Commvault Systems, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Commvault Systems, Inc. provides data management software and services, helping companies protect, manage, and recover their data across hybrid and multi-cloud environments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Commvault is a data management company whose main products enable companies to protect their data from various attacks such as cyber security and ransomware.

Business Overview:

Revenue Streams: Commvault primarily generates revenue from two sources: subscriptions and perpetual licenses (recurring revenue) and professional services that are a supporting segment. Subscriptions are term-based, meaning that customers pay for access to the software over a specific period. Perpetual licenses are more traditional sales of software with an upfront payment. Customer support, provided both directly and through partners, is also a significant portion of revenues.
Industry Trends: The data management market is characterized by increasing complexity due to cloud adoption, hybrid IT environments, and rising data security threats. The need for comprehensive data protection and management solutions is increasing in the industry. The competitive landscape is highly dynamic, with many players— both large and small— vying for market share.
Margins: In recent quarters, gross margins have been consistently around 80%, reflecting the high-value nature of software and services. However, operating margins are under pressure due to rising operating expenses, especially related to R&D and restructuring. For example, in the last quarter reported, operating margin was ~ 14%.
Competitive Landscape: Commvault operates in a competitive market with companies like Veeam, Veritas, and Dell EMC. Its competitive position is built primarily on its comprehensive data management solution that is designed to offer a one stop shop for clients for data management.
Differentiation: Commvault differentiates itself through its unified data management platform, which covers data protection, data management, data governance, and compliance. The Commvault cloud platform is designed to help companies protect themselves from cyberthreats and recover data. It also has an “everywhere” data management solution for hybrid and multi-cloud environments.

In the latest quarter, Commvault increased their total revenue by 10% year over year, with subscription revenue increasing by 22%, indicating continued strong demand for their SaaS offerings.

Financial Analysis:

Revenue Growth: Commvault is demonstrating steady revenue growth, driven by subscription services, but affected by declines in perpetual licenses. Total revenue increased by 12% YoY, with subscription revenue increasing by 22% in the latest quarter, and is expected to increase over the next few years.
Profitability: While gross margins are solid, operating expenses weigh heavily on profitability. The company has focused efforts on cost-cutting, especially in the workforce and real estate consolidation, in an effort to reach higher operating profitability. Net income is volatile due to fluctuations in income tax and investment outcomes, but seems to be heading in a positive direction.
Balance Sheet: The company has a solid balance sheet with good levels of cash and marketable securities ($460 million as of June 30, 2024, and a further $560 million is expected to be generated from the sale of their HQ building). Debt is not significant, and equity is above average (40% equity in their capital structure). The company’s ability to cover its short-term liabilities is high as the current assets to current liabilities ratio has been roughly at 2.2 to 2.5 in the last few quarters.
Cash Flow: Cash flow from operations is volatile and can fluctuate. However, the company has been generating good positive free cash flow. FCF is a good metric of whether companies can cover their debt or reinvest into their own operations. In Commvault’s case, it has been positive and growing in recent quarters.
Share Repurchase Program: The company has a robust share repurchase program which implies they believe their stock is undervalued. In the latest quarter, the company announced to buy back approximately 1.3 million shares at an average price of $70.99.
Recent Developments and Concerns: The company has a restructuring plan to reduce costs in areas including employee headcount and real estate footprint. This restructuring and reduction in operating costs is expected to improve profitability moving forward. However, the transition period can be disruptive and might negatively impact employee performance. Commvault is also increasing emphasis on cloud-based offerings, which has been a challenge in transitioning its existing customer base from its traditional software model.
Controversy: The sale of Commvault’s headquarters in a sale-leaseback deal with a buyer (a partnership led by a company director) has been controversial. The deal has been criticized as potentially having below market value and providing a conflict of interest. However, both sides have said the deal was approved by a special committee of the board and by shareholders.

Net loss per share was $0.05 for the most recent quarter, compared to a loss of $0.22 in the same quarter of the prior year, due to non-recurring expenses. If these non-recurring expenses are removed, the net profit per share would have been at $0.15.

Moat Analysis:

Switching Costs: Commvault benefits from high switching costs, which can be created by its complex software platform and deep integrations with customer infrastructure. Transitioning away from the Comvault software is not trivial and requires a complete overhaul for clients. This acts as a moat, as it incentivizes customers to stay with the company over time. This effect is more pronounced for its enterprise customers than those with less complex needs.
Intangible Assets: The company’s brand in the data protection industry, although not top tier, has a strong foothold among enterprise clients. It also leverages technical expertise developed over many years in a niche market, which makes it tough for companies to enter the market easily. The company also has a strong ecosystem of partners that increases its reach.
Network Effect: While not a clear differentiator, the integrations that are built on the company’s software and a large customer base mean that if a new company wanted to compete in its space, it would not be able to have all the features and a wide array of customers the company has. This creates a pseudo-network effect.
Cost Advantage: While the company has a strong focus on cloud, its cost advantages are weak in the industry. Low-cost providers with less overhead can offer similar services at better prices in a commodity product such as data storage. The company is actively working to cut costs to improve its margin structure in the long-term.

Moat Rating:

Based on the above, Commvault’s moat is rated a 3 out of 5. The company has a narrow moat that stems from switching costs and intangible assets, such as its brand and technical expertise. It can protect its profitability, but does not always guarantee long-term success, especially due to the intense competition in the cloud space and companies with similar features. However, the company is seeing an increase in subscription revenues and is taking action to improve its cost structure and improve profitability.

Risks:

Industry Competition: The data protection and management industry is highly competitive with many established vendors and new entrants. The company faces strong competition from companies that have a broader portfolio. A major shift in the industry could affect the business negatively.
Technological Disruption: Rapid changes in technology can render the company’s software obsolete or allow competition to replicate the capabilities of its platform. The company needs to invest heavily into R&D to stay on the top of the technology curve.
Execution Risk: Commvault’s transition to a subscription-based model may not be seamless and could lead to customer dissatisfaction and revenue losses if not implemented correctly.
Cybersecurity Risk: As a data protection company, Comvault becomes a target for hackers. Any data leak or security breach might hurt its reputation and customer confidence.
Economic Downturn: An economic recession may cause lower revenue growth as companies cut spending.

Business Resilience:

Despite these risks, Commvault has shown some resilience. The nature of its software provides a recurring revenue stream, and switching costs make it sticky among clients. Also, the transition to cloud and recurring revenue is a long-term positive trend. The company has a good balance sheet and cash flow to help weather difficult economic periods. However, it needs to continue improving its profitability to further improve its long term outlook.

Understandability Rating:

I give Commvault a 3 out of 5 for understandability. The business itself and its services are not that complex and easy to understand. However, a deep dive into the technical complexities of data protection, cloud infrastructure, and financial jargon is required to understand everything completely.

Balance Sheet Health Rating:

Commvault gets a 4 out of 5 for balance sheet health. The company has large amounts of cash, good solvency, and low debt. However, the company’s profitability has been shaky, but it is actively making changes to improve it.

Recent Concerns/Controversies and Management Response

Reorganization: Management acknowledged a “challenging” first half of the year during an earnings call, due to the company’s reorganization efforts, particularly in the sales department. They noted that they are “focused on moving with speed” and that they are “seeing good early results”. As a result of this restructuring, the company has seen a decrease in employee and real estate related costs. Management emphasized that this was an “intentional and necessary investment”.
Sale-Leaseback: The sale of its headquarters has generated skepticism around whether fair prices were achieved, and the fact that a board member has vested interest in the buying company. Management has stressed that special committee approval and shareholder approval was obtained, and the transaction has been fully audited. They emphasized that it has provided them access to more capital which is needed to move the company forward.
Transition to cloud: The company is focusing heavily on cloud. In the company’s Q2 2024 earnings call, the management stated that for that period, 75% of all recurring revenue was driven through SaaS and term-based licenses. This is a major positive, showing that Commvault is a transitioning to recurring revenue that also allows them to access and serve smaller clients.
Competition: In the Q2 2024 earnings call, the management said that they saw good strength in their cloud offerings and increased their market share. In addition, they are starting to beat competitors in other areas as well. However, a main challenge was the increased costs associated with the transition to their hybrid cloud offerings.

These are some of the risks that are mentioned by the company. The management are working hard to cut costs and to move to cloud and recurring revenues, which they hope will improve profitability.