Commvault Systems, Inc. (CVLT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Annual Meeting of Stockholders conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Warren Mondschein. Thank you. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. My name is Warren Mondschein. I'm the General Counsel and Secretary of Commvault. I will be the secretary of this meeting. On behalf of the Board of Directors and management, it's my pleasure to welcome you to our Annual Stockholders' Meeting. Given the current pandemic, today's meeting is our first virtual meeting. It is taking place via conference call, and it is also being webcast and will be available for replay on the Investor Relations page of our website. I would like to call this meeting to order and make some quick introductions. First, let me introduce Sanjay Mirchandani, our President and CEO; also Brian Carolan, our CFO; and Nick Adamo, the Chairman of our Board of Directors. We are also joined by our other directors, Gary Smith, Keith Geeslin, Dave Walker, Martha Bejar, Chuck Moran, Y.Y. Lee, Allison Pickens, Arlen Shenkman and Todd Bradley. I'd also like to welcome Tony Masherelli, representing Ernst & Young, our independent auditors; and Stephen Jones, representing our transfer agent, Computershare. I'd like to begin by reporting on the formal steps we have taken in connection with this meeting. On April 23, 2020, the Board of Directors adopted a resolution establishing today as the date of the annual meeting and setting the close of business on July 6 as the record date for this meeting. As a result, notice, a proxy statement, proxy cards and an annual report were directed to be given or made available to all holders of record as of that date. I have an affidavit duly signed and sworn to by our transfer agent showing that these materials were mailed or made available to each holder of record on or about July 17. Stephen Jones, from our transfer agent, has been appointed as election inspector and he has executed an oath of the inspector of election. A copy of each of these documents will be filed in the minutes of this meeting. As of our record date, there were approximately 46.3 million shares of stock entitled to notice of and to vote at this meeting. A complete certified list of the registered holders of our common stock as of the record date is available for inspection by e-mailing the company at annualmeetinginfo, all one word, @commvault.com. The company's transfer agent has prepared and certified this list, and we will maintain it with the records of the company. So let me give you a brief overview of what will take place today. Once we establish the existence of a quorum and complete certain other formalities, we will vote on each of the proposals specified in our proxy statement. We will address these proposals in order. And since this is a virtual meeting, we will be able to take questions on each of the proposals, which can be submitted via e-mail to that same e-mail address, [email protected]. [Operator Instructions] Unfortunately, we are unable to take questions from the webcast. We will do our best to take as many questions as we can on each proposal, and only shareholders will be permitted to ask questions. [Operator Instructions] Once we have discussed all of the proposals, we will collect and count the votes. Since this is a virtual meeting, if necessary, you may vote or change your vote by completing the ballot, which is available on our website by the end of this meeting. The e-mail address to submit a ballot is again that same e-mail address, [email protected], and you may download a ballot on the Investor Relations page of our website, ir.commvault.com/annual-meeting. Please note that if you have previously voted and do not wish to change your vote, you do not need to do anything. If you intend to vote during the meeting, I recommend that you please download that ballot now so that it may be timely submitted by the end of the meeting. This meeting also has an associated PowerPoint slide presentation that you can download off of the Investor Relations page on our website, and that will allow you to follow along with Brian's comments. Brian is going to be the one primarily using the PowerPoint. While we count those votes, Sanjay will talk to you about the company, Brian will speak about our financial performance and then at the conclusion of the meeting, we will have time for a brief Q&A session. [Operator Instructions] So moving on. The 5 items of business to be voted on at this meeting are the election of four Class 2 directors, the approval of the declassification or destaggering of our Board, the approval of Ernst & Young as the company's independent auditors for fiscal 2021, approval of an amendment to add more shares to our incentive plan and the approval on an advisory basis of our executive compensation. Detailed information concerning each of these items was made available to stockholders in our proxy statement. I have been advised by our election inspector that a preliminary vote count shows approximately 42.4 million shares of common stock are represented at this meeting, which represents approximately 91.5% of our outstanding shares. Therefore, a quorum is present and this annual meeting is properly called for the conduct of business. The first item of business is the election of directors. Stockholders are being asked to elect four directors who will each serve as a Class 2 Director for a 3-year term expiring at the 2023 annual meeting. The nominees recommended by the Board are Todd Bradley, Chuck Moran, Allison Pickens and Arlen Shenkman. Detailed information about each director nominee was included in our proxy statement. I do encourage you to read their full biographies there, but I'll give you a brief summary on this call. First, Todd Bradley. He has served as a Director of our company since June of 2020. Mr. Bradley recently joined One Equity Partners as an operating partner and previously served as the Chairman and CEO of Mozido, a cloud-based mobile payment provider, from October 2015 to May of 2017. Prior to that, Mr. Bradley served as the President of TIBCO Software, a provider of infrastructure and business intelligence software, from June 2014 until it was acquired by Vista Equity Partners in December of 2014. From 2005 to April 2014, Mr. Bradley served in a variety of roles at HP, including most recently as their Executive Vice President, Strategic Growth Initiatives. Mr. Bradley is currently a member of the Board of Directors of Eastman Kodak and Mattel, and he serves on the Audit Committee at Mattel. He holds a BS from Towson University. Next is Charles Moran, who has served as a Director of our company since July of 2018. Mr. Moran is the founder of Skillsoft, and he served as its CEO and President from 1998 until his retirement in December of 2015. He was also a Director on the Skillsoft Board. Prior to that, he was the President and CEO of NETg, National Education Training Group. And prior to that, he was the CFO and COO at Softdesk. Mr. Moran currently serves as a member of the Board of Directors of Manhattan Associates and Duck Creek Technologies, and he serves as a director and adviser to various private companies. Mr. Moran had a Masters of Business Administration from Suffolk University and a Bachelor of Science degree from Boston College. Next is Allison Pickens, who has served as a Director of our company since June of 2020. Ms. Pickens most recently served as the COO at Gainsight, a SaaS company, from 2014 to 2020. Ms. Pickens previously worked at Bain Capital Private Equity as an Associate from 2009 to 2011 and the Boston Consulting Group where she was a management consultant to both public and private companies from 2007 to 2009. She was a member of the Technology Advisory Network at Boston Consulting Group and an Executive-in-Residence at Bessemer Venture Partners. She is a member of the Board of Directors of Rainforest QA, a venture-backed SaaS company, and she holds an MBA from the Stanford University Graduate School of Business and a BA from Yale. And last but not least, Arlen Shenkman served as a Director of our company since June of 2020. Mr. Shenkman currently serves as Executive Vice President and CFO at Citrix Systems. He joined Citrix in September of 2019 from SAP where he served as the Executive Vice President and Global Head of Business Development and Ecosystems beginning in 2017. Prior to that role, Mr. Shenkman served as CFO of SAP North America from 2015 through 2017 and the Global Head of Corporate Development for SAP from 2012 through 2015. Mr. Shenkman has a JD from the University of Miami School of Law and MBA from the Fox School of Business at Temple University and a bachelor's degree in political science from George Washington University. The Board of Directors recommends that you vote for each of these nominees. Other nominations to the Board of Directors may only be made by stockholders who provided timely and proper notice pursuant to our bylaws. As there were no such additional nominations, I will open up the meeting for discussion concerning any of these nominees. So now any stockholder who would like to discuss a director's election, you can do so now. Only stockholders will be permitted to discuss these nominees, and we will do our best to give each stockholder who wishes to speak a chance. [Operator Instructions] Operator?

[Operator Instructions]

Okay. Just another moment. And seeing no questions, we're going to move on to the next item of business, which is to amend our articles of incorporation to declassify or destagger the Board as recommended by the Board of Directors. A more complete description of this proposal was included in our proxy statement. Since our initial public offering in 2006, our Board has been divided into 3 classes, each elected for a 3-year term. This results in staggered elections with a different class of directors standing for election every third year at the company's annual meeting. The Board has believed that this classified structure promotes continuity and stability of the company's strategy, oversight and policies; provides negotiating leverage to the Board in a potential takeover situation; and facilitates the ability of the Board to focus on creating long-term stockholder value. However, as part of the Board's regular discussions on corporate governance issues and in response to feedback from certain of our stockholders, the Board has continued to evaluate this classified Board structure and consider arguments both for and against the continuation of a classified Board. The Board has considered the growing sentiment, particularly in the institutional investor community, in favor of annual elections and the Board's ability to continue to be effective in protecting stockholder interests under an annual election system. The Board also recognizes that many other public companies have eliminated their classified Board structures in recent years. Therefore, after careful deliberation by the Nomination and Governance Committee and the full Board, the Board has approved proposed amendments to our Certificate of Incorporation that would eliminate the classified Board structure and provide for the annual election of directors beginning at the 2021 Annual Meeting, that's next year. If approved, the annual election of directors will be phased in gradually to assure a smooth transition and would not change the unexpired 3-year terms of directors elected prior to the effectiveness of the amendments, that includes the directors to be elected today. Upon the expiration of each class's current 3-year term, those directors or their successors will be elected to the Board for a 1-year term beginning with the annual meeting next year. This phased-in approach will result in the discontinuation of our classified Board and all directors being nominated annually for 1-year terms by the 2023 annual meeting. Now pursuant to our bylaws -- I'm sorry, pursuant to our Certificate of Incorporation, the affirmative vote of 66 2/3 of our outstanding shares is required to approve this proposal. Accordingly, extensions and broker non-votes will have the same effect as votes against the proposal. If the stockholders approve the proposed amendments, they will become effective upon the filing of a Certificate of Amendment with the Delaware Secretary of State, which we expect to file properly after this annual meeting. If the proposed amendments are not approved, the Board will remain classified. The Board of Directors recommends that you vote for the declassification of the Board. I will open the meeting again for discussion regarding this proposal only. Any stockholder who would like to discuss this proposal, please go ahead and do that now. [Operator Instructions] As before, we will do our best to give each stockholder who wishes to speak a chance. So operator, if you can let us know -- go ahead.

[Operator Instructions]

Okay. I am being told that we have no questions in the queue or on e-mail. So we will move on to the next item of business, which is to ratify the selection of Ernst & Young as our independent auditors for our fiscal year 2021 as recommended by the Board. I'll note that if the selection of Ernst & Young is not ratified by the stockholders, the Board of Directors will consider such a vote as advice to select other independent auditors for the 2022 fiscal year. This is due to the difficulty and expense involved in changing auditors on short notice. The Board of Directors recommends that you vote for Ernst & Young as our independent auditors for fiscal 2021. I will again open the meeting for discussion regarding E&Y. Any stockholders who would like to discuss this proposal or ask a question of E&Y, please do that now. [Operator Instructions] We'll give that a second. Okay. We're going to move on now to the next item of business, which is to vote on an amendment to our Omnibus Incentive Plan. Our Board of Directors believes it is important for employees to have an equity interest in the company and is recommending that the stockholders approve the incentive plan as amended by this amendment so that the plan can continue to operate. Increasing the number of shares of common stock available for issuance is necessary to ensure that we have a sufficient number of shares available for issuance under the plan. This fourth amendment increases the number of shares reserved for delivery under the plan by 1 million shares. The amendment does not amend or replace any other provisions of the incentive plan, and it will become effective upon stockholder approval. A more complete description of the plan was included in the proxy, and I'd encourage anyone seeking more information to please read the full description. The Board of Directors recommends that you vote for approval of the incentive plan as amended by the fourth amendment. Again, I will open up the meeting for a brief discussion. If any stockholder who would like to discuss this proposal, wishes to ask a question, you can do so now. [Operator Instructions]

[Operator Instructions]

Okay. We're going to move on then to the advisory vote on executive compensation. We strive to enhance long-term stockholder value by closely aligning our executive compensation philosophy and practices with the interests of our stockholders. Our executive compensation program is designed to attract, motivate and retain talented executives who possess the skills required to formulate and drive our company's strategic direction and to achieve annual and long-term performance goals necessary to create stockholder value. Our compensation practices are structured to pay for performance, to encourage business decision-making aligned with the long-term interest of our company and to promote and support the human resource requirements of our business. We believe that our executive compensation programs are structured in the best manner possible to support our company and our business objectives. This proposal, commonly known as a say-on-pay proposal, gives our stockholders the opportunity to express their views on our named executive officers' compensation. This vote is not intended to address any specific item of compensation but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in our proxy statement. The say-on-pay vote is advisory and therefore, not binding. However, the Board of Directors and the Compensation Committee value the opinions of our stockholders, and they will certainly review the voting results. The Board of Directors recommend that you vote for the approval of executive compensation. I will again open the meeting up for a brief discussion. [Operator Instructions]

[Operator Instructions]

Okay. As there are no such questions, we will move on. Those being the only matters of business to be voted on at this meeting, we will now count the votes. If you have previously voted and do not wish to change your vote, you do not need to do anything. If you have not previously voted or if you would like to change your vote, please submit a completed ballot, as noted at the beginning of the call, via e-mail to [email protected]. Votes must be submitted via e-mail prior to the end of the meeting. Proxies or ballots that are submitted today will automatically revoke previous proxies. Now while those votes are being counted, Sanjay and Brian will each make a brief presentation. Before they begin, I would like to remind you that today's presentation and related Q&A session may include forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. This information contains projections and expectations of the company and represents our current beliefs. However, actual results in the future may differ materially from these forward-looking statements. These projections and statements of expectations should be interpreted in conjunction with the risk factors and other disclosures that may affect our results, all of which can be found in the company's recent Form 10-K, 10-Q, proxy statement, annual report to stockholders and other related SEC filings. The timing of any future product releases also remains in our sole discretion. In addition, in their remarks, Sanjay and Brian may provide -- more likely Brian, may provide non-GAAP financial results. The reconciliation between the non-GAAP and GAAP measures can be found in Table 4 accompanying our most recent earnings press release and also posted on our website. So with that now, let me turn it over to Sanjay. Sanjay?

Thank you, Warren. Good morning and thank you for joining us today for Commvault's Annual Shareholder Meeting. I would like to extend my appreciation to our Board of Directors for their guidance and support throughout the year and formally welcome Todd Bradley, Allison Pickens and Arlen Shenkman to the Board. We're very pleased to have you. Since our meeting last year, we've been focused on simplifying everything we do, innovating our solutions and executing on all aspects of our business. And I'm pleased to report we're making significant progress, as demonstrated in our Q1 results. More importantly, we believe our triple-play approach, that is having the best portfolio, the best partners and the best execution, will help us accelerate our return to growth. Let's discuss each one by one, starting with our portfolio. Innovation is core to who we are and gives us an edge in a very competitive industry. It is in the solutions we offer customers and the 950 patents we hold. And it continues to earn us industry accolades, most recently from Gartner, who named us as a Leader in their 2020 Magic Quadrant for Backup and Recovery Solutions. And they scored us highest in all 3 categories of their Critical Capabilities report: public cloud, virtual and physical environments. This is significant as enterprises increasingly turn to us to help them reduce IT complexity, rein in data fragmentation and accelerate their cloud journeys. To help, we recently unveiled a newly expanded and revitalized product portfolio to empower organizations and also accelerate the digital transformations. While we believe these capabilities are unmatched in the industry, products alone are not enough. We must also have a robust partner ecosystem to bring value to customers. In partners, not only are we driving increased partner contributions, but we are strengthening relationships through our enhanced partner program. And early this fiscal year, we signed a strategic multiyear partnership with Microsoft to offer a metallic SaaS service with Azure as well as to collaborate on ongoing go-to-market engineering and sales opportunities. Which brings me to our third initiative, which is critical to our success, executional excellence. Our go-to-market teams are gaining momentum and leaving no stone unturned. Our ability to deliver complex solutions, mostly remotely, is now mainstream for us. Looking ahead, we believe our enhanced portfolio and ability to upsell and cross-sell our solutions will enable us to land new customers and maximize customer lifetime value. In closing, while we have work to do, we are optimistic about our return to predictable, sustainable growth. And we believe that our triple-play focus on our portfolio of partners and execution will enable us to deliver solutions that meet our customers' needs while continuing to grow the top line and increasing our efficiency. Once again, thank you for joining us today and for continuing to support Commvault. We truly appreciate it. With that, I'll turn it over to Brian Carolan, our CFO. Brian?

Thank you, Sanjay, and good morning, everyone, and thanks for joining our annual stockholders' meeting. I will spend the next few moments covering some financial highlights for our fiscal year ended March 31, 2020, also referred to as FY '20; and our most recent quarter ended June 30, 2020, which is the first fiscal quarter of FY '21. Please turn to Slide 6. For FY '20, we achieved total revenue of approximately $671 million. This compared to total revenue of $711 million in FY '19. Non-GAAP operating income or EBIT for FY '20 was approximately $88 million, representing an EBIT margin of 13%. During FY '20, we generated approximately $85 million of free cash flow and ended the year with a cash and short-term investments balance of approximately $340 million, with 0 debt on our balance sheet. Now turning to Slide 7. Q1 FY '21 total revenues were $173 million, a 7% increase over the first quarter of fiscal 2020. Q1 software and product revenue increased 20% year-over-year to approximately $77 million. Total expenses were approximately $138 million for the quarter, down approximately 4% year-over-year. Non-GAAP operating income was $32.5 million, representing an EBIT margin of 18.8%. Please refer to Slide 8. Beginning in FY '18, we introduced subscription-based pricing that align to our customers' workloads and purchasing preferences. Our subscription software contracts are generally sold for a term of 3 years. As such, FY '21 represents the first significant renewal cycle for us. This opportunity represents a positive inflection point for our business. We expect the upcoming renewal cycle to serve as a revenue tailwind in FY '21 and beyond. Now turning to Slide 9. In order to best report and measure our business consistent with the way customers consume our products and services, we will be increasingly focused on the following 3 operating metrics: subscription as a percentage of software and products revenue; recurring revenue as a percentage of total revenue; and annual recurring revenue, or ARR. In Q1, FY '21, subscription revenue represented approximately 69% of total software revenue versus less than 10% in FY '17. Our total recurring revenue increased 24% year-over-year to $141 million and represented 82% of total revenue in the quarter. This compares to approximately 50% in FY '17. This quarter, we are also introducing annual recurring revenue, or ARR. We define ARR as the annualized value of Commvault's recurring revenue streams at a point in time. As of June 30, 2020, our ARR increased 9% year-over-year to approximately $472 million. Please refer to Slide 10 for some highlights from our balance sheet. As of June 30, 2020, our cash and short-term investments balance was approximately $356 million and our total assets were approximately $866 million. Deferred revenue was approximately $330 million, working capital was approximately $211 million, and we have 0 debt on the balance sheet. Please turn to Slide 11 for some comments on capital allocation. We have a balanced strategy designed to drive long-term shareholder value while preserving liquidity and flexibility. Our capital allocation priorities are ongoing in continued investment in R&D and innovation, a demonstrated pattern of consistent share repurchases each year. In fact, over the last 6 years, our cumulative share repurchases exceeded 125% of cumulative free cash flow. And it's also available for strategic M&A as used for Hedvig. In closing, we believe that FY '21 is a positive inflection year for the company. We expect subscription and recurring revenue to represent an increasing mix of our overall revenue base. We returned to growth in fiscal Q1 '21, and we are working diligently to continue to deliver year-over-year growth. Now I'll turn the meeting back over to Warren for some closing comments. Warren?

Thank you, Sanjay and Brian. I've been advised that the election inspector has completed the vote. Because this is our first virtual meeting, if there are any additional ballots that have been submitted via e-mail, those votes may not be reflected here, but they will be in our 8-K filing with the final results. I certainly expect any changes that come in now will be immaterial. With respect to the election of directors, the election inspector reports that approximately 98% of the votes cast have been voted in favor of Mr. Bradley. It was 38.5 million for and 727,000 against. For Mr. Moran, approximately 94% of the votes cast have been voted in his favor: 36.9 million for, 2.4 million against. Approximately 99.2% of the votes cast have been voted in favor of Ms. Pickens. The votes cast for her were 39 million for, 257,000 against. And approximately 98.7% of the votes cast have been voted in favor of Mr. Shenkman. His vote totals were 38.7 million for and 481,000 against. So please let the record show that Mr. Bradley, Moran and Shenkman and Ms. Pickens have been elected as Class 2 Directors pursuant to our bylaws to hold office until the annual stockholders' meeting in 2023 or until their successor is elected and qualified. With respect to the approval of amendments to declassify our Board, 99.8% of the votes have voted in favor of the proposal, less than 1% have voted against and less than 1% has abstained. So please let the record show that the destagger proposal has been approved by shareholders. With respect to the approval of E&Y as our independent auditors, 95.5% of the votes have voted for the proposal, 4.4% against and less than 1% abstaining. So let the record show that E&Y has been approved as our auditors for the fiscal year '21. With respect to the approval of the 2016 Omnibus Incentive Plan as amended by the fourth amendment, 94.4% of the votes have voted for the proposal, 5.5% of the votes have voted against and less than 1% again abstained. So please let the record show that the plan, as amended by the fourth amendment, has been approved. And on the advisory vote on executive compensation, 85.8% of the votes have voted for the proposal, about 14% of the votes have voted against and less than 1% abstaining. So let the record show that our executive compensation has been approved, albeit on an advisory basis. The election inspector will furnish the company a written report of the final vote count, which will be included in the minutes of this meeting. There being no further business to be addressed at this meeting, the formal portion of the meeting is now adjourned. I would like to open the meeting to stockholders, if there are any remaining questions. We will verify stockholder names against our shareholder list before you are able to ask a question. So please be patient with us. [Operator Instructions]

[Operator Instructions]

Okay. Well, not seeing any, I'd like to thank everybody for attending this year's meeting. We look forward to talking to you again next year, hopefully, under more normal circumstances. Thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.