Q4 2022 Commvault Systems Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Commvault.
Fourth quarter fiscal year 2022 earnings conference call.
At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session to.
To ask a question. During this session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero. It is now my pleasure to introduce head of Investor Relations Mike Melnyk.
Good morning, and welcome to our earnings Conference call I'm, Mike Melnyk head of Investor Relations and I'm joined by Sanjay Mirchandani, Commvault, CEO and Brian Carolyn Commvault CFO .
And info graphic with key financial operating metrics is posted on the Investor Relations website for reference.
Statements made on today's call will include forward looking statements about commvault future expectations plans and prospects all such forward looking statements are subject to risks uncertainties and assumptions. Please refer to the cautionary language in today's earnings release and Commvault. Most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could.
Cause the company's actual results to be different from those contemplated in these forward looking statements.
<unk> does not assume any obligation to update these statements. During this call <unk> financial results are presented on a non-GAAP basis.
A reconciliation between the non-GAAP and GAAP measures can be found on our website.
Thank you again for joining US now I'll turn it over to Sanjay for his remarks Sanjay. Thank.
Thank you Mike Good morning, and thank you for joining us today.
Fiscal 2022 was the best year in Commvault history, our differentiated platform and portfolio are resonating with customers and partners alike.
Demand is strong and our team is executing enabling us to outpace and take share from the competition.
We closed the year on a high note posting record quarterly revenue EBIT and EPS Q.
Q4 software revenue of $101 million was a new milestone for the company and.
And we crossed $200 million in total revenue for the second consecutive quarter.
Our growth was driven by the continued traction of our software and SaaS offerings increased multi product adoption and through large deals.
Additionally, metallic continue to scale and contribute meaningfully to our revenue and customer growth.
As we accelerate our recurring revenue journey, we are increasingly focused on ore as a barometer of our future growth potential.
Over 80% of our revenue is now recurring in nature and growing.
At March 31st subscription and SaaS AAR, our increased 46% year on year to $346 million and now represents 59% of total.
And I am pleased to report that in just six quarters of commercial availability metallic has exceeded $50 million in E. R. R.
Growth is extraordinary customers love it and we love it.
Brian will discuss the financial highlights in a moment, but let's first discuss the year ahead.
Over the past three years, we've assembled a world class leadership team with deep domain expertise in cloud and SaaS.
We transformed the company through our simplification innovation and execution mantra.
Today's data protection market, especially data management to the service is at a tipping point.
This is an incredible tailwind for the company and it is why we firmly believe our time is out.
You see it's rare to have three critical drivers converging at once.
One our heritage is grounded in solving very hard and complex data problems with customers. This has never been more important.
Two.
We continuously innovate elegant and industry, leading solutions to these problems and software and SaaS.
And three our execution engine is humming as the proven by the results were sharing today.
Commvault has all of this let me discuss these one by one.
First we solve hard problems our.
Our customers live in a transient world.
Data is everywhere on site in the cloud and flight.
And on remote devices, they're contending with multiple generations of data in new and different workloads.
Well funded bad actors are using ransomware and other threats to take organizations infrastructures and data hostage.
All of which are creating what I call it the collision.
Putting more pressure on often siloed it and security teams, who are entrusted to protect data.
While moving to the cloud.
Upstart point solutions and companies built through piecemeal acquisitions only create more silos.
<unk> looked to us as a proven and trusted partner to help them on their journey.
For 26 years Commvault has helped to solve these hard problems and provided customers the peace of mind.
The data is secure and readily available.
That's why government agencies, they demand the highest security and capabilities like the U S Coast Guard the U S Air Force and Spain's Ministry of Justice All chose Commvault for the data protection needs.
Second we built elegant world class solutions to these hard problems.
We do this for any workload and any customer environment, one provider one platform for a multitude of data management needs, our flexible architecture and single pane of glass removes the rigidity and complexity in their systems.
Additionally, as many of our customers straddle both on Prem and cloud environments. They need a solution that can flex and scale to meet their evolving needs having.
Having moved several extra bytes of customer data to the cloud over the past few years, we enable this transformation. It is a competitive advantage for example in Q4, we displaced the incumbent vendors.
Legacy and an upstart and welcomed fincantieri one of the world's largest shipbuilders to our roster.
They chose us to protect their on Prem workloads and thousands of Vms migrate their office 365, mailboxes to the cloud and provide cloud based immutable copies of their data against ransomware, all through our unified platform.
And speaking of ransomware when customers are staring down an unfortunate attack. Our teams are there to help them get back to work for example, when a fortune 500 materials company was hit by a global ransomware attacks. It goes up that alerted them.
Not only to be saved their data, but it opened the door to an expanded relationship as the only provider to meet the company's ransomware multi cloud automation and integration needs.
But the third and probably the most important reason I believe it is our time is our razor sharp execution.
Over the past two years, we've delivered consistent revenue growth, while accelerating our transition from perpetual to subscription software. We built a world class SaaS franchise that has surpassed 50 million that we.
We self funded this while delivering 800 basis points of margin expansion.
And we've gone from nine to 29, and our pursuit of the rule of 40.
This is definitive proof, we are well executing company and it's why I believe it is our time.
Now, let me take a moment to discuss our portfolio.
Today, our software combined with metallic offers customers a unified solutions they need to address the complexity and collision of systems workloads and competing in security priorities.
They shouldn't have to choose a naturally between on premise software or SaaS, depending on where they are in their journey and their work and their various.
Various workloads they will need both.
We're the only company that provides some software and SaaS at scale with the flexibility they require.
For example, an existing commvault customer a multinational software and service provider and services provider recently expanded their on Prem data management capabilities across the entire footprint.
<unk> added Hyperscale X and metallic to accelerate their cloud transition.
We're now helping them protect thousands of virtual machines, kubernetes workloads and more than a petabyte of data in azure and they're doing it with one unified platform.
And that is why we went and.
This is the power of and.
And this is showing up in the financials. This quarter, we saw 80% year on year growth in the number of customers with more than one product, which drives higher is ESP higher lifetime value and higher recurring revenue.
This is why we are bullish we've put in the hard work and we are ready to lean into our future as the cloud management.
Data data a minute sorry cloud data management company.
Before I turn the call over to Brian to discuss our results.
I want to recognize him and the announcement we made today.
Brian has enabled us to build the solid foundation, we stand on today as a company.
On a personal note his counsel to me the leadership team and the board has been invaluable and we all wish him well.
Gary Merrill his appointment as our new CFO to reflect the deep bench of talent your combo.
Gary has held several senior roles at Commvault, including Chief Accounting Officer, and most recently as chief of business operations Importantly.
He has been leading our transformation initiatives that allow us to build a modernized business platform and positioned us for accelerated growth now I'll turn the call over to Brian . Thank you very much I appreciate that after more than 21 successful years with Commvault I've decided that it's the right time for me, both professionally and personally to move on.
Commvault was coming off another record year and is well positioned for success and it gives me great pleasure to hand, the CFO reins to Gary who has been my colleague and partner for the past 16 years at <unk>.
Competence and his ability to lead the team.
Now, let's talk about the FY 'twenty two results the best year in our company's history, we reported record results driven by the power of ads with both software and SaaS contributing to our accelerating growth trajectory and.
And we closed the year at a high note Q4 was a record quarter.
We exceeded $200 million in total revenue for the second consecutive quarter with total revenue growth of 8% year over year to approximately $206 million.
Software and products revenue increased 12% year over year to approximately $101 million Q4 marked the first time in company history that we crossed the $100 million milestone and quarterly software revenue.
Software only growth excluding appliance pass through revenue was approximately 15% year over year.
Fourth quarter subscription software revenue increased 45% year over year to approximately $77 million subscription license sales represented 77% of total software revenue an increase from 71% last quarter and 59% a year ago.
We're clearly benefiting from the tailwind of our subscription transition and our growing recurring revenue model.
Revenue from software transactions over $100000 increased 19% year over year and represented 73% of software revenue.
The volume of these transactions grew 14% year over year and the average deal size increased 4% to approximately $327000.
We closed numerous seven figure deals in the quarter.
Subscription and metallic AOR grew 46% year over year to $346 million and now represents 59% of total <unk>.
Up from 55% last quarter and 46% in Q4 'twenty one.
As Sanjay noted earlier metallic <unk> crossed the 50 million dollar milestone during the quarter.
Total <unk> increased 13% year over year to approximately $583 million.
On a constant currency basis, <unk> was up 14% year over year.
Our growth is being driven by new subscription customers and metallic.
This is an important proof point in the transformation of our company. We believe <unk> is a good measure of the underlying health of the business and as a barometer of our potential for future growth.
Total recurring revenue, which includes subscription software maintenance support services and SaaS grew 19% year over year to $173 million.
Recurring revenue represented 84% of total revenue in the quarter, an increase from 76% a year ago.
Now I'll discuss expenses and profitability.
We reported fiscal fourth quarter gross margins of 85%.
Consolidated gross margins reflects an increased mix of SaaS revenue, which expectedly carries a higher cost of sales and software.
Total expenses, including both cost of sales and operating expenses increased approximately 4% year over year to $157 million.
Spence growth reflected a seasonal FICA tax reset annual merit increases and go to market investments Q4 expenses also benefited from a $5 5 million dollar net settlement of certain legal matters. This gain is netted with related expenses and G&A.
non-GAAP EBIT increased 20% year over year to a record of approximately $47 million and non-GAAP EBIT margins improved 230 basis points year over year to 22, 6%.
Now I will discuss cash flows and the balance sheet for.
For the quarter, we generated approximately $87 million of free cash flow.
Growth in free cash flow was driven by strong Q3 performance growth in deferred revenue related to metallic and timing of payrolls.
We ended the quarter with no debt and approximately $268 million in cash on the balance sheet.
Of which over 70% sits overseas.
In Q4, we repurchased approximately 600000 shares of our common stock for $40 million.
Now I will discuss our financial outlook for Q1, FY 'twenty three.
We expect Q1 software revenue of approximately $89 million in total revenue of approximately $195 million.
Due to the ongoing geopolitical uncertainty we are closely monitoring potential risks to our business, particularly customers spending patterns in Europe .
Also note Russian operations previously contributed approximately 1% of total revenue, which is factored into near term guidance.
We expect total expenses, including cost of sales and operating expenses to be up approximately 8% year over year.
Q1 expense growth reflects SaaS infrastructure costs and go to market investments to support our accelerating revenue profile.
We anticipate that this will result in non-GAAP EBIT margins of approximately 20%.
Our projected share count for Q1 is approximately 46 million shares.
As we start the new fiscal year I'll take a moment to update you on our progress towards the targets we laid out.
Our January 2021 Investor event.
At that time, we outlined our plans to transition to a recurring revenue model.
<unk> bye sustainable growth improved profitability and strong free cash flow and an attractive capital return policy.
To report that we've made terrific progress.
Our software and total revenue is currently tracking at or above target. While <unk> is currently tracking materially above target.
And our subscription software mix and recurring revenue mix are comfortably within their targeted ranges.
We ended FY 'twenty two at 29 against the rule of 40, we're very proud of the progress we've made considering we're at just nine two years ago.
This improvement was driven by accelerating revenue growth and significant margin expansion all while.
Scaling a hyper growth SaaS platform.
While SaaS was not a major focal point of the Investor event I am pleased to report that metallic is pacing well ahead of expectations.
Factoring in the success and momentum of metallic we now believe that FY 'twenty three non-GAAP EBIT margins should be in the low 20% range currently reflected in consensus estimates.
We remain focused on making continued progress towards our investor day target of 32 against the rule of 40 in fiscal 'twenty three.
From a capital return perspective since the time of the event through March 31 2022.
We repurchased approximately five 2 million shares for $367 million.
Our board recently approved a new share repurchase authorization for up to $250 million of stock.
In FY 'twenty three we expect to continue with our existing practice to return approximately 75% of free cash flow overtime.
I'll now turn the call back to Sanjay for his closing remarks, Sanjay Thanks, Brian to recap.
Fiscal year 'twenty, two was a record year for Commvault and we intend to build on that momentum in fiscal year 'twenty three.
Overall market demand is healthy.
Power and is resonating with customers and partners.
And our team is executing and.
In fiscal year 'twenty, three we expect to accelerate our growth and lead the cloud data management wave. It is argue or it's our time now we'll open the call up for questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key.
Our first question comes from the line of James Fish with Piper Sandler.
Hey, guys. Thanks for the questions.
And the fiscal year here Brian .
Brian I just wanted to actually clarify something you just said youre reaffirming our goal of 32.
<unk> revenue growth and EBITDA margins for fiscal 'twenty, three which with low twenties EBIT. It would imply you're talking about 9% to 10% revenue growth for the year.
James It's Brian here. Good morning, So yeah, I mean, we've made great progress towards our targets that we laid out in January 2021, and we're tracking at or above all the top line ones.
Importantly, our a R is tracking well above the goals that we laid out at this point, we're not changing 32 as an objective and our objective is to continue to make progress towards that through throughout this fiscal year.
Got it.
Brian It was great to work with you.
I appreciate all the help over the years.
Last one from me many infrastructure peers have been seeing pressure on the supply chain and obviously you guys have moved the model more towards software, but theres still some hardware element with Hyperscale. For example, what are you guys seeing regarding any tightening of components for Commvault are indirect impacts from project delays given the supply chain.
Hello.
It doesn't seem like a whole lot, but noting your lead metrics like billings actually showed material upside to estimates thanks guys.
It's always going to think about well you know.
The past couple of quarters, we've been keeping a real eye on.
Just our piece of the deal, but the hardware that that supports our software and.
So for the past couple of quarters, we've been able to successfully derisk it but it is a real it is a real uncertainty in closure times, because software needs the hardware or the storage below it and.
And if the customers don't have delivery time scales. It can matter. So we've been keeping a tight eye on it after Q2, we've been.
Our whole forecasting process has.
It takes that into account, it's not a perfect science, but we're keeping a rely on it the flip side is if.
If the workload lends itself to a SaaS based delivery, we've got we've got metallic and customers leaning on that.
Thank you.
Question comes from the line of Aaron Rakers with Wells Fargo.
Okay.
Hi, guys. Thanks for taking my question. This is Michael on behalf of Darrin.
It looks like it sounds like metallic is doing really well growing very nicely and you guys are executing on that I'm. Just curious are you able to provide any additional metrics on maybe like the deal size growth youre seeing specifically within.
Metallic and maybe an update on the customer growth in the quarter.
While customer grow.
Customer growth was just shy of.
I think 500 new customers.
Last quarter, we've also got a great consistent overlap of customers, having more than having.
Having metallic and software over 50% of our customers have bulk.
And over 60% of our new customer base was brought in by Metallics. So we're seeing we're seeing if I.
If my numbers are right I think they are worth.
Great.
Great traction on size of customers is small medium large we're seeing velocity.
And we're seeing the power of and in action.
At some point, we'll share more details about.
The deal size and all the metrics that you'd be interested in but.
We think sharing the $50 million milestone was kind of important.
Yes.
I appreciate that.
Thank you Andrew.
Question comes from the line of Jason Ader with William Blair.
Yes.
You and I first want to say, Brian and good luck.
These calls are not going to be the same without you and Michelle.
A second just to be clear.
Brian Youre, not saying rule of 32 for FY 'twenty, three you're saying that you.
You still have that as a target, but not necessarily for FY 'twenty three I just wanted to.
To double check that.
It's our objective at this point, Jason I think it's too early to change anything were not changing that as an objective right now.
I think it really comes down to we're seeing great success from metallic obviously the margins associated with a SaaS business are a little bit different.
And we may see a balance that is more pronounced as a as we shift more revenue growth and margin growth, but that's too early in time to change that.
We'll update you another time during the year at another investor event.
Okay. So its not guidance its still the objective, but it's not guidance is that correct right way to think about it okay.
Rex.
And then was there any FX impact in the quarter or the guide.
Just curious because of what's going on in EMEA in particular.
No great question, So our growth was somewhat dampened by foreign exchange.
By two to 300 basis points with revenue.
We're factoring in current FX rates as we speak.
For this guidance and so we're keeping an eye on it as well.
Gotcha, Okay, and then one last.
On the services line.
I'm just trying to do some quick math, if we just sort of divide by four on the 50 million a R. R.
I know that's not exact but it's sort of a rough, let's just say $10 million to $12 million kind of revenue for metallic.
In Q4.
Yes.
Yes, I'm sorry.
No. Please.
I was just going to say and I subtract that from the services line.
On the left is support and professional services, which would be kind of in the low nineties.
Which.
Basically is flat with like two years ago. So is there anything going on on the support and professional services side.
Because software is still growing.
Why would support and professional services be kind of flat two years later.
Or am I thinking about the numbers right.
I think youre close without being completely exactly on that I know, it's not easy to back into all of that but we're seeing an accelerating SaaS growth in terms of recognized revenue and that's going to that's going to carry over the course of time.
One is there are I don't know if exactly divided by four you could take that salaries.
And on the rest of the services.
What we're doing is we've been at this for several years now is that with programmatically and strategically converting many of our perpetual customers to new subscription and SaaS offerings and.
And that's showing up in the form of just accelerating.
With strong revenue growth in <unk> as well.
I'll just add something on the on the PSP, we keep that right sized.
As we build more automation as we invest more into our channel.
As we do more cloud enabled delivery.
Our professional services continues to play an important part, but it's right.
So if we're going to think about it like a couple of years from now on the support and professional services forgetting about metallic or SaaS is.
Is it right to think about that business sort of kind of flattish over the next couple of years, because you're sort of subtracting some stuff in adding some stuff.
It was just kind of trying to figure out a model that without metallics because that is that do you have any.
Can you give us any help there.
I think you're Directionally correct in that okay.
Thank you guys. Thank.
Thank you Jason I appreciate it.
Thank you and our next question comes from the line of Eric Martin Newsy with Lake Street.
Yes, you had a small acquisition in the quarter wondering what the contribution was revenue wise.
Well firstly.
I think we closed it early fab if memory serves me right.
And we've been in the throes of integrating it and making the products are more part of the the Commvault frameworks. So that's that's on track as part of that was our primary focus the revenue streams that that.
That they had the acquisition the company we acquired had continue.
It's I'd say, it's not material.
Okay.
Hey.
The.
As we look out here to FY 'twenty three just curious to know kind of enterprise the appetite for large.
Key transformational projects, maybe versus a year ago can you give us kind of a 30000 foot view of that.
Increasing I would say if I had to use one word I would say its increasing you can see the number of.
Deals we did in the past couple of quarters over $100000 or over $1 billion, we see those increasing and we see them being more strategic.
I'll give three examples in my prepared comments about how customers are leveraging the single unified platform for more complex ransomware.
<unk> for cloud based transformations for broader digital transformation.
Data management, and all of that but we're seeing more and more of that the conversations are more strategic conversations involved. It's just about every conversation and deal involves cloud in some form.
And our track record of moving extra bytes of data rapidly for customers into the cloud holds us in good stead.
Okay, and then lastly for me your.
Investment in human capital to support the plan for FY 'twenty three specifically interested.
It's wise our numbers wise.
Or are we looking at the investment in sales and customer support.
Eric we're not going to provide that level of specificity at this point in time, but we're focused on attracting retaining and building talent.
And if you said some of the numbers you'll see Eric.
For us productivity across the board and the company has been a massive priority over the past three years and that's how we've been able to fund a lot of what we've done and continue to fund a lot of what we wanted to do.
Driving driving productivity, we've got a good six instead of leadership.
I understand that Youre seeing.
We're obviously driving.
Multi product adoption, which requires a level of sophistication and the conversations we have with customers all of that driving productivity all of that's helping us.
Resource, what we need to do so without getting into the details productivity has been our internal calling card.
Understand thanks for taking my questions.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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Sure.
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