Commvault Systems Inc (CVLT) 2017 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Commvault Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

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

Sir, you may begin.

Thank you.

Good morning.

Thanks for dialing in today for our fourth 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 these statements that relate to our beliefs, plans, expectations or intentions regarding the future are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

Actual results may differ materially due to a number of risks and uncertainties such as competitive factors, difficulties and delays inherent in the development, manufacturing, marketing and sale of software products and related services, and general economic conditions.

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

The company undertakes no responsibility to update the information in this conference call under any circumstance.

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

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

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

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

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

As you may have noticed in our press release issued earlier this morning, we have early adopted the new revenue recognition accounting standard.

As part of today's call we will be presenting slides during our discussion of the impact of the new rules.

If you have not already done so, I would suggest logging into the webcast now.

Please also note that in order to best see the slides we would suggest enabling full-screen slide mode within the webcast.

Directions on how to enable the full-screen model are currently being displayed within the webcast.

This conference call is also being recorded for replay and will be -- 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 fourth quarter and FY '17 year-end earnings call.

We achieved strong fourth quarter financial performance which was highlighted by a 15% year-over-year license revenue growth, and 10% sequential license growth.

These results were driven by an increase in both the number and size of enterprise revenue transactions.

We had good contributions from all 3 global sales theaters.

Please note that Commvault has adopted a new revenue standard, ASC 606 effective April 1st 2017.

As a result, the format of this earnings call is going to be slightly different.

I will be covering most of the financial highlights from Q4.

These results are all reported under current GAAP rules and not the new revenue standards.

Brian Carolan will then spend majority of his prepared remarks describing the details of new revenue standard as it relates to Commvault.

After Brian's summary I will close out the call with comments on our plans to continue to improve performance in FY '18, including an overview of our FY '18 product releases.

Let me briefly summarize our Q4 financial results.

Software revenues were up 15% year-over-year, and 18% year-over-year on a constant currency basis.

Total revenues were up 8% year-over-year and 10% year-over-year on a constant currency basis.

EBIT margin was 12.5%, EPS was $0.29 per share, free cash flow was $27 million.

During Q4 '17 we repurchased approximately $25 million or approximately 505,000 shares of our common stock at an average cost of $49.54 per share.

We added 43 net employees in fiscal Q4 ending the quarter with 2,656 employees.

We added approximately 600 new customers in the quarter.

The highlights for the quarter were we had strong sales execution in all theaters on a year-over-year growth basis, software revenue in Americas, EMEA, and APAC was up 11%, 9% and 63% respectively.

APAC had a particularly strong fiscal year with license revenue growth of 38% over fiscal 2016.

We had good year-over-year growth in enterprise deal revenue, software 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 14% year-over-year increase.

The number of enterprise deals increased 10% year-over-year.

Our average enterprise deal size increased 4% year-over-year to approximately $282,000 during the quarter.

A primary element of most enterprise deals is the journey to the cloud.

This includes customers utilizing the Commvault Data Platform to migrate data to and from the cloud, manage data in the cloud, or manage data across on-premise data centers and multiple clouds.

Our strategic partnerships with Microsoft and Amazon continued to grow.

As anticipated, our services revenue of $88.2 million was down slightly on a sequential basis.

As of March 31, 2017, our deferred revenue balance was approximately $278 million, which is an increase of $32.7 million or 13% over the prior-year period, and at 9% sequentially.

We have a healthy large deal funnel as we enter Q1 '18.

During the quarter, approximately 67% of software license revenue was sold on a per terabyte capacity basis.

This is down from 68% in Q3 '17.

Capacity-based license sales also represented 69% of our full-year software revenue, down from 73% in FY '16.

We anticipate that capacity-based licenses will continue to decline as software license revenue continues to shift to standalone solution sets, and as we gradually introduce subscription-based pricing models.

For the full fiscal year total revenues were approximately $651 million, representing a 9% increase over fiscal 2016.

Annual software revenues were up 15% and 17% year-over-year on a constant currency basis.

This is particularly encouraging and validates the successful implementation of our strategy.

Specifically, annual license revenue growth improved significantly from a negative 9% in FY '16 to a positive 15% in FY '17.

Our much improved license revenue growth in FY '17 was due to a number of factors including our clearly defined leadership position as the data experts for large enterprises as they journey to the cloud.

Very strong growth from our standalone solution sets driven by virtual, edge and archive.

Strong growth in our healthcare vertical, better execution from our sales teams as a result of improved sales leadership, structure and staffing combined with our industry-leading software and services, all of these factors provide a foundation for growth as we enter FY '18.

That foundation will be enhanced in FY '18 with a strong product cycle, compelling new pricing models and improved distribution leverage.

As a result, we enter FY '18 with increased confidence.

I will now address our Q1 FY '18 and full-year FY '18 financial outlook.

The good progress we made with all elements of our business during FY '17 positions us to continue to deliver solid software license revenue and earnings growth in FY '18.

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

However, we do have a strong big deal funnel which could help us to achieve our Q1 '18 objectives.

Our new solutions and enhancements should begin to impact revenues in the second quarter of FY '18 and help accelerate growth through the balance of fiscal '18.

Our new pricing could have a positive impact on growth starting as early as Q1 '18.

We believe our revenue outlook for Q1 '18 and the full year has improved slightly as compared to current street consensus estimates.

Brian will discuss this in more detail later on in the call.

We expect services to be relatively flat sequentially in Q1 FY '18 due to the compounding impact and the maintenance pricing changes we instituted last fiscal year.

As communicated last quarter, we expect services growth to reaccelerate in the second half of FY '18 and should incrementally positively impact total revenue growth and operating margins for the full year.

Brian will discuss this in more detail on operating margins later in the call.

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

Achieving our FY '18 license growth objectives will be dependent in large part on a continued successful market adoption of solutions based on our Commvault Data Platform and associated software and services for deployment to and from the cloud.

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.

We are bringing to market many new products with new pricing models and are now moving into new market segments.

This has implied execution risk since successful launch of these products will require enhancements to our go-to-market capabilities and broadening of our partner and alliance relationships.

We continue to be in an opportunity-rich situation in the market.

However, in order to achieve our FY '18 earnings objectives, we need to prudently control expenses in the near term without jeopardizing our ability to achieve our software growth objectives or critical technology innovation objectives.

In summary, we continue to see solid business momentum, which combined with strong sales execution and industry-leading technology and services (inaudible) enterprise customers’ journey to the cloud and that has enabled us to have a strong finish to FY '17.

The key elements are in place for an improved FY '18.

We have made very good progress across all aspects of the company and are building the foundation for sustained solid revenue and earnings growth.

We also have a clear vision for the future, which I will cover after Brian's remarks.

I will now turn the call over to Brian.

Brian?

Thanks, Bob and good morning everyone.

For this fiscal quarter, I'm going to provide some abbreviated financial highlights in order to leave more time to discuss the new revenue recognition standard, ASC 606 which we adopted effective April 1st 2017.

Please note that the financial highlights mentioned below are based on the old revenue recognition standard and not the new standard.

I'll discuss the impact of the new standard on recast FY '17 results shortly.

There are also tables included in our press release issued earlier this morning which help bridge the gap between our reported results under the old and new revenue recognition standards.

And lastly my remarks are accompanied by a slide presentation, which is available on the webcast site for this call.

If you are not already logged into that webcast, I would suggest doing that now.

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

Q4 total revenues were approximately $173 million representing an increase of 8% over the prior year period and 4% sequentially.

On a constant currency basis, Q4 total revenues were up 10% year-over-year.

For the full fiscal year we reported total revenues of approximately $651 million representing an increase of 9% over fiscal 2016.

Total revenues for fiscal 2017 were up 11% year-over-year on a constant currency basis.

Q4 software revenue was approximately $85 million, which increased 15% year-over-year and 10% sequentially.

On a constant-currency basis, Q4 software revenue was up 18% year-over-year, and for the full fiscal year, software revenue was approximately $296 million, representing an increase of 15% over fiscal 2016.

Software revenue for fiscal 2017 was up 17% year-over-year on a constant currency basis.

Services revenue for Q4 was approximately $88 million, an increase of 2% year-over-year and flat sequentially.

Our maintenance and support renewal rates remain strong and our maintenance pricing realignment process is substantially complete.

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

Gross margins were 88% for the quarter.

Total operating expenses were approximately $128.7 million for the quarter, up approximately 15% year-over-year and 5% sequentially.

Non-GAAP operating margins were 12.5% for the quarter, resulting in operating income or EBIT of $21.7 million.

Non-GAAP operating margins were 11.7% for the full fiscal year.

Net income for the quarter was $13.7 million and EPS was $0.29.

As of March 31st our cash and short-term investments balance was approximately $450 million of which approximately 40% is located outside the U.S.

For the quarter, our days sales outstanding or DSO was 65 days which is flat from the prior year.

That concludes my abbreviated comments on the Q4 and full year FY '17 results under the old revenue recognition standard.

Let me now transition and spend the next several minutes discussing our adoption of the new revenue recognition accounting standard.

I'll then wrap up with our expectations for FY '18 before handing the call back over to Bob.

As Bob noted, the new accounting standard does not have a significant impact on our fiscal 2018 outlook, which has improved slightly since our last call in January.

During the next few minutes I will summarize ASC 606 and our process to adopt the new rules, highlight the most significant impacts of the new standard for Commvault, discuss why we are early adopting the standard, provide some specific examples of contracts under the old and new rules so you can understand the differences, discuss the impact on the income statement, balance sheet and statement of cash flows, cover our recast financial statements for FY '17 and lastly provide some qualitative and quantitative projections of what the new standard means for FY '18 and beyond.

As a matter of background ASC 606 revenue from contracts with customers will be effective for public companies in calendar year 2018 with early adoption permitted in 2017.

ASC 606 is a principles-based five-step framework that is applicable to all industries.

The standard also includes guidance regarding the accounting for contract acquisition costs which includes sales commissions.

Commvault has been preparing for adoption as of April 1st 2017 for quite some time.

We've elected to adopt the new standard using the full retrospective approach.

We believe that showing our recast financial statements using the new rules serves the company and our shareholders better as we will be able to make apples-to-apples comparisons in the period of adoption.

The new standard impacts the timing of recognition of revenues and expenses, not the total amounts previously recognized.

It is important to note that the adoption of the new standard has no impact on our historical cash flows.

Also the vast majority of our software has historically been sold as a perpetual license, and under the new standard, the accounting for such perpetual transactions will not materially change.

There are 3 key areas of change for Commvault under the new standard.

First, the new standard will generally require us to recognize term license arrangements which we refer to as subscription arrangements upon delivery of the software.

Under the new rules license revenue generated from such committed subscription arrangements will generally be recognized at the time of sale as opposed to over the term of the license under legacy GAAP.

I will elaborate on our anticipated gradual move to more subscription-based pricing models in a moment.

Please note that committed subscription arrangements are different from a utility type arrangement where there is no contractual minimum.

This utility license model is most commonly used by our service provider partners.

Revenue from these non-committed utility type arrangements will still be recognized over time based on actual software usage.

Sales of committed subscription and utility type arrangements have historically been less than 10% of total software revenue.

Second, the new rules replace the historical VSOE model with an estimated selling price approach.

This is an important change for Commvault.

Under historical GAAP, if new services offerings for which we did not have VSOE were sold at the same time as software products, we were generally required to recognize the related software revenue over time.

Under the new rules the company will generally be required to recognize software revenue upfront and allocate an appropriate amount of revenue to the new service offering using an estimated selling price.

Finally under the new standard, we currently anticipate capitalizing 15% to 20% of our commissions cost and amortizing these capitalized costs over a period of approximately 5 years.

This is a change from our historical practice where all of our commissions are expensed at the time of the software sale.

Upon adoption we established a material asset on our balance sheet for these deferred costs.

We estimate that this change will result in an additional 30 basis points to 40 basis points of annual EBIT margin versus the previous accounting rules.

Please note that the annual basis point benefit in EBIT margin is typically realized in the second half of our fiscal year due to the seasonality of software revenue.

I would like to spend the next few minutes discussing why we are focusing on committed subscription models and the associated accounting for these models which is significantly impacted by these new rules.

Since our software is delivered to the customer and not hosted by Commvault, committed subscription software revenue will be recognized upfront under the new standard as opposed to over the course of the subscription period.

We believe that adopting the new revenue recognition standard effective April 1st 2017 aligns well with current market demands and our planned gradual shift to new subscription-based software offerings throughout FY '18 and beyond.

Subscription-based licensing helps to facilitate customer acquisition by allowing new customers to adopt Commvault solutions with a less significant upfront investment.

It also benefits our existing customers as they expand their workloads into the cloud.

Over time we believe this increases customer satisfaction and will result in incremental recurring revenue and cash flow.

In summary, we are embracing early adoption of the new revenue standard because it aligns well with the underlying market dynamics and changes to our licensing models that we have been discussing publicly for quite some time.

It is important to note that we are in the very early stages of rolling out our subscription models.

Fine-tuning of pricing, packaging and sales processes will occur over the course of fiscal 2018.

As we have previously stated we expect subscription-based revenue to become gradually more significant as the year progresses.

Let me give you a very high-level overview of the types of solutions that would align well to a subscription-based licensing and pricing model.

More and more customers ask us to protect cloud-focused workloads as data continues to grow outside the traditional datacenter.

Moving to subscription licensing allows us to align our pricing to public and hybrid cloud infrastructures that are built on consumption-based pricing.

The most common workloads we see customers deployed for the cloud are disaster recovery, edge or end-point protection, big data, e-mail archive, dev/test, and copy data management.

Let's now look at a simple representative example of a committed subscription license arrangement and how it is accounted for under both old and new GAAP.

In this example the customer will have the right to use software and receive maintenance and support for a total cost of $300,000 over a 3-year period.

The annual committed cost to the customer is $100,000.

Under the new revenue rules Commvault will allocate $185,000 to software and $115,000 to 3 years of maintenance and support or approximately $38,000 per year.

On the next slide, you can see how the $300,000 of subscription revenue is accounted for under historical GAAP and the new standard.

Under historical GAAP we would have recognized $100,000 of revenue each year on a ratable basis.

Under the new standard we will recognize $185,000 of software revenue upfront.

The $115,000 of maintenance and support will then be recognized ratably over the 3-year term at a rate of approximately $38,000 per year.

The result is that the sales of our new subscription licenses will be accounted for much more like the sales of our perpetual licenses with all of the software revenue being recognized upfront.

It is worth noting that on a prospective basis under the new revenue standard, recognition can occur in advance of invoicing our customer which is a change from historical GAAP.

While our current goal is to align revenue and cash flow by collecting cash up front, this may not be practical or in our best interests in all arrangements.

If we determine it is prudent to allow for a customer to pay for their commitment over time, it will result in an unbilled receivable on our balance sheet.

That asset will be split between amounts that will be billed in the next 12 months and amounts that are longer term.

Let's now turn to the impact of the new standard on our recast fiscal 2017 results.

I will start with the income statement and then present the cash flow statement and balance sheet.

As shown in footnote A, the net impact on software revenue was $5.75 million or less than 2% of software revenue reported under historical GAAP.

In the box to the right you will see the detail of the adjustments impacting software revenue.

Commvault has always applied the old rules-based revenue recognition standard in a rigorous and consistent manner.

For example in certain situations we recognize software revenue on a cash basis.

Furthermore under historical GAAP we were required to record revenue under a sell-through approach.

This often meant requiring certain end-user documentation in order to obtain sufficient evidence of an arrangement from sales that were sold through our distribution network.

Now shifting gears to the new standard, when applying the new standard we are required to apply a principle stage framework also in a rigorous and consistent manner.

Under the new standard the sell-through method of revenue recognition no longer exists.

As a result some end-user documentation in channel deals is no longer required for the timing of our revenue recognition.

In addition there will be less situations when we recognize software revenue on a cash basis.

As a result, when the new standard is applied, it results in approximately $2.8 million of net software revenue from perpetual deals being recast to an earlier period.

Also $1.2 million of the adjustment is due to the subscription accounting change we just discussed in a representative example.

The remaining adjustment of $1.7 million is simply a reclassification of certain costs that were previously accounted for as operating expenses.

In the table supporting our press release, you will notice the FY '17 net impact of the software adjustments is primarily related to the fiscal fourth quarter.

The impact on the fourth quarter is the result of our transition to the new standard and recognition of software revenue in an earlier period under the new rules.

Please note that this adjustment to fourth quarter software revenue has no impact on our FY '18 outlook which I will discuss in a moment.

Footnote B includes the detail of the $4 million impact on operating expenses.

You can see the $2.3 million impact of the change in accounting for commissions that we discussed earlier in the call, along with a reclassification adjustment that also impacted software revenue.

And as you can see in note C, the net impact of all of these changes results in a recast non-GAAP EBIT margin of 11.5%.Let me now briefly discuss the impact of the adoption of the new standard on our cash flow statement and balance sheet.

I would like to point out 2 specific observations on the recast statement of cash flows.

First, there is no change to our ending cash and cash equivalents balance as of March 31st, 2017.

And secondly there is no change to our operating or free cash flows for FY '17.

As noted earlier under the new standard revenue recognition can occur in advance of invoicing our customer.

Despite this we currently expect FY '18 free cash flow to exceed non-GAAP EBIT as it has in the prior 3 fiscal years.

Turning to the balance sheet.

You will see an increase in receivables related to the acceleration of revenue under the new rules and the establishment of a new account called "Unbilled receivables" which primarily relates to committed subscription revenue that is being recognized in advance of invoicing.

Beginning with fiscal 2018 we'll begin including the balance of any unbilled receivables in our calculation of DSO.

As a result it's our expectation that DSO will increase from historical levels.

The most significant impact on the balance sheet is the establishment of an asset for deferred commissions and the cumulative impact of the adoption on equity.

You will also notice a decrease to our deferred tax asset.

Please note that this tax adjustment has no impact on our cash taxes paid during the periods presented.

I will now spend a couple of minutes on our forward-looking projections for FY '18 and more specifically our first fiscal quarter under the new standard.

Let me please clarify for everyone that my remarks regarding the FY '18 outlook are based off the recast FY '17 results and are within the context of the new revenue recognition accounting standard.

Please note that for this quarter only we will be more explicit with our expectations as a result of our adoption of the new revenue standard.

As I mentioned earlier our outlook for FY '18 has improved slightly since our last earnings call in January.

This improved outlook is independent of our adoption of the new revenue standard.

We anticipate FY '18 total revenue growth to be high single digits or approximately 100 basis points higher than current consensus growth estimates.

This would imply total revenues approaching $700 million.

We still expect strong double-digit software revenue growth for FY '18.

As previously communicated, services revenue growth will likely be flat year-over-year for the first half of FY '18 due to the compounding effect of our maintenance pricing realignment.

We expect that services revenue will then begin to show sequential growth in the back half of the year resulting in full year services revenue being up slightly over FY '17.

Let me now discuss operating margins.

We expect fiscal 2018 operating margins under the new accounting standard to be approximately 13% which is up approximately 150 basis points year-over-year as compared to the recast FY '17 results under the new standard.

Please note that the changes in accounting for commissions expense has little or no impact on this year-over-year basis points expansion as the change in accounting has been factored into both the recast FY '17 results and our FY '18 expectations.

Let me now talk about Q1.

Again all of my following comments regarding Q1 are within the context of the new accounting standard.

As Bob indicated earlier, we believe we could do slightly better than the current Q1 FY '18 Street consensus for total revenue.

However 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 FY '18 as we anticipate sequential declines in both revenue and EBIT.

We do anticipate that EBIT margin in FY '18 will then sequentially increase over the rest of the year.

We believe that Q1 FY '18 Street consensus for EBIT margin of approximately 9% is reasonable.

As noted earlier the favorable impact on EBIT margins due to the change in accounting for commissions will likely be realized in the second-half of the year.

For FY '18 we expect deferred revenue to be flat to slightly up sequentially in the first half and then begin to accelerate in the second half.

At the end of FY '18 we expect the year-over-year growth percentage of deferred revenue to be in the mid to high single-digit range as of March 31st, 2018.

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

We will continue to use a non-GAAP tax rate of 37% for FY '18 which approximate our anticipated longer term tax rate.

We are closely monitoring potential tax reform and will make any adjustments necessary should and any legislation be passed.

In the first quarter we'll also be required to adopt additional new accounting rules related to stock based compensation and related income taxes.

These rules will be adopted on a prospective basis meaning there is no impact on historical results.

Moving forward, the full tax deduction we receive from our stock-based compensation programs will be accounted for as a reduction of tax expense versus an adjustment to equity.

We expect this change will better align our GAAP and cash tax rates over time.

These tax benefits will also be accounted for as operating as opposed to financing cash flows.

We anticipate that our annual diluted weighted average share count for FY '18 will be approximately 48 million to 49 million shares.

Please note that certain senior executives have approximately 350,000 outstanding stock options that will reach the end of their tenure lives and will therefore expire in the next 12 months.

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

That concludes my prepared remarks, and before I turn the call back over to Bob, I would like to thank you for your patience as I described the adoption of the new revenue recognition standard and its impact on Commvault.

We are excited about this standard as we believe it aligns the accounting with the underlying pricing model trends in our market.

I will now turn the call back over to Bob.

Bob?

Thank you, Brian.

In FY '17 we achieved a good turnaround in license revenue growth from a negative 9% in FY '16 to a positive 15% FY '17.

Objective in FY '18 is to further improve license revenue growth with a significantly enhanced product portfolio to bond with new pricing models and increase distribution leverage.

Our enhanced product portfolio is clearly focused on providing market-leading solutions for customers dealing with the big 3 trends in the market: number one, the journey to the cloud; secondly, IT infrastructure modernization with solutions that has (inaudible) cost flexibility and high utilization rates as public cloud infrastructures; and thirdly, increasing strategic need for modern business analytics.

Aligned with those trends, Commvault does bring to market the largest new product cycle in our history, one that outpaces both our legacy competitors and new market entrants.

Our objective with all our new products is to provide the best-in-breed solutions that meet customers' demands to make complex tasks simple.

Commvault has been known for having the best solutions, but not always the most simple to deploy and manage.

Now we are delivering both.

We are launching key new products in this June 2017 quarter.

The new products include an enhanced platform for the cloud; new hyper-converged solutions for secondary storage infrastructure modernization; new solution set products and extensions; new service offerings for end-point; Commvault managed services and new solutions for service providers.

Additional products will be launched this calendar year including significant enhancements to our Commvault Data Platform for business analytics.

Concurrent with the launch of new products, we're introducing new subscription-based pricing models for our Commvault Data Platform which align with how customers consume both cloud infrastructures as well as the new hyper-converged on-premise storage infrastructures.

I'll spend a minute on the enhancements to our platform.

Our platform has been dramatically enhanced with new web-based console that makes it much easier for users to intuitively manage complex tasks in the cloud on premise and for mobile devices.

This includes best-in-class orchestration and automation of cloud infrastructures, moving data to new clouds and managing data in different cloud storage tiers.

The new enhanced platform is much more highly instrumented providing real time visibility into infrastructure applications and automated tiering and monitoring.

In addition, the compute capabilities now inherent in cloud environments, the need for orchestration capability are extremely important for workload portabilities, use cases like disaster recovery, dev/test and data migration.

Now I want to talk about our new hyper-converged solutions for secondary storage infrastructure modernization.

There is a massive trend in the industry to move away from legacy infrastructure solutions to more commodity cloud-like infrastructures which use lower cost open industry standard service and storage.

The key commoditized hardware components will be managed by software.

The software enables quick automatic deployment, easy scalability and enables very high utilization rates.

Our approach to hyper-converged store is unique since it combines the Commvault Data Platform's comprehensive index knowledge of the data with the management of the backend storage infrastructure.

In summary, the worlds of data management and IT infrastructure management are now converging.

Commvault hyper-converged solutions for secondary storage of Big Data will be sold as Commvault software with well-defined reference architectures as well as solutions that are installed and deliver with hardware such as appliances and scale-out infrastructures.

Commvault’s hyper-converged reference architectures are available this quarter and hyper-converged solutions deliver it with hardware for both smaller and larger scale-out configurations will be available by this fall.

In relation to any competitive offering in these solutions of the optimizer backup data protection, snapshot, replication, archiving, copy management, all with instant data accessibility, highly orchestrated to work with portability across hybrid IT, have much lower cost and have higher functionality and scalability.

Our new Commvault space services offering will include Commvault managed services for backup archive and end-point solutions.

We have seen very strong early adoption and customer interests and we've had early good customer success in the areas of our service-based offerings.

Now I want to talk about going forward on our Commvault enhancements for business analytics.

As we've noted in the past, we are enhancing the Commvault Data Platform to serve as a foundation for the development of highly sophisticated business analytics application.

This is a major expansion opportunity for Commvault.

We are in a strong position to enter this market since we are already well-positioned with our core platform, the indexes, and understands data in any environment on premise, in the cloud, on mobile devices and can index and manage data of the internet of all things and the Industrial Internet.

It is a natural extension for us to add the capabilities for enhanced search to enrich the understanding of the data, to ensure that the right data can be fed to any appropriate analytics engines including those embedded in our platform.

This also includes embedding machine learning and other artificial intelligence capabilities into our platform.

We are also adding the capabilities to make it easy for users to write applications on top of our platform.

We plan to provide more details on our analytics capabilities and many other new products on our second annual Commvault GO Conference scheduled for November 6 to 8 in Washington D.C. Further details can be found on our website.

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 returns to solid double-digit software growth in FY '17.

Last year's fiscal momentum is carried into Q1 with a solid big deal funnel, some of which is driven by our new subscription-based pricing models.

We are positioned to improve our performance in FY '18 with the release of our enhanced platform; the introduction of high-impact new products; increased opportunities to improve distribution leverages, new pricing models and the foundation to reaccelerate maintenance revenue in the second half.

We have had demonstrated success in executing our FY '17 strategy.

We are highly focused and committed to successfully implementing our FY '18 game plan and delivering another solid year of improved performance.

I will now turn the call back over to Michael.

Michael?

Thank you, Bob.

Operator, can we please open the line for questions?

(Operator Instructions) Our first question comes from the line of Joel Fishbein with BTIG.

The above -- the one number that stood out to me that you really didn't address on the call was the bookings number.

The bookings number was up a lot.

Can you just talk about that?

And I guess related to that is what's happening, you mentioned a big deal funnel’s big, if you could give us any examples of any recent wins would be helpful.

I'll let Brian answer the question on deferred.

But on big deal wins, a press release went out this morning with a whole number of those big deal wins, which also -- you pick a copy of that, but they were across all theaters and across all industries, so extremely encouraging.

As far as the Q1 big deal funnel, it is about as large as we've seen in Q1 in our history.

So it's very encouraging.

So they went to the quarter with that kind of funnel and we got off to quite a good start in the first month of the new fiscal year as well.

Joel, it's Brian here and just to answer your question about the billings and bookings performance, we saw a nice sequential uptick in deferred revenue.

It was up 9% sequentially in Q4, that was really driving the overall billings number for us, and that's a result of us going through the maintenance pricing realignment.

We're entering into longer-term contracts with customers and also we saw a slight up-tick in multiyear maintenance sales in Q4.

Great.

Just one quick follow-up to that with the -- and Brian, you alluded to this on the call is that the maintenance pricing is pretty much behind you now.

I mean, is that -- we just have one more quarter, is that correct, I just want to make that clear.

Yes, that is fair to say.

We're at the tail end of that maintenance pricing realignment process.

Now it just needs to work its way through the P&L for the first half of FY '18 and we'll see a resurgence in services revenue.

And that's what our expectation for the second half for the fiscal year.

Our next question comes from Jason Ader with William Blair.

Brian, I just had a question on the expected impact from the shift to subscription in fiscal '18 from a revenue headwind standpoint?

I'll answer that, Jason.

I don't think it's going to be a headwind.

I think it's going to be a tailwind.

It's early so we don't have enough data.

But it aligns really well with how customers want to buy and it appears because it's too early to say clearly some of this acceleration and funnel growth in these big deals is tied to our new pricing models.

So I would assume from an assumption standpoint at this point that that will be a tailwind force and not a headwind.

Okay.

Great.

And then just a quick follow-up on the large deal question.

Would you have any $5 million or above deals in the quarter?

I don't think about that …

We had several seven-figure deals closed in the quarter.

Yes.

We had a lot of seven-figure deals closed --

But no 5.

But no 5 per se.

No 5 or above.

Okay.

Our next question comes from the line of Abhey Lamba with Mizuho Securities.

Congrats on a good quarter.

Bob, you seem a lot of confident going into first quarter especially as we have also have tough compares for the next few quarters.

Can you talk about the fundamental drivers that give you the confidence?

I understand we have a good start of the year.

But going forward, what are fundamental drivers that give you confidence (inaudible) over the next couple of quarters especially as new products are going to be launched and is the attraction from these new products required for you to hit those targets?

Yes, I understand.

So fundamentally we've got really good momentum in the business and I recall this on our core to take big deal data protection and management, particularly as it relates to the journey to the cloud, our standalone products had an outstanding year last year.

Outstanding or awesome.

And we have had excellent sales execution.

Now combine that with a really good solid big deal funnel going into the quarter, the fact that now in our core we've got major enhancements to the platform on our core journey to the cloud combined with new pricing models and enhanced standalone.

So we're coming into the year in a really strong position not to mention the fact that we had a good solid first month, and then in addition to that, as we mentioned now we're launching this quarter our move into secondary storage with whole series of applicants, clearly leading edge hyper-converged solutions against anybody, and right back of that are a series of new standalone solutions and right in back of that is analytics.

And you combine that with enhancements we're making to our distribution and strategic partner leverage, you've got the elements in place.

So this is a big, what I call, execution exercise because all the pieces are now in our hand and now the question is how high up is up.

Got it, Bob.

And Brian, you mentioned in your 606 kind of impact on 2017, just one clarification.

In adjustments to revenue, there's some operating expense reclassification.

Can you elaborate on that, how these expenses kind of falling into the revenue bucket?

Yes, by -- so these were payments made back to our distribution network in the form of marketing development funds, and under the new revenue standard it needs to be accounted for as a contra revenue adjustment as opposed to an operating expense.

Our next question is from Srini Nandury with Summit Redstone.

In prepared remarks, you mentioned you plan to introduce several new products.

Can you give us some color and preview them a little bit if possible and when would they be introduced?

I'm going to let Al -- I've summarized it and I forgot to mention in my last comment they were significantly expanding our managed service and SAS offerings as well.

So Al, why don't you take this?

Yes, I think the new product is of great interest.

Bob just alluded to a big one.

Some of them were tied to our platform enhancements.

The first big one is our storage services layer which is applicable to hyper-converged architectures for secondary environments.

As Bob said, that's a really good play.

There's lots of things there particularly in the secondary storage base putting, if you will, our data services on top of modern architecture.

We're doing a number of things also with our UX, our user experience capabilities that's now going across almost all of our product line.

We're getting extremely good feedback from our channel, our sales guys and of course our customers of all those enhancements.

And then we went through our product line and did a number of things, what I call [cloudised] on a recent sales kickoff around our VM protection, we're doing many more things with Live Sync, we're doing change block tracking, we're doing a number of instant access and a capabilities copy management, doing things in the orchestration space with not only DR, but dev/test and many more.

As Bob just alluded, one of the things we're getting really good feedback on is our SAS offerings, be it end-user, be it archive, be it backup and of course our managed services offerings as well.

Again, as Bob alluded, these are all upon us in terms of new offerings and new solutions out there.

Services side, we're doing some cool new things as well.

Bob, pull up the chair.

Our next question is from Aaron Rakers with Stifel.

I do have a follow-up as well.

Kind of following up on that last question, as you look at your expectations for fiscal 2018 and we think about the opportunity expansion that might exist from new pricing models as well as the new solutions you're coming out, how would you characterize the expansion of your total addressable market, your opportunity set and how meaningfully that's factored in currently to that fiscal '18 outlook?

Yes, it's good question.

It's a significant expansion on TAM.

For sake of argument, let's just say it's 15% TAM expansion, could be a lot bigger than that depending on the numbers you use for -- in the hyper-converged area.

So it could be a lot larger than that.

So yes, it's a meaningful expansion of TAM, Aaron.

Okay.

And is that -- really quickly is that a material contributor to your fiscal '18 views that you could be slightly above where the current consensus of that?

So let me be clear, I think the consensus is reasonable.

I've said all along that our longer term objective is to get this company back -- first get a license revenue growth north of 20% and then the services line which is swinging around and matches so that in time total revenues would be growing at 20%.

With all the things we have in our hand, that objective is achievable.

It may take us a little bit of time to do that, but the opportunity is right in front of us, Aaron, right now.

Okay.

And then the follow-up question I had was as you think about that revenue growth and then you start to think about the productivity of your sales-force, I'm curious to where you think you're at, what inning maybe you're in terms of what you would deem to be an appropriate productivity level for sales and how we think about that relative to the operating margin?

So we have significant sales productivity built into our internal FY '18 plans.

As we said all along, in the second half of FY '18 operating margins will begin to swing around significantly particularly in the fourth quarter, and once you get into FY '19, you have significant operating margin expansion again.

So if you wanted to think of what's possible, what's possible is when you get into FY '20, you're back north of that or in that 20% operating margin range.

So that is a doable objective or goal.

It's not what I would put in your models, but that is certainly the way we're thinking about the business internally.

So it allows us to invest and stay ahead of the market which -- and we are ahead of the market now in all competitors, it allows us a -- it has a massive market expansion opportunity by the way, that's going to be business analytics, but that's going to take a few years to impact the numbers.

But it will impact the numbers in FY '19 because it's substantial.

So we've got all the expansion on our core business that Al just went through which is massive and right back of that you're coming with another big business expansion opportunity here.

So it took us a little while to get all this foundation in place, but it's in place now, to, one, accelerate growth; and two, we work the models as we've done in the past to get our operating margins back in line including significant improvements and sales productivity.

Our next question is from Alex Kurtz with Pacific Crest Securities.

Bob, maybe you could just take us through why the deal size in the enterprise space seems to be improving and sort of how that's playing out with customers as they implement these hyper-cloud solutions?

Is it just that you're getting exposure to more capacity in the environments, more applications than you were a couple of years ago and is that really the big trend, or is there some other dynamic that's driving the improvements in the deal size and the bigger deal as well?

I'll speak and I'll let Al jump in afterward.

I think the issue in the expansion is, is that in major enterprises, as they are shifting to the cloud and thinking about business analytics and how they're going to -- they are more data focused than they were, it's a shift from infrastructure focused -- what do I do with my data and applications, and as they start to think that way, we become much more strategic and relevant, so we're taking out numbers of competitors in these big accounts to solve problems across, I call it core data protection as Al mentioned, DR and archive and how I manage the cloud and how do I set myself up for analytics and (inaudible) when do I do it, my data at the edge.

So it's -- these deals are much more comprehensive and we're taking out legacy competitors that are increased rate and we are expanding into more use cases.

So it's kind of all the above.

And Al, why don't you take it?

Yes, that -- I think you're right on the money.

I'd also add that our sales leadership and our sales management particularly at the enterprise, across all our regions has dramatically improved.

Yes.

So they're doing a great job.

Yes.

And again back to Bob's point, I think because Bob and I sit in a lot of [EBCs] is people coming in, just had a couple yesterday, people are looking for a federated standard broad-based enterprise class solution.

I think -- personally I think there is less and less interest in point-level solutions or departmental level these days and again as all the dynamics Bob talked about in terms of cloud hybrid environments, portability, diverse operations, automobile users, all that environment is -- it's serious, it's a serious requirement and there's not a lot of people that can handle it.

And you combine that with our services and support assets because we've made massive investments in services and support so that we become the trusted adviser on helping these customers architect and manage these environments and then your support now has to be a lot more comprehensive and automated than it was before and those are investments were very significant over the last couple of years and they're really paying off for us now.

Our next question is from the line of Andrew Nowinski with Piper Jaffray.

Just a question in the follow-up on Microsoft.

They've been a strategic partner for a long time, but can you give us any color on how Microsoft might be incentivizing their own sales people to close Commvault deals and whether you're seeing any inflection in revenue growth from a Microsoft?

I'd say the Microsoft partnership continues to improve significantly.

They are a great partner.

They're helping us align their field and ours (inaudible) point in terms of helping customers turning to the cloud, they're a big customer of ours internally, so they are a significant factor in a lot of these major deals where we we're working together to provide cloud-based solution.

So that partnership continues to expand and I can't say enough about how engaged they are and how proactive they are and -- in working with us to the benefit of our mutual customers.

Got it.

And then given the increasing adoption of Office 365, is that also a tailwind for Commvault?

365 is a major tailwind.

I'll let Al go into that.

Yes, Office 365 is working for us very well.

Again with Microsoft -- I think back to your core question though is Microsoft a number of our cloud partners the alignment is generally around most of their field and most of their internal people are totally [centered] around driving cloud usage and cloud capacity.

So we're a big used case obviously for that.

It worked well with Microsoft and a number of the other cloud guys.

Yes, to that point, their sales teams get comped on selling Commvault, that was the question that I didn't answer?

Right.

Right.

That part (inaudible).

And that as well.

So that's always a nice alignment featured here with our partners.

The 365 cuts across a number of different apps in 365 and since our data protection and search is lot more comprehensive across, we had added value to the customer because sometimes they want to bring critical data from 356 let's say to a data warehouse for analytics and things like that and we provide those kinds of capabilities.

So it's definitely a tailwind for us.

Yes, as well as archive and compliance and all of those things.

Yes.

I'm sorry, I didn't answer that question.

Our next question is from the line of Michael Turits with Raymond James.

Thanks for all the patient explanation on 606.

Brian, my question is lots about 606 and just about the economics of license versus equivalent kind of type of subscription deal, sort of a follow up to Jason Ader's question.

So if we look back at Slide 12 with that sample $300 million deal over 3 years, can you give us some sense for what that would have looked like in a license basis, license and maintenance, in other words, is this a 3-year breakeven, so it would be same $300 million over 3 years?

It would be very close, Michael.

I think that the way the economics work in this, again, this is a simple representative transaction, but under perpetual sales we would recognize the bulk of the software revenue upfront, and that's a reasonable amount of maintenance that we recognize over the following 3 years.

It would be very close and I think over time this will result in a recurring revenue stream for us beyond the 3-year period and incremental cash flows and revenue.

Right.

And so the license upfront, it would show in a pure license deal you think would be equivalent or smaller or larger than that $185 million in the subscription deal?

Might be a little less upfront.

Again, this is -- though is going to drive new customer adoption and also benefit our existing customers as they expand into cloud workload.

So as Bob said, we view this as a tailwind.

We have increasing confidence in FY '18 despite our adoption of this.

So it's not necessarily we're counting on the new revenue standard to get there at all and this is going to end up being a kind of a tailwind for us over time.

What some of these customers are doing is since it's an OpEx, they -- those deals could be 2 or 3 times larger than a typical perpetual deal because they are now putting that in a 3-year committed model and we're recognizing it upfront and we're also working on mechanisms to get the cash upfront as well.

So it's working enough.

And it ties to our platform because it's very difficult to do this, what about the kind of platform model that we have.

And our next question is from Eric Martinuzzi with Lake Street Capital.

I had a question for Brian.

Regarding the recast revenues for 2017, do you have for the full-year FY '17 the geographic break-out of the revenue for the 3 different geos?

Eric, we don't have that at our fingertips, I'm sorry.

Okay.

And then …

On a recast basis.

From broad strokes here as far as you talked about a full-year '18 guide on the revs of high single-digits, maybe address it that way, the 3 different segments, where are we growing -- where are the growth rates of the 3 different …

On just -- yes, so based off of historical GAAP, we saw very good growth this past quarter internationally especially in APAC.

You'll notice that from our disclosures.

And on a relative basis, I mean I'd say all 3 theaters are functioning very well.

We're seeing strong performance.

The Americas, we're seeing strong contribution from larger enterprise transactions.

In EMEA, we have got good progress and in APAC as I mentioned was up quite a bit.

In fact, APAC was up something like 38% on a constant currency basis for the full 12 months.

Yes.

Thank you.

And I'm not showing any further questions.

Ladies and gentlemen, this does conclude the program and you may now disconnect.

Everyone have a great day.