Commvault Systems - Earnings Call - Q2 2020
October 29, 2019
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Commvault Second Quarter Fiscal Year twenty twenty Earnings Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Melnyk, Director of Investor Relations.
Thank you. Please go ahead, sir.
Speaker 1
Good morning, and thanks for dialing in today for our call to discuss our fiscal second quarter twenty twenty 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
Speaker 2
and are
Speaker 1
based on our current expectations. Actual results may differ materially due to risks and uncertainties such as competitive factors, difficulties and delays inherent with 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. In addition, the development and timing of any product release as well as features or functionality remain at our sole discretion.
Our press release related to today's announcement was issued over the wire services earlier this morning and has also been furnished to SEC as an eight ks 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 the webcast.
An archive of today's webcast will be available on our website following the call. As a reminder, our acquisition of Hedvig closed on October 1. As a result, our second quarter results discussed this morning do not include Hedvig. With me on the call this morning are Sanjay Mirchandani, President and Chief Executive Officer of Commvault and Brian Caron, Chief Financial Officer of Commvault. Sanjay and Brian will each share opening remarks and commentary before we open the call for Q and A.
With that, I'll turn it over to Sanjay. Thank you, Michael.
Speaker 2
Good morning, and thanks for joining us today. As you saw from our press release this morning, we delivered results above expectations for both revenue margins. This performance as well as our positive outlook reflects the good headway we're making on the simplification, innovation and execution priorities we established at the start of the fiscal year. We have work to do, but we're making real measurable progress and we remain focused on setting achievable goals and meeting them. Key actions since our last earnings call include our first major acquisition with Hedvig, the introduction of Metallic, a new SaaS offering, relaunching our brand and hosting nearly 2,000 customers, partners and thought leaders at our Commvault GO Conference earlier this month.
Brian will provide more context on our financial results in a few minutes. But first, I want to highlight our priorities and positive work underway. Let's discuss them one by one. First, we are simplifying how we do business. During the quarter, we continue to improve our org structure and reexamine, redesign and simplify core processes.
The resulting operational efficiencies not only contribute to our profitability, but enable us to reinvest in growth driving initiatives. We also continue to implement, streamline and align the tools and processes to drive predictability and better linearity in our sales pipeline. Enhancements are being extended to our customers and partners as well. We are making it easier and more beneficial for them to do business with Commvault. The feedback from these efforts has been positive as noted by Brian Saligoni of TIM AG, a longtime partner who said, We are excited about these changes and enhancements to the Commvault Partner Advantage Program.
The new levels of simplicity and transparency will help our resellers achieve greater profitability faster than before. We plan to do more to simplify our business and empower our ecosystem to build on this enthusiasm. Next, on innovation. Commvault has always been a leader in developing innovative solutions for our customers. This was validated once again when we were named as an innovator in the most recent Forrester Wave for Data Resiliency Solutions.
And for the eighth consecutive year, Commvault was cited as a leader in Gartner's twenty nineteen Magic Quadrant for Backup and Recovery. These are two of the most influential analysts for IT decision makers and we are proud of the recognition we have received. We're continuously innovating our Commvault Complete portfolio and we expect to release new updates and capabilities roughly every ninety days. We've also built machine learning and artificial intelligence into our products and extended our capabilities across numerous public cloud providers and industry leading applications. As a result, we have a lower customer base and strong customer satisfaction ratings, which are reflected in our high renewal rates.
We're also focused on giving our customers technology to use and analyze the data. We recently launched a reimagined Commvault Activate product with more intuitive compliance ready workflows to provide the insights and analytics needed for customer sensitive data governance requirements. Not only is it feature rich, but we made it simpler and easier for our partners and customers to buy and use. Vincent Chang, President of AeroSoft Solutions noted, We're particularly excited about the new licensing and pricing model, which will make Acctivate easy to buy and for us as a partner, easier to sell and grow. Importantly, we're turning our innovation into new market opportunities.
For example, we recently expanded our portfolio to include Metallic, an enterprise grade software as a service data protection solution. Built as an internal startup on Commvault's proven technology, Metallic sets a new standard for SaaS data protection with unrivaled flexibility, scalability and simplicity. Now customers can easily leverage our technology in any form factor, on premise, in the cloud, as an appliance or as a service. Metallic is available today in The United States through an initial set of launch partners who are truly excited about the offering. Steve Guggenheim, our Corporate Vice President, Microsoft said, Many of our mutual customers are migrating their applications and data to the cloud.
One of the really interesting use cases for Metallic is providing additional protection for individual user information within Microsoft Office three sixty five. And we didn't stop there. We also closed our first major acquisition Hedvik on October 1. We put in place a world class bench of HEDVIC and Commvault leaders to drive our innovation roadmap and go to market strategies. This includes HEDVIC Co Founder and CEO, Avinash Laxman and industry veteran, David Wigglesworth, to lead We believe Hedvig and Metallic represent a compelling growth opportunity for Commvault.
Hedvig gives us entry to the software defined storage market and approximate 2,700,000,000.0 TAM growing solidly in the double digits. In addition, Metallic opens an approximate $1,600,000,000 addressable opportunity within the broader data replication and data protection public cloud service market. This market is projected to grow at a high single digit rate. Together, these new offerings enable us to expand our TAM by almost 60%. When combined with our market strength, well established customer base and focus on execution, we believe that Commvault has meaningfully enhanced its growth potential.
Finally, I'll share how we're working to improve execution, particularly in go to market. These efforts are showing signs of paying off, evidenced by having landed 7 figure deals in all three regions
Speaker 3
during the quarter.
Speaker 2
Structurally, we've installed a completely new segmentation based go to market strategy to drive focus and clarity. We've added key leaders to build off this initial success. I've asked Commvault's VP, Anthony Faustidi, to lead our new global enterprise segment. They'll be working to land and expand opportunities among key Fortune 500 clients. We hired David Boyle, a 31 industry veteran as our Vice President of America Sales.
David was instrumental in building Dell EMC's enterprise business and we expect him to have immediate and meaningful impact. We're also making progress on addressing capacity by filling more than 100 open field positions. We believe all of these measures will enable us to better capture new customers and increase share of wallet with existing customers. Supporting our partner ecosystem continues to be a priority. Our initial program indicators are positive and in line with expectations.
Specifically, our pipeline is healthy and our partner driven deals are up sequentially and year over year. And we are seeing strong momentum from our largest partners like NetApp, Wipro and HPE. To further enhance this program, we are delighted that two world class leaders chose to join Commvault in October, including Mercer Rowe, our new Global Head of Channels and Alliances and Edison Perez, who will serve as a strategic go to market advisor. From an execution perspective, we believe the building blocks are in place and we remain extremely committed to growing our partner ecosystem. Looking ahead, Commvault is dedicated to helping our customers become data ready.
This means we enable our customers to protect, control, manage and use data today and as they move from one technology to the on prem, in the cloud, in containers, on virtual machines, any application, anywhere. While multi cloud, cloud native applications, automation and DevOps offer customers tremendous competitive advantages, they also create potential complexity and data fragmentation. This is hard to manage, especially with their multiple generations of infrastructures and applications that never stop creating data. To meet business needs and drive value, IT professionals must be data ready. This is our sweet spot.
Taking it a critical step further with the acquisition of Hedvig, we are rapidly bringing data and storage management together to help our customers. To create value for our shareholders, are relentlessly pursuing and executing the strategies that
Speaker 3
drive responsible and predictable growth. This quarter,
Speaker 2
we delivered improved financial results. We continued to focus on our priorities. We added new leaders, closed a major acquisition and launched new products. It was a heavy lift, but it was executed with precision. I'm confident in the actions we are taking on the road ahead, and I believe we're on the right track to deliver even better results in the future.
With that, let me turn it over to Brian to give you more financial details. Brian?
Speaker 3
Thanks, Sanjay, and good morning, everyone. I will now cover some financial highlights for the second quarter of fiscal twenty twenty. Total revenue in the second quarter was $167,600,000 a decline of 1% year over year and growth of 3% sequentially. As expected and consistent with our prior guidance, FX was a moderate headwind in the second quarter. On a constant currency basis, total revenue increased 1% year over year and 4% sequentially.
Software and products revenue was $68,600,000 representing a decline of 1% year over year and an increase of 8% sequentially. On a constant currency basis, software and products revenue increased 1% year over year and grew 9% sequentially. Our largest region, The Americas, increased double digits sequentially with growth primarily driven by large deals. EMEA performed well with revenue flat sequentially and growing 22% year over year. APAC grew 2% sequentially and increased 7% year over year.
EMEA and APAC year over year growth would have been twenty eight percent and ten percent, respectively, on a constant currency basis. Revenue from enterprise software deals, which we define as deals over $100,000 represented 64% of software and products revenue for the quarter. Revenue from these transactions was down 3% year over year, but up 12% sequentially. Our average enterprise deal size was approximately $328,000 during the quarter, up 15% year over year and 10% sequentially. As Sanjay mentioned a moment ago, we had 7 figure deals in each region during the quarter.
Total services revenue was approximately $99,000,000 a slight year over year decline. Growth was tempered by changes in foreign exchange rates, some of our customers moving to subscription models and a year over year decline in professional services. Gross margins were 81.8%, a decline of approximately two eighty basis points year over year. 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 $110,000,000 for the quarter, down 5% year over year.
We continue to optimize our overall expense base by reallocating resources toward investments in our go to market strategy, innovation and other growth driving initiatives. Operating margins were 14.8% for the quarter, resulting in operating income or EBIT of approximately $24,800,000 Net income for the quarter was $19,200,000 or $0.42 per share based on a diluted weighted average share count of approximately 45,700,000.0 shares. Now I'll 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. We have highlighted 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 or ACV. I will start with repeatable revenue. As a reminder, our primary repeatable revenue streams are subscription, software and maintenance services. We consider approximately 73% of our Q2 fiscal twenty twenty total revenue to be repeatable in nature. This represents a 200 basis point improvement from the prior fiscal year.
These repeatable revenue streams, which were up approximately 1% year over year, continue to outperform our non repeatable 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 enhance upsell opportunities. As of Q2, ACV has grown to $121,000,000 up approximately 60% year over year and up 14% sequentially. 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 that we sold in FY 2018, which is our first year of adoption of ASC six zero six and when we started focusing on more repeatable software and services revenue streams. I'll now shift gears to our balance sheet and cash flows. As of September 30, our cash and short term investments balance was approximately $475,000,000 up $24,000,000 from our balance on June 3039. Subsequent to quarter end, we closed the Hedvig transaction. Per the terms of our purchase agreement, we paid approximately $166,000,000 in cash as part of the transaction.
After this acquisition, our cash balance was just over $310,000,000 of which approximately half resides outside The U. S. As a result of the timing of the Hedvig transaction and other anticipated restructuring costs, we did not repurchase any stock during the quarter. Approximately $160,000,000 remains in the current authorization that expires on 03/31/2020, and we intend to remain opportunistic in our repurchase program. Days sales outstanding or DSO was seventy seven days.
This compares favorably to eighty one days in Q2 twenty nineteen and ninety two days in Q1 twenty twenty. The improvement was a result of better linearity throughout the quarter. As of September 3039, our deferred revenue balance was approximately $321,000,000 an increase of 2% year over year. On a constant currency basis, deferred revenue was up 4% year over year. Nearly all our deferred revenue is services revenue that has been invoiced to customers.
Free cash flow, which we defined as cash flow from operations less capital expenditures, was approximately $23,400,000 for the quarter, up 35% over the prior year. This strong performance was driven by our improved operating results and better linearity during the quarter. Note that our free cash flow will be impacted by approximately $10,000,000 of restructuring costs accrued in Q2, most of which will be paid out in Q3. Now I'll discuss our near term financial outlook. Our Q2 twenty twenty results demonstrate that we're beginning to make progress on our Simplify, Innovate and Execute agenda.
We are encouraged by our progress, but we recognize that we have more work ahead of us as we position the company for a return to predictable growth. With that said, we believe that the current Q3 twenty twenty consensus forecast for approximately 73,000,000 of software and products revenue is within our expected range. This includes a nominal contribution from Hedvig. Services revenue should be up modestly sequentially, also in line with current consensus expectations. Keep in mind that while we exceed our Q2 expectations and we are confident about the second half outlook, factors such as deal size and timing of close rates can cause volatility in our quarter to quarter results.
As we noted on our last call, we believe that Q1 twenty twenty marked a baseline quarter and we expect to show continued sequential growth throughout the rest of the fiscal year. Now I'll discuss our EBIT margin expectations for Q3. Over the course of the next couple of quarters, some of the cost savings achieved will be reallocated to hiring quota carrying sales reps as we optimize our go to market efforts. In addition, our annual customer event Commvault Go was held earlier this quarter and represented a significant investment. Even with these additional cost pressures, we expect EBIT margins to be approximately 14% in Q3, which is above the current consensus forecast of 11.6%.
Looking ahead, we expect fourth quarter EBIT margins to increase sequentially from Q3 levels. Lastly, let me briefly update you on our share count. As a result of the stock issued as part of the consideration for the Hedvig transaction, we expect a diluted weighted average share count of approximately 46,500,000.0 shares in Q3 twenty twenty. Now I'll turn it back over to Sanjay for some closing remarks. Sanjay?
Speaker 2
Thank you, Brian. As I've shared since joining the company, Commvault has good bones, great technology, outstanding people, a loyal customer base and a balance sheet that allows for growth investments. Over the past two quarters, we simplified our internal operations, enhanced our go to market capabilities, strengthened our team and remained laser focused on innovation. Additionally, our reputable portfolio of technologies is only getting better. The introduction of Metallic and acquisition of Hedvig have expanded our TAM by almost 60%.
I'm confident that we have the portfolio we need to win new business and take share from our traditional competitors as well as the upstarts in the industry. With the success of our recent Go! Conference is an indication, we believe our customers and partners are excited and see where we're taking Commvault. But don't take my word for it. During the conference, ESG's Christophe Bertrand said, Commvault is not changing, it has already changed.
The company is actively morphing into its next phase of evolution. In closing, I'm proud of what our team has accomplished in just a couple of quarters and I'm optimistic about the opportunity ahead for Commvault and its shareholders. To capitalize on it, we must continue to deliver on our Simplify, Innovate, Execute agenda. This will enable our return to predictable and responsible growth. Before I wrap up my prepared comments, I'd like to take a moment to thank Al Bunty, our former Chief Operating Officer who stayed on as an advisor when I joined the company.
He has decided that the time is right to step down from his advisory role, although he will continue to serve on our Board of Directors. His contributions to the company and our employees for two decades were instrumental and immeasurable. So on behalf of the entire team, thank you, Al. Now we'll open up the call to questions.
Speaker 0
Our first question comes from Jason Ader with William Blair. Your line is open.
Speaker 4
Thank you. Just I had two questions. First, just looking at the sales and marketing line, it was definitely quite a bit below where we were anticipating it to be. Maybe you can talk, Sanjay a little bit about some of the specific changes that you've made. I know you've talked about reallocation, but any more detail on the streamlining that's going on with sales and marketing.
I understand it will be up in Q3, but any more color on that would be very helpful.
Speaker 3
Good morning, Jason. It's Brian here. I'll start and then I'll hand it over to Sanjay. Yes, as you can see in our fiscal Q2, we made a number of restructuring adjustments, and we're pivoting more towards, as we indicated in our last earnings call, more towards quota carrying resources and additional sales capacity. We recognize that we were a little bit behind in that front.
I think we're making some good efforts this quarter thus far. And you're going to see an increase in our direct quota carrying resources in support of our partner network as well that we've enhanced this past quarter.
Speaker 2
Yes, that and the only thing I'd add to that, Jason, is the fact that we've been actively working on a segmentation model that allows us to be more focused, more laser focused on the resource allocation that we want. We've realigned our partner go to market thesis. We've brought on board some new leadership. We feel pretty good about where things are landing from a strategy and early results in that direction.
Speaker 4
And what was the headcount from quarter to quarter excluding HEDVIC?
Speaker 3
We didn't comment on that specifically.
Speaker 4
Okay. If you have that, that would be helpful. And then second question, Brian, just on guidance methodology. Has anything changed? Obviously, you had a better than expected result in Q2.
Did you change your methodology at all over the last couple of quarters? And then any comments on visibility relative to where it has been over the last year or so?
Speaker 3
Yes. Mean I think in terms of guidance and expectations, we're now firmly focused on sequential growth for the rest of this fiscal year. We feel good about where we are. We feel good about the progress we've made in Q2. But there's more work ahead of us.
I think in terms of visibility, I'd say it's good. It's consistent with what we've been seeing recently, but it's early. And we've got some new leadership on board. They're bringing in and attracting new talent. And it's going to take a little bit of time for us to gain some resurgence to more repeatable and predictable growth.
Speaker 2
Just I'm just going to supplement one thing to what Brian said. So it's about making sure that we're predictable. Also, we're super focused on linearity inside of our business and inspecting to make sure that we've got the right linearity in our business. So those are the types of things we end up sequential quarter on quarter growth. Thank you.
Speaker 0
Thank you. Our next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Speaker 5
Yes, thanks. A couple of questions, if I can, as well. As you look at the deferred revenue trends that we've seen, I know it's up on a year over year basis and constant currency is a factor as well. But it's still down about 5%, give or take, relative to where we exited the last fiscal year. So I'm just curious as we think about the company and hopefully some reacceleration of billings growth going forward, how should we think about deferred revenue trends over the next couple of quarters as you see sequential growth in revenue?
Speaker 3
Aaron, it's Brian here. Yes, so in terms of deferred revenue, there is some seasonality to that number, especially this quarter. We expect to see a resurgence of that in our fiscal Q3, often tied to our support renewals that tend to be heavier in fiscal Q3. And then just our sequential growth in general will contribute to that line.
Speaker 5
Okay. And then kind of also, when you talk about annualized contract value, you also throughout the comments that you have opportunities to upsell going forward. Can you talk at all about what you've been seeing as far as your ability to upsell on your customer base? And then also, Brian, you've talked about as we look into fiscal twenty twenty one, you see an opportunity to see some pretty good renewal contributions on some of the subscription. How do you think about that manifesting itself in terms of the model, albeit I know that you're not going to give guidance for fiscal twenty twenty one?
I'd just love to understand what we should be thinking about in terms of that comment.
Speaker 2
Arren, it's Sami. I'll go first. I'll sort of get to the first part of your question and then hand it over to Brian. So just at a high level, the we're excited about the fact that between Hedvig, the ninety day drop that we're doing with every ninety days that we're doing with Commvault Complete, Metallic, Reimagined Activate and other products that make up the portfolio, we've really got a great set of capabilities now, which we essentially launched all of this a couple of weeks ago at Commvault Go. We've got a great sort of set of capabilities for our customers of all sizes.
This and not to forget our hyperscale technology. So when you look at all of that, we've got a great set of capabilities now for customers that allow us to go back in and help them do the entire spectrum of what we call data ready, not just manage the data or protect it, but actually be able to use and analyze that data in different ways. So that's what we're sort of alluding to when we say we have the upsell capability. And I'll hand it back to Brian to address the other pieces. So Aaron, so we've been
Speaker 3
talking about this for quite some time that we're really excited as we enter FY 2021 because it's going to be the first year that we're
Speaker 2
going to see some meaningful what we expect to be
Speaker 3
meaningful renewals of the original subscription contracts that we sold in FY 2018. It's going to create an opportunity for some upsell and cross sell as well as some of our new technologies that we recently acquired. And obviously, it's early days. This is going to be the first time that we're dealing with that in any kind of magnitude, but we think it creates opportunity as well.
Speaker 2
And in the case of just to give you some more color. In the case of Hedvig, we've set up a specialized set of selling capabilities inside the organization, go to market capabilities that are dedicated to taking that software defined storage portfolio to market. So we've thought this through pretty well and overlays nicely with our go to market segmentation.
Speaker 4
Thank you.
Speaker 0
Thank you. Our next question comes from Brent Thill with Jefferies. Your line is open.
Speaker 6
Hey, guys. This is Joe on for Brent. Congrats on the results. Good to see the hard work start to show up in the numbers. It looks like the results in EMEA were strong.
I believe you guys had noted some macro weakness there last quarter. Any update there? And then just on the demand environment in that region in general?
Speaker 3
Yes. I know we had some cautionary statements around the macro environment, especially in The U. K, could have shown some signs of just softening. But overall, EMEA wide, we're actually very pleased with the performance there. I think I mentioned on the call that there were 7 figure deals in each one of our geographic regions, including EMEA, and we're really pleased with the year over year and sequential growth there.
Speaker 6
Awesome. Great to hear. And then just as a follow-up, you guys have been very busy adding products organically and inorganically. We've always viewed you guys as the most complete enterprise ready solution. I guess, Sanjay, you've been there three quarters now.
What's left? Is there anything you're missing? Or I guess asked another way, what's the biggest customer request coming out of Go?
Speaker 2
Short of giving away our products, short of giving away anything that I might be working on prematurely, I will say to you that the bit that we're sharing with customers that is really resonating is that the hard problems our customers are going to have to tackle with data as they move to multi cloud, cloud native applications, deep DevOps engagement and automation are going to look a whole lot different than the data problems of yesterday. And we believe that bringing together data management and storage management is truly going to allow us to do things that no one has done. We feel very good about that. And the Hedvig acquisition was well thought through. The technology is amazing.
They've got incredible traction from what they're building. So we feel very good about the coming together. So I think our portfolio, in time, you will see that our portfolio, as you bring these pieces together, will look like no one else's, and I think we're ahead of everyone else. Good to hear. Thanks, guys.
Congrats again.
Speaker 0
Thank you. Our next question comes from Eric Martinuzzi with Lake Street. Your line is open.
Speaker 7
Yes. A question on gross margin assumed for next quarter. I know you gave us an EBITDA or an EBIT outlook, non GAAP EBIT outlook for Q3. Think we're at 14% in Q3. Just curious, where do the gross margins go in Q3 versus the 81.8% that you posted here in Q2?
Speaker 3
Hi, Eric. It's Brian here. Yes, good question. Actually, in Q2, we actually saw the best quarter ever in terms of our appliance sales for hyperscale. So we were pleased with that.
That obviously put a little bit of pressure on the gross margins. We would expect that to probably flatten out and continue into fiscal Q3 and probably for the remainder of the year. And then one other point I want to make going back to Jason's question about headcount. We were actually down 130 heads sequentially from fiscal Q1 levels.
Speaker 7
Okay. And then the software sales in The Americas, obviously, much as you've seen strength outside of The Americas, that's really been a sore spot for you. The success that you're having in EMEA and APAC, could you kind of contrast that with what are you doing right there? Because obviously we're stumbling in The Americas.
Speaker 2
I wouldn't say we're I wouldn't use that exact terminology of The Americas. I'd say that we've been very transparent that we've been working through a rebuild of our business in The Americas. For us and we had a good quarter in Q2, sequentially up over Q1 in The Americas, and we're building back. I mean, I could give you data points, but the fact of the matter is we're rebuilding a lot of that open headcount in The Americas where we need more capacity. The partner program is aligning well.
We closed our single largest appliance deal in The U. S. This last quarter. So the hyperscale technology is working well. We just launched Metallic only in The U.
S. So we're building back The U. S. Very capably. We just hired David Boyle to come in and in conjunction with what we've asked Anthony Fostee to do with the global segment, we're doubling down on The U.
S. Focus. And it's working progress. I've never shied away from that.
Speaker 7
Okay. And then I know as far as HEDVIC's contribution in Q3, characterized it as nominal. Is there an internal timeline for when HEDVIC is no longer nominal? In other words, when does HEDVIC start ringing the register for us in the top line?
Speaker 3
Eric, it's Brian here. We would probably envision that into FY 'twenty one. We're not saying that there won't be contribution from Hedvig this year, but the majority of that would come in FY
Speaker 2
I just want to remind folks that the reason we went into Hedvig as an acquisition was around the strategic impact it has on our portfolio over to the future. Not to say that the financial impact isn't going to be there. We have some deals in the pipeline for the second half. But I just we went in for this because of the longer term strategic technical impact that, that IP has on the portfolio.
Speaker 7
I get that from what just from the conversations I had with some of your larger enterprise accounts at Go, they're definitely excited about it. I was just trying to get a feel for when.
Speaker 2
So
Speaker 7
certainly appreciate the strategic impact.
Speaker 0
Our next question comes from James Fish with Piper Jaffray. Congrats
Speaker 8
on the quarter. Maybe just to kind of double click on a prior question. The primary storage vendors have all seen a downtick in spending over the last six months. I guess what are your views on the macro environment moving forward as it relates to sort of the secondary environment? And what you're seeing specifically with large enterprises given concern there?
It sounds like you guys had a really good quarter on large enterprises this quarter, but just curious as how you're thinking about it moving forward.
Speaker 2
I mean if you look at it's a great question, James. And if you look at the look at our position and where we've been in secondary storage with our hyperscaler, that's an area we felt and we feel is continuing to grow. The simplicity of the solution that we bring to customers is key. That's what's causing this business is getting some good traction now. With Hedvig, what we are able to do for our customers today and over time in a more composite way is truly bring together the next generation applications that they want to build, which is obviously coming off of virtual machines and sort of a VMware environments over into any kind of containerized environment in the multi cloud world.
We believe that the ubiquity that software defined storage layer brings will blur lines between traditionally thought through primary and secondary storage plays. So it's really about the ubiquity and the ability to be able to build applications on a platform and move it around any cloud anywhere. That's sort of the mindset that we've got here. Got it.
Speaker 8
And then Brian, maybe for you. With a few quarters under your belt or with quarter now under your belt, any update as to what you think this business could look like longer term?
Speaker 3
Yes. So James, we're not going to really comment on any specifics, but I will tell you that we're encouraged by the longer term growth potential, as we increase our TAM expansion with the acquisition of Hedvig, with the launch of Metallic and just the overall go to market adjustments that we're making and adding increased sales capacity for the remainder of the year, that encourages us as we move forward.
Speaker 2
All right. Congrats again.
Speaker 0
Thank you. Our next question comes from Dan Bergstrom with RBC Capital Markets. Your line is open.
Speaker 3
Yes, thanks for taking my question. Around Metallic and the additional protection around Office three sixty five, did you have a previous product that fit with the partner sales motion around O365 upgrades? Or is that essentially a new opportunity for you? And then early any early partner customer feedback there?
Speaker 2
Dan, this is Sanjay. So we have a product. Commvault Complete absolutely supports Office three sixty five capabilities today
Speaker 9
and has for a while.
Speaker 2
We've taken some of those capabilities, not just Office three sixty five, but endpoint VMs, files, things that we our studies have told us and our data has told us that customers in the size of 500 to 2,500 employees need a predefined workflow to get going with a SaaS service. So the Office three sixty five piece was a very demanded sort of capability that we built into the product. But we've had that technology obviously in house for our enterprise customers for a while. Sorry, was there another part to your question that I missed?
Speaker 3
Any early feedback on the product?
Speaker 2
Yes. So we've got lots and lots of trials and lots and lots of activity on the website since we launched it two weeks ago. Partners seem to like it. The and I want to reinforce that this technology is delivered only through partners as our commitment to the partner community and our programs. The feedback so far is very positive.
Speaker 3
Great. Thanks.
Speaker 0
Thank you. Our next question comes from Alex Kurtz with KeyBanc. Your line is open.
Speaker 9
Yes. Thanks for taking a couple of questions here. Brian, did you mention just sort of what the impact was to the top line from subscription adoption in the quarter?
Speaker 2
We didn't call it out specifically, Alex. But as we've been
Speaker 3
moving over the past year, again, we think that's probably in the low 7 figure range in terms of a moderate headwind as we go through our transition. And again, we're kind of looking forward to next fiscal year when those headwinds hopefully start turning into a tailwind for us as we start to renew some of the early agreements.
Speaker 9
And just on the hiring of North America reps, just the timing of that, how long you think it will take to ramp them to productivity and kind of what that means for the next fiscal year? So I guess, would you say a lot of your productivity assumptions are really based in the second half because it's going to take at least six months to get this crew up and running? Just sort of what how do see the linearity of that productivity impacting next year?
Speaker 3
Yes. I think when you're looking for the profile of an enterprise sales rep, it does take two, three, four quarters for them to get fully productive. So a lot of the impact will be seen in the beginning of next fiscal year. Then in terms of the hiring activity, I think we're encouraged by what we've seen so far this quarter. There's an active pipeline.
I think we're encouraged also by the new leadership we have in place, David Boyle and Ricardo DiBlasio, Anthony Faustini. Those are attracting new talent to Commvault that we haven't seen before. So we're encouraged.
Speaker 2
And we've opened this up. We've got a lot of attention on the open positions we have. And I think we're in a
Speaker 3
good place. We're just working as hard and as fast as we can to fill them.
Speaker 2
Now while I have you guys on the call, if you know really good sales reps, feel free send them to us. We can go even faster. We'll take all the help we can get, guys.
Speaker 0
Thank you. And I'm currently showing no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker 2
Thank you very much.