Commvault Systems, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. Although the request metadata refers to 2018 Q4, this filing reports FY2019 results; the quarter ended March 31, 2019 is identified below where relevant. Commvault sells data protection and information-management software, integrated appliances, support and professional services.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $711.0 million | $699.4 million |
| Software and products revenue | $309.9 million | $311.7 million |
| Services revenue | $401.1 million | $387.6 million |
| Gross profit / gross margin | $594.0 million / 83.5% | $601.2 million / 86.0% |
| Operating income (loss) / margin | $4.9 million / 0.7% | $(0.9) million / (0.1)% |
| Net income (loss) | $3.6 million | $(61.9) million |
| Operating cash flow | $110.2 million | $84.2 million |
Revenue rose 2% year over year, as 3% services growth offset a 1% decline in software and products. Enterprise software transactions above $100,000 increased 9% in revenue, while transactions below that threshold fell $17.9 million. The 2018 net loss included a $58.4 million income-tax expense, primarily related to a valuation allowance on deferred tax assets.
At March 31, 2019, cash and cash equivalents were $328.0 million and short-term investments were $130.3 million, principally U.S. Treasury bills. Working capital was $328.7 million; current assets were $655.0 million and current liabilities $326.3 million. The balance sheet reports no borrowings and FY2019 interest expense was zero. Total deferred revenue was $337.7 million. The company said existing cash and expected operating cash flow should cover anticipated needs for at least 12 months.
Net cash used in investing was $5.3 million, including $6.6 million of capital expenditures. Net cash used in financing was $90.7 million, reflecting $132.7 million of share repurchases, partly offset by $42.0 million from stock plans. Repurchases totaled 2.1 million shares at an average $62.74 per share.
For the quarter ended March 31, 2019, revenue was $181.4 million and net loss was $2.2 million, compared with revenue of $184.9 million and net loss of $1.7 million in the year-earlier quarter.
Material changes and significant items
- Software and products gross margin fell to 92% from 98%, chiefly because of hardware and royalty costs associated with appliance and HyperScale offerings. Management expected these costs as a share of product revenue to continue increasing as sales ramped.
- Sales and marketing expense declined 10% to $370.1 million, primarily reflecting lower compensation and restructuring-related savings. R&D expense increased 2% to $92.6 million.
- G&A expense rose 11% to $100.9 million. It included $11.2 million of professional and consulting fees related to a shareholder settlement and operational review, and $12.2 million for modification of the former CEO’s stock awards.
- The company recorded $14.8 million of restructuring charges, primarily severance and related costs, to improve sales, marketing and distribution efficiency and reduce costs more broadly.
- Approximately 40% of software license revenue was sold under subscription arrangements. Accounts receivable increased partly due to subscription transactions recognized at sale but payable over time.
- The company repurchased $132.7 million of shares during FY2019. Subsequent to year-end, the board increased the available authorization to $200 million, expiring March 31, 2020.
Outlook, risks and contingencies
Management expects subscription arrangements to become a larger share of total revenue over the next few years and anticipates continued investment in R&D. It provided no specific revenue, earnings or margin guidance in the supplied filing text. Management cautioned that appliance growth may further pressure product margins and that restructuring may not achieve its intended results.
- Distribution concentration is material: Arrow generated about 38% of FY2019 revenue, and OEM agreements generated about 11%. Partners generally have no minimum sales commitments and may terminate or prioritize competing products.
- Competition is intense and includes larger, better-resourced vendors; technology shifts, pricing pressure, long enterprise sales cycles and customer purchasing delays could affect results.
- Foreign exchange is a meaningful exposure: about 47% of revenue came from outside the U.S.; management estimated a 10% currency-rate change would affect annual operating profit by approximately $8.5 million.
- Other disclosed risks include customer support renewals, product defects or security breaches, supply-chain forecasting for appliances, international operations, intellectual-property claims, and attracting and retaining key staff. Sanjay Mirchandani became CEO in February 2019 following the former CEO’s retirement.
- The company reported no pending legal action it believed could reasonably be expected to materially harm its business or operating results. It had $44.2 million of operating lease and purchase obligations, including $25.8 million due in less than one year. No material off-balance-sheet financing arrangements were reported.
- The FY2019 effective tax rate was 65.8%; tax expense was primarily related to foreign taxes and GILTI. A substantial valuation allowance remains against deferred tax assets, and future realization depends on taxable income and other factors.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of March 31, 2019.
Important facts for investors to verify
- Whether software and products revenue stabilizes and enterprise-deal growth offsets declines in smaller transactions.
- Whether appliance and HyperScale sales expand, and how their hardware and royalty costs affect gross margins.
- Whether subscription growth translates into durable revenue and cash generation, given payment-over-time terms and receivables growth.
- Whether restructuring delivers sustained expense savings without disrupting sales execution or customer support.
- How dependent results remain on Arrow, OEMs and support renewals, and whether channel concentration changes.
- Whether tax-asset valuation assumptions, foreign exchange exposure and share repurchases remain consistent with liquidity and operating needs.