Commvault Systems - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Commvault Q1 Fiscal Year twenty twenty Earnings Conference Call. Participate will follow at that time. Will As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jay Whelan, Chief Accounting Officer.

Sir, you may begin.

Speaker 1

Good morning. Thanks for dialing in today for our fiscal first quarter earnings call. With me on the call are Sanjay Merchandani, President and Chief Executive Officer and Brian Carrollan, Chief Financial Officer. Before we begin, I'd like to remind everyone that the statements made during this call, including in the question and answer session at the end of the call, may include forward looking statements, including statements regarding financial projections and future performance. All the statements that relate to our beliefs, plans, expectations or intentions regarding the future are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

Actual results may differ materially due to a number of risks and uncertainties such as competitive factors, difficulties and delays inherent in the development, manufacturing, marketing and sale of software products and related services and general economic conditions. For a discussion of these and other risks and uncertainties affecting our business, please see the risk factors contained in our annual report on Form 10 ks and our most recent quarterly report on Form 10 Q and in our other SEC filings and in the cautionary statement contained in our press release and on our website. The company undertakes no responsibility to update the information in this conference call under any circumstance. Our earnings press release was issued over the wire services earlier today and has also been furnished to the SEC as an eight ks filing. The press release is also available on our Investor Relations website.

On this conference call, we will provide non GAAP financial results. A reconciliation between the non GAAP and GAAP measures can be found on Table four accompanying the press release posted 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. I will now turn the call over to Sanjay.

Speaker 2

Good morning and thank you for joining our fiscal first quarter earnings call. In my first six months as CEO and President, I have spent a lot of time with our customers, partners, product teams and our employees. And I continue to believe we have what we need to drive innovation and customer value for years to come. That said, we're not pleased with our Q1 results. Rather than making excuses, we're going to talk about our progress to date and why we believe our future is bright.

As we stressed on our last call, we have work to do and you will hear on this call that we've taken decisive actions and believe we're making the right steps to lay the foundation for growth. The foundation starts with having the right strategy and the right people to execute. In very quick order, we identified and onboarded the right people to build on Commvault's strong including Ricardo De Blasio, our new Chief Revenue Officer. He brings extensive knowledge of the industry and strong reputation for execution to reinvigorate our field and channel go to market initiatives. He is already making an impact.

Sandra Hamilton's customer success expertise is critical to our progression of the company. She's focused on evolving our customer engagement model. Ralph Galustian, a Commvault veteran is driving our new business incubation team to test and launch in an innovative new product next quarter. I'll tell you more in a few minutes. We're really excited about this.

And Ranga Rajagopalam, our newly hired VP of Products brings the deep domain expertise and product management experience needed to advance our already robust innovation roadmap. During our last call, I said I would share more details on the strategy to expedite Apopxa growth. It is built around three priorities, simplification, innovation and execution. Let's take a few minutes to discuss our progress with each of these. Simplification is all about world class operational efficiency.

Led by Gary Merrill, our operations team is focused on improving our tools and analytical capabilities, sales and forecasting processes, partner enablement portal and our internal employee experience. Combined with Sandy Hamilton's focus on customer success, we are building what we believe is a world class engagement model for Commvault. We are extremely pleased with the progress to date. Simplifying how we do business by customers and partners will enable us to unlock the full potential of our solutions and increase the value of our customer relationships. This brings us to driving innovation, our second priority.

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

One, from the viewpoint of the CIO, customers' IT strategies always need what I like to call a from to strategy that is most companies need to determine the best way to go from something to something, existing technology to new technology. When I speak to our customers, this is a key differentiator and they rely on Commvault to be the trusted partner to help them on this journey. Number two, our customers and partners are also leveraging us in exciting new ways to support the cloud native applications protect against threats like ransomware and to comply with the regulatory and e discovery requirements, which brings us to our third reason. As companies modernize infrastructure and applications, they must also pivot their workforce and skills accordingly. Commvault software helps companies more efficiently manage complex and varied tasks so that employees can be more productive.

As customers pursue multi cloud strategies, platform as a service or PaaS applications have become more strategic as cloud native applications rely on PaaS to deliver modern experiences. We recently delivered new enhancements to our cloud services across Microsoft Azure, Amazon AWS and the Google Cloud Platform to complement their PaaS offerings and ensure the data is protected in a seamless way. We're encouraged by our hyperscale appliance and software growth year over year as well as by the customer feedback that this provides flexibility and scalability in how they manage the on prem, hybrid and multi cloud environments. And finally, we're excited to announce a new SaaS offering that we will make available to beta customers in mid August with the initial launch during Q3 in The U. S.

Built in house with a startup like team focused on time to market and user experience. This offer will deliver the decades of capabilities and best practices Commvault is known for as a streamlined SaaS experience that is fast and easy to try, buy and use. In our early testing, it is literally provisioned and backing up in minutes. I'm confident that this offer is going to impress the market. No other vendor in our space offers such a robust set of capabilities delivered in a way that is so simple to use.

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

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

Europe, our second largest market is an area for improvement. We saw large cross border deals slow, which we believe is macro related. We're also seeing a steady stream of large $6.07 figure opportunities, which are more complex with larger closing cycles. We're adjusting accordingly and encouraged by the prospects. We're also excited about the opportunity in APAC.

We're seeing strong trends in Australia, our largest market and India continues to show very impressive growth. We believe there are significant growth opportunities in this geography. Now let's talk more about partners. We continue to make great strides with our partner ecosystem. In fact, a recent worldwide partner survey confirmed that Commvault is very highly regarded by our partner community.

This is further reinforced by HPE recognizing us as their technology partner of the year for storage solutions. Additionally, just two weeks ago, we launched the simplest, most transparent and financially rewarding program for partners in Commvault's history. This has been well received by partners who are now poised to significantly increase their profitability and predictability of full year incentives. Combined with our leading technology and simplified enablement tools, this program makes Commvault a data backup partner of choice. In closing, we expect that by dramatically improving our execution, optimizing our partner program and continually enhancing our customer experience, Commvault will be the vendor of choice for our customers and partners both today and in the future.

We have taken decisive action and have made significant progress to our operational efficiency. Our improved ability to execute and our innovation roadmap has never been richer. Again, while we're not pleased with our Q1 results, we remain committed and optimistic about our return to predictable growth. Now let me turn it over to Brian to review the first quarter results. Brian?

Thanks Sanjay and good morning everyone. I will

Speaker 3

now cover some financial highlights for the first quarter of fiscal twenty twenty. Total revenues in the first quarter were $162,200,000 representing a decrease of 8% year over year. Software and products revenue was $63,700,000 which was down 15% year over year and down 13% on a constant currency basis. Our performance in The Americas was the primary reason for the year over year decline. We also pointed to the European macro environment as a headwind this quarter.

While we are disappointed with the year over year decline in the first quarter, we expect to see improvements from our new go to market strategies including our new partner advantage program. Revenue from enterprise software deals which we define as deals over $100,000 represented 62% of software and products revenue for the quarter. Revenue from these transactions was down 11% year over year. However, our average enterprise deal size was approximately $298,000 during the quarter, up 23% over the prior year. We believe that growth in the size of our enterprise contracts underscores the value that these customers see in Commvault's innovation and it is why we are so focused on continuing to invest in innovation to support our growth in the enterprise segment of the market.

Total services revenue for Q1 was approximately $98,500,000 a decrease of 3% year over year. While we continue to have strong maintenance renewal rates, year over year services revenue growth was tempered by changes in foreign exchange rates and by some of our customers moving to subscription models as well as the recent declines in software revenues. Total operating expenses were approximately $116,000,000 for the quarter, down approximately 6% year over year. We ended the first quarter with 2,513 employees, which is also down approximately 6% year over year. Operating margins were 9.6% for the quarter, resulting in operating income or EBIT of approximately $15,500,000 Net income for the quarter was $12,700,000 or $0.27 per share based on a diluted weighted average share count of approximately 46,300,000.0 shares.

Let me now touch on our subscription pricing models and our continued shift to more repeatable revenue. We see customers continuing to transition to consumption models that provide flexibility to adapt to changes in their business. For the past few quarters, we've been highlighting two revenue metrics to help investors track the growth and progress of our subscription revenue transition. These two metrics are repeatable revenue and annual contract value otherwise known as ACV. I will start with repeatable revenue.

As a reminder, our primary repeatable revenue streams are subscription software and maintenance services. We would consider approximately 70% of our Q1 fiscal twenty twenty total revenue to be repeatable in nature. These revenue streams continue to outperform our non repeatable revenue and were down 2% year over year. Our second metric is annual contract value. This metric demonstrates the growth of our subscription and utility based pricing models that we expect will drive new customer acquisition, land and expand growth and upsell opportunities.

As of Q1, ACV has grown to $106,000,000 up 66% from a year ago. As a reminder, our weighted average subscription contract length is approximately three years. In FY 2021, we expect to start seeing a meaningful impact of the renewals of the subscription agreements we sold in FY 2018 when we started focusing on more repeatable software and services revenue streams. Let me now shift gears to our balance sheet and cash flows. As of June 30, our cash and short term investments balance was approximately $451,000,000 down 2% from our balance at March 3139.

Our DSO was ninety two days versus ninety one days in the prior quarter. As a reminder, our DSO calculation includes the unbilled receivables we are required to record as part of the new revenue standard. Deferred revenue was approximately $332,000,000 which is an increase of 3% over the prior year period. On a constant currency basis, deferred revenue was up 4%. Nearly all of our deferred revenue is services revenue that has been invoiced to customers.

Free cash flow which we define as cash flow from operations less capital expenditures was approximately $30,000,000 for the quarter, up 31% over the prior year period. During the quarter, we repurchased approximately $40,000,000 of our common stock at an average cost of approximately $48 per share. Approximately $160,000,000 remains in the current repurchase program authorization that expires on 03/31/2020. We will continue to be opportunistic with our share repurchases. Let me now discuss our near term financial outlook.

We do not believe our recent financial is indicative of Commvault's longer term potential. We are actively implementing our plan of simplifying our business operations, driving executional excellence and innovation. In addition, some of the steps we're taking like adding quota carrying sales resources in The Americas may take time before they result in improved financial performance. As a result, we will continue being measured with our outlook. We currently expect Q2 software revenue to be flat to slightly up from Q1.

We also expect that services revenue will be flat. As a reminder, large deal closure rates will likely remain lumpy, particularly in the near term. As part of our refreshed partner advantage program, we believe our indirect routes to market should improve and provide more predictable run rate revenue over time. It is also worth noting that we expect FX to be a sequential headwind in the second quarter. Let me now discuss our EBIT margin expectations for Q2.

Over the last year, we have taken significant steps to reduce costs. We will continue to identify areas of operational improvement, simplify our business operations and improve execution. However, to our measured outlook on software, we would expect EBIT to be flat sequentially. We are using this opportunity to reset the Q2 as a baseline for future growth. Some of the headwinds we saw in Q1 persist in the current quarter.

However, we believe that we have marked the trough for the year and we intend to show positive sequential growth throughout the second half of the fiscal year. We are confident in our future and we expect to demonstrate predictable financial results for our shareholders. Before I turn things back over to Sanjay, you may have seen our press release regarding Michael Melnick, our new Director of Investor Relations. Mike comes to us with over twenty years of financial services experience and will be an integral part of our management team helping us engage with all of our key stakeholders. I'll turn things back over to Sanjay.

Sanjay?

Speaker 2

Thanks Brian. While we have work

Speaker 3

to do, we've made the right changes to our strategy,

Speaker 2

our leadership team and our partner ecosystem to get us back to predictable growth. The industry is ripe with opportunity and we have the strong products and rich product pipeline that customers need as they move towards modern infrastructure and multi cloud environments. This is why we're confident in our ability to create value for our customers, our partners and our shareholders for years to come. This concludes our prepared remarks and we will now open up for questions.

Speaker 0

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

Speaker 4

Yes, thanks for taking the questions. First of all, Sanjay, I know that you've had a little bit of time now at the company. We've seen two really tough quarters. And so I can appreciate kind of the commentary around the three areas of focus. But I'm kind curious of as you've gotten your arms around the story, just how you're thinking about the long term growth potential of Commvault, just the addressable market growth.

Any kind of expectations from perspective of how we should think about this as far as top line growth? And then also as make investments in a go to market and kind of sales organization, I'm just curious of what you think about the long term model in terms of operating profitability, EBIT margin, etcetera? And I have a follow-up as well.

Speaker 2

Thanks, Aaron. Yes, it's been six months, almost to the day. And I had my first full quarter in Q1 running the business after the transition. It's been good. It's been good because I spent a good amount of time in the field.

We got into the details with the new partner program, the innovation roadmaps. I talked about some of the newer technologies they're bringing to market. So it's been a good ninety days for me. I wish the results were stronger, but again to your question, how do I feel about the longer term potential? I think if you believe that our customers around the world are on a journey, they're going from something to something.

I was the CIO for almost five years of a large company. And you're always transitioning. And as a result, customers after they try point solutions come back to the fact that they need an integrated roadmap. They need a company that can count on a global basis to truly help them through what the next big problem is that they're trying to solve for. We do that every day, whether it's multi cloud or it's virtual or it's containers.

We're doing that every day with our customers. Our roadmap has never been richer. We also attach ourselves to big trends because that's where customers want us to be. So whether it be the work we're doing with the public cloud providers, the additions we're making to our technology on Microsoft Azure or AWS, all of this keeps our customers ahead of where they need to the next big problem they're trying to solve for. We're spending a lot of time on our simplification.

So innovation is one piece of it. The second piece that I feel very bullish about. So as a tech company, if my innovation roadmap wasn't as rich as I believe it is, we would be having different conversation. So it's not about the innovation anymore. We are really investing in that.

Simplification is something that I feel very strongly about. Being operationally excellent allows us to not only drive some of the things you asked me in the second part of your question, the efficiency etcetera, but also allows us to scale. And so we're squarely focused on that. And we're making and a little bit of that is how we do things, sausage making if you would. I'll spare you the details, needless to mention we're making good progress there.

So it comes down to execution and the flywheel of execution that I truly think that we need to be focused on. Ricardo, Sandy, Rob with the new SaaS product, Branza with our product innovation with our product management, we're bringing in some talent with the company to truly get our execution flaws. And that's what they're focused on. That's what I'm focused on. So we just need a little bit of time if you would to get that up and running.

We've identified where we need to be focused that ninety days of having field helped me and now we're just getting it done. So the goal here is to return to predictable growth just as fast as we can.

Speaker 4

Perfect. And then just maybe as a follow-up to that kind of discussion, can you help

Speaker 1

us understand a little bit of

Speaker 4

what's going on in The Americas region, particularly around the sales force? How much attrition have you seen? How much how do we think about how much sales capacity that you need to put in place over the next couple quarters? And I'll cede the floor. Thank you.

Speaker 2

So the Americas for us is the economy is strong, the demand is the funnel looks good. We'll be seeing both in Europe and in Americas we're seeing $6.07 figure deals come up in the funnel. So I feel much better about the pipeline and things across The U. S. What we've seen our partner program that we put into place is brand new and it's getting good accolades from the partner community.

So I feel good that that will start giving us some traction. On attrition, our attrition hasn't gone up quarter on quarter. We're tracking, we're not in any way hugely concerned about our attrition at this stage. It's just that we're being super selective about the talent we're trying to bring into the company and just need to do it right. So the sales culture that Ricardo is trying to build that I'm very supportive of and the fact that we need to bring in the right caliber of folks into the sales organization is what we're focused on.

Thank you.

Speaker 0

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

Speaker 5

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

Speaker 2

So the I'm going to just little crossword before without telling you too much about the product that we're going to be launching. So I'm going to give you a sense that this is something that I'm really excited about because it's a product that we've built like a startup inside the company. The team is working at an incredible pace. They've turned the very design principles of how we do things on their head and it's all about the user experience really making it from the point when a customer thinks about a technology like ours to the point where we're expanding with them. It's all about the user experience.

We've taken the decades of sort of work and best practice and machine learning and things that we've learned over the last so many years and have really made them part of the products that's super easy and anticipates what a customer wishes to do. Without getting into without preempting the feature set and they're going into private beta in a matter of weeks. This product is 100% partner friendly because it's 100% sold through partners. And so we don't see ourselves competing. We see ourselves completely collaborating with our partners and all our focus groups tells us that partners actually like what we're building.

Speaker 5

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

Speaker 2

So we launched it on July 15, and we obviously spent a lot of time with partners and getting making sure we understood where we needed to focus. The it's all about making sure that it's easy the first thing is all about making sure it's easy to do business with us. So the portal, the enablement, the deal registration process, it's the overall engagement model that we've completely that Gary and his team have completely reinvented for us. And I think it's taken a step ahead of anything out there. So we may have been a little late for the game, we've actually stepped ahead as a result of that.

The feedback, some of the feedback we got was the quarter structure that they the rebate structure that they wanted, which we've adjusted, they want to annualize plans, which we've given them, more business development funds, we've sort of upped the ante on that. And then a whole bunch around enablement because that happens that's the cost, that's the hidden cost of partners. But if it's not easy to get up and running, getting the SEs up and running and the account managers up and running, then it just makes it more difficult for partners as we all know. So an incredible effort around the portal, the deal registration, the engagement model, the sales kits, the sales plays, the videos, the thought leadership content, all of that stuff is built in. So we're really excited.

But I think we've and all the early feedback we've gotten worldwide on the program is this is great. So now let's see how it all goes.

Speaker 5

Okay, great. And then last one for me. Sanjay, can you give us a bit of a window into, let's say, some of your conversations with Ricardo on essentially his diagnosis? I mean, he's worked with a lot at a lot of different companies. He came in, he spent some time, he's only been there, what a couple of months now.

Two Two Okay. So what is he telling you that you can share with us the problems that exist today organization and the go to market organization.

Speaker 2

So those if you've met Ricardo, the guy is just all energy and he's been in the industry a long time. We've been talking even before he came in a So he kind of knew the he knows the landscape well. He has a domain expertise in this space. So his ramp up has been pretty quick.

In many ways, he and I approach it the same way, which is all about keeping things simple, having the right segmentation model, having a strong partner ecosystem that you're investing in, going deeper, just making sure that we're really in the weeds with it, looking at the compensation program, making sure that any tweaks that are needed are in place. That we're going after use cases that matter the most and we're not spreading ourselves too thin. So focus on the markets that we need to be focused on. So these are all the things that were in the details. We've already started rolling the stuff out capacity.

We need more feet on the street because there is demand demand in The U. S. So all of these things we're focused on, geographical expansion where it matters. I mentioned APAC as an example. So there's a lot of work we're doing there.

We've also again on the inside amped up our digital marketing and all the things we're trying to do with customer success and bringing those pieces together. Lots of wear there.

Speaker 3

Jason, it's Brian here. I think Ricardo also brings to the table just a wealth of experience when it comes to deal forecasting, pipeline diligence, just making sure that when we're calling forecast, it's something that we're going to take the heart and he's already having impact in that area.

Speaker 2

As we speak, he's on forecast course. Thank you, guys.

Speaker 0

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

Speaker 6

Thank you. So Sanjay, it's great to hear the new management team that's in place. I presume that most of the large pieces are in place here. And all the questions about the long term opportunity for you. But I really think at this point, it really comes down to just trying to hit some numbers.

And I know the guidance you gave seems like, well, it doesn't seem like something you can't do with software revenue flat quarter to quarter. But the last two years in a row, it actually declined sequentially. So when I look at stuff like that, I mean, you look at your stock and the stock is the cheapest stock we cover at 4 times recurring revenue, at least the way we look at it. And frankly, I just think you just got to hit some numbers short term and the long term stuff. That's why you came here, right?

When you came, you started talking about the product we buy into that too. I mean, there's Commvault is known as having good product. Right now, it really needs some execution. And I know you got the team in place, but I'm just wondering if next quarter, when the last two years in a row, software revenue declined, this quarter is going to be flat, at least that's what you're guiding. I know it's off a really disappointing fiscal first quarter, But I don't know, I guess it goes along with one of those questions along back just happened.

How confident are you that you can hit these numbers because investors after a while even the value ones get tired?

Speaker 2

Hey, John. Good to hear from you. I couldn't say I wouldn't say it differently than you said it. Execution and hitting our numbers are what we're focused on. And there are the I will say on the innovation piece as much as we have great technology, the space we're in is moving so quickly that we have to keep focused on innovation or we have an opposite problem.

So I'm not saying that's what we have in saying. We have a really good flow of technology and listening to our customers that continue to evolve it. So I take that lightly that piece of it. The rest of everything you said, completely agree with. We are so focused on trying to get back to growth.

It's our singular focus. Everything internally is driven around that. I'm not a miss is a miss. There's no excuse about it. And I feel pretty good that we have the right team.

I feel pretty good we have the right technology. I feel pretty good we have the right strategy. Now it's just about doing it every single day.

Speaker 3

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

We understand the importance of that. We do have the right motions in play. We've got the right leadership team. We've got our new partner advantage program. We'll start seeing the hopefully the renewal effect subscription agreements that I alluded to on the call.

So we've got a lot of things in our favor here. And again, we tried to reset the baseline and we understand the importance of kind of hitting a number and growing it from here.

Speaker 6

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

Do you

Speaker 3

have that I think was

Speaker 2

slightly more favorable, is that?

Speaker 4

Probably about a point.

Speaker 6

Okay. And then the last thing I just sort of point out or question, you said that fiscal twenty twenty one renewals, you had a big renewal year coming up, which implies that some excitement there around the opportunity to upsell and cross sell. But given the performance in not just now, but over the last couple of years, it also seems to me to be a huge risk that they don't renew. I I guess I don't know if I think

Speaker 3

you can look at it a couple of different ways and we'll give you more color on that as we get closer to FY 2021. But if you look at our maintenance support renewals is a good proxy for how we're going to do with subscription renewals, would say that it's pretty strong. And so we're working closely with Sandy Hamilton in instituting a kind of a world class customer success function and making sure that we handle these things with really good care and making sure that it's a win win for both the customer and Commvault as we get to the renewal cycle.

Speaker 6

Okay. But that repeatable revenue declined 2% this

Speaker 2

year. Understood. Some of that

Speaker 3

is driven by kind of near term software results, it goes hand in hand. But I think you can look at this not just within a ninety day window, but in longer term window.

Speaker 6

Okay. Thanks a lot guys.

Speaker 0

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

Speaker 7

Great. Thank you. I just like to follow-up to a prior question as it relates to your long term profitability. I think the prior management team had laid out a plan for reducing spending on sales and marketing as a percentage of revenue, but it sounds like you have a plan more for ramping up spending at least in the near term.

Speaker 3

So I guess what are

Speaker 7

your views on that long term model? And then second, given that subscription growth did slow significantly, I'm trying to understand how you might balance cost cutting initiatives while managing through that transition to subscriptions and also trying to get growth back on track?

Speaker 3

We understand that this is going to be a balanced approach. We understand that the need to get to responsible and predictable growth and that means both top line and margin improvement over time. I wouldn't say in terms of adding more resources to quota carrying that will probably require a little bit more of a recalibration than anything else and we're focused on putting our investments into the right resources to drive that near term and longer term growth. We're confident that we have the right plans in place. We just need to implement and execute at this point.

Speaker 7

Okay. And then I think you noted that Europe was an area in need of improvement and that it was macro related. I guess I just want to

Speaker 2

ask, are you certain or how can

Speaker 7

you be certain that Veeam wasn't putting pressure on your business in that region?

Speaker 2

Veeam? No. We fundamentally play the slow the macro or the slowdown that we think we're seeing is actually in a space that I don't think Veeam plays in, which is a lot much larger enterprise business. We've seen customers sort of deals that or transactions that would have been across Europe and European slowdown a little bit. Some customers are looking at multi cloud in a very serious way which means there's multiple layers of technology in that.

So that takes a little longer, but the combination of that sort of thing and what we think are sort of transactions that look pan European.

Speaker 7

Got it. Thank you. Thank

Speaker 0

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

Speaker 3

Yes. Thanks for taking a couple of questions here. Just back on the big deal execution, Brian, this has been something that has been a recurring challenge for Commvault, both in a good and a bad way, right? Because you're in big deals, you're competing, it means your technology matters. But I mean, we could go over the years of how these big deals impact a quarter for Commvault.

So what are you guys doing differently now as far as how you forecast big deals in your pipeline? Then I have a quick hyperscale question. Okay. Just to take that Alex, this is Brian here. So yes, mean the lumpiness that we refer to is a result of us not being predictable in our execution.

So we understand the need to improve our forecasting methodology, our overall deal hygiene and become more predictable. I think with the direction of Ricardo, we're going to

Speaker 2

do that. So that's step one.

Speaker 3

Secondly, as we rolled out this partner program with the incentives that we put in place, we're going to start seeing a more predictable revenue stream come from that. And that's going to be both for new customer acquisition and also our existing customers. And then third, the subscription revenue business that we're going to start that's going to add more predictability to the baseline. Again, that'll kind of come towards more FY 2021, but that should start taking effect and I believe that's going to have an impact. Okay.

And then on hyperscale, how is this product there's so much excitement about this product when you guys announced it and allowing you guys to go into the mid market and just compete more effectively against some of the startups. So is there some kind of metrics that you can give us or some kind of context about how that product performing over the last ninety days? Well for hyperscale, the last ninety days, yes, mean we are I mean

Speaker 2

hyperscale is the technology of

Speaker 3

the future. I mean, I think that we're we are seeing growth on a year over year basis with respect to our hyperscale offering. And I think that again, this is I don't know if you want to comment on it.

Speaker 2

Yes, let me Alex, the way we think about the hyperscale, the hyperscaler is both the software and the appliance. And our play with our customers on this is it's one part of an overall approach they may want to take. Our technology works together. So if a customer has a cloud footprint, they have an on prem footprint, they want to have over time a SaaS footprint and they want in certain cases an appliance or hyper converged capability and I'm oversimplifying it, but the brain in our software talks to the other they all talk to each other. It's the same back point.

So as a result, we've got customers that start out talking with us about a hyperscaler and over time sort of want to have the whole complete product in conjunction with it or a cloud enabled capability. So, for us, it's an important part of an overall solution that the customer can have any sort of in any way they like. It is very channel friendly. It is very easy to set up. Is literally I have done this personally in fifteen minutes setting it up from scratch.

It's a good piece of software. Our partners like the reference architecture. So it's sort of meeting or exceeding our expectations as technology. We have a lot of repeat customers. It is a product that's about a year end and it's doing well.

Speaker 3

Okay. Thank you.

Speaker 0

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

Speaker 8

Yes. I have a question on the revenue recognition regarding the subscription utility software. I was under the impression that that line would just kind of grow sequentially as we added more subscription contracts to the base. It declined between Q4 and Q1. Could you refresh my memory on the revenue recognition there?

Speaker 3

Sure, Eric. It's Brian here. So it really depends on the needs of our service providers that drive that component of our utility based revenue. Sometimes we do enter into a multi year committed arrangement with them. So if it makes economic sense for us and them, what they'll do is they'll commit to a couple of years at one point in time.

That actually then gets recognized as basically a committed subscription arrangement as opposed to utility.

Speaker 8

Okay. So the assumption then is that

Speaker 3

Yes, it gets recognized in Yes, the committed amount gets recognized in period and it gets pulled out of utility, but it does become part of our overall subscription revenue that becomes repeatable in nature.

Speaker 8

Okay. Okay. And then, the second question here, just we did see a little bit of a I don't know, I'm trying to get a feel for normalized CapEx. I think a year ago, you guys still had spend related to the new facility, but the $841,000 in the quarter, is that kind of a normalized CapEx? Was that abnormally low?

What should we anticipate for fiscal twenty twenty?

Speaker 3

I think plus or minus $500,000 on that number, more to the plus would probably be appropriate.

Speaker 8

Got you. Thank you.

Speaker 6

Thanks, Jeff.

Speaker 0

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

Speaker 2

Thank you.