Commvault Systems, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended June 30, 2022; figures are unaudited. Commvault provides data protection and information-management software, products, and services, including its Metallic software-as-a-service offering.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $198.0 million | $183.4 million | +8% |
| Software and products revenue | $92.4 million | $82.2 million | +13% |
| Services revenue | $105.5 million | $101.3 million | +4% |
| Gross profit / margin | $164.2 million / 82.9% | $158.1 million / 86.2% | Margin down 3.3 percentage points |
| Operating income / margin | $7.4 million / 3.8% | $15.5 million / 8.4% | Down 52% |
| Net income | $3.5 million | $13.9 million | Down 75% |
| Diluted EPS | $0.08 | $0.29 | Down $0.21 |
| Cash from operating activities | $22.4 million | $37.2 million | Down $14.8 million |
Revenue growth reflected higher software and products revenue and growth in Metallic, partly offset by lower customer-support revenue. Management said revenue would have been 13% higher year over year using prior-year exchange rates, versus reported growth of 8%. Operating expenses increased 10%, including higher sales and marketing, research and development, and restructuring costs. The effective tax burden also rose: income tax expense was $3.7 million versus $1.7 million, primarily reflecting required capitalization and amortization of research and development costs under the Tax Cuts and Jobs Act.
Balance sheet, cash flow, and capital allocation
- Cash and cash equivalents were $258.7 million at June 30, 2022, down from $267.5 million at March 31, 2022. The quarter’s net cash decrease was $8.8 million, including an $11.0 million adverse foreign-exchange effect.
- Current assets were $465.0 million and current liabilities $355.9 million; working capital was $109.1 million, up from $90.0 million at fiscal year-end.
- The company had no borrowings under its $100 million revolving credit facility and reported covenant compliance. No other debt balance is reported in the supplied filing text.
- Operating cash flow was $22.4 million. Investing used $1.9 million, including $0.9 million of capital expenditures and $1.0 million for equity securities; financing used $18.3 million, primarily for share repurchases.
- A new $250 million repurchase authorization was approved April 21, 2022. The company repurchased approximately 310,000 shares for $18.9 million during the quarter; $231.1 million remained authorized.
- Deferred revenue totaled $416.5 million. Additional remaining performance obligations of $76.8 million were disclosed, including approximately $9.9 million of software and products revenue.
Material changes, outlook, and risks
- Software and products revenue growth was driven by larger deals, which represented 75% of that revenue versus 69% a year earlier. Average larger-deal revenue rose to approximately $379,000 from $305,000. Subscription arrangements accounted for approximately 81% of software-license revenue, up from 60%.
- Cost of services rose faster than services revenue, partly due to higher Metallic infrastructure costs; cost of services was 27% of services revenue versus 23% a year earlier. Overall gross margin contracted.
- Management expects existing cash and operating cash flow to cover anticipated needs for at least the next 12 months, including working capital, taxes, capital expenditures, and potential repurchases. No specific revenue or earnings guidance is provided in the supplied filing text.
- Key exposures include foreign-currency movements (44% of revenue came from outside the U.S.), reliance on indirect distribution, and concentration through Arrow, which generated 36% of revenue and represented approximately 25% of receivables at quarter-end. Larger transactions also make software revenue dependent in part on deal timing and volume.
- The company continued a restructuring program, including combining EMEA and APJ field management. Management cautioned that expected efficiencies are not guaranteed and identified potential costs, morale effects, and loss of key employees as risks.
- Stock-based compensation was $31.1 million, up from $21.8 million. The filing reported $155.8 million of unrecognized compensation expense expected to be recognized over a weighted-average 1.87 years.
- After quarter-end, the company entered executive retention agreements with its CFO and Chief Revenue Officer, providing specified severance and equity-vesting benefits following qualifying terminations. Management said it did not believe pending legal proceedings would materially affect the business or results.
Important facts for investors to verify
- Whether software and Metallic growth, larger-deal activity, and subscription mix can continue to offset customer-support declines and currency headwinds.
- Whether higher Metallic infrastructure costs and operating expenses stabilize sufficiently to support margin recovery.
- The effect of required R&D cost capitalization and amortization on future cash taxes and reported earnings.
- Arrow’s continuing role and the company’s ability to manage distributor concentration and foreign-exchange exposure.
- The pace and financial impact of share repurchases, restructuring, and stock-based compensation.
- Conversion timing and realization of deferred revenue and remaining performance obligations; the filing notes that some services revenue depends on customer needs and other factors.