Michael Picariello - CommVault Systems, Inc. N. Robert Hammer - CommVault Systems, Inc. Brian Carolan - CommVault Systems, Inc. Alan G. Bunte - CommVault Systems, Inc..

Joel P. Fishbein - BTIG LLC Jason N. Ader - William Blair & Co. LLC Greg R. McDowell - JMP Securities LLC Aaron Rakers - Stifel, Nicolaus & Co., Inc. Andrew James Nowinski - Piper Jaffray & Co. Abhey Lamba - Mizuho Securities USA, Inc. Michael Turits - Raymond James & Associates, Inc. John DiFucci - Jefferies LLC Alex Kurtz - Pacific Crest Securities, Inc.

Srinivas S. Nandury - Summit Redstone Partners LLC Eric Martinuzzi - Lake Street Capital Markets LLC Stephen D. Bersey - Mitsubishi UFJ Securities (USA), Inc..

Good day, ladies and gentlemen, and welcome to the Commvault Q2 2017 Earnings Conference Call. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Michael Picariello, Director of Investor Relations. Sir, please begin..

Good morning. Thanks for dialing in today for our first quarter 2017 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 of these statements that relate to our beliefs, plans, expectations or intentions regarding the future are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

Actual results may differ materially due to a number of risks and uncertainties such as competitive factors, difficulties and delays inherent in the development, manufacturing, marketing and sale of software products and related services and general economic conditions.

For a discussion of these and other risks and uncertainties affecting our business, please see the risk factors contained in our annual report in Form 10-K, and in our most recent quarterly report in Form 10-Q, 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 on our sole discretion.

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

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

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

Thanks, Mike. Good morning, everyone and thanks for joining our fiscal second quarter FY 2017 earnings call. We achieved strong second quarter financial performance, which was highlighted by 22% year-over-year license revenue growth.

This was driven by a significant increase in the number of enterprise revenue transactions across all of our geographic regions. We had good contributions from all three global sales theaters in the quarter. In addition, we saw continued solid growth of our sales funnels.

The current acceleration in our license revenue growth is being driven primarily by a combination of the following – excellent growth in modern data management for large enterprises; managing data on-premise to and from the cloud in the cloud and in hybrid environments; good year-on-year growth from our standalone solutions, virtual, mobile, apps and archives; and better execution from our sales teams as a result of improved sales leadership, processes, staffing and improved retention.

Additionally, overall financial performance was positively impacted by better-than-expected maintenance revenues. Let me briefly summarize our Q2 year-over-year financial results. Software revenues were up 22%. Total revenues were up 13%. EBIT was up 68%. EBIT margin was 11.4%, or up 370 basis points.

EPS was $0.25 per share versus $0.15 per share in Q2 FY 2016. Free cash flow was $19.2 million, up 136%. We are pleased with our second quarter and first half results. We believe these results validate our strategy which includes two key components.

One, the increase in market share in our core data management business, and two, expanding our market opportunity by using the unique capabilities of the Commvault Data Platform to develop new solutions and services. We recently announced additional new solutions and services which I will discuss later on in the call.

Our overall strategy, execution and innovation have enabled us to accelerate our business momentum, improve our competitive position and increase our market opportunities. We have established a strong leadership position in the enterprise with the Commvault Data Platform with a cloud focus.

As validated since the start of the calendar year, we have seen a number of petabytes of data being stored using Commvault Software within public cloud environments, more than double. So I'll say that again. Our cloud stored data in petabytes more than doubled in the first nine months of the year.

This represents a significant driver of our software growth. We have also established good growth in the mid-market with our standalone solutions. We have built a solid business foundation for growth.

We have developed a clear game plan to strengthen and build on top of that foundation in order to achieve our long-term objective of sustainable double-digit revenue and earnings growth. That game plan includes enhancing our go-to-market capabilities as we deliver a larger number of new products and enter into new market segments.

Let me review the game plan. The key components of our strategic game plan are as follows.

Our near-term plans are to accelerate growth in our core, large enterprise data management business, core federated cloud data management, backup, archive, compliance, mobile, file sync and share; move into other cloud-related standalone data management use cases for both the enterprise and mid-market with best-of-breed solutions for disaster recovery and applications management, including dev test; establish a strong position in big data markets with a unique software-defined storage solution that provides comprehensive Software Defined Data Services for big data and digital content; and, lastly, establish a stronger position in the healthcare vertical.

Our longer-term plans include expanding market opportunities to high value-add monetization opportunities in the value creation side of the data business, such as analytics and business process automation, and expanding our cloud-based managed service business and our cloud-delivered SaaS solutions.

These products were recently introduced and have received very positive initial feedback. We expect to have these key near-term solutions in the market by our Q4 FY 2017; that's the March quarter. These new solutions should begin to impact revenues in the first quarter of FY 2018 and should help accelerate our growth through fiscal FY 2018.

Our major challenges are related to successfully executing our go-to-market plans for those solutions. We expect to expand the capabilities of the Commvault Data Platform and be in market with a leading business analytics and business process automation platform in the second half of FY 2018.

In addition to our product and market opportunities, we have major opportunities to improve distribution leverage with strategic partners like Microsoft, Amazon, and the global systems integrators, as well as with our VAR and distribution partners. We are also expanding distribution opportunities with strategic partners like Cisco and Huawei.

I will now address our current FY 2017 financial outlook. We had strong sales funnel inflow during the quarter and our sales funnels are now at record levels. We believe given our strong funnel, we are positioned to achieve our Q3 objectives and are making good progress in building our funnel for Q4 FY 2017.

Our increased business momentum, combined with progress on our key strategic initiative, provide support for Commvault to continue to be aggressive in investing to take advantage of our improved competitive position and expanding market opportunity.

Our progress for the business during the first half of FY 2017 provides a good foundation for the second half of FY 2017 and positions us to continue to accelerate revenue and earnings growth in FY 2018. Brian will discuss specific operating margin guidance for FY 2018 later in the call.

Please note that although we expect momentum to continue in the second half, our year-over-year comparisons will be suppressed due to our strong results in the second half of FY 2016.

When you positively factor in our Q2 FY 2017 results and our Q3 expectations that Brian will address later on in the call, we believe the current FY 2017 Street consensus for both total revenue and EBIT margins are reasonable. While our strategic fundamentals are strong and our ability to execute is improving, we still face critical challenges.

Number one, achieving our second half FY 2017 license revenue growth objectives will be dependent in large part on a continued successful market adoption of solutions based on our new Commvault Data Platform and associated software and services for deployment to and from the cloud.

Our ability to achieve our growth objectives is dependent on a steady flow of $500,000 and $1 million plus deals. These deals have quarterly revenue and earnings risk due to their complexity and timing. Even with improved fundamentals, large deal closure rates may remain lumpy.

Three, it will most likely take several quarters for the new standalone solutions we are bringing to market to have meaningful financial impact.

Four, we are in an opportunity-rich situation in the market and we'll be prudently increasing spending to drive revenue and earnings growth for FY 2018 to take full advantage of this expanding window of opportunity. As a consequence, there will be a negative impact to our earnings if we miss our revenue targets.

And fifth, as I mentioned earlier, we are bringing to market many new products and are moving into new market segments. This has some implied execution risks since the successful launch of these products will require enhancements to our go-to-market capabilities. And lastly, we remain cautious about the global macroeconomic and political uncertainty.

In summary, we continue to see increased business momentum, which has enabled us to have a strong first half FY 2017 and position the company for good quarter-on-quarter growth going into the second half of FY 2017.

We are introducing a large number of new solutions over the next two quarters, which have the potential to provide additional revenue drivers going into FY 2018. Our confidence in both the near-term and longer-term outlook for the business has improved.

We are making good, solid progress to position the company for a good FY 2018 and long-term high revenue and earnings growth. I will now turn the call over to Brian.

Brian?.

Thanks, Bob, and good morning, everyone. I'll now cover some key financial highlights for the second quarter of fiscal 2017. Q2 total revenues were $159.3 million, representing an increase of 13% over the prior-year period and 5% sequentially. We reported software revenue of $70.5 million which increased 22% year-over-year and 10% sequentially.

Revenue from enterprise deals, which we define as deals over $100,000 in software revenue in a given quarter, represented 57% of software revenue resulting in a 44% year-over-year increase. The number of enterprise deals increased 45% year-over-year.

Our average enterprise deal size was roughly flat on a year-over-year basis and increased 11% sequentially to approximately $268,000 during the quarter. From a geographic perspective, Americas, EMEA and APAC represented 63%, 23% and 14% of software revenue respectively for the quarter.

On a year-over-year growth basis, Americas, EMEA and APAC software revenue increased 21%, 12% and 53% respectively. The revenue mix for the quarter was split 44% software and 56% services. Please remember, services revenue is a combination of both maintenance revenue and professional services revenue.

Services revenue for Q2 was approximately $89 million, an increase of 7% year-over-year and flat sequentially. Our maintenance and support renewal rates remain strong, and our maintenance pricing realignment program is tracking well, which I will discuss in more detail in a moment. We added approximately 450 new customers in the quarter.

Our historical customer count now approximates 23,500 customers. For the quarter, revenue transacted through Arrow and Avnet was approximately 37% and 11% of total revenue respectively. Now, moving on to our pricing models.

Our software licenses typically provide for a perpetual right to use our software and are typically sold on a per-terabyte capacity basis, on a per-copy basis or as a solution set. During the quarter, approximately 72% of software license revenue was sold on a per-terabyte capacity basis. This is up from 68% in Q1.

We anticipate that capacity-based licenses will continue to account for the majority of our software license revenue through FY 2017. We also anticipate a gradual shift to subscription-based pricing models overtime. Now, moving on to gross margins, operating expenses and EBIT margin. Gross margins were 87% for the quarter.

We expect the full-year FY 2017 gross margins to be similar to the first half, or approximately 87%. Total operating expenses were approximately $118.3 million for the quarter, up approximately 10% year-over-year and 3% sequentially. We added 104 net employees in fiscal Q2, ending the quarter with 2,556 employees.

Non-GAAP operating margins were 11.4% for the quarter, resulting in operating income or EBIT of $18.2 million. Q2 EBIT margins increased by 370 basis points year-over-year and 160 basis points sequentially.

Net income for the quarter was $11.5 million, and EPS was $0.25, based on a diluted weighted average share count of approximately 46.7 million shares. 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 fee.

We anticipate that we will have nominal net interest income in FY 2017. Let me now touch on our outlook for the remainder of FY 2017. As Bob stated earlier, we expect quarterly sequential growth in the second half. However, our year-over-year growth comparisons will be suppressed by our strong result in the second half FY 2016.

We believe the current Q3 FY 2017 and full-year FY 2017 Street consensus for both total revenue and EBIT dollars is reasonable once you factor in our Q2 actual result. We expect fiscal 2017 annual operating margins to be approximately 11.5%.

As a reminder, we will continue to prudently accelerate investments in order to strengthen our market position in the industry and increase market share.

If we are successful with our investment strategy, we believe that there is some revenue and earnings upside as compared to current Street consensus and it could set us up for a strong result in FY 2018 and beyond. Let me spend a minute on our maintenance pricing realignment that continues to phase in through FY 2017.

As previously communicated, we are mostly done with the pricing changes in our larger enterprise customer base, which represents approximately 75% of our maintenance renewal dollars. We are currently working through the mid to lower end of the market which represents the remaining 25% of the maintenance renewal dollars.

We are about halfway through this group and should be mostly completed by the end of the fiscal year. FY 2017 services revenue will lag software revenue growth due to prior-year software revenue results, as well as the ongoing realignment of our maintenance pricing.

Our Q2 2017 maintenance revenue was higher than anticipated due to better-than-expected renewal rates along with overachievement of software revenue. For the full year, we believe FY 2017 services revenue will increase in the low to mid single-digit percentage range due to our first half overachievement.

However, we are forecasting services revenue to be roughly flat sequentially in Q3 2017 and then to decrease sequentially in Q4 2017 primarily from the compounding impact of the maintenance pricing realignment process. This will have a negative impact on year-over-year growth rates on earnings and cash flows.

As a reminder, maintenance and support services revenue typically represents approximately 85% to 90% of our services revenue line. Our revenue and margin outlook commentary assumes current FX exchange rates. Let me now briefly comment on tax rates and share count.

We will continue to use a pro forma non-GAAP tax rate of 37% for FY 2017 and we anticipate that our annual diluted weighted average share count will be approximately 47 million to 48 million shares. We did not make any share repurchases in Q2.

We still have approximately $93 million available in our share repurchase program and will continue to be opportunistic in share repurchases. Now, moving on to our balance sheet and cash flows. As of September 30, our cash and short-term investments balance was approximately $440 million of which approximately one-third is located outside the U.S.

Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $19.2 million, which was up over 2x year-over-year. As of September 30, 2016, our deferred revenue balance was approximately $252 million, which is an increase of $28 million, or 12%, over the prior-year period, and up 2% sequentially.

The vast majority of our deferred revenue is services revenue and not software revenue. We continue to expect deferred services revenues to sequentially improve in the second half. At the end of FY 2017, deferred services revenue should be in the mid single-digit percentage growth range year-over-year.

For the quarter, our days sales outstanding, or DSO, was 60 days, which is up from 59 days in the prior-year quarter. And that concludes the financial highlights. I'll now turn the things back over to Bob.

Bob?.

Thank you, Brian. I want to spend a few minutes covering our first user conference, Commvault GO and provide an overview of the new solutions we're bringing to market over the next two quarters.

Commvault GO was held in Orlando earlier this month, approximately 1,300 people attended the sold-out event, including customers, prospects, partners, analysts, reporters and industry experts.

Commvault GO featured keynote sessions with executives from Commvault and key partners Microsoft and Cisco, along with industry analysts from Gartner and ASG and insights from customers including Ardent Mills, News Corp and the City of Oakland.

The conference was sponsored by more than two dozen technology and distribution partners and featured hands-on labs, 60-plus breakout sessions and topics from cloud adoption to the latest techniques in application protection and technology refresh.

At the conference we talked about the confluence of a number of big factors driving customer agendas including the move to the cloud, the explosion of data and applications, the increasing numbers of disconnected data silos including mobile, new compliance and security demands, and significant new technology innovations now available including ours.

Enterprise is now more than ever needed in an effective way to manage access and activate data regardless of where it resides. We outlined the need for companies to have a holistic strategy to manage their data, a strategy best implemented using a data platform.

This platform-centric approach allows customers to manage and understand all their data with a common management and operations framework, a single common indexing capability and a single open, virtual repository for all their data.

In my keynote, I made a strong case for the Commvault Data Platform as a differentiator because it is the only platform available in the market with the openness, ease of use, scalability, orchestration and technology to meet customers' needs to address the increasing complexity of managing data, whether the data is in the cloud, on-premise, in mobile or as part of the Internet of Things.

The case for the platform was backed up by real customer examples and further highlighted by our COO, Al Bunte's keynote as he outlined practical applications of the Commvault Data Platform to meet a variety of use cases. These use cases include modernizing the application environment, consolidating data centers and the move to the cloud.

Al also discussed new workloads like big data environments and digital content like police body camera footage. There was extremely positive feedback from our attendees and sponsors and great coverage among analysts, press and in the social media.

We also heard from many customers that the event had a very real positive impact on their near-term buying decisions. I believe our first GO was a huge success and exceeded our expectations. Planning for Commvault GO 2017 is underway. So now let me talk about some new technologies we are launching over the next couple of quarters.

We have a massive amount of new Commvault technology coming to market. Our pace of innovation is accelerating. Commvault today is innovating many times faster than we were a few years ago. I want to highlight a few of the major innovations and capabilities that we announced earlier this month.

They include major enhancements to the Commvault Data Platform for managing data to the cloud, in the cloud and cloud-to-cloud for use cases such as applications management, dev test and disaster recovery. We have also extended the platform for software-defined storage. So let me talk about applications management, dev test and DR.

This quarter we introduced new orchestration capabilities that make it much easier for customers to develop applications and manage data in the cloud.

For example, new capabilities will enable a customer to automatically migrate a database and application copies into the cloud and then launch them in the cloud at the push of a button for dev test purposes.

This includes fully automated, properly configured and secured cloud services, spin-up of the application and secured delivery of synchronized data. This allows an organization to utilize the elastic cloud resources as needed for frequent dev test needs, which enables development teams to deliver projects to market much more quickly.

We have used these capabilities internally to dramatically reduce the time for our own software development. Let me talk about our new modern web-based UIs.

We are introducing new web-based user interfaces, which deliver a simplified experience for our solution sets such as virtual machine protection, application recovery and management, automated DR, dev test, endpoint protection and compliance.

These new UIs are designed to make it much easier for customers to use our products and dramatically reduce the learning curve to deploy our solutions. In addition, these UIs can be easily personalized for specific users' experience with embedded analytics to manage their SLAs or govern their overall usage.

These new UIs and standalone solutions can be seamlessly plugged into the Commvault Data Platform, which then provides our customers a common repository and index of all the data in an enterprise in a single integrated common management console.

Next, I want to talk about our software-defined storage capabilities of the Commvault Data Platform for use cases like big data analytics and digital repositories for digital content like image files and genomics.

We have expanded our core platform architecture with an embedded software-defined capability to automate and manage the storage of data in web scale IT environments.

With the Commvault Data Platform, we can offer customers the ability to quickly and automatically deploy new scale-out storage infrastructures, which use low cost, open, industry-standard servers and these infrastructures.

Our approach to software-defined storage is unique since it combines the Commvault Data Platform's comprehensive index knowledge of the data with the management of the backend storage infrastructure. Our software-defined capability will enable customers to build low-cost, scalable infrastructures for specific use cases.

For example, our software-defined capability can be used to archive and manage data in large Hadoop clusters, or as I mentioned earlier, digital content like police body camera footage.

At our GO conference, the team showcased this new capability in a bare minimum to first backup demonstration in less than 30 minutes for a three-server node configuration. By enabling customers to easily utilize web scale infrastructures, customers can now leverage new solutions specifically tailored to big data and digital workloads.

Through the Commvault Data Platform and these new Software Defined Data Services, Commvault helps to free organizations from vendor lock-in, drive lower cost and higher utilization than legacy approaches. Our platform also provides greater agility, performance and flexibility and enables IT to easily and inexpensively scale to meet new requirements.

Going forward, in terms of our next-generation enhancements of the platform, so with a highly-automated open platform powered by indexing and orchestration, we are now adding to the Commvault Data Platform's data management capabilities and extending the platform for content-related use cases.

This will enable customers to use their data to develop unique, high-value business applications and better automate key business processes. Please note, the development and timing of any product release, as well as any of its features or functionality remain at our sole discretion. Summary, Commvault had a solid performance in our Q2 FY 2017.

We entered Q3 with continued momentum. Our confidence in the outlook for the business has increased with strong funnel growth, the introduction of new solutions and enhancements to the Commvault Data Platform and opportunities to increase distribution leverage.

We have a clear game plan to achieve sustainable, strong double-digit revenue and earnings growth over the long-term. However, we still have a lot of work to do to improve our go-to-market capabilities as we accelerate the introduction of new products and services.

Our focus now is to achieve our second-half FY 2017 objectives and position the company for a strong FY 2018. I will now turn the call back over to Michael.

Michael?.

Thanks, Bob.

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

Yes, sir. Our first question is from Joel Fishbein of BTIG. Your line is open..

Good morning, guys. Just two quick ones. First, on the linearity, Bob, how linear was the quarter? It seems like you had good progress throughout the quarter. I'd love to hear on that. And then, Brian, just for you, the services line, going into the year, we're expecting that to be flat to slightly down. You've clearly outperformed that.

Any color there? I know you said part of it was due to the renewals and part of it was due to the strong license performance, but any color there on that would be also very helpful..

Yeah, Joel. On linearity, we had solid linearity throughout the quarter, I would say, better than we would normally have. So, we were happy with the linearity that we achieved last quarter..

Hey, Joel, it's Brian. Just to address your point on maintenance revenue heading into the year and our overachievement on that line, I think when we came into the year, there was an element of risk associated with this in terms of the volume of customers that we were going to need to touch. We needed to have a very programmatic approach to this.

There was an element of risk and I think we've overachieved against that to date. We're about halfway through this segment of the population. There are still some headwinds to this as we approach the second half, but things are tracking well and we're pleased with the results..

Great. Thank you..

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

Yeah, thanks. I've got a couple of quick ones for Brian and then one for Bob.

Brian, were there any large deals in the quarter, say above a few million dollars, and also maybe I missed it, but did you give any commentary on fiscal 2018 operating margin?.

We did not specifically address FY 2018 on this call. But with respect to the large deals, we did see a substantial uptick both in the volume of deals, what we classify as enterprise deals, that was up approximately 45% year-over-year.

And embedded in that were several seven-figure deals and there was a substantial sequential uptick in the seven-figure deals this quarter..

Okay. And then for Bob; Bob, you talked about sales execution, clearly it's improving from where you were, let's say, a year ago, year-and-a-half ago.

Can you just give us some idea of what is going well? What's really changed in terms of your ability to execute better today? And then, secondly, where do you think you can do better as you move forward?.

Sure. So the major elements of the success of the sales organization is, one, in all regions throughout the world, we have stronger leadership. As you know, we brought in new leadership in the Americas. We have a new leader in APAC that's completely restructured APAC and established a strong foundation there.

And we have strength in leadership in EMEA as well. So it's leadership. The structure of the sales territories and the sales, SE overlays has been optimized from where we were before and we've done that in most regions of the world. We've got better alignment and better execution with distribution and alliances.

And we've recently had much lower attrition. All of that's combined. And the last factor is across the board, our teams are much more adept in selling to large enterprises, both commercial and government. So the execution is across the board.

As we look out, we're doing a lot of work internally, as I mentioned earlier, on our go-to-markets and alignment with our solutions and use cases and messaging. So, a lot of work internally going to that and then aligning a lot better with the field because I think there is a lot of room yet where we can improve both distribution and alliances.

So as well as we have done, there's still a lot of areas we can improve; and Ron Miilller, who runs sales, is working on, I call it, selective areas where we can continue to improve sales execution.

So in summary there's lots of opportunity to continue to improve our overall field execution, starting with our delivery of our products and go-to-market expertise..

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

Great. Thank you very much. I'd just like to drill down a little bit into your comment that public cloud was a significant driver of software growth. And along those lines, you talked about increasing distribution leverage with both Microsoft and Amazon.

So I guess, number one, I was just wondering if you could give a little more color on those relationships.

And I guess part two of that question is drill a little bit into that your comment about a gradual shift to a subscription-based model over time and what you're seeing today in terms of that gradual shift, and maybe what we can expect as we move into FY 2018. Thank you..

So at the 100,000-foot level, the major driver of our business is large enterprises as they move to the cloud. And that's helping them manage data from on-premise to the cloud, manage data in the cloud and then help them manage data in these hybrid environments.

That is the big driver in large enterprise and more and more our standalone solutions for the mid-market are dealing with the same issues, but on a individual product basis or individual use case basis for, let's say, dev test or for DR. So the cloud has become the major driver of our business in what we would call modern data management.

And in doing so, we partner heavily with the big cloud providers like Microsoft and AWS. The numbers, what we said is that the number of petabytes stored in the cloud in the first nine months of the calendar year more than doubled, and I can tell you the cloud is a significant, material part of our revenue and of our revenue growth.

And the second question, just to reference your second question....

Yes, sure, sure. It was just the comment of a gradual shift to a subscription-based model over time.

And, I guess, what will we see in the model? Will we see any changes in the model in FY 2018 as a result of the cloud being a significant, material part of your business?.

Well, there's a couple things. One is we will most likely be an early adopter of the new accounting standards which allows you to mix and match these different license revenue models and we'll have more comment about that on next quarter.

Secondly, I believe our core business as described will continue to grow, but as we add things like software-defined solutions for big data and for digital content, those will probably be sold on a term-based.

Now, as we go into FY 2018, that's where the big acceleration will take place, they will be booked upfront and the accounting of that will look like a perpetual sale even though that term-based sale might be over in three to five years. So that is probably the biggest change in time-based revenue.

In addition to that we are – and this is, I think, going to be slow and gradual, we are moving to a subscription base, both managed services and delivering these solutions as a SaaS or as a cloud-based service. That, I think, will be a slower adoption and take place over time and that will be booked as a typical subscription-type sale.

And lastly, in the second half of FY 2018, maybe sooner but certainly, probably second half of 2018 as we get into our content-based platform for business analytics and business process automation, it is likely that those solutions will be supplied on a subscription basis as well.

So the way I would sum it up is you have a core business called a perpetual business, which should continue to grow and these other businesses most likely will result in accelerated growth rate on top of that. So we'll give you more guidance on that as we get into FY 2018..

Thank you..

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

Yeah. Thanks for taking the questions too as well. I was wondering, Bob, if you could help us kind of – if you would quantify or kind of give us a little bit more context behind the record funnel that you're now sitting on.

And in particular given the momentum that you've seen in some of these large seven-figure deals, I'm curious of how that funnel build has specifically looked around those deals on a forward basis?.

Well, clearly, that's been the big driver of funnel growth is our large deals, deals over $500,000, deals over $1 million has been the biggest factor in our funnel growth year-over-year. And that's historically and going forward is the same.

And obviously, if we grow 22% in license revenue in the quarter that's pretty indicative of where the funnel is going.

And we also mentioned even though we've had strong funnel growth, and we have and it's continued and it's been consistent, we have some tougher comparisons going into Q3 and Q4, but it bodes well for the underlying momentum of the business. Yeah..

Okay.

And as a follow-up, how do we think about that in the context of you managing sales capacity expansion versus say productivity gains?.

We are doing both. We clearly have what I would call significant initiatives to improve productivity. At the same time, we are expanding sales capacity.

So that they are both built into the models and what I can tell you is, you look out to FY 2018, the results are going to be – I think it will be good no matter what on the top-line and the bottom-line would be dependent on how well we achieved our sales productivity objectives..

Okay. Thank you..

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

All right, thanks. Congrats on a nice quarter today.

First question I have is on guidance, I guess you previously said you expected solid double-digit growth in software licenses for FY 2017, but given the comments today about the consensus estimate being reasonable, which I think is about $635 million in total, it seems like that would imply that license growth has decelerated down to the low single digits for Q3 and Q4.

So I guess, can you provide any color on what kind of what changed in your outlook because from the outside it seems like momentum in the sales funnel is improving, not getting worse?.

Hi, Andy, it's Brian here. Let me just clarify that. I think the comments we made were around once you factor in the Q2 actual results and the existing consensus that's out there, it would be a higher number than what you just quoted of $635 million. So maybe just take a closer look at that model, but we are bumping up against tougher comparisons.

We do expect sequential growth in the second half, both for software revenue in particular and then total revenue. We said the year-over-year comparisons will be slightly challenged due to the strong performance in the second half of FY 2016.

But I would suggest just taking a closer look at the model because it will be higher than the number you mentioned..

Okay, got it. And then can you also give us any sort of color on the U.S. Federal impact this quarter? Historically you've had a pretty sizeable presence there. Just wondering how your sales teams in the U.S. Fed performed this quarter..

Yeah, we were pleased with the Fed this past quarter. It was up substantially, sequentially. It was also up year-over-year. It was driven by some larger enterprise-size deals, but we got good traction out of our Fed group, and we're pleased with their performance..

Got it. Thanks..

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

Yeah. Thank you.

Brian, did I hear it correct that you expect services revenues to decline sequentially in Q4? Can you talk about the drivers behind that please?.

Yes. So what I said was that services revenue would be flat sequentially in fiscal Q3, and then most likely decline sequentially in Q4. And this is just the matter of us entering into this maintenance pricing adjustments and the compounding effect of doing that throughout the year.

It's also related to just overall software growth from the prior year as well is also impacting that. So we did forecast that at some point during this transition, we would have a sequential decline in services revenue. And this is the quarter, meaning in Q4, that we will see a sequential decline..

Got it. Thanks. And, Bob, you talked about some new product releases over the next six months.

Can you talk about when you expect revenues to ramp up from these solutions? And as we look at fiscal 2018, how should we think about revenue growth drivers? Will it be mainly traditional backup solutions driving growth or do we need some of these new products to start kicking in in a meaningful way to drive – accelerate growth in fiscal 2018?.

Yeah. So I think the operative word is accelerated. So if you think about the business model that we put together a number of years ago, we are clearly working at the high end of expectations on that model, meaning the objective was to build a new foundation for growth and then enhance that. So that has worked.

And if you think about maintenance revenue, which was your prior question, obviously four to six quarters out, you will see an acceleration of the maintenance revenue tied to what we've achieved in FY 2017. You'll see that somewhere in mid-2018 and that has a big impact on overall growth rate and a substantial impact in improving operating margin.

So that – and we've already built the foundation for that and we just need to sustain it. So just going back to the fundamentals, again, the big drivers have been this whole expansion and federation of managing data to the cloud in both large enterprises and now mid-market.

So what we are doing is we're adding a substantial number of core use cases of workflows that we traditionally have not participated in. So you can think of that as both market expansion and revenue accelerators in our core business.

Now, extend that to some really large markets on big data and software-defined storage and then add on top of that in the second half of 2018 a significant move into expanding our ability to manage content with some really unique capabilities, which we'll talk about in a quarter or so.

And we're on track on all those to hit our own internal objectives. So the new products I talked about are being released this quarter and next quarter, in early next quarter.

And realistically, we will start to see the impact of those in- we'll see some impact in FY 2017, they'll start to be license revenue accelerators starting in Q1 of FY 2018 and building right through FY 2018 fiscal year into FY 2019..

Thank you. Our next question is from Michael Turits of Raymond James. Your line is open..

Hey, guys.

First on cloud, is there any way of getting a rough quantification, even order of magnitude in terms of the amount of revenue that you're getting now from backing up to the cloud and in the cloud, between cloud to cloud?.

We haven't given that number, but it is very, very material. So it has now become a substantial part of our license revenue is coming from the cloud..

And it would be natural to think that there were to be some drag on the cloud to the extent that people that were using on-premise applications have moved to SaaS.

Is there any material negativity for those people who are starting to use SaaS now that were using on-prem and now may not be backing up and I assume that all the positive revenue is more than offsetting that?.

Yeah. I mean, that's past history. That shift is way behind us now. That occurred several years ago. So, the cloud has become a major accelerator.

I'll let Al expand on this a bit because the SaaS issue actually becomes an accelerator as we manage SaaS data as well as the public cloud-related data, but Al, why don't you pick that up?.

Yeah, Michael. Bob had that right. So, on the acceleration side, I think the thing to note here as well is cloud usage has shifted a little bit more all the time to compute clouds versus just low-end storage clouds. And what that means for us is people want to use the data in the cloud.

So, for instance, DR, for instance on the SaaS models, be able to look at the data, their use at – archive kind of use cases are prevalent there, but it's really picked up on our end around the comments Bob made. And he also said some of the people moving from on-prem to SaaS, that occurred in the past.

However, we are seeing those guys come back now and want real protection or real DR or being able to preserve some of those datasets out there in a cost-effective manner..

Okay.

If I can just squeeze one more in, it was a pretty good quarter for long-term deferred sequentially; can you just about what the driver was there?.

Yeah. We're starting to see some longer-term maintenance support contracts as we go through this realignment process and just in general as we penetrate more and more enterprise accounts, so that's a nice positive uptick on long-term deferred that came along with it..

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

Thank you. Most of my questions have been answered, but I guess I'll ask, the growth across all regions was strong; it was lower growth in EMEA. And I'm just curious, I think you have somewhere around 10% revenue from the UK.

Was there any impact? Was it the UK as to why that was a slower growth? Again 12% growth from EMEA is still decent growth, but I was just curious if you're seeing any Brexit effect..

We are not seeing – John, this is Brian here, we are not seeing any immediate Brexit impact, although we are very aware of it. So we are watching our funnels, we're being proactive with how we're monitoring the situation, but that was not the reason for a slightly suppressed EMEA growth rate.

We're still pleased with the EMEA overall software growth of 12% year-over-year. There were mega deals involved and that's going to swing it from quarter to quarter. But we're overall pleased..

Okay..

And the outlook for EMEA going forward looks good as well..

Okay, great. And if I may, for Brian, it sounds like you need to continue to invest materially to fulfill your product vision and go-to-market plan, which makes sense, but I'm just curious. I assume that's going to keep margins lower than historical levels for a while, but when do you think we might start to see a return to those levels.

Do you think perhaps in 2018, maybe 2019? I'm just trying to think a little bit longer-term..

I think we said that we're going to prudently accelerate investments. We have a window of opportunity here as Bob laid out, and we want to take advantage of it; while we have the momentum, it is time to invest, it's not time to pull back at this point. However, we are keenly focused on our longer-term goals and we haven't wavered from that.

Once we're north of $1 billion, we'd like to think that that we can get back to that about 20% operating margins or a little bit north of that, so that is our longer term goal..

Yeah, if you think about it, it's really clear even with investment that as your maintenance line kicks in, in the second half of 2018 – that doesn't mean, by the way, we can't develop it in the first half as well, but you're going to see a significant improvement in operating margins.

And if you combine that with things we're doing to improve sales productivity, both of those will drive up margins and that 20% operating margin is a realistic objective even though we're investing. So what your investment does is accelerate your top-line and that investment also helps you drive sales productivity.

So the odds are all with us right now. We've got lots of tailwinds. And we're just trying to maximize them over both the short and long term..

Thank you. Our next question is from Alex Kurtz of Pacific Crest. Your line is open..

Hey guys. I'll throw a quick question here, Brian, when you think about the Q3 commentary, how are you factoring in larger transactions, as Jason was talking about, deals over $1 million? What's your dependency on closing those going into the December quarters here? Thanks..

I would say that we always try to consider a normal close rate when we factor our guidance. However, we do understand this is the biggest swinger that it happens throughout the quarter, and as Bob laid out in terms of the risk in the model, it is the close rates on those mega deals. We feel comfortable where we're at entering this fiscal Q3.

We do have a healthy pipeline, and again we are assuming normal close rates on that, and hopefully we can execute..

Thanks, guys..

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

All right. Thank you for taking my call. Congrats on a great quarter as well. Bob, Brian, you launched a standalone solution bundle some 18 months ago, if my memory serves me right.

Can you please provide some color what are the most popular bundles and can you comment the revenue contribution of these bundles since you've already mentioned that they are meaningful?.

Yeah, on the solution set side, Srini, our VM protection solution sets continue to be the most popular. Our application side has improved. The endpoint solution sets or mobile has been very strong over the last couple of quarters in even some of our archive area.

So a little bit across the board, but definitely still the strongest in the virtualization area..

And we are increasing the number of those going into market over the next couple of quarters..

Yeah..

So, that strategy has been successful and you could use the sense with doubling down on it now as well as improving our position in the enterprise..

And by the way, one little clarification on the endpoint solutions, we've seen good progress there with our service providers in moving those kind of solution sets. So....

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

Thanks. I'm curious to know, just you're talking about customers every day, I get that. But sometimes a conference can crystallize areas of investment.

Coming out of Commvault GO, that was three weeks ago, on the sales side, did you get any better sense of where the investment needs to come from as far as the partner side, your key partners on the cloud, the SIs, the large enterprise, any change there coming out of Commvault GO?.

No. I mean, it reinforced what we are doing certainly with the big public cloud providers. Certainly, Microsoft and AWS I think will expand that; even though we haven't put a lot of focus on Google, we are certain to get some pretty good attraction in the Google Cloud. The big GSIs clearly have been an area of focus. That was reinforced.

And our partners like Cisco, we are expanding that partnership because there are additional things that we can do with Cisco and Huawei. So we will expand those. Our healthcare business has been extremely strong and we've got a number of new partners in healthcare as well as, so.

And then there is no doubt that with the increased number of standalone solutions with new easier to use, web-based UIs with simpler messages that we will reenergize our core channel, enable them to be a lot more effective in moving standalone solutions globally.

So our strategy, is – all GO did is just reinforce the current strategic direction we're in both from a product standpoint and from distribution and alliances.

That's a point that I did raise is that there is no doubt that at the pace that we're moving that there is room for us to improve the pace and quality of our go-to-market execution here because we have a big opportunity and it's only going to accelerate, so there is a lot of focus on that.

And that effort by the way will track right into distribution and alliances as well..

Thank you. Our next question is from Stephen Bersey of MUFG. Your line is open..

Hey, guys, thanks.

Looking at your vertical focus solutions outside of healthcare, how do you think about it when you look at the number of new verticals you can kind of work on and kind of a release schedule of new stuff?.

Yeah, that's a really good – I'm going to let Al answer that because he is the guy that (1:02:19) figured out a way to approach this kind of targeted basis, particularly as we move into big data environments, so Al, why don't you take one?.

Yeah. So on some of the enhancements we're doing on the virtual repository, opening that up, there is obviously a lot of different use cases, but we feel like the trendy and popular and there is significant demand for right now is around the big data, so-called big data use case.

And that's protecting and preserving some of the large Hadoop cluster environments, GPFS, Greenplum, et cetera.

And that the enhancements we've made on opening in web also tie into this environment because we figured out how to move the data at about 20 times as fast as we currently do and then opening it up, we can serve it back versus restore it back.

And we think it fits that so-called digital big data use case as well as digital repository, particularly around environments like genomics – or Bob alluded to in the scripts and the press release around police videos, those types of environment have opened up for us..

And the other point I'll make is what Al and the guys have done here is with a web-based UI we can customize those UIs for those specific verticals, so as we go to market, we'll be going into market with highly targeted customizable solutions into those market segments..

Great. Thanks..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day..