Commvault Systems (CVLT)

Data backup provider Commvault (NASDAQ:CVLT) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 23.2% year on year to $275 million. Guidance for next quarter’s revenue was better than expected at $268 million at the midpoint, 1.8% above analysts’ estimates. Its non-GAAP profit of $1.03 per share was 11% above analysts’ consensus estimates.

Company Overview

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.

Data is the lifeblood of the internet and software in general, and the amount of data created is accelerating. As a result, the importance of storing the data in scalable and efficient formats continues to rise, especially as its diversity and associated use cases expand from analyzing simple, structured datasets to high-scale processing of unstructured data such as images, audio, and video.

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Commvault Systems grew its sales at a sluggish 9% compounded annual growth rate. This wasn’t a great result compared to the rest of the software sector, but there are still things to like about Commvault Systems.

This quarter, Commvault Systems reported robust year-on-year revenue growth of 23.2%, and its $275 million of revenue topped Wall Street estimates by 4.8%. Company management is currently guiding for a 19.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.1% over the next 12 months, an acceleration versus the last three years. This projection is above the sector average and indicates its newer products and services will catalyze better top-line performance.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Commvault Systems’s ARR punched in at $930.1 million in Q1, and over the last four quarters, its growth was impressive as it averaged 19% year-on-year increases. This performance aligned with its total sales growth and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Commvault Systems a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Commvault Systems to acquire new customers as its CAC payback period checked in at 84.3 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Commvault Systems’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 82% gross margin over the last year. That means Commvault Systems only paid its providers $17.98 for every $100 in revenue.

In Q1, Commvault Systems produced a 82.6% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Commvault Systems has managed its cost base well over the last year. It demonstrated solid profitability for a software business, producing an average operating margin of 4.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Commvault Systems’s operating margin decreased by 4.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Commvault Systems’s breakeven margin was down 8.1 percentage points year on year. Since Commvault Systems’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Commvault Systems has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 20.5% over the last year, quite impressive for a software business.

Commvault Systems’s free cash flow clocked in at $76.17 million in Q1, equivalent to a 27.7% margin. The company’s cash profitability regressed as it was 7.7 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Commvault Systems’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 20.5% for the last 12 months will increase to 22%, it options for capital deployment (investments, share buybacks, etc.).

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Commvault Systems is a profitable, well-capitalized company with $302.1 million of cash and $10.95 million of debt on its balance sheet. This $291.2 million net cash position is 3.9% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Commvault Systems blew past analysts’ billings, revenue, EPS, and adjusted operating income expectations this quarter. We were also happy its full-year revenue guidance topped Wall Street’s estimates. Overall, we think this was a solid quarter. The stock traded up 5.7% to $175.13 immediately after reporting.

Updated: May 22, 2025 at 10:27 PM EDT

Before making an investment decision, investors should account for Commvault Systems’s business fundamentals and valuation in addition to what happened in the latest quarter.

Commvault Systems has a few positive attributes, but it doesn’t top our wishlist. Although its revenue growth was weak over the last three years, its growth over the next 12 months is expected to be higher. And while Commvault Systems’s declining operating margin shows it’s becoming less efficient at building and selling its software, its admirable gross margin indicates excellent unit economics.

Commvault Systems’s price-to-sales ratio based on the next 12 months is 7x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $183.02 on the company (compared to the current share price of $170.01).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.