CommVault Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2011; financial results are compared with the three and nine months ended December 31, 2010. Balance-sheet comparisons are with March 31, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context and period
CommVault sells Simpana data and information management software and related services, including customer support. It reported approximately 15,600 registered customers. For the first nine months of fiscal 2012, software licenses generated 49% of revenue and services 51%. Approximately 62% of software license transactions were capacity-based.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Year-over-year change | Nine months ended Dec. 31, 2011 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $103.6 million | +24% | $292.6 million | +30% |
| Software revenue | $51.4 million | +23% | $143.0 million | +35% |
| Services revenue | $52.2 million | +25% | $149.6 million | +25% |
| Gross margin | $90.0 million; 86.9% | 87.9% in prior year | $253.9 million; 86.8% | 87.0% in prior year |
| Operating income | $12.3 million; 11.9% margin | +18% | $35.4 million; 12.1% margin | +51% |
| Net income | $7.2 million | Down from $7.3 million | $22.1 million | +37% |
| Diluted EPS | $0.15 | Down from $0.16 | $0.47 | Up from $0.35 |
Quarterly revenue growth was driven by higher software sales in the U.S. and internationally, and increased customer-support revenue. For the nine-month period, enterprise software transactions over $100,000 rose 39% in number and accounted for approximately 51% of software revenue, versus 47% a year earlier. Sales and marketing remained the largest operating expense: $56.1 million for the quarter and $157.1 million for the nine months, reflecting higher staffing, commissions and marketing investment.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $69.9 million, compared with $33.5 million in the prior-year period. Management attributed the increase to earnings, collections, growth in deferred services revenue and accrued liabilities.
- Investing cash outflow was $6.4 million, including $4.4 million of property and equipment purchases. Financing cash outflow was $24.6 million, including $45.6 million of share repurchases, partly offset by option-exercise proceeds and excess tax benefits.
- Cash and cash equivalents were $254.0 million at December 31, 2011, with a further $3.1 million in short-term investments. Working capital was $195.0 million. The company reported no outstanding borrowing and terminated its $30 million credit facility in October 2011.
- Current and non-current deferred revenue totaled $130.8 million, up from $112.9 million at March 31, 2011. Stockholders’ equity was $200.0 million.
- During the nine months, the company repurchased 1.3 million shares for $45.6 million. Approximately $52.8 million remained under the $170 million authorization, which ran through March 31, 2013.
Changes, outlook and risks
- Services gross margin declined to 75.5% for the nine months from 77.0%, primarily due to a higher mix of professional services and costs to expand worldwide support operations. Software gross margin was 98.6%, versus 98.3%.
- Management expected enterprise transaction volume and related software revenue to increase during fiscal 2012, while noting that the timing and size of individual deals are difficult to forecast. It anticipated continued investment in research and development, sales channels and infrastructure. It also expected operating expense categories to rise in dollars but decline as a percentage of revenue over the long term. The filing provides no specific numeric full-year revenue or earnings guidance.
- Key commercial risks include reliance on indirect channels and distributors: Dell represented 22% of nine-month revenue and Arrow 27%. Dell accounted for 26% of receivables and Arrow approximately 32% at period-end. These channel relationships are non-exclusive and may be terminated; the filing notes that losing a distributor without an adequate replacement could materially affect results.
- Approximately 39% of revenue was generated outside the U.S.; foreign exchange movements may affect reported results and competitiveness. The company also cited technology change, software obsolescence, competitive products and uncertainty around adoption of cloud-related offerings.
- The company reversed $1.6 million of its valuation allowance against certain state research credits following New Jersey law changes. The nine-month effective tax rate was 38%, versus 32% in the prior year. Unrecognized tax benefits were $4.9 million, with $0.9 million of related interest and penalties; management said some amounts might be realized through statute expirations.
- No litigation was reported as expected to have a material effect. Management concluded disclosure controls were effective at December 31, 2011 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether software and enterprise-deal growth can continue, and how much growth depends on large transactions and indirect channels.
- Whether services cost growth and the resulting decline in services gross margin persist as support operations expand.
- The sustainability and cash impact of share repurchases, given the terminated credit facility and remaining authorization.
- Distributor and customer concentration, including the precise exposure to Dell and Arrow and any changes to those relationships.
- Future tax rates, realization of deferred tax assets and resolution of unrecognized tax positions.