Commvault Systems, Inc.

Good day, and welcome to Commvault Q3, fiscal year 2022, 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 this session, you will need to press star then 1 on your touchtone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. As a reminder, this call is being recorded. I would like to turn the call over to Michael Melnick, Investor Relations. You may begin.

Good morning, and welcome to our earnings conference call. I'm Michael Melnick, and I'm joined by Sanjay Mirchandani, Commvault's CEO, and Brian Carolyn, Commvault's CFO. 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's most recent periodic reports filed with the SEC for discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward-looking statements. Commvault does not assume any obligation to update these statements. During this call, Commvault's 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. I'll now turn it over to Sanjay for his remarks. Sanjay?

Thanks, Mike. Good morning, and thank you for joining us to discuss our fiscal third quarter results. Our team executed well in this breakout quarter, and the headlines speak for themselves. Software and products revenue meaningfully outpaced the market growth rate, increasing 11% year over year to a record $99 million. We exceeded $200 million in quarterly total revenue for the first time in company history. And non-GAAP EBIT was a record $43 million. While proud of these results, I'm even more excited about the quality of the metrics that underpin our financials and our accelerated journey to a cloud-first recurring revenue model. 81% of total revenue was recurring in nature compared to 74% a year ago. Total ARR grew 11% year over year to $561 million. Subscription and SaaS ARR grew 45% year over year to 309 million and now represents 55% of total ARR. We had the best quarter for new customer additions in years, including several Fortune 500 wins. We've moved nearly 2.5 exabytes of customer data to the cloud, representing approximately a five-time growth in the past three years. And Metallic continued to set new financial, and operating milestones. We could not achieve these milestones without the hard work and dedication of our employees worldwide. We also remain optimistic about Q4 and beyond for several reasons. First, we're winning and taking share. Our core software is performing well, with software and products revenue growing 13% when adjusted for pass-through appliance revenue. And in aligning with customers' consumption patterns, Subscriptions represented a record 71% of software and products revenue. We're seeing broader product adoption with new and existing customers across every single product category and are setting all-time highs with Hyperscale X. This is largely because we support the broadest workloads and provide the security, scalability, and simplicity customers need to advance their cloud transformations. In most cases, we're displacing incumbents, often multiple legacy and upstart vendors, to provide customers a single, future-proof data management solution. I'll share a few examples shortly. The second reason for our optimism is that Metallic, our hyper-growth data management as a service offering, continues to gain momentum. As more applications are born in or migrate to the cloud, it's clear that SaaS is the future of the industry, and for that matter, the future of Commvault. Customers are demanding scalable, cost-efficient, enterprise-grade SaaS-based solutions And we couldn't be more pleased with the traction because the numbers are staggering. We added over 400 new Metallic logos, 60% of which were net new to Commvault. Total customers increased approximately 40% quarter over quarter, nearly 1,500. And Metallic landed its first ever seven-figure ACB deal. This is a major milestone for Metallic and for Commvault as deals like this are driving ARR growth. Which is why we remain bullish about the trajectory of our Metallic business. We have a clear first mover advantage, and we will continue to invest to further Metallic's growth and solidify our differentiated leadership position. This growth is compounded as customers increasingly embrace both Commvault software and Metallic SaaS, which is what we call the power of Ant. Over 40% of Q3 deals involved more than one product. Over 50% of Metallic customers are using another Commvault product, And approximately 30% of Metallic customers are using multiple Metallic offerings. What better way to demonstrate this than with a global materials company that had an inefficient multi-vendor environment? This Fortune 500 company wanted a single layer of data protection, flexible reporting, and swift recoverability across its myriad of workloads, which is why they chose HyperscaleX and Commvault Complete with ransomware protection and numerous Metallic offerings. We're the only company to provide this breadth of solutions, ease of use, and the future-proof architecture to meet their needs today and tomorrow. This is our competitive advantage. Our third reason for optimism is that we're also leveraging our partners and the MSP community to drive new growth opportunities. Our collaborative partner engagement model is helping us win more business globally. For example, working with one of the world's largest systems integrators, we closed a seven-figure transaction with a leading global auto manufacturer. They needed a scalable backup solution for their on-premise data centers with a broad list of workloads, certified object storage system for compliance, and ransomware resiliency. After evaluating numerous vendors, they switched from their legacy solution to HyperscaleX with Commvault Complete data protection. Once again, we were the only company that could meet all these requirements with centralized workload management. Another reason for our optimism is our ability to help customers with their most strategic and pressing business needs. For instance, the relentless rise of ransomware and other security threats are no longer just CIO or CISO concerns. They're CEO and board level priorities. You see, these threats have bridged the traditionally siloed worlds of data protection and security, adding even more complexity, cost, and risk. Rather than a multi-vendor patchwork of point solutions, Security and IT professionals alike are increasingly looking for a unified architecture and approach to help protect, prevent, and recover from these and tomorrow's threat vectors. We do this today. In Q3, our partners presented us with an opportunity with a Fortune 500 telecom company resulting in a seven-figure deal. Commvault was the only vendor that could meet the company's ransomware, multi-cloud, automation, and integration needs. the legacy and upstart competitors couldn't even meet the initial round of requirements. Folks, these threats are not going away, which is why we also continue to innovate our leading-edge ransomware offerings. In fact, we entered into an agreement to acquire an overseas technology company to further our innovation in this space. We believe this technology and talent will broaden Metallic's ransomware detection and prevention capabilities and help customers further reduce their ransomware risk. Looking ahead, I believe we're uniquely positioned in a large and growing market. Our teams are executing well, and the strength of our core software offerings is allowing us to invest and innovate for the future. Commvault continues to play a critical role in customers' IT transformation projects, which gives us confidence in the long-term opportunity for our business. Now, I'll turn it over to Brian for a closer look at the financials.

Brian? Thanks, Sanjay, and good morning, everyone. Hopefully you had a chance to review the results we released this morning. I will briefly recap and provide some additional color on the quarter. In fiscal Q3-22, we reported total revenue of $202 million, an increase of 8% year over year. Q3 marked the first time in company history that we exceeded $200 million in quarterly revenue, a milestone for Commvault. Software and products revenue increased 11% year over year to approximately $99 million. As a reminder, in FY22, we've moved primarily to a software-only model. In Q3, software-only growth, excluding appliance pass-through revenue, was approximately 13% year over year. Revenue from software transactions over $100,000 increased 24% year over year, and represented a record 76% of software revenue. The volume of these transactions grew 20% year over year, and the average deal size increased 3% to approximately $332,000. As Sanjay noted, we closed numerous seven-figure deals in the quarter. In Q3, we had the highest number of new customer additions in years across all products driven by our Americas and EMEA regions. In addition to our new customer success, business from existing customers reached an all-time high during the quarter. Taken together, the pace of both new and existing business further validates the success of our emerging land and expand motion. Let me now discuss our accelerating transition to a recurring revenue-based model. Third quarter subscription software revenue increased 45% year over year to approximately $70 million. Subscription licenses represented 71% of total software revenue, an increase from 63% last quarter and 55% a year ago. We're clearly benefiting from the tailwinds of our subscription transition and our growing recurring revenue model. Total annual recurring revenue, or ARR, increased 11% year-over-year to approximately $561 million. On a constant currency basis, ARR was up 13% year-over-year. ARR growth is being driven by new subscription customers and Metallic. As Sanjay noted earlier, subscription and Metallic ARR grew 45% year-over-year to $309 million, and now represents 55% of total ARR, up from 51% last quarter and 46% a year ago. This is an important proof point in the transformation of our company. We believe ARR is a good measure of the underlying health of the business. It represents the strength of our land, expand, and renewal motions, and is a barometer of our potential for future growth. Total recurring revenue, which includes subscription software, maintenance support services, and SAS grew 17% year over year to $164 million. Recurring revenue represented 81% of total revenue in the quarter, an increase from 79% last quarter and 74% a year ago. Now I'll discuss expenses and profitability. We reported fiscal third quarter gross margins of approximately 86%, an increase of 40 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. These savings were partially offset by an increased mix of metallic SAS revenue, which carries a higher cost of sales. We expect Metallic gross margins to improve over time with increased economies of scale. Total expenses, including both cost of sales and operating expenses, increased approximately 6% year over year to $157 million. Expense growth was driven by increased third-party marketing spend, field compensation on record bookings, and strategic investments in Metallic. Non-GAAP EBIT was a record $43 million, and non-GAAP EBIT margins improved 150 basis points year-over-year to 21.3 percent. 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 $234 million in cash, of which over 70% sits overseas. As Sanjay mentioned, we announced a technology and talent-driven acquisition of an overseas firm to enhance our ransomware protection capabilities. The purchase price is approximately $17 million and will be funded entirely from our foreign cash balance. We expect the deal to close in fiscal Q4. We currently have no debt on the balance sheet. During the quarter, we opened a new $100 million revolving credit facility to provide additional financial flexibility. In Q3, we repurchased approximately 1.3 million shares of our common stock for $85 million. Since our investor event in January 2021 through December 31st, we repurchased approximately 4.6 million shares for $328 million exceeding our initial guidance of $200 million plus 75% of free cash flow. Now I'll discuss our financial outlook for Q4 FY22. We saw accelerating momentum throughout Q3. As Sanjay articulated, we believe that the industry and our business are healthy. At this point in the quarter, our pipeline is in good shape and is always an area of focus for us. We're working diligently to further our market share gains and leadership position. Against this backdrop, we are raising fiscal Q4 revenue guidance. We expect Q4 software revenue of approximately $97 million and total revenue of approximately $202 million. Now let's shift to expenses. We expect Q4 gross margins to be flat year over year, or approximately 85%. We expect total expenses, including cost of sales and operating expenses, to be up approximately 6% year over year. Q4 expenses reflect a seasonal FICA tax reset, annual merit increases, and go-to-market investments. We anticipate that this will result in EBIT margins of approximately 20%. Our projected share count for Q4 is approximately 46.5 million shares. With that, I'll now turn things back over to Sanjay for some closing remarks. Sanjay? Thank you, Brian.

The past two years have been anything but normal. While the ongoing pandemic and the unpredictability in the supply chain continues to create uncertainty, we've adapted and delivered results. Yet, as data continues to grow in both quantity and importance, so too has the need to secure and protect that data. This is our sweet spot. Our message is resonating in the market and our products are making a difference for our customers. We are excited about the opportunity and confident in our path forward. With that, I'll open the call up to Q&A. Operator?

As a reminder, to ask a question, please press star then one. If your question has been answered and you'd like to move yourself in the queue, press the pound key. Our first question comes from Jason Ader with William Blair. Your line is open.

Yeah. Hi, guys. Good quarter. Question for me is on the Metallic versus the Commvault Classic, how much overlap in use cases are you guys seeing in the field? Are there situations where a salesperson is struggling to figure out what fits best, or are the lines of demarcation pretty clear in terms of use cases?

I think it's very clear. We've got a very clear playbook. Metallic supports mostly different workloads, Office 365, endpoints, containers, cloud-native applications. And there's a little overlap on VMs because we want to give customers that flexibility. But I'd say to you that most of the workloads and most of the work we do with Metallic is incremental. Complementary. The power of and, just while you're on that question, the power of and, our ability to give customers value on both our on-premise and through Metallic is increasing. Roughly, I think about over 40%, 41% of our bookings had more than one product. And that includes hyperscale, that includes Metallic, different products.

Gotcha. And then just to follow up for Brian, kind of along those lines, Do you have a sense of, let's say, just fiscal 22, how much of a headwind to your growth has come from the shift to more ratable rev rec, so not just metallic but also kind of more activity with MSPs where you would have had kind of an upfront rev rec, but that's shifted over to ratable?

I think it's somewhat marginal at this point, Jason. As Sanjay said, it's really complimentary at this point. Anytime you're investing in a SaaS business, it's going to have a headwind in terms of the in-period recognizable revenue. But by and large, this has been very much of the power of both succeeding together in the market. And we're not seeing it as a huge headwind.

All right. Thank you very much. Good luck.

Our next question comes from Aaron Rakers with Wells Fargo. Your line is open.

Yeah, thanks for taking the questions, and congrats on the quarter. A couple for me as well. I guess the first question is, you know, as we looked at the setup in the quarter and, you know, obviously impacting what was the September quarter as well, you guys have discussed some supply chain challenges impacting some deal closures and just the ability to deploy at some of the customers. Where do we stand today? Has that lifted out of the narrative with the customers, or is there still some conservatism going into the March quarter guidance based on those dynamics?

Like we said last quarter, we saw the supply chain headwind increasing over the course of our second quarter. It happened over time. And when we spoke in October, we sort of said we're going to land where we said we were going to land because there were ongoing risks and we were trying to normalize for them. I think what we've done this quarter, Aaron, is we've really got ahead of it. We're managing it well. The team is executing. The products are working well because customers are using the power of N. In some cases, you're using the cloud directly. So we're seeing, you know, I'm not saying we're out of it, but I'm saying we've, at least in our pipeline management, we've normalized for it.

Okay. Just a couple other quick questions. On the Metallic business, I mean, I think it was $309 million that you disclosed on the subscription and SaaS ARR. You know, it looks like, you know, based on how we kind of think about the ramp of Metallic from a revenue standpoint, you saw a very, very strong quarter. I think you actually, you know, introduced or commenced availability of Metallic, you know, in October in Asia PAC. So I'm curious, is there any way for us to kind of think about the SaaS component of of that subscription and SaaS ARR momentum that you're seeing? You know, how do we think about that piece? Because Metallic becomes a much more, you know, visible growth driver as we move forward.

I mean, you know, in all honesty, we're really pleased with the progress we're making with Metallic. The rev ramp is, you know, I call it hyper growth, and that's how I think about it. There's a strong demand on SaaS from customers, enterprise-grade SaaS. not necessarily in lieu of on-premise, but in most cases with on-premise. So the power of and is very important. We're the only ones that do this. It's a big contributor. Like I think Brian and I both said, the subscription and SaaS ARR is a 45% growth year on year, and it's 55% of the total. So it's handsome. Now, we're not unwrapping the numbers just yet, And, you know, like I said earlier, we'll call out more specifics over time. Right now, we're just focused on doing everything we can to grow this business as fast as we can. Okay.

And then the final quick question is, you know, going back to the analyst day, you know, early part of 2021, you outlined kind of some, you know, growth expectations, you know, both total revenue as well as software and then you know, also, you know, progression of EBIT, you know, I believe towards into that mid-20% range. Correct me if I'm wrong, I think out to 2024 fiscal year. You know, Brian, just curious, I mean, you know, any thoughts, you know, are you sticking by that at this point? You know, any thoughts relative to what was outlined, you know, a year ago?

Hey, good morning, Eric. Yeah, as you know, that back in January 2021, that was a two-year perspective we gave. And I think that We've proven that we're tracking toward those targets, especially on revenue and software growth, and in particular, ARR is ahead of those targets. We've also done a sizable amount of share repurchases that are well ahead of what we messaged. We're focused on balancing growth and profitability at the same time. We said rule of 32 in a couple years. I think we're approaching now the rule of 30. Keep in mind that just a couple years ago, we're at a rule of nine, so we've made substantial progress since then. And we're focused on that. You know, the mix might change a little bit between growth and margin, but our direction absolutely does not change. We're driving towards that combination. And right now we believe ARR is a great metric to measure ourselves. We'll continue to manage ARR growth while investing in a business such as Metallic. And we'll leave it at that.

I just want to add one comment. Our core software business is healthy. It's growing. We're taking shares. That was the first bullet I sort of enumerated in my comments earlier. That is allowing us to really fuel and grow Metallic. As new workloads happen in the cloud, are born in the cloud, move to the cloud, we're all over it. It's the combination that's causing customers to give us a serious look and to adopt this because it's a no-compromise architecture. This is sort of a really important way to think about it. It's not where one is you know, poking into the other. They're working together, complementary, power of hand to really deliver the value. Thank you, Dan. You're welcome.

Our next question comes from James Fish with Piper Sandler. Your line is open.

Hey, guys. Thanks for the questions. Great quarter. Kind of going off of Aaron's questions there because I think they're important. You know, Brian, you made the comment there about the mix maybe changing a little bit behind growth in margin, but you're driving towards that, you know, rule of 32 or so, I guess why not invest for more growth at this point, especially on the metallic side where you're just seeing tremendous success and kind of take down margins for fiscal 23 and potentially the out years?

Hey, good morning, James. Good to hear from you. Yeah, I mean, the good news is that Metallic is experiencing hyper growth. I mean, you're seeing that the key driver of ARR, the market's moving in that direction. Customers are demanding enterprise scale SaaS solutions. You know, we believe we have the early mover advantage and really the differentiator for us is the power of both Commvault software and our SaaS offerings. And I think it's well known that, you know, when you when you're dealing with SaaS margins, they're going to look a little different from software margins. We understand those dynamics. We're working hard to get to economies of scale. And, you know, we'll call out more specifics in due course, but, you know, we're squarely focused on growing both top and bottom.

And I'll just jump in here. At no point have you compromised the growth of Metallic. I mean, Metallic's been something we've been sharing with you over the past, like, I don't It's a business we're very happy with. It's a business that we're investing in. It's a business that leans in very nicely with our core. Our sales force knows how to take both of them to market. Our partners love it. MSPs are adopting it. So we are investing in it. And, you know, we've done it. We've done a lot of investment. And, you know, just our Q4 guidance, for example, you know, approximately about 20% of, you know, FY22 EBIT margins. Folks, that's up 700 basis points from fiscal year 20. And that's up roughly 900 basis points since fiscal year 18. So we're delivering the results. We're growing ARR, which is a key metric for us. And we're delivering a healthy EBIT margin and growing it. And as Brian said a couple of years ago, in the rule of X, we were at nine. So on all fronts, we are investing. We're hopefully making the right choices. And most importantly, customers embracing it.

Makes sense, guys. And maybe on the go-to-market aspect of it, I mean, you know, great quarter on the top line. It seemed like we spent some of the upside in SG&A. And, Brian, you gave us some details there. But has there been a change in the incentives for the sales force to sell more subscription or metallic, or is it just the factor of, you know, investing behind the growth overall and adding more headcount?

Without giving too much away, our results are commensurate with how we're prioritizing things for the field, whether it be compensation, playbooks, focus, product. The good news is when you've got something that the customers appreciate, it makes things better. So everything's aligned, hopefully, in that direction.

Thanks, Justin.

Our next question comes from Eric Martinuzzi with Lake Street. Your line is open.

Yeah, I wanted to delve into the buyback. I understand that you guys were pretty aggressive here and actually exceeded the original outlook. At the board level, have we talked about, you know, kind of a reload or a new plan, given that we've exceeded the one that we laid out a year ago?

Yeah, good morning, Eric. It's Brian here. Yeah, we laid that out in January of 2021. The commitment was $200 million plus 75% of free cash flow starting in FY22, and that's the plan we're executing against right now.

Okay. Maybe I'm not following here.

There's no change to that plan, Eric. There's no immediate change to that plan.

Okay, okay. So we should anticipate a smaller number in the current quarter.

You know, we'll be opportunistic, and we committed to 75% of free cash flow moving forward.

Okay. All right. And then I had a question regarding the large deal pricing, specifically pricing on renewals. You guys now have your entire second year of renewals on the install base, and I was wondering how that pricing discussion has been going

Well, I think we've been pleased with the performance that we've seen on our renewal business. And as we've been forecasting that, you know, this is now a tailwind for us as a company. But I'd like to emphasize that it's not just about the renewal. It's very much of a complementary motion for us. It's land, adopt, expand, and renew. All those things have to kind of work in conjunction with one another. And we're often seeing that, you know, that's opening up more and more conversations. In fact, we're seeing at the time of renewal, You know, it's the culmination of many discussions we've had with the customer, and we're seeing large deal sizes as a result. We just demonstrated that, you know, we had a record percentage of deals greater than $100,000 for the quarter. That encompassed 76% of our software revenue. That was up 24% year over year. The volume of those deals was up 20%. So one continues to feed the other. Again, it's a land, adopt, expand, and renew all in one motion.

Yeah. Congrats on the quarter and the outlook.

Thank you, Eric.

This concludes the Q&A session. Thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.