Commvault Systems Inc (CVLT) 2015 Q4 法說會逐字稿

Welcome to the Q4 2015 CommVault Earnings conference call.

My name is John and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

Now, I will turn the call over to Michael Picariello.

Good morning.

Thanks for dialing in today to our fiscal fourth-quarter 2015 and FY15 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 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 functionality, remain at our sole discretion.

Our earnings 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.

A reconciliation between the non-GAAP and GAAP measures can be found in Table 4, accompanying the press release 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.

Thanks, Mike.

Good morning everyone, and thanks for joining our fiscal fourth quarter and FY15 year-end earnings call.

I want to begin the call by describing the progress on our business transformation, and then I will provide an overview of our Q4 results and the outlook for FY16.

Brian will follow that with a detailed discussion of our financial results, including additional color on our FY16 outlook.

I will then conclude the call with an overview of the industry, our products and technology, and plans to improve sales productivity.

Regarding our business transformation, we have made significant progress towards our business transformation and operational performance objectives.

We've been describing this business transformation, which we call CommVault Next, to you over the past several quarters.

This transformation was in response to significant technological changes in the industry and a more complex competitive landscape.

Importantly, the key foundational elements to reposition and strengthen CommVault's position in the market are now in place.

Over the past quarter we have introduced new leading products, including products that separate our core solutions sets from the platform, as well as new packaging and pricing models.

These introductions were led by our new business unit structure.

In addition, we have significantly enhanced our core data protection platform functionality and pricing, increased distribution leverage by our new and existing distribution partners and channels, added key leaders and new capabilities and critical functions.

We initiated the beta program for our next-generation platform, and reinvigorated our overall marketing approach, which includes implementing new digital and outbound marketing regeneration capabilities that are driving our pipeline, and rebranding the Company, including the introduction of a new brand and logo unveiled yesterday at Microsoft's Ignite Conference, which you can experience first-hand on our website.

These transformation initiatives better align us with the fundamental changes in the market, and are enabling us to improve productivity of our sales teams.

While the progress we have made has definitely improved our confidence and successfully making our transition, we continue to believe it will take us into the second half of FY16, for the key elements of repositioning to have a positive impact of our financial performance.

Turning to the fourth quarter, the good sequential improvement in the Americas was offset by weaker results in EMEA and APAC operations, which are exacerbated by the negative impact of FX.

The strengthening of the US dollar had a significant negative impact on our international results in the quarter, impacting revenues by $4.7 million and operating earnings by $2 million on a sequential constant currency basis.

Total reported revenue was down 1% sequentially, but up 2% on a sequential constant currency basis.

Recorded non-GAAP EPS was $0.27, but was $0.30 on a sequential constant currency basis.

Later on in the call Brian will elaborate on both the constant currency and as-reported results.

This information can also be found our press release.

We generated $36 million of cash flow from operations during Q4 and approximately $124 million for the year.

We finished FY'15 with a strong balance sheet of approximately $388 million of cash and short-term investments and no debt.

Let's turn to our FY16 outlook.

We expect our FY16 growth will be driven by our ability to sell into new and existing key market segments, including large enterprise accounts and the mid-market, continuing accelerating growth in the cloud market, and a targeted focus on the healthcare market.

More specifically, our ability to penetrate more large enterprise and mid-market accounts will be driven by updated and expanded solutions and pricing, increased distribution leverage, improved marketing and lead generation, expand strategic alliances and added enterprise sales capacity.

We have an updated much more focused and competitive product line, as evidenced by market traction with recently induced standalone products, as evidenced by the 500 customers who purchased our new virtualization product, 0.5 of whom are new, continuous strength in our core business of data management, data protection, disaster recovery and archiving, increased fraction in mobile solutions, operations management and intelligence, business analytics tick and healthcare, and our new pricing structure.

This has enabled us to effectively address the customer's buying preferences, as well as the sales and distribution needs of CommVault partners.

We have also developed and are launching a comprehensive services-like consulting approach to the enterprise market.

In addition we have launched a proactive support service utilizing CommVault's embedded predictive analytic capability.

I'll now address our FY16 financial outlook.

We believe the current FY16 Street consensus growth rates for total revenue is reasonable.

For FY16 we believe we can achieve solid double digit software revenue growth in the second half of the year.

We would like you to keep in mind that our fiscal Q1 is historically our most challenging quarter.

And Brian will discuss operating margins later on in the call.

In summary, massive technological shifts in the industry and new competition, combined with our own execution issues have slowed our revenue growth.

The investments we are making to address these challenges and build a strong foundation for the future are negatively impacting near-term earnings.

We have confidence in our transformation, as evident by our early solid customer purchases of our new functionality and solution sets, combined with positive partner response to our new pricing and packaging models.

Short and long-term game plans have been implemented to provide the acquired foundation, to bring the Company back to strong, sustainable revenue and earnings growth.

We remain pleased with our progress and our transformation.

Our team is competent, highly energized and committed to the transformation of CommVault.

I'll now turn the call over to Brian.

Thanks Bob, and good morning everyone.

I will now cover some key financial highlights for both the fourth quarter and full FY15.

The strengthening of the US dollar compared to foreign currencies had a significant impacts on results for the quarter.

On a constant currency basis for the quarter, total revenues were up to 2% sequentially and year over year.

Software revenues up 1% sequentially and down 5% year over year.

From an earnings perspective, on a sequential constant currency basis for the quarter, EBIT margin was 14.4% and EPS was $0.30.

For the full fiscal year on a constant currency basis, total revenues were up 6% year over year, software revenues were down 1% year over year, EBIT margin was 17.8%, and EPS was $1.48.

Now moving onto as-reported revenue results that have not been adjusted for FX movements.

On an as-reported basis, Q4 total revenues were $150.7 million, representing a decrease of 4% over the prior year period and 1% sequentially.

For the full fiscal year, total reported revenues $607.5 million, representing an increase of 4% over FY14.

For the quarter, we reported software revenue of $70.1 million, which was down by 11% from the prior-year period and down 2% sequentially.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, decreased by 12% from the prior year period and was up 8% sequentially.

The number of enterprise deals decreased 13% year over year and increased 8% sequentially.

Our average enterprise deal size was approximately $250,000 during the current quarter, compared to $248,000 in the prior quarter and $245,000 in the prior-year period.

Americas, EMEA and APAC represented 64%, 25%, and 11% of total software revenue respectively for the quarter.

The sequential increase in Americas software revenue was 11%, while EMEA declined 21%, and APAC declined 17%.

On a sequential constant currency basis, EMEA software revenue declined 14%, and APAC software revenue declined 13%.

For the quarter, software revenues derived from indirect distribution channels decreased 9% over the prior-year period, and represented 84% of software revenue.

Our direct software revenue decreased 22% year over year and represented the balance.

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

The revenue mix for the quarter was split 46% software and 54% services.

Fiscal year revenues were split 47% software and 53% services.

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

Services revenue for Q4 was $80.7 million, an increase of 4% year over year and a decrease of 1% sequentially.

Services revenue for FY15 was approximately $324.3 million, an increase of 11% year over year.

We added approximately 350 new customers in the quarter.

Our historical customer count now totals over 21,000 customers.

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

For the quarter, revenue transacted through Arrow was approximately 38% of total revenue, growing 12% year over year and 3% sequentially.

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

We have various programs in place with our resellers, system integrators, storage partners, managed service providers and cloud service providers, and will continue to invest in such programs.

We made investments in sales resources and marketing to build brand awareness and relevancy with our key velocity partners.

As a result, we are gaining better access, mind share and strategic programmatic commitment from these partners to significantly grow CommVault's business.

Improved collaboration with these key partners will play an important role in our ongoing transformation.

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

Our software licenses typically provide for a perpetual right to use our software, and are typically sold on a per-terabyte capacity basis, on a per copy basis, or as solution set.

During the quarter ended March 31, 2015, approximately 81% of software license revenue was sold on a per- terabyte capacity basis.

These capacity-based license sales also represented 81% of our full-year software revenue, up from 80% in FY14.

Capacity-based software licenses provide our customers with licenses to specify software products based on a 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.

However, we expect that our capacity-based license sales as a percentage of total license revenue will decline as our new solution sets continue to ramp.

Our solution sets are generally sold on a per-unit basis, and can be individually deployed or combined as part of a comprehensive data protection and information management solution.

Some of our products are being sold as term or subscription-based pricing models.

We expect that there will continue to be a gradual shift to more subscription-based revenue.

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

We continue to have strong market response to our standalone virtualization solution set, which includes VM backup, recovery and cloud management solutions.

As Bob mentioned, since its launch two quarters ago we have had over 500 customer purchase this product, with more than 0.5 of these being sales to new customers.

The aggregate deal value from such customers was more than 2 times the revenue from this solution set alone, and are close to our overall AFPs.

This early success reflects the overall transformation work we have been doing in pricing and packaging, new solution offerings, enhanced marketing and demand generation, and our new business unit structure.

Now moving onto gross margins, operating expenses and EBIT margins.

Gross margins were 86.6% for the quarter and 87% for the year.

Total operating expenses were $107.8 million for the quarter, up approximately 13% year over year and 1% sequentially.

Sales and marketing expenses as a percentage of total revenues increased to 53% in the current quarter, which was up from 44% in the prior-year period.

Non-GAAP operating margins were 13.5% for the quarter, resulting in operating income, or EBIT of $20.3 million.

Q4 EBIT margins decreased by 300 basis points sequentially.

FX had a negative sequential impact on EBIT by $2 million, or 90 basis points.

Net income for the quarter was $12.8 million, and EPS was $0.27 based on a diluted weighted average share count of approximately 46.6 million shares.

FX had a negative quarter-on-quarter impact on EPS by $0.03.

For the year, net income was $66 million and EPS was $1.40 per share, based on a diluted weighted average share count of approximately 47.2 million shares.

FX had a negative impact on full year EPS by $0.08.

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'll have no net interest income in FY16.

I would now like to spend a few minutes discussing our anticipated revenue and EBIT margin outlook.

We continue to have declining operating margins in Q4, mainly due to weaker than expected top-line results, investments we made in the first half of FY15 and the impact of foreign exchange rates.

We add added 41 net employees in fiscal Q4, down from 51 in Q3, and ended the quarter with 2,287 employees.

For the full year we added 314 net employees versus 233 in FY14.

We remain cautious of FX headwinds, and our revenue and margin outlook assumes current FX exchange rates.

Despite the significant impact of FX on year-over-year results, we believe the current Street consensus total revenue growth rate for FY16 are reasonable.

Our objective is to return our software license revenue growth to historical levels in the second half of FY16.

By historical software revenue growth rates, we mean prior to FY15.

We expect the growth in services revenue to be less than the growth in software revenue in FY16, as a result of declining software revenue growth in FY15, impact of FX rates, particularly in the first half of the year and an anticipated realignment of our maintenance pricing to competitive market trends.

While we believe the current Street consensus revenue growth rates for FY16 are reasonable, we would like you to keep in mind that our fiscal Q1 is usually our most challenging quarter.

Typically our Q1 revenues are flat to slight down sequentially.

We also remain cautious of current FX challenges, particularly on a year-over-year basis.

We expect FY16 annual operating margins to decline by approximately 100 to 150 basis points through FY15.

Fiscal Q1 EBIT margins will likely decline from Q415 levels, but then improve sequentially as the year progresses, especially as the top-line growth rate increases.

Our operating margin expectations for FY16 are slightly lower than originally expected, due to FX headwinds, suppressed services revenue growth rates, and ongoing investments we are making for software revenue growth in the second half of the fiscal year.

These investments include, but are not limited to, increased field resources, enablement, channel programs, our new business unit structure, rebranding and market awareness, services-led selling and development of our next-gen solution.

While our rate of hiring has slowed in recent quarters, we'll continue to make strategic and prudent investments tied to achieving our second half of FY16, and FY17 revenue, and earnings growth objectives.

We are also focused on improving the productivity of our existing resources through sales employee enablement, retention and redeployment.

Let me now comment on tax rate and share count.

Our GAAP tax rate for FY15 was 34%, and our cash tax rate was approximately 26%.

We expect our cash tax rate to remain lower than our GAAP tax rate for FY16, and to be in the 32% to 35% range based on the passage of expected legislation.

We continue to estimate that our cash tax rate will align with our long-time GAAP tax rate over the next two fiscal years.

We'll continue to use a pro forma tax rate of 37% for FY16, which is the same pro forma rate used for FY15.

For FY16 we anticipate that our annual diluted weighted average share count will be approximately 47 million to 48 million shares.

Please note that certain senior executives and Board members have approximately 486,000 outstanding stock options that will reach the end of their tenure lives and will therefore expire in the next six months.

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

Now moving onto our balance sheet and cash flows.

As of March 31, our cash and short term investment balance was approximately $387.6 million.

Free cash flow, which we define as cash flow from operation less capital expenditures not related to the new headquarters, was $33.9 million, which is down 13% year over year.

For the full fiscal year we achieved record free cash flow of $118.1 million, which is up 3% over FY14.

As of March 31, 2015 our deferred revenue balance was approximately $229.7 million, which is an increase of $20.2 million, or 10% over the prior-year period and up $7.4 million, or 3% sequentially.

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

On a constant currency basis deferred revenue was up 7% sequentially and 18% year over year.

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

As of March 31, 2015 our deferred software revenue balance represented less than 1% of total deferred revenue.

For the quarter, our days sales outstanding, or DSO was 69 days, which is up from 65 days in both Q4 2014 and Q3 2015.

The change is due to linearity within the quarter.

We spent approximately $9 million on construction costs for our new campus headquarters during the fourth fiscal quarter.

Although the vast majority of spending on the new corporate headquarter is complete, we expect approximately $3 million of additional related cash disbursements over the next two fiscal quarters.

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

As a reminder, our annualized costs of the new headquarters, which we own outright, will be approximately $8.6 million, of which approximately $5 million will be reflected as depreciation expense, with the remainder being operating expense.

That concludes the financial highlights, and I'll turn the call back over to Bob.

Bob?

Thank you, Brian.

I will now provide our perspective on the market and an update an our new product introductions and on the plan for improving the productivity of the sales organization, particularly in the Americas.

The market is undergoing unprecedented rapid changes driven by the cloud and mobile technologies.

These shifts in the market are demanding changes to how applications are developed and how data is captured, secured, indexed, stored and protected.

These changes are also driving significant transformations of the IP infrastructure, compute, network and storage.

Customers are demanding that their data be able to move seamlessly and securely from data center or mobile device to the cloud and from the cloud.

This necessitates ubiquitous cloud data translation capabilities and new security enhancements for direct user access and multitenancy.

It is also driving the change to managing secure objects of data versus volumes of data.

These changes are accelerating the demand for more comprehensive holistic ways for companies to deal with legal and compliance requirements, since data now resides in so many separate data repositories, such as clouds, geographically disbursed data centers and mobile devices.

These changes require new technologies for disaster recovery, and for the test and development of new applications.

Customers also want production-ready data copies that are always available and which do not have to be restored from backup copies.

Cost reduction is always a key objective for our customers.

They are reducing costs by deploying private and public clouds, and open systems that utilize much lower cost commodity storage that is vendor-agnostic.

They're also deploying converged infrastructures and by implementing software-defined infrastructure elements.

In addition, as the pace of technological changes accelerates, the industry is also seeing the increasing emergence of new point products to solve very specific problems.

Most importantly, customers are utilizing many different business analytical techniques to drive more business value from their real-time and stored data.

In all cases data security is a key requirement.

These changes in the market have significantly impacted CommVault and have required fundamental changes to our business.

These include enhancements to our unique core software platform, the addition of leading standalone products, including appliances and cloud gateways, and new monetization and distribution strategies.

In the second half of FY15 and Q1 FY16, we launched a new round of standalone solutions, as well as expanded the capabilities of our current products.

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

These products are differentiated from our competition since they all can be seamlessly plug into our unique singular data and information software platform.

Uniquely, all the data we manage is comprehensively indexed with one unified very rich comprehensive index, is much more secure and is stored in one singular virtual object repository with a single metadata index.

Additionally, our platform includes comprehensive operational management capabilities, including process automation, alerting and embedded log analytics for both operational and business analytics use cases.

Our operations management capabilities are resonating very well with our customers.

These new products and capabilities are designed to strengthen our competitive position, increase our available market, provide significant additional channel leverage, and increase our value and relevancy for our large enterprise accounts.

These product images are gaining traction, and include one virtualization and recover initiatives that was enhanced in Q1 2016, at the current quarter.

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 launched include deduplication on premise, deduplication to the cloud, security and native copy capabilities.

We have had over 500 customers purchase this product since its release two quarters ago.

These early results are very encouraging.

In Q1 we also launched a new CommVault based appliances and enhancements to our appliances.

We formally launched our new appliance orfices that deliver enterprise class performance, deduplication, native copy capability, advanced secure data access, automatic provisioning and comprehensive management across appliances, appliance clusters for simplified cost effective scalability.

This appliance also incorporates our unique Simpana platform capabilities.

In addition, in Q1, this quarter, we launched our cloud gateway.

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

This packages our native cloud storage integration features, which eliminate the need for additional devices and allow customers to create hybrid cloud strategies.

Number four, we launched our information retention and compliance for SaaS applications.

There's an increasing need to manage date from SaaS-based enterprise applications like Office 365 e-mail.

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

We now offer the ability to archive data from the cloud-based SaaS applications, including Office 365 e-mail, and will in the near future include most key enterprise SaaS applications.

Disaster recovery manager was also launched in this current quarter.

This solution runs in both Microsoft and Azure, and Amazon web services' cloud environments.

It automates the disaster recovery process by using our unique orchestration, data transformation and cloud provisioning capabilities.

Additionally, our new DR solution set meets customers' new requirements to manage data between cloud vendors and locations, by offering global management and reporting capabilities.

Number six, enhancements to our native copy capability.

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

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

Our Cloud DevOps service is also a new solution 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.

CommVault's development teams pioneered the solution in-house to speed up development time, and drive down costs while increasing flexibility and agility.

Lastly, real-time secured fire sharing and collaboration, CommVault Edge.

Our upgraded mobile solutions including new functionality for our CommVault Edge solution.

This enhanced Edge solution has the capability to offer real-time secure file sharing and collaboration into the content store, eliminating the backup process entirely.

Enterprise users can now implement an enterprise-scale inside the firewall, highly secure system to manage their mobile workforce.

Our Edge eliminates the risk associated with outside firewall third-party providers, and seamlessly integrates with CommVault's global data and information management capabilities.

It also includes enhanced secure access capabilities to protect data and e-mails from outside intrusion.

Our mobile solution can be uniquely combined with our virtual secure archive, contents store, and our new automated case management product to enable best-in-class solutions for compliance and legal use cases.

Our enhanced security functionality.

Over the years we have built into our platform significant security functionality that prevents unauthorized access to data.

This is a unique functionality that is as now being recognized by our customers as a key asset to help prevent privacy breaches.

Our security functionality is critically important for end-user access, and for self-service in multi-tenant cloud environments.

Our mobile solution also enables new data encryption and secure data wipe features, which can reduce the risk of unauthorized access or data exposure with lost or stolen devices.

I'll now turn to our next major version of our software platform.

Our next-generation platform is currently in beta testing.

The next version of CommVault software, which we expect to release later in FY16, is a major upgrade with substantial enhancements.

In the next version we'll be making significant changes to how we index and transport date to make it much easier and less costly to manage data in and out of the cloud, and to provide a much stronger platform for business analytics.

These enhancements will also have significant cost performance, scale, access, recovery and added sophisticated security functionality.

Backup windows will be eliminated.

All data in the platform will be accessible and highly cost effective, native production ready formats.

A platform will be open for seamless integration with new open infrastructures, and address customer demand to avoid vendor lock-in.

It will also enable the implementation of business analytic solutions, some of which are currently in beta.

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

Now let me talk about our sales organization.

I will now provide additional details and an update on the plan for improving the productivity of the sales organization in general, and the Americas in particular.

We have introduced new products, and implemented new pricing and product initiatives to meet the changing dynamics of the market and customer buying priorities.

We have implemented new channel programs and added new channel partners.

Under new leadership, we have established and upgraded sales enablement capability for both sales and channel partners.

We have also strengthened the sales management team globally.

We hired a new Vice President of Sales in the Americas, Scott Little.

Scott comes from Oracle with extensive sales leadership.

Pete Kobs moved into a key role as VP of Global Accounts.

We recently hired a new VP of Channels, Dave Fisher, formerly VP of Sales for Forsythe.

We also hired a new Head of Global Alliances, Brian Allison.

Brian was formally at Cisco.

We are excited about having this added management capability in place as we execute our transition plans.

In addition, the plan for the Americas has been focused on improving 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.

We have also strengthened our programs with our core reseller channel and strategic partners.

The next steps for the Americas now is to focus on added sales capacity, which we deferred until the territories were optimized.

In closing, we are making substantial changes to the Company to get out in front of the dramatic technological changes in our markets, and better align with the current and emerging needs of our customers.

These changes strengthen our competitive position, increase our available market, make it easier for our channel partners to sell, and will enable us to execute our plans to significantly improve revenue and earnings growth.

We have industry-leading core fundamental technologies.

We are now delivering an industry-leading complement of products, services and support.

We are strengthening our enterprise sales force and strengthening our distribution in the enterprise, mid-market and the cloud.

We are now focusing on those key elements of our transformation to insure we achieve our objective of improving revenue and earnings performance in the second half of FY16.

I'll will turn the call over to Michael.

Operator, can we please open the lines for questions?

(Operator Instructions)

Our first question is from Aaron Rakers from Stifel.

Thanks for taking the question.

I actually have two, if I can.

First of all, Bob, I just want to understand the commentary on a forward basis.

I think in the press release you had noted that you'd expect the second half revenue growth to improve substantially on software license.

Brian, I think you said a return to historical growth rates.

Substantial seems like a little bit of a down tick relative to the prior commentary of historical.

You also say that you are comfortable with where the Street sits, which I think is about 13% software license revenue growth.

I'm wondering if you could help us understand a little bit the context of substantial versus historical.

And also are you saying that you're comfortable with the software revenue expectation that currently the Street has for the second half of the fiscal year?

Those are really good questions, Aaron.

You can see, number one in this transition, I just want to reinforce.

The market is going through these radical changes, and the cloud and mobile are driving it and they're driving changes in where value is derived and how we monetize our product.

Now, we began this transformation going back about 18 months ago, but getting the platform which we had disaggregated from our core into standalone solutions, bringing new products to market that better align for, I call it high-value monetization, align with how you can drive products through the channel, enable our enterprise customers to deal with these critical issues as they transform and bring both cloud, mobile and business analytic solutions into their enterprises.

We had to make really substantial changes to the Company.

The key point I made on the call is that most of those are in place now as far as the products and the organizational structure.

What's going on over the next couple of quarters is we're really driving distribution of those solutions into the market because we've gotten really good response from the market in terms of our market fit and competitive position.

So the odds are really high that we're going to achieve our -- and the third bullet here is that we reorganized the Americas in terms of getting the maximum use of our resources and enable our sales teams to have really rich territories so they hit their quota [objectives].

And now we're adding capacity.

So it's product, distribution and capacity additions that drive revenue growth.

So the odds are really high that we're going to get strong license revenue growth in the second half as we enable our distribution channels and position these products in those channels.

The message that's different from prior quarters is FX, number one.

And two, in realigning our processing models to the market, we're going to see some negative impact on our maintenance stream.

So license revenue outlook looks good for the second half and the growth rate on services revenue, it's going to be lighter because of our low license revenue growth in FY15 and realigning our maintenance pricing models for the market.

In summary, the second half should be strong, particularly on the license revenue side offset by weaker than prior forecast on the services line.

So that was the first (multiple speakers).

Your second question was?

Sorry.

I think when we also look at -- you made the comment on sales capacity.

One thing that we've seen recently has been some uptick in your open job listing.

So it looks like your sales and marketing expense grew about 18% in FY15.

I'm curious, are you still facing any challenges within the organization around churn?

How do we think about the growth of sales and marketing expense relative to revenue this year?

And I keep going back to the comment that this is more about productivity expansion, but we're still seeing the hiring be a necessity in the model.

I'm just trying to understand the trajectory of that hiring and whether or not you got any challenges internally in terms of churn.

Well, the bulk of the hiring in marketing is behind us.

There'll be some incremental, but not a lot.

And in sales, we did almost no hiring in the Americas, net hiring, in the fourth quarter, as Ron Miller and the team realigned the structures and sales territories.

So we deferred that hiring, actually for more than a quarter, probably for four or five months.

It's not that we didn't do any, but we cut it way back.

And now we are hiring, particularly in the Americas, but also internationally to set us up for the second half of FY16 and FY17.

So that's what is going on.

On a relative basis, relative to FY16, the increase in marketing expense will be lower and the increase in sales expense net/net will be, I think, similar.

Okay.

Thank you.

Our next question is from Jason Ader from William Blair.

Yes, thanks.

Hi, guys.

So obviously a massive amount of change going on at the Company.

And I think, Bob, you framed it that way.

It's good to hear about the VM product doing well.

Could you give us any more evidence of kind of the turnaround in real concrete terms.

Some of it could be anecdotal.

Any specific products, things that are going on inside the Company that point to kind of the early signs that things are turning around?

And then maybe some color on the funnel and sales force morale?

Okay.

That's a bunch of questions, but I think the keys here are on the -- from a product standpoint, getting our products positioned, we've gotten extremely strong response from our channel and strategic partners.

These are the high velocity partners in the channel.

This is from their CEOs on down who have committed substantially to CommVault growth going forward that wasn't there before.

These are new programs.

We have gotten significant uptake from some of the big strategic partners out there, particularly in the cloud, the big cloud providers, who have initiated CommVault programs that are -- where there are mutual programs tied to their channel partners themselves and ourselves to drive new cloud-based solutions into the market.

It's good response from channel, in general, good response from strategic, and what we're seeing from the customers is a pretty significant shift in what they are looking for in terms of their data protection technologies, particularly in the areas of compliance and legal and business analytics.

As these infrastructures get a lot more complicated, companies are having real difficulty automating their processes, tied to not only core data protection, but now legal and compliance.

And Al may want to jump in here and expand on this because we're seeing this as a trend that's accelerating right now.

Yes.

In fact, I was just going to interrupt you.

So thank you.

I was going to say, Jason, particularly talking with a number of accounts, and this is myself and Bob talked to probably a couple of dozen accounts just over the last couple of months.

But the prevailing need, especially in enterprise coming in, as Bob said is one, RTO, or recovery time objectives; and, two, really in scale and size, and as he indicated, complexity of the operations.

So our full suite, all the investments we've made in the operational side, be it through the cloud offering, through our managed service provider offerings, or enterprise account, is all really, really resonated.

It feels like it's right on the money, particularly for enterprise.

It tends to also be very unique out there from a competitive standpoint.

We don't see anybody doing like functionality in size, so to speak, in a lot of these capabilities.

Then as Bob said, you take it beyond recovery capabilities, in the cloud solutions, be it dev test or DR, you take it into compliance and archive capabilities.

Again, the automation and the ease of going from one use case to another just from a policy perspective tends to really resonate.

That functionality resonates extremely well with both Microsoft and Amazon, as well, Amazon AWS as we bring these solutions to market.

I think one way I would summarize it.

In the fall of 2013, and I keep repeating this, but it's fact; we said we had to fundamentally change our products, pricing and distribution.

We to change the fundamentals of the Company going forward.

And that was a concept and now it's a reality.

And now we have disaggregated the platform, and that was not easy.

So we separated a lot of the high-value functionality from the core platform.

And basically changed the pricing of that platform along with that.

And then we had to change distribution.

We shifted from Dell and we had to move to the cloud.

We had to make massive changes to our whole distribution network.

And we have that in place

So the objective now, Jason, is to take all this and now drive this into revenue and earnings.

And what I said on the call, our confidence is way up, because all the pieces are now in our hand.

But it will take us about two more quarters, and then we think that we can build -- you were asking about funnels.

We are building funnels, but it's going to take us about until the end of September to get the funnels with these new products and new distribution models to the levels we want to drive substantial software license revenue growth.

But it's all in motion now, and it's not theoretical.

Thank you.

Our next question is from is from Srini Nandury from WR Hambrecht Summit.

All right.

Bob, Brian, thank you for taking my call.

Really appreciate it.

Actually, [hopping] under the same question from Jason.

Can you talk about your business visibility?

Now we have your prime products and you have your [terisary] products.

And how do you look, when you come up with the guidance, or even a semblance of guidance as you just did on the call, and how should we be looking at it?

Well, I mean, I think what I have said [Abi] is that all this stuff is in place, but as we look out, I've been pretty clear our visibility for the next two quarters, Brian said flat to down for Q1, and that's where it is.

But the way we're building momentum underneath that, the odds are highly likely now that we can achieve our objectives and have a -- put this business on what I call a new sustainable model.

But it's not there yet, Abi.

I mean, it just -- the pieces are there, but the funnel, the cadence, the predictability of that new model, even though it's coming together, it's not where we want it where that I can say to you with assurance, we're going to hit 20% license revenue growth, like in our prior model, and we can predict it quarter to quarter.

And we had 10 years of that predictability.

It's not there yet.

Are the odds that it will be?

Yes.

We are internally -- you can probably get the idea from the call, our confidence keeps going up because we put the pieces together.

But we're not at the stage yet where we can say confident to you that, hey, we've got the funnel, we know what the conversion rate looks like, and we can tell you what the number's going to be two to three quarters out, because we can't.

But there's a lot of momentum happening underneath that.

But until we translate that into high revenue growth and earnings, then we're both going to know.

But the odds are pretty good right now.

And I'm not making a big deal about our next-generation platform, but there's a substantial -- we'll get a substantial uptick in the second half from that, as well.

And that's coming, because that's in beta and that's doing well.

That's kind of where we are.

All right.

Thank you so much, gentlemen.

Yes.

Okay.

Our next question is from is from Abhey Lamba from Mizuho Securities.

Thanks.

Bob, as you pointed out it's been more than a year since we started seeing these issues.

And you highlighted a lot of things that you have done internally that could help in second half.

And they all make sense.

Any comments on the external factors in terms of what you are seeing from customers, partners and competitors that give you confidence that all the things that you are lining up will actually yield results in the field?

Yes.

I mean, I think, I haven't named these partners, but there are programs in place now by the major high velocity channel partners in the field, and we have people in there, there are programs, and probably -- again, I'm not going to name the partner, but the largest high velocity partner.

We have people, programs, and they're committed to substantial growth.

I mean, that's happening as we speak.

The second one is a -- basically a partnership with them, one of the major cloud providers and ourselves, to drive solutions into the marketplace, as is the third.

We've gotten increasingly step-up from, I'll call it the more independent cloud providers.

And we have, without all the enablement in place, the channel, a number of those 500 accounts that are new, have come from our standard reseller channel, and there's an area where we've a lot more work to do.

I would say in terms of hard data, the high velocity channel partners, for sure.

The enterprise sales teams and new solutions are in place and will drive -- those will drive, including some of our new strategic partners.

Our cloud provider, and we continue to build and expand our partnerships in the cloud with some major strategic partners who have recently committed to CommVault.

And now we strengthened our channel organization globally so we can get more leverage from the channel, and we've got the products to do that.

So I mean, it's -- the financial results are not pretty.

We don't like them.

But internally we're feeling pretty good about the business.

I mean, fundamentally, probably a strong -- what we're building now is going to be stronger and more sustainable than what we have built before.

But it's on a different model that's substantially different from the way we built the Company over the past 15 years.

And we're not messing around with it, either.

You can tell from my voice and from what we've done, we're here to play to win and make sure this Company has a really strong position in the market, and we're not kidding around with it either.

We have got the weapons in our hand to do it.

So watch out.

I mean, that's my attitude on it.

So we're feeling pretty good about it right now.

That's very helpful, Bob.

My last point is on EMEA and APAC.

What is making transition a bit slower over there, and what specific steps are you taking in those regions that should help improve performance in second half?

That's it for me.

Thank you.

Yes, I mean -- yes, certainly EMEA is a really good, solid team over there and they had a relatively weak quarter in general and it was exacerbated by FX.

I think you'll start -- because their funnel is coming back.

I think they'll -- on a relative basis, they will start improving right now.

I think we did some things that, again, same things.

Strengthening channel.

They've already had a good solid core, the enterprise teams, and now we're giving them expanded products and services to drive revenue there.

The appliance program over in EMEA is off the ground.

So, I think they're in pretty good shape.

And we're making additional changes in APAC over the next month or so.

That's in motion right now.

We should have, with one of our strategic partners in APAC, a new agreement signed.

That's pretty substantial.

So on balance I think we'll do okay.

I think we've got ourselves in a pretty good position.

And Aaron asked the question, the one area that we've got to step up right now is hiring in Americas, because we deferred that for over a quarter.

And now we've got to bring that sales capacity up to speed.

That's our next area of major focus.

Almost everything else is basically in place.

Our next question is from Andrew Nowinski from Piper Jaffray.

Just a few questions on distributions.

I know a number of large channel partners are now engaging with CommVault due to your expanding relationship with Microsoft.

Just wondering if you could update us on the traction you're having with Microsoft?

And then remind us what percentage of your license revenue is attributed to call providers in general?

Yes.

I'll be a little careful here, Andrew, but I will say this.

That our relationship with Microsoft has become substantially stronger.

Is a really good alignment between our technology and what they're doing with Azure.

They're engaging with us globally in the field and with their partners.

They are doing a lot of work with us internally.

And that partnership is just getting stronger and there's really good both near-term and long-term alignment there.

And yes, and they have brought us into some of their major channel partners, as well.

So that partnership is strong and getting stronger.

And I think it'll play a major role going forward in terms of strengthening our distribution position in the market.

I'll also mention, it's not as developed but we're also getting good fraction with the team over at Amazon and AWS.

We have a question from Greg McDowell from JMP Securities.

I wanted to ask about the strategic realignment in maintenance pricing.

Was hoping you could just give us a little more detail.

For example, will existing customers who don't add any new CommVault products, will they be potentially renewing at lower rates?

Or is this more sort of maintenance rates as a percentage of new product revenue, maybe being lower because of the repackaging and repricing?

Thank you.

Brian will take that.

Hi, Greg.

This is Brian.

Just like we had to get creative with the repricing of our solution sets and have seen some early success in that, we needed to evaluate our overall maintenance pricing models, both for existing and new customers, and really align them with the realities of what is going on in the market.

We believe the changes will not only drive increased customer retention and loyalty, and we have early examples of that based on a beta program we've done, but also enable us to increase our win rate of new customers.

Our goal going into this is to remain cash neutral as possible and give our customers more for the same dollar spent, so more value.

But it's not without risk, certainly.

So these changes would likely result in a lowering of our maintenance support prices for existing and new customers in relation to the dollar spent on software.

And that's been factored into our outlook for FY16.

Our next question is from Brad Zelnick from Jefferies.

Can you talk about a little bit about the factors that'll have you finishing this year with more or less term and subscription in the mix, and what is your mix assumption baked into your comments for double digit license growth in the second half?

Yes.

I don't think -- I think at the margin you'll see a shift to more term and subscription.

But to be frank, we are managing that internally to make sure, as a public company, that we achieve our license revenue growth objectives as reported.

In other words, we're not being as aggressive as we could be in that transition in the near term to make sure we get our revenue and earnings growth in line.

There is no question over time that we're doing some very aggressive things on the flip side of that internally, to move a lot of our value into the market as a service.

And you'll see that begin -- also begin accelerate in the second half of FY16.

Right now I would call that an adder to our growth, but my friend Al Bunte is sitting next to me here, and his team are being extremely aggressive in coming up with some very unique, as a service capabilities and before the end of this calendar year those new capabilities will be in the marketplace.

So in summary, we are -- we have forecasted some marginal increase in subscription or term for FY16, but going forward beyond that, you will see that whole area accelerate as we go forward.

Our next question is from Michael Turits from Raymond James.

Thank you.

Guys, thanks for giving us so much detail on FX.

Can you just be more a little bit specific in terms of the quarter in revenues, how much of the shortfall relative to the consensus came from a change in FX compared to where you were when you announced last quarter versus how much was a fundamental issue and what those fundamental issues were?

And same question on the margin guide for next year, which is below the previous.

Hi, Michael.

This is Brian.

Since the last call, most of our shortfall was related to other issues besides FX.

So it's really the miss on the top line that was driving the bulk of that since the last earnings call.

So what really were those fundamental factors relative to what you saw at that point?

Just weaker than expected results, particularly in EMEA and APAC.

How about looking into next year?

Since you guided revenues, same growth rate as the Street overall, which basically puts you at the Street revenues for next year; but you went from guidance of margins flat to slightly up to 100, 150 bps down.

Obviously again some of that's going to be currency, but how much is currency and how much is a change in fundamental and what are they?

The majority is the combination of currency and also the lower services revenue growth rates that we're anticipating for next year.

That's going to have a dampening effect on overall revenue.

So that has accelerated since the last call in terms of our move to new pricing models for a maintenance perspective.

But our goal is to still get back to, in the second half, our historical software revenue growth rates, which were prior to FY15.

Our next question is Rajesh Ghai from Macquarie.

Thanks for taking my questions.

Bob, you talked about a more complicated compared to landscape.

I was wondering if you could comment on the potential impact of, A, the launch of Veem's enterprise product in November last year?

Secondly, on VDPA, which is, I believe, [Avamar] integrated V-sphere and the trend that we are seeing at VMC World this year, which is that EMC seems to be integrating a lot of the backup [of] data services functionality into their storage arrays and saying that essentially all (inaudible) need for backup software.

Thank you.

Okay.

Clearly Veems had an impact in the market, in the mid-market, and through their mid-market distributors they have gotten -- from an admin standpoint, they've gotten themselves positioned in the enterprise, not big-scale, but positioned there.

And they're a viable competitor in the market and they've done pretty well.

On the EMC side, in terms of our ability to compete and the things that they're doing in terms of including backup as part of their converged solution set, I think I have a different perspective on that.

I mean, clearly your data protection market is being commoditized and being substituted with disbased replication and things like that.

But from a customer standpoint, and the way the market is going to move and what you need to do with your data, I think that's only part of the story.

And I think we believe that at the end of the day, how data is captured, indexed and managed is not going to be done through disbased replication over the long term.

Near term, yes.

Longer term, I think the technology we're developing, and managing -- I got to think, maybe I can put it this way.

You are dealing with massive scale.

And you can't just be putting data inside -- in a box inside an array, because data is moving.

You're going to have massive data moving into the cloud, you've got data in array, you've got data on mobile devices.

And doing a backup or doing a replication, if you think about that long term, it's just not going to work.

It's a key technology for today, but I think if you look at what we're doing with our Edge drive, which we've just launched this quarter, is a pretty good indication of that in terms of a new and different way of managing data.

I think our next-generation platform, which I just talked about, has got a much different way of managing data.

So I think those are good things, what EMC's doing for their customers, but I think we have a different view on how this market is going to evolve and the fundamental technologies that we've built to more align with a big-scale cloud environment, which is -- which makes things a lot more complicated because you've got your data center, you've got your private cloud, you have your public cloud, you have virtualization and then you have containerization coming in.

So you have a lot of technologies that need to be dealt with seamlessly and holistically, whether it's for a small enterprise or a large enterprise.

And I think we have -- let's just put it this way, a different view on how data should be managed in those new emerging types of environments.

Our next question is from Eric Martinuzzi from Lake Street Capital.

Yes, curious to know your thoughts for (technical difficulties) the purchase (technical difficulties) for the coming year.

It looks like you did not -- there was no repurchases (technical difficulties) Q4.

What your thoughts are?

Good question.

As we have gained more confidence in this transition, another major initiative here is healthcare and business analytics.

And what we're doing today and with the new technology is we're going to bring it out to market later this calendar year.

Is pretty clear to us that as we go forward that we see more and more opportunity in the business analytics area and the unique things we can do with the platform we've developed, which is unique in the market.

This is clearly going to open up opportunities.

We have always been a Company, by the way, that's developed -- 100% of our growth has been organic.

And it looks like with the new technologies that we've developed here, we're going to have opportunities in selected areas of business analytics.

And there may be some acquisition opportunities.

As we think about creating shareholder value, we think it would be prudent and smart on our part to keep our powder dry, because the odds of that opening up as we move through this year are high and we think that would be a better use of creating value than share repurchases.

Doesn't mean we won't do share repurchases, by the way, but I think our point of emphasis and priority is going to be more on building the Company for longer-term growth.

And some of that will be in unique, I'll call them business value-added solutions, in the business analytics area; just likely, over time.

So more tuck-in stuff or more kind of a bigger footprint?

No.

I think this would be selective niche acquisitions that we can add to our platform in certain markets, and healthcare is certainly one of them.

I mentioned it on the call, but we have launched our healthcare platform and we're going to be expanding that as we move through this year.

We're getting good traction on that.

And that's going to become a -- number one, it's our third largest vertical today.

We're making a big investment there.

We're expanding partnerships there.

And there's big opportunity in that market, and we have a good leader driving it for us.

I think there'll be some good opportunity for us there to tuck in some analytics capability in that market and some others as we move forward.

Thank you.

We have a question from Phillip Winslow from Credit Suisse.

This is Siti Panigrahi for Phil.

Bob, I wanted to ask about the overall market.

You talked about some of your internal challenges that's impacting CommVault's growth, but if the market is doing well in terms of demand, who is winning -- I mean, gaining sale in the market in your view?

Veem is gaining share.

You've got -- none of our large competitors are gaining share.

You had a massive shift in this market on -- in the core data protection market, some of it's gone to disreplication, some of it's has gone to Veem, some of it's gone to converged, but that -- some of it has gone to the -- Al's just mentioned some of it's gone to the cloud.

This is what we were talking about 1.5 years ago.

You can see the shifts.

These are substantial changes.

I just went through this on the call.

These were not tweaks to the business.

This was substantial changes to our technology, monetization models, pricing, distribution, I mean tied to the shifts.

So yes, there are a number of competitors, smaller ones, cloud, that are gaining share in the core, but the market is, I won't say completely wide open, but it's pretty wide open for these other areas, whether it's healthcare or it's compliance or it's legal, or it's, I call it inside incident the firewall mobile for applications.

So I think you've got to look beyond the core.

If you talk to a CIO, they're going to tell you that in a big enterprise, they want their data protected.

So data protection is still important, and the big companies, these big deals, they would still like do that on a holistic global basis, the big banks.

Got two of the large banks in here recently.

They want it all tied together.

So data protection, they need that locked down.

But they need compliance, they need legal, they need business analytics, they need all their operations for these more complex environments automated.

This whole process automation managed service piece becomes more important.

It's a significant shift in the landscape of where the value is going in the market and how do you monetize that to maximize your revenue and earnings growth.

It's different.

It's taken us a while to put it all this together, but we're getting pretty close.

But it's a substantial change.

Thank you.

Pretty exciting.

Maybe not exciting at your end, but pretty exciting at this end because we have the foundation laid to build a pretty interesting Company going forward.

But it's a -- and companies that aren't making these massive radical changes, you end up where we are right now.

You stall out your revenue and earnings growth.

But the market's got massive potential in front of us here if you position yourself to take advantage of it.

Thank you.

We have no further questions at this time.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.