Business context and reporting period
Commvault Systems, Inc. filed this Form 10-K for the fiscal year ended March 31, 2018. The company sells data protection and information-management software, appliances and related services through direct and indirect channels. Its platform serves more than 26,000 registered customers. The filing also provides quarterly results, but the annual reporting period is fiscal 2018, not a standalone fiscal fourth-quarter report.
Key financial metrics
Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $699.4 | $645.0 | +8% |
| Software and products revenue | $311.7 | $290.7 | +7% |
| Services revenue | $387.6 | $354.3 | +9% |
| Gross profit / margin | $601.2 / 86.0% | $559.8 / 86.8% | Margin down 0.8 percentage points |
| Operating income (loss) / margin | ($0.9) / (0.1%) | ($1.2) / (0.2%) | Loss narrowed |
| Net income (loss) | ($61.9) | ($0.5) | Loss increased |
| Operating cash flow | $84.2 | $100.0 | Down 16% |
- FY2018 basic and diluted loss per share was $1.37, versus $0.01 loss in FY2017.
- Cash and cash equivalents were $330.8; short-term investments were $131.6; working capital was $322.6. The filing reports no debt balance on the balance sheet. The $250 million revolving facility was terminated in February 2018.
- Deferred revenue totaled $325.8, including $241.1 current. Stockholders’ equity was $404.1.
- The company repurchased $112.2 of stock during FY2018, or about 2.1 million shares.
- Software and products gross margin was 98%, down from 99%; services gross margin remained 77%.
Material changes versus the prior comparable period
- Revenue growth was driven by larger enterprise transactions and customer-support agreements. Enterprise transactions above $100,000 were 59% of software and products revenue, compared with 56% in FY2017; their average size rose to about $292,000 from $261,000.
- Operating expenses rose about 7% to $602.2, broadly matching gross profit and leaving a small operating loss. Sales and marketing increased 7%, and research and development increased 13%.
- Net loss widened substantially despite revenue growth, principally because income-tax expense was $58.4. The company recorded a $58.35 valuation allowance against deferred tax assets and an $18.0 reduction in deferred-tax-asset value from the U.S. tax-rate reduction.
- The company impaired its Laitek equity-method investment to zero, recording a $3.6 loss.
- Cash from operations decreased to $84.2, while accounts receivable increased; deferred revenue grew, reflecting customer-support billings and renewals.
- FY2017 and FY2016 figures were recast for adoption of ASC 606 using the full retrospective method. Comparisons should use the recast figures shown in the filing.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management expects subscription arrangements and solution-set sales to become a larger share of revenue and expects appliance sales to increase; appliance revenue was not significant in FY2018, and management expects appliance growth to pressure software-and-products gross margin.
- On May 1, 2018, the company announced a strategic transformation, a CEO search, board changes and a workforce reduction of approximately 4%. It expects $6–$8 million of pre-tax restructuring charges, mostly in FY2019’s first quarter.
- Distribution concentration is material: Arrow generated approximately 36% of FY2018 revenue, while OEM agreements generated 12%. Indirect channels produced 86% of software-and-products revenue. International operations represented approximately 46% of revenue.
- A securities class action settlement of $12.5 million was agreed in principle and funded solely by insurers, but remained subject to court approval at the filing date. A separate patent-infringement case remained pending; the company could not assess its potential impact and recorded no accrual, citing a remote probability of loss.
- The Tax Cuts and Jobs Act accounting was provisional; the company had not completed its transition-tax analysis or determined its GILTI accounting policy. Approximately $206.8 million of cash and cash equivalents was held outside the United States, with foreign earnings intended to remain reinvested abroad.
- Other disclosed risks include intense competition, dependence on reseller and OEM partners, product and cybersecurity failures, foreign-exchange exposure, renewal rates, and potential tax and litigation outcomes. A 10% change in foreign-exchange rates was estimated to affect annual operating profit by about $7.1 million.
- The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether revenue growth and enterprise-deal momentum continue, particularly as subscription and appliance offerings expand.
- Whether the 4% workforce reduction and announced transformation deliver savings, and whether restructuring charges remain within the expected $6–$8 million.
- How much the valuation allowance, tax reform adjustments and future tax guidance affect reported earnings and deferred tax assets.
- Whether operating cash flow recovers as receivables rise, and how the company deploys its substantial cash and repurchase authorization.
- Developments in the insurer-funded securities settlement and the unresolved patent litigation.
- Continued reliance on Arrow, OEM partners and international revenue, and any impact on margins from appliance sales.