Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the quarterly period ended: June 30, 2010
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Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
Commission File Number: 1-33026
CommVault Systems, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3447504 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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2 Crescent Place |
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Oceanport, New Jersey
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07757 |
(Address of principal executive offices)
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(Zip Code) |
(732) 870-4000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by the
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that registrant was required to submit and post such files.)
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of accelerated filer and
large accelerated filer in rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of
July 30, 2010, there were 43,183,648 shares of the registrants common stock, $0.01 par
value, outstanding.
COMMVAULT SYSTEMS, INC.
FORM 10-Q
INDEX
CommVault Systems, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
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June 30, |
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March 31, |
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2010 |
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2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
172,890 |
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$ |
169,518 |
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Short-term investments |
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7,544 |
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5,043 |
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Trade accounts receivable, less allowance
for doubtful accounts of $156 at June 30,
2010 and $292 at March 31, 2010 |
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45,547 |
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58,049 |
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Prepaid expenses and other current assets |
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6,633 |
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4,612 |
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Deferred tax assets |
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16,636 |
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16,693 |
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Total current assets |
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249,250 |
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253,915 |
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Deferred tax assets |
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23,676 |
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24,485 |
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Property and equipment, net |
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6,166 |
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6,356 |
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Other assets |
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1,473 |
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1,259 |
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Total assets |
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$ |
280,565 |
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$ |
286,015 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
2,724 |
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$ |
1,891 |
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Accrued liabilities |
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21,421 |
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25,727 |
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Deferred revenue |
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83,390 |
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83,112 |
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Total current liabilities |
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107,535 |
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110,730 |
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Deferred revenue, less current portion |
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8,662 |
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9,140 |
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Other liabilities |
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6,672 |
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7,845 |
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Stockholders equity: |
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Preferred stock, $0.01 par value: 50,000
shares authorized, no shares issued and
outstanding at June 30, 2010 and March 31,
2010 |
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Common stock, $0.01 par value: 250,000
shares authorized, 43,133 shares and 43,053
shares issued and outstanding at June 30,
2010 and March 31, 2010, respectively |
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432 |
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431 |
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Additional paid-in capital |
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244,599 |
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239,012 |
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Accumulated deficit |
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(87,415 |
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(81,031 |
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Accumulated other comprehensive income (loss) |
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80 |
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(112 |
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Total stockholders equity |
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157,696 |
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158,300 |
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Total liabilities and stockholders equity |
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$ |
280,565 |
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$ |
286,015 |
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See accompanying unaudited notes to consolidated financial statements
1
CommVault Systems, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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June 30, |
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2010 |
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2009 |
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Revenues: |
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Software |
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$ |
28,295 |
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$ |
29,105 |
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Services |
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38,005 |
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31,141 |
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Total revenues |
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66,300 |
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60,246 |
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Cost of revenues: |
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Software |
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556 |
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741 |
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Services |
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8,964 |
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7,609 |
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Total cost of revenues |
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9,520 |
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8,350 |
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Gross margin |
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56,780 |
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51,896 |
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Operating expenses: |
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Sales and marketing |
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35,826 |
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30,382 |
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Research and development |
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8,640 |
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7,619 |
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General and administrative |
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7,749 |
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6,936 |
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Depreciation and amortization |
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895 |
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893 |
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Income from operations |
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3,670 |
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6,066 |
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Interest expense |
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(27 |
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(23 |
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Interest income |
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119 |
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113 |
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Income before income taxes |
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3,762 |
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6,156 |
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Income tax expense |
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(264 |
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(3,721 |
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Net income |
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$ |
3,498 |
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$ |
2,435 |
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Net income per common share: |
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Basic |
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$ |
0.08 |
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$ |
0.06 |
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Diluted |
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$ |
0.08 |
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$ |
0.06 |
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Weighted average common shares outstanding: |
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Basic |
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43,168 |
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41,646 |
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Diluted |
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46,098 |
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43,764 |
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See accompanying unaudited notes to consolidated financial statements
2
CommVault Systems, Inc.
Consolidated Statement of Stockholders Equity
(In thousands)
(Unaudited)
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid - In |
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Accumulated |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Total |
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Balance as of March 31, 2010 |
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43,053 |
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$ |
431 |
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$ |
239,012 |
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$ |
(81,031 |
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$ |
(112 |
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$ |
158,300 |
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Stock-based compensation |
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3,585 |
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3,585 |
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Tax benefits relating to share-based payments |
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566 |
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566 |
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Exercise of common stock
options and vesting of
restricted stock units |
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703 |
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7 |
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4,402 |
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4,409 |
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Repurchase of common stock |
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(623 |
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(6 |
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(2,966 |
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(9,882 |
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(12,854 |
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Net income |
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3,498 |
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3,498 |
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Foreign currency translation adjustment |
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192 |
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192 |
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Balance as of June 30, 2010 |
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43,133 |
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$ |
432 |
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$ |
244,599 |
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$ |
(87,415 |
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$ |
80 |
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$ |
157,696 |
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See accompanying unaudited notes to consolidated financial statements
3
CommVault Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Three Months Ended |
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June 30, |
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2010 |
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2009 |
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Cash flows from operating activities |
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Net income |
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$ |
3,498 |
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$ |
2,435 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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923 |
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922 |
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Noncash stock-based compensation |
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3,585 |
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3,189 |
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Excess tax benefits from stock-based compensation |
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(554 |
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(155 |
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Deferred income taxes |
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(448 |
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1,943 |
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Changes in operating assets and liabilities: |
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Trade accounts receivable |
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11,372 |
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3,165 |
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Prepaid expenses and other current assets |
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(2,071 |
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(120 |
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Other assets |
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(254 |
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286 |
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Accounts payable |
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880 |
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(360 |
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Accrued liabilities |
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(1,707 |
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41 |
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Deferred revenue |
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1,735 |
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1,420 |
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Other liabilities |
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(1,040 |
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187 |
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Net cash provided by operating activities |
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15,919 |
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12,953 |
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Cash flows from investing activities |
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Purchase of short-term investments |
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(2,501 |
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Purchase of property and equipment |
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(773 |
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(913 |
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Net cash used in investing activities |
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(3,274 |
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(913 |
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Cash flows from financing activities |
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Repurchase of common stock |
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(12,905 |
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Proceeds from the exercise of stock options |
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4,409 |
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532 |
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Excess tax benefits from stock-based compensation |
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554 |
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155 |
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Net cash provided by (used in) financing activities |
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(7,942 |
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687 |
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Effects of exchange rate changes in cash |
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(1,331 |
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1,282 |
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Net increase in cash and cash equivalents |
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3,372 |
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14,009 |
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Cash and cash equivalents at beginning of period |
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169,518 |
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105,205 |
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Cash and cash equivalents at end of period |
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$ |
172,890 |
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$ |
119,214 |
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See accompanying unaudited notes to consolidated financial statements
4
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(In thousands, except per share data)
1. Nature of Business
CommVault Systems, Inc. and its subsidiaries (CommVault or the Company) is a leading
provider of data and information management software applications and related services. The
Company develops, markets and sells a suite of software applications and services, primarily in
North America, Europe, Australia and Asia, that provides its customers with high-performance data
protection; data migration and archiving; snapshot management and replication of data; embedded
deduplication; e-discovery and compliance solutions; enterprise-wide search capabilities; and
management and operational reports, remote services and troubleshooting tools. The Companys
unified suite of data and information management software applications, which is sold under the
Simpana brand, shares an underlying architecture that has been developed to minimize the cost and
complexity of managing data on globally distributed and networked storage infrastructures. The
Company also provides its customers with a broad range of professional and customer support
services.
2. Basis of Presentation
The consolidated financial statements as of June 30, 2010 and for the three months ended June
30, 2010 and 2009 are unaudited, and in the opinion of management include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair presentation of the results
for the interim periods. Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial
statements and should be read in conjunction with the financial statements and notes in the
Companys Annual Report on Form 10-K for fiscal 2010. The results reported in these financial
statements should not necessarily be taken as indicative of results that may be expected for the
entire fiscal year. The balance sheet as of March 31, 2010 has been derived from the audited
financial statements at that date but does not include all of the information and footnotes
required by U.S. GAAP for complete financial statements.
3. Summary of Significant Accounting Policies
There have been no significant changes in the Companys accounting policies during the three
months ended June 30, 2010 as compared to the significant accounting policies described in its
Annual Report on Form 10-K for the year ended March 31, 2010. A summary of the Companys
significant accounting policies are disclosed below.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP
requires management to make judgments and estimates that affect the amounts reported in the
Companys consolidated financial statements and the accompanying notes. The Company bases its
estimates and judgments on historical experience and on various other assumptions that it believes
are reasonable under the circumstances. The amounts of assets and liabilities reported in the
Companys balance sheets and the amounts of revenues and expenses reported for each of its periods
presented are affected by estimates and assumptions, which are used for, but not limited to, the
accounting for revenue recognition, allowance for doubtful accounts, income taxes and related
reserves, stock-based compensation and accounting for research and development costs. Actual
results could differ from those estimates.
Revenue Recognition
The Company derives revenues from two primary sources, or elements: software licenses and
services. Services include customer support, consulting, assessment and design services,
installation services and training. A typical sales arrangement includes both of these elements.
For sales arrangements involving multiple elements, the Company recognizes revenue using the
residual method. Under the residual method, the Company allocates and defers revenue for the
undelivered elements based on relative fair value and recognizes the difference between the total
arrangement fee and the amount deferred for the undelivered elements as revenue. The determination
of fair value of the undelivered elements in multiple-element arrangements is based on the price
charged when such elements are sold separately, which is commonly referred to as vendor-specific
objective-evidence, or VSOE.
5
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
The Companys software licenses typically provide for a perpetual right to use the Companys
software and are sold on a per-copy basis. To a lesser extent, the Company provides for a
perpetual right to use the Companys software and are sold as site licenses or on a capacity basis.
Site licenses give the customer the additional right to deploy the software on a limited basis
during a specified term. Software licenses sold on a capacity basis provide the customer with
unlimited licenses of specified software products based on a defined level of terabytes of data
under management. The Company recognizes software revenue through direct sales channels upon
receipt of a purchase order or other persuasive evidence and when all other basic revenue
recognition criteria are met as described below. The Company recognizes software revenue through
all indirect sales channels on a sell-through model. A sell-through model requires that the
Company recognize revenue when the basic revenue recognition criteria are met as described below
and these channels complete the sale of the Companys software products to the end-user. Revenue
from software licenses sold through an original equipment manufacturer partner is recognized upon
the receipt of a royalty report or purchase order from that original equipment manufacturer
partner.
Services revenue includes revenue from customer support and other professional services.
Customer support includes software updates on a when-and-if-available basis, telephone support and
bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer
support agreement, which is typically one year. To determine the price for the customer support
element when sold separately, the Company primarily uses historical renewal rates, and in certain
cases, it uses stated renewal rates. Historical renewal rates are supported by performing an
analysis in which the Company segregates its customer support renewal contracts into different
classes based on specific criteria including, but not limited to, the dollar amount of the software
purchased, the level of customer support being provided and the distribution channel. As a result
of this analysis, the Company has concluded that it has established VSOE for the different classes
of customer support when the support is sold as part of a multiple-element sales arrangement.
The Companys other professional services include consulting, assessment and design services,
installation services and training. Other professional services provided by the Company are not
mandatory and can also be performed by the customer or a third-party. In addition to a signed
purchase order, the Companys consulting, assessment and design services and installation services
are, in some cases, evidenced by a Statement of Work, which defines the specific scope of
such services to be performed when sold and performed on a stand-alone basis or included in
multiple-element sales arrangements. Revenues from consulting, assessment and design services and
installation services are based upon a daily or weekly rate and are recognized when the services
are completed. Training includes courses taught by the Companys instructors or third-party
contractors either at one of the Companys facilities or at the customers site. Training fees are
recognized after the training course has been provided. Based on the Companys analysis of such
other professional services transactions sold on a stand-alone basis, the Company has concluded it
has established VSOE for such other professional services when sold in connection with a
multiple-element sales arrangement. The Company generally performs its other professional services
within 90 days of entering into an agreement. The price for other professional services has not
materially changed for the periods presented.
The Company has analyzed all of the undelivered elements included in its multiple-element
sales arrangements and determined that VSOE of fair value exists to allocate revenues to services.
Accordingly, assuming all basic revenue recognition criteria are met, software revenue is
recognized upon delivery of the software license using the residual method.
The Company considers the four basic revenue recognition criteria for each of the elements as
follows:
|
|
|
Persuasive evidence of an arrangement with the customer exists. The Companys
customary practice is to require a purchase order and, in some cases, a written contract
signed by both the customer and the Company, or other persuasive evidence that an
arrangement exists prior to recognizing revenue on an arrangement. |
|
|
|
Delivery or performance has occurred. The Companys software applications are usually
physically delivered to customers with standard transfer terms such as FOB shipping point.
Software and/or software license keys for add-on orders or software updates are typically
delivered in an electronic format. If products that are essential to the functionality of
the delivered software in an arrangement have not been
delivered, the Company does not consider delivery to have occurred. Services revenue is
recognized when the services are completed, except for customer support, which is recognized
ratably over the term of the customer support agreement, which is typically one year.
|
6
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
|
|
|
Vendors fee is fixed or determinable. The fee customers pay for software
applications, customer support and other professional services is negotiated at the outset
of a sales arrangement. The fees are therefore considered to be fixed or determinable at
the inception of the arrangement. |
|
|
|
Collection is probable. Probability of collection is assessed on a
customer-by-customer basis. Each new customer undergoes a credit review process to
evaluate its financial position and ability to pay. If the Company determines from the
outset of an arrangement that collection is not probable based upon the review process,
revenue is recognized at the earlier of when cash is collected or when sufficient credit
becomes available, assuming all of the other basic revenue recognition criteria are met. |
The Companys sales arrangements generally do not include acceptance clauses. However, if an
arrangement does include an acceptance clause, revenue for such an arrangement is deferred and
recognized upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer
acceptance, waiver of customer acceptance or expiration of the acceptance period.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted average
number of common shares during the period. Diluted net income per share is computed using the
weighted average number of common shares and, if dilutive, potential common shares outstanding
during the period. Potential common shares consist of the incremental common shares issuable upon
the exercise of stock options and the vesting of restricted stock units. The dilutive effect of
such potential common shares is reflected in diluted earnings per share by application of the
treasury stock method.
The following table sets forth the computation of basic and diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,498 |
|
|
$ |
2,435 |
|
|
|
|
|
|
|
|
Basic net income per common share: |
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
43,168 |
|
|
|
41,646 |
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
Diluted net income per common share: |
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
43,168 |
|
|
|
41,646 |
|
Dilutive effect of stock options and
restricted stock units |
|
|
2,930 |
|
|
|
2,118 |
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
46,098 |
|
|
|
43,764 |
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
The diluted weighted average shares outstanding in the table above exclude outstanding stock
options and restricted stock units totaling approximately 613 and 3,802 for the three months ended
June 30, 2010 and 2009, respectively, because the effect would have been anti-dilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with maturities of three months
or less to be cash equivalents. As of June 30, 2010, the Companys cash and cash equivalents
balance consisted primarily of money market funds.
7
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
Concentration of Credit Risk
The Company grants credit to customers in a wide variety of industries worldwide and generally
does not require collateral. Credit losses relating to these customers have been minimal.
Sales through the Companys reseller and original equipment manufacturer agreements with Dell
totaled 26% and 23% of total revenues for the three months ended June 30, 2010 and 2009,
respectively. Dell accounted for 33% and 27% of accounts receivable as of June 30, 2010 and March
31, 2010, respectively. Sales through the Companys distribution agreement with Arrow Enterprise
Computing Solutions, Inc. (Arrow) totaled 23% of total revenues for both the three months ended
June 30, 2010 and 2009. Arrow accounted for approximately 27% and 30% of total accounts receivable
as of June 30, 2010 and March 31, 2010, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Companys cash and cash equivalents, accounts receivable and
accounts payable approximate their fair values due to the short-term maturity of these instruments.
As of June 30, 2010, the Companys short-term investments balance consisted of certificates of
deposit.
Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for such asset or
liability in an orderly transaction between market participants on the measurement date. Valuation
techniques used to measure fair value should maximize the use of observable inputs and minimize the
use of unobservable inputs. To measure fair value, the Company uses the following fair value
hierarchy based on three levels of inputs, of which the first two are considered observable and the
last unobservable:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs other than Level 1 that are observable for the asset or liability, either
directly or indirectly, such as quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data by correlation or
other means.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The following table summarizes the composition of the Companys financial assets measured at
fair value on a recurring basis at June 30, 2010 and March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
141,078 |
|
|
$ |
143,236 |
|
All of the Companys financial instruments in the table above were classified and measured as
Level I instruments.
Deferred Revenue
Deferred revenues represent amounts collected from, or invoiced to, customers in excess of
revenues recognized. This results primarily from the billing of annual customer support agreements,
as well as billings for other professional services fees that have not yet been performed by the
Company and billings for license fees that are deferred due to insufficient persuasive evidence
that an arrangement exists. The value of deferred revenues will increase or decrease based on the
timing of invoices and recognition of software revenue. The Company expenses internal direct and
incremental costs related to contract acquisition and origination as incurred.
8
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
Deferred revenue consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
March 31, 2010 |
|
Current: |
|
|
|
|
|
|
|
|
Deferred software revenue |
|
$ |
722 |
|
|
$ |
578 |
|
Deferred services revenue |
|
|
82,668 |
|
|
|
82,534 |
|
|
|
|
|
|
|
|
|
|
$ |
83,390 |
|
|
$ |
83,112 |
|
|
|
|
|
|
|
|
Non-current: |
|
|
|
|
|
|
|
|
Deferred services revenue |
|
$ |
8,662 |
|
|
$ |
9,140 |
|
|
|
|
|
|
|
|
Accounting for Stock-Based Compensation
The Company utilizes the Black-Scholes pricing model to determine the fair value of
non-qualified stock options on the dates of grant. Restricted stock units are measured based on
the fair market values of the underlying stock on the dates of grant. The Company recognizes
stock-based compensation using the straight-line method for all stock awards.
The Company classifies benefits of tax deductions in excess of the compensation cost
recognized (excess tax benefits) as a financing item cash inflow with a corresponding operating
cash outflow. For the three months ended June 30, 2010 and 2009, the Company includes $554 and
$155, respectively, as a financing cash inflow.
Share Repurchases
The Company considers all shares repurchased as cancelled shares restored to the status of
authorized but unissued shares on the trade date. The aggregate purchase price of the shares of
the Companys common stock repurchased is reflected as a reduction to Stockholders Equity. The
Company accounts for shares repurchased as an adjustment to common stock (at par value) with the
excess repurchase price allocated between Additional Paid-in Capital and Accumulated Deficit. As a
result of the Companys stock repurchases in the three months ended June 30, 2010, the Company
reduced common stock and additional paid-in capital by $2,972 and accumulated deficit by $9,882.
Foreign Currency Translation
The functional currencies of the Companys foreign operations are deemed to be the local
countrys currency. Assets and liabilities of the Companys international subsidiaries are
translated at their respective period-end exchange rates, and revenues and expenses are translated
at average currency exchange rates for the period. The resulting balance sheet translation
adjustments are included in Other Comprehensive Income (Loss) and are reflected as a separate
component of Stockholders Equity.
Foreign currency transaction gains and losses are recorded in General and administrative
expenses in the Consolidated Statements of Income. The Company recognized net foreign currency
transaction losses of $128 in the three months ended June 30, 2010 and net foreign currency
transaction losses of $527 in the three months ended June 30, 2009, respectively. The net foreign
currency transaction losses recorded in General and administrative expenses include settlement
gains and losses on forward contracts disclosed below.
To date, the Company has selectively hedged its exposure to foreign currency transaction gains
and losses on the balance sheet through the use of forward contracts, which were not designated as
hedging instruments. The duration of forward contracts utilized for hedging the Companys balance
sheet exposure is approximately one month. As of June 30, 2010 and March 31, 2010, the Company did
not have any forward contracts outstanding. The Company recorded net realized losses of $4 and $17
in general and administrative expenses related to the settlement of forward exchange contracts in
the three months ended June 30, 2010 and 2009, respectively. In the future, the Company may enter
into additional foreign currency-based hedging contracts to reduce its exposure to significant
fluctuations in currency exchange rates on the balance sheet.
9
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
Comprehensive Income
Comprehensive income is defined to include all changes in equity, except those resulting from
investments by stockholders and distribution to stockholders. Comprehensive income for the three
months ended June 30, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,498 |
|
|
$ |
2,435 |
|
Foreign currency translation adjustment |
|
|
192 |
|
|
|
(107 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
3,690 |
|
|
$ |
2,328 |
|
|
|
|
|
|
|
|
Impact of Recently Issued Accounting Standards
In January 2010, the FASB issued guidance requiring additional disclosure for significant
transfers in and out of Levels 1 and 2 fair value measurements and the reasons for such transfers.
This new guidance also requires separate disclosure information about purchases, sales, issuances,
and settlements (on a gross basis rather than as one net number) in the reconciliation for fair
value measurements using significant unobservable inputs (Level 3). In addition, this guidance
clarifies existing disclosures regarding fair value measurement for each class of assets and
liabilities and the valuation techniques and inputs used to measure fair value for recurring and
nonrecurring fair value measurements that fall in either Level 2 or Level 3. The changes under this
new guidance were effective for the quarterly period beginning January 1, 2010, except for the
disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements, which are effective for the Companys fiscal year beginning April
1, 2011. The Company believes that the adoption of these new accounting pronouncements will not
have a material impact on its consolidated financial position, results of operations or cash flows.
4. Credit Facility
In July 2009, the Company entered into an amended and restated credit facility in which the
Company can borrow up to $30,000 over a three year period. Borrowings under the amended and
restated credit facility are available to repurchase the Companys common stock under its share
repurchase program and to provide for working capital and general corporate purposes. Repayment of
principal amounts borrowed under the amended and restated credit facility is required at the
maturity date of July 2012.
The amended and restated credit facility contains financial covenants that require the Company
to maintain a quick ratio and minimum earnings before interest, taxes, depreciation and
amortization (EBITDA), as defined in the credit agreement. Borrowings under the amended and
restated credit facility bear interest, at the Companys option, at either i) LIBOR plus a margin
ranging from 2.25% to 2.75% or ii) the banks base rate plus a margin ranging from 1.75% to 2.25%.
The banks base rate is defined as the higher of the federal funds rate plus 1.5%, one-month LIBOR
plus 1.5%, or the lenders prime rate. The Company pays a quarterly commitment fee that ranges
from 0.35% to 0.50% per annum based on the unused portion of the amended and restated credit
facility. As of June 30, 2010, the Company was in compliance with all required covenants, and
there were no outstanding balances on the amended and restated credit facility.
5. Contingencies
In the normal course of its business, the Company may be involved in various claims,
negotiations and legal actions; however, as of June 30, 2010, the Company is not party to any
litigation that is expected to have a material effect on the Companys financial position, results
of operations or cash flows.
10
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
6. Capitalization
In January 2008, the Companys Board of Directors approved a stock repurchase program, which
authorized the Company to repurchase up to $40,000 of its common stock. In July 2008, the
Companys Board of Directors authorized an additional $40,000 increase to the Companys existing
share repurchase program. As of June 30, 2010, the Company has repurchased approximately $53,146
under the share repurchase authorization and may repurchase an additional
$26,854 of its common stock under the current program through March 31, 2011.
On November 13, 2008, the Board of Directors of the Company adopted a Rights Plan and declared
a dividend distribution of one Right for each outstanding share of common stock to shareholders of
record on November 24, 2008. Each Right, when exercisable, entitles the registered holder to
purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value
$0.01 per share, at a purchase price of eighty dollars per one one-thousandth of a share, subject
to adjustment. Of the 50,000 shares of preferred stock authorized under the Companys certificate
of incorporation, 150 have been designated as Series A Junior Participating Preferred.
The Rights will become exercisable following the tenth business day after (i) a person or
group announces the acquisition of 15% or more of the Companys common stock or (ii) commencement
of a tender or exchange offer, the consummation of which would result in ownership by the person or
group of 15% or more of the Companys common stock. The Company is also entitled to redeem the
Rights at $0.001 per right under certain circumstances. The Rights expire on November 14, 2018, if
not exercised or redeemed.
7. Stock Plans
As of June 30, 2010, the Company maintains two stock incentive plans, the 1996 Stock Option
Plan (the Plan) and the 2006 Long-Term Stock Incentive Plan (the LTIP).
Under the Plan, the Company may grant non-qualified stock options to purchase 11,705 shares of
common stock to certain officers and employees. Stock options are granted at the discretion of the
Board and expire 10 years from the date of the grant. At June 30, 2010, there were 554 options
available for future grant under the Plan.
The LTIP permits the grant of incentive stock options, non-qualified stock options, restricted
stock awards, restricted stock units, stock appreciation rights, performance stock awards and stock
unit awards based on, or related to, shares of the Companys common stock. On each April 1, the
number of shares available for issuance under the LTIP is increased, if applicable, such that the
total number of shares available for awards under the LTIP as of any April 1 is equal to 5% of the
number of outstanding shares of the Companys common stock on that April 1. As of June 30, 2010,
approximately 2,145 shares were available for future issuance under the LTIP.
As of June 30, 2010, the Company has granted non-qualified stock options and restricted stock
units under its stock incentive plans. Equity awards granted by the Company under its stock
incentive plans generally vest quarterly over a four-year period, except that the shares that would
otherwise vest quarterly over the first 12 months do not vest until the first anniversary of the
grant. The Company anticipates that future grants under its stock incentive plans will continue to
include both non-qualified stock options and restricted stock units.
The Company estimated the fair value of stock options granted using the Black-Scholes formula.
The average expected life was determined according to the simplified method, which is the
mid-point between the vesting date and the end of the contractual term. The Company will continue
to use the simplified method until it has enough historical experience to provide a reasonable
estimate of expected term. The risk-free interest rate is determined by reference to U.S. Treasury
yield curve rates with a remaining term equal to the expected life assumed at the date of grant.
Forfeitures are estimated based on the Companys historical analysis of actual stock option
forfeitures.
11
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
Expected volatility through the quarter ended September 30, 2008 was calculated based on
reported data for a peer group of publicly traded companies for which historical information was
available. During the quarter ended December 31, 2008, the Company began to incorporate its own
data into the expected volatility assumption. The
Company modified its expected volatility calculation because its common stock had been
publically traded for 2 years and it believed that CommVault specific volatility inputs should be
included in the calculation of expected volatility. As a result, expected volatility during the
three months ended June 30, 2010 and 2009 was calculated based on a blended approach that included
historical volatility of a peer group, the implied volatility of the Companys traded options with
a remaining maturity greater than six months and the historical realized volatility of its common
stock from the date of its initial public offering to the respective stock option grant date.
The assumptions used in the Black-Scholes option-pricing model are as follows:
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2010 |
|
2009 |
Dividend yield |
|
None |
|
None |
Expected volatility |
|
40%42% |
|
41%42% |
Weighted average expected volatility |
|
41% |
|
41% |
Risk-free interest rates |
|
2.40%2.93% |
|
2.30%3.14% |
Expected life (in years) |
|
6.3 |
|
6.3 |
The following table presents the stock-based compensation expense included in cost of services
revenue, sales and marketing, research and development and general and administrative expenses for
the three months ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Cost of services revenue |
|
$ |
101 |
|
|
$ |
108 |
|
Sales and marketing |
|
|
1,599 |
|
|
|
1,448 |
|
Research and development |
|
|
407 |
|
|
|
481 |
|
General and administrative |
|
|
1,478 |
|
|
|
1,152 |
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
$ |
3,585 |
|
|
$ |
3,189 |
|
|
|
|
|
|
|
|
As of June 30, 2010, there was approximately $24,828 of unrecognized stock-based compensation
expense, net of estimated forfeitures, related to non-vested stock option and restricted stock unit
awards that is expected to be recognized over a weighted average period of 2.43 years. To the
extent the actual forfeiture rate is different from what we have anticipated, stock-based
compensation related to these awards will be different from the Companys expectations.
The following summarizes the activity for the Companys two stock incentive plans for the
three months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
of |
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
Options |
|
Options |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Outstanding as of March 31, 2010 |
|
|
8,070 |
|
|
$ |
10.38 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
21 |
|
|
|
23.11 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(563 |
) |
|
|
7.84 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(29 |
) |
|
|
16.76 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(4 |
) |
|
|
6.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2010 |
|
|
7,495 |
|
|
$ |
10.59 |
|
|
|
5.83 |
|
|
$ |
89,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of
June 30, 2010 |
|
|
7,397 |
|
|
$ |
10.48 |
|
|
|
5.78 |
|
|
$ |
88,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2010 |
|
|
5,222 |
|
|
$ |
8.43 |
|
|
|
4.72 |
|
|
$ |
73,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of stock options granted was $10.26 per share and $7.44 per
share during the three months ended June 30, 2010 and 2009, respectively. The total intrinsic value
of options exercised was $8,620 and $784 during the three months ended June 30, 2010 and 2009,
respectively. The Companys policy is to issue new shares upon exercise of options as the Company
does not hold shares in treasury.
12
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
Restricted stock unit activity for the three months ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average Grant |
|
Non-vested Restricted Stock Units |
|
Awards |
|
|
Date Fair Value |
|
Non-vested as of March 31, 2010 |
|
|
1,011 |
|
|
$ |
15.33 |
|
Awarded |
|
|
45 |
|
|
|
22.91 |
|
Released |
|
|
(140 |
) |
|
|
12.61 |
|
Forfeited |
|
|
(24 |
) |
|
|
16.53 |
|
|
|
|
|
|
|
|
Non-vested as of June 30, 2010 |
|
|
892 |
|
|
$ |
16.10 |
|
|
|
|
|
|
|
|
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting and the amount used for income
tax purposes. The Companys net deferred tax assets relate primarily to federal and state research
tax credit carryforwards, stock-based compensation and foreign net operating loss carry forwards.
The Company assesses the likelihood that its deferred tax assets will be recovered from future
taxable income and, to the extent that the Company believes recovery is not likely, the Company
establishes a valuation allowance. In addition, the Company reviews the expected annual effective
income tax rate and makes changes on a quarterly basis as necessary based on certain factors such
as changes in forecasted annual income, changes to the actual and forecasted permanent book-to-tax
differences, or changes resulting from the impact of a tax law change. As of June 30, 2010, the
Company does not maintain a valuation allowance against any of its deferred tax assets.
Income tax expense was $264 in the three months ended June 30, 2010 compared to $3,721 in the
three months ended June 30, 2009. The effective tax rate in the three months ended June 30, 2010
was 7% as compared to 60% in the three months ended June 30, 2009. The effective rate in the three
months ended June 30, 2010 is lower than the expected federal statutory rate of 35% primarily due
to the reversal of certain tax reserves totaling $1,080 as a result of the expiration of a statue
of limitations in a foreign jurisdiction.
The effective rate in the three months ended June 30, 2009 is higher than the expected federal
statutory rate of 35% primarily due to state income taxes, tax return to accrual adjustments and
the correction of a prior period error. During the quarter ended June 30, 2009, the Company
identified a prior period error of approximately $915 related to estimated foreign tax credits
associated with the Companys Netherlands branch that were improperly recorded as deferred tax
assets during the fiscal year ending March 31, 2008. The Company concluded that this error is not
material to any annual fiscal period.
The calculation of the Companys tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in each of its tax jurisdictions. The number of years with
open tax audits varies depending on the tax jurisdiction. A number of years may lapse before a
particular matter is audited and finally resolved. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
Balance at March 31, 2010 |
|
$ |
5,229 |
|
Additions for tax positions related to fiscal 2011 |
|
|
45 |
|
Additions for tax positions related to prior years |
|
|
|
|
Settlements |
|
|
|
|
Reductions related to the expiration of statutes of limitations |
|
|
(751 |
) |
Foreign currency translation adjustment |
|
|
(101 |
) |
|
|
|
|
Balance at June 30, 2010 |
|
$ |
4,422 |
|
|
|
|
|
13
CommVault Systems, Inc.
Notes to Consolidated Financial Statements Unaudited
(continued)
(In thousands, except per share data)
During the three months ended June 30, 2010, the Company recognized $751 of previously
unrecognized tax benefits and approximately $329 of related accrued interest and penalties totaling
$1,080 as a result of the expiration of a statue of limitations in a foreign jurisdiction. The
Company believes that it is reasonably possible that
approximately $650 of the currently remaining unrecognized tax benefits and approximately $160 of
related accrued interest and penalties may also be realized by the end of the fiscal year ending
March 31, 2011 as a result of the lapse of the statue of limitations.
All of the Companys unrecognized tax benefits at June 30, 2010 of $4,422, if recognized,
would favorably affect the effective tax rate. Components of the reserve are classified as either
current or long-term in the Consolidated Balance Sheet based on when the Company expects each of
the items to be settled. Accordingly, the Company has recorded its unrecognized tax benefits of
$4,422 and $5,229 and the related accrued interest and penalties of $1,062 and $1,394 in Other
Liabilities on the Consolidated Balance Sheet at June 30, 2010 and March 31, 2010, respectively.
Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. In
the three months ended June 30, 2010 and 2009, the Company recognized $38 and $35, respectively, of
interest and penalties in the Consolidated Statement of Income.
The Company conducts business globally and as a result, files income tax returns in the United
States and in various state and foreign jurisdictions. In the normal course of business, the
Company is subject to examination by taxing authorities throughout the world, including such major
jurisdictions as the United States, Australia, Canada, Germany, Netherlands and United Kingdom.
The Companys income tax returns for the fiscal years ended March 31, 2006 through March 31, 2009
are currently under audit by the State of New Jersey. The following table summarizes the tax
years in the Companys major tax jurisdictions that remain subject to income tax examinations by
tax authorities as of June 30, 2010. The years subject to income tax examination in the Companys
foreign jurisdictions cover the maximum time period with respect to these jurisdictions. Due to
NOL carryforwards, in some cases the tax years continue to remain subject to examination with
respect to such NOLs.
|
|
|
|
|
Years Subject to Income |
Tax Jurisdiction |
|
Tax Examination |
|
|
|
U.S. Federal |
|
2001 - Present |
New Jersey |
|
2002 - Present |
Foreign jurisdictions |
|
2005 - Present |
9. Subsequent Events
On July 29, 2010,
the Company’s Board of Directors authorized a $40,000 increase to the
Company’s existing share repurchase program and extended the expiration
of the stock repurchase program to March 31, 2012. As of August 5,
2010, the Company has repurchased $53,146 of common stock out of the $120,000
in total that is now authorized under its stock repurchase program. As a
result, the Company may repurchase an additional $66,854 of its common stock
through March 31, 2012.
14
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
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, 2010. Our actual results may differ materially from those
contained in or implied by any forward-looking statements.
Overview
We are a leading provider of data and information management software applications and related
services in terms of product breadth and functionality and market penetration. We develop, market
and sell a unified suite of data and information management software applications under the
Simpana® brand. Our Simpana software is a platform with licensable modules that work together
seamlessly, sharing a single code and common function set, to deliver Backup and Recovery, Archive,
Replication, Search and Resource Management capabilities. With a single platform approach, Simpana
is specifically designed to protect, manage and access data throughout its lifecycle in less time,
at lower cost and with fewer resources than alternative solutions. Our products and capabilities
enable our customers to deploy solutions for data protection, business continuance, corporate
compliance and centralized management and reporting. We also provide our customers with a broad
range of highly effective services that are delivered by our worldwide support and field
operations. As of June 30, 2010, we had licensed our software applications to approximately 12,500
registered customers.
Our Simpana software suite is comprised of the following five distinct data and information
management software application modules: Data Protection (Back-up and Recovery), Archive,
Replication, Resource Management and Search. All of our software application modules share a
common platform that provides back-end services and advanced capabilities, like encryption;
deduplication; content indexing; policy-based automation; data classification; e-discovery and
role-based security. In addition to Back-up and Recovery, the subsequent release of our other
software application modules has substantially increased our addressable market. Each application
module can be used individually or in combination with other application modules from our single
platform suite.
In January 2009, our CommVault Simpana 8.0 software suite (Simpana 8) was made available for
public release. We believe that Simpana 8, which builds on and significantly expands Simpana 7,
will continue to create competitive differentiation in the data and information management related
markets. Simpana 8 is the largest software release in our history and includes advances in
recovery management, data reduction, virtual server protection and content organization. We
believe that Simpana 8 can meet a broad spectrum of customers discovery and recovery management
requirements and eliminate the need for a myriad of point level products.
We currently derive the majority of our software revenue from our Backup and Recovery software
application. Sales of Backup and Recovery represented approximately 66% of our total software
revenue for the three months ended June 30, 2010 and 61% of our total software revenue for fiscal
2010. In addition, we derive the majority of our services revenue from customer and technical
support associated with our Backup and Recovery software application. The increase in the
percentage of software revenue generated by our non-Backup and Recovery software products, or
Advanced Data and Information Management Products (ADIM), was primarily driven by new components
and enhancements related to Simpana 7 and Simpana 8 software suites. We anticipate that ADIM
software revenue as an overall percentage of our total software revenue will continue to increase
in the future as we expand our domestic and international sales activities and continue to build
brand awareness. However, we anticipate that we will continue to derive a majority of our software
and services revenue from our Backup and Recovery software application for the next few fiscal
years.
More recently, the industry in which we currently operate is going through accelerating
changes as the result of the introduction of new technologies such as cloud computing. We believe
cloud computing, in its various forms, represents a major new long term trend in the way that
applications are delivered, data is stored and information is retrieved. We believe as a result of
our Simpana data and information management platform, that we are in a unique position to enhance
and extend the value of our Simpana software suite by developing innovative, industry leading ways
to manage data and information in the cloud. For example, in February 2010 we announced the
release of an integrated cloud storage connector for our Simpana software, which will enable
customers to move on-premises backup and archive data into, and out of, private and public cloud
storage.
15
In addition to extending the Simpana platform into the cloud, we are continuing to pursue an
aggressive product development program in both data and information management solutions. Our
data management solutions include not only traditional backup and recovery, but also new
innovations in de-duplication, data movement, virtualization, snap-based backups and enterprise
reporting. Our information management innovations are primarily in the areas of archiving,
eDiscovery, records management, governance and compliance. We remain focused on both the data and
information management trends in the marketplace and, in fact, a material portion of our existing
research and development expenses are utilized toward the development of such new technologies
discussed above. While we are confident in our ability to meet these changing industry demands
with Simpana 8 and potential future releases, the development, release and timing of any features
or functionality remain at our sole discretion and our solutions to cloud computing or other
technologies may not be widely adopted.
Given the nature of the industry in which we operate, our software applications are subject to
obsolescence. As noted above, we continually develop and introduce updates to our existing software
applications in order to keep pace with evolving industry technologies such as cloud computing. In
addition, we must address evolving industry standards, changing customer requirements and
competitive software applications that may render our existing software applications obsolete. For
each of our software applications, we provide full support for the current generally available
release and one prior release. When we declare a product release obsolete, a customer notice is
delivered twelve months prior to the effective date of obsolescence announcing continuation of full
product support for the first six months. We provide an additional six months of extended
assistance support in which we only provide existing workarounds or fixes that do not require
additional development activity. We do not have existing plans to make any of our software products
permanently obsolete.
Sources of Revenues
We derive the majority of our total revenues from sales of licenses of our software
applications. We do not customize our software for a specific end-user customer. We sell our
software applications 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. Our software revenue was 43% of our total revenues
for the three months ended June 30, 2010 and 48% for the three months ended June 30, 2009.
In recent fiscal years, we have generated approximately 62% of our software revenue from our
existing customer base and approximately 38% of our software revenue from new customers. In
addition, our total software revenue in any particular period is, to a certain extent, dependent
upon our ability to generate revenues from large customer software deals, which we refer to as
enterprise software transactions. We expect the number of enterprise software transactions
(transactions greater than $0.1 million) and resulting software revenue to increase throughout
fiscal 2011, although the size and timing of any particular software transaction is more difficult
to forecast. Such software transactions represented approximately 44% of our total software
revenue in the three months ended June 30, 2010 and approximately 40% of our software revenue in
the three months ended June 30, 2009.
Software revenue generated through indirect distribution channels was approximately 83% of
total software revenue in the three months ended June 30, 2010 and 81% in the three months ended
June 30, 2009. Software revenue generated through direct distribution channels was approximately
17% of total software revenue in the three months ended June 30, 2010 and 19% in the three months
ended June 30, 2009. The shift in the percentage of software revenue growth generated through our
indirect distribution channels compared to our direct sales force in the three months ended June
30, 2010 compared to the three months ended June 30, 2009 is primarily the result of a higher
percentage of enterprise software transactions in our U.S. operations that were transacted through
indirect distribution channels. 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 quarter to quarter. As such,
there may be fluctuations in the dollars and percentage of software revenue generated through our
direct distribution channels from time to time. We believe that the growth of our software
revenue, derived from both our indirect channel partners and direct sales force, are key attributes
to our long-term growth strategy. We will 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 software applications could have a
material adverse effect on our revenues and results of operations.
16
We have a worldwide reseller and an original equipment agreement with Dell. Our reseller
agreement with Dell provides them the right to market, resell and distribute certain of our
products to their customers. Our original equipment manufacturer agreement with Dell is discussed
more fully below. Sales through our agreements with Dell accounted for 26% of our total revenues
for the three months ended June 30, 2010 and 23% of our total revenues for the three months ended
June 30, 2009.
We have original equipment manufacturer agreements primarily with Dell and Hitachi Data
Systems for them to market, sell and support our software applications and services on a
stand-alone basis and/or incorporate our software applications into their own hardware products.
Dell and Hitachi Data Systems have no obligation to recommend or offer our software applications
exclusively or at all, and they have no minimum sales requirements and can terminate our
relationship at any time. A material portion of our software revenue is generated through our
original equipment manufacturer agreements. Sales through our original equipment manufacturer
agreements accounted for 8% of our total revenues for the three months ended June 30, 2010 and 10%
of our total revenues for the three months ended June 30, 2009.
We also have non-exclusive distribution agreements covering our North American commercial
markets and our U.S. Federal Government market with Arrow Enterprise Computing Solutions, Inc.
(Arrow), a subsidiary of Arrow Electronics, Inc., and Avnet Technology Solutions (Avnet), a
subsidiary of Avnet, Inc. Pursuant to these distribution agreements, these distributors 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. Many of our North
American resellers have been transitioned to either Arrow or Avnet. We generated approximately 23%
of our total revenues through Arrow in both the three months ended June 30, 2010 and 2009. Avnets
total revenue contribution was not material in the three months ended June 30, 2010. If Arrow or
Avnet were to discontinue or reduce the sales of our products or if our agreements with Arrow or
Avnet were terminated, and if we were unable to take back the management of our reseller channel or
find another North American distributor to replace Arrow or Avnet, then it could have a material
adverse effect on our future revenues.
Our services revenue is made up of fees from the delivery of customer support and other
professional services, which are typically sold in connection with the sale of our software
applications. Customer support agreements provide technical support and unspecified software
updates on a when-and-if-available basis for an annual fee based on licenses purchased and the
level of service subscribed. Other professional services include consulting, assessment and design
services, implementation and post-deployment services and training, all of which to date have
predominantly been sold in connection with the sale of software applications. Our services revenue
was 57% of our total revenues for the three months ended June 30, 2010 and 52% for the three months
ended June 30, 2009. The gross margin of our services revenue was 76.4% for the three months ended
June 30, 2010 and 75.6% for the three months ended June 30, 2009. The increase in the gross margin
of our services revenue in the three months ended June 30, 2010 compared to the three months ended
June 30, 2009 was primarily due to a higher percentage of our services revenue being derived from
customer support agreements as a result of sales to new customers and renewal agreements with our
installed customer base. Overall, our services revenue has lower gross margins than our software
revenue. The gross margin of our software revenue was 98.0% for three months ended June 30, 2010,
and 97.5% for the three months ended June 30, 2009. An increase in the percentage of total
revenues represented by services revenue may adversely affect our overall gross margins.
17
Description of Costs and Expenses
Our cost of revenues is as follows:
|
|
|
Cost of Software Revenue, consists primarily of third-party royalties and other costs
such as media, manuals, translation and distribution costs; and |
|
|
|
Cost of Services Revenue, consists primarily of salary and employee benefit costs in
providing customer support and other professional services. |
Our operating expenses are as follows:
|
|
|
Sales and Marketing, consists primarily of salaries, commissions, employee benefits,
stock-based compensation and other direct and indirect business expenses, including travel
and related expenses, sales promotion expenses, public relations expenses and costs for
marketing materials and other marketing events (such as trade shows and advertising); |
|
|
|
Research and Development, which is primarily the expense of developing new software
applications and modifying existing software applications, consists principally of
salaries, stock-based compensation and benefits for research and development personnel and
related expenses; contract labor expense and consulting fees as well as other expenses
associated with the design, certification and testing of our software applications; and
legal costs associated with the patent registration of such software applications; |
|
|
|
General and Administrative, consists primarily of salaries, stock-based compensation and
benefits for our executive, accounting, human resources, legal, information systems and
other administrative personnel. Also included in this category are other general corporate
expenses, such as outside legal and accounting services, compliance costs and insurance;
and |
|
|
|
Depreciation and Amortization, consists of depreciation expense primarily for computer
equipment we use for information services and in our development and test labs. |
We anticipate that each of the above categories of operating expenses will increase in dollar
amounts, but will decline as a percentage of total revenues in the long-term.
Foreign Currency Exchange Rates Impact on Results of Operations
Sales outside the United States were approximately 36% of our total revenue for the three
months ended June 30, 2010 and 38% in fiscal 2010. 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 revenue, operating
expenses and income from operations for our non-U.S. operations. Similarly, our revenue, operating
expenses and net income will generally decrease for our non-U.S. operations if the U.S. dollar
strengthens against foreign currencies.
Using the average foreign currency exchange rates from the corresponding fiscal 2010 period,
our total revenues, cost of revenues and operating expenses from non-U.S. operations for the three
months ended June 30, 2010 would have been lower by approximately $0.3 million, $0.1 million and
$0.2 million, respectively.
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 $0.1 million
in the three months ended June 30, 2010 and net foreign currency transaction losses of $0.5 million
in the three months ended June 30, 2009.
18
Critical Accounting Policies
In presenting our consolidated financial statements in conformity with U.S. generally accepted
accounting principles, we are required to make estimates and judgments that affect the amounts
reported therein. Some of the estimates and assumptions we are required to make relate to matters
that are inherently uncertain as they pertain to future events. We base these estimates on
historical experience and on various other assumptions that we believe to be reasonable and
appropriate. Actual results may differ significantly from these estimates. The following is a
description of our accounting policies that we believe require subjective and complex judgments,
which could potentially have a material effect on our reported financial condition or results of
operations.
Revenue Recognition
Our revenue recognition policy is based on complex rules that require us to make significant
judgments and estimates. In applying our revenue recognition policy, we must determine which
portions of our revenue are recognized currently (generally software revenue) and which portions
must be deferred and recognized in future periods (generally services revenue). We analyze various
factors including, but not limited to, the sales of undelivered services when sold on a stand-alone
basis, our pricing policies, the credit-worthiness of our customers and resellers, accounts
receivable aging data and contractual terms and conditions in helping us to make such judgments
about revenue recognition. Changes in judgment on any of these factors could materially impact the
timing and amount of revenue recognized in a given period.
Currently, we derive revenues from two primary sources, or elements: software licenses and
services. Services include customer support, consulting, assessment and design services,
installation services and training. A typical sales arrangement includes both of these elements.
For sales arrangements involving multiple elements, we recognize revenue using the residual
method. Under the residual method, we allocate and defer revenue for the undelivered elements
based on relative fair value and recognize the difference between the total arrangement fee and the
amount deferred for the undelivered elements as revenue. The determination of fair value of the
undelivered elements in multiple-element arrangements is based on the price charged when such
elements are sold separately, which is commonly referred to as vendor-specific objective evidence
(VSOE).
Our software licenses typically provide for a perpetual right to use our software and are sold
on a per-copy basis. To a lesser extent, we also provide for the perpetual right to use our
software as site licenses or on a capacity basis. Site licenses give the customer the additional
right to deploy the software on a limited basis during a specified term. Software licenses sold on
a capacity basis provide the customer with unlimited licenses of specified software products based
on a defined level of terabytes of data under management. We recognize software revenue through
direct sales channels upon receipt of a purchase order or other persuasive evidence and when the
other three basic revenue recognition criteria are met as described in the revenue recognition
section in Note 3 of our Notes to Consolidated Financial Statements. We recognize software
revenue through all indirect sales channels on a sell-through model. A sell-through model requires
that we recognize revenue when the basic revenue recognition criteria are met and these channels
complete the sale of our software products to the end-user. Revenue from software licenses sold
through an original equipment manufacturer partner is recognized upon the receipt of a royalty
report or purchase order from that original equipment manufacturer partner.
Services revenue includes revenue from customer support and other professional services.
Customer support includes software updates on a when-and-if-available basis, telephone support and
bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer
support agreement, which is typically one year. To determine the price for the customer support
element when sold separately, we primarily use historical renewal rates and, in certain cases, we
use stated renewal rates. Historical renewal rates are supported by a rolling 12-month VSOE
analysis in which we segregate our customer support renewal contracts into different classes based
on specific criteria including, but not limited to, dollar amount of software purchased, level of
customer support being provided and distribution channel. The purpose of such an analysis is to
determine if the customer support element that is deferred at the time of a software sale is
consistent with how it is sold on a stand-alone renewal basis.
19
Our other professional services include consulting, assessment and design services,
installation services and training. Other professional services provided by us are not mandatory
and can also be performed by the customer or a third-party. In addition to a signed purchase order,
our consulting, assessment and design services and installation services are, in some cases,
evidenced by a Statement of Work, which defines the specific scope of the services to be performed
when sold and performed on a stand-alone basis or included in multiple-element sales arrangements.
Revenues from consulting, assessment and design services and installation services are based upon a
daily, weekly or monthly rate and are recognized when the services are completed. Training includes
courses taught by our instructors or third-party contractors either at one of our facilities or at
the customers site. Training fees are recognized after the training course has been provided.
Based on our analysis of such other professional services transactions sold on a stand-alone basis,
we have concluded we have established VSOE for such other professional services when sold in
connection with a multiple-element sales arrangement.
In summary, we have analyzed all of the undelivered elements included in our multiple-element
sales arrangements and determined that we have VSOE of fair value to allocate revenues to services.
Our analysis of the undelivered elements has provided us with results that are consistent with the
estimates and assumptions used to determine the timing and amount of revenue recognized in our
multiple-element sales arrangements. Accordingly, assuming all basic revenue recognition criteria
are met, software revenue is recognized upon delivery of the software license using the residual
method. We are not likely to materially change our pricing and discounting practices in the
future.
Our sales arrangements generally do not include acceptance clauses. However, if an arrangement
does include an acceptance clause, we defer the revenue for such an arrangement and recognize it
upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance,
waiver of customer acceptance or expiration of the acceptance period.
Stock-Based Compensation
As of June 30, 2010, we maintain two stock incentive plans, which are described more fully in
Note 7 of our Notes to Consolidated Financial Statements. We account for our stock incentive
plans under the fair value recognition provisions, which we adopted on April 1, 2006 using the
modified prospective method. Under this transition method, our stock-based compensation costs
beginning April 1, 2006 are based on a combination of the following: (1) all options granted prior
to, but not vested as of April 1, 2006, based on the grant date fair value in accordance with the
original provisions of SFAS 123 and (2) all options and restricted stock units granted subsequent
to April 1, 2006, based on the grant date fair value.
We estimated the fair value of stock options granted using the Black-Scholes formula. The
fair value of restricted stock units awarded is determined based on the number of shares granted
and the closing price of our common stock on the date of grant. Compensation for all share-based
payment awards is recognized on a straight-line basis over the requisite service period of the
awards, which is generally the vesting period. Forfeitures are estimated based on a historical
analysis of our actual stock award forfeitures.
The average expected life was determined according to the simplified method, which is the
mid-point between the vesting date and the end of the contractual term. We currently use the
simplified method to estimate the expected term for share option grants as we do not have enough
historical experience to provide a reasonable estimate due to the limited period our equity shares
have been publicly traded. We will continue to use the simplified method until we have enough
historical experience to provide a reasonable estimate of expected term. The risk-free interest
rate is determined by reference to U.S. Treasury yield curve rates with a remaining term equal to
the expected life assumed at the date of grant. We anticipate that future grants under our stock
incentive plans will include both non-qualified stock options and restricted stock units.
Expected volatility through the quarter ended September 30, 2008 was calculated based on
reported data for a peer group of publicly traded companies for which historical information was
available. During the quarter ended December 31, 2008, we began to incorporate our own data into
the expected volatility assumption. We modified our expected volatility calculation because our
common stock had been publically traded for 2 years and we believe that CommVault specific
volatility inputs should be included in the calculation of expected volatility. As a result,
expected volatility during the quarter ended June 30, 2010 and June 30, 2009 was calculated based
on a blended approach that included historical volatility of a peer group, the implied volatility
of our traded options with a remaining maturity greater than six months and the historical realized
volatility of our common stock from the date of our initial public offering to the respective stock
option grant date.
20
The assumptions used in the Black-Scholes option-pricing model in the three months ended June
30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2010 |
|
2009 |
Dividend yield |
|
None |
|
None |
Expected volatility |
|
40% 42% |
|
41% 42% |
Weighted average expected volatility |
|
41% |
|
41% |
Risk-free interest rates |
|
2.40% 2.93% |
|
2.30% 3.14% |
Expected life (in years) |
|
6.3 |
|
6.3 |
The weighted average fair value of stock options granted was $10.26 per share during the three
months ended June 30, 2010, and $7.44 per share during the three months ended June 30, 2009. In
addition, the weighted average fair value of restricted stock units awarded was $22.91 per share
during the three months ended June 30, 2010, and $14.82 per share during the three months ended
June 30, 2009.
As of June 30, 2010, there was approximately $24.8 million of unrecognized stock-based
compensation expense, net of estimated forfeitures, related to non-vested stock option and
restricted stock unit awards that is expected to be recognized over a weighted average period of
2.43 years.
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process involves estimating our
actual current tax exposure, including assessing the risks associated with tax audits, and
assessing temporary differences resulting from different treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities. As of June 30, 2010, we
had deferred tax assets of approximately $40.3 million, which were primarily related to federal and
state research tax credit carryforwards, stock-based compensation and foreign net operating loss
carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future
taxable income, and to the extent that we believe recovery is not likely, we establish a valuation
allowance. As of June 30, 2010, we do not maintain a valuation allowance against any of our
deferred tax assets.
As of June 30, 2010, we had unrecognized tax benefits of $4.4 million, all of which, if
recognized, would favorably affect the effective tax rate. In addition, we have accrued interest
and penalties of $1.1 million related to the unrecognized tax benefits. Interest and penalties, if
any, related to unrecognized tax benefits are recorded in income tax expense. Components of the
reserve are classified as either current or long-term in the Consolidated Balance Sheet based on
when we expect each of the items to be settled. Accordingly, our unrecognized tax benefits of $4.4
million and the related accrued interest and penalties of $1.1 million are included in Other
Liabilities on the Consolidated Balance Sheet. During the three months ended June 30, 2010, we
recognized $0.8 million of previously unrecognized tax benefits and $0.3 million of related accrued
interest and penalties totaling $1.1 million as a result of the expiration of a statue of
limitations in a foreign jurisdiction. We believe that it is reasonably possible that
approximately $0.7 million of our currently remaining unrecognized tax benefits and approximately
$0.2 million of related accrued interest and penalties may also be realized by the end of fiscal
2011 as a result of the lapse of the statue of limitations.
We conduct business globally and as a result, file income tax returns in the United States and
in various state and foreign jurisdictions. In the normal course of business, we are subject to
examination by taxing authorities throughout the world, including such major jurisdictions as the
United States, Australia, Canada, Germany, Netherlands and United Kingdom. We currently have our
income tax returns for the fiscal years ended March 31, 2006 through March 31, 2009 under audit by
the State of New Jersey.
21
The following table summarizes the tax years in the major tax jurisdictions that remain
subject to income tax examinations by tax authorities as of June 30, 2010. The years subject to
income tax examination in our foreign jurisdictions cover the maximum time period with respect to
these jurisdictions. Due to NOL carryforwards, in some cases the tax years continue to remain
subject to examination with respect to such NOLs.
|
|
|
|
|
Years Subject to Income |
Tax Jurisdiction |
|
Tax Examination |
|
|
|
U.S. Federal |
|
2001 - Present |
New Jersey |
|
2002 - Present |
Foreign jurisdictions |
|
2005 - Present |
Software Development Costs
Research and development expenditures are charged to operations as incurred. Based on our
software development process, technological feasibility is established upon completion of a working
model, which also requires certification and extensive testing. Costs incurred by us between
completion of the working model and the point at which the product is ready for general release are
immaterial.
Results of Operations
The following table sets forth each of our sources of revenues and costs of revenues for the
specified periods as a percentage of our total revenues for those periods (due to rounding, numbers
in column may not sum to totals):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Software |
|
|
43 |
% |
|
|
48 |
% |
Services |
|
|
57 |
|
|
|
52 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
Software |
|
|
1 |
% |
|
|
1 |
% |
Services |
|
|
14 |
|
|
|
13 |
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
14 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
86 |
% |
|
|
86 |
% |
Three Months ended June 30, 2010 compared to three months ended June 30, 2009
Revenues
Total revenues increased $6.1 million, or 10%, from $60.2 million in the three months ended
June 30, 2009 to $66.3 million in the three months ended June 30, 2010.
Software Revenue. Software revenue decreased $0.8 million, or 3%, from $29.1 million in the
three months ended June 30, 2009 to $28.3 million in the three months ended June 30, 2010.
Software revenue represented 43% of our total revenues in the three months ended June 30, 2010
compared to 48% in the three months ended June 30, 2009. The decrease in software revenue is
primarily due to lower software revenue derived from our foreign locations, which decreased 7% in
the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Software
revenue from our U.S. operations was flat in the three months ended June 30, 2010 compared to the
three months ended June 30, 2009.
22
Software revenue derived from enterprise software transactions (transactions greater than $0.1
million) represented approximately 44% of our software revenue in the three months ended June 30,
2010 and approximately 40% of our software revenue in the three months ended June 30, 2009. As a
result, enterprise software transactions increased by $0.8 million, or 7%, in the three months
ended June 30, 2010 compared to the three months ended June 30, 2009. This increase was primarily
driven by a higher average dollar amount of such transactions, partially offset by a 6% decrease in
the total number of transactions of this type. The average dollar amount of such transactions was
approximately $250,000 in the three months ended June 30, 2010 and approximately $220,000 in the
three months ended June 30, 2009. The increase in enterprise software transactions was offset by a
9% decrease in software transactions less than $0.1 million as a result of lower software revenue
transactions of this type from both our U.S. operations and foreign locations.
Software revenue through our direct sales force decreased $0.6 million, or 10%, in the three
months ended June 30, 2010 compared to the three months ended June 30, 2009, and software revenue
derived from our indirect distribution channel (resellers and original equipment manufacturers)
decreased $0.2 million, or 1%, in the three months ended June 30, 2010 compared to the three months
ended June 30, 2009. Software revenue that is derived from both our indirect channel partners and
direct sales force are key attributes to our long-term growth strategy. We will 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.
Services Revenue. Services revenue increased $6.9 million, or 22%, from $31.1 million in the
three months ended June 30, 2009 to $38.0 million in the three months ended June 30, 2010. Services
revenue represented 57% of our total revenues in the three months ended June 30, 2010 compared to
52% in the three months ended June 30, 2009. The increase in services revenue is primarily due to a
$6.1 million increase in revenue from customer support agreements as a result of software sales to
new customers and renewal agreements with our installed software base.
Cost of Revenues
Total cost of revenues increased $1.2 million, or 14%, from $8.4 million in the three months
ended June 30, 2009 to $9.5 million in the three months ended June 30, 2010. Total cost of revenues
represented 14% of our total revenues in both the three months ended June 30, 2010 and the three
months ended June 30, 2009.
Cost of Software Revenue. Cost of software revenue decreased approximately $0.2 million, or
25%, from $0.7 million in the three months ended June 30, 2009 to $0.6 million in the three months
ended June 30, 2010. Cost of software revenue represented 2% of our total software revenue in the
three months ended June 30, 2010 and 3% of our total software revenue in the three months ended
June 30, 2009. The decrease in cost of software revenue is primarily due to lower distribution,
third-party media and royalty costs as a result of the lower software revenue in the three months
ended June 30, 2010 compared to the three months ended June 30, 2009.
Cost of Services Revenue. Cost of services revenue increased $1.4 million, or 18%, from $7.6
million in the three months ended June 30, 2009 to $9.0 million in the three months ended June 30,
2010. Cost of services revenue represented 24% of our services revenue in both the three months
ended June 30, 2010 and 2009. The increase in cost of services revenue is primarily the result of
higher employee compensation and travel expenses totaling approximately $1.0 million as well as a
$0.1 million increase in third-party outsourcing costs to facilitate our services revenue growth.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased $5.4 million, or 18%, from $30.4
million in the three months ended June 30, 2009 to $35.8 million in the three months ended June 30,
2010. The increase is primarily due to a $3.2 million increase in employee compensation and related
expenses attributable to the expansion of our sales force from the prior year. Sales and marketing
expenses also increased due to a $0.9 million increase in advertising and marketing related
expenses as well as a $0.8 million increase in travel and related expenses primarily due to higher
headcount. Sales and marketing expenses as a percentage of total revenues increased to 54% in the
three months ended June 30, 2010 from 50% in the three months ended June 30, 2009.
23
Research and Development. Research and development expenses increased $1.0 million, or 13%,
from $7.6 million in the three months ended June 30, 2009 to $8.6 million in the three months ended
June 30, 2010. The increase is primarily due to $0.6 million of higher employee compensation and
related expenses resulting from the expansion of our engineering group and a $0.3 million increase
in legal expenses associated with patent registration of our intellectual property. Research and
development expenses as a percentage of total revenues were relatively flat at 13% in both the
three months ended June 30, 2010 and 2009. Investing in research and development has been a
priority for CommVault, and we anticipate continued spending related to the development of our data
and information management software applications.
General and Administrative. General and administrative expenses increased $0.8 million, or
12%, from $6.9 million in the three months ended June 30, 2009 to $7.7 million in the three months
ended June 30, 2010. This increase is primarily due to a $0.3 million increase in employee and
related compensation due to higher headcount, a $0.3 million increase in stock-based compensation
expense and a $0.2 million increase in compliance and legal costs. General and administrative
expenses as a percentage of total revenues were relatively flat at 12% in both the three months
ended June 30, 2010 and 2009.
Depreciation and Amortization. Depreciation expense was relatively flat at $0.9 million in
both the three months ended June 30, 2010 and 2009.
Income Tax Expense
Income tax expense was $0.3 million in the three months ended June 30, 2010 compared to $3.7
million in the three months ended June 30, 2009. The effective tax rate in the three months ended
June 30, 2010 was 7% as compared to 60% in the three months ended June 30, 2009. The effective
rate in the three months ended June 30, 2010 is lower than the expected federal statutory rate of
35% primarily due to the reversal of certain tax reserves totaling $1.1 million as a result of the
expiration of a statue of limitations in a foreign jurisdiction.
The effective rate in the three months ended June 30, 2009 is higher than the expected federal
statutory rate of 35% primarily due to state income taxes, tax return to accrual adjustments and
the correction of a prior period error. During the quarter ended June 30, 2009, we identified a
prior period error of approximately $0.9 million related to estimated foreign tax credits
associated with our Netherlands branch that were improperly recorded as deferred tax assets during
the fiscal year ending March 31, 2008. We concluded that this error is not material to any annual
fiscal period.
Liquidity and Capital Resources
As of June 30, 2010, our cash and cash equivalents balance of $172.9 million primarily
consisted of money market funds. In addition, we have approximately $7.5 million of short-term
investments invested in certificates of deposit at June 30, 2010. In recent fiscal years, our
principal sources of liquidity have been cash provided by operations. Historically, our principle
source of liquidity had been cash provided by private placements of preferred equity securities and
common stock and cash provided from our public offerings of common stock.
On July 9, 2009, we entered into an amended and restated credit facility in which we can
borrow up to $30.0 million over a three year period. Borrowings under the facility are available
to repurchase our common stock under our share repurchase program and to provide for working
capital and general corporate purposes. Repayments of principal amounts borrowed under the amended
and restated credit facility is required at the maturity date of July 9, 2012. The credit facility
also requires that certain financial covenants be met on a quarterly basis. The amended and
restated credit facility contains financial covenants that require us to maintain a quick ratio and
minimum earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in
the credit agreement. Borrowings under the amended and restated credit facility bear interest, at
our option, at either i) LIBOR plus a margin ranging from 2.25% to 2.75% or ii) the banks base
rate plus a margin ranging from 1.75% to 2.25%. The banks base rate is defined as the higher of
the federal funds rate plus 1.5%, one-month LIBOR plus 1.5%, or the lenders prime rate. As of
June 30, 2010, we were in compliance with all required covenants, and there were no outstanding
balances on the amended and restated credit facility.
24
As of June 30,
2010, our Board of Directors had approved a stock repurchase plan in which we
were authorized to repurchase up to a total of $80.0 million of our common
stock through March 31, 2011. On July 29, 2010, our Board of
Directors authorized a $40.0 million increase to our existing stock
repurchase program and extended the expiration of the stock repurchase plan to
March 31, 2012. Under our stock repurchase program, repurchased shares are
constructively retired and returned to unissued status. Our stock repurchase
program has been funded by our existing cash and cash equivalent balances as
well as cash flows provided by our operations. During the three months ended
June 30, 2010, we repurchased 0.6 million shares of common stock
under our share repurchase plan with a total cost of $12.9 million. As of
June 30, 2010, we have repurchased approximately $53.1 million, or
3.5 million shares, under our stock repurchase plan at an average purchase
price of $15.28 per share. As a result, we may repurchase an additional
$66.9 million of our common stock through March 31, 2012.
The primary business reason for our stock repurchase program is to reduce the dilutive impact
on our common shares outstanding associated with stock option exercises and our previous public and
private stock offerings. Under our stock repurchase program, we have bought back approximately
8.0% of the common stock that was outstanding at the time the stock repurchase program was
announced. In addition, at the time we implemented our stock repurchase program in late fiscal
2008 we believed that our share price was undervalued and the best use for a portion of our cash
balance was to repurchase some of our outstanding common stock. Our future stock repurchase
activity is subject to the business judgment of our management and Board of Directors, taking into
consideration our historical and projected results of operations, financial condition, cash flows
and other anticipated capital requirements or investment alternatives.
Our summarized annual cash flow information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
15,919 |
|
|
$ |
12,953 |
|
Net Cash used in investing activities |
|
|
(3,274 |
) |
|
|
(913 |
) |
Net Cash provided by (used in) financing activities |
|
|
(7,942 |
) |
|
|
687 |
|
Effects of exchange rate-changes in cash |
|
|
(1,331 |
) |
|
|
1,282 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
3,372 |
|
|
$ |
14,009 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities was $15.9 million in the three months ended June 30,
2010 and $13.0 million in the three months ended June 30, 2009. In the three months ended June 30,
2010, cash generated by operating activities was primarily due to net income adjusted for the
impact of non-cash charges, and a decrease in accounts receivable as a result of strong collection
efforts during the quarter and lower sequential revenues in the first quarter of fiscal 2011. In
the three months ended June 30, 2009, cash generated by operating activities was primarily due to
net income adjusted for the impact of non-cash charges, a decrease in accounts receivable as a
result of strong collection efforts and an increase in deferred services revenue.
Net cash used in investing activities was $3.3 million in the three months ended June 30, 2010
and $0.9 million in the three months ended June 30, 2009. In the three months ended June 30, 2010,
cash used in investing activities was due to purchases of short-term investments of $2.5 million as
well as the purchase of property and equipment of $0.8 million as we continue to invest in and
enhance our global infrastructure. In the three months ended June 30, 2009, cash used in investing
activities was due to purchases of property and equipment related to the growth in our business. We
anticipate that as our business grows we will continue to explore opportunities to invest in our
global infrastructure.
Net cash provided by (used in) financing activities was $(7.9) million in the three months
ended June 30, 2010 and $0.7 million in the three months ended June 30, 2009. The cash used in
financing activities in the three months ended June 30, 2010 was due to $12.9 million used to
repurchase shares of our common stock under our repurchase program, partially offset by $4.4
million of proceeds from the exercise of stock options and $0.6 million of excess tax benefits
recognized as a result of the stock option exercises. The cash used in financing activities in the
three months ended June 30, 2009 was due to $0.5 million proceeds from the exercise of stock
options and $0.2 million of excess tax benefits recognized as a result of the stock option
exercises.
25
Working capital decreased $1.5 million from $143.2 million as of March 31, 2010 to $141.7
million as of June 30, 2010. The decrease in working capital is primarily due to a $12.5 million
decrease in accounts receivable, partially offset by a $5.9 million increase in cash and short-term
investments and a $4.3 million decrease in accrued liabilities. The decrease in accounts
receivable of $12.5 million is primarily due to the sequential revenue decrease in the first
quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010. The increase in cash and
short-term investments of $5.9 million was negatively impacted by the repurchase of approximately
$12.9 million of our common stock under our share repurchase program.
We believe that our existing cash, cash equivalents, cash from operations and our $30.0
million credit facility will be sufficient to meet our anticipated cash needs for working capital,
capital expenditures and potential stock repurchases for at least the next 12 months. We may seek
additional funding through public or private financings or other arrangements during this period.
Adequate funds may not be available when needed or may not be available on terms favorable to us,
or at all. If additional funds are raised by issuing equity securities, dilution to existing
stockholders will result. If we raise additional funds by obtaining loans from third parties, the
terms of those financing arrangements may include negative covenants or other restrictions on our
business that could impair our operational flexibility, and would also require us to fund
additional interest expense. If funding is insufficient at any time in the future, we may be
unable to develop or enhance our products or services, take advantage of business opportunities or
respond to competitive pressures, any of which could have a material adverse effect on our
business, financial condition and results of operations.
Off-Balance Sheet Arrangements
As of June 30, 2010, other than our operating leases, we do not have off-balance sheet
financing arrangements, including any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities.
Indemnifications
Certain of our software licensing agreements contain certain provisions that indemnify our
customers from any claim, suit or proceeding arising from alleged or actual intellectual property
infringement. These provisions continue in perpetuity along with our software licensing
agreements. We have never incurred a liability relating to one of these indemnification provisions
in the past and we believe that the likelihood of any future payout relating to these provisions is
remote. Therefore, we have not recorded a liability during any period related to these
indemnification provisions.
Impact of Recently Issued Accounting Standards
In January 2010, the FASB issued guidance requiring additional disclosure for significant
transfers in and out of Levels 1 and 2 fair value measurements and the reasons for such transfers.
This new guidance also requires separate disclosure information about purchases, sales, issuances,
and settlements (on a gross basis rather than as one net number) in the reconciliation for fair
value measurements using significant unobservable inputs (Level 3). In addition, this guidance
clarifies existing disclosures regarding fair value measurement for each class of assets and
liabilities and the valuation techniques and inputs used to measure fair value for recurring and
nonrecurring fair value measurements that fall in either Level 2 or Level 3. The changes under this
new guidance were effective for the quarterly period beginning January 1, 2010, except for the
disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements, which are effective for our fiscal year beginning April 1, 2011.
We believe that the adoption of these new accounting pronouncements will not have a material impact
on our consolidated financial position, results of operations or cash flows.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of June 30, 2010, our cash, cash equivalent and short-term investment balances consisted
primarily of money market funds and certificates of deposit. Due to the short-term nature of these
investments, we are not subject to any material interest rate risk on these balances.
26
In July 2009, we entered into an amended and restated credit facility in which we can borrow
up to $30.0 million over a three year period. Borrowings under the amended and restated credit
facility bear interest, at our option, at either i) LIBOR plus a margin ranging from 2.25% to 2.75%
or ii) the banks base rate plus a margin ranging from 1.75% to 2.25%. The banks base rate is
defined as the higher of the federal funds rate plus 1.5%, one-month LIBOR plus 1.5%, or the
lenders prime rate. There are no outstanding balances on the amended and restated credit
facility. As a result, we are currently not subject to any material interest rate risk on our
credit facility.
Foreign Currency Risk
Economic Exposure
As a global company, we face exposure to adverse movements in foreign currency exchange rates.
Our international sales are generally denominated in foreign currencies, and this revenue could be
materially affected by currency fluctuations. Approximately 36% of our sales were outside the
United States in the three months ended June 30, 2010 and approximately 38% were outside the United
States in fiscal 2010. Our primary exposures are to fluctuations in exchange rates for the U.S.
dollar versus the Euro, and to a lesser extent, the Australian dollar, British pound sterling,
Canadian dollar, Chinese yuan, Indian rupee and Singapore dollar. Changes in currency exchange
rates could adversely affect our reported revenues and require us to reduce our prices to remain
competitive in foreign markets, which could also have a material adverse effect on our results of
operations. Historically, we have periodically reviewed and revised the pricing of our products
available to our customers in foreign countries and we have not maintained excess cash balances in
foreign accounts.
Transaction Exposure
Our exposure to foreign currency transaction gains and losses is primarily the result of
certain net receivables due from our foreign subsidiaries and customers being denominated in
currencies other than the functional currency of the subsidiary. Our foreign subsidiaries conduct
their businesses in local currency and we generally do not maintain excess U.S. dollar cash
balances in foreign accounts.
Foreign currency transaction gains and losses are recorded in General and administrative
expenses in the Consolidated Statements of Income. We recognized net foreign currency transaction
losses of approximately $0.1 million in the three months ended June 30, 2010 and approximately $0.5
million in the three months ended June 30, 2009. The net foreign currency transaction losses
recorded in General and administrative expenses include settlement gains and losses on forward
contracts disclosed below.
To date, we have selectively hedged our exposure to foreign currency transaction gains and
losses on the balance sheet through the use of forward contracts, which were not designated as
hedging instruments. The duration of forward contracts utilized for hedging our balance sheet
exposure is approximately one month. As of June 30, 2010 and 2009, we did not have any forward
contracts outstanding. We recorded net realized losses in general and administrative expenses of
less than a $0.1 million in both the three months ending June 30, 2010 and 2009. In the future, we
may enter into additional foreign currency based hedging contracts to reduce our exposure to
significant fluctuations in currency exchange rates on the balance sheet.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the our disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2010.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of June 30, 2010.
27
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the
first quarter of fiscal year 2011 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Inherent Limitations on Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not
expect that our disclosures controls and procedures or our internal controls over financial
reporting will prevent or detect all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control
objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may deteriorate. Because
of inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to claims in legal proceedings arising in the normal course
of our business. We do not believe that we are party to any pending legal action that could
reasonably be expected to have a material adverse effect on our business or operating results.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended March 31, 2010, which could materially affect our business, financial condition or
future results. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our business, financial condition and/or
operating results. If any of the risks actually occur, our business, financial conditions or
results of operations could be negatively affected. In that case, the trading price of our stock
could decline, and our stockholders may lose part or all of their investment.
28
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
As of June 30, 2010, we have repurchased $53.1 million of common stock in total that is authorized under our share repurchase program.
Set forth below is information regarding our stock repurchases during the three months ended
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Maximum Dollar |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Amount of Shares |
|
|
|
Total |
|
|
Average |
|
|
Part of |
|
|
That May Yet Be |
|
|
|
Number of |
|
|
Price |
|
|
Publicly |
|
|
Purchased Under |
|
|
|
Shares |
|
|
Paid per |
|
|
Announced |
|
|
the Plan |
|
Period (1) |
|
Purchased |
|
|
Share |
|
|
Plan |
|
|
(In
Thousands) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1 April 30, 2010 |
|
|
1,900 |
|
|
$ |
20.54 |
|
|
|
1,900 |
|
|
$ |
39,671 |
|
May 1 May 31, 2010 |
|
|
305,600 |
|
|
$ |
19.95 |
|
|
|
305,600 |
|
|
$ |
33,573 |
|
June 1 June 30, 2010 |
|
|
315,940 |
|
|
$ |
21.27 |
|
|
|
315,940 |
|
|
$ |
26,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
623,440 |
|
|
$ |
20.62 |
|
|
|
623,440 |
|
|
$ |
26,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on trade date, not settlement date |
|
|
|
(2) |
|
On July 29, 2010, our
Board of Directors authorized a $40.0 million increase to our existing
share repurchase program. As of August 5, 2010, we have repurchased
$53.1 million of common stock out of the $120.0 million in total that
is now authorized under our share repurchase program. As a result, we may
repurchase an additional $66.9 million of our common stock through
March 31, 2012.
|
Item 3. Defaults upon Senior Securities
None
Item 4. [Removed and Reserved]
Item 5. Other Information
None
Item 6. Exhibits
A list of exhibits filed herewith is included on the Exhibit Index, which immediately precedes
such exhibits and is incorporated herein by reference.
29
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
CommVault Systems, Inc.
|
|
Dated: August 5, 2010 |
By: |
/s/ N. Robert Hammer
|
|
|
|
N. Robert Hammer |
|
|
|
Chairman, President, and Chief Executive Officer |
|
|
|
|
Dated: August 5, 2010 |
By: |
/s/ Louis F. Miceli
|
|
|
|
Louis F. Miceli |
|
|
|
Vice President, Chief Financial Officer |
|
30
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
101.INS |
|
|
XBRL
Instance Document |
|
101.SCH |
|
|
XBRL
Taxonomy Extension Schema Document |
|
101.CAL |
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
|
|
XBRL
Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
|
|
XBRL
Taxonomy Extension Label Linkbase Document |
|
101.PRE |
|
|
XBRL Taxonomy
Extension Presentation Linkbase Document |
31