Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Michael Picariello

Neil Robert Hammer - Chairman, Chief Executive Officer and President

Louis F. Miceli - Chief Financial Officer and Senior Vice President

Analysts

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Jason Ader - William Blair & Company L.L.C., Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Brian Freed - Wunderlich Securities Inc., Research Division

CommVault Systems (CVLT) Q1 2013 Earnings Call July 31, 2012 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to CommVault's First Fiscal Quarter 2013 Earnings Call. [Operator Instructions] 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 first quarter 2013 earnings call. 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'd like to remind everyone that statements made during this call, including 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 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 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 in Table 4 accompanying the press release and posted on our website. This conference call is also being recorded for replay and is being webcast. An archive of today's webcast will be available on our website following the call. I will now turn the call over to our CEO and President, Bob Hammer.

Neil Robert Hammer

Thanks, Mike. Good morning, everyone. And thanks for joining our fiscal 2013 earnings call. I am pleased that we had a solid start to fiscal 2013. This is especially gratifying since Q1 is typically our most challenging quarter that comes after a very strong Q4 FY '12. CommVault had good results on all key aspect of our business and across all geographies. Our positive Q1 results are indicative of continuing good underlying demand and the strength of our product, services and distribution. This positive momentum is continuing into Q2.

Let me briefly summarize our financial results. For the quarter, total revenues were $111.3 million, up 22% year-over-year and down 2% sequentially. Software revenue was $52.2 million and grew 24% year-over-year and was down 8% sequentially.

License revenue growth in Q1 was driven primarily by our continued success in penetrating large enterprise accounts globally. We also had excellent results from our services and support organizations. Services revenue was $57 million and grew 19% year-over-year and 3% sequentially. For the quarter, non-GAAP operating income, or EBIT, was a record $22.6 million, up 49% year-over-year. Non-GAAP EBIT margins were 20.3%. Non-GAAP diluted earnings per share for the quarter were $0.30.

Please note that given the economic uncertainty, we prudently controlled our plan spending during the quarter, which contributed to our overachieving our forecast at EBIT margin goal. However, we will continue to make the proper investments in order to achieve our future revenue and earnings growth objectives.

Let me spend a minute speaking about the macro environment. At the present time, we continue to see good underlying demand for our products across all geographies, vertical market segments and distribution channels. We are not naive about the current economic climate and are well aware of the uncertainty of future demand. However, with the exception of a few minor issues, we have not yet seen any material slowdown in the demand or buying patterns for our solutions. Please note, our quarter started well and ended well. We continue to significantly outpace the growth of the market and pick up market share.

Our overall funnel and big deal pipeline growth indicate healthy demand for our products across most geographies. The competitive strength of our technology services and support in combination with our sales force and key distribution partners have thus far enabled us to navigate well through the current economic slowdown.

We do anticipate that IT spending will continue to come under our negative pressure, the remainder of calendar 2012, and we assume the fight for the same budget dollar will ultimately get tougher. However, a primary value of our software, a significant cost reduction versus the competitive solutions as well as helping to solve key regulatory requirements and compliance problems. Those objectives remain high priorities for both companies and governments when considering data and information management solutions. We have good visibility going into the remainder of our Q2. Given our positive near term and FY '13 outlook, we will continue to have strong hiring in Q2.

I want to talk a little bit about our Gartner Magic Quadrant position. I'm happy to say that CommVault, once again, earned the strongest position in the leadership Quadrant, the coveted 2012 Gartner Magic Quadrant for Enterprise Backup/Recovery Software. This further validates our leadership position while reinforcing Simpana, as the best choice for evolving enterprise IT demands. I encourage you to review the report available to our website at www.commvault.com.

In his latest report, Gartner states that by 2015, at least 25% of large enterprises will have given up on conventional Backup/Recovery Software and employs SnapShot application techniques instead. And by 2016, once the organizations will change Backup vendors due to frustration over cost complexity and/or capability. Gartner also states that organizations are increasingly making their backup product selection from vendors that offer extended -- expanded production capabilities and techniques, in addition to traditional tape-based backup software.

CommVault anticipated these custom needs and built capabilities into Simpana that enable customers to extend the value of existing hardware investments through industry-leading integration and innovation. Specifically, CommVault's IntelliSnap provides hardware snapshot management without custom scripting or solutions, and the new Simpana OnePass feature is the industry's first converged process for backup, archiving and reporting.

Awards and recognition from respected independent third-parties, such as Gartner, have clearly raised our stature in the industry and is positively impacting our ability to penetrate the market. We remain the only company in the industry with a singular fully integrated platform that has more cost effective, reliable, functional, scalable and more automated than any of our competitors. Please note, however, that we never rest on our laurels and we'll continue to push the boundaries of industry-leading solutions. I will elaborate on our strategic objectives and product divisions later on in the quarter.

Let's look at that -- our penetration of the enterprise. There is no question that our execution in the enterprise segment of the market has improved since we made the sales force segmentation transition 2 years ago. And we successfully completed an enhancement to that segmentation in Q1. Enterprise deals in Q1, which we define as deals over 100,000 software revenue, represented 56% of license revenue and grew 32% year-over-year.

Enterprise deal flow momentum and funnel growth continued to be encouraging. These steps validate the fact that we are continuing to gain strength in the enterprise segment, despite both competitive and macroeconomic concerns. For the remainder of FY '13, we will continue to work on optimizing our relationships with our current key distribution partners, develop other meaningful distribution channels and partners and continue to build out our direct sales force. As we have clearly stated in the past, our CommVault enterprise sales force is the primary driver of license revenue growth.

Now let me comment on our Dell relationship. Sales for our Dell relationships accounted for approximately 20% -- 2% of total revenues for the quarter. Total quarterly Dell revenues grew 27% year-over-year and declined 10% sequentially. Please note the majority of Dell revenues come from our installed base and in enterprise accounts where our sales forces has heavy hands-on involvement. I'll briefly comment on Dell's recent acquisitions since it is clear from some recent reports that the positioning of Dell's technology versus CommVault is not fully understood by all those following the company.

Dell's recent acquisitions are a good fit for them in their current market segments and channels. Dell as we stated on the last earnings call, will very aggressively market their newly acquired products and will be some overlap. Please note, we can and will effectively manage that overlap.

As stated on last quarter's earnings call, we will continue to work diligent with Dell in the enterprise segment of the market where we have highly differentiated innovative solutions based on our unique software platform. Through joint cooperation, we will provide meaningful data and information management solutions for our mutual customers.

Let me comment on our new headquarters. As I mentioned last quarter, we are in the process of purchasing a piece of land close to our current headquarters. This property is well suited to building a new corporate headquarters and has room for future expansion. We have not yet completed the land purchase transaction yet, but expect to do so by the end of the current calendar year. In the meantime, we have begun work on the design of the site and the design of the headquarters' building. As we get further along, I will update you on the potential timing and estimated capital expenditure of the project. At this point, it's still too early in the process to provide details. I will say we expect to run out of space in our current facility within 3 years. We also believe, given our strong cash flow and low returns on our cash balance, that the investment in the facility would be a good use of cash.

I will now address our current outlook. Enterprise deal flow momentum and funnel growth continue to track well, and we have good visibility to our current quarter forecast. The fact that we had a solid Q1 provides that foundation for the remainder of fiscal 2013.

We continue to believe we will able to achieve solid double-digit revenue and EBIT growth for fiscal 2013. While we had a good Q1 and have good momentum entering Q2, I would like to add the following words of caution regarding our future outlook. Major third-party analysts continue to forecast for tech spending in calendar 2012 versus 2011. Again, as I said earlier, although we haven't seen it yet, the fight for budget money will likely become harder as the year goes on. As we are in our election year, there's additional uncertainty in the public sector, and we are particularly cautious as the U.S. federal government remains a significant vertical for us.

While our EMEA operations had a good year-over-year revenue growth in Q1, we continue to be concerned about the European IT spending outlook as sectors of the EMEA economy are currently in recessions. In addition, there is earnings risk related to our decision to increase investment in operating expenses across all segments of the business. And if we miss our revenue targets, it would be a negative impact to earnings.

In summary, the company had another solid quarter and has established a good foundation for fiscal 2013. We believe we are well positioned once again to achieve well above industry average revenue growth rates and improved operating margins driven by a strong market traction with Simpana, continue to increase the sales affecting this in capacity and broaden distribution in fiscal 2013.

On a separate note, and before I turn the call over to Lou, I want to spend a minute on the divergence of views about CommVault in the industry. One of the reasons that the views on CommVault differs because this is a very complex industry to understand with rapid changes in both technology and in the competitive landscape. The current economy creates more uncertainty. We know, given the pace of change, that is difficult for people in the outside to see what we see or have the comprehensive understanding of our value to our customers or our competitive differentiators. We always try to deliver sufficient information to provide a clear perspective to what is driving our revenue on an earnings growth and any potential threats to our near term or longer-term growth trajectories.

At the end of the day, we will let our strong financial results and consistent track record of innovation validate what we are saying. For example, we have consistently communicated that our financial objectives has been and are to deliver well above industry average revenue and earnings growth rates while improving our operating margins. We have obviously accomplished those objectives over the past 6 years with compounded annual revenue growth of 25% and compounded EBIT growth of 37%.

Going forward, we have a clear path to well above industry average financial performance, which I will overview after Lou's comments. I will now turn the call over to Lou.

Louis F. Miceli

Thanks, Bob, and good morning, everyone. I will cover some key financial highlights for first quarter fiscal year 2013. Total revenues for the quarter were $111.3 million, representing an increase of 22% over the prior year period.

We reported software revenue of $54.2 million for the quarter, which was up by 24% or $10.4 million over the prior year period. Software revenue represented 49% of our total revenues for the current quarter compared to 48% in the prior-year period. The increase in software revenue is primarily due to higher software revenue derived from our international operations, which increased 55% over the prior year period. The growth in international software revenue is primarily due to increased sales in Europe, Australia and Canada. Software revenue from enterprise transactions represented 56% of software revenue in the current quarter versus 52% in the prior year period. This increase was driven by more million-dollar deals in Q1.

Software revenue from deals higher than $100,000 increased by 32% over the prior year period and was down 5% from the prior quarter. The number of enterprise software deals higher than $100,000 increased 24% year-over-year and declined 23% sequentially. Our average enterprise deal size was approximately $288,000 during the current quarter compared to $269,000 in the prior year period and $235,000, the prior quarter.

During Q1, the strength of our business was driven by strong demand for our virtualization, source-side deduplication and snap-based modern data protection solutions. We continue to see an increased demand for our capacity-based licensing models, which makes it much easier for our customers to purchase multiple elements of the Simpana platform. Approximately 2/3 of our software revenue in the current quarter was comprised of capacity-based licensing models. Services revenue for Q1 was $57 million, an increase of 19% year-over-year and 3% sequentially.

For the quarter, revenue from U.S. operations generated 57% of total revenue resulting in a 13% year-over-year increase, while revenue from international operations generated the balance, resulting in a 35% year-over-year increase. Our U.S. federal government business was strong and grew approximately 31% year-over-year and 45% sequentially, representing 8% of total revenue for the quarter.

In addition to U.S. federal government business being strong, we had a very strong quarter in financial services. Software derived from indirect distribution channels increased 39% over the prior year period. The increase in software from indirect distribution channels is primarily due to higher dollar value to enterprise deals in our international locations. However, most sizable deals, regardless of geography, are driven by our direct sales force even though they are transacted through the channel.

For the quarter, total revenue through Arrow contributed approximately 27% of total revenue, growing 29% year-over-year and 11% sequentially. We added over 400 new customers in the quarter. Our historical customer account now totals approximately 16,600 customers. As a reminder, approximately 2/3 of our quarterly software revenue comes from our existing installed base.

Gross margins were 86.4% for the quarter compared to 87% in the prior year period. The decline in gross margins is primarily the result of increased costs due to the expansion of our worldwide customer support operations.

Total operating expenses were $72.4 million for the quarter, up approximately 14% year-over-year and down 6% sequentially. Sales and marketing expenses, as a percentage of total revenues, decreased to 48% in the current quarter from 51% in the prior year period and 52% in the prior quarter. The sequential decrease in sales and marketing expenses is mostly due to higher compensation in Q4 associated with sales reps attaining higher commissions on over quota payment, which typically occurs in the fourth quarter of most fiscal years.

Non-GAAP operating margins were 20.3% for the quarter, resulting in operating income of $22.6 million. Q1 EBIT increased by 370 basis points year-over-year and 180 basis points sequentially. The combination of lower overall costs associated with our sales diversification [ph] strategy implemented in Q1, as well as our controlled spend due to general macroeconomic concerns resulted in a better-than-anticipated operating margin improvement.

In Q2, we will invest in customer-facing sales and technical resources as we continue to penetrate the enterprise segment of the market. For the remainder of fiscal 2013, we expect to continue to make investments that will help us to deliver solid double-digit revenue and earnings growth. With this in mind, we expect to improve fiscal year 2013 operating margins by approximately 100 basis points. We ended the quarter with 1,508 employees, up from 1,437 at the end of March. In Q2, we expect that our field resources and support hires will increase at a similar pace to the prior quarter, and our development hires will increase at a higher pace in Q2 versus Q1.

Net income for the quarter was $14.4 million and earnings per share was $0.30 per share based on a diluted weighted average share count of approximately $47.6 million shares. On a year-over-year constant currency basis, foreign currency movements had a negative impact on earnings per share of approximately $0.02. On a sequential constant currency basis, there was a negative impact on earnings per share of approximately $0.01. We will continue to use a pro forma tax rate of 37% for fiscal year 2013, which is higher than that 36% rate we used in fiscal 2012. We expect our cash tax rate to remain lower than our GAAP tax rate through fiscal 2013. Our cash tax rate will approach our long-term terminal GAAP tax rate over the next few years.

For fiscal year 2013, we anticipate that our diluted weighted average share count will be approximately 1.1 million to 1.6 million shares higher than the fiscal 2012 diluted share count. As of June 30, our cash and short-term investment balance was $320.1 million, up 7% in the end of fiscal 2012.

For the quarter just ended, cash flow from operations were $17.9 million. Free cash flow, which we defined as cash flow from operations less capital expenditures were $16.2 million, which is a decrease of 45% over the prior year quarter and 43% sequentially. The decrease in free cash flow is the result of changes in working capital on the balance sheet. In particular, approximately 75% of the year-over-year decrease in Q1 operating cash flow was due to large payouts related to record Q4 fiscal 2012 commissions and year end bonuses, as well as an additional pay period in the current quarter versus the prior year quarter, based on the timing of our biweekly pay schedule.

As of June 30, 2012, the company's deferred revenue balance was approximately $144 million, which is an increase of $25.9 million or 22% over the prior year period and down 2% sequentially. The sequential decrease in deferred revenue is due to a combination of a negative foreign exchange impact and a higher balance of deferred software that was on the balance sheet at the end of March and was subsequently recognized as revenue in Q1. Please remember typically, our deferred revenue balance is comprised mostly of deferred maintenance.

For the quarter, our DSO was 51 days, which is down from 53 days in the prior quarter and down from 67 days in the prior year period. The lower DSO was primarily due to improved linearity in the quarter.

That concludes the financial highlights. I will turn the call back over to Bob. Thank you.

Neil Robert Hammer

Thank you, Lou. I will now spend a few minutes talking about our strategic objectives, some new product visions and product functionalities that we are planning to bring to market in late 2012 and early 2013. Please note the development and timing of any release as well as any of its features or functionality remain at our sole discretion.

As I stated earlier, our financial objectives have been and are, to deliver well above industry average revenue and earnings growth rates while improving operating margins. As we have stated in the past, operating margin improvement will come primarily from increasing sales productivity. However, revenue growth will come from delivering innovative data and information management products and services.

CommVault's mission has always been to provide innovation -- innovative solutions that both provide the most value to and increase our relevance to our customers by solving a broader scope of data and information management problems. Our goal is also to provide the most comprehensive services in the industry and the industry's best support. Additionally, we always make sure we are highly differentiated from our competition with significant advantages in regard to cost, functionality performance, scale and reliability.

Looking forward, we believe there will be major changes in technology and customer requirements over the next several years. These changes will impact how solutions are delivered, implemented and supported. They will result in dramatic changes to the competitive landscape. We have a good track record in staying way out in front of changing market requirements and our competitors' products and services. We intend to continue to stay in the forefront as a leading innovator in the industry.

CommVault is not the company we were 3 years ago, and we will not look -- and we will look quite a bit different 3 years from now. We have a very deep broad pipeline of new products, services and innovation. We are currently developing next generations solutions for data management to reduce cost; improve performance, recovery, scale and security; next-generation innovative archiving, the convergence of the IT infrastructure; shared services environment; cloud infrastructures; the management of IT operations; advanced ways to deliver products and services; a series of new innovative services; the management of data at the edge, which includes laptops, mobile devices with anytime, anywhere secure access of data; easily and cost effectively securing ways of protecting and sharing files in the cloud; next-generation decision-making capabilities; and analytic solutions tied to the convergence of data types and sources.

I want to confirm that over the next 3 to 9 months, we plan to bring to market significant enhancements and new product capabilities to our Simpana software platform. So we're not just talking about ideas and concepts. We will bring a new products and solutions to market in the very near term. These include enhancements to Simpana, which we released this fall and the possibility of a significant new release beginning the first part of calendar 2013. These enhancements will include enhancements to the Simpana software's data management capabilities that address issues related to the scale of data, the management of smart mobile devices, document sharing and secure cloud repositories; adding new innovative solutions related to IT infrastructure management; unique cloud-based service capabilities; and innovative business intelligent solutions from both real time and historical data.

We will provide very specific solutions for each segment of the market, including small, medium and large enterprises. We are very excited about the breadth and depths of our new technologies we plan to bring to market, which had the potential to increase our value and relevance to our customers and partners, increased differentiation versus our competitors and significantly expand our addressable market. They will also provide opportunities for new routes to market.

In closing, we had a solid FY '13 Q1 in revenue and earnings growth, which establishes a good foundation for the balance of FY '13. Q2 is off to a good start. We are consistently gaining market share because of our increasing product differentiation, improved sales effectiveness, distribution leverage and broader brand recognition. We will continue to invest in our enterprise selling capabilities and expand our distribution reach throughout FY '13.

We have a well-defined strategic product and services vision. We believe this has the potential to significantly improve our competitive position and expand our addressable market. Our very substantial new product and services pipeline will extend through FY '14. Please note most of the innovations that are currently in our product pipeline will be in beta this quarter. We expect to continue to outpace the industry in growth and hit our FY '13 financial targets. We are excited about FY '13, our future potential, and are confident in our ability to continue to grow the company at double-digit growth rates.

I will now turn the call back to Michael.

Michael Picariello

Thanks, Bob. Before we open the line for questions, I would like to highlight that we'll be hosting our Annual Meeting Stockholder's Meeting on Wednesday, August 22 at 9 a.m. Eastern time at our headquarters in Oceanport, New Jersey. Details of our live webcast are available on the IR section of the website. Operator, can we please open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And at this time, we have a question from Joel Fishbein from Lazard.

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Strong metrics across the board. Only question investors may, may not understand this in deferred revenue, which was $144 million. And there may be some suspicion that you pulled in business into the quarter, but it was up 22% year-over-year and included a $2 million FX headwind as you guys had said. Can you just discuss the impact of capacity-based pricing and seasonality as it relates to deferred revenue line?

Neil Robert Hammer

So the first issue, Joel, is the deferred revenue issue is a time issue, which Lou can clarify in a minute. Again, had nothing to do with pulling revenue into the quarter. I think the most important point to focus on is that we had a solid Q4. We had a solid Q1, and we have good momentum going into Q2 with significant increases in our current pipeline. So I wouldn't read anything significant into that deferred revenue line other than from timing issues. And Lou, you can clarify.

Louis F. Miceli

Just remember that deferred revenue consists mainly of maintenance agreements, maintenance contracts. So the ability to pull revenue in from that is just nonexistent. So a couple of points: one is at the end of Q4, we had a higher software deferred revenue component. We usually don't have a lot of deferred software on the balance sheet. But at the end of Q4, if you look back several quarters, we did have a couple of large deals that we did -- we're able to bill and cleaned up in Q1. So that's part of it. The other piece of it is at the end of the quarter we were affected slightly by FX. So if you take the combination of foreign exchange movements and the unusual circumstances where we had a little bit more deferred software on the balance sheet at the end of Q4, while we reported a 2% decline under our normalized situation, we would've reported about a 2% increase. So again the ability to pull in revenue from deferred revenue in this company is really nonexistent because most of it is deferred maintenance.

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

One more for you, Bob. Just you're on a basically $500 million run rate right now. You said publicly that you would like to build the company. Your goal is to build the company to $1 billion or greater in revenue. Is there anything that you're seeing out there that would change that view?

Neil Robert Hammer

No, right now we're still running ahead of that plan. And we're in the process of raising that target. We're back in the process of raising the bar, because we think we have sustainability to continue to grow the company through that $1 billion.

Operator

Our next question comes from Jason Ader from William Blair.

Jason Ader - William Blair & Company L.L.C., Research Division

Just a clarification first and then a question. Bob, you're saying on the guidance that you're still comfortable with TheStreet consensus, that's the clarification?

Neil Robert Hammer

Yes, we're comfortable with TheStreet consensus.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay. And then on the question, Lou, I just wanted to have you elaborate a little bit from some granularity. Could you give us the size of the software deferred revenue that came off the balance sheet, and how much it is currently exiting fiscal Q1?

Louis F. Miceli

Yes, so the current deferred software piece is very, very small. It's been the smallest amount in several quarters. Again, we usually don't have a high software component. The piece at the end of Q4 was approximately $4 million. And it's down to less than $1 million now. So there was about a $3 million swing. That's in total.

Neil Robert Hammer

That's with FX. I mean the point, Jason, it's not relevant to our hitting our Q2 numbers. And it's just timing, and that number will bounce around at different quarters. So understand the concern about it, but I can tell you, as far as our ability to achieve what we did in Q1 or what we're going to achieve in Q2, that is not a significant factor. The more important factor is how we're doing, how we're starting off Q2 and how fast is our pipeline growing.

Jason Ader - William Blair & Company L.L.C., Research Division

And just a -- and a clarification in that. Lou, what would drive software revenue to not be recognized immediately? I just -- I guess I don't remember that happening with you guys before, is it some kind of acceptance clause or something?

Neil Robert Hammer

It always happens, Jason, it just depends on size and scope. And as we get -- this is Bob. As we get into the enterprise and deals get bigger, they get more lumpy. So you may -- over time, you're going to see puts and takes on that number as we go out. And yes, it could be acceptance clause; could be -- I mean we have a very, very conservative revenue recognition policy. And if it's not all checked, it doesn't get recognized. It's very clear. I mean it is either revenue or it's not. There aren't gray areas here. And if it's not, it doesn't get into revenue and vice versa. That's what Lou was saying is, we don't have a choice. If it's revenue, it comes into revenue. But if it's not, it's not.

Louis F. Miceli

Well, the other important point is that not everything that we're working on is on the balance sheet. So this is timing, so at any point in time, we're working on lots of enterprise deals. They're not always on the balance sheet. The fact that it's on the balance sheet meant that we were able to bill it. So don't read too much into that number because we're working on multiple, many, many other enterprise deals that never show up in the balance sheet until we take the revenue.

Neil Robert Hammer

What Lou was saying is that product could be shipped and not show up on the balance sheet, because it's not revenue. So that number is going to bounce around. I'm just being as clear and as forceful as we can, guys, that from a relevant standpoint, our -- in terms of what we achieved last quarter or what we're going to achieve this quarter, that is not a significant issue.

Jason Ader - William Blair & Company L.L.C., Research Division

Is this -- would you say this is an anomaly though, Bob, or should we expect this kind of...

Neil Robert Hammer

Well, I think it was a little bit bigger this quarter than -- because we had a couple of deals, but it will happen again. Because I can tell you, I know we have closed some very, very large deals, many multimillion dollar deals that are not showing up anywhere. Right now, they're off balance sheet because they don't meet our revenue standards. And when they show up, they may pop up on our balance sheet, and we're not going to recognize them. So you're going to see more of those swings in deferred. And this is all because us being successful versus a problem. And by the way, it helps our visibility, right? As we take more and more of these things, we have increased visibility in terms of our ability to achieve numbers.

Operator

Our next question comes from Aaron Schwartz from Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Bob, you sort of talked about, maybe a little hesitation in terms of the timing of the reinvestment here, but certainly you were upfront about sort of wanting to get back in front of that. Can you maybe talk about what's changed? It doesn't seem like you have any more comfort in, maybe the macro backdrop relative to 90 days ago. Was it really just sort of putting up a solid Q1 to get back on the reinvestments, or can you just sort of walk through, sort of the timing, and what's changed?

Neil Robert Hammer

Well, I'm mean as far as -- don't forget that we had a very strong hiring quarter in Q1. We plan to hire more, and if that's your question. And as things -- when all the macro indicators start to go south, we just pulled it back a little bit until we saw what was going on. In fact, it turned out that we had -- as it turns out, we had good solid underlying demand, and we've seen a nice, what I would call, a significant increase in our funnel. And so we're just turned the spigot on again. And we always monitor that even though we got a really good strength of the business, we -- Al's got a good hand on the stick, and we have a lot of metrics here. And we'll throttle it up and back depending on what we see. So we're just being a little extra cautious, and it turns out we were wrong. So we overshot. In other words, we overshot our bottom line target a bit.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay, and maybe just a follow-up question, specifically, the sales and marketing. You got a lot more leverage out of that line here. Can you walk through -- I think the goal of some of the sales segmentation you made in the quarter was to increase the leverage there, how much of that contributed to the sales marketing number? And then also related to that given the deferred license mechanics you just talked to, was some of the comp on those deals, may be taken in Q4, but some of the license was showing up here in Q1. So that sort of distorts just a 90-day look at the license and the sales and marketing figure?

Louis F. Miceli

Yes, you got that exactly correct. If you wanted to split it, you had a big comp component in Q4 that showed up in Q1. So -- meaning that the Q4 comp on a relative basis with the kickers and everything else, our sales comp expense was significantly higher in Q4 than it was in Q1. So that's one part of the quarter-on-quarter variance. And the other was yes, we had a good, good impact from our sales segmentation strategy, and that impacted -- had a real impact to our operating margins.

Operator

Our next question comes from Greg Dunham from Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

I want to switch gears a little bit to the enterprise business, which was up 32% year-over-year and had, according to my math, the highest ASP in the last couple of years. And this is a Q1. So was there anything unusual in terms of the -- an unusually large deal in the quarter? That would be the first question. And then, when you -- second question would be when you think forward about kind of the composition of the pipeline and the seasonality of the business, would you think as you move up in the enterprise that you are going to have kind of bigger Q4's and kind of more step-down than Q1 as most enterprise software companies do?

Neil Robert Hammer

The first question, Greg, is that we had higher numbers, 7-figure deals in the quarter, quite a bit higher than a normal. That number is going to bounce around. I can tell you that our 7-figure deal pipeline, at this point, looks very strong on a relative basis. In regard to timing, if you're thinking about calendar Q4, I think -- my judgment is that we'll see a normal seasonality, which is we had a very strong Q4, lighter Q1. We're building Q2 -- Q3, and we end up with a solid Q4. I think that is the most likely scenario as we go through FY '13. By the way, Greg, just a little anecdote, I think your analysis of the company was pretty much spot on in terms of getting a good perspective on the company and what's -- in regard to our position and competitive position, what's driving our revenue and earnings growth.

Operator

Our next question comes from Glenn Hanus from Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

Just first a quick clarification. When you said you're comfortable with TheStreet consensus, did you mean the fiscal second quarter as well as the fiscal year? Or were you just commenting on the fiscal quarter or could you just clarify that first?

Neil Robert Hammer

Both, Glenn.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. Could you comment a little more on great performance in Europe, despite macro headwinds? And then the U.S. looked relativity a little bit weaker for you, the nonfederal U.S. a little bit weaker for you. Can you comment on what the sort of dynamics were that were sort of driving those 2 results?

Neil Robert Hammer

I think the biggest issue, which you guys don't see is that this is just on a relative basis. Our European team had a good solid quarter. Their outlook looks reasonable going forward as well. I thought the biggest factor in the U.S. was just timing. We did lot of -- we took a lot of guys out of the field for training. So let's just say their time in the market was less. I would expect our underlying demand and outlook for the U.S. looks quite good. So I think that was just an aberration in Q1 versus anything fundamental. The underlying demand for the U.S. still looks quite good.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

And sales cycles, some people have talked about lengthening sales cycles. Are you seeing that kind of dynamic in your business? It doesn't seem to be impacting you if you are.

Neil Robert Hammer

Yes, I mean I said we see it a little bit at the margin. But in general, no, which may be a little bit surprising. But we just haven't seen a lot of, what I call, significant stretch out. It's -- I'd say reasonably normal at the moment.

Glenn Hanus - Needham & Company, LLC, Research Division

And lastly, maybe if you could comment a little more on what you're seeing from 1 or 2 of the competitors? EMC has their Networker 8, I guess, which is sort of a more integrated product with some of their other -- the Avamar and some of the other products there. Dell has the BakBone and the vRangers, as well as AppAssure. Can you comment on the competitors coming out with these various things and whether that you feel that's more of a competitive headwind or not?

Neil Robert Hammer

I think I made my comment on Dell. We operate -- our focus and segmentation relative to Dell, I am 100% confident we'll achieve our objectives there. I'll just leave it at that. I think Dell's products fit their segments, and we'll do well in terms of what we're trying to achieve in the market. Relative to the EMC comment on Networker 8, I don't see a significant change there. I will comment just in general that if you look at the -- look around the market and you'll say which competitors seem to have a reasonably good handle. I think, in general, EMC has done a good job in the storage market obviously. They've got a good solid track record. On the flip side, we are confident we can continue to compete against EMC, and I'm confident we'll continue to increase our differentiation versus the EMC solution. So we're looking at EMC as a good solid competitor, but we seem to do well against them in the marketplace.

Glenn Hanus - Needham & Company, LLC, Research Division

And Symantec with the, I guess, a new appliance out, can you comment on any changes you feel with Symantec?

Neil Robert Hammer

We continue to take share from Symantec, and we'll continue to take share from Symantec.

Operator

Our next question comes from Aaron Rakers from Stifel, Nicolaus.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

I didn't hear brought up, so I'll ask about the NetApp relationship, where you stand today? How that is anticipated to progress, or any update on that front? And I do have a follow-up?

Neil Robert Hammer

I said I wouldn't comment on that, Aaron, until we had significant revenue. But I will say that we are making progress, and that's all I'm going to say about it.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then, as far as the product cycle stuff. Bob, you had mentioned that you're poised to do some enhancements to the Simpana platform over the coming months. Can you talk a little bit about, you also referenced the fact that you would have more significant possible enhancement looking into early 2013. Is there still a little bit of a debate of the timing of that? Is that stepping stone that we see the next architectural refresh of this Simpana platform going into the first half of 2013?

Neil Robert Hammer

What I said in my comments, is our confidence in the timing of that release tied to our internal objectives is extremely high. My guys have done an awesome job of fitting or beating every milestone I've had and the same time increasing scope. Our Dev and Test teams have done an awesome job. Everything that I mentioned on the call will be in beta this quarter. So we're in really good shape regarding our product pipeline.

Operator

Our next question comes from Alex Kurtz from Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Bob, could you just get into more detail around why financials was so strong in the quarter? Maybe what geo's were strong for financials and sort of how that's progressing this second quarter?

Neil Robert Hammer

Sure, Al. Again, kudos by the way for doing a really nice job in summarizing and providing a pretty good, I call it, balanced perspective on the company. Nice piece of work there. So just repeat your question again for me?

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Just financials, the financial vertical, just how that's progressing and why it was so strong in the quarter?

Neil Robert Hammer

We have done an increasingly good job of penetrating very, very large financial institutions. And bringing in the 7-figure deals or 8-figure deals, or 8-figure opportunities where we've become the standard into those institutions for data and information management. And that trend just continues to accelerate. So we've had some really good success in displacing some of our major competitors in the financial services sectors of the market.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

So that hasn't changed directionally going into the second quarter?

Neil Robert Hammer

No.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Okay. And just a follow-up on Glenn's question on EMC, you're seeing any kind of change in their sort of competitive tactics, either in the mid marker or enterprise around data domain or Avamar? Does that sort of remain in check, or has there been any changes from your perspective?

Neil Robert Hammer

Well I said earlier, I mean we respect EMC that they are tough competitors on the one hand. On the other hand, they are partners of ours in the sense that we integrate really well with a lot of their hardware solutions, like VNX and Isilon. They are standard solutions in the market. They've been very cooperative with us in terms of enabling us to integrate it and provide some great solutions to our mutual customers. So yes, they're very competitive. They're extremely professional on what they do. They generally have a good strategic vision in terms of where things are going. But on the other hand, we've been able to beat them a lot on head-to-head competition because of things that I said earlier. Our solutions are much more cost effective, because we have the, in terms of some of things we've done with our single platform, they are more scalable. Our reliability is higher because we're not dealing with a bunch -- we have a platform, they have a bunch of, I call it, piece parts. So it's more difficult for them to implement a solution. We can support it better. We're more flexible. We unify backup, archiving, mobile data in and out of the cloud a lot more effectively than an EMC can do as good as they are, so that from a competitive standpoint, we've been quite successful. And from a partnering standpoint, we've been successful. So it's a pretty interesting dynamic there.

Operator

Our next question comes from Michael Turits from Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Couple of questions, first just on fed. I would assume that you feel -- your comments you feel pretty confident on them going into the fed fiscal fourth quarter in September. Any thoughts post what could be, what sounds for you like a decent Fed budget flush. How the outlook would be for Fed and for Fed spending will be post their fiscal fourth quarter close?

Neil Robert Hammer

Yes, Michael, I still think it's uncertain. I mean as well as we're doing, and we're doing really well. I think the whole Fed spending environment is uncertain even at the end of Q2. I mean we can't predict it that accurately. Fortunately, we have a lot of other segments at the market, so from a standpoint of our hitting numbers, we've got our risk covered quite well. I'd say it's very unpredictable. And I would assume it will get tougher going forward rather than easier in the fed sector. Now that being said, we're in some very large opportunities within Fed that can mitigate that and if those come to pass and they get budgeted, we still could do quite well.

Michael Turits - Raymond James & Associates, Inc., Research Division

Just some other -- just first on OpEx. You said it'll come back. You were at about kind of $79 million, $79 million, $80 million rate before, which is where we thought you might come in for this quarter. Any just general thoughts on how that OpEx, that's on OpEx, might look going in -- non-GAAP OpEx. How that might look going into the next quarter or 2? Should we think of that as coming back to that $80 or so million range?

Louis F. Miceli

Well, we haven't given specific quarterly guidance, but I'll tell you this, commission rates' going to be higher. Just on commissions, OpEx spending will go up. We're continuing to hire, so OpEx will go up. And well, about quarter-over-quarter, you will see a reasonably, I'd say, a reasonably significant increase. On the other hand, assuming we hit all objectives, I think on balance, we will do well relative to consensus, I think. I think consensus is reasonable, and I think we've got some opportunities to bring in another solid quarter here.

Operator

Our next question comes from Robert Breza from RBC Capital Markets.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Just a couple of clarifying questions. First of all, nice quarter. Lou, maybe for you, headcount's roughly up 70, 70 headcount overall. You talked about increasing certain segments, but can you just kind of talk to us, do you expect to increase at a similar pace in terms of the 70 headcount, or should we expect more?

Neil Robert Hammer

Well, I said we would increase the sales and marketing primarily at rates similar, I didn't say how much. And I did point out in my comments that on the development side, that would be up over the Q1. So at the end of the day, we should be -- we will be higher than that number. But a lot of those dev hires will come in our India operation where we hire predominately fresh out, and we rotate them through our system here. So dev headcount will be up, and sales and marketing will be fairly consistent to what you saw this quarter.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Okay. I guess given all of the new product roadmaps that you talked about in terms of security archiving, analytics, cloud sharing, I guess, Bob, how do you think about headcount trending for the rest of the year? Do you think it'll be kind of a measured pace here? Or how -- are you going to be kind of back-end loading the year? I mean obviously, those products are in development that you said will be released this quarter. But just as you think about planning really more for less next year in terms of headcount, how do we think about that trending for the rest of the year?

Neil Robert Hammer

I think -- I mean the point is that code is, it's in beta. That code is written so it's all the testing and all the expense tied to -- all the go-to-market activity is tied that release. The additional headcount for hiring now is tied to some things we want to do in the future. So I think it'll be -- other than what Lou said, every second quarter, we have a pretty high headcount increase from college graduates coming out of India. But it should be pretty steady at pretty good clip right through the fiscal year and into next year. As long as we continue to hit our financial objectives.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Bob, maybe just kind of a clarifying question. You talked about enterprise being 56% of software revenue. What is large enterprise in total revenue as a percentage, just roughly or just within a range would be helpful?

Neil Robert Hammer

I'm going to guess it's going to be similar or maybe a little bit less since the maintenance charges and enterprise is slightly less than they are in the non-enterprise segment of the market. So just figure whatever it is in enterprise, knock it down 1 point or 2 points, and that's probably what it is in total revenue.

Operator

Our next question comes from Phil Winslow from Credit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Most of my questions have been asked, but just maybe a little bit more color on, obviously, you talked about seeing your strength in large enterprises and larger deals. Just curious what you're seeing in the midmarket and also just maybe, do you see any distinction between just sort of U.S. versus international there?

Neil Robert Hammer

In the midmarket, when our growth is -- the midmarket's been okay. We've seen -- if you do the math, the midmarket is still growing at -- in the high teens versus the enterprise, which is growing into 30s. And we're -- and I mentioned on the call, that we feel that we are developing some products that have a broader range of appeal from a high SMB on up in terms of our ability to penetrate a broader range of the market. So I think we'll continue to do relatively low in the midmarket in terms of product services and distribution. But to get these really significant increases the growth relative to the market, that will come from our enterprise segmentation focus.

Operator

Our next question comes from Ryan Bergan from Craig-Hallum Capital.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Just wondering if you can elaborate further, give some more color on your expected plans to either expand or add new distribution relationships in back half of this year or the remainder of this year, whether or not they're going to be more focused on distribution or OEM? And if it's more likely to come from existing partners, or are you going to be adding new partners?

Neil Robert Hammer

We are working on some significant new partner relationships that may have OEM components to it as well as resale. Those are moving along. And as we go out over the next, call it, several years, I think you'll see a significant change in our routes to market and whole distribution ecosystem as we broaden out the company, and we start to get into analytics and some of the business intelligence aspects of what we do. That's going to start to change the complexity of our whole distribution ecosystem. That will be an evolving change. It will start certainly over the next 12 months. It will take us probably several years to change it significantly, but it will change. So in the near term, yes, there are some new partners that we are clearly that will come into play here and have some significance as we move through this fiscal year and next. And we will, I'd say, significantly broaden out our whole route to market distribution ecosystem. You'll see some pretty significant changes over the next 12 months.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

And beyond cash use for the new headquarters land and building the structure, what are your cash plans for the time being?

Louis F. Miceli

Share buyback and our headquarters building are where we're focused. If you think about it, this is a very important -- the company and its opportunity, to continue to grow the company through our own innovation here. We've got a lot to do just on execution and the opportunities we have in front of us. So that I don't see us being -- doesn't mean we won't be acquisitive, but I think we want to keep focused and see if we can continue to sustain significant enough financial results over the next -- about as far as you can see, so I think we have a lot of opportunity to do that. So from a cash standpoint, it's going to be mainly focused on the new headquarters and stock buybacks.

Operator

Our next question comes from Rob Owens from Pacific Crest.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Just one more quick one on the government. The 31% growth year-over-year, I was curious if that was big-deal driven or velocity driven? And how much, if you can attribute, what came from civilian, and what came from defense?

Neil Robert Hammer

Off top the of my head, on the civilian versus defense, I don't have it. I think it was balanced will be my guess. I don't know about the other guys here in the room, I really don't have a good answer for you. I'll tell you that the growth in federal was, again, pretty well balanced. They were large deals, but there wasn't 1 big deal, there was a number of them across a number of different government agencies. So I'd say pretty gratifying in terms of what our Fed team is doing. And as I mentioned earlier, some very, very large opportunities as, not only for our federal government, but governments around the world as they go to these consolidated shared services environment. And we're really in a good position to lead, not -- again, not only in our federal government, but we know we're going to be the standard in a number of federal governments around the world.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

And have you seen success or any notable international governments at this point, Bob?

Neil Robert Hammer

Yes. We have. We want them. They're starting to contribute to revenue, and there's a fair amount more in the pipeline.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

But that 8% number that you reported, that was a U.S. federal number?

Neil Robert Hammer

Correct. Just to broaden out the perspective, our MSP, managed service business, it is not more than 10% of revenue, so we don't report it. It is a significant component of our revenue growth. You just don't see it, but it is very, very substantially across the globe.

Operator

[Operator Instructions] And at this time, we have a question from Brian Freed from Wunderlich Securities.

Brian Freed - Wunderlich Securities Inc., Research Division

Two quick clarifications. First, on the -- about $4 million of deferred software revenue, what was the geographic mix of that specifically...

Neil Robert Hammer

I'm not going to comment on that, Brian.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay. And then second, you mentioned you had confidence in consensus, was that a full confidence in full year or the current quarter release?

Neil Robert Hammer

Both.

Operator

Our next question comes from Michael Turits from Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Just a question of FX. Lou, what was the year-over-year FX impact on revenue? And what was the quarter-over-quarter FX impact on deferred revenue, whether you want to give dollars or percent?

Louis F. Miceli

Well, total revenue, it was -- we were affected by about 3 percentage points. And for the quarter, I don't have that one handy, I can get you that offline.

Michael Turits - Raymond James & Associates, Inc., Research Division

So 3 percentage points total revenue year-over-year, right?

Louis F. Miceli

Yes.

Michael Turits - Raymond James & Associates, Inc., Research Division

And then my question was what was the sequential or quarter-over-quarter impact on deferred revenue from FX? I think one caller said $2 million, I wasn't sure about that.

Louis F. Miceli

About 2%. FX was about 2%.

Michael Turits - Raymond James & Associates, Inc., Research Division

2% impact sequentially on deferred?

Louis F. Miceli

Yes.

Operator

Thank you. This concludes our question-and-answer session. Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CommVault Systems Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts