Commvault Systems Inc (CVLT) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Third-Quarter 2015 CommVault Earnings conference call.

My name is Brandon, and I will be your operator for today.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the meeting over to Mr. Michael Picariello.

You may begin, sir.

Good morning.

Thanks for dialing in today to our fiscal third-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 remind everyone that statements made during this call, including in the question-and-answer session at the end of the call, may include forward-looking statements.

Including statements regarding financial projections and future performance.

All of these statements that relate to our beliefs, plans, expectations, or intentions regarding the future are made pursuant to the Safe Harbor Provisions 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.

Such as competitive factors, difficulties and delays inherent in the development, manufacturing, marketing and sale of products, software products, and related services, and general economic conditions.

For a discussion of these and other risks and uncertainties affecting our business, please see the risk factors contained in our annual report in Form 10-K, and our most recent quarterly report on Form 10-Q, and in other 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.

In addition, the development and timing of any product release as well as any of its features or functionalities remain at our sole discretion.

Our earnings call press release was issued over the wire services earlier today, and it has also been furnished to the SEC as an 8-K filing.

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

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

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

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

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

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

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

We continue to make good progress against our business transformation and operational performance objectives.

The financial results for Q3 2015 were in line with our expectations going into the quarter, after factoring in the significant negative impact of the changes in foreign currency exchange rates.

Many of the key elements of our current transformation are now in place, and the pace of our transformation is accelerating.

This transformation is designed to bring us back to historical financial performance in the second half of next fiscal year by implementing pricing, packaging and distribution changes that are better aligned with changes in the market and improving the productivity of our sales teams.

I am pleased to report that we're making solid progress on building the foundation to get us back to performance in the second half of the fiscal year.

For example, the initial market response to our standalone virtualization solutions set, which includes VM backup recovery and cloud management solutions exceeded both revenue and new account expectations.

Over 200 accounts purchased this product in the quarter, over half of which were new customers.

These results are encouraging.

We expect to release additional new standalone products in March, which I will address later on in the call.

Let me briefly summarize the Q3 financial results.

Total revenues were $153 million, flat year-over-year and up 1% sequentially.

Software revenue was $71.7 million, down 9% year-over-year and 3% sequentially.

Services revenue was $81.3 million, and grew 10% year-over-year and was down 1% sequentially.

On a sequential constant currency basis, total revenue is $156.9 million.

On a sequential constant currency basis, software revenues is $73.7 million and services revenue is $83.2 million.

On a year-over-year sequential quarterly basis, foreign-currency exchange rates had an adverse impact on total revenue of $4.9 million and $3.9 million respectively.

And from an earnings perspective, non-GAAP operating income or EBIT was $25.3 million down 40% year-over-year and 3% sequentially.

Non-GAAP EBIT margins were 16.5%.

Diluted earnings-per-share were $0.34.

On a year-over-year constant currency basis, EPS would have been $0.36.

We also purchased $50 million of our stock, which brings our fiscal year to date stock repurchases to $155.1 million.

We have an additional $100 million available under this program, which currently runs through March 2016.

We will remain opportunistic with share repurchases.

We generated approximately $20 million of cash flow from operations during Q3 and in the quarter.

With approximately $365 million of cash and short-term investments and no debt.

We continue to have outstanding industry analyst recognition.

In November 2014, Gartner positioned CommVault as a leader in its magic quadrant for enterprise information archiving for the second year in a row.

In addition, Gartner's critical capabilities report enterprise information archiving, CommVault outranked many of our traditional competitors in almost every category.

This compliments our rank in the leader's quadrant of Gartner enterprise backup software, and in it created appliance magic quadrant for the last [four] years in a row.

Our products continue to lead the industry in innovation and customer value.

I will now address our outlook.

We believe revenue will be up sequentially in Q4 2015, but we remain cautious of current FX challenges.

Our large deal pipeline going into Q4 has significantly increased, and there is potential to have revenue contributions from our new standalone products.

The areas of focus going into Q4 include accelerating the pace of our product transformation, packaging and new pricing models, and continuing the performance improvements in the Americas region.

In addition, we will be monitoring the impact of foreign exchange.

Let me talk about our FY16 outlook.

As we have discussed, our objectives to return to historical revenue growth rates and seller earnings growth in the second half of FY16.

The elements are now starting to come together for us to meet this target.

The team is confident, highly energized, and committed to achieving its goal.

Our business fundamentals are solid.

We have a significant and expanding market opportunity, and a leading technical foundation for both the short and long term.

We are making very rapid progress in making sure we deliver industry-leading standalone products for the key segments in the market, in conjunction with improved go-to-market and channel initiatives.

We have a strong foundation for growth already established in EMEA, and with our cloud services group.

We are making good progress in improving the performance in the Americas, although we still have some work to do.

In summary, our transformation is now in full swing.

Short and long-term game plans have been developed, and are being implemented to bring the Company back to strong revenue and earnings growth.

Enhanced business unit structures, and focus capabilities are in place.

Our market opportunity is large and increasing.

We have the best core fundamental technology in the market.

And we are rapidly leveraging that foundation to develop market selected best-in-class standalone point products and appliances, as well as strengthening our position in large enterprises.

We are focusing on dramatically improving our market led demand generation, channel leverage and enterprise go-to-market strategies.

Our standalone solutions, especially the VM protection and cloud management solutions, have gained good initial market traction.

On top of that, our next-generation open platform goes into beta in the near term.

I will provide more details on our transformation after Brian Carolan's financial overview.

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 third quarter of FY15.

Total revenues for the quarter were $153 million, representing flat year-over-year growth and an increase of 1% sequentially.

For the quarter, we reported software revenue of $71.7 million, which was down by 9% over the prior-year period and up 3% sequentially.

During the quarter, foreign currency movements had an adverse impact on reported revenues.

On a constant currency basis, total revenues were up 3% year-over-year and 4% sequentially.

And software revenues were down 6% year-over-year, and up 6% sequentially.

On a year-over-year constant currency basis, foreign currency rates negatively impacted software revenue by $2.7 million and services revenue by $2.2 million, for a total of $4.9 million.

On a sequential constant currency basis, FX rates negatively impacted software revenues by $2 million and services revenue by approximately $1.9 million, for a total of $3.9 million.

For the quarter, our US operations generated 55% of total revenues, resulting in a 1% year-over-year increase.

While revenue from international operations generated the balance, resulting in a 1% year-over-year decrease.

On a year-over-year constant currency basis, international revenues were up 6% year-over-year.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, decreased by 24% over the prior-year period and 6% sequentially.

Our average enterprise deal size was approximately $248,000 during the current quarter, compared to $284,000 in the prior-year period and $281,000 in the prior quarter.

Software revenue from non-enterprise deals increased 13% over the prior-year period and 15% sequentially.

As noted on our prior earnings call, we continue to focus on expanding our mid market distribution channel.

For the quarter, software revenues derived from direct distribution increased 11% over the prior-year period, and represented 18% of software revenue.

Our indirect revenue represented the balance, and decreased 13% over the prior-year period.

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

During Q3, our software revenue continues to be driven by a strong demand for data protection for virtualized environments.

Which include our VM protection and cloud management solutions, source side deduplication, and snap-based modern data protection solutions.

As Bob indicated, our VM protection and cloud management solutions had great adoption.

Which was faster than we expected, and with good attach rates to our other products.

These results demonstrate that when we provide alternative solutions sets that include point solutions, it becomes easier for customers to purchase and for partners to sell our products.

The revenue mix for the quarter was 47% software and 53% services.

As a reminder, services revenue was 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 Q3 was $81.3 million, an increase of 10% year-over-year and down 1% sequentially.

It should be noted that our near term services revenue growth rates will likely be suppressed by lower software growth in recent quarters and FX, assuming exchange rates as of today continue throughout the remainder of the fiscal year and into to FY16.

We added approximately 400 new customers in the quarter.

Our historical customer count is approximately 21,000 customers.

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

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.

Some of these strategic initiatives we are working on will strengthen these relationships, and we expect that these distribution partners will play an important role in our transformation.

During the quarter, revenues transacted through Dell were down 65% year-over-year.

We continued to make progress in replacing this business with other strategic partnerships and channel partners.

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

For the quarter, revenue transacted through Arrow was approximately 36% of total revenue, growing 20% year-over-year and 3% sequentially.

Hitachi Data Systems, or HDS, also continues to be a key partner for CommVault.

For the quarter, revenue transacted through HDS was approximately 9% of total revenue.

We also had solid year-over-year growth in revenues from our NetApp partnership.

Let me provide you an update on our new pricing models.

Our software licenses typically provide for a perpetual right to use our software, and are typically sold on a capacity basis, on a per copy basis, and to a much lesser extent, on a subscription or term basis.

During the quarter ended December 31, 2014, approximately 79% of software license revenue was sold on a capacity basis.

Capacity-based software licenses provide our customers with licenses to specified software products based on the defined level of terabytes of data under management.

We anticipate that capacity-based licenses will continue to account for the majority of our software license revenue for the foreseeable future.

As we previously noted, we recently hired a new pricing leader as well as introduced a new pricing structure.

During the past couple of quarters, we introduced several new innovative pricing models which match the way our customers want to buy, and also help our Partners to sell our products.

With the introduction of our new solution sets in the Spring, there will be simplified packaging and pricing models that makes it even easier for customers to acquire our solutions that solve immediate specific issues.

Some of these new products will be sold with term or subscription-based pricing models.

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

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

Gross margins were 87.5% for the quarter.

Total operating expenses were $106.5 million for the quarter, up approximately 17% year-over-year and 3% sequentially.

Sales and marketing expenses as a percentage of total revenues increased to 51% in the current quarter, which was up from 44% in the prior-year period.

Non-GAAP operating margins were 16.5% for the quarter, resulting in operating income or EBIT of $25.3 million.

On a year-over-year basis, Q3 EBIT decreased by 40%.

Non-GAAP net income for the quarter was $15.9 million, and EPS was $0.34 per share based on a diluted weighted average share count of approximately 47 million shares.

EPS was higher by $0.02 on both a sequential and year-over-year constant currency basis.

Interest income, net of interest expense on the revolving credit facility, was nominal in the quarter.

While there have been no borrowings on our credit facility, we do incur interest expense related to the commitment fee.

We anticipate that we will have no net interest income for the remainder of FY15, and net interest income before any potential borrowings will be minimal if any for FY16.

As Bob noted earlier, our objective is to significantly improve revenue and earnings growth in the second half of FY16.

This will require a sharp focus on implementing plans that have the highest revenue growth payback, increased productivity by better utilization of existing resources, and slowing down the rate of operating expense increases.

I would now like to spend a few minutes discussing our operating expense investments and EBIT margins.

We continued to have declining operating margins in Q3, mainly due to investments we made in the first half of FY15 and the impact of foreign exchange rates.

While our rate of hiring has slowed, we will continue to make prudent investments tied to achieving our second half of FY16 revenue and earnings growth objectives.

We added 51 net employees in fiscal Q3, down from 122 in Q2, and ended the quarter with 2,246 employees.

Year to date, we have made progress in hiring quota carrying sales teams globally and will continue to do so in Q4 FY15.

Our primary goal is to improve the productivity of our existing resources.

We are focused on sales employee enablement, retention, and redeployment in order to make sure we are ramping our headcount resources effectively and aligning them with high-impact priorities.

We still believe that it will take a few quarters to put the Company back on a growth trajectory.

We anticipate Q4 2015 revenues to be up sequentially.

Our internal objective is to return to our historic revenue growth rates within the second half of FY16.

Given the significant FX currency headwind as well as investments for FY16 growth, we expect FY15 operating margins to be down by approximately 825 to 875 basis points on a year-over-year basis.

Which would indicate an annual operating margin range of approximately 17.2% to 17.7%.

The negative impact of foreign currency was the most significant component of this change from last quarter's earnings call.

Our internal objective is for flat to slightly improved operating margins for FY16.

We expect margins to be more significantly impacted by FX headwinds in the first half of FY16, but improve sequentially as the year progresses.

We will provide more details on the outlook for FY16 on our next earnings call.

Let me now comment on tax rate and share count.

We will continue to use a pro forma tax rate of 37% for the remainder of FY15 and FY16.

Our GAAP tax rate for Q3 FY15 was 37%, and we expect our full-year FY15 cash tax rate to be in the range of 27% to 30%.

This is a reduction from the prior estimate of approximately 32% as a result of the favorable impact from the US federal tax legislation which was passed in December.

We continue to expect our cash tax rate to be lower than our GAAP tax rate in FY16.

For FY15, we anticipate that our diluted weighted average share count will be approximately 47 million to 47.5 million shares.

For FY16, we anticipate that our diluted average weighted share count will be approximately 48 million to 49 million shares.

Please note that certain senior executives and Board members have approximately 514,000 outstanding stock options that expire in the next 12 months.

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

Now moving on to our balance sheet and cash flows.

As of December 31st, our cash and short-term investment's balance was approximately $365 million, down 27% year-over-year.

Primarily 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 approximately $19 million.

Which is down 34% year-over-year, and down 39% sequentially.

As of December 31, 2014, our deferred revenue balance was approximately $222.4 million.

Which is a year-over-year increase of $29.5 million or 15% over the prior-year period, and up $3.6 million or 2% sequentially.

On a constant currency basis, the year-over-year growth of deferred revenue was 20% and the sequential growth was 4%.

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

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

For the quarter, our days sales outstanding, or DSO, was 65 days, which is up from 62 days in Q2 FY15 and up from 58 days in the prior-year quarter.

The change is due to linearity within the quarter.

We expended approximately $14.9 million on construction costs for our new campus headquarters during the third fiscal quarter.

Although the vast majority of spending on the new corporate headquarters is complete, we expect approximately $9 million of additional related expenditures between Q4 2015 and Q1 2016.

The total cost of the new headquarters is expected to be approximately $134 million, which compares favorably to the prior estimate of $135 million.

Our FY15 third-quarter GAAP results include $4.1 million of non-routine expenses related to the move to our new campus headquarters.

These non-routine expenses consist of a $3.1 million lease termination charge associated with the previous leased headquarters location, $600,000 of accelerated depreciation on assets associated with the previous headquarters, and $500,000 of moving and related costs.

As noted during our second-quarter earnings call, these expenses have been excluded from non-GAAP results.

As a reminder, our annualized cost of the new headquarters which we own outright will be approximately $8.5 million.

Of which, $5 million will be reflected as depreciation expense, with the remainder being operating expense.

That concludes the financial highlights.

I will now turn the call back over to Bob.

Bob?

Thank you, Brian.

As mentioned during last quarter's earnings call, we are making progress on our plans to return to historical growth rates.

We have the markets, the products, and the distribution, and the financial wherewithal to significantly improve financial performance.

Our vision and strategy are clearly defined, and we have added critical new resources and have made the structural changes to the organizations that better execute on that strategy.

In order to achieve our FY16 financial objectives, we are focused on the core issues which negatively impacted revenue and earnings growth.

Which were, the shift in both the market and competition, which required significant changes to the pricing, packaging, messaging, as well as go-to-market strategies of our products.

And secondly, the need to improve the productivity of the Americas' sales organization.

As I mentioned last quarter, our product initiatives are now being driven by our business unit structure which is providing much more comprehensive leadership to our product initiative.

As Bryan discussed, our new pricing structure is enabling us to more effectively address customer buying preferences, as well as the sales and distribution needs of comparable partners.

I will now provide additional details against our Q3 2015 products and sales initiatives, and an update on our Q4 2015 product initiatives and the progress we have made on our next generation platform.

In regard to progress on our Q3 product initiatives, the first one is virtualization and recovery.

We launched best-in-class data management solutions for virtualized environments, including data management, data protection, and archiving for both on premise and in the cloud.

The virtualization products warrants included best-in-class capabilities for deduplication, security, and native copy capabilities that allow users to directly recover native production copies from our content store.

The initial market reception for these virtualization standalone solutions was encouraging.

As I mentioned earlier, the Q3 results included over 200 deals booked for the quarter, and over 100 of those were new accounts.

These results came from all worldwide regions.

Additionally, these initial sales also demonstrated a very strong attach rate for other CommVault products.

Secondly, new CommVault based NetApp appliances.

After our initial beta period, we formally launched our integrated appliance that delivers enterprise class performance, deduplication, native copy capability, advanced secure access, automated provisioning, and management with simplified cost-effective scalability.

And includes the full power of the Simpara enterprise data protection solution.

Our new appliance solves three key challenges that customers had persistently faced using the prior-generation appliances that are built on legacy architectures.

And they are scalability, manageability, and flexibility.

Our solution offers simplified scaling using our resource automation features, so that users can expand in a cost-effective way to meet the persistent need for increased capacity.

It offers centralized management, reporting, and software deployment, and offers multi-clustering nodes and load balancing for flexibility.

It is important to note that the total cost of ownership of our native copy solutions is significantly less than our major competition in the market, and includes much more functionality.

This relates to our enhanced ability to offer direct native production data access from our highly efficient content store, Managed Data Assets.

As compared to other solutions in the market, our solutions offer the same outcome with one-third the storage needs, which is a major competitive differentiator.

Thirdly, I want to talk about information, retention, and compliance.

There is an increasing need to manage data from SaaS-based enterprise applications office 365 email.

In these cases, cloud-based SaaS applications are for protection and availability as part of the service, but retention, compliance, and the discovery challenges persist.

We now offer the ability to archive data from cloud-based SaaS applications focused on office 365 email.

We are increasingly seeing more adoption of archiving from the cloud.

In fact, CommVault uses its functionality internally for all its cloud-based SaaS applications for data protection, security, long-term retention, and business analytics.

Lastly, I want to talk about the turnaround plan for the Americas.

The initial focus on the turnaround plan for the Americas has been to improve sales productivity by realigning territories to get more effective sales capacity with existing sales resources.

Redeploying existing sales overlay resources to better align with our new product initiatives, and adding targeted resources to support our high velocity channel partners as we roll out our new standalone products.

Our new standalone products and high velocity channel programs will be of significant benefit to the Americas team, both in the enterprise and the mid market.

We have made modest gains on retention, and are making good progress in recruiting a new Americas' sales VP.

Now let me talk about additional standalone solutions that we will release later this quarter.

We are launching a new round of standalone solutions, as well as expanding the capabilities of our current products in the marketplace.

Most of these solutions can be deployed on premise, in the cloud, or as a service from the cloud.

Let me share with you a few highlights.

We are introducing a cloud gateway.

This product allows customers to efficiently archive or replicate data, including deduplication and secure encryption to all major cloud storage locations.

Secondly, we are introducing a disaster recovery manager, which will run in both Microsoft Azure and Amazon web services cloud environments.

This solution automates the disaster recovery process by utilizing our unique orchestration and cloud positioning capabilities.

Additionally, our new automated DR solution meets customer's new requirements to manage data between cloud vendors and locations, while offering global management and reporting capabilities.

Thirdly, we are offering a new cloud dev ops service that targets the top use case in the public cloud compute space.

The solution will feature self-service automation for developers to create and use VM workloads in the cloud for development and testing purposes.

Our unique log analytics, workflow and operations management capabilities are embedded in the solution set.

Our own development teams use this solution to speed up development time and drive down cost.

And lastly, I want to talk about our upgrades to our mobile solution.

Our upgraded mobile solution will also include new functionality, which we call edge drive.

The solution has the capability to offer real-time, secure, cloud sharing and collaboration into the product content store, eliminating the backup process entirely.

Enterprise users can now implement an enterprise scale, highly secure system to manage their mobile workforce that eliminates the risk associated with third-party providers.

And seamlessly integrates with CommVault's global data and information management capabilities.

It also includes an embedded secure access layer to protect data and email from outside intrusion.

Our mobile solution can be uniquely combined with added functionality for best-in-class archiving for compliance and legal use cases.

Over the years, we have built significant security functionality that prevents unwarranted access to data.

This is key unique functionality that is now being recognized by customers as a key asset to help prevent privacy breaches that we all have been reading about in the news.

We have also recently announced new data encryption and secure data white features in our mobile solution.

Which can reduce the risk of unauthorized access or data exposure with lost or stolen devices.

We believe that the current quarter release will be truly revolutionary, and that it contains functionality that is unmatched in the marketplace.

Only further extending our technical differentiation from our competitors.

It also expands CommVault's available market, provides significant additional channel leverage, and increases our value and relevancy for our large enterprise accounts.

Additionally, we have a strong pipeline of additional new standalone products which will be released in the Summer.

I want to talk about our next version of our software platform.

The next version of CommVault's software which will be released in FY16 is a major upgrade of the platform that will create an open platform.

Which customers are demanding, as they shift to building IT infrastructures on open components that they perceive will get them out from under vendor lock-in.

By open we mean, on will be able to access and read data that we store under more sophisticated security functionality and there will be operational APIs through the stack.

In the next version, we will also be making substantial changes to how we index and transport data.

These enhancements will have significant cost performance, scale, access, recovery and security advantages.

Our next generation platform goes into beta in the near term.

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, our transformation process is now in full swing and showing improved results.

Short and long-term game plans have been developed and being implemented to bring the Company back to strong revenue and earnings growth.

Our market opportunity is large and increasing.

We of the best core fundamental technology in the market, and we have a strong foundation.

And we are rapidly realizing that foundation to develop and market selected best-in-class point products and appliances, as well as strengthen our position in large enterprises.

We are focusing on dramatically improving our marketing led demand generation, channel leverage, and enterprise go-to-market strategies.

Our vision and strategy are clearly defined, and we have made structured changes across the Company to better execute on that strategy.

The initial response from the market on our virtualization products is encouraging.

We have a substantial number of new products being released this quarter, along with improved go-to-market capabilities.

We believe the actions already taken and the plans we have developed give us the potential to significantly improve our revenue and earnings performance in the second half of FY16.

Our team is confident, highly energized, and committed to success.

I will now turn the call over to Michael.

Thanks, Bob.

Operator, can we please open the call for questions?

(Operator Instructions)

Joel Fishbein, BMO Capital Markets.

Good morning, guys.

I have one quick question and a clarification.

I'll start with the clarification.

Brian, you talked about the FX impact to margins.

And I think I missed it, but clearly, there was a significant amount of headwind.

Can you just talk -- just give us those numbers again real quick?

Yes.

So on margins, Joel, for the quarter, we were affected by $0.02 on the bottom, $0.02 negative impact on EPS.

Okay.

It would have been $0.36.

And then, Bob, you talked a little bit about the pipeline improving.

Can you just go into some -- a little bit of color there?

Is it the high-end deals, is it the mid market?

Is it both?

And then the other question I had there is on Westcon in terms of distribution, how they're doing.

The comment specifically referred to an improvement in our big deal pipeline in Q4 versus Q3.

There is potential for some upside in the mid market tied to our [Sentinel] and solutions sets.

And we didn't see -- the last quarter, Joel, we didn't see those products turn up in the pipeline, because they all spun up and closed within the quarter which is quite encouraging.

So, we'll see how we do with that as we go into -- as we progress through Q4.

I will mention that certain of our high velocity partners have launched significant programs tied to those -- and these are new programs, tied to those standalone products in the current quarter.

Okay.

So the high-end pipeline has improved versus Q3 from that standpoint.

And I am assuming it's improved throughout FY15 as well.

Correct?

Let's see if I understand the question, Joel.

So, this is our last quarter of the fiscal year.

So hopefully, we close the year -- but as Bryan mentioned, we still have FX headwinds.

But we expect this current quarter to be up sequentially over Q3.

Jason Ader, William Blair.

Thank you.

Can you hear me okay, guys?

Yes, Jason.

All right.

Sorry, getting into work today was not easy.

So, Bob, CommVault's single integrated solution with capacity based pricing has been a key part of your marketing message and competitive advantage over the last five years.

So two questions on that.

How much of the market is moving away from this toward standalone offerings?

Is this just the mid market, or is it enterprise as well?

And then secondly, how does this change your ability to really differentiate your products and your marketing message as well?

Well, by the way, I think your report was quite accurate.

I think you did a good job on that.

Number one, there is still a big strategic need in large enterprises for the platform.

And we're still driving a lot of revenue from that, and we still see a big need in enterprises for that platform.

There is no question though that point products are gaining traction, both in the mid market and the enterprise.

But some of that is because customers don't know that we have standalone product that can solve these problems.

So by expanding our platform and adding a series of best-in-class products both for the enterprise and mid market, we have the best of both worlds.

And users don't -- when you get to a CIO, they don't want to be dealing with managing 15 or 20 standalones.

If they have the opportunity to bring all of these under one single management schema that is a lot more efficient, both to manage.

It's much more efficient to support, and it's certainly much more cost-effective overall, particularly if the solutions are consistently best-in-class.

So we feel quite good about our current position.

One, in expanding our platform, and two, providing the standalone products which can help our positioning enterprise.

Not only from the mid market channel, but provide the ability for our enterprise sales force to establish more easily establish position in large enterprise accounts.

So, we're feeling really good about the strategy, Jason.

So it's not that the -- in other words, I think your report was accurate.

But it's not that enterprise customers are more comfortable with standalone products, the issue was a number of new competitors entered the market with some pretty good standalone solutions.

And if there were no alternatives to that, they were willing to deploy them.

But now we're giving these, out customers, the best of both worlds.

Ability to deploy standalone in certain situations, or deploy a unified platform.

And that is critically important, by the way, when you start getting into things like compliance and legal and analytics.

Because now you've got the ability to have all your data under one virtualized management schema for those different use cases.

Bob, what inning do you think we're in in terms of this transformation in the Company towards, as you called it, best of both worlds?

Where we have the ability to sell the standalone products and best-in-class standalone, as well as the [private] full platform?

First inning, is the way I would describe it.

But we're off the ground.

And the point I was making, and we're accelerating very quickly.

So all the distribution pieces are in place, the products are in place, we're coming out with a lot more products.

So we only see acceleration from here.

But last quarter was the first real quarter of our push into the market with these standalones.

So I would call it inning number one.

But we're really positioned to accelerate from here.

I don't know, Al, do you want to --?

I would say probably inning two or in that range, Jason.

But I'd also say the starting pitching is in place.

We haven't brought in relievers yet.

And back to Bob's point on point level versus integrated suite.

A couple facts that remain there.

One is, there's still a high degree of synergy between our point level products.

And two, the platform being more operational and orchestration kind of capabilities is still a huge value add.

So it's just now we just give them more options between different enterprise suites, if you will, and we'll continue to do that, by the way, going forward.

It won't just be, you can have a point level product or the whole enchilada.

It will be PaaS and different combinations of point levels going up.

So Al was correct on all of that.

And an additional functionality is coming into play, and it's becoming much more important and that's security.

I'm not talking about security from the firewall.

We're talking about when somebody gets into the firewall, using our substantial capabilities to prevent access from data.

You've read about breaches here, and we've technology to solve that problem.

And some of our key customers are recognizing this, and wanting us to make sure that those processes, the secure processes, are deployed across all the different data use cases.

And that's another reason why point products represent a problem.

And it's a big problem that we can solve for [G] enterprise accounts.

Aaron Rakers, Stifel Nicolaus.

Yes, thanks for taking the questions.

I've got two as well.

Kind of building on Jason's question and the commentary there.

Can you talk a little bit about your ability to, I think you said, modestly or mitigate some of the term within the sales force, where you stand on hiring right now?

And I guess same question, what inning are you in terms of realigning or addressing the change of go-to-market or product portfolio with your sales force organization?

And again, I do have a follow-up.

I'm going to talk, and I'll let Al jump in.

I think it starts with having the right products that are price positioned and packaged for the market to make it easy for your sales force to sell, and then training them and enabling them to make those sales.

So by expanding our product portfolio, that's number one.

Two, if you do that effectively, you're now making your channel more capable and that provides more leverage.

Thirdly, when Ron Miller took over the Americas sales force, he was looking at ways to make the sales force a lot more productive by just doing a lot better job of realigning sales territories.

And then taking existing resources, overlay resources and other resources, and make sure we're getting the most productive value from them.

So they are in a sense generating revenue.

So there's not one answer to that.

But we've made progress, and I'd say significant progress, across all those dimensions over the last quarter.

As a result, we made progress on retention, not where we need to be, but we clearly made progress there.

If you look at the numbers, we have a lot of sales capacity in place.

So now we're adding incremental capacity, but that capacity issue isn't as big a problem as it was going back a few quarters ago.

Because had added a lot of resources.

So our main focus now is productivity of the resources we have, and driving additional revenue.

Which if we're successful doing that, drives top line growth and drops right to the bottom.

So that's what we're doing.

It's a multi-dimensional effort, and we've made significant progress on almost every dimension of that issue that I just discussed.

Okay.

And then as a follow-up, adjacent to the point product solution discussion, can you talk a little bit about the cloud?

Earlier this week, we saw some very continued rapid growth out of Microsoft and even talking about moving workloads more aggressively to the cloud, particularly backup recovery, and so on and so forth.

Can you talk about your relationship with Microsoft, and how that cloud business or CSP business has evolved?

Well just in general, we have an extremely close relationship with Microsoft.

For example, internal to Microsoft, their internal operations for all practical purposes run on CommVault.

And the reason that CommVault was selected there was to enable Microsoft internally to move as much of their data as they can to their cloud.

And I'll let Al expand on that, because we're doing a lot in that area, obviously, and it's underneath the covers here.

It's a primary of growth for us.

Yes, and on that point, I guess I'd just point you to the products that Bob highlighted that we're announcing and launching this quarter, particularly the cloud solution, solution sets.

And primarily, those are structured around the areas that we're seeing a lot of interest in utilizing cloud compute, which is disaster recovery, dev test, archive, and even some backup.

And of course file share for mobile environments.

You take those use cases and that's attracting a lion's share of not only interest, but cloud utilizations as we see it with the big guys.

So obviously we're addressing it, putting solutions together.

They can be standalone solution sets.

They can also work within our suite of products.

And as Bob said, some of those are targeted a little bit more to our favorite partners out there than other areas.

So in a broader context, Aaron, the value prop is shifting along a whole series of dimensions.

It's shifting from the old data protection or backup to advanced recovery models.

That's a lot more sophisticated than some of the new startups that are making a lot of noise in the market.

Of course underneath that recovery model, you still need two things, sophisticated data protection and security.

And the ability to seamlessly move data between on premise, traditional private cloud, public cloud, and move data between different cloud providers.

So the value of our software is clearly shifting.

And we're making those changes to the platform, as well as, as Al described, to the point solutions we're bringing to market.

In addition, we have discussed the next turn of our platform with Microsoft, and have gotten a very strong response from them in terms of the value of that platform to them.

And in managing data on premise mobile in the cloud, and what we can do to orchestrate all of that.

They're real excited about that.

So, we consider Microsoft a key partner.

And there's just a massive amount of activity going on between the two companies, and they're a good partner to work with.

Brent Bracelin, Pacific Crest Securities.

Thanks.

Two questions for me, one for Bob, one from Brian.

I will start with you, Bob.

Obviously, the last year has been tough as we think about the business here.

License growth is at the lowest in five years, [obmartins] is the lowest in four years.

But it does sound like business fundamentals are stabilizing.

You're optimistic about next year.

My question for you is with $365 million in cash and investments north of $100 million of cash flow, why would you not get more aggressive with the buyback?

And would you consider taking on debt to get more aggressive, if you feel confident in the future of this business?

I'm not going to answer that question.

I tried.

Brian, will ask you this question.

Software pricing, clearly, your rolling out several new standalone software solution sets.

You have a new version of software coming later this year, the core product.

Have you evaluated the potential to make a wholesale shift to subscription model, or are you firmly entrenched in the concept that you're going to have a multi-pronged approach to selling your software?

Thanks, Brent.

Yes we have considered that, we've been running internal models.

We're looking at those scenarios.

We plan on making our move gradually at this point in time.

Our objective is to get back to strong revenue and earnings growth rates, while transitioning gradually to more term based and subscription-based pricing.

Just one point on that is a lot of these new pricing options that we're coming out with, especially on our virtualization, our VM products, we're actually seeing a good pull through for other products as well.

So there's not a tremendous amount of ASP deterioration on that, actually it helps to drive some other products as well.

So we're pleased with that result.

Let me be clear.

The strategy here is obviously we want to sustain long-term growth for the Company, and be aligned with the way the market is acquiring products.

On the other hand, we have a very clear focus on shareholder value, and we think we can manage the move to term or subscription-based pricing while at the same time significantly improving our revenue and earnings growth rates.

Abhey Lamba, Mizuho Securities.

Thank you.

Bob, as you look at the (inaudible) in the second half of FY16 or beyond, as you get back to the historical growth rates, which products will be the major drivers of growth?

And how would that be different from what we saw a year ago when you had similar growth rates?

I'm going to summarize it up top, and I'll have Al discuss it because we've got all of these models and they're quite granular.

But the value proposition as we talked about in the enterprise shifts from a call it a backup model, to certainly to more recovery archiving, legal compliance, analytics model.

And the management and orchestration of processes across the enterprise.

And then these point products, each one of them has significant potential, whether it's mobile or appliances or our virtualized VM and our cloud orchestration solutions.

So, the growth going forward is going to look a lot different than the growth drivers going forward are going to look a lot different than our historical growth drivers.

Yes, and I think that's right on the money, particularly the recovery to the archive or what we call internally the active archive use cases.

And by the way, as Bob was referring to security positioning and feature sets and potentially products there, we believe strongly that being able to manage data knowing the content has lots of implications, the least of which would be security.

So, we think that's all extremely important here.

And again, as we go along, we also we won't abandon our core product sets.

We still see a great deal of need, demand, particularly for large-scale operations of coordinated protection products.

We are introducing our appliances, both the highly integrated one and maybe at some point a more software defined one, that we see a lot of growth out of that core data protection sale.

Got it.

In that light, your earning growth is expected to get back to the historical rates.

But margins are going to be significantly [below].

Do you see a path to historical margins, or are we at a new level and we should build it off of the current level?

No, it's going to take us a couple of quarters.

But we are clearly, all our plans to be clear, actually have profitability accelerating a lot faster than the top line in the second half.

And you do that with a combination of improved revenue growth and managing your OpEx to drive margin leverage.

Look, we've done this before in the past.

But clearly, it's pretty -- the Company got into this situation with shift in the market.

And as Brian mentioned, we got out of Dell, Dell was down 65% and we had to back fill that well and solve the Americas' problem.

Those are the issues we've been focusing at.

And as I mentioned earlier, we're making really good solid progress against all three of those issues in terms of swinging the Company back.

But to your point earlier, it's going to look different in terms of some of the major growth drivers in addition to, as Al mentioned, our core.

Michael Turits, Raymond James.

Hey, guys, good afternoon or good morning.

And congrats on a solid quarter in line with where those people were looking.

This is a question in terms of the mechanics on the margin guide down.

Now you're expecting margins 150 bips or so lower the previous FY15.

The revenue came in in line this quarter with where we were.

So I was wondering if you were expecting a significant -- revenue to come in significantly lower than where the street is for next quarter?

Because otherwise, I was wondering really what the big impact to margins would be?

Brian will go through it, but it was FX was the major change in the margin.

Absolutely, Michael.

FX had the most significant impact on the change in our margin guide for FY15.

Right.

So, does that mean that you're probably not comfortable with the revenue consensus for the next quarter?

Or another way of putting it is, what do you think the actual FX impact will be on that next quarter?

It's in the range where consensus is.

We're not --

We still expect to be up sequentially, but remain cautious of current FX conditions.

What Brian is saying is, at these current levels of FX, that consensus is reasonable.

But if we got hit with another big currency drop, then we'll have to deal with it.

Andrew Nowinski, Piper Jaffray.

Good morning, guys.

Just a question, if you look back at your historical software launches with Simpana 8, 9, 10 and then your software license growth had bottomed out in the quarter prior to launching the new version.

Perhaps because customers are waiting for a new version, do you think the pending launch of R3 here may have impacted software revenue this quarter.

And would you expect software revenue growth to follow historical trends and perhaps rebound when the new platform is launched this March quarter?

The answer is a launch on this product has a zero impact on revenue growth.

The only impact from our new platform launch this quarter, it's a series of point level, significant level products that will add to top line revenue growth in FY16.

And then we're launching them late this quarter, so there's going to be no impact from those products in Q4.

Those products will start impacting Q1, Q2, next fiscal year.

All right.

And then just a quick follow-up.

I know you've been reluctant to talk about the NetApp partnership, but you did make a fairly major announcement this quarter with them.

Leveraging your E series.

And other vendors like Symantec have had success with this appliance-based model.

So since you're only recognizing software revenue from that partnership, is there a chance that could bring your software revenue growth back to historic levels sooner than expected if it ramps up?

I would put it this way.

There is certainly significant potential for the appliances to get back to historical growth rates.

One is, large adoption by the appliance in the market.

Our appliance is just not an appliance, it is a best-in-class product.

Utilizing an HP server and certainly the NetApp storage, the appliance was engineered by us.

And as I mentioned earlier, from the standpoint of cost manageability, flexibility, functionality it is a stand out product.

So we expect to have good success with that product in the market.

And this is the first of a series, as Al mentioned.

There will be additional appliances, additional functionality.

We're launching a gateway this quarter.

Some of these appliances will go virtual downstream, so they can be deployed in the cloud still.

We have adopted that as a key part of our product strategy going forward.

Brad Zelnick, Jefferies.

Great.

Thank you very much for taking my question.

I just want to go back to the comments made in the prepared remarks, and another question that was asked about the shift to subscription and term-based licensing.

And I think in the prepared remarks, you'd said it could impact future revenues.

And I think we understand that this is what the market is looking for, and at the same time, you're balancing this with a focus on traditional fundamentals like revenue and cash flow growth.

But how do you think about the risk that customers move these in faster in this direction and how that might impact your plans to return to historical growth in the second half of 2016?

That's a real good question.

We've put a lot of effort on that.

And that is the balancing act.

In terms of how we price package, we think we can manage it.

If we do a really good job of on the fundamentals on the call them all perpetual models, if it accelerates [dressive], that could be more additive than causing a big problem with earnings growth.

So we clearly picked a strategy to accomplish both.

Underneath, by the way, our subscription revenue is grown pretty substantially underneath the numbers that you see.

It's growing at about a call it a 50% plus growth rate underneath the numbers you see here.

So we think we can manage it, but at the end of the day, that's going to be a big plus for us, not a minus.

Because as it's built, it provides, in addition to our capacity-based license, we're starting to build a pretty good annuity just on either subscription or term-based pricing.

So it's a big asset we have, and we've just got to manage it.

But you're correct.

Could you see a, as Bryan mentioned, a dislocation in the quarter?

Here or there we get some major deal that causes a blip.

The answer is, yes.

But in the aggregate, I think this is going to be a net plus as we manage it over the next few years.

Thanks for that color, Bob.

And if I can just ask one very quick follow-up, and not to be nit picky.

But I think last quarter, you'd said that you'd expected the next generation version of your platform to be in beta in Q3.

Now it looks like that's imminently expected here in Q4.

Just wondering if anything -- because I know your execution capability when it comes to product development is solid.

But just has anything changed in terms of scope or new features that you might have added in?

Thanks.

No, I don't know if there was an interpretation there.

Or --

We're actually ahead of schedule.

The scope has increased, and we're actually ahead of schedule.

In fact, the edge drive that I mentioned earlier, that has the new code in it to enable us to manage data in real-time.

So we're actually pulling some of the functionality of that new platform into some of these new standalone point solutions as we move along over the next several quarters.

So actually, that whole new platform project is going better than expected, and we're feeling really good about it.

It is very significant in terms of the underlying architecture and the changes we're making.

And it all relates to managing data in these different cloud environments.

Ittai Kidron, Oppenheimer.

Thanks, Al.

I just want to begin a little bit into the near term guidance.

You've somewhat endorsed the top line consensus.

But correct me if I'm wrong, on the bottom line, you're actually guiding right now to a very significant shortfall in the March quarter just by the virtue of reconciling it to your annual margin guidance for FY2015.

Are we looking at $0.30 to $0.32 on the March quarter?

Am I getting that right math-wise?

Well, you can work the math.

But I think what Brian was saying is that's all FX related primarily.

It's not entirely, but the vast majority of that is the FX impact.

Okay, well it was a tailwind for many years, so it's now if I guess a headwind for that part of the business.

The second question regarding our enterprise business which continues to deteriorate, actually quite significantly on a year-over-year basis.

Do you think that you've reached a bottom over there?

And when you talk about the pipeline improving in large deals, how long do you think it takes to convert that pipeline into actual revenue?

What would be the timeline you'd expect your enterprise large deal business to actually increase on a sequential basis?

Well I was specifically talking about our large deals pipeline for the March quarter.

So, we're going to hit our numbers.

We're going to convert a good part of that pipeline this quarter.

But that's what I was referring to, is our March quarter large deal pipeline.

We've seen a pretty good improvement in that pipeline.

Srini Nandury, WR Hambrecht.

All right.

Thank you for taking my call.

Bob, Brian, you guys are putting all of these changes in your products, point product, and new sales -- a new way to purchase software.

So how does this change the productivity of the sales force which are coming in?

Clearly, one, if those sales teams are getting a lot more leverage from the channel partners for let's say 30%, 40% of their revenue, it makes it a lot easier for those sales teams to hit their numbers.

Secondly, they have more and better entry points into the enterprise with these point products.

One, they're best-in-class, and if they can compete against other -- as Jason Ader mentioned, and he's correct, other point level competitors in the enterprise.

So it helps the sales team on both counts.

And then if you do a better job of aligning territories and better utilization of resources and overlays, it's going to help these sales teams succeed.

So there's a tremendous benefit, obviously.

As I said earlier, it always starts with if you have the right products and the right pricing package in ways that make it easier for customers to buy.

And that's both your enterprise customers, and it makes it easier for your channel partners to sell them.

We only have eight data points, a pretty good solid data point.

When we did this the initial response was exceptionally good.

Now we have to build on that.

If you put three or four (inaudible) together, and you'll see another product come out, then you're going to see a different Company here.

This just didn't happen.

As I mentioned, we started this in the Summer of 2013.

This just didn't come out.

We just got caught in the middle before we were able to execute on all of this.

Eric Martinuzzi, Lake Street Capital.

I have a question regarding the new end point data protection offering.

I know this is something you guys have talked about ever since Simpana 10 came out.

Just curious to know sizing that market up, is there a TAM edition that this gets you into?

What's the competitive landscape here?

What do you think the adoption is?

Is this a sale to new customer, or is this an add on for an existing?

Could you just go a layer deeper there, please?

Sure, Eric.

Good question.

That's difficult.

Yes, as you get into the file share capabilities of this market, versus just call it traditional recovery, and I don't have the exact numbers in my head.

But it significantly expands your market opportunity.

You do obviously have new competitors, like the Dropbox, Box Net type of offerings out there.

We think we're very well differentiated against those folks.

In terms of your question on how we want to take it to market, we want to actually follow a compliance lead.

Particularly in larger enterprises, where most times as you talk about compliance, and I'm talking about legal and email and those kinds of use cases, most times the compliance side of the equation is fairly vulnerable, especially if you're talking about mobile.

So we're looking to lead with compliance, then bring in archive and mobile capabilities to this marketplace.

And again as you get into then, on the mobile side, back to that, you'll now have recovery.

This is all self service.

You'll have self-service recovery, self-service share, if you will, self-service search and find.

As well as it will now have compliance features that other guys can use in like a legal hold and those kind of scenarios.

And of course overlaying this whole play with mobile here is advanced security across-the-board.

Not only in all of the elements Bob's been talking about, but several layers of encryption.

We think it's a huge differentiator, particularly just the security side of it.

Thank you.

Phil Winslow, Credit Suisse.

Hello, this is Siti Panigrahi for Phil.

Thanks for taking my question.

Bob, just wondering if you could give some color on the competitive landscape, both in the enterprise side from the legacy vendors as well as meat markets from some of these emerging private companies?

Okay.

In the enterprise for these big large enterprise deals, it's our major competitors [DAM], Symantec and EMC.

And just overall, I think our competitive position there is strengthening.

And I think everybody is aware of what's going on with these different competitors.

I think technically, we are accelerating our differentiation relative to all three of those competitors.

And certainly, we've got the sales force in place to do this.

And in addition to that, over the last several years, we've built a really strong professional services capabilities to help our customers really understand their core objectives, use cases.

And enable us to archive -- architect best-in-class solutions for them.

So it is more of a services led strategy, a much more comprehensive consultive type strategy in these big enterprises than it was a several years ago.

And the small competitors don't have those capabilities.

Secondly, in the areas of virtualization, there's been a lot of noise on using production copies for recovery, which is an important functionality for certain, not all, but for use cases.

And you've got to combine that recovery capability or that access, secure access to data, with how do you -- to Al's point, how do you manage retention and archive it for both active near-term and long-term, and you've got to combine all of that.

So both in the enterprise, we strengthened it with the platform itself, with services, and now with these best-in-class point products, both in the virtualization and the recovery space in appliances.

All those standalone products, by the way, helped us obviously, significantly with our channel partners.

Because they do stand out, and we've gotten some really good commitments from some very large channel partners.

And they're in the market starting this quarter.

You'll see some of these partners really spin up a CommVault campaign.

So in summary, our current strategy helps us with our traditional competitors in the enterprise, and significantly strengthens our position in the mid market.

Thanks, Bob.

Ladies and gentlemen, this concludes today's conference.

Thank you for joining.

You may now disconnect.