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

Good day, and thank you for standing by. Welcome to the Commvault 2021 Virtual Annual Shareholder Meeting Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to one of your speakers today, Warren Mondschein, General Counsel. Please go ahead.

Thank you. Good morning, ladies and gentlemen. My name is Warren Mondschein. I'm the Vice President, General Counsel, Chief Compliance Officer and Secretary of Commvault. I will be acting as 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 ongoing pandemic, today's meeting is a 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; Brian Carolan, our CFO; and Nick Adamo, representing our Board of Directors. He's the Chairman of our Board. I would also like to welcome Tony Masherelli, representing Ernst & Young, our independent auditors; and Adela Foresight representing our transfer agent, Computershare Investor Services. I'd like to begin by reporting on the formal steps we have taken in connection with this meeting. On April 22, 2021, the Board of Directors adopted a resolution establishing today as the date of the annual meeting and setting the close of business on June 24, as of the record date. 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 on or about July 9 to each holder of record. Adela Foresight from our transfer agent has been appointed as election inspector. She 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 million shares of stock entitled to notice of and to vote at this meeting. A complete certified list of all of the registered holders of the company's common stock as of the record date is available for inspection by e-mailing the company. The company's transfer agent has prepared and certified this list, and we will maintain it with the records of the company. 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. 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 annualmeetinginfo, that's all one word, @commvault.com. [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, but we will limit questions to 1 per shareholder. Once we have discussed all the proposals, we will then collect and count any votes. Since this is a virtual meeting, again, you may vote or change your vote by completing the ballot available on our website by the end of this meeting. The e-mail address to submit a ballot, again, is annualmeetinginfo, all one word, @commvault.com. And the ballot may be found at 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 can be timely submitted by the end of this meeting. While we count the votes, Sanjay will talk to you about the company. Brian will also speak about our financial performance. And at the conclusion of the meeting, we will have time for a brief Q&A session. [Operator Instructions] The 4 items of business to be voted on at this meeting are the election of 3 directors, the approval of Ernst & Young as the company's independent auditors for fiscal 2022, 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 43.4 million shares of common stock are represented at this meeting that represents approximately 94.2% 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 3 directors who will each serve for a 1-year term. This election represents the first year of our destaggering effort, which was approved by stockholders at last year's annual meeting. The nominees recommended by the Board of Directors are Keith Geeslin, YY Lee and Sanjay Mirchandani. Detailed information about each director nominee was included in our proxy statement. I encourage you to read their full biographies there. Keith Geeslin has served as a Director of our company since May 1996 and is Chairman of our Compensation Committee. Mr. Geeslin has been a partner at Francisco Partners, a global private equity firm, since January 2004. His private equity and venture capital experience, with a focus on technology sector companies, has given him an understanding of finance and of growth strategies as well as experience in evaluating businesses in our company's industry, all of which is very helpful to the Board of Directors. Mr. Geeslin has a long history with Commvault and its management, providing continuity to board deliberations. And he has held various public company directorships, and he brings that experience to our award. YY Lee has served as a Director of our company since February of 2018. Ms. Lee has served as Senior Vice President and Chief Strategy Officer at Anaplan, a SaaS software company, since September 2018. Through her 10 years at numerous startup and mature Silicon Valley-based technology companies, Ms. Lee brings a significant entrepreneurial and executive-level experience in the technology and software industry to our board. Her expertise in the IT space is broad, and it provides the Board with tech-focused insight and perspective in the critical areas of operations, marketing and strategic development. Sanjay Mirchandani is the President and CEO of our company. He has served as a director since joining the company in February 2019. Prior to joining our company, he served as the CEO of Puppet, an Oregon-based IT automation company. Sanjay brings a wealth of international business and startup experience through his diverse and well-rounded career in technology. As our CEO, he brings his knowledge and perspective about critical company business strategies, financial position and operational matters into board deliberations. His insight regarding the company's operations and future are critical to the successful functioning of our Board. 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 the meeting for discussion concerning any of these nominees. Any stockholder who would like to discuss a Director's election should 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. So is there anybody who would like to speak? I'm getting the no sign on the e-mail address. Operator, is there anybody?

I'm showing no questions on the phone lines at this time.

Great. So moving on to the next item, which is the approval of auditors. We are asking shareholders to ratify the selection of Ernst & Young as our independent auditors for our fiscal year 2022 as recommended by the Board of Directors. I note that if the selection of Ernst & Young is not ratified by the stockholders, the Board will consider such a vote as advice to select other independent auditors for the 2023 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 E&Y as our independent auditors for fiscal 2022. Again, I'm happy to open the meeting for a discussion regarding E&Y. Any stockholder who would like to discuss that proposal or ask a question of E&Y, please do that now. As before, we will do our best to give each stockholder who wishes to speak a chance. So no questions are -- have been submitted on e-mail. Operator, is there anything on the phone?

I'm showing no questions on the phone line.

Okay. So we'll move on 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 stockholders approve the incentive plan as amended by the Fifth 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 under the plan. The Fifth Amendment increases the number of shares reserved for delivery under the incentive plan by 2 million shares, but it does not amend or replace any other provision of the incentive plan. And it will become effective upon stockholder approval. At a high level, the purpose of the incentive plan is to attract and retain qualified employees to advance our interests and the interests of our stockholders by providing appropriate incentives to drive superior performance and achieve long-range goals, creating a link between performance and compensation. It's also to provide incentive compensation opportunities that are competitive in the industry and to align the interests of participants with those of our stockholders. A more complete description of the plan was included in our proxy. I'd encourage anyone seeking more information to read that full description. The Board of Directors recommends that you vote for approval of the incentive plan as amended by the Fifth Amendment. I'm happy to open the meeting up for a brief discussion. Any stockholder who would like to discuss the proposal can do that now. And as before, I guess, we'll do our best to give everybody who wishes to ask a question a chance. So on the e-mail, no questions. And again, operator, is there anyone on the phone who wants to ask?

I'm showing no questions on the phone line.

Okay. Moving right along then. The final item of business is to vote on an advisory basis on our executive compensation. The Dodd-Frank Act enables our stockholders to vote to approve, on a nonbinding advisory basis, the compensation of our named executive officers whose compensation is reported in our proxy. We strive to enhance long-term stockholder value by closely aligning our executive compensation philosophy and practices with the interest 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 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. Now this proposal, which is 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 highly value the opinions of our stockholders, and they will review the voting results. The Board of Directors recommends that you vote for the approval of our executive compensation. Once again, I will open the meeting up for a brief discussion. If anybody has any questions, they can ask that now. So we'll look at the e-mail. There's nothing there. And again, operator, is there anybody on the phone who wishes to ask a question.

[Operator Instructions] And I'm showing no questions at this time.

Great. So we'll move on. Those being the only matters of business to be voted on at this meeting. We will now take time to count the votes. If you have previously voted by proxy 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, you can submit a completed ballot, as I noted at the beginning of the meeting, via e-mail to [email protected]. Votes must be submitted via e-mail prior to the end of this 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 the 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 to their remarks, Sanjay and Brian may provide non-GAAP financial results. The reconciliation between the non-GAAP and the GAAP measures can be found in Table 4 accompanying our most recent earnings press release, which is also posted on our website. So with that, 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 throughout the year and to you for our ongoing support. I am proud to share that we delivered our best performance year ever in a year that could only be described as unprecedented. We outpaced the industry growth rate and gained market share. We reinforced our place as the market leader with the accolades to prove it, and we accelerated our transition to a recurring revenue model. Said simply, Commvault finished the year in a position of strength, and we believe our relentless focus on innovation and execution gives us a critical edge in a very competitive industry. You see data management and protection are not just nice-to-haves. They're organizational imperatives. Today's CIOs and IT professionals are not only grappling with intense exponential data growth but must also manage a much more complex and fragmented world, all while repelling the very real and relentless threat of ransomware. While other vendors may boast that they can do some of this, we are uniquely positioned to help our customers rein in this complexity while accelerating their cloud journeys and digital transformations. It's what we've been innovating towards for 25 years. Our robust and future-proof intelligent data services platform provides the innovation, flexibility and choice customers need. Last year, we expanded our portfolio to include Commvault HyperScale X, which scales to meet an organizational data and cloud needs today and tomorrow. With ransomware attacks at an all-time high, we introduced a new stand-alone disaster recovery product with a simplified customer experience. And our Metallic SaaS solutions are quickly gaining traction across segments, verticals and geographies, propelled by our strategic partnerships with companies like Microsoft and Software One. And our intelligent data services platform continues to garner numerous industry accolades, most recently from Gartner, who once again recognized Commvault as a leader in enterprise backup and recovery software solutions for the tenth time. We believe our new capabilities are unmatched in the industry and that we are well positioned for growth in fiscal year '22 and beyond. The breadth and depth of our portfolio capabilities are unrivaled by peers. We have a robust and innovative product road map. Our partner ecosystem is expanding and continues to perform well. Our go-to-market teams are executing well, landing new customers and expanding across our existing installed base. Subscription renewals represent a growing tailwind, and we're expanding our margins and complementing our operating leverage with a robust share buyback plan. None of which will be possible without the unwavering drive and dedication of our mottos around the world. So I'd like to extend my sincere thanks to our employees and to you, our shareholders. I'll now turn it over to Brian Carolan, our CFO. Brian?

Thanks, Sanjay, and good morning, everyone. Just as a reminder, the presentation that I'll be speaking to today is available on our Investor Relations website. I'll spend the next several minutes covering some financial highlights for both the full year FY '21 and Q1 of FY '22. Please turn to Slide 6. As a reminder, FY '21 represents the 12 months ended March 31, 2021. FY '21 total revenue increased 8% to approximately $724 million. FY '21 non-GAAP operating income or EBIT grew 57% year-over-year to approximately $138 million, representing an EBIT margin of 19%. During FY '21, we generated approximately $116 million of free cash flow and ended the year with a cash balance of approximately $397 million with 0 debt on our balance sheet. Now turning to Slide 7. Q1 '22 represents the 3 months ended June 30, 2021. Q1 FY '22 total revenues were $183 million, a 6% increase over the first quarter of fiscal 2021. Q1 software and product revenue increased 7% year-over-year to approximately $82 million. Total expenses were approximately $140 million for the quarter, an increase of 1% year-over-year. Non-GAAP operating income grew 26% year-over-year to $41 million representing an EBIT margin of 22.4%. Now turning to Slide 8. Our improvements are evident in our accelerated recurring revenue transition. Beginning in FY '18, we introduced more flexible subscription-based pricing, and we've made significant progress since then. As you can see for FY '21, we ended the year with 59% of our software revenue coming from subscription contracts and 77% of our total revenue being recurring in nature. We ended the year with an ARR number of $518 million, and it was 15% up year-over-year. During our investor event back in January, we issued some near-term guidance through FY '23, laying out some milestones for subscription as a percentage of software being in the range of 70% to 75% and total recurring revenue in the range of 80% to 85% with an ARR growth number of at least 10%. FY '21 marked the first significant year of multiyear subscription renewal cycle that we expect to serve as a revenue tailwind in the years ahead. As a reminder, on our most recent earnings call, we highlighted an $80 million software subscription renewal opportunity for FY '22. Now turning to Slide 9. Our focus on execution extends beyond sales down to profits and margins. Since FY '18, we've aggressively worked to drive overall operating expenses lower, while investing in growth-driving initiatives like our Metallic platform, restructuring of our sales force and our renewed customer success effort. We reported non-GAAP EBIT margins of 19% in FY '21 with a path to approximately 24% by the end of 2023. Please refer to Slide 10 for some highlights from our balance sheet. As of June 30, 2021, our cash balance was approximately $359 million, and our total assets were approximately $839 million. Deferred revenue was approximately $374 million and working capital was approximately $195 million. And as a reminder, we have 0 debt on our balance sheet. Please turn to Slide 11 to wrap up and to highlight a few targets from our investor event. We laid out milestones of total revenue growth of 6% to 7% CAGR through FY '23, software and product revenue CAGR of 9% to 10%, ARR growth of at least 10%, EBITDA margins of 25% plus and breaking through the rule of 32 by the end of FY '23, with longer-term aspirations to get to a rule of 40. We've built a recurring revenue model characterized by sustainable growth, improved profitability, strong free cash flow and an attractive capital return policy. We believe that we have the ingredients to create material shareholder value in the years to come. That concludes my prepared remarks. So with that, I'll turn things back over to Warren Mondschein. Warren?

Thank you, Sanjay and Brian. I have been advised that the election inspector has completed a vote count. Because this is a 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 reflected in our 8-K filing with the final results. We do expect that any changes from these results would be immaterial. With respect to the election of directors, the election inspectors report that approximately 95.4% of the votes have -- of the votes cast have been voted in favor of Mr. Geeslin. The votes cast for him are 37.6 million for and 1.8 million against. Approximately 97.5% of the votes cast have been voted in favor of Ms. Lee. The votes cast for her are 38.4 million for and 1 million against. And approximately 97.2% of the votes cast have been voted in favor of Mr. Mirchandani. The votes cash for him are 38.3 million for and 1.1 million against. So please let the record show that Mr. Geeslin and Mirchandani and Ms. Lee have been elected as directors pursuant to our bylaws to hold office until next year's Annual Stockholders Meeting or until their successor is elected and qualified. With respect to the approval of E&Y as the independent auditors, 95.1% of the votes have voted for the proposal, 4.9% of the votes have voted against and less than 1% has abstained from voting. So please let the record show that E&Y has been approved as our auditors for the fiscal year 2022. With respect to the approval of the 2016 Omnibus Incentive Plan as amended by the Fifth Amendment, 86.3% of the votes have voted for the proposal, 13.7% of the votes have voted against and less than 1% has abstained. So please let the record show that the plan, as amended by the fifth amendment has been approved. And finally, with respect to the advisory vote on executive compensation, 97.4% of the votes have voted for the proposal, 2.5% of the votes have voted against the proposal and less than 1% has abstained from voting. So please let the record show that our executive compensation has been approved, albeit on an advisory basis by our stockholders. 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. So there being no further business to be addressed at this annual meeting, the formal portion of this meeting is now adjourned. As I mentioned at the beginning of the call, I would like to open the meeting to the audience for any remaining questions. Stockholders who have any questions for management are invited to ask them now. We do request that you be reasonably brief and that you can find your comments to one subject at a time. We will check the e-mail. There are no questions on e-mail. And again, operator, can you go ahead and open the lines if there are any questions?

[Operator Instructions] And I'm showing no questions on the phone lines at this time.

Great. So that's it then everybody. Thank you all for attending this year's meeting. We do look forward to talking to you again next year. Thanks, everybody.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.