Commvault Systems Inc (CVLT) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Commvault Q2 FY 2022 Earnings Call. (Operator Instructions)

I would now like to turn the call over to your host, Mike Melnyk, Head of Investor Relations. You may begin.

Thanks, Kevin. Good morning, and thanks for dialing in today for our call to discuss our second quarter fiscal year 2022 earnings results.

Before we begin, I'd like to remind everyone that the statements made during this call, including the question-and-answer session of the call, may include forward-looking statements, including statements regarding financial projections and future performance.

All the statements that relate to our beliefs, plans, expectations or intentions regarding the future are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

Actual results may differ materially due to the risks and uncertainties, such as competitive factors, difficulties and delays inherent with development, manufacturing, marketing and sale of software products and related services and general economic conditions.

For discussion of these and other risks and uncertainties affecting our business, please see the risk factors contained in our annual report on Form 10-K and our most quarterly report on Form 10-Q and our SEC filings and in the cautionary statement contained in our press release on our website. The company undertakes no responsibility to update the information on this conference call under any circumstance.

In addition, the development and timing of any product release as well as features or functionality remain at our sole discretion. Our press release related to today's announcement was issued over the wire services this morning and has been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website.

On this conference call, we will refer to non-GAAP financial measures. A reconciliation between non-GAAP and GAAP can be found on our website. This conference call is being recorded, and a replay is available for the webcast. An archive of today's webcast will be available on our website following the call.

Now with me on the call this morning are Sanjay Mirchandani, President and Chief Executive Officer of Commvault; and Brian Carolan, Chief Financial Officer of Commvault. Sanjay and Brian will each share opening remarks and commentary before we open the call for Q&A.

Now I'll turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us...

Again, ladies and gentlemen, please stand by. Your conference call will resume momentarily. Again, ladies and gentlemen, please stay on the line. This is the operator. We can -- I can hear you now.

At what point do we have to start over? So just -- let me just start again.

Good morning. This is Sanjay. Good morning, and thank you for joining us to discuss our Q2 '22 results.

We continue to capitalize on the evolution of the hybrid cloud market, where Commvault is playing an increasingly important role in high priority, large IT transformation and ransomware remediation projects. While Q2 software revenue growth didn't meet our guidance, the impact was principally isolated to software opportunities that are part of larger IT transformation projects.

In addition, we believe industry-wide supply chain issues are impacting our customer sourcing of hardware components and associated software opportunities. While we don't believe this represents a long-term issue, we factored additional conservatism into our Q3 guidance, which Brian will cover later in the call.

Several key highlights reflect the strength of our business and the ongoing progress in executing our transformation. Total ARR grew 12% year-over-year to $543 million. Importantly, subscription and SaaS ARR grew more than 40% year-over-year to $278 million and now represents more than half of total ARR.

We're driving this growth through market share gains, as evidenced in part by Q2 revenue from new customers, which finished at the highest level in years. In addition, our SaaS offering Metallic is growing rapidly and, in just over a year of being commercially available, is now a meaningful contributor to our total ARR growth.

Now I'll provide you some additional color on the quarter and reasons for our optimism, which are centered around 4 critical indicators. First, our ability to win new business and gain market share are meaningful inflection points for Commvault.

Our largest transaction this quarter, a multimillion dollar win at one of the biggest health care organizations in the world, was a new customer and a competitive displacement. Over 50% of subscription transactions were new logos for Commvault, and more than 60% of Metallic customers were new to Commvault.

Second, every indication is that customers are embracing the power of AND or leveraging software and SaaS to more easily and safely support the hybrid cloud journeys. For instance, the total number of transactions that involve more than one product increased 150% year-over-year.

About half of our 7-figure software transactions involve multiple products and services, and Metallic landed its largest transaction to date, a high 6-figure deal that included multiple product offerings, which brings us to our third indicator.

Metallic is exceeding our internal expectations and outpacing the market and growth trajectories of leading SaaS start-ups. IDC projects the data management as a service market will grow at a mid-teens CAGR over the next several years to over $15 billion by 2024. With Metallic, we believe that we have an enterprise-grade first-mover advantage to continue capturing share in this space.

And while it has been commercially available for just over a year, Metallic has already achieved many significant milestones, which include: doubling its portfolio with new offerings with Salesforce and Microsoft Dynamics 365 and expanding availability to more than 30 countries; adding data protection for enterprise workloads on SAP HANA and Oracle as well as for containers and Active Directory; expanding storage and edge offerings with flexible storage tiers for Metallic Cloud Storage and Commvault HyperScale X; launching Metallic Government Cloud, the only data protection solution to meet the stringent FedRAMP High security protocols required by federal agencies.

And we're now making Metallic available for managed service providers to offer their own suite of value-added services built on Metallic. Last week, we announced an integrated solution with GM Sectec, a leading global managed security service provider for ransomware readiness, backup and data recovery as a service.

Additionally, our major cloud partners see the value Commvault brings to drive cloud consumption. In fact, Microsoft notes that Commvault/Metallic is a top global Azure co-sell ISP Microsoft Partner. And Google called us a leading backup and disaster recovery partner on Google Cloud. This is tremendous validation, and these relationships continue to mature.

This is just the beginning. As customers transition to the hyper cloud, they will need flexible and scalable solutions, which is by the power of AND or the ability to combine the best of both software and SaaS is so critical. We believe this is our competitive advantage.

Finally, we operate in a large and growing market, and our portfolio has been designed to align with market trends, including data management and ransomware recovery. Rapid data growth across multiple generations of ecosystems, applications and hybrid environments introduces risks that can impair a company's growth and operating objectives.

For example, today, every business in every industry is facing the very real threat of ransomware. At Commvault, we regularly help customers recover from these attacks. Just last month, a nationally acclaimed health care leader in the U.S. was hit by an attack that dropped down hundreds of servers, including their entire VM environment and 3 petabytes of application information. Our software ensured the backup remained intact. And with the help of our industry-leading customer support team, they were able to get back to full operation within 24 hours.

Simply put, one of the best defenses against ransomware is data protection with an immutable backup. Additionally, our new Commvault ransomware protection and response services give customers a multipronged approach to ransomware protection. This is just one service will complement of data management capabilities to help customers.

And the industry is taking note. Phil Goodwin at IDC commented, "Given that more than 90% of organizations use public cloud in their backup strategies, Commvault is positioned to solve their preponderance of an organization data protection needs, including hybrid cloud, multi-cloud and edge."

In summary, while our Q2 results were mixed, I'm confident that we have the right strategy for the long term, and we're making real progress as demonstrated by the strength of the underlying data I shared.

We are capturing market share, expanding our footprint with a more comprehensive portfolio, and we believe that we're in prime position with Metallic to meet the changing needs of customers as they navigate their cloud journeys.

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.

Now I will briefly recap and provide some additional color on the quarter. In fiscal Q2 '22, we reported total revenue of $178 million, an increase of 4% year-over-year. Software and products revenue increased 4% year-over-year to approximately $75 million.

As a reminder, in FY '22, we've moved to a software-only model. In Q2, software-only growth without hardware would have been approximately 9% year-over-year.

Revenue from software transactions over $100,000 increased 6% year-over-year and represented 67% of software revenue. The volume of these transactions grew 9% year-over-year, and the average deal size was approximately $311,000.

Software revenue from new business approximately doubled quarter-over-quarter and finished at the highest level in several years.

Fiscal second quarter services revenue increased approximately 4% year-over-year to $103 million. The growth in services revenue is being driven primarily by Metallic.

Let me now discuss our transition to a recurring revenue-based model. Second quarter subscription software revenue increased 24% year-over-year to approximately $48 million. Subscription licenses represented 63% of total software revenue, an increase from 53% a year ago.

Total annual recurring revenue, or ARR, increased 12% year-over-year to approximately $543 million led by growth in new subscription customers and Metallic. As Sanjay noted, subscription and Metallic ARR of $278 million now represents 51% of total ARR and is growing at over 40% year-over-year.

This is an important proof point in the transformation of our company. We believe ARR is the best 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 of our software and SaaS platform.

Total recurring revenue, which includes subscription software, maintenance support services and SaaS, was $141 million, representing 79% of total revenue in the quarter. This compares to 75% in Q2 '21.

Now I'll discuss expenses and profitability. We reported fiscal second quarter gross margins of approximately 86%, an increase of 80 basis points year-over-year. The expansion of gross margin was the result of the 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 revenue, which carries a higher cost of sales, especially as we scale up the infrastructure.

Total expenses, including both cost of sales and operating expenses, increased approximately 3% year-over-year to $145 million. Expense growth was driven by strategic investments in Metallic, a targeted ransomware campaign and headcount additions.

Non-GAAP EBIT was $31 million, and non-GAAP EBIT margins improved 50 basis points year-over-year to 17.4%.

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 $296 million in cash, and we have no debt on the balance sheet.

Deferred revenue was $372 million, an increase of 14% year-over-year. Growth in deferred revenue was primarily driven by Metallic.

During the quarter, we repurchased approximately 1.2 million shares of our common stock for $90 million. As we outlined during our investor event in January, through FY '22, we are committed to spend $200 million, plus 75% of fiscal '22 free cash flow on share repurchases. Since the investor event and through September 30, we have repurchased approximately 3.4 million shares for $242 million.

Now I'll discuss our financial outlook for Q3 FY '22. For Q3, we expect software revenue of approximately $92 million. As Sanjay discussed earlier, we're winning new business, including competitive displacements. This new business may take longer to close, especially if part of larger IT transformation projects.

In addition, we are modeling software more conservatively for any transactions tied to customers' delayed hardware orders. For modeling purposes, I'd like to remind you that Q4 software revenue historically approximates Q3 levels. We expect Q3 total revenue of approximately $195 million.

Now let's shift to expenses. We expect Q3 gross margins to be similar to Q2 levels or approximately 85% to 86%. We expect total expenses, including cost of sales and operating expenses, to be up approximately 2% year-over-year. This should result in EBIT margins of approximately 21% to 22%. Our projected share count for Q3 is approximately 47 million shares.

With that, I will now turn the call back to Sanjay for some closing remarks. Sanjay?

Thank you, Brian. As I mentioned earlier, we're making progress. And in Q3, we intend to remain focused on attracting new customers, taking share from our competitors and continuing to deliver solutions to help customers do amazing things with data and, in doing so, return to the consistent and predictable results we've achieved over the past year.

Now I'll open the call up to Q&A. Operator?

(Operator Instructions) Our first question comes from Jason Ader with William Blair.

Yes. I guess, first question, is there any update to your, I guess, 2 year -- I forgot what it was exactly on the 2021 Analyst Day. I think it was a CAGR of 9% to 10% growth. Is there any update there?

Jason, it's Brian here. We're not updating any targets at this time. I'll just remind you, though. If you look back since that investor event and assuming that the guidance of Q3 and Q4, that implies a double-digit software growth and mid-single-digit total revenue growth since the investor event.

Also our ARR is tracking very well to well ahead of that 10-plus percent target that we laid out. So at this point, we're not updating any targets, and we still are standing by those 2-year top CAGRs that we put out.

Got you. And you're saying for Q4, if I heard you right, the software product should be about the same.

Usually -- yes, usually approximates Q3 historically.

Got you. And what about the services line? Do you expect that to continue to grow sequentially?

That will grow sequentially driven by Metallic.

Okay. So just maybe, Sanjay, for you, just kind of a bigger picture question here. As we think about some of the tailwinds in the data protection market, specifically ransomware, cloud backup, you've seen some good traction with Metallic.

You're expanding your sales force and your channel engagement. You have a growing mix of renewals. I guess, it just -- it doesn't seem to compute that you would have this type of a quarter and even after Q1, which I think was a little softer, too. So seems like something has taken a step down here. I'm trying to really understand what's going on in the business.

Well, Jason, it was a mixed quarter, and the line that we came short on was the software revenue line. The key indicators of the business, like you sort of called out, and the health of the business are tracking well, okay?

And if we -- well, the most important thing is we're part of large IT transformation projects. We've been working on this to land new customers. The way you land your customers significantly is to, really, when they start transforming and go to the cloud, you want to be part of that. We're winning those -- that business. That business is taking a little longer to close than we anticipated. So we're recalibrating sort of closing cycles internally.

And secondarily, sort of we've seen a little bit of supply chain, where there's hardware associated with the transformation, there are delays in some projects. So we've seen that. We're recalibrating. We're calling in some conservatism in Q3.

But let me reinforce. There's nothing fundamentally changed with the business. It's strong. We feel good about it, and we're focused on getting back to where we were a quarter ago.

Yes. I mean, just from a devil's advocate standpoint, though, there is a lot of competition in the market as you guys well know and you deal with every day. There's a lot of private players, in particular, who have been very aggressive. Do you think that the competitive landscape has impacted your ability to execute here in the first half?

Nothing's changed. We've always been in a very competitive market. If anything, I would say, Jason, that our strategy and what we're offering our customers is actually resonating very well. What we internally and what we now externally call the power of AND, our ability to give them world-class on-premise capabilities through HyperScale X, combined with Metallic and the cloud, is exactly what they're looking for.

This allows them to make a no compromise sort of selection of our technology in their cloud journeys. I think we're -- actually, I think we're winning a lot of new business. I gave you some examples in my prepared comments about winning against competition. Our biggest -- I'd say, a good number, 2/3 of our business -- the big business we closed last quarter was competitive displacements. I mean, these are real things, and these take time.

So we're actually feeling pretty good with where we are. They're just taking a little longer. And you combine that with some downstream supply chain stuff, and we've got to recalibrate our closings.

Our next question comes from Aaron Rakers with Wells Fargo.

Yes. I got a couple as well. First of all, just on a housekeeping basis. I think, last quarter, there were some metrics executing on the subscription renewal cycle that I was curious if you guys are still giving, which is -- talk a little bit about net dollar retention on the subscription. I apologize if I missed it.

And then you also gave a metric around -- I think it was ARR for subscription and SaaS offerings at $278 million. Can you just help me appreciate what that was last quarter?

Sure. Aaron, it's Brian here. So there's been no meaningful variation in the net dollar retention rate that we have said historically. I think we look at this more on a rolling 4-quarter basis as opposed to quarter-to-quarter, so that's why we didn't call it out specifically. But there's been no meaningful variation.

And then we're really pleased with -- and we've been forecasting this as we go along is that at some point in time, our subscription and SaaS business will overtake and become the majority of our ARR, and that has happened this past quarter. It now represents over 50%, and that high growth is growing at greater than 40% per year.

Yes. Okay, and that's helpful. Under -- looking at the guidance for this next quarter, taking, I think, it was $92 million of software revenue. If I look at it, that's roughly about 22% sequential growth. If I look back over the past few years, I think the average has been more kind of in the mid, maybe slightly above mid-teens sequential growth.

I know you've done that level of sequential growth in past December quarters. But I'm curious, is that higher-than-typical seasonal growth on software reflect your assumption that some of the issues this last quarter abate, and the component constraints, that's factored into that guide? I'm just trying to gauge the conservatism in that given the variables you saw this last quarter.

Yes. So a couple of things there, Aaron. I mean, we're confident in this guide. Our renewal opportunity is much larger in the second half of the fiscal year. That's starting in fiscal Q3.

Our pipeline is healthy. The way we see it today, it's up versus Q2. We're focused on new business. We have a tremendous amount of momentum going into the quarter. But we're modeling things a little bit more conservatively.

I mean, we're starting to see longer closing cycles as we get into larger IT transformation projects, and we can't control the hardware delays that are out there. So there could be some potential delays in customer deals, and we're just trying to be a little bit more conservative with the guide.

And then the final real quick question. Relative to the expectation in the September quarter, I think it was $184 million that you endorsed this last quarter. The delta from there relative to the reported results, how would you bracket that between delays in large IT projects versus component constraints? And then I'll leave the floor.

Aaron, there's overlap. If you're part of a large -- if it's a new customer and a large IT transformation, they look at the entire stack. There's hardware involved in that. It's hard to peel them apart. They're pretty interrelated. But I will say to you, when there's no hardware involved, things move nicely. And if there's cloud, things move very nicely.

Our next question comes from James Fish with Piper Sandler.

Just building off of Aaron's last question, understanding it was roughly a $7 million miss versus your guide, but is there any way to quantify how much in bookings or revenue were delayed?

Meaning, was it actually more delays than that $7 million, and you guys really have that strong in the new business? And any sense of the timing of when these delays could come back and why it really looks like it was primarily felt in APAC and EMEA more than the U.S.?

So James, it's Brian Carolan here. So we -- you're always going to have deals that spill from quarter-to-quarter, and there's always going to be delays. We do believe it's delays. We have closed some of that business already. We will continue to close it throughout the quarter.

And again, we factored into our more conservative guidance any kind of pushout related to any hardware delays or new IT transformation projects that we're getting involved with this quarter.

Right. But I mean, is there -- can you help me understand why the -- why it was felt primarily in APAC and EMEA as opposed to the U.S. for these issues?

There's no common theme there.

Okay. And look, ARR was still up 12% and discussed -- you guys were discussing some strong new customer wins. What did new customers contribute this quarter to software revenue? I know you guys gave it in the Q. And what was the net new customer adds this quarter -- as it seems -- I'll just leave it there.

Yes. So we don't disclose exactly what the new customer revenue is, but I will tell you that we added well over 200 net new subscription customers in the quarter. We added over 300 Metallic customers in the quarter. 60% of those were new. We now broke through 1,000 total customers for Metallic, and the power of AND is really resonating. About 50% of our Metallic customers have another Commvault solution.

So we're getting a lot of traction here. We believe Metallic is complementary to our strategy. And we're trying to continue to drive subscription and Metallic customers, and that's showing up in the form of our ARR results.

Our next question comes from Jack Andrews with Needham.

I was wondering if you could just maybe drill down a little bit. Are there any sort of commonalities that you noticed in these larger IT transformation projects, whether it's specific partners opportunities or specific industry verticals? Are there some common themes that you can point to that have impacted your business?

Jack, it's Sanjay. What we're seeing is as customers, when they call it digital transformation and moving to some kind of a hybrid or public cloud model, customers tend to reevaluate the entire application stack. And when they do that, we're part of that because we have the single pane of glass that goes from anything from on-premise over into the cloud.

We're seeing that as a very -- as something that allows us to win new customers. Sometimes, it starts with Metallic, moves its way into the data center. Other times, it starts with HyperScale X and extends out to that.

The other sort of pattern we're seeing is -- and we saw it several times and continue to see that in the pipeline, customers doing the large ransomware remediation projects, making sure that they are well protected against ransomware. When you do that, that sometimes involves cloud. Other times, it's sort of redoing their on-premise.

And it's -- and we're seeing these 2 as big patterns, the large digital transformation involving the cloud and ransomware protection, DR-type scenarios with customers. And they tend to be larger. They tend to be more complex. They tend to be -- they tend to have incumbents that have been ripped out.

And all of this tends to take a little longer. And then if there's hardware, as we said, that's a newer dependency that we haven't seen in prior quarters.

So that's what we're seeing. It's across industries. Just as a case in point, the largest piece of business we did in the last quarter was a very large pharmaceutical company. The example I used on getting our customer back was also a very large customer in the health care industry. So there's -- I'm giving you examples that they are large -- very large customers. And I would say it's a mix. It's a mix, and it varies by region.

Sure. I appreciate the color around that. Just as a follow-up question. As we think about the renewal opportunity here in the second half of your fiscal year, do you have a sense as to whether that is tied into similar IT transformation projects that some of your existing customers are engaging in?

It's probably a little less, Jack. I mean, it's a renewal opportunity. So in theory, it should not be tied into a larger. Although it is an opportunity for us to have a conversation with the customer, we view that as a positive is that, that factors into our net dollar retention rate that we can go in there and talk about Metallic and talk about some of our other offerings. So we view that as an opportunity.

Our next question comes from Max Michaelis with Lake Street Capital.

I just want to touch on the supply chain issues again. At what point in Q2 did you guys begin to see the large IT transformation projects experienced delays?

At which point in Q2, I'd say, leading into the -- into month 2 of the quarter and beyond is where we really started seeing it. I honestly wish we'd seen it earlier, but it was the way it came about. So...

Okay. And then I just got 2 more follow-ups to that. And then when do you guys expect hardware component issues to resolve? As well as do you believe these issues were more or less Commvault specific or more macro in nature?

No. They're macro. It's like this, if a customer is refreshing hardware or buying new hardware, when deploying the project, then they tend to want to wait for everything to come together so they can then -- they can roll it out at the same time as opposed to buying the software, then waiting 3 months to get the hardware, then -- and then getting the integrator in. So they tend to say, "We'll just calibrate and do everything at one time."

When you're part of a bigger stack, it's hard to control that decision point. Even though we've won the business, it doesn't actually happen until the customer is ready. And we saw a little bit of that -- not a little bit, we saw that in Q2, and we factored it into our numbers for Q3.

Not a perfect science, guys. I wish I could tell you when it would -- we're just in the mix with everybody else. We're downstream. Our dependency personally is very low. But if the customer needs to attach our software to some kind of storage, server, et cetera, we're in the mix.

Our last question comes from Steve Enders with KeyBanc Capital Markets.

Okay. Great. I just want to get a better sense for the large deals that are pushing. I guess, what does it take for those deals to get over the finish line at this point? Is there a push to try and convert those over to Metallic to make sure those get done?

And I guess, how much are you expecting the deals that did kind of get delayed or pushed in the quarter? How much of that is expected to come back in kind of fiscal 3Q versus 4Q or beyond?

Sure, sure. I'd say that I think we're seeing a lot of those already -- some have closed, some will close -- projected to close this quarter. So as the -- we're seeing that all come in.

Now I can't tell you specifically everything closes in Q3 or Q4. And then this business in Q3 that again has similar dependency that we're trying to factor in the best we can.

Just Metallic for the most part is complementary to our on-premise offerings, and what -- so it's not that we just say, "Okay. You've got to -- you've got this to swap it out." But in some cases, customers look at both approaches, figure it out and make the call.

But in most cases, they've got an architecture, they've got existing installed base of our technology possibly, they're swapping out something for -- with us -- and so it's not a simple one-to-one swap. And frankly, Metallic, the power of AND does cloud-native workloads like nothing else.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.