Commvault Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Commvault sells data and information management software and related services. This unaudited report covers the quarter and six months ended September 30, 2016, the second quarter and first half of fiscal 2017. Unless stated otherwise, figures below are in millions of dollars.
Financial performance
| Metric | Three months ended Sep. 30, 2016 | Year-over-year change | Six months ended Sep. 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $159.3 | +$18.6; 13% | $311.7 | +$31.9; 11% |
| Software revenue | $70.5 | 22% | $134.4 | 18% |
| Services revenue | $88.9 | 7% | $177.4 | 7% |
| Gross margin | $137.7; 86% | Up from 85% | $269.1; 86% | Up from 85% |
| Operating loss | $(0.8) | Improved from $(4.6) | $(3.3) | Improved from $(10.8) |
| Net loss | $(0.6); $(0.01) per share | Improved from $(9.2); $(0.20) per share | $(2.6); $(0.06) per share | Improved from $(10.5); $(0.23) per share |
Operating expenses rose 11% to $138.4 million in the quarter and 9% to $272.4 million in the first half. Sales and marketing and R&D increased, principally with sales-force and engineering expansion, compensation and stock-based compensation. Total stock-based compensation was $36.0 million for the half, versus $30.3 million a year earlier. Services represented 57% of first-half revenue, versus 59%; software revenue’s greater mix contributed to higher overall gross margin. Software gross margin was approximately 99% and services gross margin 77% for the first half.
Cash flow, liquidity and debt
- Cash and cash equivalents were $321.8 million at September 30, 2016; short-term investments, principally U.S. Treasury bills, were $117.8 million. Combined, these were $439.6 million, compared with $387.2 million at March 31, 2016.
- First-half operating cash flow was $44.3 million, up from $31.5 million. Investing used $20.8 million, largely net Treasury bill purchases; financing provided $12.7 million, mainly option exercises and employee stock purchases. Cash increased $33.7 million.
- Working capital was $301.1 million, up $48.7 million from March 31, 2016. The company said existing cash and operating cash flow should meet anticipated needs for at least 12 months.
- No borrowings were outstanding under the $250 million revolving facility, which expires in 2019; the company reported covenant compliance. No shares were repurchased during the half; $93.1 million remained under an authorization expiring March 31, 2017.
Changes, outlook and risks
- Growth was led by software, including enterprise transactions greater than $0.1 million: these rose 32% in the first half, as transaction count increased 34%, partly offset by a 2% decline in average deal size. In the quarter, enterprise transaction revenue rose 44%.
- Management said capacity-based licenses were about 70% of first-half software license revenue and expected them to remain the majority in fiscal 2017. It also expects term-based subscription arrangements to become more significant over coming years.
- Management anticipates continued R&D spending. It was realigning maintenance pricing during fiscal 2017 and early fiscal 2018, focused on mid- to lower-end customers representing about one-quarter of the existing maintenance revenue base; unsuccessful execution could adversely affect performance. Estimated fiscal 2017 cash income tax expenditures were less than $5 million.
- Customer/channel concentration is notable: Arrow generated 35% of first-half revenue and held about 38% of receivables at September 30; Avnet generated 10% of first-half revenue and held about 11% of receivables. The company warns that disruption to these distributors could harm results. Foreign sales were about 42% of first-half revenue; currency movements reduced reported EMEA software growth.
- A securities class action against the company, CEO and CFO alleges misleading statements concerning the 2013–2014 period. The court denied defendants’ motion to dismiss on September 30, 2016. The company cannot predict the outcome or determine whether it will have a material effect; no reserve was recorded. It reported no other known claims requiring disclosure of a reasonably possible loss.
- Management was assessing the effects of new revenue-recognition, lease and share-based-payment accounting standards. It noted that the revenue standard could require new processes and changes to internal controls. Disclosure controls were deemed effective; no material change in internal control was reported for the quarter.
Investor verification points
- Assess whether software and enterprise-deal growth can continue, including the effect of deal size, foreign exchange and reliance on indirect channels.
- Monitor maintenance renewals and the pricing realignment’s effects on retention, revenue and margins.
- Review operating-expense growth and the effect of substantial stock-based compensation and potential dilution.
- Track the securities litigation, potential exposure and any subsequent reserve or outcome disclosures.
- Confirm liquidity, distributor receivable concentration, repurchase activity and the eventual accounting-standard adoption impacts.