Ladies and gentlemen, thank you for standing by. And welcome to the Commvault Q3 Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mike Melnyk, Director of Investor Relations. Thank you. Please go ahead, sir.

Good morning. And thanks for dialing in today for our call to discuss our fiscal third quarter 2020 earnings results. Before we begin, I'd like to remind everyone that the statements made during this call, including in the question-and-answer session at the end of the call may include forward-looking statements, including statements regarding financial projections and future performance. All the statements that relate to our beliefs, plans, expectations or intentions regarding the future are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Actual results may differ materially due to risk and uncertainties such as competitive factors, difficulties and delays inherent with 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 on Form 10-K and our most recently quarterly report in Form 10-Q, and in our other SEC filings, and in the cautionary statements 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 features or functionality remained at our sole discretion. Our earnings press release related to today's announcement was issued over the Wire services earlier this morning and has been furnished to SEC as an 8-K filing. The press release is also available on our Investor Relations website. On this conference call, we will refer to non-GAAP financial measures. A reconciliation between the non-GAAP and GAAP measures can be found on our website. This conference call is being recorded and a replay is available for webcast. An archive of today's webcast will be available on our website following the call. With me on the call this morning are Sanjay Mirchandani, President and Chief Executive Officer of Commvault; and Brian Carolan, Chief Financial Officer of Commvault. Sanjay and Brian will each share opening remarks and commentary before we open the call for Q&A. Now, I'll turn the call over to Sanjay.

Good morning. And thanks for joining us today. I’m just a few days away from my first full year of CEO and couldn’t be prouder of the entire Commvault team and all we’ve accomplished over the last 12 months. We’ve positioned the company for a return to growth and reaffirmed our place as a leader in the industry. I want to thank all our employees around the world for their ongoing dedication to which this exciting journey which in some ways is just beginning. I’m also pleased to report that we again delivered results above expectations all while successfully launching our new SaaS offering Metallic integrating Hedvig, our first major acquisition and refreshing our overall data management portfolio, including Commvault activate simply and hyperscale. Our ability to deliver these results is due to the innovation execution and simplification priorities we established at the start of the fiscal year. We achieved many milestones, but there is more for us to do. As we continue our journey as a new Commvault, I’m confident about the trajectory and our return to growth in fiscal 2021. Brian will provide more context on our better than expected results and our outlook, but first let’s discuss our strategic priorities and the work underway. I’ll start with innovation, the cornerstone of our company. For more than two decades, we have been relentless in our pursuit of innovation excellence this quarter was no exception. As I said from day one, our innovation is focused on helping customers with their journey to the cloud. Today, our customers manage more than 800 petabytes of workload in the cloud using Commvault products, and that’s based on approximately 60% of our customers reporting. We’re also committed to giving customers ease of use, the value and choice in how they want to consume…

Thanks Sanjay, and good morning everyone. I will now cover some financial highlights for the third quarter of fiscal 2020. Total revenue in the third quarter was $176.3 million, representing a 5% sequential increase. FX movements did not significantly impact our results this quarter. Software and products revenue was $76.6 million, representing a 12% sequential increase. Revenue from enterprise software deals, which we defined as deals over $100,000, represented 66% of software and products revenue for the quarter, an increase from 64% in Q2 2020. Revenue from these transactions was up 15% sequentially. Our average enterprise deal size was approximately $279,000 during the quarter. The average tenure of our relationship with these customers those purchasing more than $100,000 in software is almost nine years. This is a testament to our technology, customer service and the ability of our products to drive value for customers over time. Now, I’ll review our results by geography. Our largest region, the Americas, increased 12% sequentially with growth being driven by 26% sequential increase in the number of enterprise revenue transactions. EMEA was up 36% sequentially and was also driven by higher volume of enterprise revenue transactions. The number of these transactions nearly doubled from Q2. APJ decreased 36% sequentially coming off a strong quarter for that region in Q2 2020. Total services revenue was approximately $99.7 million remaining flat year-over-year and a slight increase sequentially. We continue to see strong maintenance renewal rates as measured on a weighted average dollar basis. These renewal rates average approximately 90% for our entire customer base and over 95% for larger customers. In fact, over the past five years, 97% of the Top 100 customers and 90% of our Top 500 customers remain active with Commvault today. These statistics are evidence of our relentless commitment to our customers…

Thank you, Brian. Modern IT is fundamentally changing the way organizations deliver value. However, it also introduces massive complexity and data fragmentation, which seriously undermines an organization's security, resiliency and competitiveness. Worst though, it still increases the risk because a single event could threaten the bottom line. Aggressively managing the entire data state is vital to future-proof and unlock an organization's opportunity. More than ever, I believe Commvault is the most steady, trusted and proven vendor to help customers get ahead of this. We deliver a radically simple yet infinitely scalable way to store, protect, manage and extract from all of the data no matter where it lives. We know data management because we invented data management. For the past 20 years, we’ve built a rich portfolio, industry recognized solutions, and secured more than 800 patents and 350 pending applications for our technology, and we have a laser focused innovative data management roadmap for the future. That is why I’m confident. We have the innovation, endurance and commitment to make our customers ready to deliver value for years to come. Now, we’ll open up the call to questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from Jason Ader with William Blair. Your line is now open.

Yes, thank you. Good morning guys. Let’s see here, the first question I have just on the Hedvig contribution, if you could help us either with the quarter that you just reported in the guide, how much contribution you're expecting from Hedvig?

Yes. so, hi Jason. Its Brian Carolan here. Good morning. Yes, so Hedvig is part of the overall numbers, nominal revenue contribution consistent with our expectations. It’s obviously in the early stages and we’re not going to get into specific expectations around that, but, you know, we’re pleased with the progress of the integration efforts throughout this past quarter and I think we’re off to a good start.

Yes, it’s Sanjay. Hi, Jason. Good morning, and so, you know, it’s going – I’m very pleased. I’m pleased with where we are. This was our first acquisition. like I said last quarter, we’re going to be very diligent about how we integrated it between the people, the technology, the products making sure we got everything right. We've been in the throes of that, and we’re very happy. In the process, we’ve also built out a specialized sales organization. We’ve got some really significant proof-of-concepts in play. We’ve made some sales. We’ve added some new customers. We’ve added to existing customers. So, it’s exactly where we wanted it.

Okay. And then, Sanjay, just so that you can help us kind of frame the future here, what is the strategy in terms of growth in margins as you think out for the next few years? Do you – you know are you kind of held-bent on getting back to double-digit growth, you know, may be at the expense of margins? Or would you be more satisfied with let’s say something like 5% to 10% growth and meaningful margin expansion?

You know, again, I’ve been consistent in my outlook and the way I’ve sort of structured the past year, coming on a year in a couple of days. It’s been about, you know, simplification, innovation and execution. What that led us to is predictable quarter-on-quarter sequential growth, and so far, so good. We’ve been able to deliver against that. And it's not been at the necessity of the cost of margins. We've been across the board trying to be whole as we can be in growing the business. Hedvig and Metallic, and the core has got the – you know we got critical mass, but Hedvig and Metallic continue to be businesses we need to invest in, and, you know, coming into next quarter, we’ll have more details, but right now, you know, its focused – all focuses on Q4 and making sure we integrate we these two technologies.

Okay. And then, one quick last one for me just what is the, let’s call it, one concrete item that you can point investors to in this current quarter that just reported that gives you confidence that, you know, things are really on the right path?

Let me – I’ll give you my take and I’m sure Brain has some financial underpinning. You know, I think overall if you just see the – you know first of all, being predictable and being able to really deliver what we said we were going to deliver internally and otherwise. This has been a transitional year. It’s a growing market; it’s a strong market. Our technology has been proven; our Net Promoter Score is high; our repeatability on business is high; and the growth drivers are on the technology of the eco-system and our own people is solid. We’ve been able to attract more people this quarter in sales and marketing than we can remember. Like historically, it’s one of the strongest we've had. The deals we’ve done, so $500,000 across the planet, shows that the partner eco-system is getting to be more robust. And just some of the used cases and outcomes that customers are using our technology for are incredible. 800 petabytes with 60% of our customers reporting in cloud doesn’t mean they’re getting ready for the cloud, we are the cloud.

And, Jason, I’ll just carry on with that – those statements and echo that, but I'll add a couple of financial metrics behind that. I’m also, you know, really pleased with our more to repeatable revenue that we’ve been on this journey for the past several years. I mean if you look back to pre-adoption of ASC 606, way back in FY 2017, less than 10% of our software and products revenue were subscription-based contracts, now that’s well over 40%. You combine that with our other repeatable revenue streams and which is north of 70%, and then, you now, further validation is just the customer loyalty and just the stickiness of our customer retention rates that I mentioned on the call. So, all those things are really positive proof points that are benefiting us now, but also will benefit down through the future.

Thank you.

We’re confident folks, I believe that’s true.

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

Yes, good morning guys. Thanks for taking the questions. You know kind of building on that last comment, you know, Brian, as we start to think about the set up and the three year anniversary of your subscription strategy as we move into fiscal 2021, maybe it’d be helpful just to kind of if you can at a high level just remind us or walk us through the mechanics of how we think about subscription and assuming that you kind of retain that 90% renewal rate? And I guess underneath of that, you know, as we think about the business model, how much of your business, you know, today is what would you would say as being new customers versus kind of, you know, that set up going into next year really harvesting that install base? I’m just trying to think about parsing through what we could – should think about in terms of the subscription renewals versus, you know, the growth on top of that from new customer expansion?

Yes. Good morning. Aaron, I hope you’re doing well. So, yes, I think you have to chunk this up into a couple of different areas. So, let’s start holistically with just repeatable revenue in general, which is greater than 70% of our total revenue. You know, we obviously have, you know, large customer base or loyal customer base, strong renewal rates. So, we’re really happy with that stability it adds to our overall, you know, underlying revenue. So then – you know the next step in the journey that we’ve been on is, you know, rolling out through subscription arrangement. As you mentioned, we started selling these in earnest in FY 2018. You know metrics such as our ACV being up 56% year-over-year. It’s up more than three-folds since FY 2018, and as I mentioned, you know, the average contract length is about three years. So, you know, we’re looking forward to that first true meaningful anniversary coming up in FY 2021. There’s still work to do because I mean this is obviously – it’s a journey with the customer. It’s part of our customer success profile. You know, we’ve established customer success teams. We’ve got leaders in place to make sure that we’re approaching them and giving them the choice of what they should do and want to do and then compounding that, we’re really excited about, you know, Metallic and what that offers from some incremental subscription revenue possibilities for us. That’s our new SaaS product. So, it's yet another repeatable and recurring revenue stream. So, I think the combination of all those is what gives us confidence heading into FY 2021.

Yes, okay. Go ahead.

No, I was just going to say from, you know, another slant on that outside of the numbers, which, Aaron, I think is important is are we creating new pathways to new customers. So, Hedvig, new set of customers, you know, Metallic, new set of customers; add-on products like Activate to our core, new set of customers; workloads moving rapidly to the cloud where we’re integral part of that for our customers, brings new customers. So, all of these, more than, you know, more than looking backward we’re looking forward to creating new avenues to drive that for our customer, through our process.

So, I'm sorry to kind of go back to this, but, you know, let’s say a customer, let's just use simple numbers, $100 of subscription was signed in 2018, they renew it at year-three, the rev rec of that renewal, again, remind me of the mechanics of that under the recurring, you know, mechanism?

Yes. Sure, no problem. So yes, if it’s a customer who signs an original subscription agreement with us, so back in FY 2018, typical contract length would be about three years. That entire contract would be up for renewal again in FY 2021. We would actually then recognize that full amount of software embedded in that contract in the quarter of the sale in FY 2021. The only thing that gets deferred is really the attached maintenance that could spread over three years. But yes, we have the benefit of recognizing that in the period of sale.

That’s perfect. And then, the final question for me is just you mentioned about filling some sale – open sales, you know, positions or filling some of the sales capacity. Can you help us understand any kind of metrics that we would think would be useful around where we stand today on sales capacity, you know, how much of that expanded, how much of sales capacity is productive? Just trying to think about how we think about that, you know, ramping as we think about the set up in the 2021?

And that'd be giving away everything to the competitors. So, let me just tell you it was one of the – it was I got a key – as the only pure play, data management company that’s public, I just need to keep something close to my chest. You know, I would say to you that we had one of these not the best intake of field sales professionals in Q3, okay. All over the world, we hired new leadership, new systems and – you know SEs, Systems Engineers. We’ve really done a good job of intake over the last of couple quarters particularly in Q3 and the momentum continues into Q4. But we’re working as I said last quarter as hard as we can to fill the positions we have, and you know, we’re being ambitious with that. So, – and then we've just – we really revamped our internal enablement program to shortcut our productivity dramatically. We put a world-class enablement program into play in the company and for our channel as a matter of fact because we see them as an absolute part of our selling motion. You know, good people bring in great the people and we’re really pleased with that. So, sort of giving you the exact numbers, I’ll tell you that I’m really pleased. We’ve got more open positions. It’s a global thing. We’ve got new leadership and they are bringing us amazing talent into the company and we’ve got some great talent already within the company.

Great, thanks guys.

Thank you. Our next question comes from Alex Kurtz with KeyBanc. Your line is now open.

Yes, thanks. Good morning, everyone. Apologize for the background noise here. So, on the renewal kick-offs here, Brian and Sanjay, will there be any changes to how the sales force has comped? You know on Aaron's example, the $100, are we going to – are they going to be comped on the $100? Or they can only be comped on new bookings?

Yes, Alex, I don’t think we’re going to give all our exact specifics where in our compensation plans, that just wouldn’t be appropriate right now, but I will say that we’re well organized or aligned internally with something that we’re squarely focused on. It’s part of our expectations heading into FY 2021.

Almost more importantly by May. Almost more importantly it’s the motion with which we are approaching our subscription business both from a – you know from a land expand and renew motion with a true customer success team that we have put in place and are growing well-integrated into Ricardo's selling motion and the partner community. We’ve spent the last two quarters really getting the mechanics of all that in place and with the enablement initiatives I mentioned we’re well on our way. You know, obviously compensation will align, but it's not the primary driver. Having the right go-to-market motion is what we’ve been focused on.

Sanjay, just a follow-up on that. I mean from everything you’ve said this morning, it seems like the organization is at a place where the sales force to really be focused on incremental bookings on the renewals, not just the renewal. Is that a fair way of looking at it given all the new products and…

Of course.

Okay.

Our core sales force is focused on bringing, you know, bringing the composite value to our customers both new and existing. We've got customers that view outcomes that they want, new parts of the journey they're on. It’s not at the cost of existing customers but we're definitely focused on new customers as well.

Okay. And then, last question for me, just – you know, Sanjay just looking at the strong large deal execution, especially I think in Americas some of the stats you’re giving earlier. So, was that driven by a couple of deals that really drove Americas in large deal flow? Or was there something else going on in the sales force, you know, quarter-over-quarter that helped you out perform?

We did what have a couple of large deals, but were actually – it was more volume driven and we’re really pleased by that because it's actually disperses it. It was a good spread. It was actually a good spread of deal sizes cross-segments. So, yes, it was a nice spread.

Okay. Thank you.

Thank you. Our question comes from Brent Thill with Jefferies. Your line is now open.

Hey, guys. This is Joe on for Brent. Thanks for the question. Brian, given you have so many different types of new products, you know, SaaS with Metallic, perpetual with Hedvig, HyperScale, maybe just walk us through the trajectory of gross margin both next quarter and next year, just how to, kind of think about it?

Sure. Good morning, [Brent]. So, in terms of the gross margins, I think, you know, we’ve reached a point of stabilization with respect to the gross margins heading into next year. I will say things like HyperScale, for example, which I think we called out in the call, we’re really pleased with that. It was strong year-over-year growth and sequential growth. In fact, Sanjay mentioned we’re starting to see that resonate even with our biggest customers. I think something like six out of our 10 largest customers are running HyperScale in their environment. That’s part of our gross margin profile. I think what you’ll see is I think we’ve reached a point of stabilization for the time being and as we get into that point 2021 and we have more recurring revenues, we have new offerings such as Metallic etcetera, you know, we’ll obviously keep you updated on the gross margin profile and any changes.

Okay, great. Thank you. And then it's great to see you did what you said you were going to do two quarters in a row now. It’s good to get some consistency. Maybe just regarding the long-term targets, when can we expect that when we get full-year guidance next quarter, and then, further than that, it seems like the renewal opportunity mathematically is the biggest opportunity for fiscal 2021 maybe just rank order, Metallic, Hyperscale and Hedvig?

So, let me just touch on the margins and I’ll – and long-term guidance and I’ll let Sanjay also way in here. You know, right now we’re focused on delivering kind of one quarter at a time. I think we’re setting, you know, hopefully, you know, achievable targets for ourselves, and you know, heading its FY – let’s get through FY 2020 and heading into FY 2021 we’ll provide, you know, further commentary at that time.

Yes, it’s – you know it was important, I guess. It’s a sort of – we do this ourselves, we remind ourselves, given the pace at which we’re working that it is a transitional year. We’re coming out of a year that has been truly one that’s gratifying and that we’ve turned the corner many things, but just have work to do. And I don’t want to get ahead of myself. This two quarters in a row doesn’t – you know the job isn’t done with that. It’s – we feel like we're beginning to turn the corner. Next year we’re saying, you know, we’re going to return to growth in fiscal year 2021, more details to follow, guys. We're just feeling confident that the right building blocks are in place.

And [Brent] just going back to your question just on areas of focus, I mean obviously we’re keenly focused on everything, and you know, we view this as it presents opportunity for us. You know this is going to be the first meaningful year of our renewals. We have, you know, new things such as Metallic and Hedvig. HyperScale is starting to take hold, so we also have just our core, you know, capacity and selling force that we’re investing in. So, we’ve got a lot of areas of investment, a lot of areas of opportunity. We’re obviously trying to keep things keenly focused heading into next year.

You’ll get more.

Sounds great. Thanks guys.

Thank you.

Thank you. Our next question comes from James Fish with Piper Sandler. Your line is now open.

Hey, guys. Congrats on the quarter. I don’t think it would be a Commvault quarter if somebody didn’t ask a competitive question, so I’ll squeeze that one in. So, one of your competitors had some interesting news this and it is now moving into the U.S. What do you guys see in terms of near-term opportunity and how do you feel about this kind of issue longer term as they move into your core backyard?

You know, it’s – first things first. You know it validates the space we’re in. It validates what customers, you know, what we're doing for our customers. It’s a growing market; it’s a strong market. You know, they’ve been around as a competitor for a while, so it’s not new. What I focus – I don’t focus so much – I don’t focus the company so much on what they’re doing as much as what we do well. But what's really important here is to focus on what Commvault does really well, and we’ve been around for over 20 years, day in and day out solving hard problems for our customer. Like I said, over 800 patents, over 350 in filing. We are focused on innovation and solving hard problems. And competitors come, competitors go. We've been around for 20 years. I’m glad to be around for next five.

Got it. And then, Brian, our maintenance dollar [attach rates] any difference between the term licenses versus the perpetual contracts? And also, how should we think about professional services as we continue to shift more toward current subscription?

Sure. So, in terms of the maintenance rates, I think they’re generally aligned, you know, kind of a rounding difference on perpetual versus subscription. Professional services business, again, this is an area of opportunity for us. We – you know and working with our partner network and also what we can do internally to help our customers on their journey to the cloud and also some unique offerings that we’re entering, especially with Hedvig and other new areas of opportunity. We’re going to captalize on that from a professional services standpoint moving forward.

Got it. Thanks guys.

Thanks James.

Thank you. And our next question comes from Ryan Myers with Lake Street Capital Markets. Your line is now open.

Hi, good morning guys. Thanks for taking my questions. First one here, can you just give us some details on the mid and long-term growth initiatives that you guys have planned?

Sure. So, Ryan, I think, you know, again, we’re focused squarely on finishing out this fiscal year. Again, we’re – you know, our growth drivers are, you know, they are the technology, the eco-system, the people that we’re investing in and we’ll – you know we want to get past this kind of view of transition that we’ve been in. It’s been a lot of hard work. I will let Sanjay comment more.

You know, just compared to our execution. You know the three initiatives that I keep talking about you know really the third piece. This is really the third piece. It’s all about execution, and what Riccardo and the rest of us at the company have sort of taken the lead on is, really segmenting how we play. You know, when you are looking at the marketplace globally, really focusing on the right segments where we add value, which is natural to us and over the course of the last year, we’ve invested heavily in our channel and channel ecosystem. So, between the partnerships we hopefully have been able to garner and build and create and our focus on how we go to market and productivity we are driving in there overlay with the products which we thought [indiscernible] richer set of products. I think we’ve got, you know that is our strategy. That is what we’ve been focused on. So, it’s not one size fits all, it is not doing everything for anything, it is about being super focused and between the segmentation, the products and our overall go to market strategy that’s what’s going to take us into next year.

Okay. So, that’s helpful. Next one. So, how have the customers responded to the new subscription pricing packages so far?

You are talking about our SaaS product based upon the tariff?

Correct.

Yes. No. So, if you recall, we only launched this some point in October at our Go Conference and then we get reopen it up to an extensive trial period for our customers which we have hundreds of customers embrace the trial. We’ve got new customers. Pricing hasn’t been an issue. I think the offerings are tight. They like them. They are straight forward to get up and running. We’ve got customers that have closed business with us in matter of days, because it is so easy and up and running. So far, all systems go and positive. And they are adding more partners. Again, keep in mind, it hasn’t even been 100 days.

Alright. Okay. And then last one from me, so Sanjay, now that you’ve been with the company for almost a year now. Can you talk about some of the things that you’ve learned in the past year that you think will help set yourself and the company up for success going forward?

You know what, I’m more excited today and say this with complete honesty. I am more excited being here today a year in then I was coming in and I am an excitable chap, okay, and I am really excited. I think the company has been dealt with strong fundamentals, great people, customers that have been with us that Brian shared numbers that are just staggering, you know been with us since the beginning of us being a company, you know 90% plus renewal rates. They are all testimony to how strong the fundamental this company are. You know, the last year has been transitional. It’s one where I look back and feel like I have put our team through a lot and they have responded and they have responded positively and I feel very confident going into next year. This is going to be where we return to growth and deliver to our expectations.

Alright. That’s it from me. Thanks guys.

Thanks Ron.

Thank you. And at this time, I’m showing no further questions. Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program and you may all disconnect.