Commvault Systems, Inc. (NASDAQ:CVLT) Q3 2024 Earnings Call Transcript
Commvault Systems, Inc. (NASDAQ:CVLT) Q3 2024 Earnings Call Transcript January 30, 2024
Commvault Systems, Inc. beats earnings expectations. Reported EPS is $0.78, expectations were $0.73. Commvault Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Michael Melnyk: Good morning. And welcome to our earnings conference call. I’m, Michael Melnyk, Head of Investor Relations and I’m joined by Sanjay Mirchandani, Commvault CEO and Gary Merrill, Commvault CFO. An earnings presentation 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 that are of 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 a 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 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 opening remarks. Sanjay?
Sanjay Mirchandani: Thank you, Mike. Good morning and thanks for joining us today. I am pleased to report our Q3 results exceeded expectations including double-digit year-over-year growth across our most important KPIs. By our own metrics, this was an exceptional quarter. We also set the stage for the future by introducing market-leading innovation. With Commvault Cloud, our revolutionary platform for cyber resilience. Some financial highlights include total revenue increased 11% year-over-year to $217 million. This was driven by a 31% increase in subscription revenue, which now represents more than half of our total revenue. Total ARR, the primary metric we use to measure underlying growth, grew 17% year-over-year to over three quarters of a billion dollars.
Subscription ARR grew 29% year-over-year to $571 million, and is now over 75% of total ARR. SaaS ARR increased 77% year-over-year to $152 million, and we expanded operating margins by 180 basis points year-over-year while continuing to repurchase shares. These results reinforce that Commvault’s products and services are in more demand than ever, especially as companies grapple with how to keep their data secure, compliant, and resilient in a world increasingly under threat of cyber-attacks. For two years now, we've discussed how the volume, intensity, and sophistication of cyber-attacks would require a radically different approach to cyber resiliency. Gone are the days when perimeter security alone would suffice. It's just a matter of time until the bad actors get in.
So rather than just looking at prevention, CIOs and CISOs alike are putting a heavy emphasis on recovery and resilience. This transition has fueled the most important pivot in our 27-year history. In November, we introduced Commvault Cloud powered by Metallic AI. This platform brings together the best of all worlds. Industry-leading data protection combined with data security, data intelligence, and recovery. Commvault Cloud offers the fastest, most reliable recovery of any solution on the market today. With our platform, data can be restored from anywhere to anywhere, rapidly, reliably, and at massive scale. The platform provides AI capabilities, giving customers automated and predictive recovery, threat intelligence, and operational efficiencies to deliver true cyber resilience.
No longer will organizations need to make unnatural choices between SaaS and other data center workloads. With our platform, we support more workloads than any other vendor in our space. And we do all of this at the lowest total cost of ownership. We scale the platform, integrating with major hyperscalers, as well as leading cyber security and AI companies like Avira, Darktrace, Databricks, Microsoft Sentinel and Palo Alto Networks among others. I'm pleased to share that customers, partners, and industry analysts have been raving about. For instance, one customer told analyst firm Enterprise Strategy Group, quote, “We're a highly regulated industry. Commvault Cloud was the only solution we found that gives us the flexibility and assurance that satisfied our auditors.
Because of Commvault Cloud, I can assure our leadership team that we are protected and we all sleep better at night”. IDC Research Vice President Phil Goodwin said, “This announcement realigns Commvault's products to meet customer preferences and sets the company on a path to be very competitive in cyber resilience”. And we continue to introduce major innovations in the platform that solve critical customer challenges. For example, with our clean room recovery offering, we are closing the gap that exists between incident response planning and readiness. Our new clean room recovery capabilities enable customers to thoroughly and cost effectively test their recovery plans. It also provides them with a safe, on-demand environment to recover.
It is this kind of groundbreaking innovation that sets us apart from the competition and helps us take share and land new business. In fiscal Q3, we added another 500 subscription customers, bringing our total to almost 9,000. Subscription customers now represent well over half of our total active customer base. A couple of examples include a large state agency that detected security gaps with its incumbent vendor. This new customer turned to Commvault for immutable Air Gap ransomware protection, anomaly detection, and an improved cyber resilience posture. And we also helped the Fortune 500 Capital Equipment Company eliminate its patchwork of vendors and move their workloads onto our unified platform. This allowed them to modernize and improve their cyber resilience posture, better protecting them from ransomware with a lower total cost of ownership.
To expand our perspective and keep us at the forefront of innovation, we also established a Cyber Resilience Council comprised of security visionaries from top cyber, cloud and government organizations. The council would advise on security trends and cyber threats, which will shape product development, strategy and partnering opportunities. It is chaired by Melissa Hathaway, a thought leader in cybersecurity and digital risk management, who served in two presidential administrations. We're two months away from closing our fiscal year and I couldn't be more excited about our momentum as we approach fiscal year 2025. With that, I'll turn it over to Gary to discuss our results. Gary?
Gary Merrill: Thanks Sanjay and good morning everyone. I am pleased to report strong revenue and earnings outperformance in Q3. Starting with the top line, total revenue was $217 million, an increase of 11% year-over-year and significantly outpaced our Q3 expectations. Our total revenue growth was highlighted by a 31% year-over-year increase in subscription revenue to $114 million, reflective of both solid double-digit growth in term software licenses and an accelerating contribution of SaaS revenue. Our execution was strong as large software deal close rates improved sequentially and we delivered against our largest term subscription renewal quarter of the fiscal year. This execution resulted in term software deals over $100,000, up 25% year-over-year, driven by increases in both average selling price and deal volume.
Q3 perpetual license revenue was $15 million as these perpetual licenses are generally sold in limited verticals and geographies. At the current run rate, we believe that the headwinds to our reported total revenue growth for perpetual license sales are normalizing as we exit the current fiscal year. Q3 customer support revenue, which includes support for both our term-based and perpetual software licenses, was $77 million, down just 1% year-over-year. Q3 and fiscal year 2024 continue to benefit from the continued trend of fewer conversions of perpetual support contracts to term software licenses. Year-to-date, customer support revenue from perpetual licenses represents 54% of total customer support, with a balance coming from term software and related arrangements.
This compares to approximately 60% in fiscal year 2023 and 75% in fiscal year 2022. At this trajectory, we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue next fiscal year. Moving from revenue results to ARR. Q3 ARR was $752 million, representing 17% year-over-year growth and continues to reflect the underlying strength of our business when our revenue is presented on an annualized basis. Subscription ARR, which includes term-based software arrangements and SaaS contracts, increased 29% year-over-year to $571 million. Within subscription, SaaS ARR grew 77% year-over-year to $152 million, driven by new customer acquisition and strong expansion with existing customers. Q3 SaaS net dollar retention rate, or NRR, was a healthy 125%.
Now I'll discuss expenses and profitability. Fiscal Q3 gross margins increased 90 basis points sequentially to 82.9% and includes continued improvement in our SaaS gross margins. Fiscal Q3 operating expenses were $132 million, up 9% year-over-year, reflecting the impact of our planned go-to-market investments throughout fiscal year 2024 and higher marketing spend during the quarter, including our shift event in New York City. Overall, operating expenses as a percentage of total revenue was 61%, representing 100 basis points of leverage year-over-year, consistent with our objective to manage expenses relative to revenue results. We ended the quarter with a global headcount of approximately 2,900 employees, last sequentially and up 3% year-over-year.
Our current headcount balance includes additional inside sales teams, renewal and related customer success teams to support the customer journey and our accelerating velocity sales motion. Non-GAAP EBIT for Q3 increased 21% year-over-year to $47 million. And non-GAAP EBIT margins increased 180 basis points year-over-year to 21.5%. Moving to some key balance sheet and cash flow metrics. We ended the quarter with no debt and $284 million in cash, of which $88 million was in the United States. Our Q3 free cash flow grew 45% year-over-year to $43 million. Through the first three quarters of the fiscal year, we generated $121 million of free cash flow, an increase of 20% year-on-year. The biggest drivers of free cash flow were SaaS deferred revenue and the strength of our software subscription renewals, which typically include upfront payment on multi-year contracts.
In Q3, we repurchased $51 million of stock under our repurchase program, resulting in year-to-date repurchases totaling $134 million, representing 111% of year-to-date free cash flow. Now I'll discuss our outlook for fiscal Q4 and the full fiscal year 2024. All of the following guidance metrics are based on current foreign currency exchange rates. For fiscal Q4, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS, to be $111 to $115 million. This represents 20% year-over-year growth at the midpoint. This Q4 subscription revenue outlook reflects continued momentum in our new customer and expansion business, but a smaller renewal pull in fiscal Q4 relative to Q3. As a result, we expect total revenue to be $210 to $214 million.
At these revenue levels, we expect Q4 consolidated growth margins to be in the range of 81% to 82%, and EBIT margins in the range of 20% to 21%. We continue to execute some foundational go-to market changes, which include amplifying our discrete focus on our land and expand opportunities, scaling our motion to secure our growing subscription renewal base, and investing to capitalize on our fiscal year 2025 growth objectives. These investments are reflected in the range of our Q4 margin guidance. Our projected diluted share count for fiscal Q4 is approximately 44.5 million shares. Now, I want to give an updated outlook on the full fiscal year 2024, which includes, once again, raising our total revenue and total ARR expectations for the full year.
We expect fiscal year 2024 total ARR growth of 15% year-over-year, which reflects a 100 basis point increase over our prior guidance. We now expect subscription ARR, which includes term-based licenses and SaaS, to increase 25% year-over-year, and reflects a similar 100 basis point increase over our prior guidance. From a revenue perspective, we now expect subscription revenue to be in the range of $420 million to $424 million, growing 21% year-over-year at the midpoint, reflecting the continued momentum in our business and is a $9 million increase at the midpoint compared to our prior guidance. At these revenue levels, subscription revenue will exceed over 50% of our total revenues for the full year. We expect total revenue to be in the range of $826 million to $830 million, reflecting an $11 million increase at the midpoint compared to our prior guidance.
Our improved fiscal year 2024 total revenue outlook reflects the seasonally stronger subscription software trends that we usually experience in the second half of the fiscal year combined with the ongoing momentum of our SaaS offerings. Moving to full year fiscal 2024 margin, EBIT and cash flow outlook. We continue to expect gross margins of 82% to 83% and non-GAAP EBIT margin expansion of 50 to 100 basis points year-over-year. We are also maintaining our expected full year free cash flows of $170 million. As of December 31st, we had $122 million remaining on our existing share repurchase authorization and we expect to continue with our existing practice of repurchasing at least 75% of our annual free cash flows. Year-to-date, we are pacing well ahead of this target and we intend to continue the share repurchase momentum during the current quarter.
For details and trends on all of our key metrics, please take time to review our investor deck contained on the investor relations section of our website. Operator, you can now open the line for questions.
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