CommVault Systems, Inc. — Form 10-Q Summary
Business context and reporting period
CommVault sells data and information management software and related services, primarily under its Simpana brand. This filing covers the fiscal second quarter and first six months ended September 30, 2010, compared with the corresponding 2009 periods. Financial amounts below are in U.S. dollars; reported statement amounts were in thousands.
Financial performance and position
| Metric | Three months ended September 30, 2010 | Six months ended September 30, 2010 |
|---|---|---|
| Total revenue | $75.2 million; up 13% year over year | $141.5 million; up 12% |
| Software revenue | $35.8 million; up 7% | $64.1 million; up 2% |
| Services revenue | $39.5 million; up 19% | $77.5 million; up 21% |
| Gross margin | 87%, unchanged | 87%, versus 86% |
| Operating income | $9.2 million, versus $6.5 million | $12.9 million, versus $12.6 million |
| Net income | $5.4 million, versus $4.7 million; diluted EPS $0.12 versus $0.11 | $8.9 million, versus $7.2 million; diluted EPS $0.19 versus $0.16 |
For the six months, operating cash flow was $23.5 million, essentially unchanged from 2009. Investing cash use was $2.7 million, including $1.8 million of capital expenditures and net purchases of short-term investments. Financing cash use was $18.7 million, mainly reflecting $31.5 million of share repurchases, partly offset by option exercise proceeds and related tax benefits.
At September 30, cash and cash equivalents were $172.9 million and short-term investments were $5.9 million. Working capital was $141.2 million. Current liabilities included $87.3 million of deferred revenue; total deferred revenue, including non-current amounts, was $97.7 million. The company had no borrowings under its $30 million credit facility and reported compliance with its covenants. Stockholders’ equity was $155.9 million.
Material changes and management commentary
- Services drove most revenue growth, chiefly from customer support agreements associated with new customers and renewals. Services rose to 55% of first-half revenue from 51%; software’s share fell to 45% from 49%.
- First-half software revenue grew modestly, with foreign operations up 8% and U.S. operations down 1%. Management attributed growth to international sales and indirect channels. Sales through Dell represented 25% of first-half revenue; Arrow represented approximately 24%.
- Simpana 9 was released in August 2010 and announced as generally available worldwide on October 5. It accounted for approximately 13% of recognized software revenue in the September quarter.
- Sales and marketing expense rose 15% in the first half, largely due to hiring, travel and marketing. Research and development rose 9%; management expects continued investment in product development. Management expects operating expense categories to rise in dollars, while declining as a share of revenue over the long term.
- The effective tax rate was 42% for the quarter and 32% for the first half. The first-half rate benefited from a $1.1 million release of tax reserves after a foreign statute of limitations expired. Management said a further approximately $0.8 million of tax benefits and related interest and penalties might be realized by fiscal year-end.
Outlook, risks and unusual items
Management stated that existing cash, operating cash flow and the credit facility should cover anticipated working capital, capital expenditures and potential repurchases for at least 12 months. It expected enterprise software transactions to increase during fiscal 2011, while noting that the size and timing of individual deals are difficult to forecast. No specific revenue or earnings guidance was provided.
Key exposures include reliance on indirect distribution and major partners: Dell and Arrow together accounted for substantial portions of revenue and receivables. Partner sales arrangements may be terminated and generally carry no minimum sales requirements. Other risks discussed include software obsolescence, competition and adoption uncertainty for cloud-related offerings, foreign currency movements, and estimation uncertainty in revenue recognition and taxes. The company reported no litigation expected to have a material effect, no outstanding credit-facility balance, and no material off-balance-sheet arrangements other than operating leases.
The company repurchased 1.6 million shares for approximately $31.5 million in the first half. Its authorization totaled $120 million through March 31, 2012; approximately $48.3 million remained available at September 30. Unrecognized stock-based compensation was approximately $22.6 million, expected to be recognized over a weighted-average 2.41 years.
Important facts for investors to verify
- Whether services-led growth and the increase in deferred support revenue continue, and how the changing software/services mix affects margins.
- Whether Simpana 9 adoption converts into sustained software growth, including growth in the U.S. and advanced data-management products.
- Revenue and receivables concentration with Dell and Arrow, and the durability of those distribution relationships.
- Cash generation after share repurchases, remaining repurchase authorization, and future capital-allocation priorities.
- Tax reserve developments, foreign-exchange exposure, and the assumptions supporting deferred tax assets and revenue recognition.