Commvault Systems, Inc. (NASDAQ:CVLT) Q2 2024 Earnings Call Transcript

Commvault Systems, Inc. (NASDAQ:CVLT) Q2 2024 Earnings Call Transcript October 31, 2023

Commvault Systems, Inc. misses on earnings expectations. Reported EPS is $0.2899 EPS, expectations were $0.65.

Operator: Good morning. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Commvault Second Quarter Fiscal Year 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will have a question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to Michael Melnyk, Head of Investor Relations. You may begin.

Michael Melnyk: Good morning, and welcome to our earnings conference call. I’m Michael 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.

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

Sanjay Mirchandani: Thank you, Mike. Good morning, everyone, and thanks for joining us today. I am pleased to report our Q2 results exceeded expectations, and we improved across our most important KPIs. Total ARR, the primary metric we use to measure underlying growth accelerated 18% year-over-year to $711 million. Subscription ARR grew 32% year-over-year to $530 million and is now nearly 75% of total ARR. SaaS momentum accelerated with Metallic ARR, up 77% year-over-year to $131 million. Metallic-SaaS net dollar retention rebounded to an impressive 130%. And we delivered improved profitability while continuing to return cash to shareholders through share repurchases. Beyond these impressive financial results, we also received numerous industry accolades, including being named the leader for the 12th consecutive time in the 2023 Gartner Magic Quadrant.

We also ranked highest in six of seven categories in Gartner’s latest critical capabilities for enterprise backup and recovery software solutions report. And once again, GigaOm named us a Leader and an Outperformer in its most recent GigaOm Radar for Hybrid Cloud Data Protection for Large Enterprises. We’re extremely proud of this recognition. We’re laser-focused on being a trusted partner to our customers by protecting their data from the threats of cyber threats, significantly reducing ramp at hybrid class complexity and infusing AI-enabled automation to tackle new and evolving data protection and security challenges. And we’re just getting started. Next week, at our Commvault Shift Customer and Partner event, we will highlight how we are shifting from data protection to leading the charge in cyber resilience.

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Q&A Session

We’re going to introduce a radically new approach that empowers customers to stand up to today’s nonstop and escalating cyber threats. We’re bringing together what we’re known for best-in-class data protection and combining it with exceptional data security, recovery and -driven data intelligence. Cyber resilience like this has never been possible until now. The time has never been better. According to a recent IDC study, most enterprises expected imminent attack. 61% of respondents believe the data loss in the next 12 months is likely to occur due to an increasingly sophisticated attack. It’s clear a new standard in cyber resilience is required, and that’s what we’re going to deliver. Commvault has always prided itself on delivering the best technology that customers need at the right time, case in point.

4 years ago, we challenged ourselves to address an emergent need in the market, enterprise-grade cloud-native data protection as a service. We made some bold moves, disrupted from within and took a new modern approach to launch Metallic, our industry-leading hypergrowth SaaS platform. We vastly simplified how we secure and defend data for any workload regardless of where it is and in the process. We revolutionize data protection as a service. Since then, we’ve gained over 4,000 customers and surpassed $130 million in ARR. And just last week, Commvault was named the leading vendor in GigaOm’s cloud-based data protection sonar report. The authors noted “Metallic protects a very broad range of cloud workloads that will be tedious to fully enumerate”.

The building on the overwhelming success of our platform, we’re now taking the opportunity to apply everything we’ve learned in data protection and combining it with powerful new innovations in data security, AI and recovery to deliver the most advanced cyber resilience platform in the industry. Next week at shift, we will unbaled this to the world along with some exciting new ecosystem partnerships that will enable us to transcend the category. Today’s problems cannot be solved with yesterday’s approach. It’s time to shift how we think about resilience. We hope that you can tune into the exciting event. Now I’ll turn it over to Gary to discuss the numbers. Gary?

Gary Merrill: Thanks, Sanjay, and good morning, everyone. I am pleased to report that our strong revenue and earnings outperformance in Q2 was driven by acceleration across our key KPIs during the quarter. Q2 total revenue was $201 million, an increase of 7% year-over-year. Our total revenue growth was led by subscription revenue of $98 million, an increase of 25% year-over-year. As a reminder, subscription revenue includes both our term software licenses and our SaaS offerings. We saw double-digit growth in term software licenses combined with an accelerating contribution of SaaS revenue, which was up over 80% year-over-year. Subscription revenue is now approaching 50% of total revenue compared to 42% one year ago. Term software license growth was driven by strong performance in renewals and its existing customer expansion during the quarter, with our subscription net dollar retention remaining within its historical range.

Overall term software deal volume increased year-over-year driven by continued improvements in our philosophy motion. Q2 perpetual license revenues were $14 million. As a reminder, our go-to-market motion is led by subscription. So perpetual license license sales are generally sold in certain verticals and geographies. At the current perpetual license revenue run rate, we believe the headwind to our reported total revenue growth from these perpetual license sales to start to normalize as we exit the current fiscal year. Q2 customer support revenue was $77 million, which includes support for both our term-based and perpetual software licenses. Fiscal year 2024, customer support revenue had benefited from fewer conversions of perpetual support contracts to term software licenses compared to prior year.

Year-to-date, customer support revenue from perpetual licenses represents 55% of total customer support, with the balance coming from term software licenses. This compares to approximately 60% in fiscal year 2023 and 70% in fiscal year 2022. At this trajectory, we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue next fiscal year. Moving from revenue to ARR. Q2 ARR growth accelerated 18% year-over-year to $711 million, and subscription ARR, which includes term-based software arrangements and SaaS contracts, grew 32% year-over-year to $530 million. These growth metrics reflect the underlying strength of our business, when our revenue is presented on an annualized basis without the impact of subscription software term length compression.

SaaS ARR finished the quarter at $131 million, an increase of 77% year-over-year. We saw healthy growth in new customers, as well as expansion within our existing customer base. SaaS net dollar retention rate for Q2 accelerated to 130% versus 118%, we reported last quarter. Now I’ll discuss expenses and profitability. Fiscal Q2 gross margins were 82% and reflect a 150 basis point year-over-year impact from our accelerating SaaS revenue, which carries a higher cost of sale than software. Fiscal Q2 operating expenses were $121 million, up 2% year-over-year. As a percentage of total revenue, operating expenses declined 310 basis points year-over-year to 60% of total revenue, driving EBIT margin leverage, as we manage our people, facilities and third-party expenses by focusing investment on our most critical priorities.

We ended the quarter with a global headcount of 2,900 employees, reflecting a 1% decline year-over-year. Our current headcount balance includes an additional inside sales teams for renewables and related customer success teams to support the customer journey and our accelerating velocity sales motion. Non-GAAP EBIT for Q2 increased 19% year-over-year to $42 million, and non-GAAP EBIT margins were 20.9%, a 210 basis point improvement year-over-year. The strong earnings and EBIT margin expansion 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 $283 million in cash, of which $93 million within the United States. Our Q2 free cash flow was $40 million and our first half fiscal year 2024 free cash flow was $78 million, up 10% year-over-year.