Commvault Systems, Inc. (CVLT) Q2 2014 Earnings Report, Transcript and Summary

Michael Picariello Neil Robert Hammer - Chairman, Chief Executive Officer and President Brian Carolan - Chief Financial Officer and Vice President of Finance Alan G. Bunte - Chief Operating Officer, Executive Vice President and Director

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division Jason Ader - William Blair & Company L.L.C., Research Division Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division Andrew J. Nowinski - Piper Jaffray Companies, Research Division Gregory Dunham - Goldman Sachs Group Inc., Research Division Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division Aaron Schwartz - Jefferies LLC, Research Division Michael Turits - Raymond James & Associates, Inc., Research Division Glenn Hanus - Needham & Company, LLC, Research Division Abhey Lamba - Mizuho Securities USA Inc., Research Division Alex Kurtz - Sterne Agee & Leach Inc., Research Division Robert P. Breza - RBC Capital Markets, LLC, Research Division Srini Nandury - Summit Research Partners, LLC Philip Winslow - Crédit Suisse AG, Research Division

Good morning, ladies and gentlemen, and welcome to CommVault's Second Fiscal Quarter 2014 Earnings Call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Michael Picariello, Director of Investor Relations. Please go ahead, sir.

Good morning. Thanks for dialing in today for our fiscal second quarter 2014 earnings call. With me on the call are Bob Hammer, Chairman, President and Chief Executive Officer; Al Bunte, Chief Operating Officer; and Brian Carolan, Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made during this call, including the question-and-answer session at the end of the call that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Actual results may differ materially due to a number of risks and uncertainties, which are discussed in our SEC filings and in the cautionary statement contained in our press release and on our website. The company undertakes no responsibility to update the information in this conference call under any circumstance. Our earnings press release was issued over the wire services earlier today, and 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 will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found in Table 4 accompanying the press release and posted on our website. This conference call is also being recorded for replay and is being webcast. An archive of today's webcast will be available on our website following the call. I will now turn the call over to our CEO and President, Mr. Bob Hammer.

Thanks, Mike. Good morning, everyone, and thanks for joining our fiscal second quarter 2014 earnings call. Our fiscal second quarter results continued our trend of delivering consistent double-digit revenue and non-GAAP operating income growth. Let me briefly summarize our Q2 financial results. Total revenues were $141.9 million, up 20% year-over-year and 6% sequentially. Software revenue was $70.8 million and grew 20% year-over-year and 8% sequentially. Services revenue was $71 million, and grew 21% year-over-year and 3% sequentially. From an earnings perspective for the quarter, operating income or EBIT was $37.8 million, up 31% year-over-year and 20% sequentially. EBIT margin was 26.6%, diluted earnings per share were $0.48. We generated approximately $24.5 million of cash flow from operations during Q2, exiting the quarter with approximately $485.1 million of cash and short-term investments and no debt. Our revenue growth was aided by the continued solid market reception of Simpana 10, which I will discuss in more detail later on in the call. Let me spend a minute speaking about our business environment. Recent quarterly results of leading tech companies in our industry indicate there was some slow down and saturated IT spending and push-outs of larger deals. On a more positive note, for the first time in many years, we are experiencing improvements in all the major regions of the global economy. The situation in U.S. is improving at a slow pace, Europe has finally come out of recession and there is positive momentum in Asia-Pacific. We are assuming storage-related IT spend will gradually improve, but still remain lackluster through the end of our fiscal year 2014. We expect to see continued weak spending from the U.S. federal sector. Globally, we are assuming overall market demand for our software and services were marginally improved. The key customer needs that are driving demand for our product and services remain intact. Now, let me address our current outlook. We have had good financial results for the first 6 months of FY '14, in which total revenues grew 20% year-on-year and EBIT increased 34% year-on-year. The first half results, combined with strong first half funnel growth, provided good foundation for us to build on for both the second half of FY '14 and for the start of FY '15. We continue to believe, we will be able to achieve solid double-digit revenue and EBIT growth in fiscal 2014. We believe that current FY '14 street consensus growth rates of total revenues is reasonable. Brian will provide guidance on operating margins. While we believe our business fundamentals are strong, our outlook needs to be tempered with the following words of caution: As noted earlier, tech spending has moderated. Many companies in the industry have reported big deal cancellations and push outs. We are assuming there will be some softness in big deal demand, as stated on prior earnings calls, big deal growth is critical to achieving our financial goals. By big deals we mean software deals greater than $500,000. We are particularly cautious about U.S. federal government spending due to uncertainty associated with recent fiscal impasse. Although macroeconomic conditions have improved in EMEA, we continue to be concerned about European IT spending and outlook. And there is increased execution risk tied to the implementation of our all-things data strategy, which is a major corporate-wide endeavor. I will discuss this issue in more detail later on in our call. In summary, the company had a good first half fiscal 2014, and is in good position to successfully achieve our annual objectives for FY '14. We expect to continue to significantly outpace the growth of the market and pick up market share. However, on a relative basis, since last quarter's earnings call, we do believe revenue and earnings risk has marginally increased due to big deal demand and strategic execution risk. I will now turn the call over to Brian.

Thanks, Bob, and good morning, everyone. I'll now cover some key financial highlights for the second quarter of fiscal year 2014. Total revenues for the quarter were $141.9 million, representing an increase of 20% year-over-year. We reported software revenue at $70.8 million for the quarter, which was up by 20% or $11.6 million over Q2 of FY '13. During Q2 FY '14, our software growth was driven by strong demand for data protection for virtualized environments, source-side deduplication and snap-based modern data protection solutions. We continue to see strong demand for our capacity-based licensing models, which has a direct correlation to the underlying volume of data under management. Capacity-based license sales represented 80% of our Q2 software revenue, which was up from 74% in Q1 FY '14 and 64% in the prior year period. For the quarter, software revenues derived from indirect distribution channels increased 26% over the prior year period and represented 93% of software revenue. Our direct revenue represented a balance and decreased 28% over the prior year period. Please remember, most sizable deals are driven by our direct sales force even though there are transactive through the channel. Let me now comment on enterprise deal mix. Software revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, increased by 23% over the prior year period and 14%, sequentially. Enterprise deals represented approximately 57% of software revenue. The number of enterprise deals increased 3% year-over-year and 4% sequentially. Our average enterprise deal size was approximately $295,000 during Q2 '14 compared to $247,000 in the prior year period and $268,000 in Q1 FY '14. Software revenue from non-enterprise deals increased 15% over the prior year period and 1% sequentially. The revenue mix for Q2 FY '14 was 50% software and 50% services. And from a services revenue perspective, our maintenance attach rates and renewal rates remain very strong. Services revenue for Q2 was $71 million, an increase of 21% year-over-year and 3% sequentially. For the quarter, revenue from U.S. operations generated 59% of total revenues resulting in a 12% year-over-year increase. While revenue from international operations generated the balance resulting in a 35% year-over-year increase. The growth in revenue in our international locations is primarily due to increases in Europe, Canada and Asia-Pacific as we expand our international operations. On a year-over-year and sequential constant currency basis, foreign currency movements did not have a material impact on either Q2 revenues or earnings per share. From a distribution perspective, many of our global resellers and strategic partners had strong growth. We saw a very good performance through Arrow, our largest U.S. distributor. For the quarter, revenue transacted through Arrow was approximately 32% of total revenue, growing 33% year-over-year and 15% sequentially. Sales through our Dell relationships accounted for approximately 19% of total revenues for the quarter. Total quarterly Dell revenues grew 11% year-over-year and was flat sequentially. As noted on prior earnings calls, we have taken proactive steps to broaden our distribution through non-Dell channels. Over time, these actions will lead to decline of our percentage of total revenues transacted through Dell. We expect to see Dell revenue to further decline in our fiscal Q3. We added approximately 400 new customers in the quarter. Our historical customer count now totals approximately 19,000 customers. Now moving onto gross margins, operating expenses and EBIT margin expansion. Gross margins were 87.4% for the quarter. Total operating expenses were $84.7 million for the quarter, up approximately 16% year-over-year and 1% sequentially. We added 99 net employees in fiscal Q2 and ended the quarter with 1,896 employees. Non-GAAP operating margins were 26.6% for the quarter, resulting in operating income or EBIT of $37.8 million. On a year-over-year basis, Q2 EBIT increased by 31%. Q2 EBIT margins increased by 220 basis points year-over-year, and increased 330 basis points sequentially. For the first 6 months of fiscal 2014, operating income grew 34% year-over-year. EBIT margins were 25% as compared to 22.4% during the first half of fiscal 2013. Sales and marketing expenses as a percentage of total revenues decreased to 44% in Q2 '14, from 45% in the prior year period and from 47% in Q1 '14. The sequential decrease in sales and marketing expenses is mostly due to our global sales kickoff event in fiscal Q1, and lower than planned spending on several investment initiatives. We plan to increase the rate of our operating expense investments in the second half of FY '14 to better position the company for our all-things data strategy, which Bob will elaborate on, later on in the call. We need to make these investments in FY '14 in order for us to achieve our targeted FY '15 and FY '16 growth rates. Such investments are expected to have a negative impacts on short-term margins. For the remainder of FY '14, we still expect to achieve solid double-digit revenue and EBIT growth. As Bob indicated, we are comfortable with the current street consensus revenue growth rates for FY '14. In addition, due to the overachievement of forecasted EBIT margin in the first half of fiscal 2014, we now anticipate that operating margins for FY '14 will improve by approximately 100 basis points. Let me now comment on tax rates and share count. We'll continue to use a pro forma tax rate of 37% for FY '14. Our GAAP tax rate for Q2 FY '14 was 35% and we expect our full year FY '14 cash tax rate to be in the mid- to high-teens. Our cash tax rate will approach our long-term GAAP tax rate over the next few years. Net income for the quarter was $23.9 million and EPS was $0.48 per share based on the diluted weighted average share count of approximately 49.7 million shares. For fiscal 2014, we anticipate that our diluted weighted average share count will be approximately 49.5 million to 50.5 million shares. Please note that certain executive officers of CommVault hold approximately 400,000 outstanding stock options with an exercise price of $6 that will reach the end of their 10-year term in the next 9 months. We expect that all of these stock options will be exercised prior to their expiration. Now moving onto our balance sheet and cash flow. As of September 30, our cash and short-term investments balance was approximately $485 million, up 6% from the end of June. Cash flow from operations was $24.5 million. Free cash flow, which we defined as cash flow from operations, operations less capital expenditures not related to the new headquarters, was $23.2 million, which is flat both over the prior quarter and sequentially. Cash flow was flat due to changes in working capital, particularly timing of customer payments. For the first 6 months of FY '14, cash flow from operations was $49.1 million, up 16% year-over-year. Free cash flow for the first 6 months of FY '14, excluding capital expenditures not related to the new headquarters was $46.5 million, up 17% year-over-year. Typically, cash flow from operations is strongest in the second half of our fiscal year. During Q2 FY '14, we expended approximately $15.2 million on construction costs for our new campus headquarters. Our estimate of the total cost remains in the range of $130 million to $135 million. We expect to spend approximately $50 million over the remainder of FY '14, but the timing of our cash expenditures is dependent on the progress of construction, which is currently on schedule. Please keep in mind that we'll fund these expenditures from our existing cash balance. As of September 30, 2013, our deferred revenue balance was approximately $191.2 million, which is an increase of $36.6 million or 24% over the prior year period and up $2 million or 1% sequentially. There was a higher balance of deferred software that was on the balance sheet at the end of June, and was subsequently recognized as revenue in Q2. Please remember, typically, our deferred revenue balance is comprised mostly of deferred maintenance, not deferred software. Deferred software will fluctuate from quarter-to-quarter based on larger deals. Deferred maintenance was up 22% year-over-year and 4% sequentially. For the quarter, our day sales outstanding or DSO was 53 days, which is down from 55 days in Q1 FY '14 and up from 49 days in the prior year quarter. The change is due to linearity within the quarter. And lastly, the Board of Directors recently increased the amount available for share repurchases by approximately $47 million, so that there is now $150 million remaining in our stock buyback program. The repurchase program has also been extended for 1 more year through March 31, 2015. There were no share repurchases during Q2 FY '14. Also, at our annual stockholders meeting in August, we received approval for an Employee Stock Purchase Plan, which will allow our employees to purchase shares in the company. 3 million shares have been authorized for issuance under the plan, which we expect to launch to employees in February. We'll be filing a registration statement for this plan shortly after our 10-Q is filed. That concludes the financial highlights. I will now turn the call back over to Bob. Bob?

Thank you very much, Brian. I want to wrap up the call with a brief commentary about our all-things data strategy and an update on Simpana 10. Our strategic marketing objectives are to continue to strengthen our position in our core data management market and establish strong positions in our data related market segments that have higher growth potential and offer the opportunity for higher profitability. We call this our all-things data strategy. CommVault's goal is to achieve our strategic market objectives, while at the same time, leading consistent industry-leading revenue and earnings growth. Our all-things data strategy addresses the key, new and emerging data-related needs of our customers and opens up many new market opportunities. As discussed previously, we believe our available market opportunity expands by approximately 6% over the next few years. In order to implement this strategy, we need to make major changes to how we package, price, deliver, distribute our leading solutions in our core data management market, as well as develop and implement unique go-to-market strategies in our other new data related market segments, such as mobile, compliance, operations management and other content, analytic related vertical solutions, such as those for healthcare. Even though each of our solutions is built on innovations on the core singular Simpana platform, each needs to be packaged and sold with their own specific value proposition. In addition, each solution must be optimized for the proper distribution channels and delivery models that match how customers want to acquire that technology. For example, delivery models could include self-services, cloud or appliance delivery models and pricing models could include perpetual, term or subscription licenses. Pricing could also include a value based pricing model that will be a complementary addition to our current capacity based pricing models. CommVault's all-things data strategy is our exciting path to sustain long-term growth and profitability. Implementing this strategy is a major company-wide effort. We understand undertaking, an aggressive, innovative strategy like this has increased execution risk. In this regard, we have initiated a number of actions to mitigate those execution risks. We believe that not executing an aggressive innovative strategy is a sure path to the boneyard of failed tech companies. As a reminder, we have or developing leading solutions as part of our all-things data strategy that address the following major needs and challenges of our customers due to tremendous increases in data scale and complexity. The introduction of cloud based applications across many different business solutions, the emergence of mobile and bring your own devices with increasing needs for anywhere, anytime accessibility and security. The need to easily and cost effectively archive fully indexed data compliance, regulatory and business needs. The need to improve operations through better, more comprehensive reporting, maximizing the IT infrastructure, labor and power utilization and minimizing downtime and to automate all processes. The accelerating needs for better, timely business intelligence to more sophisticated data analysis and business analytics. In summary, we participate in an exciting market that has many high growth, high profitability segments. We have developed technology and services to address those segments. Our future success depends on our ability to successfully execute a number of very significant changes to how we package, price, deliver and distribute and sell those solutions. Now, let me spend a minute updating our Simpana 10, which is the technical foundation of the strategy. This is a key milestone in the Simpana 10 control launch base with over 1,000 Simpana 10 customers deploying the new platform. We also achieved our objective of completely opening up Simpana 10 upgrades to all customers in September. Simpana 10 has been very well received in the market. Following are some of the areas that are gaining the strongest traction in the market. One is significant improvements for better back up in modern data protection. We have made significant improvements in scale, performance, Snap replication and the introduction of highly scaleable global deduplication. Number 2, we have expanded and enhanced the management of virtual machines well beyond traditional backup. We have developed new automatic retro machine management capabilities, such as power reduction, storage migration and image archiving behind virtual machine or VM clouds. Number 3, we have developed a new ability to manage virtual machines sprawl with many organizations now struggling to keep pace with the uncontrolled growth of virtual machine, the opportunity to start archiving our unused or unneeded VMs is now a key issue for our customers. As we have announced back in August, and we have developed a unique solution to solve that problem. Also this quarter is our new reference copy, archive option, which enables customers to archive database and content relevancy rules. This has the potential to use cost by up to 70% for business solutions like compliance. We can do this because we index all the data very cost effectively and in massive scale. These are capabilities well beyond harbor based solutions. The new generation of archiving now becomes the foundation of how we change and transform data from recovery oriented data to sets -- recovering our data sets to content rich organized information collections that can be used to enable users sharing and collaboration, business record management, business analytics and content oriented repositories. Now, let me spend a minute on talking about our next-generation comprehensive solutions for the mobile workforce. Today's workforce is becoming increasingly more mobile. As a result, more and more valuable information that needs to be managed, protected, accessed, indexed and archived for business solutions like compliance is outside the data center and IT's control. As part of that Simpana single platform, CommVault Edge technology forms a complete enterprise class solution that delivers efficient, centralized laptop/desktop data protection, secure anytime, any device access to the personal data via the cloud and fast cost-effective search and eDiscovery. Mobile work is secure -- securely access the data through an intuitive web interface with apps, smartphones and tablets and natively in Windows Explorer. With a click, workers can automatically synch files and folders across all PCs, mobile devices and could be set up for immediate access. This enables a customer's mobile workforce to get what they need, when they needed. It eliminates the need to rely on third-party consumer on-net services for cloud file storage and takes the burden off a high-priced corporate IT resources. In addition to new products, such as CommVault Edge, we have made very good progress in 2 other key areas that are critical to implementing our all-things data strategy. The first is broadening and deepening our professional services and consulting services capability. We have substantially increased both the size and scope of our global professional services organization with the addition of highly skilled consultants, as well as the roll out of new consulting services. Secondly, we have strengthened our ability to increase our positions with them as MSPs for managed service providers, outsources and systems integrators for the formation of a focused global team, the Cloud Services group. These new capabilities are resonating extremely well with customers, our catalyst providing customers with value well beyond simple backup. Let me spend a minute talking about some products we will release in the very near future. We will launch these as part of our Simpana 10 platform and they include leading edge next-generation products for SharePoint and exchange archiving. Two, lower end data protection products, which will be sold through high velocity SMB reseller channels; self-service try and buy products for the SMB market, including products targeted to the virtual machine administrator and products aimed at replicated task recovery; and lastly, increased partner option of IntelliSnap, which is data aware management of snapshots. We will provide more details on these products at the appropriate time. Please note, the development and timing of any release, as well as any of its features or functionality remain at our sole discretion. In closing, we had a solid FY '14 Q2 in revenue and earnings growth, which establishes a good foundation for the balance of the fiscal year. Q3 is also a good start despite lingering macroeconomic concerns and political uncertainty. Simpana 10 is also off to a good start and we continue to gain market share. Our all-things data Strategy is our exciting path to sustain long-term growth and profitability. And we will continue to invest across the company to ensure the successful execution of that strategy. We are excited about FY '14, our future potential and are very confident in our ability to continue to grow the company at double-digit growth rates. Our next financial milestone is $1 billion in revenue and operating margins in the mid-20% range. We have defined plans in place that we believe will enable us to achieve that milestone over the next several years. I will now turn the call back to Michael.

Thank you, Bob. Operator, can we please open the line for questions.

[Operator Instructions] Our first question comes from Joel Fishbein from Lazard Capital.

I have 2 -- 1 question and a follow-up for Brian. I'm getting a lot of questions, Bob, from investors on the deferred line. It was up 24%, looks like a good number to me, but because I guess it's not what The Street was expecting. It caused some confusion. How meaningful is this metric, and if you could give some color on that, that will be helpful?

I'll let Brian answer and then I'll provide some additional color.

Yes, Joel. Just keep in mind, our deferred revenue balance called about 90% of that is deferred maintenance revenue that just comes off the balance sheet and gets recognize. The other remaining portion is for professional services and also software. Software being the kind of the smallest portion that's in there. And software will fluctuate from quarter-to-quarter depending on the timing of recognition of very large perpetual deals. So that, in total, it did go down quarter-on-quarter, but deferred maintenance was up 4% quarter-on-quarter, and I think the totality of deferred revenue was up 24% year-over-year, which is a fairly strong growth, as you said.

Yes, and then you also commented that you had a very linear quarter 2 and DSOs went down. So I guess it was just more of a timing for the bigger deals like you said.

That was what I was saying, Joe. I think the key stat behind that is that, you've heard me comment about visibility and funnel. The combination of visibility and funnel has also improved on a relative basis. So the way I would read into that is, our business momentum has clearly increased despite of the -- as you would call it, very difficult environment. But our momentum has improved. But also it has to improve for us to hit the kind of numbers we want. So fortunately, so far and we've seen that momentum improvement occur, now we need to translate that momentum into revenue over the next couple of quarters. But clearly, it's at a level where the opportunity is there for us to achieve our numbers going forward.

Great. Brian, just a quick follow-up on the operating margin. You hired a lot of people this quarter and margins expanded dramatically. I think I heard your guide for the year is up 100 basis points year-over-year. Can you just give us a color on how you're -- where you're seeing the leverage points are considering, you are so aggressively hiring and as Bob indicated, you got a lot of initiatives going right now as well?

Yes. So we're going to continue to invest throughout the year, we're going to ramp up our operating expense spend. We're going down the path of the all-things data strategy. We need to invest in customer phasing and technical resources and keep in mind that as the year goes along, our compensation plan rates will kick up and go to higher rates as they accelerate ahead this quarter.

Our next question comes from Jason Ader from William Blair. Jason Ader - William Blair & Company L.L.C., Research Division: Bob, I wanted to ask on the slowdown of the U.S., looks like it's much lower than the international. Obviously, very good performance internationally in a tough environment, but in the U.S., up 12%. Is this due to kind of the large deals slowing down a bit and then the federal impact and how do you see this playing out going forward?

No, I had nothing to do with either 1 of those. Last quarter, U.S. was up 30%, international 9%. And in this quarter, international was up 35% and U.S. was up 12%. And you'll see that flip again. It's just the timing of big deals that come through and get recognized. That's all it is, and you'll see it flip around again. So I wouldn't read anything into that stat because the total revenue growth of 20% is pretty consistent, even as Joel mentioned, this environment is tough and we seem to be gaining momentum within a tough environment. But again, I would not read anything into the flip between international and U.S. Jason Ader - William Blair & Company L.L.C., Research Division: Okay. Bob, can you comment specifically on federal, and what you saw in both the September quarter and then also what your outlook is for the December quarter for federal?

Well, we had -- I felt in general, demand was poor, but we had a reasonably good federal quarter. It was 9% of our -- excuse me, 11% of our revenue, up from 9% of total revenue, a year ago and it was 43% higher year-over-year. So -- and that all ties to basically timing of big deals, because the business is lumpy. And in general, I would say the outlook at federal is, in general is weak, but we have some, again some relatively large opportunities within federal that could mitigate that. So you might see some lumpiness in it, but so far the lumpiness has been in our favor. And you might see it again, by the way, going forward because we have some opportunities again to mitigate generally poor environment with some CommVault-specific opportunity. Jason Ader - William Blair & Company L.L.C., Research Division: Okay. And then just last 1 from me. Just trying to reconcile about your comments kind of in the Q&A here and then from the script. You said the visibility in funnel has improved on a relative basis in the Q&A, but during the script, you said on a relative basis, risk have risen relative to last quarter. So, how do we reconcile those 2 comments and where is the visibility in funnels improving, then why should we be worried about some of those risks?

Well, the funnel has improved very significantly. The key is translating that funnel into deals. So yes, the opportunity in a number of deals is up, I'd say pretty dramatically. But we still -- we understand we're in a weak environment and also lumpy. So when you start getting into physically 7-figure and multi-7-figure deals which makes a difference in our performance, we're just issuing a concern. I think the positive is that the opportunities are there and the negative is we're in an environment and those deals get pushed out, there could be some future problems. And on the execution risk, I mean clearly, we've made the right bets. We've made the right bets in the right markets and we're getting good customer response in regard to those bets. But there's a lot of change, I said it before. We want to be transparent as a management team here and we are making a lot of changes. They're exciting, but they're also compelling and they're broad-based around the company, so the senior team is all over this issue. But when you're making changes, there's always risk attached to it, Jason, and I want to make it really clear, the strategy is awesome. Opportunity is great. But we've got a lot of things to do to make sure we execute that strategy and it's a compelling task. So far, we're making lots of progress, but it's not just paint by the numbers here.

Our next question comes from Aaron Rakers from Stifel. Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division: First on a quick follow-up, just so I'm clear on the operating expense line. Last quarter, you had suggested that you missed your hiring plans. Would you say this quarter you hit the hiring plans as far as headcount expansion?

No, we did not. We did not hit our hiring plans. Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then as far as the large deals, I know the average deal size north of $100,000 was -- it looks like the highest I've ever seen. You talked about potential risks associated with $500,000 plus deals. At what point are you able to share how we should think about that contribution falling into the model and obviously using that as a gauge for judging the risk of that lumpiness quarter-by-quarter?

Well the problem -- I mean, if we had some consistency in it that we could benchmark, I'd share it. So right now, we're just sharing it on a relative basis, Aaron. But it just moves -- at this point in the company's history, it is just too lumpy to get in light of this much this quarter, that much that quarter. It just moves around too much. I will say, again on a relative basis, that the opportunities in that category have increased quite substantially. Year-over-year, I'd say dramatic, up in -- it's opportunity now. Expansion and opportunity, and now, we'll see how we can get more consistent in translating the -- let's say, the funnel into revenue. Revenue is not just closing a deal, by the away. Revenue is closing a deal and we've got, I think everybody is aware, extremely strict rules to go, that are tight on revenue recognition and appropriately so, to make sure that we've got the highest quality of earnings in the industry. And so you can close on it but if that not the revenue, you'll see them pop in and out of the balance sheet. That's what or maybe they shed off balance sheet, but they're not even recognizable from a balance sheet standpoint. Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then final question for me is, I think you released Simpana 10 here in installed base at the end of the September quarter. It also seems like you've got a lot going on with this all digital strategy that you've put in place. Maybe you could talk a little bit about how we should expect the ramp of Simpana 10 into the existing customer base and then how do you think about the packaging or pricing models, when you expect those strategies to be implemented and put in place as far as the all things digital?

Al will take this one, Aaron.

Hi, Aaron. So on the flow into the base there or the rate of V10, it's moving along very quickly, as you noted, since we opened it up in September. I think Bob commented that we're over 1,000 sales. As of this morning, we're somewhere around 1,400, maybe a little bit over. That's continuing at like somewhere in the 100 a week range. So we're pleased with that. The uptake's been tremendous. The thing that I'm really pleased about on the uptake here is we're quite innovative on the upgrade process. We opened up to our base the idea that you could run a cloud analytics program, if you will, to take a look at the operational characteristics of your operating sales, so to speak. We would peruse it, we would look at it and we would also assign a development engineer to the upgraded process. And that's been extremely well received, not only by our customer base, but internally in terms of understanding what the customer base is looking at. So I think that will help us tremendously going forward.

So the quality of Simpana 10 and the appeal has been, by far, the best product we ever released. So there's ability, quality, customer experiences at a record high relative to past releases.

Our next question comes from Andrew Nowinski from Piper Jaffray.

Just wanted to clarify. On the software revenue growth, it was still below normal seasonality, I guess, for the second consecutive quarter. Is that just a factor of the late releases of Simpana 10 into your installed base this quarter?

I don't think so. I think that the environment is tough out there even though we're doing really well with it. When you see competitors at minus 5% and we're at 20%. So the gap of performance between us and our competitors has actually widened. So I think it's a factor of that. And some of it is a factor of as we shift in our products' market segments, that does impact it somewhat. So I think there's a potential, put it that way, for that to accelerate going forward, but with the risk as I've noted it. So I think we are on with the Simpana 10 and moving the strategy along, the foundation is certainly getting stronger as we go forward here.

Okay, understood. And then on the managed service provider vertical, that's historically been a very strong growth opportunity for CommVault, particularly with the likes of Rackspace and others. Can you just provide an update on the adoption that you're seeing of Simpana 10 within that vertical and where it ranks amongst your other verticals?

Yes, Andrew. Well as Bob noted in the call, it's been a key area of investment for us. We've put a really good team on this starting first of our fiscal year. The numbers continue to be good in that space. We're excited, continue to be excited about the opportunity there. Some longer-term opportunities got covered during the quarter. So we're feeling very positive about it. And above all, as Bob said, we feel really strongly about it as the right move as a business, because a lot of demand for IT services are shifting to that vertical. So it's strong for us.

Yes, just on a relative basis, that sector is growing significantly more than our 20% growth rate. Year-over-year, and what Al was saying is that we signed one of the major MSP providers globally this past quarter.

Yes.

Our next question comes from Greg Dunham from Goldman Sachs.

I want to dig in a little bit on the timing of the go-to-market changes. How is that going to progress over the course of the next several months and quarters. And then can you characterize the level of change versus prior iterations of the go-to-market that you've put in place? Thanks.

I'll start it and let Al comment as well. The Company has gone through lots of transformations over the years. And I would say the level of change on this one is probably the biggest we've made. We're also doing it with the strongest amount of foundation and capability to enable us to execute that change. So when you start talking about new market segments, new pricing models, value propositions, positioning, delivery models, you're talking about a lot of change. Again, the company has a strong foundation and capability to execute it. But it's large and timing is as we speak. So I'll let Al expand. So we're all over this as a senior team and understanding it, checking it, making the appropriate adjustments as we execute to see what's working and what's not. Al's right in the middle of this and he can comment further for you.

Yes. Just a couple of additional comments, Greg, as Bob said, it's a big deal. We do have a plan, that's typical of us, we believe we've thought our way through it pretty carefully. It involves all the comments he made in the script of pricing and delivery methods and go-to-market vehicles. Looking at detailed use cases in many cases, digging well under the broader platform capabilities. So it's going to take a while. We're through it, we're on it, I mean. I would guess at least 3 to 4 quarters of detailed work here to get a lot of these things out there. But again, we have a plan. We're making progress every day on it and we'll continue to move it along.

By the way, it's consistent with what I've said in the past, which FY '14 was our foundation to get these core initiatives in place, that we would see revenue contribution in FY '15 from those initiatives. I'd say our confidence level of achieving those in FY '15 has gone up dramatically. But I think the recognition normally of the task is also -- we've realized that and taken the appropriate steps. And so I'm comfortable, achieve what we need to achieve in '15, maybe a little bit more than we originally thought. And as I said earlier that in FY '16, '17 this will become material part of our contribution and I'm also confident that given the path we're on -- we will achieve that objective as well.

Our next question comes from Eric Martinuzzi from Lake Street Capital.

My question has to do with competitive landscape, interested in any changes there. Not necessarily the players and I assume it's still the Symantecs and EMCs and IBMs of the world, but I'd imagine given the pressures in their own top lines, they're trying new things and I was curious to know if you've seen any evidence of that.

Yes, that's with the pricing. Those guys are completely irrational in their pricing policies, trying to do -- I mean we've become public enemy #1. So any tricky, crazy pricing initiative they can possibly think of, they threw at customer and we're pretty savvy in understanding what those are and can parry them pretty well. But that's their primary weapon, if you want to call it. It's our pricing and so we're pretty well attuned to what each of these different vendors are doing there and kind of respond accordingly. So my answer to them is, bring it on.

You've talked in the past about competing against free. Is it typically -- is it free on that product, is it bundling of other things? I'm just interested in the difference versus years past.

I think it's different, peculiar bundling. What some of the unnamed competitor will do with that they will bundle, discount their price and then when maintenance renewals come up on their hardware, they have -- they call it a profit improvement program to make up for the loss of the initial discounted price on a deal. So we're well aware of those kind of tactics. So yes, it is bundling. And the customers -- the customers are aware of it. They're not happy about that either. They know what these guys are doing. And so in most cases, that is not a strategy that builds a lot of customer loyalty and they know in the future, maintenance release they're going to be taken advantage of because they are stuck. So maybe Al wants to comment a little bit on this?

No, I think that hits pretty well. The bundling as Bob said, is very clever. I mean it's designed to hit different budget buckets out there. So it's just not one bundle that you consistently go in and see in there. But it is fairly creative on how they go in and attack it and we see it on a consistent basis, particularly in larger environments.

Our next question comes from Aaron Schwartz from Jefferies.

I had a follow-up question on I guess Simpana 10 and the go-to-market. For company or for customers that are upgrading to 10 now with the capacity base license, presumably they have access to all the features through that license. If you're allowed some of these changes into next year, can you just sort of walk through the mechanics of that conversation with the customer there, additional products that they need to license that are not part of the 10 upgrade, or what, from a mechanical standpoint actually happened and what's that conversation like with the customer?

So there are 2 parts. Al is going to take this, but one part is upgrading but they have, and 2, is the whole discovery and educating customer on what are the other opportunities for us to help them solve all the problems, beyond data protection. So I'll let Al take it, because he's driving this.

Yes, Aaron. So it starts with what they have, and look in our environment and see just exactly what they have, what they're using, what they're deploying and the first step is to make sure that it's all optimized. We've initiated the kind of a formal program on that as we go around. To your point, there aren't a ton of people that have bought everything. New size, new features sets out there, even people who've bought the whole platform. So there's new things that come along, mobile is probably a good example of that in the recent releases and/or new things drive more capacity under management is another way of thinking. But back to the point, so we go in and take a look at what people are doing, what they're using, what they're deploying, were they seeing operational benefits. I've said many times, we're all about customer value. We're trying to really make sure that's exemplified out there. And then as he also said, now moving forward, looking at newer feature sets, usually around content, a lot of our existing use cases are primarily focused on recovery and active archive, if you will. So now going forward, taking a look at content related applications, that's where we're getting a lot of the verticals, compliance, et cetera. And again, there's a big opportunity on that and both in terms of revenue and market opportunity down the road.

And unique to this what Al was saying underneath there is our ability to index all the data at the time. We see it and understand the context of that data. And that's different from many of the other vendors in the industry. So that allows us to seamlessly bridge the gap between what I call typical data protection recovery and content-related application. So it's seamless. Same copy, but we can provide a lot of different use cases for that copy of data.

Okay. And a quick follow-up if I could, probably for Brian. On the deferred software, I know you covered it and it's a small component, but from the metrics you gave, it looks like that was down about $5 million sequentially. Is that roughly in the ballpark?

It's close to that, about $4.5 million, sequentially.

Our next question comes from Michael Turits from Raymond James. Michael Turits - Raymond James & Associates, Inc., Research Division: So just a follow-up on the deferred and then a question on competition. So on the deferred, it sounds like it's pretty lumpy and obviously at the fall of this quarter in the license space. But as we calculate billings or bookings that they were below the rate of revenue growth this time, typically they have been about the same. So given the lumpiness, does that make sense, Brian, to think that breaks it starts to have back up towards your revenue growth rate?

I would say that, yes, that's correct. You're going to see that swing from quarter-to-quarter. I wouldn't read into the quarterly swings, but over time, it should match. Michael Turits - Raymond James & Associates, Inc., Research Division: Okay. And then, Bob, you made some interesting comments last quarter about what you called the something like very broader increased competition or new forms of competition in the data centers, some of your customers move to SaaS models and the cloud models. Is that something -- maybe give us a little more detail in this quarter?

Well I think, that's proving to be more of an opportunity, and I'll let Al expand on that, for us because of our ability to manage our hybrid on-premise cloud environment. So that -- when going to the customers, it's a big advantage for us and I'll let Al expand that as to why. And on the flip side of that, some of the smaller newer vendors have come in at the lower end of the market, we just have released a series of products and there have been no series of product release this quarter aimed at, we call it high velocity SMB, whether it's for virtual machine solutions or data protection solutions or high availability recovery solutions. We've done a pretty good job there of making sure that we can expand our SMB footprint as well. So just swinging back on the first part of that question to the cloud and why this has become more of an opportunity than an issue for us. So I'll let Al speak about it.

Yes. I think, like I say, I think we were on the right track a quarter or so ago. It continues to play out there, it's extremely high demand. The world according to me, Michael, is the cloud market is bifurcating somewhat between the infrastructure people and the management people. We think the opportunity is usually on the management side for a lot of typical reasons. And to that point then, a lot of things that we've put into our products set relate to the management, particularly the operational side of the equation. We think we're very differentiated on the things we're doing there, be it automated workflows, be it the way we're doing our metrics, the way we're doing our reporting, the analytics against all the data, say from or captured from an operational environment. I think, it's highly unique and it adds real value to these big MSPs and they're unique in their operations in that they're extremely dynamic and it's high-volume, high-velocity. So we feel like we've got a good fit for that opportunity.

And on the back end of the application side of that, in terms of how you manage and protect applications in the cloud, it's a little bit different. But we're also well positioned for that as well. And you may want to comment on that.

So obviously, you have the multi-tenancy issue or different views, for the same operational set of data there. One is the people managing it; two, the people that own the date and the security has to be respected, obviously. You need enough depth to understand what you have and where it's going and what the operational aspects of it are. So again, unique.

Our next question comes from Glenn Hanus from Needham & Company. Glenn Hanus - Needham & Company, LLC, Research Division: A quick follow-up. So on the hiring front, did you get in light of the environment, did you deliberately hold back some this quarter or was it just kind of execution in finding the right people and bringing them on. Are you kind of a little bit more cautious on the OpEx side recently and going forward or is it more just sort of executing on difficult aggressive plans?

I'd say it's a little bit of both, but it's primarily execution. Just didn't do what we said we needed to do in certain areas. Glenn Hanus - Needham & Company, LLC, Research Division: Okay. Do you want to comment at all on some of your other distribution partners, Hitachi? How things are progressing with perhaps NetApp? Even, any other comments on some of the other partners?

Hitachi in the field, we've got, I'd say globally extremely good traction and very high growth. Obviously we've done really well with -- in the U.S. with Arrow and the whole distribution network that resale network underneath them, particularly on some of the higher velocity initiatives in the Dell replacement with partners like CDW. We had completely mitigated any Dell risk. With those kinds of initiatives and you'll see it in our numbers going forward where Dell is going to go down and our growth will continue to be -- likely continue to be really solid. NetApp, I'll let Al comment.

Continues to be positive momentum. About what the company is doing in terms of growth rate. We do keep our expectations low there and externally, as we -- until we get something momentous to talk about there. But again, positive.

Our next question comes from Abhey Lamba from Mizuho Securities.

Bob, you seem to be doing pretty well in Asia-Pacific and Europe, while most of the other players are having a hard time in that region. Maybe you can talk about a little bit about what are the big factors driving out our performances. Is it low base or increase investments or some other factors?

In EMEA, we've put the new management team in EMEA well over a year ago. We've changed almost all the leadership and the team is executing like hell. I mean, they're doing a really good job in an extremely tough environment. So I mean kudos to just a lot of hard work and hiring a lot of people who've got passion and know how to get things done. And I think you'll see that continue. And some are in Asia-Pacific. We had a good team there, but we wanted to take that up a level. And I think you'll see a good solid expansion and growth in APAC. It's just putting a stronger -- taking management to the next level and building the CommVault infrastructure, lots of investment in Australia and Singapore, Japan, so -- China. So we're getting a good solid performance out of that team. So it's execution.

And on the margin side, you seem to have already hit the mid-20s milestone. How far are you planning to take it down before you kind of bring it back to the same levels as you invest in the business?

I'll let Brian answer that question.

We said it's going to be 100 basis points for this year on a full year basis and then we hope to grow it from there over the next few years.

That's an area we've overshot a bit this year as you are all well aware. So it puts us in a good foundation place for us to deal from, but it's not easy given the investment profile and the rest of strategy we have, obviously. So what I would pay attention to is our pre-tax earnings growth rate and not the percent. So our objective is to, right now, is to really focus on really strong pretax earnings growth, and I'm not going to be as focused on the operating margin percent. But we want to deliver a strong revenue and earnings growth as far as we can see. That's our objective.

Our next question comes from Alex Kurtz from Sterne Agee. Alex Kurtz - Sterne Agee & Leach Inc., Research Division: Just one question, Bob. I think our understanding is that the capacity model was it allowed customers to sort of grow their environments without having to spend all this money upfront and there were some kind of flexibility in the pricing model in that. Over time, you've captured all that revenue, but it just sort of lowered the threshold as far as the accessibility. So with these larger deals, can you just talk about the capacity model in context of that? Does that not apply to the larger customers and that's more of the mid-market phenomenon with the capacity model and sort of the lower pricing?

No. It applies across the board and what I was indicating earlier is, there is an issue there. A fundamental issue. As we add all these values, we're not able to differentiate the value in our all and capacity model. So we're basically giving a lot away. So in areas where customer may want data protection and ultimately is buying a bundle that includes a lot of other things. So I think what you'll find is, we'll enable customers to buy what they want in their capacity model and all these extremely unique -- for example, what Al just mentioned, operations has very close to what some of like a SPLUNK might deliver in the market and we're basically giving that away for free. So as we go forward, I think will start to segregate that in ways that are -- still provide extremely good returns to our customers, but segregate the value more than we do today. And we're going to start doing that certainly in calendar -- we're starting to make the moves now. But we start to get into calendar 2014, clearly, as we migrate through next year. We'll do it in a way that's, I'd say very constructive for our customers.

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

My question has been answered.

Our next question comes from Srini Nandury from Summit Research.

I have a basic question on the condition out there. There's a major disruption at one of your largest competitor out there. There's a sales weakness, sales disruption and one of their major Windows platform is suffering. So is there -- your growth rates, can it be faster than what it is because of all these disruptions going on there. Can you grow faster this year compared to last year?

Well, I think our objective is to see if we can improve our growth rates and certainly, situations like that are helpful. Yes, I mean, clearly when a major competitor has issues, it's certainly -- it is a positive in our ability to increase market share.

Thank you. Our next question comes from Phil Winslow from Crédit Suisse. Philip Winslow - Crédit Suisse AG, Research Division: Most of my questions have been answered, but Bob, I was wondering if you could just provide a little more color on what you're seeing between some of your larger customers and sort of the SMB environment, if there's any sort of any distinction in buying patterns that you're seeing between the two and if there's sort of any distinction there when you think about it by geography too?

SMB has been -- we've had I'd say, consistent steady growth and we're improving our position both for like go-to-market and for our products sets there and moving away from Dell is actually helping that instead of hurting it. So that's completely separate environment and it seems to be enough demand out there in spite of the economics for us to sustain at a reasonable growth rate in SMB. What's going on in the enterprise is that our broader value set is certainly putting us in a position for much, much bigger deals, where you get into your high 7s and 8-figure deals. We didn't have those kind of opportunities in the past. So they're there. On the flip side, Phil, that environment is extremely competitive given the broader weakness and some of the larger competitors were fighting like hell either to hold on to the accounts they have or try to increase their revenue growth. And somebody mentioned, you've got IBM, you've got EMC and you've got Symantec. I mean, that's typically lightning in those sectors. The good news is we have been quite successful, but it is not an easy environment and you've got -- the way you execute in that environment, today, has to be a lot more comprehensive and thoughtful than it was 1 year or 2 ago. And we're putting in the strategies and the go-to-market and improved selling campaigns in order to continue to execute in that segment of the market, but not easy.

Thank you, ladies and gentlemen. This concludes CommVault's Second Fiscal Quarter 2014 Earnings Call. Thank you for participating. You may now disconnect.