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CommVault Systems Inc. (NASDAQ:CVLT)

F3Q08 (Qtr End 12/31/07) Earnings Call

February 5, 2008 5:00 am ET

Executives

Bob Hammer - Chairman, President and CEO

Al Bunte - COO

Lou Miceli - CFO

Michael Picariello - Director IR

Analysts

Tom Curlin - RBC

Fred Reid - Goldman Sachs

Aaron Schwartz - JP Morgan

Brent Bracelin - Pacific Crest Securities

Aaron Rakers - Wachovia Securities

Marks Griffin - Thomas Weisel Partners

Dennis Simpson - Credit Suisse

Dan Renouard - Robert W. Baird

Steve Koenig - KeyBanc Capital Markets

Operator

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the CommVault's fiscal third quarter 2008 Earnings Call. At this time all of our participants are in a listen-only mode. Following today's presentation, instructions will be given for our 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 afternoon. Thanks for dialing in today. With me on the call are Bob Hammer, Chairman, President and Chief Executive Officer, Al Bunte, Chief Operating Officer, and Lou Miceli, Chief Financial Officer.

Before we begin, I like to remind everyone that statements made during this call including in the question-and-answer 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 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 circumstances. Our earnings press release was issued today over the wire services after market closed and it also has been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website. On this conference call we will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found in Table IV accompanying the press release which is also 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 Hammer

Thanks Michael. I would also like to welcome everyone to our third fiscal quarter of 2008 earnings call. We had another record quarter as we continued to make progress in achieving our long-term strategy for the company. We had strong performance from our international operations and we made excellent progress in increasing our market penetration of our non-backup or emerging products. In addition, we recently launched our first SaaS offering which we call Remote Operations Management Service or ROMS for short which I will talk about later in the call.

The demand for our Simpana 7.0 Software Suite remains very strong and it has fully helped us accelerate the growth of emerging products as well as strength in our position in our core data protection business. Specifically we have seen strong demand for archiving, single instancing, data classification and search.

We continue to outperform our competition and increase our market share. For the quarter, we achieved revenues of $50.3 million, up 31% on a year-on-year basis, versus $38.3 million in fiscal Q3, 2007. Software revenue grew on a year-on-year basis by 28%, while our services business grew 36% year-over-year.

For the quarter, non-GAAP operating income or EBIT was $8.6 million, up 51% year-over-year versus EBIT of $5.7 million to the same period a year ago. Non-GAAP net income was $6.9 million for the quarter and non-GAAP earnings per share was $0.15 for the quarter. Our CFO, Lou Maceli will provide more details on the quarterly financial results later in the call.

I will address deal stats first. We added 389 new customers in the quarter. As usual new customer adds did not include a large number of small orders from new OEM customers who registered through the internet. Our customer base now totals approximately 7,500 which does include the OEM customers who registered thorough the internet. We had solid growth across both our backup products as well as accelerating sales of our emerging products. For Q3 2008, sales of non-core backup or emerging products increased to approximately 26% of software revenue versus 23% in Q2 '08 versus 16% in Q3 of last year. Growth in sales of our merging products have been primarily driven by new components of our Simpana 7.0 Software Suite including single instancing, advanced archiving, enterprise wide search, and discovery and data classification.

As we continue to make significant progress in expanding our market positions above core backup and emerging products in fiscal 2008, we expect the percentage of our emerging product sales to increase as a percentage of total revenue over the medium to long-term, however we still expect that this percentage will continue to fluctuate quarter-to-quarter in the short-term.

We see broader deployment of our full suite of products and larger deals. In deals, over $100,000 sales of our emerging product represent approximately 33% of the sales. This is continued validation that our customers like our singular approach to the market and is a significant part of the growth and sales of our emerging products. Our customers are purchasing multiple elements of the Simpana Suite.

Our singular approach to the market is residing with the customers and with experts in the industry. The judges that searched storage.com announced this morning that our Simpana 7.0 Software Suite received the Gold 2007 Product of The Year Award for backup and disaster recovery software. A quote from the search.storage announcement is as follows.

"Simpana is at the vanguard of the long awaited consolidation of data protection apps. It involves backup archiving replication including CDP, [de-dup] search and data management reporting into a single package.

In the third quarter of fiscal 2008 approximately 33% of our software revenues came from deals over $100,000 compared to 37% of software revenue generated from deals over $100,000 in our second quarter of fiscal 2008, and compared to 30% in the third quarter of last year. All though deals over $100,000 as a percentage of revenue declined sequentially they were actually immaterial higher number of deals greater than $100,000 than last quarter.

The number of deals greater than $100,000 were up 47% in Q3 FY '08 versus same quarter a year ago. We continue to see an increase in our visibility to big deals as we continued to take market share. We continue also to anticipate that about a third of our software revenue in the medium-term could come from deals greater than $100,000.

I will now address geographic revenues. On the geographic front the United States operations generated 63% of our total revenues in the quarter, with operations from the rest of the world generating the remained 37%. We continue to expand our international distribution with strong growth in Europe, Australia and Asia.

Revenue from foreign locations was up 86% in Q3 FY '08 versus same quarter a year ago. We continue to be successful in broadening our distribution reach and have recently announced a new resale agreement with Sun, which I will talk about in a few minutes.

Let's talk about channel relationships and distribution. We continue to have strength across all of our distribution channels with good contributions from our OEM partners, resellers and systems integrators. We continue to build out and strengthen our distribution channels as this is key to our growth strategy.

Now I'll talk about Dell. Sales through both our OEM and SMB relationship with Dell accounted for approximately 23% of total revenues in the third quarter of fiscal '08, with the breakup being 6% OEM and 17% SMB. We continue to see strength through multiple sale segments within Dell globally. We are seeing significant traction globally across all lines of business in storage hardware. Our partnership with Dell continues to grow stronger, we continue to make progress and discussions with Dell regarding the expansion of our relationship.

Regarding HDS, we saw a significant increase in license revenue from Q3 FY '07 particularly in international markets. Our relationship in business with Hitachi Data Systems continues to develop as we refine our distribution strategy and improve our business execution.

Sun, as you have recently seen in our recent announcement a week ago, we have entered into a formal worldwide resale agreement with Sun Microsystems. We expect this relationship to provide us access to Sun accounts and customer's interest in running Microsoft Exchange and SharePoint and those looking to upgrade the Sun 64-bit hardware. We are aggressively working on a large process which is expected to begin this month. The program includes Microsoft's long standing support from Microsoft and for the Microsoft's [Sun] and for a comparable Sun relationship.

We will go to Bull. Back in the spring we announced the signing of an OEM agreement with Bull that will enable Bull to market and sell Bull branded versions of CommVault's full Simpana Software Suite through its channels worldwide. Bull is taking a very structured approach and investing in the necessary resources to make these products successful in the market. The Bull funnel is developing well and we are confident Bull will meet our FY '09 goals for revenue generated by Bull.

Arrow, as you know about a year ago we signed a wide ranging distribution agreement with Arrow helping our North American commercial markets. In July 2007, we amended our agreement with Arrow to include our U.S. Federal government market. Many of our North American resellers have been transitioned to Arrow throughout fiscal 2007 and fiscal 2008.We generated approximately 11% of our total revenue through Arrow in the nine months ended December 31, 2007.

Let's talk about SaaS, we see Software-as-a-Service as an area for a strong growth potential and will continue to invest in both technology and distribution in this space. You may have seen a recently announced ROMS service which we believe is the most sophisticated subscription based automated support service in the industry and this was launched in our current quarter. In addition, we have established a good foundation with many customers using our software to deliver SaaS dated management solutions.

Two of our largest customers in this space are Incentra and Rackspace and we have been delighted with the success we have had with both of these companies. Several weeks ago we announced that we expanded our relationship with Incentra Solutions for SaaS offerings in North America and Europe announcing a three -year extension to our existing agreement. Incentra has been using CommVault as the foundation for the company's SaaS offerings over the past five years.

Let's talk a little bit about CommVault's current position, our market's buying pattern for our solutions continues to remain robust. While we are not naive to the current economic climate, we have not seen a slowdown. We believe we have strengthened our foundation for growth going into FY '09. All the key elements are in place for us to execute and achieve our FY '09 objective. This includes [want] a strong product line. We have established momentum in the market with Simpana 7.0 which has significantly strengthened our competitive position in the market. New products are contributing to growth. We have been successful in broadening the company's product offerings beyond traditional backup. We move into FY '09 with a solid momentum and our emerging product lines. We have streamed distribution globally.

International expansion is a major contributor to growth. We have strong sales and systems engineering teams in all of our key markets. We have successfully added three tier distribution. We are getting solid distribution leverage internationally from our existing strategic distribution partners Dell and HDS. We have added two new strategic partners in Bull and Sun. We have established positions in many new international markets such as China, Singapore, Latin America, South Africa and the Middle East among others.

We have best-in-class support. We have distanced ourselves from our competition in regard to support. We are driving further strengthen in our support position with the launch of our first automated support service offering ROMS. We have a clear divine vision. We believe our relative competitive position has improved. We believe we have gotten stronger and our major competition is not moving as fast as we are. We have a well-defined vision going forward, and are making good progress on bringing technology and products to markets beyond Simpana 7.0.

At the present time we see strong demand across all vertical sectors of the market and across all geographies. We are well aware that the current economic climate has added a lot of uncertainty about future demand. We know that tech spending usually lags in economic downturn and we will continue to watch the situation closely.

Given the strength of our current position, confidence in our vision, and many opportunities to investor growth, we think it is prudent to increase our near-term spending in sales and marketing more than previously planned in order to maximize the long-term shareholder value. Specifically, we will be relatively more aggressive in the near-term in hiring sales representatives particularly in the United States where we have fallen behind our recruiting goals.

We are doing this with the knowledge of the risks associated with the current economic climate. As you may have seen we started to advertise again in key industry publications, as we just recently launched our Switch campaigns which you can also see on our website. Other than the Simpana launch this past summer, we have not historically spent money on advertising. As we go after bigger enterprise deals we have found that we need to spend more on our sales and marketing initiatives than previously thought.

The market's reaction to Simpana has exceeded our expectations. This acceptance of Simpana has reinforced our decision to continue to focus on investing for long-term growth. We believe we are in a very good position to continue to take market share and we want to make the necessary investments to ensure that, that happens. We will continue to aggressively invest in sales and distribution in order to meet our FY '09 revenue and growth objectives. In addition, we will continue to invest strongly in our R&D as we develop our next generation portfolio of products.

Our operating margin growth maybe slightly impacted in the short-to-medium term as a result of our more aggressive investment and hiring strategy, but we believe now is the time to put added emphasis on growth. This will enable us to continue to build our infrastructure in preparation for significant future product releases.

After Lou's comments I will speak briefly about our new ROM service and about the future product direction of the company. I will now turn the call over to Lou who will provide more details about our quarter results as well as our FY 2008 guidance. Lou?

Lou Miceli

Thanks, Bob and good afternoon everyone. As Michael mentioned I will be referring to mostly non-GAAP numbers. A full reconciliation of GAAP to non-GAAP results can be found on Table IV to our press release.

Let me begin with the review of revenues. Total revenues increased 31% year-over-year and 6% sequentially over the prior quarter. Software revenues increased 28% year-over-year and 2% sequentially. Approximately two-thirds of our software revenue continues to come from our installed base with the rest from new customers.

Services revenue increased 36% year-over-year and 12% sequentially. The higher services revenue growth was favorably impacted by higher utilization of professional services due in part to increased implementation of Simpana 7.0. The rate of maintenance renewals continues to be very high on a worldwide basis largely due to the company's reputation of outstanding support and consequently we continue to see growth opportunities in services revenue.

The revenue mix for the quarter was 54% software and 46% services, which is a slight shift from 55% and 45% for the prior year period. The overall growth in software revenue was driven by three primary factors, a higher volume of purchases from both new and existing customers, significant growth in our international operations, and a higher volume of sales greater than a $100,000. Specifically for the nine months ended 12/31/07, the growth in software in foreign locations was 73% and in the U.S. it was 11%.

In addition, the number of software transactions greater than a $100,000 was up by 38% over the prior year with a significant amount of transactions over a $100,000 occurring in the U.S. Software revenue generated through indirect distribution channels was approximately 80% for the nine months ended 12/31/07 and approximately 70% for the prior year period. The increase in software generated through indirect channels is a result of both an increase in software revenue from international operations and a shift to indirect distribution channels in the U.S. The shift to indirect distribution channels in the U.S. is sometimes driven by customer purchasing preferences, which may cause this static to fluctuate from time-to-time without any significance.

We will continue to invest heavily in both direct and indirect channels. However, we anticipate that the amount of revenue generated through indirect distribution over the long-term will continue to be significant and this will require highly skilled combo of sales and field engineer teams working with our indirect partners for the larger enterprise transactions.

Now on the gross margins. For the quarter gross margins were 86.3%, which is up 85.4% in Q3 fiscal year 2007. Gross margin for services revenue was 73.1% in the current quarter versus 70.5% in the comparable prior year period, due to a stronger mix of maintenance contracts and lower professional services. Gross margins on our software revenue were 97.6% in the current quarter versus 97.5% in the prior year quarter.

Total operating expenses for the quarter were $34 million. Sales and marketing expenses increased $5.6 million or 34% over the prior year quarter. Approximately 75% of this increase was related to employee compensation, which includes higher headcount costs, as well ad higher commissions on record revenues.

The rest of the increase can be attributed to higher travel and related expenses, additional advertising, and slightly higher rent associated with geographic expansion. This increase is consistent with our plans to strengthen our position in the market and position us for growth in fiscal year 2009.

R&D spending increased by about $800,000 in the quarter or 14% over the prior year period. The increase was primarily due to higher employee compensation associated with increased headcount. We continue to leverage our investments in R&D by expanding our Hyderabad, India location. We now have 90 employees in India with the majority of these being in R&D. Our Simpana 7.0 product significantly expands and builds on our previous QiNetix platform. We believe we are creating competitive differentiation in the marketplace. We anticipate that our investments in R&D will produce future products that will keep us competitive and as a result we expect to continue to invest heavily in R&D.

G&A expenses increased by $1.3 million in the quarter, which was 32% over the prior year period. This increase is primarily a result of higher head count needed to support the expansion of operations on a worldwide basis as well as an increase for international tax planning fees. Our total worldwide headcount increased by 43 people, from 790 at the end of September, to 833 at the end of December. The headcount increases were primarily in sales and marketing, technical services, customer support and R&D.

Non-GAAP operating margins were 17.1% for the quarter, resulting in non-GAAP operating income of $8.6 million. This represents EBIT growth of approximately 51% year-over-year. The non-GAAP net income was $6.9 million and non-GAAP EPS was $0.15 per share based on a diluted weighted average share count of approximately 46.1 million shares.

Now moving to the balance sheet and cash flow statement. As of December 31st, our cash balance was $95.1 million, up approximately 20% from $79.2 million as of September 30th. Cash flow from operations was approximately $13.1 million in the current quarter compared to $8.7 million in the comparable prior year quarter. Free cash flow which we define as cash flow from operations less capital expenditures came in at $11.9 million for the current quarter compared to $7.8 million in the comparable prior year quarter. Cash flow from operations was strong due to positive changes in working capital.

Our DSO was 60 days which is higher than historic averages. This is up from 55 days in the prior quarter and is a result of several factors. Higher accounts receivable balances caused by a higher percentage of indirect revenue, higher maintenance support billings in the quarter, increased international revenues, and also more deals over $100,000.

Enterprise deals typically closed later in the quarter thereby resulting in higher DSOs. Deferred revenue increased $4.3 million or approximately 9% sequentially over the prior quarter. Deferred revenue is comprised of mostly 12 months maintenance contracts and professional services. This increase is an indication of our strong services business and increased software sales from our growing installed base of approximately 7,500 customers.

Capital spending was approximately $1.2 million in the third quarter. Our current estimate for fiscal year 2008 remains between $4.2 million and $4.4 million.

Now onto taxes, you'll note that for the quarter we recognized a GAAP benefit of approximately $900,000 on the tax line. This benefit is primarily the result of a $2.4 million reversal of a deferred income tax valuation allowance that we maintained in certain international jurisdictions.

This one-time GAAP adjustment has been included as a pro forma adjustment on Table IV of our press release. Excluding the impact of this one benefit, we estimate that our fiscal 2008 GAAP tax rate will be in the range of approximately 31% to 33%.

Currently, we continue to implement tax planning measures that are expected to reduce the long-term terminal rate to within a range of 28% to 32% over the next few years. For the quarter, our non-GAAP income and EPS contains a pro forma effective tax rate of 28%, which we will maintain for the remainder of fiscal 2008 on a non-GAAP basis.

Our estimate of the actual cash tax rate for fiscal year 2008 is approximately 10% based on current assumptions. This is mostly for state taxes, federal alternative minimum taxes, and for taxes in locations around the world where we have used up all of our NOLs.

In the United States, we believe we have sufficient net operating losses and tax credits to offset taxable income for the next two fiscal years. Consequently our cash tax rate should continue to be substantially lower than both the GAAP and non-GAAP tax rates. Over the next two years our cash tax rate will approach our GAAP tax rate.

Now moving on to fiscal year 2008 guidance. For the 12 months ended March 31, 2008 revenue is expected to be in the range of a $195 million to $196 million. Using the mid-point of our guidance this represents revenue growth of 29.4% year-over-year. We are expecting fiscal year 2008 non-GAAP gross margins to be between 86% and 86.3%.

As Bob, mentioned earlier because of the validated market acceptance of Simpana 7.0, strong growth in emerging products, as well as solid acceptance of our products internationally, we are increasing our near-term spending in sales and marketing beyond previously planned levels in order to maximize long-term shareholder value. We will invest aggressively in sales and marketing in order to meet our fiscal year 2008 and fiscal year 2009 revenue objectives. We still believe that we can incrementally increase our operating margins as we grow the top line. However we are reinvesting more aggressively in order to strengthen our position for long-term growth and increase our market share in both our core and emerging products.

We are now expecting non-GAAP operating margins to be between 16.7% and 17%. Using the mid-point of our guidance, this represents EBIT growth of approximately 45% year-over-year. Our long-term operating margin goal continues to be in the low-to-mid 20s. We are lowering our non-GAAP diluted earnings per share, which is now expected to be in the range of $0.56 to $0.58 per share using a projected fully diluted share count of approximately 45.5 million to 46 million shares and applying a pro forma tax rate of 28% for the full year. The non-GAAP EPS guidance excludes approximately $0.12 to $0.14 per share related to the effects of stock-based compensation expense under FAS 123R, which is net of non-GAAP income tax expense of approximately $0.05 per share. We will provide our fiscal year 2009 guidance on our next call, which we anticipate will occur in mid-May due to our March 31 fiscal year end.

That concludes my prepared remarks. Let me turn the call back over to Bob. Bob?

Bob Hammer

Thank you, Lou. I would like to spend a few minutes on a brief summary of our newly announced ROM service and a broader perspective of our future product direction. ROMS, which we believe is the most sophisticated subscription based automated support service in the industry, was launched in our current quarter. This new service, which has been two years in the making, provides our customers with an automated interface that gives them a real time view of their storage and data environment and enables real time identification of problems, their root cause, and cures. ROMS offers comprehensive on demand reporting and monitoring capabilities for data management, access, and protection technologies.

Through a user friendly intuitive web dashboard, our customers can access and track real time alert trend and storage usage reports anytime, anywhere. ROMS integration will enable customers to dramatically reduce both operational cost and system downtime. ROMS enables reduction of personnel expenses associated with data management activities by allowing customers to offload their responsibility to CommVault's ROMS systems personnel. We expect that time to resolution for issues effecting management system will be greatly reduced as ROMS provides CommVault's support with all the necessary information to address alerts as they occur.

We believe that Simpana 7.0 and ROMS enable the best value proposition to the customers in this industry. I will just want to take a minute about future direction. I will talk more about this as time goes on. This is beyond Simpana 7.0.

Going forward, we have focused our product development efforts on areas that we believe will provide significant additional high value add to our customers. These include innovative new ways to manage data protection, innovations in single instancing, and de-duplication, next generated automated records management, better ways to manage workstations and laptops, better ways to mange the growth of databases, and enhance data management capabilities in virtualized environments. We are confident we can add value in each of the areas mentioned and believe our future developments will help ensure that we remain the leading innovator in broad base data and information management software technologies and services.

We are very confident about our future and our ability to create long-term shareholder value. We are generating a significant amount of cash and had approximately $95 million of cash on hand on our balance sheet as of December 31, 2007. We feel the best use for a portion of our cash is to buy back some of our outstanding stock. That is why our Board of Directors has just approved a repurchase program authorizing the company to repurchase up to 40 million of common stock over the next 12 months. We will be opportunistic with the buy back subject to market conditions and will keep you informed of our progress each quarter.

Finally, I would like to announce that Al Bunte has been appointed to our Board of Directors at the meeting last week. Al has served as our Executive Vice President and Chief Operating Officer since October 2003, and served as our Senior Vice President from December 1999 until October 2003. During his tenure with CommVault, Al has provided outstanding senior management leadership in many areas of the company including strategy, product development, marketing and support. He has been particularly effective in ensuring that the company is consistently innovative and his appointment to the Board is well deserved.

And with that, I like to turn the call back to Michael, who will open it up for Q&A. Thank you.

Michael Picariello

Thanks Bob. Before we open up the lines for your questions, I would like to highlight a few upcoming Investor Relation events. Al, will be speaking at the Goldman Sachs Technology Investment Symposium in Las Vegas on February 26, 2008. And either Bob or Al will present at the Small Mid Cap Mini Conference sponsored by Wachovia in Park City, Utah on March 13, 14, 2008. Both Bob and Al's respective presentations at each conference will be available live on our investor relations website and will also be archived for 90 days.

Please open up the call for questions.

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator Instructions). We will take our first question from the line of Tom Curlin of RBC. Please proceed.

Tom Curlin - RBC

Hey, good afternoon, and congratulations on another strong quarter.

Bob Hammer

Thanks, Tom.

Lou Miceli

Thanks, Tom.

Tom Curlin - RBC

You have not provided any guidance yet for fiscal '09, that's correct, right?

Lou Miceli

That's correct, Tom.

Tom Curlin - RBC

Just given the comments on investments, should we assume that -- how do we think about the trajectory of operating expenses relative to revenue? For fiscal '09, I realize you may not be willing to provide specifics, but there is definitely language in your prepared comments that would suggest those growth rates are perhaps converging or at least will be closer to each other than they were in '08. So how should we think about the trend? Do you think OpEx will grow roughly as fast as revenue in '09?

Bob Hammer

Well, the issue we are facing, Tom, which is a kind of a -- it's a positive issue in that as I mentioned in the call, the Simpana acceptance in the market has been -- has exceeded expectations almost across the board. So we are really confident about [primarily] on core but in our emerging products -- and this is global. So we are confident about that. Our distribution network is as strong as it has ever been in the sense that not only our channel partners but our CommVault teams globally have all been upgraded to sell high-end solution cells. So we have got a really strong foundation there. And the basic fundamental demand appears to us globally to be very strong. So given that, we feel very prudent to increase spending and emphasize a little bit more on the growth side than optimizing our operating income. It doesn’t mean we will see operating income accretion because we probably will, but we’re working through that right now. So we just see more opportunity than we thought, and we think it prudent and we kind of re-look at the strategy and take advantage for the growth opportunity in front of us a little bit more than we recently had anticipated.

Tom Curlin - RBC

And when you say operating-income accretion, you’re speaking on a percentage-margin basis?

Lou Miceli

Yes, on a percentage margin basis.

Tom Curlin - RBC

So, it’s I guess, possible to I guess a possible scenario would be that operating margin for fiscal ’09 would be similar to fiscal ’08?

Bob Hammer

That would be at this time, and don’t hold to me this but that -- we’ve not given any guidance there, but that should be the worst case in terms of what we’re going suggest but we haven’t locked it down.

Tom Curlin - RBC

Okay, and then just on competition in the quarter. Symantec has a new version of net backup out. Have you seen any unusual behavior from them on the pricing front or bundling tactics, just what’s the latest I guess specifics on?

Bob Hammer

Well, in general we continue to increasingly take share from Symantec, and we haven’t seen any let up in our ability to beat them either in the major accounts for the mid-market. We just haven’t seen any material change that we could see yet -- doesn't mean we won't -- but we haven’t seen that. In regards to pricing clearly, when they see us and our major account that they think is strategic, they will get extremely aggressive meaning they will take software to down to zero. We’ve seen that; we’ve seen them take software down to zero and to discount maintenance to keep us getting an account. And some of the accounts we won anyway. But they will get that -- what I call paranoidcally aggressive when we -- they see us coming in their strategic areas.

Tom Curlin - RBC

And are you seeing more of that, just because that's a major change, even for an existing net backup customer right to do that upgrade. So I would imagine there is -- there are more deals where things have opened up, right?

Bob Hammer

There are more deals when things have opened up, that is correct.

Tom Curlin - RBC

I mean, Bob, with that are you saying then I guess even more aggressive or a greater mix of deals where they are very aggressive in your pipeline?

Bob Hammer

Well, in the past we used to see them drop software prices down 75% or 50%. This is the first time we're seeing a few deals where they have actually dropped it to zero.

Tom Curlin - RBC

Okay. And then finally on the Sun agreement, can you elaborate a bit on the nature of the product, how you invariably packaged through that channel from a product perspective and then just from a go-to market how you view at-large enterprise versus mid-enterprise, how does the go to market look?

Bob Hammer

So, let me comment on it at the $100,000 foot level. Clearly, when Sun decided to bring and decided to support Microsoft's 64-bit architecture and operating system, they were looking to provide -- they did a management capability along with that both from the server and storage side. If you read their press releases, they made statements like "it's not all about historic it's all about the data," which was similar to our perspective on the market. So both Sun and Microsoft, given that perspective, were looking for a best-in-class partner here, and both Sun and with Microsoft's strong support suggested that, that partnership be consummated with CommVault. And clearly this announcement was focused on some key areas, and those were Exchange and SharePoint. Now you know, Tom, Sun covers both the enterprise and SMB markets. So it's too early to tell where we are going to see the traction, but I think they have trained a lot of their people on it. It will launch in mid-February. And as we go a little bit further down the road, maybe we can give you a bit more color as to where we are seeing the traction on it. But I think all three companies are quite optimistic that this is going to be quite successful.

Tom Curlin - RBC

Okay, thank you very much.

Bob Hammer

Thanks, Tom.

Operator

Thank you very much, sir. (Operator Instructions). Our next question comes from the line of Derek Bingham of Goldman Sachs. Please proceed.

Fred Reid - Goldman Sachs

Hi, guys. This is [Fred Reid] for Derek.

Bob Hammer

Hi, Fred.

Fred Reid - Goldman Sachs

Hi, are there any verticals where you are seeing a particular strength or weakness perhaps like financial services or government?

Bob Hammer

We are seeing very strong strength in government globally and, surprisingly enough, our strength in the financial services market relative to where we have been has been strong. Across the board within the United States, we have not seen any drop in demand in the financial sector from our customer base yet.

Fred Reid - Goldman Sachs

Great. And one follow-up, the Simpana upgrade cycle, can you quantify how that's impacting ASPs or deal sizes at all?

Bob Hammer

There is a stat in our Q, and it is impacting more the number of deals we getting over $100,000. And I just mentioned in my summary that in deals over $100,000 that 33% of the revenue in those deals is coming from product sales and backup. If you look at ASP, it is a meaningful because it's a bit of a large number of accounts they don't see it but so we don't look at that stat, but we just see from our Q that in deals over $100,000 the average ASP there is $200,000.

Fred Reid - Goldman Sachs

All right, great thanks a lot.

Operator

Thank you very much sir, and ladies and gentleman, our next question comes from the line of Aaron Schwartz of JP Morgan. Please proceed.

Aaron Schwartz - JP Morgan

Good afternoon. Last quarter, you had mentioned that you had seen little leverage from the OEMs in the quarter because there was still on boarding with Simpana. I was just wondering, could you provide an update on that and then two -- did that have an impact in the quarter? I know Dell can be sort of up and down, and maybe last quarter it was normally on the up side, but it did look because it may be little lower than expectations this quarter.

Bob Hammer

Well, Dell has got a staggered quarter, so that Aaron you won't Dell impact until full Q4. Right?

Aaron Schwartz - JP Morgan

Okay.

Bob Hammer

Because most of Dell revenue last quarter didn't include the upgrade. So the first impact you'll see from Dell is going to be in the March quarter.

Aaron Schwartz - JP Morgan

So, you would expect that to be stronger than the March quarter relative to the quarter you just printed?

Bob Hammer

You'll certainly see a lot more Simpana 7.0 from Dell in the March quarter than in the December quarter.

Aaron Schwartz - JP Morgan

Okay, because I am just trying to reconcile from your comments. It sounded like you are pleased with the large deal upon you gained a lot of the metrics around the larger on transactions, and it seems like Dell was more of the volume-based deals, and just given the seasonality of December and where you are at in the product cycle, I think some expectations were for a little better license growth in the quarter. I'm just wondering it may be the volume business and Dell has been pushed out a quarter or just sort of trying to reconcile all those comments?

Bob Hammer

No, the issue, and I've said this, and in case you didn't catch it between the lines, I'll say it a little bit more clearly. If you look,our international revenues were up substantially right, 86% year-on-year, and that's because we invested heavily, and it's been on the street internationally. And then invested just as heavily domestically, we're going to kind of turn that around here in the new term. So that is more relevant to top-line growth than any other stats that you got.

Aaron Schwartz - JP Morgan

Okay.

Bob Hammer

We got the product, and we got the demand. We're doing well versus competition, et cetera. It really comes down to this whole investment strategy of ours, and we're addressing that, trying to be more effective and more consistent about it.

Aaron Schwartz - JP Morgan

Okay. So it seems like you are still optimistic about the pipeline, so you're just trying to invest more to may be feed better execution in terms of the pipeline to dollars?

Bob Hammer

Well, that is exactly correct.

Aaron Schwartz - JP Morgan

Okay. And then just a follow-up on all the subscription-based announcements you had in the quarter and some of your comments: How do you actually envision that impacting the model longer term in terms of what will be maybe higher deferral rates around product sales for that?

Bob Hammer

That's a good question. I mean, we're seeing it now. We are -- it's a subscription-based model, but the revenue from those deals is recognized in the current quarter. In other words, over time those subscriptions build up, and they get recognized on a quarterly basis. So it's not that deferred is growing, it's just that our subscription-based revenue as a percent of total licensed revenue is growing. It is not going to defer.

Aaron Schwartz - JP Morgan

Okay, and then lastly: the question I had is in terms of your partnership with Microsoft, I know it has been an active partnership, but nothing had been formal. With the acquisition of (inaudible), did that change anything there in terms of potential working title with Microsoft?

Bob Hammer

Well, its got the potential to do that. Yes.

Aaron Schwartz - JP Morgan

Okay. Well thanks for taking my questions.

Bob Hammer

Welcome.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Brent Bracelin of Pacific Crest Securities. Please proceed.

Brent Bracelin - Pacific Crest Securities

Thank you. Bob, my first question concerns the demand environment. Could you just compare-contrast your kind of order pipeline today versus kind of three months ago going into last quarter?

Bob Hammer

Going into the December quarter or going into the March quarter?

Brent Bracelin - Pacific Crest Securities

Compared today versus three months ago?

Bob Hammer

It's significantly higher.

Brent Bracelin - Pacific Crest Securities

Okay, follow up to that: Would be as you look at the large deal,s you did see a kind of a slight down tick arguably from that nearly high level last quarter? Did you see any sort of large deals slip out of December? Large deals are always tough to predict when they close. But could you comment a little bit on kind of your visibility in those large deal kind of pipeline?

Bob Hammer

Well, we certainly had visibility to more large deals than we closed.

Brent Bracelin - Pacific Crest Securities

Okay.

Bob Hammer

So the answer is yes, but we saw some -- but for any other, there is no trend reason. It is just we did see some of that.

Brent Bracelin - Pacific Crest Securities

Okay, and then another follow-up here for me is: You look at kind of the timing around kind of making some accelerated investments in marketing and sales. Today, clearly, you saw 2.02 25 internationally. How do you know the slowdown in the U.S. isn't kind of economic-driven versus kind of a sales-marketing issue?

Bob Hammer

Because we look at sale-force productivity, and the numbers for sale-force productivity were right on-target last quarter. It was just numbers. In other words, we weren't seeing budget cuts or anything else, and your sales productivity that was going to tally-up with pretty much with what was going on. We slice that in a number of different ways. We got, really got hand on that.

Brent Bracelin - Pacific Crest Securities

Perfect, thank you.

Operator

Thank you very much, sir. (Operator Instructions) Our next question comes from line of Aaron Rakers of Wachovia Securities. Please proceed.

Aaron Rakers - Wachovia Securities

Yeah, thanks guys. A couple of questions from myself as well. I guess the first one I want to go back to the comment about behind the goals in terms of recruiting for the company. Can you wrap some color around that, specifically as it references to the sales force? What's your target in terms of sales force additions and then kind of segway that into what you typically see in terms of productivity ramps from new hires in that sales force?

Bob Hammer

Well, we don’t give out those numbers, Aaron, but clearly we wanted to be further ahead in the U.S. than we were on recruiting side. And there is couple of factors. There are lots of reasons, no excuses for that, but we had this massive product launch, and in addition to that is part of that product launch in several regions globally and domestically. We did some fairly significant retooling to prepare those areas to sell a much broader enterprise suite. So, we are extremely successful on the retooling side. We are exactly where we want to be and from a number standpoint domestically. We didn't hit the target we wanted, and we just have a lot more focus on it and trying to get in terms of our internal processes to deliver that in an effective way. We're spending some extra time and attention there.

Aaron Rakers - Wachovia Securities

And in terms of productivity as you look to incrementally add more people. How do we think about the preferred ramp-up new hires coming on?

Bob Hammer

I'll let Al answer that because he deals and we review that really in-depth detail every 30 days, and Al's runs SaaS model. So he can answer that for you.

Al Bunte

Aaron, it's as Bob says. We look at and slice it in a number of different ways. So it makes a big difference between a guy going into an existing what we call existing territory versus a brand new territory or even a country. But in general when you average that all out its two to three quarters for a sales team to get up to speed from minimal productivity to our full levels of productivity.

Aaron Rakers - Wachovia Securities

Okay. And then the second question or topic would be, you talked about Symantec becoming it sounds like incrementally more competitive in the market. Can you talk about others out there in the market namely EMC, is that the low hanging fruit for you, is there been any change on the competitive landscape on that front?

Bob Hammer

We don't see EMC very much, we see Avamar on occasions. But in a big enterprise data management information management DOE we don’t see them as a significant competitor it's mainly Symantec.

Al Bunte

Or IBM.

Aaron Schwartz - JP Morgan

Okay. And when do you expect, I now you mentioned the launch of Sun in the mid-February timeframe, clearly there is a training cycle that has to take place. Is it more of a second-half '08 when we start to see a revenue contribution or is it even in calendar 2009 when we think you start to see some material revenue from the Sun relationship?

Bob Hammer

I can tell you from the planning point of view it'll be later in 2008. But we could see it -- we could get surprised here it could be significantly better. But typically CommVault whether it's a new product a new relationship, we don't forecast a lot of major up tick early until we can validate it. So, it is quite conservative there, but I think that the relationship has got a lot of potential.

Aaron Schwartz - JP Morgan

And then final thing for me, last quarter you gave a little bit of flavor around what you are seeing in terms of the installed base upgrading to the Simpana 7.0 platform, an update on that front, where that currently stands and when you expect to see may be that hit the 80% plus mark? It would be helpful.

Bob Hammer

I stretched that one a little bit, Aaron. But clearly, our installed not what's been purchased but our installs off Simpana 7.0 are now well north of a 1000 installs. So, we are really confident about where this product is and its ability to produce the desired results. So, the major constraint about how many are still there is really tied to our services organizations' ability to upgrade people fast enough. So, we are as happy about that as we can be. And these upgrades have gone exceptionally well. So, we are really happy about all that. The quality level of 7.0 is the best, from our internal stats, the best release we ever had and it was our largest release. So, we are very happy about that as well.

Aaron Schwartz - JP Morgan

And final thing for me, you mentioned earlier. I will take a stab at this. Your pipeline sounds like its pretty healthy going into the quarter. When you compare that relative to your sequential revenue growth, have you seen your pipeline grow substantially more than your sequential revenue growth? Any kind of flavor you can give on that front and I will end there? Thanks.

Bob Hammer

On a relative basis -- relative to our expected result, our pipeline in the March quarter is higher than in the December quarter.

Aaron Schwartz - JP Morgan

Fair enough. Thank you.

Operator

Ladies and gentlemen your next question comes from the line of Tim Klasell of Thomas Weisel Partners. Please proceed.

Marks Griffin - Thomas Weisel Partners

Hi, how are you doing? It's Marks Griffin stepping in for Tim.

Bob Hammer

Hi, Mark. How are you?

Marks Griffin - Thomas Weisel Partners

Good, how are you guys doing?

Bob Hammer

Good.

Marks Griffin - Thomas Weisel Partners

Not to beat a dead horse, but just one question on the increased S&M. Have you started the hiring already, or like have we come to some kind of a percentage or we’ve got a third of the guys already on the books or something like that?

Bob Hammer

We’ve definitely started.

Marks Griffin - Thomas Weisel Partners

Definitely started in the?

Bob Hammer

But, we still have a fair way to go, but we’ve definitely started.

Marks Griffin - Thomas Weisel Partners

Okay, alright that kind of [killed]. Can you enlighten us a little bit more on the Hitachi relationship? You kind breezed through that one. You kind of just said it was going well, and then I was just wondering if you can give.

Bob Hammer

Well, I mean the numbers is year-over-year in the percentage are up substantially.

Marks Griffin - Thomas Weisel Partners

So it's up.

Lou Miceli

It is still very choppy, meaning there is certain areas which has been consistent with what I've said in the past. There are certain international areas that are going really well, we've won a large number of large deals and there are some very large deals in the pipeline going forward with Hitachi. But its not a, what I'd say, a global, well-oiled machine like Dell at this point.

Marks Griffin - Thomas Weisel Partners

Okay. It sounds good. That’s it for me. I appreciate it.

Bob Hammer

Okay.

Operator

And ladies and gentlemen our next question will come from the line of Phil Winslow with Credit Suisse Please proceed.

Dennis Simpson - Credit Suisse

Yeah, this is Dennis Simpson for Phil. Just a real quick on the supply line, can you talk about which modules that are showing the more strength?

Bob Hammer

Yeah, I think we said in the call, if I pick them up pick. They were single instancing, archiving, there is a very large data classification and search -- they are the major ones.

Dennis Simpson - Credit Suisse

Okay, thanks.

Operator

Ladies and gentlemen, your next question comes from the line of Dan Renouard of Robert W. Baird. Please proceed.

Dan Renouard - Robert W. Baird

Hi. Thanks. Most of my questions have been answered. But can you guys talk about the hiring environment, has that changed at all? And are most of your hire is coming from competitors, or are you guys typically training on your own? Maybe you could just enlighten us a little bit on that front? Thanks.

Bob Hammer

Yeah, Dan, what we've found is that we need a special skill set and a special set of experience to succeed with the breadth and the depth of our software suite, particularly as we focus on the enterprise, which requires really sophisticated solution side. And so, we are very selective in the process. And the environment right now I'd say seems to be a little bit easier internationally than it is domestically. But if I had to put a trend on it, it's probably getting a little easier than harder, where maybe a year ago it was probably harder versus easier.

Dan Renouard - Robert W. Baird

Thank you.

Operator

Ladies and gentlemen, your next question comes from the line of Steve Koenig of KeyBanc Capital Markets. Please proceed.

Steve Koenig - KeyBanc Capital Markets

Hi guys. Thanks for taking the question.

Bob Hammer

Hi, Steve.

Steve Koenig - KeyBanc Capital Markets

Just wondering about, kind of a little color on the composition of revenue growth going forward here, your sources revenue accelerated nicely as you utilized some of the new hires that you made in the first half in consulting. Should we expect, as we get through Q4 here and in the next year, that consulting is going to continue to sustain. It's kind utilizations, and the mix should shift a little bit more like towards consulting. And then therefore on the software revenue line you have been flirting with 30% growth there. But should we count on that 30% coming in to (inaudible) or should the mix kind of be where it was this quarter?

Bob Hammer

Well, this quarter -- what I said last quarter was that in the September quarter we were down sequentially in services, mainly because we had taken a lot of our field engineering force, and they were focused on training for Simpana 7.0. So, we lost lot of utilization. We expected that it will come back strongly in the December quarter, and it did. So, you saw a spike up, as a result of that.

We are not giving guidance on this, Steve. But going forward if you look at the fundamental strength of the company, the services and license revenue should be pretty much in sync overtime and unless we step that up like with things like (inaudible) so you may get some increased leverage. But fundamentally, if you look at where is that growth coming from. If we have accelerated growth, clearly if you can work with the numbers in products other than back up and recovery. There is no reason given where we are in back up and recovery that we shouldn’t see reasonably strong growth there.

And we have strong growth internationally, on top of all that. And we are adding distribution. So, the fundamental price for us is to sustain our good solid growth rate, both in services and in license revenue, we just have to translate that to guidance and we will always be prudent in our guidance.

Steve Koenig - KeyBanc Capital Markets

And so, is it reasonable for us to expect that given the lag time between hiring and making reps productive -- any acceleration, there or would it be more around the second half and the release of product functionality?

Bob Hammer

We don’t need additional products to drive growth.

Steve Koenig - KeyBanc Capital Markets

Okay.

Bob Hammer

Additional functionality really will impact FY10. We have sufficient products in our pipeline to sustain; build growth for FY09.

Steve Koenig - KeyBanc Capital Markets

Okay. But it’s reasonable for us to think it’ll take a couple of quarters to make the reps productive?

Bob Hammer

Yes, the new reps that we bring in will take a couple of quarters to get productive.

Steve Koenig - KeyBanc Capital Markets

Okay. Thanks a lot.

Operator

(Operator Instructions)

This time, we have no further questions in queue. We like to thank you very much for your participation in today’s conference call. This concludes your conference for today and you may now disconnect. Have a good day. Thank you.

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Source: CommVault Systems F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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