Business context and reporting period
Commvault Systems, Inc. provides data and information management software and related services. This unaudited Form 10-Q covers the first quarter of fiscal 2017, the three months ended June 30, 2016, compared with the three months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $152.4 million | $139.1 million | Up 10% |
| Software revenue | $63.9 million | $56.5 million | Up 13% |
| Services revenue | $88.5 million | $82.6 million | Up 7% |
| Gross margin | $131.4 million; 86% | $118.6 million; 85% | Margin improved |
| Operating loss | $2.5 million | $6.3 million | Narrowed |
| Net loss | $2.0 million; $0.05 per share | $1.3 million; $0.03 per share | Loss increased |
| Operating cash flow | $24.0 million | $21.9 million | Up |
- Software gross margin was approximately 99% in both periods; services gross margin was 77% versus 76%. Services represented 58% of revenue, compared with 59%.
- Operating expenses increased to $134.0 million from $124.8 million, including higher sales and marketing and research and development costs. Stock-based compensation was $17.3 million, versus $15.2 million.
- The income tax benefit fell to $0.6 million from $5.0 million. Management attributed the current-period effective tax rate of 22% in part to a $0.6 million state-tax estimate adjustment; the prior-period rate was 79%. This smaller tax benefit helps explain why net loss increased despite the narrower operating loss.
- Cash and cash equivalents were $302.2 million and short-term investments were $107.9 million at June 30. Working capital was $270.1 million, up $17.7 million from March 31. Cash and investments together totaled about $410.2 million.
- Cash increased $14.1 million during the quarter. Investing activities used $9.9 million, primarily net purchases of Treasury bills; financing activities provided $1.8 million. No borrowings were outstanding under the $250 million revolving facility, and the company reported covenant compliance.
- Total deferred revenue was $247.9 million, compared with $244.9 million at March 31. No share repurchases were made; $93.1 million remained under the authorization, which expires March 31, 2017.
Changes, outlook, commentary, and risks
- Software growth reflected increases across the Americas, EMEA, and APAC; enterprise transactions (over $0.1 million) rose 19%, while their average transaction value declined to about $242,000 from $251,000. Customer support revenue increased, partly offset by lower professional services revenue.
- Management said it expects continued research and development investment and anticipates capacity-based licenses will remain the majority of software license revenue in fiscal 2017. It expects term-based subscription arrangements to become more significant over the next several years. The filing gives no specific revenue or earnings guidance.
- The company expects fiscal 2017 cash tax payments below $5 million and believes cash, investments, and operating cash flow will cover anticipated needs for at least 12 months.
- A maintenance-pricing realignment is being phased in during the fiscal year, primarily affecting the mid- to lower-end market and approximately one-quarter of the existing maintenance revenue base. Management cautioned that an unsuccessful realignment could adversely affect results.
- Sales through Arrow represented 34% of quarterly revenue, and Arrow accounted for approximately 46% of receivables at June 30. OEM agreements generated 15% of revenue. Channel dependence and the ability to retain support renewals are key business risks.
- Approximately 44% of revenue came from outside the United States. Currency movements reduced reported APAC software growth; management also cited exposure to exchange-rate changes. About $147 million of cash was held by foreign entities and is intended to be indefinitely reinvested; repatriation could have tax consequences.
- A securities class action remains pending after plaintiffs refiled their complaint and defendants moved to dismiss. The company had recorded no reserve and said the outcome and potential financial effect could not be determined. The filing also identifies product obsolescence, competition, and execution of product development as risks.
- Management reported effective disclosure controls as of June 30, 2016, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether software and customer-support growth continues, including the trend in enterprise deal size, renewals, and the maintenance-pricing transition.
- Whether operating expenses and stock-based compensation support revenue growth while improving operating profitability.
- The ongoing tax-rate drivers and the timing and cash impact of any foreign earnings repatriation.
- The status and possible financial consequences of the securities litigation, and the concentration of sales and receivables with Arrow.
- The effect of currency movements and adoption of new revenue-recognition and lease accounting standards; the filing says their financial impacts were still being assessed.