Commvault Systems, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of fiscal 2019. Amounts below are in U.S. dollars; financial statement figures are generally converted from thousands to millions. Results are unaudited.
Business context
Commvault sells data and information management software, integrated appliances, customer support and professional services. It reported approximately 27,000 registered customers and operates as one segment. Services represented 57% of quarterly revenue; software and products represented 43%.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $176.2 million | $166.0 million | Up 6% |
| Software and products revenue | $75.1 million | $74.8 million | Up 0.4% |
| Services revenue | $101.1 million | $91.2 million | Up 11% |
| Gross profit / gross margin | $148.6 million / 84.3% | $144.3 million / 87.0% | Margin down about 2.7 percentage points |
| Operating loss | $(6.8) million | $(4.4) million | Loss widened |
| Net loss / diluted loss per share | $(8.6) million / $(0.19) | $(0.3) million / $(0.01) | Loss widened |
| Operating cash flow | $24.8 million | $19.9 million | Up $4.8 million |
Services growth was principally driven by customer support agreements, which increased $8.5 million. Software and products revenue was nearly flat: enterprise transaction revenue declined 6%, as a 35% drop in average deal size outweighed a 46% increase in transaction count. Smaller transactions grew 11%.
Software and products cost rose to $4.1 million from $0.8 million, reflecting hardware and royalty costs associated with appliance and hyperscale offerings. Services gross margin was 77% in both periods. The quarter included $7.9 million in restructuring charges. Operating expenses totaled $155.4 million versus $148.7 million a year earlier. Income tax expense was $2.6 million, compared with a $3.8 million benefit in the prior-year quarter; the current-period expense primarily reflected foreign taxes.
Balance sheet and liquidity
- At June 30, 2018, cash and cash equivalents were $351.9 million and short-term investments were $109.8 million, for combined balances of approximately $461.7 million.
- Working capital was $319.7 million, down from $322.6 million at March 31, 2018. Total assets were $804.5 million; stockholders’ equity was $396.7 million.
- The filing reports no borrowings or debt balance. Current liabilities were $313.9 million, including $234.1 million of deferred revenue.
- Operating cash flow was $24.8 million. Investing activities provided $18.4 million, primarily from net Treasury bill maturities, partly offset by $3.5 million of capital expenditures. Financing activities used $11.6 million, including $25.0 million of share repurchases and $13.4 million in stock-plan proceeds.
- Cash increased by $21.1 million during the quarter. Approximately $197 million of cash and cash equivalents was held by foreign legal entities.
Material changes, outlook and risks
- Restructuring: The company began a program to improve efficiency in sales, marketing and distribution and reduce costs elsewhere. Workforce reductions were approximately 4%; charges were $7.9 million, primarily severance. The company cautioned that the program may not achieve its intended results and could involve further costs, morale effects or loss of key employees.
- Management outlook: No specific revenue or earnings guidance was provided in the supplied filing text. Management expects subscription arrangements to become a more significant share of revenue and anticipates continued R&D investment. It also expects software and products cost as a percentage of related revenue to rise as appliance and hyperscale sales ramp. Management believes existing cash, investments and operating cash flow should cover anticipated needs for at least 12 months.
- Concentration and execution risks: Arrow generated approximately 37% of revenue and accounted for 33% of accounts receivable. Indirect channels produced 84% of software and products revenue. Customer support renewals are significant to revenue, and OEM partners have no minimum sales obligations.
- Currency and international exposure: Approximately 46% of revenue came from outside the United States. Foreign currency movements affect reported results; the quarter included $0.5 million in net transaction gains. Potential local-law restrictions and foreign withholding taxes could affect access to overseas cash.
- Legal and tax matters: A securities class-action settlement received final court approval; the $12.5 million settlement was funded solely by insurers. A separate patent-infringement lawsuit remained unresolved; the company recorded no accrual, assessing the probability of loss as remote, while noting the outcome could not be predicted. Tax accounting under the U.S. Tax Cuts and Jobs Act remained provisional; the company estimated the one-time transition tax at zero and had not selected its accounting method for GILTI.
- Other items: The quarter included $25.0 million of share repurchases, with $87.8 million remaining under the authorization through March 31, 2019. Revenue recognized from the opening deferred-revenue balance was $90.2 million. Approximately $20.9 million of remaining performance obligations was disclosed, including $0.5 million related to software and products.
Key facts for investors to verify
- Whether services-led revenue growth and the mix of customer support renewals are sustainable, and how subscription adoption affects revenue timing.
- Whether enterprise deal sizes recover and whether appliance and hyperscale growth can offset their higher associated costs.
- Restructuring execution, realized savings, additional charges and any effects on sales capacity or employee retention.
- Revenue and receivables exposure to Arrow, indirect channels, OEM partners and customer renewal activity.
- Foreign exchange effects, accessibility of foreign-held cash, and any revisions to provisional tax or GILTI estimates.
- Developments in the patent litigation and any changes to the company’s assessment of potential exposure.