Commvault Systems Inc (CVLT) 2017 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the CommVault Q3 2017 earnings conference call.

(Operator Instructions)

As reminder this call will be recorded.

I would now like to introduce your host for today's conference Mr Michael Picariello, Director of Investor Relations.

You may begin.

Good morning.

Thanks for dialing in today for our third-quarter 2017 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 risks -- for a discussion of these and other risks and uncertainties affecting our business please see the risk factors contained in our annual report on Form 10-K and our most recently quarterly report on Form 10-Q and 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 its features or functionality remain at our sole discretion.

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

Thanks, Mike.

Good morning everyone, and thank you for joining our fiscal third-quarter FY17 earnings call.

We achieved solid third quarter financial performance which was highlighted by a 10% sequential license revenue growth validating our continued business momentum.

We were able to achieve these results in spite of the negative impact from FX on both licensed and service revenues.

Brian will elaborate on the FX impact later on in the call.

Let me briefly summarize our Q3 year-over-year financial results.

Software revenues were up 8%.

Total revenues were up 7%.

EBIT margin was 12.7%.

EPS was $0.28 per share.

And free cash flow was $24.4 million, up 76%.

The highlights for the quarter were we had outstanding sales execution with strong year-on-year international growth.

We had excellent growth in the number of enterprise customers tied through their journey to the cloud which includes managing data with CommVault data platform solutions on premise, in the cloud, in hybrid environments and migrating it to and from the cloud.

We experienced good growth for our standalone solutions in the mid-market and in the enterprise, and we continue to have a healthy sales funnel which puts us in a good position heading into Q4 2017.

Our results this quarter were due to a number of factors including our industry leading technology and services, increased uncertainty in the competitive landscape and outstanding sales execution.

Our standalone solutions are showing strong demand particularly for our mid-market customers.

During calendar year 2016 the number of petabytes of data being stored using the CommVault software within public cloud environments increased by 250%.

We have made good progress in the key elements in our short and long-term strategic initiatives.

While we have some challenges in our business particularly with -- in regard to operating margins we believe we are on course to achieve our long-term objective of sustainable strong double-digit revenue and earnings growth over the next several years, and we have properly set the stage to achieve solid revenue and earnings growth in FY18.

Let me talk a minute about our strategic direction.

The major elements of our strategy are to accelerate our growth rate and increase market share in our core enterprise data management business by helping customers journey to the cloud.

We can do this by making continued enhancements to our leading CommVault data platform including innovative software defined storage and [copy] data management solutions.

Secondly, broaden the strength in our cloud related standalone data offerings with both new and upgraded solutions.

Third, establish a strong position in the healthcare vertical.

Fourth, expand our cloud based managed service business and our cloud delivered SaaS solutions.

These services were recently introduced and received initial positive feedback.

And lastly longer-term, broaden our portfolio with products that address enterprise digitization such as business analytics, search and process automation.

In addition, we have launched substantial new initiatives to improve our execution making it a lot simpler to do business with CommVault in regards to products, pricing, ordering and channel capabilities.

Increasing distribution leverage with new strategic partners and launching more focused targeted sales and marketing efforts.

We are also focused on enhancing our go to market capabilities to keep pace with our increasing rate of new product introductions.

CommVault continues to outpace the market with a robust pipeline of product innovations.

We plan to launch key new products this quarter another series of products next quarter.

Our new solutions and enhancements should begin to impact revenues in the first quarter of FY18 and should help accelerate our growth through FY18.

I will discuss some of these in more detail later on in the call.

In addition, we are on schedule for a major product launch this fall tied to enhancements to our CommVault data platform [potital] business solutions.

These enhancements will include unique capabilities for business analytics, search and business process automation.

We will now announce our fall major product launch at our second annual CommVault Go conference which is scheduled for November 6-8 in Washington DC.

We are also excited to have major opportunities to improve distribution leverage with strategic partners like Microsoft, Amazon, Cisco and several global systems integrators as well as with our VAR and distribution partners.

For example this past Monday we announced new optimized, cloud reference architectures for Amazon Web Services.

This makes it easier for customers to implement more comprehensive data protection and management with the CommVault data platform in the AWS cloud.

Customers can do this directly with CommVault and can easily direct data storage specific AWS services such as Amazon S3, S3, S3 standard and Glacier.

Combined with support for petabyte scale movement of data with CommVault and AWS Snowball, CommVault customers have enormous flexibility to move product and workloads to, in and from the cloud.

On Monday's press release enterprise customer Dow Jones discussed their move of more than 50% of their infrastructure to the cloud, leveraging CommVault's ability to protect that data on premise now in the cloud or wherever their data resides.

I will now address our current Q4 2017 and FY18 financial outlook.

Our strong progress for the business during the first three quarters of FY17 positions us to continue to deliver solid software revenue and earnings growth in FY18.

We believe given our current funnel we are positioned to achieve our Q4 2017 objectives.

We believe the current Q4 2017 consensus estimate for total revenue is reasonable, and our FY18 operating margins will be consistent with the full-year outlook we provided last quarter or approximately 11.5%.

Our Q3 overachievement is being offset by FX headwinds and the anticipated sequential decline in services revenue in Q4.

As we indicated last quarter, maintenance growth is expected to decline in Q4 2017 and be relatively flat in Q1 FY18 because it's tied to the period of low software growth that we experienced last fiscal year, and it is also negatively impacted by lower pricing and FX.

Maintenance growth is expected to reaccelerate in the second half of FY18 and then should positively impact revenue growth and operating margins.

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

Brian will discuss more details on maintenance repricing, FX headwinds and operating margins later on in the call.

For the full-year FY18, Street consensus for total revenue is reasonable.

We expect 100 -- approximately 100 basis points of operating margin expansion in the next fiscal year.

While our strategic fundamentals are strong and our ability to execute has improved, we still face critical challenges.

Achieving our FY18 license revenue growth objectives will be dependent in large part on continued successful market adoption of solutions based on our new CommVault data platform and associated software and services for deployment to and from the cloud.

These objectives will also be dependent on the new standalone solutions we are bringing to market.

Our ability to achieve our growth objectives is dependent on a 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 large funnels, large deal closure rates may remain lumpy.

As we noted on the last earnings call we continue to be in an opportunity rich situation in the market.

However, in order to achieve our FY18 earnings objectives, we need to prudently control expenses in the near term without jeopardizing our ability to achieve our software growth objectives or our critical technology innovation objectives.

As I mentioned earlier we are bringing to market many new products and are moving into new market segments.

This has some implied execution risk since the successful launch of these products will require enhancements to our go to market capabilities.

The recent strengthening of the US dollar compared to certain foreign currencies acts as a headwind to both revenue and earnings growth.

Remain -- we remain cautious about the global macro economic and political uncertainty.

In summary, we continue to see solid business momentum which combined with strong sales execution has enabled us to achieve good Q3 FY17 financial results.

We are making very good progress across all aspects of the Company by strengthening our competitive technology position, broadening our product line, expanding distribution and making it easier to do business with us.

The major headwind we have to deal with is maintenance growth and recent FX impacts.

Fortunately the foundation is in place for maintenance growth to turn around which we expect to begin in the second half of FY18.

Key fundamentals of the business have improved in both the near-term and long-term -- in both the near-term and the long-term, and as a result the confidence in the business has increased.

In summary, we believe we are well-positioned going into FY18 and are building a good foundation for long-term high revenue and earnings growth.

I will now turn the call over to Brian.

Thanks, Bob, and good morning, everyone.

I will now cover some key financial highlights for the third quarter of FY17.

The strengthening of the US dollar compared to certain foreign currencies had a significant impact on both the year-over-year and sequential revenue growth for the quarter.

Q3 total revenues were $165.8 million representing an increase of 7% over the prior-year period and 4% sequentially.

On a constant currency basis, total revenues were up 9% year-over-year and 6% sequentially.

We reported software revenue of $77.3 million, which increased 8% year-over-year and 10% sequentially.

On a constant currency basis, software revenue was up 11% year-over-year and 12% sequentially.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, represented 57% of software revenue resulting in a 15% year-over-year increase.

The number of enterprise deals increased 22% year-over-year.

Our average enterprise deal size decreased 6% year-over-year and 2% sequentially to approximately $261,000 during the quarter.

From a geographic perspective Americas, EMEA and APAC represented 56%, 32% and 12% of software revenue, respectively, for the quarter.

On a year-over-year growth basis the Americas was flat, and EMEA and APAC were up 23% and 17% respectively.

EMEA software revenue was up 32% on a year-over-year constant currency basis.

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

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

Services revenue for Q3 was approximately $88.5 million, an increase of 5% year-over-year and flat sequentially, which is consistent with our comments on the last earnings call.

Our maintenance and support renewal rates remain strong, and our maintenance pricing realignment process is tracking well.

We added approximately 600 new customers in the quarter.

Our historical customer count is now approximately 24,000 customers.

For the quarter, revenue transacted through Arrow and Avnet was approximately 39% and 10% of total revenue, respectively.

Now moving on to our pricing models.

Our software licenses typically provide for perpetual rights 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 68% of software license revenue was sold on a per terabyte capacity basis.

This is down from 72% in Q2 2017.

We anticipate that capacity-based licenses will continue to account for the majority of our software license revenue for the foreseeable future but will continue to decline as software license revenue gradually shifts to standalone solutions sets and subscription-based pricing models.

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

Gross margins were 87.9% for the quarter.

Total operating expenses were approximately $122.5 million for the quarter, up approximately 9% year-over-year and 4% sequentially.

We added 57 net employees in fiscal Q3, ending the quarter with 2,613 employees.

Non-GAAP operating margins were 12.7% for the quarter, resulting in operating income or EBIT of $21.1 million.

Q3 EBIT margins decreased by 80 basis points year-over-year and increased 130 basis points sequentially.

Net income for the quarter was $13.3 million and EPS was $0.28, based on a diluted weighted average share count of approximately 47.1 million shares.

EPS was $0.29 on a sequential constant currency basis.

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 and FY18.

Let me now touch on our outlook for the remainder of FY17.

Despite the headwinds caused by the strengthening of the US dollar since our last earnings call in October, we believe the current Q4 FY17 consensus estimate for total revenue is reasonable.

We do see risk, however, in achieving the current Q4 FY17 consensus estimate for EBIT as a result of the negative impact of FX changes on both software and maintenance revenue growth, investments we made during FY17 to take full advantage of the opportunity rich situation in the market and drive growth in FY18 and beyond and the compounding impact of our maintenance pricing realignment and the anticipated sequential decline in services revenue as a result of the 12 month lag effect from the prior-year software revenue results.

As a reminder, maintenance and support services revenue typically represents approximately 85% to 90% of our services revenue line.

I would also like to highlight one additional key spending increase in Q4.

Historically we see a large sequential increase in employer paid FICA expense in Q4 because many of our employees in the US reach the FICA limit well before the end of the calendar year.

This year we expect our FICA expense in Q4 to be approximately $3 million higher than Q3.

In summary, we expect FY17 annual operating margins to be consistent with the full-year outlook we provided last quarter or approximately 11.5%.

I will now address our expectations for FY18.

We believe current FY18 consensus estimates for total revenue is reasonable despite FX rate changes that have negatively impacted our software and maintenance revenue growth rates by about 1%.

We expect strong double-digit software revenue growth for FY18.

Services revenue growth, however, will likely be flat to down year-over-year for the first six months of FY18 due to the compounding effect of our maintenance pricing realignment.

We expect year-over-year services revenue improvement to occur in the back half of the year and the full year services revenue to be up slightly over FY17.

We expect FY18 operating margins to be up approximately 100 basis points year-over-year to approximately 12.5%.

EBIT margin expansion in FY18 is impacted by lagging services revenue growth, FX headwinds and investments we have made to achieve our software revenue growth objectives.

In spite of the increased operating margin pressure from FX headwinds and lagging services revenue growth, we are taking several prudent measures to control costs and reallocate existing resources.

Our objective is to do this in a manner that will not impact our software growth objectives but will provide operating margin leverage when services revenue begins to reaccelerate.

As Bob indicated earlier we would like you to keep in mind that fiscal Q1 is usually our most challenging quarter due to seasonality.

We expect this trend to continue in Q1 FY18 as we anticipate a sequential decline in both revenue and EBIT.

We also anticipate that Q1 FY18 EBIT dollars will decline on a year-over-year basis as a result of the flattening services revenue as well as earnings pressure resulting from using current foreign-exchange rates.

We do anticipate that EBIT dollars in FY18 will then sequentially increase over the rest of the year.

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

We will continue to use a non-GAAP tax rate of 37% for FY17 and FY18 which approximates our anticipated longer-term tax rate.

We anticipate that our annual diluted weighted average share count for FY17 and FY18 will be approximately 47 million and 49 million shares, respectively.

During Q3 2017, we repurchased approximately $25 million or 477,000 shares of our common stock at an average cost of $53.40 per share.

As disclosed in our earnings release issued earlier this morning, our Board of Directors has increased the total amount available for share repurchases to $150 million and extended the program for another year through March 2018.

We expect to remain opportunistic with stock repurchases.

Now moving on to our balance sheet and cash flows.

As of December 31 our cash and short-term investments balance was approximately $437 million.

Of which approximately one third is located outside the US.

Free cash flow which we define as cash flow from operations less capital expenditures was approximately $24.4 million, which was up 76% year-over-year.

As of December 31, 2016 our deferred revenue balance was approximately $255 million which is an increase of $24.5 million or 11% over the prior-year period and up 1% sequentially.

On a constant currency basis, deferred revenue was up 13% year-over-year and 3% sequentially.

Using current exchange rates we expect March 31 deferred revenue to increase approximately 3% to 4% from ending December 31 balances.

For FY18 we expect deferred revenue to be flat to slightly up sequentially in the first half of FY18 and then begin to accelerate in the second half.

At the end of FY18 we expect deferred revenue to be up approximately 9% year-over-year at March 31, 2018.

As a reminder the vast majority of our deferred revenue is services revenue, not software revenue.

For the quarter our Days Sales Outstanding or DSO was 62 days, which is up from 60 days in the prior-year quarter.

Before I turn the call back over to Bob, I would like to spend a few minutes discussing our efforts related to the new revenue standard.

As you may be aware, the FASB has issued a new revenue standard that we are required to adopt on April 1, 2018.

Early adoption of the new revenue standard is available on April 1, 2017 which is the start of our next fiscal year.

While we are far along in our early adoption efforts, we have not made a final decision regarding the timing of our adoption.

We believe that adopting new revenue recognition standards on April 1, 2017 aligns well with the gradual shift we expect to more subscription revenue as we roll out new subscription-based software and services offerings throughout FY18.

The adoption process of the new revenue recognition standard requires interpretation of the rules, recasting of our historical results and changes to internal processes and controls.

The recasting of our historical FY16 and FY17 financial results will provide comparable results in the year of adoption.

Our current assessment is that the new standard will not materially impact our historical revenues.

The changes in accounting for sales commissions, which are also covered by this new revenue standard, may materially impact our financial results.

Under the new standard, a portion of the cost of sales commissions will be recorded as an asset and recognized as an operating expense over the time period that the Company expects to recover the costs.

Currently all commissions are expensed as incurred.

To date, our efforts have been focused on being in position to early adopt the new revenue recognition rules on April 1, 2017, but we will not make a final decision until later this fiscal quarter as we continue to finalize our accounting policy conclusions and implement new related processes and controls.

We will continue to monitor evolving interpretations of the standard and will announce our final decision during the fourth quarter earnings call.

That concludes the financial highlights.

I will now turn the call back over to Bob

Thank you, Brian.

CommVault is the only company in the industry with an enterprise data platform that is available today, which enables customers to address their key strategic issues across the Data Center and into the cloud with one holistic fully integrated indexed platform.

We have integrated the ability to embed the contextual understanding of data being managed through comprehensive dynamic indexing and securitization, combined with software defined infrastructures and leading copy data management capabilities that natively extend into the cloud for active data use cases.

We can do this across all infrastructures and what some industry pundits are now calling supernova with applications and data spread across on premise, co-location hosting and the cloud.

Gartner says IT leaders must apply an enterprise-wide strategy in this regard, a requirement for which CommVault is uniquely suited.

These capabilities enhance our competitive position versus our legacy competitors and provide best in class, more comprehensive, scalable solutions versus [newnish] competitors or siloed tools in the market.

Many customers and industry experts have now come to realize that you cannot truly manage data unless you have a comprehensive understanding of that data and combine that understanding with seamless data portability so that it can be used in different locations and forms as compared to blind single use copy images.

As I mentioned earlier, CommVault continues to outpace the market with our robust pipeline of product innovations.

The new products and services we are launching this quarter and throughout FY18 address the big strategic needs of our customers including a journey to the cloud, natively extending infrastructure and applications into and across cloud environments, modernizing IT infrastructure, replacement of legacy infrastructures with modern lower cost cloud scale out infrastructures, addressing the scarcity of IT resources through simplification and automation, securitizing and controlling access to critical data, and lastly, the digital enterprise driving improved business performance through data analytics.

I want to talk a minute about the journey to the cloud.

Next month we will further enhance our offering with new solutions with industry-leading web-based UIs and enhanced automation to make it easy for customers to extend data services across the enterprise powered by CommVault solutions.

I will now discuss some of the key enhancements tied to the journey to the cloud and converged data management.

These enhancements include new and enhanced solutions including data and application migration with new or upgraded solutions for Oracle applications and the Oracle cloud, Big Data, SaaS data and SAP HANA, migrating and cloning data resources into the cloud, which includes automated orchestration of compute and storage services, disaster recovery, QA, dev test and cause inspection and optimized cloud protection recovery solutions inside and across clouds to secure data against ransomware risks and provide disaster recovery.

We continue to make good progress on our software defined data service solutions which are in early release.

We will broaden out the availability of these solutions next quarter.

So more and more of our customers are replacing or planning to replace their current IT infrastructures with low-cost flexible scalable infrastructures similar to those found in the public cloud.

This trend is driving the convergence of data management and IT infrastructure management into new highly automated service oriented architectures.

Our teams have been hard at work to embed those cloud like capabilities directly into the CommVault data platform so we can ensure the delivery of a new class of active, copy management and direct data usage services across an infrastructure built with low-cost, scale out hardware.

This is in contrast to prior infrastructures that required expensive controllers and imposed constraints on our customers' cost to scale.

Our new software defined data services architecture delivers the most comprehensive set of data management and infrastructure management capabilities and services.

Our software defined data services includes built-in redundancy for hardware failure, built-in security at the file level, active data availability and automated orchestration behind policies, complemented with a rich API set for customizability.

As part of our early release program, we have been working with both new and existing customers to design and deploy the software defined data service capabilities of the CommVault data platform for use cases like enterprise converged back up, Big Data analytics, digital repositories for image files, and genomics data runs.

With a CommVault data platform based on software defined data services deployment model, we can offer customers the ability to quickly deploy new automated scale out storage infrastructures employing low-cost open industry standard service -- servers and infrastructures.

Unlike the software defined storage offerings in the market, we combine infrastructure automation and web scale with data lifecycle management, data indexing, tenant-based security, and access controls and learning and analytics to create a comprehensive sets of data services.

This unique proposition allows users to more fully utilize their data, enable secure user access and fully automated auditable compliance and ensures data retention business service level requirements.

This new class of enterprise software defined data services solutions will be delivered in fully automated virtual or physical appliances that allow customers to quickly set up new infrastructures that can be deployed on premise or in the cloud.

In addition, during Q1 and Q2 FY18 we plan to release both new and enhanced solutions for enterprise search, file sync and share collaboration, cloud-based email and endpoint protection as well as new capabilities for our service provider customers.

We will also offer new platform enhancements and pricing.

As I mentioned earlier, our enhancements tied to the digital enterprise will be released this fall.

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

In closing, CommVault had another solid performance in Q3 FY17.

Our business momentum continues, and we are carrying that momentum into Q4.

Confidence in the outlook for the business has increased with good funnel growth, the introduction of new solutions and enhancements to the CommVault data platform and opportunities to increase distribution leverage.

In the short-term we have a great opportunity in customers' transition to the cloud to accelerate our growth rate and increase our market share in our core data management business.

Just as a reminder, we will need until the second half of FY18 to reaccelerate our maintenance revenue stream.

We have a clear game plan to achieve sustainable strong double-digit revenue and earnings growth over the long term.

We have built a solid foundation for FY18.

I will now turn the call back over to Michael.

Thanks, Bob.

Operator, can we please open the line for questions?

(Operator Instructions)

Joel Fishbein, BTIG.

Good morning, guys, and thank you for the color on the constant currency.

A question on the business in the Americas.

Bob, you mentioned the good execution.

I was curious about the close rates and any changes at all in the competition considering that business was flat year-over-year.

That would be helpful thanks.

It was the Americas basically had a good solid quarter, Joel.

The issue in the Americas was their large deal -- the mega deal [falls] rate which will bounce back in the March quarter.

There is nothing fundamental there.

No increased loss to competition.

This was just I would call it big deal lumpiness.

But there is no color on competition.

We still are gaining position in the Americas against our legacy competitors.

And as I said on the call we are -- we did have good performance on our standalone solutions particularly virtualization.

And we're about to launch a full series of new products that will strengthen both our enterprise and midmarket position.

In fundamental terms the Americas is in good shape

That is great.

As a follow-up any color on AWS and Azure in terms of the pull through there.

We'd love to get any color there as well.

When you look at our internal numbers, in both cases we've had strong pull from both AWS and Azure.

The pull from AWS has been stronger so there's a higher percentage of our customers' data in AWS, but I would also say we are gaining a lot of momentum and traction with Microsoft and Azure.

There is really good go to market cooperation with the two companies.

We feel really good about that as well.

As we go into later this quarter you'll see us provide a whole series of new solutions for the Oracle cloud as well.

That will become a positive factor for us.

Aaron Rakers, Stifel.

Thanks.

I want to build on that latter question.

You've talked about broadening strategic partnerships.

You've talked about leverage in your distribution channels.

As we look at if it's Microsoft, Amazon, Cisco, now it sounds like Oracle -- do continue to see or how would you characterize your engagement with even further expanding a partnerships either be it the likes of the solution partners or even more strategic infrastructure/cloud partnerships?

Beyond the ones you just mentioned, Aaron, there's a lot of work we are doing with the global systems integrators.

So that the global GSIs are becoming more and more major factors in driving revenue.

They are controlling a lot of these major products whether it's infrastructure migration to the cloud or new applications and deployment.

If you look at AWS, Microsoft, Oracle and then the big global GSIs, those are all new areas of distribution leverage for us.

We're also putting a lot more focus and effort in our service provider customers at which Al can talk about here in a second in terms of improving our position with them.

In addition to that we've gotten a lot of traction in our healthcare vertical with new partners such as Epic and healthcare, so healthcare is a high-growth area for us.

In addition to that, international we've clearly enhanced our partnership for example with Huawei in many parts of the world.

Al, you want to take a second and?

Yes, I think also, Aaron, I think Bob nailed that pretty well.

I was going to comment even to Joel just a little color on the GSI side.

We had a major system integrator partner in yesterday, and what is happening with these guys, Aaron, is they are developing practices around and consulting activities strictly around, in this case going to AWS.

And of course our play within that is now what are the implications for data management?

So we're seeing more of that to Bob's point across a number of those SIs, and our play there is to get involved in them.

And then his points on service providers you're seeing -- and you know this, but more and more service providers are moving off the old host it model and/or infrastructure model to more of the management model and are actually using cloud infrastructure and/or open infrastructure, if you will, for the core hardware platforms that a lot of their activity is focused on.

You're seeing a real -- I don't want to over use the term convergence, but you are seeing a real convergence of SIs, cloud providers, service providers even major resellers with programs all focused around this thing we call cloud.

As a quick follow-up is there any framework, I know 250% growth in petabytes managed into -- updated into public cloud.

How big would you say public cloud is as wither a percentage of software business or as a percentage of the total petabytes you would say manage under the CommVault platform?

We think that it's a very small percentage of our managed petabytes at this day.

I have seen industry factors that they are somewhere around 7% adoption, and again I'm not burdened with any facts as President Elect would be, but I think we are at the very early point of adoption here.

Percentage of revenue?

Oh, yes.

Percentage of revenue is very, very material.

Almost every one of our big enterprise deals has a cloud component attached to it.

Even though you have some customers that we've mentioned publicly, we just mentioned Dow Jones, who may have half of their data going to the cloud or in some cases all of it going to the cloud.

But almost every customer has some component, Aaron, going to the cloud.

Cloud is strategically relevant, and I would say this for the sake of argument, well over 90% of our enterprise deals.

I can say 100% but certainly well over 90%, and if I look out over the next year or two in terms of data that we would be managing, it would be certainly well north of 100 petabytes and maybe double that over the next year or two.

To give you some direction on terms of size or the amount of data we are starting to manage in these public clouds.

Jason Ader, William Blair.

Thank you.

A couple of questions for me.

First, Bob, I know you mentioned you are comfortable with the consensus estimate for the March quarter.

I'm trying to understand Q4 seasonality on the software side.

How do you look at that historically?

Right now it looks like consensus is up about 4% sequentially on the software side.

I know there is some FX probably as a headwind in there, but how do think about -- what is a normal sequential growth rate for your software business in your fiscal year, especially because it's the fiscal year end and you would expect sales guys trying to close those big deals.

Hi, Jason, it is Brian.

Maybe I will take that one.

In terms of I don't know if there's any set firm seasonality percentage we can put on it, but we did say their are services will decline sequentially in fiscal Q4 as expected.

And therefore some of that I think we are affirming total revenue is going to have to shift to the software line if you model that appropriately that's where it should shift to while keeping the consensus total revenue where it is.

Okay so the decline would be in the services revenue in the $2 million range?

Do you have any kind of specificity there?

We're not going to say what number is, but it will decline.

Okay.

And second question this is probably for you, Brian, as well.

On the leverage 100 basis point expansion for FY18, I know you have some headwind from the services line, but if you're going to grow your software revenue strong double digits as you said, I'm a little surprised that you'd only be able to expand by 100 basis points.

What are some of the other factors involved here that are not creating more leverage?

The biggest issue is maintenance.

We just cannot get around it.

When you have maintenance running flat it's just very hard to get operating margin expansion when we are trying to from an investment standpoint our goal is still to get our license revenue growth in a reasonable period back north of 20%.

What Brian said on the call, we are controlling expenses so we can get very strong Op margin expansion in the second half of 2018 and controlling it without having a significant impact on license revenue growth.

But that is -- that overrides every issue.

You've got some Op expense given the depth and breadth of the business and to these new markets and distribution areas were moving into, but I can tell you more than anything else, maintenance is the issue on Op margin expansion.

Once that comes in line you will see a lot of leverage in the business.

And we are -- that starts to happen in the third quarter of FY18 and really start to accelerate in the fourth quarter.

And that's where the leverage of the business is.

That combined with a fair amount of sales force productivity we set ourselves up for in FY18 drives your op margins.

Those two areas.

Do you expect a higher at a slower pace going forward?

We're slowing it down from planned levels.

That's what we are doing.

Reallocating resources and we're slowing it down.

So we can get our financial model in-line here.

Once the -- I think you'll see a good solid license revenue growth and once the maintenance line swings around, then you've got your operating leverage.

The sales force productivity -- and sales force productivity is whole number of elements in terms of how you drive that.

We've got that pretty well-positioned

Thank you.

Abhey Lamba, Mizuho Securities.

Thank you.

Bob, continuing on your comments of margins.

Given your commentary that are tied to maintenance and productivity enhancements down the road, should we expect greater margin expansion beyond FY18 as we get into FY19?

Should we be looking for higher than 100 Bps of expansion?

Absolutely.

Okay great.

Going back to your earlier comments, Bob, your compares are getting tough starting with the next couple of quarters.

And can you talk about the different growth drivers that can help you accelerate your software license revenue to double digits?

It has been -- the major factors if you think about why the companies returning to growth it's been tour V11 platform -- data platform and journey to the cloud combined with good solid growth in our standalone virtualization solutions and much better sales execution and higher sales capacity.

That is what got us this far.

Going forward we are going to do a number of things.

We are enhancing our data platform relative to competition including software defined data services which is a pretty -- it's a significant deal.

We're coming at the end of the early release so come next quarter that will be in full release.

We are enhancing and doubling or tripling the number of standalone solutions that are monetizeable out there with new web-based UIs to make it easier for customers and channel partners to drive it.

So you've got expansion on the top end of the platform and you've got significant increase in the number of products with I will call it modern web-based UI attached to them which should make it easier and making it -- trying to take away all the barriers in terms of business with CommVault just to make it easier to work with us including new pricing models.

Now add to that things we're doing in healthcare and then come this fall and this is not trivial, the enhancements to the platform for the standpoint of business analytics and process automation is substantial including new advanced search capabilities.

We've got ourselves well-positioned to open up lots of market increase competitive position against legacy competitors.

There won't be a niche competitor out there from a best in class standpoint that's going to cause us -- we will we lead across all of these high-growth niche markets with standalone solutions.

And we're expanding distribution.

Those are all in place.

Now it's just making sure we execute like hell.

And as a team we are working with alignment and focus to improve our execution.

Got it.

Think of CommVault as making a transition successfully which we are now in phase 2 of that to leverage off of that into another phase of growth.

And all the foundation points for doing that are in place as we speak.

Got it.

Thanks, Bob, and my last question is your commentary about funnel.

How should we think about your funnel fitting into the quarter versus last year and the last quarter?

You characterized it as healthy in your prepared comments today.

And the last call you had called it a be at the [vected] levels.

Just trying to see where we are sequentially and on a year-over-year basis.

Thank you.

It's definitely up.

The key to it, and I can tell you right now is big deals.

We've got a lot of them.

If we have reasonable big deal close rate we're going to have a really good solid quarter.

That's where it is.

Thank you.

Alex Kurtz, Pacific Crest Securities.

Thanks guys for sneaking me in here.

A quick follow-up on the big deals, Bob.

Could you see a point next year maybe were even exiting FY18 where you are approaching $300,000 for your enterprise deals?

My question is really about some of the changes that we are hearing about from Dell EMC in their S&B midmarket business that appear to be happening right now and how you guys plan to execute against those changes in the marketplace.

Dell EMC is a formidable competitor, but when you get into both the midmarket and enterprise with what I call modern data protection in terms from a technology standpoint, I think we're way in front of them.

From a distribution standpoint and with things like their flash storage and things like that, that's where they are seeing the growth, but I'll let Al comment on the core technologies when you get into not only [thread aerating] managing data in the cloud, which they are weak there.

Their core legacy storage is causing customers a lot of problems.

And they are not in a lot of what I would call the leading high-growth areas of the standalone markets.

Why don't you comment?

Yes, I think like Bob said, they are formidable especially on reputation and brand awareness and strategic and/or just volume muscle.

But as he was relating there's lots of -- lots of holes in the product line, but the big one that we always see is being able to manage across legacy apps and infrastructure into highly virtualized environment and in their case way beyond VMware, you have to get into the Open Stack world.

And then all the way to new infrastructure not only converge type or converge and obviously public cloud, and a number of their solutions end up fairly siloed yet.

Again they will muscle their way through it just in terms of big company, but strategically and technically we feel like we're in a really good place up against guys like that.

Again we realize it is not just a technology battle there with guys like that.

As Bob said we're putting a lot of effort into our go to market motions, our packaging, our positioning, our messaging, our pricing, et cetera to try to counteract those kinds of threats out there.

And just real quick -- thanks, Alan.

And just real quick on the opportunity of getting enterprise deals over $300,000 over time, do you guys think about that?

Two things.

Yes it's your million-dollar deals, your million and multi-million-dollar.

It's also the number of deals.

We've had quarters where our ASP may go down because the number is high and even though we've had a good solid number of seven-figure deals as well.

That is not something -- the ASP on that is not something we focus because that's a number issue.

We certainly are focused on these big seven-figure deals.

I will make another point.

Brian mentioned it, but this is pretty significant.

The new pricing -- the new accounting standards allow you to mix perpetual and subscription.

When you get into software defined structures were somebody is going to be buying on term or you are going to -- someone has our platform and you're going to start delivering SaaS type Solutions on top of that, if we can adopt a new accounting standard it gives us a lot more flexibility in driving the business and driving larger deals.

So our financial team is doing everything they can to make sure we are positioned to do that even though we're not quite there yet.

But that could have -- that really help this Company accelerate big deal growth if we can get in position to do that next quarter.

Michael Turits, Raymond James.

Hi, guys quick questions, first on margins and then on deferred.

On margins I know Bob you said the primary impact to your FY18 margins was on services.

I'm not sure but it does not seem like your services outlook actually has changed that much.

[You thought] it was going to be bad.

What has changed besides currency that brought you down a point into FY18?

Michael, this is Brian.

We never talked about FY18 specifically until now.

In terms of the three major headwinds, we talked about FX, we talked about lagging services, and we also talked about the investments we've made in FY17 to drive strong double-digit software growth in FY18.

Those three things combined which would drive to --

Michael, we haven't brought FY18 down.

We have not talked about it before.

In terms of margins -- let's say at least relative to the Street, and you can't control that, but Street was a bit higher, almost two points of margin expansion --

Because the Street had too much maintenance growth in their model.

And also they weren't factoring in current FX.

Got it, thanks.

And then just on deferred revenue, the deferred revenue was strong, little stronger on the long-term side than the short-term side.

Anything happening there in terms of duration extension?

Yes just this is a positive from our perspective.

As part of our maintenance repricing process is it has led to longer-term arrangements with customers, and we view that as a positive as we get in the back half of FY18 and hopefully see a resurgence in the services revenue line that long-term deferred is going to help us.

Great thanks for the clarification.

Stephen Bersey, MUFG Securities.

Thanks guys.

Maybe just an update on how you are feeling about your progress within the healthcare vertical and maybe how that experience is shaping up your views towards other opportunities in other verticals.

We have seen substantial growth in health care.

Primarily as we integrated with companies like Epic.

And it's a source of our big deal growth as well.

So we have over achieved our objectives there.

We will continue to expand the healthcare vertical, and we are going into as we move into these other technologies including business analytics, we will have a much sharper vertical focus on the business moving forward.

Got it.

And maybe on the pipeline one more time.

Are you seeing any changes in some of the metrics that you track on the pipeline?

For instance the velocity of deals through it, whether they are slowing down or increasing.

Deals dropping off or getting at it on?

Any change in the metrics?

We have really comprehensive -- we look at pipeline eight ways from Sunday.

And we are -- you've got to look at what your pipeline drivers are.

In the past they were this whole move to the cloud definitely accelerated the pipeline.

Our virtualization accelerated the pipeline and what we're doing now is dramatically broadening our product lines, so when we go out over the next few weeks both at the enterprise level and in the midmarket we've got a whole series of engines now to accelerate momentum on top of the momentum we've established already.

The answer is yes.

We look at it eight ways from Sunday.

Great, thanks.

Sounds like some great products are coming out and I'm looking forward to it.

Srini Nandury, Summit Redstone Partners.

Thank you for taking my question.

Bob, can you tell us what's happening with Europe you grew faster than the world market.

What's going on there?

We've had new leadership in Europe and both at the theater level and in some of the major markets over there.

And that team has just done a great job of execution.

We're just in a much stronger position than we were a year ago.

And it should strengthen our position both in the enterprise and the midmarket over there and that will continue.

Our new theater head over there has done a great job very quickly.

Strengthening the position in core markets like Germany which we were weak now we are strong.

For example.

Northern Europe has been doing really well.

Our new team in the South which was flat has seen really good growth.

I would call it sales execution, much better organization and focus as a result we've gotten good results.

I think to add to that, some the maintenance pricing realignment has impacted EMEA.

And you also saw that in the uptick in the number of new customers we added this past quarter which a good chunk of that was coming from Europe

Andrew Nowinski, Piper Jaffray.

Thanks.

Can you give us any color on the size and growth of your subscription based products?

I would say Andrew, to date that subscription has flattened out.

That is why we've been working almost a year now on a whole series of new products, services provider programs and new pricing models.

I'm confident that will turn, but I don't think you'll see the turn in that card for another couple of quarters.

I think is a couple of quarters I think we will see a resurgence in growth.

I think what's happened with us anyway is that a lot of our customers went to the cloud instead of the service providers and a lot of our service providers changed their models to be MSP -- managed service providers into the cloud so we had a mix shift and where we are going next is some different areas in terms of subscriptions would be much broader.

And it's going to be significant, but you'll start to see that tick up.

It will take us two quarters I think as these models get into the market.

Eric Martinuzzi, Lake Street Capital.

Thanks.

A product question.

November 2017 the new major product.

Typically that is the privatization our customizations you've done for some of your bigger users.

Specifically diving into business analytics and in the process automation side, can you give an example of one on each of what that product will do that your current products does not do?

Or do better than your current product does not do well?

That's a mouthful.

Al, why don't you take it from search.

Let's keep it on that.

I would say search, data cube and maybe some of the embedded machine learning.

We will try to keep this short because it's massive.

He is right, Eric.

Our way of thinking here is to productize and that's a good share of the activity going on between now and next fall.

But productize not only search which we've had for some time, but there's a number of improvements we can do and we're using some open source engines out there to do that.

But really as Bob said we're working with a couple of partners on integrating and machine learning or AI kind of hooks into a content indexed repository, if you will.

So now you can start posing those questions in a real simple example is Google doing instead of searching on flights for tomorrow just ask them what's the best flight for me to take tomorrow or later today from Newark to San Francisco.

Now you are taking search and tying it together with some intelligence.

And from a number of standpoints on a number of examples of we do out there, again we are focused on making sure the foundation is there, the repository is there.

It's all-encompassing.

It goes across everything that we can crawl to, everything that we've touched, everything we have indexed.

It's quite comprehensive and then like I said working with a number of providers and a good share of this by the way is open source tools out there.

So hopefully that gives you a little bit of color.

But I would say between now and then it's almost more of a productization and solutionization issue then and some finishing out the technology, the hard-core development activity.

Relevant to your entire customer base or just power users?

It will be across --

No, it will be across.

Think of the back end we talked about having a single repository for our customers in the cloud and end points in different data centers.

They are dealing with things like compliance and legal and now we are going to turn that back end into a big database and think of it now as a big relative database in the back end.

We have -- we are making it easier for third parties to develop applications.

So your API automation is significant.

And then how you triage and report up the information that comes out of these analytics that Al is talking about that we're embedding a lot of analytics capabilities into it.

And when he is talking about search is when you are going across clouds and machines and everything, how do you find out contextually what is relevant to move into an analytics engine?

It's a very complex process.

You cannot just do it in a cloud, you go do it across the different repositories.

We've built those capabilities to go out and find relevant data that to be analysed and then you can tie that to many different analytics and search capabilities some of which will be embedded in the platform.

And some of which we'll provide hooks will reach out to different analytics to provide results and then present this in some really slick graphical way to the user.

There's a fairly substantial amount of enhancements that go along with this to make this work and then tie that to different verticals and use cases.

That is what we plan to do come November.

You may see some of this come out to market earlier, but clearly from a platform standpoint we plan to introduce this in the fall, but some elements of this might come out in the summer.

[Alexander Rejubich], Jefferies.

Hey guys.

This is Adria Lubich on for John DiFucci.

I just had a quick question on competitive environment.

You still have some of these legacy Incumbents going through their own restructuring but you also some newer private guys coming from a virtualizing cloud perspective.

Can you give us an update on the puts and takes of any update of the competitive environment.

Our view is that we continue to gain relatively to the legacy guys.

And when you start to look at some of the new guys coming in whether it's in software-defined or copy data management, our view is come this quarter with our standalone solutions, we don't see a niche start up competitor out there that we think is going to be an issue.

We think we will be well beyond the new guys coming in.

You still have Veam out there and they have momentum and virtualization.

We don't see -- we see them here or there on some of our big accounts.

We are starting to take them out in some major accounts now.

As they run into some of their federation and scale issues.

But I would say the issue is not -- it's more execution on the CommVault side than the competitive threat.

This is in our hands here to execute.

Again back to the core concepts Bob and Brian were talking about today, we are seeing huge uptick again in enterprises primarily and enterprises interested in being able to manage data from a broad perspective across their wide flung infrastructure which includes everything from data centers to hyper converts to private to public to highly virtualized environments.

And back to Bob's point, most of the startup are the younger guys out there we watch them and they have some interesting technologies, but in general they stay at the very low end of the market or siloed in a lot of the converts guys around BDI at this point.

And a lot of the broader scenarios is kind of talk.

We of course need to make sure they don't expand greatly beyond there, but I agree wholeheartedly with what Bob just said particularly in the mid-midmarket up to enterprise.

We feel confident in our positioning at this point

The scale issue by the way we were dealing with terabytes now we are dealing with petabytes, that scale is going to go up 1000 X really quick.

Positioning ourselves for massive shift in scale on this market which will happen.

If you are not thinking that thousand petabytes and then think about 1000 on top of that yadabyte, if you're not thinking in those terms -- (multiple speakers) the petabytes -- in that sequence we believe that's going to be another shift in the market.

That will take place over the next couple of three years.

Ladies and gentlemen that concludes our Q&A session.

Thank you for participating in today's conference.

This concludes today's program and you may all disconnect.

Everyone have a great day.