Commvault Systems Inc
NASDAQ:CVLT
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
70.43
176.57
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Commvault Systems Inc
You don't have any saved screeners yet
Good day, ladies and gentlemen, and welcome to the Third 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. Gary Merrill, Chief Accounting Officer at Commvault. Sir, you may begin.
Good morning. Thanks for dialing in today for our fiscal third 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 in 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. 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.
Thanks, Gary. Good morning, everyone, and thank you for joining our fiscal third quarter FY 2019 earnings call. On today's call, we will discuss our fiscal 2019 third quarter results and we will provide an update on our business model transformation to deliver shareholder value called Commvault Advance.
As a reminder, Commvault Advance is a multiyear effort to position the business for improved short-term and sustainable long-term revenue and earnings growth. The key takeaways for today's earnings call are: we achieved solid sequential revenue growth and continued strong year-over-year earnings growth, we have made significant progress in lowering our operating costs; we believe improving business momentum will carry into Q4 and will serve as the foundation for software and product revenue growth reacceleration in FY 2020 as well as good continued earnings growth; and we have made exciting progress in technical innovation and new product development that has the potential to strengthen Commvault's position both in the short and long term.
Let me start by providing an overview of our third quarter financial results, which showed significant sequential revenue improvement and continued our recent trend of strong year-over-year earnings growth. Software product revenues were a Commvault record, $84.5 million, up 22% sequentially and 4% year-over-year. Total revenues were $184 million, up 9% sequentially and 2% year-over-year.
Operating costs declined 9% year-over-year. EBIT margin was 18%, up 580 basis points year-over-year. This was our strongest EBIT margin since the quarter ending June 2014. EBIT or operating income was up 50% year-over-year and EPS was $0.54 per share versus $0.30 in the prior year or up 80% year-over-year. We repurchased 54.4 million of our common stock in the quarter bringing our fiscal 2019 total to nearly 93 million.
During the quarter, we continued to optimize our cost structure, which drove continued significant year-over-year earnings growth. The reduction and reallocation of field resources combined with solutions better aligned to routes of distribution also drove substantial improvement in field productivity in Q3. We believe our Q3 performance is early validation of the positive impact of executing Commvault Advance.
Commvault Advance encompasses enhancements to our products licensing models and pricing. We also shifted field resources towards supporting our channel and strategic partners while making improvements to our marketing efforts. Finally, we strengthened our sales distribution and marketing organizations with strategic leadership positions -- additions in key roles. Many of these changes were deployed in the field and with our partners over the summer and fall.
We are also hearing that the changes we made are resonating well with our customers and distribution partners in particular our simplified pricing and packaging, Commvault Complete Backup and Recovery solution, and Hyperscale Software and Appliances are now generating increased interest and resulted in solid funnel growth during the quarter.
Our 22% sequential software and product growth is driven by improving momentum in the enterprise supported by increasing impact from partner-led sales and marketing strategy that is the core of Commvault Advance.
Let me talk about our enhanced, expanded, and simplified product portfolio. One of the key elements of Commvault Advance that has contributed to our improved results is our enhanced, expanded, and simplified product portfolio, which is making our products easier for customers to install and use plus making it dramatically easier for our sales teams and partners to sell.
Commvault now has four distinct simply powerful offerings; Commvault Complete Backup and Recovery, Commvault HyperScale Software and appliances which offers converged data protection combined with scale-out storage, Commvault Orchestrate which includes fully automated disaster recovery Dev/Test and data migration, and Commvault Activate which is designed to help customers know their data and then to discover and extract new business insights from it. We expect the product revenue momentum we saw in Q3 from our enhanced product portfolio to continue into Q4 and provide a good foundation for growth in FY 2020.
Let me shift gears and talk about our efforts with respect to cost efficiencies. As I've previously mentioned, we have made significant reductions to our operating cost structure that has enabled us to deliver meaningful improvements to our operating margins and earnings in Q3 and year-to-date FY 2019.
During the third quarter, we continued to further optimize our cost structure. Year-over-year Q3 operating costs were down 9%. For the first nine months of fiscal 2019, our operating cost reductions have led to a 50% year-over-year improvement in EBIT. As a reminder, our cost reductions were implemented within the framework of Commvault Advance and did not negatively impact our aggressive product development strategy.
I will now address our FY 2019 Q4 outlook. We are pleased with the significant sequential improvement in our Q3 financial results. We also continue to see improved business momentum, strong inflow of opportunities to our sales funnels, and good forecast from our field sales teams. We believe we can continue to show improved sequential earnings improvement.
However, given the early stage of our transformation, we plan to remain conservative with our near-term outlook. We expect fourth quarter total revenue to be approximately $189 million, up 2% year-over-year. We now also expect the Q4 EBIT margin percentage to be approximately 17.7% and the full year FY 2019 EBIT margin percentage to approach 16% or approximately a 500 basis point improvement over the prior year. Brian Carolan will provide more color on Q4's outlook as well as FY 2020 in a few minutes.
Our anticipated growth for Q4 FY 2019 and FY 2020 is primarily based upon success with the Commvault Data Platform to gain share in large enterprise accounts with their journey to the cloud and solutions to help them mitigate and recover from cyber attack with highly automated artificial intelligence and machine learning aided data protection, disaster recovery and intrusion protection and mediation; success of our Commvault HyperScale Appliance and HyperScale Software Solutions, cloud migration and management solutions; third, becoming a leading platform foundation for governance, eDiscovery, data analytics and as an optimized data source for business analytics; and fourth, finally, improving our growth in the mid-market while offering much more support to our channel and strategic partners combined with our new simplified Commvault Complete and Appliance product offerings and simplified pricing.
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're making fundamental changes to the business, which carries risk tied to disruption and execution. There's still lots of work left to do, but that work is now being done within the context of improving tailwinds.
While we are seeing an improvement in the inflow of large six and seven figure deals, they come with additional risk due to their complexity and timing. As we have communicated in the past, 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 the subscription pricing models, the transition drives a headwind to near-term license revenue. This transition will continue to have a dampening effect on revenue, but we believe will ultimately result in higher lifetime value.
In summary, we believe our Q3 results are an early validation of our Commvault Advance strategy. In addition, we have improved visibility going into Q4 and we believe we have a strong foundation for continued and improved revenue and earnings performance for fiscal 2020. We have also made substantial progress in technology innovation and product development which I will discuss in more detail later on in the call.
Before I turn it -- the call over to Brian let me briefly update you on the search process for a new CEO. The CEO search committee of our Board has made significant progress since our last earnings call and we plan to make an announcement in the near future. We have no additional information to share on today's call or here in the follow-on Q&A sessions.
I will now turn the call over to Brian. Brian?
Thank you Bob and good morning everyone. I'll now cover some financial highlights for the third quarter of fiscal 2019. Q3 total revenues were $184.3 million representing an increase of 2% over the prior year period and 9% over Q2. We reported Q3 software and products revenue of $84.5 million which was up 4% year-over-year and 22% over Q2.
Using FX rates from the prior year would have resulted in year-over-year software and products revenue growth of 6%. We saw good year-over-year improvement in both EMEA and APAC which were up 10% and 9% respectively on a constant-currency basis.
Revenue from enterprise deals which we defined as deals over $100000 in software and products revenue in a given quarter represented 65% of such revenue. Revenue from these transactions was up 19% year-over-year. The number of enterprise revenue transactions also increased 19% year-over-year. Our average enterprise deal size was approximately $268000 during the quarter which was the same as Q3, 2018.
Gross margins were 84.7% for the quarter. The cost of third-party royalties related to our HyperScale Software Solutions and the cost of hardware related to our HyperScale Appliances is included in the cost of software and products revenue. Total operating expenses were approximately $120.3 million for the quarter, down approximately 9% year-over-year and up 4% sequentially. We ended the December quarter with 2576 employees, which is down approximately 9% since the beginning of the fiscal year.
Operating margins were 18% for the quarter, resulting in operating income or EBIT of approximately $33.1 million. As Bob mentioned, EBIT was up 50% year-over-year. Net income for the quarter was $25.4 million and EPS was $0.54 based on a diluted weighted average share count of approximately 47.4 million shares.
As a reminder, during FY 2019, we lowered our pro forma income tax rate from 37% to 27%. We believe that as a result of U.S. tax reform, 27% will align to our long-term GAAP and cash tax rates. We anticipate that our diluted weighted average share count for full year FY 2019 will be approximately 48 million shares.
Let me now touch on our subscription pricing models and our continued shift to more repeatable revenue. As a reminder, during our October 2018 earnings call, we introduced two revenue metrics to help investors track the growth and progress of our subscription revenue transition. These two key operating metrics which are repeatable revenue and annual contract value helped demonstrate our continued progress towards more repeatable software and products revenue streams.
Additional explanations and background regarding these metrics were included in the slide that we presented on the Q2 call. In our press release filed this morning, we included additional detail and historical amounts related to these metrics.
Let me start with repeatable revenue. As a reminder, our primary repeatable revenue streams are subscription software and maintenance services. We would consider approximately 66% of our Q3 total revenue to be repeatable in nature.
Our repeatable revenue has been consistently growing in excess of our legacy pricing models and were up 15% year-over-year in Q3. The recent growth of our repeatable revenue streams has been driven by subscription software and products revenue.
Subscription based pricing represented 37% of software products revenue in Q3, which compares to 21% in Q3 of last year. Software and products revenue from such subscription-based models are up 85% year-over-year. This consists of both committed and often multi-year subscription sales as well as pay-as-you-go utility site arrangements.
Our second metric is the subscription and utility annual contract value or ACV. As we transition to a mostly subscription or repeatable revenue model, this metric will provide greater visibility into the increased subscription contracts we sell. ACV is defined as, one the total active subscription contracts value 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 and 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 also represents a data point to 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 Q3, ACV has grown to $90 million more than 2x what it was a year ago. 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.
Let me now discuss our financial outlook. As Bob discussed earlier, we expect fourth quarter revenue of approximately $189 million resulting in total FY 2019 revenues of approximately $719 million. These expectations are based on Q4 software revenue of approximately $88.5 million.
If we achieve our revenue outlook, we believe we will continue to see strong year-over-year margin expansion and earnings growth based on the cost-cutting initiatives that we undertook in fiscal 2019. We now expect a Q4 EBIT margin of approximately 17.7%, a 550 basis point improvement over the prior year.
As a reminder, our fiscal Q4 is impacted by the calendar year reset of U.S. payroll taxes, which we estimate as approximately $3.1 million of incremental expense versus Q3. We also typically have higher cost of commissions in Q4 as a result of some of our sales teams earning higher rates from being in accelerators.
I would also like to address our longer term outlook. On our Q2 earnings call, we laid out our longer term financial targets. Our goal is to achieve revenue growth in fiscal 2020 and 2021 of at least 9% while increasing margins to 20% in fiscal 2020 and 25% in fiscal 2021. While there is much work to do, we believe we made good progress in fiscal 2019 towards achieving these goals.
Let me now shift gears to our balance sheet and cash flows. As of December 31st, our cash and short-term investments balance was approximately $458 million. $132 million of this balance was held in international locations. Our foreign cash balance is spread across more than 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 may be 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 defined as cash flow from operations less capital expenditures was approximately $30 million which was up 5% over the prior year period.
As of December 31st, 2018, our deferred revenue balance was approximately $325 million, which is an increase of 6% over the prior year period. On a constant currency basis, deferred revenue was up 9%. 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 the quarter, we repurchased approximately $54 million of our common stock at an average cost of approximately $58 per share.
For the fiscal year, we have repurchased nearly $93 million of our common stock. As of December 31st, approximately $151 million remains in our current share repurchase authorization which expires on March 31st, 2020.
That concludes my prepared remarks and I will turn the call back over to Bob. Bob?
Thank you, Brian. Let me talk about the business landscape and market dynamics. IT infrastructure is undergoing the most radical transformation since the advent of client server computing over 20 years ago.
Gartner predicts that by 2025, 24% of IT workloads will be on-premise with 36% in the public cloud and 40% in SaaS. This hybridization will put a premium on platform-based unified data management approach across these different IT infrastructures.
Enterprise and mid-market customers are focused on finding a unified data management approach to consolidate multiple point data management solutions and to reduce the complexity and cost of managing applications and data and hybrid and cloud environments.
These same companies are also looking to modernize secondary storage environments. Adding to this complexity is the explosion of applications which has developed in the cloud using distributed compute network and storage resources versus traditional applications which use dedicated IT resources.
Customers are having difficulty in managing tracking and securing these applications. We're now facing an era where the management of the application is beginning to merge with the management of data and infrastructure. These changes are driving the new hybrid operating model that spans local data, compute resources, cloud path, environments, data, cloud and SaaS-based applications.
In summary, the management of IT environments and application development is getting increasingly complex, combined with the unabated growth and diversity of data. All of these dynamics are driving more enterprise customers to demand more comprehensive unified -- a more comprehensive unified platform-based -- outcome-based data management solutions, modern converged data management and secondary storage, pay-as-you-go procurement models and SaaS-delivered solutions.
In this era of rapidly changing market environment, I want to put in perspective the strength of Commvault's competitive position. The new competitors in the market are claiming unified data management as a brand new concept. Yes, they have integrated converged unified data management with scale-out secondary storage, but the concept is not new. Commvault was and is the standard for unified data management.
Commvault has always provided our users with a unified view and an ability to access and manage stored data by bringing together secondary stored data silos into one single namespace with our platform. Additionally, over the past eight years, we have broadened our capabilities through tight integration, with public cloud, private cloud or any storage hardware including our own HyperScale appliances and HyperScale software-defined storage.
For example, approximately 430 petabytes of data is stored in the public cloud with our platform which we believe is orders of magnitude higher than any other competitor in the market, including the newer competitors. We also have the broadest depth of coverage of any competitor in the industry. We have made everything simpler and easier with our new Commvault Command Center user experience, user interface and comprehensive automation and orchestration capabilities.
On top of that our dynamic four-dimensional indexing combined with machine learning is unique in the market. This enables our customers to have the most cost-effective systems better ways to quickly recover from cyber attacks, meet critical compliance requirements and provide a strong foundation for data and business analytics. The market is now getting a better understanding of the major advantages that Commvault provides versus both the new and legacy competitors and we believe this is one of the primary reasons why we are beginning to see good funnel growth acceleration.
These shifts in the market and shifts in Commvault buying behavior mirror shifts in our funnel growth. Over the last few quarters, we have seen our funnel growth accelerate from enterprise customers, seeking unified consolidated enterprise-wide data management solutions versus a combination of specialized points products.
In our view, our recent uptick in enterprise customer demand is being driven by customers dealing with the four Cs, which we outlined at Commvault GO in October. The four Cs are: cloud, specifically the move to public or hybrid cloud; secondly, cyber risk mitigation requiring fast enterprise-wide disaster recovery; third, compliance and the need to meet new regulations like GDPR; and fourth, cost reduction consolidating disparate data management solutions and implementing secondary storage modernization.
Now there is a fifth Continue, which is complexity. Complexity is driving companies to standardize their approach to data management, this includes customers having to deal with multiple infrastructures on-premise and in the cloud, the explosion of application development in the cloud, the acceleration of the amount and type of data and the increasing importance of data as a foundation for business analytics.
Most customers are having to deal with these issues with shrinking budgets and a difficulty in hiring skilled IT staff. The combination of the issues surrounding data now requires more standardization of the management of the data and infrastructure and the automation of data and infrastructure-related transfer cost reductions, risk mitigation security and agility.
We believe Commvault is well positioned to address the 5Cs in addition to having what the best-in-class enterprise -- having the best enterprise volume of data management solution. The enhancements we've made over the last few years in connection with Commvault Advance, simplified the purchase installation and use of our products.
This includes our modern simplified Commvault Command Center user interface that enables users to use the power of more than 600 automated functions to simply dial-in an outcome. Our automation now includes Commvault-developed machine learning capabilities to make our user experience better and more efficient.
For example Commvault Software analyzes patterns and performance and if operations need to be altered or reprioritized the software will dynamically auto-optimize and auto-tune operations. We also use machine learning to provide outcomes-based solutions to establish data recovery SLAs and our software figures out the resources required to deliver those SLAs.
In summary, we are seeing increased demand from enterprise customers desiring a much more modern unified data management solution to replace multiple point products as well as to replace their legacy secondary storage solutions. The growth of large enterprise deals drove our Q3 sequential product revenue growth and is the foundation for our Q4 outlook.
We believe improved enterprise demand for our platform will continue through FY '20, Q4 and FY '20 product revenue growth will also be aided by improving demand for our converged data management appliances in the midmarket.
Lastly before wrapping up the call, I wanted to comment on several of our strategic technology initiatives related to the Commvault Data Platform. These include setting a new standard for enterprise-wide fast automated disaster recovery, using machine learning for much faster automated enterprise recovery from a cyber attack.
Comprehensive data developments enhanced machine learning capabilities in the platform to improve the automation of enterprise-wide GDPR compliance and aid discovery.
Let me talk about scale. We are adding unique new scale-out capabilities to the platform and enhancements to the Commvault Command Center to make it easier and more cost-effective for our customers to deal with exit by scale. This includes new capabilities to quickly capture, copy and secure data.
It also includes new unique technology to enable our customers to better customize the management of data infrastructure for each data management use case. Additionally, we are bringing to market the management of cloud-based -- capability to manage cloud-based open source tools which includes new capabilities to enable the seamless integration and management of the various toolsets provided by the major cloud vendors including their backup tools.
Lastly, SaaS data management. We're introducing new SaaS solutions, which can be fully integrated with our platform. Our expanding SaaS service catalog with new full service outcomes will be delivered by Commvault, as well as our key partners.
All of these new capabilities and solutions will become available throughout the next 12 months. We believe these capabilities and solutions will enhance Commvault's position as the data management standard of choice.
In summary, it is gratifying to see two years of work in fundamentally changing the business foundation of Commvault with Commvault Advance starting to pay off with solid proof points.
Our Q3 sequential revenue growth and year-over-year earnings growth results were strong. We've increased visibility and have a good outlook for Q4. More importantly, we are seeing increased momentum in new account acquisition from our enhanced partner-led distribution model particularly in the Americas.
Our simplified products and pricing models now have good traction in the market, particularly Commvault Complete, HyperScale and HyperScale Appliances. We have a good pipeline of high value-add products including the new Commvault Activate solutions coming to market this quarter.
We have built a foundation to accelerate growth in FY 2020. We expect that FY 2020 growth will be driven by the accelerated growth in the enterprise, accelerated growth in the midmarket with appliance, and our increasing leadership position with solutions based enhancements to the Commvault Data Platform as well as new activate and SaaS solutions.
Clearly we have made lots of progress but there's plenty of opportunity for Commvault to build on the foundation of Commvault Advance and the improved business momentum to continue to increase shareholder value with improved revenue and earnings growth.
In 1998 we started Commvault with a vision. It's all about the data. That vision was right in 1998 and it's the right vision in 2019. Almost two decades ago we set the standard for unified data management and in 2019, we are still setting the standard for unified data management in the enterprise.
Since this is likely my last earnings call, I want to express my thanks and gratitude to the whole Commvault organization for helping me build a great company and coming through the other side of a major transformation in high style. I'm confident that Commvault has a big window of opportunity in front of it. It will be exciting to see this company evolve over the next several years. It has been a pleasure and a privilege to serve as Commvault's CEO. Thank you.
Operator, can we please open the line for questions?
[Operator Instructions] And our first question comes from Joel Fishbein of BTIG. Your line is now open.
Good morning, gentlemen. And Bob I hope, if this is your last earnings call, it's been a pleasure to work with you and congrats on your departure and your retirement.
In terms of -- I have one quick question for Bob and one follow-up for Brian. Bob, you reiterated the long-term guide and it looks like you're on a clear path to be able to hit the EBIT operating margin target. Is there something specific you can point to that gets you to believe that you can reaccelerate the growth to at least 9% in fiscal '20 and fiscal '21?
Well it's funnel and momentum in enterprise, and we're clearly seeing the beginnings of some pretty good acceleration in the mid-market. So the foundation of the strategy is working. Clearly, all the points I made on unified data management, I clearly believe we are way out in front of any competitor particularly when it comes to managing data in the cloud. I don’t think it's a close second. And I mentioned we have over 400 petabytes in the cloud. And one of the key new guys was really excited that they have four petabytes in the cloud, so just our technology and capability in the cloud is second to none.
Our indexing capability, our 4D dynamic indexing and what we do with that is in a class by itself. Our ability to grab and consolidate point solutions across a big enterprise, there's no close second. That's why we're starting to win these major deals that have clearly accelerated. The market has shifted. We saw the shift in the market start to take place last spring. It accelerated through the summer and fall. Even as we're going through this massive transformation, and our Q2 numbers weren't great, but we saw the funnel accelerate which was – we’re trying to figure out what is going on, but it's clear when you get dig into the accounts that it's this big unified data management move and our capabilities in hybrid environments that's driving it.
We moved a lot of our resources into support channel both for the enterprise and mid-market. And we aligned our products having Commvault Complete and Appliances to make it simple and easy for these channel partners to sell. It's clearly showing up in our funnel and showing up in deals. So the strategic moves we've made are -- we've got the proof points. Now we just need to stay focused and drive it, but we have everything in our hands to drive good solid growth. That 9% that Brian mentioned is an absolute realistic target for FY '20.
Thank you. And Brian just a quick follow-up, thank you for the color on the repeatable revenue streams. Can you just tell us what the average contract length is on your subscription contracts or your subscription deals?
Sure. It's about three years Joel on average.
Okay. And you're just getting the year upfront and then putting that on the balance sheet?
No. That's not the way the new revenue recognition rules work. We've been discussing that for a few quarters now that when we sell a committed multi-year subscription arrangement, we're able to recognize that full amount upfront in the period of sale.
Just the year, and not the three years, right?
The full three years. The full three years get recognized upfront in the period of sale.
Okay, all right, thank you.
And the renewal of that contract renews both the software and maintenance and that's a big tailwind that starts to impact growth in FY '21.
Joel, we laid this all out on the October 2018 earnings call and reemphasized how the accounting works. I would just suggest going back and there are some really good slides and really good examples. And we articulated that pretty clearly.
All right, thank you.
Thank you.
Thank you. Our next question comes from Jason Ader of William Blair. Your line is now open.
Yes. Thank you. And I also wanted to say, Bob, there's been some ups and downs over the years, but it's great to see you closing out your tenure with a nice uptick. And I'm sure everybody that's followed Commvault over the years has been rooting for you. So it's great to see. My question...
I appreciate it, Jason. Just a comment on the turn so to be clear. This turn and the results we're seeing is a Commvault design strategy and it was implemented by the team here and had nothing to do with outside influence. Just to be clear on that subject.
Okay, great. I have two questions. One for Bob and one for Brian. Bob, obviously, there’s been a lot of heavy lifting as you talked about on the call and some of the restructuring and some of the refocusing and the realignment. In your opinion, what's been the biggest difference maker that's allowed you guys to kind of start to really move in the right direction here?
It clearly is the kind of the foundation of the business we had intrinsically with Commvault, and the team here -- everybody dug in and innovated across the company. It was no one thing. When you're going through a transformation like this, the foundation which you had to change your products and pricing and simplicity, you had to stop [ph] with the product and make sure that it was aligned to how the market consumes and how this routes to market to drive deals.
So it was product first. It was pricing reducing complexity. And then on top of that, we needed to radically strengthen the number of resources applied to our partner-led strategy, and this is counterintuitive. We actually reduced field resources substantially, shifted the focus of those resources, aligned them with these new pricing and products that we brought to market. And it all worked, I'd say faster than I would have anticipated in terms of impact.
So it's product. It's making the whole company simplified from products to processes, shifting resources and then bringing in and strengthening our relationship with our strategic partners, like the NetApps and the HPEs and the Microsofts and the AWSs, to help get a lot more efficient distribution leverage and sales force productivity. All those elements are working.
There's still a lot of work to do to take this machine and take it up a level. I honestly believe that there's a lot of running room for this company over the next five years. Al and I, in the background here, have been working on, I'd call it, next-gen strategy and we can see pretty far out where we have very substantial fundamental strategic advantages from anybody else in the market. And we're going to leverage those advantages in a template that the company can execute on.
So I think the fundamentals of what we did are working. I think we got a good vision for the future and we got to give a lot of credit to our culture and our team here to make things happen in spite of the massive disruptive change that we had to put the organization through.
Okay. Thank you.
Kudos to the guy on my left. The cost reduction was started by Brian waving a red flag. It wasn't an outside influence, it was Mr. Carolan here and we started to work through that and get our cost structure aligned with, I call it, near-term, a more realistic growth rate.
And very much of a team effort.
Yes, it was a real team effort.
…management team, yes.
Okay. And for Brian, could you just tell us number one, the direct/indirect mix? And then number two, any positive impact on the product line from the shift from maintenance or the transition from maintenance to term?
Sure. So the indirect/direct mix I think it was around 90% -- I'm sorry 96% indirect this quarter and 4% direct. So obviously, our partner-led approach and strategy is really starting to take hold and we're pleased to see the early validation of that. And then, secondly, I'd say from a product perspective, we're still primarily seeing our results from our complete backup and recovery the simplified offering that we rolled out. I think it's resonating in the market as well as our HyperScale solutions as well inclusive of appliance. So, those are the biggest drivers for us in the quarter.
I was specifically referring to where you've proactively gone to customers on maintenance and converted them over to term.
Okay. Sorry, I missed that part of your question. So the -- with respect to that, we saw some continued elements of that during our fiscal Q3. We don't expect that to continue at the same rate in Q4, but we did see a similar rate in Q3 that we had in Q2.
Okay.
As you pointed out Jason, it really helps Commvault to strengthen the position in these accounts for the long term as well, because a lot of these are a shift to subscription, but also those -- typically and many of these larger deals is add-on revenue tied to our newer modern solutions as well.
Great, good luck. Thank you.
Thank you. Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open.
Yes. Thanks for taking the question. And also Bob, it's been great working with you over the past many years and wish you the best. On the question front and I do have a follow-up, you mentioned just a minute ago that you had 96% of your -- I'm assuming your software license revenue that's driven by your indirect partners. I'm curious, when you look at that growth that you've seen, I think that was only about 84% a couple of quarters ago. So that's a pretty remarkable increase. How much has the go-to-market changed where it is completely partner-led, whereas in the past you've had an indirect revenue contribution, but it's been heavily driven by Commvault. I'm just curious with how -- is there any metrics you can point to as far as the success of fully handing off that customer engagement through a partner-led model?
It's early. So I may be I can describe it this way. When we put resources -- and I'm going to talk about channel partners first and strategic second. So the differences in the past we have a relationship with a channel partner and a Commvault rep would do 100% of the lifting of the account. So there was very little impact from the channel partner. Now these deals are being -- we have resources in these channel partners, but the partner is driving the effort with I'll call it the support in the back by Commvault. The model that you're referring to where the channel is driving independently a lot of the revenue I think that's several quarters out. I think Aaron that will take time to mature, but the fact they get off the flock so fast is really encouraging.
In addition the strategics our relationship with the strategics has improved really dramatically by adding resources and aligning with what they're trying to accomplish with it – with their businesses. And we're seeing a lot of funnel growth and engagement by our strategic partners now a lot more than we ever had before.
So in summary, the model is truly working. To get it to a point where you've got a midmarket channel that's basically independent I think that's going to take us maybe through FY 2020 to really get that mature to that point. The same with the strategics, Ron Miller is working with certain of our strategics that have a portion of that revenue completely driven and the ownership of those accounts by our strategic partners. So that effort is also being taken up a level and matured. So in summary, great results, early days, but we're really excited that this model is going to work and it's going to take us a while to mature it.
Okay. Thank you. And then as a quick follow-up you've mentioned 430 petabytes into public cloud environments managed under the Commvault platform framework. I'm just curious as we think about things like AWS's backup announcement, how much has that grown over the past year or past couple of years? And how do you characterize the competitive nature of things like AWS backup or the cloud vendors themselves becoming, do you see them becoming more competitive against you? Thank you.
The answer is just in general. I really believe that as the cloud vendors add these tools and there are hundreds of tools somebody's got to manage them. And somebody's got to add value on top of them. We see that as an opportunity not a competitive threat. At the bottom of the market, at your SMB, those tools are going to take out the market. But in the area that we compete at the higher middle-market and enterprise, the ability to manage hundreds of thousands of these toolsets combined with our own capabilities is a major opportunity and not a competitive threat including data.
And on the growth of the amount that you're managing?
My God. It's –
It's doubled over the year.
It's 100%?
Yeah. It doubled over a year. A little more than doubled.
And it's accelerating.
Okay. Thank you very much.
Yeah,
Thank you.
Thank you. Our next question comes from Alex Kurtz of KeyBanc Capital Markets. Your line is now open.
Thanks, guys. And not to sound too redundant, Bob, it's been quite amazing to watch you grow this company over the last handful of years. And you and Al have really built something sustainable and it's great to see this turnaround kind of emerge over the last quarter or so here. And it should be interesting to see, how this all develops going into the rest of calendar 2019. Just from the perspective of the appliance strategy can you just give us an update on what the impact to revenue could look like over the next couple of years? I mean, obviously that market is really starting to heat up and you guys have been able to kind of pivot a bit with your software to the kind of updated appliance view. So where do you see that as far as like top -- is that in the top three of most impactful products that you have in the portfolio right now as far as reaccelerating revenue and bookings?
Yes. It's HyperScale on the appliance, no doubt. In the near term, I'm going to say in the near term maybe over the next three years. We're starting to see that accelerate pretty dramatically now. It just took us time to mature those solutions in the market but we're starting to see that accelerate as we move on now continuing for the next few years.
Longer-term, we see something else going on, but right now it's quite important. Again, both the appliance and our HyperScale solutions as secondary storage modernizes. And I'll let Al make a couple of comments here on this.
I was just going to add Alex, and thanks for the kudos upfront. I was just going to add that Bob and I and the team here think one of the real key dynamics to the data protection market is the refresh of secondary environments. I mean, a lot of them are out of gas. Their portfolio depreciated. They don't scale up beyond here. They were missing some of the orchestration elements, so it's a nice dynamic to grab on to.
So, I agree with Bob. It's going to be one of our top three product pushes over the next several years. And to your question, it's just the last quarter, it popped up very nicely. So we're pleased with it.
It's secondary storage. But more and more, it's also being tied to...
It's also tied to used cases, yes.
Our used cases and move to the cloud or tied together.
Yes. Good point.
All right. Thank you.
Thank you. Our next question comes from Andrew Nowinski of Piper Jaffray. Your line is now open.
Okay. Congratulations on the solid quarter. Bob, good luck on your next future endeavors. It's been a real pleasure working with you over the last decade or so.
Andrew, Thanks.
I have a question on your growth and the enterprise revenue. If you look over the last three to four years your enterprise deals have continued to increase as a percentage of the total software revenue. And Bob, I know you touched on it in your prepared remarks saying that that was driven by the four or five Cs, but I'm wondering if there were any other factors that might be contributing to that, whether it's market share gains from Dell or perhaps the move to subscription. Just wondering if you could go over the puts and takes as to what's driving your growth in enterprise.
I really think it's the five Cs I mentioned. This whole consolidation move when we get into these big enterprise deals and the sophistication required not only of consolidating, but it's based on to think about disaster recovery from a cyber attack or GDPR. There's fundamental things that are driving this and they want a lot more automation and control of this -- this is a big enterprise across the enterprise.
So we are seeing that as a -- and the cost reduction that I mentioned as big motivators. And to be blunt, nobody else can scale like we can. Nobody else has got these modern ways of simplification tied to -- how do I automate this, including the automation of policies.
Al and I were just -- and our CTO were light blowing this last night. This is all going to start really early on in these processes and these companies want complete automation tied to outcomes. And I think Commvault because of our ongoing architecture and the way we do things and the way our, what we call our Commvault file system and our -- we call it our Commvault OS, we are fundamentally different in architecture than any of the legacy guys or any new guys on the block that have sustainable differentiated value. That is as far out as you can see and we're laying all that out.
And then A. you want to…
Yeah. I think Andrew, I think Bob hit it well. When I go into big accounts, it's not really consolidation. Its standardization is what they're looking for. All around the rationale that Bob just went through, the big one I get in the really big accounts is again automation, workflows all the way to self-service are -- again everybody is trying to drive this to IT as a service, right, lack of resources lack of skill sets lack of funding and a massive amount of data and new distributed applications coming in.
So how are you going to manage that? And the only way to manage it is to automate it. In our realm, we think the hypothesis is that you automate off a great standard. So those kinds of dynamics of course world according to me and Bob is what's going on in enterprise.
Thank you. That's really helpful. As a follow-up, you mentioned a number of times in the call today that you had an increasing impact in your partner-led sales. And I know all of your partners are important, but I was wondering if you could perhaps rank order the list of partners that you think might have the most meaningful impact on your revenue growth going forward.
Well, certainly our top channel partners globally play a massive role in this regard. We've seen much better I'll call it collaboration with NetApp for example. HPE has become a good partner because we can do things that the other guys can't do including the newer guys on the block.
The major cloud providers, the Microsofts and AWS are strategically important to us, and as I mentioned earlier, we see a lot of opportunity that as far as we can see to add value there. So those four are some of the bigger ones. Al, if you want to add any.
I think, again we described partners as big strategic influencing deals as well as big channel partners driving deals and selling deals. So it's all on both fronts. And the only other thing I'd include is the big SIs, we continue to focus on.
And again way back to Bob and I -- discussion on enterprises. You need skill sets and resources like the SIs and the big channel players to really pull off these enterprise deployments.
That’s great. Congratulations, guys.
Thank you. [Operator Instructions] Our next question comes from John DiFucci of Jefferies. Your line is now open.
Thank you. Thanks for taking my question. I have a question for I think Bob and then a follow-up for Brian. So, it's nice to see better numbers this quarter Bob. As you know you've had a string of challenging results. And I'm just trying to understand how much of this quarter as a result of your efforts of Commvault Advance, which is what you've been talking about here versus sort of a bottoming of fundamentals after I don't know something like five quarters of sort of tough results. Just trying to gauge it because it -- I'm not trying to -- I'm trying to ask that it in a respectful way? Go ahead.
That's okay. So I wrote a white paper which was pretty well before when I started to get involved with the company. In terms of just looking -- as a team we are looking at -- we had 10 years of basically 20% compounded revenue growth and 30% compounded EBIT.
And our model broke and we tried to fix it a couple of ways. It didn't work. So we finally said okay, let's just step back from this thing and see if we can fundamentally change what's wrong and get ourselves in a position -- this is not a short-term fix and we knew it was going to be painful and get this company on a -- just take it apart, put it back together again fundamentally.
As we mention, it was the foundation of the platform itself, a lot of work to do to simplify it. All the product, things we needed to do, all the pricing simplified messaging, shifting resources these were fundamental things we needed to change within the company both from a product standpoint, process standpoint, partners, leverage, there was no easy answer here.
It's all the above and it's several years worth of work. And we're right in the middle of it. As we are making this transformation, it's ugly right, when you're moving 700 people around, changing roles, cutting what turned out to be 9% to 10% of the staff here. I mean these are gut wrenching.
For us to get through all that, put that new house together and see it work. So I've been doing this a long time, longer than most. And Al has been with me and we've gone through a few of these, this is not our first rodeo, as I'd say.
And we did it -- we did this similarly in another company. But -- and you come out the other end and then you build on it. We just -- there's no doubt we did this. There's no doubt this is results from Commvault Advance and a shift in the market back to a more unified or without -- better use the term standard of what they're doing when it comes to managing data.
And by the way, its data now, its infrastructure and real soon it's going to be application. So there's a fundamental shift in the company. It's early. I mean we've been flying out of this thing and that was extremely gratifying. But I don't want to minimize the amount of work left to do to crank this engine to its full potential which is well beyond what we're talking about.
Yes. And I'd add John kind of in retrospect, like Bob said, we had some pretty good white papers and discussions internally on our execution. But in retrospect, I think we were a little bit underestimating the massive nose of the cloud or the market disruptions as Bob talked about.
Cloud's an obvious one, distributed apps, app development those kinds of things. But the one I harped on with all you guys for years is, at the same freaking time we were going through a move from perpetual to subscription or into pricing and not only is that taking a haircut on your topline, it's really disruptive and trying to keep everything simplified and smooth. All your coding systems, all your pricing systems et cetera.
So I think it was handling the market disruptions. Like Bob said, I think we're in really good shape to play strategically and we've made massive improvements on our aligned execution there. So, that's the way I would describe it anyway.
Thank you very much both you guys. I really appreciate the perspective. And Brian something a little more in the media here. So, cash flow this quarter was better than what was expected. Even with the big jump in receivables that was much greater than it usually is sequentially. I think that means you signed a decent number of large deals at the end of the quarter and that's sort of reflected in some of the data you gave on large deal metrics which we see is good and it means you collect much of that cash in the next -- in the fourth quarter which should be good for cash flow in that period.
However, I know I'm going to get this question, so I wanted you to address it publicly. A big sequential jump in AR sometimes means that unnatural things were done at the end of the quarter to boost results. So, can you just comment on that and what's going on there please?
So, nothing unnatural happened at the end of the quarter to boost results. So, I just want to rephrase that is that we are as typical with most enterprise software companies. We do transact a lot of business at the end of the fiscal quarter. That was no different this quarter, but nothing "unnatural" occurred.
Brian do you want to -- the guys are going to see this in the Q on what we call visibility.
Sure. I mean that's a disclosable item in our Q is that we did have some unfulfilled orders that came in late in the quarter some appliance-related. But there's about $6 or so million dollars of unfulfilled performance obligations that will now carry into our fiscal Q4.
Okay. That's -- thank you. That's helpful and that's not on the balance sheet or anywhere.
It is not on the balance sheet, but that is a required disclosable item under the new accounting rules.
So, it's the opposite of what you just said. Instead having unnatural acts, we let the business flow and we just couldn't -- fulfill them.
We had positive natural acts.
Yes.
Okay, great. Thanks a lot guys and nice job. Thank you.
Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. Thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.