Commvault Systems Inc (CVLT) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first quarter 2015 CommVault earnings conference call.

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

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

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

Please go ahead, sir.

Good morning.

Thanks for dialing in today for our fiscal first quarter 2015 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 reminder 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 statement 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 Investor Relations website.

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

The reconciliation between the non-GAAP and GAAP measures can be found on table 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.

Thank you, Michael.

Good morning, everyone, and thank you for joining our fiscal first quarter 2015 earnings call.

Let me briefly summarize our Q1 financial results.

Total revenues were $152.6 million, up 14% year over year and down 3% sequentially.

Software revenue was $72.1 million and grew 10% year over year and down 9% sequentially.

Services revenue was $80.6 million and grew 17% year over year and 4% sequentially.

We had solid performance from all theaters, Americas, EMEA and APAC.

We purchased a record $105 million of our stock during the quarter, and the Board recently extended by one year, and increased our stock purchase plan by $105 million, bringing the total amount available for future repurchases to $150 million.

We signed an agreement for a five-year $250 million line of credit.

And from an earnings perspective for the quarter, non-GAAP operating income, or EBIT, was $33 million, up 5% year over year and down 18% sequentially.

Non-GAAP EBIT margins were 21.6%.

Diluted earnings per share were $0.44.

We generated approximately $35.4 million of cash flow from operations during Q1 and in the quarter, with approximately $399 million of cash and short-term investments.

We had a strong quarter from enterprise deals, which we define as deals over $100,000.

Sale to enterprise accounts increased 27% year over year, and were 63% of Q1 license revenues versus 55% in Q1 of the prior year.

We also set a record for enterprise deal size, which was $356,000 versus an average enterprise deal size of $268,000 in Q1 2014.

We made very good progress in recruiting enterprises sales teams in our product management organization, which Brian will detail later in the call.

From an industry recognition standpoint, for the fourth year in a row, CommVault once again earned the strongest position in the Leaders quadrant of Gartner Inc's coveted 2014 Magic Quadrant for Enterprise Backup Software and Integrated Appliances.

Being chosen as a leader by Gartner for the fourth consecutive year is a remarkable achievement, which validates the strength of our product offerings and our ability to consistently deliver the most innovative data and information management solutions to our customers.

I encourage you to review the Gartner report, which is available on our website.

CommVault was also proud to have received the Server Platform Partner of the Year Award from Microsoft.

Our partnership with Microsoft is becoming stronger, as we work with them to provide unique cloud-based solutions, as well as innovative solutions for Hyper-V server virtualization, Exchange and SharePoint.

Now let me talk about outlook.

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

We had a good start to FY15 and have a clearly defined path for growth, which includes the following elements: increasing penetration of large enterprise accounts by significantly increasing the number of enterprise sales teams; introducing new innovative products and functionality as part of our R2 release, which I will discuss in more detail later on in the call; releasing new Simpana cloud automation and management capabilities with innovative products and services which will help large enterprises migrate to the cloud; and continuing to capture market share in large enterprise in our core data management, data protection, disaster recovery and archiving segments of the market; accelerating growth in the cloud segment of the market by establishing strong positions with major cloud providers; increasing penetration of the SMB market with new targeted products and packaging tied to our R2 release and subsequent near-term releases, which will include appliances; and lastly, introducing new stand-alone innovative products for mobile, operations management and intelligence, business analytics and healthcare.

While our strategic fundamentals are strong and our ability to execute is improving, I would like to add the following words of caution, as well as some of the challenges we are facing.

We are winning larger and larger enterprise deals; however, our ability to grow is more dependent on not just big deals, but a steady flow of $500,000 and $ 1million-plus deals, which have quarterly revenue and earnings risk, due to their timing.

It will take us through Q2, current quarter, to bring our quota carrying sales teams up to acceptable levels.

We will begin to see an impact from that increased sales capacity in the second half of the fiscal year.

A larger portion of our revenues are moving, and will move, to subscription revenues for both cloud and enterprise revenues.

Some leading industry analysts have lowered their IT spending forecast for 2014.

We have heard from some vendors and resellers that traditional storage hardware growth is slowing and refresh cycles have been extended, as a result of customers looking at the cloud and newer alternative storage technologies.

Importantly, the cloud, and to some degree mobile, are causing rapid, unprecedented seismic changes in the industry which are affecting all vendors.

I will discuss this issue later on in the call, as well.

We are confident over the longer term that we will be well positioned to take advantage of these market changes.

The key elements required to transform our business are all in place.

We believe this should enable us to improve revenue and earnings growth.

These key elements include the development of the required innovative technologies, product and services, the expansion into new markets, sufficient sales capacity, and the development of new distribution channels and partners.

In summary, we had a good start to FY15.

We have made very good progress in reengineering our products, services, distribution, and business monetization models tied to the rapid changes in our markets.

I will discuss the progress in these areas in more detail later on in the call.

We have also made very good progress in achieving our key recruiting objectives.

We are committed to continue to make the required investments in the near-term in order to achieve our long-term growth and profitability objectives.

We have lots of work yet to do, as we complete the transformation of our business during this time of rapid changes in the industry.

As I said in last quarter's earnings call that the first half of our fiscal year would be a challenge and we would see a stronger second half of the fiscal year.

Fortunately, we saw increased momentum in our business, as evidenced by our big deal results in Q1.

That being said, we still have work to do in order to achieve our first half objectives.

On the flip side, we do see momentum building for the second half of our fiscal year, tied to a larger second half big deal funnels and the expected positive impact from increased sales capacity in our R2 release.

In summary, although the elements required to transform the business are in place, we believe it will take us several more quarters to go back to a sustainable, consistent higher growth trajectory.

I will now turn the call over to Brian.

Thanks, Bob, and good morning, everyone.

I will now cover some key financial highlights for the first quarter of fiscal year 2015.

Total revenues for the quarter were $152.6 million, representing an increase of 14% over the prior-year period and a decline of 3% sequentially.

For the quarter, we reported software revenue of $72.1 million, which was up by 10%, or $6.8 million over the prior-year period, and down 9% sequentially.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, increased by 27% over the prior-year period and 2% sequentially.

The number of enterprise deals decreased to 5% year-over-year and 30% sequentially.

Our average enterprise deal size was approximately $356,000 during the current quarter, compared to $268,000 in the prior-year first quarter.

As Bob mentioned, all theaters had solid quarterly results, including the Americas, which had good sequential software license revenue growth driven by improved large deal close rates.

During Q1, our growth was driven by demand for data protection for virtualized environments, source ID 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 81% of our Q1 software revenue.

For the quarter, software revenues derived from indirect distribution channels decreased 6% over the prior-year period and represented 76% of software revenue.

Our direct revenue represented the balance, and increased 141% over the prior-year period.

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 quarter was 47% software and 53% services.

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

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

Services revenue for Q1 was $80.6 million, an increase of 17% year over year and 4% sequentially.

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 58% of total revenues, resulting in a 7% year-over-year increase, while revenue from international operations generated the balance, resulting in a 24% year-over-year increase.

Geographically, EMEA, Canada and APAC had a very strong quarter, while the Americas continued to improve.

The comparison of the year-over-year growth in the Americas was negatively impacted in Q1 2015 by the timing of recognition of several large deals in Q1 of the prior year.

We added approximately 350 new customers in the quarter.

Our historical customer count is now over 20,000 customers.

Our breakdown of license revenue from new and existing customers was in line with historical ratios.

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

For the quarter, revenue transacted through Arrow was approximately 33% of total revenue, growing 28% year over year and flat 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 will continue to invest in such programs throughout FY15.

We also continue to add new key 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 over 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 86.7% for the quarter.

Total operating expenses were $97.7 million for the quarter, up approximately 16% year over year and 2% sequentially.

Sales and marketing expenses as a percentage of total revenues increased to 48% in the current quarter, which was up from 47% in the prior-year period.

Non-GAAP operating margins were 21.6% for the quarter, resulting in operating income, or EBIT, of $33 million.

On a year-over-year basis Q1 EBIT increased by 5%.

Q1 EBIT margins decreased by 170 basis points year over year and 410 basis points sequentially.

Non-GAAP net income for the quarter was $20.9 million and EPS was $0.44 per share, based on a diluted weighted average share count of approximately 47.9 million shares.

On a year-over-year and sequential constant currency basis, foreign currency movements did not have a significant impact on either Q1 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 declining operating margins in Q1, due to planned aggressive headcount additions, as well as increased targeted spending on several investment initiatives.

We added 100 net employees in fiscal Q1 and ended the quarter with 2,073 employees.

This was up from 37 net new employee additions in the prior quarter.

Most of the net new employees hired in Q1 2015 are field facing sales and technical resources.

In Q1 and early Q2, we made substantial progress in hiring quota carrying sales teams globally, and particularly in the Americas.

Additionally, we have added substantial talent to product management.

We expect to continue to aggressively hire over the next two quarters, with a heavy focus on the recruitment of enterprise sales teams.

With significantly enhanced talent acquisition capabilities and as demonstrated by the number of hires in Q1 2015, we believe that we are now organized to succeed in this area.

In the short term, as we continue to hire and before the sales teams become fully productive, they will have a negative impact on short-term margins.

Our Q1 2015 operating margins were also negatively impacted by increased spending related to our global sales leadership kick-off event and other Q1 sales enablement initiatives.

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.

For the remainder of FY15, short-term margins will be negatively impacted by additional investments that we are making.

These will include significant major investments in the following areas: our sales teams globally, our cloud services group, our product management and go-to-market capabilities including our partner advantage program, and continued investments in product development, consulting services, and support.

FY15 will be an aggressive investment year, as we are investing to accelerate top line growth for the back half of FY15 and FY16.

We are confident in our strategy.

We also believe that the near-term actions discussed earlier by Bob will result in a positive uptick to revenue growth sometime in the second half of the fiscal year, but cannot predict the exact timing and magnitude of that growth.

This could negatively impact contribution margins in the near-term.

As a result, we expect FY15 operating margins to be down by approximately 200- to 300 basis points.

We believe the current Street consensus revenue growth rates for FY15 are reasonable.

Our objective is to return to our historic growth rates by the end of FY15.

It should be noted, however, that our gradual shift to more subscription-based revenue is not fully predictable and may have an impact on in period recognized revenue.

The higher planned investment rate and our increased ability to achieve our hiring objectives will put us in a much stronger position to achieve our $1 billion planned revenue and earnings goals.

We remain committed to our $1 billion objective and growth plans, while achieving operating margins in the mid-20s 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.

Our GAAP tax rate for Q1 2015 was 31%.

We expect our cash tax rate to remain lower than our GAAP tax rate for FY15 and to be approximately 30%.

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 47.5 million to 48.5 million shares.

Now moving on to our balance sheet and cash flows.

As of June 30, our cash and short-term investments balance was approximately $398.5 million, down 13% year over year, due to cash outlays for the new headquarters build-out and share repurchases.

Free cash flow, which we define as cash flow from operations less capital expenditures not related to the new headquarters, was $34.1 million, which is up 46% year over year and a decrease of 12% sequentially.

As of June 30, 2014, our deferred revenue balance was approximately $213.9 million, which is an increase of $24.7 million, or 13% over the prior-year period, and up $4.3 million, or 2% sequentially.

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

As of June 30, 2014 our deferred software revenue balance represented less than 1% of total deferred revenue, or approximately $300,000.

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

For the quarter, our days sales outstanding, or DSO, was 66 days, which is up from 65 days in Q4 FY14 and up from 55 days in the prior-year quarter.

The change is due to linearity within the quarter.

During the first quarter of FY15, under our stock repurchase program, we repurchased approximately 2.1 million shares of our common stock totaling approximately $105 million.

The Board of Directors also recently increased and extended the amount available for share repurchases by an additional $105 million, so that there is now $150 million available in our stock buyback program through March 2016.

During calendar 2014, we have repurchased approximately 6% of CommVault stock at an average price of $53.19.

We will remain opportunistic with share repurchases.

In order to maintain our liquidity position while accelerating our stock repurchase program, we have opened a five-year revolving credit facility under which we can borrow up to $250 million at favorable interest rates.

Borrowings under this facility can be used to repurchase our common stock under the repurchase program or to provide for working capital for general corporate purposes.

There have been no borrowings under this credit facility to date.

During Q1 FY15, we expended approximately $18.2 million on construction costs for our new campus headquarters.

Our estimate of the total cost of this project remains to be $135 million.

Through June 30, we have spent approximately $90 million on this project, and we expect to spend an additional $45 million in FY15, with most of this being disbursed in calendar 2014.

We expect to complete this phase of 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.

Our current 182,000 square-foot leased headquarters has an annual cost of approximately $5.5 million, which is reflected in operating expense.

Our new 280,000 square-foot headquarters facility, which we will own outright, will cost about the same on a square-foot basis as our current facility.

As a result of being in a larger facility, our annualized cost of the new headquarters will be approximately $8.5 million, of which $5 million will be reflected as depreciation expense, with the remainder being operating expense.

The incremental costs have been factored into our EBIT margin expectations for FY15 and beyond.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Bob?

Thank you, Brian.

I would like to provide a brief update on our perspective of the market.

As I mentioned earlier, the lightning fast shift to the cloud is changing the competitive landscape of the industry.

To be successful in this transformative market, vendors must quickly reengineer their products, services, distribution and business models.

This is a process we started some time ago and we are well down the path in successfully making those changes.

From a CommVault perspective, we are seeing the following.

Very large enterprises are still choosing CommVault as the vendor of choice in large IT infrastructure consolidations for global data protection, compliance, search, and legal.

We are seeing an increasing demand for archiving and mobile capabilities.

The biggest new trend we are seeing is the rapid adoption of private and hybrid clouds in the enterprise segment of the market.

This includes increasing interest in adoption of open commoditized infrastructures, like OpenStack.

As we have stated many times, there has been a very rapid emergence of MSPs and cloud providers serving various segments of the market.

CommVault has become the major vendor, through our large number of those providers for both products and innovative services.

The acceptance of public cloud providers is accelerating, and we are increasing our product innovation and engagement in this segment of the market.

The SMB market has changed rapidly, with the emergency of new competitors, use of replication-based solutions to replace traditional backup, and the increasing move by SMB customers to utilize the services of cloud providers.

I'm going to give you an overview of the next major release of Simpana 10, which we call R2.

Our Simpana R2 release addresses many new customer requirements, both in the enterprise and the SMB segment of the market.

R2 has been introduced to specific customers in an early release mode and will be formally released to the market in the next few weeks.

R2 introduces new innovation, as well as simplified packaging and new pricing that makes it easier for customers to acquire Simpana-based solutions that solve immediate specific issues.

R2 expands the scope of Simpana from a data and information management solutions platform to now include a comprehensive management suite which can be used in conjunction with Simpana or as a stand-alone function.

The Simpana management suite will enable enterprises to manage all things related to their IT infrastructure, processes, mobile devices, and the cloud.

The cloud lifecycle management solution, which is a key new element of the suite, provides capabilities to manage and automate key operations in data centers and public and private clouds.

All of these innovations are wrapped up in an industry-leading set of web-based, customizable operational monitoring and analytics tools, as well as custom workflows to automate complex operations in large on-premise or cloud data centers.

Specifically, some of the new capabilities include: cloud lifecycle management, stand-alone solutions for virtual machine management, and email archiving, a stand-alone mobile solution with enhanced functionality, live native copy options, new security information and event management/SEIM, healthcare solutions, and the introduction of an appliance program.

In the near future, we are planning to introduce additional R2 stand-alone solutions, including disaster recovery, dev test, and cloud archiving.

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

In closing, we had a good start to our fiscal year, with strong performance in the enterprise segment of the market.

For the fourth consecutive year, we have been in the strongest position in the Leaders Quadrant of Gartner's prestigious Magic Quadrant for Enterprise Backup Software and Integrated Appliances.

Additionally, we were proud to receive Microsoft's Server Platform Partner of the Year Award.

We have quickly addressed our own internal issues associated with sales recruitment.

We are successfully adapting to the transformative changes in the market with innovative new products, technologies and services, new packaging and pricing models that make it easier for customers to buy our products, and expanded distribution channels and partners.

Our objective is to take advantage of the changes in the market to establish a sustainable path to long-term high revenue and profitability growth.

I will now turn the call over to Michael.

Thanks, Bob.

Before we open up the lines for questions, I would like to highlight that we will be hosting our annual stockholders meeting on Thursday, August 21 at 9 AM Eastern time at our headquarters in Oceanport, NJ.

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

Operator, can we please open the lines for questions?

Thank you.

We will now begin the question and answer session.

We ask that you please limit yourself to one question and one follow-up.

(Operator Instructions)

Jason Ader, William Blair.

Thank you.

Brian, I had two quick numbers questions for you.

And then, Bob, I wanted a second one for you.

Brian, just on the subscriptions part of the business, can you give us the percentage currently of sales from subscriptions?

And then also, what percentage of the business do you estimate is what you would call SMB?

Sure, Jason.

So the subscription-based revenue is currently less than 10% of license revenue.

And then in terms of SMB, we don't typically break that out.

But you did see the strong performance in the Enterprise segment of the business.

So the flip side of that is the smaller deals.

Should we assume everything that's not Enterprise is SMB or no?

No, I wouldn't necessarily assume that.

That's a deal-size metric.

It's not necessarily a market segment metric.

Okay.

And then, Bob, on the SMB market, can you elaborate a little bit on the three items you mentioned in terms of some of the changing dynamics?

I think you mentioned use of replication to replace backup, some of the new competitors, and then adoption of cloud.

Maybe just a few words on each.

Sure.

Over the last several years, the snap and replication technologies, both from hardware providers and software, became more accepted in the market as a simplified way of backing up data.

It doesn't provide a secure backup.

But it does a complete secure backup, which only can be done by an index copy of the data that has no overwrite protection to it.

But for many use cases, customers are using that technology as a proxy, let's say, for backup.

And that trend has increased.

And my belief in the SMB segment of the market and for cloud in the lower end of the market, I think that kind of technology will be predominant.

And then clearly, in the SMB segment of the market, there have been some new competitors who have done quite well in that segment of the market.

The solutions are quite simple.

They don't lend themselves to big Enterprise deployments.

But there's been some pretty good acceptance.

So that's a fact.

And two, as I mentioned, as data management moves to the cloud, the cloud providers are using both techniques.

At the low end, they're using replication techniques.

And at the higher end, they're using technology that we provide to our MSP and cloud providers for more sophisticated data and information management solutions.

So do you have a play in the use of replication to replace backup, or is that kind of a net negative for you?

No.

We do have our own replication technology.

So it is an alternative as part of the Simpana platform, number one.

And number two, one of the issues has been we've been a platform play.

And as I've talked about, probably for the last several quarters, in terms of addressing some of these segments of the market where customers really want to buy a non-platform single-point solution, we clearly are on a very aggressive path to enable our customers to buy a series of different use cases as a single standalone product.

And I'm going to let Al expand a little bit.

And we'll first start with the virtualization side of the market and expand it from there.

Thanks, Bob.

One thing, Jason, go back a little bit on the discussion here.

So one of the things we're doing in R2 is what Bob referred to as the so-called live options.

Those are immediately available.

They are here now.

And what those look like under the covers is like a lot of the replication capabilities out in the market today.

It's primarily targeted for DR. So people want these image-based environments.

And of course, you want to improve your RTO capabilities by not going through a restoration process.

And that's what these solutions do.

First release is primary really tied to VMware.

So we've seen a tremendous amount of response for those.

Then, as you get into the DR capabilities out in the marketplace, this leads you into cloud kind of environments because that's a great spot for using total utilization applications like DR. And as Bob said, then a lot of our VM management capabilities now start coming into play.

Where we manage the lifecycle of a virtual machine; we manage snapshots; we put them together with workflows.

And these days, we're even starting to put an end user UI on the front end of this, so to offer it as a service.

So that whole play ties really nicely not into current demands but into cloud-y kind of environments that are becoming prevalent out there.

Those solutions that Al just mentioned, by the way, Jason, position us strongly, not only in the SMB segment of the market; but they are also used selectively in the Enterprise, as well.

To be specific, without mentioning names, clearly it puts us in a strong position against one of the major SMB virtualized software solution providers.

And with live copy, puts us in a strong position of a hardware provider who uses appliances to provide that solution.

For us, these are simple use cases.

We just separated them from the platform and just made it easier for customers to buy a specific use case, like Al mentioned, such as DR. And in the case of live copy, provide the ability to mount a live native copy without restoring it from a backup.

Joel Fishbein, BMO Capital Markets.

Hello.

Thanks for taking my question.

Bob, you normally do give us a little bit of color around the visibility and pipeline.

Any color there would be very helpful.

And I have one follow-up.

I'm going to talking about our funnels and outlook for the second half of the year.

What I was saying on the call, Joel, is that we clearly see a lot of increased momentum going into Q3 and Q4.

And we have some challenges in regard to our funnels and visibility in Q2, as I stated on the call.

Okay.

Brian, one for you, just as a follow-up.

Can you talk about how you would normally recognize a large deal, let's say, over a couple million dollars?

How would that show up, from our standpoint?

I know it's deal-specific, but any color you could give us there would be helpful.

It is deal-specific, for sure, Joel.

And we see a variety.

I'd say the large portion is perpetual base.

So that you would see the software revenue being in period recognized amount of revenue.

And then ongoing from there is obviously the maintenance and support and professional services revenue.

But having said that, we are seeing other deals come into our pipeline that will be more term- and subscription-based recognized transactions.

Okay.

And then, Bob, the last one for you, just on the R2 and some of the live releases.

Do you expect that to help accelerate the revenue in the back half of the year?

That unbundling is how I classify it.

If you look at the points on why we are optimistic in the second half of the year, number one is by adding a lot of Enterprise sales capacity, it enables us to build big funnels.

So you start there.

Now you add on top of that, call it market expansion now, with a series of new products, which increases the likelihood of improved revenue growth because those are additive.

They're not subtractive.

They're additive.

And both from a channel perspective and also as an entry point to large enterprises.

So the answer is, yes, we expect it to help our revenue growth.

And over time, it certainly will help in maintaining or potentially accelerating our ASPs.

Great.

Thank you very much.

Andrew Nowinski, Piper Jaffray.

Good morning.

Nice quarter.

I just wanted to get a quick clarification on Brian's comments here first.

I think you said you plan to continue hiring aggressively over the next two quarters.

Though I thought you said last quarter that it would be wrapped up by the end of the first half of FY15.

So is that extension of your hiring plans reflective of just a better-than-expected pipeline?

No.

This is Bob.

I'll answer the question.

One, we got way behind, Andrew.

And we needed to catch up, particularly in the Americas.

So we put a -- which I've mentioned previously -- a much stronger talent acquisition capability in place.

It's a massive global organization, and it is working.

So we expect by the end of the Q2 to kind of get to the position that we want to get to in terms of a baseline and Enterprise deal capability.

And then we have to add additional capability as we move into FY16 because we're expecting strong growth in FY16 as well.

Understood.

And then on the competition side, I guess, I'd like to get a little more color on that dynamic.

You discussed VMED at length.

So I'd like to ask about the others.

EMC noted strong double-digit growth in their data protection revenue, and that was both year over year and sequentially.

So maybe you could start by just discussing some of the competitive landscape that you're seeing out there and whether anything's changed with regard to -- specifically with EMC.

Thanks.

Well, our stats show our deal losses to EMC going down.

EMC's CEO mentioned increased capability on competing with CommVault.

We don't see it.

Certainly, we've seen their senior executives flying around in jet planes trying to unhook deals at an increasing rate.

And we expect to keep them busy.

So the answer is, we don't see it; they see it.

We'll see what happens in the market over the next several quarters and see whose revenue growth out paces whose.

Okay.

Thanks a lot.

Aaron Rakers, Stifel.

Thanks for taking the questions.

One question on guidance and outlook, and then a follow-up, if I can.

So first of all, Bob, on the outlook, as we go back a year or last quarter, you had talked about a return of historical growth rates in the second half of FY15.

Today you're saying you're more or less comfortable with where the Street sits, which I don't think necessarily gets you back to those historical growth rate numbers.

How are you thinking about that?

And how does that kind of coincide with now guiding down 200 basis points to 300 basis points on operating margin relative to what you've previously said?

Let's just take the growth outlook, Aaron.

One is, we still believe that we'll get into historical-like growth rates by the end of the fiscal year.

What Brian was saying is, the question is timing.

It could be early.

It could be Q3; it could be late Q3; it could be early Q4.

We're just being a little cautious at the moment in terms of our perspective.

But all of the elements, as I said, are in place.

We have enough sales capacity to do this.

We have funnel growth to do it.

We have new products coming into market.

We have increased distribution leverage.

So the elements are there.

We'll just have to see how they play out.

So that's one.

And secondly, our recruiting engine is in full gear, as you've seen on our stats.

And you combine that with a potential challenging Q2.

So we think Brian's comment on a 200- to 300-basis-point negative impact on operating margins is appropriate.

But let me emphasize, we are really confident about the business.

And we are investing to succeed and increase our growth rate.

And we're not going to horse around.

I'm not going to try to finesse this to hit Street EBIT margin numbers.

It's just not going to happen.

The market is there.

We've got the products.

We have the distribution.

And we're going to get this Company back on a long-term sustained path, and we're committed to doing it.

And we may take some heat in the near-term to do it, but we're not going to horse around with it, Aaron.

Fair enough, Bob.

And then the follow-up, if I can.

Al, I think you made the comment in conference calls about lumpation and deal closures on large deals.

I know you had a really solid quarter this quarter, but the number of those deals actually declined a little bit.

So can you talk a little bit about large deal closure rates?

Has that returned to normal?

If not, when do you expect that?

How do we think about the deals that slipped after last quarter?

Thank you.

Thanks, Aaron.

I'm glad to see you're paying attention to my comments.

(Laughter) And you're propagating the use of lumpation.

But, yes, I think the simplest way to say it is we've returned to more normal close rates, particularly our large deals, is the simple answer for you there.

There's another dimension we can add to that, Aaron.

We've been pretty clear that the hiring problem we had earlier did affect funnels; and particularly, our large deal funnels.

And we still are dealing with the negative impact of that in Q2.

But as a result of this hiring, we're seeing a significant uptick in those funnels in Q3 and Q4.

So we're at the bottom of that cycle, if you want to think of it that way.

So what Al was saying is, yes, we had normalized close rates.

But in addition to that, you need the funnels.

So you have normalized close rate on a low funnel, you don't get a good result.

So you have need a normalized close rate on a large funnel, and that's what we're seeing in the second half of the year.

Thank you.

Michael Turits, Raymond James.

Hello.

Good morning.

A couple of things.

First of all, it was a solid quarter, both from a seasonal perspective in terms of the sequential growth rates, and a decent return to mid-teens top-line growth.

As you look at September, I know you still have challenges; but the Street is below seasonal.

Do you think you're at the position now where you can actually do more typical seasonal growth into next quarter?

No.

No.

Next quarter is a challenge, Michael.

After that, things should get interesting.

But it doesn't mean -- we still could throw up a good quarter this quarter.

But I think we have the end of our challenges tied to our low capacity additions in FY14.

This should be the end of it.

Not to be too repetitive on the margins, but can you be any more specific about the changes in your outlook in terms of margins.

I know you should do what you want to do and not just hit the Street numbers.

But the last outlook was for margins flat to slightly down, now 200 to 300 bps.

What's the change versus where you saw that last quarter?

I think we got a little bit more of a challenge in Q2.

And our recruiting engine is doing better than we had planned.

And we're going to keep going with it.

So if you combine the two, we're doing better on recruiting.

And that's not just in Enterprise sales and SEs, which is the critical one.

Al has also had great success in hiring some really good, innovative talent in our product management and marketing areas.

So that's working in our favor, as well.

But it doesn't negatively impact operating margins in the near term.

And if I could get a last question in.

You've talked quite a bit in the past about deals and arrangements, partnerships with cloud service providers that you believe would be ramping, I believe, in the back half.

Can you give us an update on that?

Are those still arrangements that you think will yield a lot of revenue growth and acceleration in the back half?

And anything incrementally you could tell us about them would be helpful.

Well, right now, we're tracking to our plan in that area; and we continue to acquire new partners.

We expect to acquire some significant new partners this quarter as well.

In addition to that, we're getting some quite good traction with the major cloud providers, also.

That looks like a significant opportunity for us as well.

Okay, Bob.

Thanks, Bob.

Thanks, Al.

Thanks, Brian.

Srini Nandury, Summit Research.

Thank you for taking my call.

I've got a couple of questions on your hiring in the US and everywhere else.

What percentage of your holes have been filled in the US since [courage], and what gives you confidence that the people you're hiring are the right people?

I'm not sure on the percentage basis.

But just in general, if this Company is going to grow -- I'll pick a number, historical growth rate back at 20% -- we have to hire round numbers about 20% more sales teams.

And we're on track to do that or do better than that.

So I hope that answers that part of the question.

Is that what you were trying to--?

Yes.

A follow-up question would be, you are actually going to be moving to this unbundled pricing.

You'll be selling based upon the user or you'll be setting up on VMs and sockets and so forth.

So your pricing model gets a lot more complicated.

So what measures are you taking to educate your sales force, the old ones and the new ones coming in?

Well, don't forget, these are additions.

Our capacity and model stays in place.

These are additions to that model.

And our education of our technical and sales teams has been going on since June.

So the significant education, obviously, of our sales teams.

But these are standalone products with relatively simple messages versus our big platform message.

In addition, these standalone products provide our channel with products that are a lot easier to sell, from a channel perspective.

Because they're standalone, the messaging is simple, the pricing is competitive, and the technology is superior.

So we will get channel leverage from this.

And we'll get increased penetration also in our Enterprise accounts, just as entry plays into some large enterprises that we would normally not have to wait for a big platform play.

So this should provide leverage across both the Enterprise and the SMB segments of the market.

And to answer your question, how do we know they're going to be the right people?

One, we've taken more care to define the requirements of what it would take for an Enterprise sales rep to succeed here.

So we've done that.

We've hired people with very good experience and track records.

And the proof of the pudding, we'll both know in a couple three quarters because we'll talk about it.

All right.

Thanks, Bob.

I appreciate it.

Greg Dunham, Goldman Sachs.

Hello.

Thanks for taking my question.

First question, on the Enterprise sales reps.

Can you remind us how long it takes a typical Enterprise sales rep to build pipeline and then start becoming productive?

Hello, Greg.

This is Mr. Bunte.

It takes a couple of quarters to start building significant pipeline.

And it probably takes another quarter or two beyond that before they start really ramping up their bookings productivity.

Okay.

So when we think about the expansion in the capacity this quarter and into Q2, they're really not going to start adding to business until FY16.

Is that the right way to think about it?

No, I didn't say that.

I said they'd ramp to full productivity.

So they actually start not at zero, but somewhat in between there and 100%.

So we start seeing addition to our overall capacity almost immediately.

Okay.

We will start to see the impact of this in Q3.

One, we hired a number of people in Q1 and in early Q2.

So, as Al said, you don't start at zero.

So the acceleration will start in Q3.

That makes sense.

And the next question, on the SMB front.

You got the question before on the call.

It's clearly less than one-third of your business.

But when you think about the SMB business two years out, five years out, is this going to just incrementally get smaller and smaller with time?

Or is this an area where you'd expect that mix of business to stay consistent?

No, I think it gets smaller.

I think the SMB market shifts to the cloud, and the Enterprise segment gets bigger.

But the makeup of the Enterprise segment is going to look a little different as we get into verticals and analytics and some other areas of the market.

But that's my view of it.

Okay.

And I'd agree, Greg.

It will look like our cloud business, in a couple of years.

So you'll see probably more subscription-y kind of revenue, (Inaudible) partners, potentially other services offerings that we put together.

But I agree with Bob.

That mid market and lower end of the market, they want to buy outcomes; and they want to buy solutions.

Okay.

Thank you.

Rajesh Ghai, Macquarie.

Yes.

Thanks.

I had a couple of questions on pricing.

So I do think CommVault has a niche, compared to other backup vendors selling to the cloud, in terms of the fact that you are the only ones with multi-tiering backup capabilities.

As more and more Enterprise data moves to the cloud, do you see yourself seeing any pricing compression compared to what you could get on Enterprise in terms of dollar per gigabit?

If not, if you ask by what factor is that lower in general, what do you think of pricing in the cloud in general, considering that we hear about Amazon and Google lowering prices every day?

Well, I'll take it at the very high end.

And then Al is going to answer the question.

So in general, you'll always have pricing compression in the market.

So what you want to do is move to higher and higher valuated segments of the markets.

And what I was saying earlier, the pace of the change tied to those movements is higher now than it's been in my history with CommVault.

One, we're well-positioned to do that.

And as far as -- don't confuse the price of infrastructure with the price of solutions.

In the cloud market, for what I call very simple data protection, there is no doubt that the Amazons and the Microsofts are going to dominate that market.

And your traditional SMB suppliers are going to have more difficulty.

In the broader pricing strategy, I'm going to let Al take this, because we've known about this for a long time, have communicated this publicly for a long time.

And now these different pricing and monetization models are now out to market with this releasing in this quarter.

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

Yes, a couple other comments, Rajesh.

And Bob's right on the money, in general.

But as you go to cloud, be it private or public, one of the things we're seeing is a shift in use cases.

So they're not necessarily moving big Enterprise mission-critical workloads, especially enterprises, out to cloud kind of environments.

What they're doing is primarily around use cases like dev test, DR, long-term archiving, file share -- those kinds of use cases, which are traditionally down the, let's call it backup or core data production elements of name spaces that people want to protect.

But they do want to manage them.

So dev test is a good example.

They want to manage and orchestrate the VMs that get let up, the data that gets generated.

They don't want to save, necessarily, data like they do backup.

But snapshots are cool.

And more importantly, they want to be able to re-gen that environment very quickly.

So all of the things Bob talked about from a management perspective in this particular use case, really, really resonate in cloud kind of environments.

And, yes, as Bob said, the pricing is going to compress over time.

But the other good news in our business is data is growing even faster than price compression.

Thanks.

That's very helpful.

And my second question is essentially around Q2.

That's typically been a strong federal US federal quarter for you.

Do you see anything different this year, especially given that you don't have Dell backing you this year as much?

Thank you.

Well, let me just expand on the first question.

If you think about the enterprises as they go through these transitions, one, there's still a lot of, I'll call, legacy-use cases that have to be managed as these companies, one, transition either to private cloud or to public cloud.

So to Al's point, you need a management layer that ties all these pieces and use cases together as these enterprises evolve.

And we've been in dialogue with a lot of our key customers lately.

And they really like our ability to provide that management layer on top to orchestrate and automate all these different processes and manage these different environments, number one.

And two, our content store, which enables us to have basically the ability to have visibility on one virtualized back-end storage for all their data.

It's all indexed; and that covers cloud, mobile, private cloud, public cloud, et cetera.

So we're in a very unique position as this market evolves.

In regard to Q2, we've done a lot of restructuring and changing.

And I think this year, our federal quarter will not be as strong as normal.

It has nothing to do with the market.

It's more CommVault-specific.

Eric Martinuzzi, Lake Street Capital.

I wanted to take just a deeper dive on the OpEx for this quarter, and then how it plays out in Q2.

As far as the sales and marketing, I get that.

That's ramped up with the hiring.

But one number that was actually lower than I was expecting was the G&A.

Was there anything in there one-time, maybe to the good, this quarter?

Or is that something that we could use for modeling in the September quarter?

No.

No, Eric, we don't recall anything specific in G&A that would be a one-timer.

I think it's basically on a normalized run rate, at this point.

Okay.

Thank you.

Alex Kurtz, Sterne, Agee.

Thanks for taking the question.

I just wanted to come back to the 20,000 customers and this discussion on increased sales capacity.

I think the thing I'm trying to understand and reconcile is, you have a very large customer base.

They're fairly captive.

Ripping out your software is sort of ripping out a transmission on a car.

And you have continued data growth and virtual machine growth.

So shouldn't there be a little bit more flexibility as far as driving future revenue out of the install base, as opposed to all this increased sales capacity?

Can you just sort of take us through what mix you need between the capacity growth within the 20,000 customers and these big deals that you're hunting in FY15 and FY16 to hit that $1 billion goal over the longer term?

So round numbers -- and this has gone on here for years -- the mix between existing customers and new customers is about two-thirds/one-third.

So if you're not driving new accounts and penetrating newer enterprises, we're just not going to hit these kind of growth rate numbers.

In addition to that, as a Company, we've got to do a much better job in increasing our footprint -- not just on data growth, but increasing our footprint with our existing customers, whether it's mobile or it's email archiving or it's compliance or it's legal or it's operations.

Because now we've got all this operations analytic capability.

You need to do all of the above in order to hit your numbers.

And you've got a market that is under some price compression, as well.

So when you put it all together, if we put the sales capacity in place, we get our new accounts; we utilize our new products in terms of penetrating existing accounts and new accounts.

When you add all of that up, you've got quite a positive picture as the Company evolves over the next few quarters.

But you've got to do all of the above.

You just can't just mine your base in this business.

And, Bob, just a last question here.

I know there were a couple of large transactions last quarter.

I think you were talking about maybe you had a handful of $5 million-plus kind of transactions that got away from you at the end of last quarter.

If we look at that $356 million Enterprise deal number, is that the right number?

Or is there a lower normalized number because those large transactions potentially closed during the June quarter?

I think you got it right.

We did do well in that segment, in large deals in the June quarter.

I think what you will see is something more normal in Q2.

But as you start moving out to Q3, Q4, we see a lot of additional very large, multi-million dollar deals coming into the funnel.

So I think you'll see that number swing quarter to quarter.

But potentially, you look out X number of quarters, it'll probably normalize at a higher number.

But not in the near term.

Thank you.

(Operator Instructions)

Abhey Lamba, Mizuho Securities.

Thanks.

Bob, on the margin front, I understand you're increasing investments this year.

How should we expect your margin profile beyond this year?

Can you start expanding margins in FY16, especially if your expectations of accelerating revenue growth come true?

Hello, Abhey.

It's Brian.

We would say that it's probably too early to tell at this point.

We do remain committed to that $1 billion objective of ours, with operating margins going back to the mid-20%s.

It's too early to tell what the impact in FY16 will be at this point.

So in other words, your margins could still go down from the level that we could see?

I wouldn't necessarily say that.

No, I didn't say that.

Got it.

And lastly, what factors in your Product segment market demand give you confidence that we could see a revenue growth acceleration in FY16?

I understand increased hiring is going to be helpful.

But from the Product segment market demand point of view, any comments on that would be helpful.

Thanks.

Well, we've put all these models together.

So just in general, the biggest variable that determines revenue growth is Enterprise sales capacity, since we do have the technology.

There is still a large demand for what I would call legacy data protection and information management revenue in these large enterprises, as they migrate out to the cloud.

Now you add to that, what Al was talking about -- I'm going to let him take it from here -- when you start talking about all the cloud management suite and the virtualization and email archiving.

Al, why don't you just take it from there?

Yes.

And again, Abhey, it's talking about dev test solutions and DR and those types of use cases out there.

Again, as Bob was saying, the management elements beyond our traditional all-things-data vision are appropriate in these kind of environments.

And what gives us -- Bob and I and the team -- what gives us confidence we're on down the right track and have the right vision here is, we just don't dream this stuff up and talk to ourselves.

Over the last quarter, myself and Bob and a number of the senior management team has been involved in handfuls, dozens of exec briefings.

And this broader message has resonated on every single one of them, almost across the board.

I can't say that confidently enough.

Again, you know us.

We don't make these things up and talk to ourselves.

We all of the time validate it with our key partners, our key prospects, and our key customers.

And that's what, in the end, gives us confidence on these are right solution sets and the right ideas going forward.

In addition, and Al was mentioning this off-line earlier, since we have all these enhanced capabilities and expanded capabilities, one of the key things we need to do is improve our enablement, our messaging, and the training of our salespeople and our tech people and our partners.

Al, why don't you spend a minute on that?

Because that's another area of significant investment for us.

Yes.

We've revised those groups.

We're adding capabilities and headcount to those areas.

As Bob indicated earlier, we're in the midst of a worldwide enablement routine.

We usually start with our presales on our SE side of our Enterprise sales force, and that's exactly what we're doing there.

And again, go all the way from the technical SE side to our sales guys, and then even move into channel and extensive enablement programs there.

The other one that will impact us positively is later on in the quarter and early next quarter, we will be releasing a whole series of appliances that will also provide leverage in the Enterprise and in the SMB segment of the market.

It's appliances and cloud gateways.

And virtual appliances as well.

Yes, and virtual appliances as well.

Thank you.

And our last question comes from Philip Winslow, Credit Suisse.

Thank you.

I wonder if you could provide some more color on just the pricing environment that you're seeing out there.

And if you could maybe just cut it between the large Enterprise and SMBs?

Thanks.

So in large Enterprises, what we do see is that in these really large seven- and eight-figure deals, Phil, you've got lower pricing and maintenance.

And that's just relative to size.

The market pressure, if we look at the decrease just due to market, it's been pretty consistent.

I won't say consistently low, but the price pressure that the hardware guys are seeing, we're not seeing as much in software.

I guess that's a better way of putting it.

And on the SMB side, we've been overpriced in the market to some software competitors and some hardware competitors.

And what we have done is build these standalone solutions that are absolutely price competitive.

They won't impact our broader platform sale, and enable us to compete a lot more effectively in those different segments of the market, which we historically have not.

Got it.

Thanks.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.