Business context and reporting period
Commvault Systems, Inc. provides data and information management software, integrated appliances, and related services. This unaudited Form 10-Q covers the quarter and six months ended September 30, 2018 (fiscal 2019 second quarter and first half); comparisons are to the same periods in 2017. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2018 | Prior-year quarter | Six months ended Sep. 30, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $169.1 million | $168.1 million | $345.3 million | $334.1 million |
| Software and products revenue | $69.5 million | $72.0 million | $144.6 million | $146.8 million |
| Services revenue | $99.6 million | $96.1 million | $200.7 million | $187.3 million |
| Gross margin | $142.2 million; 84.1% | $144.9 million; 86.2% | $290.8 million; 84.2% | $289.2 million; 86.5% |
| Operating income (loss) | $1.0 million | $(4.7) million | $(5.8) million | $(9.0) million |
| Net income (loss) | $0.9 million | $(1.0) million | $(7.7) million | $(1.3) million |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $42.5 million | $29.6 million |
- First-half operating cash flow improved year over year, although the company reported a larger net loss. Cash and cash equivalents were $353.2 million at September 30, 2018, and short-term investments were $130.9 million.
- Working capital was $347.5 million, up from $322.6 million at March 31, 2018. The balance sheet reports no borrowings or debt; total current liabilities were $295.0 million.
- First-half investing cash outflow was $3.3 million, including $4.0 million of capital expenditures. Financing cash outflow was $8.7 million, including $38.3 million of repurchases, partly offset by $29.6 million of stock-plan proceeds.
Material changes versus comparable periods
- Quarterly revenue rose 1%; first-half revenue rose 3%. Services growth—4% for the quarter and 7% for the half—more than offset lower software and products revenue, down 3% and 2%, respectively.
- Software and products costs increased substantially, primarily from hardware and software royalties for appliance and hyperscale offerings, contributing to lower gross margin. Management expects these costs as a percentage of software and products revenue to increase as sales ramp.
- Sales and marketing expense declined 11% in the quarter and 7% for the half, with lower employee, travel, and marketing costs. Research and development expense increased 7% and 8%, respectively, due mainly to engineering staff expansion.
- First-half restructuring charges were $8.4 million, primarily severance and related costs; $6.6 million was paid by September 30, leaving a $1.8 million accrual.
- Software and products revenue declined in EMEA, down 17% for the quarter and 12% for the half, while Americas and APAC grew modestly. First-half enterprise transaction revenue was nearly flat: transaction count increased 26%, but average transaction size fell 20%.
Outlook, commentary, risks and unusual items
- Management believes cash, investments, and operating cash flow will cover anticipated needs for at least the next 12 months. No specific revenue or earnings guidance is provided.
- Management expects continued investment in research and development and expects a larger subscription-license contribution over time. It cautions that product adoption, release timing, and industry change create uncertainty.
- Sales through distributor Arrow represented 36% of revenue in the first half; Arrow also held 28% of receivables at September 30. The filing warns that a reduction or termination of this relationship could materially affect results. Customer-support renewals and large enterprise transactions are also important revenue drivers.
- Sales outside the United States were 46% of first-half revenue, exposing results to foreign-exchange movements. Approximately $130 million of cash was held outside the U.S.; local restrictions and withholding taxes may limit near-term availability. About $20 million in China and India remained treated as permanently reinvested.
- Quarterly general and administrative costs included $4.2 million related to non-routine shareholder matters and $1.4 million for an intellectual-property settlement. Realtime Data’s patent claims, including claims against customers based on Commvault products, were dismissed with prejudice under an agreement reached October 5, 2018; $1.4 million was accrued.
- The company recorded a valuation allowance against deferred tax assets. First-half tax expense of $3.9 million primarily reflected current foreign taxes; accounting for U.S. tax reform effects, including GILTI, remained provisional or under assessment.
- On October 18, 2018, the board extended the share-repurchase program through March 31, 2020, and increased authorization so that $200 million was available. The filing says restructuring may involve unexpected costs, morale effects, or loss of key employees.
Important facts for investors to verify
- Whether services and customer-support growth can continue to offset weakness in software and products, especially in EMEA.
- Whether appliance and hyperscale growth improves overall economics despite higher product costs and lower gross margin.
- How the restructuring affects expense levels, execution, and revenue performance, and whether further charges arise.
- Revenue and receivable exposure to Arrow, renewal rates, and the scale and timing of enterprise transactions.
- Cash availability across jurisdictions, the effects of foreign exchange and tax-rule interpretations, and the pace of share repurchases.