Business context and reporting period
Commvault Systems, Inc. filed this unaudited Form 10-Q for the third quarter of fiscal 2016, the three months ended December 31, 2015, and the nine-month year-to-date period. The company sells data and information management software and related services, including customer support. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter ended Dec. 31, 2015 | Prior-year quarter | Nine months ended Dec. 31, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $155.7 million | $153.0 million | $435.6 million | $456.8 million |
| Software revenue | $71.4 million | $71.7 million | $185.4 million | $213.2 million |
| Services revenue | $84.3 million | $81.3 million | $250.1 million | $243.6 million |
| Gross margin | 86.9% | 87.0% | 85.8% | 86.6% |
| Operating income (loss) | $3.5 million | $4.9 million | $(7.3) million | $34.0 million |
| Net income (loss) | $4.9 million | $3.1 million | $(5.7) million | $22.3 million |
| Diluted EPS | $0.10 | $0.07 | $(0.12) | $0.47 |
| Cash from operating activities | Not separately presented | $47.2 million | $87.9 million |
Quarterly revenue rose 2%, as services growth more than offset slightly lower software revenue. Year-to-date revenue declined 5%, led by a 13% fall in software revenue; services revenue increased 3%. Year-to-date operating expenses increased to $380.9 million from $361.6 million, contributing to the operating loss. The nine-month tax benefit was $1.7 million, compared with $11.9 million of tax expense in the prior-year period; management attributed the benefit primarily to federal research and development credits made permanent by legislation.
Liquidity, cash flow and capital
At December 31, 2015, cash and cash equivalents were $316.4 million and short-term U.S. Treasury investments were $84.7 million. Working capital was $277.6 million. The company reported no borrowings under its $250 million revolving credit facility and said it was in compliance with its covenants. It believed cash and operating cash flow would cover anticipated needs for at least 12 months.
Year-to-date operating cash flow fell to $47.2 million from $87.9 million. Investing activities used $46.5 million, including net Treasury purchases, capital expenditures and a $4.6 million minority investment in Laitek. Financing activities used $18.5 million, including $34.6 million of share repurchases. Cash and cash equivalents declined by $21.3 million during the period. Approximately $125 million of cash was held by foreign legal entities; the company intends to indefinitely reinvest undistributed foreign earnings and notes potential tax and legal constraints on repatriation.
Material changes and management commentary
- Year-to-date enterprise software transaction revenue fell 22%, reflecting 14% fewer transactions and a 9% lower average transaction value. Enterprise transactions represented 51% of software revenue, down from 56%.
- Software revenue decreased in all three regions year to date. Currency effects were significant: management said EMEA software revenue would have risen 3% at prior-year exchange rates rather than declining 9%; APAC would have fallen 5% rather than 16%.
- Sales and marketing expense rose 5% year to date, primarily due to sales-force expansion; research and development expense rose 7% as the engineering group expanded. Management expects continued R&D investment.
- Services increased to 57% of year-to-date revenue from 53%. Management cautioned that services carry lower gross margins than software and that maintenance pricing changes could hurt results if reduced revenue is not replaced by other sales.
- The company continued a broad business transformation begun in fiscal 2015, covering products, packaging, pricing, distribution, sales enablement and organizational structure. Management warned execution may be disruptive, delayed, more costly than expected or fail to achieve its intended results.
Outlook, risks and unusual items
The filing provides no specific revenue, earnings or margin guidance. Management noted that results for the interim periods are not necessarily indicative of full-year results. Risks highlighted include software obsolescence and adoption, competition, execution of the transformation plan, renewal of support contracts, reliance on distribution partners and foreign-exchange movements. Arrow generated 38% of nine-month revenue and represented approximately 47% of year-end receivables; Hitachi Data Systems generated 11% of nine-month revenue. The company also noted that its OEM partners have no minimum sales obligations.
A securities class action naming the company, its CEO and CFO was dismissed in its entirety without prejudice on December 17, 2015; plaintiffs were allowed to amend their complaint. The company intends to defend the case, cannot estimate possible losses, and recorded no reserve. Other notable items include $47.5 million of year-to-date stock-based compensation and a $4.6 million equity-method investment in Laitek, with an option to acquire the remaining ownership at a fixed price for two years.
Important facts for investors to verify
- Whether software revenue and enterprise deal trends improved after the year-to-date declines, especially in the Americas and APAC.
- Whether revenue growth can offset higher sales, marketing and R&D spending and restore operating profitability.
- Support renewal rates, maintenance pricing changes and the company’s ability to replace any reduced support revenue.
- Cash-flow generation, use of repurchases and the availability or restrictions on foreign-held cash.
- Developments in the securities litigation, the Laitek investment and option, and execution and costs of the business transformation.
- Foreign-exchange effects and continued concentration in Arrow and other distribution and OEM partners.