Commvault Systems (NASDAQ:CVLT) Q1 2021 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to the Commvault Quarter 1 Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If at any time during the conference you need to reach an operator, please press star 0. I would now like to welcome one of your speakers for today, Mr. Michael Melnyk, Director of Investor Relations. Please go ahead, sir.

0:37 Good morning, and thanks for dialing in today for our call to discuss our fiscal first quarter 2021 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. Thank you very much. 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 recently quarterly report on Form 10-Q and in our other SEC filings and in the cautionary statement contained in our press release and on our website.

1:43 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. Transcription by CastingWords With me on the call this morning are Sanjay Mirchandani, President and Chief Executive Officer of Commvault, and Brian Carolyn, Chief Financial Officer of Commvault.

2:34 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. Good morning, and thank you, Mike.

2:45 Thank you all for joining us today to discuss our fiscal first quarter results. Over the past several quarters, we've spoken about the need to simplify everything we do Deliver our best-in-class portfolio and confidently and crisply execute our plans internally and through our partner ecosystem. During Q1, we successfully started our first subscription renewal cycle. We received the largest PO in our history, an eight-figure subscription deal. We hit an all-time high in average enterprise deal size. We posted a record dollar contribution from seven-figure deals, and we signed a multi-year agreement with Microsoft. I'm proud to say that companies are increasingly using our technology to help them move into the cloud. This was further validated last week when Gartner named us as a leader in the 2020 Magic Quadrant for Backup and Recovery Solutions, and Commvault was the first vendor to ever score highest in all three categories of their accompanying critical capabilities report, the public cloud, virtual, and physical environments.

3:47 As we previously discussed, enterprises are grappling with more infrastructure applications and complexity than ever before, especially when compounded with nonstop security threats and rapid change we've all experienced, especially over the past few months. To tackle the complexity head-on, we unveiled our intelligent data management vision at our Future Ready event last week, which is composed of three critical elements. First, our portfolio. Second, our partnerships. and third, our Executional Excellence Initiatives. Let's discuss each one by one, starting with our portfolio. We never stop innovating. It is core to who we are and it gives us a critical edge in a very competitive industry. At FutureReady, we unveiled our newly expanded and revitalized portfolio to empower organizations to reduce this complexity, rein in the data fragmentation, and accelerate their cloud journeys. It includes a new standalone Commvault backup and recovery product, and a new Commvault disaster recovery product.

4:51 Or both can be bundled together as a complete data protection offering. We also introduced Commvault Hyperscale X, the next generation of our Hyperscale product, which brings together the best of Commvault data protection with Hedvig Storage Management. This is a significant achievement. And Hedvig now has enhanced support for containerized workloads and is integrated for Kubernetes deployments to help DevOps professionals accelerate their application journey. We believe these capabilities are unmatched in the industry and they enable our customers to accelerate their digital transformations in today's remote world using tools that are low touch, light touch, use AI and machine learning to automate workflows, and are available with flexible cloud-based pricing. But products alone aren't enough. Our partners are critical in bringing value to our customers. In Q1 of 21, we signed a strategic multi-year partnership with Microsoft focused on offering Our metallic SaaS with Azure will be working closely on go-to-market, engineering, and sales activities to unlock more joint opportunities.

5:54 We also have strong contributions and interest from our partner ecosystem. To further the momentum, we recently launched a simplified and well-received partner program, which brings me to the third initiative, Executional Excellence. Our go-to-market teams are gaining momentum and leaving no stone unturned. Our ability to deliver complex solutions, mostly remotely, is now mainstream for us. Looking ahead, we believe our enhanced portfolio and ability to upsell and cross-sell our solutions will enable us to land new customers and maximize customer lifetime value. While we have work to do, we're optimistic about our return to predictable and sustainable growth. With that, let me turn it over to Brian to provide some financial highlights and our Q2 21 outlook. Brian?

6:40 Thanks, Sanjay, and good morning, everyone. Before discussing our outlook, I'll briefly recap our results today. Total revenue was approximately $173 million, up 7% year over year. Software and products revenue increased 20% year over year to $76.6 million, an all-time first quarter record. Software revenue growth was driven by a significant increase in large enterprise deals and a successful initial subscription renewal effort. Software transactions over $100,000 increased 41% year-over-year to approximately $56 million. These large deals represented 73% of software revenue in the current quarter compared to 62% a year ago. The number of these transactions increased approximately 5% year-over-year, and the average deal size exceeded $400,000, approximately 35% higher year-over-year.

7:41 The increase in large software transactions was driven by an all-time record contribution from seven-figure deals. This included the largest ever purchase order in company history, a subscription transaction with an eight-figure total contract value, in addition to two other very large deals. While we were pleased with our ability to close these large deals, they influenced the contribution mix from subscription and recurring revenue as well as the average deal size and should not be considered a baseline for the next few quarters. Fiscal first quarter services revenue was approximately $96 billion, declining 2% year over year. The decline was primarily due to COVID-related restrictions, which impacted onsite professional services.

8:28 In addition, maintenance revenue growth was impacted by the strategic transition of legacy perpetual customers to subscription licensing arrangements. These conversions benefit us over the longer term because of the associated opportunity to drive lifetime value with an active customer. Let me now discuss our continued transition to a more recurring revenue-based model. As you know, prior to FY18, we primarily sold perpetual contracts. At that time, subscription and usage-based utility contracts accounted for less than 10% of our software and products revenue. Recurring revenue Thank you for joining us. and FY21 and beyond.

9:40 As Sanjay described, the announcements that we made at Future Ready represent an important streamlining of our product, packaging and pricing strategy. We expect this evolution will continue to result in even more subscription-based recurring revenue over time. In order to best report and measure our business consistent with the way customers consume our products and services, We will be increasingly focused on the following three operating metrics. Subscription as a percentage of software and products revenue, recurring revenue as a percentage of total revenue, and annual recurring revenue, or ARR. Now I'll take a moment to discuss each of these metrics. In Q1 FY21, subscription revenue represented approximately 69% of total software revenue and many more.

10:58 This compares to approximately 50% in FY17. This quarter, we are also introducing Annual Recurring Revenue, or ARR. We define ARR as the annualized value of Commvault's recurring revenue streams at a point in time. Going forward, ARR will replace ACB because we believe it is a better measure of our recurring revenue streams. As of June 30, 2020, our ARR increased 9% year over year to approximately $472 million. Now I'll discuss expenses and profitability. During the quarter, we remained disciplined on expenses. Q1 FY21 expenses, including both cost of sales and operating expenses, declined 4% year over year to $138 million, resulting in an EBIT of $32.5 million and an EBIT margin of 18.8%.

11:59 Both EBIT dollars and EBIT margins approximately doubled year over year. We note that Q1 FY21 benefited from approximately $12 million of temporary and COVID-related expense reductions. We expect approximately half of these reductions to repeat in Q2, Thank you for joining us. We expect software and products revenue to be at least flat year over year or $69 million.

12:50 Please note that the subscription renewal opportunity in Q2 FY21 is the lowest of the year. In addition, the SME segment remains challenged and COVID continues to create overall macro uncertainty. That said, we believe our renewals, enhanced product and pricing strategy, and refined go-to-market motion Thank you very much. As a result, we expect OpEx to modestly increase sequentially.

13:47 We will remain disciplined in aligning our underlying operating expense base to current revenue levels, and we have identified other potential cost-saving actions. With that, we expect Q2 FY21 EBIT margins to be approximately 13%. Lastly, our projected share count for Q2 is approximately 47 million shares. Now I'll turn the call back over to Sanjay for some closing remarks.

14:13 Sanjay? Thanks, Brian. Before questions, I'll take a moment to reaffirm our focus on portfolio partnerships and executional excellence. First, I believe portfolio advancements like Hyperscale X demonstrate our commitment to innovation and bring immense value to our customers. Second, our strategic partnerships and endorsement from marquee customers like McDonald's and Johns Hopkins reaffirms our ability to provide the flexibility and choice customers need. And last, with our expanded portfolio, impressive partner ecosystem, and execution items, we believe we can drill the top line while increasing our efficiency. Our performance this past quarter is a solid indication of where we expect to take CompVault next. Mike, let's open it up for questions. As a reminder, to ask a question, you will need to press star 1 on your telephone.

15:04 To withdraw a question, press the pound key. Again, that's star one to ask a question. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jason Adder from William Bayer. Your line is open.

15:28 Ask a little bit about some of the large deals, in particular the eight-figure deal. Could you give us a little bit more color on Maybe the vertical and exactly what type of project it was. What were they trying to do? Was it a competitive displacement or was it a renewal? And then just to clarify that there was a large chunk of this that was recognized up front because of 606.

15:57 Jason, how are you, Matt? So it was financial services. It was a competitive displacement. We had a small footprint in the account. And the customer had a very unique use case that required our activate product speech to come in and sort of show what we could do from a data optimization point of view. And then, obviously, they wanted to make sure they protected all that. So it was an activate led and data protection followed. and the bulk of that, a lot of that was done with a partner and done remotely.

16:41 Yeah, Jason, this is Brian here. Just to add some additional color to that. It was actually a deal that was sourced and closed within quarters, so we did not pull it in from future quarters. We were pleased to see that we could do that in this current environment. And then secondly, you also asked about the recognition of it. The software component was recognized in quarter in fiscal Q1.

17:04 Okay, great. And then I guess give us a sense of having a quarter like this where you had a lot of large deals closed. I mean, pretty impressive numbers on deal size, et cetera. What do you attribute that to? I mean, we're in a pandemic. I wouldn't expect, I guess, customers to be and many more.

18:00 Once the implications of COVID became real, data protection came back on the agenda for customers because with that data fragmentation, remote workers, no access to data centers, data protection, business continuity bubbles up to the top as being important. And so, you know, I think once the first shift, structural shift, if you would, of saying, okay, this is the new world order happened, then, you know, as part of the reprioritization process, data protection did bubble up to the top. and that's how I look at it. Brian, anything you want to add?

18:35 I think we benefited from a good start to our subscription renewal opportunity and I would say that incumbency right now with existing customers is critical. We're able to really make sure that we're taking good care of them and they're coming to us in a lot of cases as well. We're pleased.

18:58 and the other two very large deals that you cited were those renewals? Yes. Yes. Yes. Thanks, guys. Thank you. Again, to ask a question, that's star one on your telephone keypad. Your next question comes from the line of Aaron Rekers. The line is open.

19:22 Yeah, thanks for taking the questions and congratulations on the solid quarter. I want to kind of dive a little bit more into the subscription opportunity. As we think about the contributions of that opportunity, is there a way to frame for us how we should think about the base of subscription opportunity that you're executing on through the course of this year? Any kind of framework of how large that could be or what that base of business looks like? And then also on that topic, You talked a little bit or mentioned in the prepared remarks about, you know, cross-sell, up-sell, you know, opportunities. What have you seen so far? How do we think about that, you know, in the context of going after those subscription opportunities?

20:09 You know, Sanjay, hey, Aaron, how are you? Great. So I'll take the latter part of your question first, and I'll let Brian tackle the first part. You know, overall with subscription, you know, as we talk to our customers on a – and more classic, you know, land expand renew sort of cycle. We are sharing, you know, things like our new DR product that was just released, Activate, which allows them to do more with the data they have, Metallic, you know, for remote branches and Office 365 type scenarios. So we have an opportunity with the portfolio now, early days, but we have an opportunity with the portfolio to really take and more to our customers as they evolve in the lifecycle of what we're calling intelligent data management.

20:57 Good morning, Eric. It's Brian here. So just to touch on the subscription opportunity, you've been following us for several years now. We've been on this journey, and it's reassuring to see that what was a headwind for us is now starting to become a tailwind. In last fiscal year, about 40% of our software and products revenue was from subscription-based pricing models. This past quarter was almost 70%. We think that the majority of our software and products revenue is going to continue to go towards subscription. So we're happy with that. We think that's a great opportunity for us, both near and long term. Also, the renewal opportunity that we spoke about on prior earnings calls represents about a $50 million software opportunity for the year.

21:48 The majority of that's in the second half. Q2 specifically is the low point of the year in terms of the opportunities. That's why we're being a little bit more cautious with that. But we're off to a really good start in Q1. As I mentioned, we had our net retention rate was above 100%. We're pleased with that start for the year. And we're seeing opportunities now with our new product launch, of increased cross-sell, upsell opportunities that will come as the year unfolds in time.

22:17 That's perfect. And then just as a real quick follow-up, on the cloud side of the business, can you talk a bit more about the strategic alignment with Microsoft? When do we think that that starts to kick in from incremental revenue contribution perspective with Metallic? And then I think in the past you've talked a little bit about how much data you've managed into the public cloud arena. Can you just give us an update, you know, how that's progressed?

22:45 So, Aaron, the way we look at it is this is, you know, we've – this is not our first relationship with Microsoft. We've had a multi-year, you know, successful partnership with them. This one's focused on SaaS, Azure, Metallic, and – and it's, again, it's a multi-year, you know, our ambitions are multi-year. So, you know, I think we'll start seeing traction as we build out the plans, you know, later in the year and beyond. On the, we're excited about that. I think it's a very nice alignment. The technology and the engineering is, we've made some commitments to really make sure that we work tightly together for customers and solutioning, go to market, all elements of the relationship. But there's work to do and to make it real.

23:30 On the number that we've shared historically, we've been getting around internally that it's gotten to the point where billions and billions serve, so maybe we don't release it. But I would say to you that well over at Exabyte, it's been written based on what we have been reporting, and it's growing roughly 15% quarter on quarter. And that's a healthy clip. That tells you our place in the public cloud for customers and data. So... That's where we're going. And you saw what Gartner said in the critical capabilities list. Across virtual, physical, and cloud, we're number one.

24:11 Perfect. Thank you. Congrats again. Thank you, sir. Again, to ask a question, that's star one on your telephone keypad. Your next question comes from the line of Alex Kurtz from KeyBank Capital Market. The line is open.

24:29 Yeah, thanks for taking the question. Just back to the renewal opportunity, given what you saw with the Dave Baker deal, I guess the high-level question is the move to subscription, has this helped you improve the competitive nature of these larger deals? I guess, are you able to see better win rates with deals over, say, half a million dollars because of the move to subscription? And I guess, how does that and many more. So, what impacts your view on future renewal opportunities and the size there? So, large deals, move the subscription and how this changes the competitive nature in these larger opportunities.

25:12 Good morning, Alex. It's Brian here. Let's try to unpack that in a couple different categories. So, yes, I mean, the renewals, the opportunity that it creates is really refreshing to see. So, we've been at this for a while. Thank you very much. This gives us more options in terms of their workloads, whether they're moving to the cloud, whether they're distributed data fragmentation.

26:05 We help them pull that all in. And sometimes they prefer a subscription model to do that, and often we lead with that. So it's a choice we offer them.

26:17 A subscription renewal piece, it's our first year. We've had one quarter under our belt. We've gotten ourselves ready, but these are interesting times, so we're just making sure we stay focused and conservative.

26:35 Any comments on it?

26:36 This is a follow-up to 50 Million, Mark Bryan. Has that number changed much since you started talking about it last year? It has not.

26:45 It has not. It's basically stayed in that range. Okay. Thanks, guys. Thank you. Your next question comes from James Fish from Piper Sandler. Your line is open.

27:02 That's in the quarter, guys.

27:03 I appreciate the additional ARR disclosure. I just wanted to double click on the average deal size record and get more color there. What caused the large seven-figure deals record? Meaning was it kind of upsell related or was it cross-sell and bundling efforts? Just wanting to understand a little bit more around that greater than $400,000 marking in terms of what drove it.

27:27 Yeah. Hi, James. It's Brian here. So a couple different things. We did enter the quarter with some large renewals already at hand. We disclosed that on the last earnings call that and so on. So that drove the need. And also the new product offering specifically of Activate really resonated with that customer and helped drive the deal.

28:13 Yeah, I'd add that I would add, it's Sanjay, James, that, you know, I've been talking now for, what, four or five quarters on execution. and so forth. So, you know, that's what we were hoping to do. So, you know, that's helping as well.

28:39 And keep in mind, James, I mean, a lot of the sales leadership is only here for less than a year, in many cases like nine months. So, again, to Sanjay's point, that leadership is starting to show up in the field in the form of, you know, knocking down these enterprise seven-figure deals. Yeah, no, agreed. It was good execution.

29:00 And if I can just sneak in two quick ones for you. So last week, you hosted Future Ready. I guess what was the main feedback from the product launches in terms of what was really of interest with customers? Obviously, you had a bunch of new announcements, just curious as to which one generated the most interest. And then just understanding it is becoming more integrated, like with Hyperscale X, but what was Hedvig's contribution this quarter?

29:26 So, you know, I can't pick a favorite child, so I'm going to say that, you know, the feedback broadly on the portfolio and bringing the pieces together made a lot of sense to the folks that follow us both in the industry as well as customers. And so the sense is that, you know, the life cycle of simplifying technology and making it more granular so they could work with pieces of it, all of it, some of it, really was appreciated. I'd say that you asked about Hedvig, and we've been reasonably quiet at work integrating Hedvig into the core. And when I say that, this is sort of the vision we put out when we acquired Hedvig, which is bringing the best storage management capabilities and coupling it with what we're best known for in data protection and bringing customers a true scale-out capability That is next generation. And it's super, super simple to use.

30:28 We've really focused on simplification as a core. Hedwig is a standalone. Customers are looking at it, using it, kicking the tires with it. And now we've really enhanced our – we always had it, but now we've really enhanced our container capabilities in the product with Kubernetes support and automation backup capabilities inside of – and Edvick Spire Systems so that we're really giving DevOps and DevOps customers a DevOps-native way of sort of doing this. So, my advice, depending on the audience, it was well-received, but what was really well-received was the simplification of the portfolio and the use cases.

31:07 And, James, just to add one more point in terms of hopefully pick up in the script where I said that we do have a cost avoidance that's not insignificant. With the introduction of the Hyperscale X, and the underlying Hedwig technology behind that, it helped us to reduce our cost of sales moving forward by about 100 base points. That's not insignificant. So that was another component of this launch.

31:34 Yep, understood. Thanks, guys. Thank you. Again, to ask a question, that's star one on your telephone keypad. Your next question comes from Brent Hill from Jeffries. Your line is open.

31:50 Hey guys, this is Joe. I'm for Brent. Thanks for the question. Really appreciate all the subscription color. It's really helpful. In regards to America's software, it grew significantly while the rest of the world seemed to decline. Is that due to most of the renewal days being in the U.S. or is there other reasons for that?

32:08 That was true. Absolutely. The large portion of the renewals are in the Americas as well as the largest PO that we were able to pull in was from the Americas as well. Yeah, so that's just a really good fact for us coming out of this.

32:26 Yeah, good execution in the U.S. And I think in EMEA, we still saw a little bit of the COVID, the tail end of the COVID impact, you know, the first phase that we, and we're more exposed to sort of medium-sized businesses in Europe.

32:43 Okay, awesome. And then there's different puts and takes because of COVID, right? I mean, you Thank you for highlighting the $12 million benefit from COVID on expenses. But you grew nicely for the first time in a few quarters, and then now you're guiding for a slight decline in revenue growth next year. But then on the bottom line, it's improved. So just can you help us think how you're thinking about this business longer term for the next year or two as far as revenue growth and profitability?

33:10 Yeah. So it's In terms of software revenue, my comment was at least flat year-over-year, and that's really the driving force for us. Yes, we acknowledge that total revenue is slightly down year-over-year. We are at an inflection point for the quarter, as we said. We're still in the COVID uncertainty right now. Our renewal opportunity is not as large. In fact, it's much less than it was in Q1. We think that SME, the small and mid-enterprise, is particularly impacted by the COVID uncertainty, so I think there's some weakness there. Having said that, we're optimistic about the second half of this fiscal year and a return to growth. You know, we're going to have the larger subscription renewal opportunity.

33:57 We'll have more quarters under our belt in terms of our overall, you know, rep aging and experience and maturity. And we also have the new products and pricing strategies that we just unveiled. So the combination of all those things and hopefully we come out of this whole COVID uncertainty by that point in time. But we are poised to return to growth. That's our objective.

34:23 Awesome. Thanks, Brent. And if I could speak in a quick one. So you've highlighted the $50 million opportunity from 2018. Any sense of how big the opportunity is from 2019?

34:32 We did not. It's going to be up. We will get into that on future quarters in terms of unpacking that opportunity. Awesome. Appreciate it. Thanks. And your next question comes from the line of Eric Martinuzzi from Lake Street Capital. Your line is open.

34:54 Hey, my congratulations as well on the Q1. I was just curious, you know, going back to the guidance for the first quarter, the midpoint being about $153 million and then the execution at $173 million. Can you help me kind of parse out that $20 million of upside versus where you were when you gave the guide?

35:17 Good morning, Eric. It's Brian here. So obviously the large deal that we discussed, right, that was sourced and closed in quarter, we do not have visibility into that at that point in time. I think that we were also being slightly cautious back in early May, right in the middle of the COVID crisis. You know, we didn't want to Get Over Our Skis

36:08 We'll get into more specifics on that when we unveil longer term guidance during the year. I wouldn't expect that to be the baseline for this quarter. That's pretty hefty at 69%. Having said that, it should be north of 50% easily. Okay, that covers it for me. Thanks. Thank you, Eric. Thanks. Again, participants, to ask a question, that's star 1 on your telephone keypad. We have a question from Jack Andrews from Newham.

36:55 Your line is open.

36:58 Good morning. Thanks for taking my question. I was wondering, just given all the new product offerings that you're unveiling, where are you in terms of educating the channel on some of these new capabilities?

37:11 It's an ongoing thing, Jack. Sanjay here. You know, we unveiled them last week. And we're in the throes of getting the channel up to speed, enabled, you know, getting ready to sell it. So that's activity that's well underway.

37:30 Okay. And then just as a follow-up, when we think about the introduction of products like Hyperscale X and some of the New capabilities around backup versus disaster recovery. Is this, generally speaking, requiring you to engage with a different type of buyer in organizations?

37:49 No, no. Between disaster recovery and our data protection products like HyperscaleX, the buyers tend to be similar. Where we do have to talk to a newer kind of buyer is more DevOps, And your last question comes from Sreeni Nanduri from Summit Insights. The line is open.

38:33 All right, thank you for taking my question, guys. Congrats on the quarter. Sanjay, in layman terms, can you explain to us what Hedvig brought to Commvault and what problem did it solve for you and what are the use cases for the hyperscale solution you recently launched? Thank you.

38:48 Okay, let's unpack that. So Hedvig, as a product, is what I like to call a next-generation software-defined storage system. So it was built for its multi-protocols. and so when I say multi-protocol it does virtual machines, it does containers, it does object storage and so on and so forth. So in one software layer you can do multiple types of applications. What it brought to us was that rich capability which we've now and so on. So that's how it's helped us integrate and the entire stack that we present as part of our hyperscaler.

39:51 It's tightly integrated. It's super simplified for customers. In a few clicks, you're up and running and doing complex data protection use cases. On its own, we've also enhanced, with the latest release of Hedvig, a lot more Kubernetes and container capabilities that DevOps-type engineers can use to build next-generation containerized applications. So it's all of that. I hope that was the right level. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for joining.