Commvault Systems Inc (CVLT) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Commvault Earnings Conference Call.

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

I would now like to turn the call over to Michael Picariello, Director of Investor Relations.

Good morning.

Thanks for dialing in today for our first quarter 2018 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 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 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 services earlier today and it's also been furnished to the SEC as an 8-K filing.

The press release is available on our IR 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.

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

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

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

Thanks, Mike and good morning, everyone, and thanks for joining our first quarter earnings call.

We had a solid first quarter fiscal 2018 highlighted by 18% year-over-year software revenue growth.

All of our global sales regions contributed to our Q1 growth, which is driven by a significant increase in license revenue from enterprise transactions.

Enterprise deal growth was aided by strong initial traction from our new subscription-based pricing models.

We saw improved year-over-year enterprise license revenue growth as a result of our industry-leading Commvault Data Platform.

Our platform is best-in-class technology that supports customers' journey to the cloud, providing customers the ability to move to public clouds as well as to the newer cloud-like on-premise environments.

Let me briefly summarize our Q1 year-over-year financial results.

Software revenues were up 18% and 19% on a constant currency basis.

Total revenues were up 9% and 11% on a constant currency basis.

EBIT margin was 9.6%, EPS was $0.21 per share.

The highlights for the quarter were strong sales execution in all theaters, excellent growth in license revenue from enterprise transactions tied to the cloud, our average enterprise deal size was $375,000 during the quarter, which is a Commvault record.

A primary element of most enterprise deals, as I mentioned earlier, is the journey to the cloud as well as the move to cloud-like on-premise infrastructure.

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.

Secondly, strong initial results from our new subscription pricing-based pricing models, excellent support from our strategic partnerships with Microsoft, Amazon and Cisco.

Our services revenue of $91.2 million was up 3% sequentially, which was better than expected and was driven by strong maintenance revenue results.

Additionally, we have made very good progress on the early launch of our web-scale solutions for hyper-converged environments as well as on the development of a number of other new product and services offerings, which I will discuss later on in the call.

Our growth for the remainder of FY '18 is based upon continued success for the Commvault Data Platform to gain share in large enterprise accounts, the release of a significant amount of new products and services which will begin to have an impact in Q3 and the potential for improved distribution leverage with strategic channel and service provider partners.

I will now address our current FY '18 financial outlook.

We are positioned to continue to deliver improved software license revenue and earnings growth in FY '18.

We have a good big deal funnel, which will help us achieve our Q2 objectives.

Our new solutions and enhancements should begin to impact revenues in the second half of FY '18.

Given our solid Q1 results, our revenue outlook for Q2 and the full year has marginally improved.

We also believe that the current Q2 FY '18 and remaining FY '18 street consensus for EBIT is reasonable.

Our internal objective however is to achieve results somewhat better than consensus would indicate.

Brian will provide more details on our financial outlook.

While our strategic fundamentals are strong and our ability to execute has improved, we still face critical challenges: number one, our ability to achieve our growth objectives in the near term is dependent on a steady flow of large enterprise $500,000 to $1 million-plus deals.

These deals have quarterly revenue and earnings risk due to their complexity and timing.

Even with good funnels, large deal closure rates may remain lumpy.

We are bringing to market many new products, new services and new powerful simplified user interfaces.

These all come with new pricing models.

We are also moving into new market segments.

This is requiring us to execute a complex series of initiatives which have implied execution risk.

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 invest in the near-term without jeopardizing our ability to achieve our software growth objectives or critical technology innovation objectives.

In summary, we're encouraged by our continued business momentum, strong sales execution, industry-leading technology and services, strong new product pipeline and the progress we are making with strategic partners.

We have strengthened our foundation in order for us to achieve sustained, solid revenue and earnings growth.

I will now turn the call over to Brian.

Brian?

Thanks, Bob, and good morning everyone.

As a reminder, we adopted the new revenue standard, ASC 606 in the first quarter of fiscal 2018.

Our adoption was done on a retrospective basis to all prior periods and our financial statements have been adjusted for the new rules and are presented on a comparable basis.

Please note that we were required to apply hindsight to the March 31, 2017 balance sheet under ASC 606.

This resulted in increases to the March 31 accounts receivable and deferred revenue balances since our May 2017 earnings call.

No adjustments were made to the ASC 606 income statements that were disclosed as part of our May earnings call.

I will now cover some financial highlights for the first quarter of fiscal 2018.

Q1 total revenues were $166 million, representing an increase of 9% over the prior year period and flat sequentially.

On a constant currency basis, total revenues were up 11% year-over-year.

We reported software revenue of $74.8 million, which increased 18% year-over-year and down 4% sequentially.

On a constant currency basis, software revenue was up 19% year-over-year.

Revenue from enterprise deals, which we define as deals over $100,000 and software revenue in a given quarter, represented 63% of software revenue.

Revenue from these transactions was up 50% year-over-year and the increase was across all 3 geographic theaters.

The increase was driven by a record ASP of $375,000, up 59% over the prior year.

The number of enterprise deals decreased 6% year-over-year.

From a geographic perspective, Americas, EMEA and APAC represented 53%, 32% and 15% of software revenue respectively for the quarter.

On a year-over-year growth basis, Americas, EMEA and APAC were up 12%, 35% and 10%, respectively.

EMEA software revenue was up 39% on a year-over-year constant currency basis.

The revenue mix for the quarter was split 45% software and 55% services.

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

Total services revenue for Q1 was approximately $91.2 million, an increase of 3% both year-over-year and sequentially.

As a reminder, maintenance revenue consists of customer support and software updates, and has historically represented approximately 85% to 90% of our total services revenue.

You will notice that as a result of new disclosure requirements related to ASC 606, we have started to report our maintenance revenue separately from our professional services revenue in Table 4 of the earnings release issued this morning.

Our professional services consist primarily of installation and consulting services as well as customer education.

The growth in total services revenue was driven by a 5% year-over-year increase in maintenance revenue driven by strong renewal rates.

The increase in our maintenance revenue was partially offset by 8% year-over-year decline in our professional services.

We believe the decline in our professional services revenue is primarily a byproduct of our successful efforts to simplify installation of our software.

We've also continued to grow the ecosystem of partners that can provide end-user customers with high-quality professional services.

Our professional services organization is evolving and focusing on providing customers with outcome-based as a service offerings.

Early feedback from customers regarding these offerings has been very positive, and we believe these services will become a more significant contributor to our professional services revenue in the future.

Now moving on to our pricing models.

During the quarter, approximately 66% of software license revenue was sold on a traditional per terabyte capacity basis.

This is down from 68% in Q1 '17 and 67% in Q4 '17.

We anticipate that sales of our traditional capacity-based licenses will continue to decline as software license revenue shifts to standalone solution sets in our new platform pricing model.

During the quarter, we had strong results from our newly introduced subscription-based pricing models.

As we get more traction and predictability with such models, we will provide more metrics around this.

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

Gross margins were 87.4% for the quarter.

Total operating expenses were approximately $127 million for the quarter, up approximately 10% year-over-year and flat sequentially.

We added 77 net employees in fiscal Q1, ending the quarter with 2,733 employees.

Operating margins were 9.6% for the quarter, resulting in operating income or EBIT of approximately $16 million.

Net income for the quarter was $10.1 million, and EPS was $0.21, based on a diluted weighted average share count of approximately 47.5 million shares.

Foreign currency movements had no impact on EPS.

Net 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 FY '18.

Let me now touch on our outlook for the remainder of FY '18.

We continue to expect strong double digits software revenue growth for FY '18.

As such, we believe the current Q2 FY '18 and remaining quarters of FY '18 street consensus for software revenue is reasonable.

From a services revenue perspective, our Q1 FY '18 maintenance revenue was higher than anticipated due to strong renewal rates along with overachievement of software revenue.

We now expect year-over-year services revenue growth to be in the low-single digits in the first half of FY '18 and in the mid- to high-single digits in the back half of the year.

As a result, we anticipate FY '18 total revenue growth to approach 10%.

This would imply total revenues approaching $710 million.

Let me now touch on our outlook for EBIT.

We believe the current Q2 FY '18 and remaining quarters of FY '18 street consensus for both EBIT dollars and margin percentage is reasonable.

We do anticipate that EBIT dollars will sequentially increase in each quarter of FY '18, and expect full year operating margins to improve approximately 170 basis points, or be approximately 13.2%.

Please note, our investment strategy is tied to an internal objective that exceeds our FY '18 revenue outlook commentary.

We will continue to strategically, yet prudently, invest in FY '18 in order to strengthen our market position in the industry and increase market share.

That being said, we are focused on achieving our shorter-term financial objectives.

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

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

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

We anticipate that our 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 300,000 outstanding stock options that will reach the end of their 10-year lives and will therefore expire in the next 9 months.

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

Now moving on to our balance sheet and cash flows.

As of June 30, our cash and short-term investments balance was approximately $481 million, of which approximately 35% is located outside the U.S. Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $18.5 million which was down 20% year-over-year.

During the quarter, we made a $3 million prepayment for software royalties related to our solutions for hyper-converged environment and our scale-out appliances.

We continue to expect full year FY '18 free cash flow to exceed non-GAAP EBIT as it has in the prior 3 fiscal years.

As of June 30, 2017, our deferred revenue balance was approximately $293 million, which is an increase of 17% over the prior year period and 5% sequentially.

All of our deferred revenue is services revenue not software revenue.

For Q2 and the remainder of FY '18, we expect sequential deferred revenue growth to increase in the low single-digit percentage range.

As a result, at the end of FY '18, we expect deferred revenue to be up approximately 10% year-over-year at March 31, 2018.

You will notice in our 10-Q that we will file later this week that ASC 606 requires us to disclose contracts that have been received but are not included in either revenue or deferred revenue.

As of June 30, we had received cumulative orders totaling approximately $15 million for which Commvault still needs to satisfy certain performance obligations.

The vast majority of this balance is for professional services engagements, which is contingent upon a number of factors, including customers' needs and schedules.

While this required disclosure is new, having unfulfilled performance obligations is typical for our services business.

For the quarter, our days sales outstanding, or DSO, was 75 days, which is up from 70 days from the prior year.

At June 30, our receivables balance includes approximately $7 million of unbilled receivables.

We have included the unbilled receivables balance in our DSO calculation.

The vast majority of the unbilled receivables will be invoiced in the next 12 months.

As noted on our Q4 '17 earnings call, in certain situations, we are required under the new revenue rules to recognize revenue in advance of invoicing our customer.

As a reminder, while it is our goal to align revenue and cash flow by collecting cash upfront, this may not be practical or in our best interest in all cases.

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

Please note that the unbilled receivable balance will likely grow over time and will impact DSO.

That concludes my remarks.

I'll now turn the call back over to Bob.

Bob?

Thank you, Brian.

I would like to spend a few minutes reiterating our strategy and providing some detail on our pipeline of new products.

The major elements of our strategy remain, increasing share in our data management business in both the enterprise and mid-market with expanded and broadened solutions and use cases, develop significant new business solutions for hyper-converged secondary storage environments, expand to outcome-based services and SaaS and open up significant market opportunities with analytics-based solutions.

As I mentioned last quarter, Commvault is bringing to market a record number of new products and service innovations this fiscal year.

We have already increased the momentum of the business through the Commvault Data Platform tied to our customers' journey to the cloud.

The new products and services we are launching for the balance of this fiscal year will help us further increase that momentum.

Commvault provides best-in-class solutions that outpace both legacy and new entrants to meet customers’ demands to make complex tasks simple and to help companies get greater value from their data to improve business insights and faster decision-making.

We launched key new products in the June '17 quarter.

The new products include, key enhancements to the Commvault Data Platform for the cloud, new enterprise web-scale solutions for hyper-converged secondary storage infrastructure modernization, new enhancements to our virtualization solutions, including a best-in-class user interface for ease-of-use, new service offerings for endpoint Commvault Managed Services and new solutions for service providers.

Additional products will be launched this calendar year, including Commvault web-scale appliances for the mid-market, advancements in active copy management or ACM.

ACM is Commvault solution set for orchestrating the complex set of tasks necessary to encapsulate database and application workloads and make them portable between tiers of on-premise and cloud-based storage.

This is critical for high-scale disaster recovery and complex dev/test solutions.

Enabling enterprises to solve general data protection regulation, or GDPR, compliance problems with innovative unique solutions based on our new analytics capabilities, delivering innovation new solutions to mitigate ransomware and other cyber security risks, and significant enhancements to our Commvault Data Platform for data and business analytics.

Concurrently, we are making excellent progress on increasing distribution leverage with our strategic alliance partners, global TSIs and service providers.

We have launched more focused targeted sales and marketing efforts.

We've enhanced our go-to-market capabilities to keep pace with our increasing rate of new product introductions.

I now want to expand on Commvault's new solution for hyper-converged secondary storage which we believe is revolutionary.

Large enterprises are looking to move away from legacy infrastructures and integrate public cloud-like technologies to modernize their on-premise data centers.

They're also looking to transform their internal IT infrastructure and operations to mimic the utility, elasticity, scale and operating economics of the cloud.

New generations of appliances are being developed often in a distributed and geographically dispersed manner that rely on processing and analyzing massive amounts of big data and machine-generated workloads.

Enterprises are beginning to deploy low-costs, commoditized service and storage which are managed by software.

As it relates to Commvault's solutions for secondary storage, our software enables quick, automatic deployment, easy scalability and enables very high utilization rates.

We see an increasing trend of companies deploying hybrid IT, deploying new cloud-like on-premise infrastructures in conjunction with moving selected applications and data to the public cloud.

Commvault solutions for hyper-converged secondary storage and big data are now being sold as Commvault software in combination with well-defined hardware reference architectures.

Early this fall, we planned to complement our enterprise web-scale hyper-converged solutions with Commvault web-scale appliances for the mid-market.

In relation to any competitive offerings, these solutions will be optimized fully indexed copies for backup data protection, snapshot replication, archive and copy management, all with instant data accessibility, highly orchestrated for workload portability across hybrid IT at much lower cost and at much higher functionality, security and scalability.

Our approach to hyper-converged storage is unique since it combines the Commvault Data Platforms, comprehensive index knowledge of the data with the management of the back-end storage infrastructure.

In summary, we have converged the world's best data management platform with the most innovative hyper-converged storage services capabilities into 1 platform.

It enables customers to deploy 1 platform to manage all data use cases, manage data at the object level with comprehensive dynamic indexing with higher levels of security and lower costs.

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

In closing, we had a solid Q1, and have made significant progress in executing our strategy to improve our market position and expand our addressable markets in order to maximize revenue and earnings growth.

Specifically, we have made excellent progress on our innovative pipeline of new products, which we'll rollout throughout FY '18 and are designed to strengthen our competitive position and open up new market opportunities.

Additionally, we continue to improve our distribution leverage which is key to improving sales productivity.

We are also well positioned for improvements in services growth in the second half of FY '18.

We have successfully recast Commvault, repositioned our business and regained our momentum.

Simply put, we are the premier data to help our customers become experts with their data.

Together with our partner ecosystem, that's what we offer our customers: the most powerful software and services portfolio for customers of all sizes to protect and use their data so they can get value from it.

So today's Commvault covers the most critical needs of the market, from modernization of infrastructure, on-premise and in the cloud to protection from threats such as ransomware and enable readiness for new regulations such as GDPR.

We believe the company is in the strong and strategic position in our history.

We are focused on successfully executing a very exciting, but complex series of strategic initiatives to increase our momentum and improve our profitability.

I will now turn the call back over to Michael.

Michael?

Thanks, Bob.

Operator, can we please open the line for questions?

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

Bob, I've got 1 for you and 1 for Brian.

Bob, just in terms of the large deal momentum that you saw in the quarter, was there any particular products or new solutions that were driving the increased deal sizes or was it just more of a timing issue that you're seeing the momentum in the business?

I know you mentioned the pipeline is very, very strong but any color there would be really helpful.

Yes.

It's clear that when the market is responding to our platform, not just the journey to the cloud, which is critical, but also our ability to manage these changes in on-premise infrastructure and deal with these issues tied to security.

So it's the one platform that manages on-premise, Edge, new modernization IT infrastructures, managing data in the cloud as well as to the cloud and having ability to manage data across clouds, the platform is the driver.

And when you combine that with our new pricing -- subscription pricing models, it's providing a lot of differentiation versus competitors in both technology and pricing and driving larger enterprise deals.

That was a great segue into my next question for Brian, which was, I know you said that you'll give us more details down the road on the subscription-based pricing model, but obviously, this is fairly new to Commvault.

Just anything that you can give us in terms of how that's going to work in the future and obviously, you're pretty excited about it.

But when do you think it will be meaningful as a percent of revenue?

Well, I'd say that we're internally pleased with our first quarter with subscription-based pricing internally.

So we are optimistic this is going to be a catalyst for growth for us.

We think that the market is ready for this and also the new accounting standards align very well to the treatment of these pricing models as well.

It was significant for us in Q1, and I think that over time, if we get some more history and some traction, we will start providing some more metrics.

But we're pleased by the first start in Q1.

So if you would take the word significant, Joel, and you combine it with the innovations we've made to the platform, it's that combination that's driving and helping to accelerate momentum in the enterprise.

Our next question comes from Jason Ader of William Blair.

I have also got 1 for you Bob, and 1 for your Brian.

Bob, on the visibility front, I know you talked about getting back to where you were a few years ago, when you guys, I think, felt really good about being able to predict the ensuing quarters.

Where would you say you are versus a few years ago, and when do you think you'll get back to that level of visibility that will let you sleep well at night?

Well, we're clearly not there yet.

As I mentioned on the call, we are still big-deal dependent.

I think by the end of this fiscal year, if we execute well, we'll be even in a stronger position than we were a few years ago because of the breadth of products, the breadth of market segments we'll be addressing, the ability to drive revenue both in the enterprise, strengthen our channel.

We've got a lot of those products and services that are relevant to our strategic partners.

So I think the game plan we put together is on the cusp of enabling us to do that, but we've got, I'd say 2 to 4 quarters of getting all this into market, and then it's got the potential to provide that kind of consistency in the model.

Now we've been extremely consistent in execution over the past 8 quarters, all tied to driving the initial part of the strategy.

But to your point, Jason, we are not in the same position we were or just kind of at least, it looked to the outside that we were on automatic, as we had almost 10 years of that.

But I think we're in a much stronger strategic position now than we were back then.

We just got to do a really good job of successfully executing the next phase of our expansion here.

I don't know, Alan, if you want to add anything to it?

No, I think that's a very accurate, Jason.

And I think the only thing I would add is while the other assets that Bob did mentioned is it's obvious to, as we go along that our services capability and our large field services, technical capabilities, that's our real assets.

I happen to believe that the end-user markets out there have lost some design and architectural talent over the last few years, primarily the outsourcing and so our position there is unique.

But on top of that, as Bob said, I think strategically, we're in an all-time best position since we've been here.

And I know Bob is starting to sleep better at night and I'm sleeping pretty well myself.

Yes.

There's another aspect to work it out.

Al began driving our SaaS and managed services about 1.5 years ago, and that's got some really high growth.

That's another underlying layer that gives you more consistency and visibility to the revenue stream going forward.

And that's gotten off the ground quite well.

Okay great.

And Brian, could you give us the number of 7-figure deals possibly in any deals, any deals over $5 million, the number of deals over $5 million?

And then kind of quick, on top of that one, just if professional services decline, why would you not see higher service gross margin if the professional services is declining as a percentage of the total services mix?

Okay.

I'll just answer the first question, Jason.

There were several 7-figure deals, and we'll just leave it at that.

And obviously, we had record ASPs that we were pleased by that as well.

With respect to professional services, again, the vast majority of that is going to be maintenance revenue, which is driving it.

The professional services, yes, it did decline for the reasons that we stated, the byproduct of our software being easier to implement.

And as Al just mentioned and Bob just mentioned, we are shifting the services organization to more outcome-based as a service offerings.

It is a relatively small percentage of our total revenue right now, so it won't have a very big impact on gross margins.

Our next question comes from Abhey Lamba of Mizuho Securities.

Bob, you mentioned cloud as a driver.

Can you talk about some of the use cases that people are deploying Commvault for their cloud usage?

And who are you seeing as competitors in that category?

The major use cases are I'd say core data protection and archiving, that is today.

I think, and I'll let Al expand on this a bit, but I think we'll see that shift to things like dev/test.

I think you'll see a shift to more compute in the cloud where the apps and the data are in the cloud.

So it's clear to us that having extensive capabilities to enable customers to more efficiently and effectively use compute will expand the number of use cases in the cloud, including analytics, as we go forward.

So again, the major drivers today are, I'd say, archiving and data protection.

Al, do you want to expand on this?

I think that was pretty good, Bob.

I think the only other thing I'd comment a bit is we're seeing some, and I won't go into a lot of detail with this, but we're seeing some interesting ideas surface with ransomware and especially high-volume recovery capabilities using cloud as primarily a data protection element.

I know there are some physics there that don't quite make sense but I think we have some really clever set of approaches there, some of our compliance stuff, particularly around GDPR, can be cloud-based.

As Bob said, we're putting out some data analytics type of programs that again can help in cloud environment.

We're seeing a demand out there for people asking to understand how they are using cloud and how they're utilizing that cloud environment.

So again, those types of applications play.

And I think lastly, it's probably migration is an element of, we're seeing people wanting to move apps and/or data from infrastructure to infrastructure, cloud to cloud, and that's where kind of separates men from the boys on moving data and understanding what the data is versus just containers for high volumes of 1s and 0s.

Yes.

What Al just described is not simple, taking let's say a financial app in the database structure on a dedicated on-premise and moving it to a distributed cloud environment, and automating all that and making it simple.

Clearly, that is taking place.

The other point Al made on ransomware is that whereas ransomware, you get hit with a cybersecurity situation like we just had.

And you need to recover from a disaster like that and recover many thousands of servers, not hundreds, and do that automatically and quickly, requires a lot of new technology.

And we're bringing those technologies to market this fiscal year.

Okay.

And compared to the environment there, and also, Al, you mentioned about GDPR, can you help us kind of quantify that opportunity?

How should we think about that opportunity into -- was there some of the strengths in first quarter driven by that?

And how should that trend over the next few quarters?

Well, that's something we're -- right now, on GDPR, Abhey, we have what I consider really good raw materials.

And we're going through and packaging some software and some services together, obviously primarily, first of all, to hit the European theaters, primarily enterprise accounts with that.

And that will happen between now and our GO conference in November.

We think in terms of qualifying it, I guess I'd say it's big.

We think it's also topical.

So it's something that our customers are getting hit with.

Obviously, you got the drop-dead data May 24 or 25 next year.

So we think it's topical, we think it's timely, and we think it's very significant opportunity.

I agree with Al.

And the core issue is, you can't be compliant with a regulation on a piece of data until you understand what is it, where is it, who has access to it, what regulation that you're trying to be compliant to, what geographical region is it located.

And that requires a lot of sophistication, and you can't do that by managing virtual machines.

You can't do it by managing containers, whether it's a VM or another container.

You've got to get inside it, right down to the object level, in a lot more detail than a typical search engine would do in terms of indexing that data dynamically in a much more complex fashion than is in the market today.

So to Al's point, this is a big opportunity, and we're -- because of our underlying architecture and platform and scale, we're the company that's best positioned to solve those problems for key enterprise accounts, including our own.

Our next question comes from Greg McDowell of JMP Securities.

Two quick questions.

First, I want to drill into this idea of a strong product cycle.

You've talked about bringing a record number of new products into the market in the latter half of this year.

Could you just talk a little bit about how we should track this product cycle?

And how we should think about this product cycle versus previous product cycles?

And then I have one follow-up.

Well, the best way to track it is to look at our license revenue growth and the consistency of it.

So that is the metric, period, end of story.

That is the metric.

And when you see that expand into new territories over the next year or 2, you'll know that we're successful.

We will probably not break it out into the individual products, but we'll clearly provide color, whether it's GDPR or it's ransomware or it's hyper-converge or it's appliances or it's the analytics or it's the cloud orchestration with HCM for migrating on-premise absent data to the cloud.

All -- it encompasses all those kind of things, or it's end point or it's our SaaS.

I mean, these are all products that are rolling out now, which is that list I just went through.

And it's not -- all of it is substantial and clearly impactful to the success of this company to increase its license revenue growth momentum.

And then, Brian, one quick one for you.

I think this may be the first time you've guided to deferred revenue.

I was just wondering sort of what's -- is this going to be a standard practice moving forward, because you're essentially now implicitly guiding to a bookings number.

Is there any specific reason you're really focusing us on deferred -- I mean, I understand the ASC 606 stuff.

But just want to think about sort of your rationale and your thinking towards focusing us on the deferred revenue.

Appreciate that, Greg.

We actually have given some verbal commentary around deferred on some prior earnings calls recently.

So just for sake of clarity, I mean, as we transition to the new revenue standard and kind of what's on balance sheet versus off balance sheet, we just want to make sure that we're being explicit and making sure that the proper expectations are set.

Our next question comes from Alex Kurtz with KeyBanc.

Just a question and a clarification.

So Brian, on these large enterprise transactions, are you guys tracking and can you tell us what maybe the attach rate is for the API to the cloud?

I know you guys have a skew for that.

So just trying to figure out what that hybrid attach rate looks like for the large deals in the quarter.

I think Al can handle this one first, and I can add some commentary.

I think the only thing we would say, Alex, is it continues to grow -- the growth is accelerating there for us.

It ties back to what Bob said upfront as we're winning these deals on a "platform in the cloud" play.

I know it's 250% -- continually tracking 250% growth year-on-year, and we're running about 10 petabytes a month growth in new business there.

So that's probably the data points I'd stop with there.

Okay.

So 10 petabytes of managed data in the cloud per month?

Yes, growth.

And that -- what Al was talking about is public cloud.

Yes.

And we are seeing some pretty massive shifts to private cloud that looks like public cloud.

So if you take that in the aggregate, it's -- this is off the top of my head, so don't take this -- it is -- the vast majority of the big enterprise deals have a cloud component, whether that's 90% or 85%, it's very significant.

I don't know of a deal that we've been in where cloud has not been in the discussion.

I'm not aware of one.

I'd agree with that.

It's the hybrid IT world, is what's going on there, Alex.

And Bob, just a longer-term strategic question, and take this wherever you want.

But as enterprise becomes a bigger part of the revenue mix, have you thought about the commercial business and transactional business and sort of the costs associated with that?

And whether or not it's maybe a spot where you can maybe deleverage some of your expenses as you become more concentrated in enterprise?

Have you guys thought about what the mix between those 2 might look like over time and what that might mean for the OpEx structure?

Well, yes.

I mean, one is, how do you get sales productivity?

And then in the enterprise, there's a lot of things we're doing with our big strategic alliance partners, which we -- maybe I'll comment on a little bit more specifically toward the end of the fiscal year.

But there's some significant things going on that can help drive productivity improvements in the enterprise.

When you get into the mid market and you want to get leverage; one, it's -- -- you can get it with lower cost, assuming you have products that are well aligned with those channels.

So we've done a lot of that to make it easy and simple for a channel provider to drive revenue.

For example, a hyper-converged appliance, driving that into market has lower cost than some of the other products because it's just a simple, self-contained product that is unique in terms of its cost-performance profile in terms of going into those markets.

Addition to that, you've got a shift in the market, in the mid-market segments, maybe 5 years longer than we thought, but a shift to the mid market either going to the cloud or through service providers, who are using the cloud.

And we've put a lot of emphasis on that.

So that's a major productivity driver.

Now add managed services, and now add SaaS on top of that.

So there's a whole series of programs that's designed to, one, accelerate growth and improve sales productivity.

Our next question comes from Aaron Rakers with Stifel.

Two questions, if I can as well.

First of all, on the hyper-converged product, can you just kind of help us understand where you're at today versus when you expect to see kind of full revenue contributions to materialize?

And how we should think about that as expanding Commvault's addressable opportunity in the market?

So we just launched it, and we have -- our first sales occurred last quarter.

We're starting to -- I call it, we're in the first, early ramp this quarter.

And then by the time we get into Q3, I'd say we're in full launch mode.

And I'll let Al expand on this.

Yes.

So I call it as well, Aaron, we're in the early adoption stage.

And we've been focusing on our final stages of beta, getting references, getting proof points out there.

We're a little bit ahead on the reference architecture play versus the appliance play only by a month or so.

So as Bob said, all those activities we intend to get programmized this quarter, in fact, even next month in August, and then be able to hit Q3 really hard, all the way through GO with heavy marketing and heavy push or channel and our direct sales force.

So our enablement process is going on now, early demand gen effort, et cetera.

So hopefully, that gives you a flavor.

Yes, and maybe I'll just fill them out onto second question is, as you engage with larger customers, particularly on the enterprise side, can you talk a little bit about -- as we consolidate secondary storage under a hyper-converged platform strategy, how much incremental dollars do you think enterprise opportunities could present to you?

Yes.

It does 2 things, Aaron.

There is a number, and I don't want to put it out yet because -- until we validate it.

I don't want to set an expectation that we can't follow up on.

But it's significant in and of itself, incremental to our license revenue sale.

But it pulls along with it out of other things, whether it's GDPR or -- I mean, all these things start to tie together, big data analytics.

It's a big play in our health care accounts.

So there's a lot of synergy with this play in the market.

And because we -- in the enterprise, because we are in a completely different -- and Al can expand on this a little bit.

Our scalability versus any of the other guys out there is dramatically higher.

Our ability to go into major enterprise and really big scale is in a -- we're in a class by ourselves there.

And then when you add our securitization and you add all our understanding of the data and our ability -- when you want to go into those repositories to orchestrate all the movement to public cloud, we're just -- we're really technically separating ourselves from everyone else in the market.

The issue is execution.

It's getting these products into market, to Al's point, getting the reference accounts, getting our distributions spun up, getting this tied in with our key strategic partners.

All that is happening.

So it's got the potential for, I call it, significant TAM expansion as well as improving our ASPs.

If I could add a little bit, Bob.

I think, that's again spot on.

Aaron, I think the thing that's also unique here and another strategic weapon for us is for the first time now, our channel, our partners and our field can move into accounts with an infrastructure offering.

We've always been software only.

We've taken great pride in being able to go across any kind of environment, any kind of architecture, any kind of brand, if you will.

That continues.

However, as we see, let's just call it the aging of the appliances out there, the -- I won't mention Veritas or Data Domain.

Oh, I'm sorry.

But as those age out there and they are still very proprietary and very lock in on the vendor side, we're finding this is one more kind of arrow in our quiver to discuss broader data management platforms in place with particular enterprise customers.

So it's another -- Bob hit on almost everything, I'd say.

Again, this would add to it.

And again, the reference architecture here play -- leaves room for our partners, our infrastructure partners out there as well.

So we think it's a big deal.

There's no vendor lock in here.

It provides tremendous agility and flexibility to these customers.

They're not -- because our platform is open, so it doesn't lock.

That -- we got to continue to earn their business with our innovation, but it gives -- from a standpoint of being open, no vendor lock in, complete agility across these different infrastructures and apps and use cases.

We're in a class by ourselves.

And of course, don't forget the fundamentals there.

It's got really great performance and a very good cost profile.

Yes, particularly against guys like Dell, the upstarts and guys like Dell EMC

Right, yes, exactly.

To be specific.

Our next question comes from Andrew Nowinski of Piper Jaffray.

I'd like to get more color as to where most of your large deals are coming from.

Are you guys displacing Veritas or Data Domain?

Are those large deals coming from within your installed base as customers move to the cloud?

It's both, but there's still a lot of -- we are displacing the major legacy competitors, and those include EMC.

It includes Veritas.

It includes IBM, includes some of the old HP product that's out there, Data Protector.

So yes, there is -- as customers move to these new, modern IT environments, and they want a platform to make it easy and give them the agility to do so, we're in a very strong position because we -- we're not only doing that, but we're enabling to dramatically reduced cost, improve overall performance of their systems, improve their reliability pretty dramatically relative to these other competitors.

Our support systems are a lot more -- well, one, automated, but more comprehensive.

So there's just a lot of benefits to our customer to move to Commvault.

Okay.

And then it also looks like Veeam had a very good Q2 results.

Do you think the back-up storage market's inflecting where you're both doing well?

Or you're just completing in a different market segment than they see?

We are clearly more enterprise-focused than Veeam.

But you've got to give them credit because in that mid market, they have done exceptionally well, both from a product standpoint and from distribution.

So when you get into big enterprise, it's a completely different game, and we don't see a lot of Veeam pressure there.

In addition, even in mid market, I think we'll see some pretty significant shifts in technology and requirements that favor a lot of the things we're doing versus Veeam.

But we give them kudos for what they've accomplished.

Okay.

If I could just sneak one more in.

Can you provide any more colors as to where Microsoft is and how much revenue they're contributing to your business?

The Microsoft partnership is significant.

The engagement with Microsoft continues to expand in many different aspects.

And I would say the potential for that partnership to, I think, not only be significant, but be more significant in the future has gone up over time.

So they've proved to be an outstanding company to partner with.

Andrew, one other follow-up on Veeam, is we're hearing consistently from our distribution from our mid-market players and, obviously, our enterprise, that one platform, multiple services, multiple environments is winning the day.

Now obviously, the bigger the customer, the more that's applicable.

But we're finding that as well as just core capabilities on our product set, really plays into the mid-market sector.

So I thought I'd just add that.

Our next question comes from Srini Nandury of Summit Redstone.

Bob, can you talk about the GDPR opportunity a little bit more?

Can you talk about your initial conversations with your potential customers?

And more importantly, can you talk about the state of preparation of Commvault to increase the demand?

I have a follow-up, please.

Yes.

So GDPR requirement is quite complex, and if you're going to -- what I was saying earlier, it starts -- you cannot be compliant because this is data, data privacy.

How long you keep the data?

Do I keep it?

Do I erase it?

You can't do any of that unless you understand what you got.

And you really can't understand or catalog what you got through a container.

So it starts with a much more sophisticated classification.

So for example, if you're trying to be compliant to these different regulations, which are geographic.

We're talking mainly about the European community, but they also apply to other geographies in the world.

So if I have an individual's data, I got to start marrying indexes.

I got to marry geographically where is it.

I got to start marrying what class does it belong to.

And to do that, you cannot use your standard techniques.

You can't use data lakes.

You got to manage data across these organizations holistically.

You've got to enrich the data, which means you got to dynamically index it as things change over time.

Because you classify it one day and the next day, that piece of data could be in a different category.

And today, it could be highly classified, important; tomorrow, not so, or vice versa, by the way.

So that is a continual process, and it's got to be done holistically across the enterprise.

So it's got to start there.

And then you got to automate to these different compliance requirements.

That is a lot more sophistication than, I'll call it, standard data protection.

And to Al's point earlier, unless you have a platform that cuts across all the -- some of these different use cases, you cannot do it.

And then if you don't use some -- a lot more sophistication and search and enhancement and dynamic indexing, you cannot automate the processes.

Otherwise, it becomes a very manual, costly and not-very-effective way to comply.

So what we're doing is taking all our capabilities and templating and automating it to make it easier for customers to comply.

That's a mouthful, but there's years of work involved in what I just said, that we've been working on here now.

It's not just a year.

This goes back several years, and it requires a lot more technology than people would typically associate with Commvault.

So I don't know if you wanted to...

I think, again, I talked about it earlier.

You talked about it earlier, I think you're hitting the key points.

I think the other thing I would only add is, both Bob and I and our product teams have spent significant time with our larger European customers and prospects.

And one way to think about quantifying it is -- and this is slightly different for us because this is a risk mitigation play, not just a pure cost and performance play.

But it is risk mitigation, and I know for a fact, and Bob does, too, that some particularly, a large financial companies or just big corporations, have a very large number associated with the risk tied to noncompliance here.

So there's a demand there.

And again, as Bob said and I said, we're in the process of taking our core technologies and packaging it into a comprehensive set of software and solutions.

By the way, the thing we didn't say before was -- Bob's alluded to it, is major worldwide companies, all, almost all have European operations and European components to their business.

They, too, will be affected.

So again, this is a worldwide, big organization demand as well as European company demand.

They also got to, what I call, connect the dots.

Because you can't be compliant if you're hit with a ransomware or other cybersecurity risk, and for whatever reason, you can't be compliant because your data has been compromised.

Those capabilities also become relevant in solving a GDPR-compliance problem.

So it's a multidimensional -- requires a multidimensional solution to solve these issues.

Our next question comes from John DiFucci of Jefferies.

I have a question for Bob and Al, and then maybe a follow-up for Brian.

I guess -- and first, I just like to echo, really strong results here, a strong aggregate result, especially the software line.

And you mentioned the strong enterprise business.

But we're hearing in the field that at the very high end, the key accounts, Dell EMC has almost become irrational on price.

I guess, can you comment on this?

It's obviously not affecting your results.

But at some point, it seems like a real attractive market as you continue to move up market.

Can you comment on it and how you feel -- how you expect to deal with this going forward?

Or if they'll -- I would assume they can't continue to do this route forever.

Well, one, they are doing it.

And it's an old EMC play that -- we've seen this movie before, going back probably 15 years.

And free is not free.

And you may be giving product away, but if you give it away and you can't solve basic problems, and even though it's free, at the end of the day, it's really costing you more money.

And you're -- now you're tied into a vendor who can't solve a GDPR problem, can't deal with ransomware, can't deal with migrate -- easy migration of absent data to the cloud.

I mean, they say that they can do it, but they can't.

So their underlying architectures and technology is legacy, and you can't paper over legacy with free.

So when we go in and we sell, we've got to sell on our value.

But it's something we've done before, we've seen before, and we can handle it.

The other thing we can say to our customer, "Great.

Now have Michael Dell deliver free stuff.

We'll manage it, put our software layer in and just get it free from Michael.

And have a great day." So we will -- it is something we can manage here and still hit our numbers, let's put it that way.

But...

I'd add 2 things: One is, people, regardless, like Bob said, regardless of the price, people are continuing to be very, very concerned about lock in, not just in type of cloud or brand of cloud, but still new hardware, what type of software, those that lock me in.

And there's a reputation there that those guys are going to have to deal with.

And the last thing is, the one thing they have that we don't is $63 billion worth of debt.

Yes, okay.

Yes, you don't have that.

Okay, if I could, a follow-up for Brian.

And Brian, you talked about cash flow, which was a little weaker than we expected anyway.

And I know that you had -- there's that extra $3 million payment.

But even if you include that, normally when I look at this, I'd assume -- well, I look at accounts receivables were about $20 million greater than we had anticipated.

And given the strong enterprise deals which are probably at the end of the quarter, or a lot of them are, I'd say, "Okay, well, next quarter's going to be a good cash flow quarter." But now you restated last quarter and with ASC 606, and you mentioned the -- what would normally be off-balance receivables are now there.

And so last quarter went up by about $7 million.

When I look at that, is it -- am I still thinking the right way?

Am I still thinking that, there were a lot of large deals in the quarter.

Usually those close at the end of the quarter.

Accounts receivables are strong.

Even with that extra $7 million, if I take that out, it's like $13 million greater than I modeled, I should see that cash collected next quarter.

Am I still thinking of that right?

Because 606 sometimes confuses me.

Well, I'll make a statement on that, Brian.

I think -- don't get confused between free cash flow and cash in the bank.

So I'll let Brian...

John, I think we've demonstrated over time that free cash flow will mimic our non-GAAP EBIT performance.

And maybe from quarter-to-quarter, it may not be appear that way, but for the prior 3 fiscal years, we've demonstrated that free cash flow exceeded our non-GAAP EBIT.

That's why our expectation for FY '18, obviously with 606, where there is some kind of mismatch at times between cash and revenue, it gets on more complicated.

But it's still our expectation to have our free cash flow exceed it.

Our next question comes from Eric Martinuzzi of Lake Street Capital.

The services revenue was better than you expected, and you attributed that to a couple of reasons.

One was on the better-than-expected software licenses, but it was also -- you mentioned the renewals.

Could you go a layer deeper on the renewals?

What's behind that?

Just take it from a viewpoint of renewals now versus maybe renewals a couple of years ago.

Eric, it's Brian here.

So I think this all relates to our kind of better-than-expected performance on our maintenance services renewals in general.

We've been at this for a good couple of years now.

We've been talking about this on our earnings calls.

We started at the enterprise level, then went down to the SMB levels, some very programmatic changes that we made.

And we just saw great customer adoption and uptick, and I think that our pricing models are the right fit for the market.

We also had very strong execution internally in terms of just being proactive on our customer dialogue.

And I think that's paid off in terms of just strong renewal rates.

So overall, we're pleased.

Okay.

So a combination of the pricing and the sales execution.

And execution, yes.

This is Bob.

We've said all along that we thought the bottom was going to be at the end of FY '17, and that we would see kind of flat to up in the first half, and then it would accelerate in the second half.

And what Brian is saying, is we're doing a little better than that.

Yes.

Under promise, over deliver, I like it.

I tried to say that, Eric.

Our next question comes from Stephen Bersey of MUFG Securities.

On the ACM front, just wondering which clouds are covered.

If there's more customer interest in any particular one?

So if there's any standouts on use cases?

And then maybe on databases and applications, kind of what's covered on that front?

I'm assuming that pretty much all the majors are there.

Or is there rollout schedule?

Yes.

I would say, Steve, that it's primarily Azure.

It's probably growing the quickest right now, and I think it's -- has the biggest footprint for us out there.

That's due to a lot of different reasons, one of which is our long-standing relationship with those guys.

AWS is very significant, they're growing as well.

They're probably number 2, I think.

We're doing some with Google, starting to do some with Oracle.

I think there's actually, in total, not just going with brand names here as there's 29 different cloud environments that we deal with.

As you know, AWS has 5 or 6 play version as does Azure, et cetera.

Bob mentioned earlier -- I mean, they're all obviously pushing more and more to compute environments for obvious reasons.

And again, I think AWS and Azure are leading the charge there as well.

Our next question comes from Austin Dietz of Raymond James.

It's Michael Turits.

Two product questions.

First, can you talk about ransomware and -- (inaudible) recommendation in dealing with -- talks about more consistent and frequent backups.

And is that actually -- are you actually seeing revenue being driven?

And my second question is whether or not you could walk through the release road map a little bit.

You're talking about product benefit in the second half.

So what went GA, either in the first half or the second half, you actually think will be a material contributor?

And what are the schedules for that?

What did you say, Michael, on ransomware-type of backups?

I mean, what was your first statement there?

So there's some ransomware out there with WannaCry and with Petya.

And just about every recommendation from -- whether it's from the government or Microsoft, your partner, says to do more frequent backups and more sophisticated backups.

I get you, okay.

So I'm wondering how you're benefiting there.

Yes.

I mean, so I'll answer it more broadly, and Al will do a deep dive on this for you in terms of what's coming next.

But -- so what we've done in the past year is to try to do early detection with some pretty unique technology.

So we -- down at the file level, you look at how it's being accessed.

And if something is off a pattern, you can immediately detect there's an intruder and you shut that intruder off.

If the data gets contaminated, the most sure way is not by recovering of VM.

The more sure way is recovering it right at the object level to a backup.

And that's -- so when people talk about backups, sometimes they're talking about a replicated copy.

Sometimes they're talking about a Snap.

When you're dealing with cyber and you're dealing with something like ransomware, the only sure way is to get a locked-down, point-in-time copy that's non-corrupted.

And that's an old-line backup copy.

So I'll leave it there, and let Al pick up on this.

Yes.

I think, again, you nailed it on -- it's a point-in-time thing.

And as you said, Michael, people are looking for shorter and shorter RPOs, or recovery point objectives.

The other thing I guess I'd add to what Bob said, probably 2 things: One is, we learned with NotPetya that there's a need for a huge amount of rapid recovery, which implies lots of automation, lots of help, lots of cloud capabilities that even think about it as temporary spots to get these organizations up and moving again.

There's some things we can do in software.

There's also some things that we're putting together in terms of services on this.

So I think this becomes a -- as Bob said, there's a number of things we can do to help mitigate it or detect it early, which is really what you want to do with ransomware.

Because as you know, these usually occur over a -- for a long period of time until there's a significant base to extract fees from.

So there's ways of detecting that using advanced analytics, our honeypot capabilities.

Then there's a point-in-time capability, which we've always had.

And those continue to get better and better and niftier and niftier in terms of ease of use in high-volume and input services on the back end of the (inaudible) upfront assessment as well as recovery insurance and capabilities on the back.

There are no further questions.

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

This does conclude the program and you may now disconnect.

Everyone, have a great day.