Commvault Systems Inc (CVLT) 2014 Q2 法說會逐字稿

Welcome to CommVault's second fiscal quarter 2014 earnings call.

(Operator Instructions)

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

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal second quarter 2014 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 would 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 the Private Securities Litigation 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.

It has also been furnished to the SEC as an 8-K filing.

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

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

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

This conference call is also being recorded for replay.

It's 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, Mr Bob Hammer.

Thanks, Mike.

Good morning, everyone.

Thanks for joining our fiscal second quarter 2014 earnings call.

Our fiscal second quarter results continued our trend of delivering consistent double-digit revenue and non-GAAP operating income growth.

Let me briefly summarize our Q2 financial results.

Total revenues were $141.9 million, up 20% year-over-year and 6% sequentially.

Software revenue was $70.8 million and grew 20% year-over-year and 8% sequentially.

Services revenue was $71 million and grew 21% year-over-year and 3% sequentially.

From an earnings perspective for the quarter, operating income or EBIT was $37.8 million, up 31% year-over-year and 20% sequentially.

EBIT margins were 26.6%.

Diluted earnings per share were $0.48.

We generated approximately $24.5 million of cash flow from operations during Q2, exiting the quarter with approximately $485.1 million of cash and short-term investments and no debt.

Our revenue growth was aided by the continued solid market reception of Simpana 10, which I will discuss in more detail later on in the call.

Let me spend a minute speaking about our business environment.

Recent quarterly results of leading tech companies in our industry indicate there was some slowdown in storage related IT spending and push outs of larger deals.

On a more positive note, for the first time in many years, we are experiencing improvements in all the major regions of the global economy.

The situation in the US is improving at a slow pace.

Europe has finally come out of recession.

There is positive momentum in Asia Pacific.

We are assuming storage related IT spend will gradually improve, but still remain lackluster through the end of our fiscal year 2014.

We expect to see continued weak spending from the US federal sector.

Globally, we are assuming overall market demand for our software and services will marginally improve.

The key customer needs that are driving demand for our product and services remain intact.

Now let me address our current outlook.

We have had good financial results for the first six months of FY 2014, in which total revenues grew 20% year-on-year.

EBIT increased 34% year-on-year.

The first half results combined with strong first half funnel growth provide a good foundation for us to build on for both the second half of FY 2014 and for the start of FY 2015.

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

We believe the current FY 2014 Street consensus growth rates for total revenue is reasonable.

Brian will provide guidance on operating margins.

While we believe our business fundamentals are strong, our outlook needs to be tempered with the following words of caution.

As noted earlier, tech spending has moderated.

Many companies in our industry have reported big deal cancellations and push outs.

We are assuming there will be some softness in big deal demand.

As stated on prior earnings calls, big deal growth is critical to our achieving our financial goals.

By big deals, we mean software deals greater than $500,000.

We are particularly cautious about US federal government spending, due to uncertainty associated with the recent fiscal impasse.

Although our macroeconomic conditions have improved in EMEA, we continue to be concerned about European IT spending and outlook.

There is increased execution risk tied to the implementation of our, All Things Data strategy, which is a major corporate-wide endeavor.

I will discuss this issue in more detail later on in the call.

In summary, the Company had a good first half fiscal 2014 and is in good position to successfully achieve our annual objectives for FY 2014.

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

However, on a relative basis, since last quarter's earnings call, we do believe revenue and earnings risk has marginally increased due to big deal demand and strategic execution risk.

I will now turn the call over to Brian.

Thanks, Bob.

Good morning, everyone.

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

Total revenues for the quarter were $141.9 million, representing an increase of 20% year-over-year.

We reported software revenue of $70.8 million for the quarter, which was up by 20% or $11.6 million over Q2 of FY 2013.

During Q2 FY 2014, our software growth was driven by a strong demand for data protection for virtualized environments, 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 80% of our Q2 software revenue, which was up from 74% in Q1 FY 2014 and 64% in the prior-year period.

For the quarter, software revenues derived from indirect distribution channels increased 26% over the prior-year period and represented 93% of software revenue.

Our direct revenue represented the balance and decreased 28% 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 now 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 23% over the prior-year period and 14% sequentially.

Enterprise deals represented approximately 57% of software revenue.

The number of enterprise deals increased 3% year-over-year and 4% sequentially.

Our average enterprise deal size was approximately $295,000 during Q2 2014, compared to $247,000 in the prior-year period and $268,000 in Q1 FY 2014.

Software revenue from non-enterprise deals increased 15% over the prior-year period and 1% sequentially.

The revenue mix for Q2 FY 2014 was 50% software and 50% services.

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

Services revenue for Q2 was $71 million, an increase of 21% year-over-year and 3% sequentially.

For the quarter, revenue from US operations generated 59% of total revenues resulting in a 12% year-over-year increase.

While revenue from international operations generated the balance, resulting in a 35% year-over-year increase.

The growth in revenue in our international locations is primarily due to increases in Europe, Canada and Asia Pacific as we expand our international operations.

On a year-over-year and sequential constant currency basis, foreign currency movements did not have a material impact on either Q2 revenues or earnings per share.

From a distribution perspective, many of our global resellers and strategic partners had strong growth.

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

For the quarter, revenue transacted through Arrow was approximately 32% of total revenue, growing 33% year-over-year and 15% sequentially.

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

Total quarterly Dell revenues grew 11% year-over-year and was flat sequentially.

As noted on prior earnings calls, we have taken proactive steps to broaden our distribution through non-Dell channels.

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

We expect to see Dell revenue further decline in our fiscal Q3.

We added approximately 400 new customers in the quarter.

Our historical customer count now totals approximately 19,000 customers.

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

Gross margins were 87.4% for the quarter.

Total operating expenses were $84.7 million for the quarter, up approximately 16% year-over-year and 1% sequentially.

We added 99 net employees in fiscal Q2 and ended the quarter with 1,896 employees.

Non-GAAP operating margins were 26.6% for the quarter, resulting in operating income or EBIT of $37.8 million.

On a year-over-year basis, Q2 EBIT increased by 31%.

Q2 EBIT margins increased by 220 basis points year-over-year and increased 330 basis points sequentially.

For the first six months of fiscal 2014, operating income grew 34% year-over-year.

EBIT margins were 25%, as compared to 22.4% during the first half of fiscal 2013.

Sales and marketing expenses, as a percentage of total revenues, decreased to 44% in Q2 2014 from 45% in the prior-year period and from 47% in Q1 2014.

The sequential decrease in sales and marketing expenses is mostly due to our global sales kick off event in fiscal Q1 and lower than planned spending on several investment initiatives.

We plan to increase the rate of our operating expense investments in the second half of FY 2014 to better position the Company for our, All Things Data strategy, which Bob will elaborate on later on in the call.

We need to make these investments in FY 2014 in order for us to achieve our targeted FY 2015 and FY 2016 growth rates.

Such investments are expected to have a negative impact on short-term margins.

For the remainder of FY 2014, we still expect to achieve solid double-digit revenue and EBIT growth.

As Bob indicated, we are comfortable with the current Street consensus revenue growth rates for FY 2014.

In addition, due to the overachievement of forecasted EBIT margin in the first half of fiscal 2014, we now anticipate that operating margins for FY 2014 will improve by approximately 100 basis points.

Let me now comment on tax rates and share count.

We will continue to use a pro forma tax rate of 37% for FY 2014.

Our GAAP tax rate for Q2 FY 2014 was 35%.

We expect our full-year FY 2014 cash tax rate to be in the mid to high teens.

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

Net income for the quarter was $23.9 million.

EPS was $0.48 per share based on a diluted weighted average share count of approximately 49.7 million shares.

For fiscal 2014, we anticipate that our diluted weighted average share count will be approximately 49.5 million to 50.5 million shares.

Please note that certain Executive Officers of CommVault hold approximately 400,000 outstanding stock options, with an exercise price of $6 that will reach the end of their 10-year term in the next nine months.

We expect that all of these stock options will be exercised prior to their expiration.

Now moving on to our balance sheet and cash flows.

As of September 30, our cash and short-term investments balance was approximately $485 million, up 6% from the end of June.

Cash flow from operations was $24.5 million.

Free cash flow, which we define as cash flow from operations, operations less capital expenditures not related to the new headquarters, was $23.2 million, which is flat both over the prior-year quarter and sequentially.

Cash flow is flat due to changes in working capital, particularly timing of customer payments.

For the first six months of FY 2014, cash flow from operations was $49.1 million, up 16% year-over-year.

Free cash flow for the first six months of FY 2014, excluding capital expenditures not related to the new headquarters, was $46.5 million, up 17% year-over-year.

Typically, cash flow from operations is strongest in the second half of our fiscal year.

During Q2 FY 2014, we expended approximately $15.2 million on construction costs for our new campus headquarters.

Our estimate of the total cost remains in the range of $130 million to $135 million.

We expect to spend approximately $50 million over the remainder of FY 2014, but the timing of our cash expenditures is dependent on the progress of construction, which is currently on schedule.

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

As of September 30 2013, our deferred revenue balance was approximately $191.2 million, which is an increase of $36.6 million or 24% over the prior-year period and up $2 million or 1% sequentially.

There was a higher balance of deferred software that was on the balance sheet at the end of June and was subsequently recognized as revenue in Q2.

Please remember, typically, our deferred revenue balance is comprised mostly of deferred maintenance, not deferred software.

Deferred software will fluctuate from quarter to quarter based on larger deals.

Deferred maintenance was up 22% year-over-year and 4% sequentially.

For the quarter, our days sales outstanding or DSO was 53 days, which was down from 55 days in Q1 FY 2014 and up from 49 days in the prior-year quarter.

The change is due to linearity within the quarter.

Lastly, the Board of Directors recently increased the amount available for share repurchases by approximately $47 million, so that there is now $150 million remaining in our stock buyback program.

The repurchase program has also been extended for one more year until March 31, 2015.

There were no share repurchases during Q2 FY 2014.

Also, at our annual stockholders meeting in August, we received approval for an employee stock purchase plan, which will allow our employees to purchase shares in the Company.

Three million shares have been authorized for issuance under the plan, which we expect to launch to employees in February.

We will be filing a registration statement for this plan shortly after our 10-Q is filed.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Bob?

Thank you very much, Brian.

I want to wrap up the call with a brief commentary about our, All Things Data strategy and an update on Simpana 10.

Our strategic marketing objectives are to continue to strengthen our position in our core data management market and establish strong positions in other data-related market segments that have higher growth potential and offer the opportunity for higher profitability.

We call this, our All Things Data strategy.

CommVault's goal is to achieve our strategic market objectives, while at the same time, delivering consistent industry leading revenue and earnings growth.

Our All Things Data strategy addresses the key new and emerging data-related needs of our customers and opens up many new market opportunity.

As discussed previously, we believe our available market opportunity expands by approximately 60% over the next few years.

In order to implement this strategy, we need to make major changes to how we package, price, deliver, distribute our leading solutions in our core data management market, as well as develop and implement unique go to market strategies in our other new data-related market segments such as mobile, compliance, operations management and other content analytic-related vertical solutions, such as those for healthcare.

Even though each of our solutions is built on innovations on the core singular Simpana platform, each needs to be packaged and sold with their own specific value proposition.

In addition, each solution must be optimized for the proper distribution channels and delivery models that match how customers want to acquire that technology.

For example, delivery models can include self-service, cloud or appliance delivery models.

Pricing models can include perpetual, term or subscription licenses.

Pricing could also include a value-based pricing model that would be a complimentary addition to our current capacity-based pricing models.

CommVault's All Things Data strategy is our exciting path to sustained long-term growth and profitability.

Implementing the strategy is a major company-wide effort.

We understand undertaking an aggressive, innovative strategy like this has increased execution risk.

In this regard, we have initiated a number of actions to mitigate those execution risks.

We believe that not executing an aggressive innovative strategy is a sure path to the bone yard of failed tech companies.

As a reminder, we have or are developing leading solutions as part of our, All Things Data strategy, that address the following major needs and challenges of our customers, due to -- tremendous increases in data scale and complexity; the introduction of cloud-based applications across many different business solutions; the emergence of mobile and bring your own devices with increasing needs for anywhere, anytime accessibility and security; the need to easily and cost effectively archive fully indexed data for compliance, regulatory and business needs; the need to improve operations through better, more comprehensive reporting, maximizing the IT infrastructure, labor and power utilization and minimizing downtime to automate all processes; the accelerating needs for better, timely business intelligence to a more sophisticated data analysis and business analytics.

In summary, we participate in an exciting market that has many high growth, high probability segments.

We have developed technology to perform services to address those segments.

Our future success depends on our ability to successfully execute a number of very significant changes to how we package, price, deliver and distribute and sell those solutions.

Now, let me spend a minute updating you on Simpana 10, which is the technical foundation of this strategy.

This quarter we passed a key milestone in the Simpana 10 control launch phase with over 1,000 Simpana 10 customers deploying the new platform.

We also achieved our objective of completely opening up Simpana 10 upgrades to all customers in September.

Simpana 10 has been very well-received in the market.

The following are some of the areas that are getting the strongest traction in the market.

One is significant improvements from better backup and modern data protection.

We have made significant improvements in scale, performance, Snap replication and the introduction of highly scalable global deduplication.

We have -- number two, we have expanded and enhanced the management of virtual machines well beyond traditional backup.

We have developed new automatic virtual machine management capabilities such as power reduction, storage migration and image archiving behind virtual machine or VM clouds.

Number three, we have developed a new ability to manage virtual machine sprawl.

With many organizations now struggling to keep pace with the uncontrolled growth and virtual machines, the opportunity to start archiving out unused or unneeded VMs is now a key issue for our customers.

As we announced back in August, we have developed a unique solution to solve that problem.

Also this quarter, is our new reference copy archive option, which enables customer to archive data based on content-aware relevancy rules.

This has the potential to reduce costs by up to 70% for business solutions like compliance.

We can do this because we index all the data very cost effectively and in massive scale.

These are capabilities well-beyond hardware based solutions.

The new generation of archiving now becomes the foundation of how we change and transform data from recovery-oriented data sets to content rich organized information collections that can be used to enable user sharing and collaboration, business record management, business analytics and content-oriented repositories.

Now I am going to spend a minute on talking about our next generation comprehensive solutions for the mobile workforce.

Today's workforce is becoming increasingly more mobile.

As a result, more and more valuable information that needs to be managed, protected, accessed, indexed and archived for business solutions like compliance is outside of the data center and IT's control.

As part of the Simpana single platform, CommVault Edge technology forms a complete enterprise class solution that delivers efficient, centralized laptop/desktop data protection, secure any time, any device access to their personal data via the cloud and fast, cost-effective search in eDiscovery.

Mobile workers can securely access the data through an intuitive web interface with apps for smartphones and tablets and natively in Windows Explorer.

With a click, workers can automatically sync files and folders across all PCs, mobile devices and it can be set up for immediate access.

This enables the customers mobile workforce to get what they need when they need it.

It eliminate the need to rely on third-party consumer-oriented services for cloud file storage and takes the burden off of high-priced corporate IT resources.

In addition to new products such as CommVault Edge, we have made 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 capability.

We have substantially increased both the size and scope of our global professional services organization with the addition of highly skilled consultants, as well as the roll-out of new consulting services.

Secondly, we have strengthened our ability to increase our position with MSPs or managed service providers, outsourcers and systems integrators with the formation of a focused global team, the cloud services group.

These new capabilities are resonating extremely well with customers.

Our catalyst is providing customers with value well beyond simple backup.

Now let me spend a minute talking about some products we will release in the very near future.

We will launch these as part of our Simpana 10 platform.

They include leading edge next generation products for SharePoint and Exchange archiving.

Two lower end data protection products, which will be sold through high velocity SMB reseller channels.

Self-service try and buy products for the SMB market, including products targeted to the virtual machine administrator and products aimed at replicated task recovery.

Lastly, increased partner option of IntelliSnap, which is data aware management of snapshots.

We will provide more details on these products at the appropriate time.

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

In closing, we had a solid FY 2014 Q2 in revenue and earnings growth, which establishes a good foundation for the balance of the fiscal year.

Q3 is off to a good start, despite lingering macroeconomic concerns and political uncertainty.

Simpana 10 is also off to a good start.

We continue to gain market share.

Our All Things Data strategy is our exciting path to sustained long-term growth and profitability.

We will continue to invest across the Company to ensure the successful execution of that strategy.

We are excited about FY 2014, our future potential and are very confident in our ability to continue to grow the Company at double-digit growth rates.

Our next financial milestone is $1 billion in revenue and operating margins in the mid 20% range.

We have defined plans in place that we believe will enable us to achieve that milestone over the next several years.

I will now turn the call back to Michael.

Thank you, Bob.

Operator, can we please open the lines for questions?

(Operator Instructions)

Joel Fishbein, Lazard Capital.

Congrats on a nice job in a very terrible environment.

I have two, one question and follow-up for Brian.

I am getting a lot of questions, Bob, from investors on the deferred line.

It was up 24%.

It looks like a good number to me.

But because, I guess, it's not what the Street was expecting, it caused some confusion.

How meaningful is that as a metric?

If you could give us some color on that, that would be helpful.

I will let Brian answer it.

Then, I will provide some additional color.

Hi, Joel.

Just keep in mind, our deferred revenue balance called about 90% of that is deferred maintenance revenue that just comes off of the balance sheet and gets recognized.

The other remaining portion is for professional services and also software.

Software being the smallest portion that is in there.

Software will fluctuate from quarter to quarter depending on the timing of recognition and very large perpetual deals.

So that, in total, did go down quarter-on-quarter.

But deferred maintenance was up 4% quarter-on-quarter.

I think the totality of deferred revenue was up 24% year-over-year, which is fairly strong growth as you said.

Yes.

Then you also commented that you had a very linear quarter too and DSOs went down.

I guess it was just more of a timing for the bigger deals like you said.

That is what it was, Joel.

I think the key stat behind that is that -- you've heard me comment about visibility and funnel.

The combination of visibility and funnel has also improved on a relative basis.

So the way I would read into that is, our business momentum has clearly increased, despite of the, as you would call it -- I'd call it a very difficult environment -- but our momentum has improved.

But also, it has to improve for us to hit the numbers we want.

So, fortunately, so far, we've seen that momentum improvement occur.

Now we need to translate that momentum into revenue over the next couple of quarters.

But clearly, it's at a level where the opportunity is there for us to achieve our numbers going forward.

Great.

Brian, just a quick follow-up on the operating margin.

You hired a lot of people this quarter and margins expanded dramatically.

I think I heard your guide for the year is up 100 basis points year-over-year.

Can you just give us color on how you're -- where you are seeing the leverage points are considering you are so aggressively hiring and as Bob indicated, you have got a lot of initiatives going right now as well.

Yes.

We are going to continue to invest throughout the year.

We are going to ramp up our operating expense spend.

We're going down the path of the All Things Data strategy.

We need to invest in customer facing and technical resources.

Keep in mind that as the year goes along, our compensation plan rates will kick up and go to higher rates as they accelerate and hit field quota.

Great.

Thank you so much.

Jason Ader, William Blair.

Bob, I wanted to ask on the slowdown in the US.

It looked like it was much slower than international.

Obviously, a very good performance internationally in a tough environment.

But in the US, up 12%.

Is this due to kind of the large deals slowing down a bit and then the federal impact?

How do you see this playing out going forward?

It had nothing to do with either one of those.

Last quarter US was 30%, international 9%.

This quarter international was up 35% and US was up 12%.

You'll see that slip again.

It is just the timing of big deals that come through and get recognized.

That is all it is.

You'll see it flip around again.

So I wouldn't read anything into that stat because the total revenue growth of 20% is pretty consistent.

Evan, as Joel mentioned, the environment is tough and we seem to be gaining momentum within a tough environment.

But, again, I would not read anything into the slip between international and US.

Okay.

Can you comment specifically on federal?

What you saw in both the September quarter and then also what your outlook is for the December quarter for federal?

Well, we had -- I felt, in general, demand was poor, but we had a reasonably good federal quarter.

It was 9% of our -- excuse me, 11% of our revenue, up from 9% of total revenue a year ago.

It was 43% higher year-over-year.

So, that all ties to basically timing of big deals because the businesses lumpy.

In general, I would say the outlook of federal is in general is week, but we have some, again some relatively large opportunities within federal that could mitigate that.

So, you might see some lumpiness in it, but so far the lumpiness has been in our favor.

You might see it again by the way, going forward because we have some opportunities again to mitigate a generally poor environment with some CommVault specific opportunity.

Okay.

Then, just last one for me, just trying to reconcile, Bob, your comments kind of in the Q&A here and then from the script.

You said the visibility and funnel has improved on a relative basis in the Q&A, but during the script you said, on a relative basis the risks have risen relative to last quarter.

So, how do we reconcile those two comments?

Where is the -- if the visibility and funnel is improving then why should we be worried about some of those risks?

Well, the funnel has improved very significantly.

The key is translating that funnel into deals.

So yes, the opportunity in the numbers deal is up, I'd say, pretty dramatically.

But we understand we are in a weak environment and those are lumpy.

So when we start getting into particularly seven-figure or multi- seven-figure deals, which makes a difference in our performance, we're just issuing a concern.

I think the positive is, the opportunities are there.

The negative is, we are in an environment and those deals could get pushed out, there could be some future problems.

On the execution risks, clearly, we have made the right bets.

We have made the right bets in the right markets.

We're getting good customer response in regard to those bets.

But there is a lot of change.

I have said it before, we want to be transparent as a management team here.

We are making a lot of changes -- they are exciting, but they are also compelling and their broad-based around the Company so that senior team is all over this issue.

But when you are making change there is always risk attached to that, Jason.

I want to make it really clear, the strategy is awesome.

Opportunity is great, but we have got a lot of things to do to make sure we execute that strategy.

It's a compelling task.

So far, we are making lots of progress.

But it's not just paint by the numbers here.

Thank you.

Aaron Rakers, Stifel.

First, on a quick follow-up, just so I'm clear on the operating expense line.

Last quarter, you had suggested that you missed your hiring plans.

Would you say this quarter, you hit the hiring plans as far as headcount expansion?

No, we did not.

We did not hit our hiring plans.

Okay.

Then as far as the large deals, I know the average deal size north of $100,000 was -- it looks like the highest I've ever seen.

You talked about potential risk associated with $500,000 plus deals.

At what point are you able to share how we should think about that contribution flowing into the model and obviously using that as a gauge for judging the risk of that lumpiness quarter by quarter.

Well the problem -- if we had some consistency in it that we could benchmark, it -- I'd share it.

So, right now, we're just sharing it on a relative basis, Aaron.

But it just moves -- at this point in the Company's history, it is just too lumpy to get in, [margin] at this much this quarter, that much that quarter.

It just moves around too much.

I will say again on a relative basis, that the opportunities in that category have increased quite substantially.

Year-over-year I would say dramatic, it is opportunity now.

Expansion and opportunity and now we will see how we can get more consistent in translating the -- let's say, the funnel into revenue.

Revenue is not just closing a deal, by the way.

Revenue is closing a deal and we've got, as I think everybody's aware, extremely strict rules that go -- that are tight on revenue recognition and appropriately so to make sure that we have got the highest quality of earnings in the industry.

So, you can close them but -- if they're not revenue, they just -- you see them pop in and out of the balance sheet.

Or maybe they set off balance sheet, they are not even recognizable from a balance sheet standpoint.

Okay.

Final question for me is, I think you released Simpana 10 to your install base at the end of the September quarter.

It also seems like you have a lot going on with this all-digital strategy that you've put in place.

Maybe you could talk a little bit about how we should expect the ramp of Simpana 10 into the existing customer base?

Then how do we think about the packaging or pricing models?, when we expect those strategies to be implemented and put in place as far as the All Things Digital?

Al will take this one, Aaron.

Aaron, so on the flow into the base -- or the rate of v10, it's moving along very quickly.

As you noted since we opened it up in September, I think Bob commented that we are over 1,000 sales.

As of this morning, we are somewhere around 1,400, maybe a little bit over.

That is continuing at somewhere in the 100 a week range.

So we are pleased with that.

The uptake has been tremendous.

The thing that I am really pleased about on the uptake here is we were quite innovative on the upgrade process.

We opened up to our base the idea that you could run a cloud analytics program, if you will, to take a look at the operational characteristics of your operating cells, so to speak.

We would peruse it.

We would look at it.

We would also assign a development engineer to the upgrade process.

That's been extremely well-received, not only by our customer base but internally in terms of understanding what the customer base is looking at.

So I think that will help us tremendously going forward.

So the quality of Simpana 10 in the field has been by far the best product we've every really -- so this ability, quality customer experience is at a record high relative to past releases.

Andrew Nowinski, Piper Jaffray.

Nice results this quarter.

Just wanted to clarify on the software revenue growth, it was soft.

But it was still below normal seasonality for the second consecutive quarter.

Is that just a factor of the late release of Simpana 10 into your installed base this quarter?

I don't think so.

The environment is tough out there, even though we are doing really well with it.

When you see competitors at minus 5%, and we are at 20%.

So the gap of pro forma between us and our competitors has actually widened.

So I think it is a factor of that and some of it is a factor of as we shift our products, market segments, that does impact it somewhat.

I think there is a potential, let's put it that way, for that to accelerate going forward but with the risk as I have noted it.

I think we are on a -- the Simpana 10 and moving the strategy along, the foundation is certainly getting stronger as we go forward here.

Okay.

Understood.

Then on the managed service provider vertical, that's historically been a very strong growth opportunity for CommVault, particularly with the likes of Rackspace and others.

Can you just provide an update on the adoption of -- that you're seeing of Simpana 10 within that vertical?

Where it ranks amongst your other verticals?

Yes Andrew.

As Bob noted in the call, it has been a key area of investment for us.

We've put a really good team on this starting the first of our fiscal year.

The numbers continue to be good in that space.

However, we're excited -- continue to be excited about the opportunity there.

Some longer-term opportunities got covered during the quarter, so we are feeling very positive about it.

Above all, as Bob said, we feel really strongly about it as the right move as a business because a lot of demand for IT services is shifting to that vertical.

So it is strong for us.

On a relative basis, that sector is growing significantly more than our 20% growth rate.

Got it.

Thanks.

Year-over-year.

What Al was saying is that we signed one of the major MSP providers globally this past quarter.

Yes.

Great.

Thanks guys.

Greg Dunham, Goldman Sachs.

I want to dig in a little bit on the timing of the go to market and changes?

How is that going to progress over the course of the next several months and quarters.

Then, can you characterize the level of change versus prior iterations and we go to market that you put in place?

Thanks.

Well I will start it.

I will let Al comment, as well.

The Company has gone through lots of transformations over the years.

I would say the level of change on this one is probably the biggest we have made.

But we're also doing it with the strongest amount of foundation and capability to enable us to execute that change.

So when you start talking about new market segments, new pricing models, value propositions, positioning, delivery models.

You are talking about a lot of change.

Again, the Company has a strong foundation and capability to execute it, but it is large.

Timing is, as we speak, I'll let Al expand because we are all over this as a Senior team and understanding it, checking it, making the appropriate adjustments as we execute to see what is working and what is not.

Al is right in the middle of this.

He can comment further for you.

Yes.

Just a couple additional comments, Greg, is, as Bob said it is a big deal.

We do have a plan that's typical of us.

We believe we have thought our way through it pretty carefully.

It involves all of the comments he made in the script of pricing and delivering methods and go to market vehicles, looking at detailed use cases in many cases.

Digging well under the broader platform capabilities.

So it's going to take a while.

We are through it, or we are on it, I mean.

I would guess at least three to four quarters of detailed work here to get a lot of these things out there.

But again we have a plan.

We are making progress every day on it and we will get it to you to move it along.

It is consistent with what I have said in the past, which is FY 2014 was our foundation year to get these core initiatives in place.

That we would see revenue contribution in FY 2015 from those initiatives.

I would say our confidence level of achieving those in FY 2015 has gone up dramatically.

But I think the recognition of the -- normally of the task is also, we realize that and have taken the appropriate steps.

I am confident that we will achieve what we need to achieve in 2015.

Maybe a little bit more than we originally thought.

As I said earlier that in FY 2016, 2017, this would become a material part of our contribution.

I am also confident that given the path we are on that we will achieve that objective as well.

Okay.

Thank you guys.

Eric Martinuzzi, Lake Street Capital.

Thanks my question has to do with the competitive landscape.

Interested in any changes there.

Not necessarily the players.

I assume it is still the Symantec's and EMCs and IBM's of the world, but I imagine given the pressures in their own toplines, they are trying new things.

I was curious to know if you have seen any evidence of that?

Yes, desperate pricing.

Those guys are completely irrational in their pricing policies trying to do -- we have become public enemy number one.

So any tricky, crazy pricing initiatives that they can possibly think of they throw at a customers.

We are pretty savvy in understanding what those are and can parry them pretty well.

But that is their primary weapon, if you want to call it, is pricing.

So we are pretty well-attuned to what each of these different vendors are doing there and kind of respond accordingly.

So, my answer to them is, bring it on.

You have talked in the past about competing against free, is it typically free on that product, is it bundling of other things?

I'm just interested in the difference versus years past.

Yes.

I think it is different, particularly your bundling.

What some of the unnamed competitor will do, they will bundle, discount the price, and then when maintenance renewals come up, on their hardware they have a -- I've got to call it a profit improvement program, to makeup for the loss of the initial discounted price on a deal.

We are well aware of those kind of tactics.

Yes, it is bundling and the customers are aware of it.

They are not happy about that either.

They know what these guys are doing.

So in most cases that is not a strategy that builds a lot of customer loyalty.

They know in the future maintenance releases, they're going to be taken advantage of, because they're stuck.

Maybe Al wants to comment a little bit on this.

No, I think that hits it pretty well.

I think the bundling as Bob said, is very clever.

It's designed to hit different budget buckets out there, so it isn't just one bundle that you consistently go and see in there.

But it is fairly creative on how to go in and attack it.

We see it on a consistent basis particularly in larger environments.

Aaron Schwartz, Jefferies.

I had a follow-up question on Simpana 10 on the go to market.

For customers that are upgrading to 10 now with the capacity-based license presumably they have access to all of the features through that license.

If you were allowed some of these changes into next year, can you just sort of walk through the mechanics of that conversation with the customer.

Are there additional products that they need to license that are not part of the tent upgrade?

What from a mechanical standpoint actually happens?

What it that conversation like with the customer.

There are two parts -- Al's going to take this.

But one part is upgrading what they have.

Two is the whole discovery and educating the customer on what are the other opportunities for us to help them solve other problems, beyond data protection.

I will let Al take it because he is driving this.

Yes, Aaron, it starts with -- we go in and look at an environment and see just exactly what they have, what they're using, what they're deploying.

The first step is to make sure that is all optimized.

We've initiated kind of a formal program on that as we go around.

To your point, there aren't a ton of people that have bought everything.

There are always new feature sets out there, even people have bought the quote, whole platform.

So there are new things that come along, mobile is probably a good example of that in the recent releases and/or new things drive more capacity under management is another way of thinking.

But back to the point -- so we go in and take a look at what people are doing, what they're using, what they are deploying, where they're seeing operational benefit.

Bob said many times, we are all about customer value.

We are trying to really make sure that is exemplified out there.

Then as he also said, now moving forward looking at newer feature sets, usually around content.

A lot of our existing use cases are primarily focused on recovery and active archive, if you will.

So now going forward, taking a look at content related applications, that is where you get into a lot of the verticals, compliance, et cetera.

Again, there is a big opportunity on that, both in terms of revenue and market opportunities down the road.

The uniqueness of what I was saying underneath there is our ability to index all the data at the time we see it and understand the context of that data.

That is different from many of the other vendors in the industry.

So that allows us to seamlessly bridge the gap between, what I call, typical data protection recovery and content-related application so it is seamless.

Same copy, but we can provide a lot of different use cases for that copy of data.

Okay.

Then quick -- Bob, if I could, probably, for Brian.

On the deferred software, I know you covered it and it's a small component.

But from the metrics you gave, it looks like that was down about $5 million sequentially.

Is that roughly in the ballpark?

It is close to that.

It is about $4.5 million sequentially.

Okay.

Terrific.

Thank you.

Michael Turits, Raymond James.

Just a follow-up on the deferred.

Then a question on competition.

On the deferred, it sounds like it is pretty lumpy and obviously had the fall off this quarter in the license fees.

But as we calculated billings or bookings, they were below the rate of revenue growth this time.

Typically they have been about the same.

So, given the lumpiness, does that make sense Brian, to think that rate starts to head back up towards your revenue growth rate?

I would say that.

Yes, that is correct.

You're going to see that swing from quarter to quarter.

I wouldn't read into the quarterly swings, but over time it should match.

Okay.

Then Bob, you made -- had some interesting comments last quarter about, what you called that sounded like pretty broadly increased competition, or new forms of competition in the data center.

Some of your customers moved to SAS models and the cloud models.

Is that something you can maybe give us a little bit more detail on this quarter?

Well, I think that has proven to be more of an opportunity.

I will let Al expand on that.

For us, because of our ability to manage hybrid on premise cloud environments.

So when we go into a customer, it just is a big advantage for us.

I will let Al expand on that as to why.

On the flip side of that, some of the smaller, newer vendors have come in at the lower end of the market.

We just have released a series of products and there will be another series of products released this quarter aimed at, we call it high velocity SMB, whether it's for virtual machine solutions or data protection solutions or high availability recovery solutions.

We have done a pretty good job there of making sure that we can expand our SMB footprint as well.

So just swinging back on your first part of that question to the cloud and why this has become more of an opportunity than an issue for us.

So I'll let Al --

Yes, I think it -- like I say, I think we were on the right track a quarter or so ago.

It continues to play out there.

It's extreme high demand.

The world according to me, Michael, is the cloud market is bifurcating somewhat between the infrastructure people and the management people.

We think the opportunity is usually on the management side for a lot of typical reasons.

To that point then, a lot of things that we put into our product set relate to the management, particularly the operational side of the equation.

We think we are very differentiated on the things we are doing there be it, automated workflows, be it the way we are doing our metrics, the way we are doing our reporting and analytics against all the data saved from or captured from an operational environment.

I think it is highly unique and it adds real value to these big MSPs.

They're unique in their operations, in that they are extremely dynamic and it is high volume, high velocity.

So we feel like we have a good fit for that opportunity.

On the back end of the application side of that, in terms of how you manage and protect applications in the cloud, it is a little bit different.

But we're also well-positioned for that as well.

You may want to --

Yes.

Obviously you have the multi tenancy issue or different views of the same operational set of data there.

One is the people managing it and two is the people that own the data.

The security has to be respected obviously.

You enough depth to understand what you have and where it is going and what the operational aspects of it are, so again, unique.

Glenn Hanus, Needham & Company.

A quick follow-up.

On the hiring front, did you get -- in light of the environment, did you deliberately hold back some this quarter?

Or was it just kind of execution and finding the right people and bringing them on?

Or are you kind of a little bit more cautious on the OpEx side recently and going forward?

Or is it more, just sort of executing on difficult aggressive plans?

I would say it is a little bit of both, but it's primarily execution.

It just didn't do what we said we needed to do in certain areas.

Okay.

Do you want to comment at all on some of your other distribution partners?

Hitachi?

Or how things are progressing with perhaps NetApp even?

Any other comments on some of the other partners?

Hitachi, in the field, we have got, I would say globally, extremely good traction on very high growth.

Obviously, we have done really well in the US with Arrow and the whole distribution network, the resale network underneath them, particularly on some of the higher velocity initiatives in the Dell replacement with partners like CDW.

We had to completely mitigated any Dell risk.

With those kind of initiatives, you will see it in our numbers going forward where Dell is going to go down.

Our growth will continue to be -- likely continue to be really solid.

On NetApp, I will let Al comment.

Continues to be positive momentum.

About what the Company's doing in terms of growth rates.

We do keep our expectations low there and externally until we get something momentous to talk about there.

But again, positive.

Abhey Lamba, Mizuho Securities.

Bob, you seem to be doing pretty well in Asia Pacific and Europe while most of the other companies are having a hard time in that region.

Maybe you could talk a little bit about what are the big factors driving that out performance?

Is it low base or increased investments or some other factors?

I would love to hear that.

I'll start with EMEA, we put a new management team in EMEA well over a year ago.

We have changed out almost all the leadership.

The team is executing like hell.

They are doing a really good job in an extremely tough environment.

So kudos to just a lot of hard work and hiring a lot of people who have got a passion and know how to get things done.

I think you will see that continue.

Similar in Asia-Pacific, we had a good team there but we wanted to take that up a level.

I think you will see good solid expansion and growth in APAC.

It is just putting in stronger -- taking management to the next level and building the CommVault infrastructure.

Lots of investment in Australia, Singapore, Japan, China.

So we are getting a good solid performance out of that team.

So, it is execution.

On the margin side, you seem to have already hit the mid-20% margin.

How far are you planning to take it down before you bring it back to the same levels, as you invest in the business?

(laughter) I will let Brian answer that question.

We said it's going to be 100 basis points for this year on a full year basis.

Then we hope to grow it from there, over the next few years.

That is an area, we have overshot a bit as you are all well aware.

So, it puts us in a good foundation place for us to build from.

But it is not easy, given the investment profile and the aggressive strategy we have, Abhey.

What I would pay attention to is our pretax earnings growth rate and not the percent.

So, in other words, our objective is, to -- right now is to really focus on really strong pretax earnings growth and we're not going to be as focused on the operating margin percent.

But we want to deliver a strong revenue and earnings growth for about as far as we can see.

That is our objective.

Alex Kurtz, Sterne Agee.

Just one question, Bob.

I think our understanding of the capacity model has allowed customers to sort of grow their environments without having to spend all this money up front.

There was some kind of flexibility in the pricing model and that over time, you would capture all that revenue.

But it just sort of lowered the threshold as far as accessibility.

So with these larger deals, can you just talk about the capacity model and context of that.

Does that not apply to the larger customers and that's more of a mid- market phenomenon with the capacity model and lower pricing?

No.

It applies across the board.

As I was indicating earlier, is there is an issue there, a fundamental issue.

As we add all this value, we are not able to differentiate the value in an all-in capacity model.

So we are basically giving a lot away.

So in areas where a customer may want data protection, soon he's buying a bundle that includes a lot of other things.

I think what we'll find is we will enable customers to buy what they want under a capacity model and all these extremely unique -- for example, what Al just mentioned in operations, is pretty close to what someone like a [splunk] might deliver in the market.

We're basically giving that away for free.

So, as we go forward, I think, we will start to segregate that in ways that are -- still provide extremely good returns to our customer, but segregate the value more than we do today.

We are going to start doing that certainly in calendar -- we are starting to make the moves now.

But when you start to get into calendar 2014, clearly as we migrate through next year, we will do it in a way that's, I would say, very constructive for our customers.

Robert Rezza, RBC Capital Markets.

My question has been answered.

Thank you.

Srini Nandury, Summit Research.

I have a basic question on the competition out there.

There's a major disruption at one of your largest competitors out there.

There is a sales weakness, sales disruption.

One of their major Windows platform is suffering.

Your growth rates can it be faster than what it is because of all this disruptions that's going on there?

Can you grow faster this year compared to last year?

Well I think our objective is to see if we can improve our growth rates.

Certainly, situations like that are helpful.

Clearly, when a major competitor has issues, it certainly is a positive in our ability to increase market share.

Okay.

That's it for me.

Thank you.

Phil Winslow, Credit Suisse.

Most of my questions have been answered.

But, Bob, I was wondering if you could just provide a little more color on what you're seeing between some of your larger customers and sort of the SMB environment?

If there's any sort of distinction in buying patterns that you're seeing between the two?

If there is, any distinction there when you think about it by geography too?

Thanks.

SMB has been -- we have had, I'd say, consistent steady growth and we are improving our position, hopefully like go to market and brought our product sets there.

Moving away from Dell is actually helping that instead of hurting it.

So that is a completely separate environment.

There seems to be enough demand out there in spite of the economics for us to stand, I'd say, a reasonably good growth rate in SMB.

What is going on in the enterprise is that our broader value set is certainly putting us in a situation for much, much bigger deals.

We get into your high 7-figure and 8-figure deals, we didn't have those kind of opportunities in the past.

So they are there.

On the flip side, Phil, that environment is extremely competitive, given the broader weakness.

Some of the larger competitors were fighting like hell either to hold on to the accounts they have or try to increase their revenue growth.

Somebody mentioned, you've got IBM, you've EMC and you've got Symantec, I mean, that's typically what we're fighting in those sectors.

The good news, we have been quite successful.

But it is not an easy environment.

You've got -- the way you execute in that environment today has to be a lot more comprehensive and thoughtful than it was a year or two ago.

We are putting in the strategies and the go to market to improve selling campaigns in order to continue to execute in that segment of the market.

But, not easy.

Got it.

Thanks guys.

Thank you, ladies and gentlemen.

This concludes CommVault's second fiscal quarter 2014 earnings call.

Thank you for participating.

You may now disconnect.