Michael Picariello - Director, IR Bob Hammer - Chairman, President & CEO Al Bunte - COO Brian Carolan - CFO.

Jason Ader - William Blair Joel Fishbein - BMO Capital Markets Andrew Nowinski - Piper Jaffray Aaron Rakers - Stifel Michael Turits - Raymond James Srini Nandury - Summit Research Greg Dunham - Goldman Sachs Rajesh Ghai - Macquarie Eric Martinuzzi - Lake Street Capital Alex Kurtz - Sterne Agee Abhey Lamba - Mizuho Securities Phil Winslow - Credit Suisse.

Good morning, ladies and gentlemen, and welcome to the First Quarter 2015 CommVault Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session.

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

Good morning. Thanks for dialing in today for our fiscal first quarter 2015 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, that relate to future results and projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

Actual results may differ materially due to a number of risks and uncertainties, which are discussed in our SEC filings and in the cautionary statement contained in our press release, and on our website. The company undertakes no responsibility to update the information in this conference call under any circumstance.

Our earnings press release was issued over the wire services earlier today and is also been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website. On this conference call, we will provide non-GAAP financial results.

The reconciliation between the non-GAAP and GAAP measures can be found on Table IV accompanying the press release and posted on our website. This conference call is also being recorded for replay and is being webcast. An archive of today's webcast will be available on our website following the call.

I will now turn the call over to our CEO and President, Bob Hammer..

Thank you, Michael. Good morning everyone and thank you for joining our fiscal first quarter 2015 earnings call. Let me briefly summarize our Q1 financial results. Total revenues were $152.6 million, up 14% year-over-year and down 3% sequentially. Software revenue was $72.1 million and grew 10% year-over-year and down 9% sequentially.

Services revenue was $80.6 million and grew 17% year-over-year and 4% sequentially. We had solid performance from all theatres, Americas, EMEA, APAC.

We purchased a record $105 million of our stock during the quarter, and the board recently extended by one year and increased our stock purchase plan by $105 million, bringing the total amount available for future repurchases to $150 million. We signed an agreement for a five-year $250 million line of credit.

From an earnings perspective for the quarter, non-GAAP operating income or EBIT was $33 million, up 5% year-over-year and down 18% sequentially. Non-GAAP EBIT margins were 21.6%. Diluted earnings per share were $0.44.

We generated approximately $35.4 million of cash flow from operations during Q1 ending the quarter with approximately $399 million of cash and short-term investments. We had a strong quarter from enterprise deals, which we define as deals over a $100,000.

Sales to enterprise accounts increased 27% year-over-year and were 63% of Q1 license revenues versus 55% in Q1 of the prior year. We also set a record for enterprise deal size, which was $356,000 versus an average enterprise deal size of $268,000 in Q1 2014.

We made very good progress in recruiting enterprise sales teams and our product management organization, which Brian will detail later in the call. From a industry recognition standpoint, for the fourth year in a row, CommVault once again earned the strongest position in the "Leaders" quadrant of Gartner Inc.

coveted 2014 Magic Quadrant for Enterprise Backup Software and Integrated Appliances.

Being chosen as a leader by Gartner for the fourth consecutive year is a remarkable achievement and which validates the strength of our product offerings and our ability to consistently deliver the most innovative data and information management solutions to our customers.

I encourage you to review the Gartner report, which is available on our website. CommVault was also proud to have received the Server Platform Partner of the Year Award from Microsoft.

Our partnership with Microsoft is becoming stronger as we work with them to provide unique cloud-based solutions, as well as innovative solutions for Hyper-V, Server, Virtualization, Exchange, and SharePoint. Now let me talk about outlook. We believe the current FY 2015 three consensus growth rates for total revenue is reasonable.

We had a good start to FY 2015 and as I clearly define path for growth, which includes the following elements.

Increasing penetration of large enterprise accounts by significantly increasing the number of enterprise sales teams; introducing new innovative products and functionality as part of our R2 release, which I will discuss in more detail later on in the call; releasing new Simpana cloud automation and management capabilities with innovative products and services, which will help large enterprises migrate to the cloud; and continuing to capture market share and large enterprises in our core data management, data protection, disaster recovery, and archiving segments of the market.

Accelerating growth in the cloud segment of the market by establishing strong positions with major cloud providers; increasing penetration of the SMB market with new targeted products and packaging tied to our R2 release and subsequent near-term releases, which will include appliances; and lastly, introducing new standalone innovative products for mobile, operations management, and intelligence business analytics and healthcare.

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 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 timing. It will take us through Q2, current quarter, to bring our quota carrying sales teams up to acceptable levels.

We will begin to see an impact from net increased sales capacity in the second half of the fiscal year..

Importantly, the cloud and to some degree mobile, are causing rapid, unprecedented seismic changes in the industry, which were affecting all vendors. I will discuss this issue later on in the call as well. We are confident of our longer-term that we will be well-positioned to take advantage of these market changes.

The key elements required to transform our business are all in place. We believe this should enable us to improve revenue and earnings growth.

These key elements include the development of the required innovative technologies, products and services, the expansion into new markets, sufficient sales capacity, and the development of new distribution channels and partners. In summary, we had a good start to fiscal 2015.

We have made very good progress in reengineering our products, services, distribution, and business monetization models tied to the rapid changes in our markets. I will discuss the progress in these areas in more detail later on in the call. We have also made very good progress in achieving our key recruiting objectives.

We are committed to continue to make the required investments in the near-term in order to achieve our long-term growth and profitability objectives. We have lots of work yet to do as we complete the transformation of our business during this time of rapid changes in the industry.

As I said in the last quarter's earnings call that the first half of our fiscal would be a challenge, and we would see a stronger second half of the fiscal year. Fortunately, we saw increased momentum in our business is evidenced by our big deal results in Q1. That being said, we still have work to do in order to achieve our first half objectives.

On the flip side, we do see momentum building for the second half of our fiscal year tied to our largest second half big deal funnel and the expected positive impact from increased sales capacity and our R2 release.

In summary, although the elements required to transform the business are in place, we believe it will take us several more quarters to get back to a sustainable, consistent, higher growth trajectory. I will now turn the call over to Brian..

Thanks, Bob, and good morning everyone. I will now cover some key financial highlights for the first quarter of fiscal year 2015. Total revenues for the quarter were $152.6 million, representing an increase of 14% over the prior-year period and a decline of 3% sequentially.

For the quarter, we reported software revenue of $72.1 million, which was up by 10% or $6.8 million over the prior-year period and down 9% sequentially. Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, increased by 27% over the prior year period and 2% sequentially.

The number of enterprise deals decreased 5% year-over-year and 30% sequentially. Our average enterprise deal size was approximately $356,000 during the current quarter compared to $268,000 in the prior year first quarter.

As Bob mentioned, all theaters had solid quarterly results, including the Americas, which had good sequential software license revenue growth driven by improved large deal close rates.

During Q1, our growth was driven by demand for data protection for virtualized environments, source side deduplication, and snap-based modern data protection solutions. We continue to see strong utilization of our capacity-based licensing models, which has a direct correlation to the underlying volume of data under management.

Capacity-based license sales represented 81% of our Q1 software revenue. For the quarter, software revenues derived from indirect distribution channels decreased 6% over the prior-year period and represented 76% of software revenue. Our direct revenue represented the balance and increased 141% over the prior-year period.

As a reminder, most sizable deals are driven by our direct sales force even though they are often transacted through the channel. The revenue mix for the quarter was 47% software and 53% services. Please remember services revenue is a combination of both maintenance and support revenue and professional services revenue.

From a services revenue perspective, our maintenance attach rates and renewal rates remained strong. Services revenue for Q1 was $80.6 million, an increase of 17% year-over-year and 4% sequentially. We do not expect the growth in services revenue to outpace the growth in software revenue over time. For the quarter, revenue from U.S.

operations generated 58% of total revenues resulting in a 7% year-over-year increase, while revenue from international operations generated the balance resulting in a 24% year-over-year increase. Geographically, EMEA, Canada, and APAC had a very strong quarter, while the Americas continued to improve.

The comparison of the year-over-year growth in the Americas was negatively impacted in Q1 2015 by the timing of recognition of several large deals in Q1 of the prior year. We added approximately 350 new customers in the quarter. Our historical customer count is now over 20,000 customers.

Our breakdown of license revenue from new and existing customers was in line with historical ratios. Arrow, our largest U.S. distributor continues to be a key partner for CommVault. For the quarter, revenue transacted through Arrow was approximately 33% of total revenue, growing 28% year-over-year and flat sequentially.

Our resellers and distribution partners are very important to our growth and market reach. We have various programs in place with our resellers, systems integrators, and storage partners, and will continue to invest in such programs throughout FY 2015.

We also continue to add new key strategic managed service providers or MSP's and cloud service providers, who use our products as the engine for them to provide data and information management services to their customers.

With over 200 service providers already delivering cloud and managed solutions powered by Simpana, we are building a meaningful subscription revenue stream for CommVault. As such, this will continue to be a major area of investment for us during FY 2015. Now moving on to gross margins, operating expenses, and EBIT margin.

Gross margins were 86.7% for the quarter. Total operating expenses were $97.7 million for the quarter, up approximately 16% year-over-year and 2%, sequentially. Sales and marketing expenses as a percentage of total revenues increased to 48% in the current quarter, which was up from 47% in the prior-year period.

Non-GAAP operating margins were 21.6% for the quarter, resulting in operating income or EBIT of $33 million. On a year-over-year basis, Q1 EBIT increased by 5%. Q1 EBIT margins decreased by 170 basis points year-over-year and 410 basis points sequentially.

Non-GAAP net income for the quarter was $20.9 million and EPS was $0.44 per share based on a diluted weighted average share count of approximately 47.9 million shares. On a year-over-year and sequential constant currency basis, foreign currency movements did not have a significant impact on either Q1 revenues or earnings per share.

I would now like to spend a few minutes discussing our operating expense investments and our anticipated EBIT margin guidance for fiscal 2015. We had declining operating margins in Q1 due to planned aggressive headcount additions, as well as increased targeted spending on several investment initiatives.

We added 100 net employees in fiscal Q1 and ended the quarter with 2,073 employees. This was up from 37 net new employee additions in the prior quarter. Most of the net new employees hired in Q1 2015 are field facing sales and technical resources.

In Q1, and early Q2, we made substantial progress in hiring quota carrying sales teams globally, and particularly in the Americas. Additionally, we have added substantial talent to product management. We expect to continue to aggressively hire over the next two quarters, with a heavy focus on the recruitment of enterprise sales teams.

With significantly enhanced talent acquisition capabilities, and as demonstrated by the number of hirers in Q1 2015, we believe that we are now organized to succeed in this area. In the short-term, as we continue to hire, and before the sales teams become fully productive, they will have a negative impact on short-term margins.

Our Q1 2015 operating margins were also negatively impacted by increased spending related to our global sales leadership kick-off event and other Q1 sales enablement initiatives. Given our increased confidence in the business, we will significantly increase investments in FY 2015 to take full advantage of the many opportunities in front of us.

For the remainder of fiscal 2015 short-term margins will be negatively impacted by additional investments that we are making. These will include significant major investments in the following areas.

Our sales teams globally, our cloud services group, our product management and go-to-market capabilities including our partner advantage program, and continued investments in product development, consulting services, and support.

FY 2015 will be an aggressive investment year as we are investing to accelerate top-line growth for the back half of FY 2015 and FY 2016. We are confident in our strategy.

We also believe that the near-term actions discussed earlier by Bob will result in a positive uptick to revenue growth sometime in the second half of the fiscal year but cannot predict the exact timing and magnitude of that growth. This could negatively impact contribution margins in the near-term.

As a result, we expect fiscal 2015 operating margins to be down by approximately 200 to 300 basis points. We believe the current street consensus revenue growth rates for FY 2015 are reasonable. Our objective is to return to our historic growth rate by the end of FY 2015.

It should be noted however that our gradual shift to more subscription based revenue is not fully predictable and may have an impact on in period recognized revenue.

The higher planned investment rate in our increased ability to achieve our hiring objectives will put us in a much stronger position to achieve our $1 billion planned revenue and earning goals. We remain committed to our $1billion objectives and growth plans, while achieving operating margins in the mid-20s over the next few years.

Let me now comment on tax rates and share count. We will continue to use a pro forma tax rate of 37% for FY 2015. Our GAAP tax rate for Q1 2015 was 31%. We expect our cash tax rate to remain lower and our GAAP tax rate for fiscal 2015 and to be approximately 30%. Our cash tax rate will approach our long-term GAAP tax rate over the next few years.

For fiscal 2015, we anticipate that our annual diluted weighted average share count will be approximately 47.5 million shares to 48.5 million shares. Now moving on to our balance sheet and cash flows.

As of June 30, our cash and short-term investments balance was approximately $398.5 million, down 13% year-over-year due to cash outlays for the new headquarters build out and share repurchases.

Free cash flow, which we define as cash flow from operations less capital expenditure not related to the new headquarters, was $34.1 million, which is up 46% year-over-year and a decrease of 12% sequentially.

As of June 30, 2014, our deferred revenue balance was approximately $213.9 million, which is an increase of $24.7 million or 13% over the prior-year period, and up $4.3 million or 2% sequentially. Please remember, the vast majority of our deferred revenue is maintenance and support revenue, not software revenue.

As of June 30, 2014, our deferred software revenue balance represented less than 1% of total deferred revenue or approximately $300,000. This balance was materially unchanged from the balance at the end of March.

For the quarter, our days sales outstanding or DSO were 66 days, which is up from 65 days in Q4 FY 2014, and up from 55 days in the prior-year quarter. The change is due to linearity within the quarter.

During the first quarter of fiscal 2015 under our stock repurchase program, we repurchased approximately 2.1 million shares of our common stock totaling approximately $105 million.

The board of directors also recently increased and extended the amount available for share repurchases by an additional $105 million so that there is now $150 million available in our stock buyback program through March 2016. During calendar 2014 we have repurchased approximately 6% of CommVault stock at an average price of $53.19.

We will remain opportunistic with share repurchases. In order to maintain our liquidity position, while accelerating our stock repurchase program, we have opened a five-year revolving credit facility under which we can borrow up to $250 million at favorable interest rates.

Borrowings under this facility can be used to repurchase our common stock under the repurchase program or to provide for working capital for general corporate purposes. There have been no borrowings under this credit facility to-date. During Q1 FY 2015 we expended approximately $18.2 million on construction costs for our new campus headquarters.

Our estimate of the total cost of this project remains to be $135 million. Through June 30, we have spent approximately $90 million on this project and we expect to spend an additional $45 million in fiscal 2015, with most of this being disbursed in calendar 2014.

We expect to complete this phase of the project and move in during the second half of FY 2015. Please keep in mind that we will fund these expenditures from our existing cash balance. Our current 182,000 square foot leased headquarters has an annual cost of approximately $5.5 million, which is reflected in operating expense.

Our new 280,000 square foot headquarters facility, which we will own outright will cost about the same on a square foot basis as our current facility.

As a result of being in a larger facility our annualized cost of the new headquarters will be approximately $8.5 million of which $5 million will be reflected as depreciation expense, with the remainder being operating expense. The incremental costs have been factored into our EBIT margin expectations for FY 2015 and beyond.

That concludes the financial highlights. I will now turn the call back over to Bob.

Bob?.

Thank you, Brian. I will like to provide a brief update on our perspective of the market. As I mentioned earlier the lightning fast shift to the cloud is changing the competitive landscape of the industry. To be successful in this transformative market, vendors must quickly reengineer their products, services, distribution, and business models.

This is a process we started sometime ago and we are well down the path in successfully making those changes. From a CommVault perspective we are seeing the following. Very large enterprises are still choosing CommVault as a vendor of choice in large IT infrastructure consolidations for global data protection, compliance, search, and legal.

We are seeing an increasing demand for archiving and mobile capabilities. The biggest new trend we are seeing is a rapid adoption of private and hybrid cloud in the enterprise segment of the market. This includes increasing interest and adoption of open commoditized infrastructures like open stack.

As we have stated many times there has been a very rapid emergence of MSPs and cloud providers serving various segments of the market. CommVault has become the major vendor to a large number of those providers for both products and innovative services.

The acceptance of public cloud providers is accelerating and we are increasing our product innovation and engagement in this segment of the market. The SMB market has changed rapidly with emergence of new competitors.

These are replication based solutions to replace traditional backup, and the increasing move by SMB customers to utilize the services of cloud providers. Now giving an overview of the next major release of Simpana 10, which we call R2.

Our Simpana R2 release addresses many new customer requirements both in the enterprise and the SMB segment of the market. R2 has been introduced to specific customers in an early release mode and will be formally released to the market in the next few weeks.

R2 introduced as new innovation, as well a simplified packaging, a new pricing that makes it easier for customers to acquire Simpana based solutions that solve immediate specific issues.

R2 expands the scope of Simpana from a data and information management solutions platform to now include a comprehensive management suite, which can be used in conjunction with Simpana or as a standalone function.

The Simpana management suite will enable enterprises to manage all things related to the IT infrastructure, processes, mobile devices, and the cloud. The cloud lifecycle management solution which is a key new element of the suite provides capability to manage and automate key operations in data centers and public and private clouds.

All of these innovations are wrapped up in an industry leading set of web-based, customizable operational monitoring and analytics tools, as well as custom workflows to automate complex operations and large on premise for cloud datacenters.

Specifically, some of the new capabilities include cloud lifecycle management, standalone solutions for virtual machine management and email archiving, a standalone mobile solution with enhanced functionality, live native copy options, new security information and management, SEIM, healthcare solutions and the introduction of an appliance program.

In the near future, we are planning to introduce additional R2 standalone solutions including disaster recovery, dev test, and cloud archiving. Please note the development and timing of any release as well as any of its features or functionality remain at our sole discretion.

In closing, we had a good start to our fiscal year with strong performance in the enterprise segment of the market. For the fourth consecutive year, we have been in the strongest position in the Leaders Quadrant of Gartner's prestigious Magic Quadrant for Enterprise Backup Software and Integrated Appliances.

Additionally, we were proud to receive Microsoft Server Platform Partner of the Year Award. We have quickly addressed our own internal issues associated with sales recruitment.

We are successfully adapting to the transformative changes in the market, with innovative new products, technologies and services, new packaging and pricing models, and make it easier for customers to buy our products and expanded distribution channels and partners.

Our objective is to take advantage of the changes in the market to establish a sustainable path to long-term, high revenue, and profitability growth. I will now turn the call over to Michael..

Thanks, Bob. Before we open the lines to questions I would like to highlight that we will be hosting our Annual Stockholders Meeting on Thursday August 21, at 9.00 a.m. Eastern Time at our headquarters in Oceanport, New Jersey. Details and a live webcast are available on the IR section of our website.

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

Thank you. (Operator Instructions). Our first question comes from Jason Ader from William Blair. Please go ahead..

Yes, thank you. Hey guys. Brian, I had two quick numbers questions for you and then Bob second one for you.

Brian, just on the subscription part of the business can you give us a percentage currently of sales from subscriptions and then also what percentage of the business you estimate is what you would call SMB?.

Sure, Jason. So, the subscription based revenue is currently less than 10% of license revenue. And then in terms of SMB we don't typically break that out. But you could see the strong performance in the enterprise segment of the business. So flipside of that is the smaller deals..

Okay.

Should we assume everything that's not enterprise as SMB or no?.

No. I wouldn't -- I wouldn't naturally assume that. That's a deal size metric, it's not necessarily a market segment metric..

Okay.

And then Bob, on the SMB market could you elaborate a little bit on the three items you mentioned in terms of some of the changing dynamics, I think you mentioned use of replication to replace backups, some of the new competitors, and then adoption of cloud may be just a few words on each?.

Sure. Over the last several years as the snap and replication technologies both from hardware providers and software, it became more accepted in the market as they simplified way of stacking up data.

It doesn't provide a secure backup but it does a complete secure backup which only can be done by an index copy of the data that has no overwrite protection to it. But for many used cases customers are using that technology as a proxy let's say for backup.

And that trend has increased and my belief in the SMB segment on the market and for cloud in the lower end of the market I think that kind of technology will be predominant. And then, clearly in the SMB segment of the market there have been some new competitors who have done quite well in that segment of the market.

The solutions are quite simple, they don't bend themselves to big enterprise employments but there has been some pretty good acceptance. So that's the fact until as I mention as data management moves to the cloud that the cloud providers are using both techniques.

At the low-end they're using replication techniques and at the higher end they're using technology that we provide to our MSP and cloud providers for more sophisticated data and information management solutions..

So do you have a play in the first use of replication to replace backup or is that kind of a net negative for you?.

No, I mean we do have our own replication technology. So it is an alternative as part of the Simpana platform. And number two, one of the issues has been we've been a platform play.

And as I've talked about probably for the last several quarters in terms of addressing some of these segments of the market where customers really want to buy a non-platform single say point solution, we clearly are on a very aggressive path to enable our customers to buy a series of different used cases as a single standalone product.

And I'm going to let Al expand a little bit first up on the virtualization side of the market and expand it from there..

Thanks, Bob. One thing Jason go back a little bit on the discussion here. So one of the things we're doing in R2 is that what Bob referred to as the so called live options. Those are immediately available. They are here now. And what those look like under the covers is like a lot of the replication capabilities out in the market today.

It's primarily targeted for DR. So people want these image based environments and of course you want to improve the RTO capabilities by not going through a restoration process. And that's what these solutions do. First releases primarily tied to VMWare. So we've seen a tremendous amount of response for those.

So then as you get into the DR capabilities of the marketplace this leaves you into cloud kind of environment because that's a great spot for using all the utilization applications like DR.

And as Bob said then a lot of IBM management capabilities now start coming into play where we manage the lifecycle of a virtual machine, we manage snapshots, we put them together with workflows, and these days we are even starting to put an end-user UI on the front end of this so they offer that as a service.

So that whole play ties really nicely not into the current demands but in the cloud -- cloudy kind of environments that are becoming prevalent out there..

Those solutions that Al just mentioned by the way, Jason, are position us strongly not only in the SMB segment of the market but they are also used selectively in the enterprise as well.

To be specific without mentioning names clearly it puts us in a strong position against one of the major SMB virtualized software solution providers and with live copy puts us in a strong position of a hardware provider uses appliances to provide that solution.

For us these are simple used cases, we just separated from the platform and just made it easier for customers to buy a specific used case like Al mentioned such as DR and in the case of live copy provide an ability to mount a live made of copy without restoring it from a backup..

Our next question comes from Joel Fishbein from BMO Capital Markets. Please go ahead..

Bob can you just, you normally do give us little bit of a color around the visibility and pipeline any color there would be very helpful and I have one follow-up?.

We have -- I'm not talking about our funnels and outlook for the second half of the year what I was saying on the call Joel is that we clearly see a lot of increased momentum going into Q3 and Q4, and we have some challenges in regard to our funnels and visibility in Q2 as I stated on the call..

Hey Brian, one for you, just as a follow-up, can you talk about how you would normally recognize a large deal let's say over a couple of million dollars.

How would that show up from our standpoint, I know its deal specific but any color you would give us there would be helpful?.

Yes, it is deal specific for sure, Joel, and we see a variety. I mean I would say the large portion is perpetual base so that you would see the software revenue being in period recognized amount of revenue. And then ongoing from there is obviously the maintenance and support and professional services revenue.

But having said that we are seeing other deals come into our pipeline that would be more term and subscription based recognized transactions..

Okay. And then Bob last one for you just on R2 and some of the live releases.

Do you expect that to help accelerate the revenue in the back half the year that unbundling is how I classify it?.

Yes, if you look at the points and why we are optimistic on the second half of the year number one is by adding a lot of enterprise sales capacity enabled us to build big funnel.

So you start there and now you add on top of that call it market expansion now with a series of new products, which increases the likelihood of improved revenue growth because those are additive they are not subtractive, they are additive. And both from a channel perspective and also as an entry point to large enterprises.

So the answer is yes, we expect it to help our revenue growth and over time it certainly will help in maintaining or potentially accelerating our ASPs..

Thank you. And our next question comes from Andrew Nowinski from Piper Jaffray. Please go ahead..

Hey, good morning. Nice quarter. Just wanted to get a quick clarification on Brian's commentary first.

I think you said you plan to continue hiring aggressively over the next two quarters though I thought -- I thought you said last quarter that it would be wrapped up by the end of the first half of FY 2015 so that extension of your hiring plans reflective of just a better than expected pipeline?.

No, hi, this is Bob. I will answer the question. One, we had -- we got way behind Andrew and we needed to catch-up particularly in Americas. So we put a -- which I mentioned previously a much stronger talent acquisition capability in place, it's a massive global organization and it is working.

So we expect by the end of Q2 kind of get to a position that we want to get to in terms of a baseline in enterprise deal capability. And then we got to add additional capabilities to move into FY 2016, because we need -- we are expecting strong growth in FY 2016 as well. So --.

Understood. And then on like, on the competition side I guess like to get a little more color on that dynamic. You discussed VMet at length so I would like ask about the others. EMC noted strong double-digit growth in their data protection revenue and that was both year-over-year and sequentially.

So maybe you could start by just discussing, some of the competitive landscape that you're seeing out there and whether anything is changed with regard to specific with EMC? Thanks..

Well, our stats show our deal was with EMC going down. EMC's CEO mentioned increased capability on competing with Cornwell, we don't see it. Certainly we've seen their senior executives flying around in jet planes try and unhook deals at an increasing rate and we expect to keep them busy. So the answer is we don't see it they see it.

We will see what happens in the market over the next several quarters and see whose revenue growth outpaces who..

Thank you. And our next question comes from Aaron Rakers from Stifel. Please go ahead..

Yes. Thanks for taking the question. One question on guidance and kind of outlook and then a follow-up if I can. So first of all Bob on the outlook as we go back a year or last quarter you had talked about a return of the historical growth rates in the second half of fiscal 2015.

Today you're saying you're more or less comfortable with where the street says which I don't think necessarily gets you back to those historical growth rate numbers.

How are you thinking about that and how does that kind of coincide with now guiding down 200 to 300 basis points on operating margin relative to what you've previously said?.

So let's just take the growth outlook, Aaron. One is, it's we still believe that we will get into historical like growth rate by the end of the fiscal year. What Brian was saying is the question is timing it could be early, it could be Q3, it could be late Q3, it could be early Q4.

We're just being a little cautious at the moment in terms of our perspective but all the elements that are in place. We have enough sale capacity to do this, we have funnel growth to do it, we had new products coming into market, we are in a piece distribution leverage. So the elements are there we will just have to see how the play out. So that's one.

And secondly we are recruiting engineers in full gear as you've seen on our stats and we combine that with a potential challenge in Q2. So we think Brian comment on 200 to 300 basis point negative impact operating margins is appropriate.

But let me emphasize we are really confident about the business and we are investing to succeed and increase our growth rate and we're not going to horse around. I'm not going to try to connect this to hit street EBIT margin numbers, it's just not going to happen.

The market is there, we've got the products, we've the distribution, and when I get this company back on a long-term sustained path and we're committed to do it. And we may take some heat in the near-term to do it, but we're not going to horse around with that Aaron..

Fair enough Bob. And then a follow-up if I can. Al I think you made the comment in conference calls about lumpation and deal closures on large deals, I know you had a really solid quarter this quarter but the number of those deals actually declined a little bit.

So can you talk a little bit about large deal closure rates has that returned to normal, if not, when do you expect that. How do we think about the deals that slipped after last quarter? Thank you..

Thanks, Aaron. I'm glad to see you're paying attention to my comments. And you're propagating the use of lumpation. But I think the simplest way to say it is we've returned to more normal close rates on particularly in our large deals is the simple answer for you there..

There is another dimension we can add to that Aaron we've been pretty clear as that the hiring problem we had earlier did affect funnels and particularly a large deal funnel. And we're still dealing with a negative impact of that in Q2. But as a result of this hiring we're seeing a significant uptick in those funnels in Q3 and Q4.

So we're at the bottom of that cycle if you want to think about that way. So what Al was saying is yes, we had normalized growth rates. But in addition to that you need the funnels. So you have normalized growth rate on our low funnel you don't get a good result.

They need a normalized growth rate on a large funnel and that's what we're seeing in the second half of the year..

Thank you. And our next question comes from Michael Turits from Raymond James. Please go ahead..

Hey, guys good morning. A couple of things. First of all it was a solid quarter both from the seasonal perspective in terms of the sequential growth rates and a decent return to kind of mid-teens top-line growth.

As you look in September I know you still had challenges but and the street is below seasonality do you think you're at the position now where you can actually do more like typical seasonal growth into next quarter?.

No, next quarter is a challenge, Michael. After that things would get interesting but doesn't mean we still could throw up a good quarter next this quarter. But I think we have the end of our challenge is tied to our low capacity additions in FY 2014 this should be the end of it..

Yes, not to be too repetitive on the margins but can you any more specific about what the changes in your outlook in terms of margins. I know you do, you should do what you do, want to do and not just hit street numbers.

But that outlook for margins flat to slightly down now 200 to 300 bips what's the change ratios where you saw that last quarter?.

No, I think we got little bit more of a challenge in Q2 and our recruiting engine is doing better than we had planned and we're going to keep going with it. So if you combine the two we are doing better on recruiting and that's not just in enterprise sales, but just in MSPs, which is a critical one.

Al has also had great success in hiring some really good innovative talent in our product management and marketing areas. So that's working in our favor as well but it doesn't negatively impact operating margin in the near-term..

Can I get a last question that I'm interested? You've talked quite a bit about -- in the past about deals, arrangements, partnerships with cloud service providers that you believe would be ramping I believe in the back half.

Can you give us an update on that? Are those still arrangements that you think will yield a lot of revenue growth and acceleration in back half? And anything incrementally you could tell us about them would be helpful?.

Well, right now, we're tracking to our plan in that area and we continue to acquire new partners we expected for us and significant partner this quarter as well. In addition to that, we're getting some quite good traction with the major cloud providers also. And it looks like a significant opportunity for us as well..

Thank you. And our next question comes from Srini Nandury from Summit Research. Please go ahead..

Thank you for taking my call. I got couple of questions on your hiring in the U.S. and everywhere else. What percentage of your holes have been filled in the U.S.

sales coverage and what gives you confidence that the people you're hiring are the right people?.

So I'm not sure on the percentage basis. But just in general, if this company is going to grow, I'll pick a number, historical growth right back at 20%, we have to hire round numbers about 20% more sales teams. And we're on track to do that or do better than that. So I hope that answers that part of the question.

Is that what you're trying to --?.

Yes. A follow-up question would be you are actually going to be moving to this unbundled pricing, you will be selling based upon the user, you will be selling up on VMs and sockets and so forth. So your pricing model gets lot more complicated, right.

So what measures are you taking to educate your sales force best that old ones and the new ones coming in?.

Well, don't forget these are additions. Our capacity and model stays in place. These are addition to that model. And our education of our technical and sales teams has been going on since June, so the significant education obviously is our sales teams. But these are standalone products with relatively simple messages versus our big platform message.

In addition, these standalone products provide our channel with products that are lot easier to sell from a channel perspective because they're standalone, the messaging is simple, the pricing is competitive, and the technology is superior.

So we will get channel leverage from this, we will get -- and we will get increased penetration also in our enterprise accounts just as entry plays into some large enterprises that we would not normally not have. Have to wait for a big platform play. So this should provide leverage across both the enterprise and the SMB segments of the market.

And to answer your question, how do we know they're going to be the right people. One, we've taken more care to define the requirements, what it would take for sales an enterprise sales rep to succeed here so we've done that. We've hired enough people with very good experience and track records.

And the proof of the putting we will both know in a couple three quarters because we will talk about it..

Thank you. And our next question comes from Greg Dunham from Goldman Sachs. Please go ahead..

Hi, thanks for taking my question. First question, on the enterprise sales reps.

Can you remind us how long it takes a typical enterprise sales rep to build pipeline and then start becoming productive?.

Hi, Greg. This is Mr. Bunte. It takes a couple of quarters to start building pipeline, significant pipeline and it probably takes another quarter or two beyond that before they start really ramping up there bookings productivity..

Okay.

So when we think about the expansion in the capacity this quarter and in the 2Q, they are really not going to start adding to business until FY 2016, is that the right way to think about it?.

No, I didn't say that..

Okay..

I said they're right up to full productivity. So they actually start not at zero, but somewhat up in between there and a 100%. So we start seeing addition to our overall capacity almost immediately..

We will start to see the impact of this in Q3. One, we hired number of people in Q1 and in early Q2. So as Al said they don't start at zero. So the acceleration will start in Q3..

Okay. That makes sense. And the next question, on the SMB front. You got the question before on the call.

It's clearly less than a third of your business, but when you think about the SMB business two years out, five years out, is this going to just incrementally get smaller and smaller with time, or is this an area where you'd expect that mix of business to stay consistent?.

No, I think it gets smaller. I think the SMB market shifts to the cloud and the enterprise segment gets bigger. But the makeup with enterprise segment is going to look a little different as we get into verticals and analytics and some other areas of the market. So -- but that's my view of it..

And I would agree Greg. It's -- it will look like our cloud business in a couple years. So you will see probably more subscription-y kind of revenue, more partners potentially other services offerings that we put together. But I agree with Bob. That mid market and lower end of the market, they want to buy outcomes and they want to buy solutions..

Thank you. And our next question comes from Rajesh Ghai from Macquarie. Please go ahead..

Yes. Thanks. I had a couple of questions on pricing. So I do think CommVault has a nice, compared to other backup vendors selling to the cloud, in terms of the fact that you are the only guys with multitenant backup capabilities.

As more and more enterprise data moves to the cloud, do you see yourself seeing any pricing compression compared to what you could get in enterprise in terms of dollar per gigabit? If not, if you ask by what factor is that lower in general, do you think -- what do you think of pricing in the cloud in general, considering that we hear about Amazon and Google lowering prices every day?.

Well, I will take it from the -- at the very high-end and then Al is going to answer the question. So I mean, in general, you will always have pricing compression in the market. So what you what to do is move to higher and higher value added segments of the markets.

And what I was saying earlier, the pace of the change tied to those movements, is higher now than it's been in my history with CommVault. One, we're well positioned to do that. And as far as -- don't confuse the price of infrastructure with the price of solutions.

In the cloud market for, that I call very simple data protection, there is no doubt that the Amazons and Microsoft's are going to dominate that market. And your traditional SMB suppliers are going to have more difficulty.

In the broader pricing strategy, I'm going to let Al take because we've been -- we've known about this for a longtime I have communicated this publicly for a longtime and now these different pricing and monetization models are now out to market we're just releasing in this quarter.

So Al, why don't you take it from here?.

Yes, a couple other comments, Rajesh, and Bob is right on the money in general. But as you go to cloud be it private or public what I think we are seeing is a shift in used cases.

So they're not necessarily moving big enterprise machine critical workloads especially enterprises out to cloud kind of environment what they're doing is primarily around used cases like dev test, DR, long-term archiving, file share, those kinds of used cases which are traditionally down the what's called a backup or core data protection elements, name spaces that people want to protect.

But they do want a manage them. So dev test is a good example, they want to manage and orchestrate the VMs that get let up the data that gets generated, then I want to say if necessarily data like they do backup that snapshot circle, and more importantly, they want to be able to re-gen that environment very quickly.

So all of the things Bob talked about are from management perspective and this particular used case really, really resonate in cloud kind of environment and yes, as Bob said the pricing is going to compress over time but the other good news on our business is data is growing even faster than price compression..

Thanks. That's very helpful. And my second question is essentially around Q2. That's typically been a strong federal U.S. federal quarter for you. Do you see anything different this year, especially given that you don't have Dell backing you this year as much? Thank you..

Well let me just expand on that first question. So if you think about the enterprise as they go through this transitions, one, there is still a lot of, I will call, legacy used cases that have to be managed as these companies one transition either to private cloud or to public cloud.

So you just to out point, you need a management layer that ties all these pieces and used cases together as these enterprises evolve.

And we've been, in dialogue with a lot of our key customers likely and they really like our ability to provide that management layer on top to orchestrate and automate all these different processes and manage these different environments number one, and two, our content store, which enable us to have basically ability to have visibility on one virtualized backend storage for all their data, it's all indexed and that covers cloud, mobile, private cloud, public cloud et cetera.

So we're in a very unique position as this market evolves. In regard to Q2 we've done a lot of restructuring and changing and I think this year our federal quarter will not be as strong as normal has nothing to do with the market it's a more CommVault specific..

Thank you. And our next question comes from Eric Martinuzzi from Lake Street Capital. Please go ahead..

Yes, I wanted to take just a deeper dive on the OpEx for this quarter, and then how it plays out in Q2. As far as the sales and marketing, I get that. That's ramped up with the hiring. But one number that was actually lower than I was expecting was the G&A.

Was there anything in there one-time, maybe to the good this quarter? Or is that something that we could use for modeling in the September quarter?.

No, Eric. I don't -- we don't recall anything specific in G&A that would be a one-time or I think it's basically on a normalized run rate at this point..

Thank you. And our next question comes from Alex Kurtz from Sterne Agee. Please go ahead.

Yes, thanks guys, for taking the question. I just wanted to come back to the 20,000 customers and this discussion on increased sales capacity. I think the thing I'm trying to understand and reconcile is you have a very large customer base. They're fairly captive. I mean ripping out your software is sort of ripping out a transmission on a car, right.

So and you have continued data growth and virtual machine growth.

So shouldn't there be a little bit more flexibility as far as driving future revenue out of the installed base, as opposed to all this increased sales capacity? I guess can you just sort of take us through what mix you need between the capacity growth within the 20,000 customers and these big deals that you're hunting in fiscal 2015 and fiscal 2016, to hit that $1 billion goal over the longer-term?.

So round numbers and this has gone on here for years. Our no, the mix between existing customers and new customers about two-third to one-third. So if you're not driving new accounts and penetrating newer enterprises we just not going to hit this, these kind of growth rate numbers.

And in addition to that as a company we got to do a much better job in increasing our footprint, not just on data growth but increasing our footprint with our existing customer whether it's mobile or its email archiving or its compliance or its legal or its operations, because now we have got all this operations analytic capability.

So you need to do all the above in order to hit your numbers and you have got a market it is under some price compression as well.

So when you put it all together if we put the sales capacity in place we get our new accounts, utilize our new products in terms of penetrating existing accounts and new accounts when you add all that up you got quite a positive picture as the company evolves over the next few quarters, but you got to do all the above you just can't mine your base in this business..

And Bob, just a last question here. I know there were a couple of large transactions last quarter I think you were talking about maybe a handful of like $5 million plus kind of transactions that got away from you at the end of last quarter.

If we look at that 356 on enterprise deal number what should be, is that the right number or is there a lower normalized number because of those large transactions potentially closed in during the June quarter?.

I think you got it right. They did -- we did do well in that segment and large deals in the June quarter. I think what you will see is something more normal than Q2 where they just stopped moving out in the Q3, Q4 we see a lot of additional very large multi-million dollar deal is coming into the funnel.

So I think you will see that number swing quarter to quarter, but potentially if you look out x number of quarters it will probably normalize at a higher number but not in the near term..

Thank you. (Operator Instructions) Standing by for question. And our next question comes from Abhey Lamba from Mizuho Securities. Please go ahead..

Yeah, thanks. Bob, on the margin front, I understand you are increasing investments this year.

How should we expect your margin go far beyond this year? Can you start expanding modules in fiscal '16 especially if your expectations of accelerating revenue growth come to?.

Hi Abhey, it's Brian. We would say that it's probably too early to tell at this point. We do remain committed to $1 billion objective of ours with operating margins going back to the mid-20s. It's too early to tell what the impact in FY'16 will be at this point. .

So in other words, your margins could still go down from the level that we could see --.

I wouldn't necessarily say that. No, I didn't say that..

Got it. And lastly, Bob, what factors in your products set and market demand give you confidence that we could see a revenue growth acceleration in fiscal '16? I understand increased hiring is going to be helpful but from the product set and market demand point of view any comment on that would be helpful. Thanks..

Well, we put all these models together. So just in general, the biggest variable that determines revenue growth is enterprise sales capacity since we do have the technology. There is still a large demand for what I recall legacy data protection and information management revenue in these large enterprises as they migrate out to the cloud.

Now you add addition to that what I was talking about I'm going to let him take it from here when you start talking about all the cloud management suite and the virtualization and email archiving -- Al, so why don’t you just take it from there..

Yes, and again Abhey, I was talking about DEB test solutions and ER and those types of abuse cases out there.

Again, as Bob was saying, the management elements beyond our traditional all things data vision are appropriate in these kind of environments and what gives us, both Bob and I are in the team, what gives us confidence and we're down the right track and have the right vision here is we just don’t dream this stuff up and talk to ourselves.

Over the last quarter myself and Bob and a number of senior management team's been involved in handfuls, dozens of exact briefings and this broader message has resonated on every single lot of them almost across the board. I can say confidently enough. So again, you guys know us. We don’t make these things up and talk to ourselves.

We, all the time, validate it with our key partners, our key prospects and our key customers and that’s what in the end gives us confidence on these are right solution sets and right ideas going forward..

So, in addition and Al was mentioning this offline earlier, since we have all these enhanced capabilities and expanding capabilities one of the key things we can do is improve our enablement, our messaging, and our training of our sales people and our tech people and our partners, and Al, why don’t you spend a minute on that because that’s another area significant investment for us..

Yeah, we have revised those groups. We're adding capabilities and headcount to those areas.

As Bob indicated earlier, we're on in the midst of a worldwide enablement routine, usually we usually presales on our SE side of our enterprising sales force and that’s exactly what we are doing there, and again going all the way from the technical side to our sales guys and then even moved in to channels and extensive enablement programs there..

The other one that real impact was positively later on the in the quarter and early next quarter we'll be seeing a whole series of appliances that also provide leverage in the enterprise and the SMB segment of the market. It's appliances and cloud gateways..

And virtual supply as well..

Yes, certainly..

The third, yes..

Yes, and virtual appliances as well..

Thank you. Our last question comes from Phil Winslow from Credit Suisse. Please go ahead..

Hi. Thanks, guys. I wonder if you could provide some more color on just the pricing environment that you're seeing out there, if you can maybe just cut it between a sort of large enterprise and SMBs? Thanks..

So, in large enterprises, what you see is that in these really enlarged seven and eight figure deals, Phil, you got lower pricing and maintenance and that’s just relative to size.

The market pressure, if we look at the decrease just due to market, it it's been pretty consistent I would say consistently well, but the price pressure that the hardware guys are seeing, we're not seeing this much in software. I guess that’s a better way of putting it.

And on the SMB side we've been overpriced in the market to some software competitors and some hardware competitors.

And what we have done is build these standalone pricing, these standalone solutions that are absolutely price competitive; they won't impact our border platform sale and enable us to compete a lot more effectively in those different segments of the market which we historically had not..

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..