Commvault Systems, Inc. — Q2 FY2021 Form 10-Q
Business context and reporting period. Commvault provides data protection and information management software, appliances, support and professional services, including its Metallic software-as-a-service offering. This unaudited quarterly report covers the three and six months ended September 30, 2020; the quarter is the second quarter of fiscal 2021. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $171.1 million, up 2% from $167.6 million | $344.1 million, up 4% from $329.8 million |
| Software and products revenue | $72.3 million, up 5% | $148.9 million, up 13% |
| Services revenue | $98.8 million, approximately flat | $195.3 million, down 1% |
| Gross margin | $144.3 million; 84.3%, versus 81.3% | $292.8 million; 85.1%, versus 81.8% |
| Operating loss | $42.0 million, versus $8.2 million | $35.3 million, versus $14.8 million |
| Net loss | $41.2 million, or $0.89 per diluted share | $38.9 million, or $0.84 per diluted share |
| Operating cash flow | Not separately reported for the quarter | $42.2 million, versus $55.1 million |
The quarter’s operating loss included a $40.7 million non-cash impairment charge on Hedvig-acquired intangible assets. Cash and cash equivalents were $383.2 million at September 30, 2020, with $10.8 million of short-term investments; working capital was $244.3 million. The balance sheet does not show borrowings or a debt line item. Management said existing cash and expected operating cash flow should cover anticipated needs for at least the next 12 months.
Six-month investing cash flow was $29.1 million, mainly reflecting $32.8 million of proceeds from investment maturities, partly offset by $3.7 million of capital expenditures. Financing cash flow was $5.3 million, primarily proceeds from employee stock plans; no shares were repurchased in the period. Cash, cash equivalents and restricted cash increased by $87.1 million, including a $10.4 million favorable exchange-rate effect.
Material changes and management commentary
- Software and products drove revenue growth, with larger deals (over $0.1 million) contributing 69% of software and products revenue in the first half, versus 63% a year earlier. Six-month Americas software and products revenue rose 34%, while EMEA declined 5% and APJ declined 19%.
- Services revenue softened: customer support revenue declined, and COVID-19 affected the ability to deliver some on-site professional services. Metallic revenue remained immaterial.
- Cost of revenue fell, and gross margin improved. Management attributed savings in part to temporary COVID-19-related salary cuts, reduced professional-services delivery costs, and lower appliance costs.
- First-half research and development expense rose 33% to $62.1 million, including increased engineering headcount and Hedvig-related compensation. Management said continued R&D investment is a priority.
- Restructuring expense was $8.1 million for the first half, down from $16.9 million; the plan includes headcount reductions and office closures. Management cautioned that the plan may incur unexpected costs and may not achieve its intended results.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects continued development spending and states that liquidity is sufficient for anticipated needs over at least the next 12 months.
- The $40.7 million impairment followed a revised assessment of Hedvig’s acquired developed technology and customer relationships: standalone sales forecasts were not met and the assets’ fair value was assessed as de minimis. The valuation used significant unobservable inputs.
- COVID-19 affected travel and salary costs and constrained some professional-services work. The filing notes that actual results may differ materially from forward-looking statements.
- Arrow generated 36% of first-half revenue and represented approximately 26% of receivables at September 30. The company warns that losing or reducing this distributor relationship, without a suitable replacement, could materially harm results.
- Foreign currency exposure affects international revenue and costs; approximately 45% of first-half sales were outside the United States. Second-quarter foreign-currency transaction losses were $1.2 million.
- The company reported ongoing intellectual-property litigation-related legal expenses, but said it did not believe pending legal actions were reasonably expected to have a material adverse effect. It also reported no off-balance-sheet financing arrangements.
- On October 22, 2020, the board increased the share repurchase authorization to $200 million, expiring March 31, 2022. The company had made no repurchases during the reported quarter or first half.
Investor verification priorities
- Assess the scale and implications of the Hedvig impairment and whether the acquisition’s expected commercial contribution has changed.
- Track software and products growth, particularly large-deal performance and the diverging regional results, alongside the decline in services revenue.
- Monitor operating cash flow, working-capital movements and deferred revenue; first-half operating cash flow declined from the prior-year period.
- Evaluate exposure to Arrow, international currencies, COVID-19-related operating effects, and ongoing intellectual-property litigation.
- Confirm future use of the enlarged repurchase authorization and the effect of stock-based compensation and share issuance on dilution.