CommVault Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 30, 2012; comparative periods ended September 30, 2011. Balance-sheet comparisons are against March 31, 2012. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and results
CommVault sells the Simpana data and information management software suite and related support and professional services. It reported approximately 17,100 registered customers. For the six-month period, software generated 49% of revenue and services 51%; the company said most revenue is expected to continue coming through indirect channels.
Key financial metrics
| Metric | Three months ended Sep. 30, 2012 | Three months ended Sep. 30, 2011 | Six months ended Sep. 30, 2012 | Six months ended Sep. 30, 2011 |
|---|---|---|---|---|
| Revenue | $118.2 million | $97.5 million | $229.4 million | $189.0 million |
| Software revenue | $59.2 million | $47.8 million | $113.5 million | $91.6 million |
| Services revenue | $58.9 million | $49.6 million | $116.0 million | $97.4 million |
| Gross margin | $102.8 million; approximately 87.0% | $84.4 million; approximately 86.6% | $198.8 million; approximately 86.6% | $163.9 million; approximately 86.7% |
| Operating income | $22.4 million | $13.1 million | $38.8 million | $23.1 million |
| Net income | $13.9 million | $7.9 million | $24.0 million | $14.9 million |
| Diluted EPS | $0.29 | $0.17 | $0.50 | $0.32 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $42.3 million | $42.2 million |
- Second-quarter revenue increased 21% year over year; software revenue rose 24% and services revenue 19%. Six-month revenue also rose 21% year over year.
- Operating margin was approximately 18.9% in the quarter versus 13.4% a year earlier, and 16.9% for the six months versus 12.2%. The filing attributes expense growth principally to hiring, sales and marketing, support expansion, and higher stock-based compensation.
- At September 30, cash and cash equivalents were $352.0 million, short-term investments $1.9 million, and working capital $275.4 million. Current assets were $448.7 million and current liabilities $173.3 million.
- The filing reports no borrowings or debt balance. Total liabilities were $207.1 million, including $154.6 million of deferred revenue and $7.8 million of other liabilities.
- Cash increased $54.9 million during the six months. Investing activities used $2.2 million, primarily reflecting $3.4 million of capital expenditures offset by net investment maturities. Financing activities provided $14.5 million, including $7.2 million from option exercises and $7.3 million of excess tax benefits.
Material changes versus the prior comparable period
- Six-month software revenue grew 24%, driven by enterprise transactions, which increased 29%; their average deal size rose to about $265,000 from $233,000.
- International software revenue increased 33% for the six months. Indirect-channel software revenue rose 31%, while direct-channel software revenue fell 12%; the filing links the shift partly to the channel mix of international enterprise deals.
- Sales and marketing expense increased 11%, research and development 19%, and general and administrative expense 24% for the six months. These costs grew more slowly than revenue overall, supporting higher operating income.
- Services gross margin was 74.7% for the six months, down from 75.5%, primarily due to expansion of worldwide customer support operations. Software gross margin remained very high at 98.8%, versus 98.6%.
- Operating cash flow was nearly unchanged year over year despite higher net income; the prior period included stronger receivables-related cash contribution. No shares were repurchased in the current six-month period, compared with $45.6 million of repurchases in the prior-year period.
Outlook, risks, contingencies and unusual items
- No numerical earnings or revenue guidance is provided. Management expects the number of enterprise software transactions and related revenue to increase during fiscal 2013, while noting that the timing and size of individual deals are difficult to forecast. It anticipates continued research and development investment and expects operating expense categories to rise in dollars but decline as a percentage of revenue over the long term.
- Management believes cash, cash equivalents and operating cash flow will meet working-capital, capital-expenditure and potential repurchase needs for at least the next 12 months. Approximately $69.4 million of cash was held outside the United States; repatriation could involve legal restrictions or tax consequences.
- Channel concentration is material: Arrow generated 28% of six-month revenue and represented about 33% of receivables; Dell-related sales were 21% of revenue and Dell represented 21% of receivables. The company warns that disruption or termination of key distributor or OEM relationships could harm results.
- Foreign-exchange movements affect reported results and competitiveness; about 40% of six-month revenue was outside the United States. No forward contracts were outstanding at September 30, 2012.
- The company recorded a 39% effective tax rate for the six months. Unrecognized tax benefits were $5.0 million, with $0.8 million of related accrued interest and penalties; New Jersey was auditing tax returns for fiscal 2009–2011. The filing says roughly $0.4 million of tax benefits and $0.2 million of related interest and penalties might be realized by fiscal year-end through statute expirations.
- Management reported no legal proceedings expected to have a material adverse effect and no asserted or unasserted claims requiring contingency disclosure. Customer software agreements include intellectual-property indemnities; no related liability has been recorded, and management considers a future payout remote.
- After quarter-end, on October 25, the board increased the share-repurchase authorization by $50 million and extended it to March 31, 2014. As of November 1, $117.2 million of the revised $220.0 million authorization had been used, leaving $102.8 million available.
- Stock-based compensation was $12.1 million for the six months, and $52.0 million of unrecognized compensation expense remained, expected to be recognized over a weighted-average 2.42 years.
Important facts for investors to verify
- Whether enterprise deal growth and the stated fiscal 2013 outlook continue, given the company’s caution about the timing and size of large transactions.
- Exposure to Arrow, Dell, indirect distribution and OEM partners, including the potential revenue and receivables impact if a major relationship changes.
- Whether service-support expansion costs and stock-based compensation affect future margins, cash conversion and per-share results.
- The actual pace and rationale for repurchases under the enlarged authorization, alongside dilution from employee equity awards.
- Developments in the New Jersey tax audit, unrecognized tax benefits and potential cash or tax-rate effects of any resolution.
- Foreign-currency effects and any future repatriation costs for cash held abroad.