UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended: December 31, 2019
Commission File Number: 1-33026
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices)
(Zip Code)
(732 ) 870-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, "accelerated filer", "smaller reporting company" and "emerging growth company" in rule 12b-2 of the Exchange Act. (Check one):
☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act | ☐ | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of January 30, 2020, there were 46,601,042 shares of the registrant’s common stock, $0.01 par value, outstanding.
1
COMMVAULT SYSTEMS, INC.
FORM 10-Q
INDEX
Page | ||
Part I – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements and Notes | |
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
2
Commvault Systems, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
December 31, 2019 | March 31, 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
Short-term investments | ||||||||
Trade accounts receivable | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Operating lease assets | — | |||||||
Deferred commissions cost | ||||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued liabilities | ||||||||
Current portion of operating lease liabilities | — | |||||||
Deferred revenue | ||||||||
Total current liabilities | ||||||||
Deferred revenue, less current portion | ||||||||
Deferred tax liabilities, net | ||||||||
Long-term operating lease liabilities | — | |||||||
Other liabilities | ||||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value: 50,000 shares authorized, no shares issued and outstanding | ||||||||
Common stock, $0.01 par value: 250,000 shares authorized, 46,497 shares and 45,582 shares issued and outstanding at December 31, 2019 and March 31, 2019, respectively | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying unaudited notes to consolidated financial statements
1
Commvault Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||
Revenues: | |||||||||||||||||
Software and products | $ | $ | $ | $ | |||||||||||||
Services | |||||||||||||||||
Total revenues | |||||||||||||||||
Cost of revenues: | |||||||||||||||||
Software and products | |||||||||||||||||
Services | |||||||||||||||||
Total cost of revenues | |||||||||||||||||
Gross margin | |||||||||||||||||
Operating expenses: | |||||||||||||||||
Sales and marketing | |||||||||||||||||
Research and development | |||||||||||||||||
General and administrative | |||||||||||||||||
Restructuring | |||||||||||||||||
Depreciation and amortization | |||||||||||||||||
Total operating expenses | |||||||||||||||||
Income (loss) from operations | ( | ) | ( | ) | |||||||||||||
Interest income | |||||||||||||||||
Income (loss) before income taxes | ( | ) | |||||||||||||||
Income tax expense (benefit) | ( | ) | |||||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
Net income (loss) per common share: | |||||||||||||||||
Basic | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
Diluted | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
Weighted average common shares outstanding: | |||||||||||||||||
Basic | |||||||||||||||||
Diluted | |||||||||||||||||
See accompanying unaudited notes to consolidated financial statements
2
Commvault Systems, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | ( | ) | ( | ) | $ | |||||||||||
Other comprehensive loss: | ||||||||||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | $ | ( | ) | |||||||||
Comprehensive income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
See accompanying unaudited notes to consolidated financial statements
3
Commvault Systems, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
Common Stock | Additional Paid – In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance as of September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Stock-based compensation | |||||||||||||||||||||||
Share issuances related to business combinations | |||||||||||||||||||||||
Share issuances related to stock-based compensation | |||||||||||||||||||||||
Net loss | ( | ) | ( | ) | |||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||
Balance as of December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Common Stock | Additional Paid – In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance as of March 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Stock-based compensation | |||||||||||||||||||||||
Share issuances related to business combinations | |||||||||||||||||||||||
Share issuances related to stock-based compensation | |||||||||||||||||||||||
Repurchase of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||
Net loss | ( | ) | ( | ) | |||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | |||||||||||||||||||
Balance as of December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See accompanying unaudited notes to consolidated financial statements
4
Commvault Systems, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
Common Stock | Additional Paid – In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance as of September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Stock-based compensation | |||||||||||||||||||||||
Share issuances related to stock-based compensation | |||||||||||||||||||||||
Repurchase of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||
Net income | |||||||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | |||||||||||||||||||
Balance as of December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Common Stock | Additional Paid – In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance as of March 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Stock-based compensation | |||||||||||||||||||||||
Share issuances related to stock-based compensation | |||||||||||||||||||||||
Repurchase of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||
Net income | |||||||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | |||||||||||||||||||
Balance as of December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See accompanying unaudited notes to consolidated financial statements
5
Commvault Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended December 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities | ||||||||
Net Income (loss) | $ | ( | ) | $ | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Noncash stock-based compensation | ||||||||
Deferred income taxes | ( | ) | ||||||
Amortization of deferred commissions cost | ||||||||
Impairment of operating lease assets | — | |||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | ( | ) | ||||||
Operating lease assets and liabilities, net | ( | ) | — | |||||
Other current assets and Other assets | ||||||||
Deferred commissions cost | ( | ) | ( | ) | ||||
Accounts payable | ( | ) | ||||||
Accrued liabilities | ( | ) | ||||||
Deferred revenue | ( | ) | ||||||
Other liabilities | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
Cash flows from investing activities | ||||||||
Purchase of short-term investments | ( | ) | ( | ) | ||||
Proceeds from maturity of short-term investments | ||||||||
Purchase of property and equipment | ( | ) | ( | ) | ||||
Business combination, net of cash acquired | ( | ) | ||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities | ||||||||
Repurchase of common stock | ( | ) | ( | ) | ||||
Proceeds from stock-based compensation plans | ||||||||
Net cash used in financing activities | ( | ) | ( | ) | ||||
Effects of exchange rate — changes in cash | ( | ) | ( | ) | ||||
Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | ||||||||
Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||
See accompanying unaudited notes to consolidated financial statements
6
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited
(In thousands, except per share data)
1. Basis of Presentation
The consolidated financial statements of Commvault Systems, Inc. and its subsidiaries ("Commvault" or the "Company") as of December 31, 2019 and for the three and nine months ended December 31, 2019 and 2018 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 Company’s Annual Report on Form 10-K for fiscal 2019. 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 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 Company’s 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 Company’s 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, income taxes and related reserves, stock-based compensation and accounting for research and development costs. Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies
Correction of an Immaterial Error in Previously Issued Financial Statements
Subsequent to the issuance of the financial statements for the year ended March 31, 2018 and for the interim periods in fiscal 2019, the Company concluded that the Consolidated Statement of Operations contained an immaterial error related to the classification of legal fees related to intellectual property as Research and development expenses and not General and administrative expenses. These immaterial errors have been corrected for the comparative period shown by reclassifying $911 and $2,466 from Research and development expense to General and administrative expense for the three and nine months ended December 31, 2018. This immaterial error did not have any impact on our financial position, net loss or cash flow.
Recently Issued Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2016-02, Leases. Under the new guidance, the Company is required to recognize a lease liability and a right-of-use asset for leases. The Company adopted the new guidance on April 1, 2019 using the optional transition method, which allows for the prospective application of the standard, and as a result, the Company did not record an adjustment to retained earnings. In addition, the Company elected the package of practical expedients, for all of its leases, permitted under the transition guidance within the standard, which allowed the Company to carry forward its historical lease classification, to not reassess prior conclusions related to initial direct costs and to not reassess whether any expired or existing contracts are or contain leases. The Company also elected the lessee practical expedient to combine lease and non-lease components for new leases and modified leases. The Company also made an accounting policy election in accordance with the new standard to apply accounting similar to ASC 840 to short-term leases, which are defined as leases that have a term of twelve months or less. The new guidance does not have any impact on the Consolidated Statement of Operations or Consolidated Statement of Cash Flows.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2016-02, Leases. Under the new guidance, the Company is required to recognize a lease liability and a right-of-use asset for leases. The Company adopted the new guidance on April 1, 2019 using the optional transition method, which allows for the prospective application of the standard, and as a result, the Company did not record an adjustment to retained earnings. In addition, the Company elected the package of practical expedients, for all of its leases, permitted under the transition guidance within the standard, which allowed the Company to carry forward its historical lease classification, to not reassess prior conclusions related to initial direct costs and to not reassess whether any expired or existing contracts are or contain leases. The Company also elected the lessee practical expedient to combine lease and non-lease components for new leases and modified leases. The Company also made an accounting policy election in accordance with the new standard to apply accounting similar to ASC 840 to short-term leases, which are defined as leases that have a term of twelve months or less. The new guidance does not have any impact on the Consolidated Statement of Operations or Consolidated Statement of Cash Flows.
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). The standard amends guidance on the impairment of financial instruments. The ASU estimates credit losses based on expected losses and provides for a simplified accounting model for purchased financial assets with credit deterioration. The standard requires a modified retrospective basis adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The amendments of this ASU are effective for the Company's fiscal 2021. The Company does not expect the adoption of ASU 2016-13 will have a material impact the financial statements.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). The standard amends guidance on the impairment of financial instruments. The ASU estimates credit losses based on expected losses and provides for a simplified accounting model for purchased financial assets with credit deterioration. The standard requires a modified retrospective basis adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The amendments of this ASU are effective for the Company's fiscal 2021. The Company does not expect the adoption of ASU 2016-13 will have a material impact the financial statements.
7
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
There have been no other additional significant changes in the Company’s accounting policies during the nine months ended December 31, 2019 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended March 31, 2019 and to the changes disclosed above.
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 Company’s distribution agreement with Arrow Enterprise Computing Solutions, Inc. (“Arrow”) totaled 37 % of total revenues for both the nine months ended December 31, 2019 and 2018. Arrow accounted for approximately 32 % of total accounts receivable as of December 31, 2019 and 38 % of total accounts receivable as of March 31, 2019.
Sales through the Company's original manufacturing agreement with Hitachi Vantara (formerly Hitachi Data Systems) ("Hitachi") accounted for 11 % of total accounts receivables as of December 31, 2019.
Fair Value of Financial Instruments
The carrying amounts of the Company’s cash, cash equivalents and restricted cash, accounts receivable, and accounts payable approximate their fair values due to the short-term maturity of these instruments. The Company’s cash equivalents balance consists primarily of money market funds. The Company’s short-term investments balance consists of U.S. Treasury Bills with maturities of one year or less. The Company accounts for its short-term investments as held to maturity. The contingent consideration liability associated with the Hedvig acquisition as discussed further in Note 3 of the unaudited consolidated financial statements was valued based on a probability weighted-average approach.
December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Cash equivalents | $ | $ | ||||||||||||||
Short-term investments | $ | $ | ||||||||||||||
Total assets | $ | $ | $ | |||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
March 31, 2019 | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | $ | |||||||||||||
Short-term investments | $ | $ | |||||||||||||
Total assets | $ | $ | $ | ||||||||||||
Goodwill and Intangible Assets
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. The carrying value of goodwill is tested for impairment on an annual basis on January 1, or more often if an event occurs or circumstances change that would more likely than not reduce the fair value of its carrying amount. For the purpose of impairment testing, the Company has a single reporting unit. The impairment test consists of comparing the fair value with its carrying amount that includes goodwill. If the carrying amount of goodwill exceeds the fair value of goodwill, an impairment loss would be recognized to reduce the carrying amount to its fair value.
Purchased intangible assets with finite lives are valued using the income method and are amortized on a straight-line basis over their economic lives of five years for developed technology and two years for customer relationships as the Company believes this method most closely reflects the pattern in which the economic benefits of the assets will be consumed. Impairment losses are recognized if the carrying amount of an intangible is both not recoverable and exceeds its fair value.
8
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
3. Business Combination
On October 1, 2019, the Company completed the acquisition of Hedvig Inc., a Delaware corporation, (“Hedvig”), for a purchase price of $163,205 , which consisted of $157,589 of cash (exclusive of $4,000 of contingent consideration), and $1,616 of restricted stock units.
The Company also entered into compensation arrangements with the employees of Hedvig. This included the issuance of restricted stock units that vest over the next three years (a portion of which is allocated to the purchase price). Refer to Note 8 of the unaudited consolidated financial statements for further discussion on stock awards. Additionally, certain Hedvig shareholders will receive cash payments totaling $14,100 over the course of the 30 months following the date of acquisition, contingent on their continued employment with the Company. While these payments are proportionate to these shareholders' ownership of Hedvig, under US GAAP they are accounted for as compensation expense over the course of the 30 month service period, and not included in the purchase price.
The following table summarizes the purchase price and preliminary purchase price allocation made as of the date of acquisition:
Purchase price allocation: | |||
Cash paid at closing | $ | ||
Fair value of restricted stock units included in purchase price | |||
Fair value of contingent consideration | |||
Total purchase price | $ | ||
Assets acquired and liabilities assumed: | |||
Cash | $ | ||
Trade accounts receivable | |||
Other current assets | |||
Property and equipment | |||
Intangible assets | |||
Other assets | |||
Accounts payable and accrued liabilities | ( | ) | |
Deferred revenue | ( | ) | |
Operating lease liability, net of operating lease assets | ( | ) | |
Deferred tax liability | ( | ) | |
Total identifiable net assets acquired and liabilities assumed | |||
Goodwill | |||
Total purchase price | |||
Contingent consideration
The contingent consideration arrangement requires the Company to pay up to $8,000 of cash to the former owners of Hedvig, contingent on the Company receiving one or more bona fide and valid purchase orders from a specified customer, no later than April 30, 2020. The $8,000 is classified as Restricted cash on the Consolidated Balance Sheet. The actual consideration paid can range from $0 to $8,000 and is based on the amount of orders received. The fair value of the contingent liability was estimated to be $4,000 based on a probability weighted-average approach and was included in the purchase price. The $4,000 liability is included in Accrued liabilities on the Consolidated Balance Sheet. At the end of each reporting period after the acquisition date, the arrangement is remeasured at its fair value, with changes in fair value recorded in earnings. Changes in fair value will be recognized in General and administrative expense. As of December 31, 2019, the Company continues to estimate the fair value of the liability as $4,000 .
9
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
Actual and Unaudited Pro Forma Information
The unaudited amounts of Hedvig’s revenue and net loss included in the Company’s consolidated income statement for both the three and nine months ended December 31, 2019, and the revenue and net loss of the combined entity had the acquisition date been April 1, 2018, are as follows:
Revenue | Net Loss | ||||||
Actual from 10/01/2019 - 12/31/2019 | $ | $ | ( | ) | |||
Fiscal 2020 supplemental pro forma from 04/01/2019 - 12/31/2019 | $ | $ | ( | ) | |||
Fiscal 2019 supplemental pro forma from 04/01/2018 - 12/31/2018 | $ | $ | ( | ) | |||
The Company's post-acquisition loss for the three and nine months ended December 31, 2019 includes expenses related to the noncash amortization of intangible assets, compensation paid to Hedvig employees, restricted stock units granted to Hedvig employees and the cash payments being made to Hedvig shareholders over a 30 month service period as discussed above.
The fiscal 2020 supplemental pro forma net loss was adjusted to exclude $5,639 of acquisition-related costs incurred in fiscal 2020. The fiscal 2019 supplemental pro forma net loss was adjusted to include these charges. In addition to estimated operating expenses, both periods include noncash amortization expenses related to intangible assets as if the acquisition had taken place on April 1, 2018.
4. Goodwill and Intangible Assets, Net
Goodwill
The goodwill of $112,435 arising from the acquisition represents the estimated value of potential expansion with new customers, the opportunity to further develop sales relationships with new customer and intangible assets that do not qualify for separate recognition. None of the goodwill recorded is expected to be deductible for income tax purposes. The Company will perform the annual impairment test of goodwill on January 1.
Intangible assets, net
Intangible assets consist of developed technology and customer relationships which were valued using the income approach. Developed technology and customer relationships have estimated useful lives of five and two years, respectively, and are being amortized on a straight-line basis. Purchased intangible assets, net of amortization are summarized below:
December 31, 2019 | ||||||||||||
Gross | Accumulated Amortization | Net Assets | ||||||||||
Developed technology | $ | $ | ( | ) | $ | |||||||
Customer relationships | ( | ) | ||||||||||
Total intangible assets | $ | $ | ( | ) | $ | |||||||
10
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
Future amortization expense associated with intangible assets with finite lives is expected to be:
December 31, 2019 | |||
2020 (remaining) | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
$ | |||
5. Revenue
The Company derives revenues from two primary sources: software and products, and services. Software and products revenue includes the Company's software and integrated appliances that combine the Company's software with hardware. Services include customer support (software updates and technical support), consulting, assessment and design services, installation services and customer education. A typical contract includes both licenses and services.
Historically, the Company’s software licenses typically provide for a perpetual right to use the Company’s software. The Company also sells term-based software licenses that expire, which are referred to as subscription arrangements. The Company does not customize its software and installation services are not required. The software is delivered before related services are provided and is functional without professional services, updates and technical support. The Company has concluded that its software license is functional intellectual property that is distinct as the user can benefit from the software on its own. Software revenue is typically recognized when the software is delivered and/or made available for download as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from the functional intellectual property. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.
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, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts as a percentage of net software purchases the support is related to. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year .
The Company’s other professional services include consulting, assessment and design services, installation services and customer education. Customer education services include courses taught by the Company’s instructors or third-party contractors. Revenue related to other professional services and customer education services is typically recognized as the services are performed.
Most of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software and appliances are typically estimated using the residual approach. Standalone selling prices of services are typically estimated based on observable transactions when these services are sold on a standalone basis.
11
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
The Company’s typical performance obligations include the following:
Performance Obligation | When Performance Obligation is Typically Satisfied | When Payment is Typically Due | How Standalone Selling Price is Typically Estimated |
Software and Products Revenue | |||
Software Licenses | Upon shipment or made available for download (point in time) | Within 90 days of shipment except for certain subscription licenses which are paid for over time | Residual approach |
Appliances | When control of the appliances passes to the customer; typically upon delivery | Within 90 days of delivery | Residual approach |
Customer Support Revenue | |||
Software Updates | Ratably over the course of the support contract (over time) | At the beginning of the contract period | Observable in renewal transactions |
Customer Support | Ratably over the course of the support contract (over time) | At the beginning of the contract period | Observable in renewal transactions |
Professional Services | |||
Other Professional Services (except for education services) | As work is performed (over time) | Within 90 days of services being performed | Observable in transactions without multiple performance obligations |
Education Services | When the class is taught (point in time) | Within 90 days of services being performed | Observable in transactions without multiple performance obligations |
Disaggregation of Revenue
Three Months Ended December 31, 2019 | ||||||||||||
Americas | EMEA | APAC | Total | |||||||||
Software and Products Revenue | $ | $ | $ | $ | ||||||||
Customer Support Revenue | ||||||||||||
Professional Services | ||||||||||||
Total Revenue | $ | $ | $ | $ | ||||||||
Three Months Ended December 31, 2018 | ||||||||||||
Americas | EMEA | APAC | Total | |||||||||
Software and Products Revenue | $ | $ | $ | $ | ||||||||
Customer Support Revenue | ||||||||||||
Professional Services | ||||||||||||
Total Revenue | $ | $ | $ | $ | ||||||||
12
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
Nine Months Ended December 31, 2019 | ||||||||||||
Americas | EMEA | APAC | Total | |||||||||
Software and Products Revenue | $ | $ | $ | $ | ||||||||
Customer Support Revenue | ||||||||||||
Professional Services | ||||||||||||
Total Revenue | $ | $ | $ | $ | ||||||||
Nine Months Ended December 31, 2018 | ||||||||||||
Americas | EMEA | APAC | Total | |||||||||
Software and Products Revenue | $ | $ | $ | $ | ||||||||
Customer Support Revenue | ||||||||||||
Professional Services | ||||||||||||
Total Revenue | $ | $ | $ | $ | ||||||||
Information about Contract Balances
Amounts collected in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company's deferred revenue balance is related to services revenue, primarily customer support contracts.
Accounts Receivable | Unbilled Receivable (current) | Unbilled Receivable (long-term) | Deferred Revenue (current) | Deferred Revenue (long-term) | |||||||||||
Opening Balance as of March 31, 2019 | $ | $ | $ | $ | $ | ||||||||||
Increase/(decrease), net | ( | ) | ( | ) | ( | ) | |||||||||
Ending Balance as of December 31, 2019 | $ | $ | $ | $ | $ | ||||||||||
The decrease in accounts receivable is primarily a result of a decrease in software and products revenue relative to the fourth quarter of the prior year. The decrease in deferred revenue is primarily the result of a decrease in deferred customer support revenue related to software and products revenue transactions and customer support renewals relative to the fourth quarter of fiscal 2019 and a weakening of the U.S. dollar.
The amount of revenue recognized in fiscal 2020 that was included in the March 31, 2019 balance of deferred revenue was $51,753 and $207,938 for the three and nine months ended December 31, 2019, respectively. The vast majority of this revenue consists of customer support arrangements. The amount of software and products revenue recognized in the three and nine months ended December 31, 2019 related to performance obligations from prior periods was not significant.
Remaining Performance Obligations
In addition to the amounts included in deferred revenue as of December 31, 2019, $28,655 of revenue may be recognized from remaining performance obligations, of which $3,103 was related to software and products. The Company expects the majority of this software and products revenue to be recognized next quarter. The vast majority of the services revenue is related to other professional services which may be recognized over the next twelve months but is contingent upon a number of factors, including customers’ needs and schedules.
13
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
6. Net Income per Common Share
The diluted weighted-average shares outstanding exclude outstanding stock options, restricted stock units, performance restricted stock units and shares to be purchased under the employee stock purchase plan totaling 5,459 and 1,045 for the three months ended December 31, 2019 and 2018, respectively, and 4,952 and 1,024 for the nine months ended December 31, 2019 and 2018, because the effect would have been anti-dilutive.
7. Commitments and Contingencies
From time to time, the Company is subject to claims in legal proceedings arising in the normal course of business. The Company does not believe that it is currently party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results.
The Company has a contingent liability related to the acquisition of Hedvig. See Note 3 of the unaudited consolidated financial statements for further details on the arrangement.
8. Capitalization
As of December 31, 2019, $159,974 remained in the Company's current stock repurchase authorization which expires on March 31, 2020.
9. Stock Plans
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||
Cost of services revenue | $ | $ | $ | $ | |||||||||||||
Sales and marketing | |||||||||||||||||
Research and development | |||||||||||||||||
General and administrative | |||||||||||||||||
Restructuring | |||||||||||||||||
Stock-based compensation expense | $ | $ | $ | $ | |||||||||||||
As of December 31, 2019, there was $141,285 of unrecognized stock-based compensation expense related to non-vested stock option and restricted stock unit awards that is expected to be recognized over a weighted-average period of 2.26 years. The Company accounts for forfeitures as they occur. To the extent that awards are forfeited, stock-based compensation will be different from the Company’s current estimate.
14
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
Stock Options
Stock option activity for the nine months ended December 31, 2019 is as follows:
Stock Options | Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||
Outstanding options as of March 31, 2019 | $ | |||||||||||
Options granted | ||||||||||||
Options exercised | ( | ) | ||||||||||
Options forfeited | ||||||||||||
Options expired | ( | ) | $ | |||||||||
Outstanding as of December 31, 2019 | $ | $ | ||||||||||
Exercisable as of December 31, 2019 | $ | $ | ||||||||||
Restricted Stock Units
Restricted stock unit activity for the nine months ended December 31, 2019 is as follows:
Non-vested Restricted Stock Units | Number of Awards | Weighted- Average Grant Date Fair Value | ||||
Non-vested as of March 31, 2019 | $ | |||||
Awarded | ||||||
Vested | ( | ) | ||||
Forfeited | ( | ) | ||||
Non-vested as of December 31, 2019 | $ | |||||
The weighted-average fair value of restricted stock units awarded was $46.21 and $46.60 per unit during the three and nine months ended December 31, 2019, and $58.55 and $63.30 per unit during the three and nine months ended December 31, 2018. The weighted-average fair value of awards includes the awards with a market condition described below.
The Company issued a total of 1,018 awards to Hedvig employees in the third quarter of fiscal 2020 as part of the total consideration. These awards were granted at a fair value of $44.49 per share and $43,653 of stock-based compensation expense is expected to be recognized over a weighted-average period of 2.68 years. The awards are included in the restricted stock unit table.
Performance Based Awards
In the nine months ended December 31, 2019, the Company granted 105 performance restricted stock units ("PSU") to certain executives. Vesting of these awards is contingent upon i) the Company meeting certain company-wide revenue and non-GAAP performance goals (performance-based) in fiscal 2020 and ii) the Company's customary service periods. The awards vest over three years and have a maximum potential to vest at 200 % (210 shares) based on actual fiscal 2020 performance. The related stock-based compensation expense is determined based on the value of the underlying shares on the date of grant and is recognized over the vesting term using the accelerated method. During the interim financial periods, management estimates the probable number of PSU’s that would vest until the ultimate achievement of the performance goals is known. The awards are included in the restricted stock unit table.
15
Commvault Systems, Inc
Notes to Consolidated Financial Statements - Unaudited (continued)
(In thousands, except per share data)
Awards with a Market Condition
In the nine months ended December 31, 2019, the Company granted 95 market performance stock units to certain executives. The vesting of these awards is contingent upon the Company meeting certain total shareholder return ("TSR") levels as compared to the Russell 3000 market index over the next three years . The awards vest in three annual tranches and have a maximum potential to vest at 200 % (190 shares) based on TSR performance. The related stock-based compensation expense is determined based on the estimated fair value of the underlying shares on the date of grant and is recognized using the accelerated method over the vesting term. The estimated fair value was calculated using a Monte Carlo simulation model. The fair value of the awards granted during the nine months ended December 31, 2019 was $48.26 per unit. The awards are included in the restricted stock unit table.
10. Income Taxes
11. Restructuring
In fiscal 2019, the Company initiated a restructuring plan to increase efficiency in its sales, marketing and distribution functions as well as reduce costs across all functional areas. During the quarter, the Company incurred total restructuring charges of $2,021 . These restructuring charges relate primarily to severance and related costs associated with headcount reductions and lease abandonment charges associated with five office leases. These charges include $709 of stock-based compensation related to modifications of existing unvested awards granted to certain employees impacted by the restructuring plan.
The activity in the Company’s restructuring accruals for the three and nine months ended December 31, 2019 and 2018 is summarized as follows:
Three Months Ended December 31, | ||||||||
2019 | 2018 | |||||||
Balance at September 30 | $ | $ | ||||||
Restructuring charges(1) | ||||||||
Payments | ( | ) | ( | ) | ||||
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