COMMVAULT SYSTEMS INC quarterly report, Q2 FY2015

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Commvault Systems, Inc. — Form 10-Q Summary

Reporting period: Fiscal second quarter and six months ended September 30, 2014. Dollar amounts are in millions unless otherwise noted. The company provides data and information management software and related services, principally under its Simpana brand.

Financial performance

  • Quarter revenue: $151.1, up 7% year over year. Software revenue was $69.4, down 2%; services revenue was $81.7, up 15%, primarily from customer support agreements.
  • Six-month revenue: $303.8, up 10%. Software revenue rose 4% to $141.5, while services revenue increased 16% to $162.3.
  • Profitability: Quarterly operating income fell to $10.9 from $26.4; net income declined to $6.5 from $17.4, and diluted EPS was $0.14 versus $0.35. For six months, operating income was $29.1 versus $47.8, net income was $19.2 versus $30.8, and diluted EPS was $0.40 versus $0.62.
  • Margins: Gross margin was 86.6% for the quarter (about 87% reported) and 86.4% for six months (about 86%), versus approximately 87% in each comparable 2013 period. Six-month software gross margin was 99.1%; services gross margin was 75.4%.
  • Operating costs: Six-month sales and marketing rose 22% to $164.0, R&D rose 18% to $30.9, and G&A rose 21% to $35.2. Management attributed much of the increases to expanded sales and engineering teams and higher stock-based compensation.
  • Cash flow: Six-month operating cash flow was $67.6, up from $49.1. Investing cash outflow was $62.9, including $35.4 spent on the planned headquarters and net purchases of short-term investments. Financing cash outflow was $92.4, principally reflecting $105.1 of share repurchases. Cash and cash equivalents decreased $93.2 to $364.6.
  • Liquidity and debt: Cash and cash equivalents were $364.6 and short-term investments were $50.0 at September 30. Working capital was $311.8, down $75.2 from March 31. The company had no borrowings under its $250 revolving facility and reported covenant compliance. The facility is subject to financial covenants and other restrictions.
  • Balance sheet and shares: Total assets were $708.4; deferred revenue totaled $218.8. The company repurchased 2.139 million shares for $105.1 during the six-month period; $150.0 remained authorized through March 31, 2016. Shares outstanding were 45.577 million at September 30.

Changes, outlook and risks

  • Revenue growth was driven by services and international software sales; quarterly software revenue declined, including lower domestic and indirect-channel sales. For the six months, international software revenue increased 11%, while domestic software revenue declined 1%. Services grew to 53% of six-month revenue, versus 51% a year earlier.
  • Management expects enterprise software transactions and related software revenue to increase during fiscal 2015, while noting that the size and timing of individual transactions are difficult to forecast. It expects continued investment in sales, R&D and the headquarters project; depreciation is expected to rise in the second half. No specific earnings or revenue guidance is provided.
  • The planned corporate campus is expected to be completed in fiscal 2015; estimated total cost, including land, building and infrastructure, is approximately $135. Management expects existing cash and operating cash flow to cover anticipated needs for at least 12 months.
  • Customer and channel concentration is material: Arrow generated 34% of six-month revenue and represented about 43% of receivables at September 30. Hitachi Data Systems generated 11% of six-month revenue and represented 14% of receivables. The filing notes that key distributors and OEM partners are not obligated to sell the company’s products exclusively or at all.
  • A purported securities class action filed September 10, 2014 alleges misleading statements concerning company results, business and prospects for May 15, 2013–April 24, 2014. The company says it will defend the case, but cannot predict the outcome or estimate potential loss; no reserve was recorded.
  • Other risks include foreign-currency exposure (42% of six-month revenue came from outside the U.S.), potential constraints if the revolver is drawn, and uncertainty in revenue timing and recognition. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
  • The company is evaluating the new revenue recognition standard, effective for its fiscal year beginning April 1, 2017; it had not estimated the adoption impact.

Important facts for investors to verify

  • Whether services-led growth and international software gains can offset the recent quarterly decline in software revenue and domestic/indirect-channel softness.
  • Whether expense growth—particularly sales and marketing, stock compensation and ongoing headquarters costs—translates into improved operating profitability.
  • Progress and remaining cash requirements for the approximately $135 million headquarters project, alongside further repurchases and the $250 million credit facility.
  • Developments in the securities class action, tax audits and any resulting financial exposure.
  • Ongoing reliance on Arrow and other channel/OEM partners, and the collection and renewal trends reflected in deferred revenue and receivables.