Commvault Systems, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended September 30, 2022. The quarter is Commvault’s second quarter of fiscal 2023. Amounts below are in millions of dollars unless noted.
Business context
Commvault provides data protection and information management software, products and services, including its Metallic data protection-as-a-service offering. Revenue includes software and products and services; services comprise customer support, professional services and Metallic.
Financial performance and liquidity
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $188.1 | $177.8 | $386.0 | $361.3 |
| Gross margin | $155.8 (82.8%) | $151.3 (85.1%) | $320.0 (82.9%) | $309.4 (85.6%) |
| Operating income | $9.3 | $2.3 | $16.8 | $17.8 |
| Net income | $4.5 | $1.7 | $8.0 | $15.6 |
| Diluted EPS | $0.10 | $0.04 | $0.18 | $0.33 |
| Operating cash flow | — | $72.3 | $63.3 |
For the six months, investing cash flow was negative $3.2 million and financing cash flow was negative $51.5 million, primarily reflecting $58.8 million of share repurchases. Cash and cash equivalents were $262.5 million at September 30, down $5.0 million since March 31; foreign-exchange effects reduced cash by $22.6 million. Working capital was $106.5 million. The company reported no borrowings under its $100 million revolving credit facility and compliance with its covenants. It reported no off-balance-sheet financing arrangements.
Changes versus the comparable period
- Quarterly revenue increased 6%; software and products revenue rose 10% to $82.8 million, while services revenue rose 3% to $105.2 million. Six-month revenue increased 7%.
- Growth was led by larger software and product deals. These represented 72% of quarterly software and products revenue, versus 67% a year earlier. Metallic growth contributed to services revenue, partly offset by lower customer-support revenue.
- Gross margin declined year over year in both the quarter and first half. Management attributed higher services costs chiefly to scaling Metallic infrastructure.
- Quarterly operating income and net income improved from the prior-year quarter. First-half net income declined despite revenue growth, primarily alongside higher income tax expense; first-half operating income was also lower.
- Foreign exchange was a significant headwind: at prior-year exchange rates, quarterly revenue growth would have been 12% rather than 6%, and first-half growth 12% rather than 7%.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects existing cash and operating cash flow to cover anticipated needs for at least the next 12 months and anticipates continued investment in research and development.
- Income tax expense rose to $5.1 million for the quarter and $8.8 million for the six months. The company cited current federal and state taxes, including the required capitalization and amortization of research and development costs beginning in FY2023. It continues to maintain a valuation allowance against its gross deferred tax assets.
- Sales through distributor Arrow represented 36% of revenue for both the quarter and first half. Management warns that loss or reduced sales through Arrow, absent a replacement or successful transition, could materially affect results.
- International sales, about 45% of first-half revenue, expose results to currency movements. Dollar strength reduced reported growth; repatriating foreign cash may also involve local restrictions or tax consequences.
- The company repurchased $58.8 million of stock in the first half under a new $250 million authorization; $191.2 million remained. The program has no expiration date.
- In the prior-year second quarter, a $2.5 million legal settlement gain was recorded against general and administrative legal expenses. Management does not expect pending legal matters to have a material adverse effect.
- Management says the EMEA/APJ organizational restructuring is complete, but cautions that it may not achieve intended results and could involve unexpected costs or operational disruption. Restructuring charges were $2.1 million in each first half.
- Management reported effective disclosure controls as of September 30, 2022, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether software and products growth and larger-deal momentum continue, and how much reported growth remains after foreign-exchange effects.
- Whether Metallic growth can offset customer-support trends while infrastructure costs moderate and services margins recover.
- The effect of the higher tax burden from R&D cost capitalization and amortization on future earnings and cash taxes.
- Arrow’s continuing share of revenue and receivables, and the company’s ability to maintain distribution if that relationship changes.
- Cash generation after repurchases, the pace of buybacks, and remaining capacity under the authorization and credit-facility covenants.