Commvault Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended June 30, 2015; comparisons are with the three months ended June 30, 2014 unless otherwise noted. Amounts are in U.S. dollars. The company provides data and information management software and related services under its Simpana brand. Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change / context |
|---|---|---|---|
| Total revenue | $139.1 million | $152.6 million | Down 9% |
| Software revenue | $56.5 million | $72.1 million | Down 22% |
| Services revenue | $82.6 million | $80.6 million | Up 3% |
| Gross profit and margin | $118.6 million; 85% | $131.7 million; 86% | Gross margin contracted |
| Operating income (loss) | $(6.3) million | $18.2 million | Operating margin approximately (4.5)% versus 11.9% |
| Net income (loss) | $(1.3) million | $12.7 million | Loss of $0.03 per diluted share versus earnings of $0.27 |
| Cash from operations | $21.9 million | $35.4 million | Down $13.5 million |
Financial position and liquidity
- At June 30, 2015, cash and cash equivalents were $350.5 million and short-term investments, primarily U.S. Treasury bills, were $60.9 million. Cash and investments totaled approximately $411.4 million.
- Working capital was $301.6 million, up $18.0 million from March 31, 2015. Total deferred revenue was $231.7 million.
- No borrowings were outstanding under the $250 million revolving credit facility; the company reported compliance with its covenants. No common shares were repurchased during the quarter; approximately $100.0 million remained authorized.
- Investing activities used $14.7 million, principally for net Treasury bill purchases, headquarters spending and capital expenditures. Cash and cash equivalents increased $12.8 million to $350.5 million.
- Management said existing cash and expected operating cash flow should meet anticipated working-capital, capital-expenditure and potential repurchase needs for at least 12 months. Approximately $124.3 million of cash was held by foreign legal entities, with repatriation potentially subject to restrictions or taxes.
Material changes and management commentary
- Software revenue fell $15.6 million. Enterprise transactions above $0.1 million declined 38%, reflecting a 30% reduction in average transaction size and a 13% reduction in transaction count. Their share of software revenue fell to 49% from 63%; smaller transactions increased 7%.
- The Americas drove the software decline, with regional software revenue down 33%; EMEA increased 9% and APAC declined 19%. Management said currency movements weighed on reported international results. At prior-year exchange rates, management estimated Q1 FY2016 software and services revenue would have been $4.7 million and $5.2 million higher, respectively.
- Services growth reflected increased customer-support revenue, partly offset by lower professional-services revenue. Services represented 59% of total revenue versus 53% a year earlier; the company noted services carry lower gross margins than software.
- Operating expenses increased to $124.8 million from $113.5 million. Sales and marketing rose 7%, R&D rose 12%, and general and administrative expense rose 20%, reflecting compensation and staffing growth and continued investment in the business transformation plan. Stock-based compensation was $15.2 million.
- The income tax benefit was $5.0 million, with a reported effective tax rate of 79%; management attributed the elevated rate to projected unfavorable permanent differences. The tax benefit reduced the net loss despite the pretax operating loss.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expects capacity-based licenses to remain the majority of software license revenue in the near term and expects term-based subscription arrangements to become more significant over the next several years. It also anticipated continued R&D investment.
- The business transformation plan spans products, packaging, pricing, distribution, sales enablement, territory alignment and product management. Management cautioned that execution may be disruptive, delayed, more costly than expected, or fail to deliver intended results.
- Sales-channel and customer concentration are notable: Arrow accounted for 35% of quarterly revenue and 39% of accounts receivable at June 30; HDS accounted for 12% of quarterly revenue. OEM partners may terminate or reduce their involvement, and the company relies on maintenance renewals.
- Foreign exchange is a material exposure: 45% of quarterly revenue came from outside the United States. Currency changes may affect reported results and competitiveness.
- A securities class action against the company, its CEO and CFO alleges misleading statements concerning business and financial matters for an alleged May 2013–April 2014 class period. The company said it considers the suit without merit and intends to defend it; it had recorded no reserve and could not estimate a possible loss. A motion to dismiss was pending.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It was evaluating the impact of the new revenue recognition standard, which was to apply in fiscal 2019; the impact was not yet estimable.
Important facts for investors to verify
- Whether software revenue and enterprise deal volumes recover, especially in the Americas, and whether smaller transactions can offset weaker large deals.
- Whether the transformation plan and higher sales, marketing and R&D spending improve growth and profitability without further margin deterioration.
- Customer-support renewal trends, the balance of recurring services revenue, and reliance on Arrow and OEM relationships.
- Operating cash-flow trends, the use of cash for repurchases and investment, and any restrictions or tax costs associated with foreign-held cash.
- Developments in the securities litigation and any change in the company’s ability to estimate or reserve for potential losses.