Commvault Systems Inc (CVLT) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to CommVault's fourth 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 of Investor Relations.

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal fourth quarter 2014 and FY14 year end earnings call.

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

Before we begin, I'd like to remind everyone that statements made during this call, including 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 has also been furnished to the SEC as an 8-K filing.

The press release is also available on our IR website.

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

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

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

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

Please note that we are holding our fiscal year-end call about a week earlier than usual in prior years, due to our sales leadership kickoff, which takes place next week.

I will now turn the call over to Bob Hammer.

Thanks, Mike.

Good morning, everyone, and thanks for joining our fiscal fourth quarter and FY14 year end earnings call.

CommVault had another solid year in FY14, achieving record revenue, operating profit EPS and cash flows.

Total revenues grew by 18%, and software revenue grew by 17%.

EBIT grew 34%, and we expanded EBIT margins by approximately 310 basis points.

Importantly, we made excellent progress on our key strategic initiatives, which I will discuss later on in the call.

These include the success of Simpana 10, which has validated our All Things Data strategy, penetration of very large enterprise accounts, the building of our cloud business, validating our sales and distribution model through our success in EMEA, strategic talent and acquisition capabilities, and finalized the development of new packaging and pricing models.

This has increased our confidence in our ability to execute the transformations we are making as part of our All Things Data strategy and our ability to achieve our $1 billion plan objectives.

As a result of our increased confidence in our strategic position, we are accelerating investments across the Company in FY15.

Turning to the fourth quarter, we had mixed results.

On the positive side, we had strong results in EMEA and good success in building out our cloud business.

These positive results were offset by lower than forecast results in the Americas, which negatively impacted our license revenue growth for the quarter.

The results in the Americas were surprising, given our large enterprise deal funnel and good outlook for the quarter, as of our Q3 2014 earnings call.

The key issue in Q4 was significantly lower close rates on large enterprise deals in the Americas.

Let me briefly summarize our financial results.

Total revenues for the quarter were $156.8 million, up 13% year over year, and up 2% sequentially.

Software revenue was $79 million, and grew 10% year over year, and was flat sequentially.

Services revenue was $77.8 million, and grew 18% year over year and 5% sequentially.

From an earnings perspective for the quarter, operating income, or EBIT, was $40.3 million, up 27% year over year and down 5% sequentially.

EBIT margins were 25.7%.

Diluted earnings per share were $0.52.

We generated approximately $39.9 million of cash flow from operations during the quarter, and approximately $119.1 million for the year.

We finished 2014 with a strong balance sheet of over $482 million of cash and short-term investments, and no debt.

Our near-term financial objective is to return to historical revenue growth rates in the second half of our current fiscal year, FY15.

Let me make a few comments about our performance in the Americas.

First of all, we believe the overall product demand in the Americas remains good.

As I mentioned earlier, the poor growth rate in the Americas in Q4 was primarily due to an unusually low close rate on large deals.

The low close rate was not due to competitive losses.

The low close rate was deal-specific, with no consistent theme.

We believe the vast majority of those deals will close.

In fact, some have already closed, and several more are likely to close this quarter.

Given our strong strategic position, we believe that the key determining variable in achieving our growth objectives is a number of effective sales teams.

The Americas team has suffered from sales team under-staffing throughout FY14.

This issue was exacerbated by the decisions we made in early FY14 affecting the Americas that were related to executing our longer-term growth strategies.

They included: moving resources to our cloud services group, which we call CSG; moving key resources to our APAC team as part of APAC's restructuring; and the additional effort it took to move away from Dell.

Although the move away from Dell was successful, it was a distraction in the Americas.

These issues negatively impacted the Americas in the near term, but will pay off for the Company in FY15.

With these issues behind us, we are now in a much better position to resolve the Americas staffing issues.

Additionally, our new Chief Human Resource Officer has quickly and significantly enhanced and expanded our global talent acquisition organization and implemented a more effective talent acquisition process.

We are now in a position to resolve our talent acquisition issues over the near term.

Let me give you a brief overview of our current position and investment plans.

Our global market opportunity remains very positive, especially in our core business of data management, data protection, disaster recovery and archiving.

Simpana 10 has received an excellent market response, and has enabled us to validate our All Things Data strategy.

This validation gives us the confidence to accelerate the implementation of this strategy.

We are now very -- strategically very well-positioned for the major market shifts taking place in enterprise space, in the cloud, and in our new markets, and in the SMB segment.

Given our increased confidence in the business, we will significantly increase investments in FY15 to take full advantage of the many opportunities in front of us.

These investments will include the following.

Investments in our sales teams globally, our cloud services group, our product management and go-to-market capabilities, and continued investments in product development, consulting services and support.

As a result of a much stronger talent acquisition team and process, we expect to have a substantial increase in the number of enterprise teams by the end of the first half of FY15.

Our objectives are to get back to historical revenue growth rates in the second half of FY15, driven by a higher license revenue growth, and to have a more predictable revenue and earnings through a significant increase in recurring license revenues.

This will be accomplished primarily by increasing the number of field resources and the increasing revenue from our cloud services group.

The higher planned investment rate, and our increased ability to achieve our hiring objectives, will most likely have a slight negative impact on operating margins in the near term.

However, this will put us in a much stronger position to achieve our $1 billion plan revenue and earnings goals.

Let me talk about our FY15 outlook.

We believe the current FY15 street consensus growth rates for total revenue is reasonable.

For FY15, we believe we can achieve solid double-digit revenue growth.

Operating margins will be negatively impacted by the increasing OpEx spending.

Brian will discuss the impact to operating margins later on in the call.

Increased penetration of large enterprise accounts, with a significant increase of enterprise sales teams, accelerating growth in the cloud segment of the market, strong traction with Simpana 10 and Simpana 10 additions, and continued strength in our core business of data management, data protection, disaster recovery and archiving, increased penetration of the SMB market, and initial traction in mobile operations management and intelligence business analytics and healthcare.

While our strategic fundamentals are strong, and our ability to execute is increasing, I would like to add the following words of caution regarding our future outlook.

We are penetrating larger and larger enterprise deals, which can cause uneven revenue flows in the near-term.

It will take a couple of quarters to bring the Americas to acceptable staffing levels.

And although our outlook in the industry remains positive, other industry leaders have noted that they believe the IT spend in 2014 will be relatively flat over 2013.

In summary, we had a mixed quarter.

We were able to accomplish a number of things, which validated our long-term strategy and strengthened our strategic position.

For example, our EMEA results were a result of that region's successful reorganization, which also validated our global sales and distribution model.

We are confident that when we put the proper model in place, we will achieve high revenue and earnings growth.

Our confidence level and our strategy and business has increased.

And as a result, we are accelerating our rate of investment to ensure we can achieve our $1 billion plan objectives.

I will now turn the call over to Brian.

Thanks, Bob, and good morning, everyone.

I will now cover some key financial highlights for both the fourth quarter and full FY14.

Total revenues for the quarter were $156.8 million, representing an increase of 13% over the prior-year period and 2% sequentially.

For the full fiscal year, total revenues were $586.3 million, representing an increase of 18% over FY13.

For the quarter, we reported software revenue of $79 million, which was up by 10%, or $6.9 million over the prior-year period, and flat sequentially.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, increased by 10% over the prior period and down 7% sequentially.

The number of enterprise deals increased 21% year over year and 7% sequentially.

Our average enterprise deal size was approximately $245,000 during the current quarter, compared to $272,000 in the prior-year period.

This decrease in average deal size was driven by a higher volume of enterprise deals in Q4 FY14, as compared to the prior-year period.

Software revenue for the full fiscal year was $294.4 million, representing an increase of 17% over FY13.

Enterprise deals were 57% of license revenue in FY14, representing an increase of $26.3 million, or 19% over the prior year.

In addition, the number of enterprise transactions increased by 16% in FY14.

The average enterprise deal size was approximately $272,000 for the full fiscal year, versus $266,000 in FY13.

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

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

Capacity-based license sales represented 86% of our Q4 software revenue and 80% of our full-year software revenue.

For the quarter, software revenues derived from indirect distribution channels decreased 2% over the prior-year period, and represented 82% of software revenue.

And for the full year, software revenue from indirect distribution channels increased 15%, and represented 87% of software revenue.

Our direct revenue represented the balance, and increased 34% during FY14.

As a reminder, most sizable deals are driven by our direct sales force, even though they are often transacted through the channel.

The revenue mix for the year and for the quarter was split 50% software and 50% services.

Please remember, services revenue is a combination of both maintenance and support revenue and professional services revenue.

And from a services revenue perspective, our maintenance attach rates and renewal rates were strong.

Services revenue for Q4 was $77.8 million, an increase of 18% year over year and 5% sequentially.

Services revenue for FY14 was approximately $292 million, an increase of 19% year over year.

We do not expect the growth in services revenue to outpace the growth in software revenue over time.

For the quarter, revenue from US operations generated 54% of total revenues, resulting in an 11% year over year increase, while revenue from International operations generated the balance, resulting in a 16% year over year increase.

And for the full FY14, revenue from US operations generated 57% of total revenue, resulting in a 16% increase over FY13, while revenue from our International operations accounted for 43% of total revenue, resulting in an increase of 22% over FY13.

Geographically, EMEA had a very strong quarter and full fiscal year.

We added approximately 450 new customers in the quarter.

Our historical customer count now totals approximately 20,000 customers.

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

For the quarter, revenue transacted through Arrow was approximately 32% of total revenue, growing 13% year over year and 9% sequentially.

Our resellers and distribution partners are very important to our growth and market reach.

We have various programs in place with our resellers, systems integrators, and storage partners, and we'll continue to invest in such programs throughout FY15.

We also continue to add new strategic managed service providers, or MSPs, and cloud service providers, who use our products as the engine for them to provide data and information management services to their customers.

With approximately 200 service providers already delivering cloud and managed solutions powered by Simpana, we are building a meaningful subscription revenue stream for CommVault.

As such, this will continue to be a major area of investment for us during FY15.

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

Gross margins were 87.6% for the quarter and for the full year.

Total operating expenses were $95.5 million for the quarter, up approximately 9% year over year and 5% sequentially.

Sales and marketing expenses as a percentage of total revenues decreased to 44% in the current quarter, which was down from 48% in the prior-year period.

Non-GAAP operating margins were 25.7% for the quarter, resulting in operating income, or EBIT, of $40.3 million.

On a year over year basis, Q4 EBIT increased by 27%.

Q4 EBIT margins increased by 270 basis points year over year, and decreased 200 basis points sequentially.

Net income for the quarter was $25.5 million, and EPS was $0.52 per share, based on a diluted weighted average share count of approximately 49.4 million shares.

And for the year, net income was $96.2 million, and EPS was $1.94 per share, based on a diluted weighted average share count of approximately 49.6 million shares.

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

I would now like to spend a few minutes discussing our operating expense investments and our anticipated EBIT margin guidance for FY15.

We had better-than-anticipated operating margin improvement in Q4, due to lower-than-planned headcount additions, as well as below-target spending on several investment initiatives.

We added 37 net employees in fiscal Q4, and ended the quarter with 1,973 employees.

This was below our internal hiring targets.

As previously communicated, our under-hiring of sales and technical field personnel has been an issue throughout FY14.

We expect to aggressively increase our rate of hiring in the first half of FY15, with a heavy focus on the recruitment of enterprise sales teams.

With significantly enhanced talent acquisition capabilities, we believe that we are now organized to succeed in this area.

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.

In addition, in Q1 FY15, we will have increased spending related to our global sales leadership kickoff event, and other Q1 sales enablement initiatives.

We are also strengthening our position in the mid-market, with new products and packaging, and enhancing our support and services capabilities, which require additional investments over the course of the year.

Also, we will continue to invest in our partner advantage program and expand our cloud services group.

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

In FY15, we believe we can get back to our historic growth rates during the second half of the year.

We expect FY15 operating margins to be flat to slightly down, due to our FY14 over-achievement, as well as our plan to increase the rate of our operating expense investments in FY15.

FY15 will be an aggressive investment year, as we are investing to accelerate top line growth for the back half of FY15 and FY 2016.

While we believe the current Street consensus revenue growth rates for FY15 are reasonable, we would like you to keep in mind that our fiscal Q1 is usually our most challenging quarter.

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

In summary, we remain committed to our $1 billion objective and growth plans, 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 FY15, which is the same pro forma rate used for FY14.

Our GAAP tax rate for FY14 was 37%, and our cash tax rate was 18%.

We expect our cash tax rate to remain lower than our GAAP tax rate for FY15, and to be in the high 20% range.

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

For FY15, we anticipate that our annual diluted weighted average share count will be approximately 50 million to 51 million shares.

Please note that one of our executive officers holds approximately 130,000 outstanding stock options, with an exercise price of $6 per share, that will reach the end of their 10-year term on May 6, 2014.

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

During the fourth quarter of FY14, under our stock repurchase program, we repurchased approximately 775,000 shares of our common stock, totaling approximately $50 million.

Please note that the Board of Directors also recently increased the amount available for share repurchases by an additional $50 million, so we now have $150 million available in our stock buyback program through March 2015.

Now moving on to our balance sheet and cash flows.

As of March 31, our cash and short-term investments balance was approximately $482.7 million, up 11% year over year.

Free cash flow, which we define as cash flow from operations less capital expenditures not related to the new headquarters, was $38.9 million, which is flat year over year, and an increase of 35% sequentially.

The sequential increase is primarily the result of maintenance renewal billings in the fourth quarter.

During Q4 FY14, we expended approximately $18.7 million on construction costs for our new campus headquarters.

Our estimate of the total cost of this project is approximately $135 million.

Through March 31, we have spent approximately $72 million on this project, and we expect to spend approximately $63 million in FY15, with most of this being disbursed in the first half of the fiscal year.

We expect to complete the project and move in during the second half of FY15.

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

As of March 31, 2014, our deferred revenue balance was approximately $209.6 million, which is an increase of $25.3 million, or 14% over the prior-year period, and up $16.7 million or 9% sequentially.

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

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

As of March 31, 2014 our deferred software revenue balance represented less than 1% of total deferred revenue, or approximately $700,000.

This balance was materially unchanged from the balance at the end of December.

And for Q1 FY15, our annual year-on-year deferred revenue growth rate comp will be challenging, due to the timing of recognition of some large perpetual deals sitting in deferred software revenue as of June 30, 2013, but subsequently recognized in the September 2013 quarter.

And for the quarter, our days sales outstanding, or DSO, were 65 days, which is up from 58 days in Q3 FY14, and up from 51 days in the prior-year quarter.

The change is due to linearity within the quarter.

Please note that our DSO has no correlation to any potential extension of payment terms for transactions that have either been recognized or are in deferred revenue.

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 $1 billion objective, and update on our next planned product release this summer, and an update on our progress in the cloud.

We're driving towards achieving our $1 billion plan, I'm just going to remind everybody.

By strengthening our technology and market position in our core data management market, increasing distribution leverage in both the enterprise and mid-market segments, broadening our leadership position and protecting and managing data in the cloud with our major MSPs and cloud providers, and significantly expanding our addressable market and establishing our position as a technology leader in our All Things Data market segments, including mobile, operations, management and analytics, and business analytics.

And lastly, establishing leadership position for comprehensive services and support.

I'm going to provide a little overview of our next major release of Simpana 10.

We have our project product release on Simpana 10, which is named R2, planned to launch in July.

This release will include enhancements to core data management protection, particularly in the areas of virtualization, archiving and snap and replication management.

New technology to securely and automatically move data to the cloud, in the cloud, and cloud to cloud.

A standalone mobile solution with added capabilities for document sharing and data loss prevention.

We plan to build upon our good traction in this market from our existing mobile solutions.

New solutions for operations management in intelligent and operations analytics.

Standalone products with leading functionality and economics virtualized machine protection and management.

The ability to economically recover, use, replace and browse data in live native format and virtualized environments, providing the capability to immediately restore, copy, back data into a usable state.

This marks another milestone in our content store strategy of offering users simple, fast and easy access to their protected data assets in an on-demand style.

Integrated appliances for data protection, archiving and cloud gateways.

These integrated appliances are engineered by CommVault, and built on commercially available servers and storage.

They will be assembled and provided by key distribution partners.

These appliances will fill specific customer needs in the enterprise, the cloud and SMB segments of the market.

The new release of Simpana 10 also includes a comprehensive repackaging of our Simpana platform, for much better fit to market and price to market.

This repackaging will make it much easier for customers to buy, and easier for our sales team to sell, our Simpana 10 software.

The release includes new, very specific repackaged products, with new pricing and messaging.

It is targeted to customers' specific needs, and includes surgical positioning against key competitors.

We will be much more competitive and targeted with pricing, functionality and performance in every segment of the market.

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

I want to now update you on our progress in the cloud.

As stated in our recent press release, we are establishing the premier position in MSPs and cloud providers for data-related software solutions.

The key points in the press release were, the Simpana 10 software platform has become the data protection platform of choice for approximately 200 service provider partners.

CommVault's highly secure, scalable open platform technology is integrated across a comprehensive range of storage technologies, cloud infrastructure platforms, operating systems, hyper-visors and enterprise applications.

The Simpana platform provides consistent management and reporting tools, an enterprise-wide view into data across heterogeneous and multi-tenant environments, to a single platform.

CommVault's cloud solutions business continues to grow rapidly, with new or expanded partnerships signed recently with major leading global cloud providers and systems integrators.

We are building a substantial source of subscription revenue from our cloud deals, which we expect will become material over the next 24 months.

We will begin reporting on the subscription business sometime over the next few quarters, once we get a better validation of the revenue trajectory and subscription renewal history.

In summary, we have established a significant position with the cloud providers and MSPs, and have developed leading solutions for moving data in and out of public clouds.

We are in a great strategic position for the unprecedented shift into cloud computing.

And as a result, we plan to increase our investment in this area by 3X in FY15.

In closing, we are building on our strengths and expanding into closely-linked, high-growth data-related market opportunities.

Our core data management business will provide the growth foundation, as our cloud-based recurring revenue streams increase, and as we develop our new high-growth All Things Data business.

We are in a strong competitive position.

We will focus on positioning the Company for more sustained, predictable, high revenue and earnings growth over the longer term.

As a result, we will increase spending across the Company to take full advantage of the many opportunities before us.

This will have a short-term negative impact on our near-term earnings growth.

Our focus now is on execution.

We are in the process of significantly improving our ability to execute.

This includes expanding capabilities in marketing, packaging, pricing and distribution, as well as increasing our worldwide enterprise sales force.

We are committed to the objective of returning to our historical rates, and achieving solid double-digit revenue growth in FY15.

I will now turn the call over to Michael.

Thanks, Bob.

Operator, can we please open the line for questions?

(Operator Instructions)

Joel Fishbein, BMO Capital Markets.

A couple questions for you guys.

First, on the off-balance sheet, Bob, you didn't really mention what the visibility looks like.

And also, in line with that, what are the mega-deals?

Have you -- can you give us an update there, in terms of any of the mega-deals closing, or visibility on that?

On the mega-deals, the deals that did not close, in Q4, there are several of them.

One of those major deals has closed.

Some others are in the process of closing.

So as I said on the -- as we said on the call, we expect a number of those deals to close in the quarter.

Our normal term of visibility went down.

Our cloud subscription revenue visibility went up substantially.

Okay.

And then the second question I had is in terms of, obviously, the numbers from a gross rate perspective decelerated.

What gives you confidence that this is more execution-related and not demand-related?

That would be helpful to hear how you think about that.

In the areas where we've had the right distribution model, and I mean by that, the management is in place, we have enough enterprise teams in place, we hit our numbers.

It's about that simple.

And when we don't, we don't.

And I think you can get an idea from the tone of my voice that we're just not horsing around with the business.

It's not just putting the enterprise sales teams in place.

We've got so much going for us in the area of product and market opportunity that this is the time for us to get extremely aggressive out there, because I'm absolutely confident we can do this.

My confidence level is in spite of the weak quarter in Americas.

On the business in general, it is the highest it's ever been.

So I'm really confident that there is a extremely high probability, we get the execution pieces in place, we're going to hit numbers.

Last question for me.

Brian, how many employees did you guys add this quarter?

37, Joel.

We added 37 net new employees for Q4.

And I'm assuming most of those were sales and SD's?

It was a mix.

Yes.

Though, Joel, I think the big change on our ability to execute as far as talent acquisition is -- and this is important, because it's substantially different.

We brought in a new VP of HR earlier in the year.

And very quickly, he was able to bring in a senior talent acquisition person who has built up a massive staff globally on talent acquisition, and the funnel tied to that is there.

So you will start seeing relatively large numbers, certainly in Q1.

By the time you get to Q2, we will basically have hit our objectives across the Company, both in enterprise rep acquisition, as well as building out our marketing teams tied to our core strategic initiatives.

So I'm tired of talking about this stuff on earnings calls, and we now have the engine in place to execute.

And I'm confident we will do it.

All right.

Last one.

On the -- Bob, you mentioned that a large deal closed, or that you had closed one.

Did you recognize any of that?

Or is that on any of the numbers, either in revenue or in the deferred?

No.

It closed in Q1.

Okay.

Great.

Thank you.

Jason Ader, William Blair.

I have a clarification and question.

First, just to clarify the second-half return to normal growth rates, what is a normal growth rate?

How are you guys thinking about that?

Last five years, Jason, our revenue growth was approximately 20%.

Okay.

And then a few things I'm hearing, in terms of explanation here, some explicit, some implicit, for the software revenue miss in the quarter.

First is the enterprise staffing, which you had talked about ad nauseam.

Second is the pricing and packaging, which sounds like maybe it was suboptimal, and you're making some changes to that, as we move into FY15.

And then third thing is maybe some secular shifts in the market towards cloud services, and you're multiplying your investment there pretty substantially, as you probably see the market shifting there.

First of all, is that -- are those the only things that you're seeing, in terms of the outlook and some of the issues in Q4?

And how would you rank order those factors, if you could, for us?

I think you've got the message, Jason.

So if you look at the business, there isn't any -- the biggest variable that ties to revenue growth in CommVault today is enterprise sales teams in the field, because our core business is still very solid.

And you can tell from my voice, obviously, that's an execution issue, and it fundamentally pisses me off.

So we were -- instead of horsing around with it, we said, we're going to hit this with a, no pun intended, a damn sledgehammer.

So we put the engine in place, and the engine is in place to solve that problem.

That's pure execution.

Secondly, there is a massive shift, and you got it to the cloud.

Fortunately, we started investing in this area early, going back six or seven years ago, which I previously mentioned.

And we put teams in place, started -- very focused teams in place, over the last few years.

And as a result, we have signed a lot of the major cloud providers and MSPs.

A lot of these are not announced, for various reasons, but the contracts are signed.

And we're building up a -- quite a large potential subscription revenue stream, which I said on the call is likely to become material, let's just say, in the relatively near future.

And we'll start talking about what that looks like over the next few quarters.

And this move to the cloud has accelerated dramatically over the last six to nine months.

And fortunately, we were in a great position to take advantage of that.

And thirdly, the point we've been making on pricing -- and I'll let Al talk here in a minute -- as we went through our pricing strategy, it was not just price to value, which we previously talked about.

We really start to dig in on how we were positioned against key competitors, not only in the enterprise, but in the mid-market.

And since we had the technology, for example, to really do a really good job in the mid-market virtualization products, and against some of these companies that have live native copies, it was like, let's not horse around with this.

Let's price and package with leading technology in each of these segments.

And Al Bunte has been working on this and leading a team, and we've basically accomplished that.

And I'll let Al give you a little bit of color on that.

Yes, Jason, just a couple last comments on it, and Bob laid it out very well.

So as he said, we started by looking at a pricing model, or shifts in it, and it evolved to a packaging and a positioning and a marketing, a set of -- think of them as entry products into the platform suite.

We're going to introduce four of them next week to our leadership.

Sales leadership.

We intend to introduce a couple more throughout the summer, and we think it's the right thing to do, particularly for some of these market segments out there.

And we think it will be a really big success.

So is this like a price decrease, Al?

Is that the way to think about it?

No.

Not at all.

It's a different way -- as you know today, we price everything on front-end terabytes, almost.

So in certain segments out there, be it a virtualization, only product, or mobile product or an e-mail archive, those are all priced by, for instance, VMs; for instance, number of laptops; for instance, number of mailboxes.

So just going through that translation, as you're trying to penetrate those segments, is not a smart thing to do.

And to my point, it makes it hard to buy.

So our initiative here is, let's make this easy to buy.

And to your question, I think in most cases, it's neutral.

On the economics, in a few cases, it's positive.

In a few cases, it may be slightly lower.

But overall, it is not a price reduction.

It's just a different way to meter price and package the product line.

Couple more examples, for everybody listening on the call.

In mobile, when we start talking about price per terabyte, and people are buying mobile solutions on price per user, that buyer is confused.

Price per user per month.

So instead of trying to fight what's going on in the market, we're just taking leading products and pricing for market segment.

Give you another example.

In a virtualization market, people buy by socket.

And we start talking about price per terabyte, they don't have a clue what we're talking about.

And we are leading products in that area.

Or you have companies that buy -- they want to buy conversion -- product in the form of an appliance, and we didn't have that.

So we basically have solved all of those issues, and we're not horsing around, is the point.

One quick follow-up to finish me off, here.

Bob, do you think it's possible that the dramatic acceleration that you cited to the cloud has had an impact on the traditional business?

It would be somewhat logical that a secular shift like that would have some impact.

It sounds like it's not, maybe, the biggest impact, but is it fair to say that maybe that has taken you a little bit by surprise?

How quickly the shift has occurred?

And maybe it's had some impact on the traditional business?

If we executed right, we'd have both.

We'd have the right number of sales teams, we'd have growth, and have the cloud.

In this case, it clearly is surprising how fast this has turned.

That's a positive, and we nailed that one strategically.

That's why we're so confident where we are.

On the other side, where we've had -- where we've been missing numbers, it's pure execution issues.

And now we have an engine to solve it.

So there's no reason why this Company cannot do both.

So as you start moving big chunks of revenue to the cloud, that builds up a lot more consistency, by the way, because you've got a subscription stream coming up.

And certainly, in this fiscal year, we will start reporting that, because it's large.

And it's going to have real revenue impact in FY15.

So it's not just that we're building up the backlog of subscription recurring revenue.

It's actually going to impact our numbers this year.

So you can use that as an excuse, but I think that this Company's in the position to actually do both.

Aaron Rakers, Stifel.

I'd like to understand a little bit more context with regard to how you're expecting FY15 to play itself out?

I guess the question, when I look at where the Street is -- and I know you're supporting the street's current estimate of about 15% growth.

But how do you look at the Street, relative to the first half numbers versus the second half?

And the reason I'm asking it is, to see that re-acceleration in the back half of the year to the traditional growth rate seems to be implying a fairly sharp increase, potentially, in the sequential numbers, going into the back half of the fiscal year.

And I do have a follow-up.

Yes, Brian will take that.

We would agree with that context.

We were expecting slower growth in the first half, and accelerating growth in the second half of the year.

And the sequential increase will pick up throughout the course of the year.

Brian, to ask you, maybe a little bit differently.

Is your assumption on slower growth in the first half sub-seasonal than what we've seen over the past few years?

Could be.

In the first quarter, especially.

It's going to be, the first half will decelerate a little bit, and then we expect that to pick up on the back half of the year.

Okay.

And then the follow-up question is -- it goes back to the commentary on headcount hiring, and so on and so forth.

So over the past several years, you've posted about a 20% growth rate in your sales and marketing headcount.

It looks like this year, you did closer to maybe a low double-digit growth rate or expansion in that headcount.

And I think, if my memory serves me right, it takes 9 to 12 months to really ramp a new hire in that sales and marketing team.

So how do I have confidence in the re-acceleration of that in the first half of the year?

And then being able to drive the productivity of those new hires to sharply increase for the back half numbers?

That's a really good question, Aaron.

So number one, we do have momentum in certain areas.

EMEA, for one.

We saw a restructuring in APAC over a year ago.

And that will begin accelerating in the first half.

And we have acceleration from our cloud services group.

So the issue really comes down to the Americas.

And we're going to -- if you want to think of -- we'll probably hire 50% more heads than our growth rate early.

So that will impact operating margins, but provide a massive amount of horsepower to lift numbers in the back half of the year.

So pick your growth rate.

Say we're going to hire 50% to 100% more than that early, and that will impact -- have some near-term impact, but have a big impact in the second half.

And the reason I'm confident about it is that we've been building the funnel for the candidates, and you'll see a fairly substantial number come in in Q1.

By the time you get to Q2, we'll basically have been built out.

And we have -- I don't know the exact number, but I would guess we have increased our talent and acquisition team by 4X to 5X, in that range.

So we're just not horsing around with it this time.

Because as I said earlier, I'm tired of talking about it.

And it's impacting the business, and it's impacting shareholder value.

And it's crazy, when you have that situation, and you have a Company like this, that we've got a market that's sitting there, and we are extremely well-positioned, and we just don't have enough heads to execute it.

Eric Martinuzzi, Lake Street Capital.

The success on the cloud side of the business, you talk about this shift in the market, and happening relatively quickly.

I'm wondering, is this increased footprint with the install base, guys who have been around for a year plus, the Rackspaces of the world?

Or is this new managed services providers sign-ups?

Is that what you're talking about when you say, good results building the cloud?

It's mainly very large cloud -- not MSPs, per se, Eric, but very large cloud providers.

Big names that everybody's aware of.

And again, these contracts, they're not -- they're signed.

They're done.

It's just building them and executing them.

So -- and these are very, very large contract.

And there's another series of large contracts that are that will close this quarter.

So we've got the backlog, and now we just have to get a better idea on how that translates into a revenue -- subscription revenue trajectory, and then we're going to disclose it.

Okay.

And then just back to the Americas issues.

Anything particularly that stood out?

Public sector?

Some vertical commentary channel commentary?

Or was it across the board?

It was across the board.

Thanks.

Brent Bracelin, Pacific Crest Securities.

Bob, I wanted to follow up, obviously, on the Americas again.

Hopefully, we'll have this issue addressed here over the next six months.

But if I go back and look, five out of the last six quarters, the Americas business has been flat to up 1% or 2% sequentially.

As you think about this string of five to six quarters where you saw under-performance -- I know you had the Dell tradition.

But why are you so sure staffing, throwing more bodies is going to solve the problem?

Have you done a deeper analysis around competitive scenarios?

Just really trying to understand why you feel confident just throwing more sales people at the Americas region is going to be good?

And I guess B, why weren't you more concerned about this region, given the lackluster performance we've seen over the last several quarters?

The answer to the first question is, every time we put the right management sales team in, we hit the numbers.

The Americas team, it caused a lot of distraction.

It was pure execution, and it went on way too long.

Part of it was the de-focusing of the team.

And the other part is, when you have a situation like that, we just didn't have the talent acquisition capability and expertise to solve it in the way that it needed to be solved.

Now, we recognized this quite a while ago, but hiring somebody, bringing an HR expert in here whose basic expertise was talent acquisition and culture, making sure those are consistent.

And then hiring the talent acquisition team, which happened very quickly.

But all that needed to get in place.

And you had to get some of this distraction out of the way in the Americas, and now we're focused on it, and I'm confident we'll solve it.

But you're exactly right.

If you look at it and say, why the hell, with a Company like us, and a team that's been executing for years, did a situation like that go on for four or five quarters?

And there is no -- I can tell you the reasons.

But at that the end of the day, this is a Company issue, and there are no excuses.

Sure.

Fair enough.

I certainly appreciate that.

And then relative to the changes you've made in the Americas, it sounds like you now have a new head of HR that at least has the capacity and the engine to higher.

Has there been any changes relative to the Americas sales management leadership?

Pete Cobbs, who runs the Americas, is a very strong leader.

And Ron Miller runs -- who is the VP of Sales Globally is outstanding.

So we've got confidence in the leadership there.

We just had to provide some support for that leadership, and we're taking the appropriate actions there.

So Pete is driving it, and it will get done.

Andrew Nowinski, Piper Jaffray.

Maybe just some questions on the new R2 launch coming out in July.

I think you mentioned that it will include some analytics modules.

Is this new release similar to prior releases, where it's free to the install base that's current on our maintenance agreement?

That's probably a broad generalization.

Andrew, a few pieces are; Some are, some aren't.

This is also -- will be coincidental with our new packaging and pricing on many of these.

Just think of them as standalone products inside the suite.

They still work together, by the way, and there will also be motivations to buy a broader suite kind of package.

But some are, some aren't, is the answer.

There is a pretty much fairly heavy technology refresh in each one of the areas across the board.

So there's things that mobile, particularly around document share.

There's things in the virtualization space, as Bob mentioned, particularly around being able to recover VM images, VR images, files, et cetera, directly without going through a restore process.

And as you indicated, there is some new things around our operational capabilities, particularly with the use of analytics and log tracking environments.

So it's a broad release.

There's a number of new enhancements and effects broadly across the product line.

And Bob mentioned cloud.

There is a number of things, again, we talked about the cloud we have out there.

We also have been investing very heavily on the technology front, as most of you guys know.

Started last year, with all the things we're doing on the operational front.

We opened up the platform.

We provided work flows.

And those have been really, really well received.

And again, on the virtualization side of the equation, that's been positive.

It fits into our cloud play.

And lastly, the idea of hybrid environments, which is pretty popular out there, having a capability to manage from one UI, if you will, your data that's on premise, and your data that needs to be archived up or into a cloud kind of environment.

One of the major issues in the cloud is that data does get lost, or customers have difficulty recovering a specific object.

And the technology required to do that, in these various public clouds, is quite difficult.

Al, you may want to talk about that.

Yes.

Again, there's a series of things there that we've done.

It ties to our indexing schemas; it ties to our VM provisioning kind of environment, our VM management.

All, we think, very clever technology, very appropriate to these cloud kind of environments.

And they solve -- or try to address the issue Bob's referring to or inferring here, of knowing what you have up in the cloud.

That can be a major issue.

Right.

Okay.

So that leads me to my next question.

Good segue here.

You previously talked about expanding your TAM from $4 billion to $6 billion, by introducing a lot of new functionality, whether it was analytics or cloud or whatnot.

Do you think this -- I guess, does this R2 launch include a lot of the new modules that will get you into that new TAM?

And then, just in your opinion, do you think cloud will be a bigger revenue stream in FY15 versus the new analytics modules?

Thanks.

Yes.

A lot of the things we're introducing here, again, go to the expansion segments that we've talked about for a couple years, and ties right to the TAM expansion.

So mobile, cloud, the analytics that you talked about, or alluded to, all appropriate here, at this point in time.

I think I'd like to add, though, as we look out, and another thing that makes us confident in the segment, is we're seeing current market data come out of some of these surveys that are being done, in terms of buying intentions, going forward.

The top four or five demands and interest areas are borrowing old things like backup, data protection, disaster recovery and archive.

I think those are the top four we've seen come out of CIO's interest going forward.

So we continue to put lots of technology, lots of capabilities, lots of automation, into the data protection and core elements as well.

We also have a -- if you haven't talked about a -- there's been some changes in the relative competitive landscape, given where we are from a technology standpoint.

And where some of our competitors are, both in the enterprise segment of the market, and things we are doing to address the mid-market, and be a lot more aggressive in that area.

And we talk about that -- we -- the new packaging and pricing that I'll put together, those products certainly can be leveraged through distribution.

But as Al mentioned, they also end up being, whether it's mobile or ops analytics, they also end up being really good entry points into the enterprise.

Aaron Schwartz, Jefferies.

I just had two quick questions.

First, on the hiring.

I think before, you said that you had enough -- or you felt that you had enough sales capacity to get you through the first half of 2015, but you needed the hiring to really accelerate growth in the second half.

And now, with another quarter of below plan hiring, why is that second-half target still in place?

It seems like that would be pushed out a quarter or so.

And then the second question I have is, I was wondering if you could provide the amount of cloud subscriptions that's in deferred revenue?

And with that offering, is that just for service providers?

Or is that available to enterprise customers?

And why wouldn't that revenue mix impact license growth?

Is -- we're just recasting our models here.

Should we think about subscription having a negative impact on license growth, if enterprise customers adopt that?

Thanks.

One, this subscription is not in deferred, because it's not deferred revenue.

And Brian can address that, but it's not.

It's in its own pool, which we will disclose separately.

In regard to enterprise's adopting some -- increasing their adoption of subscription, that will happen, as well.

In addition to the subscription revenue that we are getting from the cloud providers -- but if you look at all our data, and you look at the -- and again, we use EMEA as a good example.

Because we're talking about growth rates that are well in excess of our historical growth rates.

And what we did there is put the right management teams in place, oversight, focused on the right markets.

We got enough reps in, and we saw massive growth increase.

We're doing the same thing in APAC.

So when you put the teams in place, and you've got the right structures in place, you -- we hit our revenue targets.

And I think, if we do that, we can substantially increase our core, if you want to use perpetual license revenue, in the near-term.

Longer term, there's no doubt, and more and more of our revenue is going to go through a term -- or some ratable model, whether it's pure subscription, which will be most of it, or some term-based revenue.

We see it.

We think we're in really good position for it.

But we still believe if we execute, we can, in a relatively near term, do both, as we -- as the Company transitions to that model.

Michael Turits, Raymond James.

I want to talk about the competitive comments that you made.

In the past, you have really said that there has not been a significant change in the competitive landscape.

Obviously, we just saw there were, quote, changes in the relative competitive landscape in both enterprise and in mid-market.

And with discussing the pricing situation, you talked about competing against a live native copy, companies that are happy to match them on pricing.

So what, really, has changed?

Are some of those newer companies -- do they now seem like they're just not a threat to -- only to incremental business, or to your existing target market?

(multiple speakers) different.

No, it's different.

There's two -- one, we think, in the enterprise, that we're the best positioned company to solve the big enterprise problems.

This is your big data center consolidation has moved to private clouds, moved to hybrid clouds.

New requirements in compliance, the new requirements in mobile, the need for automation, all those kind of things.

We don't think there's a close second.

So if we don't have the teams in place, shame on us for not taking advantage of that.

And I think we have gotten way ahead of everybody in the market.

So that's managing our investment strategy there.

And continuing, as Al said, to continue to invest like hell in innovation in that segment of the market.

The other areas, the way I look at it is, we have technology.

And those markets are open.

There is just a lot of - I call it share of wallet, that we should have.

And we're just letting it go.

And by -- it isn't just repackaging and pricing.

For example, and I will let Al talk about this in a minute, the way we deal with native and live copy is different from any other competitor in the market, which you are going to see come July.

It is extremely innovative, scalable, and it's got a lot more functionality and capability and anything called, whether it's in the virtualization space or the -- also claim to have the revolution in live copies.

So it's just getting increased share of wallet, particularly in the -- I call it the higher end of the SMB market.

And the same can be said for what's going on in some of the virtualization space.

So it's just doing a much better job, and repackaging, pricing and adding some technology, and enhancing our go to market capabilities in those segments.

And I will let Al expand on, certainly in the live copy capability, because it is strictly extremely innovative.

Yes.

And Michael understands this fairly well, because he and I have talked about this before.

But that's coming out as we speak, that capability.

And again, it's the ability to let users access data in native format, as Bob said, for VM images, files, or active DR targets, or popular use cases out there.

And the interesting or innovative thing about it is, most of the time when people have done that in the past, they use various, let's call it, storage intensive technologies like replication or snapshots, et cetera, that are good, but you're in a very usually expense reproduction like storage environment.

What we've done is be able to get the best of both worlds.

Is that we can give you those native, call it, format capabilities, still utilizing clever storage economics, and being able to use lower-cost storage, in this case, disk, to how is that -- those copies.

But yet, you still end up giving the users their capability.

And again, Michael, you know our content store capability.

So think of this as opening up our content store, now, to giving those end-users access in the formats they need, environment.

I just want to -- just if you could tell me, by any chance, on license -- how is license in North America, or the Americas?

License?

Say that again?

What was license growth like in the Americas?

I obviously know what total revenue growth is like.

We don't break that out, Michael.

Not license revenue.

We do total revenue.

[Eddie Lampa], (inaudible) Securities.

We understand the issues in the Americas.

Can you talk about EMEA?

What were the factors that made it to perform well?

And can such performance continue?

Or is there a risk that EMEA can have similar issues, over the next few quarters, as we saw in the Americas this quarter?

The factors were, we brought in new leadership at the [theater] level.

Every region had new management.

The oversight to the region, in terms of how things were managed, was completely revamped.

And we hired a substantial number -- a significant number of enterprise-capable reps who are capable of penetrating large enterprise accounts.

It was pretty traumatic when we did it, but the results, as I mentioned earlier, are -- were growth that was significantly higher than any historical growth rate we've had.

And we continue to invest in EMEA.

Going into FY15, and we did that early.

So on a relative basis, the EMEA organization is way ahead of the Americas, in terms of headcount, because they're going in with a very strong position.

APAC's about 1 year, 1.5 years behind, but there's a brand-new structure in APAC.

And the results of that, over a year now, will start to impact the first half of FY15.

So the odds are that EMEA should see some really good growth in FY15, as well.

Got it.

And looking at the packaging and pricing impact that you discussed, did that impact large enterprise deals more than the mid-markets?

And your pricing decisions, how much has that got to do with the competition and the competitive dynamics on that front?

I think the repackaging and pricing had - I won't say, had nothing to do with us missing our number in Americas, but it just -- this just makes it -- this is just an added ability to make it a lot easier, globally, for our sales teams to sell and position and penetrate the market.

So the biggest impact, near term, will be in the mid-market, through -- with our distribution partners, but will also give our enterprise teams ability to, whether it's mobile or its ops analytics or whatever, just easier ways to price those solution sets the way customers buy, with leading technology solutions.

If that makes sense.

What I mean is, if somebody's buying on a per user basis, and we're trying to sell on capacity, that user gets confused really quickly.

Is somebody's buying on a per socket base, and we're trying to sell them capacity, they're going to get confused.

So we just -- we -- one -- there's two things.

It's repricing and repackaging.

And it's also added technology, to make sure we are absolutely best in class in every one of these segments.

Greg Dunham, Goldman Sachs.

I just -- at a high level, I just want clarify a couple things.

Clearly, the pipeline in the Americas was good, as you headed into the last couple weeks in March.

And you didn't convert like you were hoping to.

And that's not inconsistent with a couple other companies that we've, seen even last night.

Americas has been week.

When you look at the deal slippage that you saw this quarter, how is it different and how do you characterize it, relative to the deal slippages that you've seen in the pas, historically?

Okay, Greg, so we had a -- in very large deals, we had a big pipeline, and these deals were in late stage closing.

And a lot of them missed, but the point -- and there was no consistent theme.

Every one had a little bit different story.

Some logical, some illogical.

But the fact is, as we get into this quarter, we're seeing a lot of those deals close.

But the point I was trying to make is, that always happens.

You always get -- you have good quarters, things slip, and this Company has consistently executed in spite of that.

Because if you have a big enough underlying funnel on smaller deals, the negative impact to your numbers isn't so large.

And in this case, when you're really understaffed, and those big deals become so much more important, and when you -- when they don't close, there's nowhere to go.

You just miss a number.

So what you want to do is have sufficient capabilities and funnel.

So not only do they have a big deal funnel, which we had last quarter, but if something happens, you've got enough underneath to cover.

And in this case, we didn't.

So the real -- the near-term reason was, we had a massive amount of large deals that didn't close.

But to me, that's a specific near-term situation.

The underlying fundamental situation, we just didn't have enough feet on the street.

So --

But I guess, just to clarify, it wasn't that deals required extra signatures, or and things like that?

This was more of a more traditional dynamic?

Okay.

So it wasn't like a macro issue.

No.

Hang on a second.

It was traditional.

It was exactly what you described.

It wasn't extra signatures; they just needed to get the required number of signatures.

And for some reason or another, those things -- one particular deal, it happened -- it should have happened early March, and it happened early April.

And if you look at logic, okay, that's pretty typical of the deals.

It's just, we're selected, it's going through the final process of getting the signatures done, and they didn't get done.

And there was no consistent theme, market week or something like that.

Each one of them had their own story as to why those final signatures didn't get done to get a PO cut.

So I don't -- at this point, I don't see a -- let's put it this way.

In terms of the market that we see and how we compete, I think we're fine.

In the overall market, I think what's going on in storage is, you've got so much movement into the cloud that it -- so you take a lot of this Microsoft or Google or Amazon, or those companies, that they're sucking up so much server and storage capacity, that for the typical storage vendor, the TAM is shrinking.

And for us, that turns out to be not a -- that -- to us, that's an expanding TAM, not a shrinking TAM, because those are opportunities for us, including the public clouds.

Makes sense.

Thanks, guys.

Rajesh Ghai, Macquarie.

Just wanted to follow up on your last statement, Bob, about the TAM shrinking for the storage guys, but maybe expanding for you with the cloud.

What about pricing power for the cloud guys?

Obviously, they buy a lot more.

And is -- on the capacity business, their pricing not lower than what you might get on an on-premise deployment?

My comment is, it's reasonable.

I'll let Al comment on this.

I'd agree with that, Rajesh.

It depends what you're talking about, there, in terms of pricing.

And if you're trying to get to the point of, sometimes people say, we're too pricey for the cloud environment.

Not true.

We just don't tend to historically, as Bob said, price that way.

But we found it's pretty consistent.

In fact, we're seeing cloud guys sell more on TCO these days, then even core infrastructure cost differences.

So it kind of depends.

Good.

And you -- so on this call, you've talked a lot about talent acquisition to improve execution.

Are you prepared to take tough positions to maybe make some talent upgrades?

And if that's the case, how does that distraction factor into your FY15 outlook?

Across the Company, over time, as a company grows and matures, EMEA's a pretty good example.

In certain areas, you bring in talent that's appropriate for what you're trying to accomplish at the time.

A good example is, we've got a strong product management group.

But since we have leading mobile technology, it would be a good idea if we brought in individuals who are steeped in mobile to run those product teams.

Or in operations and analytics, even though Mr. Bunte to my right here has done an awesome job of developing leading technology, you want to bring in teams that are, on the marketing side, and go to market sides that have a lot of experience in operations and analytics.

Healthcare, we built a healthcare engine.

So we are expanding our healthcare team.

So the answer is sure, as you -- a company builds and matures, there is -- we are always bringing in talent that's appropriate for what you're trying to accomplish.

The broader issue is that -- and I've said this, going back, at the beginning of FY14 is, the Company's going through a massive amount of transformation.

And underneath, successfully.

So when you do that, there's always some issues that occur within the Company, to your point about disruption.

But in a lot of the cases, we're on the other side of that.

In some areas, we're not.

But a lot of that really difficult disruption is actually behind us.

Not all of it, but a lot of it's behind us now.

And on the virtualization side, if you can talk about the competitive landscape, especially related to VM, virtual, and also the VMware solution that launched along with (inaudible) and VDP?

I'll give a broad scope.

Obviously, when we talk about leading technology and competing in the mid-market, against socket-based solutions with native live copies, you can infer from that who the competitor is, or competitors.

So I would say, in those segments, we will have leading solution, not only technically, but in price to market.

The other area, as you go into some of the high velocity markets, is not just technology and repackaging.

It's your go to market capabilities and how you market are different.

And we are prepared to invest in that also.

So I'll let Al take it from there.

Yes, I guess I think that's pretty well done, I think.

The other piece on virtualization that is important to understand is, as we're coming out with newer technology here, we expanded all the way into being able to provision VM environments.

And not only protect them, but again, provision them, and even archive and retire VM's out there, so it's a broader perspective on handling VM environments, or virtualization environments, than just data protection.

I don't know if we answered your question.

Al got the key ones, but you were talking about VMware's -- you have some comment on VMware?

Yes.

Maybe I missed that.

What was your question on that?

My question was, with [VSan] coming out of VMware, they have introduced VMware data protection solution that runs on a virtual machine on a VMware on Vsphere.

We understand if that's competitive to you, or if you think that's not going to be something that really hurts the backup players like yourself?

Thank you.

Okay.

Part of my answer, then, was, you have to take a broader perspective to virtual environments there, number one.

Number two, we're aware of it, obviously.

We haven't seen it have a major impact to date.

We do watch VMware over time, as a potential competitor.

I think we understand what they're trying to do.

We also are making sure that we can manage environments that aren't necessarily just VMware.

And we're seeing a few of the other guys, so to speak, in that space, starting to do really well.

So we are aware of it, Rajesh.

It's a good question.

I don't think it's impacting us yet, but we're paying attention.

I'd add a broader comment to that, too.

And that is, as things move to the cloud, and particularly when you're dealing with hybrid clouds, those types of data protection solutions really don't fit what Al was talking about.

When you start talking about the order provisioning, the data protection in the cloud, the ability to have broad indexes and archiving in the cloud, the ability to extract objects from a -- they call it in the industry, they call it a blob of data and pull a file out.

Those are -- all the automation that goes with it.

Those are different, much broader concepts than just the data protection you just talked about with VMware providing.

So our big volumes, whether it's the cloud providers or big enterprise, require a much more comprehensive solution.

And as Al mentioned, they also are typically deploying more than one virtualization environment that's got to be managed across a number of virtualization environments.

That's also critical.

So yes, we understand those issues.

But in our -- the core markets that we're going after, you're not -- what VMware is doing, it is not as relevant to us.

That makes sense.

Thank you so much.

Phil Winslow, Credit Suisse.

Most of my questions have been asked, but wanted to focus a little bit on the SMB versus the enterprise business, in terms of how you're thinking about it for the coming fiscal year.

Thanks.

Phil, just two things.

One is, over the last two years, we hired a senior guy from Cisco to build a much more comprehensive distribution model with our [dis-d's] and resellers.

So that's in place.

The other issue I mentioned is that our packaging and pricing for that -- those distribution channels in the mid-market has not been exactly optimal.

So now we've got two things.

We've got the channels in place, and we're building very, very targeted products that are going to be a lot easier to sell through those channels.

So now -- so the expectation would be that we will exceed our historical growth rates in those markets with much better management of the channel, and support of the channel, with products that are a much better fit for the channel.

So let me just summarize.

We have three focus.

Number one is big enterprise.

Number two is cloud, which is moving a lot faster than I said.

And third is a much stronger foundation.

In terms of TAM, as it turns out, that if you look at our markets, 80% of our TAM fits in big enterprise and the cloud.

So if you think of it that way, we're going where the money is.

The other point that's, I think, important for everybody on the call to understand is, a lot of the mid-market in and SMB market is going to the cloud through the MSBs and cloud providers.

So over time, more and more of that market is going to be serviced by those guys, and not by typical SMB channels.

So the survivors in those SMB channels are going to be really capable distribution partners.

Got it.

Thanks.

Glenn Hanus, Needham.

One follow-up here.

So you outlined what's been working in EMEA, somewhat.

How will you -- how will your implementation of that here in the US be the same or different?

And where are you now in that implementation?

Good question.

It will be the same.

The -- in terms of the talent acquisition, as I mentioned, the teams are in place, the process is in place, all the positions except for a few have been identified, are being recruited for.

They are being done in a very efficient process, in what we call waves.

So with a high return.

The first tranche of those will be completed in Q1.

And we will be in a position, by the end of Q2, in terms of getting them back to, let's call it acceptable staffing levels.

And we're talking about not just enterprise sales reps, but in our case, it's about, for every one of those reps we put in the field, we have to hire two other people, whether it's SE's or technical account managers, to make sure those teams are effective.

So we're talking about the a lot of people in place.

So I'd say well down the path, and managerially, we're making sure we have the right managerial structures in place and support structures in place to execute.

So the model is the same.

And I would say we will be well in position with that model in place by the end of the Q2, with quite a good start this quarter.

Thank you.

Greg McDowell, JMP Securities.

Two quick questions.

I wonder, first, if you could give us a sense of the magnitude of the size of the major deals that have already closed in Q1.

That's number one.

And number two, I was just wondering if you have adjusted your close rate assumptions for the rest of this fiscal year.

Thank you.

When we talk about large deals, we're talking about deals over 1 million or in the millions.

And the first deal that closed is in multiple millions.

And close rate -- I'll let Brian and Al talk about close rates.

As far as I'm concerned, we haven't adjusted our close rates going forward.

You guys know we track that very closely.

We tend to run variations off the last four-quarter averages.

Taking into account what it was a year ago, same quarter, same type environment, if you will, we do that regionally.

So yes, maybe they're adjusted down a little bit from our fourth quarter experience --

But also add this -- a lot of these deals that were late in the quarter are late stage funnel deals, as well.

So there often is a higher percentage of close rate on those deals.

Yes.

So not much.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

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