Michael Picariello - Director of Investor Relations Robert Hammer - Chairman, President and Chief Executive Officer Brian Carolan - Chief Financial Officer Alan Bunte - Chief Operating Officer.

Joel Fishbein - BTIG Aaron Rakers - Stifel Nicolaus Jason Ader - William Blair & Company Abhey Lamba - Mizuho Securities USA Inc. Alex Kurtz - Pacific Crest Securities Michael Turits - Raymond James & Associates Stephen Bersey - Mitsubishi UFJ Securities (USA), Inc.

Srini Nandury - Summit Research Partners, LLC Andrew Nowinski - Piper Jaffray Eric Martinuzzi - Lake Street Capital Markets.

Good day, ladies and gentlemen. And welcome to the CommVault Systems Q3 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

I would now like to introduce your host for today’s conference, Michael Picariello, Director of Investor Relations. You may begin..

Good morning. Thanks for dialing in today for our third quarter 2017 earnings call. With me on the call are Bob Hammer, Chairman, President and Chief Executive Officer; Alan Bunte, Chief Operating Officer; and Brian Carolan, Chief Financial Officer.

Before we begin, I would 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 of 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 our most recent quarterly report in Form 10-Q and 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 to development and timing of any product release as well as well as any of the features or functionality remain at our sole discretion.

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

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

Thanks, Mike. Good morning, everyone, and thanks for joining our fiscal third quarter FY17 earnings call. We achieved solid third quarter financial performance, which was highlighted by a 10% sequential license revenue growth, validating our continued business momentum.

We were able to achieve these results in spite of the negative impact from FX and both license and service revenue. Brian will elaborate on the FX impact later on in the call. Let me briefly summarize our Q3 year-over-year financial results.

Software revenues were up 8%, total revenues were up 7%, EBIT margin was 12.7%, EPS was $0.28 per share, and free cash flow was $24.4 million, up 76%. The highlights for the quarter were we had outstanding sales execution, with strong year-on-year international growth.

We had excellent growth in a number of enterprise customers tied to their journey to the cloud, which includes managing data with our CommVault data platform solutions on-premise, in the cloud, in hybrid environments and migrating it to and from the cloud.

We experienced good growth for our standalone solutions in the mid-market and in the enterprise and we continue to have a healthy sales funnel, which puts us in a good position heading into Q4 2017.

Our results this quarter were due to a number of factors including our industry-leading technology and services, increased uncertainty in the competitive landscape, and outstanding sales execution. Our standalone solutions are showing strong demand, particularly from mid-market customers.

During calendar year 2016, the number of petabytes of data being stored using the CommVault software within public environments increased by 250%. We have made good progress on the key elements of our short and long-term strategic initiatives, while we have some challenges in our business, particularly in regard to operating margins.

We believe we are on course to achieve our long-term objective of sustainable strong double-digit revenue and earnings growth over the next several years and we have properly set the stage, to achieve solid revenue and earnings growth in FY 2018. Let me talk a minute about our strategic direction.

The major elements of our strategy are to accelerate our growth rate and increase market share and our core enterprise data management business by helping customers’ journey to the cloud.

We can do this by making continued enhancements to our leading CommVault data platform, including innovative software to find storage and copy data management solutions. Secondly, broaden and strengthen our cloud-related standalone data offerings with both new and upgraded solutions. Third, establish a strong position in the healthcare vertical.

Fourth, expand our cloud-based managed service business and our cloud-delivered staff solutions. These services were recently introduced and received initial positive feedback. And lastly, longer-term, broaden our portfolio with products that address enterprise digitization, such as business analytics, search and process automation.

In addition, we have launched substantial new initiatives to improve our execution, making it a lot simpler to do business with CommVault in regards to products, pricing ordering and channel capabilities; increasing distribution leverage with new strategic partners; and launching more focused, targeted sales and marketing efforts.

We're also focused on enhancing our go-to-market capabilities to keep pace with our increasing rate of new product introductions. CommVault continues to outpace the market with a robust pipeline of product innovations. We plan to launch key new products this quarter, another series of products next quarter.

Our new solutions and enhancements should begin to impact revenues in the first quarter of FY 2018 and should help accelerate our growth through fiscal FY 2018. I will discuss some of these in more detail later on in the call.

In addition, we are on schedule for major product launch this fall tied to enhancements to our CommVault data platform for digital business solutions. These enhancements will include unique capabilities for business analytics, search and business process automation.

We will announce our fall major product launch at our second annual CommVault GO Conference, which is scheduled for November 6-8 in Washington DC.

We’re also excited to have major opportunities to improve distribution leverage with strategic partners like Microsoft, Amazon, Cisco, and several global systems integrators, as well as with our VAR and distribution partners. For example, this past Monday, we announced new optimized cloud reference architectures for Amazon Web Services.

This makes it easier for customers to implement more comprehensive data protection and management with the CommVault data platform in the AWS cloud. Customers can do this directly with CommVault and can easily direct data storage specific AWS services, such as Amazon S3, S3 Standard and Glacier.

Combined with the support for petabyte scale movement of data with CommVault and AWS Snowball, CommVault customers have enormous flexibility to move product and workloads in and from the cloud.

In Monday's press release, enterprise customer Dow Jones discussed their move of more than 50% of their infrastructure to the cloud, leveraging CommVault’s ability to protect their data on-premise, now in the cloud or wherever their data resides. I will now address our current Q4 2017 and FY 2018 financial outlook.

Our strong progress with the business during the first three quarters of FY 2017 positions us to continue to deliver solid software revenue and earnings growth in FY 2018. We believe given our current funnel, we are positioned to achieve our Q4 2017 objectives.

We believe the current Q4 2017 consensus estimate for total revenue is reasonable and our FY 2018 on operating margins will be consistent with the full-year outlook we’ve provided last quarter or approximately 11.5%. Our Q3 overachievement is being offset by FX headwinds and the anticipated sequential decline in services revenue in Q4.

As we indicated last quarter, maintenance growth is expected to decline in Q4 17 and be relatively flat in Q1 FY 2018 because it’s tied to the period of low software growth that we experienced last fiscal year and is also negatively impacted by lower pricing and FX.

Maintenance growth is expected to re-accelerate in the second half of FY 2018 and then should positively impact revenue growth and operating margins. We would like you to keep in mind that our fiscal Q1 is usually our most challenging quarter due to seasonality.

Brian will discuss more details on maintenance, repricing, FX headwinds and operating margins later on in the call. For the full-year, FY 2018 Street consensus for total revenue is reasonable. We expect approximately 100 basis points of operating margin expansion in the next fiscal year.

While our strategic fundamentals are strong and our ability to execute has improved, we still face critical challenges.

Achieving our FY 2018 license revenue growth objectives will be dependent in large part on 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.

These objectives will also be dependent on the new standalone solutions we are bringing to market. 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 large funnels, large deal closure rates may remain lumpy. As we noted on our last earnings call, we continue to be in an opportunity-rich situation in the market.

However, in order to achieve our FY 2018 earnings objectives, we need to prudently control expenses in the near-term without jeopardizing our ability to achieve our software growth objectives for our critical technology innovation objectives. As I mentioned earlier, we are bringing to market many new products and are moving into new market segments.

This has some implied execution risk since the successful launch of these products will require enhancements to our go-to-market capabilities. The recent strengthening of the US dollar compared to certain foreign currencies act as a headwind to both revenue and earnings growth.

We remain cautious about the global macroeconomic and political uncertainty. In summary, we continue to see solid business momentum, which combined with strong sales execution, has enabled us to achieve good Q3 FY 2017 financial results.

We’re making very good progress across all aspects of the company by strengthening our competitive technology position, broadening our product line, expanding distribution and making it easier to do business with us. The major headwind we have to deal with is maintenance growth and recent FX impacts.

Fortunately, the foundation is in place for maintenance growth to turn around, which we expect to begin in the second half of FY 2018. Key fundamentals of the business have improved in both the near-term and the long-term and, as a result, the confidence in the business has increased.

In summary, we believe that we are well-positioned going into FY 2018 and are building a good foundation for long-term high revenue and earnings growth. 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 third quarter of fiscal 2017. The strengthening of US dollar compared to certain foreign currencies had a significant impact on both the year-over-year and sequential revenue growth for the quarter.

Q3 total revenues were $165.8 million, representing an increase of 7% over the prior year period and 4% sequentially. On a constant currency basis, total revenues were up 9% year-over-year and 6% sequentially. We reported software revenue of $77.3 million, which increased 8% year-over-year and 10% sequentially.

On a constant currency basis, software revenue was up 11% year-over-year and 12% 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 15% year-over-year increase. The number of enterprise deals increased 22% year-over-year.

Our average enterprise deal size 6% year-over-year and 2% sequentially to approximately $261,000 during the quarter. From a geographic perspective, Americas, EMEA, APAC represented 56%, 32% and 12% of software revenue respectively for the quarter.

On a year-over-year growth basis, the Americas was flat and EMEA and APAC were up 23% and 17% respectively. EMEA software revenue was up 32% on a year-over-year constant currency basis. The revenue mix for the quarter was split 47% software and 53% services.

Please remember services revenue is a combination of both maintenance revenue and professional services revenue. Services revenue for Q3 was approximately $88.5 million, an increase of 5% year-over-year and flat sequentially, which is consistent with our comments on the last earnings call.

Our maintenance and support renewal rates remained strong and our maintenance pricing realignment process is tracking well. We added approximately 600 new customers in the quarter. Our historical customer count is now approximately 24,000 customers.

For the quarter, revenue transacted through Arrow and Avnet was approximately 39% and 10% 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 68% of software license revenue was sold on a per terabyte capacity basis. This is down from 72% in Q2 2017.

We anticipate that capacity-based licenses will continue to account for the majority of our software license revenue for the foreseeable future, but will continue to decline as software license revenue gradually shifts to stand-alone solution sets and subscription-based pricing model.

Now moving on to gross margins, operating expenses and EBIT margin. Gross margins were 87.9% for the quarter. Total operating expenses were approximately $122.5 million for the quarter, off approximately 9% year-over-year and 4% sequentially. We added 57 net employees in fiscal Q3, ending the quarter with 2,613 employees.

Non-GAAP operating margins were 12.7% for the quarter, resulting in operating income or EBIT of $21.1 million. Q3 EBIT margins decreased by 80 basis points year-over-year and increased 130 basis points sequentially.

Net income for the quarter was $13.3 million and EPS was $0.28 based on a diluted weighted average share count of approximately 47.1 million shares. EPS was $0.29 on a sequential constant currency basis. Interest income was nominal in the quarter.

While there 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 and FY 2018. Let me now touch on our outlook for the remainder of FY 2017.

Despite the headwind caused by the strengthening of the US dollar since our last earnings call in October, we believe the current Q4 FY 2017 consensus estimate for total revenue is reasonable.

We do see risk, however, in achieving the current Q4 FY 2017 consensus estimate for EBIT as a result of the negative impact of FX changes on both software and maintenance revenue growth, investments we made during FY 2017 to take full advantage of the opportunity-rich situation in the market and drive growth in fiscal 2018 and beyond, and the compounding impact of our maintenance pricing realignment and the anticipated sequential decline in services revenue as a result of the 12-month lag effect from the prior-year software revenue results.

As a reminder, maintenance and support services revenue typically represents approximately 85% to 90% of our services revenue line. I would also like to highlight one additional key spending increase in Q4.

Historically, we see a large sequential increase in employer-paid FICA expense in Q4 because many of our employees in the US reached the FICA limit well before the end of the calendar year. This year, we expect our FICA expense in Q4 to be approximately $3 million higher than Q3.

In summary, we expect FY 2017 annual operating margins to be consistent with the full-year outlook we provided last quarter or approximately 11.5%. I will now address our expectations for FY 2018.

We believe current FY 2018 consensus estimates for total revenue is reasonable despite FX rate changes that have negatively impacted our software and maintenance revenue growth rates by about 1%. We expect strong double-digit software revenue growth for FY 2018.

Services revenue growth, however, will likely be flat to down year-over-year for the first six months of FY 2018 to the compounding effect of our maintenance pricing realignment. We expect year-over-year services revenue improvement to occur in the back half of the year and the full-year services revenue to be up slightly over FY 2017.

We expect fiscal 2018 operating margins to be up approximately 100 basis points year-over-year to approximately 12.5%. EBIT margin expansion in FY 2018 is impacted by lagging services revenue growth, FX headwinds and investments we have made to achieve our software revenue growth objectives.

In spite of the increased operating margin pressure from FX headwinds and lagging services revenue growth, we're taking several prudent measures to control costs and reallocate existing resources.

Our objective is to do this in a manner that will not impact our software growth objectives that will provide operating margin leverage when services revenue begins to reaccelerate. As Bob indicated earlier, we’d like you to keep in mind that fiscal Q1 is usually our most challenging quarter due to seasonality.

We expect this trend this continue in Q1 FY 2018 as we anticipate a sequential decline in both revenue and EBIT. We also anticipate that Q1 FY 2018 EBIT dollars will decline on a year-over-year basis as a result of the flattening services revenue as well as earnings pressure, resulting from using current foreign exchange rates.

We do anticipate that EBIT dollars in FY 2018 will then sequentially increase over the rest of the year. Let me now briefly comment on tax rates and share count. We will continue to use a non-GAAP tax rate of 37% for FY 2017 and FY 2018, which approximates our anticipated longer-term tax rate.

We anticipate that our annual diluted weighted average share count for FY 2017 and FY 2018 will be approximately 47 million and 49 million shares respectively. During Q3 2017, we repurchased approximately $25 million or 477,000 shares of our common stock at an average cost of $53.40 per share.

As disclosed in our earnings release issued earlier this morning, our Board of Directors has increased the total amount available for share repurchases to $150 million and extended the program for another year through March 2018. We expect to remain opportunistic with stock repurchases. Now, moving on to our balance sheet and cash flows.

As of December 31, our cash and short-term investments balance was approximately $437 million, of which approximately one third is located outside the US. Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $24.4 million, which was up 76% year-over-year.

As of December 31, 2016, our deferred revenue balance was approximately $255 million, which is an increase of $24.5 million or 11% over the prior year period and up 1% sequentially. On constant currency basis, deferred revenue was up 13% year-over-year and 3% sequentially.

Using current exchange rates, we expect March 31 deferred revenue to increase approximately 3% to 4% from ending December 31 balances. For FY 2018, we expect deferred revenue to be flat to slightly up sequentially in the first half of FY 2018 and then begin to accelerate in the second half.

At the end of FY 2018, we expect deferred revenue to be up approximately 9% year-over-year at March 31, 2018. As a reminder, the vast majority of our deferred revenue is services revenue, not software revenue. For the quarter, our days sales outstanding, or DSO, was 62 days, which is up from 60 days in the prior-year quarter.

Before I turn the call back over to Bob, I would like to spend a few minutes discussing our efforts related to the new revenue standard. As you may be aware, the FASB has issued a new revenue standard that we are required to adopt on April 1, 2018.

Early adoption of the new revenue standard is available on April 1, 2017, which is the start of our next fiscal year. While we are far along in our early adoption efforts, we have not made a final decision regarding the timing of our adoption.

We believe that adopting the new revenue recognition standard on April 1, 2017 aligns well with the gradual shift we expect to more subscription revenue as we roll out new subscription-based software and services offerings throughout FY 2018.

The adoption process of the new revenue recognition standard requires interpretation of the rules, recasting of our historical results, and changes to internal processes and controls. The recasting of our historical FY 2016 and FY 2017 financial results will provide comparable results in the year of adoption.

Our current assessment is that the new standard will not materially impact our historical revenues. The changes in accounting for sales commissions, which are also covered by this new revenue standard, may materially impact our financial results.

Under the new standard, a portion of the cost of sales commissions will be recorded as an asset and recognized as an operating expense over the time period that the company expects to recover the costs. Currently, all commissions are expensed as incurred.

To date, our efforts have been focused on being in position to early adopt the new revenue recognition rules on April 1, 2017. But we will not make a final decision until later this fiscal quarter as we continue to finalize our accounting policy conclusions and implement new related processes and controls.

We will continue to monitor evolving interpretations of the standard and will announce our final decision during the fourth quarter earnings call. That concludes the financial highlights. I will now turn the call back over to Bob.

Bob?.

Thank you, Brian. CommVault is the only company in the industry with an enterprise data platform that is available today, which enables customers to address their key strategic issues across the data center and into the clouds with one holistic, fully integrated index platform.

We've integrated the ability to embed the contextual understanding of data being managed through comprehensive dynamic indexing and securitization combined with software defined infrastructures and leading copy data management capabilities that natively extend into the cloud for active data use cases.

We can do this across all infrastructures and what some industry pundits are now calling the supernova, with applications and data spread across on-premise, colocation, hosting and the cloud. Gartner says IT leaders must apply an enterprise-wide strategy in this regard, a requirement for which CommVault is uniquely suited.

These capabilities enhance our competitive position versus our legacy competitors and provide best-in-class, more comprehensive scalable solutions versus new niche competitors or silo tools in the market.

Many customers and industry experts have now come to realize that you cannot truly manage data unless you have a comprehensive understanding of that data and combine that understanding with seamless data portability, so that it can be used in different locations and forms as compared to blind, single-use copy images.

As I mentioned earlier, CommVault continues to outpace the market with a robust pipeline of product innovations.

The new products and services we are launching this quarter and throughout FY 2018 address the big strategic needs of our customers, including the journey to the cloud, natively extending infrastructure and applications into and across cloud environments, modernizing IT infrastructure, placement of legacy infrastructures with modern lower-cost clouds scale-out infrastructure, addressing the scarcity of IT resources through simplification and automation, securitizing and controlling access to critical data, and lastly, the digital enterprise driving improved business performance through data analytics.

I want to talk a minute about the journey to the cloud. Next month, we will further enhance our offerings with new solutions with industry-leading Web-based UIs and enhanced automation to make it easy for customers to extend data services across the enterprise terabyte CommVault solutions.

I will now discuss some of the key enhancements tied to the journey to the cloud and converged data management.

These enhancements include new and enhanced solutions, including data and application migration with new or upgraded solutions for Oracle applications and the Oracle cloud; big data, fast data, and SAP HANA; migrating and cloning data resources into the cloud, which includes automated orchestration of compute and storage services for disaster recovery, QA, dev test and move cause inspection; and optimize cloud protection and recovery solutions inside and across clouds to secure data against ransomware risks and provide disaster recovery.

We continue to make good progress on our software-defined data service solutions, which are an early release. We will broaden the availability of these solutions next quarter.

The more and more of our customers are replacing or planning to replace their current IT infrastructure, with low-cost, flexible, scalable infrastructures, similar to those found in the public cloud, this trend is driving the convergence of data management and IT infrastructure management into new highly automated, service-oriented architectures.

Our teams have been hard at work to embed those cloud-like capabilities directly into the CommVault data platform, so we can ensure the delivery of a new class of active, copy management and direct data usage services across an infrastructure built with low-cost, scale-out hardware.

This is in contrast to prior infrastructures that required expensive controllers and imposed constraints on our customers’ cost to scale. Our new software-defined data services architecture delivers the most comprehensive set of data management and infrastructure management capabilities and services.

Our software-defined data services include built-in redundancy for hardware failure, built-in security at the file level, active data availability and automated orchestration behind policies complemented with a rich API set for customizability.

As part of our early release program, we've been working with both new and existing customers to design and deploy the software-defined data services capabilities of the CommVault data platform to use cases like enterprise converged backup, big data analytics, digital repositories for image files and genomics data runs.

With the CommVault data platform based on software-defined data services deployment model, we can offer customers the ability to quickly deploy new automated scale-out storage infrastructures, employing low-cost, open industry standard servers and this infrastructure.

Unlike the software-defined storage offerings in the market, we combine infrastructure automation and Web scale with data lifecycle management, data indexing, tenant-based security, and access controls, alerting and analytics to create a comprehensive set of data services.

This unique proposition allows users to more fully utilize their data, enable secure user access, and fully automated, auditable compliance and ensures data retention, business service level requirements.

This new class of enterprise software defined data service solutions will be delivered in fully automated virtual or physical appliances that allow customers to quickly set up new infrastructures. They can be deployed on-premise or in the cloud.

In addition, during Q1 and Q2 FY 2018, we plan to release both new and enhanced solutions for enterprise search, files sync and share collaboration, cloud-based email and endpoint protection, as well as new capabilities for our service provider customers. We will also offer new platform enhancements and pricing.

As I mentioned earlier, our enhancements tied to the digital enterprise will be released this fall. Please note the development and timing of any product release as well as any of its features or functionality remain at our sole discretion. In closing, CommVault had another solid performance in Q3 FY 2017.

Our business momentum continues and we’re carrying that momentum into Q4. Confidence in the outlook for the business has increased with good funnel growth, the introduction of new solutions and enhancements to the CommVault data platform and opportunities to increase distribution leverage.

In the short term, we have a great opportunity in customers’ transition to the cloud to accelerate our growth rate and increase our market share in our core data management business. Just as a reminder, we will need until the second half of FY 2018 to reaccelerate our maintenance revenue stream.

We have a clear game plan to achieve sustainable strong double-digit revenue and earnings growth over the long term. We have built a solid foundation for FY 2018. I will now turn the call back over to Michael.

Michael?.

Thanks, Bob.

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

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

Good morning, guys. And thanks for the color on the constant currency. Just a question on the business in the Americas. Bob, you mentioned the good execution. I was curious about the close rates and any changes at all in the competition considering the business was flat year-over-year, that would be helpful. Thanks..

Yeah. It was just – the Americas basically had a really good solid quarter, Joel. The issue in the Americas was just their large deal, the megadeal close rate which will bounce back in the March quarter. So, there is nothing fundamental there. No increased loss to competition.

This was just, I would call, a big deal lumpiness, but is there is no color competition. We still are gaining position in the Americas against our legacy competitors.

And as I said on the call, we did have good performance on our stand-alone solutions, particularly virtualization and we’re about a whole series of new products that will strengthen both our enterprise and midmarket position. So, in fundamental terms, the Americas is in good shape..

That’s great. And then just as a follow-up, just any color on AWS and Azure in terms of the pull-through [indiscernible] any color there as well..

Well, when you look at our internal numbers, in both cases, we've had strong pull from both AWS and Azure. The pull from AWS has been stronger, so there's a higher percentage of customers’ data in AWS, but I will also say that we are gaining a lot of momentum and traction with Microsoft and Azure.

There is really good go-to-market cooperation between the two companies. So, we feel really good about that as well. And as we go into later this quarter, you'll see us provide a whole series of new solutions for the Oracle cloud as well. So, that will become a positive factor for us..

Thank you. Our question comes from Aaron Rakers with Stifel. Your line is open..

Yes, thanks. I want to kind of build on that that latter question, you’ve talked about broadening strategic partnerships, you’ve talked about leverage in your distribution channel.

As we look at if it's Microsoft, Amazon, Cisco, now it sounds like Oracle, do you continue to see – how would you characterize your engagement with even further expanding partnerships, either be it the likes of distribution partners or even more strategic infrastructure/cloud partnerships?.

Well, beyond the ones you just mentioned, Aaron, there’s a lot of work we’re doing with the global systems integrators. So, the global GSIs are becoming more and more major factors in driving revenue because they’re controlling a lot of these major products, whether it’s infrastructure migration to the cloud or new application deployment.

So, if you look at AWS, Microsoft, Oracle, and then the big global GSIs, those are all kind of new areas of distribution leverage for us. We’re also putting a lot more focus and effort in our service provider customers, which Al can talk about here in a second in terms of improving our position with them.

In addition to that, we've gotten a lot of traction in our healthcare vertical with new partners, such as Epic in healthcare. So, healthcare is a high growth area for us. In addition to that, in international, we clearly enhanced our partnership, for example, with Huawei and many parts of the world.

Al, do you want to just take a second on…?.

Yeah. I think also, Aaron – I think Bob nailed that pretty well. I was going to comment even to Joel that just a little taller on the GSI side, we had a major system integrator partner in yesterday. And what's happening with these guys, Aaron, is they’re developing practices around and consulting activities strictly around – in this case, going to AWS.

And, of course, our play within that is now what are the implications for data management. So, we’re seeing more of that, to Bob’s point, across a number of those SIs. And our play there is to get involved in them.

And then, his point on service providers, and you know this, but more and more service providers are moving off the old hosted model and/or infrastructure model to more of the management model and they’re actually using cloud infrastructure and/or open infrastructure, if you will, for the core hardware platforms that a lot of their activity is focused on.

So, you’re seeing a real – I don’t want to overuse the term convergence, but you’re seeing a real convergence of SIs, cloud providers, service providers, even major resellers with programs all focused around this thing we call cloud..

And then, as a quick follow-up, is there any framework? I know 250% growth in petabytes managed of data into public cloud, how big would you say public cloud is as either a percentage of your software business or as a percentage of the total petabytes that, you would say, manage under the CommVault platform..

We think that it is a very small percentage of our managed petabytes at this stage. I have seen industry factors that they’re somewhere around 7% adoption out there. Again, I'm not burdened with any facts [indiscernible], but I think we’re at the very early point of adoption here..

And percentage of revenue?.

In percentage of revenue, it is very, very material because almost every one of our big enterprise deals has a cloud component attached to it. So, even though that – you have some customers that we've mentioned publicly. We just mentioned Dow Jones who may have half their data going to the cloud or, in some cases, all of it going to the cloud.

But almost every customer has some component, Aaron, going to the cloud. So, cloud is strategically relevant. And I’d say, for the sake of argument, well over 90% of our enterprise deals. I could say 100%, but it’s certainly well over 90%.

And if I look out over the next year or two in terms of data that we would be managing, it would be certainly well north of 100 petabytes and it may be double that over the next year or two, to give you some direction in terms of size of – or the amount of data that we’re starting to manage in this public cloud..

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

Yeah, thank you. A couple of questions for me. First, Bob, I know you mentioned you're comfortable with the consensus estimate for the March quarter. Just trying to understand kind of Q4 seasonality on the software side. How do you kind of look at that historically? Right now, it looks like consensus is up about 4% sequentially on the software side.

I know there is some FX probably as a headwind in there.

But how do you think about – like, what’s a normal sequential growth rate for your software business in your fiscal year, especially because it’s your fiscal year-end and you would expect sales guys trying to close those big deals?.

Hi, Jason. It’s Brian. Maybe I’ll take that one. In terms of – I don’t know if there is any set, firm seasonality percentage we could put on it, but we did say that our services will decline sequentially in fiscal Q4 as expected. And therefore, some of that – if we’re firming, total revenue is going to have to shift to the software line.

So, if you model that appropriately, that’s where it should shift to, while keeping the consensus total revenue where it is..

Okay.

So, the decline would what, in the services revenue in the kind of $2 million range? Do you have any kind of specificity there?.

We’re not going to say what number it is, but it would decline..

Okay. And then, second question, this is, I guess, probably for you, Brian, as well just on the leverage.

100 basis points expansion for fiscal 2018 and I know that you have some headwinds from the services line, but if you’re going to grow your software revenue kind of strong double-digits, as you said, I guess I’m a little surprised that you’d only be able to expand by 100 basis points and what are some of the other factors involved here that are not creating more leverage?.

The biggest issue is maintenance. You just can't get around it. When you have the maintenance running flat, it is just very hard to get operating margin expansion. We’re trying to, from an investment standpoint, our goal still to get our license revenue growth in a reasonable period back north of 20%.

And so, what Brian said on the call, we are controlling expenses, so we can get very strong op margin expansion in the second half of 2018 and we’re controlling it without having a significant impact on license revenue growth. But that overrides every issue.

You had some op expense, given the depth and breadth of the business, and to these new market and distribution areas we’re moving into. But I can tell you, more than anything else, maintenance is the issue on op margin expansion. Once that comes in line, you'll see a lot of leverage in the business.

That starts to happen in the third quarter of FY 2018 and really start to accelerate in the fourth quarter. And that’s where the leverage in the business is. That, combined with a fair amount of sales force productivity we set ourselves up for in FY 2018 drives your op margins. Those two areas..

Do you expect to hire at a slower pace going forward?.

We’re slowing it down from planned levels. That’s what we’re doing. We’re reallocating resources and we’re slowing it down, so we can we get our financial model in line here. Because once the – I think you'll see good solid license revenue growth.

And once the maintenance line swings around, then you’ve your operating leverage that and sales force productivity. And sales force productivity [indiscernible] whole number of elements in terms of how do you drive that. So, we’ve got that pretty well positioned right now..

Okay, thank you..

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

Yeah, thank you.

Bob, just continuing on your comments about margins, so given your commentary that it’s tied to maintenance and productivity enhancements down the road, should we expect greater margin expansion beyond fiscal 2018? As we get into fiscal 2019, should we be looking for higher than 100 bps of expansion?.

Absolutely..

Okay, great.

And going back to earlier comments, Bob, your compares are getting tough starting with the next couple of quarters, and can you talk about the different growth drivers that can help you accelerate your software license revenue growth to double digits?.

Well, it has been. The major factors, if you think about why the company has returned to growth, it's been our V11 platform, our data platform and journey to the cloud, combined with good solid growth in our standalone virtualization solutions and much better sales execution and higher sales capacity. That's what’s got us this far.

Now, going forward, we’re going to do a number of things. We’re enhancing our data platform relative to competition, including software-defined data services which is pretty – it’s a significant deal and we’re coming at the end of the early release. So, come next quarter, that will be in full release.

We’re enhancing our and doubling or tripling the number of standalone solutions that are monetizable out there with new Web-based UIs just to make it easier for customers and channel partners to drive it.

So, you've got expansion on the top end of the platform, you’ve got significant increase in the number of products with, I’ll call them, modern Web-based UIs attached to them, which should make it easier.

We’re trying to take away all the barriers in terms of doing business with CommVault just to make it easier to work with us, including new pricing models. Now, add to that, things we’re doing in healthcare.

And then, come this fall – and this is not trivial – the enhancements to the platform from the standpoint of business and analytics and process automation is substantial, including new advanced search capabilities.

So, we’ve got ourselves well positioned to open up lots of market, increased competitive position against legacy competitors that there won't be a niche competitor out there from a best-in-class standpoint that’s going to cause us – we will lead across all these high growth niche markets with standalone solutions and we’re expanding distribution.

So, those are all in place. Now, it’s just making sure we execute like hell. And as a team here, we’re working with alignment and focus to improve our execution. So, think of CommVault making a transition successfully, which we did in our phase two of that too, leverage off of that and to another phase of growth.

And all the foundation points for doing that are in place as we speak..

Got it. Thanks, Bob. And my last question is, your commentary about funnel, how should we think about your funnel, heading into this quarter versus last year and the last quarter? You characterized it as healthy in your prepared comments today. And on the last call, you had called it, we have the record levels.

Just trying to see where we are sequentially and on a year-over-year basis..

It’s definitely up. The key to it – and I can tell you right now – is big deals. We’ve got a lot of them. And if we have reasonable big deal close rate, we’re going to have a really good solid quarter. That’s where it is..

Thank you..

Thank you. Our next question comes from Alex Kurtz with Pacific Crest Securities. Your line is open..

Yeah. Thanks, guys, for sneaking me in here. Just a quick follow up on the big deals, Bob.

Could you see point next year, maybe even exiting fiscal 2018 where you’re approaching $300,000 for your enterprise deals? Then my question is really about some of the changes that we are hearing about from Dell EMC in their kind of SMB midmarket business that could be happening right now and how you guys plan to execute against those changes in the marketplace?.

Dell EMC is a formidable competitor. But when you get into both the midmarket and enterprise with, what I call, modern data protection in terms from a technology standpoint, I think we’re way in front of them. Now, from a distribution standpoint and with things like the Flash storage and things like that, that’s where this thing is going to grow.

But I'll let Al comment on core technologies when you get into federating, managing data into the cloud, which they are weak there. Their core legacy storage is causing customers a lot of problems. And they’re not in a lot of – what I would call the leading high-growth areas of the standalone markets.

Al, why don’t you comment on that?.

Yeah. I think like Bob said, they’re formidable, especially on reputation and brand awareness and strategic and/or just volume muscle. And as he was relating, there's lots of holes in the product line.

But the big one that we always see is being able to manage across legacy apps and infrastructure into a highly-virtualized environment; and in their case, way beyond VMware. You have to get into the open stack world.

And then, all the way to new infrastructures, not only converge type or converge and, obviously, public cloud and a number of their solutions end up fairly siloed and, again, they will muscle their way through it just in terms of big company, but strategically and technically we feel like we are in a really good place against guys like that.

And, again, we realize it isn’t just a technology battle there with guys like that. So, as Bob said, we’re putting a lot of effort into our go-to-market motions, our packaging, our positioning, our messaging, our pricing, et cetera, to try to counteract those kinds of threats out there..

Thanks, Alan.

And just real quick on the opportunity of getting enterprise deals over $300,000 over time, just how do you guys think about that?.

Well, it’s two things. Yes, it’s your million-dollar deals, your million and multimillion dollar, but it’s also the number of the deals. So, we’ve had quarters where our ASP may go down because the number is high. We’ve had our good solid number of seven-figure deals as well.

So, that is not something – the ASP on that is not something we focus because that’s a number issue. But we certainly are focused on these big seven-figure deals. So, I’ll make another point. Brian mentioned it, but this is pretty significant. The new pricing, the new accounting standards allow you to mix perpetual and subscription.

And when you get into software-defined structures where somebody's going to be buying on term or you are going – someone has our platform and you are going to start delivering SAS-type solutions on top of that, if we can adopt the new accounting standard, it gives it a lot more flexibility in driving the business and driving larger deals.

So, our financial team is doing everything that they can to make sure we’re positioned to do that, even though we’re not quite there yet. But that could really help this company accelerate big deal growth if we can get in position to do that next quarter..

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

Hey, guys. Two questions. First on margins, then on deferred. On margins, I know, Bob, you said that primary impact to fiscal 2018 margins was on services. But I’m not sure, but it doesn't seem like your services outlook actually changed that much. You thought it was going to be bad.

So, what actually changed besides currency that brought you down a point into 2018?.

Michael, this is Brian. So, we never talked about 2018 specifically until now. In terms of the three major headwinds, we talked about FX, we talked about lagging services and we also talked about the investments we have made in FY 2017 to drive strong double-digit software growth in FY 2018. So, it’s those three things combined which would drive….

Michael, we haven’t brought 2018 down. We haven’t talked about it before..

So, in terms of margins, well, let’s say, at least relative to Street, and I guess you can’t control that, but Street was a bit higher at almost 2 points of margin expansion than you guided to..

Well, because the Street had too much maintenance growth in their model..

And also, they were factoring in current FX. .

Got it, thanks. And then just on deferred revenues, the deferred revenue was strong – a little stronger on the long-term side than on the short-term side.

Anything happening there in terms of duration extension?.

This is a positive from our perspective, is that as part of our maintenance repricing processes that it has led to longer-term arrangements with customers. And we view that as a positive as we get into the back half of FY 2018 and, hopefully, see the resurgence in the services revenue line. That long-term deferred is going to help us..

Okay, great. Thanks for the clarification..

Thank you. Our next question comes from Stephen Bersey with MUFJ Securities. Your line is open..

Hey, thanks, guys. Maybe just an update on how you're feeling about your progress within the healthcare vertical and maybe how that experience is shaping up your views towards other opportunities in other verticals..

We've seen substantial growth in healthcare, primarily as we integrated with the companies like Epic and it’s a source of our big deal growth as well.

So, we have overachieved our objectives there and we will continue to expand the healthcare vertical and we are going into – as we move into these other technologies, including business analytics, we will have a much sharper vertical focus on the business moving forward..

Got it.

And maybe just on the pipeline one more time, so are you seeing any changes in some of the metrics that you track on the pipeline? For instance, velocity of deals through it, whether they’re slowing down or increasing, deals dropping off or getting added on, any change in those metrics?.

I believe we have really comprehensive – we look at pipeline eight ways from Sunday. And we are in a – you’ve got to look at what your pipeline drivers are. So, in the past, they were – this whole move to the cloud definitely accelerated pipeline. Our virtualization accelerated pipeline.

And what we’re doing now is dramatically broadening our product lines. So, when we go out over the next few weeks, both at the enterprise level and in the midmarket, we’ve got a whole series of engines now to accelerate momentum on top of the momentum we've established already. So, the answer is yes. We look at it eight ways from Sunday..

Great, thanks. Well, sounds like some great products coming out and we’re looking forward to it..

Us too..

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

All right. Thank you for taking my question. Bob, can you provide some color what's happening with Europe. You grew it faster than the overall market.

So, what's going on there?.

We’ve had new leadership in Europe, both at the theater level and in some of the major markets over there. And that team has just done a great job of execution. So, we’re just in a much stronger position than we were a year ago.

And it’s just the – we’ve just strengthened our opposition both in the enterprise and the mid-markets over there and that will continue. Our new theater head over there has done a great job very quickly and strengthened position in core markets like Germany, which we were weak, now we’re strong, for example. Northern Europe has been doing really well.

Our new-put [ph] team in the South, which was flat, has seen really good growth. So, it’s, I would call it, sales execution, just much better organization and focus. And as a result, we've gotten good results..

I think just to add to that is that some of the maintenance pricing realignment has impacted EMEA favorably and you also saw that in the uptick in the number of new customers that we added this past quarter, which a good chunk of that was coming from Europe..

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

All right, thanks.

Can you guys just give us any color on the silent growth of your subscription based products this quarter?.

I’d say, Andrew, to date that – subscription has flattened out. And that is why we’ve been working, in fact, almost a year now, on a whole series of new products, service level – service provider programs and new pricing models. I am confident that that will turn, but I don't think you'll see the turn in that product for another couple of quarters.

It takes another couple of quarters. And I think we’ll see a resurgence in growth. I think what’s happened there with us, anyway, is that a lot of our customers went to the cloud instead of the service providers and a lot of our service providers changed their models to be kind of MSP – managed service providers into the cloud, so we had a mix shift.

And where we’re going next is some different areas in terms of subscription which will be a lot broader. So, it’s going to be significant, but you'll start to see that tick-up. I think it’s about two quarters, I think, as these models get into market..

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

Thanks. Product question. November 2017, the new major product. Typically, that’s the productization of customizations that you’ve done for some your bigger users, specifically diving into business analytics and in the process automation side.

Can you give me an example, one on each, of what that product will do that your current product doesn't do or do better, that the current product doesn’t do well?.

That’s a mouthful. Al, why don’t you take it right from search..

Let’s just keep it on that, right..

I’d say search, Data Cube and maybe some of the embedded machine learning..

Yeah..

We’ll try to keep this short because it’s massive..

He’s right, Eric. So, our way of thinking here is to productize, and that’s the share of the activity going on between now and next fall, but productize not only search, which we've had for some time, but there are a number of improvements we can do in there. And, of course, we’re using some open source engines out there to do that.

But, really, as Bob said, we’re working with a couple of partners on integrating and machine learning or AI kind of hooks into a content index repository, if you will. So, now, you can start posing those questions.

And a real simple example is Google doing – instead of searching on flights for tomorrow, just ask him what's the best flight for me to take tomorrow or later today from Newark to San Francisco. So, now you’re taking search and tying it together with some intelligence there.

And from a number of standpoints on a number of examples of what we do out there, again, we’re focused on making sure the foundation is there, the repository is there, it's all-encompassing. It goes across everything that we can call to, everything that we’ve touched, everything we’ve indexed. So, it’s quite comprehensive.

And then, like I say, working with a number of providers – and a good share of this, by the way, is open source tools out there. So, hopefully, that gives you a little bit of color. But it’s – I would say, between now and then, it’s almost more of a productization and solutionization than an issue then – and some finishing out the technologies.

But it’s a hardcore development activity..

[indiscernible] relevant to the entire customer base or just kind of power users?.

No, it will be across – think of the back end. We’ve talked about having a single repository for our customers in clouds and endpoints, different data centers. So, they are dealing with things like compliance and legal. Now, we’re going to turn that back in into a big database. Think of it now as a big relative database in the back end.

We have – we’re making it easier for third parties to develop applications. So, that’s your API automation is significant. And then how you triage and you report up the information that comes out of these analytics that Al was talking about that we’re embedding a lot of analytics capabilities into it.

And when he is talking about searches, when you are going across clouds and machines and everything, how do you find out contextually what is relevant to move into an analytics engine. It’s a very complex process. And you can't just do it in a cloud, you’ve got to do it across these different repositories.

So, we built those capabilities to go out and find relevant data that could be analyzed and then you can tie that to many different analytics and search capabilities, some of which will be embedded in the platform and some of which we’ll provide hooks where we’ll reach out to different analytics to provide results and then present this in some really slick graphical way to the user.

So, there is a fairly substantial amount of enhancements that go along with this to make this work and then tie that to different verticals and use cases. So, that’s what we plan to do come November. You may see some of this come out to market earlier.

So, clearly, from a platform standpoint, we plan to introduce this in the fall, but some elements of this may come out in the summer..

Thank you. And our next question comes from Adria Liguvich [ph] with Jeffries. Your line is open..

Hey, guys. Yeah, this is Adria Liguvich [ph] on for John DiFucci. I just had a quick question on sort of competitive environment. You still have some of these legacy incumbents going through their own restructurings, but you also have some newer private guys coming from a virtualizing cloud sort of perspective.

Can you maybe just give us an update on the sort of puts and takes of any updates to the competitive environment?.

So, our view is that we continue to gain relatively to the legacy guys. And when you start to look at some of the new guys coming in, whether it's in software defined or copy data management, our view is, come this quarter, with our standalone solutions, we don’t see a niche start up competitor out there that we think is going to be an issue.

We think we’ll be well beyond the new guys coming in. You still have VM out there and they’ve got momentum in virtualization. We don't see – we see them here and there in some of our big accounts. We’re starting to take them out in some major accounts now as they run into some of their federation and scale issues.

But I would say the issue is not – is more execution on the CommVault side here than competitive threat. This is in our hand here to execute. So, Al, I think….

And again, back to the core concepts that Bob and Brian were talking about today, is we’re seeing a huge uptick again in enterprises primarily.

And enterprise is interested in being able to manage data at a broad perspective across their wide-flung infrastructure which includes anything from [indiscernible] data centers to hyper-converts to private to public to highly virtualized environments. And back to Bob's point, most of the startups are the younger guys out there, we watch them.

They have some interesting technologies. But, in general, they stay at the very low end of the market or siloed in. A lot of converge guys around BDI, you’ve got at this point. And a lot of the broader scenarios is kind of talk.

So, we, of course, need to make sure they don't expand greatly beyond there, but I’d agree wholeheartedly with what Bob just said, is – particularly, in the midmarket up to enterprise, we feel confident in our positioning at this point..

The scale issue, by the way, we were dealing with terabytes, now we’re dealing with petabytes. That scale is going to go up by 1000x here really quickly. So, positioning ourselves for a massive shift in scale on this market, which will happen.

So, if you're not thinking – 1000 petabytes now and then think of another 1000 on top of that, that’s a yottabyte. You’re not thinking in those kind of terms. Well, your petabyte, exabyte, yottabyte, and that sequence – we believe that’s going to be another shift in the market that will take place over the next couple of, three years..

Ladies and gentlemen, that concludes our Q&A session. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..