CommVault Systems, Inc. — Form 10-Q Summary
Business context and reporting period. CommVault develops and sells Simpana data and information management software and related support and professional services. This unaudited filing covers the fiscal third quarter and nine months ended December 31, 2012; comparisons are with the same periods in 2011. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $128.1 | $103.6 | $357.6 | $292.6 |
| Software revenue | $65.9 | $51.4 | $179.4 | $143.0 |
| Services revenue | $62.2 | $52.2 | $178.2 | $149.6 |
| Gross margin | 87.2% | 86.9% | 86.8% | 86.8% |
| Operating income | $20.2 | $12.3 | $59.0 | $35.4 |
| Net income | $12.2 | $7.2 | $36.2 | $22.1 |
| Diluted EPS | $0.25 | $0.15 | $0.75 | $0.47 |
| Operating cash flow | Not presented separately | Not presented separately | $69.8 | $69.9 |
- Quarterly revenue grew 24%, operating income 64%, and net income 70% year over year. For the nine-month period, revenue grew 22%, operating income 67%, and net income 64%.
- Nine-month software revenue increased 25% and services revenue increased 19%. Enterprise software transactions—deals over $0.1 million—accounted for 57% of software revenue, versus 51% a year earlier.
- Sales and marketing, research and development, and general and administrative expenses rose in dollars, but sales and marketing declined to 49% of nine-month revenue from 54%. Services gross margin was 74.8%, down from 75.5%; software gross margin was 98.8%, up from 98.6%.
- Nine-month operating cash flow was essentially unchanged despite higher net income. Cash and cash equivalents were $395.3 million at December 31, 2012, up from $297.1 million at March 31, 2012; short-term investments were $1.9 million. Working capital was $313.7 million. Current liabilities were $184.1 million, including $134.9 million of deferred revenue.
- The balance sheet reports no borrowings; total liabilities were $218.7 million, predominantly deferred revenue. The company reported total assets of $538.4 million and stockholders’ equity of $319.7 million.
- Nine-month investing cash outflow was $4.4 million, including $5.6 million of property and equipment purchases. Financing provided $32.2 million, including $18.1 million of excess tax benefits and $14.1 million from stock-option exercises. Cash increased $98.2 million over the period.
Material changes, outlook, and risks
- Management attributed growth mainly to larger and more numerous enterprise software deals, expansion in international markets, and customer-support agreements from new and renewing customers. International software revenue rose 35% for the nine-month period.
- Channel exposure is significant: Arrow accounted for 28% of nine-month revenue and 33% of receivables at December 31; Dell-related sales were 20% of revenue and Dell accounted for 21% of receivables. Management noted that losing or reducing a major distributor or reseller relationship could adversely affect results.
- Management expected enterprise software transactions and related revenue to increase through fiscal 2013, while cautioning that the size and timing of individual deals are difficult to forecast. It anticipated continued investment in research and development and expected operating expenses to rise in dollars, but decline as a percentage of revenue over the long term.
- The company stated that existing cash and operating cash flow should cover working capital, capital expenditures—including its planned headquarters—and potential repurchases for at least 12 months. It expected to spend approximately $125–$135 million on the land, building, and infrastructure for a new New Jersey headquarters over roughly two years. The land purchase closed January 29, 2013.
- The repurchase authorization was increased to $220 million and extended through March 31, 2014. No shares were repurchased in the nine months ended December 31, 2012; approximately $102.8 million remained authorized.
- Following enactment of the American Taxpayer Relief Act in January 2013, management expected the renewed research credit to reduce the annual effective tax rate by approximately 2.5–3.0% in the quarter ending March 31, 2013. The nine-month effective tax rate was 39%.
- Risks include dependence on indirect channels and large deals, competition and potential product obsolescence, foreign-currency exposure, and execution and cost risks related to planned headquarters construction. Approximately 40% of nine-month revenue came from outside the United States.
- The company disclosed ongoing U.S. federal and German tax audits and $5.1 million of unrecognized tax benefits, plus $0.9 million of accrued interest and penalties. It reported no legal claims requiring contingency disclosure and no pending legal action believed likely to have a material adverse effect.
- Stock-based compensation was $21.1 million for the nine months, with $90.5 million of unrecognized compensation expense expected to be recognized over a weighted-average 2.74 years. Management reported effective disclosure controls as of December 31, 2012 and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether enterprise-deal growth and customer-support renewals persist, given their importance to revenue growth.
- How much revenue and receivables remain concentrated with Arrow and Dell, and whether channel relationships or terms change.
- Actual headquarters project spending and timing compared with the $125–$135 million estimate and available cash generation.
- Whether the expected research-credit benefit is recorded as anticipated and how tax audits or unrecognized tax positions develop.
- The effect of stock-based compensation, option exercises, and any renewed repurchases on diluted share count and per-share results.