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.

Now moving on to gross margins, operating expenses and EBIT margin expansion.

Gross margins were 87% for the quarter.

Total operating expenses were $84.1 million for the quarter up approximately 16% year-over-year and down 4% sequentially.

Non-GAAP operating margins were 23.3% for the quarter resulting in operating income or EBIT of $31.3 million.

On a year-over-year basis Q1 EBIT increased by 38%.

Q1 EBIT margins increased by 300 basis points year-over-year and increased 30 basis points sequentially.

Sales and marketing expenses as a percentage of total revenues decreased to 47% in the current quarter from 48% in both the prior year period and the prior quarter.

The sequential decrease in sales and marketing expenses is mostly due to higher compensation in Q4 associated with higher software revenue.

We had better than anticipated operating margin improvement in Q1 due to lower than planned headcount additions as well as below targeted spending on several investment initiatives.

We added 57 net employees in fiscal Q1, and ended the quarter with 1,797 employees.

This was below our internal hiring targets and we will roll the Q1 headcount hiring shortfall into Q2's hiring plan.

We expect to increase our rate of hiring in Q2 compared to Q1 with a heavy focus on the recruitment of sales and front end technical support teams.

Our planed additions to sales, services and support headcount are critical in order for us to achieve our targeted FY 2015 and FY 2016 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 likely have a negative impact on short-term margins.

In addition, as we roll out more Simpana 10 features and functionality we expect to make significant additional investments including training, market awareness, build out of our cloud storage group and expanded distribution.

We are 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.

For the remainder of FY 2014 we expect to continue to make investments that will help us achieve solid double-digit revenue and EBIT growth.

With this in mind we expect to improve FY 2014 operating margins by approximately 25 basis points or slightly better.

While we expect to accelerate our rate of investments in the remainder of 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 count.

The Company is planing 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 Q1 FY 2014 was 38%, and our cash tax rate was approximately 18%.

We expect our cash tax rate to remain lower than our GAAP tax rate during FY 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 49.5 million to 50.5 million shares.

Net income for the quarter was $19.9 million and EPS was $0.40 per share based on a diluted weighted average share count of approximately 49.3 million shares.

Now moving on to our balance sheet and cash flows.

As of June 30th our cash balance was approximately $459 million up 5% from the end of March.

Cash flow from operations was $24.6 million.

Free cash flow, which we define as cash flow from operation less capital expenditures not related to the new headquarters, was $23.3 million which is an increase of the 41% over the prior year quarter and decrease of 41% sequentially.

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

The sequential decrease in free cash flow is the result of changes in working capital on the balance sheet primarily related to differed revenue and accrued expenses.

During Q1 FY 2014 we expended approximately $8.7 million on construction cost for our new campus headquarters.

Our estimate of the total cost is in the range of $130 million to $135 million of which approximately two-thirds of the total expenditures will be spent by the end of fiscal 2014.

Please keep in mind that we will fund these expenditures from our existing cash balance.

As of June 30, 2013, our deferred revenue balance was approximately $189.2 million, which is an increase of $45.2 million or 31% over the prior year period and up $4.9 million or 3% sequentially.

The increase in deferred revenue is primarily due to strong maintenance support and renewals.

And lastly for the quarter, our days sales outstanding or DSO was 55 days, which is up from 51 days in both the prior quarter and prior year quarter due to linearity.

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 on the status of Simpana 10.

These are very exciting times to be in our industry.

We are in a rapidly changing IT environment that is creating lots of opportunities for innovative solutions like CommVault Simpana 10.

The core release has been a very high quality and is extremely stable.

As a reminder in Q1 the vast majority of Simpana 10 license revenue has come from our control release to new customers.

Existing customer lead and channel partner lead upgrades are planned to begin later on this quarter.

Simpana 10 was designed to meet the rapidly changing needs of enterprise customers due to massive data growth, changes in IT technology, increasing regulatory requirements and needs for better business information.

In addition to the leading market analysts I mentioned earlier Enterprise customers are also validating that we did an outstanding job with Simpana 10 by developing leading innovative solutions for their top priority current needs and emerging new challenges.

These include the tremendous increases in scale and various forms of cloud with scale improvements in the core platform and more comprehensive capabilities formanaging virtualized server environments.

The rapid emergence of smart bring your own mobile devices that is driving new needs for instant data access, security and synchronized file sharing.

The critical need for large scale secure multi tenancy capabilities for mobile cloud sharing, cloud and managed service providers.

The need to easily and cost effectively archive (Inaudible) index data for compliance, regulatory, and business needs.

The need to improve operations with better monitoring, analytics and reporting, and the need to automate everything to reduce complexity, improve productivity.

And lastly the critical need for better more timely business understanding through more sophisticated data analysis.

We have also validated that our Simpana 10 platform is singularly unique in the market with no other competitive solution in sight.

Simpana 10 is built on a single highly scalable technical foundation that can provide industry leading solutions across data management, operations management and information management.

CommVault is the only Company in the industry that has successfully automated comprehensive movement in production of the data with a highly scalable index knowledge and understanding of all the elements related to the content of the data.

We call this our all things data strategy.

Importantly we have gotten very good validation and customer acceptance of our all things data strategy with our customers embracing our new data management capabilities a long with our new content and operating management capabilities.

In regard to modern data management this includes advances in Snap and replication, fourth generation global deduplication and new fast recovery capabilities.

We have made major advances in our ability to improve operations by being able to automate any complex process with easy to deploy work flows combined with advance reporting capabilities.

In regards to information management we have made major advances in content related solutions based on our ContentStore which is one single virtual place to globally manage content for archiving search, mobile and analytics.

Our goal by the end of 2014 is to have established a position in all our key new market segments with a group of key reference accounts.

We are on track to achieve that objective.

This is important r in order for us to establish a strong growth foundation for FY 2015 in our new target markets.

One senior executive and existing customer remarked to me recently that after Simpana 10 was presented to his organization they were shocked at how far and how fast CommVault has innovated and matured as a Company.

He also remarked about the professionalism and general capabilities of our team versus our competition which was certainly very gratifying to me.

As a result Simpana 10 has completely changed their thinking on how data related problems can be solved.

The first release of Simpana 10 broad platform was announced in February and was focused on the Enterprise segment of the market.

As I have mentioned previously Simpana 10 would be rolled out in a series of sub releases throughout FY 2014 and FY 2015.

The first of those sub releases containing comprehensive solutions for the mobile market was announced in a press release yesterday.

The header of the press release reads "New CommVault Edge Solutions Deliver Sync, Search and Protection for the Mobile Workforce."

CommVault Edge includes highly scalable secure functionality for the Enterprise mobile workforce, which solves many of the security, scalability and cost issues associated with common public cloud based mobile solutions.

We are planning to make additional Simpana 10 product announcements later on in during the quarter.

As I also mentioned last quarter our pace of product innovation is accelerating.

In addition to the current Simpana 10 product schedule for roll out in FY 2014, we are rapidly developing several new additions to the Simpana 10 platform.

These new products should be ready for launch starting in earlier FY 2015 with beta starting in the December quarter.

In summary, we have developed and are developing a broad Simpana product pipeline that will enable use to continue to enhance our technology leadership and expand our available markets.

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

In addition to the advances in product development, we are making very good progress in two other key areas that are critical to implementing our all things data strategy.

The first is broadening and deepening our professional services and consulting services capabilities.

Wehave substantial increased both the size and scope of our global professional service organization with additions of highly skilled consultants as well as the roll out of new consulting services.

Secondly, we have also strengthen our ability to increase our positions with managed service providers outsources and system integrator's with the formation of a focused global team, the cloud services group or CSG.

Let me summarize where we are with Simpana 10.

As I have said on prior earnings call Simpana 10 has the potential to significantly enhance our industry leading value proposition in our core business and over the medium and long-term enable us to developer substantial growth in other data related market segments like mobile and analytics.

I can say with great confidence that Simpana 10 is significantly enhancing our industry leading value proposition in our core business and the early market acceptance of our functionality gives us confidence we can build a solid foundation for growth in new market segments.

In closing, CommVault had a solid Q1 FY 2014 in revenue and earnings growth, which establishes a good foundation for the balance of FY 2014.

We are having good market acceptance of Simpana 10 for both our core market as well as new market segments.

We have made a number of comprehensive changes to enhance our sales, distribution, services and support capabilities.

We are consistently gaining market share and delivering solid revenue and earnings growth.

We will continue to invest in our Enterprise selling capabilities and expand our distribution reach throughout FY 2014.

We are executing a well defined strategic market, product and services vision that clearly has the potential to sustain solid double-digit revenue and earnings growth.

These are exciting times in our industry as well as CommVault's history and we are very confident about our future.

I will now turn the call back to Michael.

Thanks, Bob.

Before we open up the line for your questions, I would like to highlight that we will be hosting our annual stockholders meeting on Wednesday, August 21st at 9 AM Eastern Time at our headquarters in Oceanport, New Jersey.

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

Can we please open up the line for questions.

Thank you.

(Operator Instructions).

Our first question comes from Joel Fishbein from Lazard.

You may go ahead.

Good morning guys.

Congrats on another great quarter.

I just have one quick question for Brian and a follow-up for Bob.

Brian, based on the strong DSO performance, it looks the quarter had very good linearly.

Any comment on that would be helpful.

During Q1 it was 55 days for our DSO.

The quarter was impacted.

We did have sales kick off with some version 10 going on.

There was some less available selling days, but we were still able to get those deals done during the third month of the quarter and we were able to achieve the 55 days for our DSO.

Great.

Bob, thanks for the commentary on Simpana 10.

It is our understanding that the product has been able to use to consolidate vendors in the get information management world.

I would see if you had any comment on that, and see how it is being used by some of your customer to potentially consolidate some of your competitors.

I think what you are referring to is you can have products for data management, you can have product for operation management, you can have products for mobile and you can have products for analytics.

So when you have customers who instead of using cloud based solutions for mobile have committing to CommVault mobile solution you eliminate other competitors in the mobile market.

On the operations side, Al has worked really hard with the team not only comprehensive reporting but enabling the automation of any process with easy deploy work flow.

So now we are in the you can call it the operation management side of the business.

And on the analytic side with ContentStore having won virtual depository we are finding customers able to do things they weren't able to do before.

I will give you an example.

I'm not going to say the industry here, but there is a company that had acquired a number of companies and it was very difficult for them to analyze what customers were doing with various products between these organization and with ContentStore they are able to log in and track customer behavior in all the different entities.

Again this is an analytics implementation that we are working on with this particular customer, it is a International customer, for sophisticated business analytics.

So the premise of Simpana 10 in summary is working in all the key areas and target markets we had focused on.

It is quite gratifying to see this kind of reception form the market.

Great.

Thank you very much

Our next question comes from Jason Ader from William Blair.

You may go ahead.

Thanks.

Hi guys.

Just wanted to ask two quick ones.

First, Bob, based on the street estimate for Q2 it looks like it is implying 3% sequential growth in revenue and I look historically and the worse you have ever done is 6%, and that is really over the last two years it has been 6%.

Before that, it was quite a bit more than that sequentially from Q1 to Q2.

So I am just wondering whether you feel like that is a conservative street estimate for Q2?

Just based on historicals is there anything to suggest why it would not be in that mid to high single digit type of range?

And then secondly, I'm curious on your comments on competition increasing.

I do not remember hearing that before, but maybe I just missed that historically.

Why do you think the competition is likely to increase and what kind of impact do you think that would have on the business?

Let's take the first question on sequential growth.

You mentioned street estimates at 3% and historical at 6%.

I think what we are saying is that street current consensus is we consider as reasonable given the current macro environment and the other issues that I had mentioned.

Could we do better than that, yes, but we always like to give what I call a reasonable expectation where we think the quarter could end up and I think that is reasonable.

Also mentioned something else that I mentioned on the call that we focus heavily on increasing our funnel particularly our mega deal funnel, and we were quite successful in doing that in Q1, but those mega deal have to be converted and they have to be converted into revenue, so that is where your risk is.

I would say the street consensus is reasonable, and if we are more successful in our conversion, it could be higher but I wouldn't plan on that right now.

And then on the competition?

I think we are dealing with a very different competitive environment.

And I will give you an example.

Go back three years when we were basically competing in the backup mark against Symantec or EMC.

There were a few discreet competitors.

Now when you walk into an enterprise there are outsources, there are various types of cloud environments, you have different user delivery systems, with different SaaS applications.

So the whole environment is quite a bit different and how we approach these customers and how we achieve value is changing really rapidly, so it is a more complex competitive environment that we have to effectively deal with.

It is not that we do not have the technology by the way or the services to do it.

It is just when we train our field sales and consultants and our field technical people in terms of how to deal with those environments it is a more complicated equation and it is likely to continue to get complex.

We just happened to be in an extremely strong position as a Company, it is better than any other company in the industry to deal with all that, but is still more complicated.

So you think it is complicated but you are in a better position to win; is that a way to summarize?

CommVault continues on a relative basis to get strong and stronger.

I does not make it easier, Jason.

It just means we are in a position to win, but the complexity of the sale increases.

We have to do a much more comprehensive job in education in value prop definition as we work with our customers to create value.

That is our mission in life as a Company.

Is to walk into an account and figure out howwe create value for that customer.

Those dimensions now have increases substantially.

Okay.

Thanks.

Our next comes from Aaron Rakers from Stifel.

You may go ahead.

Thanks for taking the questions.

I also have one question and one quick follow-up.

Bob, you mentioned again highlighting the fact that we are going into the fiscal year end for the Government vertical albeit some pressure from a sequestration perspective.

How would you characterize the current Government vertical?

How much of that what was -- what was the contribution in this most recent quarter, and how would you characterize the current pipeline and funnel?

I would say the contribution in Q1 was on the weaker side.

The pipeline for Q2 looks very strong, but we are not planning for high conversion of that given our own internal conservatism.

The pipeline looks good, but how much of that is really going to get funded and how much of that is going to convert is the question.

So in our own forecasting we have been relatively conservative in what we think the outlook will be.

The answer is we really don't know.

Okay.

Fair enough.

We have it covered in other areas because we don't know.

Fair enough.

The follow-up from me is when we look at differed revenue growth, which was notably strong at 31%, on a sequentially basis if you breakdown the short-term deferred revenue was your software piece of that up or down sequentially or can you quantify what that piece was?

It was flat sequentially from a software perspective.

Okay.

Thank you.

Our next question comes from Andrew Nowinski from Piper Jaffray.

You may go ahead.

Congrats.

Looks like your 12th consecutive solid quarter here.

I just had a question on the software revenue first.

In Q1 it looks like it may have been a bit below normal seasonality.

Was there anything in the quarter on the software license side that may have caused that to come modestly lower than normal?

I think that is a good question, Andrew.

The answer is yes, we would describe that as slightly below normal seasonality, and the reason for that is what Brian mentioned.

We took the field out for a massive amount of time starting in late Q4 right through Q1 on Simpana 10 training including a week after a very large sales kick off.

So the time out of the field early in the quarter was unusually large and the quarter was a little bit backend loaded.

That I would say is the major reason we were slightly below our, I call it our seasonality trend line.

On the flip side, we had a record substantial increase in funnel in flow because we put a lot of the focus on that as we came out of our Simpana 10 training.

It was like, "Okay, guys, we have to get back to work here and do a better job of funnel inflow." And sales team did a really good job on that.

So in summary, yes the license revenue was slightly below trend in Q1, and in Q2 we had very large funnel built particularly in what we call the really large deal funnel build in Q1.

Okay, makes sense.

And then just one quick follow up.

Despite the concerns in the quarter about Dell cutting commission revenue looks like it was near an all time high, and I understand the majority of that was from maintenance renewals, but is the continued demand through Dell indicative of their lack of a comparable product?

I would say yes and no.

Clearly we are in the process of disengaging from Dell as Brian mentioned.

We disengaged in the mid market last year successfully.

You can see we had 24% growth basically with small participation from Dell, and we are in the process of moving our enterprise focus away from Dell as well.

They do not have a comparable product.

I'm not sure what is going to happen there, but certainly we at CommVault have a business to run.

And we are taking proactive steps to make sure we hit our numbers without Dell.

Now, if Dell -- through all the changes that are occurring at Dell there is a possibility we could reengage with Dell in the enterprise and if that happens we will be a good partner and take proactive steps.

But we are making sure we can execute our plan with minimal participation from Dell over the long term.

Got it.

Thanks.

Keep up the good work.

Our next question comes from Alex Kurtz from Sterne, Agee.

You may go ahead

Thanks for taking the questions guys.

Bob, just to follow up on that last point you just made.

Has Dell actually intimated to you that they may over time want to reengage you in the enterprise?

Well, I think the comment Andrew made was they do not have any (Inaudible) in the enterprise to compete with, so it is a question of if they want to compete in the enterprise with a total solution they have to engage with somebody because their product line does not cover the enterprise right now.

So there is always discussions going on whether we reengage or not I am not sure.

You have to ask Dell that, what the strategy is for the enterprise and with who.

So, Bob, I think speaking with some investors I think the concern is flip from aperture to backbone.

And maybe the last question here from me would be could you lay out in a couple of bullet points here why backbone does not have enough, in your opinion, enough horsepower to compete against Simpana?

Maybe some quick comparative takes on that please.

I'm not going to give you a comparative take, but on a scale of 1 to 10, they are 1.5 and we are a 9.9.

Fair enough, Bob.

Thank you.

Our next question comes from Eric Martinuzzi from Lake Street.

You may go ahead.

Thanks for taking the question.

Confidence has never been an issue, Bob, love to hear it.

I have a question about the pro services business.

That was very strong this quarter.

In fact the growth rate year-on-year that up 21% versus the software up 20%, I think that is the first time in over a year now we have seen the services side grow faster on a year-on-year basis.

Curious to know if that is sustainable?

Was this just a one quarter surprise, and then on the margin side for the services also same question?

That was a good gross margin for pro services is that sustainable.

Thanks.

I am going to let Al expand on this because it is really important.

But in general I am really proud of what the team has accomplished on the services side.

Both expanding the whole scope of the business and capability of the business and then developing a whole series of new services products.

The key thing is walking to an enterprise you have to understand -- again, we are in the value creation business.

You have to understand what is the customer trying to do, you have to define the right solution for them and the you have to implement it right and you have to support it.

That is a very complicated process.

With that, I am going to turn this over to Al because Al has been driving this and he has done an awesome job here.

Al, why don't you take it from here.

Thanks, Bob.

Eric, good question.

As Bob said we have a lot of the new offerings and a lot of new talent actually in the group.

We also had to do it in our estimation to really be an effective competitor in the enterprise space.

I think that is where the growth has come primarily of what you are seeing financially.

Whether or not that will continue at a higher rate that is probably iffy because as Bob said up front you have a little bit of lumpiness going on here particularly with big environments, but we think it will continue to be strong.

And we really think a lot of our new products and we think they are a really good fit in there and we think the next place where they will be used a lot, again another point Bob tied into was as we start working with our existing customer base and upgrading their platforms.

It is not just go out and upgrade them.

It is go out and make sure they are getting the value out of the platform and continue to get broader value of the services and solutions going forward.

It should stay strong.

Overtime that business -- if you take over the next several years that business will become a stronger and stronger part of our both revenue and value prop.

Okay.

And the gross margin part of the question.

Well, as you know it is a billable ratio kind of function there, and again especially with our existing base.

We are not in this business just totally to generate services dollars.

We are a software business.

So I do not anticipate in going tremendously higher but it will probably stay high as we stay fairly efficient here.

Another way of putting it is our objective here is the strength and our position in the enterprise from a value creation standpoint and make what I would call a reasonable margin on the services business.

We are not in at this point of our growth trying to maximize our services margin by trying to maximize our revenue growth and EBIT growth.

And the value we create.

And the value we create for our customers.

But we do not want to lose money.

We made a massive investment here, and the point is we are achieving reasonably good margins off of it, but it is not a margin maximization exercise in the services business.

It is a revenue -- it is value creation for customers and revenue and profit maximization for CommVault.

Got it.

Thanks.

Our next question comes from Abhey Lamba from Mizuho Securities.

You may go ahead.

Thanks.

Congrats guys on a great quarter.

So, Bob, you highlighted the importance of deals in the $500,000 to $1 million range and growth in the funnel.

Can you talk about the environment's impact on your ability to close such deals?

Are things stabilizing on that front, or are such deals still difficult to get approved?

And also, what are your expectations as we move along in the year?

That's a good question.

Clearly, we are able to bring a lot of these deals in the funnel.

They are maturing, meaning they are moving down our close cycle reasonably well, but they are lumpy.

I mean these are relatively large deals.

Some of them are greater than $500,000, some of them are in the several million.

And closing them has a big impact on the end results for the quarter.

So right now, it looks pretty good.

I think at the margin, the macro environment is improving slightly, and we are anticipating that.

The only offset I could see -- I do not think the actions of the Fed will be impact it.

If China goes out further and starts impacting the global market, that may have an impact.

But right now, we are not forecasting that.

So we are assuming marginally better second half.

We are seeing consistent improvements in our mega deal funnel inflow.

And to your other point, another question is how well do we convert them, what is our close rate in the current quarter?

That is going to determine exactly where we end up here.

Our next question comes from Aaron Schwartz from Jefferies.

You may go ahead.

Good morning.

Bob, the first question I have is you made the comment that by the end of fiscal 2014, you wanted to establish positions in a couple of new key areas.

I presume one of those is mobile.

But could you just walk through what areas specifically you are aiming for?

And then related to that, the investments you are making in sales and go to market.

Does that change at all, are you looking at more of a specialist model?

Are you still selling the platform first and foremost?

I'll answer the last one first.

We are definitely going to more and more specialization.

I can let Al pick that up in a second.

But clearly, when you get in whether it's mobile or it's analytics or it's ops management.

Any one of these areas requires specialization in the area, and it also requires vertical knowledge.

So the major areas for growth for FY 2015 are in the mobile operations management analytics.

So those are your three areas.

When we laid out our $1 billion plan, we outlined it for everybody.

What we said was in 2014, we would come out with Simpana 10.

We would strengthened our position in our core business, and that would be the major segment for growth for the Company, clearly through FY 2014, but it was really important for us to establish positions.

So we would have some incremental revenue growth in these new segments for FY 2015, and we are on track to do that.

And then when you get into FY 2016 and 2017, those new segments will become bigger and bigger portions of the business.

So we are on track to do that, but it is requiring a massive increase in investment on the product side, on the go-to-market side, on the partnering side.

And we have been able to make these big investments and achieve our EBIT growth objectives, which is really difficult.

But we have been doing it.

We will continue to do it.

You will see clearly a step-up investment in the September quarter.

It will happen this quarter, tied to those initiatives.

And the other comment I made is there are other new segments and products that are extensions to what I just described that Mr. Bunte and our dev team and our product teams have been working on that, that are in additions to what we have already announced that are moving very rapidly and have some good potential also.

And they will start going into betas later on this calendar year and be available some time in the first half of FY 2015.

So we are feeling really good about that as well.

Okay.

Thanks, Bob.

And if I could just sneak a quick one in for Brian.

On the deferred revenue, on a constant currency basis, looked like the strongest Q1 that I've seen you guys put up with.

Was there anything specific there?

Was there any sort of catch-up maintenance with maybe Simpana 10 or a different sort of billing that goes more to the deferred on any of those modules, or was that just normal maintenance renewals?

Thanks

I would say it's pretty normal trends in our maintence support renewals.

It does help with the value story of Simpana 10, but I would say it's pretty normal renewal trends.

Our next question comes from Greg Dunham from Goldman Sachs.

You may go ahead.

Hi, thanks for taking my questions.

Just a couple of quick ones here.

The new customer account number was a little less than historical.

How much of that is related to focus on some of these mega deals?

And should we expect that number to bounce back to where it has been in the past?

I think it was more related, Greg, to timeout of the field.

We took the field out of -- you can pick a number whether it was 17% of selling days or 20%, but it was pretty substantial.

And I think that number more related to that, but that is one issue.

And yes, with more and more focus on these mega deals, there are going to be fewer customers with larger volumes.

So it is a combination of the two, but I think the biggest one was more related to just time and selling.

Okay, okay.

And then quickly, Brian.

Did I hear you correct, 25 basis points of margin expansion this year, is that what I heard correctly?

That is correct.

I said 25 basis points or slightly better.

Okay, perfect.

Thanks guys.

Our next question comes from Michael Turits from Raymond James.

You may go ahead.

Hi guys, good morning.

Two questions.

First, can you just review exactly how Simpana 10 is layering in, first off in terms of customer adoption, is it still just new customers versus the base and then from a revenue perspective as well in terms of impact?

And then I have a question on the competitive comments.

Michael, Al is going to take this for you.

Hi, Michael.

Yes, it's predominately new customers.

Bob said that in the script.

We haven't turned lose existing customer upgrades quite yet.

There are a couple here and there, but we haven't really unleashed that one.

So it's predominantly new customers.

And from a revenue perspective, how is it layering in?

What's the revenue impact to Simpana 10?

Is it capacity, is it new license?

Is there a specific attributable revenue uplift?

Yes.

It's predominantly capacity based.

It's still, again, the guys said, I think it's up 73% of our deals.

Simpana 10 is no different from that trend.

Okay.

And then the question on competition.

Bob, can you go back to drill down a little bit more on those comments about increased complexity and increased competition?

So when you are going into deals and you say you are seeing different players involved with your customers, is that because in new let's say cloud whether it is private or public cloud model that you are coming across that there are other people providing similar services, especially around backup and those are new players?

If you could be more concrete about that, that would be really helpful because it does sound like a new comment.

Well, it's a very different environment if you look at a typical customer five years ago 100% of their applications were in their data center and managed by them.

And now a typical customer, a large part of their -- one, the number of applications has gone up dramatically, and a large portion of those applications are now sitting in the cloud.

That is a different dynamic in terms of the data protection and how that data is archived and managed.

So that is a dynamic that you have to pay attention to, you can't just ignore it.

Who is supplying the services?

What are the delivery models?

Well, in apps now it is a cloud delivery model.

Because we are playing in bigger and bigger deals in larger and larger enterprises, we are seeing more of the participation from the outsources, so they can be partners or competitors.

If we do a good job of building relationships, they are partners.

And if we don't, they are competitors.

So that requires CommVault now to focus on building much stronger relationships with the outsources than we have in the past.

We are also doing the same thing with managed service providers.

And then if you look at the IT environment itself in terms of conversion, infrastructures, USC, I mean you've got a lot of different technologies coming into those environments that you got to pay attention to.

You start to add it all up, it's a lot more complicated.

That means technically, we're in awesome shape.

But the value prop and how we create value in those environments that all that education has to be transferred.

All that knowledge has to be transferred to our sales and systems and services groups and partners, and all that knowledge transfer is a pretty big effort on our part.

And we're going through that as a Company in terms of making sure that when we walk into an environment like that, we can deal with all those issues, including what I'll mention, all our consultants and services capabilities that we are bringing to bear here.

So if you want to think about it, maturing as a Company.

And we have been enterprise focused, but now we are focused more and more on the top end of that enterprise.

And it requires different skills, different competitive environments, different IT environments that we are dealing with.

And you can see it in our funnels.

I mean our funnels are growing with these kind of accounts, but it is a change for the Company in terms of how we compete.

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

You may go ahead.

Hi, thanks for taking my question.

Bob, just to drill into the Dell relationship.

Obviously, Dell continues to play in the headlines of every CNBC or Bloomberg, et cetera.

To try to put this into a risk perspective, clearly, your customers who work through Dell, they obviously know the CommVault solution.

They know where to get the add-on products, they know how to increase their capacity.

So my opinion, even though it is 20% of revenues as you talked in your prepared comments, it seems to be much more mitigated as these customers would clearly know who is supplying the product.

I mean, can you dig a little bit deeper into that and just explain a little bit more?

Yes, I've said in the past, the risk in the aggregate to Dell is quite small relative to our revenue.

It's certainly well under $10 million.

In the aggregate, if you take all the numbers apart -- because maintenance is a good part of that.

Round numbers, that's half of it.

And basically, CommVault manages the maintenance stream.

Now take another 25% or 30% and that's, to your point, revenue from existing customers that can't be displaced or easily displaced with the product that Dell has.

So those customers come back, and we're doing things to manage our existing account base better.

And then the balance is enterprise customers, and we had a good relationship with Dell.

So many of those, we sell into those customers.

So what we're doing -- and so until something changes, instead of bringing those customers -- if Dell brings the customer to us, we stay loyal, and we provide the customer with a Dell CommVault solution.

But if it's a CommVault brought deal, in many cases, we'll bring the deal to another partner today because that relationship with Dell is uncertain and we have a business to run.

So in summary, yes, the aggregate risk to our business is mitigated, has been mitigated by actions that we basically take in our own.

Perfect.

Thanks.

Our next question comes from Rajesh Ghai from Craig-Hallum.

You may go ahead

Thanks.

One question.

There was a broad divergence in the growth rate, sequential growth rates across international in the U.S. The U.S. was up 9.5%, international down 18%.

I was just wondering if you could explain the divergence?

Thanks.

I wouldn't read too much into that, Rajesh.

I mean as we do order enterprise deals and get into that segment in the market, we're going to see some disparity sometimes between U.S. and international.

I think that was almost the opposite of what it was last quarter, so I wouldn't read any trends into those numbers.

And one last question on Simpana 10, following-up on Michael Turits' question about new customers versus the existing customers.

I would have thought that the new capabilities in the Simpana 10 with an operational ContentStore or mobile would be an easier sell to the existing installed base rather than new customers?

I was just wondering if you can give us some more color on that.

Thanks.

Well, I think it was a policy of the Company, Rajesh, that we do what we call controlled releases that are heavily resourced with our internal development people and tech people and make sure that we are not missing something as we release the products.

So we do not end up like a lot of companies with issues out there.

So the first release, there is no customer-led upgrade.

We have not initiated that process yet.

It will probably happen before the end of the quarter.

So all our new customers, starting at February have gotten Simpana 10 on a controlled release.

And certain existing customers who wanted, to your point, certain of those functions, we have done an upgrade process.

But the broader upgrade of the market, just figure it won't be something that will be really a -- beginning in our Q3 and Q4.

It is not that they do not want it, it is just that we are very deliberate in our approach to how we release products here.

And it's paid off for us in high quality and high-customer satisfaction.

Sure.

Thanks.

We have time for one last question.

Our final question comes from Srini Nandury from Summit Research.

You may go ahead.

Thank you for taking my call.

I've got a quick question on the competitor side of things.

One of your competitors out of Russia seems to be growing leaps and bounds serving a small niche at the server virtualization.

Do you see these guys show up and competitive situations or can you provide some color there, please?

Who are you talking about?

[Beam] I think he's talking about.

You are talking about Beam?

Yes, that is right.

Of course, we have seen them particularly in the lower end of the market.

There are a number of things we did in Simpana 10 by the way to address that particular competitor, but yes we have seen them.

Especially at the lower end of the market we feel like we have a good strategy and a good plan for them.

I (Inaudible) on revenue call that I deal with, in fact of the calls I was on this week, they didn't come up once.

It doesn't mean that they are not doing well, but they are at the lower end of the market.

And Simpana 10 has -- put it this way, has their functionality plus a lot more.

So it is not something we don't do.

It is just not a competitive issue for us from that perspective.

One last question if I may.

Your enterprise deal sizes are growing larger and larger as they look.

Apart from capacity-based pricing, is there any other driver for this deal-size growth?

Yes, because you are into larger enterprise that use more data.

No, apart from that.

Is that the only driver for that?

That is my question.

Well, you have that, plus we sell our capacity model is sold depending on the level of functionality.

So if somebody buys a capacity bundle, that includes mobile and analytics and all the other things that we do.

They are going to pay a higher price per terabyte than somebody who doesn't.

So it is a combination of how much functionality do they buy under that capacity model, and how much capacity do they use?

Thank you.

Thank you very much.

And is that our final questions.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.