Commvault Systems, Inc. — Form 10-Q
Reporting period: Fiscal first quarter ended June 30, 2020; comparisons are with the three months ended June 30, 2019 unless stated otherwise. Amounts are in U.S. dollars.
Business context and financial results
Commvault provides data protection and information-management software, appliances, support and professional services. It reports one operating segment. Software and products contributed 44% of quarterly revenue, up from 39% a year earlier; services contributed 56%, down from 61%.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $173.0 million | $162.2 million | +7% |
| Software and products revenue | $76.6 million | $63.7 million | +20% |
| Services revenue | $96.4 million | $98.5 million | -2% |
| Gross profit / margin | $148.4 million / 85.8% | $133.5 million / 82.3% | Margin +3.5 points |
| Operating income (loss) / margin | $6.7 million / 3.9% | ($6.7 million) / (4.1%) | Returned to operating profit |
| Net income (loss) | $2.3 million | ($6.8 million) | Returned to profit |
| Diluted EPS | $0.05 | ($0.15) | — |
| Operating cash flow | $15.3 million | $31.1 million | Down $15.9 million |
Balance sheet and liquidity
- At June 30, 2020, cash and cash equivalents were $345.4 million and short-term investments were $10.8 million; total current assets were $533.5 million and current liabilities $322.8 million.
- Working capital was $210.7 million, up from $185.1 million at March 31, 2020. Total assets were $865.8 million and stockholders’ equity $434.2 million.
- The balance sheet presents no borrowings or debt; liabilities were primarily deferred revenue, accrued liabilities and operating lease liabilities. Deferred revenue totaled $329.8 million.
- Cash, cash equivalents and restricted cash increased $49.4 million during the quarter. Investing cash flow was positive $31.2 million, mainly from $32.8 million of investment maturities, partly offset by $1.6 million of capital expenditures. No shares were repurchased.
- Management said existing cash, cash equivalents and operating cash flows should meet anticipated needs for at least the next 12 months. About $160.2 million of cash was held by foreign subsidiaries; repatriation could face local restrictions or tax costs.
Material changes and management commentary
- Software and products revenue increased $12.9 million, driven by a $16.2 million increase in larger deals (over $0.1 million); smaller transactions declined $3.3 million. Larger deals were 73% of software and products revenue, versus 62% a year earlier.
- Regional software and products revenue rose 62% in the Americas, but fell 12% in EMEA and 36% in APJ. Services revenue declined mainly because COVID-19 disrupted on-site training and consulting and customer support revenue was lower.
- Gross margin improved as total cost of revenue fell 14%; lower professional-services delivery costs and temporary COVID-related pay cuts contributed. Operating expenses were broadly higher overall: R&D rose 32%, including Hedvig-related costs, while sales and marketing fell 7%, partly due to reduced travel and temporary pay cuts.
- Quarterly restructuring expense was $2.3 million, mainly severance and lease-abandonment charges, compared with $4.1 million a year earlier. The company cautioned that the program may not achieve its intended results and could entail unexpected costs or operational disruption.
- Depreciation and amortization increased to $5.1 million from $2.6 million, principally due to Hedvig acquired-intangible amortization; management expected this expense to increase in fiscal 2021. The company said COVID-19 or other factors could delay Hedvig technology integration and potentially lead to an impairment, though none had been recorded.
- Income tax expense was $4.7 million, including a $3.2 million adjustment reducing the expected CARES Act net-operating-loss carryback benefit. The company maintained a valuation allowance against its net deferred tax assets.
- Arrow generated 37% of revenue and represented about 31% of accounts receivable. Management identified dependence on Arrow and the broader indirect distribution channel as a risk. Foreign-currency transaction losses were $0.8 million, versus $0.1 million a year earlier.
Outlook, risks and unusual items
The filing gives no specific revenue or earnings guidance. Management’s liquidity expectation is for resources to cover anticipated needs for at least 12 months. Remaining performance obligations outside deferred revenue were $38.9 million; timing of much of the services portion depends on customer needs and schedules. COVID-19 affected service delivery, travel and costs, and the filing cautions that results for the quarter are not necessarily indicative of full-year results.
Other items to note include an $84,000 opening retained-earnings adjustment upon adoption of the expected-credit-loss accounting standard; a $14.1 million Hedvig-related cash compensation arrangement payable over 30 months subject to continued employment (with $1.4 million expensed in the quarter); and a June 7, 2020 agreement with Starboard Value, referenced as an exhibit. The filing does not describe that agreement’s terms in the supplied text. Management reported no pending legal action expected to have a material adverse effect and no off-balance-sheet financing arrangements.
Investor verification priorities
- Assess whether the software and products growth—especially larger deals and the Americas—can persist, given declines in EMEA and APJ and the reliance on large transactions.
- Track operating cash conversion: cash from operations fell despite the return to net income, with receivables and accrued-liability movements affecting the quarter.
- Review Arrow distribution concentration, customer-support renewal trends, and the timing and collectability of receivables and deferred revenue.
- Verify the impact of COVID-19, Hedvig integration and amortization, restructuring execution, and potential acquired-intangible impairment.
- Examine the CARES Act tax-benefit estimate, foreign-cash accessibility and currency exposure, and the terms and implications of the Starboard agreement in the referenced Form 8-K.