CommVault Systems, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the three months ended June 30, 2011. The unaudited results are compared with the three months ended June 30, 2010; balance-sheet figures are compared with March 31, 2011. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $91.5 | $66.3 | +38% |
| Software revenue | $43.8 | $28.3 | +55% |
| Services revenue | $47.7 | $38.0 | +26% |
| Gross profit / margin | $79.5 / 86.8% | $56.8 / 85.6% | Margin +1.2 percentage points |
| Operating income / margin | $10.0 / 10.9% | $3.7 / 5.5% | Operating income +173% |
| Net income | $7.0 | $3.5 | +101% |
| Diluted EPS | $0.15 | $0.08 | +$0.07 |
| Cash from operations | $31.1 | $15.9 | +$15.2 |
Operating expenses rose to $69.5 million from $53.1 million, led by sales and marketing, which increased $13.9 million to $49.8 million as the company expanded its sales force and incurred higher commissions. R&D was $9.3 million and G&A was $9.4 million. Software gross margin was 98.6%; services gross margin was 76.1%.
Financial position and liquidity
- Cash and cash equivalents were $251.0 million at June 30, up from $217.2 million at March 31; short-term investments were $3.1 million. Total assets were $366.9 million.
- Working capital was $196.5 million, up from $179.4 million. Current liabilities were $139.7 million, including $103.1 million of current deferred revenue; total deferred revenue was $118.1 million.
- The company reported no outstanding borrowings under its $30 million credit facility and stated it was in compliance with the facility’s covenants. The facility matures in July 2012.
- Investing cash outflow was $3.5 million, primarily for $1.5 million of property and equipment and net purchases of short-term investments. Financing provided $5.8 million, including $4.2 million from option exercises and $1.6 million of excess tax benefits.
- No shares were repurchased during the quarter. The company had $48.3 million remaining under its $120 million repurchase authorization through March 31, 2012.
Material changes and management commentary
- Revenue growth reflected higher enterprise software transactions, defined as transactions over $0.1 million: they accounted for 52% of software revenue versus 44% a year earlier. Their number increased 67%; average deal size was approximately $269,000 versus $245,000.
- Software revenue increased in both U.S. and international markets. Indirect-channel software revenue grew 47%, while direct-channel software revenue grew 91%. Services growth was primarily from customer support agreements.
- Sales through Dell represented 21% of total revenue, down from 26%; sales through Arrow represented 25%, up from 23%. The company also announced a global NetApp OEM agreement, but recorded no revenue under it in the quarter.
- Management expected enterprise software transactions and resulting software revenue to increase during fiscal 2012, while noting individual deal timing and size are difficult to forecast. It expected operating expense categories to rise in dollars, but decline as a percentage of revenue over the long term. No specific revenue or earnings guidance was provided.
- Management believed cash, operating cash flow and the credit facility would meet anticipated needs for working capital, capital expenditures and potential repurchases for at least 12 months. It also noted future funding might not be available on acceptable terms if needed.
Risks, contingencies, and unusual items
- A $1.6 million reversal of the valuation allowance against certain New Jersey research tax credits contributed to the quarter’s tax accounting. The effective tax rate was 31%, compared with 7% a year earlier; the prior-year rate benefited from a $1.1 million reversal of foreign tax reserves.
- Unrecognized tax benefits were $4.6 million, with $0.9 million of related accrued interest and penalties. The company said approximately $0.4 million of tax benefits and $0.1 million of related interest and penalties might be realized by the end of fiscal 2012 following statute expirations.
- Revenue and channel concentration are relevant: Dell and Arrow together accounted for 46% of quarterly revenue. Dell represented 25% of receivables and Arrow approximately 30% at quarter-end.
- International sales were approximately 38% of revenue, exposing results to exchange-rate movements. Management also highlighted competition, product obsolescence, changing technology including cloud computing, and the risk that new solutions may not be widely adopted.
- The company reported no litigation expected to have a material effect and no material off-balance-sheet financing arrangements other than operating leases. Disclosure controls were assessed as effective; no material change in internal control was reported.
Investor verification priorities
- Check whether software growth and enterprise deal momentum continued, given dependence on large transactions and their variable timing.
- Track reliance on Dell, Arrow, resellers and OEM partners, including the commercial contribution of the NetApp agreement.
- Assess whether sales-force expansion and other operating-cost growth translate into sustained operating-margin improvement.
- Review cash generation, deferred-revenue trends, share repurchases and the July 2012 credit-facility maturity.
- Monitor tax-credit realizability, unrecognized tax positions, foreign-exchange exposure, and adoption of cloud-related and other new products.