Commvault Systems, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2015 (fiscal Q2 2016). Unaudited results; financial amounts below are in U.S. dollars.
Business context
Commvault sells Simpana data and information management software and related services. The company reported approximately 22,000 registered customers. Software licenses made up 41% of first-half revenue, while services made up 59%.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $140.7 million | $151.1 million | $279.9 million | $303.8 million |
| Software revenue | $57.6 million | $69.4 million | $114.1 million | $141.5 million |
| Services revenue | $83.2 million | $81.7 million | $165.8 million | $162.3 million |
| Gross margin | $119.8 million; 85% | $130.9 million; 87% | $238.4 million; 85% | $262.6 million; 86% |
| Operating income (loss) | $(4.6) million | $10.9 million | $(10.8) million | $29.1 million |
| Net income (loss) | $(9.2) million | $6.5 million | $(10.5) million | $19.2 million |
| Diluted EPS | $(0.20) | $0.14 | $(0.23) | $0.40 |
- Quarterly revenue fell 7%; first-half revenue fell 8%. Software revenue declined 17% in Q2 and 19% in the first half, while services revenue rose 2% in both periods.
- First-half operating cash flow was $31.5 million, down from $67.6 million. Investing cash outflow was $28.1 million and financing cash outflow was $11.1 million. Cash and cash equivalents decreased $10.5 million to $327.2 million.
- At September 30, cash and cash equivalents were $327.2 million and short-term U.S. Treasury investments were $72.8 million. Working capital was $280.2 million. The company had no revolver borrowings under its $250 million facility and reported covenant compliance.
- Total deferred revenue was $224.4 million, down from $229.7 million at March 31. Total liabilities were $292.5 million; stockholders’ equity was $404.4 million.
Material changes and management commentary
- Enterprise software transactions (over $0.1 million) drove the software decline: first-half transaction revenue fell 33%, reflecting 19% fewer transactions and an 18% lower average transaction size. Smaller transactions rose 1%.
- Management attributed regional software declines to weaker enterprise transactions and, in EMEA and APAC, currency translation. First-half software revenue declined 24% in the Americas, 9% in EMEA and 18% in APAC; at prior-year exchange rates, EMEA would have grown 5% and APAC’s decline would have been 6%.
- Operating expenses increased, including sales and marketing costs associated with an expanded sales force and research and development costs associated with engineering-group expansion. Management expects continued R&D spending.
- The company continued a broad business transformation covering products, packaging, pricing, distribution, sales enablement and sales organization. Management cautioned that execution could be disruptive, delayed, more costly than expected or ineffective.
- Management said existing cash, investments and operating cash flow should meet anticipated working-capital, capital-expenditure and potential repurchase needs for at least 12 months. It also expects term-based software subscriptions to become a more significant share of revenue over coming years.
Risks, contingencies and unusual items
- Arrow generated 37% of first-half revenue and represented approximately 43% of receivables at September 30. The filing describes dependence on distribution partners and OEMs as a business risk.
- A securities class action against the company, CEO and CFO remained pending; the court had not ruled on the motion to dismiss. The company said it could not estimate possible losses and had recorded no reserve.
- The stronger U.S. dollar reduced reported international revenue. Approximately 43% of first-half sales were outside the United States; no foreign-exchange forward contracts were outstanding at quarter-end.
- Q2 recorded $4.6 million of income tax expense despite a pretax loss; the first half recorded a $0.4 million tax benefit. Management cited reduced forecasted pretax income and unfavorable permanent differences.
- Q2 share repurchases were $32.8 million (912,237 shares), including $7.8 million accrued at quarter-end and paid in October. On October 22, the board extended the program to March 31, 2017 and authorized an increase so that $150 million was available.
- The company disclosed no other legal matters believed reasonably likely to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether enterprise software deal volume and average deal size stabilize, and whether the software revenue decline reverses.
- Whether services and support renewals can sustain revenue as software revenue weakens, and how product pricing or support changes affect renewals and margins.
- Execution, cost and results of the business transformation and expanded sales and R&D investment.
- Ongoing cash generation, the pace of repurchases, and the availability and potential tax cost of foreign-held cash.
- Developments in the securities litigation, the concentration of revenue and receivables with Arrow, and continuing foreign-exchange exposure.