Commvault Systems Inc (CVLT) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the Fiscal Year Fourth Quarter Commvault Earnings Conference Call.

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

Now I would like to welcome and turn the call to Mr. Brian Carolan, Chief Financial Officer.

You may begin.

Thank you, and good morning.

Thanks for dialing in to today's call for our fiscal fourth quarter 2018 earnings call.

With me on the call are Bob Hammer, Chairman, President and CEO; and Al Bunte, Chief Operating 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 in our most recent quarterly report in Form 10-Q, and 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 release was issued over the wire services earlier today, and also has been furnished to the SEC as an 8-K filing.

The press release is also available on our website.

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

Commvault adopted the new revenue standard, ASC 606, on April 1, 2017.

Our adoption was done on a retrospective basis over all prior periods, and our financial statements have been adjusted to comply with the new rules.

As a result, the results in growth percentages we will discuss today are on a comparable basis using the new rule.

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

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

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

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

Bob?

Thank you, Brian.

Good morning, everyone, and thanks for joining our fiscal fourth quarter FY '18 earnings call.

On today's call, we will provide an update on a number of business transformation initiatives that have been underway over the past year, which we refer to as Commvault Advance.

But first, I'd like to start with comments regarding Elliott Management.

Commvault has had discussions with Elliott Management over the course of the past several weeks, discussions that have involved both me and our Board of Directors.

I am pleased to let you know that those discussions have been constructive and have resulted in a joint cooperation agreement, announced earlier today in a separate press release.

The agreement with Elliott is designed to complement Commvault's transformation with a series of governance initiatives that include agreement that the board will appoint 2 new independent directors prior to the 2018 Annual Meeting of Stockholders.

The Commvault board has formed an operations committee to identify additional opportunities to further propel Commvault Advance and its profitable growth and value-creation objectives.

In addition, the company will engage a leading outside consultant to work with the operations committee on this review.

Elliott has agreed to certain customary standstill provisions.

Lastly, we are unveiling new strategic initiatives intended to drive Commvault's next phase of growth.

I believe now is the right time to begin the transition to our next generation of leadership.

As such, we are beginning a search for new CEO of Commvault.

Typically, such a process will take a few months, during which I will continue -- remain as Chairman, President and CEO.

At its conclusion, it is anticipated I will remain as Chairman of the Board.

Our dialogue with Elliott shows that we are closely aligned on many matters, and believe it will enable us to deliver increased value creation for our stockholders and customers alike.

Now let me make some comments about Commvault Advance.

Commvault Advance spans a series of initiatives currently underway and still to come that individually and together, transform the company and position it for increasing the rate of top-line growth in getting Commvault back to sustainable 20% operating margins.

Additionally, the goal is to approach 65% to 70% repeatable revenue over the next 2 fiscal years.

Commvault Advance is focused on several key areas.

They are: one, product platforms, and I'll make a comment.

In terms of driving Commvault, we first have to start with our product line and making it much easier to sell through our channel and through our strategic partners.

So over the past 18 months, we've been developing a new channel-friendly -- channel-friendly products as well as enhancements to our enterprise suite of products, including Commvault HyperScale Software and Appliance Solutions, an updated and advanced data protection solutions, which begin to significantly impact our -- which began to significantly impact our financials in Q4, the first quarter they were in market.

We are changing our business from complex to simple and easy.

We have made substantial changes to our core platform that enable us to bring to market simple, easy but smart solutions that were easy for sales channel and our strategic partners to sell.

We're in the process of dramatically simplifying our pricing and demand to bookings processes.

Thirdly, sales and marketing.

We're reorganizing our sales, distribution and marketing functions.

The objective is to reduce cost and provide significantly more focused resources for our channel and strategic routes to market partners.

This effort is ongoing, and we expect it will be largely completed by the end of the summer.

More specifically, we have a process of strengthening our commitment to partners with a consolidation and redeployment of a substantial number of dedicated resources.

We have added new senior leadership in distribution and go to market, which includes a new VP for Global Distribution, a VP to head up alliances and a new VP to head up channels on a global basis.

Fourth, we -- the establishment of a new partner ecosystem.

Over the past year, we have established a much broader, stronger partner ecosystem with the addition of the following key strategic partners: Cisco, HPE, INFINIDAT, Microsoft and AWS.

We are also reducing cost in all functional areas.

The changes we have already made were not quick fixes but were designed to strengthen the business for sustained, improved financial performance.

Now let me briefly summarize our Q4 financial results.

Software revenues were up 3% sequentially and 7% year-over-year.

Total revenues were up 11% year-over-year.

EBIT margin was 12.2%, up 170 basis points or 28% year-over-year.

EPS was $0.31 per share.

While these results do not yet reflect these ongoing initiatives and are yet not acceptable to us, we did have several highlights in the quarter, including we achieved record quarterly revenue of approximately $185 million, highlighted by sequential software revenue growth of 7% and driven by a record number of enterprise revenue transactions.

We saw solid billings growth, driven by a 16% year-over-year increase in deferred revenue.

We saw 22% year-over-year growth in EMEA license revenue.

We had good services revenue growth of 15% year-over-year.

We continue to make excellent progress with our subscription-based pricing models, which represented approximately 37% of our Q4 and 25% of our FY '18 software revenue.

Entering the year, our historical run rate of repeatable software revenue was less than 10%.

Finally, in the first full quarter of being in the market, newly introduced initiatives of HyperScale, our Appliance, our Cisco partnership and our Advance disaster recovery has strong market reception, contributing significantly to our Q4 bookings.

These new initiatives, when combined with the tax software revenue, had a material contribution to the quarterly software results.

We have good progress in managing data in the cloud with customers putting over 200 petabytes into the cloud, which is approximately 2.5x over the prior year.

The number of customers with cloud storage nearly doubled year-over-year.

Operating cash flows were $23.3 million.

During the quarter, we repurchased approximately 21 million or 407,000 shares of our common stock.

For the full fiscal year, we repurchased 112 million of our common stock, which represents almost 5% of the shares outstanding at the beginning of our fiscal year.

We currently have over 110 million authorized by our board and available for ongoing repurchases through the end of our FY '19 fiscal year.

We are pleased with the excellent progress we have made with our transition to subscription-based pricing models.

This repeatable revenue stream is continuing to build somewhat faster than originally anticipated and had a slight dampening effect on the in-period recognized software revenue.

Our Commvault HyperScale Software and appliance solutions and platform enhancements had a significant impact on product revenues in Q4 FY 18 and is expected to materially impact revenues in fiscal -- FY '19.

We have already redeployed resources and are in the process of redeploying additional resources to take full advantage of our Commvault HyperScale Software and appliance and to provide much better support to our strategic and channel partners.

I will now address our FY '19 outlook.

The good progress we made in all elements of our business during FY '18 positions us to continue to deliver solid software license revenue and earnings growth in FY '19.

Our growth for FY '19 is primarily based upon success of our Commvault HyperScale appliance and software solutions, cloud migration and management, success with the Commvault Data Platform to gain share in large enterprise accounts for their journey to the cloud and solutions to help customers mitigate and recover from a cyberattack.

The restructuring of sales and marketing for more effective management or routes to market at lower costs, improve sales and marketing productivity tied to simpler product and pricing and improved distribution leverage with the strategic channel and service-provider partners.

Fifth, updated products and pricing and core data protection in Q1 '19; and sixth, the release of additional new products and services that we expect looking to have an impact in the second half of FY '19.

Brian will provide further color on Q1 '19 and our FY '19 outlook.

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

As we have discussed for many quarters, we're currently reliant on a steady inflow of large 6- and 7-figure deals, which come with additional risk due to their complexity and timing.

We also need to improve our close rates on these deals.

Large deals close rates will likely remain lumpy.

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

We are also moving into new market segments with new strategic partners and more aggressive channel programs.

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

While we are happy with the progress we're making with subscription-pricing models, it has negatively impacted near-term license revenue growth, specifically in Q4.

This transition will continue to have a dampening effect on revenue until it is completed.

We are clearly trying to accelerate revenues with new products, services and distribution while at the same time, improving operating margins.

This effort has timing risks.

We are shifting a substantial amount of resources in the company in support of our distribution initiatives.

As I mentioned earlier, actions are underway to consolidate and align resources across all functional areas.

While our goal is to accomplish this in a measured way, there's an element of risk to these changes.

We expect that new products like Hyperscale software and appliance and the allocation of resources tied to our routes to market will help drive improved pipeline development and ultimately, to overall productivity and top line -- improved top-line revenue growth.

While we have had early success for these products, we believe it has had a near-term cannibalistic effect on overall pipeline build and license revenue results.

In summary, we are certainly aligned and improving the sustainable financial performance of the company and meaning, aligned with Elliott.

We have been making good progress across all aspects of the company by strengthening our competitive technology position, broadening our product line, expanding distribution, reorganizing sales and marketing and driving cost reductions and efficiencies.

Although we are making progress, we're not satisfied with how long it has taken to get all these things in place to drive better financial performance.

The entire senior management team is pulling together and is keenly focused on the necessary adjustments with the intent of achieving a 20% operating margin objective while also putting us on a path to sustainable long-term success.

I will now turn the call over to Brian.

Thanks, Bob, and good morning, everyone.

I'll now cover some financial highlights for the fourth quarter of fiscal 2018.

Q4 total revenues were a record $184.9 million, representing an increase of 11% over the prior year period and 3% sequentially.

Quarterly billings, which we define as total revenue plus the sequential change in deferred revenue, was approximately $203 million, up 8% over the prior year period and 6% sequentially.

As a reminder, our deferred revenue balance consists entirely of deferred maintenance and professional services revenue and not software revenue.

For the full fiscal year, we reported total revenues of approximately $699 million, representing an increase of 8% over fiscal 2017.

We reported Q4 software and products revenue of $83.5 million, which increased 7% year-over-year and 3% sequentially.

For the full fiscal year, software and products revenue was approximately $311.7 million, representing an increase of 7% over fiscal 2017.

We are pleased that our continued shift to subscription-pricing models is resonating with customers.

This consists of both committed and often multiyear subscription sales as well as pay-as-you-go utility-type arrangements.

As a reminder, under ASC 606, we are generally required to recognize the full amount of the software revenue from a committed subscription arrangement in the period of sale, and not over time, as was generally the case under legacy revenue recognition rules.

Utility arrangements, on the other hand, generally continue to be recognized over time as they are not committed.

Subscription-based pricing represented approximately 37% of software and products revenue in Q4 and 25% for all of fiscal 2018.

We entered the year with a historical run rate of about 10%.

This repeatable software revenue stream continues to build somewhat faster than originally anticipated.

All things being equal, we estimate it had a dampening effect of approximately $4 million on our Q4 in-period recognized software revenue.

This is due to the fact that there is a reduced price of a committed subscription arrangement in comparison to a like-for-like perpetual transaction.

The positive is that we expect to be able to recognize additional revenue at the time of renewal, which is generally 3 years from the initial sale.

When you combine our subscription-based license sales with our other repeatable service revenue streams, such as maintenance, managed services and SaaS, we would consider approximately 60% of our total revenue to be repeatable in nature.

On a full-year basis, our repeatable revenue streams grew 26% year-over-year.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter represented 60% of software revenue.

Revenue from these transactions was up 5% year-over-year and 9% sequentially.

Our average enterprise deal size decreased 6% year-over-year to approximately $264,000 during the quarter.

The number of enterprise revenue transactions was a quarterly record, increasing 12% year-over-year and 10% sequentially.

During the quarter, 51% of software revenue was sold through our traditional per-terabyte capacity models, down from 67% in Q4 '17 and 66% in Q3 '18.

Sales of these traditional terabyte-capacity models have declined in recent quarters as we've been transitioning customers to standalone solution sets, appliances and hyperscale solutions that are also licensed based on the amount of data under management.

The capacity measurement for such solutions may range from the number of users, mailboxes, VMs, sockets and operating instances.

As a result, our disclosed statistic of terabyte capacity as a percentage of total software revenue is becoming a less meaningful metric to understand the underlying business.

From a geographic perspective, Americas, EMEA and APAC represented 56%, 31% and 13% of software revenue, respectively, for the quarter.

On a year-over-year growth basis, EMEA and APAC were up 22% and 9%, respectively, while Americas was down 1%.

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

Total services revenue for Q4 was approximately $101 million, an increase of 15% year-over-year and 2% sequentially.

We continue to have strong maintenance renewal rate, and our professional services business continued to show year-over-year improvement.

For the full fiscal year, services revenue was approximately $387.6 million, representing an increase of 9% over fiscal 2017.

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

Gross margins were 85.2% for the quarter.

The cost of hardware related to our Hyperscale appliances is included in the cost of software and products revenue.

As sales of these appliances continue to ramp in fiscal 2019, our gross margin percentage will decline.

I'll discuss our fiscal 2019 gross margin expectations shortly as part of my outlook commentary.

Total operating expenses were approximately $132.5 million for the quarter, up approximately 5% year-over-year and 1% sequentially.

We ended the quarter with 2,839 employees, down 2 from the beginning of the quarter.

Operating margins were 12.2% for the quarter, resulting in operating income or EBIT of approximately $22.5 million.

Net income for the quarter was $14.5 million, and EPS was $0.31 based on a diluted weighted average share count of approximately 46.6 million shares.

Let me now talk about the Q1 '19 and full year FY '19 outlook.

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 '19 as we currently anticipate a sequential decline in both revenue and EBIT.

We currently believe year-over-year Q1 software and product revenue growth will be up slightly, which reflects our continued move to subscription-based pricing.

We expect total Q1 year-over-year revenue growth to be in the mid- to high-single digits.

We expect the Q1 EBIT margin percentage to be approximately 9.6%.

We expect a lower revenue growth in the first half of FY '19 due to the fact that our key initiatives will not offset the move to subscription-based pricing.

We expect acceleration of top line software revenues in the second half of FY '19, driven by our key initiatives, such as Hyperscale, our appliance, our Cisco partnership, advanced DR and simpler packaging and pricing.

These top-line drivers, combined with the improved distribution leverage with strategic channel and service provider partners, will have to drive EBIT margin expansion, particularly in the second half of the fiscal year.

We expect total FY '19 revenue growth to approach 10%, with EBIT margin expansion of approximately 200 basis points.

We expect our subscription pricing models as a percentage of total software and products revenue to increase from 25% to approximately 30%, which reflects the continued shift to repeatable revenue streams.

Our objective is to exit FY '19 with EBIT margins of approximately 16% to 17% and to achieve sustainable 20-plus percent operating margins in the second half of FY '20.

As Bob stated, we also expect repeatable revenue to approach 65% to 70% over the next 2 fiscal years.

Although we plan to continue to invest and slightly increase operating spend in FY '19, actions are underway to reduce, consolidate and align resources across all functional areas.

This effort will include an examination of the use of contracted employees, third-party expenses, T&E and approximately 4% cost of workforce reductions.

We expect to record a restructuring charge of approximately $6 million to $8 million, most of which will be recognized in the first quarter of fiscal 2019, primarily related to severance and associated costs of the headcount reductions.

The restructuring charges, along with any other costs associated with nonroutine shareholder matters, are excluded from our outlook of EBIT margin.

These cost reductions and efficiencies, combined with our strategic initiatives, including the realignment of sales and marketing personnel in support of routes to market and product pricing and packaging changes, are designed to drive immediate and long-term improvements in sales force productivity in the company's go-to-market programs.

We anticipate that these actions will help operating margins starting in Q2 '19.

Our objective is to do this in a manner that will not impact our software growth objectives but will provide operating margin leverage in FY '19.

As Bob stated, the Commvault board has formed an operations committee, and the company will engage a leading outside consultant to identify additional opportunities for growth and value creation.

As a reminder, our margin expectations include the impact of hardware integrated with our Commvault HyperScale Appliance offering and third-party software royalties related to our Hyperscale software that will adversely impact our anticipated FY '19 gross margin percentage by approximately 100 basis points and our EBIT margin percentage by approximately 10 to 20 basis points.

We anticipate that our diluted weighted average share count for the full year FY '19 will be approximately 48.5 million shares.

Q1 share count should be approximately 47.5 million shares.

Let me now briefly comment on taxes and the impact of recent tax reform.

Cash taxes payable for fiscal 2018 were estimated to be approximately $6 million.

We have completed our analysis of the impact of the one-time transition tax on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes and concluded our onetime transition tax is 0. As discussed on the last call, we believe Commvault will benefit from tax reform and, over time, we'll see lower GAAP and cash tax rates.

Based our modeling of the new U.S. income tax reform beginning in Q1 fiscal '19, we will reduce our non-GAAP tax rate from 37% to approximately 27%, which should align with our anticipated long-term cash tax rate.

We currently expect fiscal 2019 cash taxes to be less than $10 million.

Now moving on to our balance sheet and cash flows.

As of March 31, our cash and short-term investments balance was approximately $462 million, of which approximately 45% is located outside the U.S. We're currently evaluating our worldwide cash positions to ensure we can effectively maximize the availability of our global cash balances.

During Q4 '18, we repurchased approximately $21 million or approximately 407,000 shares of our common stock at an average cost of $51.35 per share.

For the full fiscal year, we repurchased approximately $112 million or approximately 2.1 million shares of our common stock at an average cost of $53.50.

We currently have approximately $113 million remaining under our share repurchase program that will expire on March 31, 2019.

Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $21.6 million, which was down 20% year-over-year.

As of March 31, 2018, our deferred revenue balance was approximately $326 million, which is an increase of 16% over the prior year period and 6% sequentially.

All of our deferred revenue is services revenue that has been invoiced to customers.

We expect Q1 sequential deferred revenue growth to increase in the low-single-digit percentage range.

As a result, we expect the year-over-year Q1 '19 deferred revenue growth to be in the low- to mid-double digits.

We're also building an off balance sheet backlog, which unlike deferred revenue, has been committed but not yet invoiced to customers.

This balance was up 10% sequentially or $2 million to approximately $21 million as of March 31, 2018.

The balance primarily represents unbilled professional services and maintenance support contracts that will likely be billable and recognizable in the future.

For the quarter, our day's sales outstanding, or DSO, was 77 days, which is up from 73 days from the prior year period and 71 days sequentially.

Our Q4 DSO of 77 days includes an approximately 5-day impact due to unbilled accounts receivable.

During Q4, our unbilled receivable balance increased sequentially be approximately $7 million to approximately $14.3 million.

The vast majority of this balance represents committed subscription revenue that has been recognized but will be paid over time.

That concludes my prepared remarks.

I will now turn the call back over to Bob.

Bob?

Thank you, Brian.

I will now spend a few minutes on our strategic framework and our positioning for what we see as the current and emerging trends in the market.

On the strategic framework, it is important for everyone to understand that we've been executing a strategic framework that we started more than 4 years ago.

That framework has 3 phases and still provides the blueprint for growing and improving the profitability of our business.

The phases are as follows: Phase 1, after we had our situation 4 or 5 years ago and we lost a customer that represented 25% of our revenue, when we exited that strategic partner, we clearly, in that phase, performed better than the core backup and recovery market and better than our traditional competitors, but the Phase I implementation still fell short of our own expectations.

Phase 2 is to accelerate growth and profitability in the FY '18 to '20 period.

This involves repositioning of our products, distribution channel, go-to-market restructuring and operating margin improvement, driven primarily through cost reductions and sales marketing expense as a percent of revenue.

Major elements of Phase 2 are in process as we enter of FY '19.

And Phase 3 was to position the company for longer-term growth, which will require further improvements in operating margins, analytics about data, operations and business needs and next-generation architecture for scale and microservices plus fundamental new architectures to deal with new rapidly emerging requirements for massive changes in scale and dealing with issues related to the Internet of Things.

The major trends that we're seeing in the market are as follows: cloud and hybrid IT have gone mainstream; more and more applications and data will be in cloud architectures, both private and public.

The need to migrate and recover data from devastating cyberattacks is not if but when a cyberattack will occur; third, the need to deal with more complex compliance [competitors] like GDPR; and four, machine learning and analytics have become table stakes for data management operations as well as for business analytics; fifth, environments and operations have an increasing level of complexity.

As such, automation and simplicity of solutions is critical; and sixth, advances coming to market in compute, network and storage will require many multiple orders of magnitude increases in scale for data management software over the next several years.

Commvault's unique architecture and forward-thinking puts us in a uniquely strong position to address these key emerging trends.

We know we're way ahead of competitors in both enterprise and mid-market in providing newly developed unique automation and orchestration capabilities to securely move managed data from legacy infrastructures to private clouds, private clouds public clouds and management of data in multiple clouds.

We have recently enhanced our ability to increase share in our core data protection business in both the enterprise and mid-market with expanded and broad solutions and use cases, including our Hyperscale, our secondary storage for the enterprise, our Commvault HyperScale Appliance for the mid-market.

This quarter, we will introduce updated data protection solutions, including our appliances, incorporating advanced machine learning for automatic dynamic scheduling, improved operational efficiency and position for faster, automated dynamic disaster recovery.

This order -- this quarter, we will also introduce a new solutions with advanced machine learning for new cyber solutions for threat detection and mitigation and high-volume disaster recovery.

Next quarter, we will come to market with the most advanced solutions, again, using machine learning and AI for GDPR.

We will also expand into outcomes-based services and SaaS.

And lastly, this fall, we will open up significant market opportunities with a foundation for business and operational analytics for both major enterprises and the mid-market.

We are well prepared for the radical changes required to protect managed and used data as a result of the impending changes to compute, network storage and the Internet of Things.

In closing, we have made substantial progress in fundamentally positioning us for our next phase.

In this regard, we are well down the path in addressing our lower operating margins and have a path designed to get the company back to sustainable 20% operating margins in the relatively near future.

Our core strategy, business opportunity and technology position remain solid.

We have the strategic assets that we need to take advantage of these opportunities.

The strategic initiatives that we launch in FY '18 are designed to improve shareholder value.

We are making good progress across all aspects of the company to improve financial performance by strengthening our competitive technology position, broadening our product line, enhancing expanded distribution and restructuring sales and marketing and driving cost reductions.

We clearly look forward to working with Elliott as we advance the company for improved operating margin performance.

I will now turn the call back over to Michael.

Michael?

Operator, can we please open the line for questions?

(Operator Instructions) Our first question is from Joel Fishbein with BTIG.

Bob, just one quick one for you, just in terms of the general overall demand environment in general and, I guess, 2 related questions.

How are you seeing the competitive dynamics currently?

And how was the Q4 for large deal activity?

And are there still big deals out there that you guys are positioned for?

I think the demand, in general, is solid, Joel.

I don't think that's an issue.

Haven't seen any signs that there's any demand-related softening.

In regard to what's going on generally in the market, in the enterprise, I call -- you have a much more fractured enterprise environment.

So in the past, it was a lot more holistic, and now the companies are buying specific solutions tied to different use cases or workflows.

And good examples of that are what you see in virtualization and what you see in appliances.

In regard to competition, I'd say at the margin, we're seeing less competition from our major traditional competitors: Veritas, IBM and EMC.

On the other hand, clearly, some of the new competitors like Rubrik and Cohesity are clearly making progress in the market.

I will say this, since we introduced Hyperscale and appliances, in the head-to-head competitions we seem to be doing exceptionally well now.

The issue for us is to drive a lot more distribution leverage, which has not been a company strength, and that's why we're making all these reorganizations and aligning a lot more resources to drive -- because the market has voted and the market likes what they see in our solutions versus the others in the market.

We now just need to put a lot more wood behind our distribution.

Our next question is from the line of Jason Ader with William Blair.

First of all, Bob, I want to congratulate you for all your years of leadership and commend you for putting the company first with this decision.

I'm sure it wasn't an easy one.

No, but you're right.

I mean, this is all about Commvault, and it's certainly not about me.

So -- and I think we're clearly aligned with what Jesse Cohn and Elliott want to do and just need to work together and take the company forward.

Great.

Well, I have 2 quick questions.

One is just on product packaging and pricing.

You've been working hard at this, as you noted, just kind of trying to simplify packaging and pricing over the past few years, but it still seems like there's too much complexity.

So if you had to do it all over again, which it sounds like you're -- maybe that's what's going on right now, what would you do to make things simpler on packaging and pricing?

Well, there's no question, Jason, that we, as a company, got way too complicated.

And we made some pricing changes last fall.

They basically didn't work, even though it was a lot thought to it.

And we took as radical a step as we possibly could by -- and Al can comment on this in a second, but basically, converging all our data management products into basically 1 simple SKU, used for different use cases.

So data management is -- has been radically simplified.

Our deal desk and the management of that pricing has been significantly simplified.

Our appliance is really simple, our hyperscale is simple.

So across the board, I think we've made some radical changes.

Now they're in market in final beta stages and we're rolling them out more aggressively this quarter, but everything will be fully in place in early July.

So I think we've made massive changes to that.

And clearly, it has been a weakness of the company, and we've now addressed it extremely aggressively.

And by the way, that -- the simplicity of both product and pricing was absolutely key to our whole distribution strategy and strengthening our routes to market because, without that, you cannot drive product into market.

Okay, great.

And then just a second question.

I understand you're undertaking some immediate actions to try to optimize the go-to-market side.

I guess, what I would be concerned about is when you have a new CEO coming onboard, he looks at the situation and says, "No, no, no.

That's not what we need to." So how do you control that right now without going too far on making changes when you have a new CEO that's probably coming in and may want to have his own game plan or her own game plan?

Yes.

I understand.

The answer is we're driving the company forward.

Now one way of mitigating that is we're right in the final stages of signing up a really well-known third-party consulting company to aid in the process.

But we're not slowing it down trying to anticipate what a new person would do because I'm not sure whether that's going to take 3 months, 6 months, 9, I don't know.

In the meantime, we've got to get done what we've got to get done.

And so we're doing it on our own, we're trying to bring this consulting firm in here to start sometime in the next couple or 3 weeks, hopefully 2 weeks.

And we'll drive that in parallel and I think that should help mitigate any changes in philosophy on who sits in this chair.

I'll make the comment, whoever sits in the CEO chair is the CEO.

And that individual, he or she will make his decisions along with the team.

And that's just the way it's going to be, Jason.

Our next question is from Andrew Nowinski with Piper Jaffray.

Bob, it's been a pleasure working with you over the years as well, and I wish you the best on your next endeavors.

Just had a question on the headcount reduction.

It seems like the 4% headcount reduction will not have a meaningful impact on your margin, considering your sales and marketing expenses are way above the peer group at about 52%.

However, you're generating a lot of revenues through OEM partners, which should be, I think, an OpEx light route to market.

So first, can you give us any color on how we should think about sales and marketing trending over the next few years as a percent of revenue?

And then second, can you tell us how much revenue is going through your OEM partners and whether that requires less OpEx investment to generate $1 in revenue versus your direct sales force and channel?

Well, that is the answer.

But that's -- all of those new routes to market whether it's Cisco, HP, that's all beginning.

And those are not OEMs.

Those are basically strategic route-to-market partners.

And over the next month we're going to announce some others that are significant.

So the issue is getting all those new routes to market -- those routes up and running because this it's the only way you're going to solve the sales and marketing problem.

So we took a -- when we launched this, we took, I'll call it a first cut or what the organization should look like without blowing it up -- without blowing this launch up.

And then, with the consultant we're bringing in and with our own initiatives, we will figure out ways to get this -- I'll put it this way.

There's no reason at various different levels of growth why this company can't generate 20% operating margins.

And we're taking a pretty significant step, and we're continuing taking steps until we get there.

And this should be doable.

An As Brian said, we should make a lot of progress this fiscal year.

Not -- clearly, I wanted to be exiting FY '19 at 20%.

And it looks like more realistically it's going to be 16%, 17%.

But we'll be doing everything we can to get -- to make sure we drive our position and growth and margins and reach those levels.

It is -- there's enough assets here and we're in a strong enough position to do this.

So -- but to answer your question, it's got -- the big move has got to be -- come from a lot better sales productivity and leverage from the channel along with operating cost savings.

But you can't do it with cost-savings alone, you've got to solve the channel leverage problem.

Okay.

And then just a quick classification.

I guess, with regard to Q4 software revenue coming in a little bit lighter, was that entirely due to the slight dampening effect from the subscription revenue you had that you talked about?

Or were there any deals that actually pushed out into the next fiscal year?

Well, I mean, if you go by the numbers, we would have hit the number, if it wasn't for subscription.

But the bottom line is, we're not built -- what I said on the call is, we were extremely successful with Hyperscale and appliances.

But a lot of that went into our installed base.

And as we start to expand it out so that the net effect of driving growth -- it wasn't enough to compensate for the subscription pricing.

So what we're trying to do as quickly as we can is to move out in the broader market with these products over the next couple of quarters and so -- what I would call accelerate net growth of those product.

There's no reason why we can't.

And the other thing is, as Jason was asking, we've dramatically simplified our core data protection management pricing model.

I mean, it's radically -- I think we -- just round numbers, I think we consolidated 5 products and 12 SKUs, round numbers, into one.

Very simple model.

So I think that's going to help us as well.

Well, the first thing I need to do is make sure we hit 20% margins before the next guy gets in here.

So -- or the next person gets in here.

Anyway...

Our next question is from Aaron Rakers with Wells Fargo.

Also Bob, I commend you on the -- a tough decision.

I guess, the first question I want to just ask back on the subscription revenue line.

You've done 37% contribution this last quarter.

It sounds like you're assuming that that goes to 30% contribution for fiscal '19.

I'm curious, given your efforts and your focus and clearly, the adoption of hyperscale, why that 37% wouldn't necessarily continue to go higher?

Or what dampens that to a 30% level relative to the 37% contribution in this last quarter?

Aaron, it's Brian here.

So it was 25% for all of fiscal 2018.

We're saying we're going to move that to approximately 30% for the full fiscal year '19.

So yes, we are on a very good trajectory.

I think that 37% was stronger than we expected internally.

We're not so sure that we can keep that pace up necessarily, but we see this thing moving in the direction of more and more repeatable revenue streams.

And I think that's the important part of that.

Looking at it holistically with all of our repeatable revenue streams with respect to maintenance, professional services in the form of managed services and SaaS and our subscription-based pricing is that -- that 60% of total revenue will continue to gradually come up from that level as well.

Okay.

The other issue, Aaron, is we had a -- some deals that -- large deals that skewed that number in fiscal Q4 '18.

And those are harder to predict.

So if you exclude those, the 30% is probably a more realistic target.

Okay.

Let me ask maybe a different way then.

And going back to Andrew's question, if -- what was your assumption of subscription revenue contribution going into this last quarter?

Like relative to 37%, were you assuming that that would have been 30% or 25%?

Or -- I'm just trying to understand again how that trajectory of that business could change depending on those larger deal flows going forward.

Yes.

So I mean, so last quarter it was 21% as I think we disclosed in the call.

This quarter -- this past quarter, in Q4, it was 37%.

Again, 37% was at the high-end of any kind of expectations we had internally.

It was probably closer to 30%, if I had to put a number on it.

And also, as I stated on the call, is that it had a dampening effect because we moved so aggressively to the subscription pricing of about $4 million of in-period license revenue on a like-for-like basis.

Right.

Okay.

And then, the other question I just want to ask, in the prepared comments, there was a comment made about Hyperscale and that having some cannibalistic effect on some of the pipeline build.

Can you help us understand what that means?

And what are you seeing with Hyperscale deals relative to the ability to maybe attain a wallet share expansion opportunity with those platforms?

Yes.

I'll speak, and I'll let Alan speak in a second, Aaron.

We had higher-than-expected reception both for appliances and Hyperscale, for the -- at least for the -- really the first full quarter they were in the market.

But a lot of those deals were in our installed base.

So thinking about them as an expansion of position in our installed base because we got secondary storage along with our data management.

But the broader channel leverage, getting that channel spun up is happening as we speak, it will still take a couple of more quarters where we're actually picking up share in the broader market versus increasing our position in our installed base.

And Alan, you may want to take this.

I think the only cannibalistic effect, Aaron, was we pull a lot of data protection with Hyperscale.

It isn't just Hyperscale, it's really a redefined backup and recovery suite.

That, obviously, goes from one bucket to another.

Many of our traditional backup and recovery environments have been what we call scale up.

And now as they're moving to scale out environments, it's kind of taking from one bucket to another.

But Bob hit the major points here, Aaron.

I'll make a point, Aaron.

What we're seeing, and this is not bid market now, but in the major accounts, it's pretty consistent.

It's, I've got a legacy environment, I'm moving into a private cloud, I have my private cloud and now I want to move data to manage over multiple public clouds and I want to holistic way to do that.

And when I'm doing that, it's not just the data protection.

It's mitigation across all its infrastructures on cyberattack and the ability to recover a lot -- one, mitigate the detection of an intruder, do something automatic, that's why we're using machine learning, if an intruder is detected; and thirdly, be able to recover a lot faster and scale across those different environments.

That's a pretty common theme in and what we're seeing across the world and what these big customers are looking for.

Yes, the last piece there, Aaron, too, where hyperscale fits in here, that Bob alluded to is just performance and speed, let alone costs for terabytes.

So we've seen what, 5 to 8x, the amount of speed increase on the performance level.

We've seen things like 9 terabytes an hour in some of our new installed base, and that's massively faster and more efficient than traditional infrastructures out there.

So it all kind of fits together, is the point.

Our next question is from Alexander Kurtz with KeyBanc Capital.

Bob, maybe we'll get to talk to you one more time before the change, but if we don't, you've built quite the franchise here, and congratulations.

Just really want to narrow it down to 2 questions here, which is Hyperscale and the impact of the subscription transition.

So if we look at the fiscal '19 outlook that Brian's provided, do you think Hyperscale ultimately is a net positive or a negative to the fiscal '19 outlook given what you saw out of Q4?

And the same question for subscription transition.

How would you quantify it for the year, Brian, when you look at the outlook and sort of the impact and the changes as people adopt that kind of a model?

There is no doubt that growth is going to come from our big enterprise deals and Hyperscale.

It will be a major component in a significant amount of those deals.

No question.

Secondly, we're going to see significant growth just from our core, being able to have our -- I'll call it our simplified pricing and packaging and partner and channel leverage with our core data protection software.

Thirdly, the appliance got an exceptionally good reception.

And we've moved on that product and refined it really quickly, and we're going to be expanding both the footprint on appliances and really ramping up our channel.

So there aren't -- the success in driving growth is really tied to a few key things, and the good news is that the partner ecosystem is there, the products are there, to achieve these numbers.

It's now us -- for us to ramp this up and execute it as fast as we possibly can to get the kind of financial results we're looking for.

But there is no doubt that if you look at enterprise, we call it Commvault Complete data protection, Hyperscale and appliances, there is the vast majority of where the growth will come from, and that's where our focus is going to be.

Now you add machine learning and AI to all that, which is coming out, which Al and the team will be announcing formally in about 2 weeks.

Those products are done, by the way, we just haven't introduced them to the market.

They are significant, and there's a couple of years of work tied to those, with very special custom design algorithms and everything else to achieve those results.

And Alex, your other question just on subscription.

I mean, ultimately, the market votes.

I mean we are trying to make things easier for customers and distributors, resellers and partners.

And if the market prefers to buy subscription, we're going to offer subscription-based sales to them.

So it's hard to accurately predict that, but we do see this continuing to trend in that direction.

And as Bob said, I mean, we were pleasantly subscribed by a couple large deals in Q4.

We're not sure if that's a sustainable path, but we do think in FY '19, this will still continue to shift more towards subscription-based revenue...

But Brian, if we were to net out your fiscal '19 outlook, sorry, Bob, but if we were to net out the fiscal '19 outlook, there is some headwind from subscription, maybe a couple of points of growth.

And Bob, Hyperscale, you think will be a net positive not cannibalistic to fiscal '19 growth?

Well, what I meant by cannibalistic is as we broaden it out, absolutely.

That's in our numbers and that's what we're driving.

And that is -- Hyperscale and appliance are primarily subscription products.

And Alex, you are correct.

It's going to act as a slight headwind for FY '19 growth as our -- we move to subscription.

Low-single-digit headwind?

Yes, that probably sounds accurate.

Our next question is from Abhey Lamba with Mizuho Securities.

Good luck with the transition here onward, Bob.

Going to your comments about the margin commentary you gave a few minutes ago, you have been talking about 20% margin exiting fiscal '19 for some time.

It seems like it's moved by a year now, but why shouldn't your ultimate margin target for the next couple of years be even higher given all the cost actions you're planning to take over the next few quarters in addition to the leverage you can get from the channel?

Yes, well, for one, it should be higher.

But we first have to get to 20%.

But the business should generate a higher gross margin than 20%.

I agree with that, Abhey.

And we're not exactly a year out.

I would say we're 2 to 3 quarters behind where we wanted to be here in terms of ramping all this up and getting that -- it's not on the product side, I think we've done really well there, and I think we've got -- finally got our pricing in line, but it's getting these resources behind these routes to market and in place to drive it.

And that has just taken us a couple -- 3 quarters longer than we wanted to drive the results.

So just in summary, I don't think we're that far away from it.

And to your comment about shouldn't the business be able to generate higher than 20%, the answer would be absolutely.

Got it.

And secondly, GDPR has being talked about as a driver for some time.

Are you seeing some real demand originating from that?

And can you cite some examples where you could benefit from it?

That's it for me.

Yes, I'll let Al take this because we've got a lot of data going on here and there's a lot of technology here.

I mean, everybody talks about GDPR, but really providing a comprehensive solution is not as easy as it sounds.

Why don't you take this, Al?

I think Bob just hit it, Abhey.

The announcement he alluded to in a couple weeks will be around productizing our early GDPR efforts.

We've been out in an early adopter kind of beta stage for a couple quarters, and you learn a lot going through that.

It's not so simple, it's not easily programmized because everybody feels like they have a custom approach to dealing with sensitive data governance.

But again, we feel like we have the right technologies both for discovering what you have in your organization.

We think it's a consolidated approach, we're seeing the competitive offerings out there and to do those kinds of things, workload by workload or area by area and again, that makes overall company governance very difficult and lastly, the key is once you've discovered what you have, now what are you going to do with it?

So there're a number of, let's call it applications and data movement, consolidation and isolating or eliminating, et cetera, et cetera, that data.

And again, that's really the key part of what we call sensitive data governance.

You'll see more about this, as Bob said, this summer.

Our next question is from John DiFucci with Jefferies.

Your changes to sales distribution marketing seems more focused on channel routes to market.

I guess, is that true?

I mean, you've always had some focus there, I know that.

But can you talk at all about your direct sales efforts and how that might change, if at all, with what you're doing here?

Well, we've had it -- let me just go back 4 or 5 years.

Our original strategy was to drive our enterprise business with direct sales force and drive our, call it, channel with Dell.

And that worked and that's why we had 25% operating margins and sustainable 20% growth and 30% on the bottom for 7 or 8 years.

When that broke, it fundamentally broke because one, we didn't have products aligned to the channels; and second, we really weren't -- organizationally, we didn't put enough resource behind it.

So it worked for about 1 year, but it tapped out.

So we've always had channels, but we haven't had focused resources, as these are round numbers, and I'll let Alan, Brian, chime in.

But round numbers, we're moving call it 30% or 40% of our resources that were primarily direct into route to market.

We've taken existing resources and some adds, but net-net it'll probably be a net minus into routes to market.

This is -- a lot more people on our channel partners, our new strategic alliance partners, our cloud partners, and we couldn't do that without having these -- the major reengineering to our products to make them simple and easy.

So first you had to start with products and pricing; then you had to build a partner ecosystem; and then you had to shift a massive amount of resources.

So this is not a little change.

It is a massive structural change across the company on -- first, on products and pricing.

Again, a series of new routes to market and then shifting resources to that route to market.

So your enterprise direct sales force is -- becomes highly focused on these big major accounts, and then you have a lot more of your route to market organization just function on route to market, not touched or managed by a direct sales force.

So it's not a little change.

We've been working on this for quite some time, top to bottom and I call it, this is a major reorganization that we're going through right now and should be pretty well complete by -- sometime in July, we should be pretty well through it, including bringing in new leaders to drive all this and everything else, which you're on board by the way.

Al, do you want to take it?

I think the other point there, John, is many of the changes that Bob just went through, and we've indicated, are also complementary to an enterprise environment.

That's a good point.

So for instance, our partnerships Cisco and HP, those help us tremendously in enterprise environments, point one.

Point two is we're putting forward many improvements, if you will, in the whole what we call demand-to-bookings process that spans across mid-market and enterprise.

Things like -- as straightforward as better, simpler demos or streamlined POCs, et cetera, et cetera.

And one other point on enterprise.

When Bob talks about we've made our products and our pricing much simpler, when you serve both enterprise and mid-markets, just so-called dumbing down your UI is not really the answer.

So we spent, what, 1.5 years taking apart our whole user experience and everything is outcome-based now.

And as Bob also said, we're dealing with very complex environments out there and mountains of data.

And the bigger the organization, the more complexity you have.

So we solved the simplicity idea with automation, with outcome-based policies, with monitoring against those policies and, as Bob also indicated, now introducing predictive analytics and/or AI capabilities to spot those needles in the haystack.

So all that ties to simplicity, but it doesn't necessarily mean it's just dumbed down.

So again, all these initiatives go across both mid-market and enterprise, this idea here.

Our next question is from Greg McDowell with JMP Securities.

I'll start by saying that a 20-year tenure as a CEO of a technology company is simply an amazing feat.

Just a few questions for me.

First, the senior leadership changes, a lot changing, partnerships, alliances, channels.

I was just wanted to first ask, are those senior leadership changes largely complete?

Or should we expect a lot more to come?

And then I have one follow-up.

Well, the -- in the -- there was some additional to come by the way, some additions, but getting the senior leader for our whole distribution program, that person on (inaudible) was in place late last year, early this year.

We had to bring in a senior guy, a really experienced guy for managing all our alliances in a much more effective way.

That person came on board earlier this year.

We just hired a really well-known individual to -- for a channel.

So the key, the major leaders are in place.

There are some others as we're consolidating all our services, and what we're talking about, all of the services that support our channel partners are being consolidated, streamlined and simplified.

So we've still got some work to do in that area.

One of our existing senior leaders is managing that right now temporarily.

So it is not complete.

There're still things that we need to do.

That's helpful.

And just one follow-up.

I wanted to ask about your capital allocation policies on a go-forward basis.

Certainly, a portion of your shareholder base is advocating for an accelerated share repurchase program.

And was just hoping you could elaborate a little bit on your thinking and the board's thinking on is that under consideration?

And as you drive towards these increased operating margins, how you're going to put that free cash flow to use.

We've always done that opportunistically, but the answer is the possibility of doing that more programmatically is, I'll just say this, is under consideration, and was really part of the release in concert with Elliott.

So we'll think our way through it.

We want to do it in a way that doesn't jeopardize the company but provides for, I'd say, good governance of that -- our capital management.

So definitely under consideration.

Our next question is from the line of Eric Martinuzzi with Lake Street.

A clarification and then a question.

Your FY '19 revenue guide, that approaching 10%, I hear that and I think 7% to 9% growth with an 8% midpoint.

Is that -- are we talking about the same thing?

I'd say it's higher -- it's closer to 10%, Eric.

Okay.

And then for the timeline for the strategic transformation initiative here.

I understand you've said, "Hey, we're going to have this all fully baked and ready to comment on at the time that we report the second quarter financial results," which is pretty much 6 months from now.

I know it's a huge project, but given where you are, pretty close to selecting the consultant, and then I'm guessing you've probably identified the independent directors, I was kind of surprised that we're looking at 6 months before getting greater clarity there.

Can you comment on the timeline?

Yes, no, I think we'll comment on every quarter because we're pretty much in gear here with this phase of it.

And you can -- the really high probability is we bring a consultant in, and there'll be some other changes we'll make.

But I think the 6 months issue was really realistically the time it'll take to get all these channel programs significantly impacting our financial results.

But this is -- we started this -- it's really been -- started to make the moves here well over a quarter ago.

So yes, I mean, we'll comment on it on the next call.

We are in motion here and we'll let everybody know where we are along the path and when we have -- I think -- again, realistically, I don't think we'll have results from our interaction with this consultant until sometime in the second quarter.

So by the end of the second quarter, we'll comment on any additional actions we'll take as a result of that interaction.

And by the way, the management team here is really enthusiastic about it.

It's not something that we're taking as a -- we really think there's an opportunity given where we are in this transformation to bring this consultant in at a time we're -- they could have -- the timing is really good because we have so many things in place that refining it and optimizing it right now is kind of an optimum time for them to come in and provide some additional perspective.

And our last question is from Stephen Bersey with MUFG.

Just on the move to subscription.

Just wondering if you could maybe comment on the interactions you're having with customers around the subscription option for purchases.

So is it being uniformly embraced?

Are they still doing evaluations?

Is it not a good fit for others?

And then also, are there any product lines that just don't fit with a subscription model?

All our products basically fit.

We're being very aggressive with it from a sales standpoint.

We lead with subscription and we'll back off if it doesn't fit the customer's model.

We're not going to jam it into -- a customer just won't buy that way and some won't for internal reasons.

But we clearly lead with that model.

I don't know, Brian...

Absolutely.

I mean it offers up flexibility.

And also for competitive displacements if a customer is already spending OpEx on a competitors' maintenance support contract, this aligns very well in terms of our subscription-based offerings and going in and maximizing the use of OpEx budget as opposed to CapEx.

So that flexibility really resonates well.

Also it's competitive.

It ties into the competitive environment out there.

And you want to get out from under this whole maintenance renewal, maintenance repricing issue.

So there's massive motivation for us to be extremely aggressive in driving this forward.

And we know it's got a near-term dampening effect on our results, but it clearly strategically is the right thing to do.

And ladies and gentlemen, this concludes our Q&A and conference for today.

Thank you for participating.

Everyone, have a great day.