Data backup provider Commvault (NASDAQ:CVLT) fell short of analyst expectations in Q3 FY2023 quarter, with revenue down 3.61% year on year to $195 million. Commvault Systems made a GAAP loss of $310 thousand, down on its profit of $10 million, in the same quarter last year.
Commvault Systems (CVLT) Q3 FY2023 Highlights:
- Revenue: $195 million vs analyst estimates of $203.8 million (4.28% miss)
- EPS (non-GAAP): $0.62 vs analyst expectations of $0.72 (14% miss)
- Free cash flow of $29.3 million, down 40.4% from previous quarter
- Customers: 206 customers paying more than $100,000 annually
- Gross Margin (GAAP): 82.2%, down from 85.1% same quarter last year
Originally formed in 1988 as part of Bell Labs, Commvault (NASDAQ: CVLT) provides enterprise software used for data backup and recovery, cloud and infrastructure management, retention and compliance.
In today’s digital economy, companies rely on data to predict customer behavior, guide operational efficiency, and drive corporate strategy. The trouble is, your data grows, morphs, and fragments – digital bits and bytes in a constant state of movement and evolution. And data moves from on premise data centers to the cloud and back. Corporate data needs to be protected in case of disasters or from cyber criminals. And it needs to be done in a cost effective and easy to use manner.
Commvault Intelligent Data Services help enterprises drive greater efficiency by transforming how they protect, store, and use data. Commvault’ offerings are organized into three categories - Data Protection, Data Insights and more recently Storage. All of its products operate through a single simple to use interface on the Commvault Command Center, where IT professionals identify content and data they want to protect, and run automated backups. In 2020 Commvault acquired Hedvig and Metallic to expand their storage capabilities to include public cloud architectures, containers, and virtual machines.
Data is the lifeblood of the internet and software in general, and the amount of data created is growing at an accelerating pace. Likewise, the importance of storing the data in scalable and efficient formats continues to rise, especially as the diversity of the data and associated use cases expand from analyzing simple, structured data to high-scale processing of unstructured data, images, audio and video.
Commvault’s public competitors include IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and VMware (NYSE:VMW) while its private company rivals include Cohesity, Rubrik, Veeam, Veritas Technologies, Arcserve, and Acronis.
Sales Growth
As you can see below, Commvault Systems's revenue growth has been unimpressive over the last two years, growing from quarterly revenue of $187.9 million in Q3 FY2021, to $195 million.

But this quarter Commvault Systems's revenue was down 3.61% year on year, which might be a disappointment to some shareholders.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 0.76% over the next twelve months.
Large Customers Growth
You can see below that at the end of the quarter Commvault Systems reported 206 enterprise customers paying more than $100,000 annually, an increase of 33 on last quarter. That is a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Commvault Systems's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 82.2% in Q3.

That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a great gross margin, that allows companies like Commvault Systems to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Commvault Systems's free cash flow came in at $29.3 million in Q3, up 15.3% year on year.

Commvault Systems has generated $186.8 million in free cash flow over the last twelve months, an impressive 23.7% of revenues. This extremely high FCF margin is a result of Commvault Systems asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Commvault Systems's Q3 Results
With a market capitalization of $2.79 billion Commvault Systems is among smaller companies, but its more than $273.4 million in cash and positive free cash flow over the last twelve months give us confidence that Commvault Systems has the resources it needs to pursue a high growth business strategy.
We were very impressed how strongly Commvault Systems accelerated the rate of new contract wins this quarter. That feature of these results really stood out as a positive. On the other hand, revenue growth was quite weak and it missed analysts' revenue expectations. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $62.49 per share.
Is Now The Time?
Commvault Systems may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Commvault Systems is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there.
Commvault Systems's price to sales ratio based on the next twelve months is 3.5x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. In the end, beauty is in the eye of the beholder. While Commvault Systems wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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