Commvault Systems Inc (CVLT) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Commvault Q1 Fiscal Year 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Mike Melnyk. Please begin.

Good morning, and welcome to our earnings conference call. I'm Mike Melnyk, Head of Investor Relations, and I'm joined by Sanjay Mirchandani, Commvault's CEO; and Gary Merrill, Commvault's CFO.

An infographic with key financial and operating metrics is posted on the Investor Relations website for 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 different from those contemplated in these forward-looking statements.

Commvault does not assume any obligation to update these statements. During the call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between the non-GAAP and GAAP measures can be found on our website.

Thanks again for joining. Now I'll turn the call over to Sanjay for his remarks. Sanjay?

Good morning. I'm pleased to share Commvault's record Q1 results. Our subscription software and SaaS strategy is working as customers continue to prioritize data management and protection solutions as they embrace the cloud and hybrid IT. This is reflected in our results, which I will be discussing in constant currency.

Total revenue was up 13% year-over-year. Software and products revenue increased an impressive 17%. Metallic is starting to contribute meaningfully to revenue, and we once again delivered profitable growth. Total ARR, a key indicator of our future continues to be strong, growing 16% year-over-year. Combined, subscription and SaaS ARR grew approximately 50% year-over-year and now represents 64% of our total ARR. And we have 2.5x more subscription and SaaS customers than we had 2 years ago.

These are proof points that our strategy is working and that we are the trusted partner for our customers' large multi-cloud environments. I'd like to share a little bit -- a little about why I think we are poised to capitalize on the massive opportunity ahead of us. The past few years have been hard on IT professionals and will continue to be challenging with rampant data proliferation, arisen security threats, increasing costs and resource limitations. As executives prioritize IT projects in this environment, data protection will remain top of mind, especially as mission-critical, hybrid solutions continue to grow in the enterprise.

This proliferation of data across multiple environments and vendors is what causes data to be more vulnerable. Organizations are looking to consolidate their data management solutions and reduce complexity and costs while protecting their most precious assets. Nobody has the workload breadth and depth to manage this across the entire data state like Commvault. We enable this today.

Through the power of AND, which offers the best software and SaaS, we provide elegant industry-leading cloud data management capabilities so customers have the ease and flexibility to use one or both offerings to meet their unique and ever-changing needs. From a single pane of glass, customers can manage their on-prem workloads like virtual machines, containers, mission-critical legacy workloads and SaaS applications like Office 365 and Salesforce. In fact, approximately 50% of our SaaS customers also use a Commvault software product. Faced with the relentless threat of ransom attacks, more and more customers are mitigating risk by replacing their multiple point products with Commvault's integrated software and SaaS solution for air gap ransomware protection.

Within months of acquiring TrapX, a solution for advanced threat deception, we reimagine the product and introduce it as threat-wise, with end-to-end proactive and responsive capabilities to further strengthen our customers' ransomware protection. The product is currently available in early access via Metallic. Our software and SaaS offerings continue to garner industry accolades and strong ratings for cyber resiliency, governance and Kubernetes support. In fact, GigaOm recently named this as a front runner for Kubernetes and an outperformer for hybrid cloud in its latest radar reports. It is our continuous innovation that solidifies our position as an industry leader. And it is a robust partner ecosystem that enables us to reach more customers globally.

In late June, we jointly announced a strategic partnership with Oracle to offer Metallic globally on Oracle Cloud Infrastructure, OCI. With this partnership, Commvault became the first enterprise backup and recovery SaaS provider in the Oracle ISV accelerator program. This will give Oracle customers the performance, security and trust they need to accelerate the journey -- the data journey to OCI while leveraging Metallic to protect their most mission-critical workloads on premises and in the cloud. We expect this partnership to open the door to Oracle's 400,000-plus global customers. By adding native OCI integration and support, we now have industry-leading capability across all hyperscalers. With these partners, we're meeting customers where they are with our portfolio of cloud data management solutions, and we are confident this will enable us to further accelerate our growth.

Now I will turn the call over to Gary.

Thanks, Sanjay, and good morning, everyone. In my first earnings call as CFO, I'm happy to share that we are off to a solid start to the year after delivering record fiscal '22 performance. I will start with a quick recap of the quarter with growth rates on a year-over-year basis unless otherwise stated.

We beat all of our guided metrics for Q1 led by total revenue, which grew 8% to approximately $198 million. On a constant currency basis, total revenue increased 13%. Software and products revenue was $92 million, increasing 13% as reported and growth accelerating to 17% on a constant currency basis. From a geographic perspective, both our Americas and international regions delivered strong Q1 software and products revenue growth.

Our Americas region increased 15%, driven by large deals as customers spent on IT transformation projects with data management as a critical element. Our international region, which includes both EMEA and APJ, increased 8% also driven by strength in larger enterprise transactions. On a constant currency basis, international software and products revenue hit 20% growth.

On a consolidated view, the revenue from software transactions over $100,000 increased 24% and represented 75% of software revenue. Average deal size also increased 24% to approximately $379,000. We closed multiple 7-figure deals in the quarter across a variety of industry verticals.

Subscription software revenue increased 51% to approximately $75 million. Subscription license sales represented 81% of total software revenue, which is an all-time high and compares to just 60% of total software revenue a year ago. Our progress toward a subscription-led software business has given us more predictability and resilience to our business model.

Now moving to ARR. Our total ARR increased 12% to $595 million or 16% growth in constant currency. ARR growth continues to be driven by Metallic and new software subscription business. The combination of subscription and Metallic ARR grew 46% to $378 million and now represents 64% of total ARR, which compares to 59% of total ARR last quarter and only 49% in Q1 of the prior year.

For Q1 fiscal '23, we are exceeding our January 2021 Investor Day targets for 10% compounded ARR growth, which is a meaningful indicator of our future growth potential. Total recurring revenue, which includes subscription software, maintenance support services and SaaS grew 20% to $171 million or 25% growth on a constant currency basis. Recurring revenue represented 86% of total revenue for the quarter, up from 78% a year ago.

Now I'll discuss expenses and profitability. We reported first quarter gross margins of 83.6%, which compares to 85% in the prior quarter and reflects a modest shift in our gross margin profile with the success of our accelerating SaaS business. Total operating expenses were $123 million, an increase of 6% versus Q1 of the prior year and a decrease of 3% sequentially. During the first quarter, we prudently managed our expenses and increased our productivity with our total company head count roughly flat quarter-over-quarter. We are proud of our track record of responsible growth, which is core to our management philosophy.

Non-GAAP EBIT was $41 million, EBIT margin up 20.5%. In Q1, we repurchased approximately 310,000 shares of our common stock for $19 million. We ended the quarter with no debt and approximately $259 million in cash on the balance sheet of which approximately 2/3 sits overseas.

Now I'll discuss our financial outlook for Q2 fiscal '23. We expect Q2 software revenue to be in the range of $80 million to $84 million and total revenue to be in the range of $184 million to $188 million. As a reminder, in recent fiscal years, Q2 is our low point for software revenue. On a constant currency basis, the midpoint of our software revenue guidance would be up 12% and total revenue would be up 8%.

On the expense side, we expect Q2 consolidated gross margins to be flat sequentially at approximately 83%, which includes the impact from our rapidly growing SaaS business. We believe that at current revenue levels, we are nearing the low point for consolidated gross margins, and we expect ongoing improvement as our SaaS business scales. We are closely managing expenses, balancing profitability while investing in Metallics growth initiatives. We expect Q2 operating expenses to be roughly flat sequentially.

At the midpoint of our revenue guidance, EBIT margins will approach 17%. Our projected share count for Q2 is approximately 46 million shares. Our transition to a sustainable and profitable recurring revenue model is well underway. Our team is focused on execution, and we're committed to driving responsible growth in the years ahead.

I will now turn the call back to Sanjay for his closing remarks. Sanjay?

Thank you, Gary. Economic uncertainty is top of mind for you as investors as well as for our customers, partners and us as a management team. There are 2 important reasons that I'm confident we have a solid foundation and precedent to manage through this.

First, we've been through this before. Commvault has been in business for 26 years, and we have survived and thrived throughout many different economic cycles. We're in a great position as a company. We are profitable, generate significant free cash flow and have no debt on our balance sheet.

Second, protecting data is not a luxury, especially in these times. Customers and prospects need to continue focusing on best-in-class data management solutions. Just like the early days of the pandemic, protecting data and reducing cost of inefficient legacy end point solutions are top of mind for decision-makers. Against that backdrop, our team is focused on what we can control, our innovation and execution to seize the opportunity ahead and drive responsible growth as the world's leading cloud data management company.

With that, we'll open up to questions.

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

I guess I'll just start on just the macro concerns. It looks like your guidance is a little bit below the street expectations. So I'm curious of what you've seen from a demand shaping perspective through the course of this last quarter? And how much conservatism are you kind of -- any way to think about how much you're baking into that current quarter guide given the macro. Have you seen any deal slippage? Any kind of change in the deal pipeline, et cetera?

Yes. And it's Sanjay. So I'd like to start by saying that right now, we think data protection continues to be mission critical. And we're in a healthy industry. What we control is the execution, and we're doing well. We just came off a record Q1. Our guidance reflects what we see -- what we're seeing in the current macroeconomic environment. And if you add to that, that Q2 is seasonally a low point for the year. You're sort of seeing that in the range we gave you.

A little more color. Americas is strong, but we're closely monitoring Europe, okay? And FX continues to be a headwind for us, just like any company with a large international presence, and we can't control that. So on a constant currency basis, we're guiding Q2 to about 12% software growth and 8% total revenue growth, and we think that's pretty good.

Gary, anything you want to add?

Yes. Thanks, Sanjay. Aaron, good to hear from you. A couple of quick things is, in Q1, we executed very strongly in enterprise. If you look at the enterprise transactions, it was 75% of our revenue and up 24%. Pipeline is going into Q2 or once again at those levels. So we're going to work on controlling the execution. We've adjusted a little bit for FX in the current FX, with the euro and the pound now year-over-year, down almost 15%. So we know we have in front of us with the pipeline, and we're going to control the execution against that.

Yes. Great points. Can you talk a little bit about Metallic? I mean when I look at your other services growth, I think it was up 97% year-over-year in total. I think you saw north of 100% growth in the Americas in this last quarter. Is that to be taken as largely or entirely growth being driven by Metallic? Just any kind of incremental color you can add on that.

Aaron, I'll start a little bit on the financial piece and Sanjay can maybe give you some business perspective on Metallic. The growth in the other services is absolutely driven by Metallic. And as you know, last quarter, we disclosed that milestone of $50 million of ARR, and we continue to build off of that. So in Q1 and even as we look into Q2 and the rest of the fiscal year, our growth in that other services will reflect that acceleration of Metallic for sure.

And I'll just add a little color on picking up where we left off last quarter on Metallic in general. So our strategy is about the power brand, giving customers the best software combined with the best SaaS. And really, this is something that we keep an eye on. Over 50 -- roughly, 50% of our customers that our Metallic customers also have another Commvault software product, okay? And about 30% of Metallic customers also have another Metallic service, they're more than one Metallic service. And as we designed it, Metallic continues to be a customer acquisition engine for us. So we think it's -- it continues to -- if it had a great quarter in Q1, and it continues to contribute meaningfully, if you would, to both customer growth, revenue and ARR.

And our next question comes from Eric Martinuzzi of Lake Street Capital Markets.

Yes. I wanted to dive into the services line a little bit. The -- I guess, the implied guide there at $104 million. Given the growth of Metallic, I was expecting that to be kind of up sequentially. What's behind that guide there on the services?

Eric, this is Gary. I'll jump in. So Metallic's acceleration we talked about, there's a couple more things in place in that other services revenue. First is current FX rates. So also reflecting what we see from the current FX rates as about 40% to 50% of our business is denominated in both euros and pounds. Outside of FX, there's a few more things. One is, as you think about our professional services business, we bring -- brought pretty massive automation to that business and scale, especially for some of our cloud-enabled services as well as investing in our channel ecosystem.

So that business is somewhat rightsized for all the automation initiatives we've driven. And then the third piece is what's sitting in the maintenance support prospective piece of the business. And that's roughly flat. That's our historical perpetual maintenance base in that business, which is a great cash count for us, is roughly flat to down as we also look to transition our installed base programmatically to our new subscription offerings to make it even a more stickier and repeatable business model.

And we had a great quarter with that, too.

Absolutely.

Okay. So did you -- I mean, you gave 3 explanations there. Should I assume they're kind of stack ranked on the impacts of the FX or ...

Look, absolutely, FX is the big -- is actually the biggest driver. And then the other two are about equal.

Got you. And then as far as the outlook, are you seeing anything -- as part of the outlook anticipating any change in the your kind of dependency on your hardware partners and their supply chain issues?

Eric, this is Gary again. From a supply chain and hardware, that's -- for us, it's pretty much behind us. We manage our business and make sure that our pipeline coverage ratios can contemplate it, including how we run the business and how we inspect the business. And even as we think about Metallic, it's actually an acceleration for us as when customers have concerns over supply chain, the offerings we can do with hybrid cloud becomes a great momentum for our Metallic business.

And our next question will come from Jason Ader of William Blair.

I wanted to ask about the competitive landscape sort of across, let's call it, the 3 major market segments, the high end, where you -- I know you run up against a lot of incumbents, the midrange where I know there's a bunch of new players and then at the low end seems to be kind of defaulting to managed service providers. So maybe just talk about each of those 3 segments and maybe you segment the market differently than I did, but I would love to kind of just get a general update on competitive landscape.

Sure. Sure. It's Sanjay. So Jason, the high end, the enterprise, as Gary shared, we had a record number of deals last, where we see continued traction in the enterprise. That's where we've always been strong. Our products are very -- seen as extremely valuable and fit the purpose for that market segment. And we're seeing a lot more power and solutions going and customers that are touching SaaS alongside more mainstream data center on-premise solutions. So that market continues to be strong. We're taking share from incumbents every day. So that continues to be strong for us.

The mid-market is something that we've done well in different parts of the world like Europe. We do very well with the mid-market part of the U.S., we do great to the mid-market depending on the vertical. And our solutions -- the power of AND solution is really working well there. There, it's almost built for that marketplace in the sense that customers start with a workload or to on-premise ease their way into Office 365 or VMs in the cloud, and then certainly, they're using both. So we're seeing a lot of that now in the mid-market. That's really beginning to get traction in the mid-market.

And in the low end, where we weren't historically strong, we're seeing a lot of customer acquisitions through Metallic. Metallic is how we're really winning in that space. MSPs, or like the relationship with MSPs, the partnerships that we've announced are all causing us to get a lot of good traction in a market where we were not historically strong. So that's actually one where we're doing very well. So across the board, we're seeing good traction. The strategy is working. It's different in different segments as to how they absorb the solution. And overall, our market share is up. So we think we're doing great.

Excellent. And then just a quick follow-up on the macro commentary. Are you -- when you talk about watching Europe, it sounds like North America hasn't changed much, but are your -- are you getting a sense from customers in Europe that they might potentially hit the pause button on certain things? Or what specifically are you hearing from customers in your conversations that maybe is giving you a little bit more caution there? Or is it just kind of generic, let's be more prudent because of all of the headlines that we see in Europe.

I think what we -- again, what we saw were changes in buying behavior towards the latter part of last quarter. So we're taking a conservative viewpoint going into this quarter. We saw more scrutiny around budgets for sure, slower purchasing decisions, which led to in some cases, longer purchase cycles -- sales cycles, time to close. So the guidance we've given incorporates that because we're seeing that the U.S. continues to be strong. And we have -- outside of what I just said, Europe continues to be a strong market for us, just we're keeping an eye on it.

And one thing I'll add too is, what we're seeing though as Sanjay mentioned, some of that scrutiny. We're not seeing pipeline go up. Actually, pipeline continues to be very strong. For us, it's just making sure that we're being prudent around close rates.

Got you. And the European customers, are they -- are you feeling like they -- they're just -- they need a little bit of time here? Or what is your sense on like sort of the shape of close rates for the upcoming quarter?

So just to give you, we're not breaking out Europe, we're saying international, which includes Asia, software revenue last quarter was up 15% and in constant currency, up 20%, right? And total revenue, roughly 16% up in constant currency. So Europe had a good quarter. We're just saying towards the end of last quarter, we saw a little bit of a slowdown in decision-making, not the pipeline, as Gary indicated.

So we're just taking -- we're taking a more conservative approach on how we're thinking through the numbers. But the business is strong. Data protection is top of mind. We're part of a lot of high-end POCs. So you're landing new customers. So we're saying that we're just taking a conservative viewpoint on what we don't control.

But it sounds like you didn't miss your expectations in Europe in Q1, though.

No, they were very strong. So we hit 20% copper growth year-over-year on a constant currency basis in Q1 internationally.

And I'm showing no further questions. This concludes today's call. Thank you for your participation. You may now disconnect.