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Edited Transcript of CVLT earnings conference call or presentation 30-Apr-19 12:30pm GMT

Q4 2019 Commvault Systems Inc Earnings Call

Oceanport Jun 10, 2019 (Thomson StreetEvents) -- Edited Transcript of CommVault Systems Inc earnings conference call or presentation Tuesday, April 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Carolan

Commvault Systems, Inc. - VP & CFO

* James Whalen

Commvault Systems, Inc. - VP of Finance & CAO

* Sanjay Mirchandani

Commvault Systems, Inc. - President, CEO & Director

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Conference Call Participants

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* Aaron Christopher Rakers

Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst

* Andrew James Nowinski

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Eric Martinuzzi

Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst

* Erik Loren Suppiger

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Joel P. Fishbein

BTIG, LLC, Research Division - Former MD

* Steven Lester Enders

KeyBanc Capital Markets Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year-End 2019 Commvault 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, Jay Whalen, Chief Accounting Officer. Jay, you may begin.

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James Whalen, Commvault Systems, Inc. - VP of Finance & CAO [2]

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Good morning. Thanks for dialing in today for our fiscal fourth quarter 2019 earnings call. With me on the call are Sanjay Mirchandani, President and Chief Executive Officer; Brian Carolan, Chief Financial Officer; and Al Bunte; Executive Advisor to the CEO.

Before we begin, I'd like to remind everyone that the statements made during the 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 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 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 the conference call under any circumstance.

In addition, the development and timing of any product release, as well as its features or functionality, remain at our sole discretion.

Our earnings press release was issued over the wire services earlier today and has also been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website.

On this conference call, we will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found on Table 4 accompanying the press release and posted on our website. Commvault adopted a new revenue standard, ASC 606, on April 1, 2017. Our adoption was done on a retrospective basis, so all prior periods in our financial statements have been adjusted to comply with the new rules. As a result, the growth percentages we will discuss today are on a comparable basis. 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 Sanjay. Sanjay?

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [3]

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Thanks, Jay. Good morning, and thank you for joining us today. I'm pleased to be speaking with you on my first conference call as President and CEO and look forward to getting to know you.

Since joining Commvault roughly 3 months ago, I've spent a significant amount of time engaging with our employees and talking with our customers, partners and industry influencers. I wanted to hear their views on the market in general and on Commvault in particular. These conversations have reinforced my confidence in the company and our opportunities. I consistently heard that Commvault has the best technology to protect, manage and use data.

Based on my many conversations, there is an overwhelming support for our company, people want us to win. One of the reasons people are rooting for Commvault is our rich heritage of innovation and customer focus. It has been the core of our success and will continue to differentiate our company in the future. In fact, the more time I spend with the Commvault products team, the more I believe that we can continue to drive the market in innovation and drive customer value for years to come.

With that said, I want to make 2 key points: first, I'm not pleased with the results we reported today, which largely reflect lumpiness in our large enterprise business and execution challenges; second, I strongly believe that our recent performance is not an indication of the opportunity ahead for Commvault.

As Brian will discuss shortly, there are solid indicators that we're moving in the right direction, including significant increases in annual contract value, repeatable revenue and earnings per share. However, our performance also shows that we have more work to do to ensure that Commvault reaches its full potential.

In fiscal 2020, we will be focused on 3 key areas: one, simplifying our business operations; two, driving predictable and responsible growth through execution excellence; and three, continuing to innovate at a rapid pace. In my conversations with employees over the past couple of months, it is clear that they also recognize these areas as priorities for the company, they are aligned with this direction and energized by where we are now heading.

As part of my listening tour, I met with more than 60% of our employees in my first 60 days. I experienced firsthand that we have an incredibly loyal and smart team that is passionate about solving customers' hard problems today and in the future. In fact, an unprecedented 94% of employees shared their feedback in our recent annual employee survey. So they are engaged and excited about the opportunity ahead.

I will discuss each of our 3 priority areas in greater detail, but first, let me turn it over to Brian to review our Q4 and fiscal year '19 results. Brian?

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [4]

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Thank you, Sanjay, and good morning, everyone. I'll now cover some financial highlights for the fourth quarter and full fiscal year 2019. Total revenues in the fourth quarter were $181.4 million, representing a decrease of 2% both sequentially and year-over-year. For the full fiscal year, total revenues were approximately $711 million, representing an increase of 2% over fiscal 2018.

As Sanjay mentioned, we believe the differential in our revenues compared to expectations reflects 2 primary factors: lower than expected revenues from large enterprise transactions and poor execution with the channel, particularly in the mid-market. Large enterprise contracts can take longer to close and associated revenue can be lumpy due to their complexity. Our results are also tempered by our continued shift to more subscription-based pricing models.

Net income for the quarter was $23.9 million or $0.51 per share based on a diluted weighted average share count of approximately 47.2 million shares. On a full year basis, EPS was $1.80, a 76% year-over-year increase, driven by growth in repeatable revenue and our successful efforts in rightsizing our cost structure.

Taking a closer look at Q4 revenue. Software and products revenue was $80.8 million, which was down 4% sequentially and 3% year-over-year. Q4 year-over-year software results were flat on a constant currency basis. Revenue from enterprise software deals, which we define as deals over $100,000, represented 70% of software and products revenue for the quarter. Revenue from these transactions was up 13% year-over-year and the number of enterprise revenue transactions increased 2% year-over-year.

Our average enterprise deal size was approximately $293,000 during the quarter, up 11% over the prior year. We believe that growth in the volume and size of our enterprise contracts underscores the value that these enterprise customers see in Commvault's innovation and it is why we're so focused on continuing to invest in innovation to support our growth.

Total services revenue for Q4 was approximately $100.6 million, a decrease of 1% year-over-year and an increase of 1% sequentially. While we continue to have strong maintenance renewal rates, year-over-year service revenue growth was tempered by changes in foreign exchange rates and by some of our customers moving to subscription models.

Gross margins were 81.8% 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 $150 million for the quarter, down approximately 13% year-over-year and 5% sequentially. On a full year basis, operating expenses were down approximately 9% year-over-year, reflecting our continued efforts to drive efficiencies across our business. We ended the fiscal year with 2,559 employees, which is down approximately 10% since the beginning of the fiscal year.

Operating margins were 17.1% for the quarter, resulting in operating income or EBIT of approximately $30.9 million. Q4 EBIT was up 37% year-over-year. Operating margins were 15.7% for the full fiscal year, improving 480 basis points year-over-year as we saw some of our early cost reduction initiatives begin to take hold.

As a reminder, during FY '19, we lowered our pro forma income tax rate from 37% to 27%. We believe that 27% will align to our long-term GAAP and cash tax rates.

Let me know 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. Subscription arrangements make it easier for prospects to become Commvault customers, and we expect that the lifetime value of our customer relationships will increase as these new customers realize the power of our solutions. Growth from these models should also drive a more predictable and repeatable revenue stream.

For the past few quarters, we have been highlighting 2 revenue metrics to help investors track the growth and progress of our subscription revenue transition. These 2 metrics are repeatable revenue and annual contract value or ACV. I will start with repeatable revenue. As a reminder, our primary repeatable revenue streams are subscription software and maintenance services. We would consider approximately 71% of our Q4 fiscal 2019 total revenue to be repeatable in nature. On a full year basis, 68% of total revenue was repeatable. These revenues were up 14% year-over-year and was driven by subscription, software and products revenue.

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 Q4, ACV has grown to $105 million, almost double what it was a year ago.

Let me now shift gears to our balance sheet and cash flows. As of March 31, our cash and short-term investments balance was approximately $458 million, unchanged from our balance as of December 31, 2018. Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $35 million for the quarter, up 63% over the prior year period. Free cash flow for full fiscal year 2019 was approximately $105 million, up 37% year-over-year.

As of March 31, our DSO was 91 days. As a reminder, our DSO calculation includes the unbilled receivables we are required to record as part of the new revenue standard. One of the contributing factors to the increase in DSO was the continued shift to more repeatable revenue that I just mentioned.

As of March 31, 2019, our deferred revenue balance was approximately $338 million, which is an increase of 4% over the prior year. On a constant currency basis, deferred revenue was up 7%. Nearly all of our deferred revenue is services revenue that has been invoiced to customers.

During the quarter, we repurchased approximately $40 million of our common stock at an average cost of approximately $65 per share. Over the last 2 fiscal years, we have now repurchased nearly $245 million of our common stock at an average cost of approximately $58 per share. On April 18, our Board of Directors increased our share repurchase authorization back up to $200 million until it is either extended or the program expires on March 31, 2020. We will continue to be opportunistic with our share repurchases.

Let me now discuss our financial outlook. We do not believe our Q4 and fiscal 2019 financial performance is indicative of Commvault's longer-term potential. As Sanjay outlined, there is still work left to do in terms of simplifying our business operations, driving execution excellence across everything we do, and continuing to innovate at a rapid pace. We are confident in the actions that are underway in each of these areas as demonstrated by the growth in subscription revenues, ACV and earnings. Plans are still being developed and finalized to reflect the input that Sanjay has received from partners, customers and employees since joining the company just 12 weeks ago.

We are also actively recruiting for a new Chief Revenue Officer and we intend to have that role filled by the end of this fiscal quarter. Accordingly, we have decided to defer providing a longer-term outlook until we are further along in this analysis and work. Please don't take our lack of commentary as us hitting a reset button. It's simply premature for us to comment on longer-term targets this early on in Sanjay's tenure. Importantly, we're optimistic about Commvault's potential and are planning on sharing our strategy and general outlook on our next earnings call.

As it relates to our Q1, it is important to note that Commvault Advance was a major transformation and restructuring effort. We made fundamental changes to the business, which carried risks tied to disruption and execution. In addition, Q1 is historically our most challenging fiscal quarter from the seasonality perspective. In fact, it is not unusual for us to have a double-digit sequential decline in software and products revenue in the first fiscal quarter. As a result, we are being measured with our Q1 outlook.

We currently expect Q1 software revenue to be in the range of $68 million to $72 million. We also expect that services revenue will be flat to slightly down sequentially, which would indicate total revenues of approximately $168 million to $172 million.

As a reminder, large deal closure rates will likely remain lumpy, particularly in the near term. We remain focused on our indirect routes to market and on improving in this area so we have more predictable run rate revenue over the long term.

Let me now discuss our EBIT margin expectations for Q1. We have taken significant steps to reduce costs. We achieved more than $60 million of annualized cost reductions over the course of the year. This has enabled us to deliver meaningful improvements to our operating margins and earnings in both Q4 and fiscal 2019.

While we expect operating expenses to continue to decline on a year-over-year basis in Q1, we also expect our operating margins to be in the range of 10% to 11%. This decline reflects reduced operating leverage from the lower estimated Q1 revenues, as well as investments we're making related to our simplification initiatives, as well as Commvault Ready, our global field enablement event.

That concludes my prepared remarks, and I'll now hand things back over to Sanjay. Sanjay?

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [5]

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Thank you, Brian. Throughout fiscal year '19, the team worked hard to help our customers protect, manage and use data in their hybrid and multi-cloud environments, while also making significant progress both operationally and organizationally. This has enabled us to drive more repeatable revenue, which is up 14% year-over-year, rightsize our cost structure with over $60 million of annualized cost reductions and continue to return cash to our shareholders, as evidenced by our share buybacks.

We've taken important foundational steps on our journey as a company, and while we're seeing early signs of progress, work remains. As Brian indicated, I look forward to sharing a more in-depth strategy discussion on our next earnings call. That said, as I referenced earlier, in fiscal year '20 we are focused on making significant improvements in 3 key areas: one, simplifying our business operations, this is pivotal; two, driving predictable and responsible growth through execution excellence; and three, continuing to innovate at a rapid pace. I am raising the bar as I know we can do better.

Let me start with simplifying our business operations. While last year's operational improvements helped, there is more we can do to simplify processes, remove complexity, and make it easier to work with us. Ultimately, we need to evolve from operational efficiency to driving true operational excellence.

Accordingly, in the last few weeks, we've made several changes to further improve our performance and ensure we have the right people in place to deliver on our strategy. We worked to ensure the leadership team and I are much closer to our customers by realigning our field and partner teams globally, flattening our organization by eliminating the Chief Operating Officer role and recalibrating our partner organization.

Also, as Brian mentioned, we're actively recruiting a new Chief Revenue Officer. In April, I asked a Commvault veteran, Gary Merrill, to lead our global operations and simplification initiatives as Vice President of Business Operations, a new executive position and priority for fiscal year '20. To align internally, we've embraced the OKR approach, and Gary and his team are empowering our employees to drive stronger business processes and operational excellence while enhancing our analytics, tools and technologies to improve productivity.

We're already making progress in these areas. For example, in early April, we simplified and finalized our quotas, our territories and commission plan structure and got them into the hands of the field so they could hit the ground running. As a result of our changes, our field teams can now focus on our strategic initiatives like landing new customers and selling subscriptions.

We're also making incremental improvements designed to grow the business while improving our run rate through better channel engagement, enablement, and by putting resources closer to the field. This includes increasing our large deal predictability by strengthening our funnel through better demand generation capabilities and more aggressive digital marketing.

The first area is simplifying. The second area we're prioritizing is execution excellence to drive predictable and responsible growth. This is critical as we continue to evolve to a partner-centric organization. To address this, we're adjusting our go-to-market motions, including our pricing, enablement and overall readiness. These have been ongoing areas of improvement for us in the past. However, we're taking it a step further in fiscal year '20. Here's how. To drive our strategy and dramatically improve our go-to-market processes, I brought in Tom Broderick, our VP of Strategy and Business Readiness. He is responsible for ensuring that we have a clear end-to-end path to effectively and efficiently bring our products to market and drive satisfaction throughout our ecosystem. This will make us easier to do business with and improve the Commvault experience.

We're also enhancing our enablement efforts, starting with our Commvault Ready, our global field enablement event in mid-May. This event will arm our global field teams with the messaging, the campaigns, product road maps and tools they need to have productive and consistent conversations with customers and our partners.

Additionally, we've made significant progress on our partner-led strategy. This has been a fundamental shift for us as a company and is not yet a predictable reliable run rate part of our business. We continue to make numerous improvements to expand and strengthen our relationships, our ecosystem and experience. Specifically, we've elevated our strategic alliances, cloud and managed services teams higher in the organization and aligned our field partner leads closely with our field sales leadership so they're in lockstep with their regions.

These changes are having an impact. By way of example: just a couple of weeks ago, we discussed these in detail with our Americas Partner Advisory Council, which comprises approximately 20 key partners. Their support and feedback reflected the early actions we took and underscores the opportunities available to us, the progress we're making and the approach for fiscal year '20.

And finally, as a product company, we must continue to drive innovation. Data has become the foundation on which all businesses are built. More and more CEOs are investing in technology, not as a cost center, but as an enabler of revenue growth. At the same time, the technology landscape is rapidly evolving. Innovation cycles are compressing. Customer buying preferences are shifting to multi-cloud and SaaS, they're building applications and leveraging data in new ways, and rapid data recovery and security has never been more critical.

This amount of disruption in technology and customers' needs are changing everything in our industry, so much so that only the most innovative customer-centric companies will succeed. Based on what I've seen, I really believe that Commvault has spent the past 20 years getting ready for this pivotal moment. This seismic shift creates an opportunity for us to help customers navigate their multi-cloud strategies and modernize their application development needs.

Let me take a couple of minutes to explain why I see this, why I see -- what I see as the top 5 reasons as to why I'm so bullish about our future. First, abstract and critical data from the infrastructure application of middleware enables data to move freely throughout the customer's multi-cloud environment. What this gives a senior IT leader is the ability to avoid vendor lock-in, while also providing more flexibility in how they want to run and scale their business. A recent example of this in Europe, the Serbian Ministry of Environmental Protection moved from their Veeam, Veritas and Acronis solutions to Commvault. This simplified data protection operations and they told us that they reduced time spent on backups by 70% and generated an 80% savings on storage costs.

The second reason I feel positive is that once abstracted from the environment, data workloads can then be easily ported from one infrastructure application of multi-cloud environment to another based on business needs. Essentially, Commvault customers are no longer beholden to an infrastructure or application and can easily move their data as their strategy or needs evolve.

An example here is with our customer Emirates Steel. They had a challenge backing their data across different environments that ran on aging Dell hardware. They initially looked at Rubric because of its simple interface, but soon realized it didn't handle their diverse enterprise environment and fell short technically. They told us that Commvault HyperScale was a more effective solution with an interface that was just as user-friendly, and they were able to deploy it easily and across their complex environment.

A third reason why I believe Commvault will win is our ability to help our customers create more value by using a secondary copy of their data in other applications and environments. This capability provided by Commvault allows someone like a data scientist to easily analyze data sets to make better business decisions without having to spin up new expensive environments.

Fourth, as more technologies are "born in the cloud," we are integrating key cloud offerings, APIs and open-source technologies into our products to deliver true cloud native outcomes. This ensures cloud native and SaaS workloads are managed and protected with the same rigor and support as traditional technologies.

And finally, Commvault helps with one of the most pressing issues IT leaders face today, the scarcity of skills. Larger legacy vendors offer what I call a mishmash of cottage industry tools, which not only struggle to meet yesterday's technology needs but make it harder for IT teams, who still have to span across numerous point solutions. Our technologies preserve our customers' investments by making skills transferable.

Another great example: with limited budget and staff American Pacific Mortgage chose Commvault because the wide variety of solutions they can grow into and do so via one platform. They've reported a dramatically reduced recovery time for individual files that have been lost from up to 8 hours down to within a few minutes.

To summarize, Commvault is helping to eliminate lock-in, enabling the portability of data, advancing cloud initiatives and unlocking data value, while making it easier for our customers' IT organizations to manage their environments. Our decades of experience, extensive patent portfolio and multiuse scale-out architecture gives us meaningful advantage to solve the problems customers have today and as they move more towards multi-cloud deployments. Our competitors cannot simply do what we do and most lack our level of experience and rich customer base, and they do not have the innovative depth and scale-out architectures needed to grow with customers on their cloud journeys.

In conclusion, it's been said every company is being forced to become a software company. However, I'd like to take it a step further and say that every company must be a data company because software serves little purpose without data. Commvault has extremely enthusiastic and passionate employees who are ready to seize the opportunity that awaits us by helping our customers manage, protect and use their data. We have unrivaled technology to meet our customers evolving and future needs. And I'm finalizing new elements of our strategy that I believe will land new customers, broaden the reach of our partners, and clearly deliver more value. I look forward to sharing these finalized initiatives in the coming months.

One last item before we take questions. As you know, after I arrived, both Bob Hammer and Al Bunte graciously agreed to stay at the company in transitioning roles and ensure that the transition went well. While Al remains in his current advisory role and a member of our Board, Bob has decided to step down from the Board now that the transition is complete. Having led Commvault for more than 2 decades, Bob leaves a proud legacy and a lasting impression on our company and its culture. We wish him the best of luck and success in all his future endeavors.

With that, let's open up the lines for your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Our first question comes from Joel Fishbein with BTIG.

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Joel P. Fishbein, BTIG, LLC, Research Division - Former MD [2]

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I just wanted -- Sanjay, I just wanted to ask when you were on the road with customers over the past several weeks, what were some of the key takeaways or key themes that came out of your conversations with the customers relative to Commvault and the competitive environment that you're in?

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [3]

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Sure. Joel, having spent a ton of time in the field -- and I'll start by saying the first thing that was absolutely ubiquitous across every conversation was the appreciation around our road maps and our innovation. Our technology really works for our customers. And as we got into the journey they were on -- and truly just about every customer going into multi-cloud and cloud-native applications and SaaS applications, the question was, "We're using your stuff today. Please keep on innovating in this to be" -- "so that you can be ready for us." So that was ubiquitous.

The areas where we got feedback, which I hope came through in my comments earlier, were really around, "Can you make it easier to do business with? "It's just" -- "your licensing or your packaging or your engagement models, there's a little bit you can do there that would make it so much easier for us to do business with. So that's reflected in the things I'm focused on. And between that and also making sure that our partner ecosystem was wide enough to meet the needs of our customers' needs -- our customers globally. Those are the 2 things that came through loud and clear.

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Operator [4]

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And our next question comes from Aaron Rakers with Wells Fargo.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [5]

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And I do have a follow up as well, but first on the question side. Maybe building on that last comment, we've seen Commvault execute on several different kind of transitional elements in the product portfolio and packaging and simplification of kind of go-to-market. And now on this call, you mentioned yet again we're kind of implementing another layer of kind of go-to-market changes. So Sanjay, I'd love to hear your thoughts on how we as investors should think about the metrics that you're looking at to call things a success in the changes that you're now implementing? And when maybe you think that those changes will really start to solidify themselves in terms of the execution side of the story, either be it through the course of this fiscal year? Or is it rather into the next fiscal year?

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [6]

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Yes. So what I'd like to say is that -- I mean, you've been -- you know this last year has been one of a significant transition and it's across the company, self-imposed. We've been out there. We made management changes between the top layers of management across the business. And we're making -- we've done some proactive steps to truly move the company to where it needs to be. In addition, I will say to you, having been through a few of these in my career, this is not a perfect science, and so you've got to give it some time.

There are some early signs of success, and like I said, there are some other pieces -- other areas where we have work to do. The success: repeatable revenue up 14% year-on-year, rightsizing our cost structure with over $60 million of annualized savings, continued buybacks. We're doing some good things in that area and progress is coming through. Areas where -- frankly, when I was being talked about this role between Bob, Al and the Board, it was clear that the need -- the pressing need was to really commit and make our go-to-market actions world-class, make sure that we're truly -- the packaging of our products, our licensing models, our engagement model with our customers, pivoting to a channel model which is not easy for a company that's been on a certain way for a long time. All of these -- these are -- this is heavy lifting and it takes time.

As Brian shared, we took a lot of those initiatives earlier last year and we sort of put them under Commvault Advance. I'm just saying that I'm building on that. I'm building on what's been put into place and I'm focusing on simplification, execution excellence and absolutely stepping on the gas when it comes to more innovation. That's how I'm thinking about it. In the next call, I'm hoping to share more on the strategy with you and obviously get feedback.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [7]

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Very good. And then real quickly on a follow-up question. One of the things in the reported results that you'd see is that the gross margin on the product line has come down quite a bit and obviously that's a function of kind of the royalty payments and the ramp of HyperScale. So can you talk about how we should think about that product gross margin and how -- in that same kind of context, can you characterize what we've seen in terms of the ramp of HyperScale given that that's really importantly competitive against Cohesity and Rubrik in the market?

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [8]

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Good morning, Aaron. It's Brian here. I will take the first part of that. So we were really pleased with the performance of HyperScale and appliances this past quarter. It was the best quarter ever for those solutions. Yes, it did show up in the form of the gross margin impact. I think that will start normalizing into FY' 20 as we get on a more consistent run rate. But we sold our appliance into over 20 different countries this past quarter. So we're energized with that solution and that product line is taking hold and resonating in the market.

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [9]

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Yes, absolutely. The way I -- when I came in and I looked at that -- you have to think of HyperScale and what we do differently than our competitors I believe is we give our customers a choice without lock-in. It's not about you can have it, but you can only have it in the appliance. We give it to you as a reference architecture that we deliver with partners. We give it to you as pure software. Or we give to you as a world-class appliance. The choice is -- you can mix and match as a customer any way it fits your environment. So that's the way I like to think about it. Appliance is one delivery mechanism. And we have done a ton of work in simplifying the product, making it easier to use, really scaling it out. It's a great product -- it's a great product line.

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Operator [10]

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And our next question comes from Alex Kurtz with KeyBanc.

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Steven Lester Enders, KeyBanc Capital Markets Inc., Research Division - Associate [11]

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This is Steve Enders on for Alex. I was just kind of wondering on what you're seeing on the hybrid cloud initiatives that you guys have been talking about it, and you mentioned that there's over 400 petabytes being managed in a public cloud in the last quarter. I just kind of wonder what you're seeing there and what kind of retention rates you're seeing with those customers and how that changes.

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [12]

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There is an absolute move to not just hybrid cloud, but a true multi-platform, where customers are actively porting existing applications and then building brand new cloud-native applications across this space. In our -- at a high level, Steve, we've seen workloads have almost doubled or -- yes, have doubled over the course of the last year. Conservatively -- we are managing today for our customers conservatively over 0.5 exabyte in the cloud, in multi-cloud environments, and it's growing. And it just reinforces, in my opinion, the technology that we have today and more or so the direction we're taking, which we'll share more about. So this is definitely the direction our solutions between abstract and portability, cloud-native workloads, just skills transfer between one environments to the other -- I think we are -- I know we have the best platform and technology for our customers as they scale towards this new direction.

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Steven Lester Enders, KeyBanc Capital Markets Inc., Research Division - Associate [13]

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Okay, thanks. And is there any change there in terms of the retention rate of those customers and how they approach this from a subscription basis from there?

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [14]

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Well, we love the subscription model as you can see from our results, Steve, in terms of the repeatable nature and our growth in ACV and overall repeatable revenue. That's going to translate into kind of longer-term predictable and repeatable revenue for us. So we see the move to the cloud as being a stickier type solution for us. We're able to span across a multitude of environments both on-prem and off-prem. It's resonating really well. So -- I mean, everyone is talking cloud. I mean, 90-plus percent of our conversations is around that. And it's something that's going to be meaningful for us moving forward.

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Operator [15]

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And our next question comes from Andrew Nowinski with Piper Jaffray.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [16]

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You talked about the lumpiness in large enterprise and I'm just trying to understand whether that means deals in Q4 slipped into Q1 or whether you lost some of those deals in the large enterprise space?

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [17]

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Yes. Hi, Andy. It's Brian here. Yes, I mean, you saw the numbers. We're not happy with the close rates as we said on the call. Coming off a major transitional year, the move to subscription and becoming more channel focused, we just don't yet have that predictable run rate business and we're still relying upon large deals. We said that on the last call, large enterprise deals was the basis of the Q4 outlook. We don't like to blame that. We don't like to blame deal slippage. But you're always going to have that. It doesn't mean those deals were lost. We're highly focused on it.

Sanjay and I and the senior team have direct line of sight for the sales leaders. We've made some near-term tactical adjustments. We have a plan. We understand the importance of getting to a more predictable run rate. However, there were some bright spots, just pivoting off of that for a second. I mean, just -- we're pleased with the repeatable revenue, our earnings growth, our free cash flow. So there are some bright spots coming out of Q4.

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [18]

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I will just add to that -- what Brian said. The good news is we have a great enterprise base. The bad news is we have a great enterprise base. And with that comes large deals that sometimes move around based on customer needs. And to Brian's point, we need to build -- we are focused on building out a run rate business that -- and a mid-market business. So those are focus areas for us.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [19]

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Okay, thanks. And then I understand the subscription business will give you more visibility, but I'm wondering if you could talk about some of the changes and the simplification changes you're making are going to help and how they're going to address this large enterprise lumpiness issue? Because this has been an ongoing problem I think for Commvault for the last decade, and so it's hard -- I know it's a hard problem to fix.

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [20]

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Those 2 areas at least in the enterprise side that I'll touch on. Appointing Gary as our VP of Business Operations gives us the intelligence of the pipeline, the rigor around really managing the funnel, and we have a centralized capability that we're rapidly rolling out on the field, but also doing analytics. We're doing all kinds of other capabilities around the technology and the intelligence so that we do a better job surrounding that.

The other piece is having Tom Broderick come in as our VP of Strategy and Business Readiness, which really make sure that our go-to-market machinery, our go-to-market capabilities are world-class and predictable. Both of these working together with early move to getting our quotas, our territories and our commission plans all set and out will just help the enterprise get far more predictable as we grow. Support that with a channel -- a better run rate channel play as well as our mid-market, where I think over time you will see that give us the smoothness, if you would, on our predictions.

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Operator [21]

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And our next question comes from John DiFucci with Jefferies.

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Unidentified Analyst, [22]

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It's [Joe] for John. I appreciate all the color and understand you're not giving long-term guidance, but has anything fundamentally changed in the market competitively? Or do you think you can kind of get back to that 10-ish percent revenue growth and 25% operating margins that you announced with Commvault Events?

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [23]

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[Joe], again, I'm just going to say I can't get ahead of myself. I'm extremely bullish on our technology, I'm extremely bullish on the hard problems we solve of our customers, the place where customers are ahead with multi-cloud. I think as a company -- as a product company, we have the best technology in the business and our approach is second to none. We've just got to get -- sharpen our pencil on how we do things, i.e., the execution excellence and the simplification, and we're squarely focused on it. So you just got to give me a little more time to get back to you guys with the call.

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [24]

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And Joe, just another point on that. I think we demonstrated our ability to drive cost efficiencies. Now we want to shift the focus to more predictable and responsible growth. We're starting from a great position with the strength of technology. We need to focus on making it easier for our customers and partners to buy Commvault and we're confident that we can do that.

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [25]

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Just give me a little time.

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Unidentified Analyst, [26]

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Awesome. And then, Brian, just a quick follow up. I think you said that results were tempered by the repeatable revenue, but I think you had guided to 70% for the year 2 quarters ago. So was that just kind of a trajectory for the company as a whole comment? Or was that for like in the quarter results were tempered slightly by...

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [27]

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Yes, I would say that it's mostly the in the quarter number. It ended up being repeatable revenue was 71%. Software and products revenue was a meaningful percentage for us in terms of being subscription related. It was the high watermark for the year in Q4. And therefore, that drove that.

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Operator [28]

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And our next question comes from Eric Martinuzzi with Lake Street.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [29]

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I just wanted to focus on the cost side. As you look out to Q1, we finished 2019 -- fiscal '19 with headcount of 2,559. Where is that at least in the near term? Are we still optimizing the headcount or are we pretty much where we need to be?

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [30]

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Well, it's something we take seriously in terms of just the overall headcount and the management of that. I mean, it's something that we -- last year, we undertook a series of actions. I think most of the heavy lifting is behind us. We're focused more on just operational efficiencies this year -- that's the most important thing -- and focused on growth, especially of the top line.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [31]

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So you wouldn't expect much change in the headcount?

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [32]

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That's not an expectation.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [33]

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Okay. And then just a follow up related to the addition of your -- whoever that new Chief Revenue Officer is. Obviously, you've entered a year here where you needed to have quotas and territories set up for your existing sales management and sales reps. Is there a chance the new CRO may come in and put his or her own stamp on what those quotas and territories are, in other words, a mid-year course correction?

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Sanjay Mirchandani, Commvault Systems, Inc. - President, CEO & Director [34]

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I'm hoping that whoever comes in has an opinion on how do we things. But needless to mention, I've been personally involved with our theater leaders, as is Gary Merrill, our new VP of Operations. We've personally been working as a unit to make sure these things are well understood, well-structured and well on their way. So no, we haven't held anything back and we're well on our way. So I'm sure the new person will have an opinion, but will obviously do that responsibly.

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Operator [35]

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And our final question comes from Erik Suppiger with JMP.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [36]

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Just on seasonality, would you say that you were surprised by the seasonal weakness in the March quarter? And what was the linearity, how did you exit, what kind of demand did you see exiting the quarter?

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Brian Carolan, Commvault Systems, Inc. - VP & CFO [37]

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So -- I mean, we're not happy. I said that on the call. Sanjay said it as well. We're not happy with the close rates. They did come down for the large deals. It doesn't mean all those were lost. Some of those do always move in to the next quarter, into Q1. Linearity, yes, it was a fairly typical back end loaded fiscal year for us. That showed up in the DSO number itself. But that's not an indication there's any underlying quality issues there. But it was a fairly typical linearity quarter for us.

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Operator [38]

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Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.