Commvault Systems, Inc. — Form 10-Q Summary
Business context and period: Commvault sells data and information management software and related support and professional services. This unaudited filing covers the quarter and nine months ended December 31, 2016, the third quarter of fiscal 2017. Unless stated otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter | Nine months ended Dec. 31, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Software revenue | $77.3 | $71.4 | $211.7 | $185.4 |
| Services revenue | $88.5 | $84.3 | $265.9 | $250.1 |
| Total revenue | $165.8 | $155.7 | $477.6 | $435.6 |
| Gross margin | 87% | 87% | 87% | 86% |
| Operating income (loss) | $1.2 | $3.5 | $(2.1) | $(7.3) |
| Net income (loss) | $(0.04) | $4.9 | $(2.6) | $(5.7) |
| Diluted EPS | $(0.00) | $0.10 | $(0.06) | $(0.12) |
- Quarterly revenue grew 7%; software revenue increased 8% and services revenue 5%. Nine-month revenue grew 10%, led by 14% software growth and 6% services growth.
- Quarterly operating income declined despite higher revenue as operating expenses grew; sales and marketing increased 8% and R&D increased 18%. For the nine-month period, the operating loss narrowed year over year.
- Operating cash flow for the nine months was $71.1 million, versus $47.2 million a year earlier. Investing activities used $26.2 million and financing activities used $6.0 million. Capital expenditures were $4.5 million; share repurchases were $25.0 million.
- At December 31, cash and cash equivalents were $316.4 million, short-term investments were $120.7 million, and working capital was $301.6 million. Deferred revenue totaled $254.8 million.
- No borrowings were outstanding under the $250 million revolving credit facility, which expires in 2019; the company reported covenant compliance. The filing says existing cash and operating cash flow should meet anticipated needs for at least 12 months.
Material changes and management commentary
- Enterprise software transactions (over $100,000) accounted for 57% of quarterly software revenue, up from 54%; their revenue rose 15%, while average deal size declined to about $261,000 from $278,000. For the nine months, enterprise transaction revenue rose 25%, driven by more transactions, partly offset by a 3% decline in average deal size.
- Management attributed services growth mainly to customer support agreements, partly offset by lower professional services revenue. It expects capacity-based licenses to remain the majority of software license revenue in fiscal 2017 and 2018, and expects subscription or term-based arrangements to become more significant over time.
- Management anticipates continued R&D investment. It is realigning maintenance pricing, principally for non-enterprise customers, affecting about one-quarter of the existing maintenance revenue base; the change is expected to phase in during the current fiscal year and early fiscal 2018.
- The board extended the share repurchase program to March 31, 2018 and increased authorization so that $150 million was available after its January 18, 2017 action. Estimated fiscal 2017 cash tax payments are less than $5 million. No formal revenue or earnings guidance is provided.
Risks, contingencies, and unusual items
- Distribution concentration is material: Arrow generated 37% of nine-month revenue and represented 44% of receivables at December 31, 2016; Avnet generated 10% of revenue and represented 11% of receivables. OEM agreements accounted for 15% of nine-month revenue.
- Foreign currency affects reported results: approximately 43% of revenue came from outside the United States. Management reported that exchange rates reduced year-over-year EMEA software growth; the company also recorded $4.8 million of foreign currency translation loss in comprehensive income for the nine-month period.
- A securities class action concerning alleged statements from 2013–2014 remained pending after the court denied a motion to dismiss in September 2016. The company recorded no accrual, citing a remote probability of loss, but said the outcome could not be predicted.
- The company is assessing adoption of the new revenue recognition standard, potentially as early as April 1, 2017. It expects potentially material effects from capitalizing and amortizing sales commissions and from the timing of revenue recognition for term-based software licenses.
- Stock-based compensation was $55.2 million for the nine months, up from $47.5 million. The filing reports $109.5 million of unrecognized compensation expense expected to be recognized over a weighted-average 1.72 years.
Investor verification priorities
- Track whether software and enterprise transaction growth continues, especially given lower average deal size and currency effects.
- Assess the effect of maintenance pricing changes on renewals, services revenue, and margins.
- Monitor reliance on Arrow, Avnet, and OEM partners, and any changes in their contribution or receivables exposure.
- Verify progress and financial impact from the revenue recognition standard, including commission accounting and term-license timing.
- Follow the securities litigation, share repurchases, cash generation, and continued stock-based compensation expense.