Warren H. Mondschein - Chief Compliance officer, Vice President, General Counsel and Secretary
Neil Robert Hammer - Chairman, Chief Executive Officer and President
Brian Carolan - Chief Financial Officer and Vice President of Finance
CommVault Systems, Inc. (CVLT) Annual Shareholder Meeting August 21, 2013 9:00 AM ET
Warren H. Mondschein
Good morning. My name is Warren Mondschein. I'm the Vice President, General Counsel, Chief Compliance Officer and Secretary of CommVault. I will be acting as the Secretary of this meeting. On behalf of the Board of Directors and management, my pleasure to welcome you all to CommVault's Seventh Annual Stockholders Meeting.
Today's meeting is being webcast and will be available for replay on the Investor Relations page of our website at www.commvault.com.
I'd call this meeting to order and make some quick introductions: First, Bob Hammer, our President, CEO and Chairman of the Board; Brian Carolan, our Vice President of Finance and CFO; Al Bunte, our Executive Vice President, Chief Operating Officer and Director. We also have with us today Frank Fanzilli and Dan Pulver, 2 of our directors. Also in the room, Brent Ashton from Ernst & Young, our independent auditing firm; and Henry Farrell, representing our transfer agent.
I'd first like to begin by reporting on the formal steps we have taken in connection with this meeting. On April 25, 2013, the Board of Directors adopted a resolution establishing today as the day of the annual meeting and setting the close of business on July 1, 2013, as the record date. As a result, a notice of this meeting, a proxy statement, proxy cards and an annual report were directed to be given or made available to all holders of record as of July 1. I have an affidavit duly signed and sworn to by the Registrar & Transfer Company showing that these materials were mailed or made available on or about July 8 to each holder of record. Henry Farrell, again, of the Registrar & Transfer Company has been appointed as the election inspector. He has executed an oath of the Inspector of Election. A copy of all of these documents will be filed with the minutes of this meeting.
As of July 1, there were approximately 46.7 million shares of stock entitled to notice of and to vote at this meeting. A complete certified list of all of the holders of the company's common stock as of the record date is available for inspection on the table in the back of the room. The company's transfer agent has prepared and certified this list as well, and we will maintain it with the records of the company.
So I'd first give you a brief overview of what will take place today. Once we establish the existence of a quorum and complete certain other formalities, we will vote on each of the proposals specified in our proxy statement. We will address these proposals in order. We will then take time to count the votes while Bob Hammer talks to you about the company and the events of past year, and Brian Carolan will speak about our financial performance. At the conclusion of the meeting, we will have time for a brief Q&A session.
So the 4 items of business to be voted on at this meeting are the election of 3 Class I Directors, the approval of Ernst & Young as our independent auditors for fiscal 2014, the approval of the company's Employee Stock Purchase Plan and the approval on an advisory basis of our executive compensation. Detailed information concerning each of these items was made available to stockholders in our proxy statement. We will discuss each of these items of business separately, but we will vote on all matters at the same time so that anyone wishing to vote in person may do so with a single ballot. If you are a stockholder and have previously voted, you do not need to do anything. If you have not already submitted your proxy or if you wish to change your vote by voting now, please raise your hand and we will provide you with a new ballot. Anybody here changed their vote? Okay.
After the proposals have been brought before the meeting and discussed, complete that -- you can complete the ballots [indiscernible], and we're okay to move on.
So establishing the quorum. I have been advised by our election inspector that a vote count shows approximately 45 million of -- 45 million shares of common stock are represented at this meeting either in person or by proxy, which represents approximately 96% of our outstanding shares. Therefore, a quorum is present and this annual meeting is properly called for the conduct of business.
The first item of business is the election of directors. The stockholders of CommVault are being asked to elect 3 directors who will each serve as a Class I Director for a 3-year term expiring at the 2016 annual meeting. The nominees recommended by the Board of Directors are Armando Geday, Robert Kurimsky and David Walker.
Armando Geday has served as a director of our company since July of 2000. From April 1997 until February 2004, Mr. Geday served as President, CEO and a Director of GlobespanVirata, a digital subscriber line chipset design company. After GlobespanVirata, he was -- was acquired by Conexant in 2004, Mr. Geday served as CEO of Conexant from February 2004 until November of 2004. Prior to joining GlobespanVirata, Mr. Geday served as Vice President and General Manager of the Multimedia Communications Division of Rockwell Semiconductor. And prior to joining Rockwell, he held several other marketing positions at Harris Semiconductor. Mr. Geday serves on the board of TAGSYS. He obtained his bachelor’s degree in electrical engineering from the Florida Institute of Technology. He is currently an advisor and entrepreneur involved in various Internet and technology ventures.
Bob Kurimsky has served as a director of our company since February of 2001. Mr. Kurimsky served as Senior Vice President of Technology Solutions Company, a systems integrator, from 1994 through 1998 and again from January 2002 through June of 2003. Mr. Kurimsky also served as Senior Vice President of The Concours Group, a consulting and executive education provider, from 1998 through December of 2001. And prior to his service with Technology Solutions group, Mr. Kurimsky spent 20 years leading numerous information systems and administration functions at the Philip Morris Companies. He -- there, he rose to the level of Vice President. He also serves on the board of the Advisory Council, a private IT research, education and consulting firm, from 2002 to 2007. He obtained a bachelor of science at Fairfield University and a masters of engineering degree from Yale. He also attended the Stanford Executive Program at Stanford University.
And David Walker has served as a director of our company since February of 2006. He is the chairman of our audit committee. Mr. Walker served as the Director of the accountancy program and the Program for Social Responsibility and Corporate Reporting at the University of South Florida St. Petersburg from 2002 until June of 2009. Prior to joining the University of South Florida, Mr. Walker was with Arthur Andersen, having served as a partner in that firm from 1986 through 2002, most recently as partner in charge of the firm's assurance and business advisory services practice for the Florida and Caribbean region. Mr. Walker earned a masters of business administration from the University of Chicago Graduate School of Business, with a concentration in accounting, finance and marketing; and a bachelor of arts degree from DePauw University, with majors in economics and mathematics and a minor in business administration. Mr. Walker is a certified public accountant and a certified fraud examiner. He also serves on the Board of Directors of CoreLogic and Chico's, participating on the acquisition committee and charing the audit committee at CoreLogic and participating on the executive and nominating and governance committees of Chico's and chairing its audit committee. In addition, Mr. Walker serves -- served on the Board of Directors of Atlantic Blue Group from June 2012 to December 2012, First Advantage Corporation from 2003 to 2009, Paradyne Networks from 2003 to 2005 and Technology Research Corporation from 2004 to 2010. He chaired the audit committees of each of these companies during his tenure on their boards.
The Board of Directors recommends that you vote for each of these nominees.
Other nominees to the Board of Directors may only be made by stockholders who provided timely and proper notice pursuant to our bylaws. As there were no such additional nominations, I'm happy to open the floor for discussion concerning any of these nominees. Anybody who has any questions or comments about these nominees, raise your hand.
Okay, as there are none, we'll move on to the next item, which is the approval of our auditors. I note that if the selection of Ernst & Young is not ratified by the stockholders, the Board of Directors will consider such a vote as advice to select other independent auditors for the 2015 fiscal year. This is due to the difficulty and expense involved in changing auditors on short notice.
The Board of Directors recommends that you vote for Ernst & Young as our independent auditing firm for fiscal 2014. Again, I'm happy to open the floor for discussion regarding Ernst & Young. If anyone has any questions or comments, please raise your hand.
Okay, moving on quickly to the Employee Stock Purchase Plan -- for the next item of business, to approve the Employee Stock Purchase Plan, as described in our proxy statement. On January 23, 2013, the Board of Directors adopted the Employee Stock Purchase Plan subject to stockholder approval at this annual meeting. If the plan is approved, it will become effective as of February 1, 2014. The purpose of the ESPP is to provide our eligible employees the opportunity to become stockholders through the purchase of shares of our common stock using amounts deducted from their pay during 6-month periods called offering periods. If the plan is approved, the first offering period will commence as of February 1, 2014, and will end on July 31, 2014.
A summary of the material terms of the plan can be found in the proxy statement.
Stockholders are asked to approve the ESPP in order for awards to be eligible for a special tax treatment, as well as to comply with NASDAQ regulation. The Board of Directors believes that this plan is in the best interests of the company and our stockholders and recommends that shareholders approve the Employee Stock Purchase Plan.
And lastly, the next item of business is to vote, on an advisory basis, on our executive compensation. As described in our proxy statement, we strive to enhance long-term stockholder value by closely aligning our executive compensation philosophy and practices with the interests of our stockholders. We do this by rewarding the achievement of specific annual, long-term and strategic goals by our company, focusing on revenue growth and profitability. Our executive compensation program is designed to attract, motivate and retain talented executives who possess the skills required to formulate and drive our company's strategic direction, as well as to achieve annual and long-term performance goals necessary to create stockholder value.
Our compensation practices, which balance long-term and short-term rewards, are structured to pay for performance, to encourage business decision-making aligned with the long-term interests of our company and to promote and to support the human resource requirements of our business. We believe that our executive compensation programs are structured in the best manner possible to support our company and our business objectives.
Now this proposal, which is commonly known as a say-on-pay proposal, gives our stockholders the opportunity to express their views on our named executive officer compensation. And this vote is not intended to address any specific item of compensation but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in our proxy statement. The stay-on-pay vote is advisory and, therefore, not binding. However, the Board of Directors and the Compensation Committee value the opinions of our stockholders and will review the voting results. The Board of Directors again recommends that you vote for the approval of the executive compensation.
Now these being the only matters of business to be voted on at this meeting, we'll open the polls now to vote. And as I mentioned before, if you've previously voted, you do not -- and you do not wish to change your vote, you don't need to do anything now. I know that we didn't pass out any ballots, so we should have all of the votes counted. I'll ask Henry Farrell to tabulate the votes. And while these votes are being counted, chance for Bob and Brian to each make a brief presentation.
Before they begin, I would like to remind you that today's presentation and the related Q&A session may include forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Now this information contains projections and expectations of the company and represents our current beliefs. However, actual results in the future may differ materially from these forward-looking statements. These projections and statements of expectations should also be interpreted in conjunction with risk factors and other disclosures that may affect our results, all of which can be found in the company's recent Form 10-K, 10-Q, proxy statement and Annual Report to Stockholders as well as any other related SEC filings.
So with that, I'm going to turn it over to Bob for his presentation.
Neil Robert Hammer
Thank you, Warren. Good morning, everyone, and welcome to the 2013 CommVault Annual Shareholders Meeting. What I'm going to do this morning is provide a brief overview of the company.
Now let's start with who we are. CommVault is a very-fast-growing software and services company. I talked to a CEO a couple of days ago. He called me and wanted to sell me some hardware, and I said, "No, we're not a hardware company. We are a software and services company." We are a data-related software and services company. We make it less costly to manage access and protect data and provide leading solutions for mobile workers, compliance, operations management and business analytics.
Here are some of the details of the company. We have approximately just under 1,800 employees. We are global. We've now have 18,600 customers. Our revenue growth for the past 6 years has compounded at 22%. All our growth from the sound hearing [ph] company has been organic. We have 0 acquisitions. 42% of our revenues are international. And as of the end of last quarter, we had $459 million of cash. We have no debt, and our market cap is approximately $3.7 billion.
We are recognized as an industry leader. We're recognized for our strong, sustained financial results. We have been recognized by leading third-party analysts. And most importantly of all, we have strong customer acquisition and loyalty. For the past 5 years, customer growth has been over 128%, which has grown 18% compounded, a real good, strong customer loyalty, as validated by our high-maintenance renewal rates which are in the high 90s.
In the past 6 years since we've gone public, we have compounded revenue at 22%. And as important, we've compound our earnings at 31% year-over-year. We've had very good, consistent growth, and we've managed that way through the recession in good order.
In terms of recognition by leading third parties. Gartner, in their magic quadrant for enterprise backup and recovery, ranks us as the leading company in our field, ahead of such companies as EMC, IBM and Symantec. Forrester, who've just issued their Forrester Wave of Enterprise Backup and Recovery Software in Q2 '13, again ranks us #1, ahead of EMC, Symantec, IBM and HP. So very strong third-party recognition from the analysts.
First and foremost, we are in the data business. That's where our focus is. And the big themes of data are massive data growth, the cloud computing revolution, the move to mobility and the need for new types of analytics for better business decision-making.
So the growth of data drives our business. Data is growing faster than the ability to store and manage it. The rapid moves to mobile -- to the mobile workforce and the cloud makes this more difficult. Regulations and litigation needs require companies to keep data for longer periods of time and be able to easily search its content. We've all heard the term Big Data, and the issue there is companies need to find ways to better analyze their data for better, more timely decision-making.
The big engine for growth is the Internet highway. The Internet is expected to grow from 2011 to 2016 for 4x. Added back is the core foundation for data growth. You add massive improvements in computing and storage, and now you've got the foundation for growth of data.
Cloud computing, where the infrastructure and applications are moving to the cloud, has become pervasive whether those clouds are private and on-premise, whether they're in the public or they're some combination of the two. And we see this in almost every major enterprise that we work with today.
Exploding of mobile devices. Everybody knows that smart devices mobility is moving to the mobile worker. That requires a whole series of functions, but data has to be secured. Those mobile workers need easy access to their data. They need to sync their files between different devices. And for a corporation, you've got to automate the governance of that data on those devices. And CommVault is right in the middle of supplying the leading solutions for the mobile worker.
Business analytics are really important in terms of, in today's fast-paced environment, these big-changing competitive environments, companies need better ways to analyze their data relative to their customers and competitors. And that's -- and the keys there are enabling our customers to marry realtime data to historical data in massive scale across the enterprise. And CommVault, with the Simpana 10 and ContentStore, is the biggest -- has the most capability of enabling companies to enable business analytics across the enterprise.
Data, obviously a great place to be from a business standpoint. CommVault has many opportunities to expand from its core business out to a whole series of new markets. So we've built this company on data management and a core backup business. And now we're moving into much more sophisticated disaster recovery solutions and enabling our customers to meet their compliance and regulatory, enabling customers to utilize the cloud, as I mentioned earlier; enabling them to really manage and automate solutions for the mobile worker; automate their operations, which we are getting much more complex; reporting on those operations as the automating our processes become critical today and, as I mentioned earlier, now applying getting value from the stored data by the use analytics. These are big markets, and CommVault is well positioned to move into these other markets as we grow the company from its current state to $1 billion.
This company has exceeded with one relentless priority, and that's delivering value to our customers. We start with, how do we deliver highly differentiated value to our customers, better than any of our competition? Start there, and then add support and services, and then you leverage -- and you leverage that strong position with distribution. And for any company and any business, this is probably #1, and certainly in CommVault's priority.
So our software is the best answers -- has the best answers to our customers related to managing data. For example: How do I reduce my costs and operational problems due to the massive scale and human error? How do I ensure my data is protected and can be easily retrieved in case of a disaster? How do I meet my regulatory and compliance requirements? How do I solve data problems for my mobile workers who are using many different devices: laptops, tablets and smartphones? How do I easily search and get secured access to data that is in the cloud, on-premise or is in multiple devices and is stored in many different locations? How do I do -- how do I create insight and value from my data? These are the questions that we can answer for our customers with our software and services.
Services becomes critical. So it's not only having the best software in the industry, but it's also working with our customers to understand, what are their problems? How do I architect the right solutions for these customers? How do I implement them quickly? And how do I provide a support infrastructure to make sure that our software consistently delivers the value that is expected? So services becomes strategic, and the company's investing significantly on a broad range of services across the globe.
Now in regard to our direction, clearly, we've stated probably many times that we've had $1 billion plan. We're on track to achieve that plan, again, one, through innovation; support and services; and the ability to execute a broad strategy and, clearly, a very complex distribution.
So in summary, we're well positioned to achieve that plan, which is a -- which we've stated as $1 billion in revenue and about 25% in EBIT. We have the vision, we've got the products, we've got the markets. The future is in our hands, and the key to all this is execution.
Thanks very much. I'll now turn it over to Brian Carolan. Brian?
Thank you, Bob. And good morning, everyone. I appreciate the opportunity to present to everyone today. I'm going to spend a few minutes covering some key financial highlights for the 12 months ended March 31, 2013, which is our full fiscal year of 2013; and the 3 months ended June 30, 2013, which is our full fiscal quarter of 2014.
This slide shows our performance for fiscal years 2007 through 2013. From a revenue perspective, we achieved a 22% compounded annual growth rate during this period. We also achieved positive non-GAAP operating income, representing a 31% compound annual growth rate. As we have disclosed in our earnings calls, we measure ourselves to non-GAAP results. Non-GAAP results exclude noncash stock-based compensation charges and related FICA expenses. We also use a pro forma non-GAAP tax rate. A reconciliation of the GAAP to non-GAAP results is in the appendix of this presentation, along with our earnings releases.
For our full fiscal year FY '13, we achieved record revenues of $495.9 million, which represents a 22% increase over the prior year. Non-GAAP operating income for fiscal 2013 was $113.1 million, representing an EBIT margin of 22.8%. This is a 53% year-over-year increase in non-GAAP operating income and represented margin expansion of 470 basis points for the full year. The majority of our margin expansion came from sales and marketing expenses, which decreased as a percentage of total revenues from approximately 51% in FY '12 to 47% in FY '13.
We began fiscal 2014 with a solid first quarter. For the 3 months ended June 30, 2013, total revenues were $134.4 million, an increase of 21% over the first quarter of fiscal 2013. Non-GAAP operating income for Q1 of FY '14 was $31.3 million, representing an EBIT margin of 23.3%. This is a 38% increase from $22.6 million in the same period of the prior year. This increase represented margin expansion of 300 basis points year-over-year.
Let me now provide some commentary on capacity-based license sales. We continue to see strong demand for our capacity-based licensing models, which has a direct correlation to the underlying volume of data under management. For fiscal year of 2013, capacity-based license sales represented 69% of our FY '13 software revenue, as compared to 62% of our FY '12 software revenue. This represented a 39% year-over-year increase. And for the 3 months ended June 30, 2013, capacity-based license sales represented 74% of our Q1 FY '14 software revenue, as compared to 66% in the prior year period. This represented a 34% year-over-year increase.
We anticipate that capacity-based licenses will continue to account for the majority of our software revenue for the foreseeable future.
Let me also spend a minute on enterprise software transactions, which we define as license revenue sales of $100,000 and above in a fiscal quarter. As you can see on this slide, we continue to see accelerating revenue growth from enterprise software transactions. Enterprise transactions made up 57% of our fiscal 2013 license revenues, which was up from 52% of our license revenues in fiscal 2012. This represented a 35% year-over-year increase. And for Q1 FY '14, enterprise transactions made up 55% of our license revenues, which was down from 56% in Q1 FY '13. This represented an 18% year-over-year increase. The number of enterprise deals increased 27% year-over-year. And our average enterprise deal size was approximately $268,000 during Q1 FY '14, as compared to $288,000 in the prior year period.
From a cash flow perspective, cash flow from operations was $24.6 million during Q1 FY '14. Free cash flow, which we define as cash flow from operations, less capital expenditures not related to the new headquarters, was $23.3 million, which is an increase of 41% over the prior year quarter and a decrease of 41% sequentially. The year-over-year increase in free cash flow is a result of favorable changes in working capital on the balance sheet, as well as higher operating income and revenue.
Shifting now to a few key items on our balance sheet. As of June 30, 2013, our cash balance was approximately $459 million. Our total assets were approximately $633 million. Deferred revenue was approximately $189 million, which is an increase of $45 million or 31% over the prior year period and up $5 million or 3% sequentially. Working capital was approximately $361 million. And lastly, we have 0 debt on the balance sheet.
I would now like to cover some employee headcount statistics. We had 1,740 employees as of March 31, 2013, which represents a 21% increase when compared to March 31, 2012. We added 57 net employees in fiscal Q1 FY '14 and ended the quarter with 1,797 employees. This is approximately a 19% increase year-over-year.
So in summary. We had a 22% compounded annual growth rate in revenue from FY '07 through FY '13. Our gross margins are in the 87% range. Enterprise deals represented 55% of our Q1 FY '14 software revenue. Capacity-based license sales represented 74% of our Q1 software revenue.
We have strong services, the business represents about half of our total revenue. We have approximately $459 million of cash as of June 30, and no debt. And lastly, we have approximately $102.8 million available for share repurchases.
The next couple of slides in this appendix show a reconciliation of GAAP to non-GAAP results for FY '13 and Q1 of FY '14. These non-GAAP financial measures exclude noncash stock-based compensation charges and additional FICA and related payroll tax expense incurred by CommVault when employees exercised in-the-money stock options or invest in restricted stock awards.
We also applied a non-GAAP effective tax rate of 37% in fiscal 2013 and Q1 of FY '14. Please note, however, the cash tax rate is expected to be approximately 12% for fiscal 2013 and 18% for Q1 FY '14.
A reconciliation of GAAP to non-GAAP results are also shown in the table supporting our press releases.
And with that, that concludes my prepared remarks. And I will now hand things back over to Warren Mondschein. Warren?
Warren H. Mondschein
Thank you, Bob and Brian.
I've been advised that the election inspector has completed the vote count. I'll go through the results now with everybody.
With respect to the election of directors, approximately 95.8% of the votes cast have been voted in favor of Mr. Geday. The votes cast for him are 41.4 million for, 1.8 million withheld. Approximately 95.5% of the votes cast have been voted in favor of Mr. Kurimsky. The votes cast for him are 41.2 million for, 1.9 million withheld. And approximately 96.5% of the votes cast have been voted in favor of Mr. Walker. The votes cast for him are 41.7 million for and 1.5 million withheld.
So with that, please let the record show that Misters Geday, Kurimsky and Walker have been elected as Class I Directors pursuant to our bylaws to hold office until the annual meeting in 2016 or until their successors are elected.
With respect to the approval of Ernst & Young as independent auditors, 97.1% of the votes have voted for the proposal, 2.9% of the votes have voted against the proposed and there were 0% that abstained. The actual vote counts were 43.6 million for Ernst & Young, 1.3 million against Ernst & Young. There were 22,000 shares recorded as abstaining. And again, no shares were recorded as a no vote.
So again, please let the record show that Ernst & Young has been approved as our auditors for the fiscal year 2014.
With respect to the approval of the company's Employee Stock Purchase Plan, 97.6% of the votes have voted for the proposal -- oh, I'm sorry, 97.6% of the votes have voted for the proposal, 1.6% of the votes have voted against the proposal and 0.8% were recorded as abstaining. So please let the record show that the company's Employee Stock Purchase Plan has been approved by our stockholders.
And finally, with respect to the advisory vote on executive compensation, 98.4% of the votes have voted for, 1.6% of the votes have voted against and 0.1% have abstained from voting. So let the record show that our executive compensation has been approved on an advisory basis by our stockholders.
The election inspector will furnish the company a written report of the final vote count, which will be included in the minutes of this meeting.
So there being no further business to be addressed at this annual meeting, the formal portion of the meeting is now adjourned. And I'm happy to open the floor for any questions before we conclude. If anybody has any questions, now is the good time to raise your hand. Al, Brian and Bob are all available. Brent Ashton is also here from Ernst & Young, he's also available to take any questions. Anything?
Okay, well, thank you, all, for coming to this year's annual meeting. We look forward to seeing you again next year. Thanks.
Neil Robert Hammer