Commvault Systems Inc

NASDAQ:CVLT

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Commvault Q1 Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Jay Whalen, Chief Accounting Officer. Sir, you may begin.

[Jay Whalen, Chief Accounting Officer]

Good morning. Thanks for dialing in today for our fiscal first quarter earnings call. With me on the call are Sanjay Mirchandani, President and Chief Executive Officer; and Brian Carolan, Chief Financial Officer.

Before we begin, I'd like to remind everyone that the 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 the statements that relate to our beliefs, plans, expectations or intentions regarding the future are 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 recently 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.

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 could be found on Table IV accompanying the press release and posted on our website. This conference call is being recorded and replay is available for webcast. An archive of today's webcast will be available on our website following the call.

I will now turn the call over to Sanjay.

[Sanjay Mirchandani, President and CEO]

Good morning, and thank you for joining our fiscal first quarter earnings call.

In my first six months as CEO and President, I have spent a lot of time with our customers, partners, product teams and our colleagues, And I continue to believe we have what we need to drive innovation and customer value for years to come.

That said, we’re not pleased with our Q1 results. Rather than making excuses we're going to talk about our progress to-date and why we believe our future is bright. As we stressed on our last call, we have work to do and you will hear on this call that we have taken decisive actions, and believe we are making the right steps to lay the foundation for growth.

The foundation starts with having the right strategy and the right people to execute. In very quick order, we identified the non-voted the right, to build on Commvault strong condition including Riccardo Di Blasio our new Chief Revenue Officer. He brings his extensive knowledge of the industry and strong reputation for execution to reinvigorate our field and channel go-to-market initiatives. He is already making an impact.

Sandra Hamilton’s Customer Success expertise is critical to our progression as a company. She is focused on evolving our customer engagement model. Rob Kaloustian, our Commvault veteran is driving our new business incubation team to test the launch in an innovative new product next quarter. I’ll tell you more in a few minutes. We are really excited about this. And Ranga Rajagopalan, our newly hired VP of Products brings the deep domain expertise and product management experience needed to advance our already robust innovation roadmap.

During our last call, I said I would share more details on the strategy to expedite our faster growth. It is built around three priorities simplification, innovation and execution. Let's take a few minutes to discuss our progress with each of these.

Simplification is all about world class operational efficiency. Led by Gary Merrill, our operation’s team is focused on improving our tools and analytical capabilities. Sales and forecasting processes, partner enablement portal and our internal employee experience.

Combined with Sandy Hamilton's focus on customer success, we are building what we believe is a world class engagement model for Commvault. We are extremely pleased with the progress to-date. Simplifying how we do business with our customers and partners will enable us to unlock the full potential of our solutions and increase the value of our customer relationships. This brings us to driving innovation our second priority.

Our technology is trusted and is mission-critical to our customers and we are encouraged by the workload in use cases we are seeing. Simply said for our customers multi-cloud is real. Last quarter, we said that our customers are managing more than 500 petabytes in the cloud with Commvault. This has now grown to more than 600 petabytes and has doubled in the past year.

This matter for three reasons, one from the view point of a CIO, customer's IP strategies always need what I like to call a from-to strategy. That is most, companies need to determine the best way to go from something to something, existing technology to new technology. When I speak to our customers this is a key differentiator and they rely on Commvault to be their trusted partner to help them on this journey.

Number two, our customer and partners are also leveraging us in exciting new way to support the cloud native applications, for technicians just like Ransomware and to comply with a regulatory e-discovery requirements which brings us to our third reason. As companies' modernize infrastructure and applications, they must also pivot their workforce and skills accordingly.

Commvault software helps companies' more efficiently manage, complex and various task so that employees can be more productive. As customers' pursue multi-cloud strategies, platform is a service of hired application to become more strategic, as cloud native application rely cloud to deliver modern experiences. We recently delivered new enhancement to our cloud services across Microsoft Azure, Amazon AWS and the Google cloud platform to compliment the cloud offerings and ensure that data is protected in a seamless way.

We are encouraged by HyperScale appliance and software growth year-over-year, as well as by the customer feedback that this provides flexibility and scalability in how they manage their on-prem, hybrid and multi-cloud environments. And finally, we're excited to a new announce a new SaaS offering that we will make available to pay customers in mid-August with the initial launch during Q3 in the U.S.

Built in-house with a start of live team focused on time to market and user experience, this offer will deliver the decades of capabilities and best practices Commvault is known for as a streamline SaaS experience that is fast and easy to drive by and use. In our early testing it is literally provisioned and backing up in minutes. I’m confident this offer is going to impress the market. No other vendor in our space offers such or above set of capabilities delivered in a way that is so simple to use. Simplifying our operational efficiency and advancing our innovation are crucial.

Additionally success hinges on our ability to flawlessly execute. Today we are going talk about execution in terms of geographies and partnerships. Our goal is to be predictable in everything we do, we worked in Q1. Brian will get into more specifics in a few moments. But let me provide you with a brief overview what we’re seeing by geography.

In North America, the economy is strong and we have a robust pipeline. Deal sizes are increasing and the volume of large deals in the pipeline is encouraging. However, we’ve had challenges in deal closure. Given this, we’ve acted quickly to put right leaders in place and are actively increasing our quarter carrying sales people. Riccardo working closely with the Americas team, he’s quietly focused on this.

Europe, our second largest market is an area for improvement. We saw large cross-border deal slowing, which we believe is macro related. We are also seeing a steady stream of large six and seven figure opportunities which are more complex with larger closing cycles. We are adjusting accordingly and encouraged by the prospects.

We are also excited about the opportunity we had. We are seeing strong trends in Australia, our largest market and India continues to show very impressive growth. We believe there are significant growth opportunities in this geography.

Now let’s talk more about partners. We continue to make great strides with our partner ecosystem. In fact, a recent worldwide partner survey confirmed that Commvault is very highly regarded by our partner community. This is further reinforce by HPE recognizing us as a technology partner of the year for store solutions.

Additionally, just two weeks ago we launched a simplest, most transparent and financially rewarding program for partners in Commvault’s history. This is been well received by partners, who are now towards a significantly increase their probability and predictability of full year incentives. Combined with our leading technology and simplified enablement tools, this program makes Commvault the data backup partner of choice.

In closing, we expect by dramatically improving our execution, optimizing our program, and continually enhancing our customer experience, Commvault will be the vendor of choice for our customers and partners both today and in the future. We have taken decisive action and has made significant progress to our operational efficiency.

Our improved ability to execute and our innovation roadmap is ever been richer. Again, while we are not pleased with our Q1 results, we have been committed and optimistic about our return to predictable growth.

Now, let me turn it over to Brian to review the first quarter results. Brian?

[Brian Carolan, CFO]

Thanks Sanjay and good morning, everyone.

I will now cover some financial highlights for the first quarter of fiscal 2020.Total revenues in the first quarter were $162.2 million, representing a decrease of 8% year-over-year. Software and products revenue was $63.7 million, which was down 15% year-over-year and down 13% on a constant currency basis.

Our performance in the Americas was the primary reason for the year-over-year decline. We also pointed to the European macro environment as a headwind this quarter. While we are disappointed with the year-over-year decline in the first quarter, we expect to see improvements from our new go-to-market strategies, including our new partner advantage program.

Revenue from enterprise software deals which we defined as deals over $100,000, represented 62% of software and products revenue for the quarter. Revenues from these transactions was down 11% year-over-year, however our average enterprise deal size was approximately $298,000 during the quarter, up 23% over the prior year. We believe that growth in the size of our enterprise contracts underscores the value that these customers see in Commvault’s innovation and it is why we're so focused on continuing to invest in innovation to support our growth in the enterprise segment of the market.

Total services revenue for Q1 was approximately $98.5 million, a decrease of 3% year-over-year. While we continue to have strong maintenance renewal rates, year-over-year services revenue growth was tempered by changes in foreign exchange rates and by some of our customers moving to subscription models as well as the recent decline in software revenues.

Total operating expenses were approximately $116 million for the quarter, down approximately 6% year-over-year. We ended the first quarter with 2,513 employees, which is also down approximately 6% year-over-year.

Operating margins were 9.6% for the quarter, resulting in operating income or EBIT of approximately $15.5 million.Net income for the quarter was $12.7 million or $0.27 per share, based on a diluted weighted average share count of approximately 46.3 million shares.

Let me now touch on our subscription pricing models and our continued shift to more repeatable revenue. We see customers continuing to transition to consumption models that provide flexibility to adapt to changes in their business. For the past few quarters we've been highlighting two revenue metrics that help investors track the growth and progress of our subscription revenue transition.

These two metrics are repeatable revenue and Annual Contract Value otherwise known as ACV.I will start with repeatable revenue. As a reminder, our primary repeatable revenue streams are subscription software and maintenance services. We will consider approximately 70% of our Q1 fiscal 2020 revenue to be repeatable in nature.

These revenue streams continue to outperform our non-repeatable revenue and were down 2% year-over-year. Our second metric is annual contract value. This metric demonstrates the growth of our subscription and utility based pricing models that we expect will drive new customer acquisition, land and expand growth and upsell opportunities.

As of Q1, ACV has grown to $106 million, up 66%from a year ago. As a reminder our weighted average subscription contract length is approximately three years. In FY 2021 we expect to start seeing a meaningful impact of the renewals of the subscription agreements we sold in FY 2018,while we started focusing on more repeatable software and services revenue streams.

Let me now shift gears to our balance sheet and cash flows. As of June 30, our cash and short-term investments balance was approximately $451 million, down 2% from our balance at March 31, 2019.Our DSO was 92 days versus 91 days in the prior quarter.

As a reminder, our DSO calculation includes the unbilled receivables were required to record as part of the new revenue standard. Deferred revenue was approximately $332 million, which is an increase of 3% over the prior year period. On a constant currency basis deferred revenue was up 4%,nearly all of our deferred revenue is services revenue that has been invoiced to customers.

Free cash flow which we defined as cash flow from operations less capital expenditures was approximately $30 million for the quarter, up 31% over the prior year period. During the quarter we repurchased approximately $40 million of our common stock at an average cost of approximately $48 per share. Approximately $160 million remains in the current repurchase program authorization that expires on March 31, 2020. We will continue to be opportunistic with our share repurchases.

Let me now discuss our near-term financial outlook. We do not believe our recent financial performance is indicative of Commvault's longer-term potential. We're actively implementing our plan of simplifying our business operations, driving executional excellence and innovation.

In addition, some of the steps we are taking like adding quarter carrying sales resources in the Americas may take time before they result n improved financial performance. As a result, we will continue being measured with our outlook. We currently expect Q2 software revenue to be flat to slightly up from Q1. We also expect that services revenue will be flat.

As a reminder, large deal closure rates will likely remain lumpy, particularly in the near-term. As part of our refreshed partner advantage program, we believe our indirect routes to market should improve and provide more predictable run rate revenue over time. It is also worth noting that we expect FX to be a sequential headwind in the second quarter.

Let me now discuss our EBIT margin expectations for Q2.Over the last year we have taken significant steps to reduce costs. We will continue to identify areas of operational improvement, simplify our business operations and improve execution. However, due to our measured outlook on software, we would expect EBIT to be flat sequentially.

We're using this opportunity to reset the Q2 as a baseline for future growth. Some of the headwinds we saw in Q1 persist in the current quarter. However, we believe that we have marked the trough for the year and we intend to show positive sequential growth throughout the second half of the fiscal year. We're confident in our future and we expect to demonstrate predictable financial results for our shareholders.

Before I turn things back over to Sanjay, you may have seen our press release regarding Michael Melnyk, our new Director of Investor Relations. Mike comes to us with over 20 years of financial services experience, and will be an integral part of our Management team, helping us engage with all of our key stakeholders.

I'll turn things back over to Sanjay. Sanjay?

[Sanjay Mirchandani, President and CEO]

Thanks Brian.

Although we have work to do, we've made the right changes to our strategy. Our leadership team and partner ecosystem, to get us back to predictable growth. The industry is ripe with opportunity. And we have the strong products and rich product pipeline that customers need as they move towards modern infrastructure and multipart environment. This is why we're confident in our ability to create value for our customers, our partners and our shareholders for years to come.

This concludes our prepared remarks, and we can now open up for questions.

[Operator]

[Operator Instructions] Our first question comes from Aaron Rakers with Wells Fargo. Your line is now open.

[Aaron Rakers, Wells Fargo]

First of all, Sanjay, I know that you had a little bit of time now at the Company. We've seen two really tough quarters, and so I can appreciate kind of the commentary around the three areas of focus. But I'm kind of curious, as you've gotten your arms around the story, just how you're thinking about the long-term growth potential of Commvault, just the addressable market growth? Any kind of expectations from a topline perspective of how we should think about this as far as topline growth?

And then also as you make investments in the go-to market and kind of sales organization, I'm just curious of what you think about the long-term model in terms of operating profitability, EBIT margin et cetera? And I have a follow-up as well.

[Sanjay Mirchandani, President and CEO]

Yes, it's been six months almost today. And I have my first full quarter in Q1 running the business, after that I have to be transitioned. It's been good. It's been good because I've spent a good amount of time in the field. We got into the details with the new partner program, the innovation roadmaps. I talk about some of the newer technologies we're bringing to markets.

So it's been a good 90 days for me. I wish the results were stronger. But, again, to your question; how do I feel about the longer-term potential? I think if you believe that our customers around the world are on a journey, they're going from something to something. I almost see - almost five years. It's a large company and all of this transitioning.

And as a result, customers after they try point solutions, come back to the fact that they need an integrated road map. They need a company they can count on a global basis to truly help them through what the next big problem is they kind to solve for.

We do that every day. Well, that's multi-cloud or it's virtual or it's containers. We're doing that every day with our customers. Our roadmap has never been richer. We also attach ourselves to big trends because that's where customers want us to be.

So whether it be the work we're doing with the public care providers. The additions we're making to our technology on Microsoft actual or AWS, all of this keeps our customers ahead of where we need to - the next big problem they're trying to solve for.

We're spending a lot of time on our simplification. So innovation is one piece of it. The second piece that I feel very bullish about, so as a tech company, my innovation roadmap wasn't as rich as I believe it is, we would be having a different conversation.

So it's not about the innovation anymore. We are really investing in that. Simplification is something that I feel very strongly about. Being operationally excellent allows us to not only drive some of the pages you’re asking to second part of your question, the efficiency et cetera, but also allows us to square. And so we're squarely focused on that. And we're making - a little bit of that is how we view these results, its making if you would I will tell you the details, but needless to mention we're making good progress there.

So it comes down to execution, and the flywheel of execution that I truly think that we need to be focused on. Riccardo, Sandy, Rob with the new SaaS product, Ranga with the product innovation - with our product management. We're bringing some talents to this company to truly get our execution flawless. And that's what they're focused on. That's what I'm focused on.

So we just need a little bit of time, if you would, to get that up and running. We've identified where we need to be focused for 90 days of having a field has helped me, and now we're just getting it done. So, you know, the goal here is to return to predictable growth just as fast as we can.

[Aaron Rakers, Wells Fargo]

And then just maybe as a follow-up to that kind of discussion. Can you help us understand a little bit of what's going on in the Americas region? Particularly around the sales force; how much attrition have you seen and how do we think about how much sales capacity that you need to put in place over the next of couple of quarters?

[Sanjay Mirchandani, President and CEO]

So the Americas for us is - the economy is strong, the demand is - the funnel looks good. We're seeing it both in Europe and in Americas we're seeing six and seven figure deals come up in the funnel. So I feel much better about the pipeline and things across the U.S.

What we've seen, our partner program that we put into place is brand new. And it's getting good accolades from the partner community. So I feel good that that will start giving us some traction. On attrition, our attrition happens on quarter-and-quarter. We're not in any way hugely concerned about our attrition at this stage. It's just that we're being super selective about the talent we're trying to bring into the company and just need to do it right.

So the sales cost that Riccardo is trying to build that I'm very supportive of, and the fact that we need to bring in the right caliber of folks into the sales organization is what we're focused on.

[Operator]

And our next question comes from Jason Ader with William Blair. Your line is now open.

[Jason Ader, William Blair]

Sanjay, can you expand at all on the new SaaS offering. Is this just basically a backup and recovery solution that's sold as a service? And if so, wouldn't that be competing with some of your partners that are selling back up as a service?

[Sanjay Mirchandani, President and CEO]

So I am just little [indiscernible] without telling you too much about the product that we're going to be launching. So I'm going to give you a sense that this is something that I'm really excited about because it's a product that we've built like a start up inside the company. The team is working at an incredible pace.

They turned the very design principles of how we do things on the head, and it's all about the user experience really making it at a point when a customer things about, a technology like ours to the point where we're expanding with them. It's all about the user experience.

We've taken the decades of work and best practices and machine learning and things that we've learned over the last so many years and have really made them part of the product that's super easy and anticipates what a customer wished to do.

Without getting into - without pre-empting the feature set and we're going into private data in a matter of weeks. This product is 100% partner friendly, because it's 100% sold through partners. And so we don't see ourselves competing, we see ourselves completely collaborating with our partners and all our focus in sales is that the partners actually like what we're doing.

[Jason Ader, William Blair]

And then speaking of partners, can you talk about any specifics on the new partner program that is exciting? Some of those folks out there that you mentioned, you're getting accolades from, what are some specifics that it's different than what you've had historically with your partner programs?

[Sanjay Mirchandani, President and CEO]

So we launched in July 2015, and we obviously spent a lot of time with partners and making sure we understood where we needed to focus. It's all about making sure that it's easy - the first thing we thought it's all about making sure it's easy to do business with us.

So the portal, the enablement, the deal registration process just the overall engagement model that we completely guide in the stream of completely reinvented for us and I think it's taken a step ahead of anything out there. So we may have been a little late for the game, but we've actually stepped ahead as a result of that.

The feedback, some of the feedback we got is the portal structure that - the retail structure that they wanted which we've adjusted, they want to analyze plans that we've given them, more business development funds, we've sort of up on that.

And then whole [indiscernible] enabled them. Because that happens, that's the cost, that's the hidden cost of partners. But if it's not easy to get up and running, getting the SE's up and running, account managers up and running; you know, it just makes it more difficult for partners as we all know.

So an incredible effort around the portal, the deal registration, the engagement model, the sales kit, sales play, the videos, the top leadership content all of that stuff is built in. So we’re really excited about it. I think - and all the early feedback we got and worldwide in the program is this is great. [indiscernible].

[Jason Ader, William Blair]

And the last one from me. Sanjay can you give us a bit of a window into let’s say some of your conversations with Riccardo on essentially his diagnosis. I mean he's worked with at a lot of different companies. He came in, he spent some time, he is only been there what a couple of months now only two months okay. So what he is telling you that you can share with us on the problems that exist today in the sales organization and then go to market organization?

[Sanjay Mirchandani, President and CEO]

So if you met Riccardo you know the guy is just all energy and he has been in the industry a long time. We’ve been talking even before he came in a little bit so he kind of new - he knows the landscape well. He had a domain expertise in the space so his ramp up has been pretty quick. In many ways he and I approach it the same way which is all about keeping things simple.

Having the right segmentation model, having a strong partner ecosystem that your are investing in, going deeper just making sure that we are really way to that, looking at the compensation program making sure that tweaks are needed in place. Then we are going after use cases for customers that matter the most and we are not spreading ourselves to them so, focused on the market that we need to be focused on.

So these are all the things that we are in details. We already started rolling the stuff out in a capacity, they need more big on the street because there is demand in the U.S. So all of these things we are focused on, geographical expanding where it matters I mentioned APAC as example. So there is a lot of work we’ll be doing there. We’ve also again on the inside and of our digital marketing and all the things we are trying to do with customer success and bring those pieces together so lots of work there.

[Brian Carolan, CFO]

And Jason it’s Brian here I think Riccardo also bring to table just a wealth of experience when it comes to your forecasting, pipeline, diligence just making sure that. When we’re calling forecast it’s something that we’re going to take part and he is already having impact in that area.

[Sanjay Mirchandani, President and CEO]

As we speak he is on forecast course.

[Operator]

And our next question comes from John DiFucci with Jefferies. Your line is now open.

[John DiFucci, Jefferies]

So Sanjay it’s great to hear the new management team it’s in place I presume, most of the large pieces are in place here. And all the questions about the long-term opportunity for you, but I really think at this point it really comes down to just trying to hit some numbers. And I know the guidance you gave seems like well it doesn't seem like something you can't do with software revenue flat quarter-to-quarter, but the last two years in a row it actually declined sequentially.

So when I look at stuff like that I mean you look at your stock and the stock is the cheapest stock we cover four times recurring revenue, reach the way we look at it. And frankly, I just think you just got to hit some numbers short-term and the long-term stuff that's why you came here. When you came you started talking about the product and we buying that to. I mean Commvault is known as having good product right now it really needs some execution.

And I know you got the team in place, but I'm just wondering if next quarter when the last two years in a row software revenue declined, this quarter it’s going to be flat at least that’s your guiding. I know it's a loss - it’s really disappointing fiscal first quarter, but I don't I guess it goes along with one of those questions the one back it just happened. How confident are you that you can hit these numbers because investors after a while even the value ones get tired?

[Sanjay Mirchandani, President and CEO]

John could to hear from you. I wouldn’t say differently then you said it execution are hitting our numbers are what we’re focused on. And there are – I will say on the innovation piece as much as we have great technology. The space we are in is moving so quickly that we have to keep - focused on innovation or we have an opposite problem. So I’m not saying that’s what we have saying we have a really good flow of technology and listening to our customers and continuing to evolve it.

So I don't take that lightly that piece a bit, the rest is everything you said I completely agree with. With are so focused on trying to get back to growth. It’s our singular growth as everything internally is driven around that and this is a miss there is no excuse about it. And I feel pretty good that we have the right team I feel pretty good we have the right technology. I feel pretty good we have the right strategy now it just about doing it every single day.

[Brian Carolan, CFO]

And John just to add, that I think you can look at the last couple of fiscal years in our Q2. As a good measure for what we’re going to do this Q2. I think we understand the need to get back to predictable growth and that's we’re trying to do. We believe - we kind of reset the baseline here, we want to gain back investor confidence. We understand the importance of that. We do have the right motions in play.

We got the right leadership team. We got a new partner advantage program. We’ll start seeing the - hopefully the renewal affect of the subscription agreement that I alluded to on the call. So we got a lot of things in our favor here. And again we try to reset the baseline and we understand the importance of kind of hitting the number and growing it from here.

[John DiFucci, Jefferies]

Okay, and hitting the number I think it’s the first thing you got to do and growth is great. But on that point, I think you said in the press release you said repeatable revenue decline 2% year-over-year Brian. Is that - what it do on a constant currency basis do you have that there?

[Brian Carolan, CFO]

Maybe slightly more favorable is not…

[John DiFucci, Jefferies]

And then the last thing just sort of point the question, you said that fiscal 2021 renewals you had a big renewal you're coming up which implies that some excitement there around the opportunity to upsell and cross-sell, but given the performance and not just now but over last couple years. It also seems to me to be a huge risk that they don't renew.

[Brian Carolan, CFO]

I think we can look at it, you can look at it a couple different ways and we’ll give you more color on that as we get closer to FY 2021. But if you look at our maintenance support renewals is a good proxy for how we’re going to do with subscription renewals I would say that is pretty strong.

And so we’re looking closely with Sandy Hamilton in instituting a kind of world-class customer success function and making sure that we have handle these things with really good care and making sure that it's a win-win for both the customer and Commvault as we get to the renewal cycle.

[John DiFucci, Jefferies]

Okay but the repeatable revenue declined 2%?

[Brian Carolan, CFO]

Understood, some of that is driven by kind of near-term software results it goes hand-in-hand, but I think if you look at this - it's not just within 90-day window but a longer-term window.

[Operator]

And our next question comes from Andrew Nowinski with Piper Jaffray. Your line is now open.

[Andrew Nowinski, Piper Jaffray]

I just like to follow-up to a prior question as it relates to your long-term profitability. I think the prior management team had laid out a plan for reducing spending on sales and marketing as a percentage of revenue, but it sounds like you plan more for ramping up spending at least in the near-term. So I guess what are your views on that long-term model and then second given that subscription growth did slow significantly I'm trying to understand how you might balance cost cutting initiatives while managing through that transition to subscriptions and also trying to get growth back on track?

[Brian Carolan, CFO]

We understand that this is going to be balanced approach. We understand the need to get to responsible and predictable growth and that means both topline and margin improvement over time. I wouldn't say in terms of adding more resources to quarter carrying that will probably require a little more of a recalibration than anything else.

And we're focused on putting our investments into the right resources to drive that near-term and longer-term growth. We're confident that we have the right plans in place we just need to implement and execute at this point.

[Andrew Nowinski, Piper Jaffray]

And then I think you noted that Europe was an area a need of improvement and that was macro related. I guess I just want to ask are you certain or how can you be certain that [indiscernible] wasn't putting pressure on your business in that region?

[Sanjay Mirchandani, President and CEO]

We fundamentally played - the slow, the macro or the slowdown that we think we’re seeing is actually in a space that I don’t think being played and which is the much larger enterprise business. We’ve seen customer’s deals - or transaction that would have been across Europe and European slowdown a little bit. Some customers are looking at multi-cloud in a very serious way, which means there’s multiple layers of the technology in that -- in that so that takes a little longer but it’s a combination of that sort of thing and what we think are sort of transaction that look pan-European.

[Operator]

And our next question comes from Alex Kurtz with KeyBanc Capital Markets. Your line is now open.

[Alex Kurtz, KeyBanc Capital Markets]

Just back on the big deal execution Brian, this is been something that has been a recurring challenge for Commvault, [indiscernible] way, right because you're in big deals, you’re competing, that means your technology matters but you go over the years of how these big deals impact the quarter for Commvault, so what are you guys doing differently now as far as how you forecast your big deals in your pipeline then I have a quick HyperScale question.

[Brian Carolan, CFO]

Just to take that out. Its Brian here. So yes, I mean, the lumpiness that we referred to is a result what’s not being predictable in our execution, so understand the need to improve our forecasting methodology. Our overall feel hygiene and become more predictable, I think with the direction of Riccardo, we’re going to do that. So that’s step one.

Secondly as we rolled off this partner program with the incentives that we put in place, we’re going to start seeing more predictable revenue stream come from that and that’s going to be both for new customer acquisition and also our existing customers.

And then third, the subscription revenue business that we’re going to start seeing, that’s going to add more predictability to the baseline again, that will kind of come towards more FY 2021 but that should start taking out effect and I believe that’s going to have an impact.

[Alex Kurtz, KeyBanc Capital Markets]

And then on HyperScale, how is this product so much excitement about this product when you guys announced it and allowing you guys to go into the midmarket and just compete more effectively against some of the startups, is there a some kind of metrics that you can give us or some kind of contacts about that product performing over the last 90 days?

[Brian Carolan, CFO]

The last 90 days, yes, I mean, HyperScale is the technology of the future. I think that we’re -- we're seeing growth on a year-over-year basis with respect to HyperScale offerings and I think that again this is one of one comments.

[Sanjay Mirchandani, President and CEO]

Let me, let me, Alex, the way we think about the HyperScale, the HyperScale is both the soft line big appliance and our play with our customers on this is it -- it’s one part of an overall approach they may want to take. Our technology works together.

So if a customer has cloud footprint, they has an on-prem footprint. They want to have overtime a SaaS footprint and they want in certain cases an appliance or a higher converged capability and I am oversimplifying it, but the range in our software cuts to the other public - they all talk to each other. It’s a same pattern like.

So as a result, we’ve got customers that start out talking with us about an HyperScale and overtime sort of more than have to hold complete product in conjunction with it or a cloud enabled capability. So it is for us - is important part of an overall solution that the customer can have any -- in sort of any way they like.

It is very channel friendly, it is very easy to set up. As you know, it is - maybe I have found this personally in 15 minutes setting it off from scratch. It’s a good piece of software. Our partners like the reference architecture. So you know, it's sort of beating ends - exceeding our expectations as technology. We have lot of moving customers. It is a part of about the year end and it’s doing very well.

[Operator]

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

[Eric Martinuzzi, Lake Street]

I have a question on the revenue recognition regarding the subscription in utility software. I was in the impression that that line which is going to grow sequentially as we added more subscription contract that are based -- it declined between Q4 and Q1.Could you refresh my memory on the revenue recognition there?

[Brian Carolan, CFO]

Eric, its Brian here. So it really depends on needs of our service providers that drive that component of our utility based revenue. Sometimes we do enter into a multi-year committed arrangement with them. So if it makes economic sense for us and them what they’ll do is they’ll commit to a couple years at one point in time. That actually then gets recognized basically a committed subscription arrangement as opposed to utility.

[Eric Martinuzzi, Lake Street]

Okay. So the assumption then is that…

[Brian Carolan, CFO]

Its gets recognized and yes, the committed amount gets recognized in periods and it gets called out the utility but it does become part of our overall subscription revenue that becomes repeatable in nature.

[Eric Martinuzzi, Lake Street]

And then the second question here just we did see a little bit of and I am trying to get a feel for normalized CapEx. I think a year ago you guys still had things related to the new facility but 841,000 in the quarter, is that kind of a normalized CapEx was that abnormally low, what should we anticipate for fiscal 2020?

[Brian Carolan, CFO]

I think plus or minus $0.5 million on that number more to the plus will probably appropriate.

[Operator]

Thank you. And that does conclude our Q&A session for today and it does conclude today’s call. Thank you for your participation in today's conference. You may all disconnect. Everyone have a great.