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Executives

Mike Picariello - Director of IR

Bob Hammer - Chairman, President and CEO

Louis Miceli - CFO

Al Bunte - COO

Analysts

Tim Klasell - Thomas Weisel Partners

Aaron Rakers - Wachovia

Tom Curlin - RBC

Derek Bingham - Goldman Sachs

Michael Turits - Raymond James

Jayson Noland - Robert Baird

Brian Freed - Morgan Keegan

Steve Koenig - KeyBanc Capital Markets

Phillips Winslow - Credit Suisse

Walter Pritchard - Cowen

CommVault Systems Inc. (CVLT) F1Q09 (Qtr End 06/30/08) Earnings Call August 4, 2008 5:00 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to CommVault fiscal first quarter 2009. (Operator Instructions).

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

Mike Picariello

Good afternoon. Thanks for dialing in today. With me on the call are Bob Hammer, Chairman, President and Chief Executive Officer, Al Bunte, Chief Operating Officer and Lou Miceli, Chief Financial Officer.

Before we begin, I would like to remind everyone that statements made during this call including in the question-and-answer session at the end of the call, that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectation.

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 circumstances.

Our earning press release was issued today over the wire services after the market closed and has also been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website. On this conference call, we will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found on Table IV accompanying the press release and posted on our website.

This conference call is also being recorded for replay and is being webcast. An archive of today's webcast will be available on our website following the call.

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

Bob Hammer

Thanks, Michael. Welcome everyone and thanks for joining our fiscal first quarter 2009 earnings call. For the quarter, we achieved revenues of $55 million, up 25% on a year-over-year basis, versus $44 million in fiscal Q1, 2008. Software revenue grew on a year-over-year basis by 15%, while our services business grew 37% year-over-year.

For the quarter, non-GAAP operating income or EBIT of $7.2 million, up 16% year-over-year versus EBIT of $6.2 million in fiscal Q1, 2008, non-GAAP earnings per share for the quarter was $0.12. Lou Miceli will provide more details on the financial results along with the updated guidance later on in the call.

As you are already aware from our press release, the results for the quarter are lower than our historical growth rate and below our expectations. The biggest issue that negatively impacted the quarter was the timing of deal flow with several large deals moving into Q2. In contrast, our overall sales funnel increased significantly from its previous high in Q4, FY '08, and our enterprise deal funnel is also very strong, but we also have very good visibility of our large enterprise deal funnel going into Q3.

We had a strong July, which validated the underlying strength of the business. In fact, dollar volume enterprise order received so far in the quarter were over 85% of the dollar volume of enterprise orders recognized in all of Q1 '09. The growth in the overall funnel big deal pipeline in July orders indicate healthy demand for our products across all geographies.

In summary, we had increasing visibility early in Q2. We continue to see very little negative impact from the current economy. As a result of our confidence in the underlying strength of the business, we are reaffirming and modestly raising our guidance for FY '09.

In addition, due to the uncertainties in the equity markets and the macro environment, we feel that is prudent to provide quarterly guidance for the remainder of this fiscal year. When conditions become more stable, we will reevaluate our position on providing quarterly guidance. We will provide both Q2 and updated fiscal 2009 guidance later on in the call.

Now, I will address specific Simpana and enterprise deal status. As a result of the deal for which we believe that the Simpana revenue percentages and the enterprise deal status are indicative of the underlying strength of the business. We added 326 new customers in the quarter. As usual the new customer additions do not include a large number of small quarter orders from OEM customers, who registered through the internet. Our customer base now totals approximately 8,500.

Let's talk about Simpana. For fiscal Q1 2009 sales of our advanced data and information management products or ADIM is a product, which do not include backup products represented 27% of software revenues versus 15% in Q1 of last year.

Archiving, single instancing replication and search functionality are key drivers of the growth for these products. Enterprise deals carry a much higher percentage of the advanced data and information management products. ADIM product sales were up 109% in Q1 FY'09 from Q1 FY'08.

As I previously mentioned, we clearly see our business moving into a broad base heterogeneous data management business, where backup is only one of the functions our products address. In fact as I have also mentioned before our next-generation data management technology will shift the data management burden further away from traditional backup. The demand for our Simpana 7.0 Software Suite remains strong. Currently just over 40% of our entire install base that either upgraded to or has purchased the Simpana suite.

Let's talk about enterprise deals. In the first quarter of fiscal 2009 approximately 29% of our software revenue came from deals over 100,000, compared to 26% in the first quarter of last year, and down from 41% in the fourth quarter of fiscal 2008. The dollar volume of deals over 100,000 grew 30% year-over-year, increasing competitive advantage of our unified suite of products leverage from our strategic distribution partners and increased market awareness has contribute to the year-over-year increase in enterprise deals.

In addition, our expanded sales force in the US is making progress, reaching full productivity levels and our global sales force continues to drive larger deal volume, which we believe has increased our visibility into Q2.

In deals over 100,000 sales of our advanced data and information management products represented approximately 38% of the sale in the first quarter, compared to 17% of the sale in the first quarter of fiscal 2008.

Moving on to international growth. International operations generated 41% of our total revenues in the quarter with United States operations generating 59%. International revenue was up 40% in Q1 FY'09 versus the same quarter a year ago.

We continue to expand our international distribution with strong growth in Europe, Canada and Australia. We anticipate that our international expansion will continue to be a major contributor to our growth as we are getting solid distribution leverage internationally.

Moving on to Dell and HDS. Sales through both our OEM and SMP relationship with Dell accounted for approximately 21% of total revenues for Q1, 2009. Total Dell revenues were up 21% over the same quarter last year. We feel that our relationship with Dell is a strong it has ever been and we look forward to announcing new strategic initiatives with Dell during fiscal 2009.

HDS, while we do not disclose HDS revenue as it is less than 10% of total revenue, we continue to see significant year-over-year increases in Hitachi license revenue in international markets. We believe that this relationship will continue to be a meaningful partnership, which will contribute to our overall success.

Let's talk about our stock repurchase program. Given the underlying fundamentals for the business and our confidence in achieving our full year operating plan, our Board of Directors has decide to do double the side of our stock repurchase program. The board had previously approved a stock repurchase program of $40 million that they have now increased to $80 million.

In order to keep those strong cash balance while accelerating our stock repurchase program the company has opened a $40 million credit facility with Wells Fargo, which we currently intend to use exclusively for stock repurchases.

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

Lou Miceli

Thanks, Bob, and good afternoon everyone. I will cover the financial highlights for the first quarter along with updating our fiscal year 2009 guidance. I will begin with revenues. For the first quarter, total revenues were $55 million, an increase of 25% year-over-year, and a decrease of 3% sequentially.

Software revenues were $27.7 million, an increase of 15% year-over-year, a decrease of 12% sequentially. Services revenue was $27.3 million, an increase of 37% year-over-year, and 8% sequentially.

The overall sequential decline in software revenue for the quarter was driven by lower software revenue in the US, as a result of lower volume of enterprise deals in the quarter, which was caused by a few deals slipping into Q2. While we expected the quarter to be flat to slightly up, we are still confident with our ability to hit our Q2 and full year revenue growth targets, which I will address when I cover guidance.

For the quarter the growth of software revenue internationally was 36% and in US, it was 1% over the prior year period. Software revenue generated through indirect distribution channels was approximately 84% of software revenue for the quarter, compared to 76% in the prior year period.

The shift towards higher indirect revenue is the result of an increase in software revenue from our international operations, which is sold mostly through indirect channels and a shift in the United States to indirect distribution channels being driven predominantly through our growing relationship with Arrow's ATI division.

Approximately 19% of revenue for the current quarter was sold through our distribution agreement with Arrow compared to 8% in the prior year period. While we continue to invest in both our channel distribution and our direct sales force, we expect to see a continuing trend of increasing revenue sold through indirect channels.

The revenue mix for the quarter was 50% software and 50% services. While this is not inline with our historical levels, we still anticipate the split for the year to be 55% software and 45% services. 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 rate continues to remain very high and our renewal rates remain strong on a worldwide basis. Gross margins were 86.3% for the quarter. Gross margins on our software revenue were 97.5% in the current quarter versus 98.1% for the prior year quarter. Gross margin for service revenue was 75% in the current quarter versus 70.9% in the comparable prior year period, due to a higher mix of maintenance contracts relative to professional services.

Now moving on to operating expenses. Total operating expenses were $39.4 million for the quarter, sales and marketing expenses increased by $6.1 million or 30% over the prior year period. Approximately two-thirds 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 primarily due to higher travel and other related expenses.

Research and development spending increased by about 900,000 in the quarter, or 15% over the prior year period. We continue to leverage our investments in R&D by expanding our Hyderabad, India location.

G&A expenses increased by $1.6 million or 35% over the prior year period. This increase primarily relates to higher headcount, higher public company costs, as well as higher legal expenses. We added 67 employees during the quarter bringing total worldwide headcount to 933 at the end of June.

The headcount increases were primarily in sales, customer service and support. Non-GAAP operating margins were 13.1% for the quarter, resulting in non-GAAP operating income of $7.2 million. This represents EBIT growth of approximately 16% year-over-year.

The non-GAAP net income for the quarter was approximately $5.5 million and non-GAAP EPS was $0.12 per share based on a diluted weighted average share count of approximately 44.9 million shares.

Now moving to the balance sheet. Cash flow from operations was approximately $14.1 million in Q1, up 141% over the prior year quarter, due to changes in accounts receivable balances. Free cash flow, which we define as cash flow from operations less capital expenditures came in at $12.5 million for the quarter; up 171% over the comparable prior year quarter.

As of June our cash balance was $98.2 million, up approximately 7% from $91.7 million at the end of March. During the quarter, we repurchased approximately 684,000 shares of our common stock for approximately $11.4 million of which $7.8 million was paid for as of June 30, 2008.

Under the current program, we now have purchased approximately $26.4 million of CommVault stock in the last two quarters. We are also announcing an increase to the stock repurchase program of an additional $40 million increasing the total stock repurchase program to $80 million, which means that we have $53.6 million remaining to spend on future potential stock repurchases through August 2009.

In order to maintain our liquidity position, while accelerating our stock repurchase program, we have opened a credit facility under which we can borrow up to $40 million at favorable interest rates. Borrowings under this facility can be used to repurchase our common stock under the repurchase program or to provide for working capital and/or general corporate purposes. However, we currently intend to use this facility exclusively for stock repurchases.

We believe our stock is currently undervalued and we will continue to be active in our stock repurchase program. Our DSO was 69 days. This is up from 63 days in the prior quarter and is primarily due to lower revenue on higher average accounts receivable balances.

Deferred revenue increased $3 million or approximately 5% sequentially over the prior quarter. Capital spending was approximately $1.6 million in the first quarter. Our current estimate for fiscal year 2009 capital spending is between $5 million and $5.5 million.

Now on to taxes. The company used a non-GAAP pro forma tax rate of 30% for Q1, 2009, compared to 28% in Q1, 2008. The GAAP tax rate for Q1, 2009, was 32%, and we currently estimate that our fiscal year 2009 GAAP tax rate will be in the range of 30% to 32% based on our current assumptions.

The cash tax rate was less than 10% for the quarter. Our cash tax rate in the US will remain lower than the GAAP income pro forma non-GAAP rate for the foreseeable future, mainly due to deferred tax assets that we currently have on our balance sheet. However, in most foreign locations, where we are profitable, we do not have any NOL carry forwards.

As a result, we currently expect that our fiscal year 2009 cash tax rate will be in the low teens. 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% to 32% over the next few years.

Now move on to guidance. As Bob previously mentioned, we are providing Q2 guidance and updating our fiscal 2009 guidance. For the three months ending September 30, 2008, our total revenue guidance is $63 million, which represents revenue growth of 33% year-over-year and 15% sequential growth.

Based on this revenue level, we are expecting Q2, 2009, non-GAAP gross margins to be approximately 87%. We are also expecting non-GAAP EBIT margin of 16.5% for the quarter. Based on this guidance, our total revenue growth for the six-month period would be 29% and EBIT growth would be 33%.

While we intend to be active with the remainder of our stock repurchase program, we did not take into consideration any stock repurchases in our earnings per share calculations. Using a share count of approximately $44.6 million and applying a pro forma tax rate of 30% for the quarter, we are expecting non-GAAP earnings per share to be $0.17 for the second quarter of fiscal year 2009.

The quarterly non-GAAP guidance exclude approximately $0.04 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 $0.02 per share.

Now for the full year guidance. As a result of our confidence in Q2 and our outlook for the balance of fiscal year 2009, we are also raising our guidance for fiscal 2009. We anticipate fiscal year 2009 revenues to be approximately $250 million, which represents revenue growth of 26% year-over-yea. Based on this revenue level, we are expecting fiscal year 2009 non-GAAP gross margins to be 86.7%. We continue to expect that we will improve non-GAAP operating margins by about 150 basis points above fiscal year 2008 levels for a non-GAAP EBIT margin of 18%.

Using a share count of approximately 44.5 million to 45.5 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 $0.72 to $0.74 per share. Our guidance includes an interest income rate assumption of 2% to 2.5% on expected cash balances, but does not include any potential interest expense from our credit facility.

The non-GAAP guidance exclude 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 and with that, let me turn the call back over to Bob.

Bob Hammer

Thank you, Lou. As I mentioned at the start of the call, our Q1 growth rate was negatively impacted by the timing of the closing of several large deals. The fundamentals of our business remain strong. Our funnel growth and strong start to the Q2 quarter gives us confidence we would be at or ahead of our expectations come mid year.

In addition, we believe our fully staffed sales force and the strength of our expanding distribution will enable us to meet our revised upward guidance for the balance of fiscal 2009.

I would like to talk about distribution. We have made excellent progress in bringing the US sales force up to full staffing levels that are required to hit our growth targets. We are making progress and expanding our relationship with Arrow. We are in execution mode with our new European distributor Magirus.

We are in a process of expanding our relationship with Adnet in EMEA. We continue to make substantial progress in broadening our geographic coverage including discussions with other strategic global partners. We have signed an amendment to our existing OEM and resell agreement with HDS, which should enable us to increase our effectiveness through HDS.

And the last week Dell and CommVault signed a three-year agreement and broadening distribution of CommVault Simpana software and services, through Dell software and peripheral channel on a worldwide basis.

The CommVault-Dell will offer its customers, a full spectrum of data information management solution that reduce costs and complexity for Dell and their customers. We are also making progress on additional avenues of distribution, which we are forecasting to have completed and in place in our fiscal fourth quarter.

In summary, we are continuing to broaden our global distribution reach, in order to meet our near-term and longer-term growth objectives.

I would like to talk now about innovation and future product direction. Let me spend a few minutes updating you on a progress on our next-generation technologies. As I have mentioned before, we have been investing substantial amounts to ensure that we increase our highly differentiated value proposition in the market.

Our next Simpana release will be by far the largest release in our history. Typically we introduce a new release about every 18 months. Considering we release Simpana 7.0 in July of 2007, our next major release is on track and we are looking forward to some new product announcements later in our fiscal year.

Our internal testing on our upcoming release confirms our belief, that this release will enhance our competitive position in our core data management market, open up new market opportunities and broaden our position in information management. As I have mentioned previously, the release will include the following.

Breakthrough new ways to manage data protection, significant innovations for block-level de-duplication, next-generation automated records management, better ways to manage workstations and laptops, better ways to manage the growth of databases, enhanced data management and personalized server environment, and next-generation technology for the management uptake.

In summary, with these products and a strong distribution engine behind them, I am confident about the core strengths of the business including the growth of our ADIM products.

I was not satisfied with our overall Q1 results, although I was pleased with the growth of our international operation and the significant growth of our global funnel. I am very encouraged with the strong start to Q2 both domestically and internationally, including the number and size of large enterprise deals won and that are in our funnel.

As discussed, we are making excellent progress in broadening and strengthening our global distribution capability. We are also really excited about the depths and breadths of innovations in our next software release.

We believe, we are the best position company to meet the current and future needs of the industry, which is why we have raised our annual guidance for FY '09 and doubled our stock repurchase program.

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

Mike Picariello

Thanks Bob. Before we open the lines for your questions, I would like to highlight a few upcoming Investor Relations events. Al will be speaking at the 2008 Pacific Crest Technology Leadership Forum at Vail Colorado, tomorrow, August 5th at 1 pm Eastern Time.

In addition he will be speaking at the 2008 North American Technology Conference hosted by RBC Capital Markets in San Francisco on August 7th at 2 pm Eastern Time. Al's presentations will be available live on our Investor Relations website and will also be archived for 90 days.

Finally, we will be hosting our annual stockholders meeting on Wednesday August 27th, at 1 pm Eastern Time in Eatontown, New Jersey. Details and live webcast are available on the IR section of our website.

Can we please open up to questions, now?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question comes from the line of Tim Klasell with Thomas Weisel Partners. Please proceed.

Tim Klasell - Thomas Weisel Partners

Yes, good afternoon, everybody. A part of question that comes top of my mind here, some of the large deals that stretched out a little bit have they already closed in this quarter?

Bob Hammer

Some of them have, Tim. When I am talking about large deals, we typically talk about deals over 100,000, but there are quite a few deals that are well north of $1 million and we have strong bookings in that category already in Q2.

Tim Klasell - Thomas Weisel Partners

Okay, very good. And as we think of CommVault overall, as you begin to add more and more high level products and the deals are getting larger should we be thinking differently about the amplitude of the seasonality versus what we have seen historically from CommVault?

Bob Hammer

Well, if it wasn't for the results this quarter? I'd say no. When we talk about deals over $1.0 million, Tim, and now we are talking about deals in the millions.

I mean that these are in the $3 million to 5 million, one shot deals that are first orders. Some of these deals are extremely large and we have many more deals over $1 million in the funnel and a few of those slip and they can skew the numbers and make things look differently than they really are.

So, hopefully given the breadth and depth of the distribution, the basic catch up on our hiring that we can minimize what happened this quarter. What the point is for the year our overall outlook for the business has not change. Yes, just unfortunate we had the result we have this quarter, but it's really unfortunate given the underlying strength of the business.

Tim Klasell - Thomas Weisel Partners

Okay, great. Then one final question here on your biggest competitor out there, put up some pretty good numbers on their storage management business and has there been anything changed out there in the competitive landscape?

Bob Hammer

No, our competitive win rate against Symantec and against the other major competitors does not changed one iota. We have said in the past that the win rate, once it ends up and our deal ends as our funnel is approximately 90% and that has not changed at all.

I congratulate Symantec on their numbers, but that had nothing to do with CommVault as far as our win rate relative to Symantec.

Tim Klasell - Thomas Weisel Partners

Okay, very good. Thank you.

Operator

Your next question comes from the line of Aaron Rakers with Wachovia. Please proceed.

Aaron Rakers - Wachovia

Yes. Thank you for taking the question, a couple of questions as well. Going back to the deal slippage, Bob, could you say if it were for maybe throw a number out there, a couple, four, five large deals that had slipped, would you had basically hit the expectations that you would guided for the quarter?

Bob Hammer

We have exceeded those expectations.

Aaron Rakers - Wachovia

So, what I am trying to understand that is, if you have a funnel build, and it sounds like there is larger deals north of $1 million that are taking a little bit longer just to effectively close. How do we get comfort that won't be the case this quarter here as we come up into the final couples of weeks of September?

Bob Hammer

Well, there is a big difference is that, as I mentioned in my earnings overview that we have already closed 85% of the number we closed all last quarter. In other words, what I reference is, we have in our hand orders that are in our hand that equal 85% of the numbers that we booked in Q1 already. So, we will exceed all of what we booked in Q1 in the very near future here.

Lou Miceli

Deals over 100,000.

Aaron Rakers - Wachovia

Over a 100,000? Okay. And then maybe if I could shift gears, one thing that was mentioned that is new in my opinion is that the signing of the three-year relationship with Dell. Maybe you could elaborate on that a little bit? And also maybe talk a little bit about what you are doing to expand the relationship with Arrow?

Bob Hammer

Okay. On Dell we have always had an SMP contract with Dell that we sold globally. It didn't include all our products and it include all their verticals and this includes all of CommVault's Simpana and all of Dell's verticals.

So, it basically augments our OEM relationship and there is more to come on Dell. We are doing up some other things with Dell. So, it was a win-win expansion of our Dell relationship.

Aaron Rakers - Wachovia

And on Arrow, I guess post Symantec and Arrow part of ways I guess?

Bob Hammer

Well, we mentioned in the past that we moved from one Arrow division to the ATI Division, which is a much more solutions-oriented division.

We are training their technical people now and have their sales people trained (Inaudible) Symantec. And the way so that focusing on CommVault and they are putting a lot of people through training to be a lot more effective with our value-added resellers.

Aaron Rakers - Wachovia

Okay. Final question if I may. Can you break down how significant maintenance is within the services line?

Bob Hammer

We typically have not, you know from past history what that was, but we have not disclosed that number publicly.

Aaron Rakers - Wachovia

Okay, fair enough. Thanks guys.

Operator

Your next question comes from the line of Tom Curlin with RBC. Please proceed.

Tom Curlin - RBC

Hey, good afternoon. As you look at some of these larger deals, do you think that part of what is happening here is a learning curve for the sales force in terms of getting deals of this size done or maybe the amount of friction that you see competitively as you win deals of this size?

I would have to thank that you are showing up more on the radar screen of competitors if you are heading into $3 million to $5 million deal size range?

Bob Hammer

Yes, Tom. Almost all the once that slipped and nothing to do with competition. They were procurement related in almost all cases, not all, but they are mainly deals that we thought would close at sufficient time in the closing process to get these deals done and for one reason or another they got stuck and came out on the other end of the quarter.

It was just I'd say look at the tranche I am really unfortunate given looking the strength of our funnel. As we entered this quarter, in fact going to the end, we feeling, really good here not only about Q1, but Q2, the funnel is big and obviously deals, are probably going to over achieve, the number and we did, but I'd say in a vast majority of the cases nothing to do with competition those are just in the category, but stuff happens and fortunately the vast, vast majority of those would be in, either are in our hands or will be in our hands in Q2.

Tom Curlin - RBC

Can you talk about the mix of these deals? Are these broad Simpana full suite?

Bob Hammer

These are broad Simpana full suite deals, you bet.

Tom Curlin - RBC

Okay.

Bob Hammer

And big, some of them most extremely large.

Tom Curlin - RBC

Any particular verticals that might be new to you as a result of the traction?

Bob Hammer

They are still horizontal.

Tom Curlin - RBC

Okay.

Bob Hammer

But we are seeing globally by the way a lot of deals in government sector.

Tom Curlin - RBC

Okay, alright. Thank you very much.

Operator

Your next question comes from the line of Derek Bingham with Goldman Sachs. Please proceed.

Derek Bingham - Goldman Sachs

Hi, my first question, of the 85% of the enterprise volume from last quarter that you closed already. How much of that, is it safe to say that almost all of that were deals that you were expecting to close last quarter?

Bob Hammer

Yes.

Derek Bingham - Goldman Sachs

And then you mentioned the dollar volume of large deals was up strongly up 30%. So, I was curious on the smaller more transactional deals. How are those growing? How does those growing?

Bob Hammer

They exceeded our forecast, the smaller deals. So, this was a large deal issue clearly. It wasn't a small deals, that was surprisingly strong and in addition to that, the amount of ADIM in those smaller deals was also surprisingly strong given the fact that our enterprise deals were off. We were surprised that our ADIM sales as a percent of revenue were so high and it grew 99% year-on-year.

Derek Bingham - Goldman Sachs

And the transactional trends so far that you are seeing in this quarter so far. How are those holding up?

Bob Hammer

I just off a revenue call and that's why we raised guidance. Our criteria to raise guidance for the quarter and the year was that, just to validate what we thought in terms of what was slipped and the size of the funnel, what came into the funnel and what was on track to close in Q2.

So, we are feeling really good at the moment. But at the end of the day it's what is booked. What gets in here is orders and what is booked by finance is going to determine, but right now we are feeling really good, about not only the quarter, but the visibility of some of these really large deals going on at the Q3 and Q4 are coming in very strongly also. I am talking about not only deals over 100,000 we are talking about deals well over $1 million.

Derek Bingham - Goldman Sachs

Got it, okay. Thank you very much.

Bob Hammer

Your next question comes from the line of Aaron Schwartz with JPMorgan. Please proceed.

Aaron Schwartz - JPMorgan

Good afternoon. I had a question on the deals that didn't close in the quarter. Should we read anything into that in terms of you being disciplined around pricing in terms of maybe not discount into close deals in a quarter or was that purely a procurement deal that was just out of your hands?

Bob Hammer

It wasn't pricing, Aaron. We are disciplined. We are maintaining our discipline. So, we didn't try to move things by significant discounting in almost every case these were closing process, procurement issue of which I will, but some of those can sound really silly, but why it is a multi-million deal did not close, but they didn't on just things that happened in the procurement process. So, it had nothing to do with pricing.

Aaron Schwartz - JPMorgan

Okay. And if we look at the full year guidance you raised that number. Can you talk about the close rate assumptions there? Is it a stable close rate assumption or you just have a larger pipeline at this point or did you actually change the close rate assumption because you just have more traction with some of the sales investments that you made in recent periods?

Lou Miceli

Well, we assumed a more normal close rate than we had last quarter because last quarter was unusual. The raising guidance clearly ties to our visibility, when you are closing seven figure deals they cover a lot of territory. The funnel of those deals is highest as ever been in our history and we have good visibility to them and that gives us more confidence in validating not only the funnel itself, but raising our guidance.

Aaron Schwartz - JPMorgan

Okay. And then lastly for me on the expense side, it sounds like you are done with the catch up hiring in the Americas, if that's the right term for it. This is the expense that you had in Q1, is that of the normal run rate we should look at outside of additional commissions or will you continue to add internationally, are going to continue to be hires that we should think about when modeling the sales and marketing out?

Bob Hammer

As I mentioned in the call, to-date we have not seen an impact on our revenue or funnel build from the economy. If I said in last quarter, so, it does not mean we will given the uncertainties we see out there, but to-date, that hasn't impacted us.

We are extremely confident about, where we are as far as competing technically against our major competition. We have got a really significant new release coming out, that we are now confident about what it is and when it is going to come out. We are expanding distribution and we are opening up more markets and we are seeing on a relative basis our ability to compete in general is going up.

For given that, we are continuing to invest as I have mentioned in the past for long-term sustainable growth for the company and we are continuing to make those investments.

Aaron Schwartz - JPMorgan

Okay. That's helpful. Thanks for taking my questions.

Operator

Your next question comes from the line of Michael Turits with Raymond James. Please proceed.

Michael Turits - Raymond James

Hi, guys. Were there anything in the deals that slipped, did any of the customers mention budget issues there in anyway?

Bob Hammer

Yes, one was a budget issue because somebody took the money out of the wrong bucket and had to be re-bucketed. But by most of them, which may sound silly, but when you take a multiple seven figure deal and it is in the wrong bucket and it cost a few weeks, it has an impact, right?

There are budget issues out there, but at the end of the day, there is enough money in our funnel and deal closings for us to hit our numbers. There has been some I call at the margin issues related to budget, but those issues really didn't impact our results.

Michael Turits - Raymond James

And then as you move to larger deals, is it just a question that now you need to maybe readjust, what you think of the typical sales cycle to incorporate longer, larger deal procurement types?

Bob Hammer

We try to do that in our forecasting, but to be honest we had so much coverage going through this quarter that we still felt, way into the quarter just because of the breadth and depth of our coverage relative to our number that we were comfortably meet or exceed that number and we didn't.

So, I don't know what to say. It was just clearly surprising and unfortunate, but that's what it was and then these deals came in. I would say that our guidance for Q2 taken into account, that we have enough coverage to hit that guidance.

Michael Turits - Raymond James

And then last question, you here on 60, 67 something headcount add this quarter. Last year you added about 140. You are going to do roughly the same amount or you doubled last quarters add so, that trail off or were going to end up going well above last year's headcount adds.

Al Bunte

We are planning on being a little above last year's headcount. Obviously as you saw we added 67 this last quarter. That was a strong hiring quarter for us on a net basis. The year we are anticipating ahead of last year.

Michael Turits - Raymond James

Okay. A little bit, not significantly?

Al Bunte

I would say modestly.

Michael Turits - Raymond James

Okay. Thanks. Appreciate it.

Operator

Your next question comes from the line of Jayson Noland with Robert Baird. Please proceed.

Jayson Noland - Robert Baird

Thank you. On the large deals you are seeing in your pipeline, $1 million and $3 million to $5 million are they rip and replace deals, taking out a competitor's product? And what would you say is the driver of these deals, is that a rearchitect type of thing with the VMware, or what is going on?

Bob Hammer

I would say Al can join in a second here, I would say in almost all cases, not all, there has been re-architect and in almost all cases there is a fairly large element of rip and replace. And Al if you want to add to that?

Al Bunte

Yes, I agree, Bob. There most of them were rip and replace. It's hitting the typical dynamics that we see out there in terms of guys are re-architecting based on server consolidation, some virtualization. Usually there is a need to hit better recovery SOAs out there and again the underlying dynamics based on data growth. So, apparently typical, but we have definitely seen it in these bigger deals.

Bob Hammer

I will also mention, we are seeing in a number of cases, competitors running into scale issues either on the frontend or the backend meaning, they are having scale issues tied to data management you call them backup windows.

On the other side difficulty in recovery and we are also another major motivator is support and reliability of managing these disparate platforms relative to our single platform.

Jayson Noland - Robert Baird

Are you guys targeting larger enterprises or are OEMs taking you in?

Bob Hammer

Well, clearly we have been as a company, we have been on what I call a student body right for now about three years to target the whole company has been reengineered to focus on the enterprise with our overlay sales force and our partners are taking us in. So, it is a combination of both of those.

Jayson Noland - Robert Baird

Then one last question for me maybe, Bob if you can talk about software as a service opportunity a little bit for the long-term?

Bob Hammer

Well, it has not shown up as a number that is greater than 10% of our revenues, but underlying that is a strong growth driver. I do not know the exact number of accounts now that use our platform as their SAP engine, but it is certainly pretty substantial and it is a major growth driver for us and everyone knows that it comes like Rackspace and Incentra, Atos Origin use CommVault as their engine.

So, we are winning quarter-on-quarter we are bringing more and more customers in who are using our platform for SAP. So, it is a major growth engine for us and I will just let Al spend a second on some of the underlying technologies that enable us to compete really effectively against our competition in this area. Al, you may want to take two seconds here.

Al Bunte

Yes, probably number one it was just a large operations in big scale. As you guys know most of these any services or SAP offerings out there have thousands and thousands of customers and therefore servers or applications to try and manage here.

A number of things we do there is really not only competitive, but vastly superior. So, then it gets into a number of things of how we move data, how we move data over networks, all of the capabilities and advantages we have in that arena.

And probably lastly, and big operational reporting and management, a number of things in our suite work really, really well again these large operation.

Jayson Noland - Robert Baird

Thanks guys.

Operator

Your next question comes from the line of Brian Freed with Morgan Keegan. Please proceed.

Brian Freed - Morgan Keegan

Good afternoon. Just a couple of quick questions. One, can you comment on the traction you saw with Sun in the quarter?

Bob Hammer

I would say Brian, it's spotty. We are getting Sun orders in now this quarter. In certain markets we have traction, in others we don't. Again there are orders coming into our funnel and closing, but it is at this time I would call it spotty.

Brian Freed - Morgan Keegan

Okay. And then secondly you mentioned block-level de-duplication is something that's a forthcoming focus of yours. Is that something that we would expect to see integrated as a feature of Simpana, or would it be something that could appear as a standalone appliance?

Bob Hammer

Well, it is clearly integrated yes it could be used as a standalone appliance in both cases. On the integration side, we are unique in that our de-duplication technology carries with it all the basic function of Simpana, you can encrypt it, you can search it, you can archive it, you can move it to tape.

So, it is clearly and its, scales much higher than the existing hardware technology that is out there and is a lot less costly. So, it is clearly, de-duplication is a function that has high value to the customers and we have fully integrated that function into our Simpana platform.

CommVault is not going to get into the appliance business, but I mentioned in the past that, we do have partners that are going to be using our code for appliances in general and more to come on that subject, when these technologies, all these products begin to hit the market.

Brian Freed - Morgan Keegan

Great, thanks.

Operator

Your next question comes from the line of Steve Koenig with KeyBanc Capital Markets. Please proceed.

Steve Koenig - KeyBanc Capital Markets

Hi, guys, thanks. Want to just get a housekeeping question out of the way. Did you say that ADIM was 27% of software revenues? Did I hear that right?

Bob Hammer

I believe that is the right number, Steve. But I am pretty sure that it was 27% this quarter down from 28% last quarter and up from 15% in Q1 FY '08.

Steve Koenig - KeyBanc Capital Markets

Okay. On the Simpana product cycle, how should we think about that as we move into the back half of the fiscal year? Should we expect that software revenue growth would accelerate as the product cycle gets a little older?

And what did you assume in guidance in terms of a new product and how do you manage that product transition so as not to disrupt your fiscal year end?

Bob Hammer

Well. We did the same thing with Simpana 7.0 and we managed that really well with our customers. And our customers can always buy, when we automatically upgrade them to the core features that are in the product they buy today and they can purchase new products at a price when we come out with a price book. So, we don't anticipate a disruption in that regard.

But I mean, we feel that's very manageable and obviously if we are coming out with this product sometime in our late Q3, Q4 that typically we don't plan for big revenue from a planning guidance standpoint, we don't assume lot of revenue from new products until into the next fiscal year which would be our FY '10.

Steven Koenig - KeyBanc Capital Markets

Okay.

Bob Hammer

But we are really confident about what we have. I mean, we are well enough down the development process obviously this far down you pretty much know what you have got and this release by the way is significantly larger than our last release. Our last release was the largest in our history and that probably wanted a new code and this release was significantly larger than our previous release.

Steven Koenig - KeyBanc Capital Markets

Okay. Regarding the Q2 here, is it possible to expect that linearity would be normal in the Q2 or should we expect the quarters be much more front-end loaded given that you probably had some large deals close here given the stats that you cited?

Bob Hammer

We wouldn't have raised guidance unless it was a lot more front-end loaded.

Steven Koenig - KeyBanc Capital Markets

Okay, that's fair. And then lastly, just a question or two about Symantec here. They look like they are now growing faster than the market. I guess the overall question is if Symantec is able to stabilize their share and you continue to grow yours as fast and now that it appears NetBackup is maybe a more stable product then it used to be and has better disk-based backup. How does your positioning change, when you go up against Symantec?

Bob Hammer

All I can say is our big deal funnel is growing. Obviously the guidance we just gave you our growth prospects seemed to be strong and Symantec got some very large accounts. We seemed to be very successful.

Steven Koenig - KeyBanc Capital Markets

Okay, great.

Bob Hammer

Part of that.

Steven Koenig - KeyBanc Capital Markets

Okay. Thanks a lot, Bob.

Bob Hammer

Thanks.

Operator

The next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

Good afternoon, gentlemen. Bob, can you shed a little light on some of those seven figure deals that are in the funnel or that have closed in terms of the deal mix on that and whether some of those came through partner or more direct? Just a little shading in terms of …

Bob Hammer

Just in general, [Gabe], it is global. What we are seeing this quarter is a lot stronger US than what you will see in the seven figure deals is deals in the US and globally. And since a much larger part of our revenue now is coming through distribution, I think that will show up in our numbers that our distribution is working and we are working with partners on a number of those large deals.

Unidentified Analyst

Would any of those touch into the, let's call it emerging markets?

Bob Hammer

You mean like.

Unidentified Analyst

China, India?

Bob Hammer

Not in Q2. But a lot of them will come from international revenue.

Unidentified Analyst

Okay. Thank you.

Operator

And your next question comes from the line of Phillips Winslow with Credit Suisse. Please proceed.

Phillips Winslow - Credit Suisse

Hi guys, most of my questions have been asked, but just wanted to do dig a little bit into your expectations for operating expense growth. You guys talked about a full year non-GAAP EBIT margin close to 18%, but 16.5% for Q2.

You guys are guiding reasonably flattish or actually I will call it about 30 to 50 bps year-over-year in the first half, but the seconds half, actually I've to take it up close to 20% to get to your full year, or call it 19%-20%. How would you expect your expenses to moderate in the second half? Is there anything going on in Q2 that's not going to continue in the second half?

Lou Miceli

I just say in general, I understand where you're going on this Phil. Obviously, we are continuing to invest and if you just work your model backwards, and you will find the answer. But, we're just giving guidance on Q2 and the fiscal year; we're not going to get into the quarterly numbers on operating expenses for Q3 and Q4.

Phillips Winslow - Credit Suisse

And well I guess, instead of a higher level, where should we expect for the majority of the focus to go between sales and marketing, R&D and G&A, and then maybe--?

Lou Miceli

It's clearly, the bulk of the investment is going to be on sales and marketing and support. They all go hand-in-hand, because you put salespeople out there, you got to put your support infrastructure in place, both field support and corporate support, and we are expanding marketing worldwide to support in a broader distribution model, so that's where the bulk of the investment is.

We will continue to invest in there, I mean, we're working, obviously we have a major release coming out and we are defining the releases after that, we'll right down the path on the next couple of releases. So, yes that will continue, there're a lot of things we can do to innovate and create value for our customers and continue to expand in our available market.

So, we will continue to do that as well, but on a percentage basis the bulk of the near-term future investment will be in sales, marketing and support.

Phillips Winslow - Credit Suisse

Got it, alright. Thank guys.

Operator

Your next question comes from the line of Walter Pritchard with Cowen. Please proceed.

Walter Pritchard - Cowen

Hi, most of my questions have been asked and answered as well. Just, the last one was around seasonality of the business, I am just wondering how the different seasonality that you're experiencing here in the first half of the year impacts what you might expect in the second half, which we thought as it relates to your general pattern of the September quarter being stronger than the December quarter and seeing a pretty strong uplift in March?

Bob Hammer

Yes, typically, I don't think we have said in the past, if you go back five years, we had a number of quarters like this that are flat to down and prior to couple of fiscal years, our Q1 was slightly up. And that's, if you look at the underlying business this quarter should have been slightly up and it was not.

But, our Q2, I am not sure you can go by past dynamic, because we are seeing a different dynamic of the business. We are seeing the company shift to a much larger enterprise deals, we talked a lot about that during the call. We are seeing a significant product line shift. We said our ADIM products were up over a 100% versus last year, and we are seeing distribution at the lower-end being affected.

So, I am not sure it's normal seasonality, but more tied to the dynamic of the growth of the company. The wildcard here is that we haven't see yet is do we see any negative impact from this economy globally.

Walter Pritchard - Cowen

Thanks a lot.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: CommVault Systems Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript
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