Commvault Systems Inc (CVLT) 2022 Q3 法說會逐字稿

Good day, and welcome to Commvault Q3 Fiscal Year 2022 Earnings Conference Call. (Operator Instructions)

As a reminder, the call is being recorded. I would now like to turn the call over to Michael Melnyk, Investor Relations. You may begin.

Good morning, and welcome to our earnings conference call. I'm Michael Melnyk, and I'm joined by Sanjay Mirchandani, Commvault's CEO; and Brian Carolan, Commvault's CFO.

Statements made on today's call will include forward-looking statements about Commvault's 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 this call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between the non-GAAP and GAAP measures can be found on our website.

Thank you again for joining us. I'll now turn it over to Sanjay for his remarks. Sanjay?

Thanks, Mike. Good morning, and thank you for joining us to discuss our fiscal third quarter results. Our team executed well in this breakout quarter and the headlines speak for themselves. Software and products revenue meaningfully outpaced the market growth rate, increasing 11% year-over-year to a record $99 million. We exceeded $200 million in quarterly total revenue for the first time in company history, and non-GAAP EBIT was a record $43 million. While proud of these results, I'm even more excited about the quality of the metrics that underpin our financials and our accelerated journey to a cloud-first recurring revenue model.

81% of total revenue was recurring in nature compared to 74% a year ago. Total ARR grew 11% year-over-year to $561 million. Subscription and SaaS ARR grew 45% year-over-year to $309 million and now represents 55% of total ARR. We had the best quarter for new customer additions in years, including several Fortune 500 wins. We've moved nearly 2.5 exabytes of customer data to the cloud, representing approximately a 5x growth in the past 3 years. And Metallic continue to set new financial and operating milestones. We could not have achieved these milestones without the hard work and dedication of our employees worldwide. We also remain optimistic about Q4 and beyond for several reasons.

First, we're winning and taking share. Our core software is performing well with software and products revenue growing 13% when adjusted for pass-through appliance revenue. And in aligning with customers' consumption patterns, subscriptions represented a record 71% of software and products revenue. We're seeing broader product adoption with new and existing customers across every single product category and are setting all-time highs with HyperScale X. This is largely because we support the broadest workloads and provide the security, scalability and simplicity customers need to advance their cloud transformations. In most cases, we're displacing incumbents, often multiple legacy and upstart vendors to provide customers a single future-proof data management solution. I'll share a few examples shortly.

The second reason for our optimism is that Metallic, our hyper-growth data management as a service offering, continues to gain momentum. As more applications are born in or migrate to the cloud, it's clear that SaaS is the future of the industry, and for that matter, the future of Commvault. Customers are demanding scalable, cost-efficient, enterprise-grade SaaS-based solutions, and we couldn't be more pleased with the traction, because the numbers are staggering. We added over 400 new Metallic logos, 60% of which were net new to Commvault. Total customers increased approximately 40% quarter-over-quarter, nearly 1,500, and Metallic landed its first ever 7-figure ACV deal. This is a major milestone for Metallic and for Commvault as deals like this are driving ARR growth, which is why we remain bullish about the trajectory of our Metallic business.

We have a clear first-mover advantage, and we will continue to invest to further Metallic's growth and solidify our differentiated leadership position. This growth is compounded as customers increasingly embrace both Commvault software and Metallic SaaS, which what we call the power of AND. Over 40% of Q3 deals involved more than one product. Over 50% of Metallic customers are using another Commvault product and approximately, 30% of Metallic customers are using multiple Metallic offerings. What better way to demonstrate this than with a global materials company that had an inefficient multi-vendor environment.

This Fortune 500 company wanted a single layer of data protection, flexible reporting and swift recoverability across its myriad of workloads, which is why they chose HyperScale X and Commvault Complete with ransomware protection and numerous Metallic offerings. We're the only company to provide this breadth of solutions, ease of use and the future-proof architecture to meet their needs today and tomorrow. This is our competitive advantage.

Our third reason for optimism is that we're also leveraging our partners and the MSP community to drive new growth opportunities. Our collaborative partner engagement model is helping us win more business globally. For example, working with one of the world's largest systems integrators, we closed a 7-figure transaction with a leading global auto manufacturer. They needed a scalable backup solution for their on-premise data centers with a broad list of workloads, certified object storage system for compliance and ransomware resiliency. After evaluating numerous vendors, they switch from their legacy solution to HyperScale X with Commvault Complete data protection. Once again, we were the only company that could meet all these requirements with centralized workload management.

Another reason for our optimism is our ability to help customers with their most strategic and pressing business needs. For instance, the relentless rise in ransomware and other security threats are no longer just CIO or [CECL] concerns; they're CEO and Board-level priorities. You see these threats have bridged the traditionally siloed worlds of data protection and security, adding even more complexity, cost and risk. Rather than a multi-vendor patchwork of point solutions, Security and IT professionals alike are increasingly looking for a unified architecture and approach to help protect, prevent and recover from these and tomorrow's threat vectors. We do this today.

In Q3, our partners presented us with an opportunity with a Fortune 500 telecom company, resulting in a 7-figure deal. Commvault was the only vendor that could meet the company's ransomware, multi-cloud, automation and integration needs. The legacy and upstart competitors couldn't even meet the initial round of requirements.

Folks, these threats are not going away, which is why we also continue to innovate our leading-edge ransomware offerings. In fact, we entered into an agreement to acquire an overseas technology company to further our innovation in this space. We believe this technology and talent will broaden Metallic's ransomware detection and prevention capabilities and help customers further reduce their ransomware risk. Looking ahead, I believe we are uniquely positioned in a large and growing market. Our teams are executing well and the strength of our core software offerings is allowing us to invest and innovate for the future. Commvault continues to play a critical role in customers' IT transformation projects, which gives us confidence in the long-term opportunity for our business.

Now I'll turn it over to Brian for a closer look at the financials. Brian?

Thanks, Sanjay, and good morning, everyone. Hopefully, you had a chance to review the results we released this morning. I will briefly recap and provide some additional color on the quarter. In fiscal Q3 '22, we reported total revenue of $202 million, an increase of 8% year-over-year. Q3 marked the first time in company history that we exceeded $200 million in quarterly revenue, a milestone for Commvault. Software and products revenue increased 11% year-over-year to approximately $99 million. As a reminder, in FY '22, we've moved primarily to a software-only model. In Q3, software-only growth, excluding appliance pass-through revenue, was approximately 13% year-over-year. Revenue from software transactions over $100,000 increased 24% year-over-year and represented a record 76% of software revenue. The volume of these transactions grew 20% year-over-year, and the average deal size increased 3% to approximately $332,000.

As Sanjay noted, we closed numerous 7-figure deals in the quarter. In Q3, we had the highest number of new customer additions in years across all products, driven by our Americas and EMEA regions. In addition to our new customer success, business from existing customers reached an all-time high during the quarter. Taken together, the pace of both new and existing business further validates the success of our emerging land and expand motion.

Let me now discuss our accelerating transition to a recurring revenue-based model. Third quarter subscription software revenue increased 45% year-over-year to approximately $70 million. Subscription licenses represented 71% of total software revenue, an increase from 63% last quarter and 55% a year ago. We're clearly benefiting from the tailwinds of our subscription transition and our growing recurring revenue model. Total annual recurring revenue, or ARR, increased 11% year-over-year to approximately $561 million.

On a constant currency basis, ARR was up 13% year-over-year. ARR growth is being driven by new subscription customers and Metallic. As Sanjay noted earlier, subscription and Metallic ARR grew 45% year-over-year to $309 million and now represents 55% of total ARR, up from 51% last quarter and 46% a year ago. This is an important proof point in the transformation of our company. We believe ARR is a good measure of the underlying health of the business. It represents the strength of our land, expand and renewal motions and is a barometer of our potential for future growth. Total recurring revenue, which includes subscription software, maintenance support services and SaaS, grew 17% year-over-year to $164 million. Recurring revenue represented 81% of total revenue in the quarter, an increase from 79% last quarter and 74% a year ago.

Now I'll discuss expenses and profitability. We reported fiscal third quarter gross margins of approximately 86%, an increase of 40 basis points year-over-year. The expansion of gross margin was the result of a decrease in pass-through hardware and royalties associated with the legacy version of our HyperScale products. These savings were partially offset by an increased mix of Metallic SaaS revenue, which carries a higher cost of sales. We expect Metallic gross margins to improve overtime with increased economies of scale.

Total expenses, including both cost of sales and operating expenses, increased approximately 6% year-over-year to $157 million. Expense growth was driven by increased third-party marketing spend, field compensation on record bookings and strategic investments in Metallic. Non-GAAP EBIT was a record $43 million and non-GAAP EBIT margins improved 150 basis points year-over-year to 21.3%.

Now I'll discuss cash flows and the balance sheet. For the quarter, we generated approximately $26 million of free cash flow. We ended the quarter with approximately $234 million in cash, of which over 70% sits overseas. As Sanjay mentioned, we announced a technology and talent-driven acquisition of an overseas firm to enhance our ransomware protection capabilities. The purchase price is approximately $17 million and will be funded entirely from our foreign cash balance. We expect the deal to close in fiscal Q4. We currently have no debt on the balance sheet. During the quarter, we opened a new $100 million revolving credit facility to provide additional financial flexibility. In Q3, we repurchased approximately 1.3 million shares of our common stock for $85 million. Since our investor event in January 2021 through December 31, we repurchased approximately 4.6 million shares for $328 million, exceeding our initial guidance of $200 million plus 75% of free cash flow.

Now I'll discuss our financial outlook for Q4 FY '22. We saw accelerating momentum throughout Q3. As Sanjay articulated, we believe that the industry and our business are healthy. At this point in the quarter, our pipeline is in good shape and is always an area of focus for us. We're working diligently to further our market share gains and leadership position. Against this backdrop, we are raising fiscal Q4 revenue guidance. We expect Q4 software revenue of approximately $97 million and total revenue of approximately $202 million.

Now let's shift to expenses. We expect Q4 gross margins to be flat year-over-year or approximately 85%. We expect total expenses, including cost of sales and operating expenses, to be up approximately 6% year-over-year. Q4 expenses reflect a seasonal FICA tax reset, annual merit increases and go-to-market investments. We anticipate that this will result in EBIT margins of approximately 20%. Our projected share count for Q4 is approximately 46.5 million shares.

With that, I'll now turn things back over to Sanjay for some closing remarks. Sanjay?

Thank you, Brian. The past 2 years have been anything but normal. While the ongoing pandemic and the unpredictability in the supply chain continues to create uncertainty, we've adapted and delivered results. Yet as data continues to grow in both quantity and importance so too has the need to secure and protect that data. This is our sweet spot. Our message is resonating in the market, and our products are making a difference for our customers. We are excited about the opportunity and confident in our path forward.

With that, I'll open the call up to Q&A. Operator?

(Operator Instructions)

Our first question comes from Jason Ader with William Blair.

Good quarter. Question for me is on the Metallic versus the Commvault Classic. How much overlap in use cases are you guys seeing in the field? Are there situations where a salesperson is struggling to figure out what fits best? Or is it pretty -- are the lines of demarcation are pretty clear in terms of use cases?

I think it's very clear. Our -- we've got a very clear playbook. Metallic supports mostly different workloads, Office 365 endpoints, containers, cloud native applications, and there's a little overlap on VMs because we want to give customers that flexibility. But I'd say to you that most of the workloads and most of the work we do with Metallic is incremental, complementary. The power of AND -- just while you're on that question, the power of AND, our ability to give customers value on both our on-premise and through Metallic is increasing. Roughly, I think about over 40% -- 41% of our bookings had more than one product, okay? And that includes HyperScale, that includes Metallic, different products.

Got you. And then just a follow-up for Brian kind of along those lines. Do you have a sense of, let's say, just fiscal '22, how much of a headwind to your growth has come from the shift to more ratable rev rec? So not just Metallic, but also kind of more activity with MSPs, where you would have had kind of an upfront rev rec, but that's shifted over to ratable.

I think it's somewhat marginal at this point, Jason. As Sanjay said, it's really complementary at this point. Any time you're investing in a SaaS business, it's going to have a headwind in terms of the in-period recognizable revenue. But by and large, this has been very much of the power of both succeeding together in the market, and we're not seeing it as a huge headwind.

Our next question comes from Aaron Rakers with Wells Fargo.

Congrats on the quarter. A couple for me as well. I guess the first question is, as we look at the setup in the quarter and obviously, impacting what was the September quarter as well. You guys have discussed some supply chain challenges impacting some deal closures and just the ability to deploy at some of the customers. Where do we stand today? Has that lifted out of the narrative with the customers? Or is there still some conservatism going into the March quarter guidance based on those dynamics?

Like we said last quarter, we sort of saw the supply chain headwind increasing over the course of our second quarter. So it wasn't -- it happened over time. And when we spoke in October, we sort of said, we're going to land where we said we were going to land because there were ongoing risks and we were trying to normalize for them. I think what we've done this quarter, Aaron, is we've really got ahead of it. We're managing it well. The team is executing. The products are working well because customers are using the power of AND and in some cases, they're using the cloud directly. So we're seeing -- I'm not saying, we're out of it, but I'm saying we've -- at least in our pipeline management, we've normalized for it.

Okay. Just a couple of other quick questions. On the Metallic business, I mean, I think it was $309 million that you disclosed on the subscription and SaaS ARR. It looks like based on how we kind of think about the ramp of metallic from a revenue standpoint, you saw a very, very strong quarter, I think you actually introduced or commenced availability of Metallic in October in Asia Pac. So I'm curious, is there any way for us to kind of think about the SaaS component of that subscription and SaaS ARR momentum that you're seeing. How do we think about that piece because Metallic becomes a much more visible growth driver as we move forward?

I mean, in all honesty, we're really pleased with the progress we're making with Metallic. The rev ramp is, I call it hyper growth and that's how I think about it. There's a strong demand on SaaS from customers -- enterprise-grade SaaS not necessarily in lieu of on-premise, but in most cases, with on-premise. So the power of AND is very important. We're the only ones to do this. It's a big contributor. I think Brian and I both said, the subscription and SaaS ARR is a 45% growth year-on-year and it's in the 55% of the total. So it's handsome. Now we're not unwrapping the numbers just yet, and like I said earlier, we'll call out more specifics over time. Right now, we're just focused on doing everything we can to grow this business as fast as we can.

Okay. And then the final quick question is, going back to the Analyst Day early part of 2021, you outlined kind of some growth expectations, both total revenue as well as software and then also progression of EBIT, I believe, towards into that mid-20% range. Correct me if I'm wrong, I think out to 2024 fiscal year. Brian, just curious, I mean, any thoughts are you sticking by that at this point? Any thoughts relative to what was outlined a year ago.

Yes. As you know that back in January 2021, that was a 2-year perspective we gave. And I think that we've proven that we're tracking towards those targets, especially on revenue and software growth and in particular, ARR is ahead of those targets. We've also done a sizable amount of share repurchases that are well ahead of what we messaged. We're focused on balancing growth and profitability at the same time. We said rule of 32 in a couple of years. I think we're approaching now the rule of 30. Keep in mind that just a couple of years ago, we're at a rule of 9. So we've made substantial progress since then, and we're focused on that.

The mix might change a little bit between growth and margin, but our direction absolutely does not change. We're driving towards that combination. And right now, we believe ARR is a great metric to measure ourselves. We'll continue to manage ARR growth while investing in the business such as Metallic, and I'll leave it at that.

I just want to add one comment. I just want to have one comment. Our core software business is healthy. It's growing. We're taking share and that was the first bullet I sort of enumerated in my comments earlier, and that is allowing us to really fuel and grow Metallic, okay? And so as new workloads happen in the cloud, are born in the cloud, move to the cloud, we're all over it. And it's the combination that's causing customers to give us a serious look and to adopt this because it's a no compromise architecture. This is sort of a really important way to think about it. It's not where one is poking into the other. It's -- they're working together, complementary, power of AND to really deliver the value.

Our next question comes from James Fish with Piper Sandler.

Great quarter. Kind of going off of Aaron's question there because I think they're important. Brian, you made the comment there about the mix maybe changing a little bit behind growth in margin, but you're driving towards that rule of 32 or so. I guess, why not invest for more growth at this point, especially on the Metallic side, where you're just seeing tremendous success and kind of take down margins for fiscal '23 and potentially the out years?

James, good to hear from you. Yes, I mean the good news is that Metallic is experiencing hyper growth. I mean you're seeing that. The key driver of ARR. The market's moving in that direction. Customers are demanding enterprise scale SaaS solutions. We believe we have the early mover advantage. And really, the differentiator for us is the power of both Commvault software and our SaaS offerings. And I think it's well known that when you're dealing with SaaS margins, they're going to look a little different from software margins. We understand those dynamics. We're working hard to get to economies of scale, and we'll call out more specifics in due course, but we're squarely focused on growing both top and bottom.

And I'll just jump in here. The -- at no point have we compromised the growth of Metallic. I mean Metallic's been something we've been sharing with you over the past like, I don't know, 6, 7 quarters, and it's a business we're very happy with. It's a business that we're investing in. It's a business that leans in very nicely with our core. Our sales force know how to take both of them to market. Our partners love it. MSPs are adopting it. So it's -- we are investing in it, and we've done a lot of investment. And just our Q4 guidance, for example, approximates about 20% of FY '22 EBIT margin, that's up 700 basis points from fiscal year '20, okay? And that's up roughly 900 basis points since fiscal year '18. So we're delivering the results. We're growing ARR, which is a key metric for us, okay? And we're delivering healthy EBIT margin, so -- and growing it. And as Brian said a couple of years ago -- and the rule of X, we were at 9, okay? So on all fronts, we are investing. We're making -- we're hopefully making the right choices and most importantly, customers are embracing it.

Makes sense, guys. And maybe on the go-to-market aspect of it. I mean great quarter on the top line. It seemed like we spent some of the upside in SG&A, and Brian, you gave us some details there. But has there been a change in the incentives for the sales force to sell more subscription on Metallic? Or is it just a factor of investing behind the growth overall and adding more headcount?

Without giving too much away, our results are commensurate with how we're prioritizing things for the field, whether it be compensation, playbooks, focus, product. The good news is, when you've got something that the customers appreciate it, it makes things better. So everything is aligned hopefully in that direction.

Our next question comes from Eric Martinuzzi with Lake Street.

Yes. I wanted to delve into the buyback. I understand that you guys were pretty aggressive here and actually exceeded the original outlook. At the Board level, have we talked about kind of a reload or a new plan given that we've exceeded the one that we laid out a year ago?

Eric, it's Brian here. Yes, we laid that out in January of 2021. The commitment was $200 million plus 75% of free cash flow starting in FY '22, and that's the plan we're executing against right now.

Okay. Maybe I'm not following here because...

There's no change to that plan, Eric. There's no immediate change to that plan.

Okay. Okay. So we should anticipate a smaller number in the current quarter.

It's -- we'll be opportunistic, and we committed to 75% of free cash flow moving forward.

Okay. All right. And then I had a question regarding the large deal pricing, specifically pricing on renewals. You guys now have -- you're into your second year of renewals on the installed base, and I was wondering how that pricing discussion has been going.

Well, I think we've been pleased with the performance that we've seen on our renewal business. And as we've been forecasting that this is now a tailwind for us as a company, but I'd like to emphasize that it's not just about the renewal, it's very much of a complementary motion for us. It's land, adopt, expand and renew. All those things have to kind of work in conjunction with one another, and we're often seeing that's opening up more and more conversations. In fact, we're seeing at the time of renewal, it's the culmination of many discussions we've had with the customer, and we're seeing large deal sizes as a result.

We just demonstrated that we had a record percentage of deals greater than $100,000 for the quarter that encompass 76% of our software revenue. That was up 24% year-over-year. The volume of those deals was up 20%. So one continues to feed the other. Again, it's a land, adopt, expand and renew, all in one motion.

Congrats on the quarter and the outlook.

This concludes the Q&A session. Thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.