COMMVAULT SYSTEMS INC

Previous wording

You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, changes in demand as well as the risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Current wording

You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Previous wording

Incorporated in Delaware in 1996, Commvault Systems, Inc. provides its customers with a cyber resiliency platform that helps them secure, defend and recover their most precious asset, their data. We provide these products and services for their data across the following environments: on-premises, hybrid and multi-cloud. Our cyber resiliency offerings are delivered via self-managed software, SaaS, integrated appliances, or managed by partners. Customers use our technology to protect themselves from threats like ransomware and recover their data efficiently.

Current wording

Incorporated in Delaware in 1996, Commvault Systems, Inc. provides its customers with a scalable platform that enhances customers' cyber resiliency by protecting their data in a world of increasing threats. We provide these products and services for their data across many types of environments, including on-premises, hybrid and multi-cloud. Our offerings are delivered via self-managed software, software-as-a-service ("SaaS"), integrated appliances, or managed by partners. Customers use our Commvault Cloud platform to protect themselves from threats like ransomware and recover their data efficiently.

Previous wording

We expect our subscription arrangements will continue to generate revenues from the renewals of term-based licenses and SaaS offerings sold in prior years. Any of our pricing models (capacity, instance based, etc.) can be sold via a subscription arrangement, either through term-based licensing or hosted services. In term-based license arrangements, the customer has the right to use the software over a designated period of time. The capacity of the license is fixed and the customer has made an unconditional commitment to pay. Software revenue in these arrangements is generally recognized when the software is delivered. In SaaS offerings, revenue is recognized ratably over the contract period.

Current wording

We expect our subscription arrangements will continue to generate revenues from the renewals of term-based licenses and SaaS offerings sold in prior years. Any of our pricing models (capacity, instance based, etc.) can be sold via a subscription arrangement, either through term-based licensing or hosted services. In term-based license arrangements, the customer has the right to use the software over a designated period of time. The capacity of the license is fixed and the customer has made an unconditional commitment to pay. Software revenue in these arrangements is generally recognized when the software is delivered. In SaaS offerings, customers use hosted software over the contract period without taking possession of the software. Revenue related to SaaS is recognized ratably over the contract period.

Previous wording

We sell to end-user customers both directly through our sales force and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers and original equipment manufacturers. Subscription revenue generated through indirect distribution channels accounted for approximately 90% of total subscription revenue in both the nine months ended December 31, 2023 and 2022. Subscription revenue generated through direct distribution channels accounted for approximately 10% of total subscription revenue in both the nine months ended December 31, 2023 and 2022. Deals initiated by our direct sales force are sometimes transacted through indirect channels based on end-user customer requirements, which are not always in our control and can cause this overall percentage split to vary from period-to-period. As such, there may be fluctuations in the dollars and percentage of subscription revenue generated through our direct distribution channels from time-to-time. We believe that the growth of our subscription revenue, derived from both our indirect channel partners and direct sales force, are key attributes to our long-term growth strategy. We intend to continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term. The failure of our indirect distribution channels or our direct sales force to effectively sell our products and services could have a material adverse effect on our revenues and results of operations.

Current wording

We sell to end-user customers both directly through our sales force and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers, original equipment manufacturers, and marketplaces. Subscription revenue generated through indirect distribution channels accounted for approximately 90% of total subscription revenue in both the three months ended June 30, 2024 and 2023. Subscription revenue generated through direct distribution channels accounted for approximately 10% of total subscription revenue in both the three months ended June 30, 2024 and 2023. Deals initiated by our direct sales force are sometimes transacted through indirect channels based on end-user customer requirements, which are not always in our control and can cause this overall percentage split to vary from period-to-period. As such, there may be fluctuations in the dollars and percentage of subscription revenue generated through our direct distribution channels from time-to-time. We believe that the growth of our subscription revenue, derived from both our indirect channel partners and direct sales force, are key attributes to our long-term growth strategy. We intend to continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term. The failure of our indirect distribution channels or our direct sales force to effectively sell our products and services could have a material adverse effect on our revenues and results of operations.

Previous wording

We have a non-exclusive distribution agreement with Arrow pursuant to which Arrow's primary role is to enable a more efficient and effective distribution channel for our products and services by managing our reseller partners and leveraging their own industry experience. We generated 36% and 37% of our total revenues through Arrow for the nine months ended December 31, 2023 and 2022, respectively. If Arrow were to discontinue or reduce the sales of our products or if our agreement with Arrow were terminated, and if we were unable to take back the management of our reseller channel or find another distributor to replace Arrow, there could be a material adverse effect on our future business.

Current wording

We have a non-exclusive distribution agreement with Arrow pursuant to which Arrow's primary role is to enable a more efficient and effective distribution channel for our solutions by managing our resellers and leveraging their own industry experience. We generated 34% and 38% of our total revenues through Arrow for the three months ended June 30, 2024 and 2023, respectively. If Arrow were to discontinue or reduce the sales of our solutions or if our agreement with Arrow were terminated, and if we were unable to take back the management of our reseller channel or find another distributor to replace Arrow, there could be a material adverse effect on our future business.

Previous wording

Our customer support revenue includes support contracts tied to our software products. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support, and other premium support offerings, for both term-based software license and perpetual software license arrangements. We sell our customer support contracts as a percentage of net software. Customer support revenue is recognized ratably over the term of the customer support agreement.

Current wording

Our customer support revenue includes support contracts tied to our software products. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support, and other premium support offerings, for both term-based software license and perpetual software license arrangements. We sell our customer support contracts as a percentage of net software. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year on our perpetual licenses. The term of our subscription arrangements is typically one to three years, but can range between one and five years.

Previous wording

Sales outside the United States were 47% of our total revenues for both the nine months ended December 31, 2023 and 2022. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions generally results in increased revenues, operating expenses and income from operations for our non-U.S. operations. Similarly, our revenues, operating expenses and net income will generally decrease for our non-U.S. operations if the U.S. dollar strengthens against foreign currencies.

Current wording

Sales outside the United States were 48% and 45% of our total revenues for the three months ended June 30, 2024 and 2023, respectively. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions generally results in increased revenues, operating expenses and income from operations for our non-U.S. operations. Similarly, our revenues, operating expenses and net income will generally decrease for our non-U.S. operations if the U.S. dollar strengthens against foreign currencies.

Previous wording

Using the average foreign currency exchange rates from the three months ended December 31, 2022, our total revenues would have been lower by $2.4 million, our cost of revenues would have been lower by $0.1 million and our operating expenses would have been lower by $0.9 million from non-U.S. operations for the three months ended December 31, 2023. Using the average foreign currency exchange rates from the nine months ended December 31, 2022, our total revenues would have been lower by $3.8 million, our cost of revenues would have been higher by $0.1 million and our operating expenses would have been lower by $0.8 million from non-U.S. operations for the nine months ended December 31, 2023.

Current wording

Using the average foreign currency exchange rates from the three months ended June 30, 2023, our total revenues would have been higher by $1.2 million, our cost of revenues would have been higher by $0.1 million and our operating expenses would have been higher by $0.4 million from non-U.S. operations for the three months ended June 30, 2024.

Previous wording

In addition, we are exposed to risks of foreign currency fluctuation primarily from cash balances, accounts receivables and intercompany accounts denominated in foreign currencies and are subject to the resulting transaction gains and losses, which are recorded as a component of general and administrative expenses. We recognized net foreign currency transaction losses of approximately $1.6 million and $1.8 million for the three and nine months ended December 31, 2023, respectively. We recognized net foreign currency transaction losses of approximately $0.3 million and $0.1 million for the three and nine months ended December 31, 2022, respectively.

Current wording

In addition, we are exposed to risks of foreign currency fluctuation primarily from cash balances, accounts receivables and intercompany accounts denominated in foreign currencies and are subject to the resulting transaction gains and losses, which are recorded as a component of general and administrative expenses. We recognized insignificant net foreign currency transaction losses for both the three months ended June 30, 2024 and 2023.

Previous wording

There have been no significant changes in our critical accounting policies during the nine months ended December 31, 2023 as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended March 31, 2023.

Current wording

There have been no significant changes in our critical accounting policies during the three months ended June 30, 2024 as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended March 31, 2024.

Previous wording

–Total revenues increased $34.8 million, or 6% year over year, driven prim arily by an increase in subscription revenue, offset by decreases in perpetual license and customer support revenues. We remain focused on selling subscription arrangements through both term-based software licenses and SaaS offerings.

Current wording

–Total revenues increased $26.5 million, or 13% year over year, driven prim arily by an increase in subscription revenue, partially offset by decreases in customer support and other services revenues. We remain focused on selling subscription arrangements through both term-based software licenses and SaaS offerings.

Previous wording

–Subscription revenue increased $26.9 million, or 31% year over year, driven primarily by a 91% increase in our SaaS revenue. Term-based license revenue increased 16%, due to an increase in larger term-based license transactions (deals greater than $0.1 million) period over period. Subscription revenue accounted for 53% of total revenues for the three months ended December 31, 2023 compared to 45% for the three months ended December 31, 2022.

Current wording

–Subscription revenue increased $26.8 million, or 28% year over year, driven primarily by a 69% increase in our SaaS revenue. Term-based license revenue increased 13%, primarily due to an increase in the number of larger term-based license transactions (deals greater than $0.1 million) period over period. Subscription revenue accounted for 55% of total revenues for the three months ended June 30, 2024 compared to 49% for the three months ended June 30, 2023.

Previous wording

–Perpetual license revenue decreased $4.9 million, or 25% year over year. Our go to market motion is led by subscription and perpetual licenses are generally only sold in certain verticals and geographies. Perpetual license revenue accounted for 7% of total revenues for the three months ended December 31, 2023 compared to 10% for the three months ended December 31, 2022.

Current wording

–Perpetual license revenue increased $0.6 million, or 4% year over year. Our preferred route to market is led by the sale of term-based licenses. Perpetual licenses are generally only sold in certain verticals and geographies. Perpetual license revenue accounted for 6% of total revenues for the three months ended June 30, 2024 compared to 7% for the three months ended June 30, 2023.

Previous wording

–Customer support revenue decreased $0.9 million, or 1% year over year, driven by a $7.2 million decrease in customer support revenue attached to perpetual license support renewals, partially offset by a $6.3 million increase in support allocated to term-based license arrangements.

Current wording

–Customer support revenue decreased $0.6 million, or 1% year over year, driven by a $6.3 million decrease in customer support revenue attached to perpetual license support renewals, partially offset by a $5.7 million increase in support allocated to term-based license arrangements.

Previous wording

–Other services revenue was flat compared to the same period of the prior year. Changes in other services revenue can vary period over period primarily due to the timing professional services are delivered.

Current wording

–Other services revenue decreased $0.2 million, or 2% year over year. Changes in other services revenue can vary period over period, primarily due to the timing professional services are delivered.

Previous wording

We track total revenues on a geographic basis. Our Americas region includes the United States, Canada, and Latin America. Our International region primarily includes Europe, Middle East, Africa, Australia, India, Southeast Asia and China. Americas and International represented 58% and 42% of total revenues, respectively, for the three months ended December 31, 2023. Total revenues increased 16% and 6% year over year in the Americas and International, respectively.

Current wording

We track total revenues on a geographic basis. Our Americas region includes the United States, Canada, and Latin America. Our International region primarily includes Europe, Middle East, Africa, Australia, India, Southeast Asia and China. Americas and International represented 62% and 38% of total revenues, respectively, for the three months ended June 30, 2024. Total revenues increased 14% and 13% year over year in the Americas and International, respectively.

Previous wording

▪Total revenues in the Americas was impacted by a 24% increase in subscription revenue, offset by a 44% decrease in perpetual license revenue, driven by the shift from selling perpetual licenses to subscription arrangements. Customer support and other services revenues declined 6% and 2%, respectively.

Current wording

▪Total revenues in the Americas was impacted by increases of 26% and 6% in subscription and perpetual license revenues, respectively, offset by decreases of 3% and 2% in customer support and other services revenues, respectively, as compared to the same period of the prior year.

Previous wording

▪The increase in International total revenues was primarily due to a 19% increase in subscription revenue, offset by a 14% decrease in perpetual license revenue. Customer support revenue increased 2% year over year. Other services revenue increased 3% year over year due to an increase in the delivery of professional services for the region as compared to the same period of the prior year.

Current wording

▪The increase in International total revenues was primarily due to increases of 30%, 4%, and 2% in subscription, perpetual license, and customer support revenues, respectively, offset by a 2% decrease in other services revenue, as compared to the same period of the prior year.

Previous wording

–Total cost of revenues increased $4.5 million, and represented 18% of our total revenues for both the three months ended December 31, 2023 and 2022.

Current wording

–Total cost of revenues increased $4.2 million and represented 18% of our total revenues for both the three months ended June 30, 2024 and 2023.

Previous wording

–Cost of subscription revenue increased $4.2 million, representing 14% of our total subscription revenue for the three months ended December 31, 2023 compared to 13% for the three months ended December 31, 2022. The year over year increase is primarily the result of an increase in the cost of infrastructure related to growth in our SaaS offerings.

Current wording

–Cost of subscription revenue increased $5.2 million, representing 14% of our total subscription revenue for the three months ended June 30, 2024 compared to 13% for the three months ended June 30, 2023. The year over year increase is primarily the result of an increase in the cost of infrastructure related to growth in our SaaS offerings.

Previous wording

–Cost of perpetual license revenue increased $0.2 million and represented 5% of our total perpetual revenue for the three months ended December 31, 2023 compared to 3% for the three months ended December 31, 2022.

Current wording

–Cost of perpetual license revenue decreased $0.1 million and represented 2% of our total perpetual revenue for the three months ended June 30, 2024 compared to 3% for the three months ended June 30, 2023.

Previous wording

–Cost of customer support revenue decreased $0.1 million and represented 19% of our total customer support revenue for both the nine months ended December 31, 2023 and 2022.

Current wording

–Cost of customer support revenue decreased $0.7 million and represented 19% of our total customer support revenue for both the three months ended June 30, 2024 and 2023.

Previous wording

–Cost of other services revenue decreased $0.3 million, representing 67% of our total other services revenue for the three months ended December 31, 2023 compared to 74% for the three months ended December 31, 2022. The decrease in cost of other services revenue was driven by timing of the delivery of certain professional services.

Current wording

–Cost of other services revenue decreased $0.2 million, representing 72% of our total other services revenue for both the three months ended June 30, 2024 and 2023. The decrease in cost of other services revenue was driven by timing of the delivery of certain professional services.

Previous wording

–Research and development expenses increased $1.9 million, or 6%, driven by increases in employee compensation and related expenses, partially offset by a $0.5 million decrease in stock-based compensation. Investing in research and development remains a priority for Commvault and we anticipate continued responsible spending related to the development of our software applications and hosted services.

Current wording

–Research and development expenses increased $1.7 million, or 5%, driven by increases in employee compensation and related expenses, partially offset by a $0.2 million decrease in stock-based compensation. Investing in research and development remains a priority for Commvault and we anticipate continued responsible spending related to the development of our software applications and hosted services.

Previous wording

–Depreciation and amortization expense decreased $1.0 million, driven by the reclassification of our owned corporate headquarters as assets held for sale in the fourth quarter of fiscal 2023.

Current wording

–Depreciation and amortization expense increased $0.3 million, driven by the acquisition of intangible assets in the first quarter of fiscal 2025.

Previous wording

Income tax expense was $17.8 million in the nine months ended December 31, 2023 compared to expense of $14.6 million in the nine months ended December 31, 2022. The increase in income tax expense compared to the prior year relates primarily to current federal and state taxes driven by the increase of pre-tax income relative to the same period in the prior year.

Current wording

Income tax expense was $2.1 million in the three months ended June 30, 2024 compared to expense of $6.9 million in the three months ended June 30, 2023. The decrease in income tax expense compared to the same period in the prior year relates primarily to the recognition of deferred tax assets that were not recognized in prior years due to the Company’s valuation allowance, as well as windfalls from stock compensation.

Previous wording

In recent fiscal years, our principal source of liquidity has been cash provided by operations. As of December 31, 2023, our cash and cash equivalents balance was $284.3 million, of which approximately $196.7 million was held outside of the United States by our foreign legal entities. These balances are dispersed across approximately 35 international locations around the world. We believe that such dispersion meets the current and anticipated future liquidity needs of our foreign legal entities. In the event we need to repatriate funds from outside of the United States, such repatriation would likely be subject to restrictions by local laws and/or tax consequences, including foreign withholding taxes.

Current wording

In recent fiscal years, our principal source of liquidity has been cash provided by operations. As of June 30, 2024, our cash and cash equivalents balance was $287.9 million, of which approximately $223.3 million was held outside of the United States by our foreign legal entities. These balances are dispersed across approximately 35 international locations around the world. We believe that such dispersion meets the current and anticipated future liquidity needs of our foreign legal entities. In the event we need to repatriate funds from outside of the United States, such repatriation would likely be subject to restrictions by local laws and/or tax consequences, including foreign withholding taxes.

Previous wording

On December 13, 2021, we entered into a five-year $100 million senior secured revolving credit facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A. The Credit Facility is available for share repurchases, general corporate purposes, and letters of credit. The Credit Facility contains financial maintenance covenants, including a leverage ratio and interest coverage ratio. The Credit Facility also contains certain customary events of default which would permit the lender to, among other things, declare all loans then outstanding to be immediately due and payable if such default is not cured within applicable grace periods. The Credit Facility also limits our ability to incur certain additional indebtedness, create or permit liens on assets, make acquisitions, make investments, loans or advances, sell or transfer assets, pay dividends or distributions, and engage in certain transactions with foreign affiliates. Outstanding borrowings under the Credit Facility accrue interest at an annual rate equal to the Secured Overnight Financing Rate plus 1.25% subject to increases based on our actual leverage. The unused balance on the Credit Facility is also subject to a 0.25% annual interest charge subject to increases based on our actual leverage. As of December 31, 2023, there were no borrowings under the Credit Facility and we were in compliance with all covenants.

Current wording

On December 13, 2021, we entered into a five-year $100 million senior secured revolving credit facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A. The Credit Facility is available for share repurchases, general corporate purposes, and letters of credit. The Credit Facility contains financial maintenance covenants, including a leverage ratio and interest coverage ratio. The Credit Facility also contains certain customary events of default which would permit the lender to, among other things, declare all loans then outstanding to be immediately due and payable if such default is not cured within applicable grace periods. The Credit Facility also limits our ability to incur certain additional indebtedness, create or permit liens on assets, make acquisitions, make investments, engage in loans or advances, sell or transfer assets, pay dividends or distributions, and engage in certain transactions with foreign affiliates. Outstanding borrowings under the Credit Facility accrue interest at an annual rate equal to the Secured Overnight Financing Rate plus 1.25% subject to increases based on our actual leverage. The unused balance on the Credit Facility is also subject to a 0.25% annual interest charge subject to increases based on our actual leverage. As of June 30, 2024, there were no borrowings under the Credit Facility and we were in compliance with all covenants.

Previous wording

On April 20, 2023, the Board of Directors approved an increase of the existing share repurchase program so that $250.0 million was available. The Board's authorization has no expiration date. For the nine months ended December 31, 2023, we have repurchased $133.7 million of our common stock. The remaining amount available under the current authorization as of December 31, 2023 was $122.3 million.

Current wording

On April 18, 2024, the Board of Directors approved an increase of the existing share repurchase program so that $250.0 million was available. The Board's authorization has no expiration date. For the three months ended June 30, 2024, we repurchased $51.4 million of our common stock. The remaining amount available under the current authorization as of June 30, 2024 was $205.1 million.

Previous wording

Our summarized cash flow information is as follows (in thousands):

Current wording

Our summarized cash flow information is as follows (in millions):

Previous wording

–Net cash provided by operating activities was impacted by net income adjusted for the impact of non-cash charges and increases in deferred revenue, partially offset by increases in accounts receivable and deferred commissions.

Current wording

–Net cash provided by operating activities was impacted by net income adjusted for the impact of non-cash charges and a decrease in accounts receivable, partially offset by a decrease in accrued liabilities.

Previous wording

–Net cash used in investing activities was related to $1.1 million for the purchase of equity securities and $3.2 million of capital expenditures.

Current wording

–Net cash used in investing activities was related to $21.0 million for the acquisition of Appranix, $0.5 million for the purchase of equity securities and $0.8 million of capital expenditures.

Previous wording

–Net cash used in financing activities was the result of $133.7 million of repurchases of common shares, partially offset by $7.8 million of proceeds from employee purchases of common shares under the ESPP and the exercise of stock options.

Current wording

–Net cash used in financing activities was the result of $51.4 million of repurchases of common shares, partially offset by $5.3 million of proceeds from the exercise of stock options.

Previous wording

Working capital decreased $7.1 million from $140.8 million as of March 31, 2023 to $133.7 million as of December 31, 2023. The net decrease in working capital was primarily driven by increases in accrued liabilities and short-term deferred revenue, partially offset by an increase in accounts receivable.

Current wording

Working capital decreased $5.6 million from $110.2 million as of March 31, 2024 to $104.6 million as of June 30, 2024. The net decrease in working capital was primarily driven by decreases in cash and cash equivalents as a result of the Appranix acquisition as well as a decrease in accounts receivable, partially offset by decreases in accrued liabilities and the current portion of deferred revenue.