Commvault Systems, Inc. (CVLT) CEO Sanjay Mirchandani on Q2 2020 Results - Earnings Call Transcript

Oct. 29, 2019 3:14 PM ETCommvault Systems, Inc. (CVLT)
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Commvault Systems, Inc. (NASDAQ:CVLT) Q2 2020 Earnings Conference Call October 29, 2019 8:30 AM ET

Company Participants

Michael Melnyk - Director of Investor Relations

Sanjay Mirchandani - CEO and President

Brian Carolan - CFO

Conference Call Participants

Jason Ader - William Blair

Aaron Rakers - Wells Fargo

Joseph Gallo - Jefferies LLC

James Fish - Piper Jaffray

Dan Bergstrom - RBC Capital Markets

Alex Kurtz - KeyBanc Capital Markets


Ladies and gentlemen, thank you for standing by. And welcome to the Commvault Second Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speakers today, Michael Melnyk, Director of Investor Relations. Thank you. Please go ahead, sir.

Michael Melnyk

Good morning. And thanks for dialing in today for our call to discuss our fiscal second quarter 2020 earnings results.

Before we begin, I'd like to remind everyone that the statements made during this call, including in the question-and-answer session at the end of the call may include forward-looking statements, including statements regarding financial projections and future performance. All the statements that relate to our beliefs, plans, expectations or intentions regarding the future are pursuant to the Safe Harbor provisions 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 such as competitive factors, difficulties and delays inherent with the development, manufacturing, marketing and sale of software products and related services, and general economic conditions.

For a discussion of these and other risks and uncertainties affecting our business, please see the Risk Factors contained in our Annual Report in Form 10-K and in our most recently quarterly report in Form 10-Q, and in our other 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.

In addition, the development and timing of any product release as well as features or functionality remained at our sole discretion. Our earnings press release related to today's announcement was issued over the Wire services earlier this morning and is also been furnished to SEC as an 8-K filing. The press release is also available on our Investor Relations website.

On this conference call, we will refer to non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found on our website. This conference call is being recorded and replay is available for webcast. An archive of today's webcast will be available on our website following the call. As a reminder, our acquisition Hedvig closed on October 1st. As a result our second quarter results discussed this morning do not include Hedvig.

With me on the call are Sanjay Mirchandani, President and Chief Executive Officer of Commvault; and Brian Carolan, Chief Financial Officer of Commvault. Sanjay and Brian will each share opening remarks and commentary before open the call for Q&A.

With that, I'll turn it over to Sanjay. Sanjay?

Sanjay Mirchandani

Thank you, Michael. Good morning. And thanks for joining us today. As you saw from our press release this morning, we delivered results above expectations for both revenue and operating margins. This performance as well as our positive outlook reflects the good headway we are making on the simplification, innovation and execution priorities we established at the start of the fiscal year. We have work to do but we are making real, measurable progress and we remained focused on setting achievable goals and meeting them. Key actions since our last earnings call include our first major acquisition with Hedvig. The introduction of Metallic, a new SaaS offering, re-launching our brand and hosting nearly 2,000 customers, partners and thought leaders at Commvault Go Conference early this month.

Brian will provide more contexts on our financial results in a few minutes. But first I want to highlight our priorities and positive work underway. Let's discuss them one by one. First, we are simplifying how we do business. During the quarter, we continue to improve our odd structure and reexamine, redesign and simplify core processes. The resulting operational efficiencies not only contribute to our profitability but enable us to reinvest in growth driving initiative. We also continue to implement, streamline and align the tools and processes to drive predictability and better than linearity in our sales pipeline.

Enhancements are being extended to our customers and partners as well. We are making it easier and more beneficial for them to business with Commvault. The feedback from these efforts has been positive as noted by Bijan Taleghani of TIM AG, a long time partner who said, we are excited about these changes enhancements to the Commvault partner advantage program. The new levels of simplicity and transparency will help our resellers achieve greater profitability faster than before. We plan to do more to simplify our business and empower our ecosystem to build on this enthusiasm.

Next, on innovation. Commvault has always been leader in developing innovative solutions for our customers. This was validated once again when we were named as an innovator in the most recent Forrester Wave for data resiliencies to solutions and for the 8th consecutive year, Commvault was cited as a leader in Gartner's 29th Magic Quadrant for backup and recovery. We got two of the most influential analyst for IT decision makers and we are proud of the recognition we've received.

We are continuously innovating our Commvault complete portfolio and we expect to release new updates and capabilities roughly every 90 days. We've also built machine learning and artificial intelligence into our products and extended our capabilities across numerous public cloud providers and industry leading applications. As a result, we have lower customer base and strong customer satisfaction ratings which are reflected in our high renewal rates.

We are also focused on giving our customers technology to use and analyze the data. We've recently launched a reimagine Commvault Activate product with more intuitive, compliance ready work load to provide the insight and analytics needed for customer sensitive data governance requirements. Not only is it featuring rich but we made it simpler and easier for our partners and customers to buy and use. Vincent Chang, President of Arrosoft Solutions noted, we are particularly excited about the new licensing and pricing model which will make Activate easy to buy and for us as a partner easier to sell.

Importantly, we are turning our innovation into new market opportunities. For example, we've recently expanded our portfolio to include Metallic, enterprise grade software to service data protection solution. Both have been internal startup on Commvault's proven technology. Metallic sets new standard for SaaS data protection makes unrivaled flexibility, scalability and simplicity.

Now customers can easy leverage our technology in any form factor, on premise, in the cloud, as it appliance or as a service. Metallic is available today in the United States through an initial set of launching partners who are truly excited about the offering. Steve Guggenheimer, Corporate Vice President of Microsoft said, many of our mutual customers are migrating their applications and data to the cloud. One of the really interesting use cases is for Metallic is providing additional protection for individual user information within Microsoft Office 365.

And we didn't stop there. We've also closed our first major acquisition Hedvig on October 1st. We put in place a world class bench of Hedvig and Commvault leaders to drive our innovation roadmap and go-to-market strategies. This includes Hedvig Co-Founder and CEO, Avinash Lakshman and industry veteran David Wigglesworth to lead Hedvig's global sales organization.

We believe Hedvig and Metallic represent a compelling growth opportunity for Commvault. Hedvig gives us entry for the software defined storage market and approximate $2.7 billion TAM growing solidly in the double-digits.

In addition, Metallic opens an approximate $1.6 billion addressable opportunity within the broader data replication and data protection public cloud service market. This market is projected to grow at a high-single-digit rate. Together, these new offerings enable us to expand our TAM by almost 60%. When combined with our market strength, well established customer base and focus on execution, we believe that combo has meaningfully enhanced its growth full potential.

Finally, I'll share how they are working to improve execution, particularly in go-to-market. These efforts are showing signs of paying-off evidenced by having landed seven figure deals in all three regions during the quarter.

Structurally, we've installed a completely new segmentation based go-to-market strategy to drive focus and clarity. We've added key leaders to build up this initial success. I'd asked Commvault's VP, Anthony Faustini to lead our new global enterprise segment. He'll be working to land and expand opportunities among key Fortune 500 clients.

We hired David Boyle, a 31 year industry veteran as our Vice President of America sales. David was instrumental in building DELL EMC's enterprise business and we expected to have immediate and meaningful impact. We're also making progress and addressing capacity by filling more than 100 open field positions. We believe all of these measures will enable us to better capture new customers and increase share of wallet with existing customers.

Supporting our partner ecosystem continues to be a priority. Our initial program indicators are positive and in-line with expectations. Specifically, our pipeline is healthy and our partner driven deals are up sequentially and year-on-year.

And we are seeing strong momentum from our largest partners like NetApp, Wipro and HPE. To further enhance this program, we're delighted the two world class leaders chose to join Commvault in October, including Mercer Rowe, our new Global Head of channels and alliances, and Edison Peres, who will serve as a strategic go-to-market advisor.

From an execution perspective, we believe the building blocks are in place and we remained extremely committed to growing our partner ecosystem. Looking ahead, Commvault is dedicated to helping our customers become data ready. This means we enable our customers to protect, control, manage and use data today and as they move from one technology to the next. On-prem, in the cloud, in containers, on virtual machines, any application anywhere.

While multi cloud, cloud native applications, automation and DevOps offer customers tremendous competitive advantages. They also create potential complexity and data fragmentation. This is hard to manage, especially with their multiple generations of infrastructures, and applications that never stop creating data.

To meet business needs and drive value, IT professionals must be data ready, this is our sweet spot. Taking it a critical step further with the acquisition of Hedvig, we are rapidly bringing data and storage management together to help our customers. To create value for our shareholders, we're relentlessly pursuing and executing the strategies to drive responsible and predictable growth.

This quarter, we delivered improved financial results; we continue to focus on our priorities. We added new leaders; closed a major acquisition and launch new products. It was a heavy lift, but it was executed with precision.

I'm confident in the actions we are taking and the road ahead. And I believe we're on the right track to deliver even better results in the future.

With that, let me turn it over to Brian to give you more financial details. Brian.

Brian Carolan

Thanks, Sanjay, and good morning, everyone. I'll now cover some financial highlights for the second quarter of fiscal 2020. Total revenue in the second quarter was $167.6 million, the decline of 1% year-over-year, and growth of 3% sequentially. As expected and consistent with our prior guidance, FX was a moderate headwind in the second quarter. On a constant currently basis, total revenue increased 1% year-over-year and 4% sequentially.

Software and products revenue was $68.6 million, represented declined of 1% year-over-year, and an increase of 8% sequentially. On a constant currency basis, software and products revenue increased 1% year-over-year, and grew 9% sequentially. Our largest region, the Americas, increased double-digits sequentially with growth primarily driven by large deals. EMEA performed well with revenue flat sequentially and growing 22% year-over-year. APAC grew 2% sequentially and increased 7% year-over-year. EMEA and APAC year-over-year growth would have been 28% and 10% respectively on a constant currency basis. Revenue from enterprise software deals which we defined as deals over $100,000 represented 64% of software and products revenue for the quarter. Revenue from these transactions was down 3% year-over-year but up 12% sequentially.

Our average enterprise deal size was approximately $328,000 during the quarter, up 15% year-over-year and 10% sequentially. As Sanjay mentioned a moment ago, we had seven figure deals in each region during the quarter. Total services revenue was approximately $99 million, a slight year-over-year decline. Growth was tempered by changes in foreign exchange rates. Some of our customers moving to subscription models and a year-over-year decline in professional services.

Gross margins were 81.8%, a decline of approximately 280 basis points year-over-year. The cost of third-party royalties related to our Hyperscale Software solutions and the cost of hardware related to our Hyperscale Appliances is included in the cost of software and products revenue. Total operating expenses were approximately $110 million for the quarter, down 5% year-over-year. We continue to optimize our overall expense base by reallocating resources toward investment in our go-to-market strategy, innovation and other growth driving initiatives.

Operating margins were 14.8% for the quarter, resulting in operating income or EBIT of approximately $24.8 million. Net income for the quarter was $19.2 million or $0.42 per share based on a diluted weighted average share count of approximately 45.7 million shares.

Now, I'll touch our subscription pricing models and our continued shifts to more repeatable revenue. We see customers continuing to transition to consumption models that provide flexibility to adapt to changes in their business. We have highlighted two revenue metrics to help investors track the growth and progress of our subscription revenue transition. These two metrics are repeatable revenue and annual contract value or ACV. I will start with repeatable revenue.

As a reminder, our primary repeatable revenue streams are subscription, software and maintenance services. We consider approximately 73% of our Q2 fiscal 2020 total revenue to be repeatable in nature. This represents a 200 basis point improvement from the prior fiscal year. These repeatable revenue streams which were up approximately 1% year-over-year continue to outperform our non repeatable revenue. Our second metric is annual contract value. This metric demonstrates the growth of our subscription and utility based pricing models that we expect will drive new customer acquisition, land and expand growth and enhance up sell opportunities.

As of Q2, ACV has grown to $121 million, up approximately 60% year-over-year and up 14% sequentially. As a reminder, our weighted average subscription contract length is approximately three years. In FY'21, we expect to start seeing a meaningful impact of the renewals of the subscription agreements that we sold in FY'18, which was our first year of adoption of ASC-606 and when we started focusing on more repeatable software and services revenue streams.

I'll now shift gears to our balance sheet and cash flows. As of September 30th, our cash and short-term investments balance was approximately $475 million, up $24 million from our balance on June 30th, 2019. Subsequent to quarter end, we closed the Hedvig transaction. For the terms of our purchase agreement, we paid approximately $166 million in cash as part of the transaction. After this acquisition, our cash balance was just over $310 million of which approximately half resides outside the US.

As result of the timing of the Hedvig transaction, and other anticipated restructuring costs, we did not repurchase any stock during the quarter. Approximately $160 million remains in the current authorization that expires on March 31st, 2020. And we intend to remain opportunistic in our repurchase program.

Days Sales Outstanding or DSO was 77 days. This compares favorably to 81 days in Q2, 2019 and 92 days in Q1, 2020. The improvement was a result of better linearity throughout the quarter. As of September 30, 2019, our deferred revenue balance was approximately $321 million, an increase of 2% year-over-year. On a constant currency basis, deferred revenue was up 4% year-over-year. Nearly all our deferred revenue is services revenue that has been invoiced to customers.

Free cash flow which we defined as cash flow from operations less capital expenditures was approximately $23.4 million for the quarter, up 35% over the prior year. The strong performance was driven by our improved operating results, and better linearity during the quarter. Note that our free cash flow will be impacted by approximately $10 million of restructuring costs accrued in Q2, most of which will be paid out in Q3.

Now I'll discuss our near-term financial outlook. Our Q2 '20 results demonstrate that we're beginning to make progress in our simplified, innovate and execute agenda. We are encouraged by our progress but we recognize that we have more work ahead of us as we position the company for return to predictable growth. With that said, we believe that the current Q3 '20 consensus forecast for approximately $73 million of software and products revenue is within our expected range. This includes a nominal contribution from Hedvig. Services revenue should be up modestly sequentially, also in line with current consensus expectations.

Keep in mind that while we exceed our Q2 expectations, and we are confident about the second half outlook, factors such as deal size, and timing of close rates can cause volatility in our quarter-to-quarter results. As we noted on our last call, we believe that Q1 '20 marked a baseline quarter, and we expect to show continued sequential growth throughout the rest of the fiscal year. Now, I'll discuss our EBIT margin expectations for Q3. Over the course of the next couple of quarters, some of the cost savings achieved will be reallocated to hiring quota carrying sales reps as we optimize our go-to-market efforts.

In addition, our annual customer event Commvault Go was held earlier this quarter and represented a significant investment. Even with these additional cost pressures, we expect EBIT margins to be approximately 14% in Q3, which is above the current consensus forecasts of 11.6%. Looking ahead, we expect fourth quarter EBIT margins to increase sequentially from Q3 levels.

Lastly, let me briefly update you on our share count. As a result of the stock issued as part of the consideration for the Hedvig transaction, we expect a diluted weighted average share count of approximately 46.5 million shares in Q3, 2020.

Now I'll turn it back over to Sanjay for some closing remarks. Sanjay?

Sanjay Mirchandani

Thank you, Brian. As I've shared since joining the company, Commvault has good bones, great technology outstanding people, a loyal customer base and a balance sheet that allows for growth investments. Over the past few quarters, we simplified our internal operations, enhanced our go-to-market capabilities, strengthen our team and remained laser focused on innovation.

Additionally, our reputable portfolio of technologies is only getting better. The introduction of Metallic and acquisition of Hedvig have expanded our TAM by almost 60%. I'm confident that we have the portfolio we need to win new business and take share from our traditional competitors, as well as the upstarts in the industry. If the success of our recent Go conferences in indication, we believe our customers and partners are excited and see where we are taking Commvault. But don't take my word for it. During the conference ESG's Christophe Bertrand, Commvault is not changing. It has already changed. The company is actively morphing into its next phase of evolution.

In closing, I'm proud of what our team has accomplished in just a couple of quarters. And I'm optimistic about the opportunity has Commvault and its shareholders. T capitalize on it, we must continue to deliver on our simplified, innovate, and execute agenda. This will enable high return to predictable and responsible growth. Before I wrap up my prepared comments, I'd like to take a moment to thank Al Bunte, our former Chief Operating Officer who stayed on as an advisor when I joined the company. He has decided the time is right to step down from his advisory role, although he will continue to serve on our Board of Directors. His contributions to the company and our employees for two decades were instrumental and immeasurable. So on behalf of the entire team, thank you, Al.

Now we will open the call to questions.

Question-and-Answer Session


[Operator Instructions]

Or first question comes from Jason Ader with William Blair. Your line is open.


Thank you. I just had two questions. First, just looking at the sales and marketing line, it was definitely quite a bit below where we were anticipating it to be. Maybe you can talk, Sanjay, a little bit about some of the specific changes that you've made. I know you've talked about reallocation but any more detail on the streamlining that's going on with sales and marketing. I understand it will be up in Q3, but any more color on that would be very helpful.


Good morning, Jason. It's Brian here. I'll start and then I'll hand over to Sanjay. Yes, I mean you can see in our fiscal Q2 we made a number of restructuring adjustments and we're pivoting more towards as we, both indicated in our last earnings call more towards quota- carrying resources and additional sales capacity. We recognize that we're a little bit behind in that front. I think we're making some good efforts this quarter thus far and you're going to see an increase in our direct quota of carrying resources in support of our partner network as well that we've enhanced this past quarter.

Sanjay Mirchandani

Yes. That and the only thing I'll add to that, Jason, is the fact that we've been actively working on a segmentation model that allows us to be more focused, more laser focused on the resource allocation that we want. We've realigned our partner go-to-market thesis; we've brought on boards some leadership. We feel pretty good about where things are landing from a strategy and early results in that direction.


And what is the headcount from quarter-to-quarter excluding Hedvig?

Sanjay Mirchandani

We didn't comment on that specifically.


Okay. If you have that that would be helpful. Then second question, Brian, just on guidance methodology. Has anything changed? Obviously had a better than expected result in Q2, did you change your methodology at all over the last couple of quarters and then any comments on visibility relative to where it has been over the last year or so?


Yes. I think in terms of guidance and expectations, we're now firmly focused on sequential growth for the rest of this fiscal year. We feel good about where we are we. We feel good about the progress we've made in Q2, but there's more work ahead of us I think in terms of visibility, I would say it's good; it's consistent with what we've been seeing recently, but it's early and we've got some new leadership on board. They're bringing in and attracting new talent and it's going to take a little bit of time for us to gain some resurgence to more repeatable and predictable growth.

Sanjay Mirchandani

Yes. Just I'm going to -- I'm just going to supplement one thing to what Brian said. So it's about making sure that we're predictable also we are super focus on linearity inside of our business and expecting to make sure that we've got the right linearity in our business. Those are types of things and then sequential quarter-on-quarter growth.


Our next question comes from Aaron Rakers with Wells Fargo. Your line is open.


Yes. Thanks. A couple questions, if I can as well. As you look at the deferred revenue trends that we've seen, I know it's up on a year-over-year basis and constant currency is a factor as well. But it's still down about 5% give or takes relative to where we exited the last fiscal year. So I'm just curious as we think about the company and hopefully some reacceleration of billings growth going forward, how should we think about deferred revenue trends over the next couple of quarters as you see sequential growth in revenue.


Good morning, Aaron. It's Brian here. Yes, so in terms of deferred revenues there is some seasonality to that number especially this quarter. We expect to see a resurgence of that in our fiscal Q3, often tied to our support renewals that tend to be heavier in fiscal Q3 and then just our sequential growth in general will contribute to that line.


Okay and then kind of also, when you talk about annualized contract value, you also throughout the comment said you have opportunities to up sell going forward. Can you talk at all about what you've been seeing as far as your ability to up sell in your customer base? And then also, Brian, you've talked about as we look into fiscal 2021 you see an opportunity to see some pretty good renewal contributions on some of the subscription. How do you think about that manifesting itself in terms of the model albeit I know that you're not going to give guidance for fiscal 2021? I just love to understand what we should be thinking about in terms of that comment.

Sanjay Mirchandani

Aaron, it's Sanjay. I'll go first. I'll sort of get to the first part of the question then handed over to Brian. So just at a high level, we are excited about the fact that between Hedvig, the 90-day drops that they're doing with every 90 days that we're doing with Commvault Complete, Metallic, reimagine Activate and other products that make up the portfolio. We've really got a great set of capabilities now. We've essentially launched all of this a couple of weeks ago at Commvault Go. We've got a great sort of capabilities for our customer, customers of all sizes. This and not to forget our hyperscale technology. So if you look at all of that, we've got a great set of capabilities now for customers that allow us to go back in and help them do the entire spectrum of what we call data ready not just manage the data or protected but actually be able to use and analyze that data in different ways.

So that's what we sort of alluding to when we say we have up sell capability. And I'll hand it back to Brian to address the other piece.


So, Aaron, so we've been talking about this for quite some time that we're really excited as we enter FY'21 because it's going to be the first year that we're going to see some meaningful, what we expect to be meaningful renewals of the original subscription contracts that we sold in FY'18. It's going to create an opportunity for some up sell and cross-sell, as well as some of our new technologies that we've recently acquired. And obviously it's early days, it's going to be the first time that we're dealing with that in any kind of magnitude but we think it creates the opportunity as well.

Sanjay Mirchandani

And in the case of Hedvig, just to give you some more color. In the case of Hedvig, we set of a specialized-- we have set of selling capabilities inside the organization, go-to-market capabilities that are dedicated to taking that software-defined storage portfolio into market. So we thought this through pretty well and overlays nicely with our go-to-market segmentation.


Our next question comes from Brent Fill with Jefferies. Your line is open.


Hey, guys. This is Joe on for Brent. Congrats on the results. Good to see the hard work start to show up in the numbers. It looks like the result in EMEA was strong. I believe you guys had noted some macro weakness there last quarter. Any update there? And then I just on the demand environment that region in general.


Yes. No, we had some cautionary statements surround the macro environment especially in the UK could have shown some signs of just softening. But overall EMEA wide, we are actually very pleased with the performance there. I think I mentioned on a call that there were seven-figure deals in each one of our geographic regions including EMEA and we're really pleased with the year-over-year and sequential growth there.


Awesome, great to hear. And then just as a follow-up you guys have been very busy adding products organically and inorganically. We've always viewed you guys is the most complete Enterprise ready solution. I guess, Sanjay, you've been there three quarters now. What's left? Is there anything you're missing or I guess asked another way what's the biggest customer request coming out of Go?

Sanjay Mirchandani

Instead of giving away our products, instead of giving away anything that I might be working but surely I will say to you that the bit that we're sharing with customers that said that that is really resonating is that the hard problems our customers are going to have to tackle with data as they move to multi-cloud, cloud native applications, deep DevOps engagement and automation are going to look a whole lot different than the data problems of yesterday. And we believe that bringing together data management and storage management is truly going to allow us to do things that no one has done.

We feel very good about that. And the Hedvig acquisition was well thought through the technology is amazing. They've got incredible traction from what they are building. So we feel very good about the coming together. So I think our portfolio in time you will see that our portfolio is to bring these pieces together will look like no one else's. And I think we're way ahead of everyone else.


Our next question comes from Eric Martinuzzi with Lake Street. Your line is open.


Yes. Question on gross margin assume for quarter. I know you gave us an EBITDA or EBIT outlook, not gave EBITDA outlook for Q3. I think we were 14% in Q3, just curious where do the gross margins go in Q3 versus the [eighty one eight] that you posted here in Q2.


Hi, Eric. It's Brian here. Yes, good question. Actually in Q2 we actually saw the best quarter ever in terms of our appliance sales for hyperscale. So we are pleased with that then obviously put a little bit of pressure on the gross margin, so we would expect that to probably flatten out and continue into fiscal Q3 and probably for the remainder of the year. And then one other point I want to make going back to Jason's question about headcount. We were actually down a 130 heads sequentially from fiscal Q1 levels.


Okay and then the software sales in the Americas, obviously, as much as you've seen strength outside of the Americas that's really been a sore spot for you. Could -- the success that you're having in EMEA and APAC, could you kind of contrast that with what's --what are you doing right there because obviously we're stumbling in the Americas?

Sanjay Mirchandani

I wouldn't say we're --I wouldn't use that exact terminology on the Americas. I'd say that we've been very transparent that we've been working through a rebuild of our business in America. And for us and we had a good quarter in Q2 sequentially up over Q1 in the Americas. And we're building back. I mean I could give you data points but the fact the matter is we're rebuilding a lot of that open headcount in the Americas where we need more capacity. The partner program is aligning well. We closed our single largest appliance deal in the US this last quarter.

So the hyperscale technology is working well. We just launched Metallic only in the US. So we're building back to US very capably, we just hired David Boyle come in and in conjunction with what we've got Anthony Faustini to do with the global segment. We're doubling down on the US focus and this work in progress. I've never shied away from that.


Okay. And then I know as far as Hedvig's contribution in Q3, you characterized it as nominal. Is there an internal timeline for when Hedvig is no longer nominal? In other words when is Hedvig start ringing the register for us in the top line?


Yes. Eric, it's Brian here. We would probably envision into FY'21. We're not saying that there won't be contribution from Hedvig this year but the majority that was coming up for 2021.

Sanjay Mirchandani

And I just want to remind folks that reason we went into to Hedvig as an acquisition was around the strategic impact it has on our portfolio into future, not to say that the financial impact isn't going to be there. We have some deals on the pipeline for this for the second half, but I just-- we went into for this because of the longer- term strategic, technical impact that IP has on the portfolio.


I get then from what just in the conversations I had with some of your larger enterprise accounts at Go that they're definitely excited about it. I was just trying to get a feel for when.

Sanjay Mirchandani



Certainly appreciate the strategic impact.


Our next question comes from James Fish with Piper Jaffray. Your line is open.


Hey, guys. Congrats on the quarter. Maybe just the kind of double-click on a prior question. The primary storage vendors have all seeing that downtick in spending over the last six months. I guess what are your views on the macro-environment moving forward as it relates to sort of the secondary environment? And what you're seeing specifically with large enterprise is given concern there? It sounds like you guys had a really good quarter outcome large enterprises fit this quarter but just curious how you're thinking about it moving forward?

Sanjay Mirchandani

And if you look at, it's a great question. And if you look at our position than where we've been investing in secondary storage with our hyper scalar. That's an area we felt and we feel is continuing to grow. This is the simplicity of the solution that we bring for customers are key, that's what's causing, this business is getting some good traction now. With Hedvig, what we are able to do for our customer is today and over time, in a more composite way.

It's truly bring together the next generation applications that they want to build, which is, obviously coming off of virtual machines and sort of the VMware environments over into any kind of containerized environments in the multi cloud world. We did -- we do believe that the ubiquity that that software defined storage lay or bring will blow the lines between traditionally thought through primary and secondary storage place.

So it's really about the ubiquity and the ability to be able to build applications on a platform and move it around any cloud anywhere. That's the mindset that we've got here.


Got it. And then Brian, maybe for you, few quarters under your belt now or what quarter now under your belt. Any update as to what you think this business could look like longer term?


Yes. So, James, we're not going to really comment on any specifics. But I will tell you that we're encouraged by the longer- term growth potential, and especially as we increase our TAM expansion with the acquisition of Hedvig with the launch of Metallic, and just the overall go-to-market adjustments that we're making and adding increase sales capacity for the remainder of the year. That encourages us as we move forward.


Thank you. Our next question comes from Dan Bergstrom with RBC Capital Markets. Your line is open.


Yes. Thanks for taking my question. Around Metallic and the additional protection around Office 365. Did you have a previous product that fit with the partner sales motion around o-365 upgrades? Or is that -- is that essentially a new opportunity for you? And then early any early partner customer feedback there?

Sanjay Mirchandani

Dan, this is Sanjay. So we have a product, Commvault complete absolutely and absolutely support Office 365 capability today has for a while. We take it some of those capabilities, not just Office 365 but endpoint VMs files, things that we -- our studies have told us are, and our data has told us that customers in the size of 500 to 2,500 employees need a predefined workflows to get going with a SaaS service. So the Office 365 piece was a very demanded sort of capability that we built into the product, but we had that technology obviously in house for our enterprise customers for a while. So sorry, was there another part of your question that I missed?


Any early feedback on the product?

Sanjay Mirchandani

Yes. So we've got lots and lots of sub trials and lots and lots of activities on the website since we launched it two weeks ago. Partners seem to like it, and I want to reinforce that this technology is delivered only through partners. As our commitment to the partner community and our programs. The feedback so far is very positive.


Thank you. Our next question comes from Alex Kurtz with KeyBanc. Your line is open.


Yes. Thanks for taking a couple questions here. Brian, did you mention to sort of what the impact was the top-line for subscription adoption in the quarter?


We didn't call it off specifically, Alex, but as we've been moving over the past year. Again, we think that's probably in the low-7 figure range in terms of a moderate headwind as we go through our transition. And again, we're kind of looking forward to next fiscal year when those headwinds quickly start turning into a tailwind for us as we start to renew some of the early agreements.


Okay. And just on the hiring of North America reps just the timing of that, how long you think it will take to ramp them to productivity? And kind of what that means for the next fiscal year? So I guess, would you say a lot of your productivity assumptions are really based in the second half? Because it's going to take at least six months to get this crew up and running to sort of what is your linearity of that productivity impacting next year?


Yes. I think when you're looking for the profile of an enterprise sales rep, it does take, two, three, four quarters about to get fully productive. So a lot of the impact will be seen in the beginning of next fiscal year. Then in terms of the hiring activity, I think we're encouraged by what we've seen so far. This quarter, there's an active pipeline. I think we're encouraged so by the new leadership we have in place David Boyle and Riccardo Di Blasio, Anthony Faustini those are attracting to Commvault that we haven't seen before. So we're more encouraged.

Sanjay Mirchandani

We -- once we've opened this up we've got a lot attention on the open positions we have. And I think we're in a good place. We're just working as hard and as fast as we can to fill them. Now while I have you guys in the call, if you know really good sales reps, feel free to send them to us. We can do it faster. We take all the help we can get guys.

End of Q&A


Thank you. And I'm currently showing no further questions at this time. Ladies and gentlemen, this concludes today's conference all. Thank you for participating. You may now disconnect.

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