Commvault: Solid Quarter, Buy The Underappreciated Stock

Summary

• Commvault reported another stellar quarter and guided up. Management is optimistic about share gains and growth prospects.
• The company's modern platform - consisting of Hyperscale X (Hedvig), Metallic SaaS, and its core data protection - is eliciting strong interest from customers looking to move to the cloud.
• New products such as Metallic are driving new logo additions, upselling into the existing install base, and attracting new customers who never considered Commvault before.
• Commvault shares will be driven by beat and raise quarters, multiple expansion, and share buybacks.
• Given good risk/reward, solid execution, compelling valuation, and opportunity to gain share, Commvault is a buy.

Photo by Dmitrii Musku/iStock via Getty Images

Following Commvault's (NASDAQ:CVLT) solid F4Q21 results, we reiterate our buy rating on the stock and recommend investors to buy shares on any future weakness. Commvault continues to execute well both on the product side as well as on the business side. Commvault stock is reasonably priced, its SaaS business is growing fast, and the company is pivoting to the subscription/SaaS model. Commvault is one of the best backup and recovery software in the industry. The Commvault platform is robust, extensible, and comprehensive. Commvault platform makes it easy for enterprises to back up their data to the cloud. The company's new product offerings Metallic (SaaS solution in the cloud) and Hyperscale X (Hedvig), bring new customers to Commvault. For more details on Commvault's products and services, please see our prior write-up on SA.

Metallic is one of the most promising offerings from Commvault. Metallic is driving new customers and new use cases to the Commvault platform. Metallic is considered the gold standard in enterprise backup as a service. We believe Commvault will be afforded a higher multiple when it breaks out the performance of the Metallic SaaS offering. Commvault story continues to get better as many enterprises are looking for an effective backup as an antidote to the rash of ransomware attacks plaguing their businesses. We will not be surprised to see the stock hit $100 within the next nine to 12 months, driven by solid execution, portfolio expansion, and share buybacks.

Fourth consecutive beat and raise quarter

Commvault reported fourth consecutive beat and raise quarter. Commvault reported results that exceeded expectations on revenue, margins, and EPS lines and provided guidance ahead of estimates. Revenue was $191.3 million and was ahead of the consensus estimate of about $183 million. Revenue was up 16% Y/Y. Software revenue was $89.4 million and was up 35%. Services revenue was $102 million and were up 4% Y/Y.

EPS was $0.59, versus the consensus estimate of $0.48. EPS beat was driven by higher revenue, higher gross margin, and lower operating expenses. Operating expenses were $123.9 million or 64.7% of revenue, down from 73.1% in the prior year. Given the pandemic, curtailed business travel aided in lowering operating expenses. CEO Sanjay Mirchandani noted that "We outpaced the industry growth rate, gained market share, and solidified our place as a market leader." Mr. Mirchandani attributes the success of Commvault to "customers rapidly modernized the data environments by expanding with our newer solutions, including our Metallic SaaS offerings."

Mr. Mirchandani also said that "Over the past two years, we built our core offering, pricing and licensing to better align with customer priorities. Our intelligent data services platform is built for today and tomorrow. And we conveniently provide these services as software on-premises, in the cloud, as a managed service through our partners, or as Software-as-a-Service. We believe that this creates incredible opportunities for us by meeting customers where they are and taking them to where they want to go." Net net, management sounded very bullish on the call, and we agree with the administration that the future looks bright for Commvault.

The following chart illustrates the company's performance versus our estimates.

Repeat beat and raise likely in August

We believe estimates are conservative, and we expect the company to beat estimates when it reports results in August. Commvault guided F1Q22 revenue to be about $181 million, implying revenue growth of 6%, down from 16% Q/Q and down from 7% Y/Y. The company guided software revenue of about $81 million or up about 6%. This growth is anemic and somewhat conservative, given that the software revenue grew 35% during the prior quarter in F4Q21. CFO Brian Carolan is known to issue conservative guidance, and this quarter was no exception. However, CFO Brian Carolan expressed confidence in the outlook for the company. He noted:

Given our record Q4 2021 results and our current Q1 2022 outlook, we remain confident that we're on track to deliver against the near-term targets that we outlined during the January investor event. Our belief is underpinned by the following. First, we're landing new subscription customers and taking a share in the market. Second, subscription renewals are a tailwind; we estimate the FY 2022 software subscription renewal opportunity to be approximately $80 million; this compares to approximately $50 million in FY 2021. The opportunity is weighted about 60% towards the back half of the year, with Q1 representing approximately $17 million. Third, our retention and expansion motion works. Our subscription net dollar retention rate currently exceeds 110%, and we're seeing existing customers adopt more of our intelligent data services at a faster pace. Finally, the Metallic effect has arrived; it's called the power events. On-premise and SaaS are resonating with customers. We expect Metallic to be a meaningful contributor to incremental ARR growth each quarter."

Given the estimates are conservative and the company exuding confidence in its growth prospects, we expect a repeat beat and raise quarter in August.

Compelling valuation

YTD, the stock has outperformed both the S&P and Nasdaq indices. CVLT is up about 29% YTD, while S&P is up 11% and Nasdaq is up 6%. Despite the outperformance, the stock is still cheap when compared to many names in our coverage universe. Over the last 12 months, CVLT is up 72%, while Nasdaq is up 58%, and S&P is up 47%.

On an EV/Sales basis, CVLT is trading at 3.6x EV/C2022 sales. We believe this multiple looks even more reasonable if we consider the subscription growth. The following charts illustrate Commvault valuation relative to the security software peer group. We think Commvault to be security software, given backups are adequate protection against ransomware attacks.

Source: Author based on Refinitiv data

What to do with the stock

We continue to like Commvault, and we recommend investors to buy the stock now. Many enterprises are looking at data backup through the lens of enterprise security. Backing up data is the only effective antidote to ransomware. When looked at through the lens of enterprise security, we believe the stock is cheap. On top of it, investors are also not giving Metallic SaaS business any credit. The Metallic SaaS business is growing very fast, and we expect investors to provide a higher multiple to this business eventually.

We expect the stock to also benefit from the stock buyback program that the company is working through. During F4Q21 (March Quarter), the company purchased 943,000 shares at a total outlay of $62 million. The company still has about $138 million left in its prior share buyback authorization. We expect the company to buy back shares opportunistically on dips, providing support to the stock. Finally, we expect the multiple to expand on the stock. The stock is likely to appreciate from the current levels driven by beat and raise that the company is expected to produce during the rest of the C2021. If the stock sells off for any reason, we would recommend investors back up the truck and add to their positions.

Analyst’s Disclosure: I am/we are long CVLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.