Commvault Systems, Inc. — Fiscal 2015 Third Quarter
Reporting period: Quarter and nine months ended December 31, 2014. The company provides data and information management software and related services, primarily through its Simpana suite. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2014 | Prior-year quarter | Nine months ended Dec. 31, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $153.0 | $153.3 | $456.8 | $429.5 |
| Software revenue | $71.7 | $79.2 | $213.2 | $215.4 |
| Services revenue | $81.3 | $74.0 | $243.6 | $214.2 |
| Gross margin | $133.1; 87% | $134.8; 88% | $395.7; 87% | $375.1; 87% |
| Operating income | $4.9 | $27.7 | $34.0 | $75.5 |
| Net income | $3.1 | $17.6 | $22.3 | $48.4 |
| Diluted EPS | $0.07 | $0.35 | $0.47 | $0.97 |
- Quarter revenue was essentially flat year over year; nine-month revenue grew 6%. Net income fell 83% for the quarter and 54% for the nine-month period.
- At December 31, cash and cash equivalents were $314.9 and short-term investments were $50.0, down $117.8 combined from March 31. Working capital was $269.3, versus $387.0.
- Nine-month operating cash flow was $87.9, compared with $79.2 a year earlier. Investing cash use was $79.0, including $50.3 for the corporate campus and net purchases of Treasury bills. Financing cash use was $140.1, principally $155.1 of share repurchases. Cash declined $142.8 during the period.
- The company had no borrowings under its five-year, $250 million revolving credit facility and reported covenant compliance. It had approximately $250,000 of letters of credit outstanding. Deferred revenue totaled $222.4.
Material changes and management commentary
- Quarterly software revenue declined 9%, mainly because revenue from enterprise transactions over $100,000 fell 24%: both the number and average size of such deals declined. Services revenue rose 10%, largely from customer support agreements. For nine months, software revenue was down 1% while services revenue increased 14%.
- Operating expenses rose substantially: quarterly sales and marketing increased 17%, R&D 21%, and G&A 25%. Nine-month increases were 20%, 19%, and 23%, respectively. Management attributed much of the sales and R&D increase to staff expansion, including the sales force and engineering group.
- The headquarters move contributed $3.6 of quarterly G&A expense, including a $3.1 lease termination charge and $0.5 of moving costs. The company also recorded approximately $0.6 of accelerated depreciation on former-headquarters leasehold improvements. It expected about $9.0 of additional campus-related cash disbursements over the following months and approximately $5.0 of annual depreciation associated with the new headquarters.
- Management said existing cash, investments, and operating cash flow should cover anticipated needs for working capital, capital expenditures, and potential repurchases for at least 12 months. It anticipated continued R&D investment and stated that operating expense categories may rise in dollars but decline as a percentage of revenue over the long term. No specific revenue or earnings guidance was provided.
- The company repurchased $155.1 of stock (3.2 million shares) in the nine-month period; $100.0 remained authorized through March 31, 2016. It cited offsetting stock dilution as the program’s primary purpose.
Risks, contingencies, and other notable items
- A securities class action filed in September 2014 alleges misleading statements concerning the company’s results and prospects. A lead plaintiff was appointed in January 2015. The company said it believes the suit is without merit and intends to defend it; outcome and potential loss could not be estimated, and no reserve was recorded.
- Distribution concentration is significant: Arrow accounted for 35% of nine-month revenue and approximately 42% of year-end receivables. Hitachi Data Systems accounted for 10% of nine-month revenue. Management noted that channel partners may not be obligated to sell or recommend the company’s products.
- Foreign currency exposure is material, with approximately 43% of nine-month sales outside the United States. Management noted that exchange-rate movements can affect reported results and competitiveness. The company had no forward contracts outstanding at December 31.
- Approximately $114.3 of cash was held by foreign entities and was intended to be indefinitely reinvested; repatriation could involve restrictions or tax consequences. Federal tax returns for fiscal 2012 and 2013 and New Jersey returns for fiscal 2010–2013 were under audit.
- The company reported effective disclosure controls as of December 31, 2014, and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether enterprise software deal volume and size recover, particularly after the sharp quarterly decline, and how direct versus indirect channel performance develops.
- Whether growth in recurring customer-support revenue can offset weaker software licensing and support overall margins.
- The pace and returns of elevated sales, R&D, stock-based compensation, and headquarters spending; also monitor remaining campus cash outlays.
- Cash generation and liquidity after substantial repurchases, including foreign cash accessibility and the company’s use of its undrawn credit facility.
- Developments and any eventual loss estimate in the securities litigation, as well as outcomes of tax audits and foreign-currency movements.