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Executives

Michael Picariello - Director of Investor Relations

Robert Hammer - Chairman, President and Chief Executive Officer

Alan Bunte - Chief Operating Officer

Brian Carolan - Chief Financial Officer

Analysts

Joel Fishbein - Lazard Capital Markets

Jason Ader - William Blair

Aaron Rakers - Stifel Nicolaus

Alex Kurtz - Sterne Agee

Eric Martinuzzi - Lake Street

Aaron Schwartz - Jefferies

Michael Turits - Raymond James

Andrew Nowinski - Piper Jaffray

Greg Dunham - Goldman, Sachs & Co.

Glenn Hanus - Needham & Company

Rajesh Ghai - Craig-Hallum Capital Group LLC

Brian Freed Wunderlich Securities, Inc.

Robert Breza – RBC Capital Market

CommVault Systems, Inc. (CVLT) F3Q13 Earnings Conference Call January 30, 2013 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to CommVault’s Third Fiscal Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question-and-answer session.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Michael Picariello, Director of Investor Relations. Please go ahead, sir.

Michael Picariello

Good morning. Thanks for dialing in today for our fiscal third quarter 2013 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 Q&A session at the end of the call that relate to future results and projections, are forward-looking statements within the meaning 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, which are discussed in our 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. Our earnings press release was issued over the Wire Services earlier today and it has also been furnished to the SEC as an 8-K filing. The press release is also available on our IR website.

On this conference call, we will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found on Table IV 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.

Robert Hammer

Thanks Mike. Good morning everyone and thanks for joining our fiscal third quarter 2013 earnings call. We had another very solid quarter setting records for revenues and earnings. We had a strong quarter in all aspects of our business and in all geographies. In addition, we have established good visibility entering into our Q4. Our positive results are a validation of our unique ability to address the changing data and information management needs of large commercial and government enterprises, as well as leading managed service providers.

Let me briefly summarize our Q3FY13 financial results. Total revenues were $128.1 million, up 24% year-over-year and up 8% sequentially. Software revenue was $65.9 million, and grew 28% year-over-year and 11% sequentially. Services revenue was $62.2 million and grew 19% year-over-year and 6% sequentially.

From an earnings perspective, operating income or EBIT was $29.8 million, up 52% year-over-year. EBIT margins were 23.3%. Diluted earnings per share for the quarter were $0.39. We generated $27.5 million of cash flow from operations during the quarter.

Let me talk about our growth drivers. Our 28% year-over-year license revenue growth for the quarter was primarily due to our ability with Simpana 9 to better meet the needs of large commercial and government enterprise customers over implementing global shared service models. Outstanding sales execution, contribution from large managed service providers, highly differentiated support and services, and increased market awareness and industry recognition. It is important to note that license revenues generated from Simpana 9 in our core data management market will continue to be the primary driver of FY13Q4 growth and FY14 license revenue growth. Simpana 10, which I will talk about in a little more detail later, will significantly enhance Simpana 9’s industry leading value proposition in our core business and enable us to begin to penetrate other data-related market segments.

Let me spend a minute speaking about the macroeconomic environment. Current macroeconomic indicators point to a generally lackluster global economy in the first half of calendar 2013 with improvements expected in the second half. Specifically, we are assuming the following: The European economy will remain weak, the US economy will be slow in the first half of the year, even though there is continuing underlying improvement and we expect to see improvements in the Asian economies, particularly in China. In addition, we believe continuing uncertainty will have a negative impact on capital spending in both the US and in Europe. In contrast to the lackluster macro environment we continue to see good underlying demand for our products across all geographies and vertical market segments. What we know we are not immune to the broader macroeconomic uncertainty and remain focus on the possibility of a slowdown. We also expect to see cutbacks in the US Federal spending this quarter.

Now, let me address our current outlook. We had an excellent first nine months of FY13, in which revenues grew 22% year-over-year. License revenues grew 25% and non-GAAP EBIT increased 55% year-over-year. As of today we have seen limited negative impact to our business from the macroeconomic environment. Our visibility going to Q4 remains solid. We are focused on building our funnels for Q1 and Q2 FY14 and ensuring the quality of those funnels to mitigate any potential economic headwinds. In addition, we are accelerating our investment in sales capacity.

While we have strong consistent growth in revenue and earnings, I would like to add the following words of caution regarding our future outlook. We continue to have quarterly revenue and earnings risk due to timing of a very large multimillion deals. The continuing uncertainty will have a negative impact on capital spending in the US, particularly in spending by the US Government. While CommVault EMEA had good year-over-year revenue growth in Q3, we assume the outlook for IT spending in Europe will be weak and we are in an opportunity rich situation and are increasing spending across the company to take full advantage of the many opportunities before us. This includes increasing share on our core data management business in FY14 and building the necessary foundations for growth for FY15 and beyond in other data related market segments such as mobile, computing, operations management and business intelligence and analytics. With that said, we believe the current FY13 consensus growth rates for revenue is reasonable. Brian will discuss our operating margin guidance later in the call.

For FY14 we believe we will be able to achieve solid double-digit revenue and EBIT growth as our forecast and visibility look promising. This is being driven by strong market traction with Simpana 9 and we expect increased customer value and competitor differentiation with the launch of Simpana 10, good sales execution, significant add in sales capacity and broadened distribution.

In summary, the company had another very solid quarter and is in good position to successfully achieve our objectives for fiscal 2013. We have also established a solid foundation of growth for FY14. We are making the required investments to ensure that we can continue to outpace the market in growth and profitability over the meeting for long term. We are well on track in establishing the product distribution, services, support and marketing foundations to enable us to achieve our billion dollar plan revenue objectives as well as achieve our mid-20s operating margin objective over the next few years.

I will now turn the call over to Brian.

Brian Carolan

Thanks Bob and good morning everyone. I will now cover some key financial highlights for the third quarter of fiscal year 2013. Total revenues for the quarter were $128.1 million, representing an increase of 24% over the prior year period and 8% sequentially.

For the quarter, we reported software revenue of $65.9 million, which was up 28% or $14.5 million over the prior year period. Software revenue represented 51% of our total revenues for the current quarter, compared to 50% in the prior year period. Our higher software revenue was derived from the record number of enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter. Enterprise deals were 58% of license revenue in the quarter, representing year-over-year growth of 59% and 17% sequentially. The number of enterprise deals grew by 64% year-over-year and 10% sequentially.

Our average enterprise deal size was approximately $260,000 during the current quarter, compared to $247,000 in the prior quarter. For the first nine months of fiscal year 2013, the dollar value of enterprise software transactions increased by 39% year-over-year. Enterprise deal flow momentum and funnel growth continued to be strong entering our fiscal Q4.

During Q3, our growth was driven by strong demand for virtualization, source-side deduplication and snap-based modern data protection solutions. We continue to see strong demand for our capacity-based licensing models, which makes it much easier for our customers to purchase multiple elements of the Simpana platform. In fact, about 70% of our software revenue in the current quarter was comprised of capacity-based licensing models. We expect that capacity-based licenses will continue to account for the majority of our software revenue for the foreseeable future.

From a services revenue perspective, our maintenance attach rates and renewal rates remain very strong. Services revenue for Q3 was $62.2 million, an increase of 19% year-over-year and 6% sequentially.

For the quarter, revenue from US operations generated 58% of total revenues resulting in an 18% year-over-year increase, while revenue from international operations generated the balance, resulting in a 32% year-over-year increase. The growth in international software revenue is primarily due to increased sales in Europe, Australia, Canada, and Latin America.

Software revenues derived from our indirect distribution channels increased 26% over the prior year period and represented 86% of software revenue. Our direct revenue grew 40% year-over-year and represented the balance of software revenue. Please remember, most sizable fields are driven by our direct sales force even though they are transacted through the channel. Many of our global resellers and strategic partners had strong growth. We saw very good performance through Arrow, our largest US distributor. For the quarter, total revenue through Arrow comprised approximately 28% of total revenue, growing 27% year-over-year and 3% sequentially. We also saw continued strong growth from our Managed Service Provider or MSP partners.

Sales through our Dell relationships accounted for approximately 19% of total revenues for the quarter. Total quarterly Dell revenues grew 2% year-over-year and declined 4% sequentially. The majority of our Dell revenues continue to come from our enterprise install base where our sales force is directly involved. We will continue to partner with Dell in the enterprise segment of the market where we have highly differentiated innovative solutions based on our UNIX software platform. Please note, from quarter-to-quarter, there will likely be fluctuations in the amount of revenue transacted through Dell due to the timing of large enterprise deals. However, overtime our percentage of total revenues transacted through Dell will likely decline as we broadened our other distribution channels.

We added approximately 485 new customers in the quarter, our historical customer count now totals approximately 17,700 customers. Approximately two-thirds of our quarterly software revenue comes from our existing install base which combined with our capacity based licensing model provides a very strong engine for future growth.

Gross margins were 87.4% for the quarter compared to 87% in the prior year period.

Now moving on to operating expenses and EBIT margin expansion. Total operating expenses were $80.9 million for the quarter, up approximately 17% year-over-year and 11% sequentially. Sales and marketing expenses, as a percentage of total revenues decreased to 47% in the current quarter, which was down from 51% in the prior year period. Non-GAAP operating margins were 23.3% for the quarter, resulting in operating income or EBIT of $29.8 million. On a year-over-year basis, Q3 EBIT increased by 52%. Q3 EBIT margins increased by 430 basis points year-over-year and decreased 110 basis points sequentially. Our operating margins continue to benefit from the sales segmentation strategy that we implemented at the beginning of fiscal 2013.

Net income for the quarter was $19 million and EPS was $0.39 per share based on a diluted weighted average share count of approximately 48.6 million shares. On a sequential and year-over-year constant currency basis, there was minimal foreign exchange impact on EPS.

I would now like to spend a few minutes discussing our operating expense investments for the remainder of fiscal 2013. It is our intention to increase the rate of our operating expense investments in Q4 to position the company for solid growth in fiscal 2014. These investments will include sales reps, sales engineers, and professional services. We added 76 employees in fiscal Q3, which was a record quarter for us in terms of net headcount additions. We ended fiscal Q3 with 1,658 employees up, from 1,582 at the end of September. We expect that our field resources and support headcount additions will increase at a higher pace in fiscal Q4, as compared to the past few quarters.

In addition, we expect to introduce our next software release, Simpana 10 in fiscal Q4 and such a release will require significant investments in training, market awareness and expanded distribution. I would like to highlight one additional key spending increase in Q4. Historically, we see a large sequential increase in employer paid spike expense in Q4, because many of our employees in the U.S. reach the cycle limit well before the end of the calendar year. This year we expect our spike expense in Q4 to be approximately $1.5 to $2 million higher than Q3.

I’ll now address the current street consensus revenue growth rate in our anticipated EBITDA margin improvement for fiscal 2013 and 2014. As Bob indicated we are comfortable with the current street consensus revenue growth rates for fiscal 2013. Due to the over achievement of forecasted EBITDA margin in the first 9 months of fiscal 2013 and lower than planned investment levels, we now believe we can improve operating margins for fiscal 2013 by 375 basis points.

For fiscal 2014, we believe we can again deliver very solid double digit revenue and EBITDA growth. However, we expect fiscal 2014 operating margin improvement to be muted due to our fiscal 2013 over achievement as well as the fact that we’re making significant strategic investments then enhance both our short and long term growth opportunities and advance our leadership position in the market.

While we believe we could deliver margin expansion in fiscal 2014, we expect operating margins to be flat to slightly up. We expect to accelerate our rate of investments in fiscal 2014, but still anticipate strong above the industry EBITDA growth in absolute numbers. We’ll provide more specifics on FY14 during our Q4FY13 earnings call. In summary, we remain committed to our $1 billion revenue plan with operating margins in the mid twenties over the next few years.

Let me now comment on tax rates and share accounts. We’ll continue to use a pro forma tax rate of 37% for fiscal 2013 and plan to use the same rate for fiscal 2014. Our cash tax rate will approach our long term GAAP tax rate over the next few years. The cash tax rate for fiscal 2013 is estimated to be in the range of 14% to 18%. We expect our cash tax rates to remain lower than our GAAP tax rate for fiscal 2014. For fiscal 2013, we anticipate that our diluted weighted average share account will be approximately 48.1 to 48.4 million shares. For fiscal 2014, we anticipate that our diluted weighted average share count will be approximately 50.3 to 51.3 million shares.

Now, moving on to our balance sheet and cash flows. As of December 31, our cash and short term investments balance was $397.2 million of 12% from the end of September. Cash flow from operations was 27.5 million. Free cash flow which we define as cash flow from operations with capital expenditures was 25.2 million, which is a decrease of 4% over the prior year quarter and an increase of 11% sequentially. The decrease over the prior year quarter is a result of mainly changes in accounts receivable and deferred revenue. The sequential increase in free cash flow is a result of changes in working capital on the balance sheet, as well as higher operating income and revenue.

As of December 31, 2012, our deferred revenue balance was approximately $161.6 million which is an increase of $30.9 million or 24% over the prior year period and up $7 million or 5% sequentially. As our fiscal Q4 is typically a significant quarter for us in terms of maintenance support renewals, we would expect sequential differed revenue growth to accelerate operating cash flows in the fourth quarter. Our Days Sales Outstanding or DSO was 51 days which is up from 49 days in the prior quarter and down from 59 days in the prior year quarter. The lower year-over-year DSO was primarily due to improved linearity in the quarter. And lastly, before I turn the call back over to Bob, I would like to briefly update you on the status of our new campus headquarters. Based on our current growth rates, we expect to run out of space in our current leased facility within about 2 years, which prompted the need to strategically plan for the future.

As such, we are pleased to report that yesterday we closed on the purchase of a 55 acre parcel of land located about 5 miles from our current headquarters. We are in the process of completing the design of the new campus headquarters which will be completed in phases. We’d expect to complete phase I of the project in about 2 years. Our early estimate of the cost of the phase I build out including the land purchase, building and campus infrastructure is approximately $125 million to $135 million. We expect the cost per square foot of the new headquarters to be comparable to what we pay for our leased facility today.

We’ll use our existing cash and future operating cash flows on this project. There are a number of significant benefits associated with this strategic investment. Some of which includes much better customer facing capabilities with an executive briefing center as well as world class custom support and training centers. Our employee productivity and retention and improved ability to recruit. The development of the new headquarters is making a very strong statement to our large enterprise accounts and key partners that we are building the company for the long term, that concludes the financial highlights.

I’ll now turn the call back over to Bob, Bob?

Robert Hammer

Thank you Brian. I’ll wrap up this call with a brief overview of our strategy, the dynamics of the market and lastly provide a brief perspective of Simpana 10. We are planning to formally launch Simpana 10 on February 25, 2013 and will begin shipping this quarter.

Please note the development and timing of any release as well as any other features of functionality remain at our sole discretion. First and foremost, CommVault is a data focused company, we focus on providing solutions for customer’s data and information management needs. The demand driver for our business is the growth and complexity of managing data which has been growing about 50% annually. The majority of our licensed revenue growth has been derived from our core data protection and data management business. It is important to note as I discussed earlier, that in FY14 most of our growth would come from our core business and we will continue to derive solid growth from our core data and management business on our way to a billion dollars in revenue. However, we are making substantial investments across the company to ensure that we will also derive meaningful revenue growth in FY15 and beyond from other data related market segments including regulatory and compliance, mobile computing, business analytics and operations management.

Simpana 10 will play a significant role not only in our ability to increase our share in our core data management market, but also penetrate the other data related market segments that I just mentioned. Simpana 10 is not just another innovative CommVault release, it is an industry changing breakthrough product that includes innovations that will impact the way data is stored, managed, accessed, the way operations are managed and the unique way of business insight can be extracted from data.

(inaudible) on the market, the needs of the market are in rapid transition. Customers require innovative new technologies to deal with the sheer volume of data. The diversity of data sources to manage and the longer term retention requirements primarily tied to the host of new privacy legislations. Innovations are also required to provide new ways of managing data in more complex, higher scale and dynamic IT infrastructures, but cloud mobile devices and large shared service environment. Additionally, there are increasing requirements for sophisticated analytics to make sense of all the data that companies are creating, but all those demands were innovations together and now you have the basis for this continuity in technology innovation across the board's broad spectrum of IT.

CommVault has been and will continue to be a (inaudible) leader in bringing innovative technologies to market. We are the only company with a fully integrated [ph]Simpana software platform that can holistically deal with the significant changing needs of the market.

Our current software platform release of Simpana 9 has established a strong leading position in the market due to its scalability, flexibility, reliability and cost effectiveness. With our Simpana 10 release, we will take innovation in the market to a whole new level radically changing the way data is moved, retained, stored, archived, recovered, shared and analyzed. More specifically as I mentioned last quarter with Simpana 10 we plan to bring some market significant enhancements and new product capabilities to our Simpana software platform which include, next generation data management and protection, reduced cost, improved performance, recovery scale and security.

Next generation innovative archiving, new automation capabilities with shared service environments for both private and public clouds including automated workflows. Comprehensive reporting and monitoring of IT infrastructures, advanced ways to deliver and use of products and services, innovative new services, transforming the management of mobile devices, enabling anytime, anywhere, secure access and search of data to the user’s mobile technology. Cost effective ways of securing, protecting and sharing files in the cloud across all devices. Next generation capabilities to more easily enable better decision making including a secure virtual repository for all data. And lastly, new analytical solutions tied to unique ways to converge different types of data and sources of data.

These new products and services have the potential of significantly increasing our value and relevance to our customers and partners. Increasing CommVault’s differentiation versus our competitors. Over the next three years we believe that Simpana 10 has the potential to expand our addressable market by 60%. We will provide a lot more in detail on Simpana 10 on February 25.

In closing, we had another solid quarter. We believe the combination of our technology and leadership, enterprise selling capability and a continued third party recognition as the industries innovative leader will enable us to outpace the industry in growth and achieve our Q4FY13 financial targets as well as our FY14 plan. We are making excellent progress in building the necessary foundation to achieve our longer term $1 billion revenue plan objective.

We believe Simpana 10 is a landmark platform that will completely change the game in data management and protection, next generation archiving, mobile and business analytics. We are excited and looking forward towards introduction in the market over the next few weeks.

I’ll now turn the call back to Michael.

Michael Picariello

Thanks Rob. Before the operator opens the lines for questions. I’d like to highlight that Alan Bunte will be speaking at the Stifel Nicolaus 2013 Annual Technology Conference in San Francisco, California on February 6 at 4:30 PM Eastern Time. Details and a live webcast will be available in the RR section of our website.

Operator, can you please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) And the first question is from Joel Fishbein from Lazard Capital Markets. Please go ahead.

Joel Fishbein - Lazard Capital Markets

Good morning guys. In terms of the off balance sheet backlog, can you give us any color there, obviously building a strong pipeline and I would like to commentary there, but any specifics around that would be very helpful and then I have one follow up.

Robert Hammer

Our visibility Joel increased quarter on quarter and we have got good visibility going in to -- fiscal Q4.

Joel Fishbein - Lazard Capital Markets

Okay, and then one more in terms of government. Although, you had a lot of cautionary comments regarding dispending there which I think is fairly high profiled in the market place. CommVault specifically is well positioned to help in a lot of government deployment. Can you just talk about instead of just the near term, but over the long term with the opportunities in the government help them with their data management needs?

Robert Hammer

I’ll talk about the U.S. government and governments in general. Many other governments around the world are beginning to develop and deploy very broad shared services models where different functions in different departments of government use the same IT infrastructure. CommVault is significantly involved in both the U.S. government and major projects in other governments overseas. We believe that therefore represents a very significant potential for us going forward. We will see parts of results from that in both the near, medium and the long term.

Joel Fishbein - Lazard Capital Markets

Okay, great. Thanks a lot.

Operator

Thank you. And the next question is from Jason Ader from William Blair. Please go ahead.

Jason Ader - William Blair

Thank you. Bob, just a follow-up on the federal question. Could you give us a sense of how the federal business did, maybe sequentially year-on-year? And then, also any specific color you can give on the MSP business in terms of the percentage of sales coming now from MSPs and how that business grew both sequentially and year-over-year as well? Thank you.

Robert Hammer

The U.S. federal government year-over-year decline is slightly. Now, it’s really due to the timing of some major deals that we had, very strong Q3 FY12. So, I wouldn’t read anything into it, because I think we are extremely well positioned in our federal business over the next few years.

MSP business was very strong. We continue to take a large share in that business. It was up substantially, which we are very pleased with the result there and we believe going forward that as I have said earlier that the MSP segment of the market will be a primary driver of our license revenue growth going forward.

Jason Ader - William Blair

And any idea how big that is as a percentage of sales right now?

Robert Hammer

I think I have said before that from a license revenue standpoint, it’s approaching 10%. We don’t report segments and so, they approach 10% of total revenue. So, we expect that the MSP will achieve 10% of our license revenue sometime in fiscal ’14.

Jason Ader - William Blair

Okay. And then real quick on the last thing, just on the enterprise deal sizes, obviously you think any larger, could you give us any color on the kind of high seven-figure, maybe even eight-figure deals that you guys are starting to win or have in the pipeline? Is that a substantial change versus year or two ago in terms of those kind of high seven-figure approach in eight-figure deals?

Robert Hammer

There’s a discontinuity in the curve. It’s up dramatically. We have moved from typically these larger deals for us in the 5-terabyte range. Now, we are seeing deals in – that has the potentials, 20-some terabytes, 50-some terabytes. So, the deal size has grown dramatically in the past 12 months. That’s the high end. And that is mainly due to two reasons, one is the move to shared service environments in big enterprises and governments, and the growth of large MSPs.

Jason Ader - William Blair

Okay. Thank you.

Operator

Thank you. The next question is from Aaron Rakers from Stifel Nicolaus. Please go ahead.

Aaron Rakers - Stifel Nicolaus

Yes, thanks guys for taking the question. First, if I look at your strong momentum on the enterprise side, what I am interested in is actually SMB side of the business. It looks like it was about 2% growth by my math. Just curious where you guys stand. I think you launched the IntelliSnap product back in late October, you implemented some segmentations in the sales force. Can you talk a little bit about what’s going on in the SMB segment, how we should think about that growing going forward?

Robert Hammer

Sure, Aaron. So, number one, we are basically overachieving our objectives. In the enterprise, we had a major focus on the enterprises for about four or five years. We haven’t had that kind of focus in the SMB. So, we made a number of organizational changes about a year ago, and we have renewed focus on SMB, both from a distribution standpoint and product standpoint. So, I would say over the next fiscal year, give us to fiscal ’14, I think by the end of fiscal ’14, we will have significant experience in our position across the higher end of the SMB market as well.

Aaron Rakers - Stifel Nicolaus

Okay. And then as a follow-up, maybe we should talk a little bit about your distribution relationships. Obviously, Dell is coming off a little bit, but can you talk or update us on the competition versus cooperation that you have with an EMC? And then also, I know you wanted to talk about it yet, but any changes, any thoughts on what’s going on at NetApp at this point. Thank you.

Robert Hammer

I will just take it in a broader context. Clearly, in general, we are forming our distribution capability. In the enterprise, if you look at what is going on in these big shared services consolidations, and our ability to move into new market segments with Simpana 10, including mobile and analytics, we are shifting our focus and broadening our distribution to include a lot more of the systems integrators. So, the mix of our distribution is going to shift towards the Sis, what we are doing with some of our hardware partners, we will continue to partner, but we are much broader company today, so that we have got the opportunity to broaden distribution. Again on the enterprise, as I mentioned earlier, we are doing a lot of work to strengthen our position in the mid-market with our re-sellers and distributors.

So, in general, we are going through another significant upgrade and expansion of our distribution capability over the next several years, and we are absolutely confident that it’s going to help us sustain very high revenue and earnings growth.

Aaron Rakers - Stifel Nicolaus

And the final question from me, for double-digit growth looking into fiscal ’14, what’s your assumption of capturing or addressing that incremental expansion of the TAM by 60%? Is that a full fiscal ‘14 story or is that kind of roll through the model as we progress through that year? And that’s it, thanks.

Robert Hammer

Yes, it’s pretty clear, and the point is, is that the majority of the growth is going to come from our core business in ’14, based on the core value proposition of Simpana 9. Now, Simpana 10 dramatically enhances that, that’s our core revenue driver. We are in a unique position that we have opened up many new opportunities and have the luxury of investing heavily in expanding our business into other data-related market segments. That investment and that foundation will be laid in FY14 and will start to have some material to our revenue and earnings growth in FY15, FY16 and beyond.

Aaron Rakers - Stifel Nicolaus

Great, thank you, Bob.

Operator

Thank you. And the next question is from Alex Kurtz from Sterne Agee. Please go ahead.

Alex Kurtz - Sterne Agee

Yes, thanks. A clarification and a question. Just on the guidance, looking into this print, you guys were tracking towards about 18% to 19% growth, you obviously beat all those consensus on December. So, should we still expect sequential growth obviously into your fiscal fourth quarter, because that will put you above where consensus was before the print?

Robert Hammer

Sequentially on revenue you are saying?

Alex Kurtz - Sterne Agee

Yes.

Robert Hammer

You could probably – that’s a concern that would be, yes, sequentially up.

Alex Kurtz - Sterne Agee

Okay. Thanks. And then, Bob, just a follow-up on Aaron’s question around Dell. It looks like maybe you are tracking towards, maybe around 8% to 10% growth for fiscal ’13 around their contribution. Is sort of high-single digit, sort of the right place to think about Dell’s contribution going forward? Is the relationship changing so much, it’s hard to tell at this point what it could be in next year?

Robert Hammer

It will grow next year because of our strength in the enterprise and working with Dell and strong enterprise accounts, but clearly, Dell will become less relevant to us overtime.

Alex Kurtz - Sterne Agee

Okay. Thank you guys.

Operator

Thank you. And the next question is from Eric Martinuzzi from Lake Street. Please go ahead.

Eric Martinuzzi - Lake Street

Thanks and congratulations on the strong execution in December. The capacity-based pricing, I imagine, given the data growth, some of your larger customers has got to become, let’s just characterize it as an awkward conversation, can you talk a little bit about the process that you are going through as people get into either new services or start to need greater capacity, higher handling those pricing negotiations?

Robert Hammer

I am not sure I understand the question. I mean, the discussion we are having with our major account is right now is not awkward at all, I mean from a strategic standpoint, because the data growth issue has consequences. One, they don’t have the – they can’t use the traditional method to protect it, because they don’t have enough time to hit a backup window. After they back it up, they can’t find it. And they are having a lot of difficulty meeting the new regulation side of privacy.

In addition to that, they don’t have the skilled labor to manage it and the ability to manage it is becoming cost prohibitive. So, all these major customers or major enterprise customers have only one choice and that’ to completely reengineer and re-architect the way they protect store and manage data. Since we have the best technology in the market to solve those problems, those are happy discussions. And our whole model is based on providing our customers with the big returns on the money they invest with us, both from a product and services standpoint. So, we sell on value and we are solving some really critical problems very cost effectively and provide very high returns, the money that customers invest with us. So, it’s (inaudible) at all.

Eric Martinuzzi - Lake Street

Okay. So, it’s kind of positioning of a TCO discussion for the account manager the accounts?

Robert Hammer

TCO is critical, but the other point is customers are in situations where the technologies doesn’t work. So, I have one customer and we went through this, this was last year, reached a significant enterprise account and the CIO said to me, ‘Bob, to be blunt, the TCO is icing on the cake, because if I can’t meet my regulatory requirements and I can’t protect my data, I am in trouble. So, I need to install my core basic fundamental problems first and it is great that you can provide me fundamentally basically 50% savings of what I am doing today, but that’s my second priority.’ It’s not the case with all customers, but I am just doing it. This situation has now gone from nice-to-have to critical, for these major accounts.

Eric Martinuzzi - Lake Street

Got it, thank you.

Operator

Thank you. And the next question is from Aaron Schwartz from Jefferies. Please go ahead.

Aaron Schwartz - Jefferies

Good morning. I had a question on some of the reinvestment commentary you made. You talked a lot about sort of the self distribution going forward, but the question I had is, you also talked about expanding to a lot of new ancillary markets. If we look at your development expense, it’s quite low relative to benchmarks as a percent of revenue. Should we expect sort of a shift here over the next couple of years, just maybe a little bit more leverage on the sales line and a little bit more expense on the development line as you get into some of these newer markets?

Robert Hammer

It’s about the opposite. It was very efficient in development on a relative basis, so that the base expense is occurring in sales, it’s just capacity, services, our whole professional services model is shifting. So, we are becoming a much more comprehensive provider of unique consulting and advisory service to our customers. We have to expand our product management function, so we can manage and focus on these new market segments, our support models change. So, if you look at the expenditure, it’s in marketing, sales, services, support, more so than it is in debt.

Aaron Schwartz - Jefferies

Okay. And given what you said there is, well let’s see, maybe change in distribution with greater contribution from SI partners, so it sounds like they will do some of the consulting premises that you will still take a lot of that on as well.

Robert Hammer

So, the point is, the answer is yes. But understand that, there are few organizations that really understand comprehensive data models. We have to develop the expertise and the processes and the tools in order to properly architect, implement, support these new IT environment type, the management use of data. So, we develop the skills of practices in a comprehensive, from a personal standpoint, we have got another skills on the ground globally. Then we can educate our partners and back them up as they go in applied services to their customers. So, CommVault is taking a lead, both in the processes, the architectures, the toolsets and understanding and we are tapping that along to various partners so they can also apply leverage and provide those same services to the marketplace.

Operator

Thank you, and the next question is from Michael Turits from Raymond James. Please go ahead.

Michael Turits - Raymond James

Hi guys, very strong quarter. Couple of questions here. One, with Simpana 9, it was a fairly rapid transition to higher growth rates as people started to adopt that. It sounds like you are just cautious a little bit, so that might take a little bit long with on the 10, obviously, very ambitious in terms of the expansion of the scope of the market. Can you walk through that a little bit what the differences are, how that adoption rate might be different? And then, the follow-up question is on professional services, it sounds like that will be needed to – can you give us some sense of how much of your services are now closer and how much that might increase as we transition?

Robert Hammer

The uptake on Simpana 9 was tied to enhancements in our core markets. As I mentioned on the call, Simpana 10 significantly increases our value of proposition to our customers and differentiation to our competitors in our core market. So, it solidifies and enable us to sustain high growth rate in our core data protection and information management markets as it exist today. When we start to expand to new market segments, analytics, mobile, operations management, those are – we got to build those franchises. Those don’t happen very quickly. So, what I indicated on the call is we are making very significant investments in FY14 to build a foundation, plus to build businesses in those new market segments, but that transition will occur over the next several years. Now, we have built our $1 billion plan model, and I can tell you how we comp [ph] we are going to hit that over the next few years. The majority of our business when we hit the $1 billion will still be from our core business, but there will be a substantial, on top of it, it will be substantial contribution from some of these new market segments.

As we move to $2 billion, and we have laid out a, brought on what that looks like these new segments, we will outpace the growth of our core. So, as I mentioned on the call, we have an opportunity-rich environment here. So, the key for us is to maintain focus and make sure that we have absolute executable plan, all of our key initiatives, both in our core and our ability to extend the business to related data market segments.

Operator

Thank you. And the next question is from Andrew Nowinski from Piper Jaffray. Please go ahead. Andrew, your line is now open for a question. If your phone is on mute, please unmute it.

Andrew Nowinski - Piper Jaffray

Sorry, thanks. Good morning. So, as a follow-up to Michael’s question, do you have customers that have already started beta testing for Simpana 10, and then when you look back at the launch of 8,9, do you have any idea what percentage of existing customers that upgraded to the new version in the quarter as it was launched? Thanks.

Robert Hammer

Yes, we have beta tested Simpana 10. It will be (inaudible) mode starting late February. So, we are very confident about the ability and quality and functionality of Simpana 10. In regard to the uptick, we don’t publish what those are, but you know, round numbers, more than half of our customers are on 9 today, round numbers. And what we expect as we go through the summer, that’s the vast majority of old accounts, new accounts, we will be shipping Simpana 10, and all of our account base will transition to Simpana 10 over the next few years. We are extremely confident about the products and again, the ability to enhance our position in our core business, some really unique, innovative solutions to some of these other market segments. But again, we are in the position, we can manage the transition to 10 in a way that enables us to keep our good, solid foundation and extend it overtime and maintain good, solid revenue and earnings growth.

Andrew Nowinski - Piper Jaffray

Okay. Very good, Bob. Just one more quick question. EMC noted yesterday it hit a billion-dollar annual run rate with Isilon and Atmos. It sounds like Isilon is expanding well beyond the media and life sciences market. So, just wondering if you can talk about whether or not you are also entering new verticals in your partnership with EMC, given your historically high attach rate to Isilon? And thanks a lot.

Robert Hammer

Yes, I mean, we don’t have any formal partnership with EMC Isilon, but it’s a very good product and we are well integrated with that product in many different verticals and expect to continue to partner with the Isilon team as we build out our platform.

Operator

Thank you. The next question is from Greg Dunham from Goldman, Sachs, please go ahead.

Greg Dunham - Goldman, Sachs & Co.

Hi, thanks for taking my question. I want just a clarification on how much of the incremental spend in sales and marketing is related to Simpana 10 in FY14 versus just kind of like growing the core? And then a separate question, we are pretty cautionary about Europe, but your international business at 32% growth is continuing to outpace the US. Is there anything you see going forward that that gives you thoughts about the international region or is that just kind of general macro commentary? Thanks.

Robert Hammer

Well, we have a new management team in Europe and to be frank they have been hit to cover off the ball and probably will continue to hit the cover off the ball. But the cautionary tale there is Spain just reported a quarter where they had a 1.8% decrease in their economy. So, the question is, can we continue to achieve the (inaudible) good seller results in the place of some of the European economies which were in depression areas. But so far, we have seen really good execution from the team and the outlook continues to be good. We have seen a significant improvement in our execution with the change of management of our European business.

Greg Dunham - Goldman, Sachs & Co.

Okay. And quickly on the level of spend Simpana 10 related versus kind of just growth in the core?

Robert Hammer

There will be a significant incremental spend for Simpana 10 and its extensions in FY14.

Operator

Thank you. The next question is from Glenn Hanus from Needham, please go ahead.

Glenn Hanus - Needham & Company

Thanks. Quick follow-up question on the guidance revenues. I mean, just looking at the consensus to sort of like 130ish for March, sort of a slight uptick historically, I mean, you are obviously coming off a very strong outperformance here. The slight uptick implied in your guide is that just your normal sort of conservative guidance, or there is some – perhaps the federal or some vertical market or some other thing in particular that gives the little more cautious guidance that way? Thanks.

Robert Hammer

We are always prudent in our guidance, Glenn. And as I always say, that’s the way the math works, but yes. Prudency is always the appropriate response.

Glenn Hanus - Needham & Company

Okay. It sounds like your overall tone on the macro is fairly similar to last quarter where you said you are not immune but you are not really being impacted yet. Is that sort of status quo from last quarter’s commentary there? Is that fair?

Robert Hammer

That’s fair, Glenn.

Glenn Hanus - Needham & Company

Okay. Thank you very much.

Operator

Thank you. The next question is from Rajesh Ghai from Craig-Hallum, please go ahead.

Rajesh Ghai - Craig-Hallum Capital Group LLC

Yes, thanks. Congratulations on the continuing momentum. A couple of questions on Simpana 10, if I may, Bob, how do you estimate the material TAM expansion that we have discussed in the past about 30% to 40% increase is TAM. What metrics are you specifically using to estimate that? Secondly, with the new functionality and features that are coming out of Simpana 10, how many of those features would be available to the install base as part of the maintenance and what percentage or if you can give us some metric on how much of the new function the features would entail new licenses? Thank you.

Robert Hammer

On the TAM, we can take it offline, but we have a lot of – one, I wasn’t as clear on the last earnings call, but over the next three years, if you look three years out, TAM expansion 60% and we have got a lot of detail on that and we can provide it to you offline, Rajesh. One thing to understand, is we look at this market different than most analysts and our competitors because we have a platform that cuts across a lot of different market segments. So, the way we view it and the way we determine TAM is unique. In regard to the features that customers will get in an upgrade, any core feature backup, archive, dedu, if they bought it already, it will be upgrade. But Simpana 10 includes many, many new features and technologies and extensions and those customers will have to pay for those increased products or functionality. And also we are going to make it easier for customers that by 10 with some quite unique updated pricing models as well.

Rajesh Ghai - Craig-Hallum Capital Group LLC

Great thank you. Congratulations again.

Operator

Thank you. (Operator Instructions) The next question is from Brian Freed from Wunderlich Securities, please go ahead.

Brian Freed – Wunderlich Securities

Hey guys, just couple housekeeping items as we work down the line. First, on you tax rate, I think you guided for a consistent tax rate. Can you talk about if there is any impact from the R&D tax credits that might provide a benefit for you guys? And then, secondly as we look at the guidance for the full year operating margin, the 375 basis points year-over-year. And implies about a $5 million sequential increase in your spend. You talked about 2 million from the FICA, but am I on the ball park kind of a net upward spend in OpEx, did you launch Simpana 10?

Brian Carolan

Yes, so just take those in order I guess, with respect to the tax rate, since that was passed in early January, that will be a Q4 event for us. We can expect to recognize, approximately 2.5% to 3% benefit in Q4, that’s kind of based into our non-GAAP pro forma tax rate of 37% that we stated. And also just keeping in mind our cash tax rate, is further more important metric, that’s going to be in the 14% to 18% range for the fiscal year. And then with respect to the uptick in the operating expense line, that is corrected. We do expect it to go up for a number of reasons, some of which is FICA, some of which is version 10. We’re coming off of record hiring quarter in fiscal Q3 we’re anticipate to accelerate those investments in fiscal Q4.

Brian Freed – Wunderlich Securities

Okay, so would it be reasonable to think the tax rate in Q4 might be something more in the range of 34% to 35%?

Brian Carolan

It almost doesn’t matter, that’s why we use the pro forma tax rate of 37%. The GAAP tax rate really isn’t relevant for us.

Alan Bunte

Won’t affect the EPS Brian, has no impact on EPS.

Brian Freed – Wunderlich Securities

Alright, thank you.

Operator

Thank you and the next question is from Robert Breza from RBC Capital Markets, please go ahead.

Robert Breza – RBC Capital Market

Hi, maybe just a housekeeping question, Bob for you. You mentioned two thirds of the revenue is really coming from the install base. Is there a way you can help us understand how much of that is coming from the capacity based model, as customs are increasing capacity you mentioned, the 50% growth rate data, but also as we look at Simpana 10 when taking new products within an installed base, just trying to understand to have a level of differentiation, thanks.

Robert Hammer

It’s a good question. One, the additions or the annuity that’s coming off of the capacity base license models is exceeding expectations. We’re not publishing the number, but it’s certainly at the very high end of what we thought it was going to be and if we have enough history where it’s absolutely predictable, we may communicate that, but it is surprisingly strong renewal rate coming off those capacity pricing models. So, we’re really happy about that. And so if you look at the business, you’ve got annuity coming off maintenance, and now you’ve got a pretty strong annuity coming off of our capacity based license model. So, there is an underlying foundation to our revenue base now that we didn’t have a few years ago.

Robert Breza – RBC Capital Market

Can you give color around new products and how that price due using install base?

Robert Hammer

Yes, your new products, that is helping to drive the renewal of the capacity based license model, because if, you get a new customer and let’s say they install data protection and then they want to add, let’s say archiving to that, they are going to come back and purchase additional licenses. As we move into mobile and some other functions, they are the same phenomena (inaudible) or operations management is where, we’re offering customers some very unique capabilities that have high payback and where there is a very large customer need. I’ll let Alan comment a little bit on this, because he has been the architect in the team and we always focused on developing technologies that have real value to our customers. Alan, you want to expand on this a bit.

Alan Bunte

Yes, tied to again the pricing model where you are going is, as Bob said and one of the guys asked earlier on CLA is one of the things the market really likes is we make a simple way to buy a platform. It is just measured with the capacity meter is the way I put it. So, as you get all these other data management capabilities in there, our intent is to get more data on your management, so to speak and provide a lot more use case to that data way beyond just back up and recover, I guess is the point, so there is lots of things in 10 as Bob talked about that move down at expanded functionality and the data management space. He also commented in the core that we focused primarily on scale and automation. And that translates every time on the customer side, again [ph] (inaudible) the big thing on the customer side that directly translates into better cost, performance and better administration performance from our productivity. So, easier to manage, less resources to manage it and less infrastructure needed per terabit if you will, go on for us. All of those things are really implicit and part that we can bask at our functionality.

Robert Breza – RBC Capital Market

Great, thank you.

Operator

Thank you, this concludes our question and answer session of the today’s call. Ladies and gentlemen, this concludes today’s conference. Thank you for participating, you may now disconnect.

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