Commvault Systems, Inc. (CVLT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2018 Commvault Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Michael Picariello, Director of Investor Relations.

Good morning. Thanks for dialing in today for our first quarter 2018 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 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 these statements that relate to our beliefs, plans, expectations, or intentions regarding the futures 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 our most recent quarterly report in Form 10-Q, in our other SEC filings and in the cautionary statement contained in our press release and on our website. The company undertakes no responsibility to update the information in this conference call under any circumstance. In addition, the development and timing of any product release, as well as any of its features or functionality, remain at our sole discretion. Our earnings press release was issued over the last wire services earlier today and has also been furnished to the SEC as an 8-K filing. The press release is also available on our IR website. On this conference call, we will provide non-GAAP financial results. A reconciliation between the non-GAAP and GAAP measures could be found on Table IV accompanying the press release and posted on our website. This conference call is 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 first quarter earnings call. We had a solid first quarter fiscal 2018 highlighted by 18% year-over-year software revenue growth. All of our global sales regions contributed to our Q1 growth, which is driven by a significant increase in license revenue from enterprise transactions. Enterprise deal growth was aided by strong initial traction from our new subscription based pricing models. We saw improve year-over-year enterprise license revenue growth as a result of our industry-leading Commvault Data Platform. Our platform is best-in-class technology supports customers’ journey to the cloud, providing customers’ ability to move to public clouds as well as to the newer cloud like on-premise environments. Let me briefly summarize our Q1 year-over-year financial results. Software revenues were up 18% and 19% on a constant currency basis. Total revenues were up 9% and 11% on a constant currency basis. EBIT margin was 9.6%; EPS was $0.21 per share. The highlights for the quarter were strong sales execution in all theaters, excellent growth in license revenue from enterprise transactions tied to the cloud. Our average enterprise deal size was $375,000 during the quarter, which is the Commvault record. A primary element of most enterprise deals as I mentioned earlier is the journey to the cloud, as well as a move to cloud like on-premise infrastructure. This includes customers’ utilizing the Commvault Data Platform to migrate data to and from the cloud, manage data in the cloud, or manage data across on-premise data centers and multiple clouds. Secondly, strong initial results from our new subscription pricing based – pricing models, excellent support from our strategic partnerships with Microsoft, Amazon and Cisco. Our services revenue of $91.2 million was up 3% sequentially, which was better than expected and was driven by strong maintenance revenue results. Additionally, we’ve made very good progress on the early launch of our web-scale solutions for hyperconverged environments, as well as a development of a number of other new product and services offerings, which I will discuss later on in the call. Our growth for the remainder of FY2018 is based upon continued success for the Commvault Data Platform to gain share in large enterprise accounts. The release of a significant amount of new products and services, which will begin to have an impact in Q3 and the potential for improved distribution leverage was strategic channel and service provider partners. I will now address our current FY2018 financial outlook. We are positioned to continued deliver improve software license revenue and earnings growth in FY2018. We have a good big deal funnel, which would help us achieve our Q2 objectives. Our new solutions and enhancement should begin to impact revenues in the second half of FY2018. Given our solid Q1 results, our revenue outlook for Q2 and the full year has marginally improved. We also believe that the current Q2 FY2018 and remaining FY2018 Street consensus for EBIT is reasonable. Our internal objective power is to achieve results somewhat better than consensus would indicate. Brian will provide more details on our financial outlook. While our strategic fundamentals are strong and our ability to execute has improved, we still face critical challenges. Number one, our ability to achieve our growth objectives in the near-term is dependent on a steady flow of large enterprise $500,000 to $1 million plus deals. These deals have quarterly revenue and earnings risk due to their complexity and timing. Even with good funnels, large deal closure rates may remain lumpy. We are bringing to market many new products, new services and new powerful simplify user interfaces. These all come with new pricing models. We’re also moving into new market segments. This is requiring us to execute a complex series of initiatives, which have implied execution risk. We continue to be in an opportunity-rich situation in the market. However, in order to achieve our FY2018 earnings objectives, we need to prudently invest in the near-term without jeopardizing our ability to achieve our software growth objectives or critical technology innovation objectives. In summary, we are encouraged by a continued business momentum, strong sales execution, industry-leading technology and services, strong new product pipeline and the progress we’re making with strategic partners. We have strengthened our foundation in order for us to achieve sustained solid revenue and earnings growth. I will now turn the call over to Brian. Brian?

Thanks, Bob, and good morning, everyone. As a reminder, we adopted the new revenue standard ASC 606 in the first quarter of fiscal 2018. Our adoption was done on a retrospective basis all prior periods in our financial statements have been adjusted for the new rules and are presented on a comparable basis. Please note that we were required to apply hindsight to the March 31, 2017 balance sheet under ASC 606. This resulted in increases to the March 31 accounts receivable and deferred revenue balances since our May 2017 earnings call. No adjustments were made to the ASC 606 income statements that were disclosed as part of our May earnings call. I’ll now cover some financial highlights for the first quarter of fiscal 2018. Q1 total revenues were $166 million representing an increase of 9% over the prior year period and flat sequentially. On a constant currency basis, total revenues were up 11% year-over-year. We reported software revenue of $74.8 million, which increased 18% year-over-year and down 4% sequentially. On a constant currency basis, software revenue was up 19% year-over-year. Revenue from enterprise deals which we defined as deals over $100,000 in software revenue in a given quarter represented 63% of software revenue. Revenue from these transactions was up 50% year-over-year and the increase was across all three geographic theatres. The increase was driven by record ASP of $375,000, up 59% over the prior year. The number of enterprise deals decreased 6% year-over-year. From a geographic perspective Americas, EMEA and APAC represented 53%, 32% and 15% of software revenue respectively for the quarter. On a year-over-year growth basis Americas, EMEA and APAC were up12%, 35% and 10% respectively. EMEA software revenue was up 39% on a year-over-year constant currency basis. The revenue mix for the quarter was 45% software and 55% services. Please remember services revenues was a combination of both maintenance revenue and professional services revenue. Total services revenue for Q1 was approximately $91.2 million, an increase of 3% both year-over-year and sequentially. As a remainder, maintenance revenue consists of customer support and software updates, and has historically represented approximately 85% to 90% of our total services revenue. You’ll notice that as a result of new disclosure requirements related to ASC 606, we’ve started report our maintenance revenue separately from our professional services revenue in Table IV of the earnings release issued this morning. Our professional services consist primarily of installation and consulting services as well as customer education. The growth in total services revenue was driven by 5% year-over-year increase and maintenance revenue driven by strong renewal rates. The increase in our maintenance revenue was partially offset by 8% year-over-year decline in our professional services. We believe the decline in our professional services revenue as primarily a buy product of our successful efforts to simplify installation of our software. We’ve also continued to grow the ecosystem of partners that can provide end user customers with high quality professional services. Our professional services organization is evolving and focusing on providing customers with outcome based as a service offerings. Early feedback from customers regarding these offerings has been very positive and we believe these services will become a more significant contributor to our professional services revenue in the future. Now moving on to our pricing models, during the quarter approximately 56% of software license revenue was sold on a traditional per terabyte capacity basis. This is down from 68% in Q1 2017 and 67% in Q4 2017. We anticipate that sales of our traditional capacity based licenses will continue to decline as software license revenue shifts if you standalone solution sets and our new platform pricing model. During the quarter, we had strong results from our newly introduced subscription based pricing models. As we get more traction and predictability with such models, we will provide more metrics around us. Now moving on to gross margins, operating expenses, and EBIT margin. Gross margins were 87.4% for the quarter. Total operating expenses were approximately $127 million for the quarter, up approximately 10% year-over-year and flat sequentially. We added 77 net employees in fiscal Q1 and in the quarter were 2,733 employees. Operating margins were 9.6% for the quarter resulting in operating income or EBIT of approximately $16 million. Net income for the quarter was $10.1 million and EPS was $0.21 based on a diluted weighted average share count of approximately 47.5 million shares. Foreign currency movements had no impact on EPS. Net interest income was nominal in the quarter, while there have been no borrowings on our revolving credit facility, we do incur interest expense related to the commitment fees. We anticipate that we’ll have nominal net interest income in FY2018. Let me now touch in our outlook for the remainder of FY2018. We continue to expect strong double-digit software revenue growth for FY2018. As such we believe the current Q2 FY2018 and remaining quarters of FY2018 Street consensus for software revenue is reasonable. From a services revenue perspective, our Q1 FY2018 maintenance revenue was higher than anticipated due to strong renewal rates along with overachievement of software revenue. We now expect year-over-year services revenue growth to be in the low-single digit in the first half of FY2018 and in the mid-to-high single digit in the back half of the year. As a result, we anticipate FY2018 total revenue growth to approach 10%. This would imply total revenues approaching $710 million. Let me now touch on our outlook for EBIT. We believe the current Q2 FY2018 and remaining quarters of FY2018 Street consensus for both EBIT dollars and margin percentage is reasonable. We do anticipate that EBIT dollars was sequentially increase in each quarter in FY2018, and expect full year operating margins to improve approximately 170 basis points or the approximately 13.2%. Please note our investment strategy is tied to internal objective that exceeds our FY2018 revenue outlook commentary. We will continue to strategically, yet prudently invest in FY2018 in order to strengthen our market position in the industry and increase market share. That being said we’re focused on achieving our shorter-term financial objectives. Let me now comment briefly on tax rate and share count. We will continue to use a non-GAAP tax rate of 37% for FY2018, which approximates our anticipated longer-term tax rate. We are closely following potential tax reform, and we’ll make any adjustments necessary should any legislation will be passed. We anticipate that our diluted weighted average share count for FY2018 will be approximately 48 million to 49 million shares. Please note that certain senior executives have approximately 300,000 outstanding stock options that will reach the end of their 10-year lives and will, therefore, expire in the next nine months. We expect that all of these stock options will be exercised prior to their expiration. Now moving on to our balance sheet and cash flows. As of June 30, our cash and short-term investments balance was approximately $481 million of which approximately 35% is located outside the U.S. Free cash flow which we define as cash flow from operations less capital expenditures was approximately $18.5 million, which was down 20% year-over-year. During the quarter, we made a $3 million prepayment for software royalties related to our solutions for hyperconverged environment and our scale-out appliances. We continue to expect full year FY2018 free cash flow to exceed non-GAAP EBIT as it has in the prior three fiscal years. As of June 30, 2017, our deferred revenue balance was approximately $293 million, which is an increase of 17% over the prior year period and 5% sequentially. All of our deferred revenue is services revenue not software revenue. For Q2 and the remainder of FY2018, we expect sequential deferred revenue growth to increase in the low-single digit percentage range. As a result at the end of FY2018, we expect deferred revenue to be up approximately 10% year-over-year at March 31, 2018. You will notice in our 10-Q that we will file later this week that ASC 606 requires us to disclose contract that have been received, but are not included in either revenue or deferred revenue. As of June 30, we had received cumulative orders totaling approximately $15 million, which Commvault don’t need to satisfy certain performance obligations. The vast majority of this balance is to professional services engagements, which is contingent upon a number of factors including customer’s needs and schedules, while this require disclosure is new having unfulfilled performance obligations is typical for our services business. For the quarter, our days sales outstanding or DSO was 75 days, which is up from 70 days from the prior year. At June 30, our receivables balance includes approximately $7 million of unbilled receivables. We have included the unbilled receivables balance in our DSO calculation. The vast majority of the unbilled receivables will be invoiced in the next 12 months. As noted on our Q4 2017 earnings call and certain situations we are required under the new revenue roles to recognize revenue in advance of invoicing our customer. As a reminder, while is our goal to align revenue and cash flow by collecting cash upfront this may not be practical or in our best interests in all cases. If we determine it is prudent per customer or partner to pay for their commitment overtime. It will result in an unbilled receivable on our balance sheet. Please note that the unbilled receivable balance will likely grow overtime and will impact DSO. That concludes my remarks. I’ll now turn the call back over to Bob. Bob?

Thank you, Brian. I would like to spend a few minutes reiterating our strategy and providing some detail on our pipeline of new products. The major elements of our strategy remain increasing share in our data management business both the enterprise and mid-market was expanded and broaden solutions and use cases. Develop significant new business solutions for hyperconverged secondary storage environments, expand to outcome based services and SaaS and open up significant market opportunities with analytics based solutions. As I mentioned last quarter, Commvault as bring into market a record number of new products and service innovations this fiscal year. We have already increased the momentum with a Commvault Data Platform tied to our customer’s journey to the cloud. The new products and services we are launching to the balances of this fiscal year will help us further increase that momentum. Commvault provides best-in-class solutions that outpace both legacy and new entrants to meet customers’ demands to make complex tasks simple and to help companies get greater value from the data for improved business insight and faster decision making. We launch key new products in the June 2017 quarter, the new products include key enhancements to the Commvault Data Platform for the cloud, new enterprise web-scale solutions for hyperconverged secondary storage infrastructure modernization, new enhancements to our virtualization solutions including a best-in-class user interface for ease of use, new service offerings for endpoint, Commvault managed services, and new solutions for service providers. Additional products will be launched this calendar year, including Commvault web-scale appliances for the mid-market, advancements and active copy management or ACM, ACM is Commvault solution set for orchestrating the complex set of task, necessary to encapsulate database and application workloads and make them portable between tiers of on-premise and cloud-based storage. This is critical for high scale disaster recovery and complex dev-test solutions. Enabling enterprises to solve general data protection regulation or GDPR compliance problems with innovative unique solutions based on our new analytics capabilities. Delivering innovation new solutions to mitigate ransomware and other cyber security risks and significant enhancements to our Commvault Data Platform for data and business analytics. Concurrently we’re making excellent progress on increasing distribution leverage with our strategic alliance partners, global GSI’s and service providers. We have launched more focused targeted sales and marketing efforts. We have enhanced our go-to-market capabilities to keep pace with our increasing rate of new product introductions. I now want to expand on Commvault’s new solution for hyperconverged secondary storage, which we believe is revolutionary. Large enterprises are looking to move away from legacy infrastructures and integrate public cloud like technologies to modernize their on-premise data centers. They’re also looking to transform their internal IT infrastructure and operations to mimic the agility, elasticity, scale and operating economics of the cloud. New generations of appliances are being developed often in a distributed and geographically dispersed manner that rely on processing and analyzing massive amounts of big data machine generated workloads. Enterprises are beginning to deploy low cost commoditize servers and storage, which are managed by software. As it relates to Commvault solutions for secondary storage, our software enables quick automatic deployment, easy scalability and enables very high utilization rates. We see an increasing trend of companies supplying hybrid IT, deploying new cloud like on-premise infrastructures in conjunction with moving selected applications and data to the public cloud. Commvault solutions for hyperconverged secondary storage and big data are now being solved as Commvault software in combination with well defined hyper reference architectures. Early this fall, we plan to compliment our enterprise web scale hyperconverged solutions with Commvault web-scale appliances for the mid-market. In relation to any competitive offering, these solutions will be optimized fully index copies for backup data protection, snapshot, replication, archive, and copy management, all with instant data accessibility, highly orchestrated for workload portability across hybrid IT, have much lower cost, and have much higher functionality, security and scalability. Our approach so hyperconverged storage is unique since it combines the Commvault Data Platforms comprehensive index knowledge of the data with the management at the backend storage infrastructure. In summary, we have converged the world’s best data management platform for the most innovative hyperconverged storage services capabilities into one platform. It enables customers to deploy one platform to manage all data use cases, manage data at the object level with comprehensive dynamic indexing with higher levels of security and lower cost. Please note the development and timing of any product releases as well as any of its features of functionality remain at our sole discretion. In closing, we had a solid Q1 and have made significant progress in executing our strategy to improve our market position and expand our addressable markets in order to maximize revenue and earnings growth. Specifically we have made excellent progress on our innovative pipeline new products, which will rollout throughout FY2018 and as design to strengthen our competitive position and open up new market opportunities. Additionally we continue to improve our distribution leverage, which is key to improving sales productivity. We are also well-positioned for improvements and services growth in the second half of FY2018. We have successfully recast Commvault reposition our business and regain our momentum. Simply put we are the premier data – help our customers become experts with their data. Together with our partner ecosystem that’s what we offer our customers the most powerful software and services portfolio for customers of all sizes to protect and use that data, so they can get value from it. So today as Commvault covers the most critical needs of the market from modernization of the infrastructure, on-premise and in the cloud to protection from threats such as ransomware and enable readiness for new regulations such as GDPR. We believe the company is in the strongest strategic position in our history. We are focused on successfully executing a very exciting, but complex series of strategic initiatives to increase our momentum and improve our profitability I will now turn the call back over to Michael. Michael?

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

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

Thank you. Good morning, guys. Very strong execution. Bob, I’ve got one for you and one for Brian. Bob just in terms of the large deal momentum that you saw in the quarter, was there any particular products or new solutions that were driving, the increased deal sizes? Or was it just more of a timing issue that you’re seeing the momentum in the business? I know you mentioned the pipelines very, very strong, but any color there would be really helpful.

Yes. It’s clear that one, the market is responding to our platform, not just the journey to the cloud which is critical. But also our ability to manage these changes and on-premise infrastructure and deal with these issues tied to security. So it’s the one platform that manages on-premise edge new modernization IT infrastructure, managing data in the cloud, as well as to the cloud and having ability to manage data across cloud, it’s the platform is the driver and when you combine that with our new pricing – subscription pricing models providing a lot of differentiation versus competitors and both technology and pricing and driving larger enterprise deals.

Thank you. That was a great segue into my next question for Brian which is, I know you said you give us more details down the road on the subscription based pricing model, but obviously this is fairly new to Commvault just anything you can give us in terms of how that’s going to work in the future and obviously get pretty excited about it. But when do you think it will be meaningful as a percent of revenue.

But I’d say that we’re internally pleased with our first quarter with subscription based pricing internally. So we’re optimistic. This is going to be a catalyst for growth for us. We think that the market is ready for this and also the new accounting standards aligned very well to the treatment of these pricing models well. It was significant for us in Q1. And I think that overtime if we get some more history and some traction, we will start providing some more metrics, but we’re pleased by the first start in Q1.

As if you take the word significant Joel and you combine it with the innovations we’ve made to the platform, it’s that combination that’s driving and helping to accelerate momentum in the enterprise.

Great. Thank you so much.

Our next question comes from Jason Ader of William Blair. Your line is open.

Yes, thanks. I’ve also got one for you Bob and one for you Brian. Bob on the visibility front, I know you talked about getting back to where you were a few years ago, when you guys I think so really good about being able to predict the ensuing quarters. Where would you say you are versus a few years ago and when you think you’ll get back to that level of visibility that you know well I just sleep well at night?

Well, we’re clearly not there yet. As I mentioned on the call, we are still big deal dependent. I think by the end of this fiscal year, we execute well. We’ll be even in a stronger position than they were a few years ago because the breadth of products, the breadth of market segments will be addressing the ability to drive revenue both in the enterprise strengthen our channel. We’ve got a lot of those products and services are relevant to our strategic partners. So I think the game plan we put together is on the cusp of enabling us to do that. But we’ve got – I’d say two to four quarters getting all this into market and then it’s got the potential to provide that kind of consistency in the model. Now we’ve been extremely consistent in execution over the past day quarters, all tied to driving the initial part of the strategy. But to your point Jason we’re not in that same position we were just kind of at least look to the outside that we were on automatic, because we had almost 10 years of that, but I think we’re in a much stronger strategic position now than we were back then. We just got to do a really good job of successfully executing the next phase of our expansion here.

Okay, great.

I know Al if you want add anything to that.

No. I think that that’s very accurate Jason. I think the only thing I would add is or the other assets that Bob didn’t mention as it’s obvious to us as we go along that our services capability in our large field services technical capabilities that’s our real asset. I happen to believe that the end user markets out there have lost some design and architectural talent over the last few years primarily the outsourcing and so our position there is unique, but on top of that as Bob said I think strategically, we’re in an all time best position that we’ve – since we’ve been here. And I know Bob starting to sleep better at night and I’m sleeping pretty well myself.

Yes. There’s another aspect to work it out. Al began driving our SaaS and managed services about a year and a half ago and that’s got some really high growth that’s another underlying layer that gives you more consistency and visibility to your revenue stream going forward. And that’s got off the ground quite well.

Okay, great. And Brian could you give us the number of seven figure deals possibly in any deals over $5 million, the number of deals over $5 million and then like a quick, on top of that one just, the professional services decline why would you not see higher services gross margin of the professional services is declining as a percentage of the total services mix?

Okay. Just answer the first question Jason, there were several seven figure deals and we’ll just leave it at that. And obviously, we had a record ASPs that we were pleased by that as well. With respect to professional services again the vast majority of that is going to be maintenance revenue, which is driving a professional services, yes, it decline for the reason that we stated by product of our software being easier to implement. And as Al just mentioned and Bob just mentioned we are shifting the service organizations more outcome based as a service offerings. It is a relatively small percentage of our total revenue right now. So it won’t have a very big impact on gross margins.

Thanks.

Our next question comes from Abhey Lamba of Mizuho Securities. Your line is open.

Yes, thanks. Congrats Bob and team. Really good execution. Bob you mentioned cloud as a driver, can you talk about some of the use cases that people are deploying Commvault for their cloud usage and who you’re seeing as competitors in that category?

The major use cases are I’d say core data protection and archiving that is today. I think and I’ll let Al expand on this a bit, but I think we’ll see that shift to things like dev-test. I think you’ll see a shift to more compute in the cloud where the apps and the data are in the cloud. So it’s clear to us that having extensive capabilities to enable customers to more efficiently and effectively is compute. We’ll expand that the number of use cases in the cloud including analytics as we go forward. So again the major drivers today are I’d say archiving and data protection and Al you want to expand on this.

I think that was pretty good. So as I think the only other thing I’d comment a bit is we’re seeing some and I won’t go in a lot of detail with this, but we’re seeing some interesting ideas surface with ransomware and especially high volume recovery, capabilities using cloud as primarily data protection element. I know there are some physics there that don’t buy make sense, but I think we have some really clever set of approaches there, some of our compliance stuff, particularly around GDPR can be cloud-based. As Bob said we’re putting out some data analytics type of programs that again can help in cloud environment. We’re seeing a demand out there for people asking to understand how they are using cloud and how they are utilizing that cloud environment. So again those types of applications play and I think lastly, it’s probably migration is an element. We’re seeing people wanting to move apps and/or data from infrastructure to infrastructure, cloud to cloud. And that’s where kind of separates men from the boys and moving data and understanding what the data is versus just containers are high volume, so ones and zeros.

Yes. What Al just described is not simple, taking a – lets a financial app on a database structure, on a dedicated on-premise and moving into a distributed cloud environment and automating all that making it simple. Clearly that is taking place. The other point I’ll made on ransomware is that, where there’s ransomware you get hit the with cyber security, situation like we just had and you need to recover from a disaster like that and recover many thousands of servers, not hundreds and do that automatically and quickly requires a lot of new technology and we’re bringing those technologies to market this fiscal year.

Got it, thanks. And competitive environment there and also Al you mentioned about GDPR. Can you help us kind of quantify that opportunity how should we think about that opportunity? Was there some of the strength in first quarter given by that and how should that trend over the next few quarters? That’s it for me.

That something we’re right now on GDPR, we have what I consider really good raw materials. And we’re going through and packaging some software and some services together. Obviously primarily first of all to hit the European theaters, primarily enterprise accounts with that and that will happen between now on our GO Conference in November. We think in terms of quantifying it I guess I’d say it’s big. We think it’s also topical. So it’s something that our customers are getting hit with obviously you’ve got the dropped at date of May 24 or 25 next year. So we think it’s topical. We think it’s timely and we think it’s very significant opportunity.

I agree with Al. The core issue is you can’t be compliant with a regulation on a piece of data. And to your understand what is it? Where is it? Who has access to it? What regulation you’re trying to be compliant to? What graphical region is its located? And that requires a lot of sophistication and you can’t do that by managing virtual machines. You can’t do it by managing containers whether it’s a VM or another container. You’ve got to get inside it right down to the object level, in a lot more detail and a typical search engine would do in terms of indexing that data dynamically and much more complex fashion and then is in the market today. So to Al’s point, this is a big opportunity and where because of our underlying architecture and platform and scale where the company as best position to solve those problems for key enterprise accounts including our own.

Our next question comes from Greg McDowell of JMP Securities. Your line is open.

Great, thank you very much. Two quick questions. First, I want to drill into this idea of strong product cycle, you’ve talked about bringing a record number of new products in the market, in the latter half of this year. Could you just talk a little bit about how we should track this product cycle and how we should think about this product cycle versus previous product cycles? And then I have one follow-up.

The best way to track it is to look at our license revenue growth and the consistency of it. So that, that is the metric. That period end of story that, that is the metric. And when you see that expand into new territories over the next year or two, you’ll know that we’re successful. We will probably not break it out into the individual products, but we’ll clearly provide color whether those GDPR or it’s ransomware or its hyperconverged or its appliances or it’s the analytics or its the cloud orchestration with HCM for migrating on-premise absent data to the cloud. It encompass all those kind of things or its end point or it’s our SaaS. I mean these are all products that are rolling out now which is that was I just went through and it’s not all of it is a substantial and clearly impactful to the success of this company to increase its license revenue growth momentum.

Thank you, Bob. And then Brian, one quick one for you. I think this may be the first time you guided to deferred revenue. I was just wondering so what’s – is this going to be a standard practice moving forward, because you’re essentially now implicitly guiding to a bookings number. Is there any specific reason you’re really focusing us on deferred I mean I understand ASC 606 stuff? But just want to think about sort of your rationale and your thinking towards focusing us on the deferred revenue.

Appreciate that Greg. We actually have given some verbal commentary around deferred on some prior earnings calls recently. So just for sake of clarity I mean as we transition to the new revenue standard and kind of what’s on balance sheet versus off balance sheet we just want to make sure that we’re being explicit and making sure that the proper expectations are set.

Fair enough, thanks.

Our next question comes from Alex Kurtz of KeyBanc. Your line is open.

Thanks guys. Just a question and a clarification, so Brian on these large enterprise transactions, are you guys tracking and can you tell us what maybe that the tax rate is for the API to the cloud, I know you guys have a skew for that? So just try to figure out what that hybrid attach rate looks like for the large deals in the quarter.

I think Al can handle this one person I can some commentary.

I think the only thing we would say Alex is it continues to grow, the growth is accelerating there for us. It ties back to what Bob said upfront is, we’re winning these deals on platform and in the cloud play. I know its 250 – continually tracking 250% growth year-on-year, and we’re running about 10 petabytes a month growth in new business there. So that’s probably the data point I’d stop with there.

Okay. So Al 10 terabytes of manage data in the cloud per month.

Yes, strong.

Okay.

And I think what Al is talking about is public cloud.

Yes.

And we’re seeing as some pretty massive shifts to private cloud that looks like public cloud. So if you take that in the aggregate, it’s this off the top of my head, so don’t take this. It is the vast majority of the big enterprise deals have a cloud component whether that’s 90% or 85%. It’s very significant. I don’t know how a deal that we’ve been in where cloud has not been in the discussion. I’m not aware of one.

I’d agree with that. It’s the hybrid IT world. This what’s going on there Alex.

And Bob just a longer-term strategic question and take us where you want, but as enterprise becomes a bigger part of the revenue mix. Have you thought about the commercial business and transactional business and sort of the cost associated with that and whether or not it’s maybe a spot where you can maybe deleverage some of your expenses as you become more concentrated in enterprise? Have you guys thought about what the mix between those two might look like overtime and what that might mean for the OpEx structure?

Well. Yes, I mean one, it’s how do you get sales productivity. And then the enterprise there’s a lot of things we’re doing with our big strategic alliance partners, which we – maybe I’ll comment on little bit more specifically toward the end of the fiscal year, but there’s some significant things going on that can help drive productivity improvements in the enterprise. When you get into the mid-market and you want to get leverage, one it’s you can get it with lower cost some of you have products that are well aligned with those channels. So we’ve done a lot of that to make it easy and simple for a channel provider to drive revenue for example, hyperconverged appliance driving that into market has a lower cost than some of the other products because it’s just a simple self-contained product that is unique in terms of its cost performance profile, in terms of going into those markets. Addition to that you’ve got a shift in the market – in the mid-market segments, maybe five years longer than we thought, but a shift to the mid market either going to the cloud or through service providers or using the cloud and we put a lot of emphasis on that. So that’s a major productivity driver. Now add managed services and now add SaaS on top of that. So there’s a whole series of programs that designs one accelerate growth and improve sales productivity.

Thank you.

Our next question comes from Aaron Rakers of Stifel. Your line is open.

Yes. Thanks for taking the questions and congratulations on a quarter. Two questions if I can as well. First of all in the hyperconverged product, can you just kind of help us understand where you’re at today versus when you expect to see kind of full revenue contributions to materialize it? And how we should think about that as expanding Commvault addressable opportunity in a market?

So we just launched it and we have our first sales or occurred last quarter. We’re starting to – I call it we’re in the first early ramp this quarter. And then by the time we get into Q3, I’d say we’re in full launch mode. And I’ll let Al expand on this.

Yes. So I call it as well we’re in the early adoption stage. We’ve been focusing on our final stages of beta getting references, getting proof points out there. We’re a little bit ahead on the reference architecture play versus the appliance play only by a month or so. So as Bob said all those activities we intend to get programmized this quarter in fact even next month in August and then be able to hit Q3 really hard all the way through go with every marketing and heavy push or channel and our direct salesforce. So our enablement process is going on now, early demand gen effort, et cetera. So hopefully that gives your flavor.

Yes. And then maybe I just build on that just second question is as you engage with larger customers particularly on the enterprise side, can you talk a little bit about as we consolidate secondary storage and/or hyperconverged platform strategy? How much incremental dollars you think enterprise opportunities could present to you?

Yes. It does two things there. And there is a number and I don’t want to put it out yet, because and so we validate it. I don’t want to set an expectation that we can’t follow-up on, but it’s significant in and of itself incremental to our license revenue sales. But it pulls along with it lot of other things whether it’s GDPR or and all these things start to tied together big data analytics, it’s a big play in our healthcare account. So there’s synergy with this play in the market. Because we – in the enterprise, because we are in a complete different and now can expand us a little bit. Our scalability versus any of the other guys out there is dramatically higher. Our ability to go into major enterprise and really big scale is – we’re in a class by ourselves there. And then when you add our securitization and add all our understanding of the data and our ability when you want to go into those repositories, so orchestrate all the movement to public cloud. We just for really technically separating ourselves from everyone else in the market. The issue is execution. It’s getting these products into market, to Al’s point, getting the reference accounts, getting our distributions spun up, getting this tied in with our in a few strategic partners all that is happening. So it has got the potential for I call it significant TAM expansion as well as improving our ASPs.

If I can add a little bit Bob, I think that I can spot on. Aaron I think the thing that’s also unique here and another strategic weapon for us is for the first time, now our channel, our partners and our field can move into account with an infrastructure offering. We’ve always been software only. We take great pride and being able to go across to any kind of environment, any kind of architecture, any kind of brand if you will. That continues however as we see let’s just got the aging of the appliances out there. I won’t mention Veritas or data domain, sorry. But as those age out there and they are still very proprietary, very locking on a vendor side we’re finding this is one more kind of arrow in our quiver to discuss broader data management platforms it plays with, but declare enterprise customers. So it’s another Bob hit on almost everything I’d say again this would add to it. And again the reference architecture here play leave from for our partners – our infrastructure partners out there as well. So we think it’s a big deal.

There’s no vendor lock in here. It provides tremendous agility and flexibility to these customers and not – because our platform is open. So it doesn’t lock that, we got to continue to earn their business with our innovation. But it gives from a standpoint of being open no vendor lock in, complete agility across these different infrastructures and apps and use cases. We’re in a class by ourselves.

And of course, don’t forget the fundamentals there. It’s got really great performance and a very good cost profile.

Yes, particularly against guys like – like, like Dell the up starts and guys like Dell EMC.

Right, and yes, exactly.

It is to be specific.

Our next question comes from Andrew Nowinski of Piper Jaffray. Your line is open.

Hi, thanks. I think to get more color as to where most of your large deals are coming from. I get displacing Veritas or daily domain are those large deals coming from your installed basis customers moved to the cloud?

Both, but this still a lot of – we are displacing the major legacy competitors and those include EMC and includes Veritas and includes IBM and includes some of the old HP product, that’s out there data protector. So yes, there is as customers move to these new modern IT environments and I want a platform to make it easy and given the agility to do so. We are in a very strong position, because we are not only doing that, but we’re enabling the dramatically reduce cost, improve overall performance of their systems, improve their reliability pretty dramatically relative these are the competitors. Our support systems are lot more one automated, but more comprehensive. So there is just a lot of benefits for our customer to move to Commvault.

Okay. And then also looks like VM had a very good Q2 result. Do you think the backup stores market inflecting, we were both doing well? Are you just competing the different market segment than ASC?

We are clearly more enterprise focused than be, but you’ve got to give them credit because in that mid-market, they have done exceptionally well both from our product standpoint and from distribution, when you get into big enterprise, it’s a completely different game. And we don’t see a lot of being pressure there. In addition even the mid-market I think we’ll see some pretty significant shifts in technology and requirements that favour lot of those things we’re doing versus VM what done. Let me give them good as for what they’ve accomplished.

Okay. If I could just quick one more end, can you explain any more colors to where Microsoft is and how much revenue they are contributing to business?

The Microsoft partnership is significant. The engagement with Microsoft continues to expand in many different aspects. And I would say the potential for that partnership to not only, be significant, but be more significant in the future that’s gone up overtime. So that they have proved to be a outstanding company to partner with.

Andrew one other follow-up back on being as we’re hearing consistently from our distribution from a mid-market players and obviously our enterprise that one platform multiple services, multiple environment is winning the day. Obviously the bigger the customer the more that’s applicable, but it were finding that as well as just score capabilities on our products that really plays into the mid-market sectors. I thought it just add that.

Our next question comes from Srini Nandury of Summit Redstone. Your line is open.

All right. Thank you for taking my question. I really appreciate it. Bob can you talk about the GDPR opportunity little bit more? And can you talk about your initial conversations with your potential customers and more importantly can you talk about the state of preparation of Commvault to intercept the demand? I have a follow-up, please.

Yes. So GDPR requirement is quite complex and if you’re going to – what I was saying earlier its starts – you cannot become compliance, this is data, data privacy, how long you keep the data, do I keep it, do I raise it. You can do any of that unless you understand what you’ve got. And you really can understand a catalog what you got through a container. So it starts with much more sophisticated classification. So for example, if you’re trying to be a compliant to these different regulations, which are geographic, we’re talking mainly about European community, but they also apply to other geographies in the world. So if I have an individual’s data, I’ve got to stop marrying indexes. I got to marry geographically with where is it. I got to stop marrying what class does it belong to. And to do that you cannot use your standard techniques, you can’t use data lacks you, you’ve got to manage data across these organizations holistically. You’ve got a enrich the data which means you got a dynamically index it as things change overtime. You classify it one day and the next day that piece of data could be in a different category. And today it could be high classified important tomorrow, not so or vice versa by the way. So that is a continual process and it’s got to be done holistically across the enterprise. So its going to start there and then you got to automate to these different compliance requirements. That has a lot more sophistication than I call standard data protection. And Al as point earlier, unless you have a platform that cuts across all the – these different use cases, you cannot do it. And then if it is some a lot more sophistication and search an enhancement and then I’m indexing, you cannot automate the processes, Otherwise it becomes a very manual costly and not very effective way to accomply. So what we’re doing is taking all of our capabilities and some planning and automating it to make it easier for customers to comply. That’s a mouthful but this years of work involved in what I just said that we’ve been working on here. Now its not just a year, this goes back several years and it requires a lot more technology then people would typically associate with Commvault. So Al if you want to add.

I think again, I talk better earlier, you talked about it earlier, think you’re hitting the key points. I think the other thing I would only add is, both Bob and I and our product teams have spent significant time were its on a larger European customers and prospects. And one way to think about quantifying it is and this is slightly different for us, because this is a risk mitigation play, not just a peer cost and performance play. But it is risk mitigation and I know for a fact and Bob does to that, so particularly large financial companies are just big corporations have a very large number associated with the risk tied to non-compliance here. So there’s a demand there and again as Bob said and I said we’re in the process of taking our core technologies and packaging it into a comprehensive set of software and solutions. By the way and thing we didn’t say before was Bob’s alluded to it is major world wide companies almost all have European operations and European components to their business need to will be effective. So again this is a worldwide big organization demand as well as European company demand.

It also got, what I call connect the dots because you can’t be compliant, if you hit with ransomware or other cyber security risk. And for whatever reason you can be compliant because your data has been compromised. Those capabilities also become relevant and solving a GDPR compliance problem. So it’s a multidimensional – it requires a multidimensional solution to solve these issues.

Our next question comes from John DiFucci of Jefferies. Your line is open.

Thank you. I’ve a question for Bob and Alan and may be a follow-up for Brian. I guess, first I’d just like to echo really strong results here, strong aggregate result especially in software line and you mentioned the strong enterprise business. But we’re hearing in the field that at a very high end the key accounts Dell EMC is almost become irrational on price. I guess can you comment on this, this obviously not affecting your results. But at some point it seems like the real attractive market as you continue to move up market. Can you comment on it and how you feel – how you expect to deal with this going forward? I would assume they can’t continue to do this for forever.

Well one, they are doing it, and it’s an old EMC play, that we’ve seen this movie before. I’ve gone back probably 15 years and free is not free and you may be giving product away, but if you give it away and you can solve basic problems and even though it’s free at the end of the day it’s really costing you more money. And now you’re tied into a vendor who can solve the GDPR problem, you can deal with Ransomware, it can deal with easy migration of apps and data to the cloud. I mean they say that they can do it but they can’t. So their underlying architectures and technology is legacy and you can’t taper over legacy with free. So when we go in and we sell we’ve got to sell on our value but it’s something we’ve done before, we’ve seen before and we can handle it. The other thing we can say to our customer rate, great. Have Michael Dell delivered free stuff, we’ll manage it, put our software layer in and just get it free from Michael and have a great day. So, we will – it is something we can manage here and still hit our numbers, let’s put it that way.

I’d add two things, one is people regardless like Bob said, regardless of the price, people are continuing to be very, very concerned about lock in. Not just in type a cloud or brand a cloud, but still new hardware, what type of software does it block me and there’s a reputation there that those guys are going to have to deal with. And the last thing is the one thing they have the that we don’t is $63 billion worth of debt.

Okay, thanks. Yes, you don’t have that. Okay, if I could follow-up for Brian. Brian, you talked about cash flow which is little weaker than we expected anyway. And I know that there’s that extra $3 million payment. But even if you conclude that normally when I look at this I’d assume – I look at the accounts receivables were about $20 million greater than we had anticipated and given the strong enterprise deals, which are probably at the end of the quarter or a lot of them are. I’d say, okay, well next quarter is going to be a good cash flow quarter. But now, you restated last quarter and with ASC 606 and you mentioned the, what would normally be off balance, receivables are now there. And so the last quarter went up by about $7 million. When I look at that is it – am I still thinking the right way, am I still thinking that – a lot of large deals in the quarter, usually those close at the end of the quarter accounts receivables were strong even with that extra $7 million if I take that out it’s like $13 million greater than I modeled. I should see that cash collected next quarter. Am I still thinking of that right because 606 sometimes confuses me.

Well, I’ll make a statement let Brian, I think, don’t get confused between free cash flow and cash in the bank. So I’ll let Brian.

Look John, I think we’ve demonstrated overtime that free cash flow will mimic our non-GAAP EBIT performance. And maybe from quarter to quarter, it may not appear that way. But for the prior three fiscal years, we’ve demonstrated that free cash flow exceeded our non-GAAP EBIT. That’s our expectation for FY2018, obviously, with 606 where there is some kind of mismatch of times between cash and revenue it gets a little bit more complicated, but it’s still our expectation to have our free cash flow exceeded.

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

Thanks. The services revenue was better than you expected and you attributed that to a couple of reasons, one was on the better than expected software licenses, but it was also you mentioned the renewals. Did you go a layer deeper on the renewals? What’s behind that just take it from a viewpoint of renewal of now versus maybe renewals a couple years ago.

Good morning Eric. It’s Brian here. So I think this all relates to our can better than expected performance on our maintenance services renewals in general, we’ve been at this for good couple of years now we’ve been talking about this on our earnings calls we started at the enterprise level then went down to the SMB levels and very programmatic got changes that we made. And we just saw great customer adoption and uptick and I think that our pricing models are the right fit for the market. We also had very strong execution internally in terms of just being proactive on our customer dialogue and I think that’s paid off in terms of just strong renewal rate. So overall we’re pleased.

Okay, so combination of the pricing in the sales execution.

And execution, yes.

Yes, this is Bob. We’ve said how long that we thought the bottom was going to be at the end of FY2017. And that we would see kind of flat up in the first half and then we’d accelerate in second half and what Brian is saying we’re doing little bit better than that.

I’m going to promise over deliver, I like it.

I tried to say that, Eric.

Our next question comes from Stephen Bersey of MUFJ Securities. Your line is open.

Thanks guys. Hey, on the ACM front, just wondering which clouds are covered, if there is more customer interest in any particular one. So if there’s any standouts on use cases. And it maybe on databases and applications kind of what’s covered on that front I’m assuming that pretty much all the majors are there at their rollout schedule.

Yes, I would say Steve that, it’s primarily assured, it’s probably growing the quickest right now and I think it’s as the biggest footprint for us out of there that’s due to a lot of different reasons, one of which is our long standing relationship with those guys. AWS is very significant they’re growing as well. They’re probably number two I think. We’re doing somewhat Google starting to do a somewhat Oracle, I think there’s actually in total not just going what brand names here is there is 29 different cloud environments that we heal with. As you know AWS has five or six player version as does Azure et cetera. Bob mentioned earlier, mean there are obviously pushing more and more to compute environments for obvious reasons and again I think AWS and Azure are leading the charge there as well.

Our next question comes from Austin Dietz of Raymond James. Your line is open.

Hey, it’s Michael Turits. Two product questions. First, can you talk about ransomware that’s just about every recommendation in dealing with talks about more consistent frequent backups which is that actually – you’re actually seeing revenue being driven? And my second question is whether or not you can walk through the release roadmap a little bit, talking about products benefiting in the second half, so what went GA either in the first half or in the second half you actually think you’ll be a material contributor in north of the schedules there.

What did you just say Michael on ransomware type of backups, I mean, what was your first statement?

So, there’s some ransomware out there with WannaCry and with patch in. And just about every recommendation whether it’s from the government or Microsoft or Gartner, says do more frequent backups and more sophisticated backups.

I got it, okay.

So I’m wondering how you’re benefiting there.

Yes. I mean, I’ll answer it more broadly and Al will do a deep dive on this for you in terms of what’s coming next. So what we’ve done in the past year is to try to do early detection was a pretty unique technology. So down at the file level, you look at how it’s being accessed. If something is off a pattern, you can immediately detect there’s an intruder and you shut that intruder off. If the data gets contaminated, the more sure way is not by recovering a VM, the most sure way is recovering it right at the object level to a backup. And that’s so when people talk about backups, sometimes they’re talking about a replicated copy, sometimes they’re talking about a snap. When you’re dealing with cyber and you’re dealing with something like ransomware, the only sure way is to get a lockdown point in time copy that’s non-corrupted and that’s an old line backup copy, so I’ll leave it there and let Al pick up on this.

Yes, I think again emailed it on. It’s a point in time thing. And as you said, Michael, people are looking for shorter and shorter RPOs or recovery point objectives. The other thing I guess I’d add to what Bob said properly two things, one is we learned we’re not better that there is a need for a huge amount of rapid recovery, which implies lots of automation, lots of help, lots of cloud, capabilities, could even think about it as temporary spots to get these organizations up and moving again. There’s some things we can do in a software, there’s also some things that we’re putting together that in terms of services on this. So I think this becomes – as Bob said, there’s a number of things we can do to help, mitigate it or detect it early, which is really what you want to do with ransomware because as you know these usually occur over a prolonged period of time, until there’s a significant base to extract fees from. So there’s ways of detecting that using advanced analytics or our honeypot capabilities. Then there’s a point in time capabilities which we’ve always had, but those continue to get better and better, and niftier and niftier in terms of ease of use and high volume and input services on the back, and there’s a scope for upfront assessment as well as recovery and insurance kind of capabilities on the back.

There are no further questions. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a great day.