Commvault Systems, Inc.
Q4 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Commvault Q4 FY2021 Earnings Conference Call. At this time, all participant lines 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, Mr. Michael Melnyk, Director of Investor Relations. Thank you. Please go ahead, sir.

[Michael Melnyk:]

Good morning, and thanks for dialing in this morning to discuss our fourth quarter and fiscal year 2021 earnings results. Before we begin, I'd like to remind everyone that the statements made during this call, including in the question-and-answer session at the end of the call, may include forward-looking statements, including statements regarding financial projections and future performance.

[Sanjay Mirchandani:]

Thank you, Mike. Good morning, everyone. And thanks for joining us today. I'm pleased to report that Commvault finished Q4 and full year fiscal year 2021 on a high note, with a record quarterly sales and earnings results. We accomplished this in a year where the pandemic focused customers to adopt solutions that would remain a core part of their IP strategy as they accelerate their migration to the cloud. By nearly all accounts, we've performed well. Our portfolio and roadmap are aligned with our customers’ highest priorities. Our vision is resonating in the marketplace and our team is focused on our continued execution. This was evident in our Q4 results. We have software revenue growth of 35% and total revenue growth of 16% year-over-year. We accelerated our recurring revenue transition as Q4 subscription revenue represented 59% of software revenue and recurring revenue represented 76% of total revenue.

[Brian Carolan:]

Thanks, Sanjay and good morning, everyone. Hopefully you had a chance to review our fourth quarter and full year results we’re released early this morning. We once again set numerous records this past quarter and fiscal year 2021 represented a breakout year for Commvault. We're entering FY 2022 with wind at our backs, but before I discuss our Q1 2022 outlook, I'll review the results for the quarter and the full year. Fourth quarter total revenue was a record $191 million, up 16% year-over-year, for the full year, total revenue increased 8% to $723 million. Fourth quarter software and products revenue increased 35% year-over-year to $89.4 million another quarterly record, for the full year software products revenue, rose 19% to approximately $327 million. Large deals represented 69% of software revenue in the quarter, compared to 67% a year ago. Revenue from software transactions over $100,000 increased 39% year-over-year to a quarterly record, $62 million.

[Sanjay Mirchandani:]

Thanks, Brian. Fiscal year 2021 was a record year. But as Brian noted, we have more to do. At our fiscal year 2022 virtual company kickoff a few weeks ago, I updated our employees on how we're approaching the year ahead. I'll briefly share the key themes that we discussed for the year ahead. We will relentlessly innovate, especially around Hybrid Cloud and SaaS data services. We will vigorously build on a leadership position to take share and widen the gap with the rest of the market. We'll continue to improve our end-to-end customer experience working as one organization with our partners. We will maintain a laser focus on execution excellence, as we look to build on the performance we achieved this past year. And all of this lines up to deliver against the near-term targets that we outlined at the investor event in January. With that, I'd like to thank you for your time today, and we will now open it up for questions.

[Operator:]

Your first question comes from Jason Ader with William Blair.

[Jason Ader:]

Yes. Thank you. Brian, just quick question on services. I know that you had outlined for the near-term kind of 6% to 7% total revenue growth and software 9% to 10% that implies pretty low services growth, and just given where you are in Q4 and the momentum you have in Metallic. Is that still reasonable to assume like a low-single digit growth for services in 2022?

[Brian Carolan:]

I think it is, Jason, first of all good morning, great to have you here. I think a reasonable services growth rate for FY 2022 of low-single digits is probably appropriate. Again, we're going through a period of transformation and we've been strategically converting many of our older perpetual maintenance customers to more modern workloads that could be in a SaaS, it could be converting them to new subscription offerings and that has a bit of a headwind services growth in general, but longer-term, we'll feel very confident about our near-term targets we laid out during the investor event. Metallic is going to be a key part of that growth.

[Jason Ader:]

And just to be clear, the term, the support elements of a term license goes into the services line, correct?

[Brian Carolan:]

Correct.

[Jason Ader:]

Okay. All right. And then for Sanjay, I guess the my question is on the data protection market and it does seem like more customers are starting to look at data protection through a data security lens, which is not totally new, but seems like it's ticked up a lot just with the kind of ransomware scourge out there. Can you just talk to that? I don't know if you have any anecdotes, but I'd be interested in hearing about, what you're hearing from your sales folks from customers around data protection being viewed through somewhat new lens.

[Sanjay Mirchandani:]

Fair question. This – the way we look at it is that protecting against bad actors is part of the construct of how we think about data protection and data management, while back you would say that's a security play and this is a data protection play. Now it's sort of – it morphs a little bit more, it's morphing. And what we do is make sure that we're giving our customers newer tools, newer ways, newer angles by which to stay on – stay protected. So for example, if our customers are using HyperScale X, they get automatic and I call it the easy button. They get an automatic extension into MCSS Metallic cloud storage service, for air gapped, copy of their data should they want it. They don't need to the cloud experts, they don't need to have a cloud account, we just take care of it, and give them that additional layer of protection. Are you 100% protected, always? No, but do we give you – I'll be constantly innovating and putting more into the technology so that it's sort of seamless? Yes.

[Jason Ader:]

Great. Thank you.

[Operator:]

Your next question comes from Aaron Rakers with Wells Fargo.

[Aaron Rakers:]

Yes. Thanks for taking the question and congratulations on another quarter of really strong results and for the full year. I guess I wanted to ask first on Metallic, you threw out several metrics that were quite impressive. ARR up 2x quarter-over-quarter, I don't know if I missed it, but did you say how much Metallic is of ARR or how we should think about be as Metallic kind of penetrating the existing installed base of the Commvault customers, new customers, et cetera? Any kind of additional kind of just color on just the momentum and sort of what you deemed as the kind of the era of Metallic now?

[Sanjay Mirchandani:]

Sure, Aaron. So, we're really excited about the progress of making a Metallic. In a fact, this was a product that really came to market at the start of the pandemic about a year ago. And if you recall, we were giving it away to customers and non-customers to try our endpoint because of the – everyone is working remotely. The products made some good progress, we've gone from two countries a year – roughly a year ago to 24 countries, we've gone from three offerings to real multi-cloud hybrid cloud offerings, including Office 365, Database, VMs, Kubernetes containerized apps, on-premise, Edge. So we – we’ve also tied it back to HyperScale X, so that customers don't have to choose, they get both, they get the power of AND like I was saying. So we've been focused really on making sure that the product capabilities are seamless and are what the workloads customers want. Now the outcomes of that, and we did knocked about the numbers and believe me we'd love to, but we need a little more time. We've doubled the number of customers. ARR has doubled every quarter since inception, okay, 50% of our customers, Metallic customers also have another software solution because they see the power of AND coming to play. And we've scaled, it’s about a third of our customers plus minus are in the enterprise. So we're really excited about both the breadth of the appeal on the product and the depth of the capabilities that we've built. And we're not going to slow down. So, standby, we will share more over time, but right now we’re very pleased.

[Aaron Rakers:]

Fair enough, Brian, this was a quick other question here is that, when I look at the reported results, one of the numbers that really stands out is that your free cash flow, I think it's like 70% higher than the prior peak. I know that deferred revenue has grown quite well over the last two quarters. Is there anything that kind of structurally we think about changing in the free cash flow or that trajectory that free cash flow for the company, because it is quite impressive this last quarter?

[Brian Carolan:]

Hey, Aaron, thanks for the question. I think longer-term, you'll see a normalization of that. I think we had a very strong Q4 free cash flow and it was driven by, as I said, a record Q3 performance and we did have some one-time items that showed up in there in the form of time to go to payroll and also some IRS tax refund. So, we can't count on those repeating every quarter. So longer-term, I would just say keep mimicking basically our free cash flow follows our EBIT – our non-GAAP EBIT performance, and there is a correlation there over time.

[Aaron Rakers:]

Okay. Thank you.

[Operator:]

Your next question comes from James Fish with Piper Sandler.

[James Fish:]

Hey guys. Good morning. Congrats on the quarter. A lot of good things are really going on. I just was curious if you could maybe rank order or give us a little bit more color as to how to think about the demand for data management overall versus the federated product portfolio being able to address any workload in any form factor against kind of the change in the go-to market efforts over the last year that really led to the upside and really the momentum in the businesses. Is there any rank order that you could give there?

[Sanjay Mirchandani:]

James, hi it’s Sanjay. So I guess to the parts of your question, hopefully I'll cover what you need me to. But the first thing is, if you look at wherever you were a year ago, whoever you are today, data management, data protection are imperatives. Customers are now looking at this as part of their core IT strategy as they transform. So it's not just about moving stuff into the cloud, it's about saying, okay, we’re helping our customer move their data to the cloud and then help them digitally transform with that, okay. So there is – so that one – that's job one. The second is, as much as everyone wants to transform there is what we are addressing as a business integrity gap, which is essentially the chasm between your desire to offer to a certain transform level digitally and your ability. And it's not for lack of trying, it's about being able to get it done. And that's where we come in and we're helping customers with giving them a unified data platform through our intelligent data services consumed either through a SaaS or on-prem or both, and that's sort of the differentiator. That is what is allowing us to really get out there and do some mission critical work for customers as they move to the cloud, so the scope of work has increased. Now, we have also curated our product offerings so that it's easier for customers to consume it. Let's say, they want DR as a service, if you would. We've got – we've seen DR as a capability being consumed by customers in – for the last quarter, for example, we saw good uptick in that. In the case of specialized workloads, like Office 365 or Salesforce, we do that off of our Metallic screen so that it's all managed through one pane of glass. So I'm not sure if I answered your question directly, but that is the approach we're taking to help our customers through that top sort of data issues. I'm happy to take a second question if you have it, if I didn't cover everything.

[James Fish:]

We can talk about it offline. Just to follow-up on Aaron's question on Metallic. Sanjay, you had mentioned that Metallic, you were kind of giving way to customers during the pandemic to try giving – just being a good vendor and good support overall. Just curious maybe it's for Brian, I guess, how should we think about the monetization strategy of that over the next year as you shift from kind of free to paid offering?

[Brian Carolan:]

I'll take that question. So the free offering was to our endpoints. Okay. As customers started working remotely, we give them the endpoint capability. I think it's through September. And from that point on, I mean, customers can do the basic trial program, but it's all paid service and really we – I think the endpoint piece was for awhile would give us great feedback. Customers appreciated it, some converted, and we move forward.

[James Fish:]

Got it. Thanks guys.

[Operator:]

Your next question comes from Jack Andrews with Needham.

[Jack Andrews:]

Good morning. Thanks for taking the question and congratulations on the results. Sanjay and Brian, I was wondering if you could maybe drill down a bit more on, what's been driving your very strong, large deal performance. Is this happening just organically with customers? Or is there sort of a subconscious sales motion changes that you've undertaken to really drive this. Any additional thought, does this get back to some of the pricing and packaging changes that you've made to make Commvault easier to consume any sort of thoughts on more details about what was driving that large deal strength?

[Sanjay Mirchandani:]

Hey, Jack, it's Sanjay, how are you? So it's a couple of things. One is, as we shared up the course of last year, we've been very focused on our go-to-market activities, with segment of the market in a way that we think we can really get into and help our customers we've aligned the portfolio and the workloads to match that. And now with the compounding of HyperScale X and Metallic, this gives us the breadth that customers want. Now we are appealing to their digital transformation from a data point of view, but not just taking the data to the cloud, it's using the data with the cloud and that is appealing. So a lot of our lot of our bigger deals, if you would are more strategic. It's both the journey to the cloud with the data, and then optimizing and using it. And our portfolio is completely aligned around it. That we shared in Jan when we did the Analyst Day, it's all about aligning our portfolio with the workloads that customers are having the hard data issues. So I think what's – not to geek out on you, but what's really appealing to customers. And if I was a CIO today would appeal to me very much is that I could have single pane of glass for any workload, whether it originated on-prem on our appliance, in the cloud managed service, you get a single pane of glass. So that is very appealing when skills are premium. Okay. Because especially in the world we live in today and the macro where people are working remotely and things have changed on their head. We are making things easier to do remotely with a single pane of glass, and optimizing on IT professionals that are in the organization becomes paramount. And we've really focused on that.

[Jack Andrews:]

No, thanks. Appreciate the color around that. Just as a quick follow-up question, you've completed the first year of a subscription renewal cycle, which has been a new motion for Commvault. I was just wondering when you think about entering, as Brian alluded to a larger, real opportunity here in the new fiscal year, just what are the lessons learned from this? What do you think has gone well, and where do you think you can still improve in terms of executing on the subscription renewal opportunity?

[Brian Carolan:]

Good morning, Jack. It's Brian here. So, yes, so FY2021 was that kind of inaugural year for us in terms of a meaningful subscription cycle, but we got ahead of this. When Sanjay came in a couple of years ago, he said that the need to build out a customer success function, that's really dedicated to paying attention to this group of customers. And it was only going to compound from there and become more of a tailwind for us. And we're really pleased with the results that we had in our first year, this whole land, adopt, expand and renew formula that we have, I think is just starting for us. And we're really starting to hit our stride. And that is nice to see is that we also have the portfolio that's well aligned for expansion capability. So we'd go in and have that conversation with those customers. It's not just about the renewal, it's about what else can we do with them? How can we broaden our portfolio footprint and also help them on their journey, wherever that may be to the cloud or to SaaS or to a hybrid type environment. And what’s nice to see is that as a reminder, what Sanjay mentioned is that, with the power of AND, I mean, about 50% of our Metallic customers have another Commvault solution, and it really gives us something to hone in on and talk about during these conversations.

[Jack Andrews:]

Great. Thanks for taking my questions.

[Operator:]

Your next question comes from Jacob Stephan with Lake Street Capital.

[Jacob Stephan:]

Hi, good morning. Thanks for taking my question. So large deal success has kind of been a focus or a pretty prominent over the last two quarters, was that more of a pipeline anomaly or is that the new status quo?

[Sanjay Mirchandani:]

I would say that we are seeing success across the board, Jacob, so yes, we are seeing success in the large deal, execution of pipeline, I think that has to do with restructured go-to-market infrastructure. We've got a sales force that's hitting its stride. There's just executional excellence that's happening in that area. But we're also seeing in the sub 100K category, which would be kind of the mid-enterprise. We're also seeing success there across all three geographic regions. That's a credit to our velocity, sales, our channel relationships, and again, just better execution all around. So we liked this balanced formula where we can have those large enterprise transactions kind of drive probably 70% of the quarter for us, but we need the stability of also selling into enterprise and also complementing that with Metallic as well, which spans across all categories.

[Jacob Stephan:]

Great. And so just moving forward into 2022 here, where do you see your sales force trend indeed do you think you're going to invest more in that, or do you think you might keep it at the level of that currently? How do you think about that?

[Sanjay Mirchandani:]

By and large, I think we've got what we want from a structural point of view, from a segmentation point of view there are areas of the world or parts of the segment in some segments where people continue to invest. But by and large, I think we're in a good place and we focused on productivity like we saw in last quarter. And I think – we kicked off the year, we're on our way. So I think we're in a pretty good place, Jacob.

[Jacob Stephan:]

Great. Thank you and congrats on the quarter.

[Sanjay Mirchandani:]

Thank you.

[Operator:]

I'm showing no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.