Commvault Systems Inc (CVLT) 2014 Q3 法說會逐字稿

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

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

Please note that this conference is being recorded.

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

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

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal third quarter 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'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 has also been furnished to the SEC as an 8-K filing.

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

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

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

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

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

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

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

Our results for the quarter continued our track record of delivering solid double-digit revenue and non-GAAP operating income growth.

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

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

Let me briefly summarize our Q3 FY14 financial results.

For the quarter, total revenues were $153.3 million; up 20% year-over-year and up 8% sequentially.

Software revenue was $79.2 million and grew 20% year-over-year and 12% sequentially.

Services revenue was $74 million and grew 19% year-over-year and 4% sequentially.

We continue to meet our stated objectives in transitioning away from Dell to other distribution partners.

The 20% increase in Q3 2014 total revenue was achieved even though our Dell revenue decreased 28% year on year, while, for example, our revenue from Arrow grew 31% year on year.

It is also important to note that the majority of the Q3 Dell revenue was maintenance revenue from our install base.

We expect Dell revenue to continue to decline as a percent of sales.

From an earnings perspective, operating income, or EBIT, was $42.5 million, up 42% year-over-year and 12% sequentially.

EBIT margins were 27.7%.

Diluted earnings per share were $0.54.

We generated approximately $30.2 million of cash flow from operations during Q3, exiting the quarter with approximately $500.5 million of cash and short-term investments and no debt.

Our revenue growth, aided by the continued solid market reception of Simpana 10, increasing penetration in a large enterprise accounts, and outstanding sales execution in our international operations.

Simpana 10 continues to significantly enhance CommVault's leading value proposition in our core business and enables us to begin penetrating other data-related market segments.

Let me spend a minute speaking about our business environment.

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, Europe has come out of recession, and there is positive momentum in Asia Pacific.

Leading firms like Gartner, IDC, and Forrester are forecasting that IT spending for 2014 will modestly improve over 2013.

We are assuming overall storage-related IT spend will gradually improve.

Globally, we are anticipating overall market demand for our software and services will improve in calendar 2014.

I would now address our current outlook.

We had a positive first nine months of FY14, in which total revenues and licensed revenues grew 20% year on year and non-GAAP EBIT increased 37% year on year.

Our consistent above industry average results are a validation of CommVault's unique ability to address the changing data and information management needs of large commercial and government enterprises, as well as providing best in class solutions for leading managed service and cloud providers.

Our visibility going into Q4 has increased over Q3.

While we have strong consistent growth in revenue and earnings, our business fundamentals are strong, I would like to add the following words of caution regarding our future outlook.

We continue to have quarterly revenue and earnings risk due to the timing of large million dollar deals.

We have still not met our hiring objectives in sales or field facing technical teams.

While major firms are forecasting improvements in IT spend for calendar 2014, one recent survey indicates a slower start to 2014, and as I stated last quarter, there is execution risk tied to the implementation of our all-things data strategy, which is a major corporate-wide endeavor.

I will discuss the strategy in more detail later on in the call.

With that said, we believe the current FY14 Street consensus for growth rates and for total revenues are reasonable.

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

But 2015, we believe, we will be able to achieve solid double-digit revenue and EBIT growth.

We are forecasting that FY15 growth will continue to be driven by strong market traction with Simpana 10, strong product roadmaps, and continued success with large enterprise accounts.

We expect to see strong growth in the cloud market.

We are also forecasting revenue from our new business areas including mobile, content and archive, healthcare, and operations intelligence.

In summary, CommVault had another very solid quarter and is in good position to successfully achieve our annual objectives for FY14.

We have also established a solid foundation for growth in FY15.

We are increasing our rate of spending in order to make the required investments to ensure we can continue to outpace the market in growth and profitability over the medium to long-term.

We are well on track in establishing a product distribution services support and marketing foundations to enable us to achieve our FY15 objectives and over the next three years, to achieve our billion dollar plan and maintain mid-20%s operating margin objectives.

I will now turn the call over to Brian.

Thanks, Bob, and good morning, everyone.

I'll now cover some key financial highlights for the third quarter of FY14.

Total revenues for the quarter were $153.3 million, representing an increase of 20% over the prior year period and 8% sequentially.

We reported software revenue of $79.2 million for the quarter, which was up 20% year-over-year and 12% sequentially.

During Q3, our software growth continues to be driven by 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 is a direct correlation to the underlying volume of data under management.

Capacity-based license sales represented 77% of our Q3 software revenue, which was slightly down from 80% in Q2 FY14 and up from 72% in the prior-year period.

We anticipate that capacity-based licenses will continue to account for the majority of our software revenue, despite quarter-to-quarter fluctuations.

Let me provide you an update on the new pricing models, which Bob touched on during last quarter's earnings call.

Please note, these models will be positioned as options to our current capacity-based pricing model.

During Q3 FY14, we began to opportunistically offer term-based pricing structures where customers can rent the software licenses for a period of time as opposed to owning a perpetual license.

In addition to term-based pricing options, we have started to also market test a value layering price structure versus our current bundled capacity charge.

The value layering approach allows customers to more easily purchase the specific solution sets they require.

Both the term and value layering price models are being well-received in market testing.

The rollout of these models is being done through a well thought out, deliberate process and we expect customer adoption to be modest in the near-term.

For the quarter, software revenues derived from indirect distribution channels increased 19% over the prior-year period and represented 85% of software revenue.

Our direct revenue represented the balance and increased 31% 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 24% over the prior-year period and 18% sequentially.

Enterprise deals represented approximately 61% of software revenue.

The number of enterprise deals increased 14% year-over-year and 22% sequentially.

Our average enterprise deal size was approximately $284,000 during Q3 2014 compared to $260,000 in the prior-year period and $295,000 in Q2 FY14.

Software revenue from non-enterprise deals increased 14% over the prior-year period and 4% sequentially.

We continue to expand our SMB distribution channel.

The revenue mix for Q3 FY14 was 52% software and 48% services.

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

Services revenue for Q3 was $74 million; an increase of 19% year-over-year and 4% sequentially.

For the quarter, revenue from US operations generated 55% of total revenues, resulting in a 13% year-over-year increase, while revenue from international operations generated the balance, resulting in a 29% 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.

For the nine months ended December 31, 2013, revenue from US operations generated 58% of total revenues, resulting in a 17% year-over-year increase, while revenue from international operations generated the balance, resulting in a 24% year-over-year increase.

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

Arrow, our largest US distributor, continues to be a strong partner for CommVault.

For the quarter, revenue transacted through Arrow was approximately 30% of total revenue, growing 31% year-over-year and 2% sequentially.

We added approximately 400 new customers in the quarter, bringing our historical customer count to approximately 19,500 customers.

Sales through our Dell relationships accounted for approximately 11% of total revenues for the quarter.

Total quarterly Dell revenues were down 28% year-over-year and 38% sequentially.

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

These actions will lead to the further decline of our percentage of total revenues transacted through Dell.

We expect to see Dell revenue further decline below 10% of total revenues over the next few quarters, as we continue to disengage from Dell, other than on an opportunistic basis.

When Dell-related revenue as a percentage of total revenue drops below 10%, we will stop disclosing Dell-specific information.

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

Gross margins were 88.2% for the quarter, due to the mix of software and services revenue.

Total operating expenses were $91.2 million for the quarter, up approximately 13% year-over-year and 8% sequentially.

Sales and marketing expenses as a percentage of total revenues, decreased to 44% in the current quarter, which was down from 47% in the prior-year period.

Non-GAAP operating margins were 27.7% for the quarter, resulting in operating income, or EBIT, of $42.5 million.

On a year-over-year basis, Q3 EBIT increased by 42%.

Q3 EBIT margins increased by 440 basis points year-over-year and increased 110 basis points sequentially.

Net income for the quarter was $26.9 million and EPS was $0.54 per share, based on a diluted weighted average share count of approximately 49.9 million shares.

On a year-over-year and sequential constant currency basis, foreign currency movements did not have a material impact on the Q3 revenues.

FX movements positively impacted earnings per share by approximately $0.01, both year-over-year and sequentially.

I would now like to spend a few minutes discussing our operating expense investments for the remainder of FY14.

We had better than anticipated operating margin improvement in Q3, due to lower than planned headcount additions, as well as below targeted spending on several investment initiatives.

We added 40 net employees in fiscal Q3 and ended the quarter with 1,936 employees.

This was below our internal hiring targets and we will roll the Q3 headcount hiring shortfall into Q4's hiring plan.

We expect to increase our rate of hiring in Q4 compared to Q3, with a heavy focus on the recruitment of sales and front end technical support teams.

Our planned additions to sales, services, and support headcount are critical in order for us to achieve our targeted FY15 and FY16 growth rates.

Please keep in mind that a typical sales rep and sales engineer each take about a year to become fully productive.

So in the short term, as we continue to hire, they will have a negative impact on short-term margins.

Our inability to add enough sales and technical field personnel has been an issue for us throughout FY14.

Fixing this issue will be the top priority for our new Chief Human Resources Officer, Jesper Helt.

Jesper joined CommVault earlier this month and we are excited to have him on our Management team.

His bio can be found on our website.

I would like to highlight one additional key spending increase in Q4.

Historically, we see a large sequential increase in employer-paid FICA expense in Q4 because many of our employees in the US reached the FICA limit well before the end of the calendar year.

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

I will now address the current Street consensus revenue growth rates and our anticipated EBIT margin improvement for FY14 and 2015.

As Bob indicated, we are comfortable with the current Street consensus revenue growth rates for FY14.

Due to the overachievement of forecasted EBIT margin in the first nine months of FY14 and lower than planned investment levels, we now believe we can improve operating margins for FY14 by approximately 225 to 250 basis points.

For FY15, we believe we can again deliver solid double-digit revenue and EBIT growth.

However, we expect FY15 operating margin improvement to be muted due to our FY14 overachievement, as well as our plan to increase the rate of our operating expense investments in the fourth quarter of FY14 and FY15.

These investments include additional go-to-market resources and expenses to better position the Company for our all things data strategy.

We need to make these investments in order for us to achieve our targeted FY15 and FY16 growth rates.

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

While we expect to accelerate our rate of investments in FY15, we still anticipate strong, above-industry EBIT growth in absolute numbers.

We will provide more specifics on FY15 during our Q4 FY14 earnings call.

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

Let me now comment on tax rates and share count.

We will continue to use a pro forma tax rate of 37% for the remainder of FY14 and FY15.

Our GAAP tax rate for Q3 FY14 was 37% and we expect our full-year FY14 cash tax rate to be in the range of 16% to 20%.

Our cash tax rate will remain lower than the GAAP tax rate through FY14 and into FY15.

For FY14, we anticipate that our diluted weighted average share count will be approximately 49.5 million to 50.5 million shares.

For FY15, we anticipate that our diluted weighted average share count will be approximately 51 million to 52 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 tenure term in the next six months.

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

Now moving onto our balance sheet and cash flows.

As of December 31, our cash and short-term investments balance was approximately $500.5 million, up 3% from the end of September.

Cash flow from operations was $30.2 million.

Free cash flow, which we define as cash flow from operations less capital expenditures not related to the new headquarters, was $28.8 million, which is up 10% year-over-year and 24% sequentially.

The increases are a result of change in working capital on the balance sheet, as well as higher operating income and revenue.

During Q3 FY14, we expended approximately $19.6 million on construction costs for our new campus headquarters.

We expect to spend approximately $25 million in Q4 2014, but the timing of our cash expenditures is dependent on the progress of construction, which is currently on schedule.

By the end of FY14, we will have expended approximately 60% of the total cost of the project.

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

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

As of December 31, 2013, our deferred revenue balance was approximately $192.8 million, which is an increase of $31.2 million or 19% over the prior-year period and up $1.6 million or 1% sequentially.

Please remember, the vast majority of our deferred revenue is maintenance revenue, not software revenue.

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

Lastly, for the quarter, our days sales outstanding, or DSO, was 58 days, which is up from 53 days in Q2 2014 and up from 51 days in the prior-year quarter.

The change is due to linearity within the quarter.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Bob?

Thank you, Brian.

I want to wrap up the call with a brief commentary about our underlying business growth drivers and an update on our all things data strategy that I spoke about last quarter, including an overview of our near-term product pipeline.

We just posted the strongest revenue earnings quarter in CommVault's history and have delivered compounded annual revenue growth of 22% and compounded annual EBIT growth of 31% over the past seven years.

The compelling reason why we have been able to deliver consistently strong financial results is that we continually lead the industry in providing unrivaled innovative solutions for our large enterprise customers.

These enterprise customers include large commercial and government enterprises and managed service and cloud providers.

We provide solutions for their most critical data-related challenges, which include the need to resolve data, scale, and cost issues, improve recovery SLAs and centralized data protection, improve operations by automating everything, deploy comprehensive operational analytics and real-time historical reporting, deal effectively with issues related to the emergence of private and public clouds, meet compliance regulations which mandate companies keep their data for longer periods of time, which requires advanced archiving and data management capabilities, and lastly, enable mobile users to have secure, anytime, anywhere, any device access to the data.

Their devices need to be managed and the data needs to be automatically governed.

Simpana, our singular data information management platform, is unique in the industry.

It enables us to deliver solutions that have more functionality, that are more cost-effective, more reliable, and can be supported across a very broad range of enterprise customer needs.

In summary, our ability to consistently provide leading solutions for data-related challenges has enabled us to increase market share in the large enterprise and MSP and cloud provider segments of the market.

Our unique capabilities are especially important as enterprises move to the cloud-based solutions.

I want to spend a minute on why the cloud has been a major catalyst for our revenue growth and will continue to be a major factor in our future growth.

CommVault has invested heavily in cloud-based product development.

We invested early on in anticipation of a massive shift to the cloud, to cloud computing, and launched our first products in 2008.

We pioneered developing innovative technology that enables large enterprises and MSP and cloud providers to effectively deploy cloud solutions.

In doing so, we have established strong competitive position versus our larger legacy competitors, as well as new entrants to the market.

As a result, over the past seven years, we were able to consistently outpace the market in revenue growth in those segments.

Our growth in the MSP and cloud segment has been a key contributor to our revenue growth.

We are a provider of data-related solutions to approximately 150 managed service and cloud providers around the globe.

These providers serve hundreds of thousands of customers worldwide.

We estimate those providers manage more than 50 petabyes of data with the Simpana software platform.

Many of the global cloud providers have adopted CommVault Simpana as the foundation for the data management offering, including Rackspace, Atos Origin, British Telecom, EarthLink, Expedient, hosting.com, IT-Lifeline, LayeredTech, Onyx Managed Services, Peak10, PCM, Revera, and Microsoft.

It is important to note that the competitive differentiators that have enabled us to strengthen our positions in large enterprises as they implement hybrid cloud solutions are very similar to the competitive differentiators that have enabled us to become a leader in providing solutions to the major MSP and cloud providers.

We deliver flexible, secure solutions that make it easy for large commercial and government customers to adopt hybrid clouds and enable them to move and manage data in public clouds.

We have recently added a new interface layer which opens the Simpana platform for multi-tenant, scale out, data management services allowing service organizations to create custom solutions.

For those cloud providers, we deliver flexible, secure solutions and services that make it easy for large cloud providers to manage and move data from their customers' environments into their clouds for compute, storage, or recovery use cases.

Unlike many legacy competitive products, Simpana's modular architecture is naturally suited for the cloud.

It separates us from our competitors by delivering massive scalability, best in class multi-tenancy, comprehensive data security, and complete automation and operations management reporting capabilities.

This allows our service-driven customers to quickly adapt and deploy new service offerings, employing our automated work flows behind customer branded portals.

Simpana software offers customers a seamless capability to index, encrypt, move, store, archive, and access data for operations, analytics, compliance, and mobile usage across all major cloud platforms.

Secure access tied to index data ensures a customer retains a comprehensive, holistic view of the data whether it is on premise, on mobile devices, in the cloud, or in multiple clouds.

In this time of heightened security concerns, customers are demanding a new set of criteria for data management functions.

Fortunately, this is something we have great experience with.

Simpana allows users to have secure access to the data from anyplace, anytime, and on any device, including our newest features which extend into data synchronization and file sharing options.

Simpana is also integrated with major cloud providers such as Microsoft Windows Azure, Amazon web services, Net App private storage for AWS, and Hitachi content platform.

We also offer sophisticated data management solutions for SaaS-based applications, including data protection, archiving, and compliance.

We expect that the cloud-based MSPs, cloud providers, outsources, and systems integration business will grow substantially and become a material part of our business over the next few years.

In April of last year, we strengthened our ability to increase our positions in these segments of the market with the formation of a focused global team, the cloud services group we call CSG.

In summary, the move to the cloud is a major catalyst for CommVault's growth.

Our unrivaled, comprehensive Simpana software platform and specialized cloud services and support lead the industry in providing solutions for our customers' cloud-based needs.

CommVault's all things data strategy, as I talked about last quarter, is our exciting path to sustained long-term growth and profitability.

It addresses the key new and emerging customer data protection and management needs and opens up many new market opportunities for growth in healthcare, compliance, mobile, business intelligence, analytics, operations management, and data-related process automation.

CommVault's key strategic objectives are to strengthen our position in our core data management business and simultaneously expand into new high growth data-related market segments.

These strategic objectives are being supported by an accelerated pace of CommVault innovation.

We have a very deep product pipeline based on Simpana 10 and in the next few quarters, we will launch additional new products on the Simpana 10 platform, including leading edge solutions for advanced replication and recovery features, healthcare, operations management, including infrastructure analytics, enhanced business analytics capability, advanced mobile filesharing, leading edge next-generation products for SharePoint and exchange archiving, and solutions for database archiving.

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

To summarize, we are strengthening our position in our current core data protection and management business and moving to several new high-growth, high profitability market segments.

We have developed the technology, services, and support to address those segments.

Our focus now is on execution.

This includes building the marketing and distribution infrastructures and pricing models for our new market segments.

In closing, we had a solid FY14 Q3 in revenue and earnings growth.

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

Our innovative all things data strategy solutions address critical customer needs in the high growth, high value segments of the market.

As stated last quarter, we will continue to make the necessary changes and investments across the Company to ensure the successful execution of this strategy.

We are excited about our prospects for Q4 2014 and for FY15 and our future potential.

We are confident in our ability to continue to grow the Company at double-digit growth rates.

Our next financial milestone is our $1 billion plan of revenue and maintain our 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.

Thank you.

I will now turn the call back to Michael.

Before the operator opens up lines for questions, I would like to highlight that Al Bunte and Brian Carolan will be speaking at the Stifel Nicolaus 2014 Annual Technology Conference in San Francisco, California on February 11 at 1:55 PM Eastern Time.

In addition, Al and Brian will be speaking at the Goldman Sachs 2014 Annual Technology and Internet Conference, also in San Francisco, on February 12 at 12:40 PM Eastern Time.

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

Operator, could we please open up the line for questions?

(Operator Instructions)

Joel Fishbein, BMO Capital Markets.

Great license acceleration this quarter.

Brian, I have a couple of clarifications.

Number one, stock's down in the pre-market based on what the perception around deferred revenue being weak.

I know it's a little bit redundant.

Can you just go through the deferred revenue and talk about the break out between maintenance and product and if there were any changes in the product deferred, any meaningful movement there and then just what the maintenance deferreds were?

Sure, Joel.

Just as noted on prior earnings calls and also just during this call, the vast majority of what's sitting in deferred revenue is maintenance revenue, not software revenue.

Typically, any software deals that would go into a deferred category, it's typically just a timing issue on just a small portion of perpetual deals.

In other words, it's a timing issue of when we receive cash or can bill it versus when it reads our revenue recognition criteria, again, for a small portion of deals.

That will fluctuate a bit quarter to quarter, but we feel that it's not a good indicator of our licensed revenue growth, which was up 20% year over year as the majority of it never makes its way into a deferred software category.

As of December 31, our deferred revenue balance, over 99% of it is maintenance and professional services.

Whatever is sitting there at the end of September, there was a few deals remaining in there that we did recognize.

Going forward, you will see some fluctuations in there, again, but it's only temporary pattern in terms of just larger perpetual deals and timing issues with respect to revenue recognition.

All right.

You mentioned a little bit about linearity, could you just comment about linearity versus previous quarters?

Sure.

There's a higher concentration of larger deals for sure.

I think I mentioned the stat of 61% of our licensed revenue were enterprise deals.

We also had an all-time high of international million dollar deals, which is a good thing for us.

Linearity kind of kicked up the DSO a little bit to 58 days for the quarter.

Is there any change to the renewals, are more renewals getting pushed into 4Q as people are adopting Simpana 10?

Is that one of the issues that's may be happening?

No.

I'd say it's pretty typical for us.

Q4 is typically a strong renewals quarter for us, which has always been the case kind of going back in time.

No unusual pattern there.

All right.

Great.

Thanks a lot.

Aaron Rakers, Stifel.

As a follow-up to the deferred revenue discussion, I know that you had mentioned, obviously, a sharp falloff in the Dell relationship and you also alluded to that majority being driven by the maintenance stream of that relationship.

Has that or should we expect that to continue or will that weigh on the deferred revenue balance as we go forward?

Or rather, are you able to replenish that maintenance stream into that deferred revenue line?

No, it won't have an impact.

Any kind of falloff in Dell revenue, especially Dell maintenance-driven revenue will just be replaced through alternative distribution channels.

We do not expect a significant falloff in deferred maintenance as a result of a drop in Dell revenue.

Okay.

I know you kind of gave a little bit more clarity on what you're doing from a pricing perspective with the two new programs kind of modestly rollout here in the coming quarters.

If we look at that and the change in pricing on a like to like basis, so a customer deciding to go with either of these two new programs relative to capacity-based licensing, how do we think about that from a revenue perspective, I know albeit moderate, in terms of its impact over the near-term?

This is Bob.

Today, when we price the capacity model, all our solutions are priced into that model whether a customer deploys those solutions or not.

By enabling a value-based pricing model, we enable customers to pick and choose those solutions sets that have the impact tied to their data-related goals.

Basically, we're giving away a lot of value, which customers just do not use.

If you use that as a theory, we would expect that we would price to the customers' needs and net-net the value to CommVault would go up and the customer would get exactly the value that he's paying for.

I'll let Al take a crack at that, but that's basically what the expectation is.

I think that's clear, Aaron, and as well as the other initiative on some of the term-based pricing scenarios that we're testing and using opportunistically out there.

I think the point you need to understand is, this is not a one-to-one replacement for all of our pricing methodology today.

It's simply perceived as an option for the customer.

We find different capital budgeting models, different P&L models out there.

People want to buy software differently.

Again, it's just an option.

Thank you.

Whether you are talking about operations analytics or healthcare or advanced mobile solutions, those will all be priced to value, with good return for the customer.

Jason Ader, William Blair.

Bob, just on the software revenue for the March quarter, you've had a couple of quarters now where you've been able to take some things off the balance sheet, which has allowed you to grow very nicely.

That is not true.

Let's be really clear.

I

n Q3, that revenue did not come off the balance sheet.

The revenue was due to, on software revenue, was due to pure license revenue growth.

That is the misconception out there.

Total revenue, yes, it impacts total revenue, but it does not impact or did not impact in Q3, our software revenue significantly.

Okay.

I'm looking at Brian's comments --

I'll let Brian take this from here, but to be really clear, we had extremely strong license revenue growth based on million dollar deals.

They were at a record and it drove our results.

That's what you've got to focus on.

You guys are all twisted on up on deferred, but I think you're just overstating the impact of deferred to what's driving the growth of this Company.

Jason, just to give you a metric, on the deferred software, quarter on quarter change in deferred software was $4.1 million.

We recognized $79.2 million.

You can kind of look at those stats and make your own informed judgment.

$4.1 million was the change from Q2 to Q3?

That is correct.

Okay.

All right.

My point, Bob, was really just about the March quarter and I know that people are twisted up about this and what I wanted to try get a sense from you on is obviously, it can't help you at all in March, because it's basically 1% or less now of the total deferred the software side.

On the March quarter software revenue, I know you don't specifically give guidance between software and services, but would you expect kind of a similar growth rate -- we've had about 20% growth for the first three quarters of the year in software year over year.

Is that a reasonable assumption for the March quarter?

Because I think, clearly, that would put to bed any concerns on the deferred helping things out this year on the software side.

All we said is we expect a good solid quarter and the quarter is dependent on our achieving our license revenue growth targets.

Okay.

Eric Martinuzzi, Lake Street.

Let me offer my congratulations, as well, on the real strong finish to the calendar year.

The guidance for Q4, I know you kind of addressed it from a fiscal year perspective, but if I could just take it back to where the street is for Q4, that's $158.5 million of revenue and $0.46.

The implication here is that you're comfortable with that.

Is that an accurate statement?

That is correct, Eric.

All right.

A question on the new feature adoption for Simpana 10, I know you said when people by Simpana 10, they're getting access to everything, but I want to take it a layer deeper.

Is a Simpana 10 selling so well because of these additional features?

How are you measuring that and how are you doing versus your own internal expectations?

Are they buying it for the legacy capability or is it being bought for that plus these additional capabilities?

I'll take it at the top and I'll let Al expand on it.

It's really both.

I think, clearly, we have validated, in the market, these advanced features in our core data protection business and I'll allow Al to expand on it.

Secondly, we clearly have validation on our mobile and operations analytics in some of these other new market segment targeted products.

We're really confident about that.

Our issue right now is on the execution side and putting the product management and the go-to-market capabilities to drive it in there.

But from a market reception, customer reaction position against competitors, we're feeling really good about it.

I agree, Eric.

A couple of other comments: for instance, on the data protection use cases and solution sets out there, you know our story there is that we've modernized that over the last few years.

We focused on virtualized environments, modeling it through what that means in the cloud environment.

Those things are extremely popular, those methods using replication techniques, snapshot techniques, et cetera, and again, we've seen a strong growth there.

The other side of that equation, again, talking data protection in those environments is all the automation we've done on the operational side, including adding automated workflows is extremely popular and almost the bigger you are, the more dynamic you are, the more the popularity.

Those kinds of feature sets that, of course, were all new V10 have been really popular and then as Bob added, now as you move beyond the data protection use cases, the mobile, the operational analytics, our new reporting capabilities and even early on now, our intelligent archiving is starting to gain a lot of traction.

We feel good about both sides of the equation.

Thanks.

Andrew Nowinski, Piper Jaffray.

As a follow-up to your pricing commentary, Bob, it appears evident that you continue to add more functionality to your platform but your installed base gets the new functionality, essentially, for free, as long as they queue up their maintenance agreement.

Do you expect your larger customers within your installed base to adopt the new pricing models?

We've been testing those models with our distribution partners and our customers.

In terms of their acceptance of that approach versus our current capacity-based approach -- by the way, as Alan mentioned, this is an add, it's not an either/or.

It's what makes the most sense for the customer.

For example, if they're not deploying something, they won't have to pay for it, if they don't want to go to that model.

As it turns out, in a lot of cases, the customer's saying, we prefer to stick with a higher-priced bundle approach because we may use these features and we want the flexibility.

We've seen that in the term pricing, as well.

Yes, it's a good idea, but three years from now, with the hardware guys, we have to do a complete refresh and we don't like that.

We're happy that you've given us the alternative, but we'd rather stay with your current perpetual model.

These alternatives give the customer a lot more options and flexibility on how they purchase from us.

We've tested it and we don't see it -- the cost we're offering as an option.

We don't see it as an issue.

We see it as a major benefit.

Yes.

That makes sense.

Certainly, it's a benefit for the customers, but how does CommVault capture a bigger share of their wallet given the fact that you continue to add more to your platform?

Let's just take two examples: one is operations automation and analytics.

I have a vendor out there and they're paying that vendor -- pick a number, $1 million.

The add-on value to the customer and we have competitive, over the next few quarters, we'll have a complete set of competitive solution sets in that area.

The incremental add for a customer to buy those is relatively small versus what they're paying for a point level solution out there.

That goes -- same case for mobile or healthcare.

We're actually offering added functionality, better cost savings, and better support, higher scalability, a lot of other things at a lower cost of acquisition to these customers.

They benefit and we benefit.

Okay.

Makes sense.

As we open this up to these advanced functions that are going to be new, the normal capacity-based model will be there, but as we add these very, very advanced functions, the customers will have to pick and choose their purchasing models.

Okay.

That makes sense.

If they want them, they have to pay for them, but if they pay for them, they're going to know exactly what they paid for and we will give them an ROI and they'll know what their return on that investment is and what their benefit is.

Okay.

Just a clarification, in Q2 you defied the odds and had a solid pickup in the demand in the fed.

Can you give us an update on what you saw in that sector in Q3 and what you're expecting going forward now that the sequestration issues have been resolved?

Thanks.

We had a very strong fed quarter, but it was due to some large deals.

I'd say the underlying fed business was not strong, but as a result of our ability to garner some extremely large deals in the fed, we had a good solid quarter and you can expect that to continue.

I'd say the underlying fed business will improve.

But in our case, we offset that with some larger deals which ends up positively in terms of our fed business growth.

Brent Bracelin, Pacific Crest.

Brian, I wanted to talk a little bit about (inaudible) of the trends you saw.

Clearly, a strong quarter, but it could've been stronger for the US region was growing faster.

It looks like through the US region, growing in the low teens.

Could you talk a little bit about the headwinds, tailwinds you're seeing in the US right now and then perhaps some of the levers that could improve growth?

Sure, Brent.

Yes, on a relative basis, international had a stronger quarter than the US.

A lot of that was driven by some large multi-million dollar deals in international, as I mentioned.

It's a little bit lumpier then we typically have seen.

I think if you look at the year-to-date increases, it kind of smoothes out a little bit.

The US is up 17%, international is up 24%.

We're optimistic about the momentum going into Q4, basically across the US and international equally.

Okay.

Fair enough.

Bob, obviously, you talked about Q4 visibility improving versus your visibility last quarter, but if I look at some of the external metrics that we have visibility into, DSOs have increased for now three straight quarters, obviously deferred revenue didn't increase as much as it seasonally has in the past this quarter.

Help us connect the dots why you feel better about visibility going into this quarter than last year versus some metrics that we see that are a bit contrary to that?

Just to Brian's point and Jason's point, impact to our software revenue growth from deferred is small and getting smaller.

The changes in deferred are primarily going to be maintenance-related going forward here.

The visibility that I talk about -- I talk about visibility and I talk about funnel.

What visibility is are deals that we've shipped software or we have orders for or we can see that they're going to ship early in the quarter, but we haven't gotten paid or they just don't meet our revenue recognition guidelines.

It just says that we have strength -- the visibility is going up on a relative basis.

We have strength for early in the quarter revenue that has an extremely high profitability of closing early in the quarter, but it doesn't show up in deferred and internally we separate that from -- it's the high potential probability part of our funnel.

Funnel is your total opportunities for the quarter.

Right now, in Q4, when you have higher visibility than we had going into Q3 and our funnel in Q4 is higher than we had in Q3, so the combination of the two says that we have a reasonably good outlook looking into Q4.

Okay.

Helpful color.

Thank you.

Aaron Schwartz, Jefferies.

I just had another question on some of the program changes that you are contemplating or making on the product side.

For lack of a better term, in a way maybe we think about Simpana and the capacity-based licenses, some customers may have been force fed modules that they are not using and so you're looking to better monetize customers in some of the modules to get better uptake for products going forward.

Presumably, that may require some different sales specialization around some of the areas you're talking about expanding in.

The question I have for you is, how do you manage or how do you see any potential air pocket around that if the sales hiring has been a little bit below your plan?

It seems like you're putting a lot more onus on your sales force to make sure that customers are adopting and taking a product to where you can get adequately paid for that.

That is a really good question.

Let's frame it.

Let's take operation analytics as an example.

If you're going to frame that value to the customer, you need a team that really understands the impact of these and those analytic techniques and the outcomes the customer.

That means that your product management, go-to-market overlay teams have to be in place to articulate that, because trying to educate a worldwide sales force on all of the specifics on a discipline like that is difficult.

The challenge is, and we're really clear on this, is to make sure that those capabilities are in place and parallel with our implementing these new pricing models in the field.

That's why we're going slow.

We want to make sure that those capabilities are there so that -- and in the near-term, we're just doing this from a corporate standpoint and not on our price book and we won't put them in the price book until those capabilities are out there.

The question is a really good question and it ties to making sure you have crisp execution on strategy like that.

I guess the question is, it seems like maybe the product, and I don't know if you agree or disagree with this statement, it seems like the product in the phase rollout for Simpana 10 for certain modules may be a little bit ahead of what you need to do on the sales capacity side to make sure you monetize that properly so --

Innovation is ahead of our go-to-market and field execution capability.

So we would agree with that.

Is there any sort of near-term risk in growth?

Because as you stated it takes 9 to 12 months to see productivity there.

Let's separate sales capacity from the ability to execute and sell into a new segment of the market.

You need the sales capacity if you want to grow, as I mentioned, we've been growing 22% over the past seven years compounded and over that period, we've generally improved sales productivity.

Round numbers to hit those objectives, you're hiring 20% new sales teams every year.

If you hire below that, it's going to be more difficult to hit your target revenue and license revenue objectives.

That's one part of the model.

The other part of the model is that you need a whole infrastructure to go and penetrate these new markets: product management, field overlay, technical expertise, SEs, and field technical people who understand the technology and can articulate it, so you need both.

You need sales capacity and you need the, I'll call it, the go-to-market infrastructure in order to penetrate these new market segments.

Technically, we're actually ahead of where we thought we'd be in innovation.

As Brian mentioned, one of the major tasks of Jesper Helt, who just joined us, is to accelerate our hiring, both in the field and in our, let's call it, our go-to-market capabilities in order to penetrate these new market segments.

Got it.

Thank you.

Srini Nandury, Summit Research Partners.

I have a question on the competitor dynamics there.

Can you talk about the competitor dynamics, particularly the pricing trends.

We saw some of your largest competitors, which competitors are gaining share our displacing the most and how much of your new pricing models are really customers versus competitors?

That's a good question.

Traditionally, in our core market, our major competitors are Symantec, EMC, and IBM and we have consistently taken share from all three of those competitors in our core data protection and management business.

I said on the prior earnings call, there's a lot of price competition in those markets, particularly as hardware solutions, I call it, are tied to the spindle, so as the price of disk goes down, the price of those solutions sets go down.

We've been able to counteract that so we do see pricing pressure, but we've mitigated it by selling on value.

But there's no question it's there.

As prices start heading down to zero, that pricing pressure is going to increase.

Part of what we're doing in our pricing models is tied to giving us a more flexibility in dealing with, I'll call it, traditional competition, making it easier for our channels and salespeople to deal with that.

Second, as Al was talking about earlier, we've created a lot of innovation and we just don't want to give that away.

We want to give our customers a high return on that investment, but separate that from, let's say, our core data protection and management solutions sets.

All right.

Thank you.

Rajesh Ghai, Macquarie.

I just wanted to follow-up on some of the questions asked on Simpana 10.

Considering that you've expanded your TAM quite significantly and levered yourself to some of the megatrends out there, whether it's hyper cloud or mobile or big data, I think one of the questions that keeps coming up is, can CommVault widen metrics in terms of what the traction is in these new markets, as well as try to give us an idea of whether it strategy or expanding the TAM or going out to new markets is succeeding?

Also, could you share data of what the mobile functionality that we have, mobile data management, if that's actually helping you get a new deals or in expanding your TAM.

Firstly, regarding the cloud, as I said earlier on the call, the cloud in enterprise and in MSPs and cloud dividers, is a major, major factor of our growth.

I could say it's not 100% of these million dollar deals we do are cloud-related, but almost 100% have a major cloud component to it.

I define that quite clearly on the call and I'd go through that transcript because that is driving our business.

Million dollar deals drive our business and the cloud is a major component of those million dollar deals.

More than anything else, that is overriding our growth today.

Regarding the content-related, whether it's archiving analytics and there's a component of mobile in there, so you've got a core component model of your data protection is, we call that core, you get into your file access, filesharing.

We view that as content-related, but the content-related part of our business is now becoming a key component of our growth.

We can see it and measure it now and as we look forward, I can tell you we don't hit our billion dollar numbers and our $2 billion numbers without extremely high growth in those segments; growth rates that are, for the sake of argument, several times higher than our core.

To answer your question, those segments are important.

They are growing today.

Mobile is one of them.

We have a lot of large mobile deployments.

Archiving, as Al mentioned, advanced archiving is another significant area for growth for us.

Mobile will continue to expand, archiving will continue to expand and a component of archiving, by the way, is compliance.

As we start moving into operations and operations analytics where we have really some compelling technology as we start rolling that out sometime the first half of this into FY15, as we start moving out aggressively into the healthcare market, where we have a foundation, by the way, those other new market areas will become drivers.

We're not overly confident, but we are pretty confident in our ability to execute those strategies.

Thank you.

Michael Turits, Raymond James.

Bob, you talked about price competition of the large guys that continues to add some price pressure.

Anything new on versus smaller competitors, little guys, and any view there?

Also Brian, just wanted a clarification, I think it's obvious, but I just want to make sure I was right, you said that the software deferred revenues were changed $4.1 million.

I assume you mean software deferred was down $4.1 million sequentially, correct?

That is correct, Michael.

Quarter on quarter change was $4.1 million.

Down.

Down, right?

Down.

Let me clarify something.

That is correct.

It's where the math is, but when I say visibility is up, you don't see it, but I'm just telling you, on our license revenue and growth, when you take all of that into consideration, is strong.

We've just got to keep it that way.

Don't get overly focused on deferred because you're going to get twisted up in your underwear.

Yes, I hate that.

But visibility -- I think you defined it essentially as off-balance-sheet backlog is one way of looking at that, right?

Correct.

You could look at it that way.

It's not revenue.

It's just not revenue.

It doesn't meet our criteria and we're very strict on how we -- and as soon as it is revenue, it becomes revenue.

We have a very rigorous consistent revenue recognition checklist here.

That's where it comes from.

I'm just saying, on balance, if you look at Q3, when you net all the figures out, we had a really good, solid license revenue growth quarter.

I was just asking Bob about the smaller competitors, any change in the landscape there?

People have been brought up to you before, like (inaudible) and anyone on the small side that's either more or less visible?

From our revenue, we see Veeam, we see Activio out there.

It isn't impacting our revenue significantly, but I would view it more as opportunity.

We started -- as we extracted from Dell we did two things.

We successfully -- everybody thought we couldn't, in a few quarters, navigate our way out of Dell; for all practical purposes, we're out.

We've moved those accounts and that revenue to other distribution partners.

Secondly, we started to build our own, I'll call it, mid-market capability and started to roll out products into that mid-market.

Going over the next few quarters, we will continue to expand our capability with, I call it, leading products, both from a technology and pricing standpoint, that address the higher -- not the low end of the SMB but the mid- to higher end of the SMB, mid-market.

You'll see us move into those sectors a lot more aggressively than we have in the past and we're confident we can succeed in those areas.

Okay, guys.

Thanks.

Greg Dunham, Goldman Sachs.

I do appreciate how you guys described how the cloud is driving your business and how hybrid cloud is good for business.

But maybe drilling in a little bit on that, what differentiates you in hybrid cloud versus some of your competitors specifically?

Historically, you have said that the backdrop from a buy-in perspective has gotten more complex.

Has that changed at all this quarter?

Or is it getting any better as you've improved some of the messaging around hybrid cloud?

No.

When you talk to customers, relative to our large competitors, they're running into massive scale issues.

They are running into significant compliance issues because our competitors back up products and archive and compliance are two completely separate products.

They don't scale very well.

They're extremely costly.

Secondly, when you start talking about deploying a consistent universal data protection compliance strategy across the globe in hundreds of locations with many, many petabytes, our competitors don't scale.

They don't have the universal console.

They have scalability problems.

Their backup products and archive products are separate.

Their reporting isn't as complete.

They don't have the automation that we do.

They don't have the operation analytics capability we do, so when you start to put those things together, we're solving some really big fundamental problems.

I was in a, without naming the account, but I was in a very large customer in China a couple of months ago and a well-known name in China and he had some of our, I'd say, typical traditional legacy competitors in there and it's the first time I met the CEO and he said, Bob, you're winning the technical evaluation.

I said can I tell you a little bit more about CommVault?

He said, no.

He said, I know who you are.

I know what you're ranked.

I know what your reputation is and I know you can solve my problems better than my traditional vendors.

I just need you to execute.

These are fundamental issues.

Big banks, big insurance companies, big governments, as the governments, one of the reasons we're doing so well in the federal government is the move to consolidated clouds, big governments, Canada is moving to consolidated cloud.

State governments are doing the same and that's a sweet spot for us.

I've spelled out a lot of the issues in the call and I'll let Al walk down and expanded this a little bit further, because it is a key driver of our growth.

I would just add, Greg, and Bob laid that out really well, but the other element and he talked about it in the script, but it's the dynamics and the flexibility of our capabilities, our architecture, our solution sets, because what's going on out there is, people's underlying infrastructure can change dramatically overnight.

They can add public cloud capabilities to their already private cloud capabilities.

They can add multiple public cloud capabilities.

You have to, of course, maintain the same management, the same compliance, the same access, the same visibility, and, of course, the same security settings.

It's not so easy to do in practice.

It's that dynamics, that flexibility, as part of our solution sets that I would add to Bob's comments.

We're the only ones, by the way, that in massive scale, index all the data.

Everybody else fundamentally moves around ones and zeros.

By indexing, it means we know what application it came from, what version of the app it came from, whose data it is, who has access to it, if it's encrypted, who's the key.

As Al said, so you have a file and its moving from on premise to a hybrid cloud to a public cloud, so that intelligence moves with the data.

It's captured at the console, so we always know where it is, who has access to it for fast recovery, for DR, for whatever.

Its unique out there and those kinds of capabilities are driving our business.

There's nobody has a build this kind of platform with this kind of functionality and scalability across all these different use cases that these big enterprises require.

Okay.

Thank you.

Glenn Hanus, Needham and Company.

Last quarter, you give us a little bit of sense of sales of Simpana into your install base, Simpana 10.

Can you give us an update this quarter on how that rollout is going?

Glenn, this is Al Bunte.

We continue to be pleased with it.

We're rolling along.

I think, compared to past releases, we've had greater uptick with our bigger customers this early in a release.

They normally wait quite a while, for obvious reasons.

I believe we're at right around 3,000 sites that we've been deployed with V10.

We're running over 100 a week in terms of deployment; both upgrades and new deployments of it.

Again, we're feeling quite good about it.

We're getting good response from it and good satisfaction levels out there with our customer base.

Abhey Lamba, Mizuho Securities.

Bob, just one clarification and then I have a question on visibility for Q4.

Thanks for explaining in better detail.

How does the visibility this year compare with normal Q4 or last year's Q4?

I don't have the specific answer because I know we had a very strong Q3 last year.

My guess, relative to a year ago, it's probably down a bit, but it's up quite a bit from last quarter.

I can be real clear about what happened between Q2 and Q3.

A year ago Q3 to Q4 this year versus last year, I'm not as clear, but directionally, I think I'm correct.

Got it.

Thank you.

As we look at specific growth drivers for FY15, now we've got capacity in cases that existing customers, new customers signings in the core offering, and adoption of market expansion that feature Simpana 10.

It seems like migration from to median based to capacity based may not be a tailwind anymore.

Can you help us understand all these drivers and maybe start to rank them for next year?

Any quantitative or qualitative color would be helpful.

Yes.

I can clearly, without question, big enterprises, big governments, MSB cloud providers, those big enterprises, cloud-based deployments, by far, are the driver.

Those are where the million dollar deals are.

I

n parallel with that, we, clearly, are confident about where we are going into these new market segments.

We've got it built into our plan.

We are basically where I said we'd be two years ago.

When we launched Simpana 10, I said we launch it, we'd established credibility in our core and straighten it.

We're clearly there.

And that we would validate where we are in our new market segments.

We are clearly there and we'd start to build revenue in 2015, which is our current fiscal year coming up.

I'm confident we can hit those objectives because we're tracking against those.

Then those would become a more significant component of our growth in FY16 and FY17.

That's exactly where we are.

The only color I would add to that is we're more confident about that because we have the products out, we're innovating faster than we had planned and we've gotten a really good market reception and we're really clear on where our competitive position is.

The only thing we're behind on is getting our go-to-market engines, what I call it, just getting our field execution capabilities up where they need to be.

But that's our major focus, so again, biggest driver: large deals, big enterprises, and cloud-based solutions.

Thank you.

Thank you.

I am showing no further questions at this time.

Do you have any final remarks?

No.

Thanks very much.

Thank you and thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.