Commvault Systems, Inc. (NASDAQ:CVLT) Q4 2024 Earnings Call Transcript April 30, 2024

Commvault Systems, Inc. beats earnings expectations. Reported EPS is $2.81, 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).

Operator: Thank you for standing by, and welcome to the comparable Q4 FY 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. Finally, a reminder, this conference is being recorded. I would now like to turn the conference over to Mike Melnick, Head of Investor Relations. Please go ahead.

Michael Melnyk: Good morning, and welcome to our earnings conference call are Michael. I'd now like Head of Investor Relations, and I'm joined by Sanjay Mirchandani from both CEO and Gary marrow, Campbell, CFO and earnings presentation with key financial and operating metrics posted on the Investor Relations website. For reference. Statements made on today's call will include forward-looking statements about combo 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 conference calls. Most recent periodic reports filed with the SEC for a discussion of risks and uncertainties that could cause the Company's actual results to be materially different from those contemplated any forward looking statements.

Combos does not assume any obligation to update these statements during this call, Campbell's financial results are presented on a non GAAP basis. 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, Mark. Good morning and thanks for joining us today. Q4 was an outstanding quarter, capping a breakout year for cobalt and setting the stage for fiscal year '25 and beyond. We ended our fiscal year with continued strong momentum across all primary KPI.s highlights from Q4 include total revenue increased 10% to $223 million. Total ARR rose 15% to $770 million. Subrsciption ARR increased 25% to nearly $600 million SaaS ARR jumped 65% to $168 million. Can we close the year with over 5,000 SaaS customers, and we did this profitably. Our Q4 and fiscal year results shine a bright light on the critical role combo play in a world dominated by ransomware attacks and cyber threats. Organizations need to know that when they are hit, they can recover.

This is what we empower our customers to be resilient and pickup. Our financial results speak to the multiyear journey. We started five years ago when I joined combo, I said the company had great bonds with a strong financial foundation and best in class technology, and we had a tremendous opportunity to unlock a new level of growth within the company. With that goal in mind, we reinvigorated our brand and go-to-market motion, strengthened our partner ecosystem and expanded our routes to market, and we double down on comp, of course, drives innovation. To that point, we launched a hyper-growth SaaS offering that is one of the fastest growing of its kind in the industry today. And we transformed our business model from legacy perpetual, the modern subscription and SaaS.

We did all of this while focusing the company to sustainable and profitable growth with some notable results over the past three years. Since fiscal year 22, total ARR increased at a 15% CAGR subscription ARR grew at 31%, CAGRr and ARR from a hyper-growth SaaS offering more than tripled. We consistently delivered profit margins of 20% or better. We generated over $500 million of free cash and returned over $600 million of cash to shareholders through stock repurchases. I'm extremely proud of what we've accomplished and would like to thank our customers, partners and employees for their trust and commitment to cobalt. Our job is only getting more excited. In November, we shifted our company and everything. It represents the cyber resilience.

As I alluded to previously, the biggest challenge organizations face today, the unrelenting breadth and scale of cyberattacks. We're talking automated, intelligent and state-sponsored attacks. These attacks with immense pressure and CSOs, the C-suite and the Board to rapidly recover and be resilient. This is exactly what we enable with a combo of cloud cyber resilience platform, Sucampo cloud. We offer autonomous recovered so that customers can recover the environment at scale, customers can proactively perform health checks and detect anomalies and threats. They can utilize our AI technology to enhance the recovery process, and they can secure and recover their data across any workload, any infrastructure and from any location to any location, all at the lowest possible TCO.

one of our marquee clients this quarter is Albertsons Companies, a Fortune 100 grocer that migrated the retail. I wanted to strengthen the cyber resiliency, amended combos, unique and differentiated platform to provide additional security recovery, workload protection and cloud integration. Last year as a particularly difficult year for hospital systems as cyber and ransomware attacks nearly doubled with the risk of an attack. Top of mind, a large network of hospitals in Latin America was concerned about their ability to recover from a cyber attack with Catapult. They have peace of mind that they can easily and quickly recover, have hit with one platform. They can manage their on-prem remote and cloud data, and we protect an immutable copy of the data, which is critical for recovery.

These are just two examples of why we're winning in the market and are frequently chosen over competitive offerings. But we're not stopping there. We're taking recovery even further with Kampo clean room recovery. Yesterday, we announced how this new and unique offering empowers organizations to be ready to recover. By providing a clean, isolated and on-demand recovery location in the cloud, they can spin up as many workloads have been. Clean-room. Recovery also enables users to proactively to the response plans so they can quickly recover when bad actors Striker building on these unrivaled capabilities. two weeks ago, we closed on the acquisition of a products. With this technology, customers will be able to rapidly discover, rebuild and get that critical cloud applications and production infrastructure fully operational as an outage or cyberattack with the dynamics and public clouds.

This rebuild will take minutes or hours rather than days or weeks after all in the unfortunate event of an attack time is money by marrying tar balls, extensive risk readiness and recovery capabilities with the product is cloud native mobile capabilities. We help customers shorten recovery times after and attack. This takes cyber resilience to a whole new level. In closing, I believe we are the best company with the best people and by far the best platform for cyber resilience in the industry with cabo cloud, we believe that we can offer the most comprehensive enabled platform for CSOs and CIOs to work together. It was engineered with a hybrid enterprise and mine to enable customers to manage their resilience across any workload environment.

All cash available as software SaaS or both. That way if our customer suffer an attack, we helped us to confidently and quickly recovered their business and stay resilient. We believe fiscal year 25 will be zero year for cobalt to continue accelerating our growth. With that, I'll turn it over to Gary to discuss the numbers and provide more insights on our forward outlook. Gary.

Gary Merrill: Thank you, Sanjay. As Sandy mentioned, we closed the fiscal year with strong momentum with all of our key primary metrics coming in ahead of expectations. Our cyber resilience platform and related messaging is resonating in the market in our team, executed in the field, driving another quarter of double digit revenue growth. I'll recap Q4 and full fiscal year '24 results before discussing our outlook for fiscal year '25. As a reminder, all growth rates are on a year-over-year basis unless otherwise noted, total revenue grew 10% to $223 million, driven by a 27% increase in subscription revenue, which now exceeds 50% of total revenue. Subscription revenue growth was fueled by increased contributions from our saas portfolio and solid double digit growth in term software licenses.

Our software revenue growth reflected a healthy balance between renewals and our strongest land and expand quarter of the fiscal year. Once again, we saw improved close rates in over $100,000, increased 13% as we close and accelerated volume of larger deals. From a geographic perspective, the Americas and International region had strong performance with those regions posting double digit term software growth. Our Americas region delivered its best new customer acquisition quarter of the year as our cyber resiliency platform gained additional traction in the enterprise market. Q4. Perpetual license revenue was flat sequentially at $15 million as perpetual licenses are generally sold in limited verticals and geographies. We expect the headwinds from perpetual license sales to diminish in fiscal year '25 and beyond.

Q4 customer support revenue, which includes support for both our term based and perpetual software licenses, with $77 million flat sequentially and year over year. For the full year. Customers for revenue from term software and related arrangements accelerated to 47% of total customer support. This compares to just 40% in fiscal year '23, and we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue in fiscal year '25, driven by the attach on term software license growth. Now I'll discuss ARR. Q4 total ARR was $770 million, an increase of 15% year over year, which reflects the underlying strength of our business when our revenue was presented on an annualized basis, subscription ARR, including term-based licenses and SaaS contracts, grew 25% year over year to $597 million.

This includes $168 million of SaaS ARR, which jumped 65% from a year ago. On a quarter over quarter basis, Q3 to Q4 SaaS ARR growth was impacted by $2 million of foreign exchange headwinds as the US dollar strengthened primarily versus the euro in fiscal Q4. On a constant currency basis, we added approximately $18 million of net new SaaS ARR in both fiscal Q3 and fiscal Q4 as the underlying strength of our SaaS business continues. New SaaS ARR contributed two thirds of our total ARR growth for the full fiscal year 24, and that there are now represents 22% of total ARR compared to just 15% a year ago. From a customer perspective, existing customer expansion was strong with Q4. Saas net dollar retention of 123% being benefited by both upsell and cross-sell activities.

Now I'll discuss expenses and profitability. Fiscal Q4 gross margins were 83.2%, an increase of 30 basis points sequentially, reflecting the healthy mix continued SaaS gross margin improvement. Fiscal Q4 operating expenses increased 13% to $139 million, reflecting higher year-end commissions and bonuses against a record revenue quarter. We ended the quarter with approximately 2900 employees, which was flat sequentially and an increase of 4% year over year. Non-gaap EBIT for Q4 was $45 million. In non-GAAP EBIT margins were 20.2%. Our Q4 free cash flows grew 18% year over year to $79 million, reflecting continued growth in SaaS. Deferred revenue and strength of our Software and Subscription business typically include upfront payments on multiyear contracts.

In Q4, we repurchased $50 million of stock under our repurchase program. Now I'll discuss the full year fiscal '24 results. Total revenue increased 7% to $839 million, driven by double-digit growth in the second half of the year. We are pleased with the acceleration in total revenue growth throughout the fiscal year, and we expect our business momentum to continue into fiscal year '25. Subscription revenue increased 23% to $429 million, crossing over 50% of our total revenue. Fiscal year '24 operating expenses were 61% of total revenue compared to 62% in the prior year, demonstrating operating expense leverage in our responsible growth model. Full year. Non-gaap EBIT grew 11% to $177 million. Non-gaap EBIT margins improved 70 basis points to 21.1%.

Moving to some key balance sheet and cash flow metrics. We ended the quarter with no debt and $313 million in cash with approximately $100 million in the United States. Full year fiscal '24 free cash flows improved 20% year over year, reaching the milestone of $200 million. For the full fiscal year. We also returned $184 million to shareholders as part of our share repurchase program, representing 92% of free cash flow. Our average price of shares we repurchased during fiscal year 24 with $74. Now I'll discuss our outlook for fiscal Q1 and the full fiscal year '25. With our subscription software evolution can complete, we are now focused on accelerating our total revenue growth rate while continuing to generate strong free cash flows and provide.

For fiscal Q1, we expect subscription revenue, which includes both the software portion of term-based licenses and sense to be $116 million to $119 million. This represents 21% year over year growth at the midpoint. As a result, we expect revenue to be $213 million to $216 million with growth of 8% at the midpoint. At these revenue levels, we expect Q1 consolidated gross margins to be in the range of 81% to 82%. We expect Q1 non-GAAP EBIT margins to be in the range of 18% to 19%. Q1 operating expenses will include approximately 200 basis points of investments related to Ally fiscal year sales kickoff that occurred earlier this month. And our normal appearance at the RSA Conference in May to the West did not incur in the prior year. Our projected diluted share count for fiscal Q1 is approximately 45 million shares.

Now I wanted to give our initial outlook for the full fiscal year '25. We expect fiscal year '25 total ARR growth of 14% year over year. We expect subscription ARR to increase in the range of 21% to 23% year over year. From a revenue perspective, we expect subscription revenue to be in the range of $514 milion to $518 million, grown 20% year over year at the midpoint, with strong contribution from both term software licenses and SaaS. We expect total revenue growth to accelerate and be in the range of $904 million to $914 million, an increase of 8% at the midpoint. Moving to full year fiscal 25 margin EBIT and cash flow outlook, we expect gross margins to be in the range of 81.5% to 82.5%, inclusive of the accelerating contribution of our SaaS business.

We also expect non-GAAP EBIT margins to be in the range of 20% to 21%, including a Q1 event costs that did not occur in the prior year. And seven focused investments to accelerate our revenue momentum. Operating margins to be seasonally stronger in the second half of the fiscal year. Compared to the first half, we expect full year free cash flows of at least $200 million. Our Board of Directors recently increased the authorization on our share repurchase program to $250 million. We expect to continue with our existing practice of repurchasing at least 75% of our annual free cash flows in fiscal year '25 w e are also lowering our non-GAAP tax rate from 27% down to 24%. We believe that a 24% hit rate expectations over the next few years. Given the current cyber market tailwinds, the predictability of our large and growing subscription revenue base and our execution momentum in the field.

I'd like to discuss our next major milestone. Today I'm excited to share that as we exit fiscal year '26, we expect to see total ARR of $1 billion with subscription ARR representing 90% of total ARR, including an accelerating SaaS contribution ranging from $310 million to $330 million. For additional details and trends on all of our key metrics, please take time to review our investor deck contained in the investor relations section of our website. Operator, you can now open the line for questions.

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