CommVault Systems, Inc. — Q1 FY2015 10-Q
Reporting period: Three months ended June 30, 2014, compared with the three months ended June 30, 2013. Financial statements are unaudited. Amounts below are in millions, except per-share data.
Business context
CommVault sells Simpana data and information management software and related support and professional services. Services comprised 53% of quarterly revenue; software comprised 47%. The company reported more than 20,000 registered customers. Sales through distributor Arrow represented 33% of revenue, and Hitachi Data Systems represented 10%.
Financial results and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $152.6 | $134.4 | +14% |
| Software revenue | $72.1 | $65.3 | +10% |
| Services revenue | $80.6 | $69.1 | +17% |
| Gross profit | $131.7 | $116.6 | +13% |
| Gross margin | 86% | 87% | Down about 1 percentage point |
| Operating income | $18.2 | $21.4 | −15% |
| Net income | $12.7 | $13.5 | −5% |
| Diluted EPS | $0.27 | $0.27 | Unchanged |
| Operating cash flow | $35.4 | $24.6 | +44% |
Operating expenses rose 19% to $113.5 million, led by sales and marketing, up 20% to $80.3 million, and higher stock-based compensation. Operating margin declined to about 12% from 16%. The effective tax rate fell to 31% from 38%, partly reflecting recognized tax benefits.
At June 30, cash and cash equivalents were $373.5 million and short-term investments were $25.0 million. Working capital was $294.3 million, down $92.7 million from March 31. The company had no borrowings under its new $250 million revolving credit facility; it reported approximately $250,000 of outstanding letters of credit. No other debt balance is reported in the filing.
Cash fell $84.2 million during the quarter. Investing activities used $19.5 million, including $18.2 million for the planned headquarters; financing activities used $101.2 million, primarily for $105.1 million of share repurchases. Deferred revenue was $213.9 million, up from $209.6 million at March 31.
Material changes, outlook and risks
- Revenue growth was driven by services and international software sales; international software revenue increased 24%, while U.S. software revenue increased 2%. Enterprise transactions greater than $0.1 million accounted for 63% of software revenue, versus 55% a year earlier. Direct-channel software revenue increased sharply, while indirect-channel software revenue declined 6%.
- Management expected enterprise software transactions and related revenue to increase during fiscal 2015, while noting that the timing and size of individual deals are difficult to forecast. It anticipated operating expense categories would rise in dollars, with a long-term expectation that they decline as a percentage of revenue. No specific quarterly or annual earnings or revenue guidance was provided.
- The company estimated the headquarters project, including land, building and campus infrastructure, at approximately $135 million and expected completion in about nine months. It anticipated continued spending during fiscal 2015 and higher depreciation in the second half of the year.
- On July 24, 2014, the board increased the share repurchase authorization and extended it through March 31, 2016. After the quarter’s repurchases and this increase, approximately $150 million remained authorized.
- The new five-year credit facility carries financial covenants and restrictions on certain transactions and activities. The company said it was compliant at quarter-end. Borrowing would add interest expense and could constrain financial flexibility.
- Key exposures include dependence on distribution and OEM partners, especially Arrow; large-deal timing; competition and product obsolescence; foreign currency movements; and the ability to execute product development plans. Approximately 42% of revenue came from outside the U.S. Unrecognized tax benefits were $2.7 million; U.S. federal returns for fiscal 2012–2013 and New Jersey returns for fiscal 2010–2013 were under audit.
- The filing disclosed no legal claim considered reasonably possible that required loss disclosure. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Adoption of the new revenue standard was scheduled for fiscal 2018; the company had not estimated its impact.
Important facts for investors to verify
- Whether higher sales and marketing, R&D and stock-based compensation spending can support continued revenue growth and operating-margin recovery.
- The durability and timing of enterprise deals, international growth, and customer-support renewals; also monitor Arrow and OEM channel concentration.
- Remaining headquarters costs, completion timing and resulting depreciation relative to the $135 million project estimate.
- Share repurchase pace and funding, cash generation, and any future use of the revolver or covenant headroom.
- Developments in the tax audits, foreign exchange exposure and the eventual financial impact of the new revenue standard.