Commvault Systems, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended March 31, 2016. The filing also reports fourth-quarter results for the quarter ended March 31, 2016. Amounts are in U.S. dollars.
Business context
Commvault sells data and information management software and related support and professional services. Its products share a unified software platform and address backup and recovery, cloud and infrastructure management, and retention and compliance. It reported more than 22,500 registered customers. Sales rely heavily on indirect channels, distributors and OEM partners.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $595.1 million | $607.5 million | Down 2% |
| Software revenue | $258.8 million | $283.3 million | Down 9% |
| Services revenue | $336.3 million | $324.3 million | Up 4% |
| Gross margin | $512.4 million; 86% | $525.5 million; 86% | Dollar amount down |
| Operating income | $2.0 million | $38.8 million | Down 95% |
| Net income | $0.1 million | $25.7 million | Down substantially |
| Diluted EPS | $0.00 | $0.54 | Down |
| Cash from operations | $84.4 million | $123.8 million | Down 32% |
- FY2016 operating margin was approximately 0.3%, compared with 6.4% in FY2015. Services gross margin was 76.1%; software gross margin was 99.1%.
- Fourth-quarter revenue was $159.6 million and net income was $5.8 million; the first two FY2016 quarters recorded net losses.
- At March 31, 2016, cash and cash equivalents were $288.1 million, short-term investments $99.1 million, and working capital $252.4 million. Cash and investments totaled about $387.2 million.
- No borrowings were outstanding under the $250 million revolving credit facility. Stockholders’ equity was $396.3 million; the company reported no funded debt outstanding under that facility.
- Deferred revenue was $244.9 million, primarily customer support obligations. Current assets were $517.4 million and current liabilities $265.0 million.
- Cash declined $49.6 million during the year. The company repurchased $91.5 million of shares and invested $49.1 million net in short-term Treasury securities, alongside capital spending and a $4.7 million investment in Laitek.
Material changes and management commentary
- Software revenue fell mainly because enterprise transactions declined: their number was down 10% and average deal size down 4%. Enterprise transactions represented 53% of software revenue, versus 56% in FY2015.
- Services growth, including a $15.2 million increase in customer support agreement revenue, partly offset weaker software sales. Services rose to 57% of total revenue from 53%.
- Operating expenses rose 5% to $510.4 million. Sales and marketing expense increased 5% as the company expanded its sales force; R&D expense increased 8%.
- The effective tax rate was 93%, versus 34% in FY2015. The filing attributes the elevated rate to low pretax income, unfavorable permanent differences and a $1.4 million increase in the valuation allowance for New Jersey research credits.
- Management expected continued R&D investment, a growing contribution from subscription or term-based licenses over the next several years, and a phased maintenance-pricing realignment over 12 months. The pricing changes primarily target mid- and lower-market customers and affect about one-quarter of the maintenance revenue base.
- Management said existing cash, cash equivalents and operating cash flow should cover anticipated working capital, capital expenditures and potential repurchases for at least the next 12 months.
Risks, contingencies and unusual items
- Channel concentration is significant: Arrow generated approximately 38% of FY2016 revenue and represented 43% of year-end accounts receivable. OEM agreements generated 15% of revenue; Hitachi Data Systems alone accounted for 11%.
- Foreign operations generated approximately 42% of revenue. Management estimated that a 10% movement in foreign exchange rates could affect annual operating profit by about $4.5 million.
- A securities class action filed in 2014 was refiled in February 2016 after dismissal; defendants’ renewed motion to dismiss was pending. The company had not recorded a reserve and could not estimate the outcome or potential impact.
- Other material risks include enterprise deal timing and sales-force productivity, competition, maintenance renewals and pricing, customer adoption of new products, currency movements, and reliance on reseller and OEM relationships.
- Stock-based compensation was $64.2 million, a substantial noncash expense. The company had $105.5 million of unrecognized stock compensation expected to be recognized over a weighted average 2.15 years.
- The company reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether software revenue and enterprise deal volume stabilize after the FY2016 declines, particularly in the Americas sales organization.
- Whether expense growth moderates and operating profitability recovers, given near break-even FY2016 results and continued planned R&D investment.
- Whether services and maintenance renewals continue to grow and how the maintenance-pricing realignment affects retention, revenue and margins.
- The company’s dependence on Arrow, HDS and other indirect channels, including any change in partner contribution or receivable concentration.
- Potential developments in the securities litigation and any future estimate of financial exposure.
- The timing and cash-flow effects of share repurchases, capital needs and the Laitek investment or purchase option.