Commvault Systems, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2019; comparisons are to the corresponding 2018 periods. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $176.4m | $184.3m | $506.1m | $529.5m |
| Software and products revenue | $76.6m | $84.5m | $208.9m | $229.1m |
| Services revenue | $99.7m | $99.8m | $297.2m | $300.5m |
| Gross margin | $145.8m; 82.7% | $155.4m; 84.3% | $415.7m; 82.1% | $446.2m; 84.3% |
| Operating income (loss) | $(0.5)m | $10.4m | $(15.3)m | $4.6m |
| Net income (loss) | $(0.7)m | $13.4m | $(14.6)m | $5.7m |
| Diluted EPS | $(0.01) | $0.28 | $(0.32) | $0.12 |
- Q3 total revenue fell 4%; software and products revenue declined 9%, while services revenue was essentially flat. For the nine months, total revenue declined 4% and software and products revenue fell 9%.
- Q3 operating margin was approximately negative 0.3%, versus 5.7% a year earlier; nine-month operating margin was negative 3.0%, versus positive 0.9%.
- Operating cash flow was $56.0m for the nine months, down from $73.6m. Capital expenditures were $1.9m; operating cash flow less capital expenditures was approximately $54.1m.
- Cash and cash equivalents were $272.0m, restricted cash $8.0m, and short-term investments $65.0m at December 31. Working capital was $191.6m, down from $328.7m at March 31. The filing reports no off-balance-sheet financing arrangements and does not identify borrowings or debt.
- Current assets were $525.4m and current liabilities $333.8m. Deferred revenue totaled $333.2m, compared with $337.7m at March 31.
Material changes and notable items
- Commvault acquired Hedvig on October 1, 2019 for stated consideration of $163.2m: $157.6m cash, $1.6m in restricted stock units, and $4.0m estimated contingent consideration. The acquisition added $112.4m of goodwill and $52.0m of intangible assets. The company also holds $8.0m of restricted cash for a contingent payment tied to specified customer purchase orders by April 30, 2020.
- Hedvig’s reported post-acquisition revenue was $0.2m and net loss was $9.3m for October–December; the loss includes acquisition-related amortization and compensation items. The filing’s nine-month pro forma combined revenue was $507.2m and net loss $19.2m for FY2020, versus $532.8m and $21.1m for the comparable FY2019 pro forma period.
- Nine-month investing cash outflow was $94.1m, principally reflecting the $157.5m net cash acquisition outlay, partly offset by investment maturities. The cash, cash equivalents and restricted cash balance declined $48.0m over the nine months.
- Restructuring charges were $19.0m for the nine months, including severance and office lease-related charges. Sales and marketing expense declined 10% year over year, while research and development expense rose 11%, partly reflecting Hedvig-related headcount and compensation.
- Q3 general and administrative expense included $4.4m of non-routine Hedvig acquisition costs. Software and products cost rose to 11% of that revenue from 7%, due to hardware and royalty costs; management expects this cost ratio to rise as appliance and hyperscale sales ramp.
Management outlook, risks and contingencies
- Management said existing cash, cash equivalents and operating cash flow should meet anticipated needs for working capital, taxes, capital expenditures and potential repurchases for at least the next 12 months. No revenue or earnings guidance is provided in the supplied filing text.
- Management noted enterprise software and products transactions declined in number: 11% in Q3 and 18% for the nine months. The company depends on large transactions, indirect distribution and customer support renewals.
- Arrow generated 37% of total revenue in both nine-month comparison periods; Hitachi OEM sales represented 11% of nine-month FY2020 revenue. The filing notes these partners are not obligated to sell Commvault products exclusively or at all.
- Foreign exchange is a risk: 49% of nine-month revenue came from outside the United States. Management reported a $0.2m net foreign-currency transaction loss for the nine months.
- The company cautioned that restructuring may not achieve its intended results and could entail additional costs or operational disruption. Acquisition integration, retention, technology acceptance and acquired-intangible valuation are also risks. Management reported no pending legal proceeding expected to have a material adverse effect.
- On January 23, 2020, the board authorized a share repurchase program with $200.0m available, expiring March 31, 2021. This followed $40.0m of repurchases in the nine months; no shares were repurchased during Q3.
Investor verification priorities
- Track software and products revenue, enterprise deal count and regional performance, especially the continued decline in the Americas and APAC.
- Assess whether services and support renewals can offset product-revenue weakness, and monitor deferred revenue and renewal trends.
- Evaluate Hedvig integration, acquired technology’s commercial contribution, ongoing compensation and amortization costs, and the contingent payment trigger.
- Monitor gross-margin pressure from appliance and hyperscale costs and the effects of restructuring on operating expenses and execution.
- Reconcile liquidity changes, including acquisition spending, repurchases and deferred-revenue movements; confirm the company’s capital-allocation plans and repurchase activity.
- Consider partner and geographic concentration, foreign-exchange exposure, and the tax effect of the valuation allowance on deferred tax assets.