Commvault Systems, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2017. Unaudited results; dollar amounts below are in millions unless stated otherwise. Comparisons are with the prior-year periods, adjusted retrospectively for adoption of the new revenue standard.
Business context
Commvault sells data and information management software, appliances, customer support and professional services. It reported more than 26,000 registered customers and operates as one segment. Appliances were introduced in fiscal 2018, but related revenue was not significant to date.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $180.4 | $167.1 | $514.5 | $478.3 |
| Software and products revenue | $81.4 | $78.7 | $228.2 | $212.5 |
| Services revenue | $98.9 | $88.4 | $286.3 | $265.8 |
| Gross margin | $155.4 (86.2%) | $145.9 (87.3%) | $444.6 (86.4%) | $414.5 (86.7%) |
| Operating income (loss) | $3.5 | $3.8 | $(5.5) | $0.6 |
| Net income (loss) | $(58.9) | $2.0 | $(60.2) | $(0.7) |
| Operating cash flow | Not separately reported here | Not separately reported here | $60.8 | $71.1 |
- Quarterly revenue grew 8%; software and products revenue rose 4%, while services revenue increased 12%. Nine-month revenue also grew 8%.
- Quarterly operating margin was approximately 1.9%, compared with 2.3% a year earlier. Nine-month operating margin was approximately negative 1.1%, versus approximately 0.1%.
- Quarterly and nine-month net losses were primarily driven by income tax expense: $62.6 million and $55.3 million, respectively. The filing attributes the increase chiefly to U.S. tax reform’s reduction in deferred tax asset value and a full valuation allowance on remaining net deferred tax assets.
- Nine-month operating cash flow declined to $60.8 million from $71.1 million. Cash and cash equivalents were $314.5 million, with $131.0 million of short-term investments. Working capital was $309.5 million.
- No borrowings were outstanding under the $250 million revolving credit facility; the company reported covenant compliance. The facility expires in June 2019.
Material changes and notable items
- Sales and marketing expense increased 8% for both the quarter and nine-month period, reflecting higher employee compensation and sales-force expansion. Research and development expense rose 13% quarterly and 14% for nine months; management expects continued R&D investment.
- Deferred revenue was $307.6 million in total at December 31, 2017, up from $279.9 million at March 31, 2017. The company said the increase primarily reflected customer support billings and renewals.
- The company repurchased $91.3 million of shares during the nine months, including $80.1 million in the quarter. After quarter-end, the board extended the repurchase program and authorized an additional $100 million, leaving $133.7 million available.
- Adoption of ASC 606 was retrospective and principally changed commission-cost accounting; the company said historical cash flows were unaffected. Adoption of share-based compensation guidance resulted in $7.9 million of excess tax benefits recognized in the nine-month period, reducing net loss by $7.9 million, or $0.17 per share.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects subscription arrangements to become a more significant portion of revenue and anticipates continued R&D spending. It believes cash, investments and operating cash flow will cover anticipated needs for at least the next 12 months.
- Sales through distributor Arrow represented approximately 37% of revenue for the nine-month periods and about 40% of accounts receivable at both balance-sheet dates. OEM agreements represented about 14% of nine-month revenue in FY2018. These channel relationships are material dependencies.
- Approximately 46% of nine-month revenue came from outside the United States, exposing results to currency movements. Foreign-held cash was approximately $184 million; repatriation may involve local-law restrictions or withholding taxes.
- A securities class action has a $12.5 million settlement agreement in principle, subject to court approval, and is expected to be funded solely by insurers. Related derivative litigation and a patent-infringement suit remain unresolved; no accruals were recorded for these matters.
- The company estimated a $24.3 million reduction in net deferred tax assets from the lower U.S. corporate tax rate. Its one-time transition-tax estimate was incomplete at filing, though management said the amount was not expected to be material. Tax accounting estimates were provisional and subject to change.
Important facts for investors to verify
- How much of the reported tax expense and deferred-tax-asset valuation allowance is nonrecurring, and how the final tax-reform accounting differs from these provisional estimates.
- Whether revenue growth, particularly services renewals and enterprise software transactions, continues while operating profitability and operating cash flow recover.
- The outcome and insurance coverage of the securities settlement, plus developments in derivative and patent litigation.
- The company’s reliance on Arrow and other indirect channels, and the cash and share-count effects of continued repurchases.
- Whether subscription growth, appliance sales and foreign-exchange movements materially change revenue mix or margins.