CommVault Systems, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing also reports unaudited fourth-quarter results for the three months ended March 31, 2015; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
CommVault develops and sells Simpana data and information management software, including backup and recovery, archiving, replication, search and e-discovery, and analytics, along with support and professional services. The company reported more than 21,000 registered customers. Revenue is generated through direct sales and indirect channels; Arrow accounted for approximately 36% of FY2015 revenue, and OEM agreements accounted for 15%.
Financial highlights
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $607.5 million | $586.3 million | Up 4% |
| Software revenue | $283.3 million | $294.4 million | Down 4% |
| Services revenue | $324.3 million | $291.9 million | Up 11% |
| Gross margin | $525.5 million; 86% | $512.0 million; 87% | Margin down 1 percentage point |
| Operating income | $38.8 million | $100.4 million | Down 61% |
| Net income | $25.7 million | $64.1 million | Down 60% |
| Diluted EPS | $0.54 | $1.29 | Down 58% |
| Operating cash flow | $123.8 million | $119.1 million | Up 4% |
Operating margin was approximately 6% versus 17% in FY2014; net margin was approximately 4% versus 11%. Services represented 53% of revenue, compared with 50% in the prior year. Software gross margin was 99.1% and services gross margin was 75.4%.
At March 31, 2015, cash and cash equivalents were $337.7 million and short-term investments were $49.9 million, versus $457.7 million and $25.0 million, respectively, a year earlier. Working capital was $283.6 million, down from $387.0 million. The company had no borrowings under its $250 million revolving credit facility and reported compliance with its covenants. Total assets were $713.5 million and stockholders’ equity was $407.0 million.
Cash used in investing activities was $90.0 million, primarily reflecting $59.3 million of spending on the new headquarters, $5.8 million of other capital expenditures, and net purchases of short-term investments. Cash used in financing activities was $133.6 million, including $155.1 million of share repurchases. Cash and cash equivalents declined $120.1 million during the year, including a $20.2 million adverse effect from exchange rates.
Fourth-quarter results and changes versus prior periods
FY2015 fourth-quarter revenue was $150.7 million, compared with $156.8 million in FY2014 Q4. Net income was $3.4 million, versus $15.7 million; diluted EPS was $0.07, versus $0.32. Revenue was relatively steady across FY2015 quarters, while net income declined from $12.7 million in Q1 to $3.4 million in Q4.
For the full year, services growth more than offset lower software revenue. Software weakness was attributed primarily to fewer enterprise transactions and lower productivity in the Americas sales organization; reported EMEA results were also affected by currency movements. Sales and marketing expense rose 19% to $336.0 million, largely due to expanded sales staffing and compensation. R&D expense increased 16% to $64.1 million. These expense increases, along with headquarters-related costs, substantially reduced operating income despite revenue growth.
Outlook, commentary, risks and unusual items
- Management said it expected existing cash, cash equivalents and operating cash flow to meet anticipated needs for working capital, capital expenditures and potential repurchases for at least the next 12 months. The filing does not provide specific revenue or earnings guidance.
- Management described a broad business transformation involving products, packaging, pricing, distribution, sales enablement, territory alignment and product management. It cautioned that execution could be disruptive, delayed, or more costly than expected.
- The company expected subscription or term-based licenses to become a more significant share of revenue over time. Such arrangements recognize revenue ratably and could reduce near-term reported revenue and earnings compared with perpetual licenses.
- Channel concentration is material: Arrow generated approximately 36% of FY2015 revenue, while OEM sales represented 15%. The filing notes these partners generally have no minimum sales obligations and may terminate relationships.
- A securities class action filed in September 2014 names the company, CEO and CFO and alleges misleading statements concerning financial results and business prospects. The company said it intended to defend the case, could not predict its outcome or estimate potential losses, and had recorded no reserve.
- Other watch items include foreign exchange exposure (management estimated a 10% change in all foreign exchange rates could affect annual operating profit by approximately $6 million), tax examinations, customer-support renewals, intense competition, and product-development and execution risks.
- The company completed its move to a new owned headquarters; related capital spending was $59.3 million in FY2015. It repurchased 3.2 million shares for $155.1 million during the year; $100 million remained authorized as of May 8, 2015.
- The FY2015 effective tax rate was 34%, compared with 37% in FY2014. Management noted the R&D tax credit had expired on December 31, 2013, and expected cash taxes to increase as the cash tax rate approached the effective rate over the next one to two fiscal years.
Important facts for investors to verify
- Whether software revenue stabilizes and enterprise transaction volumes recover, particularly in the Americas.
- Whether services growth and renewals can offset software weakness without further pressure on consolidated margins.
- Whether sales-force investments and the business transformation improve productivity and profitability, and at what cost.
- How much channel concentration and partner dependence affect future revenue, collections and customer reach.
- Cash needs for headquarters, repurchases and other investments, and the company’s liquidity after the substantial FY2015 buyback.
- Developments in the securities litigation, tax audits and foreign-exchange exposure.