Commvault Systems Inc (CVLT) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2016 CommVault earnings conference call.

(Operator instructions)

As a reminder this call is being recorded I would now like to introducer your host for today's conference, Mr. Michael Picariello, Director of IR.

Sir, please go ahead.

Good morning, thanks for dialing in today for our fourth-quarter 2016 earnings call.

With me on the call are Bob Hammer, Chairman, President, and CEO; Al Bunte, COO; and Brian Carolan, CFO.

Before we begin, I would like to remind everyone that statements made during this call, including 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 our 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 the Form 10-K, and in our most recent quarterly report in Form 10-Q, in our 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 the features or functionality, remain at our sole discretion.

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

The press release is also available on our IR website.

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

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

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

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

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

Thanks, Mike.

Good morning, everyone, and thanks for joining our fiscal fourth-quarter and FY16 year-end earnings call.

Let me briefly summarize our Q4 financial results.

Software revenues were up 5% year over year and 3% sequentially.

Total revenues were up 6% year over year and 2% sequentially.

EBIT was at 29% year over year.

EBIT margin was 16.4%, or up 290 basis points year over year.

EPS was $0.36 per share versus $0.27 in Q4 2015.

Cash flow from operations was $37.2 million.

During the quarter we repurchased approximately $56.9 million of our common stock.

We had solid contribution from all three global theaters.

The Americas and EMEA regions had particularly strong results.

We are pleased that we achieved a much improved Q4 2016 and second-half FY16 results.

As we had forecasted, FY16 was clearly a tale of two halves, the first half to the second half comparisons are as follows: Software revenues were up 27% in the second half versus the first half.

Total revenues were up 13%.

EBIT was up 134%.

EBIT margins for the second half were up 780 basis points versus the first half.

The improved results and increased momentum in the second half of FY16 were due to the positive financial impacts from fundamental changes we made to the business over the past two years.

These impacts include: Strong sales contribution from a restructured and staffed Americas sales organization.

Very positive market reception of our CommVault D11 data platform, which we introduced last fall.

High-growth and material contribution from our standalone products such as cloud, mobile and compliance.

Meaningful contributions to license revenue from new distribution and alliance partners such as Microsoft, AWS, Cisco, Nutanix and Pure as well as the large global system integrators.

The move to the cloud has become a major factor contributing to our increased business momentum.

This combo of solutions can holistically solve a broad range of the critical new problems that customers are facing as they migrate to the cloud, managed data, and private, hybrid, and public clouds and deploy new hyper-converged and big data storage infrastructures.

As a result, more and more companies are choosing CommVault as their strategic data and information management vendor.

Our accelerating pace of innovation is enabling CommVault to improve our competitive position against our traditional larger competitors.

With our broad enterprise-wide capabilities, we are also improving our position versus small competitors that are only solving a small part of complex systematic, systemic customer problems.

We talk about FY17.

Our FY17 objective is to build on the momentum we established in FY16, to position the Company for long-term, high revenue and earnings growth.

We believe we are well positioned to take advantage of a unique window of opportunity.

The market is in a major state of disruption due to the move to the cloud, massive technological shifts in IT infrastructures, the deployment of SaaS-based solutions, and the need for more sophisticated business analytics.

The market is also being disrupted by vendor consolidation and buyouts.

Our aggressive early investment approach to deal with these changes has enabled us to improve our competitive position and increase our market opportunities.

We have a clear game plan built on a strong business foundation and have the financial wherewithal to continue to strengthen our position in the industry during a time of expanding market opportunity.

Specifically, we have developed the best product and services to enable customers to move to the cloud, deploy new on-premise IT infrastructures, manage SaaS related data, and build unique business analytics solutions.

We are in the strongest position we have ever been to execute our strategy.

We built and staffed updated organizational structures across the Company and have established much better alignment across functions to achieve our core objectives.

We have significantly enhanced distribution with a number of new alliance and strategic partners, as well as a better functioning channel.

We have the deepest product pipeline in our history, with an accelerating pace of innovation, including software-defined storage capabilities, capabilities to manage big data, secure data portability, and a new foundation for business analytics.

Let me address our investment objectives and impact on EBIT margins.

We're going to be more aggressive in our investment approach to accelerate revenue and earnings growth in FY17 and FY18 in order to take advantage of our expanding market opportunity.

Please keep in mind that we had lower than expected operating expenses in Q4 2016 and we will be catching up on some of those investments, especially in the first half of FY17.

This combined with lower maintenance revenue growth will constrain operating margin expansion in FY17.

With that said, we will be prudently managing the amount operating expense increases, to ensure that going forward we achieve both our revenue objectives and substantial operating margin expansion over the long term.

Brian will discuss specific operating margin guidance for FY17 later in the call.

I will now address our FY17 revenue outlook.

We continue to see sales funnels improving along with good visibility, and we expect positive license revenue growth trends to continue.

As such, we believe the current FY17 in Q1 Street consensus for both total revenue and EBIT margin is reasonable.

Our objective however, is to do somewhat better than consensus would indicate.

Please note, our fiscal Q1 is historically our most challenging quarter.

We expect Q1 to show a sequential decline for total revenue and EBIT from Q4 2016 results, but much improved from the prior year Q1.

We want to remind everyone that even though we believe license revenue growth will continue to accelerate and FY17, we expect maintenance revenue to remain flat for the year.

As a result, earnings growth will be driven by software license revenue growth.

We expect maintenance growth to reaccelerated in FY18, as result of FY17 license revenue growth.

While our strategic fundamentals are strong and our ability to execute is improving, we still phase critical challenges.

We need to expand the market visibility and understanding of the strategic value of CommVault's V11 data platform and broader set of standalone products.

We are winning larger and larger enterprise deals, however our ability to grow is more dependent on just big deals or the steady flow of $500,000 and $1 million plus deals.

These deals have quarterly revenue and earnings risk due to their complexity and timing, even with improved funnels, large deal closure rates may remain lumpy.

Achieving our FY17 license revenue growth objectives will be dependent in large part on continued success with market adoption of solutions based on our new combo data platform and associated software and services for deployment to and from the cloud.

We are in an opportunity-rich situation in the market and will be prudently increasing spending to increase revenue and earnings growth for FY17 to take full advantage of the expanding window of opportunity.

As a consequence, there will be negative impact to our earnings, if we miss our revenue targets.

We recently hired a new Vice President of EMEA.

We anticipate this person to start at the beginning of Q2 FY17.

In summary, we continue to see increased business momentum, which has enabled us to have a strong finish to FY16 and establish the foundation for an improved FY17.

We also believe that the structural changes taking place in the market are acting as strong catalysts for our business growth.

I will now turn the call over to Brian.

Thanks, Bob.

Good morning, everyone.

I will now cover some key financial highlights for both the fourth quarter and full FY16.

I will state our as reported, non-GAAP results first and also state the year-over-year results on a constant currency basis where meaningful.

Fourth-quarter total revenues were $159.6 million, representing an increase of 6% over the prior-year period and 2% sequentially.

For the full fiscal year total reported revenues were approximately $595 million, representing a decrease of 2% over FY15.

Total revenues for FY16 were up 3% year over year on a constant currency basis.

For Q4 2016 we reported software revenue of $73.3 million, which was up 3% sequentially, and 5% year over year.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, represented 58% of total software revenue.

The number of enterprise deals increased 13% sequentially.

Our average enterprise deal size was approximately $272,000 during the current quarter, which was down 2% from approximately $278,000 in Q3 2016.

America's, EMEA, and APAC represented 60%, 30%, and 10% of software revenue respectively in the quarter.

On a sequential growth basis, Americas and EMEA software revenue increased 2% and 7% respectively.

APAC software revenue decreased 3% sequentially.

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

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

Services revenue for Q4 was $86.2 million, an increase of 2% sequentially and 7% year over year.

Services revenue for FY16 was approximately $336.3 million, an increase of 4% year over year, or up 9% on a constant currency basis.

Our maintenance and support renewal rates remain strong.

We added approximately 450 new customers in the quarter.

Our historical customer count now exceeds 22,500 customers.

For the quarter revenue transacted through Arrow, was approximately 38% of total revenue, growing 9% year over year and flat sequentially.

Moving on to our 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 a solution set.

During the quarter approximately 70% of software license revenue was sold on a per-terabyte capacity basis.

This is down from 73% in Q3 2016.

Capacity based license sales also represented 73% of our full-year software revenue, down from 81% in FY15.

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

Over time, we anticipate a gradual shift to more subscription-based and consumption-based pricing models.

Consistent with recent prior quarters, sales of our stand-alone solution sets continue to have a 2X attach rate of sales of other software solutions.

These 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.

As Bob noted earlier, the move to the cloud has become a major factor in our increased business momentum.

Over the past 12 months, we saw of 4X increase in the petabytes of data being stored using CommVault software within public cloud environments.

We also saw a substantial sequential increase in Q4.

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

Gross margins were 87.5% for the quarter and 86.6% for the year.

We expect the full-year FY17 gross margin percentage to be the same as FY16, or approximately 86.5%.

Total operating expenses were approximately $111 million for the quarter, up approximately 3% year over year and down 1% sequentially.

Sales and marketing expenses as a percentage of total revenues decreased to 51% in the current quarter, which was down from 53% in the prior-year period.

We added seven net employees in fiscal Q4 and 92 net employees for all of FY16.

We ended the fiscal year with 2,379 employees.

Non-GAAP operating margins were 16.4% for the quarter, resulting in operating income or EBIT of $26.2 million.

Q4 EBIT margins increased by 290 basis points, both sequentially and year on year.

The over achievement in Q4 EBIT margins, as compared to Street consensus, was caused primarily by higher revenue as well as not meeting our headcount hiring objectives.

Our lack of headcount additions in the second half of FY16 was a result of focusing more on the productivity of our existing resources and finishing out FY16 with much improved results as compared to the first half, as well as careful planning of where our strategic investments needed to be made in FY17, which then stalled our ability to make additional hires at the end of FY16.

Please note, there are many new headcount additions that were being recruited for in Q4 2016 but did not actually start with the Company until Q1 2017.

As a result, you should see much higher net headcount additions in the first half of FY17.

Net income for the quarter was $16.6 million, and EPS was $0.36 based on diluted, weighted average share count of approximately 45.8 million shares.

For the year, net income was $42.4 million and EPS was $0.91 based on a diluted, weighted-average share count of approximately 46.5 million shares.

FX had a negative impact on full-year EPS by $0.10.

Interest income was nominal in the quarter.

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

We anticipate that we will have nominal, net interest income in FY17.

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

As Bob stated earlier, while we believe the current FY17 and Q1 2017 Street consensus for both total revenue and EBIT margin is reasonable, our internal objective is to achieve results somewhat better than consensus would indicate.

As such, our investment strategy is tied to an internal plan that exceeds our FY17 revenue outlook commentary.

We will prudently accelerate these investments in FY17 in order to strengthen our market position in the industry and increase market share.

If we are successful with our investment strategy, we believe that there is revenue and earnings upside as compared to current Street consensus and it could set us up for strong results for the next few years.

However, there is also investment risk on the downside and there is some uncertainty in the near-term.

Please note the unexpected size of the EBIT over achievement in Q4 2016 now creates a challenge for operating margin expansion FY17, as we need to increase investments on key strategic initiatives that are critical for us to sustain a high software revenue growth rate.

These strategic investments include, but are not limited to: Investing in enough sales capacity to drive software growth targets for FY17 and FY18.

Conducting our first worldwide sales kickoff event in two years in order to adequately educate and train the field on high impact, V11 and next-generation solution areas.

Conducting our first-ever customer conference, which we're calling CommVault Go, in Q3 2017.

Establishing an advanced solutions overlay group to help field sales teams better position our expanding value propositions to customers and partners.

And developing high-growth vertical market businesses, including healthcare and the anticipated future launch of our second vertical market business.

We would like you to keep in mind, that the our fiscal Q1 is usually our most challenging quarter due to seasonality.

We expect this trend to continue, as we anticipate a sequential decline in both revenue and EBIT.

However, there is the potential to over achieve current Street consensus for both total revenue and EBIT in Q1.

We anticipate operating margins to improve sequentially as the year progresses, especially as the top-line growth rate increases.

Our revenue and margin outlook assumes current FX exchange rates.

As Bob also indicated, FY17 operating margins will be negatively impacted by maintenance and support services revenue.

We believe maintenance revenue will lag software license revenue growth in FY17 due to FY16 license revenue results, as well as the ongoing realignment of our maintenance pricing.

From a services revenue perspective, our continued maintenance pricing realignment will phase in from FY17.

This strategy aligns with our V11 software release and has resulted in streamlined maintenance pricing that we believe will accelerate new customer acquisitions and make it easier to do business with CommVault.

Our existing customers will also benefit from these changes and will ultimately have to lower total cost of ownership.

As a result of these changes, our maintenance and support services revenue will likely remain flat for FY17.

Maintenance and support services revenue typically represents about 85% to 90% of our services revenue line.

Let me now comment on tax rates and then share count.

Our GAAP tax rate for FY16 was 93%, which is not meaningful, given that our GAAP pretax income was close to breakeven.

Cash taxes paid in FY16 were significantly less as compared to FY15.

Over the next few years we estimate our GAAP and cash tax rates will become more closely aligned with our pro forma tax rate of 37%.

We will continue to use a pro forma tax rate of 37% for FY17, which is the same pro forma rate used for FY16.

For FY17, we anticipate that our annual diluted weighted-average share count will be approximately 46.5 to 48 million shares.

Now moving on to our balance sheet and cash flows.

As of March 31, our cash and short-term investments balance was approximately $387 million.

Free cash flow, which we define as cash flow from operation less capital expenditures not related to the new headquarters, was approximately $36 million, which is up 6% year over year.

During the fourth quarter we repurchased approximately $57 million, or 1.6 million shares of our common stock, at an average cost of $35.61 per share.

During FY16 we have made cumulative repurchases of approximately $91.5 million, or 2.6 million shares of our common stock, at an average cost of $35.70 per share.

As of today there is $93.1 million available under the share repurchase program that currently expires on March 31, 2017.

We will remain opportunistic with stock repurchases.

As of March 31, 2016 our deferred revenue balance was approximately $245 million, which is an increase of $15 million, or 7% over the prior-year period and up 6% sequentially.

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

Consistent with my earlier comments regarding maintenance pricing realignment and related services revenue growth rates, we expect deferred services revenues to be flat to slightly down sequentially in the first half of FY17, and began to sequentially improve in the second half.

At the end of FY17, we expect deferred services revenue to be up slightly year over year.

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

As of March 31, 2016 our deferred software revenue balance represented less than 1% of total deferred revenue.

Lastly for the quarter, our days sales outstanding, or DSO, was 65 days, which is up from 60 days in Q3 2016 but down from 69 in the prior year quarter.

The change is due to linearity within the quarter.

That concludes of financial highlights, I will now turn the call back over to Bob.

Thank you, Brian.

Our strategy has two key components, one to increase market share in our core data management business.

And two, expand our market opportunity by using the uniqueness of the CommVault data platform to develop high-value, vertical solutions such as healthcare.

I will now provide some additional detail on why we believe our core data management business has become a significant growth opportunity.

The management of data is becoming much more complex as companies move to the cloud, deploy next-generation IT infrastructures, manage data from SaaS applications and has data indexed, secured and accessible for business analytics.

It is important to note that data management capabilities from cloud and SaaS vendors does not replace the need for comprehensive data management as delivered by CommVault.

For example, replication data protection technologies from cloud and SaaS vendors, do not replace the need for a backup copy for critical data needs such as compliance, legal and historical business analytics.

They do not provide the data and information management capability to federate the management of data across the proliferating silos of cloud, mobile, SaaS and new IT infrastructures.

The management of data has become much more complex, and more and more of our customers and partners are looking to CommVault as the key strategic partner as they transition to the cloud, look to reduce costs and ensure they are legally compliant, adopt new IT infrastructures like hyper converged, opened stack, Hadoop, flash and software-defined storage, deploy newly architect cloud-based applications, and rely more and more on business analytics.

Our platform is becoming the industry standard for enterprises to holistically federate and manage data across all infrastructures.

It enables them to have one federated management platform to securely migrate, manage, access and drive more value for data holistically across the cloud, traditional and new IT infrastructures and SaaS generated data.

I wanted to briefly share with you one customer's experience on how CommVault was able to help them move to the cloud.

Some of you may have listened to CommVault's hosted cloud webinar on March 30 with two of our customers and one partner.

One of our customers News Corp, had a global objective to drastically reduce their data center footprint hosting by 75% and then move their data into the cloud.

Globally, they wanted to reduce from 32 traditional data centers down to six for efficiency and cost savings.

News Corp wanted to create virtual data centers as if they were on premise.

In doing so they work with our partner and our professional services team to help them architect and build enterprise data centers in the public cloud, migrate on-premise applications to the cloud, implement enterprise backup and disaster recovery in the cloud using CommVault, close their UK data centers, decommission physical hardware, and reduce operational costs and future hardware CapEx.

They were able to accomplish this by seamlessly federating, as I stated, their on-premise CommVault with their cloud CommVault.

Let me just reiterate, this is a very important point.

When I talk to CEOs and CIOs, a major reason they are choosing CommVault is because of our ability to seamlessly and comprehensively manage data across their on-premise mobile and cloud environments.

This is a significant differentiator between CommVault and others in the market.

Next I would like to briefly discuss another key differentiator, which is are increasing pace of innovation.

We have a deep pipeline of additional innovative products and services to help our customers achieve their business and operational objectives.

In March, we introduced Service Pack 3 for the new V11 level platform, which also marks the V11 formal upgrade program.

We complemented that release with two enablement and awareness tracks, as result we are seeing a meaningful increase in V11 upgrades, as well as sales and new solution sets.

Over the summer and fall, we will be introducing a broad range of additional solutions to arrive from the CommVault platform featuring: User self-service, ways for users to directly and securely access and manage the data in the cloud.

A new category of cloud-first solutions that will enable enterprises to better manage data created in the cloud, including more comprehensive protection, data lifecycle and secure data portability.

A new category of content-first solutions powered by federated indexing and intelligent search of data sources spanning online, cloud, and manage copies, which can be coupled to business content management policies to reduce risk, expand collaboration, and establish content-oreinted retention strategies based on the value of data as compared to just blind copies.

Comprehensive embedded software defined storage will be introduced later in the summer and the fall.

Lastly, we will be introducing a new series of SaaS-based solutions.

Our enhanced and broadening product portfolio is helping accelerate revenue growth.

In closing, I am pleased with our performance in the second half of FY16 and the foundation we have established for future growth.

As I stated earlier, we still have work to do to achieve our long-term financial objectives, but we enter FY17 with a significantly better ability to execute.

We currently have a well-defined strategy for growth and the industry-leading software platform, including standalone data management and healthcare solutions.

We have an enhanced, and broad product portfolio and a strong technology pipeline.

We have improving market and competitive positions, a stronger more stable enterprise sales force, an expanded distribution in plenty of our partners and routes to market.

We have industry-leading support and services, and we continue to have a strong balance sheet with no debt.

Business momentum is improving.

And we have positioned CommVault for much better financial results in FY17.

We are focused on maximizing our growth of both revenue and earnings.

I will now turn the call back over to Michael.

Operator, can we please open the line for questions?

(Operator Instructions)

Our first question comes from Jason Ader, William Blair & Company.

Your line is open.

Yes, thank you.

Bob, you talked about the internal plan being better than consensus in terms of software revenue growth in particular.

Can you give us a sense of what that internal growth rate is that you are looking to achieve?

Qualitatively, it is quite a bit higher.

Okay.

And then one for Brian, a follow-up on the model.

Brian, 11% operating margin in FY16, obviously you have some increased investment needs in the first half of the year.

Do you think you can exceed the 11% in FY17?

There's always a potential, Jason.

Based on our internal forecast, we are shooting for as you noted, higher, more aggressive software growth targets, and tied to that is an increased investment strategy but certainly adding some more leverage on the bottom if we are able to achieve our internal forecast.

Okay, but I think the consensus is around 10% is that too low, should we be modeling all of them at 11%?

It is somewhere in between I believe, it was closer to 10.6% is what is out there and I think that's reasonable for now.

Okay.

Thanks guys.

Our next question comes from Andrew Nowinski, Piper Jaffray & Company.

Your line is now open.

Thanks, and congrats on a nice quarter.

First question our software license revenue, it was clearly better than expected.

Do you guys have any color on how much of that came from the V11 versus version 10 and then what drove the upside if there is any from a specific vertical?

I think the vast majority of the shift is still V10, but the decisions customers are making up clearly on V11.

And the pipeline build and recent wins in the pipeline are clearly on V11, and all the things I mentioned about V11's capabilities, there's no question that on momentum is V11 driven momentum.

And your second question was?

Just wondering on the software license, is there is anything from a vertical perspective that drills some of that upside?

No.

We had good strong performance across all of our major verticals, which typically are finance, government, and healthcare are the top three vertical markets, and we had strong contributions from every one of those verticals.

There was no vertical in particular that drove the license revenue growth.

I can tell you that the win rates are across the board in all industries.

Got it.

It's been almost a year since you've announced that you were a preferred partner of Cisco and just wondering if you can you give us an update on how that partnership has ramped, and whether your version 11 looks -- growth opportunities with Cisco going forward.

Thanks.

I would say on Cisco that partnership has evolved certainly better than I would have expected.

It continues to deepen and broaden, and they are bringing material revenue.

We are partnering in a lot of major accounts, and I think that partnership will continue to expand.

I will just make a note that our Microsoft partnership continues to do well.

We're getting a lot of traction with AWS at an accelerating pace.

We're doing well with Pure well with [Neutanics] and these are partners [that really] contribute very much to our revenue a year ago, so I think partners and alliances program is providing us a much broader foundation in the market then we had going into FY16.

Okay.

Keep up the good work.

Thanks.

Our next question comes from Abhey Lamba, Mizuho Securities Company, Ltd.

Your line is open.

Thank you and congrats on a good quarter.

Bob, can you talk about what type of workload through cloud is gaining greater traction, and as you target these cloud-related workloads, what are you seeing the most in competitive environment?

I will take it.

I'm going to let Al expand on this a little bit, maybe with some customer examples.

Clearly our ability to index, understand what data a customer has, put a policy on it, and then securely orchestrate the migration of data to the cloud, and then manage it once it's in the cloud is a significant differentiator.

I will let Al expand on this a bit.

Yes.

I think Bob hit a lot of the key points in his script as he went through, and as he just said, more and more and more people want to know what is there, they want to manage it based on content not just big blobs of data.

But to your question, in terms of use cases, I think it is still led by backup and archive.

FileShare is a big area however, the interesting thing we're seeing with FileShare is, people want protection for that share both from a secure access point of view, as well as Bob indicated point in time [copies] and traditional data management protection techniques.

DR is a big one.

Dated test, and the hot thing and I just talked to her couple industry analysts out there, the hot thing we're seeing in the industry, is not exactly to your question but is the term workload portability.

Being able to move data around particularly in heterogeneous environments is a really, really big deal.

And to do that on an automated, orchestrated, under policy, management kind of approach is a huge differentiator.

Got it.

Bob, you mentioned your internal plan is somewhat higher than what you shared with us in terms of consensus adjustments and you have good final going into next year.

What type of close rates do you need to hit to meet your internal plan, with the current data close rates -- do they need to improve to get your current plan quite

The close rates we're predicting are quite similar to historical, but in order to hit our higher numbers, we've got to do a better job on our sales force productivity.

And as a whole series of initiatives that we have started in FY16 to improve the productivity of our sales force.

Some of them I mentioned in the script.

So I think we are well positioned with product line, with staffing, and with structures and processes, and new alliances and partners to help our sales force be a lot more productive.

So those combinations could have a pretty significant impact on the shape of our license revenue growth acceleration.

Our next question comes from Aaron Rakers, Stifel Nicolaus Your line is now open.

Thanks for taking the questions and congratulations on the quarter as well.

Bob, I want to build on that last comment when you look at your FY17 plan, and even looking back at FY16, I am curious of what you have done with regard to sales capacity, what your plan is going into FY17, and how do you think about productivity?

Where are we at today relative to the productivity prior to a lot of that transformational things you have to do, and do you think we get back to that similar level based on your forecast, your internal plan for FY17, or do you think we can actually drive similar levels of leverage without getting fully back to the prior productivity level?

Understand.

On our sales capacity going into FY17, and the structures, and the leadership, is up.

One, the capacity is up significantly from FY16, we didn't have the Americas staffed, so that was a major hole we had going into FY16.

The opposite situation going into 2017, and we added staff to EMEA, and we've got a restructured APAC with new leaders and all segments of the APAC organization.

In addition to that, we have staffed up our alliances group and we have added these fields overly teams to help the field sell these expanded solution sets, and we have expanded our capabilities in marketing.

So it is dramatically different going into FY17 versus 2016 from a capacity, structure, and its overall ability to execute.

In regard to sales force productivity, we are planning for a good solid increase in productivity in 2017, but call it our more aggressive targets, but that increase in productivity still does not get us back to where we were before, when we were at our peak.

I think we won't get back, I think that will take us another couple, three years to get back to those kind of productivity levels.

It could happen sooner, but to your point we're not planning, we don't need to get back to those kind of levels to hit our more aggressive license revenue targets in FY17.

Our next question comes from Srini Nandury, Summit Securities.

Your line is now open.

All right, thank you.

Congrats on the nice quarter Bob and Brian.

I have a bigger picture question if I may, Bob, the last three, or four years we saw this industry move to the list servers data centers, so to speak.

It looks like now containers are looking to displace less servers.

How do you think the business will change when containers start gaining steam in 2017 and beyond is what many people expect.

Do you need to retool your software offerings and perhaps change the architecture [however] the software is [departed] to your customers?

Fortunately our architect functionality is extremely well aligned with the move to containers.

So we view that as a major plus for us not a minus.

I'm going to let Al get into this in a little more detail, but we are well positioned now and as we move through the balance of this, not the fiscal year, the calendar year, we will be substantially increasing our solutions based on containerization.

So Al, why don't you expand on that point.

We are seeing more and more interest develop, particularly from enterprise accounts for the container ideas.

It just makes too much sense, but as Bob said, to be able to do that, you really need to be able to know what's inside the container.

And that is where our heritage, our architecture, our history is all about as Bob said, in quite a lot of detail here, even on this call, is it is all about the data, it is all about the content, and technologically it revolves around our indexing and almost file system like capabilities that we've built into our platform.

If you understand what is inside the container, now you can manage not only the containers, were they are, but platforms there are, but use them effectively and for many of the use cases beyond just a cause IDR type of solution, so as Bob said, we feel extremely well-positioned for this.

We have been working hard on a lot of these capabilities.

Not just now, but have for a few quarters and we feel really well positioned as the market goes, and I think it inevitably will, by the way, go in this direction.

In a broad summary on workload portability for the containers plays an increasing role.

I do not think there will be anybody, I think it will be CommVault and others.

I think we're going to be way out in front of the industry in our ability to manage workloads with a whole series of different techniques and containers will certainly be one of them.

What Al was saying is, if you're just moving of volume and you don't know what objects, files are sitting inside the container, you cannot do very much with it.

But if you have full understanding of what is inside that container, as you move into these different infrastructures securely, for all things we talked about, whether it's data protection, or secure user access, or for business analytics, or whatever use case you've got, then you've got a much more powerful solution.

So we are enthusiastic supporters, let's put it that way, of the mood to containerization.

Our next question comes from Greg McDowell, JMP Securities.

Your line is now open.

Hi this is Rishi Jaluria dialing in for Greg McDowell, thank you for taking my question.

First question, I wanted to dive a little bit into the geographies.

It sounds like there was relative weakness in APAC at least relative to the Americas and EMEA.

Can you dive into what factors drove that, again relative under performance?

I would say from an internal standpoint they over performed, on the year-to-year basis, so the issue is we have been completely restructuring APAC.

Structures, leadership, re-staffing, and so we knew on a year-over-year basis, we've taken a few quarters to catch up as we put all this together, but from an internal basis they significantly over achieve the number we expected from them.

I would say the team and APAC did a really good job, not only in delivering a higher number than we expected, but also in continuing to build out their leadership team structures and staff.

I would say more appropriately for the current dynamics in the market.

So we feel really good about the team and its performance.

Our next question comes from John DiFucci, Jefferies & Company.

Your line is now open.

Thank you.

First question for Bob or Al, it's on the maintenance repricing.

I think you talked last quarter about being most of the way through on the enterprise and beginning to work through the mid-market to lower end.

I assume that has the impact on the guidance you gave for the year for maintenance.

Can you tell us, do you expect any difference in the behavior, or reaction from the mid-market in regards to this?

And I guess Brian, if you could remind us what percentage, even roughly of your maintenance revenue is actually mid-market and below.

Thanks.

Sure.

Hi John this is Brian, I will take this question.

We have been communicating for several quarters now, just about our ongoing pricing realignment and you are right.

At the enterprise-level which encompasses about 75% of our ongoing maintenance and support revenue stream, most of that is behind us.

What is in front of us is remaining 25%, which is that the mid to lower end of the market.

Where we have instituted a very programmatic approach that we have launched this past quarter.

So far so good, it is in his early stages, but the market reception has been very good.

We believe this is going to accelerate new customer acquisition, it's going to make it easier to do business with CommVault, and it will become a catalyst for us in terms of overall license revenue growth.

What's dampening down the FY17 services revenue growth is really what you have to look at is FY16 license revenue, there will be a lag affect that will impact the services revenue growth rate.

Once we get through this year we should see a period of normalization starting to happen in FY18.

But until then, it acts as a headwind to -- margin expansion.

Our next question comes from Rajesh Gahi, Macquarie.

Your line is open.

Thanks for taking the question.

Bob, my first question is on the macro environment, obviously you seem to have exceeded expectations in this environment whereas most of your competitors especially on premise license software guys, have either missed numbers, or guided down.

I'm just wanted to understand what you're seeing in terms of the macro?

And my second question is around sales and marketing.

Obviously you said you're focused on improving productivity.

I'm just curious, this is the first time since 2009 we are seeing a sequential decline in sales and marketing expense in the fourth quarter.

What drove that?

Was it rush and push, was it [voluntary] departures what exactly was the reason for that?

I appreciate it, thank you.

On macro, I would say we are concerned about it from what we read in the press, but counter to that is we've continue to see good solid funnel growth, and we seem to be able to get involved in sufficient number of large deals.

So right now I would say the macro is not a factor in our current outlook.

On a specific basis to CommVault But we will continue to monitor it.

On the sales, marketing and productivity, to be direct about it, as we were putting together the plan for FY17 we had slowed down our hiring a bit, as we ended the second half of FY16 just to make sure that we were going to hit our numbers, and when we went to turn up recruiting we were a little slow off the block.

So we under spent on recruiting in the fourth quarter, and we're catching up with it quite quickly here in the first quarter.

It was more a question of cranking up that recruiting engine and getting people in, but right now we are on a pretty fast-pace.

I would not read anything into it except that we under spent.

Our next question comes from Michael Turits, Raymond James & Associates, Inc.

Your line is now open.

Hi guys.

In terms of your rough guidance to consensus being reasonable, what is a different way of asking the productivity and capacity question, what is embedded there?

The software revenues for the street or up to 13% in the next year, you say capacity up, so is your assumption that capacity is up roughly that amount and productivity is flat?

If you get to the street numbers?

Bob, you can make that rough assumption.

I think internally were trying to do better than that on both sides, both in capacity and productivity.

And then, I don't mean to point on it but, I think it kind of worked out from (inaudible) for this full year to be 11.3% and Brian you said 10.6% is reasonable for next year which is actually 70 Bips down.

I don't mean to put too fine a point on it but, do we think of it is flat or 70 Bips --?

Yes.

Well I think slightly down is correct because we over rotated in Q4.

So I think that 10.6% is the right number.

So is flat on EBIT absolute dollars Michael, but would be down on a margin percentage but we are confirming what's out there as of today's pre-announcement.

(Operator instructions)

Our next question comes from Siti Panigahi from Credit Suisse.

Your line is open.

Thanks for taking my question.

Just want to confirm, did you say US software revenue growth 2% and EMEA 7%?

I did.

Okay.

So just wondering, was there any big deals in the quarter that you want to highlight, did you see any big deals there?

And then also, you talked about the hiring for next and some of this year.

Were you planning to higher?

Mostly in the US, or any other region?

Are they mostly in sales and marketing, or could you highlight those?

It's mostly on sales and marketing.

Although we are hiring on R&D.

And it is pretty much across the board.

Where last year was, it was much heavier in the Americas because we had a hole to fill.

Now it is across the theaters.

And it is not just in sales headcount, but from a productivity standpoint, both from a sales overlay, from our solutions group, and our marketing teams investing to support the field.

There is more investment going into those areas to ensure much higher productivity from those customer facing assets that we have.

Our last question comes from Steven Burstein, MUFG.

Your line is now open.

Hey guys, just wondering as you roll some of the subscription-based products out, if you will be looking at any more SaaS type metrics in the calls?

Yes this is Bob.

I would say particularly as we get into the second half of FY17 with new SaaS products, pricing models, there is no doubt that the SaaS related time-based subscription type revenue will accelerate.

And when we have a track on it, and we have some predictability we will definitely be breaking it out.

But I do not think that will happen and FY17, but it is quite likely that we will do it in FY18 because we're really positioning a whole series, again is not just SaaS products, but our pricing models are going to lend themselves to more SaaS-based deployments by our customers.

So I think of FY18 where that would be more relevant then FY17.

But the programs are significant internally, Al and the team have been working over year on these and they will start to rollout in the near future and will evolve as we go through the fiscal year.

I'm showing no further questions.

Ladies and gentlemen thank you for participating in today's conference.

You may now disconnect.

Everyone have a great day.