CommVault Systems, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2014, ended September 30, 2013. Unaudited results are compared with the corresponding 2012 periods. CommVault sells Simpana data and information management software and related services; it reported approximately 19,000 registered customers.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Software revenue | $70.8 | $59.2 | $136.1 | $113.5 |
| Services revenue | $71.0 | $58.9 | $140.1 | $116.0 |
| Total revenue | $141.9 | $118.2 | $276.3 | $229.4 |
| Gross profit / margin | $123.7 / 87.2% | $102.8 / 87.0% | $240.3 / 87.0% | $198.8 / 86.7% |
| Operating income / margin | $26.4 / 18.6% | $22.4 / 18.9% | $47.8 / 17.3% | $38.8 / 16.9% |
| Net income | $17.4 | $13.9 | $30.8 | $24.0 |
| Diluted EPS | $0.35 | $0.29 | $0.62 | $0.50 |
- Growth and profitability: Revenue rose 20% in both periods. Six-month software and services revenue grew 20% and 21%, respectively. Six-month operating income increased 23% and net income increased 28% year over year.
- Costs: Six-month sales and marketing expense increased 20%, R&D 17%, and general and administrative expense 25%. Management attributed increases principally to hiring and expansion, marketing, and higher stock-based compensation. Six-month stock-based compensation expense was $20.3 million, up from $12.1 million.
- Cash flow: Six-month operating cash flow was $49.1 million, versus $42.3 million. Investing used $47.5 million, including increased spending on the planned headquarters and short-term investments. Financing provided $26.5 million, including $16.8 million of excess tax benefits from stock-based compensation and $9.7 million from option exercises.
- Liquidity and debt: At September 30, cash and cash equivalents were $462.2 million and short-term investments $23.0 million; working capital was $390.7 million. The balance sheet reports no debt. Current and long-term deferred revenue totaled $191.2 million.
Material changes and business developments
- Enterprise software transactions (over $100,000) accounted for 56% of six-month software revenue, unchanged as a share year over year; their dollar value grew 21%. Capacity-based licenses rose to approximately 77% of license transactions from 65%.
- Indirect-channel software revenue increased 24% in the first six months, while direct-channel software revenue declined 11%, reflecting transaction mix and channel shifts. Arrow generated approximately 31% of total revenue and represented about 43% of receivables at quarter-end. Dell agreements generated 20% of six-month revenue.
- On October 16, 2013, CommVault notified Dell it would terminate its OEM agreement effective December 16, 2013; its reseller agreement with Dell remained in place. Management expected Dell revenue to decline as a percentage of total revenue going forward.
- Construction in progress for the planned New Jersey headquarters reached $40.4 million. The project, including land, was estimated at $130–$135 million and expected to be completed over approximately 14–20 months.
- After quarter-end, the board increased the stock repurchase authorization by $47.2 million and extended the program to March 31, 2015. No shares were repurchased during the six-month period; the company reported $150 million of remaining authorization after the amendment.
Outlook, risks, and contingencies
- No formal numerical revenue or earnings guidance is provided in the filing. Management expected enterprise software transactions and related revenue to increase through fiscal 2014, while noting that the timing and size of individual deals are difficult to forecast. It anticipated continued R&D spending.
- Management believed existing cash and operating cash flow would cover working capital, capital expenditures, and potential repurchases for at least 12 months. It expected to fund headquarters construction from cash on hand and operations.
- Key risks include dependence on resellers and distributors, notably Arrow; customer and channel concentration; competition and rapid technology change; foreign-currency exposure; and variability in the timing of large enterprise transactions. Approximately 40% of six-month revenue came from outside the United States.
- The company reported no asserted or unasserted claims for which a loss was considered reasonably possible and no pending legal action believed likely to have a material adverse effect. U.S. federal and German subsidiary tax returns were under audit. Unrecognized tax benefits were $4.8 million, with $0.9 million of related accrued interest and penalties.
- Management reported effective disclosure controls as of September 30, 2013 and no material change in internal control over financial reporting during the quarter. The filing notes that controls provide reasonable, not absolute, assurance.
Most important facts for investors to verify
- Whether revenue growth and enterprise-deal momentum continue, and how much growth is driven by large transactions and channel mix.
- The business impact of terminating Dell’s OEM agreement, while its reseller relationship remains active, and the company’s concentration with Arrow.
- Headquarters project cost and schedule versus the $130–$135 million estimate and 14–20-month completion expectation.
- Cash generation and the effects of stock-based compensation, option exercises, tax benefits, and the expanded repurchase authorization on share dilution and liquidity.
- Developments in the U.S. and German tax audits, and foreign-currency exposure, including the company’s substantial international operations.