Commvault Systems Inc (CVLT) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Commvault Fourth Quarter Full Year 2020 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Mike Melnyk, Director of Investor Relations.

Please go ahead, sir.

Good morning, and thanks for dialing in today for our call to discuss our fourth quarter and fiscal year 2020 earnings results.

Before we begin, I'd like to remind everyone that the statements made during this call, including in the question-and-answer session at the end 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 a discussion of these and other risk factors and uncertainties affecting our business, please see the risk factors contained in our annual report on Form 10-K and our most recently quarterly report on Form 10-Q and in other SEC filings and in the cautionary statement contained in our press release and on our website.

And the company undertakes no responsibility to update the information in 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 earlier this morning and has also 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 refer to non-GAAP financial measures.

A reconciliation between the non-GAAP and GAAP measures 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.

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 QA.

Now I'll turn the call over to Sanjay.

Sanjay?

Thank you, Mike.

Good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 2020 results.

I would like to begin by extending our thoughts to the millions suffering from the coronavirus and the subsequent economic hardships.

Across Commvault, we remain focused on keeping our employees safe and healthy while providing our customers with world-class products and services they expect.

In March, we began working from home to prioritize safety.

Our employees, many of whom were already remote workers, quickly adjusted with minimal disruption to our operations.

I would like to thank all our vaulters for stepping up to ensure our business continues without interruption.

I would also like to acknowledge the team's creativity in helping our customers adjust to, recognizing the pandemic introduce new data challenges for a much larger remote workforce.

We created the Commvault cares program to provide customers with additional software, support and education at no cost until September.

This includes offering Metallic endpoint backup and recovery with unlimited Azure backup storage from our good friends at Microsoft to protect against data corruption, deletion, malware and ransomware attacks.

To date, hundreds of customers have accessed free trials and are benefiting from the program.

As you know, the pandemic presented some challenges for us during the quarter as the economic picture is still evolving.

However, we believe the progress we made last year and our ability to help our customers now, when they need us most, will enable us to weather these challenges and continue leading our industry for the long term.

This is reinforced by the improved performance we delivered in the 2 prior quarters.

We expected to carry that momentum into Q4, but COVID impacted APJ and EMEA throughout the quarter, then extended to the Americas in March.

Despite this, we closed multiple 7-figure deals and won many new customers, including McDonald's; Blue Cross Blue Shield, Minnesota; The City of Philadelphia; The Polish Ministry of Finance and Shared Services Canada, which provides IT services for the Canadian government.

We launched a targeted competitive switch campaign and kicked off our fiscal year '21 subscription renewal cycle with 2 of our largest customers renewing their deals.

That said, our current outlook for total software and product revenue is more measured than our pre-COVID expectations.

We've seen a decline in the volume of smaller portfolio transactions due to -- likely due to SMB customers that may be disproportionately challenged.

Additionally, we believe customers may defer routine capacity add-ons until economic conditions begin to stabilize.

Even with the mission-critical nature of our products, we expect new customer signings to remain challenged because they require a higher touch sales process.

During the quarter, we made some prudent short-term adjustments to our expense structure to align with the current revenue environment, most notably, a temporary reduction of salaries.

Our fiscal discipline and strong financials allow us to confidently make decisions that balance the needs of our customers, shareholders and employees while remaining focused on our return to growth.

Even with the expected pressure, we believe we have the staying power to emerge from this pandemic as a stronger company because of our innovative product strategy, our large and loyal customer base and growing softer subscription and recurring revenue base.

Let's discuss each of these.

First, our innovative product strategy.

We advanced our storage and data management vision by integrating Hedvig with Commvault Complete to solve customers' hardest data management problems.

This provides customers more choice and flexibility with their data without the large upfront investment.

With more milestones and use cases coming, we will have additional capabilities to cross-sell into our customer base.

We'll share more on the road map in the future.

Additionally, we continue to roll out our SaaS solution, Metallic.

Customers increasingly want a flexible consumption-based and cloud-centric solution to support their infrastructure, remote operations and endpoint devices.

Metallic meets this head-on and is the ideal platform for our future SaaS offerings.

We also continue to lead when it comes to migrating workloads to the cloud.

Conservatively, we estimate that our software already manages more than an exabyte of customer data in multi-cloud environments.

In Q4, we added support for several cloud-native applications and expanded on our capabilities to enable customers to accelerate their cloud usage.

One of our cloud success stories is McDonald's, whose Director of Cloud Services, Douglas Leonard said, quote, "We're investing heavily in the cloud to keep our IT operations running.

The software solution from Commvault has cut across every use case McDonald's Cloud Services team has.

Commvault solution tunes performance across AWS and Microsoft Azure, cloud service and drives cost savings.

McDonald's realizes value from a trusted innovative team with Commvault".

This is a premier example of how we're helping our customers modernize their environments and accelerate their path to the cloud, even in the midst of an unprecedented quarter.

The second reason we have stayed in power is our loyal, world-class customer base, the majority of which are large, well-capitalized enterprises with whom we have long-standing relationships.

The average tenure of our customers is 9 years, and our historical maintenance rates are approximately 90% across our customer base.

More impressively, it's 97% among our top 100 customers.

Given our diverse base, we're not disproportionately exposed to any one industry.

Having nurtured our customer relationships for decades, we believe our incumbency is an asset.

We have the right go-to-market strategy and are keenly focused on our customers' success.

We just hosted our first ever all virtual sales kickoff and Q1 is off to a strong start.

The third reason we have stayed in power is our subscription and recurring revenue streams.

They are growth driver for us in fiscal year '21.

In Q4, we added approximately 150 subscription customers, and revenues now represent over 40% of our software and product revenue.

With fiscal year '21 is our first full renewal cycle we are focused on this opportunity.

Now let me turn it over to Brian to give you some detail on our fourth quarter and full year results as well as our outlook for the first quarter.

Brian?

Thanks, Sanjay, and good morning, everyone.

Before discussing our outlook, I'll briefly recap our results.

As Sanjay discussed, we have demonstrated continued success in our subscription transition by adding approximately 150 additional customers in the fourth quarter.

For the full year, subscription revenue exceeded 40% of software and products revenue compared to less than 10% in FY '17.

As a reminder, we began our transition to a more subscription-based recurring revenue model in FY '18.

We expect recurring software and products revenue to increase as a percentage of total revenue in FY '21, as we capitalize on the renewal opportunity associated with our existing subscription customer base.

Services revenue, the majority of which is maintenance, accounts for approximately 60% of total revenue.

Fiscal fourth quarter services revenue was approximately $98.3 million, declining 2% year-over-year and 1% sequentially.

On a constant currency basis, fourth quarter services revenue was down 1%, both sequentially and year-over-year.

For the full fiscal year, services revenue was approximately $396 million, down 1% year-over-year.

FY '20 operating expenses declined 3% year-over-year to $459 million.

Over the past several years, we've successfully reduced our underlying operating expense base driven by our deliberate efforts to tighten the cost structure, while continuing to invest in strategic initiatives, such as Metallic and Hedvig.

Unlike some of our competitors, we are able to fund our future through our profits and cash flows.

Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $31.1 million for the quarter, representing our strongest cash flow quarter of the year.

For the full year, free cash flow was $85.3 million.

We repurchased 872,000 shares for $37.2 million during the fiscal fourth quarter and 1.7 million shares for $77.2 million during the full fiscal year.

Over the past 5 years, we repurchased over $600 million of our stock, representing more than 125% of cumulative free cash flow.

We have almost $163 million remaining on our existing share repurchase authorization, which expires March 31, 2021.

Now I'll discuss our financial outlook for Q1 FY '21.

Given the uncertainty and limited visibility associated with COVID-19, we are being measured with our outlook.

At this time, it's simply not possible to predict when we might return to a more normal business environment.

Having said this, we have several factors that provide underlying support for our existing revenue base.

For example, over 70% of our revenue is recurring in nature.

Approximately 2/3 of new software sales are to existing customers and subscription renewals represent a growing and more predictable part of our sales motion.

As Sanjay noted, we did see a notable decline in smaller transactions in the last weeks of March as the virus spread and economic shutdowns intensified.

We expect these trends to continue throughout the current quarter and to have a continued dampening effect on our business.

For the first quarter of FY '21, we expect total revenue of approximately $150 million to $155 million, including $58 million to $62 million of software and products revenue.

Our revenue outlook is underpinned by the successful renewal of 2 of our largest subscription customers.

These renewals were signed in Q4 before their contract expirations and will represent combined software revenue of approximately $10 million in Q1 FY '21.

We are working diligently to exceed our guidance and to deliver year-over-year software revenue growth.

In response to COVID-19, we made temporary but prudent adjustments to our expense structure to align with the current revenue environment.

With these adjustments, our underlying OpEx is down sequentially.

With that, we expect Q1 FY '21 EBIT margins to be approximately 5% to 7%.

We'll continue to monitor the situation, and we're prepared to make further adjustments, if necessary.

Lastly, our projected share count for Q1 is approximately 46.4 million shares.

Now I'll turn the call back over to Sanjay for some closing remarks.

Sanjay?

Thank you, Brian.

I joined Commvault with a commitment to return the company to responsible growth, and this continues to be our #1 priority.

During this difficult time, our strong balance sheet, rich technology portfolio and loyal customer base position us well to weather the storm.

More importantly, our resilience in response to the crisis has only deepened my conviction in Commvault's success for the long run.

I am confident we have the talented team and the focus needed to further strengthen our customer relationships and partnerships during this crisis and seize new opportunities in the future.

I look forward to updating you on our progress in the coming quarters.

Now we'll open up the call to questions.

(Operator Instructions) Our first question comes from Aaron Rakers of Wells Fargo.

Maybe the first question, if I can, as you start to get more vocal about the subscription renewal cycle into fiscal '21 and kind of the framework that you just laid out for fiscal 1Q guide, can you help us understand what the base of business is that is actually the subscription base that we should think about for the full fiscal '21?

I guess what we're really thinking about is what was the base of subscription revenue that you generated in fiscal '18 that comes up for the renewal cycle in fiscal '21?

Sanjay, I could take that one, if you want?

Sure.

It's Brian here.

I hope you're well.

Yes.

So as you know, it's early days for us with the subscription renewals, but we're off to a good start.

As I mentioned on the call, we successfully renewed 2 of our largest renewals in our Q4 that will be recognized in fiscal Q1.

And so just to frame out the opportunity, we believe there's about a $50 million software opportunity coming up in FY '21.

It's mostly weighted towards the second half of the fiscal year.

Obviously, this is a new motion for us.

We're trying to be prudent with our assumptions and pragmatic about it, but we're on it.

We have a dedicated team working hard as part of our customer success organization.

Team works with customers to optimize their use of our platform and software and strives to strengthen that relationship and contacting that customer well in advance of when that renewal is coming due.

So again, it's a great opportunity for us, but we're being measured at this point in time, and we think this is going to help us drive more predictable results moving forward.

Okay.

And then as a real quick second question.

Through this last quarter, last month or so, you announced some patent litigation against Cohesive.

Can you just help us understand what you're exactly currently seeing in the competitive landscape and the measures you're taking versus 2 competitors?

I'll take that, Brian.

Aaron, I hope you well, as well.

I've said this through the course of the year that I've been here that our portfolio -- our technology portfolio is second to none, and we continue to invest in our portfolio aggressively.

We think we've spent in excess of $1 billion on our IP as a company.

And competitively, we see, not getting into the details of the lawsuit.

But competitively, we think our portfolio, especially with our focus on cloud, our SaaS capabilities, our software-defined storage abilities, our ability to truly help customers use data with Activate, are all coming to the fore.

These are all use cases that are being absolutely -- are super-relevant and customers are talking to us and using our technology for it.

So focus really on our technology, making sure that we continue to lead in that space.

And on the lawsuit, really, it's -- I don't want to compete against ourselves.

And the next question comes from Alex Kurtz of KeyBanc Capital Markets.

Just a follow-up on Aaron's question.

How do you think about sales comp -- sales structure as you go into this renewal opportunity this year?

And then maybe behind that, given what you're seeing and challenges in the SMB space, are you going to reevaluate that part of the business right now?

And how you work with the channel partners, maybe to lean on them more and maybe refocus some of that selling capacity to the mid-market?

So kind of 2 questions there that the comp structure on renewals and the approach?

And then how you're thinking about SMB in the next 6 months and how you go to market?

Sanjay, I could take the first piece, if you want to take the second piece?

It's Brian here.

I hope you're well, as well.

So with respect to the subscription renewal opportunity and compensation, we've got a very well organized approach internally here.

There are incentives in place for our field to be involved and actively involved with these renewals.

We have it well segmented according to enterprise and SMB.

And that's also working hand-in-hand with our customer success organization, so it's a multipronged approach.

And we're well aligned, and they're incentivized.

So we believe this is going to be a good formula for, hopefully, the fiscal year.

I'll -- and I'll take the second part.

Folks, we're not all in the same location, obviously.

So it's a little more handholding than usual when we're in the same room.

So Alex, good to hear from you.

To your question, SMB, non-SMB channel, what are we thinking?

Where are we applying resources?

This is a -- it's a great question because all over the -- over the course of last year, we talked extensively, we shared extensively about our simplify, innovate, execute model.

And part of execute was really to make sure we had a customer segment model that leaned on where the opportunity was and where the business was and where our partners were.

And so for us, our enterprise business is one that be -- where -- like I shared, we've been in that business a long time.

We've got great relationships.

We continue to stay close.

And as our customers come out of this, I think we'll be good.

On the SMB, our product offerings, much like Metallic, are very attractive.

They're lightweight.

They're cloud oriented.

They help customers of that size.

And our service providers are also doing a lot of work with customers in that segment, and we're working with them.

We've extended our portfolio and made it easy for them to sort of use the technology in this -- during the course of this pandemic through our customer cares program.

And we think that our offer -- I think that we've aligned well with that.

And to support the partner channel, which is really leading in some of this, we have an ISR team that's active and mobilized.

So hopefully, I answered your question.

We feel good about that space.

And our next question comes from Jason Ader, William Blair.

First question for me is, we're May 12 now, so you're almost 1.5 months into the quarter.

Can you talk about any change in trend versus margin?

I mean, what are you seeing in the first 6 weeks of the quarter relative to what you saw in the month of March?

Let me -- sure.

Jason, it's Sanjay.

So I think it's a great question, and we're monitoring this all the time, talking to channel partners, talking to the customers.

They've been the structural shift in the market, if you would.

When all of this first started happening, the work-from-home scenario, our customers were adapting.

We adapted.

I think we've -- 6 weeks now into the quarter, I think people are sort of finding their feet in this new world order and the remote environment.

So what we did was, we put our Commvault cares' program into place.

Stay closed with our customers.

We're helping them through -- there's an increase in, say, ransomware and security sort of threats at this stage.

We're helping them through that.

We bring -- we're helping them with monitoring because they can't get to their data center sometimes in full force.

And we internally pivoted very quickly as they have, as our customers and partners have.

So we're doing everything we can to stay close.

But there's a lot of conversation about cloud now.

More so, I think there's been a fundamental acceleration in customers' plans to adopt and embrace public cloud scenarios.

Our products, our campaigns, and our conversations are all aligned to that.

So we feel pretty good.

Right now, it's a lightweight, cloud-oriented, and that's where -- that's the next wave, if you would, of conversations after the structural shift and work-from-home scenarios have been sort of mostly settled.

But no material change in terms of the tone of business or anything that...

Well, data protection is high on the list.

And especially as we have remote workers and new data scenarios, this is bubbling to the top.

But I think as customers initially had to respond, they had to sort of prioritize what it is, and that was about working from home, getting the endpoint sort of sorted out.

And now we're having conversations again where customers say, okay, how can you help us?

And is our strategy valid?

Do we have gaps?

There's expansion opportunities.

So the conversations are beginning again, but it varies, and it varies by geography, and it varies by segment.

Okay.

Great.

And then secondly, I think there's been some concern over the last couple of years of some of the very well funded and aggressive upstarts coming after your base.

Have you detected any change in the success rate of those upstarts, trying to go after your base, just given that there seems -- there does seem to be an advantage of incumbency right now?

Going after new customers, trying to shift at this -- in this time is hard.

It's hard because right now what we're telling our customers is, we're here to help you, we are here to make sure you're secure, we need to make sure that you've got what you need, and incumbency matters.

I think incumbency is king at these points.

And having those conversations with customers is what matters.

Honestly, Jason, I've always -- I'm a big believer in focusing on the fundamentals: run a good business, get the right balance, have good free cash flow.

We've always tried to do the right thing.

And running a good fundamentally solid business at this point is -- it's key.

Customers want us around, and that's what we're focused on.

Can't speak for the competition.

(Operator Instructions) And our next question comes from Brent Thill with Jefferies.

This is Joe on for Brent.

Given that net new logos will likely struggle, in regard to that $50 million renewal opportunity, what are the renewal rate assumptions?

And then maybe can you walk us through the opportunities for upsell?

Is it 3 years of usage?

Or is there an opportunity beyond $50 million?

What were the pricing dynamics of the 2 large deals that already closed?

Sure.

I'll take that one, Sanjay.

So as we framed out the opportunity, we are being somewhat measured in our expectations.

It's early for us, just to be completely candid.

This is the first year of a significant renewal cycle.

And they typically are 3-year contracts.

And with the way our recognition model works is that when we secure that renewal, we recognize the upfront software value for the full term of that upfront in the period of sale or upon when the contract comes due.

In the case of the 2 large ones that we renewed in Q4, that will be recognized in Q1, we're not going to get into Zacks' specifics, but I will say they're 2 of our largest, more tenured customers.

This all goes into the customer success discussion.

We have regular dialogue and QBRs with them, active dialogue right at the top.

And we're pleased with the results of those renewals.

And as we looked out over time, we've got a strong product pipeline.

And our expectation is to have these upsell and cross-sell opportunities with our new product portfolio.

That's available, but also coming available later in the fiscal year.

So yes, we're excited, but it's early days.

Awesome.

That's helpful.

And then I know you guys have a million things to focus on, but maybe just talk about the conversations you had with an activist investor.

Are there any incremental changes that you plan on enacting coming out of those conversations?

Or any change in strategy between growth and profitability?

Anything would be helpful.

Sure.

I'll take that one, Sanjay, if you want.

Yes.

We've had a number of constructive conversations with the investor that you might be referring to since learning of their investment.

We're always open to shareholder feedback and suggestions, and we'll continue to act in their best interest and our company's best interest.

We're not going to get into specifics about those discussions, but I would say they're constructive.

And I think their expectations and their wants are the same as ours.

We're aligned in terms of the long-term shareholder value and a balanced growth profile for the business, and we're excited about the opportunity once we get through this, hopefully, temporary period of time.

And ladies and gentlemen, this does conclude our question-and-answer session.

This does conclude today's conference call.

Thank you for participating.

You may now disconnect.