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Executives

Michael Picariello – Director, IR

Bob Hammer – Chairman, President and CEO

Lou Miceli – CFO

Alan Bunte – COO

Analysts

Joel Fishbein – Lazard

Aaron Rakers – Stifel, Nicolaus

Aaron Schwartz – Jefferies

Alex Kurtz – Sterne

Glenn Hanus – Needham

Greg Dunham – Goldman Sachs

Michael Turits – Raymond James

Ryan Bergan – Craig-Hallum

CommVault Systems, Inc. (CVLT) F2Q 2013 Earnings Call October 29, 2012 8:30 AM ET

Operator

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

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

Michael Picariello

Good morning. Thanks for dialing in today for our fiscal second quarter 2013 earnings call. With me on the call are Bob Hammer, Chairman, President and Chief Executive Officer; Al Bunte, Chief Operating Officer; and Lou Miceli, Chief Financial Officer.

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

The company undertakes no responsibility to update the information in this conference call under any circumstance. Our earnings press release was issued over the Wire Services earlier today and it has also been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website.

On this conference call, we’ll provide non-GAAP financial results. A 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 Mike. Good morning everyone and thanks for joining our second quarter earnings call a day earlier than expected, as everybody knows we have a little bit of weather here. In fact Al and I were part of the evacuees last night. We had to find some shelter somewhere else. And most of our office facility is shutdown, but it looks like we’re in good condition in our follow through on the call. I hope everybody on the call is safe and stays safe until this – the storm is over.

Regards to our quarter, we had another very solid quarter. Our positive results are indicative of continued good underlying demand and the strength of our product, services and distribution across all geographies. We saw strong growth in the Americas, Europe and our U.S. Federal margins. We are seeing a positive business momentum continuing into our Q3.

Let me briefly summarize our financial results. For the quarter, total revenues were $118.2 million, up 21% year-over-year and up 6% sequentially. Software revenue was $59.2 million, and grew 24% year-over-year and 9% sequentially. We also had an excellent results from our services and support organizations. Services revenue was $58.9 million, and grew 19% year-over-year and 3% sequentially.

For the quarter, non-GAAP operating income or EBIT was a record $28.8 million up 63% year-over-year. Non-GAAP EBIT margins were 24.4%. Non-GAAP diluted earnings per share for the quarter were $0.38.

Our 21% year-over-year revenue growth was primarily due to the combination of three major factors. Share increases in very large big data related enterprise deals and commercial and government accounts, penetration into the managed service provider market and the increasing recognition in the market of CommVault’s leading technology and support capabilities. These factors combined with good sales execution, have enabled us to significantly outpace the growth of the market and continue to pick up market share.

This past quarter’s earnings growth was also affected by the positive impact of significantly higher than planned and forecasted operating expense reductions from the successful implementation of cost saving initiatives, as well as below targeted spending on several investment initiatives.

We also have lower sales and marketing expense quarter-on-quarter, due to the significant expense we incurred in Q1 2013 related to our global sales kick-off. We are forecasting some positive impacts of the expense reductions initiatives to carry into Q3 and Q4. However, these savings will be partially offset by increasing the rate of our operating expense investments in the second half of FY2013. These investments are being made in order to better position the company to achieve its FY2014 revenue and earnings growth objectives.

Let me spend a minute speaking about the macro environment. The September quarter results of tech companies in general, and for our industry specifically indicated that there was a clear slowdown in IT spending and push-outs of larger deals. However, despite the apparent drop in industry spend we saw a good demand for our products across all geographies, vertical market segments and distribution channels. Our overall funnel and big deal pipeline growth indicate continued demand for our products in the December quarter.

Now I’m going to talk for a minute on distributions. Sales through our Dell relationship accounted for approximately 21% of total revenues for the quarter. Total quarterly Dell revenues grew 18% year-over-year and 3% sequentially. Please note, the majority of our Dell revenues comes from our install base and in enterprise accounts where our sales force has heavy involvement with the customer. Dell is aggressively marketing their recently acquired data management software solutions to smaller deals in the SMB segment of the market.

However, in summary, Dell’s product initiatives have had limited impact to our total Dell revenue. As we have previously communicated, we have and will continue to partner with Dell in the enterprise segment of the market where we have highly differentiated innovative solutions based on our unique software platform.

I’ll talk a second on some other distribution partners. Many of our other global resellers and strategic partners had strong growth. We saw a very good performance from Arrow, our largest U.S. distributor. We also saw continued strong growth from our managed service provider customers or MSP partners.

In regards to broader distribution, we have established a new global organizational structure and are making significant investments to better support and manage our current distribution partners and to develop other meaningful channels and partners.

During the last quarter, we strengthened our SMB and mid-market distribution capability. We are accelerating investment in our own sale capabilities including sales reps, sales engineers and professional services. As we have clearly stated in the past, our CommVault enterprise sales force is the primary driver of large enterprise license revenue growth, regardless of the distribution partner. Additionally, we have and are developing products that are more channel-specific for the mid-market.

The new IntelliSnap Recovery Manager product announced – released announced earlier today that the first in a series of products designed to be more easily sold through mid-market channels. Simpana IntelliSnap Recovery Manager makes it easy to blend the speed and efficiency of array-based snapshots directly into the recovery process; it cuts recovery times from hours to minutes and reduces costs by eliminating multiple solutions and manual processes. It enables full system restores or single-file search and restore capabilities. Simply put, it makes it easy for customers to take advantage of hardware snapshots to quickly restore anything, anywhere across virtual and physical environments.

Simpana IntelliSnap Recovery Manager provides an excellent entry point to CommVault’s Simpana 9 software, as customers can easily upgrade to the full Simpana suite once they require enterprise scale, heterogeneous store and environment support, or the need for advanced applications like backup, archive, eDiscovery, replication and advance reporting and analytics.

Now, let me address our current outlook. We have had an excellent first six months of FY2013, in which total revenues grew 21% and EBIT increased 50% – 56% year-on-year. The first half results provided strong foundation for us to build on, both for the second half of FY2013 and for FY2014. We have had good funnel growth and have good visibility going into the second half of our fiscal year. However, I want our investors to be aware that our second half comparable growth rates will be more difficult to achieve than were, excuse me, comparable growth rates for the first half of the fiscal year.

In addition, we are facing increasing economic and political uncertainty. Taking into consideration the more uncertain macro environment, we still believe the current FY2013 Street consensus growth rates for total revenue is reasonable. We also believe we can improve operating margins. That being said, while we believe that our business fundamentals are strong, our outlook needs to be tempered with the following words of caution.

As noted earlier, tech spending has become weaker and companies in our industry are reporting deal cancellations and push-outs. As a result, we are assuming there is a reasonable probability we will see some negative impact from the drop-off in overall tech spending. There is additional uncertainty obviously tied to the fiscal cliff scenario.

Secondly, we continue to have quarterly revenue and earnings risk due to the timing of the increasing number of – number and size of very large deals. We are particularly cautious about the U.S. Federal Government spending due to current budget constraints, election-year uncertainty and the potential negative impact of the fiscal cliff.

While our EMEA operations had good year-over-year revenue growth in Q2, we continue to be concerned about European IT spending outlook, as sectors of the EMEA economy are currently in recession. And lastly, there is earnings risk related to our decision to increase investment and operating expenses in the second half of FY2013 across all segments of the business.

In summary, the company had a solid first half of fiscal 2013 and is in a good position to successfully achieve our annual objectives for FY2013. We are increasing our investments to ensure that we can continue to outpace the market in growth and profitability over the medium to long-term.

We’re establishing a solid foundation for growth in FY2014. This includes increasing our investments in sales, services and support, and marketing. In addition, it is our intention to introduce our next Simpana software release in the early part of calendar 2013. This release has the potential of significantly enhancing our technology leadership and expanding our available markets. We are well on track in establishing a solid foundation to enable us to achieve our $1 billion plan objectives over the next several years. I will discuss our market demand drivers on our next release of Simpana later on in the call.

Now I want to spend a minute on our new headquarters. As previously mentioned, we are in the process of purchasing property near our current headquarters to establish a headquarters campus for the future growth of the company. We have not completed the land purchase transaction yet, but expect to do so by the end of the current fiscal year. We would expect to complete Phase I of the project in two and a half years or less. Once we have closed on the property and completed the design, we will provide more details.

One thing is clear; based on our current growth rates, we expect to run out of space in our current facility well within three years. There are a number of significant benefits associated with this decision, some of which include much better customer-facing capabilities with an executive briefing center, as well as world-class customer support and training centers, higher employee productivity and retention, and an improved ability to recruit. The development of the new headquarters is also making a very strong statement to our very large enterprise accounts and key partners that we’re building the company for the long-term.

I have a brief announcement to make. Before Lou takes – makes his financial comments this morning. We are announcing, effective today, the appointment of Brian Carolan to the position of CFO replacing Lou Miceli, who will remain with CommVault in an important senior management position. Brian has been with CommVault since 2001. He is currently our Vice President of Finance, Chief Accounting Officer, a role he has held since July 2006, and before that was our Controller since February 2001.

In addition to his leadership role in accounting, Brian, working with Al Bunte, has played a very significant role in financial and strategic planning over the past five years. Prior to joining CommVault, Brian was with Ernst & Young in its audit practice, where he started his career in 1993. He obtained his bachelor’s degree in accounting from Villanova University, his master’s degree in business administration from New York University and is a certified public accountant.

Brian will have worldwide responsibility for all financial matters, including reporting controls. He will also have public-facing responsibilities with investors, financial analysts and customers. Brian will report directly to me and will continue his role in financial and strategic planning operations working under the guidance of our COO, Al Bunte. He and I have worked together on a daily basis over the last several years and I know he is more than ready to handle this responsibility.

Lou Miceli will step into a new role of Senior Vice President of Finance, reporting directly to me. Lou will be primarily responsible for managing the planning, design and construction of our new campus and headquarters building, including land acquisitions. This project is a major undertaking and requires the full dedication of a senior level executive.

Lou will continue to provide consultation and oversight as a senior advisor to the finance organization, as well as an advisor to other matters as directed by me. Lou joined CommVault in 1997 as our CFO and helped us take the company public in 2006. I would like to personally thank Lou for his leadership and establishing a best-in-class accounting and finance function for CommVault.

I will now turn the call over to Lou.

Lou Miceli

Thanks Bob and good morning everyone. I will cover the key financial highlights of the second quarter of fiscal year 2013. Total revenues for the quarter were $118.2 million, representing an increase of 21% over the prior year period and 6% sequentially.

For the quarter, we reported software revenue of $59.2 million, which was up 24% or $11.4 million over the prior year period, primarily driven by enterprise transactions. Software revenue represented 50% of our total revenues for the current quarter, compared to 49% in the prior year period. Enterprise deal flow momentum and funnel growth continued to be strong. Enterprise deals, which we define as deals over a $100,000 in software revenue were 56% of license revenue in the quarter, representing year-over-year growth of 26% and 9% sequentially. The number of enterprise deals grew by 6% year-over-year and 28% sequentially.

Our average enterprise deal size was approximately $247,000 during the current quarter, compared to $208,000 in the prior year period and $288,000 in the prior quarter. Our SMB business grew 21% year-over-year and 9% sequentially, primarily on the strength of our global SMB channel partners.

During Q2, our growth was driven by strong demand for our virtualization, source-side deduplication and snap-based modern data protection solutions. We continue to see strong demand for our capacity-based licensing models, which makes it much easier for our customers to purchase multiple elements of the Simpana platform. Approximately two-thirds of our software revenue in the current quarter was comprised of capacity-based licensing models.

Our maintenance attach rates and renewal rates remain very strong. Services revenue for Q2 was $58.9 million, an increase of 19% year-over-year and 3% sequentially.

For the quarter, revenue from U.S. operations generated 63% of total revenues resulting in a 24% year-over-year increase, while revenue from international operations generated the balance, resulting in a 16% year-over-year increase.

The growth in international software revenue is primarily due to increased sales in Europe, Asia-Pacific, Canada and Mexico. Our U.S. Federal Government business was strong and grew approximately 23% year-over-year and 24% sequentially, representing 9% of total revenue for the quarter. Please keep in mind that our second fiscal quarter coincides with the U.S. Federal Government yearend and this is typically our strongest quarter in this vertical.

Software derived from indirect distribution channels increased 25% over the prior year period and represented 89% of software revenue. It’s worth noting that most sizable deals are driven by our direct sales force even though they are transacted through the channel.

For the quarter, total revenue through Arrow contributed approximately 29% of total revenue, growing 30% year-over-year and 14% sequentially. Arrow is an important distribution partner and we anticipate continued strong contributions on them going forward.

We added approximately 480 new customers in the quarter. Our historical customer count now totals approximately 17,100 customers. As a reminder, approximately two-thirds of our quarterly software revenue comes from our existing installed base.

Now I will discuss margins and operating expenses. Gross margins were 87.2% for the quarter compared to 86.7% in the prior year period. Total operating expenses were $73 million for the quarter, up approximately 11% year-over-year and 1% sequentially. Sales and marketing expenses, as a percentage of total revenues decreased to 45% in the current quarter from 50% in the prior year period and 48% in the prior quarter.

Non-GAAP operating margins were 24.4% for the quarter, resulting in operating income or EBIT of $28.8 million. On a year-over-year basis, Q2 EBIT increased by 63%. Q2 EBIT increased by 620 basis points year-over-year and 410 basis points sequentially.

For the first six months of fiscal 2013, operating income grew 56% year-over-year. EBIT margins for the first six months of fiscal 2013 were 22.4% versus 17.4% during the first six months of fiscal 2012.

The sales segmentation strategy implemented at the beginning of fiscal year 2013 resulted in better-than-anticipated operating margin improvement in Q2, as well as improved visibility.

As a result, we are going to aggressively increase the rate of our operating expense investments in the second half of the fiscal year to better position the company for fiscal 2013. These investments will include customer-facing sales and technical resources, broadening our distribution capability, strengthening our position in the mid-market and enhancing our support and services capability.

In addition, as Bob mentioned earlier, we expect to introduce our next-generation Simpana release in the early part of calendar 2013. Such a release is likely to significantly enhance our technology leader position and expand our available market. However, this will require significant and higher-than-planned investments in training, market awareness and expanded distribution. We will also establish the infrastructure in marketing, sales and support for us to successfully execute our plans for entry into new market segments.

As Bob indicated earlier, we are comfortable with the current Street consensus revenue growth rates for fiscal 2013. In addition, due to the over achievement of forecasted EBIT margin in the first half of fiscal 2013, we now anticipate that operating margins for fiscal 2013 will improve by approximately 200 basis points to 250 basis points.

We ended the quarter with 1,582 employees up from 1,508 at the end of June. We expect that our field, resources and support hires will increase at a higher pace in Q3 versus Q2.

Net income for the quarter was $18.3 million and earnings per share was $0.38 per share based on a diluted weighted average share count of approximately 47.8 million shares.

On a sequential constant currency basis, there was a positive impact on earnings per share of approximately $0.01. We will continue to use a pro forma tax rate of 37% for fiscal year 2013. We expect our cash tax rate to remain lower than our GAAP tax rate through fiscal 2013. Our cash tax rate will approach our long-term terminal GAAP tax rate over the next few years. For fiscal year 2013, we anticipate that our diluted weighted average share count will be approximately 48 million to 48.3 million shares.

Now I will discuss the balance sheet and cash flows. As of September 30, our cash and short-term investment balance was $353.9 million, up 11% from the end of Q1 of this fiscal year. For the quarter just ended, cash flow from operations was $24.4 million, free cash flow which we define as cash flow from operations less capital expenditures was $22.8 million, which is an increase of 135% over the prior year quarter and 40% sequentially.

The increase in free cash flow is a result of changes in working capital on the balance sheet as well as higher operating income. As of September 30, 2012, the company’s deferred revenue balance was approximately $154.6 million, which is an increase of $30.3 million or 24% over the prior year period and up 7% sequentially.

For the quarter, our DSO was 49 days to down from 51 days in the prior quarter and down from 61 days in the prior year quarter. The lower DSO was primarily due to improved linearity in the quarter.

Now let me update you on some changes to our repurchase program. A Board of Directors recently approved an additional $50 million to be used for share repurchases bringing the total amount available for future share repurchases to $102.8 million. The Board also extended our repurchase program for an additional year and the program is now effective through March 31 of 2014.

That concludes the financial highlights, but before turning the call back over to Bob. I’ll also want to take this opportunity to congratulate Brian Carolan, as he steps into the CFO role.

Brian has been instrumental in helping me manage the worldwide finance function for many years and he has earned the respect and trust of the entire organization. I want to personally thank Brian for his many years of hard work and dedication, and I’m very happy to see him take this next step in his career. It’s a well deserved promotion and I’m confident that he will continue to do an exceptional job for CommVault.

I will now turn the call back over Bob.

Bob Hammer

Thank you very much, Lou. I want to take a few – make a few comments, on what is driving demand for data – our data and information management software and services, and a brief summary of our next-generation technology. The key points I want to make here is to try to give you a perspective of why we are continually and consistently outpacing the market.

As I have said in the past, what the industry calls Big Data or the massive growth and complexity of data is breaking traditional processes and procedures. Big Data is overwhelming IT networks and storage infrastructures and increasing legal, compliance and regulatory business risks.

As a result, there is a growing consensus among enterprise and governmental customers that the IT challenges must be solved globally and holistically by completely reengineering IT infrastructures and utilizing global shared services models across all IT environments. These shared service models tend to be driven our requirements for data growth management, cost control, operations management, compliance and eDiscovery and more efficient and effective technical support.

Concurrently, there is a major trend in the SMB and mid markets for customers to outsource the data management needs to manage service providers or MSPs. In conjunction with the reengineering – reengineered IT infrastructures for shared services, models and MSPs, commercial and government enterprises are implementing next-generation data and information management solutions.

CommVault was the world’s only fully integrated data and information management software platform leads the market in providing such next-generation solutions. Our platform enables customers to holistically and effectively implement comprehensive automated global data and information management solutions. The benefits customers derive from deploying our platform include; lower cost, high reliability, better support, better ability to recover data and lower business compliance and regulatory risk.

In addition, we enable customers to have one universal secure repository for search, compliance and business value creation. Yes, there are other ways of solving data and information related challenges, but more and more large enterprise customers are validating that CommVault has the best software platform, the best most cost effective technology services and support.

In summary, the major catalyst for our increased growth of very large enterprise deals is the need for comprehensive next-generation shared services solutions by commercial government and MSP enterprises.

Now let me talk about our next-generation technology and how we’re going to enhance our value to our customers and continue to differentiate ourselves from our competitors. So in summary, our objective going forward is to increase our value through our customers by continuing to lead the industry with innovative product solutions in our core businesses, adding additional innovative solutions and services, and providing next-generation support capabilities.

We will also make the platform open versus proprietary. For example, we will provide APIs to enable third parties to integrate and write to it. Additionally, we are developing workflow capabilities to enable our customers to simply and easily automate processes and to develop applications on top of our platforms.

Please note, the development and timing of any release as well as any of its features or functionality remain at our sole discretion.

As we have stated on our prior earnings calls, we plan to introduce the market game-changing addition to Simpana platform in the first part of calendar 2013. The new product and services will be introduced to the market in a series of releases, through to calendar 2013 and will include next-generation data management and protection to reduce costs, improve performance, recovery, scale and security, next-generation innovative archiving.

New automation capability for shared service environments for both private and public clouds including workflows; comprehensive reporting and monitoring of IT infrastructures; advanced ways to deliver end-user products and services; innovative new services, a management of data at the edge, laptops, mobile devices with anytime, anywhere secure, search and access of data; cost effective ways of securing, protecting, ensuring files in the cloud and across all devices; next-generation capabilities to more easily enabled better decision making; and lastly analytical solutions tied to the convergence and data types and sources.

These new products and services have the potential of increasing our value and relevance to our customers and partners, increasing differentiation versus our competitors and significantly expanding our addressable market.

In closing, we had another solid quarter. Now we are concerned about the macro environment and we believe the combination of our technology leadership, enterprise selling capability and continued industry leader recognition will enable us to continue to outpace the industry in revenue and earnings growth.

We have released Simpana IntelliSnap, the first of a series of new products aimed to the mid-market through our channel partners. The next generation Simpana, which is planned to release in early 2013 is a landmark platform release that is uniquely aligned with the key IT transformational market requirements. We are excited and looking forward to its introduction to the market.

We are well positioned to achieve our FY 2014 plan objectives and attracting well to achieve our $1 billion revenue plan objective and our objective to improve operating margins into the low to mid-20s. We’re excited about our future potential and are confident in our ability to continue to grow the company at well above industry growth rates.

I’ll now turn the call back to Michael.

Michael Picariello

Thanks Bob. Before the operator opens up the line for questions, I will like to let everyone know that both Lou and Brian Carolan are available for questions during today’s question-and-answer session.

Operator, can we please open up the line for questions.

Question-and-Answer Session

Operator

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

Joel Fishbein – Lazard

Good morning guys and congrats on another strong execution. Bob just on your comments regarding the next version of Simpana and some of the features, two – just two questions there. Number one is, have you guys put some parameters around how much this may grow your total addressable market? And also – and are you – will you be selling into the same group of IT buyers that you’re selling into now and then the third part of it is – will this also be capacity-based pricing?

Bob Hammer

Yes, on the addressable market these are round numbers, but it’ll grow the addressable market about 100% – another 60% round numbers.

Joel Fishbein – Lazard

Okay.

Bob Hammer

The second question, Joel was...

Joel Fishbein – Lazard

Was just regarding, I’m just curious about, will you be selling into the same – the same IT buyer, I mean or is there somebody – or you have to go deeper inside the IT organization to sell some of the additional features?

Bob Hammer

We’ll sell beyond the current IT structures within our customer base. I’d hold – obviously we’d get into analytics, we’ll be selling to more-and-more of the business related functions within both commercial enterprises and government, so a much different buyer and with our mid-market products like IntelliSnap, we’ll be selling to different buyers as well.

Joel Fishbein – Lazard

Okay. And then the last part of that is just, will that also be on the capacity-based pricing as well or will you offer it both ways or how will that be offered?

Bob Hammer

Well, I’m going to let Al to expand this a bit. The answer is, yes, and then we’re going to do some other things – greater things with pricing as we get into some of these other market segments. So, Al why don’t you expand on that?

Alan Bunte

Yeah, that’s accurate, Joel. Yeah, the core pricing will remain capacity based. We have some ideas on different elements of the data management areas particularly around archive and some of the innovative things we’re doing there. But obviously, as we get into the analytics, as Bob said, we’ll probably utilize more traditional allies, more traditional application-based pricing, which would be seat or end-user based type of methodologies for applying our pricing.

Joel Fishbein – Lazard

Great. Thank you.

Operator

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

Aaron Rakers – Stifel, Nicolaus

Yeah, thanks guys and also congratulations on a good quarter. First, if I can touch on the implied operating margin, I can appreciate the reinvestment or the up investments in the model. Just trying to understand how you are thinking about the operating margin relative to what you’ve historically set around your target model. Now that we’re actually sitting at a – last quarter being a mid-teens operating margin. And it looks like implying about a 300 basis point or so decline, second half versus first half.

Bob Hammer

Okay. So let’s take the longer view, Joel, I mean, Aaron, we are being consistent and focusing the company on hitting this $1 billion revenue target with low to mid 20s operating margins and we’ve set programs to achieve that objective. Obviously, we got a little bit ahead ourselves here. And Lou pointed out in his comments; we’re doing this in a number of ways, better focus and sales segmentation, in a better sales productivity, some other cost saving methods.

So we are clearly, I would say a little bit ahead of our path on achieving those earnings operating margin objectives. The issue near-term is that clearly given the strength of our business and the opportunity we have not only with our current outlook, but with next generation of the Simpana platform coming to market. We’re going to take this opportunity to invest pretty heavily across the board, as Lou said in his comments and sales (inaudible) capabilities and our support marketing.

So – and almost all segments of the business we’re going to invest to strongly position the company going into FY 2014, in spite of the current macro environment and that will have a negative downward pressure on operating margins, as will now you’re getting into the latter part of the year where you have, from a compensation standpoint, accelerators and from a sales commission standpoint, we’re going to be paying higher commission. So, you put all that together, you’re going to see some lower operating margin in the second half versus what we saw in Q2.

Aaron Rakers – Stifel, Nicolaus

Well, I understand. The second question I’d like to understand a little bit more, managed service provider or MSPs, where that currently stands. I think last quarter you had talked vaguely about that getting up to close to 10% of total revenue. Where do you stand on that and how do we think about that go-to-market strategy or how we should think about that in the context of some of the upcoming product launches?

Bob Hammer

Well, clearly, we’re establishing a leadership position in MSPs due to our platform, because we’re the only company out there with a platform and it aligns really well with the things that MSP is trying to accomplish in relation to data and information management.

So, what we – that segment of the market that as far as we can see will be extremely high growth and what we are going to be doing differently is organizing to get more focus globally on that segment of that – the MSP customers across the globe going into FY 2014. So, we think that over time that will be very significant part of our business; and again over time, by the time we get to that $1 billion target, it should be well over 10%.

Operator

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

Aaron Schwartz – Jefferies

Good morning. I just had some questions on some of the new market segments that you talked to with Simpana 11. Can you also talk about how that coincides maybe with the segmentation, your sales force will through that continue next year? Do you sort of build that with some different functionality in the sales force to address this in market segments?

Bob Hammer

Yeah, I mean, our sales segmentation and focus changes every year tied to our product innovation and areas of the market that we think have high growth potential for us. So, clearly, we will be providing either overlays or some more segmentation to accomplish those objectives.

One of them that I already mentioned is, we’re doing this right now as we speak with Simpana 9 in the mid market. We’ve got a lot more focus on our mid markets distributors and resellers and our developing products to fit those segments of the market. And our channel strategies and segmentation strategies aligned with that. So, Aaron, you’ll see that a continual evolution from us in that regard.

Aaron Schwartz – Jefferies

Okay. And then second question I had is your growth has been exceptionally impressive given that it’s all been organic historically, if you enter into any of these new markets would you expect that to continue?

Bob Hammer

Well, from our – in regard to our $1 billion plan right now, it is all organic. We see a clear path to achieve that objective both top and bottom-line with organic growth. And so let’s not forget what our objective is here as a company. And number one is to lead the market with innovative products that have high value to our customers and differentiate us from our competitors, with the objective of significantly outpacing the market in growth and profitability; if we continue to do that, what do we do? We create enormous amount of shareholder value.

So just getting big to get big has no value to this company. If we see innovative technology that enables us to better serve our customers and provide better shareholder value, we will consider it, but to-date we have not – we’ve looked at a lot of different opportunities and have elected not to transact any acquisitions, because we didn’t see the value in doing so, for our customers or our shareholders.

Aaron Schwartz – Jefferies

Okay, terrific. Thanks guys and be safe.

Operator

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

Alex Kurtz – Sterne

Yeah, just two questions on the competitive front. Did your sales force note any change, Bob, from EMC out of – EMC World and VMworld with some of the changes with Avamar? And then anything on Symantec and Veritas, given sort of the structural changes going on well – with that company?

Bob Hammer

No. I mean, EMC is a competitor to us, with products like Avamar and Data Domain. We obviously compete effectively against EMC, otherwise we wouldn’t be having this kind of growth rate. We expect to continue to outpace EMC in innovation, that’s on the one hand. On the other hand, we – our attach rates with EMC, with products like Isilon and VNX, are really high. So on the one hand, EMC is a big competitor and they try to kill us every day. On the other hand, we partner quite effectively with them in the market in providing EMC customers with best-in-class solutions.

In regard to Symantec, the answer is no. I mean on occasion, as I’ve said many times, we see waves of, I call it significant price cutting from Symantec as they try to hold on to their installed base and we’re seeing some of that now. But other than that, we have not seen any changes.

Alex Kurtz – Sterne

Thanks, Bob.

Operator

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

Glenn Hanus – Needham

Yeah, good morning and congrats. First on OpEx, could you just talk a little more – I mean you really came well under, at least my expectations there. Could you talk about where the savings really came from, did you pull back on spending so much, just given the environment? And then I think you already addressed the investment question going forward. Thanks.

Bob Hammer

Yeah, Glenn, we didn’t pull back on anything. We may have underachieved spending. In other words, we just – we had set some objectives and we didn’t achieve them, not because we were pulling back, but we just didn’t get them done in the timeframe we wanted to get them done, and we are addressing that. I think we can be a little bit more effective in executing some of those, and those are forward strategies. So there was no pullback at all, it was just – so we did have an impact of that and we had a higher than planned impact tied – as we mentioned, tied to our sales segmentation.

Glenn Hanus – Needham

Okay, could you maybe just talk a little bit more about some of the distribution partners; Fujitsu, Hitachi, I don’t know if there’s anything new with developments with NetApp? Thanks.

Bob Hammer

Fujitsu, as I said, continues to progress extremely well. That partnership started well, and continues to track well. And we expect high growth and again, this is mainly in the German, Austria, Switzerland area, but really good solid traction there.

NetApp, again, I said I wouldn’t talk about this anymore, but clearly – the two companies are making a lot of progress. And I would – and we had a pretty good quarter with NetApp last quarter. I would expect to see continued growth and collaboration with NetApp over the coming year. And maybe a year from now, it could get interesting, but it’s clearly improved pretty significantly. And there is nothing much to say about the other partners right now.

Glenn Hanus – Needham

Okay, great. I think that does it for me, you addressed some of the others. Thanks.

Bob Hammer

Thanks.

Operator

Thank you. And the next question is from Greg Dunham from Goldman Sachs. Please go ahead.

Greg Dunham – Goldman Sachs

Hi, thanks for taking my question. I wanted to talk – you were pretty specific about cautionary language and about competitors that are seeing kind of macro pressures in the space, but clearly in the results it doesn’t show up in your numbers. Question is, are you seeing any deals with which – you mentioned that, I guess that October started out strong, was that due to anything around deal slippage, or are you seeing any signs in your own business of weakening? Thanks.

Bob Hammer

No. Gary, we seem to be defying the laws of physics here. We have basically not seen deal slippage. We have seen continual growth in our funnels. My only point is, if almost everybody else in our industry is seeing something, at some point we’re likely to see something, that was my point on my comments, but to-date, maybe a little bit harder to get approvals through, but we seem to be able to accomplish that and close these deals at an increasing pace.

So – but my words of caution are real. I mean we have an environment that clearly has deteriorated and you can see that – not knowing – more broadly in the economy, and certainly from results of companies that have reported in our industry, and we’re just keeping our eyes open here and wanted to make sure that our shareholders understood that, but we are an outlier at the moment and we may not always be an outlier.

Greg Dunham – Goldman Sachs

That’s helpful. One quick follow-up, how should – I guess remind us what is typical when you have a release like a Simpana 10, in terms of the impact on quarterly numbers. Is there an impact on the quarter before, is there an impact on the quarter of, how should we think about that from a timing perspective? Thanks.

Bob Hammer

We never see impacts from the quarter before, this is – I can’t even count now, but somewhere in the 30, number 30 plus major release we’ve had. We’ve never seen negative impacts on prior quarters. Some releases we’ve seen very sharp uptick when we introduced source-side dedup (ph) for example, and we saw a pretty strong uptick.

My comment on this one, this one is deeper, broader, will have a much bigger impact to the company of any release we’ve had, but it’s likely to occur over time. So I don’t expect to see big near-term spikes, but it will help us to, one, solidify our position in the industry and enable us to achieve really good solid well-above industry average growth rates for quite a long period of time. This one has a – what I call, a lot of legs to it. Clearly, it provides a foundation for us to hit our $1 billion revenue target, this one and its extension. So we’re really confident about the release and excited about it, but again, I don’t expect a near-term spike as we release it.

Greg Dunham – Goldman Sachs

Okay, thank you.

Operator

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

Michael Turits – Raymond James

Hey guys, good morning. First of all, Lou congrats to you and thanks on a great, great job as CFO.

Lou Miceli

Thank you, Mike.

Michael Turits – Raymond James

And then, as far as the next quarter goes, does your comfort with the estimates extend to next quarter? And how quickly does OpEx begin to ramp? Typically third quarter is – fiscal quarter is a pretty good ramp of 7% to 10% in OpEx growth. So should we see that kind of typical ramp coming up ahead, more or less?

Bob Hammer

You’ll see a pretty good solid ramp of OpEx in Q3 versus Q2.

Michael Turits – Raymond James

Okay. And you said you’re also comfortable with the Street numbers for next quarter’s results as well?

Bob Hammer

Well, what we – what we said was, we are comfortable with consensus for – FY 2013’s consensus, but – so you can draw your models between Q3 and Q4, but we’re definitely comfortable with the full-year Street consensus.

Michael Turits – Raymond James

Okay. Then just one small thing on partnership; I don’t know how big HDS is, but they did make a small acquisition in this space themselves. Just wondering on how that partnership is going? I can’t recall how large it is and then what you are talking about – how that acquisition might impact the partnership?

Bob Hammer

Well, I mean HDS as we’ve stated on the call is, it’s not strategic, it’s opportunistic; both companies seem to be doing pretty well with it. It will remain opportunistic and no, I don’t think this particular acquisition, since it’s relatively low in functionality. Well, it’s not an enterprise product and we’re 100% focused on enterprise with HDS.

Michael Turits – Raymond James

Okay. Things seem great, congratulations. Thanks a lot.

Operator

(Operator Instructions) And the next question is from Ryan Bergan from Craig-Hallum. Please go ahead.

Ryan Bergan – Craig-Hallum

Thanks. Just wondering if you can address what your plans are for cash, the balance has grown nicely here. Clearly you increased the stock buyback and you have the land purchase and the building of the new campus ahead of you. But any other plans for cash we can think of, anything along the lines of acquisitions? I know you haven’t been an acquisitive company, but how can we think about your uses of cash beyond what I’ve just mentioned?

Bob Hammer

Yeah, I mean in that order, it’s – clearly we’re committed to building this campus and this new headquarters, which is substantial, because it’s not only a new headquarters, but establishes a foundation for future growth for the company. So that’s a very substantial investment.

Fortunately, we’re generating a lot of cash, so even net of that investment, we are still going to end up with a lot of cash. And the second priority after that is, opportunistically, to take advantage of the – when the market gets irrational, to go in and buy back stock. That’s not a program, it’s when the market gets irrational, we’ll come in and act accordingly.

And then third, there will still be significant cash available for an acquisition if it makes sense, but it’s not a proactive part of our strategy, as I said earlier. If it fits, if it offers significant additional customer value, if it enables us to create additional shareholder value, we’ll consider it, and because we’re pretty – we’re a pretty experienced M&A team here, but we haven’t found anything to date.

Now I’ll make a comment, as you get into business value creation and analytics, you get into that side of the business, there may be some opportunities that will open up for us. And the other point that everybody should be aware of, because it’s very significant, is this platform now becomes open versus proprietary, which enables a lot of third parties to write to it and use it as a repository on, I’ll call it the back-end, or we can export information at our top end to other applications.

When you start doing that, it does enable us to think about bringing in other functionality to the platform without having to integrate with it. So we’ll see, but again it’s not a – it’s not, at this point, a proactive top priority for the company.

Ryan Bergan – Craig-Hallum

Thanks, Bob, and stay safe, guys.

Bob Hammer

Thanks.

Lou Miceli

Thank you.

Operator

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

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