Commvault Systems, Inc. — Form 10-Q Summary
Business context and period: The filing covers the first quarter of fiscal 2020, the three months ended June 30, 2019, compared with the same quarter of fiscal 2019. Commvault sells data and information management software, appliances, customer support, and professional services. It reported more than 28,000 registered customers and operates as one segment.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Total revenue | $162.2 million | $176.2 million |
| Software and products revenue | $63.7 million | $75.1 million |
| Services revenue | $98.5 million | $101.1 million |
| Gross margin | $133.5 million; 82.3% of revenue | $148.6 million; 84.3% of revenue |
| Operating loss | $6.7 million | $6.8 million |
| Net loss | $6.8 million; $0.15 per diluted share | $8.6 million; $0.19 per diluted share |
| Cash from operating activities | $31.1 million | $24.8 million |
| Cash and cash equivalents | $320.8 million | $328.0 million at March 31, 2019 |
| Short-term investments | $130.3 million | $130.3 million at March 31, 2019 |
Operating cash flow increased year over year, while cash and cash equivalents declined by $7.2 million during the quarter. Investing activities used $0.8 million and financing activities used $39.4 million, primarily for share repurchases. Working capital was $292.3 million, down $36.3 million from March 31, 2019. The balance sheet reports no borrowings; current liabilities were $320.2 million, including $235.2 million of deferred revenue. The company said existing cash and operating cash flows should meet anticipated needs for at least the next 12 months.
Material changes versus the prior-year quarter
- Revenue fell 8%; software and products revenue declined 15%, and services revenue declined 3%.
- Americas software and products revenue declined 26%; EMEA declined 3%, while APAC increased 2%. Management cited fewer enterprise transactions, especially in the Americas. Enterprise transactions were 62% of software and products revenue, versus 59% a year earlier, but their number declined 27%.
- Software and products costs rose $1.9 million, largely due to hardware and royalty costs for appliance and hyperscale offerings. Management expects these costs as a percentage of software and products revenue to rise as those offerings ramp.
- Operating expenses decreased $15.2 million, including lower sales and marketing costs associated mainly with restructuring and reorganization. Restructuring expense was $4.1 million, compared with $7.9 million in the prior-year quarter.
- Net loss narrowed, although gross margin percentage decreased. Reported results include $3.3 million of costs related to a non-routine shareholder matter in general and administrative expense.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management anticipates continued investment in research and development and expects more revenue to come through indirect distribution channels over the long term.
- Arrow generated 38% of quarterly revenue and accounted for 34% of receivables at June 30. The filing warns that disruption to this distributor relationship, without a replacement, could materially harm results.
- Customer support renewals are an important revenue source; failure to renew on beneficial terms could harm the business. Revenue also depends in part on large enterprise transactions.
- The restructuring plan involves headcount reductions and an office closure. Management cautions that unexpected costs, employee morale effects, or loss of key employees could prevent anticipated benefits. Quarter charges included a $0.9 million lease impairment.
- Approximately 50% of revenue came from outside the United States. Currency movements affect reported results; at prior-year exchange rates, Q1 FY2020 software and products revenue would have been $1.5 million higher and services revenue $2.3 million higher, with higher costs also expected.
- Adoption of the new lease standard on April 1, 2019 added lease assets and liabilities; at June 30, operating lease liabilities totaled $19.5 million. The company reported no finance leases.
- Cash and cash equivalents held by foreign entities were approximately $153 million; repatriation could be subject to local restrictions or taxes. The company repurchased $40.0 million of shares; $160.0 million remained under the authorization, which expires March 31, 2020.
- Management reported effective disclosure controls. It did not believe pending legal proceedings were likely to have a material adverse effect. A prior-period classification error was corrected by moving $0.7 million of 2018 expense from research and development to general and administrative, with no impact on net loss, financial position, or cash flow.
Investor verification priorities
- Track software and products revenue, enterprise-deal volume, and the steep Americas decline in subsequent quarters.
- Assess whether appliance and hyperscale growth can offset higher product costs and protect gross margins.
- Monitor services and customer-support renewals, deferred revenue, and the effect of currency movements.
- Review restructuring costs and realized savings, including any further office or lease charges.
- Evaluate reliance on Arrow and the use of cash for repurchases against operating and investment needs.
- Follow costs and developments related to the non-routine shareholder matter; the filing does not provide further detail about the matter.