Q2 2021 Commvault Systems Inc Earnings Call
Sanjay and Brian will eat share opening remarks and commentary before we open the call for Q&A.
Now turn the call over to Sanjay Sanjay. Thank you Mike. Good morning. And thank you for joining us today. I'm pleased to share that we delivered on other quarter of balance top-line growth and improved profitability key elements of prohibition are coming together in Q2 resolved continued adoption of our portfolio driving total revenue growth metallic platform crossed into multimillion-dollar ARR the net all the retention rate for a subscription business exceeded hundred percent for the second quarter in a row with our focus on go-to-market execution just as we had in q1, we landed multiple seven-figure deals in the Americas additionally Europe had a solid quarter with your on your and quarter-on-quarter Grove to this our focus on operating efficiency drove healthy margin and profit growth.
Our strategy as evidenced by these results is working when I talk to customers two things continue to be on top of mine navigating their Journey to the cloud and Sakura data in face of threats, like rent somewhere I'll go is to provide solutions that make it easier for customers to address these challenges.
Regarding plowed a newly-introduced Solutions and Partnerships are helping customers move to the cloud faster each quarter. We're seeing double-digit sequential growth in the amount of customer data moving to the public Cloud. I metallic salts offerings are also off to a strong start metallic now protects tens of thousands of Office 365 mail boxes and end points and more than 5 petabytes of data per page customers with 80% of those customers being net new to compost in Q2 and we're excited by the many accolades and awards. It is received. Most recently a coveted best of being World award.
Between metallics Rich Innovation roadmap strategic partnership with Microsoft and the upcoming expansion into new markets and geographies. We look forward to sharing more updates to the quarters to come up with regarding security security conscious customers dealing with the scourge of ransomware are trusting cam bolt to ensure they can recover their data and get their businesses back up and running ransomware incidents wage here to be at an all-time high the FBI estimates a 400% increase in ransomware attacks that were pre pandemic levels and rethink this to across our customer base in September alone a college success team before more than a thousand business-critical restores worldwide for our customers following ransomware and malware attacks. We are proud to be the trusted partner customers turn to when rep strikes
The rising ransomware is one of the reasons we launched a security dashboard in Q2 to help customers identify and resolve security risks additionally with ranch over top of mine. We introduced Carl possessed recovery Standalone product that simplifies the customer experience. We believe these Trends in cloud and security represent a Tailwind for us because we have the innovative solutions to help customers both these critical needs while Innovation is our lifeblood. I also understand how wrong Innovation can sometimes act the complexity complexity and undermine value. I saw this when I was a CIO, this is why we know that Innovation with Simplicity is the key combination in July. We launched new flagship products Next Generation combo of hyperscale X. It can capsulize power of all things controlled world class data protection had been distributed storage and seamless connection to the cloud be a metallic delivered as an integrated scale-out Appliance. Yep.
manage under a single
Simple and elegant pain of loss. This is the vision. We laid out a year ago and delivered on it in Q2.
In addition with hyperscale acts we introduced devops oriented multi-cloud container data management and expanded data protection capabilities with kubernetes workloads while our competitors are struggling to pull together. They contain a strategy and making pre-announcements. Our customers already confidently using compost storage and data protection for containers in production.
So the bringing together the priorities around cloud and ransomware metallic cloud storage service is the next exciting new offering in a rapidly expanding SAS business this new service makes access to secure cloud storage as simple as as a click-of-a button within the compost Command Center or single-pane-of-glass. It is built with layered are gaps Cloud security and we believe it is the ultimate cloud-based solution for ransom Bay Packers.
We believe this blog for a strategy is driving or return to growth our industry-leading technology paired with newly packaged products and modern licensing options is making it easier for customers to accelerate Cloud Journeys embrace the workloads reduced Mass data fragmentation and manage security threats on valders. Once again, become the leading force in our industry whether it is the most urgent off the day, so just cloud of security critical emerging areas such as containers or formidable Partnerships that like that of Combos and Microsoft that have value for customers. Our approach is not only best-in-class. It's becoming the industry Playbook bottom line. We have the right Vision customers and Prospects are seeing the value of our portfolio and we are executing with that. Let me turn it over to Brian to provide some financial highlights and IQ 321 out. Look over your Brian. Thank Sanjay and good morning everyone. We're pleased to report for a second quarter in a row. We were able to deliver top and bottom line growth specifically wage.
Successfully executed on subscription renewals added more new subscription and SAS customers posted Healthy Growth and had another quarter of solid margin expansion pack review. The results total revenue was approximately $171 up 2% year-over-year software and products Revenue increased 5% year-over-year off 72.3 million dollars software Revenue growth was driven by large deal revenue and continued success in our subscription business large deals represented 66% of software Revenue in the quarter compared to 64% a year ago revenue from software transactions over $100,000 increased 8% year-over-year to a page Forty-Eight million dollars the volume of these transactions increased 11% Year-over-year average deal size was approximately $319,000 revenue from birth.
large deals group
Across all three regions we close multiple seven-figure deals in the quarter with the America's leading the way we're encouraged by the growth in the large deal pipeline as we enter the second half of our fiscal year.
We also saw a rebound in deals under $100,000 revenue from these transactions grew both sequentially and year-over-year with solid improvements in the Americas and Amiya Thursday.
Fiscal second-quarter Services Revenue was to a more recurring Revenue based model as a reminder FY 21 marks the first significant year of our subscription renewal cycle.
Which represents a positive inflection point for our business, we expect the renewal cycle will continue to be a revenue Tailwind for the next several years as our business moves more torque Revenue over time. We will be increasingly focused on the following three operating metrics to align are reporting with the way customers consume our products and services page our subscription as a percentage of software and products Revenue recurring Revenue as a percentage of total revenue and annual recurring revenue or a r r now take a moment to get us each of these three metrics in Q2 FY 21 subscription Revenue represented 53% of total software Revenue. We added approximately 200 subscription customers and our subscription net retention rate, exceeded 100% for the second consecutive quarter, which indicates we're executing on expansion opportunities across our base wage.
Our total recurring Revenue increased 6% year-over-year to $129 and represented 75% of total revenue in the quarter wage last quarter. We introduced annual recurring revenue or a r r we Define a r r as the annualized value of Cam bolts recurring revenue streams at a point in time as Thursday September 30th r a r r increased 9% year-over-year to approximately $483. Now I'll discuss expenses and profitability you to FY Twenty One total expenses, including both cost of sales and operating expenses were flat year-over-year at $100 growth and software products Revenue combined with our discipline around expenses resulted in even of approximately $29 a 17% year-over-year increase ebit. Margin expanded 210. Yep.
Points year-over-year to 16.9% Let me now shift gears and discuss cash flow and the balance sheet for the quarter. We generated approximately twenty-five million dollars of free cash flow. We ended the quarter with $394 in cash and cash equivalents and continue to have no debt on the balance sheet. I'd like to address the non-cash impairment charge that took it in our press release issued earlier this morning. This accounting charge is primarily due to the revenue performance of the Standalone head big product, which do not meet our initial assumptions as a Founder this storage Technologies absolutely strategic to our portfolio was the primary motivation behind her acquisition and was integrated into our hyperscale X offering in less than a year off of this technology gives us capabilities that remove Reliance on third-party vendors will drive meaningful gross margin expansion on our hyperscale platform and improve the overall customer.
Now I'll discuss our financial outlook for Q3 fy14 the third quarter of FY twenty one. We expect total revenue of approximately $170 a month to $170 billion dollars. We expect software and products revenue of $77 to $79 million dollars. I'll take a moment to provide some additional color on Q3 revenues with the launch of hyperscale X in Q2. We will start to see the elimination of pass-through Hardware revenue from appliance sales the absence of this pass-through Hardware Revenue agent represent a fiscal third-quarter top-line headwind of several million dollars.
Expense side. We expect to start seeing gross margin benefit from reduced third-party royalties associated with hyperscale x the reduction of the app for mentioned Hardware pass through revenue and cost efficiency measures that we have implemented in our customer support function. We remain disciplined and aligning our underlying operating expense base to current Revenue levels. We expect Q3 2018 total expenses to be down modestly year-over-year resulting in ebit. Margin of approximately 17% are projected share count for Q3 is approximately 47.5 million shares.
Now I will update you on share repurchases our board recently increased the share repurchase authorization amount to $200 and extended the program for another year. March 31st, 2022, the enhanced authorization reflects the confidence that we have in the momentum of the business and the return potential we see from current price levels. We plan to be active with the repurchases this quarter. It is also our expectation that share repurchases will be the primary use of cash for the foreseeable future.
Finally, we look forward to providing long-term Financial targets and additional details around our Capital allocation policy in the near future stay tuned for additional details now, I'll turn the call back over to Sanjay for some closing remarks zonjic. Thanks, Brian organizations need to embrace data differently in the world a multi-cloud. They need to be the best data protection the baggage storage management and the best SAS experience in all of that has to be simple seamless integrated and extensible. We've been on this path for more than a year and have solutions to these challenges today. And as you've seen lately our competitors are scrambling to keep up we are confident in the opportunity ahead. We have the right Playbook right Vision right portfolio.
And the focus on execution that we believe will drive sustainable and profitable growth and fiscal year 2021 and Beyond A Renewed commitment to share repurchases and Our intention to provide long-term Financial Tom in the near future underscores our confidence with that that's open it up for questions ladies and gentlemen, as a reminder. If you would like to ask a question, please press star four of the number one on your telephone keypad. If you would like to withdraw your question, press the pound key, please stand by while we compiled the Q&A roster.
And your first question is from the line of Jason William Blair.
Good morning, guys, excuse me. Wanted to ask a few questions about some go-to-market. So the some of the channels took that we talked to mentioned that you guys will be implementing some pricing changes starting November 1st. Can you elaborate on those first? And then I have a follow-up.
Sure. Good morning Jason. It's it's Brian pure. Thanks for dialing in. Yes. So we actually as part of our launch in July we came out with some simplified pricing and packaging to a line to more customer usage. So it's going to be more cloud and consumption-based and we think this is going to actually you know, smooth the go-to-market efforts and and also the sell-through the channel know it's early June but we've gotten some we got some good feedback on it just made him more granular for customers to really aligned to the workload as well as um to getting on board with it and it really just supports our continued move to more, you know, registering subscription-based consumption-based offerings.
Okay and Sanjay for you, just what are some of the areas on the go-to-market side that you still feel like you guys could be doing a better job of?
You know, we we've we've done a lot of the work in that space as you've been you know tracking with us Jason. I think we're going to you know, just continue to make sure that our offerings are subscription offerings are SAS related Technologies are new newer products. Like, you know, our our our products are understood and and easy to adopt so it's just really fine-tuning. If anything I think we've got a pretty good handle on where we want to be most of the stuff we want to do. We've already put in the put in place, you know, I'd say we had a you know, uh, and and let's say if I had to pick a a theater, you know, I'd say we continue to we continue to work on you know, our asia-pacific Japan business. So, you know, those are sort of broadly broad Strokes.
But by and large I think things are you know, as you can see from the results things are beginning to happen and and just on the large deal side. Are you happy with where the mix of the business is right now? I'm still seems like you're pretty dependent on these large deals, but maybe there's more of them. So maybe maybe just quick comment on your comfort level with sort of the a mix of both deals today.
Jason it's Brian here. So I think it's it's got balanced growth. I mean, we we're pretty pleased with our ability to perform in that large deal segment right now, especially in the current environment, but you know, the Americas and Mia and even a PJ all scored seven-figure deals and the quarter with America's having, you know multiple, so I think that's that's you know goodness for us. But we also took to see some stabilization as I said in the deals under $100,000 with solid contributions from the Americans to Mia. So I think that was that was good.
Thank you.
Your next question is from the line of Aaron rakers with Wells Fargo.
Hi, this is Jake on for Aaron Rats on the Breakwater. I was wondering if you could talk a little bit more about your subscription ramp specifically the up-sell opportunities you're seeing there.
Sure. Thanks for dialing in so we're as I said on the call. We're we're pretty pleased with the start in terms of our subscription renewal business. It's our summer and fall quarter in for a meaningful subscription cycle. And what's what's reassuring and gratifying is that the up-sell and cross-sell emotions are starting to to show up with Jeanette dollar retention rate on all of our subscription business being firmly over a hundred percent that also goes for a r r and what's what's also reassuring is that the second half opportunities for our subscription renewals is going to be greater than the first half. So that gives us further confidence in the second half and you know, the other thing the other thing I just say more from a product point of view everything we brought the market from just about everything we brought the market in the recent in the recent past whether it's our metallic offerings Dr. Are working on base pricing and our ability to sort of deliver all of that from a single-pane-of-glass.
fastly simplifies customers of
So we need to pick and choose what they want to use with us. And that's in the subscription basis. So ease of consumption becomes key in that model and you know, we're also we're also for example, you know selling the the marketplace with Azure all of these things make adoption super easy and all directed towards subscription.
Great, and this is follow up. I was wondering if you could give us a little bit more color on what you're seeing in the Enterprise market right now. I can I can give you something Jason. You know Enterprise is you could you know, without going back into the numbers. It's you know, we're seeing we're seeing incumbency continues to be important at this time, you know, knowing the technology knowing the skills having the skills off the road map these sort of things help customers make make better decisions in the Enterprise and especially times like this. Um ransomware is top-of-mind to customers right. So and our technology, even though we would reduce data protection lends itself really well to ransomware type attacks our new our new, you know, Mateo, uh service ties into our core product giving customers more capabilities. So we seen the Enterprise really lean towards that
Starting to lean towards that and our new car product which would be brought out of you know, a couple of months ago sort of launched a couple of months that goes also seeing good traction from a even sales. So often in all I say that that Enterprise customers are doing fine. I think we're you know, the structural shifts that that we saw that had to happen a few months ago are in place, uh, and hopefully holds it took that as you know, as I technology super relevant to the segment. So, you know, it's a we think we're going to replace their great. Thanks so much.
The next question is from the line of Brent Hill with Jeffries.
Hey guys, this is Joanne for Brent appreciate the question. It's good to see the commitment to the growth on the top line and disciplined on the bottom line. But your cash flow for the first half of your is down year-over-year. When should we see a slow start to track more evenly with Eva.
Joe it's Brian here just to touch all that we typically our back-end loaded in terms of our cash flow. So with improving profitability in the second half will become increasingly close. So just kept keep in mind that that will happen and it's it's it tends to be coming off will also a a week or Q4 that was you know, the the COVID-19 from Q4 FY twenty that impacted our q1 cash flows. But again, we'll see accelerating momentum in the back half of the year.
Okay, but there's nothing else that stood out as abnormal know and then you touched on it already but just in regards to guidance, how should we think about the remote opportunity in 3 to maybe you can just size it relative to one key or two q and then I think we talked about a little bit last quarter. But any commentary on the the rough opportunity size and fiscal 22 relish the 21. Yeah, so we haven't will stay tuned for that as part of our longer-term targets. We will issue longer-term, you know color around the subscription renewal opportunity Beyond FY twenty one month. So just big picture we had approximately fifty million dollars of software opportunity related to subscription renewals and FYI 21 about 60% of that sits in the second half of the Year month and that's something we've said, you know, I'm prior calls
You guys you next question is from the line of Alex Kurtz with keybanc Capital Mark Market.
. Thanks. Thanks for taking the questions just
On on the network tension rate Brian, you know, can we can we categorize it as over 110% is that is that a fair starting point? I know you might fill that fill out later on that obviously are very important metrics to track. Can we start? We start there? We're not ready to kind of disclose that level of specificity but I I would say oh, we above 100%
Okay, and then the subscription business, you know 53% right of software. Is there a way to accelerate that and and accelerate the decline in pass-through Hardware or and maybe says through sales compensation or channel channel alignment on a certain marketing programs, but I guess
Is that just a function of you know, the renewals and and customers coming up from work capacity then then transition transition to the men. I guess what's the path to 100% off? You know how how long could that take? So let me let me unpack that cuz there's a couple of different concepts in there one is just let me get the hardware component out of the way. I did mention that for this fiscal quarter of when you do a year on your compared. There are several million dollars of a headwind to top-line growth because we are going to start sending the pass-through Hardware. We're going to begin that this quarter month will continue on and basically be out of our piano almost by the end of this fiscal year I'd say but it but significantly reduced. So with with respect to subscription, however off all of our efforts now are are leaning more towards subscription and consumption-based offerings and we're going to emphasize that in terms of our go-to-market moja
We're going to lead with subscription offerings. I don't know if we ever get to 100% of software because there's certain industries and and Gio's that just don't consume that way but we are going to continue that and as part of our longer-term targets that will issue. We'll we'll talk to that guidance, but we've come a long way in just a couple of years. I mean just back in 2017. This was less than 10% need a software now. It's it's firmly over fifty percent. We continue to see that increase and it will increase and it's aligning to the you know, the more modern way that that customers want to consume and keep in mind that you know, when we start also selling more metallic which is off to a great start by the way, we've got a solid seven figures of metallic. Krr. That's built into our numbers that will also drive off or repeatable Revenue not necessarily on the software line, but total revenues will be can continue to become more reputable.
and I guess the the
Newell the renewal Cycles obviously accelerate the subscription percentage right? Yep. So FYI will be greater than FY twenty one and this will be a revenue 2014 us off just a couple just to clarify couple things out jump off here the pass-through Hardware business you've never have added margin to the pass-through business, right the the pastor Revenue very long margin on that that component night, but we're we're excited about this hyperscale x, you know launch because it reduces, you know, our Reliance upon task through appliance sales and it's going to drive lower a lower overall cost because there's less royalties. There's no royalties on that.
Okay, last name, I think you typically give Enterprise deals percentage of license revenue or maybe some function of that. Did you disclose that this quarter? Yes, I did. That was it was 66% of our software Revenue deal count was up 11% and the average deal size was three $319,000. Thanks guys suck balls.
Your next question is for the line of Jack Andrews with Needham.
Good morning, and congratulations on the results. I want to ask, you know, maybe Sanjay. If you could just reflect on it's been slightly over a year since you first introduced the metallic just wage been the biggest surprise to you around the introduction of this product. And and what still needs to be done from your perspective.
You Know Jack so firstly, you know, we we built the product in record time brought it out put it on a on a enough to be announced in October put it on preview and then the and then back to the pandemic climate hit us we turn around and made the product available to anyone any business in the United States that wanted to Avail of our end point capabilities and I gave that to them till September in parallel. We've had some of those I would say customers with some of the folks that used it become customers and then we've seen patterns of customers by one service and expanded to more than one service and you know, and we're very pleased. I mean we're very pleased that said this last quarter was probably the full quarter where we were on the market place with with with Microsoft with the partnership was signed and we started with the attraction. We launched more services. We're getting into new markets very very very soon substantial new markets and an increase in the portfolio this Thursday.
This is a big part of our future. This is a big part of how customers wish to consume technology from everything. We're seeing you know, and I am and the team and I are super glad we made a decision last year to build it and bring it to market right now. Thanks for the perspective around that and just as a follow-up sort. If you could touch a little bit more on the value proposition of hyperscale trying to think of a guy from a good Market strategy. Are you going to need to perhaps have more of a developer lead go to Mars go to market strategy around this or is this going to touch into you know different buying a seller's sure, you know, just the way I look at hyperscale acts is it's the it's it's our Flagship product that brings everything that we're building brings our vision in one place. So as much as I could consume SAS separately or parts of our technology in in and out themselves hyperscale is a is a converge capability that brings our data protection our storage capabilities and extending into the cloud.
Metallic all in one place you can plug on top of that Dr. You can plug on top of that file optimization capabilities and we make it available in in pretty much every way that a customer may want to consider for example if they want to use
That in devops oriented workflows the you know, we have the richer set of rest apis that allows them to do it. So we are you know, we are getting queries from customers to say. Hey, can we bought a building? You know, what building this thing in a devops model. Can you can we view data protection or or your storage capabilities in that model and the answer is a resounding? Yes. And if they want to continue using it, you know in the way in in in more traditional ways or to assess we've got that too. So that's why hyperscale active such an important platform for us because that is the Cornerstone that is where we bring everything together and delivering them. The customers can use it either through you know, their own workflows are got it that that's really helpful. Thanks for taking my questions.
Gotcha.
operator another question
Yes, sir. Next question is from the line of James fish with Piper Sandler. He's lying may be muted.
Hey guys. Thanks for the question. Brian mentions a strategic maintenance change. Can you walk us through what that was and how that might have impacted revenues this quarter and then maybe if possible how could flow through for the rest of the next year or so?
Sure. So the morning James so you saw how our software growth is, you know 5% Services growth is is somewhat muted. This has been strategic for a silver bowl time is that we're proactively working with our customers to convert their historical Legacy Perpetual maintenance contracts into you know, more modern subscription offering. Um, and this this helps us, you know, great way on a number of different fronts one is if it adds more certainty to our revenue streams over time. It's a more modern way to Consumer products that aligns with the way you want to consume it with, you know, cloud workloads and more offerings that we have that are going to be more consumption-based and also, you know, we're able to drive the cross sell and up-sell opportunities with that and grow with them. So, you know that net dollar retention rate that I spoke about for our subscription business, you know that exceeds firmly over one hundred percent that's Testament to our ability to wage.
To grow the overall lifetime value with the customer. So we're pleased with that the services Revenue will be muted because of it, but I think over time this will continue to add to our ARR growth and it also will be in a set of four customers to continue to you know, expand their product portfolio with combo.
Got it. And then you know as part of these transitions, you know, we're about three-quarters of the way to you mentioned. You won't get to a hundred percent. But you know, we're we're roughly 75% coming from software today. But at what point do you think we actually start removing kind of the revenue Edwin related to the transition and and we don't have come into the pricing impact in this kind of movement. But let me just clarify James. It's actually it's 53% of our software is subscription-based recurring and 75% of our total revenue is recurring in nature exact issue more longer-term targets as part of, you know, an investor analyst day so stay tuned for that, but it'll continue to track, you know north of where it is today off and you know as we have more opportunities in FY 22 an FYI 23 will become a headwind for us. We're squarely focused on this. I think it's it's a really good thing for our business model wage.
And also a lines to the way in.
Will customers want a consumer products?
Thanks for the questions guys.
Your final question is from the line of Eric Martin with Lake Street.
Yeah, I wanted to drive a little bit deeper on the the revenue opportunity from the the kick off on the hyperscale a obviously we've got a capacity need expansion going on with your largest customer. But you also talked about kind of across cell and upsell opportunity as you look at the rule out of this of the the launch of the the new flagship offering. Where do you see the biggest opportunity? Is it really more on the capacity expansion of your customers as they consume and need more data information management capability or is it across seller upsell?
Specifically to hyperscale the hyperscale Xterra. Yeah for me hyperscale is a One-Stop shop for for the various use cases customer swamp. So capacity is is one but it's really ease of use is the East for them to be able to deploy this, you know data protection built-in workflows with Dr. If they wanted cloudburst ransomware, we've got everything in one place and you know, and this it gives you sort of it has new functionality new workloads, obviously more capacity containers. So it's a One Stop Shop and it's the same way because the phone customers to get started or expand. So I'd say the answer is both.
Okay. All right, and then margin question for you, you had talked about the operating expenses inching up and I'm kind of jumping back to the Q with your expected them the operating expenses to rise throughout the year. We were actually at least based on my map. It looks like the the non-gaap operating expenses were roughly flat black versus q1. Do we still expect those operating expenses to rise now in the out quarters?
So at least for Q3 we're guiding that it's going to be slightly down year-over-year. You know, this is a matter of just we're trying to fight any expenses trying to come back in terms of the temporary ones that were able to reduce such as lower TNT and event costs and things like that from the New World Order and you know, we're we're maintaining a discipline around all non-essential costs and primer sizing our investments right now. So we're we're kind of pleased where we are right now more to come on the longer-term margin profile and expense profile the company, but we're making our discipline internally right now. It's good to say congratulations on the quarter. That's it for me. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call for today. We thank you for participating in Acts that you now disconnect your lines.
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