Commvault Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Commvault provides data and information management software, integrated appliances and related services. This unaudited filing covers the third quarter and first nine months of fiscal 2019, ended December 31, 2018; comparisons are with the same periods of fiscal 2018. Unless noted otherwise, amounts are in U.S. dollars.
Key financial metrics
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $184.3 million | $180.4 million | $529.5 million | $514.5 million |
| Gross profit / margin | $155.4 million / 84.3% | $155.4 million / 86.2% | $446.2 million / 84.3% | $444.6 million / 86.4% |
| Operating income (loss) / margin | $10.4 million / 5.7% | $3.5 million / 1.9% | $4.6 million / 0.9% | ($5.5 million) / (1.1%) |
| Net income (loss) | $13.4 million | ($58.9 million) | $5.7 million | ($60.2 million) |
| Diluted EPS | $0.28 | ($1.30) | $0.12 | ($1.33) |
| Operating cash flow | Not presented for the quarter | $73.6 million | $60.8 million |
Quarterly revenue increased 2%; software and products revenue rose 4% to $84.5 million, while services revenue grew 1% to $99.8 million. For the nine-month period, revenue grew 3%; software and products revenue was nearly flat at $229.1 million, and services revenue increased 5% to $300.5 million. Services represented 57% of nine-month revenue.
Quarterly operating expenses declined to $145.0 million from $151.9 million, mainly reflecting lower sales and marketing costs. This improved operating income despite higher product costs. Product and software cost of revenue increased to $6.1 million from $1.2 million in the quarter, and to $15.3 million from $3.1 million year to date, due to hardware and royalty costs associated with appliance and hyperscale offerings. Services gross margin was 77% in both nine-month periods.
At December 31, 2018, cash and cash equivalents were $327.4 million and short-term investments were $130.5 million, for combined cash and short-term investments of $457.9 million. Working capital was $329.3 million. Total assets were $814.7 million and stockholders’ equity was $395.0 million. The balance sheet reports no borrowings or other debt. Current and long-term deferred revenue totaled $325.4 million.
Nine-month cash flow included $73.6 million from operations, $4.0 million used in investing and $59.9 million used in financing. Capital expenditures were $5.1 million; share repurchases used $92.7 million, partly offset by $32.8 million in proceeds from stock-based compensation plans. Cash declined by $3.4 million, including a $13.1 million adverse effect from exchange rates.
Material changes versus prior comparable periods
- Quarterly net income shifted from a $58.9 million loss to $13.4 million of income. The comparison is heavily affected by the prior-year quarter’s $62.6 million income tax expense; the current quarter recorded a $1.2 million tax benefit. The prior-year tax charge followed a valuation allowance against deferred tax assets.
- Nine-month net income improved to $5.7 million from a $60.2 million loss. The prior-year period included $55.3 million of income tax expense; current-period tax expense was $2.7 million, primarily related to current foreign taxes.
- Quarterly software and products revenue growth was led by enterprise transactions, which increased 19% in number and represented 65% of software and products revenue, versus 57% a year earlier. For the nine months, enterprise transaction revenue grew 7%, while revenue from transactions below $0.1 million declined 9%.
- Nine-month sales and marketing expense fell 8% to $281.5 million, while research and development expense rose 4% to $72.2 million. Restructuring charges were $13.3 million year to date, including $5.0 million in the quarter.
- Cash provided by operations improved by $12.8 million year over year for the nine months. The company repurchased $92.7 million of stock, compared with $91.3 million in the prior-year period.
Outlook, commentary, risks and unusual items
- Management said existing cash, cash equivalents and operating cash flow should be sufficient for anticipated needs for at least the next 12 months. No numerical revenue or earnings guidance is provided in the filing.
- Management expects product cost as a percentage of software and products revenue to increase as appliance and hyperscale sales ramp, and anticipates continued investment in research and development. Subscription licenses are becoming a more significant share of revenue, and management expects that trend to continue.
- The fiscal 2019 restructuring is intended to improve efficiency in sales, marketing and distribution and reduce costs. Management cautioned that it may not achieve its intended results and could involve additional costs, morale impacts or loss of key employees.
- Arrow generated 37% of total revenue in each nine-month comparison and represented 37% of receivables at December 31, 2018. The company also relies on channel partners and OEM relationships; OEM agreements generated 11% of nine-month revenue. Disruption or termination of key distribution relationships could adversely affect results.
- Foreign currency exposure is material: 47% of nine-month revenue came from outside the United States. Management identified exchange-rate movements as a potential source of adverse revenue, cost and competitive effects. Short-term investments are primarily U.S. Treasury bills; management reported no material interest-rate risk from these short-term holdings.
- The company recorded $1.4 million of expense related to settlement of Realtime Data LLC patent claims; the claims were dismissed with prejudice, and management considered any additional loss remote. Nine-month general and administrative expense also included $9.1 million of costs related to a non-routine shareholder matter, including settlement-related professional fees and operational-review consulting.
- The company stated that its disclosure controls and procedures were effective as of December 31, 2018, and that no material change in internal control over financial reporting occurred during the quarter. Adoption of the new lease standard was expected to add operating lease right-of-use assets and liabilities, estimated at less than 10% of total assets and liabilities, with no significant income-statement impact expected.
Important facts for investors to verify
- Whether the improvement in reported net income is sustainable apart from the unusually large prior-year tax charge and the current-period tax benefit.
- Whether software and products growth can continue, given nine-month weakness in smaller transactions and the decline in EMEA software and products revenue.
- Whether appliance and hyperscale growth offsets the expected rise in associated product costs and pressure on gross margin.
- Whether restructuring delivers lasting expense savings without impairing sales execution, employee retention or growth targets.
- Arrow and other channel concentration, customer-support renewals, and the conversion of receivables and deferred revenue into cash and recognized revenue.
- The pace of share repurchases: $151.1 million remained under the authorization at December 31, 2018, which expires March 31, 2020; repurchases are discretionary.