Commvault Systems, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended June 30, 2017. Commvault provides data and information management software and related services. Comparative figures are for the three months ended June 30, 2016, adjusted retrospectively for adoption of ASC 606 where applicable. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 adjusted | Change |
|---|---|---|---|
| Total revenue | $166.0 | $151.8 | +9% |
| Software revenue | $74.8 | $63.4 | +18% |
| Services revenue | $91.2 | $88.4 | +3% |
| Gross margin | $144.3; 86.9% of revenue | $130.8; 86.2% | Margin expanded |
| Operating expenses | $148.7 | $134.0 | +11% |
| Operating loss | $(4.4) | $(3.2) | Loss widened |
| Net loss | $(0.3); $(0.01) per diluted share | $(2.6); $(0.06) per diluted share | Loss narrowed |
| Operating cash flow | $19.9 | $24.0 | Down $4.1 |
Cash and cash equivalents were $349.5 million and short-term investments were $131.5 million at June 30, 2017. Working capital was $349.6 million. The company had no borrowings under its $250 million revolving credit facility and reported covenant compliance. Deferred revenue totaled $292.5 million, including $217.5 million current. The filing says existing cash and operating cash flows should meet anticipated needs for at least 12 months.
Material changes and management commentary
- Software revenue growth was driven by larger enterprise transactions: deals above $0.1 million represented 63% of software revenue, versus 49% a year earlier. Enterprise transaction revenue rose 50%, while the number of such transactions declined 6%; software revenue from smaller transactions fell 13%.
- Software revenue increased across regions: Americas +12%, EMEA +35%, and APAC +10%. Services growth reflected a $3.6 million increase in customer support revenue, partly offset by lower professional services revenue.
- Sales and marketing expense rose 8%, primarily from sales-force compensation and stock-based compensation. R&D expense rose 17% with engineering expansion; management expects continued R&D investment. G&A expense increased 20%, primarily due to employee compensation.
- The company expects subscription arrangements to become a more significant share of revenue in fiscal 2018. No quantitative revenue or earnings guidance is provided in the filing.
Accounting, risks, and contingencies
- Commvault early adopted ASC 606 on April 1, 2017 using full retrospective application. The principal change was deferring and amortizing eligible sales commissions over an estimated five-year benefit period. Management reported no impact on historical net cash flows from this change.
- It also adopted share-based compensation guidance prospectively. A $2.358 million excess tax benefit from exercised options and vested awards was recorded in income tax benefit and reduced reported net loss; the change also affected cash-flow classification. The lower net loss should therefore be considered alongside this benefit.
- Distribution and customer concentration are material: Arrow accounted for 36% of quarterly revenue and 33% of receivables; Avnet accounted for 12% of revenue; Hitachi Data Systems accounted for 11% of revenue. Revenue also depends on support renewals and large enterprise deals.
- Foreign markets generated approximately 45% of revenue, exposing results to currency movements. Approximately $169 million of cash and cash equivalents was held by foreign legal entities; repatriation may involve restrictions or tax consequences.
- Pending matters include securities class-action litigation, a shareholder derivative action, and a patent-infringement suit. The company recorded no accrual, concluding loss was remote for each, but stated that outcomes and potential material effects could not be determined.
- A company director became Rackspace’s CEO during the quarter. Commvault reported $4.054 million of recognized revenue from Rackspace and $4.032 million of receivables at quarter-end.
Key facts for investors to verify
- Whether enterprise deal growth and higher average deal size can continue, given the decline in deal count and smaller-transaction revenue.
- How ASC 606 and the growth of subscription arrangements affect revenue timing, deferred revenue, and commission assets in subsequent quarters.
- Underlying earnings trends excluding the $2.358 million share-based compensation tax benefit, and the drivers of operating expenses and operating cash flow.
- Exposure to major distributors, OEM relationships, customer-support renewals, and foreign currency movements.
- Developments in the disclosed litigation and any changes to the company’s liquidity, repurchase plans, or credit-facility status.