Q4 2020 Earnings Call

Welcome to come but fourth quarter full year 2020 earnings conference call.

Thank all participants are the listen only mode I could speak or presentation. There will be a question answer session asked a question during the session. Please press star one on her telephone. Please be advised that today's conference is being recorded fear for any further within like the star zero.

Dallas to hand, the call first or what's your speaker today like Melnick stature of Investor Relations. Please go ahead Sir.

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

We began 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 in future performance.

Well the statements that relate to our beliefs plans expectations or intentions regarding the future pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, and a based on our current expectations actual results may differ materially do any risks and uncertainties such as competitive factors difficult.

Season delays inherent with development manufacturing marketing and sale of software products and related services in general economic conditions.

A discussion of these other risk factors and uncertainties affecting our business.

We see the risk factors contained in our annual report on form 10-K, and our most recently quarterly report on form 10-Q, and the other S. You think filings and in the cautionary statement contained in our press release and on our website.

The company undertakes no responsibility to update the information on this conference call under any circumstance. In addition, a development and timing of any product release as well as features or functionality remain at our sole discretion a press release related to today's enough that was issued over the wire services earlier. This morning and has also been furnished to the FCC as an 8-K trying.

Alan The press release is also available on our Investor Relations website.

On this conference call, we refer to non-GAAP financial measures reconciliation between the non gap 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 Campbell, and buying Carolyn Chief Financial Officer of Campbell, Sanjay Brio, each year opening remarks and commentary before we open the call for QNX 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 in fiscal year Twentytwenty results.

I would like to begin by extending our thoughts or the million suffering from the corner buyers and the subsequent economic hardships across cobalt.

We are focused on keeping our employee 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 we're already remote workers quickie adjusted with minimal disruption to our operations.

I would like to thank all our halters, we're stepping up to ensure a business continues without interruption.

I would also like to acknowledge the teams creativity and helping our customers that jumps to.

Recognizing the pandemic introduced new data challengers for a much larger remote workforce, we created a combo cares program to provide customers with additional software support an education at no cost until sometime.

This includes offering metallic endpoint backup and recovery with unlimited Asher backup storage, but my good friends of Microsoft.

To protect against data corruption deletion malware and ransomware attacks.

To date hundreds of customers have access to trials and benefiting from the program.

As you know the pandemic presented some challenges for us.

During the quarter and 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 as much will enable us to whether these two these challenges continue leading our industry for the long term.

This is reinforced by the improved performance we delivered in two prior quarters, we expected the carried that momentum into Q4, the cold weather impacted BJ and EMEA throughout the quarter, then extended to the Americas in March. Despite this we closed multiple seven figure deals and won many new customers, including.

Mcdonalds.

New Cross Blue Shield, Minnesota, the city, Philadelphia, the Polish Ministry of Finance and shared services, Canada, which provides I'd services with the Canadian government.

We launched a target targeted competitive switch campaign and kicked off by fiscal year 21 subscription renewal cycle and the two of our largest customers renewing their deals.

So I'll start out look what total software and product revenue, it's more measured had been a pre colbert expectations. We've seen a decline in the volume of smaller portfolio transactions do <unk> likely to discuss it'd be customers that maybe disproportionately challenged.

Additionally, we believe customers may differ.

Routine capacity add ons until economic conditions, we can begin to stabilize.

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

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

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

Even with the expected pressure, we believe we have to staying power to emerge from the spend that make us a stronger company because of our.

Maybe to product strategy, our large and loyal customer base and growing some softer subscription and recurring revenue base.

Let's discuss interesting.

First our innovative product strategy, we advanced our storage and data management vision by integrating had big what combo completes its all customers hardest data management problems. This provides customers more choice and flexibility with their data would that be large upfront investment with more milestones and use cases coming.

We will have additional capability just to cross sell into our customer base will share more on the road map into future.

Additionally, we continue to roll out our SaaS solution metallic customers increasingly want a flexible consumption based on cloud centric solution to support their infrastructure remote operations that endpoint devices metallic meets this handle and is the ideal platform for future SAS offerings.

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

Conservatively.

We estimate that all software already manages more than an exabytes of customer data in multi cloud environments.

Before we added support with several cloud native applications and expanded our capabilities to enable customers to accelerate the clock using.

Wonderful cloud success stories, as Mcdonald's, whose Directorate cloud services Douglas let upset quote.

Nothing heavily in the cloud to keep all righty operations running the softest solution from comp that's got across every you stays Mcdonald's cloud services team has come all solution tunes performance across Cws, and Microsoft Azure cloud service and drives cost savings.

Mcdonald's realizes value from a trusted then a bit of team with humbled and cool.

This is a Premier example of how we're helping our customers moment, modernizing bargains and accelerate that pops to the cloud even in the midst of an unprecedented corner.

The second reason, we have staying power, it's our loyal world class customer base, the majority of which or large well capitalize enterprises with whom we have long standing relationships. The average tenure I thought customers is nine years, and our historical maintenance suites of approximately 90% across our customer base more impressively.

97% among our top hundred customers.

Given not divorce base.

We're not disproportionately exposed to any one industry, having nurtured customer relationships for decades, we believe in our incumbency isn't asset.

We have the right go to market strategy and acutely focused on a customer success.

We just hosted a horse ever old virtual sales kickoff and Q1 is off to a strong start.

The third reason, we have staying power as a subscription and recurring revenue streams no growth driver for us in fiscal year 21.

In Q4, we added approximately 150 subscription customers and revenues now represent about 40% soft Clint product revenue.

This 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.

Right.

Thanks, Andre 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 fyseventeen.

As a reminder, we began our transition to a more subscription based recurring revenue model in F. Why 18.

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

Services revenue with 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.

Yeah for 20 operating expenses declined 3% year over year to $459 billion 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.

Talent and had big.

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

Free cash flow, which we defined 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 872000 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 five years, we repurchased over $600 million bar 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 31st 2021.

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

Given the uncertainty and limited visibility associated with Cobot 19, we're 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 two thirds 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 and smaller transactions in the last weeks of March as the virus spread and economic shutdowns and TEP 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 F. why 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 two of our largest subscription customers. These renewals were signed in Q4 before their contract expirations and we'll rep represent combined software revenue of approximately $10 million in Q1 F. Why 21 way.

We're working diligently to exceed our guidance and to deliver year over year software revenue growth.

In response to cope with 19, we may temporary but prudent adjustments to our expense structure to aligned with the current revenue environment.

With these adjustments are underlying opex is down sequentially.

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

We will continue to monitor this situation and we are 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 saw Jay for some closing remarks Sanjay.

Thank you Brian.

I joined combo with a commitment to returning the company to responsible growth and this continues to be our number one priority.

During this difficult time, our strong balance sheet, rich technology portfolio, and custom and loyal customer base position us well to weather the storm more importantly, our resilience in response to the crisis is only deepened my conviction in console successful the long run.

I am confident you have the talented team and the focus needed to further strengthen our customer relationships and partnerships. During this crisis in season, 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 two questions.

Thank you as a reminder to ask a question do you want me to press Star One I heard telephone withdraw your question press the pound cake.

My first question comes from Aaron Rakers Wells Fargo's. Your line is the open.

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And Aaron if your phone is on mute seasoned meal.

Yes, sorry about that guys.

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 one Q guide can you help us understand what the base of business is that that is actually you know the subscription base that we should think about for the full fiscal 21, I guess what were.

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 2001.

So on track it ticked I wonder if you want.

Sure.

Good morning, Eric It's Brian here I hope, you're well yeah. So as you know it's early days for us with new subscription renewals, but we're off to good start as I mentioned on the call we successfully renewed.

Two of our largest renewals and our Q4 that will be recognized in fiscal Q1.

So just to frame out the opportunity. We we believe there's about a $50 million software opportunity coming up enough why 21.

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 worked with customers to optimize their use of our platform and software and strive to strengthen that relationship and contacting that customer well in advance of one that renewal is coming due.

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

Okay. Thank you and then as a real quick second question three this last quarter last month, or so you announced some patent litigation against a cohesive rubric can you just help us understand what you're exactly currently see in the competitive landscape and the metrics you're taking the versus two two competitors.

I'll take that offline.

Aaron.

I hope you well as well.

I I I've said this through the course of Oh, the year that I've been here that are our portfolio our technology portfolio.

Is second to none and and we continue to invest in our portfolio.

Massively we think we've spend or 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 are our ability to truly help customers use data with activate our all coming to the core. These are all use cases that.

Absolutely be our super relevant and and customers are talking to us and using our technology for it so.

Focus really on on on our technology, making sure that.

Making sure that we continue to lead in that space and and and on the lawsuit really it's I don't want to compete against ourselves.

Thank you.

Thank you and your next question comes from Alex Kurtz of Keybanc capital markets. Your line is now open.

Yeah. Thanks for taking that the question hope everyone. So safe and healthy on your end just to follow up on on Aarons question.

How do you think about sales comp sales structure you go into this renewal opportunity this year and.

Then maybe behind.

Given what you're seeing in challenges in the in the SMB space.

Are you going to Revaluate.

That part of the business right now and how you work with channel partners, maybe lean on them more and maybe refocus some of that selling capacity to the mid market.

So kind of two questions there that.

The comp structure renewals in the approach and then how you're thinking about SMB. The next six months in how you go to market.

So I wish I could take the first piece if you want to take the second piece.

So good morning, Alex its Brian here hope, you're well morning, as well so with respect to the subscription renewal opportunity and and compensation. We've got a very well organized approach internally here or there are incentives in place for our field to be involved and actively involved with.

These renewals, we haven't well segmented.

Quarter to enterprise and SMB.

And that's also working hand in hand, with our customer success organization. So it's a it's a multi pronged approach and we are well aligned and they're incentivized.

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

I'll take the second part talks about not all them. The same location. Obviously, so it's a little it's a little more hand only than usual whether in the same room. So yes, Alex good too good to hear from you.

To your question SMB non SMB channel would it be thinking wherever you're playing resources. This is this is a it's a great question because all over the over the course of last year.

We talked extensively be shared extensive me, but our our simplify innovate execute model and part of execute was really to make sure. We had a customer segment model that that.

The non.

But the opportunity wasn't where the business was about partners for and so you know for us.

Our enterprise business.

As one that will be we like I said, we've been we've been in that business. A long time, you've got great relationships continue to stay close and and as our customers come out at this I think we'll be will be will be good on the SMB are a product offerings much like like metallic.

A very attractive their lightweight cloud oriented they help customers about size.

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

Our portfolio and made made it easy for them to sort of use the technology and this and this during the course of those pandemic throughout customer cares program.

And we think that our offer I.

I think that we've aligned well with that and to support the the partner channel, which which is really leading and some of this we haven't I start team. That's that's a that's active in mobile so.

Hopefully I answered your question, we feel good about that sticks.

Thank you.

Being killed and our next question comes from Jason Adir will explain your line is now open.

Hi, guys.

Okay well.

First question for me.

Is we're you know.

12, now so you're almost a month and a half into the quarter can you talk about any change in trend versus March for me what do you see.

First six weeks through the quarter relative to what you saw in the month of March.

Let me I'm sure Hey, Jason.

That sounds right. So you know I think I think it's a great question. Then we're monitoring this all the time I'm.

Talking channel partners talking to even talking to customers. The you know the they've been to strike the though the structural shift in the market. If you would you know when this but all of the Superstardom happening the work from home scenario.

Customers by adopting we adapted I think we've you know.

Six weeks now into the quarter I think people to sort of finding their freedom.

This new world order and the remote and the remote environment.

So what we did was.

We put our customers compile cares program into place.

Stay close to customers you know, we're helping them through there's an increase in say ransomware and security threats at this stage, we're helping them to that we drink by helping them, but monitoring because they can't get too there.

They can't get to their datacenter, sometimes in full force.

You know and and we could you be internally pivoted very quickly as they had as our customers and partners.

So we didnt everything we can to stay close but there's a lot of conversation about cloud now more so I think I think there's there's been a fundamental acceleration and customers plan stood up and embrace public cloud scenarios. Our products are campaigns and our conversations are are all aligned to that.

So we feel we feel pretty good right now it's it's it's a lightweight cloud oriented.

Thats why that's the.

Thats. The next wave if you would have of conversations after the structural shift and work from home scenarios up and sort of some must be settled.

But no but no.

Material change in terms of the a the tone of business or.

Anything that well.

You know data protection is is a you know is high on the list spend in specialty, especially as you have remote workers and new data scenarios. This is this is bubbling to the top but I think you know as customers initially have to respond they have to sort of prioritize what it is and that was but working from home getting the endpoints sort of sorted out.

And now we're having having conversations again, where you know where customers. How can you help us and there's a strategy valid do we have gaps.

There's expansion opportunities. So the conversations are begin again, but it varies and it's a it varies by by geography and it varies by by segment.

Okay, Great and then secondly.

Yeah, I think theres 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.

You know the success rate of of those.

So those upstarts trying to go after your base just given that there is seems there does seem to be an advantage of incumbency right now.

You know going after new customers trying to trying to shift at this at this time as hard it's hard because right now what we're telling our customers is.

Here to help you weigh in here to make sure Youre your secure way need to make sure that you've got what you need and incumbency matters I.

I think incumbency is king of these points and having having those conversations with customers is what matters.

Hi.

Honestly, Jason I was I was a big believer and focusing on the fundamental run a good business kept the right balance you don't have good free cash flow. We've always tried to do the right thing and running a good.

Fundamental solid fundamentally solid business.

At this point as is.

It's key customers want us around and that's that's what we're focused on.

Can't speak for the competition.

Okay. Thank you.

Thank you and again, ladies and gentlemen, if youd like to ask a question at this time. Please press Star then one I touched on telecom.

Our next question comes from friends Dallas Jefferies. Your line open.

Hey, guys. This is Joe on for Brian. Thanks for the question given that net new logos will likely struggle in regards that 50 million renewal opportunity what are the renewal rate assumptions and then maybe can you walk us through the opportunities for up so is it three years of usage or is there an opportunity beyond 50 million, where the pricing dynamics with the two large deals that already close.

Sure I'll I'll take that once Andre so they're good morning.

So as we framed out the opportunity we are being somewhat measure in our expectations. It's early for US you know just to be completely cabinet. This is the first year of a significant for renewal.

Cycle and they typically our three year contracts.

And with the way our 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 or the two large ones that we renewed in Q4 that will be recognized.

In Q1, we're hoping to get into exact specifics, but I will say there two of our largest more tenured customers. This fall goes into the customer success discussion.

We have regular dialogue and QB ours with them active dialogue right at the top and.

We're pleased with the.

The result of those renewal.

And as we look out over time, we've got a strong product pipeline and you know our expectation is to have these upsell and cross sell opportunities with our new product portfolio.

Thats available, but also coming available later in the fiscal year.

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

Okay. Paulson that's helpful. And then I know you guys 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 an assay and come out of those conversations or any change in strategy between growth and profitability.

I think would be helpful. Thanks.

Sure I'll take that one sorry, if you want yeah, 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.

The shareholder feedback and suggestions and we'll continue to act and their best interest in our company's best interest.

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

And I think you know there their expectations and their wants or the same as ours. We're aligned in terms the long term shareholder value and a balanced growth profile for the business.

We're excited about the opportunity once we get through this hopefully temporary period of time.

Awesome. Thanks, guys.

Thank you ladies and gentlemen, this does conclude our question and answer session. This does concludes today's conference call. Thank you for participating you may now disconnect.

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