Commvault Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 second quarter and six months ended September 30, 2019. Financial statements are unaudited. Unless stated otherwise, amounts are in millions of dollars.
Business context and financial performance
Commvault provides data and information management software, integrated appliances, customer support, and professional services. It reported one operating segment and more than 29,000 registered customers. Results reflect lower year-to-date software and product sales, substantial restructuring costs, and a post-quarter acquisition.
| Metric | Three months ended Sep. 30, 2019 | Three months ended Sep. 30, 2018 | Six months ended Sep. 30, 2019 | Six months ended Sep. 30, 2018 |
|---|---|---|---|---|
| Total revenue | $167.6 | $169.1 | $329.8 | $345.3 |
| Software and products revenue | $68.6 | $69.5 | $132.3 | $144.6 |
| Services revenue | $99.0 | $99.6 | $197.5 | $200.7 |
| Gross margin | $136.3 (81.3%) | $142.2 (84.1%) | $269.8 (81.8%) | $290.8 (84.2%) |
| Operating income (loss) | $(8.2) | $1.0 | $(14.8) | $(5.8) |
| Net income (loss) | $(7.1) | $0.9 | $(13.9) | $(7.7) |
| Diluted EPS | $(0.16) | $0.02 | $(0.31) | $(0.17) |
- For the quarter, revenue fell 1% year over year; for the six-month period, it fell 4%. Six-month software and products revenue declined 8%, while services revenue declined 2%.
- Quarterly software and products revenue in the Americas fell 13%, partly offset by growth of 22% in EMEA and 7% in APAC. Year-to-date, the Americas declined 20%, versus growth of 8% in EMEA and 4% in APAC.
- Enterprise transactions (over $100,000) made up 63% of six-month software and products revenue, but their number declined 22% year over year. The average transaction size increased to about $313,000 from $262,000.
- Software and products cost rose as appliance and hyperscale offerings incurred higher hardware and royalty costs. Management expects this cost as a share of software and products revenue to increase as sales of those offerings ramp.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $55.1, up from $42.5 a year earlier. Investing activities provided $31.3, mainly reflecting net maturities of short-term investments; financing activities used $33.7, including $40.0 of share repurchases.
- Cash and cash equivalents were $377.6 and short-term U.S. Treasury investments were $97.6 at September 30, 2019. Current assets were $624.8 and current liabilities $320.1; working capital was $304.6, down from $328.7 at March 31, 2019.
- The balance sheet reports no borrowings. Operating lease liabilities totaled $18.3, of which $7.8 was current. The company adopted lease accounting on April 1, 2019 and recognized operating lease assets and liabilities.
- Management said available cash, investments, and operating cash flow should cover anticipated needs for at least the next 12 months. It noted that foreign-held cash of about $164.1 could be subject to local restrictions or withholding taxes if repatriated.
Material changes, outlook, and risks
- Restructuring expense was $12.9 in the quarter and $16.9 for six months, chiefly for severance and closure or abandonment of three offices. The six-month charges included $2.05 of lease-asset impairment. Management cautioned that the plan may incur additional costs or impair morale, retention, growth, or operating targets.
- General and administrative expense included $7.6 of costs related to a non-routine shareholder matter and $1.3 of Hedvig acquisition costs for the six months.
- On October 1, 2019, after quarter-end, Commvault completed its acquisition of Hedvig, a software-defined storage company, for approximately $225 in total consideration, subject to customary adjustments and including employee retention compensation. The company reported $165.5 of cash payments at closing and was still evaluating purchase-price allocation.
- Arrow accounted for 37% of six-month revenue and 31% of accounts receivable at September 30. The company also relies on customer-support renewals and indirect distribution; loss of key channel capacity or lower renewals could adversely affect results.
- Foreign sales were 49% of six-month revenue. Currency movements affected reported results; management identified the U.S. dollar versus the euro and several other currencies as exposures. The filing provides no numerical earnings or revenue guidance.
- The company reported no pending legal action it believed would reasonably be expected to have a material adverse effect. Management concluded disclosure controls were effective as of September 30. A prior-period expense classification error was corrected and described as immaterial, with no effect on financial position, net loss, or cash flow.
Most important facts for investors to verify
- Whether enterprise deal volume and software/product revenue stabilize, particularly in the Americas, and whether growth in EMEA and APAC continues.
- Whether appliance and hyperscale sales improve sufficiently to offset their higher product costs and pressure on gross margin.
- The realized costs and operating effects of the restructuring, including whether targeted efficiencies materialize.
- Hedvig’s final purchase-price allocation, integration and retention costs, and post-acquisition liquidity after the closing cash payment.
- The shareholder matter’s nature and ultimate cost, and the company’s exposure to Arrow and customer-support renewal levels.