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CommVault (NASDAQ:CVLT)

F4Q08 (Qtr End 03/31/08) Earnings Call

May 13, 2008 5:00 pm ET

Executives

Michael Picariello – Director of Investor Relations

N. Robert Hammer – Chairman, President and Chief Executive Officer

Louis Miceli – Chief Financial Officer

Alan Bunte – Chief Operating Officer

Analysts

Thomas Curlin – RBC Capital Markets

Brent Bracelin – Pacific Crest Securities

Aaron Schwartz – JP Morgan

Derek Bingham – Goldman Sachs

Aaron Rakers – Wachovia Capital Markets

Steven Koenig – KeyBanc Capital Markets

Tim Klasell – Thomas Weisel Partners

Phillips Winslow – Credit Suisse Securities

Michael Turits – Raymond James & Associates

Walter Pritchard – Cowen and Co.

Operator

Welcome to the CommVault fiscal fourth quarter and fiscal 2008 earnings call. (Operator Instructions) At this time for opening remarks and introductions I will turn the call over to Michael Picariello, Director of Investor Relations.

Michael Picariello

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 would like to remind everyone that statements made during this call including the Q&A session at the end of the call that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Actual results may differ materially due to a number of risks and uncertainties which are discussed in our SEC filings and in our cautionary statement contained in our press release and on our website.

The company undertakes no responsibility to update this information in the conference call under any circumstance. Our earnings press release was issued today over the wire services after the market closed and has also been furnished to the SEC as an 8K 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 and posted on our website. This conference call is also being recorded for replay and is being web cast live. An archive of today’s web cast will be available on our website following the call.

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

Robert Hammer

Welcome everyone and thanks for joining our fiscal fourth quarter and fiscal 2008 year-end conference call. We had a strong fourth quarter and fiscal year with continued progress in all areas of our business. The demand for our 7.0 software suite remains very high and has clearly helped us accelerate the growth of our emerging products.

With Simpana we continue to outperform our competition and increase our market share. For the quarter we achieved revenue of $56.6 million up 33% on a year-over-year basis versus $42.6 million in fiscal Q4 2007. Software revenue grew on a year-over-year basis by 32% while our services businesses grew 34% year-over-year.

For the year we achieved record revenues of $198.3 million, up 31% on a year-over-year basis versus $151.1 million in fiscal 2007 exceeding the high end of our revenue guidance. Software revenue grew on a year-over-year basis by 30% while our services business grew 33% year-over-year.

For the year non-GAAP operating income (EBIT) was $32.8 million up 44% year-over-year versus EBIT of $22.7 million for fiscal 2007. Non-GAAP earnings per share for fiscal 2008 was $0.57. Lou Miceli will provide more details on the financial results along with the fiscal 2009 guidance later in the call.

I want to talk about the economic environment. The buying patterns for our solutions remains strong. At the present time we continue to see healthy demand for our products across all geographies, vertical market segments and distribution channels. We are well aware that the current economic environment has added a lot of uncertainty about future demand. While we are not [inaudible] about the current economic climate we have not seen a slow down in demand for our solutions.

We believe demand for data management solutions is driven by the need to manage the unabated growth of data, data protection and availability, compliance, e-discovery and disaster recovery. Demand for data management solutions is also being driven by the need to retain data longer and reduce the cost of both storage and energy.

In addition, the adoption of disk space data management solutions and the need for improved recovery of data are causing customers to upgrade from traditional back up to more modern data protective solutions which utilize functions such as replication, continuous data protection and single instancing.

These industry trends have had a positive impact on our Q4 and we are seeing the benefit on our pipeline funnel as well. Gartner validated these industry trends in their recently released Market Scope for Enterprise Backup/Recovery Software in 2008. CommVault was one of the two highest rated vendors in their new rating system.

The demand for our Simpana 7.0 software suite remains extremely strong and has clearly helped us accelerate the growth of our emerging products which were up 103% in Q4 FY08 from Q4 FY 07. The core backup business was up 13% sequentially and 16% year-over-year. We have seen a very high adoption rate of Simpana. Currently about 1/3 of our entire install base has either upgraded to or purchased the Simpana suite.

We believe CommVault is uniquely positioned to deliver data and information management solutions with a single unified software platform that delivers best-in-class functionality and reliability with real cost and administrative savings. Our unique solution has enabled us to grow approximately three times faster than the market and gain market share.

I will now talk about Simpana deal stats. We added 295 new customers in the quarter. As usual the new customer additions do not include a large number of small orders from new OEM customers who registered through the Internet. Our customer base now totals approximately 8,000 customers.

We had solid growth across both our core backup products as well as accelerating sales of our emerging products. For fiscal Q4 of 2008 sales of non-core backup or emerging products increased approximately 28% of our software revenue versus 26% in Q3 2008 and versus 18% in Q4 of last year.

Since the release of Simpana in July 2007, we have seen our emerging product revenue grow by over 140%. Specifically archiving single instancing replication and search are key components of this growth. Since emerging products now represent a significant and increasing portion of our revenue we are going to rename that category to Advanced Data and Information Management Products. This also recognizes that the company is well past the point of being just a backup company.

In the fourth quarter of fiscal 2008 approximately 41% of our software revenue came from deals over $100,000 compared to 33% of our software revenue generated from deals over $100,000 in the third quarter of fiscal 2008 and compared to 34% in the fourth quarter of last year.

The dollar volume of deals over $100,000 grew 55% in fiscal 2008. We contribute the increase in enterprise deals to increasing competitive advantage of our unified suite of products, leverage from our strategic distribution partners, and increased awareness from the increased number of highly experienced enterprise sales representatives that are now reaching full productivity levels.

Our visibility to enterprise deals going into FY 2009 is extremely strong. We continue to see customers purchasing a higher percentage of multiple elements of the Simpana suite with deals over $100,000. In deals over $100,000 sales of our advanced data and information management products represented approximately 35% of the sales in the fourth quarter. This is continued validation that our customers like our singular approach to the market.

Large deals are contributing to a significant portion of the growth in our advanced data and information management product sales. It should be clear based on this track record of growth and market share gain that the company has established itself as a strong competitor in the enterprise segment of the market.

In summary, we continue to outperform our competition and increase our market share across all segments of our business. Now let’s talk about our geographicals.

On international the United States operations generated 63% of our total revenues in the quarter with operations in the rest of the world generating the remaining 37%. We continue to expand our international distribution with strong growth in Europe, Canada, Australia and China. International revenue was up 45% in Q4 FY 08 versus the same quarter a year ago. For the full year the split was 64% of total revenues from the United States and 36% coming from the rest of the world compared to a split of 70/30 in fiscal 2007.

As we head into fiscal 2009 we have strengthened our distribution globally. International expansion is and will continue to be a major contributor to our growth. We now have strong sales and systems engineering teams in all of our key markets. We are getting solid distribution leverage internationally from our existing strategic distribution partners Dell and HDS. We have added two new strategic partners, [inaudible] and Sun. We are also gaining nice leverage from our existing international resellers such as Horizon in the U.K. and Adnet in Australia.

Adnet’s proposed purchase of Horizon should benefit us as Adnet will bring a broader reach for our solutions in EMEA. We have also established positions in many new international markets such as China, Singapore, Latin America, South Africa and the Middle East.

Now I’ll talk about Dell. Sales to our OEM and SMP relationship with Dell accounted for approximately 24% of total revenue for the fourth quarter of fiscal 2008 with a break out being 19% to SMP and 5% through OEM. For the full fiscal year sales through Dell accounted for 24% of revenue with 18% through SMP and 6% through OEM.

Fiscal 2008 Dell licensed revenues were up 63% year-over-year. We have a strong relationship with Dell and expect our relationship to continue to broaden. I’ll talk about HDS.

We saw a significant increase in license revenue during Q4 FY08 particularly in international markets. We continue to have success with Hitachi and the enterprise segment of the market on a global basis and we believe that this relationship will continue to drive revenues and contribute to our overall success.

I want to talk now about our investments to increase our market penetration. As we spoke about last call, given the strength of our current position, confidence in our vision and our many opportunities to invest for growth we think it is prudent to increase our near-term spending in sales and marketing in order to maximize long-term growth and profitability and enhance long-term shareholder value.

When I speak about my confidence in our current position specifically the 77% growth we saw in advanced data and information management products in FY 08 which accounted for 28% of our license revenue in Q4. The growth in international business, which grew 65% in FY08 and represented 37% of our license revenue in Q4 and the growth in deals over $100,000 grew 55% in FY08 and represented 41% of our license revenue in Q4. We have made significant progress in hiring quote carrying representatives particularly in the United States and expect to be at our target headcount levels no later than the end of Q1 2009.

In addition to quota carrying reps we continue to add field technical personnel and field domain specific technology specialists in order to increase our distribution leverage. We have also significantly expanded our capabilities in marketing and brand awareness in order to improve the effectiveness of our field teams and provide broader market awareness.

In addition, as I mentioned in our last quarterly earnings call, we are making significant progress on a broad range of new technologies and products which will further enhance our competitive position in our core business, our advanced data management and information management products business and will enable us to enter new information management markets.

Lets talk about our brand awareness campaigns. Where we had good sales representation and access to deals we have a very high win rate. However many prospective customers don’t know about CommVault. Most of the CommVault prospects are very surprised to learn about the depth and breadth of our product offerings and the impact our products can have on reducing costs and improving business operations. It is clear that we need to effectively communicate our unique singular approach and value adds to a much broader market audience. As such, we are making investments in marketing and branding to increase our brand awareness and gain access to more opportunities over the coming year.

Let’s talk about the impact of our increased investments. We strongly believe that the investments we are making today in our sales force, expanded distribution leverage, brand awareness and R&D will enable us to accelerate our revenue and market share gains at rates that are higher than our historical rates. Our confidence is based on our previous success at accelerated growth in the following areas that we have invested in the past two years; enterprise deals, advanced data and information management and international sales and marketing.

In addition we will continue to invest strongly in our R&D as we develop our next generation portfolio of products. The resulting revenue grains should enable us to continue operating margin expansion at healthy rates in the medium term. It is important to note that even with additional near-term investments we believe we can still increase our operating leverage in fiscal 2009 by approximately 150 basis points.

I will now turn the call over to Lou who will provide more details about our quarterly and annual results, as well as our FY 2009 guidance.

Louis Miceli

I will cover the financial highlights for both the fourth quarter and fiscal year 2008 along with our fiscal 2009 guidance. As a reminder I will be referring to non-GAAP results and a full reconciliation of GAAP to non-GAAP results can be found on Table IV of our press release.

I’ll begin with revenues. For the quarter, total revenues were $56.6 million an increase of 33% year-over-year and 13% sequentially over the prior quarter. Software revenues were $31.1 million an increase of 32% year-over-year and 16% sequentially. Services revenue was $25.3 million an increase of 34% year-over-year and 8% sequentially.

For the year, total revenues were $198.3 million an increase of 31% year-over-year. Software revenues were $109 million an increase of 30% year-over-year and services revenue was $89.3 million an increase of 33% year-over-year.

The overall growth in software revenue for fiscal year 2008 was driven by two primary factors. We continue to see significant growth from our international operations and a number of deals greater than $100,000 increased in all geographic areas. For the quarter, the growth of software revenue internationally was 51% and the U.S. was 22% over the prior year period. In Q4 2008 the number of software transactions greater than $100,000 was up by 82% over Q4 of fiscal year 2007.

Software revenue generated through indirect distribution channels was approximately 80% of software revenue for both the current quarter and for the full year compared with 68% in Q4 2007 and 69% in the full prior year period. The shift towards higher indirect revenue is the result of an increase in software revenue from our international operations which is mostly sold through indirect channels and a shift in the U.S. to indirect distribution channels being driven predominantly through our growing relationship with Arrow.

Approximately 19% of total revenue was sold through our distribution agreement with Arrow in Q4 of fiscal year 2008 compared to 14% in Q3 of fiscal 2008. In addition, we have higher revenue through our reseller arrangement with Dell in both the U.S. and Europe, thereby increasing the indirect percentage. Furthermore, deals initiated by our direct sales force in the U.S. are sometimes transacted through indirect channels based on end-user customer requirements.

While we will continue to invest in both our channel distribution and our direct sales force we expect to see a trend of increasing revenue from indirect channels for the foreseeable future.

The revenue mix for the quarter and for the year was 55% software and 45% services. We are anticipating the same split of 55% software and 45% services for fiscal year 2009. We continue to see growth opportunities in our services revenue which is supported by the increases to deferred revenue on the balance sheet.

Our maintenance attach rates are very high and our renewal rates remain strong on a worldwide basis. Gross margins were 86.7% for the quarter and 86.5% for the year. Gross margins on our software revenue were 97.6% in the current quarter versus 98.1% for the prior year quarter.

The gross margin for services revenue was 73.2% in the current quarter versus 70.7% in the comparable prior year period due to a higher mix of maintenance contracts relative to professional services.

Moving on to operating expenses. Total operating expenses were $37.4 million for the quarter and $135.7 million for the full fiscal year. In Q4 2008 sales and marketing expense increased $6.6 million or 36% over the prior year quarter. Approximately 2/3 of this increase was related to employee compensation which includes the additions of new employees as well as increased commissions on higher revenue. The rest of the increase was due to higher travel and related expenses, additional advertising and slightly higher rent associated with geographic expansion.

Research and development spending increased by about $800,000 in the quarter or 14% over the prior year period. We continue to leverage our investments in R&D by expanding our Hyderabad, India location. We now have 92 employees in India.

G&A expenses increased by $1.5 million in the quarter which is 38% year-over-year increase. This increase primarily relates to compliance and insurance costs associated with being a public company as well as higher recruiting costs. We added 33 employees during the quarter bringing the total worldwide headcount to 866 at the end of March. The headcount increases were primarily in customer service support, sales and marketing and R&D.

Non-GAAP operating margins were 19.3% for the quarter resulting in non-GAAP operating income of $10.9 million. For fiscal year 2008 non-GAAP operating margins were 16.5% resulting in non-GAAP operating income of $32.8 million. This represents EBIT growth of approximately 44% year-over-year for the full fiscal year and a 150 basis point improvement on full year EBIT margin.

Non-GAAP net income for the quarter was $8.5 million and non-GAAP EPS was $0.19 per share based on a diluted weighted average share count of approximately 45.5 million shares. For the year, net income was $26.1 million and non-GAAP EPS was $0.57 per share based on a diluted weighted average share count of approximately 45.7 million shares.

Now on to the balance sheet. As of March 31, our cash balance was $91.7 million, down approximately 4% from $95.1 million at the end of December primarily due to our stock buyback program. During the quarter we repurchased just over 1 million shares of common stock totaling approximately $15 million under our previously announced share repurchase program. We are authorized to repurchase an additional $25 million under this program. We believe our stock is currently undervalued and we will continue to be active in our stock buyback program.

Cash flow from operations was approximately $11 million in Q4 and approximately $34.4 million for fiscal year 2008. Free cash flow, which we define as cash flow from operations plus capital expenditures, came in at $9.7 million for fiscal Q4 2008 which is up 38% over fiscal Q4 2007. For the fiscal year 2008 free cash flow came in at $30.1 million which is an increase of 14% over the prior year.

Our DSO was 63 days at March 31, 2008. This is up from 60 days in the prior quarter and is the result of several factors; a larger volume of deals greater than $100,000 that closed late in the quarter, higher accounts receivable balances caused by a higher percentage of indirect revenue, higher maintenance support billings in the quarter and increased international revenues. It should be noted that the quality of our underlying receivables has been and continues to be very strong.

Deferred revenue increased $7.2 million or approximately 14% sequentially over the prior quarter. This is a strong validation of our growing services business.

Capital spending was approximately $1.3 million in the fourth quarter and $4.3 million for the year. Our current estimate for fiscal year 2009 capital spending is between $4 million and $4.5 million.

Now I’ll spend a few minutes on taxes. The company used a non-GAAP pro forma tax rate of 28% throughout fiscal year 2008. The GAAP tax rate for fiscal year 2008 was 23% and the actual cash tax rate was 13%.

For fiscal year 2009 our guidance will be based on a non-GAAP pro forma tax rate of 30%. The company has deferred tax assets on the balance sheet as of March 31, 2008 in the amount of $54.9 million which are comprised of net operating loss tax benefits in the U.S.

Consequently, our cash tax rate in the U.S. will remain lower than the GAAP and pro forma non-GAAP rate for the foreseeable future. However, in most foreign locations we either do not have net operating loss tax benefits or we expect to fully utilize such benefits during fiscal year 2009.

As a result, we expect the cash tax rate to increase from its current level of 13% for fiscal year 2008 to the high teens in fiscal year 2009. The company continues to implement tax planning measures that are expected to keep the long-term terminal tax rate to within a range of 30-32% over the next few years.

Moving on to fiscal year 2009 guidance. For the twelve months ending March 31, 2009 our initial total revenue guidance is $245 million which represents revenue growth of 24% year-over-year. Based on this revenue level we are expecting fiscal year 2009 non-GAAP gross margins to be 86.7%. We are also expecting to improve non-GAAP operating margins by about 150 basis points above FY 2008 levels for a non-GAAP EBIT margin of 18% based on revenue of $245 million.

While we intend to be active with the remainder of our share buyback program we did not take into consideration any stock buyback in our projected FY 2009 non-GAAP earnings per share calculations. Using a share count range of approximately 45.2 million to 46.3 million shares and applying a pro forma tax rate of 30% for the full year we are expecting non-GAAP earnings per share to be in the range of $0.70 to $0.72 per share based on revenue of $245 million for fiscal year 2009.

Our guidance includes an interest rate assumption of 2% to 2.5% on expected cash balances. The non-GAAP guidance excludes approximately $0.16 to $0.18 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 $0.07 per share.

That concludes my prepared remarks. With that I would like to turn the call back over to Bob.

Robert Hammer

In summary, we are very confident about our future and our ability to create long-term shareholder value. We believe we have established a solid foundation for growth heading into fiscal 2009 and beyond. We believe we are the best positioned company to meet the current and future needs of the industry as outlined in Gartner’s recently released market scope. All the key elements are in place which should enable us to execute and achieve our FY 2009 objectives.

The key elements for growth are; solid growth in our core business, high growth in our advanced data and information management products, strong international growth, success in penetrating enterprise with deals over $100,000 and investing in more feet on the street, expanding our distribution network combined with achieving broader market awareness and developing a compelling pipeline of new technologies and products.

We are confident about our near-term outlook. We have a strong deal pipeline going into fiscal Q1 2009 quarter which indicates we could have a near-term upside impact to our first half growth prospects.

With that I would like to turn the call back to Michael who will open it up for Q&A.

Michael Picariello

Before we open up the lines for your questions I would like to highlight an upcoming investor relations event. Bob will be speaking at the JP Morgan 36th annual technology conference in Boston on May 20 at 10:00 a.m. eastern time. Bob’s presentation will be available live on our investor relations website and will also be archived for 90 days.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Thomas Curlin - RBC Capital Markets.

Thomas Curlin – RBC Capital Markets

I know you don’t do quarterly’s you just do fiscal but given the incremental OpEx investments is there any way you can help us with the linearity assumptions on the bottom line through the year on a quarterly basis? Is there an operating margin metric to think about in the first half versus the second? Or should we think about operating margin maybe being flat year-over-year for the first half of the year and then maybe accelerating in the second? What can you give us?

Robert Hammer

In general if you look at our historicals the last two years we have had slightly up quarters on revenue and I indicated in my remarks that the near-term outlook looks quite promising. So, given our guidance we are not going to provide quarterly guidance. Historically the last is slightly up and until we see it and we do it I indicated Tom we might see some upside to our guess here but we have to execute and we will talk about that in July.

Louis Miceli

No, I think Q1 has historically been flat to slightly up and I would suggest that trend may continue but at this point.

Thomas Curlin – RBC Capital Markets

You are talking about year-over-year?

Robert Hammer

Yes. Quarter-over-quarter.

Louis Miceli

Historically Q1 has been flat to slightly up.

Robert Hammer

We have a good pipeline but we have to see if we can translate that into our numbers.

Thomas Curlin – RBC Capital Markets

On the competitive environment, any changes there? Last quarter Symantec made incrementally more aggressive. They have a product cycle out as well. But also it seems like maybe there is more emphasis on backup executive stays and maybe less investment on the net backup front going forward that you see any of that? How would you describe that competitor and any changes felt elsewhere?

Robert Hammer

I think what everybody should look for is let our numbers speak for themselves. Obviously we saw accelerated growth in enterprise and we’ve seen accelerated growth in our advanced data and information management products. I think where that is coming from, these comments are really important.

We’ve been saying this for a number of years but clearly this is what is going on in the market. There has been a move from tape to disk. There has been a move on the market from focusing on backup to focusing on recovery. Both of those areas you are seeing when people talk about putting data management solutions in versus backup they are talking about a comprehensive solution which includes not just backup but replication, management snapshots, continuous data protection, single instancing and management reporting tools.

The backup copy which used to be “the” copy which companies used to retain for long periods of time is becoming shorter. So instead of having a backup copy for years that copy now is only being kept now for…a lot of companies wanting data protection are just keeping that product for weeks or months. So it is a very different dynamic and it changes the whole switching element in the market.

Companies when they move from traditional backup to more data protection they are looking for the best integrated suite of products that can provide that solution. That is CommVault. We are more scalable. We take complexity out because we save them more money and we are easier to use. We have the most modern architecture in the industry.

So those trends in the market which Gartner pretty much spelled out in our last market scope, it increases our differentiated value proposition in the market. It is a different game. It is not a backup game. Backup is not an issue. Advanced data protection is an issue and as we get into more sophisticated information management those are the things that are driving this company and that is what people should focus on.

Thomas Curlin – RBC Capital Markets

Are there any areas that are particularly hot in terms of the advanced archive and index and tracking capabilities you rolled out with Simpana?

Robert Hammer

The strong growth is on; those products were over 100% in Q4 versus a year ago. 103% to be exact. It is archiving. It is replication. It is single instancing and it is continuous data protection for managing remote offices. Those are the big ones. Our other products are also gaining traction including our reporting tools.

Operator

The next question comes from Brent Bracelin - Pacific Crest Securities.

Brent Bracelin – Pacific Crest Securities

You talked about a slight acceleration in the license enterprise business. It looks like you had a healthy acceleration in the growth on deferred revenue. How much of the improvement here would you attribute to the broader sales coverage, improving sales productivity versus growing demand for the Simpana upgrades?

Robert Hammer

I think they go hand in hand. One, there is a market need out there and we’re becoming more effective in market awareness to deliver our solutions to meet those needs. So if you can look at where the big growth is, go back 15 months. We invested very heavily in international and that is more feet on the street and on distribution. That helped it pay off really well for us.

We transitioned our sales force to be more effective in selling at the enterprise and that clearly paid off for us. We are seeing improvements in sales productivity because as we moved to getting distribution leverage from channel and you are starting to get leverage into the larger accounts. So all those things are having an impact.

I think what you have to separate is as we saw last quarter are about the Americas. We’re making big investments there but the impact of those investments you are going to see a bit later on in the fiscal year. The investments you are seeing in Q4 and you’ll see in the next couple of quarters are for investments already made.

Brent Bracelin – Pacific Crest Securities

On the order pipeline, clearly you saw a benefit from large deals that closed in Q4. I’m really wondering as you think and look at that pipeline do you have a composition of large deals still there or did you close a lot of those and what is the visibility like entering fiscal 2009? Clearly you took the numbers up here and feel strong about it but how do you feel about large deal growth upside in Q4 and as we go into the next year what the composition of large deals going forward?

Robert Hammer

It has gone up quarter-on-quarter. As always the question is can we get them closed but the pipeline for big deals is very strong in this current quarter.

Brent Bracelin – Pacific Crest Securities

The advanced data management section, 20% of the business now, doubling here year-over-year, how sustainable is that? Is it solely tied to the large deals or are you now starting to have good success with that on a stand-alone basis?

Robert Hammer

It ties to what I was saying when you think about data management don’t think about backup anymore. Backup, that copy is still important but that is not the business. The business is providing a broader, more comprehensive data management solution that deals with managing disk-to-disk and managing improved recovery.

That requires things like replication and managing snaps and continuous data protection. You just can’t use that backup copy and [inaudible] what customers need today in managing their data. It is just different. So we’re seeing a transition in this industry and we are at the forefront of that in terms of having the leading technology to meet those needs.

Operator

The next question comes from Aaron Schwartz - JP Morgan.

Aaron Schwartz – JP Morgan

I just wanted to revisit the comment you made about the investments you made in the Americas. Coming more to the model later in the year. Can you help us with some of the assumptions you made in your revenue guidance? You assume full productivity by those investments by the end of the year? Or do you handicap the close rates and that would be a source of upside? I’m just wondering if you can help us with the assumptions for the growth rate.

Robert Hammer

The productivity model takes into account longevity and typically we would assume full productivity four to five quarters out after initial hiring. We have a progression on that and it is all built into our models.

Aaron Schwartz – JP Morgan

The comments you just made about the Advanced Product groups and moving away from backup, can you maybe just talk a little bit about.

Robert Hammer

I’m not saying we are moving away from backup I’m saying the industry in its requirements is changing. The backup copy which used to be “the” copy to manage data is now just one of many different technologies that are used to manage data. That’s all I’m saying.

Aaron Schwartz – JP Morgan

You have a lot of advanced technology. It seems like a lot of the growth has been from your enterprise customers. I’m just wondering as that broadens out and hits more of the mainstream customer base do you need some more specialization in your channel partners or how do you monetize that across the customer base?

Robert Hammer

Well we are working with our channel partners now, all of them, and in terms of explaining what the value proposition is and how you solve a customer’s problem today in these newer environments. What we mentioned on the call is typically any large deal greater than $100,000, 35% of the revenue is in those advanced data information management products today. That percentage has been going up over time.

As we get into, as I mentioned on our last earnings call, we have a very robust pipeline of new products and technology coming to the market and that will enhance our position in terms of driving revenues in these new areas whether it is on the data management side or the information management side.

Aaron Schwartz – JP Morgan

Lastly, the increase in deferred was much stronger than I think you have ever seen on a quarter-to-quarter basis historically. Is that just the strength in maintenance renewals or are you seeing an increase in size in maintenance renewals with module add ons? Can you just walk us through that dynamic there?

Louis Miceli

A good chunk of it is just the continued success we have in renewing maintenance agreements on a worldwide basis. We have now many customers that we sold a fair amount of software to so they continue to renew their maintenance contracts. Plus the growing annuity that comes from just add on business so clearly we feel good about that.

We had a number of large maintenance renewals that we were able to obtain in the quarter. There are also a few customers that renewed multiple year maintenance agreements that are reflected in our numbers. So we feel really good about our support and our reputation in the marketplace and our customers continue to renew and the tax rate on the new business is essentially 100%.

Operator

The next question comes from Derek Bingham - Goldman Sachs.

Derek Bingham – Goldman Sachs

On the margin expansion assumption you said you expect something around 150 basis points. Could you talk a little bit about where you expect that to come from? Are there particular line items where you expect to see more leverage than others this year?

Robert Hammer

In general, in spite of my comments on increased spending, the bulk of that is going to come from the sales and marketing as far as leverage offering goes.

Derek Bingham – Goldman Sachs

When you have modeled it out do you see the sales and marketing as a percentage of sales in FY 2009 as roughly the same as last year and the leverage coming from other line items?

Robert Hammer

We’ll see operating leverage coming from that line as well.

Alan Bunte

It may be across the board, Derek. Sales and marketing will stay roughly the same, maybe a little lower and we’ll see maybe a little more leverage on a percent basis from R&D and G&A groups in 2009.

Derek Bingham – Goldman Sachs

In the nearer term we had sales and marketing up a little under $3 million sequentially in March. If you are part way through your hiring ramp up should we see a similar sequential increase in dollars in the June quarter as you [inaudible] your sales?

Alan Bunte

Perhaps. Yes.

Derek Bingham – Goldman Sachs

So I’m not way off the mark there do see another couple of million sequentially?

Alan Bunte

You are usually not.

Derek Bingham – Goldman Sachs

You mentioned you have got Simpana 7 penetration at about 1/3 of your customer base. Any thoughts on where you would expect that to go this year in terms of who you think are qualified customers or customers that are big enough to require that technology?

Robert Hammer

Simpana in general if it is not our installed base, Derek, for all practical purposes the new customer is going to be on Simpana from the get go and then you’ve got conversion occurring in our installed base and right now it is about 50/50. If you look at 1/3 of our 8,000 customers that are on Simpana about half of those are new and about half of those are installed base upgrades. That should give you a perspective on it. Simpana is what we sell today.

Operator

The next question comes from Aaron Rakers - Wachovia Capital Markets.

Aaron Rakers – Wachovia Capital Markets

Everybody is trying to understand the ramp in terms of your new sales hires. Can you say how many of your sales additions over the last few months, or how many of them are that have been with the organization less than that four to five quarter type metric you look at in terms of productivity?

Robert Hammer

We don’t give that out Aaron but I think what we have said clearly is the bulk of that ramp is occurring in the United States. That comparative meaning that is Canada, the U.S. and South America.

Aaron Rakers – Wachovia Capital Markets

On the Dell relationship specifically around the OEM piece of it, given that business is recognized one quarter in arrears I would have expected a little bit more of a pick up on that OEM side. Is there something to read into that?

Robert Hammer

No. The answer is the key reason is we launched 7.0 with Dell SMP in the third quarter and we launched it through OEM in the fourth quarter and we’re just coming off a mechanics standpoint I mentioned we had. Dell revenue was up I think almost 62% year-over-year. So we just saw stronger growth in SMP mainly because of the Simpana 7.0 launch along with 7.0.

Aaron Rakers – Wachovia Capital Markets

So going forward given that you just ramped on the OEM side this last quarter we should start to see that kick in?

Robert Hammer

The most important stat is look at the combined number and that is probably the most relevant number.

Aaron Rakers – Wachovia Capital Markets

With regard to the Sun relationship, is there any contribution this last quarter from Sun and if not when do we start to see that flowing to the model?

Robert Hammer

Well in our model we have included very little Sun revenue in our own FY 2009 model. That doesn’t mean that we’re not seeing some really good activity out there. We should see it in the second half of FY 2009 but in our models there is very little in the model.

Aaron Rakers – Wachovia Capital Markets

On Aero given the discontinuance of the Symantec relationship with them, have you seen any impact thus far and what is your expectation with regard to continuing to ramp that Aero relationship going forward?

Robert Hammer

I think Lou mentioned that Aero went from 14% of revenue to 19% from Q3 to Q4. Clearly that channel is working for us and it certainly will make it a lot easier for us to work with Aero since they are focused on [inaudible] and with two vendors it just makes it a lot more efficient particularly as we move to their ATI division and so it clearly will help.

Aaron Rakers – Wachovia Capital Markets

I was wondering if you could talk about your strategy around software as a service and what looks to be more of a subscription-like model. Is there anything in terms of impacting the model as we go through fiscal 2009?

Robert Hammer

Software as a service is a strategically important sector for us. We have been in that business now for many years, actually, in terms of making sure that our core platforms can be used as a very effective engine for companies who are selling software as a service. What we are selling to companies like Incentra is in the rack spaces and the [inaudible] origin so they are using our product to support their SaS customer base.

We are being very aggressive there from an innovation standpoint and a go to market standpoint. We think it is really important but we are not going to get into the brick and mortar side of that business in terms of building the data centers and providing the direct services except some exceptions like ROMs and things like that.

But what I think of this is we’ve got the best singular platform in the industry which makes it easy to take complexity out and easy for companies to plug their platforms in and provide those data management and information management services to their customers. We’re going to be very active in that sector.

Operator

The next question comes from Steven Koenig - KeyBanc Capital Markets.

Steven Koenig – KeyBanc Capital Markets

You talked a little bit about your strategic advantage and your competitive advantage. I’m wondering about tactically are you still seeing competitors use pricing. Everyone uses pricing to win deals, but are you seeing anyone behave irrationally? Is Symantec still giving away licenses? Are you seeing maintenance being discounted? What are you seeing tactically out there?

Robert Hammer

We still see some of those things in the market but I think we like to still let our numbers speak for themselves. We’re growing about three times faster than the market. So whatever our competition is doing we seem to be able to effectively compete and increase market share and our robust growth rates relative to anybody else out there. It doesn’t mean those things don’t go on but we seem to be able to compete effectively in spite of it.

Steven Koenig – KeyBanc Capital Markets

Shifting gears to your product road map. You addressed SaS a little bit. I’m wondering if you can just comment generally on how you expect the market to be different a year from now? How your product road map expands to address that?

Robert Hammer

On the last call I mentioned we are focused on a number of areas that will come in our next release. We talk about the whole backup/recovery in terms of how that is going to be managed. We’re going to be innovating there. We said clearly that we would be adding block level D duplication in addition to our single instancing.

We have got next generation technologies that are tied to inter-managing data in virtual server environments. We think managing remote devices and things like workstations and laptops we think are important to bring in under platform control. We talked about improving our data classification and extending that to Unix and Lennox. We said databases aren’t being managed as effectively as they could and some next generation database management is required.

Those are some of the key things that we are working on. We’re making, I would say, outstanding progress in bringing some of those concepts to market.

Steven Koenig – KeyBanc Capital Markets

Are you still expecting to target that by the end of this calendar year?

Robert Hammer

All we said was that typically we release products somewhere in the 18 month from prior releases. We haven’t given any dates. That has been our historical.

Steven Koenig – KeyBanc Capital Markets

Cash flow from operations, how should we think about how that grows? Should it grow in line with adjusted earnings, etc., more or less?

Louis Miceli

I think you should think about it in terms of the historical track record we have. I think you’ll probably find it will be similar to the past couple of years.

Robert Hammer

EBIT is your key variable there.

Operator

The next question comes from Tim Klasell - Thomas Weisel Partners.

Tim Klasell – Thomas Weisel Partners

On the new sales hires you have added throughout the quarter was there some extra productivity there and does that help to drive the beat on the top line?

Robert Hammer

There was extra productivity but those hires that we are hiring in Q4 and Q1 as I mentioned earlier the full impact from those hires won’t be felt for a couple of quarters. So the growth that we saw were based on investments we made earlier in FY 2008 and don’t relate to that hiring. That will come into play a little bit later in FY 2009.

Tim Klasell – Thomas Weisel Partners

On the pipeline, how do you feel about the pipeline at this point versus this time last year as you were going into your Q1? How is your closure rate is the real question?

Robert Hammer

I think it is very different, Tim. One, we are seeing many, many more very large deals in the pipeline than we did a year ago. That is across all geographies. We are seeing success there. Clearly and when you look at the pipeline the impact of non-backup is really high. It is really different. We didn’t have Simpana a year ago.

We’re seeing that we are pioneers in backup to disk and focusing on recovery. Now that is becoming a standard concept. I was fully surprised to see Gartner come out with its latest market scope and I think they are right on the mark in terms of their perspective on what is going on out there. I suggest you all read it because it is pretty accurate in what we see in terms of current market dynamics and what the customer needs at this point.

As far as our pipeline it is larger deals, clearly products like archiving and those kinds of things we see having an impact to our pipeline and clearly things like modern data protection and our advanced data management are clearly having an impact on our growth. Then you have got the fact that our international engine is just a lot stronger than it was a year ago and we’ve had a lot of success in expanding internationally. I’d say the whole complexion of our pipe and outlook is quite a bit different than it was 12 months ago.

Tim Klasell – Thomas Weisel Partners

On the international side those are pretty impressive numbers. Any particular geo that is doing much better than the rest or is it pretty broad?

Robert Hammer

It is pretty broad, fortunately.

Tim Klasell – Thomas Weisel Partners

Lou, better international sales and larger deals all that is good but it does drive DSO’s up. What is the range we should be expecting going forward now that it looks like the business composition is a bit different?

Louis Miceli

I would expect it to be somewhere in the 60’s. Perhaps at the current level. I wouldn’t be concerned if it went up a little bit. As I said the quality of the receivable is strong. I think we have best-in-class revenue recognition practices and thorough review of it before we book it from a credit point of view. So yes as we continue to grow the business you might see it go up a bit. I think it will probably hang at the 60’s at some level.

Operator

The next question comes from Phillips Winslow - Credit Suisse Securities.

Phillips Winslow – Credit Suisse Securities

On R&D, it has been turning up $100,000 to $200,000 a quarter for most of fiscal 2008. Just curious if you are expecting that similar type of headcount add when you look ahead towards 2009?

Robert Hammer

We expect something similar.

Phillips Winslow – Credit Suisse Securities

When you do look longer term at this model obviously you are expecting a big kick up with 150 and margin expansion in fiscal 2009. 2008 was reasonably similar in EBIT. When you do think about this long-term model are you comfortable with the long 150 basis points over the next three to five years or does that change at all?

Robert Hammer

We are really confident, Phil, and I mentioned on a prior call that our internal objective is to hit $500 million. We haven’t said when. And to have operating margins in the low 20’s. We are right on the path of achieving that objective. You just take our numbers and track them out and you can plot it out. I won’t mind saying we are very confident we will be able to achieve that objective.

Operator

The next question comes from Michael Turits - Raymond James & Associates.

Michael Turits – Raymond James & Associates

The stuff that you said helped this quarter are things you have been working on for awhile, there were two specific things in terms of [inaudible], core softness [inaudible] and U.S. [inaudible]. What was it that happened differently? What did you see that [inaudible] specific things?

Robert Hammer

Both of those tie together. Obviously the U.S. had a very solid quarter and if you look at the stats with that quarter-on-quarter growth it drove up our core business as well as accelerated the growth on our emerging. So those were tied together. I would say that the U.S. had very high sales productivity during the quarter. It had a very strong execution in the market quarter. They just executed well across the board.

Michael Turits – Raymond James & Associates

I know you had restructuring. Was there anything there in particular?

Robert Hammer

Yes, our restructuring has had a lot to do with that. Those restructuring were material in the improved productivity of the U.S. There is no question that those areas that we restructured performed exceptionally well. So those investments we made which were a little bit painful at the time have turned out to be, those teams are doing extremely well. We are really happy with those new teams. They had a material impact on our ability to execute in the fourth quarter.

Michael Turits – Raymond James & Associates

On the core, was it just the same thing because that had really been flattened? It had been a concern to us but the backup going a little competitive? Were you doing?

Robert Hammer

It’s just that I wouldn’t read too much into it from the December quarter. I think the market read a lot more into it than obviously we understood here internally in terms of things that were driving the business. It’s not that the core backup is unimportant because it is still important to this company. I’m just saying that if you look at the broader industry trends is driving the things that are right in line with the Simpana platform. So you are still selling backup. That backup copy is still an important copy but it is part of a much more comprehensive solution. Those were the points I was trying to make.

Michael Turits – Raymond James & Associates

If you had to characterize the competition against Symantec would you say that it is the same level of difficulty? Or easier or better this quarter versus last quarter?

Robert Hammer

Actually obviously our growth went up and our growth rate accelerated so I think that speaks for itself. But Symantec is our toughest competitor out there. They do an effective job. They are a really good competitor and we consistently outperform them. Our intention is to continue to do that through value to our customers.

Michael Turits – Raymond James & Associates

Obviously a very strong top line quarter and you compete on the bottom line but the margins did come in a little bit below guidance and it looks like you spent a little bit more I would assume in sales and marketing to throw that. Is that right? Where did you end up spending more than you expected and how do I get some confidence going forward that you have a handle on what that spending is?

Robert Hammer

I said a last quarter that we were going to increase our spending. Obviously we are trying to do this Mike, not sustained. We want to grow this company at consistently high rates relative to market growth. We think with the changing dynamics out there and the product line we have and the necessary to get a broader reach that those investments were appropriate.

A year ago we spent a lot of money on international and bringing Simpana to the market. Obviously that paid off for us. We think that the additional investment we are making now particularly in the Americas in terms of feet on the street, additional market awareness and continued investment by the way in international will also pay off in the long run for our shareholders.

We’re really confident about that. We said in light of that our operating margin growth would drop from 2% to 3% to about 1.5%. That is basically where it is and that is the guide we’re giving for FY 2009. It is pretty consistent with our investment strategy and growth objectives.

Operator

The last question comes from Walter Pritchard - Cowen and Co.

Walter Pritchard – Cowen and Co.

What was the impact on the quarter to revenue in currency?

Robert Hammer

Obviously Walter with the higher international and with the currency you’re going to get some.

Louis Miceli

I don’t have it for the quarter. For the year it was a couple percent. If you want a number I’ll have Mike follow-up with the quarter number for you.

Walter Pritchard – Cowen and Co.

Any headcount number that you would associate with your guidance for the year ending headcount?

Robert Hammer

We haven’t given out ending headcount for FY 2009.

Operator

There are no more questions at this time. Thank you for your participation in today’s conference. You may now disconnect.

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