CommVault Systems, Inc. — Form 10-Q Summary
Business context and reporting period. CommVault develops and sells data and information management software and related services under its Simpana brand. This unaudited filing covers the first quarter of fiscal 2011, the three months ended June 30, 2010; comparisons are with the three months ended June 30, 2009 unless otherwise noted. Amounts below are in millions of dollars, except per-share data.
Financial results and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Software revenue | $28.3 | $29.1 | Down 3% |
| Services revenue | $38.0 | $31.1 | Up 22% |
| Total revenue | $66.3 | $60.2 | Up 10% |
| Gross profit | $56.8 | $51.9 | Up 9% |
| Gross margin | 85.6% | 86.1% | Down 0.5 percentage points |
| Operating income | $3.7 | $6.1 | Down 39% |
| Operating margin | 5.5% | 10.1% | Down 4.6 percentage points |
| Net income | $3.5 | $2.4 | Up 44% |
| Diluted EPS | $0.08 | $0.06 | Up $0.02 |
| Cash from operations | $15.9 | $13.0 | Up $3.0 |
- Services generated 57% of revenue versus 52% a year earlier. Growth was primarily from customer support agreements, which increased $6.1 million. Software revenue fell, principally because foreign software revenue declined 7%; U.S. software revenue was flat.
- Operating expenses rose: sales and marketing to $35.8 million (up 18%), R&D to $8.6 million (up 13%), and general and administrative to $7.7 million (up 12%). Sales and marketing reached 54% of revenue versus 50%, pressuring operating income despite revenue growth.
- Services gross margin was 76.4%, compared with 75.6%; software gross margin was 98.0%, compared with 97.5%. Services have lower gross margins than software.
- Net income benefited from income tax expense of $0.3 million and a 7% effective tax rate, versus $3.7 million and 60% in the prior-year quarter. The 2010 rate reflected a $1.1 million tax-reserve reversal after a foreign statute of limitations expired; the prior-year rate included tax adjustments and correction of an approximately $0.9 million prior-period deferred-tax error, which the company said was not material to any annual fiscal period.
- At June 30, cash and cash equivalents were $172.9 million and short-term investments were $7.5 million. Current assets were $249.3 million and current liabilities $107.5 million; working capital was $141.7 million, down from $143.2 million at March 31.
- Operating cash flow was $15.9 million. Investing used $3.3 million, including $2.5 million for short-term investments and $0.8 million for property and equipment. Financing used $7.9 million, mainly reflecting $12.9 million of share repurchases, partly offset by option-exercise proceeds and related tax benefits. Cash increased $3.4 million during the quarter.
- No borrowings were outstanding under the $30 million revolving credit facility, which matures in July 2012; the company reported compliance with its covenants. Total debt is not otherwise reported as outstanding. The filing says existing cash, operating cash flow and the facility should meet anticipated needs for at least 12 months.
Material changes, outlook, and risks
- Enterprise software transactions (over $0.1 million) increased 7% in revenue and represented 44% of software revenue, versus 40% a year earlier; the number of such transactions declined 6%, while average deal size rose to approximately $250,000 from $220,000. Smaller software transactions declined 9%.
- Management expected the number of enterprise transactions and related software revenue to increase throughout fiscal 2011, while noting that the size and timing of individual deals are difficult to forecast. No numeric full-year revenue or earnings guidance is provided.
- The company anticipated continued investment in R&D and sales capacity. It expects operating expense categories to increase in dollars but decline as a percentage of revenue over the long term. It also expects services to remain a larger revenue source, while software revenue is expected to continue to be majority-derived from Backup and Recovery for the next few fiscal years.
- Management described cloud computing as a long-term industry trend and cited its cloud storage connector, announced in February 2010. Adoption of cloud solutions and the timing or success of product development are uncertain; software may become obsolete as technology, standards and customer requirements evolve.
- Dell contributed 26% of quarterly revenue and 33% of accounts receivable at June 30; Arrow contributed 23% of revenue and 27% of receivables. The filing highlights reliance on these distribution relationships and on indirect channels, which generated approximately 83% of software revenue.
- Approximately 36% of quarterly revenue came from outside the U.S.; currency movements can affect reported results and pricing. The company recorded $0.1 million of foreign-currency transaction losses, versus $0.5 million a year earlier, and had no forward contracts outstanding at quarter-end.
- Unrecognized tax benefits were $4.4 million, with $1.1 million of related interest and penalties. New Jersey was auditing tax returns for fiscal 2006–2009; management considered it reasonably possible that additional tax benefits could be realized by fiscal year-end 2011.
- The board repurchased 623,440 shares for $12.9 million during the quarter, at an average price of $20.62 per share. After quarter-end, the board added $40 million to the authorization and extended the program to March 31, 2012; the expanded authorization totaled $120 million, with $66.9 million remaining as of August 5, 2010.
- The company reported no litigation expected to have a material financial effect, no material change in internal controls, and effective disclosure controls as of June 30. Customer software agreements include intellectual-property indemnities; the company said prior payouts had not occurred and future payouts were considered remote.
Important facts for investors to verify
- Whether growth in recurring support services and larger enterprise deals can offset declining software revenue and smaller transactions.
- Whether higher sales and marketing spending produces revenue growth and restores operating margins.
- The sustainability of reported net income given the unusually low quarterly tax rate and potential changes in tax reserves or audits.
- Revenue and receivables exposure to Dell and Arrow, and the company’s ability to maintain effective indirect and direct sales channels.
- Cash generation, share repurchase pace, dilution from equity compensation, and continued compliance with credit-facility covenants.
- Execution and customer adoption of Simpana product releases and cloud capabilities, in a market exposed to technology change and product obsolescence.