Commvault Systems, Inc. — Form 10-Q Summary
Business and period: Commvault sells data and information management software and related support and professional services. This filing covers fiscal Q2 and the six months ended September 30, 2017; the statements are unaudited. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $168.1 (+5%) | $159.4 | $334.1 (+7%) | $311.2 |
| Software revenue | $72.0 (+2%) | $70.4 | $146.8 (+10%) | $133.8 |
| Services revenue | $96.1 (+8%) | $89.0 | $187.3 (+6%) | $177.4 |
| Gross margin | $144.9; 86.2% | $137.8; 86.4% | $289.2; 86.6% | $268.6; 86.3% |
| Operating loss | $(4.7); (2.8%) | $(0.1) | $(9.0); (2.7%) | $(3.3) |
| Net loss | $(1.0) | $(0.1) | $(1.3) | $(2.7) |
| Operating cash flow | Not separately stated | Not separately stated | $29.6 | $44.3 |
Q2 revenue growth was led by customer support services; software revenue grew modestly overall, with Americas software revenue down 7% and EMEA and APAC up 23% and 10%. For the first half, enterprise software transactions grew 23% in revenue, supported by a higher average transaction size, while the number of such transactions declined 6%. Operating expenses rose faster than revenue in Q2, notably sales and marketing, R&D, and general and administrative costs.
Liquidity, debt, and capital
- At September 30, cash and cash equivalents were $363.3 million and short-term investments were $131.3 million. Working capital was $373.1 million.
- The company had no borrowings on its $250 million revolving credit facility, which expires in June 2019, and reported compliance with its covenants.
- First-half operating cash flow fell to $29.6 million from $44.3 million. Investing used $13.2 million, mainly net Treasury bill purchases and capital expenditures; financing provided $5.5 million, including $16.7 million from equity plans and $11.3 million of share repurchases.
- The company repurchased 192,367 shares for $11.3 million in Q2; $113.7 million remained under the authorization, which expires March 31, 2018.
Changes, outlook, and risks
- The company adopted ASC 606 revenue guidance retrospectively from April 1, 2017. Prior periods were adjusted; management said the principal effect was capitalization and deferral of certain sales commissions, with no impact on historical cash flows.
- Adoption of share-based compensation guidance caused $3.8 million of excess tax benefits to be recorded in the first-half income tax benefit, reducing net loss by $3.8 million, or $0.08 per diluted share. This benefit materially affected the reported loss comparison.
- Management expects subscription arrangements to become a more significant share of revenue during fiscal 2018, anticipates continued R&D spending, and estimates fiscal 2018 cash income-tax payments below $6 million. It provided no specific revenue or earnings guidance in the supplied filing text.
- Management said existing cash, investments, and operating cash flows should cover anticipated needs for at least 12 months. Approximately $189 million of cash was held by foreign entities; repatriation could involve restrictions or tax costs.
- A securities class action had an October 2, 2017 agreement in principle to settle for $12.5 million, subject to documentation and court approval; the company said insurers would fund it and recorded no accrual. A shareholder derivative suit and patent-infringement litigation remained pending, with outcomes uncertain.
- Risks include reliance on distributors (Arrow generated about 36% of first-half revenue), customer-support renewals, large enterprise deals, foreign currency exposure, product obsolescence and competition. The filing reported effective disclosure controls as of September 30, 2017.
Investor verification points
- Assess the quality and sustainability of reported earnings, particularly the $3.8 million share-based compensation tax benefit and ongoing stock-based compensation expense.
- Track operating cash flow and working-capital movements, including the decline in accrued liabilities and growth in deferred revenue.
- Monitor software growth by region and deal size, the lower count of enterprise transactions, and the anticipated shift toward subscription licensing.
- Confirm final court approval and insurer funding of the securities settlement, and follow developments in the derivative and patent cases.
- Review distributor and customer-support renewal concentration, foreign-cash repatriation considerations, and remaining share-repurchase authorization.