Commvault Systems, Inc. (NASDAQ:CVLT) Q1 2024 Earnings Call Transcript

Commvault Systems, Inc. (NASDAQ:CVLT) Q1 2024 Earnings Call Transcript August 1, 2023

Commvault Systems, Inc. misses on earnings expectations. Reported EPS is $0.15 EPS, expectations were $0.64.

Operator: Good day, and thank you for standing by. Welcome to the Commvault Fiscal 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Melnyk, Head of Investor Relations. Please go ahead.

Mike Melnyk : Morning, and welcome to our earnings conference call. I’m Mike Melnyk, Head of Investor Relations, and I’m joined by Sanjay Mirchandani, Commvault’s CEO; and Gary Merrill, Commvault’s CFO. An earnings presentation with key financial and operating metrics is posted on the Investor Relations website for your reference. Statements made on today’s call will include forward-looking statements about Commvault, future expectations, plans and prospects. All such forward-looking statements are subject to risks, uncertainties and assumptions. Please refer to the cautionary language in today’s earnings release and Commvault’s most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company’s actual results to be materially different from those contemplated in these forward-looking statements.

Commvault does not assume any obligation to update these statements. During the call, Commvault’s financial results are presented on a non-GAAP basis. A reconciliation between GAAP and non-GAAP can be found on our website. Thank you for joining us. Now I’ll turn the call over to Sanjay for his remarks. Sanjay?

Sanjay Mirchandani: Thank you, Mike. Good morning. I’m pleased to report our Q1 results met our expectations and position us well for fiscal year 2024. Let me share some highlights. Total ARR, the metric we use to measure the growth of our recurring revenue streams, increased 15% year-over-year to $686 million. Our subscription ARR grew 32% year-over-year to $500 million. Metallic, our hyper growth SaaS platform grew ARR 72% year-over-year and now exceeds 4,000 customers. All of these showcased the strength of our subscription-based recurring revenue model that we’ve been driving to over the past several years. And we did it while delivering 22% EBIT margins and continuing to return cash to shareholders through share repurchases.

Our strategic objective is clear: to be the leading cloud first data protection company in the industry. This requires constant innovation, execution excellence and the ability to rapidly evolve with the ever-changing data protection market. Our customers have reached inflection driven by 4 major forces that are shifting the data protection demands and expectations of the modern enterprise. One, they’re experiencing unique and complex challenges on their hybrid cloud journeys. Two, customers shouldn’t have to choose between a software and SaaS. At this point, it should be a natural and seamless decision with a modern unified platform. Three, the world of data protection and data security are converging and require customers to consider a new approach.

And lastly, the advancements in artificial intelligence have opened the door to improved customer experiences and increased value. Let’s discuss each of these. The first and perhaps most important is the industry-wide move towards the hybrid cloud. According to a recent report, 82% of IT leaders say that they have adopted hyper cloud, nearly half of which are embracing multiple public clouds. As a result, data is distributed across multiple environments. It’s fragmented and in flight. Managing this new reality can become untenable in cost, complexity and security delivered at scale. To manage all of this, today’s hybrid enterprises are doing nothing at all or a patchwork of anything from basic cloud native backup to point solutions. Some SaaS, some software, each intended to solve a piece of the puzzle.

Rather than holistically simplifying and managing everything, this only increases more complexity and cost. This is where Commvault comes in. Which leads me to the second major force. Customers create the power and simplicity of a single as-a-service solution. Today, customers are forced to make on natural choices that are inefficient and unsustainable. Instead, they need the best of both software and SaaS in a single solution. Our cloud-based data protection platform does just that as software or SaaS on the same control plane. Not only do we help customers reduce complexity, our unified platform has the best total cost of ownership and greater value than any solution that we compete against, cloud native or software. This is revolutionary for the industry and positions us as the company to beat within the category.

And both existing and new customers are embracing this technology. I’ll discuss 3 examples. First, we won an M365 deal with Netcare, a publicly traded South African health care company. The company cited the simplicity and cost efficiency of our single platform versus the existing cloud native solution as the key decision-making criteria. Second thesis, a SaaS-based student learning system chose Commvault to drive 6-figure cost savings versus its cloud native tools. Third, a Fortune 1000 food manufacturer and an existing Commvault software customer expanded with our SaaS solution to protect thousands of Office 365 users. With each of these customers, we were the natural choice, given our proven mission-critical capabilities, our ability to operate between technologies and workloads our cost advantages and our capability to accommodate future cloud use cases on our platform.

These examples are consistent with the trends we’ve seen every quarter since the launch of our SaaS platform. 40% of our SaaS customers use another Commvault product and 30% use multiple SaaS offerings. Software and SaaS are complementary and accretive to our business, which brings us to the third course. As a line between data protection and data security players, customers are rethinking their approach to modern cyber resiliency. Ransomware threats are on the rise again in 2023. Data from cryptocurrency trading firm chain analysis indicates cyber ransom payments, more than doubled in the first half of 2023. And a report by Cybersecurity Ventures, Note that cybercrime will account for $10.5 trillion in costs by 2025. Of course, ransomware is only part of the modern era of pervasive autonomous threats in conjunction with other malicious data exfiltration and data destruction activities.

This is increasingly driving the need for a layered security approach that includes predictive threat analytics to defend both backup and production workloads and ironclad cyber resilience in the case of a breach. No amount of preemptive defense can take the place of unfailing rapid recovery and no amount of security is 100% successful. The two must operate hand in hand. Building on the early success of our Threatwise Cyber Deception offering. In June, we offered new security capabilities across our portfolio. These were designed to help customers proactively and reactively secure defend and recover their production workloads while strengthening their backup infrastructure. These advanced security features are managed and delivered through the simplicity of our new cloud command interface, which provides global visibility and smart insights across all workloads, monitoring backup health and security posture.

We also expanded our security ecosystem to include product integrations with Microsoft, Palo Alto, [Central One] and CyberArk. While others in the industry provide limited point solutions, Commvault offers a platform that protects and enables customers to recover both production and backup environments. Finally, the fourth force impacting data protection is the topic that’s driving an unprecedented frenzied adoption of AI across every enterprise. The rise of generative AI is ushering in a new era, one that is increasingly automated and autonomous and moving faster than one can imagine. We’ve been using AI and machine learning for years in our technology and our operations. Further leveraging AI-driven automation across our platform, we can help customers rapidly recover and also constantly optimize manage and control every aspect of their data protection capabilities.

We’re continuing to incorporate AI-based road maps across our offerings, and we’ll take a very considered point of view around the right way to apply this new technology as it matures. Our organization’s secure, defend and recover their most precious asset, the data, is fundamentally changing these forces. The bottom line is we can no longer look at each separately. The future of our industry depends on our proven ability to offer a seamless automated and cost-effective approach to these hard problems. In the fall, we’ll be announcing some exciting capabilities and offerings that will further empower customers and redefine the industry. With that, I’ll turn it over to Gary to discuss the numbers. Gary?

Photo by Danial Igdery on Unsplash

Gary Merrill : Thanks, Sanjay, and good morning, everyone. Coming off a strong finish to fiscal year ’23, we are off to a solid start to fiscal year ’24. As a reminder, we have recast our P&L presentation effective this quarter, which is led by our term license software and SaaS offerings, which are now approaching 50% of total revenue. The revenue from these arrangements is referred to as subscription and combining them in a single line item allows the investment community to have an enhanced understanding of our results. Our fiscal Q1 results were driven by 11% year-over-year growth from our subscription business, which increased to $97 million as a result of the accelerating contribution of SaaS revenue. Q1 perpetual license revenues were $13 million.

Our go-to-market motion is led by subscription. So perpetual license sales are generally sold in certain verticals and geographies. Q1 customer support revenue was $77 million, which includes support for both our term-based and perpetual software licenses. The year-over-year decline was in line with our expectations. As a result of the cumulative impact of the strategic conversion of certain perpetual customers to our subscription offerings. Moving from revenue results to ARR now. Total ARR in Q1 was $686 million, an increase of 15% year-over-year, outpacing our annual growth expectations. In Q1, subscription ARR, which includes both term-based arrangements and SaaS contracts grew 32% year-over-year to $500 million, crossing a major milestone and nearly doubling over the past 8 quarters.

As Sanjay noted earlier, SaaS ARR continued its strong growth, up 72% year-over-year to $113 million. SaaS net dollar retention for Q1 was 118%, with our SaaS offerings being a primary driver of customer expansion. Now I’ll discuss expenses and profitability. Fiscal Q1 gross margins were 82.9% and reflect a 70 basis point year-over-year impact of our accelerating SaaS revenue, which carries a higher cost of sale than software. Fiscal Q1 operating expenses were $119 million, down 3% year-over-year. We ended the quarter with a global head count of approximately 2,800 employees, including additional inside sales reps we onboarded during the quarter to drive our velocity SaaS motion. We are managing our people, facilities and third-party expenses by focusing investment on our most critical resources.

We will continue to evaluate our resource base against the market demand environment. Non-GAAP EBIT for Q1 was $44 million, and non-GAAP EBIT margins were 22%. The strong earnings result was driven by continued operating expense discipline relative to our top line revenue. Moving to some key balance sheet and cash flow metrics. We ended the quarter with no debt and $275 million in cash, of which $81 million was in the United States. Our Q1 free cash flow was $38 million, up 76% year-over-year. Key drivers of free cash flow, our deferred revenue from SaaS and the strength of our subscription software renewals, which typically include upfront payments on multiyear contracts. In Q1, we repurchased $51 million of stock under our repurchase program, representing 135% of Q1 free cash flow.

Now I’ll discuss our outlook for fiscal Q2. We continue to believe that ARR and free cash flow should be viewed as primary KPIs of our underlying business momentum. For fiscal Q2, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS to be $95 million to $99 million, representing 24% year-over-year growth at the midpoint. We expect total revenue to be $193 million to $197 million, with year-over-year growth of 4% at the midpoint. At these revenue levels, we expect consolidated gross margin to be approximately 82.5% and EBIT margin of approximately 20%. As I mentioned on our last earnings call, we are executing some foundational go-to-market changes, which include amplifying our discrete focus on our land and expand opportunities while also scaling our motion to secure our growing subscription renewal base.

We continue to hire additional inside sales reps focused solely on the SaaS velocity market as we refine our segmentation model. Some of these investments will continue into fiscal Q2, and we expect that these go-to-market refinements should drive enhanced field sales productivity as we exit the fiscal year. Our projected diluted share count for fiscal Q2 is 45 million shares. As of June 30, we have $205 million remaining on our existing share repurchase authorization. We expect to continue with our existing practice of repurchasing at least 75% of our annual free cash flows. Finally, as noted on Page 2 of this morning’s earnings press release, we are also reconfirming our existing guidance for all provided metrics for the full year fiscal ’24.

We remain confident in our full year outlook given the ongoing momentum in our SaaS business and the seasonally stronger trends we historically see in the second half of the fiscal year, including a larger term software renewal opportunity and potential for improved large-deal traction. I will now turn the call back to Sanjay for his closing remarks. Sanjay?

Sanjay Mirchandani: Thank you, Gary. Our customers are facing hard problems as they modernize their data protection approach across a hybrid cloud environment, our ability to offer them a streamlined unified approach that is powered by AI will be a welcome change and a true differentiator in our industry. We’re the only company with a tested track record, vision and proven execution to deliver this value at scale. Now we’ll take your questions.

Mike Melnyk: And for the — to begin Q&A. Can we take the first question, please?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Aaron Rakers of Wells Fargo.

Aaron Rakers : A couple if I can, real quickly. I’m just curious, guys, congrats on the execution in the quarter. Just given the current macro backdrop and the spending environment that some are concerned about with regard to enterprise. I’m just curious of how you would characterize the linearity through the quarter, deal activity? Any kind of deals shrinking in terms of size or any push outs? And just kind of — overall kind of context of what you’re seeing from enterprise customers spend wise right now?

Gary Merrill: It’s Gary. I can take this question. So our linearity from a fiscal Q1 perspective is what we typically see in our fiscal Q1, some of the macro trends that other companies have mentioned, we’re obviously also experienced. But we have not seen, from a linearity perspective, the impact on that. I think we were consistent with some of the recent trends in the market is the deal size value, okay? We do see some pressure on the ASPs of our larger deals. And most of that is driven really by term length, okay? So the quantity of the deals and the volume of the enterprise deals is still strong. It’s still actually consistent with even year-over-year levels. But what we do see a little bit of a downtick in the ASPs on compression of term as customers are continuing their journey to the cloud, right?

They continue to focus on optimization of the workloads that they have and being able to make sure that they’re ready for their next turn. And with some of that, they take a little bit of a step back and some of the deal size lengths start to compress a little bit. Our average length of our term deals in fiscal Q1 was about 2 years.

Aaron Rakers : And just to give some context, that was any — what was that last quarter? What was that a year ago?

Gary Merrill: Yes. We’re down — our average term on our subscription deals is down about 10% year-over-year. And it’s mid-single digits decline sequentially.

Aaron Rakers : Yes. Yes. That’s helpful. I appreciate all that color. As a quick follow-up, I’m just curious, one of the things that we’ve thought about on the Commvault story as we moved into fiscal ’24 was just — this base of renewal opportunity setting itself up and really comping relative to what the subscription revenue looked like 3 years ago or so. Can you help us appreciate the cadence of the renewal base of business through this year? And it sounds like a potentially a pretty material step-up into the back half of the year when we look at the metrics you’re giving around renewals and net dollar retention, et cetera, just help us frame that.

Gary Merrill: Sure. Aaron, I can touch on that also as well. The renewals in our business typically follow the linearity that we typically see across the broad portfolio of our go-to-market motion, which means that we’ll see a higher renewal value in the second half. So that goes for both renewal opportunities and conversion opportunities. we’d expect probably about 60% in the second half versus relatively maybe 40% roughly in the first half. And some of those — the term length discussion I had on your previous question applies to the renewals. As some of our renewals also see some of the — those things change in dynamics on term length as well.

Aaron Rakers : Yes. And then the final question, and I’ll cede the floor, is you beat operating margin this quarter, 22%, I think you guided around 20%. I know you’re guiding around 20% this next quarter. So appreciating that you gave the full year — reiterated the full year guidance of up 50 to 100 basis points year-on-year. I’m just curious to how you’re thinking about the flow-through of operating margin. Is there incremental investments you’re making relative to what you thought of coming into this year, why wouldn’t we see some upside to that $50 million to $100 million continue to flow through as we think about the back half of the fiscal year as well?