Q1 2023 Commvault Systems Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the Commvault Q1 fiscal year 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one.
On your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Mr. Mike Miller. Please begin.
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 , Gary Merrill Commvault CFO .
And info graphic with key financial and 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 <unk>. 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 Commvault does not assume.
Any obligation to update these statements during.
During the call Commvault financial results are presented on a non-GAAP basis, a reconciliation between the non-GAAP and GAAP measures can be found on our website.
Thanks again for joining now I will turn the call over to Sanjay for his remarks Sanjay.
<unk>.
I'm pleased to share Commvault record Q1 results are subscription software and SaaS strategy is working as customers continue to prioritize data management and protection solutions as they embrace the cloud and hybrid it.
This is reflected in our results, which I will be discussing in constant currency.
Total revenue was up 13% year over year.
Software and products revenue increased an impressive 17%.
<unk> is starting to contribute meaningfully to revenue and we once again delivered profitable growth.
Total IRR a key indicator of our future continues to be strong growing 16% year over year.
Combined subscription and SaaS IRR grew approximately 50% year over year and now represents 64% of our total IRR and.
And we have two five times more subscription and SaaS customers than we had two years ago.
These are proof points that our strategy is working.
And that we are trusted partner for our customers large multi cloud environments I'd like to share a little bit a little about why I think we are poised to capitalize on the massive opportunity ahead of us.
The past few years have been hard and it professionals and will continue to be challenging with ramp and data proliferation horizon security threats, increasing costs and resource limitations.
As executives prioritize it projects in this environment and data protection will remain top of mind, especially as mission critical hybrid solutions continued to grow in the enterprise.
This proliferation of data across multiple environments and vendors is what causes the data to be more vulnerable.
Oregon organizations are looking to consolidate their data management solutions and reduced complexity and cost while protecting their most precious asset.
Nobody has the workload breadth and depth to manage this across the entire data state like Commvault, we enabled us today.
Through the power of and which offers the best software and SaaS, we provide elegant industry, leading cloud data management capabilities. So customers have the ease and flexibility to use one or both offerings to meet the unique and ever changing needs.
From a single pane of glass customers can manage their on Prem workloads like virtual machines containers mission critical mission critical legacy workloads and SaaS applications like office 365, and Salesforce in fact, approximately 50% of our SaaS customers also use a commvault software product.
Faced with the relentless threat of ransomware attacks more and more customers are mitigating risk by replacing their multiple point products with Commvault integrated software and SaaS solution for Aercap Ransomware protection.
Within months of acquiring traffic's, a solution for advanced threat perception, we re imagine the product and introduce it to as threat wise with end to end proactive and responsive capabilities to further strengthen our customers, perhaps on where protection. The product is currently available in early access via metallic.
Our software and SaaS offerings continued to garner industry accolades and strong ratings for cyber resiliency governance and kubernetes support impact.
In fact, <unk> recently named US as a front runner for kubernetes and an outperformer for hybrid cloud in its latest radar reports.
It is a continuous innovation that solidifies our position as an industry leader and it is a robust partner ecosystem that enables us to reach more customers globally.
In late June we jointly announced a strategic partnership with Oracle to offer metallic globally on Oracle cloud infrastructure OCI.
With this partnership Commvault became the first enterprise backup and recovery of SaaS provider and the Oracle ISP accelerated program.
This will give oracle customers the performance security and trust they need to accelerate that journey the data journey to OCI, while leveraging metallic to protect their most mission critical workloads on premises and in the cloud.
We expect this partnership to open the door to Oracle's 400000, plus global customers.
By adding native OCI integration and support we now have industry, leading capabilities across all hyperscale.
With these partners, we're meeting customers, where they are with our portfolio of cloud data management solutions and we are confident this will enable us to further accelerate our growth now I will turn the call over to Gary.
Thanks, Sanjay and good morning, everyone.
In my first earnings call as CFO I am happy to share that we are off to a solid start to the year after delivering record fiscal 'twenty two performance.
I will start with a quick recap of the quarter with growth rates on a year over year basis, unless otherwise stated.
We beat all of our guided metrics for Q1 led by total revenue, which grew 8% to approximately $198 million.
On a constant currency basis total revenue increased 13%.
Software and products revenue was $92 million, increasing 13% as reported and growth accelerating to 17% on a constant currency basis.
From a geographic perspective, both our Americas and international regions delivered strong Q1 software and products revenue growth.
Our Americas region increased 15% driven.
Driven by large deals as customers spend on it transformation projects with data management as a critical element.
Our international region, which includes both EMEA and <unk> increased 8% also driven by strength in larger enterprise transactions.
On a constant currency basis international software and products revenue hit 20% growth.
On a consolidated view the revenue from software transactions over 100000 increased 24% and represented 75% of software revenue.
Average deal size also increased 24% to approximately 379000.
We closed multiple seven figure deals in the quarter across a variety of industry verticals.
Subscription software revenue increased 51% to approximately $75 million.
Subscription license sales represented 81% of total software revenue, which is an all time high and compares to just 60% of total software revenue a year ago.
Our progress toward a subscription led software business has given us more predictability and resilience to our business model.
Now moving to <unk>.
Our total <unk> increased 12% to $595 million.
Or 16% growth in constant currency.
<unk> growth continues to be driven by metallic and new software subscription business.
The combination of subscription and metallic <unk> grew 46% to $378 million and now represents 64% of total IRR.
Which compares to 59% of total AOR last quarter and only 49% in Q1 of the prior year.
Through Q1 fiscal 'twenty three we're exceeding our January 2021, Investor day targets for 10% compounded IRR growth.
Which is a meaningful indicator of our future growth potential.
Total recurring revenue, which includes subscription software maintenance support services, and SaaS grew 20% to $171 million or 25% growth on a constant currency basis.
Recurring revenue represented 86% of total revenue for the quarter up from 78% a year ago.
Now I'll discuss expenses and profitability.
We reported first quarter gross margins of 83, 6%, which compares to 85% in the prior quarter and reflects the modest shift in our gross margin profile with the success of our accelerating SaaS business.
Total operating expenses were $123 million, an increase of 6% versus Q1 of the prior year and a decrease of 3% sequentially.
During the first quarter, we prudently managed our expenses and increased our productivity with our total company head count roughly flat quarter over quarter.
We are proud of our track record of responsible growth, which is core to our management philosophy.
non-GAAP EBIT was $41 million EBIT margin up 25%.
In Q1, we repurchased approximately 310000 shares of our common stock for $19 million.
We ended the quarter with no debt and approximately $259 million in cash on the balance sheet.
Of which approximately two thirds sits overseas.
Now I will discuss our financial outlook for Q2 fiscal 'twenty three.
We expect Q2 software revenue to be in the range of $80 million to $84 million in total revenue to be in the range of $184 million to $188 million.
As a reminder, in recent fiscal years Q2 is our low point for software revenue.
On a constant currency basis, the mid point of our software revenue guidance would be up 12% and total revenue would be up 8%.
On the expense side, we expect Q2 consolidated gross margins to be flat sequentially at approximately 83%.
Which includes the impact from our rapidly growing SaaS business.
We believe that at current revenue levels, we are nearing the low point for consolidated gross margins and we expect ongoing improvement as our SaaS business scales.
We are closely managing expenses balance.
Balancing profitability.
While investing in metallic growth initiatives.
We expect Q2 operating expenses to be roughly flat sequentially.
Okay.
At the midpoint of our revenue guidance EBIT margins will approach 17%.
Our projected share count for Q2 is approximately 46 million shares.
Our transition to a sustainable and profitable recurring revenue model is well underway.
Our team is focused on execution and we are committed to driving responsible growth in the years ahead.
I'll now turn the call back to Sanjay for some closing remarks Sanjay.
Thank you Gary <unk>.
Economic uncertainty is top of mind for you as investors as well as for our customers partners and us as a management team.
There are two important reasons that I am confident we have a solid foundation and precedent to manage through this.
First we've been through this before Commvault has been in business for 26 years, and we've survived and thrived throughout many different economic cycles, we're in a great position as a company.
We are profitable generate significant free cash flow and have no debt on our balance sheet.
Second protecting data is not a luxury especially in these times customers and prospects need to continue focusing on best in class data management solutions.
Like the early days of the pandemic.
Protecting data and reducing cost of inefficient legacy endpoint solutions are top of mind for decision makers.
Against that backdrop, our team is focused on what we can control.
Our innovation and execution to seize the opportunity ahead and drive responsible growth as the world's leading cloud data management company.
With that we'll open up to questions.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
And our first question comes from Aaron Rakers of Wells Fargo. Your line is open.
Yes, thanks for taking the questions I guess I'll just start on just the macro concerns it looks like your guidance is a little bit below the street expectations. So I'm curious of what you've seen from a demand shaping perspective through the course of this last quarter.
And how much conservatism are you kind of any way to think about how much you're baking into that current quarter guide given given the macro have you seen any deal slippage any any kind of change in the deal pipeline et cetera.
Yes, Sanjay how are you.
Great.
So I'd like to start by saying that breakdown we think.
Data protection continues to be mission critical and we're in a healthy healthy industry.
What we control is the <unk>.
Execution, and we're doing well, we just came off a record Q1.
Our guidance reflects what we're seeing what we're seeing in the current macroeconomic environment.
And if you add to that that Q2 is seasonally a low point for the year.
You're sort of seeing that in the range we gave you.
Little more color Americas strong, but we're closely monitoring Europe .
Okay, and FX continues to be a headwind for us just like any company with a large international presence.
We can't control that so on a constant currency basis, we are guiding Q2 to about 12% software growth.
An 8% total revenue growth and we think that's that's pretty good.
Gary anything you want to add nothing Sanjay Erin good to hear from you a couple of quick things.
In Q1, we executed very strongly in enterprise. If you look at the enterprise transactions. It was 75% of our revenue and up 24%.
Pipelines going into Q2 are once again once again at those levels. So we're going to work on controlling the execution.
We've adjusted a little bit for FX in the current FX with the euro and the pound now year over year down almost 15%. So we know we have in front of us with the pipeline and we're going to control the execution against that.
Yes, great great.
Great points.
Can you talk a little bit about metallic I mean, when I look at your other services growth I think it was up 97% year over year in total.
As you saw north of 100% growth in the Americas. In this last quarter is that can be taken as largely or entirely growth being driven by metallic just any any kind of incremental color. You can you can add on that.
Aaron I'll start a little bit on the financial ethane Sanjay can maybe give you some business perspective on metallic.
The growth in the other services is absolutely driven by high metallic and as you know last quarter, we disclosed that milestone of $50 million of IRR and we continue to build off of that so in Q1, and even as we look into Q2 and the rest of the fiscal year our growth in that offer services will reflect that acceleration.
Of metallic for sure.
I'll just add a little color on sort of picking up where we left off last quarter on an metallic and Jim.
So our strategy is about the power and giving customers. The best software combined with the best SaaS and really this is something that we keep an eye on over 50, roughly 50% of our customers.
Then a metallic customers also have another commvault software product.
Okay, and about 30% of <unk>.
<unk> customers also have another metallic service for their more than one metallic service.
And as as we designed it metallic continues to be a customer acquisition engine for us.
So we think it's.
It continues to if it had a great quarter in Q1 and it continues to.
Contributing meaningfully if you with difficult customer quote.
Revenue Andy.
Great guys. Thank you.
Yes.
Our next question.
And our next question comes from Eric <unk> of Lake Street Capital markets. Your line is open.
Yes, I wanted to dive into the services line a little bit.
I guess.
Slide guide there at a 104 million given the growth that metallic I was expecting that to be kind of.
Up sequentially.
What's behind that.
Sure.
Guide there on the services.
Hey, Eric This is Gary I'll jump in so.
Metallic acceleration we talked about.
Couple more things in play and that other services revenue first is.
Current FX rates, so also reflecting what we see from our current FX rates as about 40% to 50% of our business is denominated in both euros and pounds.
Outside of FX, because a few more things one is as you think about our professional services business, we bring brought.
Pretty massive automation to that business and scale, especially for some of our cloud enabled services as well as investing in our channel ecosystem. So that business is somewhat right sized for all the automation initiatives we've driven.
And then the third piece is we're sitting in the maintenance support.
Prospective piece of the business and Thats roughly flat thats, our historical perpetual maintenance base in that business, which is which is a great cash cow for us.
Flat to down as we also look to transition our installed base programmatically to our new subscription offerings to make it even more stickier and repeatable business model.
And we had a great quarter with that too absolutely.
Okay. So it gives you I mean, you gave three explanations there should I assume theyre kind of stack rank the impact.
Yes.
Absolutely FX.
Probably the biggest driver and then the other two are about equal.
Gotcha.
And then as far as.
The outlook.
Are you seeing anything.
The outlook anticipating.
Any change in the year.
You're kind of dependency on your hardware partners in their supply chain issues.
This is Gary again from a from a supply chain and hardware.
For us, it's pretty much behind us, we manage our business and make sure that our pipeline coverage ratios can contemplate it including how we run the business and how we inspect the business and even as we think about metallic.
The acceleration for us as when customers have concerns over supply chain the offerings.
Can do with hybrid cloud becomes a great momentum for our metallic business.
Got you thanks for taking my question.
Okay.
Okay.
And our next question will come from Jason Ader of William Blair. Your line is open.
Yeah. Thank you hi, guys.
Wanted to.
Ask about the competitive landscape sort of across let's call. It the three major market segments, the high end where.
I know you run up against a lot of incumbents.
The midrange, where I know, there's a bunch of new players and then at the low end seems to be kind of defaulting to managed service providers.
Maybe just talk about each of those three segments and maybe you segment the market differently than I did but I would love to just get a general update on the competitive landscape sure sure Sanjay.
Sanjay so Jason.
The high end the enterprise as Gary shared we had record number of deals where we see continued traction in the enterprise. That's why we've always been strong our products are very.
<unk> is extremely valuable and and fit for purpose for that market segment, and we're seeing a lot of.
We're seeing a lot more powerful and solutions going and customers that are touching SaaS alongside more mainstream datacenter on premise solution. So that market continues to be strong we're taking share from incumbents.
Everyday so that continues to be.
To be to be strong for us the mid market is something that we've we've done well in different parts of the world like Europe , we do very well with the MC market parts of the USB the greater the mid market, depending on the vertical and our solutions. The power of <unk> solution is really working well there.
It's almost built.
For that marketplace in the sense that customers start with the workover to on premise ease their way into office 365 of Vms in the cloud and then suddenly they're using both so we're seeing a lot of that.
In the mid market Thats really beginning to get traction in the mid market and in the low end, where we weren't historically strong we're seeing a lot of golf customer acquisitions through metallic metallic is is how we're really winning in that space msp's.
All right.
The relationship with MSP the partnerships that we've announced are all causing us to get a lot of good traction in a market, where we were not historically strong. So that's actually one where we're doing.
Very well so across the board we're seeing good traction.
The strategy is working it's different in different segments as to how they absorb the solution and overall.
Our market share is up.
So.
We think we think we're doing great.
Excellent.
Just a quick follow up on the on the macro commentary.
Are your when you talk about watching Europe , It sounds like North America, Hasnt changed much but our year.
Are you getting a sense from customers in Europe that.
Hey, Mike.
Potentially hit the pause button on certain things or what or.
What specifically are you hearing from customers.
In your conversations that maybe is giving you a little bit more caution there or is it just.
Kind of generic let's be more prudent because of.
All of the headlines that we see in Europe .
I think what we again, what we saw were.
With changes in buying behavior towards the latter part of last quarter. So we're taking we're taking a conservative viewpoint going into this quarter, we saw more scrutiny around budgets for sure slower.
Slower purchasing decisions, which led to.
In some cases longer purchase cycles sales cycles time to close so the guidance we've given incorporates that.
Because we're seeing that the U S continues to be.
<unk> continues to be strong in.
And we are outside of what I, just said Europe continues to be a strong market for us we're keeping an eye on it.
One thing I'll add to it.
We're seeing though as Sanjay mentioned some of that scrutiny, we're not seeing pipeline <unk> actually pipeline continue to be very strong for us is making sure that we're being prudent around close rates.
Got you and.
The European.
Customers are they.
Are you are you feeling like they.
They're just they need a little bit of time here or what is what is your sense on.
Unlike some of the shape of close rates for let me just assuming courts.
So just to give you we're not breaking out Europe of expanding international codes, which includes Asia software revenue.
Last quarter, which was up 15% and in constant currency up 20%.
Right.
And total revenue roughly 60% up in constant currency. So Europe had a had a good quarter, where just think towards the end of last quarter, we saw a little bit of a slowdown in decision, making not the pipeline as Derek indicated so.
We're just taking <unk>.
Taking a more conservative approach on how we are probably thinking through the numbers, but.
The business is strong data protection is top of mind, we're part of a lot of high end <unk>. So youre landing new customers. So we're saying that we're just thinking we're just making a conservative viewpoint on.
What we don't control.
But it sounds like you didn't Miss your expectations in Europe in Q1 now.
Yes, they were very strong we hit 20% copper growth year over year on a constant currency basis in Q1 internationally.
Okay, great. Thank you.
And I'm showing no further questions. This concludes today's call. Thank you for your participation you may now disconnect.
Paul.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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