Commvault Systems Inc Q1 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the Commvault Q1 Fiscal Year 2020 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jay Whalen, Chief Accounting Officer. Sir, you may begin.

Good morning. Thanks for dialing in today for our fiscal first quarter earnings call. With me on the call are Sanjay Mirchandani, President and Chief Executive Officer; and Brian Carolan, 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-K and in 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 it has also been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website. On this conference call, we will provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures could be found on Table IV accompanying the press release and posted on our website. This conference call is being recorded, and 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.

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 colleagues, 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 make 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 have taken decisive actions and believe we are 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 the need to build on Commvault's strong foundation, including Riccardo Di Blasio, our new Chief Revenue Officer. He brings his extensive knowledge of the industry and a 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 as a company. She is focused on evolving our customer engagement model. Rob Kaloustian, our Commvault veteran, is driving our new business incubation team to test the launch of an innovative new product next quarter. I’ll tell you more in a few minutes. We are really excited about this. And Ranga Rajagopalan, 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 our faster 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 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 with our 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 workload and use cases we are seeing. Simply said, for our customers, multi-cloud is real. Last quarter, we said that our customers were 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 a CIO, customers' IP 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 their 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, for technologies like ransomware and to comply with regulatory 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 various tasks so that employees can be more productive. As customers pursue multi-cloud strategies, platforms as a service, or hybrid applications become more strategic as cloud-native applications rely on the cloud 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 the cloud offerings and ensure that data is protected in a seamless way. We are encouraged by HyperScale appliance and software growth year-over-year, as well as customer feedback that this provides flexibility and scalability in how they manage their on-premises, hybrid, and multi-cloud environments. And finally, we're excited to announce a new SaaS offering that we will make available to pay customers in mid-August, with the initial launch during Q3 in the U.S. Built in-house with a start-up-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 buy and use. In our early testing, it was literally provisioned and backing up in minutes. I’m confident 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 execute flawlessly. Today, we will talk about execution in terms of geographies and partnerships. Our goal is to be predictable in everything we do; we worked on that 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 pipeline. Deal sizes are increasing, and the volume of large deals in the pipeline is encouraging. However, we’ve had challenges in deal closure. Given this, we’ve acted quickly to put the right leaders in place and are actively increasing our quota-carrying salespeople. Riccardo is working closely with the Americas team, and he’s quietly focused on this. Europe, our second largest market, is an area for improvement. We saw large cross-border deals slowing, which we believe is macro-related. We are also seeing a steady stream of large six and seven figure opportunities, which are more complex with larger closing cycles. We are adjusting accordingly and encouraged by the prospects. We are also excited about the opportunity we have. We are 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 a technology partner of the year for store 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 the data backup partner of choice. In closing, we expect that by dramatically improving our execution, optimizing our 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 made significant progress in our operational efficiency. Our improved ability to execute and our innovation roadmap is richer than ever. Again, while we are 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.

Thanks, Sanjay, and good morning, everyone. I will now cover some financial highlights for the first quarter of fiscal 2020. Total revenues in the first quarter were $162.2 million, representing a decrease of 8% year-over-year. Software and products revenue was $63.7 million, 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 defined as deals over $100,000, represented 62% of software and products revenue for the quarter. Revenues from these transactions were 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're 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 $98.5 million, 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 decline in software revenues. Total operating expenses were approximately $116 million 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 $15.5 million. Net income for the quarter was $12.7 million, or $0.27 per share, based on a diluted weighted average share count of approximately 46.3 million 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 that 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 will consider approximately 70% of our Q1 fiscal 2020 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 million, 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 from 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 million, down 2% from our balance at March 31, 2019. Our DSO was 92 days versus 91 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 million, which is an increase of 3% over the prior year period. On a constant currency basis, deferred revenue was up 4%, and 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 million for the quarter, up 31% over the prior year period. During the quarter, we repurchased approximately $40 million of our common stock at an average cost of approximately $48 per share. Approximately $160 million remains in the current repurchase program authorization that expires on March 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 performance is indicative of Commvault's longer-term potential. We're actively implementing our plan of simplifying our business operations, driving executional excellence and innovation. In addition, some of the steps we are 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, due to our measured outlook on software, we would expect EBIT to be flat sequentially. We're using this opportunity to reset 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're 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 Melnyk, our new Director of Investor Relations. Mike comes to us with over 20 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.

Thanks, Brian. Although we have work to do, we've made the right changes to our strategy, 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 can now open up for questions.

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

First of all, Sanjay, I know that you 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 of curious, 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 a topline perspective of how we should think about this as far as topline growth? And then also as you make investments in the 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, etc.? And I have a follow-up as well.

Yes, it's been almost six months today. And I have my first full quarter in Q1 running the business after that transitional period. It's been good. It's been good because I've spent a good amount of time in the field. We got into the details of the new partner program, the innovation roadmaps. I talked about some of the newer technologies we're bringing to market. So it's been a good 90 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 almost see it - almost five years. It's a large company, and all of this 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 they can count on globally to truly help them through what the next big problem is they are trying to solve. We do that every day. Whether that’s multi-cloud, virtual, or containers, we are helping our customers daily. Our roadmap has never been richer. We also align ourselves with big trends because those are where customers want us to be. So whether it be the work we're doing with the public cloud providers or the additions we're making to our technology on Microsoft Azure or AWS; all of this keeps our customers ahead of the next big problem they're trying to solve. 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 is, as a tech company, my innovation roadmap wasn't as rich as I believe it is, we would be having a 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 metrics you’re asking about in terms of efficiency, etc., but also allows us to scale. And so we're squarely focused on that. We're making progress there. So it comes down to execution, and the flywheel of execution that I truly think we need to be focused on. Riccardo, Sandy, Rob with the new SaaS product, Ranga with product management - we're bringing in some talents to truly get our execution flawless. 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 for 90 days of having a field has helped me, and now we're just getting it done. The goal here is to return to predictable growth just as fast as we can.

And then just maybe as a follow-up to that kind of discussion. Can you help us understand a little bit of what's going on in the Americas region? Particularly around the sales force; how much attrition have you seen, and how do we think about how much sales capacity that you need to put in place over the next couple of quarters?

So the Americas for us is strong—the economy is strong, and the demand is solid; the funnel looks good. We're seeing it both in Europe and in the Americas; we're seeing six and seven figure deals come up in the funnel. I feel much better about the pipeline and deal flow across the U.S. What we've seen is that our partner program is brand new, and it's receiving good feedback from the partner community. So I feel good that this will start giving us some traction. On attrition, our attrition happens quarter over quarter. We're not hugely concerned about our attrition at this stage. It's just that we're being very selective about the talent we're trying to bring into the company, and we just need to do it right. So the sales capacity that Riccardo is trying to build, which I'm very supportive of, is focused on bringing in the right caliber of people into the sales organization.

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

Sanjay, can you expand at all on the new SaaS offering? Is this just basically a backup and 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?

I am just a little hesitant without telling you too much about the product that we're going to be launching. But I will tell you that this is something that I'm truly excited about because it's a product that we've built like a start-up inside the company. The team is working at an incredible pace. They have turned our very design principles of how we do things on their head, and it's all about the user experience—really making it at a point when a customer thinks about technology like ours to the point where we are expanding with them. It's all about the user experience. We've taken decades of work, best practices, and machine learning, and have really made them part of the product that's super easy and anticipates what a customer wishes to do. Without getting into specific features, we are going into private data in a matter of weeks. This product is 100% partner-friendly because it's 100% sold through partners. We don't see ourselves competing; we see ourselves collaborating completely with our partners, and all our focus in sales is that the partners actually like what we're doing.

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 are different than what you've had historically with your partner programs?

So we launched in July 2015, and we obviously spent a lot of time with partners, ensuring we understood where we needed to focus. It's all about making sure that it's easy— the first thing we thought about was ensuring it's easy to do business with us. The portal, the enablement, the deal registration process, and the overall engagement model have been completely reinvented for us, and I think we've taken a step ahead of anything out there. We may have been a little late to the game, but we've stepped ahead as a result of that. The feedback we've received from partners is about the portal structure—they wanted a more user-friendly structure, which we've adjusted. They want clearer business development funds, which we have increased. Whole other enablement efforts have been implemented. Because that happens, that's the hidden cost of partners — if it's not easy to get up and running for account managers and SEs, you know, it just makes it more difficult for partners as we all know. So there's been an incredible effort around the portal, the deal registration, engagement model, and sales kit—sales play, videos, top leadership content—all of that stuff is built in. We’re really excited about it, and all the early feedback we got worldwide about the program has been very positive.

And the last one from me. Sanjay, can you give us a bit of a window into some of your conversations with Riccardo on essentially his diagnosis? I mean, he's worked with a lot of different companies. He came in, he spent some time, and I believe he's only been there what, a couple of months now? So what is he telling you that you can share with us on the problems that exist today in the sales organization and the go-to-market organization?

If you met Riccardo, you know the guy is just full of energy, and he has been in the industry for a long time. We’ve been discussing even before he came in, so he kind of knew—we had many conversations, and he is getting up to speed quickly. In many ways, he and I approach things similarly, which is all about keeping things simple. Having the right segmentation model, investing in a strong partner ecosystem, going deeper, making sure that we have a compensation program in place that effectively incentivizes performance are all critical. We’re also looking for use cases that matter most to customers and are not spread too thin. So these are all the areas in which we are currently focused. We’ve already started rolling out the strategies that we believe will help; they need to be more pronounced on the street because there is demand in the U.S., too. So there is a lot of work to be done.

And Jason, it’s Brian here. I think Riccardo also brings a wealth of experience to the table when it comes to forecasting—pipeline diligence—just making sure that when we’re calling forecasts, it’s something that we can stand by, and he is already having an impact in that area.

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

So Sanjay, it’s great to hear the new management team is in place; I presume most of the large pieces are in place here. 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 something you can’t do with software revenue flat quarter-to-quarter, but the last two years, it actually declined sequentially. When I look at stuff like that, I mean, you look at your stock and the stock is the cheapest stock we cover at four times recurring revenue, which is the way we look at it. Frankly, I just think you’ve got to hit some numbers short-term; and the long-term stuff, that’s why you came here. When you started talking about the product, and we are buying that, too. I mean, Commvault is known as having a good product, but right now, it really needs some execution. I know you’ve 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 it’s going to be flat, at least that’s your guidance. I know it's a disappointing fiscal first quarter, but I don't know; it goes along with one of those questions—the one back—that just happened. How confident are you that you can hit these numbers? Because investors, after a while, even the value ones get tired?

John, it's good to hear from you. I wouldn’t say anything different than what you said: execution and hitting our numbers are our focus right now. I will say that on the innovation piece, as much as we have great technology, the space we are in is moving so quickly that we have to keep focused on innovation, or we run the risk of falling behind. I'm not saying that’s what we have; what I'm saying is we have a really good flow of technology, we are listening to our customers, and continue to evolve it. I don't take that lightly. The rest of what you said, I completely agree with. We are focused on trying to get back to growth. This is our singular goal; internally, everything is driven around that, and this is a miss—there are no excuses about it. I feel confident we have the right team; I feel confident we have the right technology; I feel confident we have the right strategy. Now it’s just about executing every single day.

And John, just to add, 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're kind of resetting 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, and the new partner advantage program; we’ll start seeing, hopefully, the renewal impact of the subscription agreements that I alluded to on the call. We’ve got a lot of things in our favor here. Again, we're trying to reset the baseline, and we understand the importance of hitting these numbers and growing from there.

Okay, hitting the number is definitely the first thing you’ve 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 that do on a constant currency basis? Do you have that there?

Maybe slightly more favorable, I'm not sure...

And then the last thing, just sort of point the question: you said that fiscal 2021 renewals, you had a big renewal coming up, which implies some excitement around the opportunity to upsell and cross-sell, but given the performance, not just now but over the last couple of years, it seems to be a huge risk that they don’t renew.

I think we 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 and support renewals, that’s a good proxy for how we’re going to do with subscription renewals; I would say that is fairly strong. We’re looking closely with Sandy Hamilton to create a world-class customer success function and making sure that we handle these renewals with really good care and ensuring it’s a win-win for both the customer and Commvault as we approach the renewal cycle.

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

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 plan to ramp up spending, at least in the near-term. So I guess what are 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?

We understand that this is going to be a balanced approach. We recognize the need to achieve responsible and predictable growth, which means enhancing both topline and margin improvement over time. I wouldn't say that in terms of adding more resources to quota-carrying staff that we will be incurring a lot of additional costs; it will likely involve a recalibration of some of our existing initiatives. We're focused on directing 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.

And then I think you noted that Europe was an area in need of improvement and that was macro-related. I guess I just want to ask how can you be certain that slowdowns in Europe weren’t putting pressure on your business in that region?

We fundamentally believe the slow-down we think we’re seeing in Europe seems primarily focused on the larger enterprise business that we operate in. We've seen our customer transactions across Europe and are experiencing a slight delay. Some clients are seriously evaluating multi-cloud opportunities, and that may take a little more time, but we believe it's a combination of factors at play.

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

Just back on the big deal execution, Brian. This has been something that has been a recurring challenge for Commvault. You are into big deals; you're competing, which means your technology matters. But over the years, how these big deals impact the quarter for Commvault? What are you guys doing differently now as far as how you forecast your big deals and your pipeline? Then I have a quick HyperScale question.

Just to take that question, it's Brian here. Yes, the lumpiness we've referred to has stemmed from unpredictability in our execution. We understand the crucial need to improve our forecasting methodology and our overall hygiene to become more predictable; with Riccardo directing this effort, we’re looking to improve that area significantly. Secondly, as we rolled out this new partner program with the enhanced incentives we implemented, we expect to see more predictable revenue streams stemming from that, both from new customer acquisition and existing customers. Thirdly, the subscription revenue model that we’re implementing should yield greater predictability in our baseline, although its impact will take longer to materialize—probably more towards FY 2021.

And then on HyperScale: there has been considerable excitement about this product since you announced it. It allows you to compete more effectively against some of the startups. Can you provide metrics or context about the product's performance over the last 90 days?

Yes, I mean, HyperScale is the technology of the future. We’re seeing year-over-year growth with respect to HyperScale offerings, and I think this is one of our core strengths.

Let me add, Alex, the way we think about HyperScale is that it includes both the software and the appliance aspect, and our pitch to customers is it's one part of an overall approach they want to take. Our technology works together; if a customer has a cloud footprint, they have an on-premises footprint, they want to gradually migrate to SaaS, and they want in certain cases an appliance or hyper-converged capability. I may be oversimplifying it, but the range in our software provides customers with the flexibility they need. It's a very channel-friendly product, and it's very easy to set up. Personally, I was able to provision it in about 15 minutes from scratch. It’s an impressive piece of software, and our partners appreciate the reference architecture that comes with it. The interest from customers has exceeded our expectations.

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

I have a question on the revenue recognition regarding the subscription and utility software. I was under the impression that this line was going to grow sequentially as we added more subscription contracts, but it declined between Q4 and Q1. Could you refresh my memory on the revenue recognition there?

Eric, it's Brian here. It really depends on the needs of our service providers that drive that component of our utility-based revenue. Sometimes we enter into multi-year committed arrangements with them. If it makes economic sense for both of us, they might commit to a couple of years at one point in time. That actually gets recognized as a committed subscription arrangement as opposed to utility.

Okay. So the assumption then is that...

The amount gets recognized and yes, the committed amount gets recorded over periods and it contributes to our overall subscription revenue, which becomes repeatable in nature.

And then the second question here: we did see a little bit of, and I'm trying to get a feel for normalized CapEx. I think a year ago, you guys still had things related to the new facility, but was $841,000 in the quarter, is that kind of a normalized CapEx, or was that abnormally low? What should we anticipate for fiscal 2020?

I think plus or minus $0.5 million on that number to the plus will probably be appropriate.

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