Commvault Systems, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended March 31, 2020. The filing is an annual report, not a standalone Q4 filing; unaudited Q4 results are noted below. Commvault sells data protection and information management software, appliances, support and professional services. It acquired software-defined storage company Hedvig on October 1, 2019, and launched its Metallic SaaS offering, which had immaterial FY2020 revenue.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $670.9 million | $711.0 million | Down 6% |
| Software and products revenue | $275.3 million | $309.9 million | Down 11% |
| Services revenue | $395.6 million | $401.1 million | Down 1% |
| Gross margin | $553.8 million; 82.5% | $594.0 million; 83.5% | Down $40.1 million |
| Operating income (loss) | $(17.5) million | $4.9 million | Declined $22.4 million |
| Net income (loss) | $(5.6) million | $3.6 million | Declined $9.2 million |
| Cash from operations | $88.5 million | $110.2 million | Down $21.7 million |
- Q4 FY2020 revenue was $164.7 million and net income was $8.9 million; the filing does not provide a clear standalone Q4 comparison for all metrics in the supplied text.
- At March 31, 2020, cash, cash equivalents and restricted cash were $296.1 million, with $43.6 million of short-term investments. Working capital was $185.1 million, down from $328.7 million a year earlier, largely due to the Hedvig acquisition.
- The balance sheet lists no debt. Total liabilities were $433.2 million, including deferred revenue and operating lease liabilities. Deferred revenue totaled $326.2 million.
- Net cash used in investing was $74.0 million, including $157.5 million net cash paid for Hedvig, partly offset by investment maturities. Net cash used in financing was $39.4 million, including $77.2 million of share repurchases.
- Services gross margin was 78%, up from 77%; software and products gross margin was 90%, down from 92%, reflecting hardware and royalty costs associated with appliances and HyperScale offerings.
Material changes and business developments
- Software and products revenue fell $34.6 million. Enterprise transactions (over $100,000) declined 19% in number, partly offset by a 10% rise in average transaction size. Enterprise deals remained about 65% of software and products revenue.
- Sales and marketing expense fell 9% to $335.8 million, mainly due to restructuring-related compensation reductions. Research and development expense rose 19% to $110.0 million, reflecting engineering expansion and Hedvig-related costs.
- Restructuring charges were $21.3 million, compared with $14.8 million in FY2019. Hedvig added $112.4 million of goodwill and $46.4 million of net intangible assets; its acquisition-related amortization and integration are expected to affect future expenses.
- About 41% of software license revenue was sold under subscription arrangements. Management expects subscription revenue as a share of total revenue to increase and expected material renewals from prior-year subscription licenses beginning in FY2021.
- Arrow accounted for approximately 37% of total revenue, and OEM sales accounted for 10%, highlighting reliance on indirect channels and partners.
Outlook, risks and unusual items
- The filing gives no formal revenue or earnings guidance. Management said existing cash and expected operating cash flows should cover working capital, capital expenditures and potential repurchases for at least 12 months.
- COVID-19 created uncertainty around customer spending, sales activity, collections and the economy. Management said customer support operations had not been significantly impaired, but sales efforts and customer spending could be affected.
- The company estimated that a 10% change in foreign exchange rates would affect annual reported operating profit by approximately $9.6 million. Approximately 49% of FY2020 revenue came from outside the United States.
- Management identified possible impairment risk for Hedvig-developed technology if COVID-19 or other factors prevent achievement of valuation forecasts. Goodwill impairment testing as of January 1, 2020 found no impairment.
- The CARES Act contributed to a $6.9 million income tax benefit; the company estimated a cash refund of approximately $10.0 million from carrying back net operating losses.
- After year-end, Commvault filed patent infringement suits against Cohesity and Rubrik; outcomes and potential financial effects were undetermined. The board also adopted a 364-day shareholder rights plan on April 3, 2020.
- Other key risks include intense competition, dependence on reseller channels and maintenance renewals, long and uneven sales cycles, technology changes, and the costs and integration risks of acquisitions. The auditor issued unqualified opinions on the financial statements and internal controls; revenue recognition and the Hedvig acquisition were identified as critical audit matters.
Investor verification priorities
- Track whether subscription renewals and Metallic generate meaningful recurring growth, and whether that growth offsets declining software and products sales.
- Assess Hedvig integration, acquired technology performance, amortization, contingent payments and impairment risk.
- Monitor operating cash flow, working capital, deferred revenue, receivable collections and the impact of share repurchases on liquidity.
- Evaluate exposure to Arrow and other indirect channels, enterprise deal timing, and the renewal rate and economics of support contracts.
- Follow COVID-19 effects on demand and collections, foreign exchange exposure, and developments in the Cohesity and Rubrik litigation.