CVLT - Commvault Produces Operating Growth As Transition Gains Speed

2023-11-03 13:59:15 ET

Summary

• Commvault Systems, Inc. provides a range of data backup and recovery software and services.
• The company is transitioning to a subscription-centric focus and has strong free cash flow and growing operating income.
• The global market for cloud storage services is expected to reach $333.8 billion by 2030, providing growth opportunities for Commvault.
• I reiterate my Buy outlook for Commvault Systems, Inc.

A Quick Take On Commvault Systems

Commvault Systems, Inc. ( CVLT ) reported its FQ2 2024 financial results on October 31, 2023, beating revenue and consensus earnings estimates.

The firm provides various on-premises and cloud data storage and recovery technologies.

I previously wrote about CVLT with a Buy outlook.

While the stock has suffered slightly in the general market selloff since my last quarterly report, I reiterate my Buy outlook on CVLT due to progress in its transition to a subscription-centric focus, strong free cash flow and growing operating income.

Commvault Overview And Market

New Jersey-based Commvault provides businesses with a variety of data protection, backup and recovery solutions.

The company is led by CEO Sanjay Mirchandani, who was previously Chief Executive Officer of Puppet and SVP Asia Pacific Japan for VMware.

The company's main offerings include:

• Backup & recovery.

• Disaster recovery.

• File storage optimization.

• Data governance.

• eDiscovery & compliance.

• Managed services.

• Security.

Commvault acquires new customers from its direct and inside sales and marketing efforts and through partner referrals.

CVLT counts more than 100,000 customers and 7,000 ecosystem partners worldwide.

According to a 2023 market research report by Vantage Market Research, the global market for cloud storage services (as a proxy for data protection software and services) was an estimated $90.6 billion in 2022 and is forecast to reach $333.8 billion by 2030.

This represents a forecast CAGR of 17.7% from 2023 to 2030.

The primary reasons for this expected growth are the growing demand for enterprises for ever larger amounts of data and a rising number of remote-located employees and contractors needing access to relevant data stores.

Also, an important challenge for the industry is to effectively defend against security threats and improve data privacy for corporate and personal data.

The chart below shows the historical and projected market growth for the cloud storage industry from 2022 to 2030.

Major competitive or other industry participants include:

• Amazon.com, Inc. (AMZN).

• Alphabet Inc. (GOOG) (GOOGL).

• Microsoft Corporation (MSFT).

• Dell EMC (DELL).

• IDrive.

• pCloud.

• Dropbox.

• Icedrive.

• NordLocker.

• Others.

The company also provides on-premises storage solutions.

Commvault's Recent Financial Trends

Total revenue by quarter has remained stable; Operating income by quarter fell slightly sequentially:

Gross profit margin by quarter has trended lower; Selling and G&A expenses as a percentage of total revenue by quarter have also moved lower more recently:

Earnings per share (Diluted) have rebounded, as the chart shows below:

(All data in the above charts is GAAP).

In the past 12 months, CVLT's stock price has risen 4.31% vs. that of the iShares Expanded Tech-Software Sector ETF's ( IGV ) rise of 40.86%:

For balance sheet results, the firm ended the quarter with $283.3 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash flow was $174.1 million, during which capital expenditures were only $3.3 million. The company paid $96.7 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Commvault

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

CVLT's most recent unadjusted Rule of 40 calculation was 15.7% as of FQ2 2023's results, so the firm's performance has improved somewhat, per the table below:

(Source - Seeking Alpha)

Sentiment Analysis

I prepared the chart below from the frequency of keywords in management's recent earnings conference call:

The firm is facing continued revenue headwinds from its perpetual license segment and clients pushing out decisions from caution due to macroeconomic concerns.

Analysts asked leadership about changes in ARR (Annual Recurring Revenue), growth for its Metallic system and customer support revenue.

The company reported strong Metallic and subscription growth this quarter, but management adjusted forward guidance down somewhat due to shifts in revenue mix, not demand weakness.

The firm's long-term transition to subscription and SaaS continues, with support from its perpetual segment declining gradually.

Management sees no change in customer demand, only prudent caution given the uncertain macro environment and lengthening sales cycles.

Commentary On Commvault

In its last earnings call (Source - Seeking Alpha ), covering FQ2 2024's results, management's prepared remarks highlighted 18% growth in its ARR, which rose by 18% YoY.

Its Metallic cloud-native data protection service has passed the 4,000 customer mark and now generates $130 million in ARR.

Total revenue for FQ2 2024 rose 6.9% year-over-year, while gross profit margin fell by 1.9%.

The gross margin drop was due to "accelerating SaaS revenue, which carries a higher cost of sale than software."

The firm's SaaS net dollar retention rate was 130%, indicating strong product market fit and sales & marketing efficiency.

Selling and G&A expenses as a percentage of revenue fell by 0.8% YoY, while operating income rose an impressive 89.2%.

The company's financial position is strong, with ample liquidity, no debt and excellent free cash flow.

CVLT's Rule of 40 performance has improved over FQ4 2023, but is still in need of further improvement.

Looking ahead, consensus fiscal 2024 topline revenue estimates expect growth of 4.2% over the previous fiscal year.

If achieved, this would represent a rise in revenue growth rate versus fiscal 2023's growth rate of only about 2% over fiscal 2022.

In the past twelve months, the firm's EV/EBITDA valuation multiple has fallen about 31%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include continued progress on making its transition to a substantially subscription-based business (90% of revenue).

Operating income is increasing despite pressure on gross margin from its legacy segment, indicating that the company is executing well on its Metallic system.

While the stock has suffered slightly in the general market selloff since my last quarterly report, I reiterate my Buy outlook on Commvault Systems, Inc. shares.

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