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 Aaron Rakers - Wells Fargo Securities LLC Jason N. Ader - William Blair & Co. LLC Andrew James Nowinski - Piper Jaffray & Co. John DiFucci - Jefferies LLC Alex Kurtz - KeyBanc Capital Markets, Inc. Eric Martinuzzi - Lake Street Capital Markets LLC.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Commvault Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Michael Picariello, Director of Investor Relations. Sir, you may begin..

Good morning. Thanks for dialing in today for our fiscal second quarter 2019 earnings call. With me on the call are Bob Hammer, Chairman, President and Chief Executive Officer; Al Bunte, Chief Operating Officer; and Brian Carolan, Chief Financial Officer.

Before we begin, I'd like to remind everyone that statements made during this call, including in the question-and-answer session at the end of the call may include forward-looking statements, including statements regarding financial projections and future performance.

All these statements that relate to our beliefs, plans, expectations or intentions regarding the future are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

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

For a discussion of these and other risks and uncertainties affecting our business, please see the Risk Factors contained in our Annual Report in Form 10-K and in our most recent quarterly report in Form 10-Q, and 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 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.

The reconciliation between the non-GAAP and GAAP measures can be found on Table IV accompanying the press release and posted on our website. Commvault adopted the new revenue standard ASC 606 on April 1, 2017.

Our adoption was done on a retrospective basis, so all prior periods and our financial statements have been adjusted to comply with the new rules. As a result, the results in growth percentages we will discuss today are on a comparable basis using the new rules.

All references to software revenue are inclusive of dollar amounts or percentages for both software and products revenue as disclosed in our P&L. Today's live webcast will also include a slight presentation as part of Commvault's prepared remarks to facilitate update on our Commvault Advance initiatives.

These initiatives include an update on our transition to subscription revenue licensing models as well as our recent operational review. The slides also cover our announcement of new multi-year revenue and operating margin targets. If you have not done so already, I would suggest logging into the webcast now to view or download a copy of the slides.

Please also note that in order to best see the slides, we suggest enabling full-screen slide mode within the webcast. In addition, the slides can also be downloaded from the Commvault website under the Investor Relations page. This conference call is being recorded for replay and is being webcast.

An archive of today's webcast will be available on our website following the call. I will now turn the call over to Bob..

one, the success of Commvault HyperScale Appliance and HyperScale Software solutions, cloud migration and management; success for the Commvault Data Platform to gain share and large enterprises with a journey to the cloud and solutions to help customers mitigate and recover from a cyberattack with highly automated machine learning and artificial intelligence aided data protection, disaster recovery, and intrusion detection and mediation; third, becoming a leading foundation for governance, data analytics and as an optimized data source for business analytics; and finally, dramatically improving our growth in the mid-market by offering much more support to our channel and strategic partners combined with the introduction of new innovative product offerings and pricing.

In summary, the implementation of the Commvault Advance initiatives in Q2 resulted in disruption that we – that did not (00:18:21) allow us to achieve our top line objective. However, we believe the pieces are now in place for the company to execute and deliver improved financial performance. I will now turn the call over to Brian.

Brian?.

one, the total active subscription contracts value inclusive of revenue that was recognized as either software or support services annualized for a 12-month equivalent value; plus two, the annualized value of active utility or pay-as-you-go usage billings.

We believe this ACV metric normalizes the variations in contractual length among our subscription and utility transactions and will help investors and analysts track Commvault's transition to more potentially repeatable revenue streams.

This metric will be a valuable beta point that (00:30:36) demonstrate the growth of our subscription and utility-based pricing models that we expect to drive new customer acquisition, land-and-expand growth, as well as upsell opportunities. As of Q2, ACV has grown to $76 million after only a short period of selling subscription licenses.

Importantly, ACV is accelerating and achieved approximately 90% year-over-year growth this quarter. As part of our Commvault Advance initiatives, our go-to-market model is highly focused on primarily selling these subscription licenses, and we expect subscription ACV to grow significantly over the next several years.

I would now like to spend the next few minutes addressing both our near-term financial outlook and our longer-term operating targets.

As outlined in today's press release, we have been making good progress within our Commvault Advance framework across all aspects of the company by strengthening our competitive technology position, broadening our product line, expanding distribution relationships, reorganizing sales and marketing, and driving cost reductions and efficiencies.

We are on a path to improving the sustainable financial performance of the company. While we expect that the changes we have made to products, pricing, distribution, and partnerships will drive future revenues and operating leverage, we also took actions to align our cost structure with a reasonable revenue growth target.

As Bob discussed earlier, the implementation of the Commvault Advance initiatives resulted in near-term disruption that did not allow us to achieve our Q2 and near-term top line objectives. We are also conservatively planning for modest revenue growth in Q3 and Q4.

We expect third quarter total revenue to be approximately $181 million and fourth quarter revenue of approximately $189 million, resulting in total FY 2019 revenues of approximately $715 million. These expectations are based on Q3 and Q4 software revenue of approximately $82 million and $86.5 million, respectively.

If we achieve our revenue outlook, we will continue to see margin expansion and strong year-over-year earnings growth based on the cost-cutting initiatives we began in early fiscal 2019.

We now expect the Q3 EBIT margin percentage to be approximately 15% and the full-year FY 2019 EBIT margin percentage to be approximately 14.7%, which is a 380 basis point improvement over the prior year. While our strategic fundamentals are strong and our ability to execute has improved, we still face critical challenges.

It is important to note that Commvault Advance is a major transformation and restructuring effort. We are making fundamental changes to the business which carries risks tied to disruption and execution.

While we believe that the majority of the elements of Commvault Advance are in place, there is a certain element of transformational risk associated with the execution of such initiatives, particularly in the near term. Despite these risks, we are already seeing improvements across numerous KPIs, and October order volume is tracking well.

Secondly, as we have discussed for many quarters, we are currently reliant upon a steady inflow of large six and seven-figure deals, which come with additional risks due to their complexity and timing. While we also need to improve our close rates on these deals, large deal closure rates will likely remain lumpy, particularly in the near term.

And lastly, while we are happy with the progress we are making with subscription pricing models, the transition drives a headwind to near-term license revenue growth. This transition will continue to have a dampening effect on revenue, but we believe will ultimately result in a higher lifetime value.

As previously stated, fiscal 2019 will be impacted by the near-term disruption of the changes we implemented as part of our Commvault Advance initiatives.

As we enter fiscal 2020, our goal is to capitalize on these changes and start to realize leverage from our distribution model, as well as the operational efficiencies we identified and implemented in fiscal 2019. Turning to the next slide, you can see the detail of our multi-year revenue and operating margin targets.

Our fiscal 2020 objective is to grow revenue by at least 9% while achieving 20%-plus operating margins. Our fiscal 2021 target is to continue driving operating leverage and obtain 25%-plus operating margins. Our continued transition to more repeatable revenue will also be a key component of our improved financial performance.

As you can see on slide 21, our target is to achieve 80% repeatable revenue in fiscal 2021. Given our transition to subscription software licensing began in fiscal 2018, fiscal 2021 represents the first opportunity for Commvault to significantly benefit from renewals of existing subscription customers.

As we continue driving repeatable revenue, we'll focus on maximizing the value of subscription and utility annual contract value. As previously discussed, our current ACV is approximately $76 million. Our goal is to achieve approximately $240 million of subscription and utility annual contract value by the end of fiscal 2021.

The $240 million goal is approximately 8 times the ACV we started with when we began our move to subscription-based pricing. In fiscal 2019, we've been focused on targeting areas of cost savings such as reducing head count by approximately 7% since the start of the year, and setting the foundation for Commvault Advance.

One of the core principles of Advance is to drive distribution leverage through a focus on our alliances and partnerships. If we are successful, this will accelerate operating margin expansion and reduce our sales and marketing expense as a percentage of revenue.

As you can see on this slide, our goal is to reduce sales and marketing expense from 53% of revenue in fiscal 2018 to 40% in fiscal 2021. Let me now shift gears to our balance sheet and cash flows. As of September 30, our cash and short-term investments balance was approximately $484 million.

During the quarter, we repatriated $67 million of international cash back to the U.S. and reduced the amount of cash held in foreign locations from $197 million as of June 30 to $130 million as of September 30. Our remaining international cash balance is spread across over 35 countries.

While our goal is to continue to return as much cash as possible back to the U.S., we may not be able to do so in an economically efficient manner or maybe limited by foreign laws and regulations. However, we do believe that steps we are taking will result in the vast majority of future net cash flow to be concentrated in the U.S.

Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $17.3 million, which was up 2x over the prior-year period. As of September 30, 2018, our deferred revenue balance was approximately $316 million, which is an increase of 7% over the prior-year period.

Nearly, all of our deferred revenue is services revenue that has been invoiced to customers. Lastly, let me update you on our share repurchases. During fiscal 2019, which includes transactions through yesterday, we have repurchased approximately $47 million or approximately 707,000 shares of our common stock at an average cost of $66.33 per share.

As disclosed in our earnings release issued earlier this morning, our Board of Directors has recently increased the total amount available for share repurchases to $200 million and extended the program for another year through March 2020. That concludes my prepared remarks, and I will now turn the call back over to Bob.

Bob?.

Thank you, Brian. I would like to spend a few minutes talking about Commvault GO and the new products we announced during the show. We hosted our annual Commvault GO user conference earlier this month in Nashville. Registration exceeded last year's total with approximately 2,200 customers, prospects, and partners in attendance.

We announced a number of new products and services, including an exciting new way for customers to interface with our software called Commvault Command Center, new Backup and Recovery as a Service offerings, and further expanded our portfolio of appliance offerings.

We raised the industry benchmark for software interaction and data management with the announcement of the Commvault Command Center which provides customers with a single console for managing Commvault's complete portfolio of products across an entire enterprise's on-premise, cloud and end-point infrastructures.

The Command Center is enhanced with a power of artificial intelligence and machine learning to provide easier to understand dynamic dashboard views of our customers' environments, much more comprehensive real-time reporting and unique learning capabilities including the ability to take corrective actions.

Role-based security enables IT, admin, and end users to have their own easily customizable dashboards. The Command Center can be deployed on-premise or in the cloud, and is available now.

We announced a new Backup and Recovery as a Service offering to deliver Commvault's powerful simplicity for customers wishing to consume backup and recovery needs as a service.

We also announced two other backup services for virtual machines on AWS and Azure, and a backup service for native cloud applications, such as Microsoft Office 365 and Salesforce. These solutions will be available within cloud marketplaces for ease of acquisition and deployment.

Customers can purchase the services as a pay-as-you-go license or as a fixed-term subscription. We also expanded the company's family of appliances with the addition of two new appliances.

The new appliances expand our offerings into a family of small, medium, and large appliances that enable our customers to cost effectively scale from 10 terabytes to more than 1 petabyte or tens of petabytes.

The new larger appliance is targeted at managed service providers and large enterprises featuring scale-out technology with our Commvault HyperScale Software. The small offering takes the full power of Commvault Complete Backup & Recovery into an Appliance offering perfect for remote office and branch offices.

All of our appliances can be used to seamlessly backup data on-premise or move it directly to the cloud. Commvault uses cloud resources natively which has cost, performance advantages versus competitive offerings which require the customer to install an instance (00:41:58) of their appliance in the cloud.

During the show, Al and I also delivered a keynote presentation that outlined new and exciting products and fresh ideas that meet today's unique data management challenges and opportunities with three main messages.

One, Commvault Complete Backup & Recovery continues to set the new industry benchmark for what it means to be Complete and Backup & Recovery solutions. Advances in machine learning and AI will create a self-driving like experience that redefines how customers engage with their software.

This is made possible through the capabilities of the new Commvault Command Center.

Secondly, the Simple Smart Cloud highlighting Commvault's ability to deliver a promise of the cloud faster through automated and orchestrated resource (00:42:50) management and control, we're now helping customers deliver on a multi-cloud environment as a true extension of the modern on-premise data center.

And lastly, we continue to improve customers' knowledge of their data with a holistic enterprise-wide view, and we are delivering applications that allow them to act upon that knowledge. This comes to life through Commvault Activate. Innovation remains the hallmark behind Commvault's product vision and leadership.

Commvault is applying leading edge AI and machine learning to deliver outcomes that customers value most. Commvault challenges the industry to expect more as we deliver truly complete backup and recovery. Before we wrap up, let me briefly update you on the search process for a new CEO.

As stated previously, the CEO search committee of our board remained – or retained a leading search firm in May and has been identifying and actively interviewing candidates. The search process is well underway, and the search committee is making good progress.

In closing, under Commvault Advance, we made significant progress in the quarter establishing a stronger foundation to better enable us to achieve more improved and predictable financial performance both in the short and long-term.

While we are not satisfied with our Q2 revenue performance, we are seeing strong early momentum from our Commvault Advance initiatives, and are excited about our accelerating subscription revenue. We have made comprehensive operational changes over the last several months, and these changes are now behind us.

We're now focused on ongoing forward execution. The actions we took to align our cost structure at the beginning of the year were evidenced in the 61% year-over-year EBIT improvement.

Now that the foundation of Commvault Advance is in place, we believe we will see increased momentum as our channel strategy, go-to-market initiatives and alliance partnerships start to show positive traction. As I mentioned earlier, we're entering the second half of the year with a much stronger funnel.

We'll be focusing our efforts on executing the key elements of Commvault Advance where we already have solid proof points of success. Our objective is to make sure we achieve our near-term financial objectives while solidifying our Commvault Advance foundation for FY 2020. Our immediate focus is to achieve our Q3 revenue and earnings forecast.

Now, let me turn the call back to Mike.

Mike?.

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

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

Good morning. I have one for Bob and one for Brian. I'll start with Brian. Hey, Brian, thanks for the detail on the move to the subscription model. What I'm just trying to understand is with a lot of these companies, you start this – you see deferred revenue grow, right, as you sign these deals, particularly larger ones.

And I'm just trying to understand why we're not seeing an uptick in deferred revenue with some of these subscription deals. And then, I'll wait and ask Bob the next question..

Sure. Good morning, Joel. So, as I described in the call, we're a bit unique when it comes to the application of ASC 606. When we sell our subscription software and license arrangements, we actually recognize that revenue upfront in the period of sale on the software portion.

The only thing that goes into deferred revenue potentially would be the maintenance that's attached to that just like a normal arrangement under a perpetual model to same type of carve-out for maintenance and support that gets deferred over the contractual term. So, you don't see it show up in deferred.

It actually shows up in in-period revenue that's been recognized. That's why we're going to try to point to other metrics such as ACV and repeatable revenue and try to give you good visibility into the traction that we're making on more repeatable revenue models..

Would you have a like a backlog number then like in terms of total contract backlog, or is that not a metric that might be meaningful?.

That's really what – it's almost really – you look at the ACV as a proxy for what the backlog would be essentially..

Okay. Great. And then, Bob, just for you.

What gives you confidence that you can grow 9% next year? Obviously, you're making a lot of changes right now and I'm just – what's giving you the confidence, is it something that you're seeing out there specifically that you can point to?.

Yes, Joel. Clearly, we're seeing a substantial – I mean, substantial uptick in funnel flow in the enterprises, they start to change. We saw it in the spring, and it really accelerated through the summer in spite of our disruption and continued as we entered Q3 in very large deals into the funnel.

And those deals were tied to a trend in the industry for large enterprises to consolidate all their data management functions to deal with cost, cyber, compliance, and the cloud. And I believe our data management platform and the market is recognizing this, is in a class by itself in terms of delivering those capabilities.

So, that significant increase in large deal (00:49:07) inflow also gives us optimism for this current quarter, and it's continued. And secondly, as I discussed in my remarks, we now have a much stronger distribution position. And although that's going to take a little time to impact our earnings, we are starting to see that as well.

So fortunately, we got a massive significant upturn in our, I'll call it, core enterprise business, and also that is also being driven by a much stronger partner and alliance relationships in the enterprise. And from the mid-market standpoint, we are seeing good traction with our Appliances and Commvault Complete and new pricing.

So, the whole foundation of Commvault Complete was not try to make band-aid changes here. That's why it goes back a couple of years to make fundamental changes in our products, pricing, routes to market, alignment with those routes to market, and a much more efficient cost structure.

So, internally, there is a lot of optimism underneath and I really think we've done this the right way although it had some intended risks as we made these massive changes last quarter..

Great, thank you..

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

Yeah. Thanks for taking the questions as well. So I want to go back to that that last question and just understand the variables at play to underpin what looks to be a 17%-plus sequential increase in your implied software license revenue this quarter.

I think with that in mind, it would be helpful to understand exactly what degree of funnel pipeline growth that you've been seeing, and what assumptions are you making in terms of converting those funnel opportunities into recognized revenue? I'm just trying to understand the basis for that increase conservatism-wise or what you see to drive that level of sequential growth..

So, the funnel growth, Aaron, is material and significant. I mean, it's – we're talking about (00:51:31) a very major increase in the growth of funnel, particularly in large enterprises and particularly in the Americas. And the assumptions we're making on funnel close are, what I call, reasonable, and Brian can answer that question.

So we're not putting big close rates on these areas of the funnel. And you've other thing that goes along with this is our – we've had predictive models here that are quite sophisticated and they've been quite accurate and our predictive analytics also look really good relative to the guidance we just provided..

Yeah. I think just to follow on with Bob's point, I mean, we're using fairly typical and average close rates applying that to the current quarter funnel. Again, we see a healthy uptick in our enterprise deal funnel heading into this this quarter, which we're pleased with.

Although, I did say that could be lumpy at times, we're pleased with that number and available funnel..

I think, Aaron, you saw... (00:52:40).

...this kind of validates what you saw at GO since you were there and what you heard on the floor..

Yeah. Just a quick follow-up, I'm just curious, I think last quarter, Bob, in response to a question you said that – basically 98% I think was the number – that the total sales force realignment efforts have been completed.

As we look at the leverage that you're presenting to us going forward, I'm curious if what else is there in terms of sales realignment or for that matter, sales head count reduction efforts that should be anticipated in front of us if there are any?.

I would say, the bulk of this is behind us. But as we go forward and bring new leadership in which we have done, I think over time, we'll continue to refine that model. So I think there are additional benefits to be gained on efficiency, but those are incremental relative to what we just went through..

Okay. Thank you..

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

Yeah, thanks. Bob, thank you for the CEO search update. I guess my question on that is, it's five months into when you announced it, and we haven't seen any announcements yet.

So I guess why is it taking so long, is there anything you can give us some more color on that?.

I just made the comment that the search committee is making very good progress on the CEO search..

Okay. Fair enough. And then over the last few years, we've seen a series of restructuring and pricing and packaging changes.

I know that you guys are optimistic on the things that you're implementing right now, but why should investors believe that this time is going to be different?.

Well, the only validation of that is for us to hit the numbers. That's the only real validation. All I can say is, the funnel growth and the types of deals we're seeing now are in a different category than we've seen in our history. So, a lot of the deal – there is a lot of deals that are in the multiples of millions of dollars.

And it's both in – mainly in the Americas and EMEA, but I mean multiple millions is a, call it, $3 million, $4 million, $5 million, $6 million kind of deals and they're accelerating. So, we've got that, that's real. And these deals are well scrubbed (00:55:41) and they're moving through the funnel well.

In addition, we've never had the strength of our product line for the bid (00:55:49) market with our Appliances and Complete and really getting our prices in line, and now we've beefed that up with a lot more resources and focus. So I think fundamentally we didn't try to do a quick-fix here.

We try to really understand the market dynamic and address it.

In addition, and let me be clear about this, if you look at our platform for the cloud, I mean, a real cloud platform to manage data and migrate it to the cloud and manage it in as a scale-out platform and with Linux functionality, I don't think there's a stronger platform in the industry than what we have here at Commvault.

And we've been able to take the next step in enhancing that platform for, let's call it, multiple exabyte-scale which we anticipate will be in the market sometime early next fiscal year. It's not that far away. So, I think technically we're in a really good position.

I think we're seeing the real traction from the consolidation taking place in the enterprise and across the board for data management functions. I think cyber is a big driver of that and we've had really good success in taking major customers, and they're going to recover from major cyberattacks.

We had Maersk present at our GO conference, that's a good example of that. Clearly things like GDPR and compliance are playing a role of that. And the cloud is becoming increasingly important. I don't think there is any platform on the planet that allows customers to natively use the cloud in all its aspects like we have.

So, in spite of the changes or the things we made, I think the company is fundamentally in a extremely strong strategic position to accelerate growth. And we have established a much more efficient cost structure to drive the bottom line..

Thanks..

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

Okay. Thank you very much. Good morning. So looking at slide 21, your assumptions for repeatable revenue growth suggest a growth of just 17% in fiscal 2019. I think that decelerates down to about 16% by fiscal 2021 despite the mix continuing to increase.

So, is that factoring in price declines, or why should we expect repeatable growth to basically top-out at the fiscal 2019 level for just at the start of the transition and we having (00:58:37) seen an impact from renewals yet?.

Well, again, we're trying to be a little bit conservative with our guidance out there, Andy. So, I think that we'll see an acceleration by FY 2021, will be the first meaningful year where we see renewals start to happen. But we want to be reasonable with our expectations until we actually see that happen..

Okay, fair enough. And then in Europe, if I look there, the software revenue actually did decline about 17% this quarter despite the GDPR tailwinds.

I guess, can you just give us an update on what's going on in Europe, and are competitors such as a Veeam perhaps putting any pressure on your ability to grow revenue in Europe there?.

No, I mean, the EMEA team is consistently either met their number or beat it. And last quarter – we basically took the field out for about six weeks as we were going through this whole transition. So, in some sense, the quarter really didn't start to the (00:59:44) 1st of August.

So, as far as we know – because their expectations for Q3 are for us (00:59:54) very, very significant quarter-on-quarter growth. So, I think what we stated is accurate that you can't draw any long-term conclusion from what happened last quarter. We really believe the majority of that was disruption..

Okay. Thanks, Bob..

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

Thank you. I have a question for Brian and then maybe a follow up for Bob. Hey. So, Brian, thanks again for all that information on the transition to the subscription model, that's all really helpful. But when we look at the utility revenue, I think that's one piece that's going to cause some questions, and I just want to make sure we understand that.

Can you tell us about what the size or the percentage of that revenue is like on an annual basis? And if you can, what the annual retention of that utility revenue is even if it's on a customer basis (01:01:03) we can sort of gosh, retain (01:01:07) how repeatable that is?.

Sure. So the utility portion of the subscription revenue and repeatable revenue is actually, it's relatively small in the grand scheme of the total. I would say that our retention rate is extremely high on that. This is often a pay-as-you-go model based upon usage. It's a quite sticky revenue stream that repeats so (01:01:31) typically every quarter.

And what we're trying to do with the ACV metric is trying to annualize that as well because it is on a run rate that is somewhat predictable for us. And it's not the majority of the revenue, it's not even close to that. We didn't say what the number is, but it is a smaller portion of that total..

Okay. Well, that's a start. So, thanks. It's small, but it does have a pretty high retention rate, so that's good to hear..

It does. Right..

Okay. And, Bob, listen, so just to go along with some of the questioning here, Commvault's always had strong vision and product sometimes getting to market has been a challenge, getting the product to market. But in both of those points, it's always been strong vision in compelling and (01:02:19) product.

But go-to-market execution seems to have been spotty over history. And you said this, in this quarter, the disruption was greater than you expected. And so, we've heard like in the field of – like it's higher than normal voluntary sales personnel attrition. And so that seems like the disruption is going to be – is going to persist here.

And I guess how do you recover from that? I know you're trying to shift more to partners, but that also increases some risk to – (01:02:49) any kind of shift does, right? So, I guess to some of those questions around like how do you feel confident about 9% growth next year, I mean, is it the fact that you just don't need sales as much as you did before with the shit to more of a product or partner-driven go-to-market strategy because even in that case, I don't know, it just still seems pretty important here?.

Now, let's be clear. Sales is still really critical. And the surprise – if you want to call it a surprise is, we've always been strong in the enterprise, and it drove a lot of our growth in our early years. And the enterprise for a couple of years shifted the buying point products in the next shiny (01:03:42) box or whatever.

And that began shifting probably about six months ago, maybe a little longer. So, I consolidate (01:03:50) a holistic play in the enterprise, and that's really accelerated.

And that holds series of variable (01:04:02) I just went through on consolidation, cost, cyber, compliance, and I'll just mention (01:04:07) offline here that – and we've automated so much of the processes within data management now. So we've taken a lead in automation both on-premise and the cloud.

So you've got this massive shift in the enterprise that is more holistic enterprise-wide solutions. That requires a really strong enterprise sales force. And I mentioned earlier when we started Advance, but we wanted more leverage with distribution partners in the enterprise and now we've got the combination of the two.

And then the mid-market, even though we shifted more resources to partners, that's a process that is not going to happen in a day. It is happening as we speak. We're seeing it. But that engine will gain momentum quarter-on-quarter. So the answer is, sales for our business is still extremely important.

And yes – I mean, there is no doubt, when you make major changes like this, and these were fundamental, we didn't try to band-aid it, and we did it quickly. You got to see some disruption because it's not only a structure that we change, it's comp and a lot of other things and (01:05:23) pricing.

So, I believe the pluses well outweigh the risk on the bottom, but I don't want to minimize that we won't see some attrition disruption as we manage our way through that. But I think it will be manageable because we got so many strengths now for our sales people to hit their quotas and make a lot of money..

So, it sounds like sales – or voluntary sales attrition from what we're hearing in the field is – sounds like it's accurate, but there's so many things going on here that you think you've able to offset that?.

Yes. And, look, some of that goes on when you make major change..

Yeah. Okay. Well, thank you, guys..

Thank you. Our next question comes from the line of Alex Kurtz of KeyBanc Capital Markets. Your line is now open..

Yeah. Thanks, guys. Good morning. I just want to follow up on that last question, Bob.

Are you taking any specific actions with your top reps to incentivize them specifically to stay on for the next couple of quarters as you go through this transition? Is there any specific actions you're taking there was a (01:06:43) lot of organizational changes here, I was wondering if there was a program around the sales force around retention..

The answer is just in general we are taking specific action in specific cases and trying to make it easier for our sales teams to earn their quotas. There is not a general corporate-wide action. There are specific actions in the field..

Okay. And, Bob, just competitively in the U.S.

especially, I know there's been a lot of discussion the last couple of earnings calls around a couple of emerging platforms that are competing in the channel, just any kind of update and what you're seeing quarter-to-date, year-to-date, any changes sequentially?.

Well, in the enterprise, we're seeing a significant resurgence against all the competitors, legacy and the new competitors. In the mid-market and in certain, I'll call, lower scale deployments in enterprise, we clearly see the new converged guys in the market, and they have a lot of momentum.

But now you've got a Commvault with a full product line and much stronger distribution to deal with that.

I can say when we get into head-to-head competition now, when we're there, we have a really high win rate because of just the breadth and depth of what we're doing in terms of – and having products (01:08:22) what they have, but go way beyond the (01:08:27) capability, particularly in our ability to move data, yeah, into the cloud and manage it in the cloud and manage it back for data protection that (01:08:38) all the automated and orchestration capability we have for Dev/Test and DRS and a (01:08:44) class by itself now.

So, I think we're in a really solid position technically, and I think we've done a lot to fundamentally change our – and strengthen our go-to-market. So I think internally, we feel really good about all this, although it was painful in the near term..

Understood. And, Brian, just last question for me, I think historically, you've called out the subscription headwind, but the (01:09:10) dollars, I think you've kind of projected what the delta would have been.

Sorry, if I missed it this earnings call, but have you called that out yet?.

No, we didn't put a number on that. I'd say it's fairly consistent with what we did in prior quarters. It's probably in that $3 million to $4 million range is the headwind..

Great. Got it. (01:09:31) All right, thanks, guys..

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

My question has to do with a couple of your key channel partners, just wondering – sometimes I grow numb to the annual HP announcement or the annual NetApp announcement.

Obviously, given the shift to channel dependency here and away from the direct side, what have we done differently this year versus past years? I feel like you've always had products that play well with them, but what are the one or two significant changes with those two key partners?.

I'll take HP and I'll let Al take the NetApp. The difference is that we have, what I'd call, fully integrated online (01:10:30) plays with HP. So when they go to market, they go to market with a solution that includes Commvault (01:10:37) as part of the solution, and that's brand new.

That agreement was a completely new agreement that was executed this summer and basically went into market over the last couple of months. We have significant deals in the funnel with them that are real, that will most likely close this quarter. In addition to that, for example, HP had 30 people at our partner conference this year.

And their Head of Storage (01:11:18) all their major accounts with Commvault. So, there's really good on-the-ground integration with HP. So they've put the resources. We have the aligned plays (01:11:26). We've got pricing. So we've got, I'd say, extremely good alignment with them and they are putting a lot of resource behind our partnership.

So, I'm really confident about where we are with them, and we're also seeing it in our funnel growth. So it's radically different from anything we've had in the past with HP and it's brand new, and I'll let Al take on NetApp..

Yeah. And I think NetApp is similar to what Bob just said on HPE.

Lots of programs, lots of campaigns, lots of sales initiatives, but I think overall, one Bob didn't talk about, it's applicable across all of our major, particularly storage or infrastructure partners is our ability to deal with software-defined secondary storage, notably came out with our HyperScale both Appliance and reference architecture programs.

And I think, Eric, and you would know this, we're seeing a major battleground developing for secondary storage. It's all predicted that there is going to be a huge amount of movement in this direction. We also think in the current market that there is lot of vulnerability to older technologies, expensive technologies.

And again, the modern scale-out HyperScale environment is extremely compelling. So we see a number of – and again, what I'd call, historic storage suppliers wanting to participate in this kind of trend..

Yeah. And Al just made a really good point. And HyperScale in HP's case, they drive that with their Apollo Servers. So, it's not just our Appliances, it's on their own server infrastructure for secondary storage.

And concurrent with that, there is no doubt that our platform has ability to seamlessly manage data on-premise and in a cloud across an enterprise is a major strategic advantage versus anybody out there..

Okay. Because that's – they don't lack (01:13:49) for people looking – your competitors also have programs with them. So, I'm glad to hear there's higher level executive commitment for you guys..

Well, that's (01:14:01) higher level of integration..

Yeah. Yeah. And to be clear, in HPE's case, and they do have a competitor in the enterprise – they're (01:14:10) focused with Commvault in the enterprise. The HPE play is mainly a large enterprise, global large enterprise play..

Yeah. Okay. Thank you..

Thank you. And I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great..