CommVault Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2011. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context
CommVault sells Simpana data and information management software and related support and professional services. It serves approximately 15,000 registered customers. Backup and Recovery remained its largest software application, accounting for about 56% of software revenue in the first half. Sales are predominantly through indirect partners.
Financial performance
| Metric | Three months to Sep. 30, 2011 | Year-over-year | Six months to Sep. 30, 2011 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $97.5 | +30% | $189.0 | +34% |
| Software revenue | $47.8 | +34% | $91.6 | +43% |
| Services revenue | $49.6 | +26% | $97.4 | +26% |
| Gross profit / margin | $84.4 / 86.6% | Margin: 87.3% prior year | $163.9 / 86.7% | Margin: 86.5% prior year |
| Operating income / margin | $13.1 / 13.4% | +$3.9 | $23.1 / 12.2% | +$10.2 |
| Net income | $7.9 | +$2.5 | $14.9 | +$6.0 |
| Diluted EPS | $0.17 | $0.12 prior year | $0.32 | $0.19 prior year |
| Operating cash flow | Not presented quarterly | — | $42.2 | $23.5 prior year |
Margins shown are calculated from reported amounts. Six-month software revenue growth was led by enterprise transactions over $0.1 million, which rose 69% in number and represented 54% of software revenue, versus 46% a year earlier. Sales and marketing expense rose 36% to $101.0 million in the first half, principally reflecting sales-force growth, compensation and commissions. Management attributed services cost growth to expanding customer support operations and higher outsourcing costs.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $216.7 million and short-term investments were $3.1 million. Total assets were $344.6 million.
- Current liabilities were $144.3 million; working capital was $166.9 million, down from $179.4 million at March 31. Current deferred revenue increased to $107.0 million from $98.2 million; total deferred revenue, including non-current, was $124.4 million.
- The company reported no borrowings on its $30 million credit facility at September 30 and was in compliance with its covenants. It terminated the facility on October 12, 2011, eliminating that borrowing availability. The filing reports no other debt balance.
- First-half operating cash flow of $42.2 million was offset by $4.9 million used in investing and $35.9 million used in financing. Cash declined $0.4 million, to $216.7 million; financing outflows included $45.6 million of share repurchases.
- Management said existing cash, cash equivalents and operating cash flow should cover anticipated working capital, capital expenditure and potential repurchases for at least 12 months.
Changes, outlook and notable items
- Management expected enterprise software transactions and resulting software revenue to increase during fiscal 2012, while noting that the timing and size of individual deals are difficult to forecast. It anticipated continued growth in Advanced Data and Information Management products, but expected Backup and Recovery to remain a significant revenue source for the next few fiscal years.
- Management expects investment in product development and global infrastructure to continue. It described cloud computing as a long-term industry trend and discussed Simpana cloud-related capabilities, while cautioning that product development timing and customer adoption are uncertain. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
- On October 27, the board increased the repurchase authorization by $50 million and extended the program to March 31, 2013. As of November 3, $52.8 million remained available under the revised $170 million authorization.
- The effective tax rate was 36% for the first half, versus 32% a year earlier. The 2011 period included reversal of $1.6 million of valuation allowance related to New Jersey research credits; the prior-year period benefited from a $1.1 million tax-reserve reversal.
- There were no litigation matters expected to materially affect financial position, results or cash flows, and no material change in internal control was reported. The company disclosed that Dell represented 21% of first-half revenue and 24% of receivables at quarter-end; Arrow represented 26% of first-half revenue and 28% of receivables.
Risks and contingencies
Key disclosed exposures include reliance on distribution and OEM partners, particularly Dell and Arrow; dependence on enterprise deals and indirect channels; competition and potential software obsolescence as technology changes; and foreign-currency movements, with 38% of first-half revenue generated outside the United States. Management also cited the possibility that additional financing may not be available on favorable terms if needed. The company had $4.8 million of unrecognized tax benefits and $0.9 million of related accrued interest and penalties; management believed some amounts could be realized as statutes of limitation lapse. Customer software agreements include intellectual-property indemnities, for which the company had not recorded a liability and considered the likelihood of payout remote.
Important facts for investors to verify
- Whether enterprise-deal growth and the stated fiscal 2012 expectation translated into sustained revenue growth, given deal-size and timing variability.
- Whether services growth and support expansion can be maintained without further pressure on services gross margin, which declined to 75.5% for the first half from 76.9%.
- Partner concentration and receivables exposure, especially Dell and Arrow, and the ability to replace or manage distribution if a relationship changes.
- Cash deployment: the scale of ongoing repurchases relative to operating cash generation, the revised authorization, and the loss of the $30 million credit facility.
- Foreign-exchange effects, tax-credit realizability and the resolution of unrecognized tax benefits.