Q2 2022 Commvault Systems Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and bulk to the Commvault Q2, FY 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press star Zero I would now like to turn the call over to your host Mike Melnyk headed.
Investor Relations you may begin.
Thanks, Kevin Good morning.
And thanks for dialing in today for our call to discuss our second quarter fiscal year 'twenty to 'twenty two earnings results before we begin I'd like to remind everyone that the statements made during this call including the.
A question and answer session of the call May include forward looking statements, including statements regarding financial projections and future performance all the statements that relate to our beliefs plans expectations or intentions regarding the future are pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 and are based on our current expectations.
Actual results may differ materially due to the risks and uncertainties such as competitive factors difficulties and delays inherent with development manufacturing marketing and sale of software products and related services and general economic conditions for discussion of these and other risks and uncertainties affecting our business. Please see the risk factors contained in our Andy.
Our report on Form 10-K, and our most recent quarterly report on Form 10-Q.
SEC filings and in the cautionary statement contained in our press release on our website. The company undertakes no responsibility to update the information on this conference call under any circumstance. In addition to the development and timing of any product release as well as features or functionality remain at our sole discretion our press.
Release related to today's announcement was issued over the wire services. This morning and has been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website.
This conference call, we will refer to non-GAAP financial measures. The reconciliation between non-GAAP and GAAP can be found on our website. This conference call is being recorded and a replay is available for our webcast 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 of.
Sort of Commvault, and Brian Carolan, Chief Financial Officer of Commvault, Sanjay and Brian will each share opening remarks and commentary before we open the call for Q&A now ill turn the call over to Sanjay.
Thank you Mike Good morning, and thank you for joining us.
Again, ladies and gentlemen, please standby your conference call will resume momentarily.
And ladies and gentlemen, please stay on the line.
Yeah.
Yeah.
But wouldn't you start again.
Okay. This is the operator, we can now I can hear you now.
One point to be honest, so I, just let me just start again.
Good morning. This is Sanjay good morning, and thank you for joining us to discuss our Q2 'twenty two results.
We continue to capitalize on the evolution of the hybrid cloud market, where commvault is playing an increasingly important role in high priority large ITT transformation and ransomware remediation projects.
While Q2 software revenue growth didn't meet our guidance the impact was principally isolated the software opportunities that are part of larger it transformation projects.
In addition, we believe industry wide supply chain issues are impacting our customers sourcing of hardware components and associated software opportunities.
While we don't believe this represents a long term issue, we factored additional conservatism into our Q3 guidance, which Brian will cover later in the call.
Several key highlights reflect the strength of our business and the ongoing progress in executing our transformation.
Total <unk> grew 12% year over year to $543 million.
Importantly, subscription and SaaS AOR grew more than 40% year over year to $278 million and now represents more than half of total <unk>.
We're driving this growth through market share gains as evidenced in part by Q2 revenue from new customers, which finished at the highest level in years.
In addition, our SaaS offering metallic is growing rapidly and in just over a year of being commercially available is now a meaningful contributor to our total <unk> growth.
Now I will provide you some additional color on the quarter and reasons for our optimism which are centered around four critical indicators.
First our.
<unk> to win new business and gain market share a meaningful inflection points for Commvault, our largest transaction this quarter a multimillion dollar win at one of the biggest health care organizations in the world was a new customer and a competitive displacement over 50% of subscription transactions were new logos.
As for Commvault.
And more than 60% of metallic customers Wouldnt you to commvault.
Second every indication is that customers are embracing the power of and or leveraging software and SaaS.
More easily and safely support the hybrid cloud journeys.
For instance, the total number of transactions that involve more than one product increased 150% year over year.
About half of our seven figure software transactions involve multiple products and services and metallic landed its largest transaction to date a high six figure deals that included multiple product offerings.
Which brings us to our third indicator.
<unk> is exceeding our internal expectations and outpacing the market and growth trajectories of leading SaaS startups.
D C projects the data management as a service market will grow at a mid teens CAGR over the next several years to over $15 billion by 2024 with metallic we believe that we have an enterprise grade first mover advantage to continue capturing share in this space.
And while it has been a commercially available for just over a year metallic has already achieved many significant milestones which include.
Doubling its portfolio with new offerings for Salesforce, and micro Microsoft dynamics, 365, and expanding availability to more than 30 countries.
Adding data protection for enterprise workloads on SAP, Hana and Oracle as well as for containers and active directory.
Expanding storage and edge offerings with flexible storage tiers for metallic <unk> cloud storage and Commvault Hyperscale X.
Launching metallic government cloud the only data protection solution to meet the stringent fed ramp high security protocols required by federal agencies.
And we're now making metallic available for managed service providers to offer their own suite of value added services built on metallic.
Last week, we announced an integrated solution with <unk>, a leading global serve global managed security service provider for ransom or readiness backup and data recovery as a service.
Additionally, our major cloud partners see the value Commvault brings to drive cloud consumption. In fact, Microsoft note that Commvault slashed metallic is a top global Azure co sell ISP, Microsoft partner, and Google called as a leading backup and disaster recovery partner on Google Cloud.
This is tremendous validation and these relationships continue to mature.
This is just the beginning as customers transition to the hybrid cloud they will need flexible and scalable solutions, which is by the power of and or the ability to combine the best of both software and SaaS is so critical we believe this is a competitive advantage.
Finally, we operate in a large and growing market and our portfolio has been designed to align with market trends, including data management and ransomware recovery.
Rapid data growth across multiple generations of ecosystems applications in hybrid environments introduces risks that can impair our company's growth and operating objectives. For example, today every business in every industry is facing the very real threat of ransomware.
At Commvault, we regularly help customers recover from these attacks just last month, a nationally acclaimed healthcare leader in the U S was hit by an attacker dropdown hundreds of servers, including their entire VM environment and three petabytes of application information.
Our software ensured the backup remained intact and with the help of our industry, leading cost customer support team they were able to get back to full operation within 24 hours simply.
Simply put one of the best defenses against Ransomware is data protection with an immutable backup. Additionally, our new can't Commvault Ransomware protection and response services give customers a multi pronged approach to answer by protection. This is just one service will complement of data management capabilities to help customers.
And the industry is taking note Phil.
Phil Goodwin at IDC commented given that more than 90% of organization, 90% of organizations use public cloud and the backup strategies Commvault is positioned to solve the preponderance of an organization's data protection needs, including hybrid cloud multi cloud and edge.
In summary, while our Q2 results were mixed I am confident that we have the right strategy for long term for the long term and we're making real progress as demonstrated by the strength of the underlying data shared we.
We are capturing market share expanding our footprint with a more comprehensive portfolio and we believe that we're in prime position that metallic to meet the changing needs of customers as they navigate their cloud journeys.
Now I'll turn it over to Brian for a closer look at the financials Bryan. Thanks, Sanjay and good morning, everyone. Hopefully you had a chance to review the results. We released this morning, now I'll briefly recap and provide some additional color on the quarter.
In fiscal Q2, 'twenty two we reported total revenue of $178 million, an increase of 4% year over year.
Software and products revenue increased 4% year over year to approximately $75 million.
As a reminder, in FY 'twenty two we've moved to a software only model in Q2 software only growth without hardware would've been approximately 9% year over year.
Revenue from software transactions over $100000 increased 6% year over year and represented 67% of software revenue.
Volume of these transactions grew 9% year over year and the average deal size was approximately $311000.
Software revenue from new business, approximately doubled quarter over quarter and finished at the highest level in several years.
Fiscal second quarter services revenue increased approximately 4% year over year to $103 million the growth in services revenue is being driven primarily by metallic.
Let me now discuss our transition to a recurring revenue based model.
Second quarter subscription software revenue increased 24% year over year to approximately $48 million subscription licenses represented 63% of total software revenue an increase from 53% a year ago.
Total annual recurring revenue or <unk> increased.
12% year over year to approximately $543 million led by growth in new subscription customers and metallic.
As Sanjay noted subscription and metallic <unk> of $278 million now represents 51% of total IRR and is growing at over 40% year over year.
This is an important proof point in the transformation of our company. We believe <unk> is the best measure of the underlying health of the business. It represents the strength of our land expand and renewal motions and as a barometer of our potential for future growth of our software and SaaS platform.
Total recurring revenue, which includes subscription software maintenance support services and SaaS was $141 million.
Renting 79% of total revenue in the quarter. This compares to 75% in Q2 'twenty one.
Now I'll discuss expenses and profitability.
We reported fiscal second quarter gross margins of approximately 86% an increase of 80 basis points year over year.
The expansion of gross margin was the result of the decrease in pass through hardware and royalties associated with the legacy version of our Hyperscale products.
Savings were partially offset by an increased mix of metallic revenue, which carries a higher cost of sales, especially as we scale up the infrastructure.
Total expenses, including both cost of sales and operating expenses increased approximately 3% year over year to $145 million expense growth was driven by strategic investments in metallic a targeted ransomware campaign and head count additions.
Non-GAAP EBIT was $31 million and non-GAAP EBIT margins improved 50 basis points year over year to 17, 4%.
Now I'll discuss cash flows and the balance sheet.
For the quarter, we generated approximately $26 million of free cash flow. We ended the quarter with approximately $296 million in cash and we have no debt on the balance sheet differ.
Deferred revenue was $372 million, an increase of 14% year over year growth in deferred revenue was primarily driven by metallic.
During the quarter, we repurchased approximately one 2 million shares of our common stock for $90 million as we outlined during our investor event in January through FY 'twenty. Two we are committed to spend $200 million plus 75% of fiscal 'twenty two free cash flow on share repurchases.
Since the Investor event and through September 30, we have repurchased approximately three 4 million shares for $242 million.
Now ill discuss our financial outlook for Q3, FY 'twenty two for.
For Q3, we expect software revenue of approximately $92 million as Sanjay discussed earlier, we are winning new business, including competitive displacements.
This new business may take longer to close, especially if part of larger transformation project in.
In addition, we are modeling software more conservatively for any transactions tied to customers' delayed hardware orders.
For modeling purposes, I'd like to remind you that Q4 software revenue historically approximate.
With Q3 levels.
We expect Q3 total revenue of approximately $195 million.
Now, let's shift to expenses, we expect Q3 gross margins to be similar to Q2 levels or approximately 85% to 86%.
We expect total expenses, including cost of sales and operating expenses to be up approximately 2% year over year. This should result in EBIT margins of approximately 21, 22%.
Our projected share count for Q3 is approximately 47 million shares with that I will now turn the call back to Sanjay for some closing remarks Sanjay. Thank you Brian.
As I mentioned earlier, we're making progress and in Q3, we intend to remain focused on attracting new customers taking share from our competitors and continuing to deliver solutions that help customers do amazing things with data.
And in doing so return to the consistent and predictable results we've achieved over the past year.
Now I will open the call up to Q&A.
Later.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Jason Ader with William Blair.
Yes, good morning, guys.
I guess first question is there any update to your I.
I guess two year I forget what it was exactly on the.
The 2020.
One analyst day, I think it was a CAGR.
9% to 10% growth.
Is there any update there and good morning, Jason It's Brian here, we're not updating any targets at this time ill just remind you, though if you look back since that investor event, and assuming that the guidance of Q3.
Q4 that implies double digit software growth and mid single digit total revenue growth since the investor event.
Also our <unk> is tracking very well to well ahead of that 10% target that we laid out.
So at this point, we're not updating and targets and.
And we still are standing by those two year Congress that we put out.
Got you and Youre seeing for Q4, if I heard you write the software products should be about this unusually three yes, it usually approximates Q3.
Historically.
Gotcha and what about the services line do you expect that to continue to grow sequentially that will grow sequentially driven by metallic.
Okay.
So just maybe Sanjay for you just kind of a bigger picture question here.
As we think about some of the tailwind and the data protection market specifically ransomware.
Cloud backup.
You've seen.
<unk> seen some good traction with metallic you're expanding your sales force and your channel engagement you have a growing mix of renewals.
I guess, just I guess it doesn't it doesn't seem to compute that you would have this type of a quarter.
<unk>.
And even after Q1, which I think was a little softer too. So seems like something has taken a step down here I'm trying to really understand what's going on in the business.
Well Jason.
It was a mix quarter and the volume that we can short onwards, the software revenue line.
The key indicators of the business like you sort of called out and the health of the business are tracking well, okay and.
The most important thing is we're part of large it transformation projects. We've been working on this to land new customers the way Youre land, new customers significantly as to really when they when they when they start transforming and go to the cloud you want to be part of that we are winning those that business that business is taking a little longer to close than we anticipated so recalibrating that closing cycles into.
Finally.
And.
Secondarily sort of you're seeing a little bit of supply chain, whether it's hardware associated with with the transformation.
No.
Theyre out there there are delays in some projects. So we've seen that with recalibrating with calling in some conservatism in Q3, but let me reinforce theres nothing fundamentally changed with the business is strong we feel good about it and.
We're focused on getting back to where we were a quarter ago.
Yes, I mean, just from a Devil's advocate standpoint, though there is a lot of comp.
Competition in the market.
As you guys well know when you deal with every day there is a lot of.
Private players in particular have been very aggressive.
Do you think that the competitive landscape has impacted your ability to execute here in the first half.
If exchange, we've always been in a very competitive market.
If anything I would say, Jason that our strategy and what we're offering our customers is actually resonating very well will be internally and we will be now externally called the power of and our ability to give them world class on premise capabilities through Hyperscale <unk> combined with <unk>.
Metallic and the cloud is exactly what theyre looking forward. This allows them to make a no compromise sort of selection of our technology and their cloud journeys.
I think we actually think we're winning a lot of new business I gave you. Some examples in my prepared comments about.
Winning against competition, our biggest our biggest I'd say.
Good number two thirds of our business the big business, we closed last quarter.
What's competitive displacements I mean these are these are real things and these take time, so we're actually feeling pretty good about where we are.
Just taking a little longer and you combine that with some downstream supply chain stuff and we got to recalibrate our closings.
Got you. Thank you.
Our next question comes from Aaron Rakers with Wells Fargo.
Yes, thanks for taking the questions guys I got a couple as well.
First of all just on a housekeeping basis, I think last quarter. There were some metrics executing on the subscription renewal cycle that I was curious if you guys are still getting which is.
Talk a little bit about net dollar retention.
On the subscription I apologize if I missed it and then you also gave a metric around I think it was <unk> for subscription and SaaS offering of 278 can you just help me appreciate what that was last quarter.
Sure Good morning, Erinn, it's Brian here.
So there has been no meaningful variation in the other net dollar retention rate that we have said historically I think we look at this more on a rolling four quarter basis as opposed to quarter to quarter.
So that's why we didn't call it out specifically, but theres been no meaningful variation.
And then we're really pleased with and we have been forecasting. This as we go along is that at some point in time, our subscription and SaaS business will overtake and become the majority of our IRR and that has happened this past quarter. It now represents over 50% and that high growth.
Is growing at greater than 40% per year.
Okay.
And Thats helpful.
Looking at the guidance for this next quarter, taking I think it was $92 million software revenue.
Look at it that's roughly about 22% sequential growth if I look back over the past few years I think the average is that more kind of in the mid maybe slightly above mid teens sequential growth I know you've done that level of sequential growth in.
Past December quarters, but I'm curious does that is that higher than typical seasonal growth on software reflect your assumption that some of the issues. This last quarter abate and the component constraint desktops factored into that guide I'm, just trying to gauge the conservatism in that given the variables.
We saw that last year. So a couple of things there Aaron we're confident in this in this guide our renewal opportunity is much larger in the second half of the fiscal year that starting in fiscal Q3, our pipeline is healthy way, we see it today, it's up versus Q2, we're focused on new business, we have a tremendous amount of momentum going into the quarter, but.
We're modeling things a little bit more conservatively I mean, we're starting to see a longer closing cycles as we get into larger it transformation projects.
And we can't control the hardware delays that are out there. So it could be some potential delays in customer deals and we're just trying to be a little bit more conservative with the guidance.
And then the final real quick question relative to the expectation in the September quarter. I think there was $184 million endorsed this last quarter. The delta from there relative to the reported results. How would you how would you bracket that between delays in large projects versus component constraints and then I'll cede the floor. Thank you guys.
Erinn this overlap if you're part of a large if it's a new customer in a large it transformation.
They look at the entire stack that's hardware involved in that.
It's hard to Peel them, apart pretty interrelated, but I will say to you. When there is no hardware involved things moved nicely and if this cloud things moved very nicely.
Yes. Thanks.
Our next question comes from James Fish with Piper Sandler.
Hey, guys just building off of Aaron's last question understanding was roughly $7 million.
That's versus your guide, but is there any way to quantify how much in bookings or revenue were delayed meaning was it actually more delay from that $7 million and you guys really have that strong new business and any sense of the timing of when these delays could come back and why it really looks like it was primarily felt in APAC and EMEA more than the U S.
So.
James It's Brian Carolan here how are you.
So youre always going to have deals that spill from quarter to quarter and theres always going to be delays. We do believe it's delays we've closed some of that business already.
We will continue to close throughout the quarter and again, we factored into our more conservative guidance any kind of pushout related to.
Hardware delays are new it transformation projects that we're getting involved with this quarter.
Right, but I mean is there can you help me understand why the.
White was felt primarily in APAC and EMEA as opposed to the U S for these issues.
There is no common theme there.
Okay.
And Marc <unk> was still up 12% and discussing that you guys were discussing with some strong new customer wins.
What did new customers contribute this quarter to software revenue I know you guys gave mchugh and what was the net new customer adds this quarter as it seems.
Okay I'll just leave it there.
Yeah. So we don't disclose exactly what the new customer revenue is but I will tell you that.
We added well over 200 net new subscription customers in the quarter, we added over 300 metallic customers in the quarter, 60% of those were new we know broke through 1000 total customers for metallic.
And the power of and it's really resonating about 50% of our metallic customers have another commvault solution.
No.
We're getting a lot of traction here.
We believe metallic is complementary to our strategy and we're trying to continue to drive subscription and metallic customers and thats showing up in the form of our IRR results.
Okay.
Thanks, guys.
Okay.
Yeah.
Our next question comes from Jack Andrews with Needham.
Hi, good morning, Thanks for taking my question.
Was wondering if you could just maybe drill down a little bit are there any sort of commonalities that you've noticed in these larger it transformation projects whether it's.
Specific partners.
Opportunities are.
Specific industry verticals are there are there some some some common themes that.
That you can point to that.
Have impacted your business.
Okay.
Jack It's Sanjay.
What we're seeing is as customers, whether you call it digital transformation and moving to some kind of a hybrid or public cloud model.
Customer sent to reevaluate the entire application stack and when they do that.
We're part of that because we have the single pane of glass that goes from anything from on premise over into into the cloud, we're seeing that as a very.
It's something that allows us to win new customers, sometimes it starts with metallic moves its way into the data center all the time to start with sort of the hyperscale acts and extends out to that the other the other sort of pattern. We're seeing is.
And we started several times and continue to see that in the pipeline customers doing large ransomware remediation projects, making sure that they're well protected.
Against Ransomware, when you do that that.
That's sometimes involves clouds other times, it's redoing their on premise and it's and we're seeing these big patent the large digital transformation involve in the cloud and.
Grant's on my protection Dr type scenarios.
With customers and they tend to be larger they tend to be more complex. They tend to be they tend to have incumbents that have been ripped out and all of this.
<unk> tends to take a little longer and have this hardware as we said.
That's a new one dependency that we haven't seen in <unk>.
Near quarters so.
That's what I'm, saying it's across industries.
It's across industries just as.
As a case in point the largest the largest piece of business. We did in the last quarter was a very large pharmaceutical.
The example, I used on getting a customer back.
It was also a very large customer in the health care industry. So there's a I am giving an example that there are large.
Large customers and and I would say, it's a mix it's a mix.
It varies by region.
Sure no. Thanks I appreciate the color around that just as a follow up question as we think about the renewal.
Opportunity here in the second half of your fiscal year do you have a sense as to whether that is tied into <unk>.
Similar.
It transformation projects that some of your existing customers are engaging in.
Probably a little less Jack I mean, it's a renewal opportunity so.
In theory, it should not be tied into a larger although it is an opportunity for us to have a conversation with the customer we view that as a positive is that and how that factors into our net dollar retention rate that we can go in there and talk about metallic and talk about some of our other offerings.
So we view that as an opportunity.
Got it thanks very much.
Our next question comes from Max <unk> with Lake Street capital.
Hey, guys I, just wanted to touch on the supply chain issues again.
At what point in Q2 did you guys begin to see the large it transformation projects experience delays.
At which point in Q2, I'd say, I'd say, leading into the into months two of our quarter and beyond.
Is where we really started seeing it.
No.
Honestly wish we had seen it earlier, but it was it was the way it came about.
Okay, and then I just got two more follow ups to that and then when do you guys expect hardware component issues to resolve as well do you believe these issues were more or less commvault specific or more macro in nature.
Macro.
Mike. This is if a customer is refreshing hardware or buying new hardware win.
When deploying the project.
And then they tend to want to wait for everything to come together. So they can then they can throw it out at the same time as opposed to buying the software than waiting three months to get the hardware and then getting the integrator and so they tend to say bill just calibrate into everything at one time.
When you're part of a bigger stack, it's hard to control that decision point is even though we've won the business.
It doesn't actually happen till the customer is ready.
We saw a little bit of that and not a little bit we saw that.
In Q2, and we factored it into our numbers for Q3.
Not a perfect science guys I wish I could tell you when it would.
We're just in the mix with everybody else, we're downstream and our dependency personally is very low, but the customer if the customer needs to attach our software to some kind of storage server et cetera.
We're in the mix.
Alright, thanks, guys.
Okay.
Last question comes from Steve Enders with Keybanc capital markets.
Okay.
Okay, great. Thanks for thanks for taking my question.
Just trying to get a better sense for the large deals that are in <unk> I guess, what does it take for you know for those deals to get over the finish line at this point.
Is there a push to try and convert those over over to metallic.
To make sure those get done.
I guess, how much are you expecting the deals that did kind of get delayed or pushed in the quarter. How much of that is going to come back and kind of fiscal <unk> versus <unk> or beyond sure sure.
I would say that I think.
Seeing a lot of those already in some of those some will close are projected to close this quarter. So we're seeing that all come in now I can't tell you specific to everything closes in Q3 and Q4 and then this business in Q3 that again has similar dependency that we're trying to factor in the best we can.
Just you know metallic for the most part is complementary to our on premise offerings.
Yes.
So it's not it's not that we just say okay. You know you've got a you've got this to swap it out because in some cases customers look at both approaches figure it out.
And make the call, but in most cases, they've got an architecture, they've got existing installed base of our technology, possibly they are swapping out something for with us.
And so it's not a it's not a simple one to one swap and frankly metallic of the power of AD does that's cloud native workloads like nothing else.
Okay perfect. Thanks for taking the question.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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