Commvault Systems, Inc. (CVLT) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the CommVault Third Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Michael Picariello, Director of Investor Relations. You may begin.

Good morning. Thanks for dialing in today for our third quarter 2016 earnings call. With me on the call today are Bob hammer, Chairman, President and Chief Executive Officer; Al Bunte, Chief Opening Officer; and Brian Carolan, Chief Financial Officer. Before we begin, I’d like to remind everyone that statements made during this call including in the question-and-answer session at the end of the call may include forward-looking statements including statements regarding financial projections and future performance. All of these statements that relate to our beliefs, plans, expectations or intentions regarding the future are made 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 in 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 recent quarterly report in Form 10-Q and 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 any of its features or functionality remain at our sole discretion. 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. A reconciliation between the non-GAAP and GAAP measures can be found in table four accompanying the press release and posted on our website. This conference call is also being recorded for replay and is being webcast. An archive of today's webcast will be available on our website following the call. I will now turn the call over to our CEO and President, Bob Hammer.

Thanks, Mike. Good morning, everyone, and thanks for joining our fiscal third quarter FY2016 earnings call. I'm happy to report that we had substantial sequential improvements in our financial results. We’ve overachieved our expectations for the quarter in both revenue and earnings. Let me briefly summarize our Q3 financial results. Software revenues were up 24% sequentially. Total revenues were up 11% sequentially. EBIT margin was 13.5% or up 580 points sequentially. EPS was $0.28 per share versus $0.15 per share in Q2. The headlines for the quarter were, we had outstanding sales execution particularly in the Americas and EMEA. We experienced very significant increases in the amount a number of large enterprise deals and had higher than normal transaction close rates. Sales funnel inflow continue to grow significantly during the quarter driven primarily by improvement in large enterprise deals in the Americas. As a result, we now have a much bigger funnel, which puts us in a better position heading into Q4 2016 and into FY2017. We entered Q4 with good visibility to our current forecasts. The 11th version of our data platform was released on October 20 by a controlled release, including CommVault software services and additions to the solutions portfolio. It has been very well received by the market in particular for our platform and the expanded cloud functionality. We expanded our healthcare business. We announced a strategic investment in partnership with Laitek, a privately held data migration and storage service company focused on healthcare industry. Specifically, the two companies will leverage Laitek migration expertise in the healthcare vertical to retire legacy image archiving and communication systems. This will enable hospitals to move their data, which is in many different proprietary formats and data silos into one data silo with one format. Data will be stored in CommVault’s cloud-based data management platform and can be used for single patient records and diagnostics. The Laitek technology will be fully integrated with our platform. We expect that our healthcare vertical will be a high growth business in FY2017. We believe that success in executing our transformation has enabled us to build a foundation for us achieve solid revenue and earnings growth in FY2017. In broad summary, the business acceleration this quarter was due to continued successful implementation of our transformation initiatives, our industry leading technology and services particularly those that enable customers to manage their transition to the cloud, benefits from increased uncertainty in the competitive landscape and an outstanding sales execution. I will now provide you an update on our business transformation. Please note that this will be the last earnings call where I will address this business transformation as we are now shifting our focus to maximize revenue and earnings growth. Our transformation has been driven by significant structural and competitive changes in the market, which required us to make fundamental changes to our business and our organizational structure. We initiated the CommVault Next transformation a couple of years ago in anticipation of many of those changes. The objective of CommVault Next was to turn CommVault into solid revenue and earnings growth in an environment driven by the secular disruptions caused primarily by the shift of the cloud and SaaS environments. As a reminder to successfully execute this transformation, we made the following fundamental changes. We changed our organization model to put accountability in the product areas with a business unit structure. We brought in new leadership and made structural and operational changes particularly in the Americas theatre. We introduced a number of standalone solutions targeted at changing customer buying habits and needs. We updated our pricing and packaging to make CommVault easier to sell and easy to buy. And we instituted a services lead approach while delivering proactive support. We enhanced our go-to-market capabilities with a proved demand generation branding and messaging and we expanded our strategic partnership with Microsoft, Cisco and AWS along with new technology infrastructure vendors like Pure, Nutanix, and the OpenStack consortium as well as large global systems integrators. Our CommVault Next transformation has enabled us to build a new strategic foundation and has positioned us well to meet the needs of customers in this rapidly changing environment. We have consistently communicated in the past that we believe that transformation would result in improved financial performance in the second half of FY2016. I am pleased to say that we accomplish that objective and, as a result, are successfully executing the key elements of our transformation we now have increased business momentum with accelerating revenue and earnings growth. Business momentum was confirmed by the significant growth in our sales funnel. This has enabled us to reignite our Q3 2016 top line growth and position us to have a strong finish to FY2016 and establish the foundation for improved FY2017. We also believe the structural changes taking place in the market are acting as strong catalyst for our business growth. I will provide more details on this as the call progresses. I will now address our FY2016 and FY2017 financial Outlook. The combination of an improving near-term outlook and the establishment of the strategic foundation for long-term growth has put us on a firmer position to drive both near- and longer-term revenue and earnings growth. We continue to see funnels improving and our confidence has increased that we will see license revenue momentum continue to build into FY2017. More specifically, we should see sequential license revenue improvement in Q4 2016 based on an increase of enterprise deals in the funnel. Our funnel indicate that good year-on-year comparisons on license revenue growth are possible in the March 2016 quarter. We expect positive growth – these positive growth trends to continue through FY2017. We want to remind everyone that even though license revenue growth is accelerating, that we expect maintenance revenue to remain flat through FY2017. This is due to both the drag and maintenance revenue impacted by FY2015 and first half of FY2016 license revenue results and the ongoing realignment of our maintenance pricing. As a result of flat maintenance revenue, earnings growth will be driven by software license revenue growth in FY2017. Brian Carolan will provide more detail on maintenance during his earnings call comments. Given the slow FY2016 first half, we believe that FY2016 total revenue will be slightly down in comparison to FY2015 levels. For Q4 2016, we believe the current Street consensus for total revenues is reasonable. Beyond that, our strong Q4 2016 outlook increasing funnel build and visibility sets us up for what we expect to be a positive start to FY2017. Let me spend a minute on our investment spending going forward. CommVault has made significant investments throughout our transformation. To put us in a unique position to holistically solve a broad range of the critical new problems that customers are facing as they migrate to the cloud, manage data in the private, hybrid and public clouds and in concluding open, converged and big data infrastructures. As a result, an increasing number of customers are engaging with us as a key strategic partner. This is positively impacting the number and size of large enterprise deals that we have closed and that are in our funnel. The move to the cloud has clearly become a major factor in our increased business momentum. A window of opportunity has opened up for CommVault as a result of the combination of the structural shifts in the market, which are acting as catalyst for growth. The successful implementation of our transformation plan, improving sales funnels, a strong product pipeline and disruption of key competitors. As a result, we will take advantage of this window to implement a prudently more aggressive investment approach to accelerate revenue and earnings growth in FY2017 and FY2018. We will be increasing selective investments in the short- and long-term to optimize growth. This will impact the rate of operating margin expansion in the short-term and into FY2017. With that said, we will be managing the amount of operating expense increases to ensure going forward we achieve both our revenue growth objectives and concurrently achieve good near-term EBIT growth and substantial operating margin expansion over the long-term. Brian will discuss more details on software and services revenue growth rates as well as operating margins later on in the call. While our strategic fundamentals are strong and our ability to execute is improving, I would like to add the following words of caution as well as highlight some of the challenges we are facing. We are winning larger and larger enterprise deals, however, our ability to grow is more dependent on not just big deals, but a steady flow of $500,000 and $1 million plus deals, which have quarterly revenue and earnings risk due to their complexity and timing even with improved funnels, large deal closure rates may remain lumpy. Achieving our FY2017 license revenue growth objectives will be dependent in a large part on continued successful market adoption of solutions based on our new CommVault data platform and associated software and services. We're in an opportunity rich situation in the market and will be prudently increasing spending to increase revenue and earnings growth for FY2017 to take full advantage of the expanding window of opportunity. As a consequence, there would be a negative impact to our earnings if we miss our revenue targets. Services are forecast to be flat in FY2017 to book our declining software revenue growth from past quarters and the ongoing realignment of our maintenance pricing to be competitive with the market. We remain concerned about current macro conditions especially in Asia and parts of EMEA. We recently hired a new Vice President of Asia-Pacific and Japan, Owen Taraniuk, and Owen joins CommVault bringing 25 years of experience in the technology solutions industry. Owen is in the process of a significant strengthening of this business, which will take a few quarters to positively impact financial results. Our VP of EMEA recently resigned to pursue another opportunity. Ron Miller, our worldwide Vice President of Sales has personally taken over the region while we are in the process of recruiting and hiring a new VP of sales for EMEA. Ron will be hands-on to ensure we continue to execute well in EMEA. Despite these challenges, it is important to note that there is some very large enterprise deals in the funnel planned for the quarter and next quarter, which if closed could positively impact financial results. In summary, we have started to reignite growth and are establishing a foundation with a business forecasting model has better predictability. We have made a lot of progress on the key elements of our transformation, which has resulted in strong Q3 results and a much improved near-term outlook. We're in a stronger position to drive both near-term, near- and longer-term revenue and earnings growth, but still have a lot of work to do to successfully implement a number of key strategic initiatives tied to our next generation platform that are necessary for us to achieve these objectives. I will discuss this further later on the call. I will now turn the call over to Brian. Brian?

Thank you, Bob, and good morning, everyone. I will now cover some key financial highlights for the third quarter of fiscal 2016. The strengthening of the U.S. dollar compared to certain foreign currencies had a significant impact on the year-over-year results for the quarter. Foreign currency movements had a minimal impact on a sequential constant currency basis. I will state our as reported non-GAAP results first and also state the year-over-year results on a constant currency basis. Third quarter total revenues were $155.7 million representing an increase of 11% sequentially and an increase of 2% over the prior-year period. Total revenues were up 6% year-over-year on a constant currency basis. We reported software revenue of $71.4 million, which was up 24% sequentially and flat year-over-year. Software revenue was up 4% year-over-year on a constant currency basis. Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, represented 54% of total software revenue. The number of enterprise deals increased 33% sequentially. Our average enterprise deal size was approximately $278,000 during the current quarter, which was up 3% from approximately $269,000 in Q2 2016. Americas, EMEA, and APAC represented 60%, 29% and 11% of software revenue respectively for the quarter. On a sequential growth basis, Americas, EMEA, and APAC software revenue increased 18%, 37% and 26% respectively. The revenue mix for the quarter was split 46% software and 54% services. Please remember services revenue was a combination of both maintenance and support revenue and professional services revenue. Services revenue for Q3 was $84.3 million an increase of 1% sequentially and 4% year-over-year. Services revenue was up 9% year-over-year on a constant currency basis. Our maintenance and support renewal rates remain strong. We added approximately 400 new customers in the quarter, our historical customer count now totals over 22,000 customers. For the quarter, revenue transaction through Arrow was approximately 35% of total revenue increasing 9% year-over-year and 11% sequentially. I would now like to spend a few minutes on our pricing models. Our software licenses typically provide for perpetual right to use our software and are typically sold on a per terabyte capacity basis, on a per copy basis or as a solution set. During the quarter ended December 31, approximately 73% of software license revenue was sold on a per terabyte capacity basis. This is down from 77% in Q2 2016. We anticipate that capacity based licenses will continue to account for the majority of our software license revenue for the foreseeable future. Over time, we anticipate a gradual shift to more subscription based and consumption based pricing models. Sales of our stand alone solution sets increased substantially and had more than a 2x tax rate of sales of other software solutions. These solution sets are generally sold on a per unit basis and can be individually deployed or combined as part of a comprehensive data protection and information management solution. Now moving onto gross margins, operating expenses and EBIT margin. Gross margins were 87.4% for the quarter. Total operating expenses were $112.8 million for the quarter, up approximately 6% year-over-year and up 5% sequentially. During Q3, we continued to focus on improving the productivity of existing resources, while prudently investing in the business. We ended the quarter with 2,372 employees. We saw continued improvement in sales rep retention. Sales and marketing expenses as a percentage of total revenues were 54% in the current quarter, which was down from 56% in the second quarter. The sequential increase in sales and marketing expenses was primarily the result of an increase in fuel compensation tied to significantly improved commissionable bookings. Operating margins were 13.5% for the quarter, resulting in operating income or EBIT of approximately $21 million. EBIT margins were approximately 14% on a year-over-year constant currency basis. Net income for the quarter was $13.2 million and EPS was $0.28 based on a diluted weighted average share count of approximate 46.6 million shares. EPS was approximately $0.31 on a year-over-year constant currency basis. Interest expense on a revolving credit facility was nominal in the quarter. While there have been no borrowings on our credit facility, we do incur interest expense related to the commitment fee. We anticipate that we will have no net interest income in FY16 and FY17. I would now like to spend a few minutes discussing our anticipated revenue and EBIT margin outlook. We believe that significant funnel growth and current sales capacity will have a positive impact on our Q4 2016 financial performance. Overall, we believe that current Q4 2016 Street consensus for total revenue is reasonable. From a revenue mix perspective, we expect that sequential quarterly services revenue will be flat for Q4. This is a result of both the trailing impact of declining software revenue in FY 2015 and the first half of FY 2016, as well as the ongoing realignment of our maintenance pricing to be competitive with the market. Our continued maintenance pricing realignment will phase-in through FY 2017. The strategy aligns with our V11 software release, which will result in streamlined maintenance pricing that we believe will accelerate new customer acquisitions and make it easier to do business with CommVault. Our existing customers will also benefit from these changes and will ultimately have a lower cost of ownership. For FY17, we expect solid double digit software revenue growth with flat services revenue. We believe current FY 2017 consensus estimates for total revenue is reasonable. Before I address operating margin expectations in our rate of investments, I would like to highlight one additional key spending increase in Q4. Historically, we see a large sequential increase in employer paid FICA expense in Q4 because many of our employees in the U.S. reached the FICA limit well before the end of the calendar year. This year, we expect our FICA expense in Q4 to be approximately $3 million higher than Q3. We expect fiscal 2016 annual operating margins to be approximately 10%. As Bob noted, now that we are shifting our focus to maximizing our revenue and earnings growth objectives we're going to increase our rates of investment, including the pace of hiring in order to take advantage of the current market opportunity we have in front of us. We will accelerate these investments in Q4 2016 and FY 2017 in order to take advantage of our unique position in the industry to pick up additional market share. Although our objective is to increase EBIT on an absolute dollar basis in FY 2017, we currently expect flat operating margins for the full fiscal year. We anticipate operating margins to improve sequentially as the year progresses, especially as the top line growth rate increases. We will provide more details on the outlook for FY 2017 on our next earnings call. Our revenue and margin outlook assumes current FX exchange rates. Our objective remains to improve our longer term operating margins from current rates. Our return to higher earnings growth rates requires a balancing act of controlling expenses, while at the same time making the necessary investments to achieve our key revenue growth objectives. Let me now comment on tax rates and share count. We will continue to use a non-GAAP tax rate of 37% for FY 2016 and FY 2017, which approximates our anticipated longer term tax rate. Cash taxes paid in fiscal 2016 are projected to be less compared to fiscal 2015 based on current estimates of taxable income. Over the long term, we expect our cash tax rate to align with our non-GAAP tax rates. For fiscal 2016, we anticipate that our annual diluted weighted average share count will be approximately 46.5 million to 47 million shares. For fiscal 2017, we anticipate that our annual diluted weighted average share count will be approximately 47.5 million to 48.5 million shares. Now moving on to our balance sheet and cash flows. As of December 31, our cash and short term investments balance was approximately $401.1 million. Approximately, one third of this balance is outside the U.S. Free cash flow, which we defined as cash flow from operations, less capital expenditures not associated with our new headquarters was $13.9 million, compared to $19 million in the prior year period. The year-over-year decline was a result of lower EBIT and higher accounts receivable due to timing of collections. As Bob noted during Q3, we made a strategic investment in Laitek for proximally $5 million. We expect healthcare to be a high growth vertical for us in FY 2017 and beyond. Since our last earnings call on October 27, we have repurchased approximately $14.8 million or approximately 477,000 shares of our common stock at an average cost of 31.13 per share. So far during FY 2015, we have made cumulative repurchases of approximately $49.5 million or 1.44 million shares of our common stock at an average cost of $34.28 per share. We currently have $135.2 million available under our stock repurchase program. We will remain opportunistic with stock repurchases. As of December 31, 2015 our deferred revenue balance was approximately $230.4 million, which is an increase of $8 million or 4% over the prior year period and up 3% sequentially. On a constant currency basis, deferred revenue was up 8% year-over-year. For Q4 2016, we expect that total deferred revenue will increase at a similar sequential growth rate as Q3 2016. Consistent with my earlier comments regarding maintenance pricing realignment and related services revenue growth rates, we expect deferred services revenues to be flat to slightly down sequentially in the first half of FY 2017 and begin to sequentially improve in the second half. At the end of FY 2017, we expect deferred services revenue to be up slightly from FY 2016. Please remember the vast majority of our deferred revenue is maintenance and support revenue, not software revenue. As of December 31, 2015 our deferred software revenue balance represented less than 1% of total deferred revenue. Lastly for the quarter, our days sales outstanding or DSO was 60 days, which is up from 59 days in Q2 FY 2016 and down from 65 days in the prior year quarter. That concludes the financial highlights, I will now turn the call back over to Bob. Bob?

Thank you, Brian. I will now provide some more detail on the key factors which are driving our improved business momentum, financial performance and outlook. The major issues as I mentioned earlier are the successful implementation of our transformation plan, structural changes in the industry, which are acting as catalyst for growth, key competitors who are being distracted, and outstanding large deal execution by the CommVault sales force. Rather than discuss all of these issues, I'm going to spend a few minutes focusing on wider major structural issues facing the industry are acting as catalyst for our growth and how our next generation did a platform both addresses these issues and how it is being enhanced to help us address new opportunities. The move to the cloud acts as a catalyst for growth for CommVault. The most important structural and disruptive changes that are helping CommVault accelerate growth are the rapid adoption of public and private clouds, along with the adoption of new software defined storage infrastructures that are being deployed for the cloud and for big data infrastructures. As customers migrate to the cloud, adopt new IT infrastructures and deploy newly architected applications, they are looking for a strategic partner who has technology and services that can help them make the transition from traditional to new IT infrastructures and holistically migrate and manage data across both traditional and new infrastructures. As a result of our leading technology and services, CommVault is becoming a strategic partner for an increasing number of large enterprises. CommVault data platform is the only major software platform in the industry whose underlying scale out architecture is compatible with the architectures found in highly virtualized environment, public clouds, private clouds like OpenStack and big data infrastructures. It is completely compatible with big data as new infrastructures. As such our platform can be installed virtually in the cloud to manage data and cloud-based applications and infrastructures. It can also be used to manage data in large [indiscernible] infrastructures. The CommVault data platform will be fully integrated with all the major hypervisors, which enable secure data portability across all cloud infrastructures. Our platform has a unique capability to index all the data no matter where it resides at an object level. A key problem customers have is they cannot effectively move their data through the cloud unless they understand what data they have and who has secure access to it. Our platform enables our customers to understand what data have so they can classify it, decide what to keep, what to do delete, and what to move to the cloud. It enables customers to have all their data secure and natively available. Data can be uniquely managed where it lives without moving it, whether it resides on a machine, a social network in both device or in the cloud. We can provide our customers with one view of their data whether it is on premise, in the public cloud in a mobile device or in a SAS application, as well as fully orchestrate and automate key processes. These data and management data understandings are critical to governance, compliance and reporting applications. In summary, our platform aligns very well with the structural changes taking place in the market. This is being confirmed by analyst, solid early customer adoption and positive response from partners who are strongly supportive of the CommVault data program and our vision. Most importantly, as I mentioned earlier, validation is coming from our customers in the form of large increase in enterprise deals that are closed or in the funnel. These deals are coming from new and existing customers who are choosing CommVault for data management, cloud data migration, and federated cloud management capabilities. I will now provide an update on our new software release and in particular the cloud data platform and our perspective on our product innovative pipeline. The first subject on our pipeline is CommVault’s cloud value proposition which is being a [indiscernible] with software to find storage capabilities or SDS. CommVault's leading data platform is now being enhanced and extended with embedded leading software defined storage capabilities. CommVault's SDS will be delivered in the near future. Unlike many of the newer SDS vendors CommVault SDS will provide a common index and awareness across traditional, cloud, SDS by webscale, OpenStack, hyper-converged, and big data environments for enterprise-wide data management, security, compliance, federated search and analytics. Our platform can handle massive data and operational scale. CommVault has a very robust innovative pipeline. Our first wave was introduced in October and we plan additional announcements early next month. In addition to SDS, we will be coming to market in the near future with a number of new solutions, including new appliances, gateways, managed services and new solutions for active archiving, cloud SAS, from CommVault and solutions to protect and manage major SAS applications from some of the market leading players. We're also using the new functionality of the platform to develop highly differentiated vertical solutions such as within healthcare. The second customized health care solution will be released this quarter at the HIMSS healthcare show in early March. In summary, the CommVault data platform provide industry-leading capabilities for customers to much more easily transition from legacy to new IT infrastructures, hyper converged private and public clouds. We are enabling customers to simplify and automate the migration of business critical workloads to and from the cloud and the management of data in the cloud. Additionally, in the near future we will be providing leading software defined storage that can be deployed on premise or in the cloud. Please note the development and timing of any product release, as well as any of its features or functionality remain at our sole discretion. In closing, we have successfully implemented key elements of our transformation and will now focus on maximizing the growth of revenue and earnings. Business momentum is improving and we have positioned CommVault for much better financial results in the second half of FY 2016. We have built a foundation for CommVault to generate significantly improved revenue and earnings growth in FY 2017. We have made significant progress in transforming the company for a cloud first world, managing data on premise, migration to the cloud and managing data and infrastructure in the cloud. There is still lots of work to be done. We are now need to achieve our Q4 FY 2016 financial objectives and make sure we get off to a strong start to FY 2017. We need to validate that we can sustain momentum in the business with revenues generated by our next generation platform and solutions portfolio. The executive team is confident and highly focused on achieving both of those objectives. I will now turn the call back to Michael. Michael?

Thanks Bob. Operator can we please open the line for questions.

[Operator Instructions] Our first question comes from the line of Joel Fishbein of BTIG. Your line is now open.

Hi guys. I have one for Bob and one for Brian really quick. First Bob, on the healthcare vertical you made the investment in this company obviously huge opportunity, you're talking about a product coming out in March. Can you give us a little bit of color on where you see the opportunity specifically, if you have any deals in healthcare right now, could this be a new end market for you guys? And then for Brian, just real quick, can you give us an update on exactly where you are on the maintenance transformation our transition? I know you have been going through it, but I think that you are largely through a big part of it, if you can give us some color on that that would be helpful too? Thanks.

First of all Joel, healthcare is either our second or third largest vertical today on the data management side, so we are well positioned globally in that industry. What the investment in Laitek does is provide a significant value-add on the clinical side of healthcare. So, simply put, hospitals have data stored in many proprietary silos, whether it is x-rays, MRIs, blood tests, these are all in proprietary silos and in proprietary data formats and they typically sit on highly expensive primary storage, so it is a big expense for the hospitals. It’s difficult for them to get at the data because it’s in so many different infrastructures. So, what we have done with Laitek is we have - with their technology and ours, we have connectors now to all the major legacy and new healthcare systems. We have built our own DICOM capability. So we can grab the data from these systems, put them in a common format, store it in our content store and now you have got and we can cleanse it, so you have got a single format, you are reducing the footprint of that data significantly, reducing the cost for the hospitals and making it really easy for them now and much quicker for them to access data for both single patient record and for diagnostics.

Laitek also brings a lot of services capability.

Good point Al. When you deploy systems like this, you need highly skilled services expertise and Laitek is a leading reputation industry for their services capability as well. Good point Al.

Great, thanks.

Hi Joel. This is Brian. Thanks for your question on the maintenance pricing realignment. So, we've been talking about this for several quarters now and trying to proactively phase this in and I’d say that it’s going well. We still have very high renewal rates from customers and high customer satisfaction. So we are doing this more to align with the competitive realities of the market also make it easier to do business with CommVault. At the enterprise level, which is our larger customer base in terms of dollars that accounts for about 75% of the maintenance renewal dollars and I would say most of the pricing changes are behind us in that segment. What’s remaining in front of us is the remaining 25% that is at the mid-to-lower end of the market. We’re dealing with a much higher volume of customers at that segment so we understand the importance to be more problematic and partner friendly and channel friendly with it. We will phase in these changes throughout FY 2017, but we’re confident that this is the right thing to do for the business. It is going to ultimately result in streamlined maintenance pricing, hopefully accelerate new customer acquisition, become a catalyst for license revenue growth and also our existing customers will benefit from these changes over time.

Thank you. Our next question comes from the line of Jason Ater of William Blair. Your line is now open.

Yeah, thank you. Hi guys. A couple of questions, first, Bob can you talk to any kind of let’s call them well-sized deals that skewed the numbers in the quarter, any kind of super lumpy deals and then just on the Q4 guidance, can you reconcile the comment around sequential growth in software with the fact that the consensus for Q4 seems about flat sequentially, so services is flat as you guided and there is sequential growth in software than the actual guidance should be a little bit higher it seems than what the Street consensus has, so I want to understand that a little bit better.

In Q4, we had a lot of deals over $500,000 and many, many deals over $1 million, so it was spread over a very large number of these big enterprise deals. I think in the aggregate we said enterprise sales is up I think 33% quarter-on-quarter. So, that was extremely gratifying and it was global. The same can be said for Q4. In the funnel there are very large number of $500,000 and million dollar deals globally. That will drive the number. I qualified that in my text by saying there is some, you would call them super well-sized deals that are in the funnel that could skew the number on top of that. And I think our comment on our prospects for Q4, I think we're using the term reasonable and we believe those numbers, they are sequentially up, but reasonable.

Okay and then one quick follow up, just a little bit away from the numbers, Bob can you just kind of, and you talked in your comments, your scripted comments about the cloud. Can you just explain very simply how the cloud is good for you because I think the conventional wisdom out there is that the cloud is bad for a lot of traditional infrastructure software.

It is not just good, it’s very good for us. So, there are a number of things. If a customer, whether they're going to public cloud or private cloud and I they want to migrate data from a legacy system, the first thing they need to do is what data do I have. So, unless you can go out and figure that out and index it an - securely index it at an object level of figure, what do I have, what I want to keep, what I want to delete and what I want to move and get a taxonomy on it, it is very difficult. And we are the best at that globally, so then we can migrate the data. Secondly, once you get it in the cloud and if you think of whether it is open stack or you think of Azure or AWS, those are different silos also. AWS might have hundreds of different data centers, so we can move the data in those clouds, orchestrate those infrastructures, right, we can spit up compute network storage in the cloud, tie to a given application and manage and index all that data. We can implement our platform in those clouds and manage the data in the cloud securely. So now you have, customers have a complete picture of what the heck is going on with the data no matter where it resides. And we can federate across the different AWS silos or Azure silos or between Azure and AWS or Azure and OpenStack etcetera. So, we can make the management of data extremely efficient, now you can use it for things like, take a simple compliance application. I got a set a policy on certain data globally it can be sitting in 30 different silos. Well, how do you do that unless you have one view of your data that you can put in an attribute on it and set a policy on it to make sure that you are in compliance with the privacy right or whatever. And we can do that holistically and match the scale across an enterprise. Or I want to do a federated search for analytics. One data that I have stored on premise on mobile or in the cloud or maybe I want to go out and grab data that’s sitting in the cloud or sitting in a social network and I do not want to move, but I just want to index it, understand it and bring that into a repository for business analytics application. We can do that and we are unique in our ability across all of these different dimensions of the cloud versus our competitors. So, it has got extremely high value to customers and I can tell you, these million dollar deals, [indiscernible] are tied to having those capabilities for these customers. All may want to add some additional information on that. By the way then you add software to client storage where you can, in the cloud you can write to our [indiscernible] define layer as additional value.

I think Bob hit it pretty well Jason. I think and again it’s probably a lengthy discussion on the technology side of why we make that happen, but I think he was hitting it. If you think about traditionally our indexing layer in there, as we have implemented to more services oriented architecture we’ve taken apart the other elements be it operational and as Bob alluded to storage as services elements. That hinge to match cloud environments and again his key point is, nobody is sitting out there with one cloud or moving all their data to a cloud. It is spread across in most of the applications out there, particularly around data management starts with where is it? And did I put that out in Azure, did I put that over in Amazon or where is it and again you know people are building infrastructures that those lines or demarcation should be very transparent.

Thank you. Our next question comes from the line of Srini Nandury of Summit Research. Your line is now open.

Alright, thank you for taking my call. Can you please provide some color about your relationships with Nutanix and Pure and also can you talk about industry trends in the backup space and you mentioned in past saying some of the locals are actually getting backed up to the cloud, can you provide us some color on what kind of workloads are getting backed up to the cloud and are people backing up to multiple clouds for example in both Azure, as well as to AWS for instance so that they don’t get logged into these clouds, any color would be appreciated.

Al’s going to take this.

I'm sure there is two questions somewhere, but first of all on new partners out there being Nutanix and Pure, I think was part of your question. Again I think it ties the whole thesis here. People are coming in and looking to put in new infrastructures. Call it hyper-converged, call it software defined, whatever the term being and people are very interested in products coming out of places like Nutanix and Pure. Those firms are helping us get ourselves in front of the end-user, particularly in looking to make those moves and the infrastructure particular in looking for data management toolsets. So, that has been quite helpful there, as well as Microsoft and AWS partnerships out there. As to workload, I think a very interesting thing is, first of all it tends to be almost everything, but the big traditional heavy transaction oriented big database kind of environments that still remain in our opinion fairly resident and in on PRIM traditional data center environments. But as you probably know that is a very small percentage of the data anymore and a very small percentage of the data growth. We tend to, as Bob alluded to get people interested in not only dealing with new infrastructures and not only dealing with all the different infrastructures that you have out there holistically, but the new apps and the new apps that are developed generally won’t run in older traditional kind of environments yet they still need management and they still need protection. So, for instance, SQL, we see a lot of SQL many apps, personal line apps setting in a lot of these environments that tend to be a great candidate for cloud infrastructure, so again having a solution that spans across those environments, new apps, old apps, production, non-production, cloud, traditional is unique to our value props and our solution sets.

Thank you. Our next question comes from the line of Aaron Rakers of Stifel. Your line is now open.

Yeah, thanks for taking the questions. I want to go back to the large deal dynamic, can you talk a little bit more about the type of growth or the level of growth you are seeing in the 500-K and a million dollar type deal sizes and is that a piece of your business that you foresee over the next couple of quarters, something that we more openly discuss or even quantify those trends around going forward?

Qualitatively it is very substantial Aaron. We have not at this point plan to break it out, but we might because we just made a very substantial turn in the pipeline on those deals as quite deep going forward as well. So, as I’ve said and as Brian said in his commentary, it will be a significant factor in our growth. It’s an area where we have very, very significant strength and it’s primarily, not entirely, but primarily tied to these, moved to these new cloud-based or big data infrastructures. That’s where it is coming from. And whether the customer is deploying it today or planning to, it is a key element of every deal we are involved in right now, and decisions have been made on those, and it is not just the technology capabilities we have, it is our service, our automated services to manage any diverse environments, which is quite unique out there, as well as our professional services so we can go in as a strategic advisor and help customers make these moves because we have made a lot of investments in our strategic consulting services to help our customers move to the next generation environments as well.

The second question for Brian, I want to go into your expectations with regard to operating margin leverage. I know you had commented that looking out into fiscal 2017 you expect operating income margin to be roughly flat year-over-year. I’m curious of how you are thinking about the balance between return of revenue growth relative to what’s been and I would assume is still a longer targeted mid-20% operating margin for the company?

Thanks, Aaron. Yes it is delicate balance to be honest with you. I mean we have to be prudently investing in the right areas of high revenue growth and ultimately have the highest impact on our earnings growth as well. We believe we're in an opportunity rich situation, we have some wins at our backs, we have good momentum, now is the time to prudently invest and not pull back. And obviously, our maintenance pricing realignment as one example that’s going to act as near term headwinds operating margin expansion, but it is certainly an investment and something that is right for the business, especially for FY 2018 and beyond when those growth rates begin to normalize we are able to get more operating margin leverage out of that revenue stream. So, FY 2017 is our expectation now, is that it would be flat operating margins. We will continue to update that thinking and give you more color on the next call. But in terms of modeling at this point in time, we think that is reasonable.

I can add more color. You are going to see that's a good solid earnings growth with relatively flat operating margins for at least four quarters, probably five quarters. After that, when you start on the - maintenance growth catches up and you have got accelerating revenue growth and we have got enough elements to do that, then you are going to see a massive expansion in operating margins. But think five, six quarters out when those two things come together Aaron, that’s what we are taking advantage of. We see the opportunity to really maximize this given our market opportunity right now with some selective investments and when those two groups come together then you can see some pretty significant improvement not only in EBIT growth, but in operating margin expansion. And it is going to come from sales and marketing. At one point, we had it down to 43%, now it is 54% so you’ve got to pick a number, we have 11 points sitting there that’s reasonable, but we don't want to sacrifice that given growth opportunity we have in front of us. And we are somewhat constrained by maintenance for four or five quarters.

Thank you. And our next question comes from the line of Greg McDowell of JMP securities. Your line is now open.

Great, thank you very much. Bob, one quick question for you, I wanted to drill a little bit into your commentary on the increased uncertainty in competitive landscape and specifically I was wondering if you could maybe comment on your opinion of the restructuring of the Veritas transaction and whether that says something specifically about maybe underlying trends in this backup and recovery market and the broader market or did it feel very company specific or is it related to the debt markets just wondering any commentary you could provide there and if there are other key competitors you feel are really suffering if you could highlight those? Thanks.

Well it’s across the board. I'm not going to get into a specific commentary on Veritas or what's going on with EMC or some of the other larger competitors of ours, HP or IBM. But, clearly we’ve gotten significantly out in the front of every one of those competitors from a technical standpoint, services and support and we're going to create additional distance between us and these competitors as we go forward because when we are on a much firmer foundation right now, we can [indiscernible] and everyone on the competitors I just mentioned has what I call significant architectural underlying issues that they got to address, which is going to take time and money. In regard to the newer competitors of the market, those coming in on the software defined store side and areas like that, we can beat or match them just on the SES side, but we have got all the data management and ability to understand data at their objective level across not just a software defined storage infrastructure, but any infrastructure. So, we have got significant advantages versus call it our traditional competitors, who have issues they have to deal with on their own both technology and business issues, which everybody is well aware of and we are getting additional technology, we’ve developed technology advantages relative to many of the new competitors who are coming into the market. So, across the board whether it is platform or standalone solutions or ability to now take this selectively into vertical markets, the underlying advantages over technology and services and start building very unique vertical solutions that have high impact, high impact to us is, think of $100 million impacts than you’ve got the foundation of a company that has some long-term staying power, but the point I mentioned on the call is we have got to execute that now. We have made the turn tied to the transformation, now building on that turn and taking that to the next level for sustained long term growth is right in front of us and we're going to take advantage of it and we’re going to make that happen. So, that is probably a good summary as I can give I think. Al wanted to comment.

Yeah, just one quick one, Bob, that was good, but I would also say our services and support equation here from a competitive standpoint in my opinion, I am slightly biased, but remains superior to most of our competition out there. The support reputation we have in the market, as well as Bob alluded to it up front, our services capability now an enterprise environment going into these new infrastructures, which are complex when you look at a big environment. Our consulting capabilities are extremely important to our relationship with the customer and our ability to succeed in this segment.

That is a five-year investment we have made there. To make sure we built a foundation.

And it is a major differentiator is the point.

Right. And what I was going to say is, that was a major expensive investment, so if you have, you're not going to get a return on that right away. So, if you are in the market and you are constrained on your spending, it is not something that is easy for some of these other competitors to implement right now.

Thank you. And our next question from the line of Andrew Nowinski of Piper Jaffray. Your line is now open.

All right. Thanks, guys. Congrats on the quarter. Just a quick question and a follow-up. I know you launched Simpana 11 in the middle of the quarter and you noted that you are receiving positive response from customers so far. But I think the channel is just getting up to speed on it, so I’m wondering if you could give us any color on what drove the strong software license growth this quarter whether it is from your standalone solutions or more from just better-than-expected demand from version 10?

It was – we had very high growth from our standalone. We had high growth from 10. This is in Q3. But a lot of customers were making decisions because we released 11. So even a customer was on 10 to the point we’re making on the cloud, those cloud decisions were an element in that decision-making and clearly a lot of the big deals that are in the funnel for the March quarter are on 11 and these new areas of functionality that we’ve just described. It was across the board.

Thank you. Our next question comes from the line of Brent Bracelin of Pacific Crest Securities.

Thanks. I wanted to drill down on the last question a little bit more. Bob, obviously, the rebound software up 24%, it’s the highest in five years. I appreciate that you are seeing more $500,000, $1 million deals, good to hear standalone is doing better. My question really comes down to what’s driving it? Is your win rate improving, do think there was a benefit may be of a budget flush in the enterprise? is it these customers are really buying into version 11 release? Help us understand the change. Again, biggest sequential growth in software in five years, what are the factors that are driving the large deal momentum you are seeing in the change that we really haven't seen in the last couple of years?

Well, it’s all of the above. As we talked about as we went into this transformation, one, we had to segregate the product line, pricing, packaging, standalone, we had to do that. We had to make some really significant, as Al talked about, underlying changes to the platform to align that with the cloud. So we made the – you got to start there, we've made significant changes in our services and support capabilities. Now you put on top of that, we had to get the Americas positioned for growth, so changes in structure, leadership, significant increases in enterprise reps, territory realignments, massive changes in the capability of the Americas. At the same time, we invested in expanding alliances, the Microsofts, the AWS’, and the Pures, and the Nutanixs and the Ciscos. We made a major investment in digital – of our marketing capability to bring leads into the funnel. It’s all of the above. It was going into it, it was investment across the company, in our structures, in our focus, establishing our BUC go up more focused on exactly what products you are – what are the product requirements in each of these different market segments to get a lot more comprehensive in defining those requirements and making sure we're meeting customers’ needs and getting out in front of the competition. It wasn't one thing. We knew, and I have said this now for probably well over a year, all these things had to come together and they did. Now we thought, by the way, over the summer and we indicated to you last quarter that we started to see it in the funnel. We didn't see it in the results, but we saw it in the funnel and what we communicated was now if we can translate that growth in the funnel into revenue, we would see some remarkable results. What happened was, we did that and the funnel kept growing at a pace that we – higher than our expectations. And then our sales execution was outstanding, and it all came together. And we’ve described the perfect storm that hit us two years ago, that was against us, now we got the opposite going on. Now we got the perfect storm that’s helping us. And we want to build on that momentum. So it’s many different things that we did that came together that ended up in a good solid strong result that has legs to it. Is that helpful?

Thank you. Our next question comes from the line Abhey Lamba of Mizuho Securities. Your line is now open.

Yeah, thanks. Well, congrats. Clearly a much positive tone than what we've seen in the past few quarters. My question is a little follow-up to the previous one in terms of sustainability of the close rates, the uptick in close rates that you’ve seen. What are the factors that give you confidence that you can get to solid double-digit quotes in fiscal 2017 and have this both quotes and funnel and close rates continue to kind of move in the right direction for you?

Well, the key is that we have continued funnel growth, so we have some visibility to Q4 and quite frankly we have visibility to Q1 to achieve our numbers. And this is better visibility than we have had in two years now. So the acceleration of that funnel and quite frankly the visibility on top of that funnel plus all the things that we talked about that are in place and we are going to add to it increases our confidence. That being said, we still got a lot to do, Abhey. But we can see through Q4 and through June reasonably well right now. And now we just continue to build on it and build on the things that we already have in place plus we mentioned where you will see product announcements coming out this quarter, there will be a series of announcements coming out next quarter, there will be announcements coming out in the September quarter. We got broader [ph] both services and product pipeline and expanding distribution. And when we talk about distribution, it’s not just our resellers. It’s our resellers and our strategic partnerships which we are expanding, our systems integration capability. And for the first time in our history, we have leverage coming out of from our marketing efforts that is helping us build pipeline. So it’s just a company that gone through an expensive, difficult, painful transformation and now we're coming out the other end of that and it’s – we’ve got a lot of work to do, but it’s a lot better with the wind at our back and lots of opportunity in front of us than what we went through in the last 24 months.

That’s very helpful.

Plus we also think the market shifts are helping us are sustainable if you believe cloud is here to stay. One of the guys asked earlier we are just even in our install base we are seeing a remarkable acceptance of using cloud infrastructure. And when I say cloud, I'm not talking just public, I am talking these hybrid, private, on-prem, converged with the addition of public kind of environments out there. It is a tremendous amount of deployment and acceptance going on there. So, again, as Bob said, we are well positioned there. So if you think that’s going to continue, that’s part of our confidence.

We're not going to get into it on this call, next call we'll talk a little bit more about it, but it’s not traditional backup. It’s the traditional understanding of the data, but done with different technologies.

Thank you. Our next question comes from the line of Ittai Kidron of Oppenheimer. Your line is now open.

Thanks. Congrats, guys, on a good quarter. I guess I wanted to dig into your flat operating margin comment into next year. Can you give us a little bit more color as to how do you think about headcount additions and what does it mean from a headcount addition in the last couple of years you’ve had a little bit of a hard time from a hiring standpoint. Are you now moving into some sort of again an aggressive hiring mode and how do you think you are set up for that or internally from a process standpoint?

The amount of hiring we will be doing is nothing like we did in the first part of FY2016, but it is more aggressive because what we did is we put the structures, organizational structures and headcount in place before we had revenue. And it impacted obviously – our license revenue was going South and our expenses were going North four three quarters. And what we did is we could see the turn and we slowed down our op expense growth pretty significantly until we could see it validated and then we plan to turn it back on. So in fact our headcount last quarter was negative as we pulled back and just made sure all these pieces were in place and we validated kind of where we were both technically and strategically. And now what we are doing – and this is at the margin now, we will be incrementally increasing it as we go forward to take advantage of these opportunities, but on a relative basis it will not be as much as we did a year ago. And we could do better. I think what we are saying here is that flat operating margin is the right assumption to use now as we go through this. We overachieve, you could see some expansion but you're not going to see the kind of dramatic expansion until your maintenance growth catches up with your license revenue growth and that is five or six quarters out. Once that happens, you got a whole different situation here, but the odds are of us achieving both of those in that timeframe are really high and in the meantime, we're still going to get to an EBIT growth tied to the growth in license revenue.

Thank you. Our next question comes from the line of John DiFucci of Jefferies. Your line is now open.

Yes, thank you. Bob, I want to go back a couple of questions because I want to just make sure I understand what is driving the improved momentum here. You said it’s the result of pretty much everything, and you specifically talked about new product launch and also the old product sales. But typically when we look at enterprise software, a new product comes out and there is usually customers might try it in their labs for while especially if it’s a major new product. They may sort of tick their toe at first and may be it build pipeline, but usually doesn't convert to sales right away. So I guess two questions, one, for the December quarter, was this quarter really driven by just better execution around version 10 and all those other things that you’ve talked about through this Q&A and in the call or was there really some significant uptick in version 11, in actual purchases, not pipeline, but actual purchases? And it sounds like your confidence in especially large deals going forward, there's certainly a component of version 11 in there, but can you talk about specifically for December quarter and then again for the future what that pipeline entails whether it’s version 10 and better execution or whether it’s more version 11? And maybe it’s just both this quarter but that would be just a little different than I'm used to seeing.

Yeah, so, on the numbers, it was our stand-alone solutions which carried with them about 2x additional license with it, so you had major growth there and including some in the enterprise. The license revenue growth in the big deals and the enterprise was primarily on version 10 sales that were what I'm going to call, in many cases, highly influenced by our version 11 vision because every EBC, every discussion I've had with these customers even though they are buying 10, were getting into these cloud discussions and capabilities even if they were deploying 10 now and we're going to move to 11, it had – not in every case, because some of those deals were in the pipeline a little bit longer, but in almost every case. The 11 capabilities had a significant impact on the decision of the customer to choose CommVault. And Al can add some color to that.

I think one last one John and a couple of you guys have brought this angle up, but I think the important thing for you all to understand is, we are a modern cloud software company. We don’t wait two years to release major functionality. We're doing it almost every quarter. So, yeah, a lots of what Bob said is very accurate and most – all of the sales were v 10, but we put new things like live sync and some of the some of the live native copy elements into the last recent releases of version 10 some of our scale up capabilities et cetera were all in our October release of v 10, SP11, SP10, something like that. But again deploying is there's constant innovation coming out from our end and people are buying new version [ph] but they are also buying the current solution sets, which add a lot of value.

And when you get into the March quarter obviously from actual bookings you are going to see a pretty substantial uptick in 11 bookings and I'm talking about the platform sale bookings.

Yeah. And lastly we did just turn and John had a good point since many people do wait a bit, at quite larger firms, what we did just release yesterday, I think, it is upgrades now are available and remember we are at SP2 on v 11.

Yeah, so last quarter was a control release of v 11.

Yeah.

So it was very selective.

But it was available if people…?

It was available.

Yes.

So it was GA, but it was under control – anybody who wanted it, could get it under a controlled release, which we put a lot more oversight on those installations as we come out. And it’s so far has done really well. Was that helpful for you John?

And our next question comes from the line of Michael Turits of Raymond James. Your line is now open.

Hey, guys. Michael Turits. Hey, Bob and Al, thanks very much. I want to come back to the cloud question. You talked a lot about what your technical and architectural advantages are during this long-term transition in the cloud, but right now in terms of revenues, has cloud been a net positive or a net negative and maybe we could just talk about specific examples and maybe as one idea Office 365 transitions maybe were formally backing of Exchange. Is that a net positive or a negative when that goes to the cloud and then maybe what about new workloads, which are incremental and being created in the cloud?

I am going to just tell you of our revenue base and that uptick in orders has a – just what we talked about Michael. The 0365 you can say it a net negative, but it is completely overshadowed by these other demands of customers and workloads that they're dealing with either migrating from an old application to a new one. I mean you want to take 365, we’ve got seven-figure deals that we closed last quarter tied to customers that are migrating from the Exchange to 365. So, last quarter, as you said, is it a positive net last quarter, I would say it was a significant net positive. I don’t know Al you want to…?

Yeah, and the only other data point I would tell you is the one that Bob said we have several success stories around just perfection and archive in old 365, forget the migration and all of that. So that was one. Two of the things that we’ve seen internally, Michael, was over one year the consumption on our – with our customers in cloud environments tripled. And that usually that workload was back up, which surprised us a little bit, but you see all of the other ones of DR, and dev test and moving a lot of file share and a lot of those capabilities moving out. So again, it’s – as Bob said, several times, it's all of the above. But we are convinced that this new or modern infrastructure architecture out there being driven by things like anything from big data, Hadoop, and Greenplum to converge infrastructure all plays to our favor and is exactly the trend in demand that we are seeing especially by A) bigger customers; and B) even the service providers.

If you are going to do compliance and you do not know what you’ve got and where it is, you cannot put an audit compliance policy on place globally. Just stop there. It’s a big issue. So if my data – an app is sitting up there and I can’t federate that across my Azure or AWS infrastructures, I got an issue. If I want to do federate or analytics, how do I do that without having that capability? In the big Hadoop environments, which is spinning up for us pretty strongly right now, people stop putting data in these big Hadoop infrastructures and now it starts to overwhelm them and they’ve got no way to archive it, move it, manage it for analytics. That’s turning out to be a really big market. A lot of technology there in terms of how do you do that whether it is Greenplum or – and we're starting to win deals just on that alone. And then swing around and start to deal with, okay, how do I – you are not going to see backups anymore or very little going forward in some of these workloads as how do I move data really quickly to the cloud and keep it active and tied to an application, we call it active archiving or whatever. That’s spinning out. So I mean it’s – if you are on the right side of the pilot curve, this is a really interesting time for companies like ours.

Thank you. And our next question comes from the line of Eric Martinuzzi of Lake Street Capital. Your line is now open.

The repurchase – just a clarification, the stock that you bought, the 477,000, was that since December 31 or was that since, I guess, the press release says since December 31, but your prepared remarks, I thought you said since October 27 and I guess another way to ask the question did you buy anything in the 90-days quarter ended December 31 or has it all been since then?

It’s been since December 31, Eric.

Okay. And then a follow-up question. The pricing model shift, maybe I’m not understanding the pricing model shift rippled across the deferred revenue, but I would have thought there would have been a higher percentage in the deferred revenue of software given your pricing model shift where you talked about, in Q2 2016, it was 77% perpetual and then it went down to 73% in Q3 2016. Can you connect those to for me?

Yeah, it’s – our sales are still largely perpetual, but there is some degree of recurring revenue and subscription based revenue, but it is still largely a perpetual sale. So our decreasing capacity based license sales was offset by an increase in solution set sales, which we saw a nice sequential uptick in that stream of revenue this past quarter and again those are largely perpetual sales as well, so they would not necessarily show up in deferred revenue.

Thank you. And that is all the time we have for questions today. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Have a great day everyone.