Commvault Systems, Inc.
Q1 2022 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the Commvault Q1 Fiscal '22 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I would now like to hand the conference over to your speaker today, Mike Melnyk, Director of Investor Relations. Please go ahead.

[Mike Melnyk:]

Good morning, and thanks for dialing in today for our call to discuss our first quarter fiscal year '22 earnings results.

[Sanjay Mirchandani:]

Good morning, and thank you for joining us this morning. As the pandemic continues, I hope you're all remaining healthy and well. As you saw in our earnings release this morning, we are off to a solid start to the year with our Q1 results, and they are consistent with our near-term expectations. Software revenue grew 7% and total revenue grew 6% year-on-year. Our total ARR grew 13% year-on-year, driven by new subscription customers and the continued strength of our Metallic data protection as a service offering. We continued to make progress on our recurring revenue transition with 78% of Q1 total revenue being recurring. We saw further evidence that our intelligent data services platform and strategy are resonating with customers as both new product contribution and multiproduct adoption increased quarter-over-quarter. And we grew responsibly, achieving a non-GAAP EBIT margin of 22.4% and posting non-GAAP EPS of $0.62. This would not be possible without the dedication and hard work of our employees, so I would like to extend my sincere thanks to all our Vaulters around the world.

[Brian Carolan:]

Thanks, Sanjay, and good morning, everyone. Hopefully, you had a chance to review the results we released earlier this morning. Coming off our record fiscal '21 performance and into the first quarter of fiscal '22, we are off to a solid start. I will briefly recap the results. In fiscal Q1 '22, we reported total revenue of $183 million, an increase of 6% year-over-year. Software and products revenue increased 7% year-over-year to approximately $82 million. As a reminder, we've moved to a software-only model. In Q1, software-only growth without hardware would have been approximately 11% year-over-year. Revenue from software transactions over $100,000 increased 2% year-over-year and represented 69% of software revenue. The volume of these transactions increased 34% year-over-year, and the average deal size was approximately $305,000. Please note that in Q1 '21, we recorded the single largest subscription software deal in our company's history, which made for a challenging comparison this quarter. Our unbundled portfolio and usage-based pricing is resonating with small and medium enterprise customers, and we saw continued improvement in software deals under $100,000. Revenue from these transactions grew 23% year-over-year, led by the Americas and EMEA. Fiscal first quarter services revenue increased approximately 5% year-over-year to $101 million. The growth in services revenue is being driven primarily by Metallic. We also saw improvement in professional services revenue as we delivered services attached to the strong software results in the second half of the prior fiscal year.

[Sanjay Mirchandani:]

Thanks, Brian. We made tremendous progress and believe we have the industry's most comprehensive platform to help organizations protect mission-critical workloads as they move further into the cloud and rapidly embrace SaaS solutions. We believe we are well positioned to meet our performance goals for both the short and long term. While we have more to do, we're optimistic that, with our growing intelligent data services portfolio and focus on execution, we will be able to help our customers continue to do amazing things with their data. With that, let's open it up for questions.

[Operator:]

. Your first question comes from Aaron Rakers of Wells Fargo.

[Aaron Rakers:]

Congratulations on the quarter. A couple of questions if I can. I guess, the first question is you talked towards the end of your comments around the outlook around the possibility of any kind of deal, large deal kind of pause as enterprises come back into the office. How would you characterize your pipeline, your deal activity and kind of closure rates here as we start to think about that? Has there been any changes in the June quarter? Or what are your assumptions into the September quarter right now?

[Brian Carolan:]

Aaron, it's Brian here. Good to hear from you. So I think we're seeing consistency. We're encouraged by what we're seeing, especially on a year-over-year growth basis. The guidance that we're issuing is 14% year-over-year growth. If you strip out the hardware, that's 20%. So that's a healthy year-over-year increase from our perspective. We're just calling it out that the pandemic is very much here. People are going to be coming back to the office, it's summertime. It's seasonality. We're just calling that out. It's not anything specific we're seeing, but there's always that possibility.

[Aaron Rakers:]

Yes, fair enough.

[Sanjay Mirchandani:]

And then the pipeline looks fine, and there's a good mix of deals in there. So just more -- it's more, call it, stating what we think.

[Aaron Rakers:]

Right. And then the other question I was going to ask you is that it looks like you're kind of consistently on that growth trajectory that you laid out at your Analyst Day back earlier this year. But operating margin leverage looks quite healthy. So I'm curious, as we think about the progression of operating margin, maybe some positive seasonality into the back half of the year, will you take any upside on operating margin, let's say, we go above that 24% and invest that back? Or are you willing, Brian, to kind of drop that through the model? Just curious how you're thinking about it.

[Brian Carolan:]

We're not going to change those near-term targets that we laid out. We feel good about those and confident in what we communicated. And again, in Q1, we were a little bit behind on our investments. We're going to catch up. We're already doing that in Q2. We would expect more leverage in the back half of the year, especially with our subscription renewal opportunity and other revenue tailwinds. But again, just to reiterate, we're comfortable with what we laid out during our January investor event.

[Operator:]

Your next question comes from James Fish of Piper Sandler.

[James Fish:]

So HP bought Zerto this quarter, it reminds a lot of us out here about what happened with Dell kind of pre-EMC. What can you say about the impact here? What's the exposure to HP as a partner? And how does the deal potentially change the possibility of this partner moving forward?

[Sanjay Mirchandani:]

Sure. No, it's a great question. And I'd like to set out by saying that HPE and Commvault, we have a super strong relationship. We're very committed to each other as partners, and nothing changes there. And interesting thing is that GreenLake, which is a big part of HPE strategy, we were just recently named 2021 HPE GreenLake Momentum Partner of the Year. So we continue to work with them on their strongest priorities. Now what I took away from the acquisition was the data management, whether it's in the form that Zerto delivers it or the way we do it, is top of mind, okay? And as far as we are concerned, we've had disaster recovery capabilities in our technology, both inside of our core technology as well as a stand-alone product, for a while. And we're seeing good momentum. Just as a data point, I think, roughly 2x the year on your customers. And an important metric, the workloads, virtual machines that you protect have doubled -- almost doubled year-on-year. So we're seeing good traction with our DR product. And this is a -- competition is the name of the game in this business, so that doesn't change.

[James Fish:]

That's great. And then you did -- on Metallic go-to-market versus the rest of the portfolio. Is there a different approach here at all? Is it fair to say we're kind of nearing that $50 million run rate in the business yet?

[Sanjay Mirchandani:]

Yes. We'll share more details on Metallic shortly, not on this call, but shortly. Like I said, it's a rising star in our portfolio. We added roughly 300-plus customers quarter-on-quarter. Our feature set, our certification on FedRAMP, I mean, we're putting a lot of muscle into this product, into this capability. And the growth is healthy, but all we're going to say -- that's all I can share at this point. We're looking at trends between cross-sell, up-sell, workloads between products, workloads within Metallic offerings. So we're seeing a lot of good patterns, a lot of which we'll start sharing very soon. But I guess the key takeaway here is that it's increasing our -- we're working with the installed base because they're seeing the value of a SaaS-based power of and. We're adding new logos. Many of them new to Commvault, which is great. Our service provider partners are looking at this as a key offering that gets them up and running quickly. So not going to comment on the number, but I will say that we're very pleased with where we're going with this.

[James Fish:]

Got it. I can't say I didn't try, Sanjay, but...

[Sanjay Mirchandani:]

I wouldn't put it past you, man.

[Operator:]

Your next question comes from Jack Andrews of Needham.

[Jack Andrews:]

I wanted to see if you could provide some more color on the strength you talked about in the sub-$100,000 deals. If you could just maybe elaborate on what products are resonating and how do we think about the expansion rates from that group of customers.

[Brian Carolan:]

Jack, it's Brian here. So thanks for your question. So we saw a pretty broad contribution from both in the Americas and EMEA. And I think it really comes down to our unbundled product portfolio that's resonating with the channel. And we're seeing higher amount of velocity deals coming through our pipeline, which is encouraging. That's going to be a strategic move for us moving forward. We'd like this nice balance between larger enterprise deals and the sub-$100,000 deals. So yes, that was -- it was a strong quarter for that, and we expect that to continue to increase as we expand our platform going out in time.

[Jack Andrews:]

Perfect. So maybe just to follow up on that then. I mean, could you just speak more broadly to how this multiproduct portfolio may be changing your land-and-expand motion? You also certainly had some strength with large deal sizes at the high end. Are you seeing changes with ASP customers are perhaps starting their journey with Commvault? And then how do we think about the trajectory of expansion rates over time?

[Sanjay Mirchandani:]

Sure. So this is Sanjay. I touched on this a little bit in my prepared comments. It's -- we're seeing -- first of all, we're seeing customers really embracing what we call the Power of And. The capabilities that our portfolio provides and the flexibility it provides between having an on-premise engine like HyperScale X combined with SaaS-based delivery of Metallic. And then as customers move down the journey, whether they start in the cloud and then incorporate on-premise, or they go the other way, we're seeing that there's a lot more land that we can do with Metallic as a way say that Office 365 workloads. Let's protect those. Once you see you protect those, then you want to do other things with those workloads on-premise or incorporate on-premise workloads. So we're seeing the Power of And really work for customers across different workloads. And this gives us the ability that maybe a few years ago we didn't have. It really allows us to really go back to our customers and offer them more just complementary capabilities. For example, with ransomware where it is today and it's top of mind to every customer, if they're an existing Hyperscale X customer, I oversimplified, but they have an easy button by which they can back up an immutable copy of their data in our cloud. And we call that service MCSS, the Metallic Cloud Storage Service. And then they have a layer of protection that they just got automatically through Metallic, integrated in with their core Hyperscale X capabilities. They don't have to be a metallic customer, but they are availing of Metallic Cloud Services, SaaS delivered services on their on-premise. So we're seeing all kinds of capabilities being used mixed and matched between cloud and on-premise. And I think this is the pattern we're going to see, and I think we have an early-mover advantage here.

[Operator:]

Your next question comes from Eric Martinuzzi of Lake Street.

[Eric Martinuzzi:]

Yes. I wanted to focus on the operating expenses here. Just as we look out to Q2. First of all, I wanted -- sorry, before we get to Q2, I wanted to make sure I understood the Q1 -- one of the Q1 add-backs. There was a small restructuring charge in the quarter. Could you explain that?

[Brian Carolan:]

Yes, Eric, it's Brian here. It wasn't really material for us in terms of the restructuring charge so we didn't really consider that to be something that we're focused on. It's really an ongoing thing as we move out, move resources to our center of excellence in India. And it's really just something that's going to be ongoing. And then with respect to just the Q1 spend in general we were impacted by the hiring in our COE. We weren't able to add resources there. Obviously COVID was impacting India. We're going to start catching up on that in fiscal Q2.

[Eric Martinuzzi:]

Okay. That may partly answer my next question, which was the Q2, with the -- you expect the expenses to rise where -- obviously, Center of Excellence is one area. But is there direct sales, channel sales? Where else are we investing in Q2?

[Sanjay Mirchandani:]

Yes. Absolutely. We're going to be investing in go-to-market Metallic. There's going to be some type of return of normalized expenses as we come out of this pandemic and also in the channel as well in marketing.

[Eric Martinuzzi:]

Okay. And then a second question for me. The repurchase program, it was relatively just in comparison to Q4, you guys were $90 million in Q1, up from $62 million in Q4. Was that entirely driven by the seasonal cash flow spend? Or is that -- should we anticipate that to kind of sustain in Q2?

[Brian Carolan:]

Yes. I mean we had a full quarter of activity in our fiscal Q1 on the share repurchases. Remember, we announced that at the end of January, so we had 2 full months of activity in fiscal Q4. We had full 3 months in fiscal Q1.

[Operator:]

The next question comes from Steve Enders of KeyBanc.

[Steven Enders:]

I just want to check on what you are seeing out there in the labor market. It sounds like there's some catch-up that you're seeing in the quarter. But I guess, how is that also more broadly impacting customers and their ability to get deals done?

[Sanjay Mirchandani:]

I'm just trying to -- can I pass your question you're saying it's how are we seeing the labor market affecting our customers or affecting how we engage with our customers?

[Steven Enders:]

So I guess 2 parts to that. Just one, how are you finding the current hiring environment and the labor market and your own ability to hire? It sounds like there is some catch-up spend that's happening there, but also how is that impacting your ability to work with customers.

[Sanjay Mirchandani:]

I think, over the course of the last quarter, there's been a lot of conversations within the company here. And we've got a really clean policy about how we're thinking about our workforce in the future. And just generally for the folks we want to try and bring onboard, where are we going to work? Is it remote? Is it hybrid? Is it in the facility. So there's a lot of those conversations that I think, correctly, people are giving a lot of focus on. And we have -- like I shared in my prepared comments, Steve, we've -- as a company, we've always been -- had a large percentage of our employees that were distributed, remote, a few hybrid. We may not have called it that, but they would come into the office as needed. And then folks that were absolutely needed on-premise and would work from there. So we've just solidified that, made it a lot more flexible for our employees and potential employees on how they work. And we're investing in infrastructure, we're investing in collaboration tools. And walking into this with our eyes open saying this is a changing world. So I think we're able to recruit the talent we want. Last quarter was just -- I think I would put it down to a little of that changed and a little bit of just the COVID uncertainty.

[Steven Enders:]

Okay. Great. I mean, I guess, good to hear the catch-up in spending happening in 2Q here or -- and the ability to hire now. Just on the Metallic side and within the customer base, I want to touch in a little bit more on how you're thinking about driving expansion within that, within those customers and kind of the additional adoption rates that you're seeing for incremental products and kind of how that has progressed now that we're a couple of years into the Metallic being released?

[Sanjay Mirchandani:]

So we've really not taken our foot off the gas by way of innovation around Metallic. Let me talk about the innovation loop for a minute. Since we brought the product out and really over the last 4 or 5 quarters we've just whether it's geographical expansion, whether it's feature functionality expansion, whether it's workload expansion, whether it's containers, whether it's supporting multiple clouds that -- the 3 Microsoft clouds, active directory, I mean, FedRAMP certification. We've not slowed down on what the capabilities Metallic can provide. The second thing, which relates to your question, is what we keep calling the Power of And, which is with existing customers or customers that have on-premise workloads and it's very much part of their future, we give them that ability to mix and match. So SaaS-based workloads, your natural leaning is to a SaaS-based capability, which is Metallic. You may want to bring some of those workloads, that data back on the edge, on-premise. You might want to take on-premise data into the cloud. We continuously innovate the seamlessness between the technology so that customers have that -- it's not a one-way street. They can mix and match as needed. And then the glue behind all of this -- and again, I'll -- with ransomware being front and center for our customers, is we've built this capability called MCSS, Metallic Cloud Storage Service, where our existing customers can literally hit a button and get access to the Metallic Managed Service capability and an air gap copy all delivered through a single pane of glass, okay? That's the magic. That's our secret sauce. That's how we -- that's the ease of use, especially in this day and age where more and more is being expected of IT professionals done remotely, okay? Having different point products does not solve the problem. It creates a new problem. What we give them is a single pane of glass that works seamlessly across any workload, whether it be in the cloud or be on-premise.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.