Washington, D.C. 20549
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 definitionthe definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company" and “emerging growth company” in rule 12b-2 of the Exchange Act.
Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrant’s definitive Proxy Statement for its 20202023 Annual Meeting of Stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the registrant’s fiscal year ended March 31, 2020.2023. Except as expressly incorporated by reference, the Proxy Statement shall not be deemed to be part of this report on Form 10-K.
PART I
Company Overview
Incorporated in Delaware in 1996, Commvault isSystems, Inc. provides its customers with a leading provider of data protection platform that helps them secure, defend and information managementrecover their most precious asset, their data. We provide these products and services for their data across the following environments: on-premises, hybrid, or multi-cloud. Our data protection offerings are delivered via self-managed software, applicationssoftware-as-a-service (SaaS), integrated appliances, or managed by partners. Customers use our technology to protect themselves from threats like ransomware and related services. Commvault was incorporatedrecover their data efficiently.
We believe in 1996 assolving hard problems for our customers by enabling them to accelerate their digital transformation and protect their data in a Delaware corporation. The Commvault softwaredifficult world. Our platform is an enterprise level, intelligentdrives automation, reduces complexity, reigns in data management solution, built from the ground up onfragmentation, and helps accelerate a single platform and unified code base. All software functionality shares the same back-end technologies to deliver the benefits ofcustomer’s cloud journey with a holistic approach to protecting, managing, and accessingsecuring data. The software addresses manyOur comprehensive solutions address the critical aspects of storagemodern data protection, from data security to data recovery, data governance and data managementcompliance, in a flexible and scalable platform. We believe our technology and service offerings provide the broadest set of capabilities in the enterprise, while providing scalability and control of data and information. We also provide our customers with a broad range of professional services that are delivered by our worldwide support and field operations.
Commvault software is built upon an innovative single platform architecture. Our software platform is unique and differentiates us from our competitors, some of whom address market needs by offering multiple and disparate point products with disparate user interfaces. We believe that the disparate and point product approach forces users to install and maintain separate products requiring their own infrastructure, training, maintenance and managementindustry, which can result in a complex and costly environment for customers who are looking for a single solution that will improve operations, minimize risk and reduce overall costs.
Commvault software enables customers to simply,efficiently and cost effectively,cost-effectively scale their data wherever it resides.
Products
Commvault helps customers protect and manage their enterprise data throughout its lifecycle, from the mobile worker to the remote office, to the data center, covering the leading operating systems, relational databases, virtualized environments and applications. In addition to addressing today’s data and information management challenges, our customers can realize lower capital costs through more efficient usein a hybrid multi-cloud environment. Commvault delivers a portfolio of their enterprise-wide storage infrastructure assets. This includes the automated movement of data from higher cost to lower cost storage devices, including cloud storage, and through sharing and better utilization of storage resources across the enterprise. We can also provide our customers with reduced operating costs through a variety of methods, including fast application deployment, reduced training time, lower cost of storage media consumables, proactive monitoring and analysis, and lower administrative overhead.
In the third quarter of fiscal 2020 Commvault completed the acquisition of Hedvig Inc., a California-based developer of software-defined storage solutions. The primary reason for the business combination is the complementary nature of Hedvig’s technology, with our other technology, which will expand our addressable market. Hedvig software allows customers to tailor their storage environment to their application and data demands through a software-defined storage platform. This transaction supports Commvault’s intelligent data management strategy of unified storage and data management. Hedvig’s technology enables a scalable, distributed software defined storage solution that is already multi-cloud enabled.
We have established a worldwide, multi-channel distribution network to sell our software and products and services to large global enterprises, smalleffectively secure, defend and medium sized businessesrecover data from ransomware attacks or any other threats. Our solutions create an intuitive data protection experience across customer-managed enterprise software and government agencies, both directly through our sales forceSaaS-delivered cloud native solutions that mitigate data sprawl, facilitate cloud adoption, and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers and original equipment manufacturers.
Our internet address is www.commvault.com. On the investor relations section of this website, we post the filings as soon as reasonably practicable aftermeet customers wherever they are electronically filedon their journey to modernize and transform their enterprise IT environment. These offerings are organized into four categories - (1) Data Recovery, (2) Data Compliance & Governance, (3) Data Storage and (4) Data Security.
Commvault's platform is managed through a single pane of glass called the Commvault Command Center. The Command Center provides configuration values and streamlined procedures for data protection and recovery tasks. Customers use the Command Center to establish their data protection environment, identify content to be protected, and initiate and monitor backups and restores. The main navigation pane provides customers with or furnishedeasy access to various components including downloads, forms, analytics, and monitoring. The Command Center provides a controlled foundation for self-service, helping to reduce the U.S. Securitiesload on administrators and Exchange CommissionIT support staff.
Data Recovery
Commvault Backup and Recovery ("SEC"CBR") including: our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statements relatedis designed to our annual stockholders’ meetingsmeet the needs of any size business protecting workloads across all locations: hybrid environments including on-premise and any amendmentmultiple cloud providers; physical servers; virtual machines; applications and databases; endpoint devices; cloud applications and more. CBR provides backup, verifiable recovery and cost-optimized cloud workload mobility, helping to those reports or statements filed or furnished pursuantensure data availability and granular recovery, even across multiple clouds. Our simplified backup and recovery solution allows customers to Section 13(a) or 15(d)protect all workloads – cloud, virtual machines ("VMs"), containers, applications, databases and endpoints – from the Command Center.
Commvault Disaster Recovery (“CDR”) provides an easy-to-use replication and disaster recovery solution from a single extensible platform, all managed through the Command Center. Commvault’s standalone disaster recovery solution is both easy to implement and cost-effective. It provides recovery orchestration and recovery validation for enterprise workloads across on-premise and leading clouds.
Commvault Complete Data Protection is a comprehensive, easy-to-use data protection solution that combines CBR with CDR. It delivers backup, replication, and disaster recovery for all workloads, on-premises, in the cloud, across multiple clouds, and in hybrid environments. It provides trusted recovery of the Securities Exchange Actdata and applications, virtual machines, and containers, along with verifiable recoverability of 1934, as amended. All such filings are available on the Investors Relations portion of our web site free of charge. The contents of our web site are not incorporated by reference into this Form 10-K or in any other report, statement or document we filereplicas, cost-optimized cloud data mobility, security and resilient ransomware protection.
Metallic Data Protection as-a-service (“Metallic”) delivers data protection technology with the SEC.simplicity and agility of SaaS, getting companies up and running to protect critical business data within minutes. Powered by
The driving force behindCommvault’s intelligent data protection platform, Metallic delivers enterprise-grade data protection as a service on a cloud platform, with advanced built-in security controls. Current Metallic offerings include data protection for Office 365, virtual machines and Kubernetes, databases, files, Dynamics 365, Salesforce and endpoints.
Data Compliance & Governance
Commvault's Data Insights portfolio is an integrated family of solutions for actionable insights, combining Commvault Data Governance, Commvault File Storage Optimization, and Commvault eDiscovery and Compliance. These solutions can operate independent of Commvault Complete Data Protection or as part of a combined solution to maximize data protection capabilities for any business. This means that customers can gain insights to data that isn’t protected by Commvault to drive analytics and other tasks.
Data Storage
Hyperscale X
Commvault HyperScale X is an intuitive, easy-to-deploy and scale-out, integrated data protection solution to help enterprises transition from legacy scale-up infrastructures. It provides security and resiliency to accelerate an organization’s digital transformation journey as they move to hybrid cloud, container and virtualized environments. Its flexible architecture allows customers to get up, run quickly and scale. HyperScale X technology accelerates hybrid cloud adoption with an integrated solution that delivers comprehensive data protection for all workloads, including containers, VMs and databases, from a single, extensible platform. With HyperScale X, customers can leverage the growth ofentire Commvault portfolio giving them access to all the features, functions, and industry leading integration with applications, databases, public cloud environments, hypervisors, operating systems, NAS systems and primary storage arrays, wherever the data resides. It is available in two form factors giving customers the flexibility to choose an implementation based on specific needs and information management software industrypreferences:
•Commvault HyperScale X Appliance: A fully integrated data protection appliance that streamlines operations and infrastructure and is ideally suited for smaller deployments that want the simplicity of an all-in-one integrated appliance from a single vendor.
•Commvault HyperScale X Reference Architecture: Our pre-validated designs for popular server platforms provides greater flexibility and allows customers to leverage existing vendor relationships and is ideally suited for larger environments that require greater scale.
Metallic Recovery Reserve
Metallic Recovery Reserve ("MRR") is the rapid growth of data, coupled with the need“easy button” to reliably protectadopt secure and quickly access that data, while maintaining the ability to effectively manage the emerging regulations around compliance and e-discovery.
The increasing reliance on critical enterprise software applications such as e-mail, relational databases, enterprise resource planning, customer relationship management and workgroup collaboration tools is resultingscalable cloud storage in the rapid growth of data across all enterprises. This data is widely considered to be one ofminutes — delivering against an organization’s most valued and strategic assets. Givenorganization's hybrid cloud strategy, without the need for actionable and intelligent insights into data sets and file systems, organizations increasingly must scale and store information at unprecedented levels. Big data initiatives leverage new approaches and technologies to store, index and analyze huge data sets, while minimizing storage requirements and driving faster outcomes.
Ensuring the security, availability and integrity of the data has become a critical task as regulatory compliance and corporate governance objectives affecting many organizations mandate the creation of multiple copies of data with longer and more complex retention requirements. Government regulations, such as those issued under the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act ("HIPAA"), Government Paper Elimination Act ("GPEA"), Homeland Security, the Patriot Act, Freedom of Information Act ("FOIA"), the Basel Committee on Banking Supervision, the Dodd-Frank Wall Street Reform and Consumer Protection Act, General Data Protection Regulation ("GDPR"), as well as company policies requiring data access, protection and preservation, are expanding the proportion of data that must be archived and easily accessible for future use.
In addition to rapid data growth, data storage has transitioned from being server-attached to becoming widely distributed across local and global networked storage systems and leading to mass data fragmentation. Data previously stored on primary disk and backed up on tapeadditional cloud expertise. It is increasingly being backed up, managed and stored on a broader array of storage tiers ranging from high-cost, high-performance disk systems, to lower-cost mid-range and low-end disk systems, to tape libraries and both public and privatean integrated, air-gapped cloud storage services. This transition has been driven by the growthtarget that enables IT organizations to efficiently adopt cloud storage for CBR, HyperScale X or Metallic – to ease digital transformation, save costs, reduce risk and scale.
Data Security
Leveraging patented deception technology, Metallic ThreatWise combines sophisticated early warning and early action with comprehensive data protection. It enables businesses of data, the pervasive use of distributed critical enterprise software applications, the decrease in disk cost,every size to neutralize attacks before they cause harm; detecting and the demand for 24/7 business continuity.diverting zero-day attacks that evade conventional detection technology and circumvent security controls.
The innovations in storage and networking technologies, coupled with the rapid growth of data, have caused information technology managers to redesign their data and storage infrastructures to deliver greater efficiency, broaden access to data and reduce costs. The result has been the wide adoption of virtualized environments with larger and more complex networked data and storage solutions. We also believe the cloud will continue to significantly impact the way that applications are delivered, data is stored and information is retrieved.
The rapid growth of data and the need to securely protect, manage and access this data is driving substantial opportunities for managed service providers ("MSPs") to help organizations deploy and manage solutions that deliver data management capabilities. The result is reduced long-term management costs with increased offerings to customers, which we believe represents a long-term industry trend in the way that services are offered.
We believe that these trends are increasing the demand for software applications and services that can simplify data and information management, provide secure and reliable access to all data across a broad spectrum of tiered storage and computing systems and seamlessly scale to accommodate growth, while reducing the total cost of ownership to the customer.
Our Software and Products
Historically, the vast majority of our software licenses provided for a perpetual right to use our software and are sold on a per terabyte capacity basis, as site licenses or via instance based packaging. Software licenses sold on a per terabyte capacity basis provide the customer with unlimited install licenses of specified software products based on a defined level of terabytes of data under management. As a result, when we sell our software via a capacity license, certain of the various functionalities discussed below are bundled into one capacity based price. Increasingly, we also sell our customers instance based licensing. We primarily sell instance based licenses for virtual machine backup, recovery and cloud management, endpoint data protection, and email archive. These instance based licenses also include various functionalities bundled into one capacity based price.
Prior to fiscal 2018, an insignificant amount of our revenue was sold under subscription, or term-based, license arrangements. Any of our licensing models (capacity, instance, etc.) can be sold via a subscription arrangement. In these arrangements the customer has the right to use the software over a designated period of time. The capacity of the license is fixed and the customer has made an unconditional commitment to pay. Software revenue in these arrangements is generally recognized when the software is delivered. In fiscal 2018, we started to introduce more subscription arrangements into the market. We expect revenue from these types of arrangements as a percentage of our total revenue to continue to increase in the next few years. Beginning in fiscal 2021, we also expect to generate material revenue from renewals of subscription licenses sold in prior years.
We also sell to some customers, primarily managed service providers, via utility, or pay-as-you-go models. In these arrangements actual usage is regularly measured and billed. Revenue in these utility arrangements is recognized as the software is used over time.
Professional & Customer Support Services
Commvault Software Solutions
The Commvault software suite contains solutions that are all built onoffers a single unified code basewide range of professional and platform to protect, manage and access data and information. Within the platform, tightly integrated, powerful software features deliver functionality throughout physical and virtual environments to help protect and recover data, manage costs and complexity and gain better insight into information.
In fiscal 2019, we simplified our product set to bring together comprehensive backup and recovery and data management, including storage infrastructure, service delivery orchestration and data governance. The packaging portfolio is suited to address the rapidly evolving business needs of today's digital organizations, helping to make managing backup simple. Commvault’s newly-packaged product set combines new innovations and capabilities into four primary products:
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| Commvault Complete™ Backup & Recovery – Backup and recovery for the enterprise with one solution. Commvault Complete Backup & Recovery, is a fully featured and comprehensive backup and recovery solution. Designed to meet the needs of any size business, it covers workloads across all locations: hybrid environments include on-premises and multiple cloud providers; physical servers; virtual machines; applications and databases; endpoint devices; cloud applications and more. Commvault Complete also includes disaster recovery capabilities, snapshot management, endpoint user protection, mailbox protection for on-premises, and SaaS offerings, replication, disaster recovery, reporting and integrated archiving. Historically, the vast majority of our licensing revenue has been generated by sales of our core backup and recovery products.
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| Commvault HyperScale™ Technology – Commvault HyperScale™ Technology delivers an on-premises, cloud-like infrastructure to support scale-out secondary storage with integrated data protection. This is available in two form factors: 1) a Commvault-branded integrated appliance, or 2) as a software solution that can be used with a customer’s preferred hardware provider.
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| Commvault Orchestrate™ – Automated service delivery technology that enables users to provision, sync and validate data in any environment for important IT needs such as disaster recovery ("DR") testing, development testing ("Dev/Test") operations and workload migrations. Commvault Orchestrate™ allows customers to extend the value of their data sitting in secondary storage. Secondary copies of data can now be used for activities like accelerating Dev/Test routines or performing application migrations. Operations that were previously manual can now be orchestrated and automated, saving customers time and money.
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| Commvault Activate™ – Discover and extract new business insights from data under management to better meet governance requirements like GDPR and deliver data to the business for analysis. Commvault Activate™ allows customers to comply with privacy regulations by detecting and taking action on data risks, use data insights to drive file efficiencies and accountability and gives an enterprise the tools to reveal and extend the value of data across the enterprise.
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| A Commvault Venture - Hedvig ® - Allows customers to tailor their storage environment to their application and data demands through a software-defined storage platform. Built on x86 servers, the Distributed Storage Platform provides the multi-protocol support required across block, file, and object storage with native application, hypervisor, container, and cloud integration to consolidation storage silos – eliminating data fragmentation issues.
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| A Commvault Venture - Metallic™ - A new offering launched in fiscal 2020, Metallic brings software-as-a-service ("SaaS") data protection to the market, delivering Commvault's powerful core technology simply through the cloud. Metallic offers a growing portfolio of SaaS backup and recovery solutions to help today's companies keep their data protected, compliant and safe from deletion, corruption and attack. Metallic revenue is recognized as Services revenue in the Consolidated Statements of Operations and was immaterial in fiscal 2020.
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Services
A comprehensive global offering of customer support and other professional services is critical to the successful marketing, sale and deployment of our software. From planning, to deployment, to operations, we offer a complete set of technical services, training and support options that maximize the operational benefits of our suite of software applications. Our commitment to superior customer support is reflected in the breadth and depth of our service offerings as well as in our ongoing initiatives to engineer resiliency, automation and serviceability features directly into our products.
We have established a global customer support organization built specifically to handle our expanding customer base.complement its product portfolio. We offer multiple levels of customer supportservice that can be tailored to the customer’s response needs and business sensitivities.our customers’ needs.
Our customer support services consist of:
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• | Real-Time Support. Real-Time Support. Customers have 24/7 access to support with our support staff available by phone for first responses and to manage resolutions. Our support staff is available 24/7 by telephone to provide first response and manage the resolution of customer issues. In addition to phone support, our customers also have access to an online product support database for help with troubleshooting and operational questions. Innovative use of web-based diagnostic tools provides problem analysis and resolution. Our software design is also an important element in our comprehensive customer support, including “root cause” problem analysis, intelligent alerting and troubleshooting assistance. Our software is directly linked to our online
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support database allowingfor help with troubleshooting and operational questions. Innovative use of web-based diagnostic tools provides problem analysis and resolution. Our solution design is also an important
element in our comprehensive customer support, including “summary of findings” problem analysis, intelligent alerting and troubleshooting assistance.
•Broad Expertise. Our support engineers have extensive knowledge of complex applications, servers and networks. We proactively take ownership of the customer’s problem. We have also developed and maintain a knowledge library of storage systems and software products to further enable our support organization to quickly and effectively resolve customer problems.
•Global Operations. We offer our global customer support from physical locations around the world, which allows us to provide 24/7 support. Our cloud-based support system creates a virtual global support center combining these locations to allow for the fastest possible resolution times for customer incidents. We have designed our support infrastructure to be able to scale with the increasing globalization of our customers.
•Customer Success Options. We offer various enhanced Customer Success options including the Enterprise Success Program ("ESP") and Metallic Customer Success. Our ESP provides industry experts who provide strategic guidance and technical advice, alongside Success Account Managers, who are all focused on proactively helping our enterprise customers to analyze problems without engaging ourachieve their goals and are aligned to their business initiatives. The entire program is centered around driving customer adoption, customer satisfaction and quick time to value.
•Technology Consulting Services. Our technical support personnel.
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• | Significant Network and Hardware Expertise. Our support engineers have extensive knowledge of complex applications, servers and networks. We proactively take ownership of the customer’s problem, regardless of whether the issue is directly related to our products or to those of another vendor. We have also developed and maintain a knowledge library of storage systems and software products to further enable our support organization to quickly and effectively resolve customer problems.
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• | Global Operations. Our global customer support headquarters is located at our state-of-the-art technical support center in Tinton Falls, New Jersey. We also have established support operations in Reading, United Kingdom; Sydney, Australia; Bangalore, India; and Shanghai, China, which are complemented by regional support centers. Our cloud-based support system creates a virtual global support center combining these locations to allow for the fastest possible resolution times for customer incidents. We have designed our support infrastructure to be able to scale with the increasing globalization of our customers.
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• | Enhanced Support Options. We offer several enhanced customer support services such as Enterprise Support. Our Enterprise Support service is for customers with critical support needs and builds on our 24/7 real-time support deliverables and includes various levels of enhanced services to ensure dedicated support and customized reporting. Enterprise Support adds a specialized team of technical support engineers, an assigned support account manager and innovative tools to achieve our customers’ mission.
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Our technology consultants ensure that our customers' softwareyour data protection environment is designed for optimal results, configured quickly, and will continueis easy to deliver overmaintain. We offer architecture design; implementation; personalization; data migration; and health assessment services. In addition, we offer customers staff-augmentation options via resident support engineers to assist with rapid expert deployment and operation of the long term. This same teamCommvault suite.
•Ransomware Recovery Services. Commvault Readiness Solutions provide the resources and expertise to quickly accelerate returning to normal business operations through the proper design, implementation, administration, and support of our customers' data protection environment.
•Education Services. We offer training content for learners at all levels, with basic, intermediate, and expert certifications available. We also provide a selection of self-paced online content for our products in our On-Demand Learning Library.
•Remote Managed Services. The Commvault Remote Managed Services offering complements our software and SaaS platforms, providing results-oriented data protection to customers worldwide. Commvault experts can install, configure, personalizeprovide secure, reliable, and validate that environment socost-effective remote monitoring and management of our customers' data protection environment.
Customers
Our current customer base spans thousands of organizations across a variety of sizes, including large global enterprise companies, and small or mid-sized businesses and government agencies. We support customers can achievein a better return on investment, fasterrange of industries, including banking, insurance and with more confidence.
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• | Technology Consulting Services. Our technology consulting ensures that a customer’s software environment is designed for optimal results and will continue to deliver over the long term. We offer services such as architecture design; implementation; personalization; data migration; and health assessment. In addition, our residency services offer customers staff-augmentation options to assist with the rapid expert deployment of the Commvault software suite.
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• | Business Consulting Services. Our business consultants provide transformational insights that align to how specific businesses gather, retain and employ data. We offer services such as disaster recovery readiness and policy implementation; private cloud services design; data classification and archive policy implementation; and operational efficiency assessment.
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• | Education Services. We provide global onsite training, offsite training and self-paced online alternatives for our products. Packaged or customized customer training courses are available in instructor-led or computer-based formats. We offer in-depth training and certification for our resellers in pre- and post-sales support methodologies, including web access to customizable documentation and training materials. In addition, we offer a Commvault Certification Program that validates expertise and advanced knowledge in topics, including Commvault Core Fundamentals, Implementation and Maintenance. We also offer more advanced Specialist, Engineer and Master technologies certifications. We believe certified personnel can increase a company's productivity and reduce operating costs.
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• | Remote Managed Services. Commvault Remote Managed Services provides remote monitoring and management of the Commvault data management platform deployed on a customer's environment. Our engineers configure, maintain and optimize a customer's Commvault software environment remotely via a secure connection.
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• | Commvault Software-as-a-Service (Metallic). In fiscal 2020, we launched Metallic. Metallic brings SaaS data protection to the market, delivering Commvault's powerful core technology simply through the cloud. Metallic revenue, which was immaterial in fiscal 2020, is recognized as Services revenue in the Consolidated Statements of Operations.
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financial services, government, healthcare, pharmaceuticals and medical services, technology, legal, manufacturing, utilities and energy.
Strategic Relationships
An important element of Commvault’s strategy is to establish relationships with third partiespartnerships that assist us in developing,support development, marketing, selling and implementingimplementation of our software and services.technology solutions. We believe that strategic and technology-based relationships with industry leaders are fundamental to our success. We have forged numerous relationships with software application, hardware and hardwarecloud vendors to enhance our combined capabilities and to create the optimal combination of data and information management applications. ThisWe believe this approach enhances our ability to expand our product offerings and customer base and to enter new markets. We have established the following types of strategic relationships:
Alliance and Technology Alliance Partners. We maintain strategic product and technology relationships with major industry leaders to ensure that our software applicationsproducts are integrated with, supported by and add value to our partners’ hardware and software products.portfolios. Collaboration with these market leaders allows us to provide applications that enable our customers to improve data and information management efficiency. Our significant strategic relationships include Atos, Cisco, Citrix, Fujitsu, Hewlett Packard Enterprise ("HPE"), Microsoft, Oracle, SAP, Netapp, AWS and VMware. In addition to these relationships, weWe also maintain relationships with a broad range of industry operating system, application and infrastructure vendors to verify and demonstrate the interoperability of our software applicationsportfolio with their equipment and technologies.
Distributors, Value-Added Reseller, Systems Integrator, Corporate Reseller and Original Equipment Manufacturer Relationships. Our corporatenetwork of resellers bundle or sell our software applicationssolutions together with their own products, and our value-added resellers resell our software applicationssolutions independently. As of March 31, 2020, we had more than 500 reseller partners and systems integrators that have distributed our software worldwide.
In order to broaden our market coverage, we work closely with our Global Original Equipment Manufacturerglobal original equipment manufacturer ("OEM") Partners,partners, investing significant time and resources to deliver unique, joint solutions incorporating Commvault software.solutions. These partners team with our technical, engineering, marketing and sales force on helping to enhance integration, tuning, operational management, implementation and vision for solutions that are designed to meet current and future data and information managementprotection needs. Our alliance managers work directly with Globalglobal OEM Partnerspartners to design, deliver and support field activities that make it easier for customers to locate, learn about, and purchase these differentiated solutions. Our most significant OEM partner is Hitachi Vantara ("Hitachi"). Hitachi has no obligation to recommend or offer our software applications exclusively or at all, and they have no minimum sales requirements and can terminate our relationship at any time. Sales through our original equipment manufacturer agreement, accounted for 10% of our total revenues in fiscal 2020 and 11% of our total revenues for fiscal 2019.
Additionally, we have a non-exclusive distribution agreement covering our North American commercial markets and our U.S. Federal Government markets with Arrow Enterprise Computing Solutions, Inc. ("Arrow"), a subsidiary of Arrow Electronics, Inc. Pursuant to this distribution agreement, Arrow's primary role is to enable a more efficient and effective distribution channel for our products and services by managing our reseller partners and leveraging their own industry experience. Sales generated through our distribution agreement with Arrow accounted for approximately 37% of our total revenue in both fiscal 20202023 and 38% of our total revenue in fiscal 2019.2022.
Service Provider Partners. Our software issolutions are the data protection platform for over 200many service providers, which provide cloud-based solutions to client systemscustomers worldwide. As companies of all sizes and markets rapidly adopt cloud infrastructures for improved costs,cost efficiencies, speed and agility, we remain committed to these strategic relationships to address this growing trend. Customers looking to move IT operations intoto the cloud depend on service providers to help them migrate, manage and protect their data and cloud infrastructures. We have partneredpartner with a broad ecosystem of managed service providerproviders and cloud partners so they canto effectively deliver data management-as-a-serviceprotection-as-a-service solutions based on Commvault softwaresolutions across geographies, vertical markets and offerings. Leading providers who have integrated Commvault software into their solution portfolios
Competition
The data protection and replication market is intensely competitive and highly fragmented. The principal competitive factors in our industry include Microsoft Windows Azure, Amazon Web Services ("AWS"), Google Cloud, Dimension Data, NetApp,product functionality, performance, integration, platform coverage, scalability, price, global sales infrastructure, technical support, branding and Rackspace.reputation. The ability of major system vendors to bundle solutions is also a significant competitive factor in our industry.
Customers
We sell CommvaultOur primary competitors in the data protection software applications market, each of which has one or more products that compete with a part of or our entire product suite, include Dell-EMC, IBM, Veritas, Veeam, Rubrik, Cohesity, Druva, and related services directly to large global enterprises, small and medium sized businesses and government agencies, and indirectly through value-added resellers, systems integrators, corporate resellers and OEM partners. We license our software applications to customers in a broad range of industries, including banking, insurance and financial services, government, healthcare, pharmaceuticals and medical services, technology, legal, manufacturing, utilities and energy.Avepoint.
Technology
We believe our software platform serves as a major differentiator versus our competitors’ data and information management software products. Our platform’s unique indexing, cataloging, data movement, media management and policy technologies are the source of the performance, scale, management, cost of ownership benefits and seamless interoperability inherent in allSome of our datacompetitors have greater financial resources and information management software applications. Additional options enable content search, data encryption and auditing features to support data discovery and compliance requirements. Each of these solutions share a common architecture consisting of three core components: intelligent agent software, data movement software and command and control software. These components may be installed on a single host server, or each may be distributed over many servers in a global network. Additionally,have the modularity of our software provides deployment flexibility. The ability to share storageoffer their products at lower prices than ours. In addition, some have greater name recognition, longer operating histories, substantially larger technical, sales, marketing and other global resources, across multiple data and information management applications provides easier datalarger installed customer base with broader product offerings. As a result, these competitors can devote greater resources to the development, promotion, sale and information management and lower total costsupport of ownership. We participate in industry standards groups and activities thattheir products than we believe will have a direct bearing on the data and information management software market.can. Refer to our "Risk Factors" below.
Sales and Marketing
We sell our data and information management software applications and related servicesprotection solutions to large global enterprises, small and medium sized businesses of all sizes, and government agencies. We sell through our worldwideglobal direct sales force and our global network of distributors, value-added resellers, systems integrators, corporate resellers and OEM partners. As of March 31, 2020, we had 653 employees in sales and marketing located worldwide.partner channels.
We have a variety of marketing programs designed to create brand awareness and market recognition for our product offerings and for sales lead generation. Our marketing efforts include sales campaigns, webinars, active participation at trade shows, technical conferences and technology seminars; advertising; content development and distribution; public relations; social media; industry analyst relations; publication of technical and educational articles in industry journals; sales training; and preparation of competitive analyses. In addition, our strategic partners augment our marketing and sales campaigns through seminars, trade shows, and joint public relations and advertising campaigns. Our customers and strategic partners provide references and recommendations that we often feature in external marketing activities.
Research and Development
Our research and development organization is responsible for the design, development, testing and certification of our data and information management software applications. As of March 31, 2020, we had 615 employees in our research and development group, more than half of which are located in New Jersey.protection solutions. Our engineering efforts support product development across all major
operating systems, databases, applications, hyperscalers and network storage devices. A substantial amount of our development effort goes into certification, integration and support of our applicationssolutions to ensure interoperability with our strategic partners’ hardware and software products.solutions. We have also made substantial investments in the automation of our product test and quality assurance laboratories.
Competition
The data storage management market is intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. We currently compete with other providers of data and information management software as well as large and emerging storage hardware manufacturers that have developed or acquired their own data and information management software products. These manufacturers have the resources and capabilities to develop their own data and information management software applications, and many have been making acquisitions and broadening their efforts to include broader data and information management and storage products. These manufacturers and/or our other current and potential competitors may establish cooperative relationships among themselves or with third parties, creating new competitors or alliances. Large operating system and application vendors have introduced products or functionality that includes some of the same functions offered by our software applications. In the future, further development by these vendors could cause some features of our software applications to become redundant.
Our primary competitors in the data and information management software applications market, each of which has one or more products that compete with a part of or our entire software suite, are Dell-EMC, IBM, Veritas, Veeam, Rubrik and Cohesity.
The principal competitive factors in our industry include product functionality, product performance, product integration, platform coverage, ability to scale, price, worldwide sales infrastructure, global technical support, name recognition and reputation. The ability of major system vendors to bundle hardware and software solutions is also a significant competitive factor in our industry. Although some of our competitors have greater resources, a larger installed customer base and greater name recognition, we believe we compete favorably on the basis of these competitive factors.
Our unique product architecture is one of the primary reasons why we compete so successfully. Whereas many other competitive solutions in the market are based on multiple, disparate products, our modular offering is based on a single, unified, underlying code base resulting in favorable efficiencies in functionality, integration, scalability and support. Our focused approach to data and information management and our ability to respond to customer feedback also drives the functionality and features of our products, which we believe lead the industry in terms of performance and usability, as evidenced by numerous industry awards we have received.
From a customer perspective, highly integrated products such as ours, which are based on a single, unified, underlying code base, are easier and less expensive to deploy, operate and manage. This flexibility, in turn, makes it significantly easier to scale our products over a customer’s entire IT environment. Supporting and enhancing our products is made more efficient due to this single, unified, underlying code base, unlike our competitors who are required to support and enhance multiple, disparate products, most of which are based on differing underlying software code. Supporting multiple, disparate products places more onerous and costly demands on our competitors’ internal human and operational capital. We believe that Commvault software, because of its unique architecture, creates a compelling functional, integration, scalability and support advantage.
Some of our competitors have greater financial resources and may have the ability to offer their products at lower prices than ours. In addition, some of our competitors have greater name recognition than us, which could provide them a competitive advantage with some customers. Some of our competitors also have longer operating histories, have substantially greater technical, sales, marketing and other global resources than we do, as well as a larger installed customer base and broader product offerings, including hardware. As a result, these competitors can devote greater resources to the development, promotion, sale and support of their products than we can.
Technology, Intellectual Property and Proprietary Rights
We believe our solutions are a major differentiator versus our competitors’ portfolios. Our solutions’ unique indexing, cataloging, data movement, media management, AI/ML, and policy technologies are the source of the performance, scale, management, cost of ownership benefits and seamless interoperability inherent in all of our data protection solutions. Additional options enable content search, data encryption and auditing features to support data discovery and compliance. Our success and ability to compete depend on our continued development and protection of our proprietary software and other technologies.solutions. We rely primarily on a combination of trade secret, patent, copyright and trademark laws, as well as contractual provisions, to establish and protect our intellectual property rights.
We providepatent our softwaretechnical infrastructure and key usability and design concepts. Our software’s unique capabilities are covered by a robust portfolio of patents worldwide. Areas such as data protection, security, transformation, insights, and compliance and governance, including our Metallic SaaS and HyperScale X solutions, are core to customers pursuantour competitive advantage. More than 1,350 patents have been issued to license agreements that impose certain restrictions on use. These license agreements are primarily in the form of shrink-wrap or click-wrap licenses, which are not negotiated with or signed by our end-user customers. These measures may afford only limited protectionCommvault globally as a result of our strategic patenting. We also have established proprietary trademark rights in markets across the globe, and Commvault owns hundreds of worldwide trademark registrations and pending registration applications. Refer to our “Risk Factors” below.
Government Regulations
The global legal environment of technology businesses is evolving rapidly and is often unclear. These topics include data privacy and security, pricing, advertising, taxation, economic sanctions, content regulation and intellectual property ownership and proprietary rights associated with our software. infringement.
We also enter into confidentiality agreements with employeesare subject to several local, state, federal and consultants involved in product development. We routinely require our employees, customersforeign laws and potential business partners to enter into confidentiality agreements before we disclose any sensitive aspectsregulations regarding privacy and data protection. Regulators around the world have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of our software, technology or business plans.
As of March 31, 2020, we had 778 issued patents and 367 pending patent applications in the United States, as well as 115 issued patents in foreign countries and 22 pending foreign patent applications. No single patent, copyright, trademark, license,personal information, payment card information or other intellectual property right is solely responsible for protecting our productsconfidential information of individuals, and the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data. In the event of a security breach, these laws may subject us to incident response, notice and remediation costs. Failure to safeguard data adequately or services. Moreover, we may lack adequate patentto destroy data securely could subject us to regulatory investigations or other intellectual propertyenforcement actions under applicable data security, unfair practices or consumer protection for certain innovations that later turn out to be important to our business. Pending patent applications may receive unfavorable examinationlaws. The scope and are not guaranteed allowance as issued patents. We may elect to abandon or otherwise not pursue prosecution of certain pending patent applications due to patent examination results, economic considerations, strategic concerns or other factors. We will continue to assess appropriate occasions to seek patent and other intellectual property protection for innovative aspects of our technology that we believe provide us a significant competitive advantage.
Changes to patent laws or regulations in the U.S. and other foreign jurisdictions, or new interpretationsinterpretation of these laws could change and regulations,the associated burdens and our compliance costs could also diminish the value of our patents and patent applications or narrow the scope of our patent protection. For example, changes in patent laws and regulations in the U.S. and new patent laws in Europe may affect the ability of companies, including Commvault, to protect innovations, bring patent infringement claims, and defend against claims of patent infringement. The costs of compliance with these laws and regulations are high and are likely to increase in the future.
DespiteWe are also subject to global laws and regulations that govern or restrict our efforts to protect our trade secretsbusiness and proprietary rights through patentsactivities in certain countries and licensewith certain persons, including the U.S. Commerce Department’s Export Administration Regulations and confidentiality agreements, unauthorized parties may still attempt to copy or otherwise obtain and use our software and technology. In addition, we intend to expand our international operations but effective patent, copyright, trademarkeconomic and trade secret protection may not be available or may be limitedsanctions regulations maintained by OFAC, as well as anti-bribery and anti-corruption laws and regulations, including the FCPA and the U.K. Bribery Act.
People
Commvault aims to unlock potential in foreign countries. If we fail to protect our intellectual property and other proprietary rights, our business could be negatively impacted.
We currently resell certain software from Microsoft, including Microsoft SQL Server, used in conjunction with our software applications pursuant to an independent software vendor royalty license and distribution agreement that we have and plan to continue renewing annually. We have also entered into and may enter into agreements with additional third parties, including RedHat, to license their technology for use with our software applications.
Some of the products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software and we may incorporate open source software into other products in the future. The use of such open source software may ultimately subject some products to unintended conditions, such as royalty-free licensing of proprietary portions of our products, disclosing proprietary parts of our source code, or commencing costly product redesigns that could result in a loss of intellectual property rights, product performance degradation, or a delay in shipping products todata, customers and which may negatively affect our business, financial condition, operating results, cash flowemployees. To accomplish that, our employees are empowered to drive innovation and abilityhelp our customers—by inspiring one another and working to commercialize our productsmake what’s already great, even greater—whether that’s product, process or technologies.
From time to time, we are participants or members of various industry standard-setting organizations or other industry technical organizations. Our participation or membership in such organizations may, in some circumstances, require us to enter into royalty or licensing agreements with third parties regarding our intellectual property under terms established by those organizations, which we may find unfavorable.
In the United States, we own federal registrations for or have common law trademark rights in the following marks: Commvault, Commvault and logo, the "C hexagon” logo, Commvault Systems, Commvault HyperScale, ScaleProtect, Commvault OnePass, Unified Data Management, Quick Recovery, QR, CommNet, GridStor, Vault Tracker, InnerVault, Quick Snap, QSnap, IntelliSnap, Recovery Director, CommServe, CommCell, APSS, Commvault Edge, Commvault GO, Commvault Advantage, Commvault Complete, Commvault Activate, Commvault Orchestrate, Commvault Command Center, Hedvig, Universal Data Plane, the “Cube” logo, Metallic, the “M Wave” logo, Be Ready and CommValue are trademarks or registered trademarks of Commvault Systems, Inc.
Employees
team. As of March 31, 2020,2023, we had 2,5332,779 employees worldwide, of which approximately 44% were in the United States and 56% were located internationally.
We remain committed to providing employees with opportunities and resources that enable them to work successfully and creatively, while also investing in their professional and personal development. Throughout fiscal 2023, our employees participated in over 900 training programs, totaling more than 15,000 hours.
Diversity, Equity and Inclusion
At Commvault, we believe that diversity is a business imperative at the heart of our human capital management strategy. We not only drive the ability to be a best-in-class data protection organization but also uphold our value in the marketplace by leading as an employer of choice.
We continue to elevate our employee engagement and belonging efforts – which is the foundation of our approach. We have implemented an Employee Resource Group (“ERG”) operating model and have established five ERGs for cross-cultural learning, mentoring and relationship building across employees:
1.CV WIT (Women in Technology)
2.Multi-Culture
3.PRISM (LGBTQ+ & Allies)
4.VALOR (Veterans & Military)
5.CapAbilities (Disability inclusion & Allies)
This year, we expanded our culture of belonging through two additional Employee Affinity Groups ("EAG"), Family Support Network and VAST - Vaulters Advocating Sustainable Technology. Foundational to these engagement initiatives is our Courageous Conversations program designed to foster difficult conversations in an open, safe and respectful manner. This program has become the hub for all diversity, equity and inclusion ("DEI") related conversations, where employees and senior leaders share courageous life experiences related to bias and social injustice. Since its inception, we have hosted powerful sessions, each virtually, reaching our workforce around the globe.
We continue to be committed to securing the best talent with a concerted effort to expound on and build an inclusive and diverse pipeline of candidates. We are committed to providing a clear vision to career progression while investing in the development, creativity and aspirational needs of all employees.
Employee Health, Safety and Wellness
Commvault values its people. A critical part of our corporate culture is the health, safety and wellness of our employees. We take a holistic approach to health and wellness to support the dynamic aspects of our employees’ lives, including 653their physical, social, mental, emotional, and financial well-being. We operate in salesaccordance with applicable safety laws and marketing, 615 in research and development, 912 in customer services and support and 353 in general and administration.procedures to ensure we provide a safe work environment for all.
Information about our Executive Officers
The following table presents information with respect to our executive officers as of May 14, 2020:3, 2023:
|
| | | | | | | | | | | | | |
Name | | Age | | Position |
Sanjay Mirchandani | | 5558 | | President and Chief Executive Officer |
Brian CarolanGary Merrill | | 48 | | Vice President, Chief Financial Officer |
Riccardo Di Blasio | | 4851 | | Vice President, Chief Revenue Officer |
Sanjay Mirchandani, has served as our President and Chief Executive Officer since February 2019. Prior to joining Commvault, Mr. Mirchandani served from September 2016 to January 2019 as the Chief Executive Officer of Puppet, Inc. (“Puppet”), an Oregon-based IT automation company. Mr. Mirchandani joined Puppet in May 2016 as President and Chief Operating Officer. Mr. Mirchandani brings a wealth of international business experience through his diverse well-rounded career in technology. Before joining Puppet, from October 2013 to April 2016, Mr. Mirchandani served as Corporate Senior Vice President and General Manager of Asia Pacific and Japan at VMware, Inc. and, from June 2006 to October 2013, Mr. Mirchandani held various senior leadership positions at EMC Corporation, including Chief Information Officer and leader of the Global Centers of Excellence. Prior to that, Mr. Mirchandani held various positions at Microsoft Corporation and Arthur Andersen LLP. Mr. Mirchandani has a Master of Business Administration degree from the University of Pittsburgh and a bachelor’s degree in mathematics from Drew University.
Brian CarolanGary Merrill has served as our Vice President, Finance and Chief Financial Officer since October 2012.July 2022. Prior to his current role, Mr. CarolanMerrill served as our Vice President, Finance and Chief Accounting Officerof Business Operations from July 2006April 2021 until September 2012.June 2022. He also held the position of ControllerVice President of Operations from February 2001 until June 2006.April 2019 through March 2021 and from December 2012 to March 2019, served as Chief Accounting Officer. Prior to joining Commvault, Mr. Carolan wasMerrill held accounting management positions with Ernst & Youngseveral
publicly traded companies. Mr. Merrill began his career with Arthur Anderson LLP in its Technology, Communications and Entertainment audit practice from 1993 until January 2001.practice. Mr. CarolanMerrill obtained his bachelor’s degree in accounting from Villanova University, his master’s degree in business administration from New York University and is a certified public accountant in the State of New Jersey.Elizabethtown College.
Riccardo Di Blasio has served as our Vice President, Chief Revenue Officer since May 2019. Prior to joining Commvault, Mr. Di Blasio led DXC Technology as Global Head of Sales for VMware Cloud Platform Services. Prior to that role, he was Chief Executive Officer at Globetouch, Inc., leading the company growth in the IoT and connected cars industry from January 2017 until April 2018. He also served as Chief Operating Officer at Cohesity from October 2015 until November 2016, where he significantly grew the sales and support organizations while expanding global operations and achieving double digit growth in sales. Previous to those positions, he served in various leadership roles for more than a decade across US and EMEA,Europe, as Senior Vice President of Sales and Marketing at VMware and EMC Corporation.
Available Information
Our website is located at: www.commvault.com. On the Investor Relations section of the website, we post filings as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission ("SEC"), including: our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statements related to our annual stockholders’ meetings and any amendment to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings are available on the Investor Relations portion of our website free of charge. The contents of our website are not incorporated by reference into this Form 10-K or in any other report, statement or document we file with the SEC.
You should consider each of the following factors as well as the other information in this Annual Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case, the trading price of our common stock could decline. You should also refer to the other information set forth in this Annual Report, including our financial statements and the related notes.
Risks Related to Our Business
The novel coronavirus (COVID-19) pandemic could adversely affect our business in a material way.
As a global company, with customers located around the world in a variety of industries, our performance may be impacted by global economic and other conditions, including the COVID-19 pandemic which has caused global economic uncertainty. Efforts to combat this pandemic to date include a range of travel restrictions, shelter in place orders, and mandatory business and other closure, each of which may cause significant disruption to our customers and cause them to curtail or limit spending. As a software company, our ability to support our customers has not been significantly impacted by work-from-home orders or travel restrictions. However, these measures have caused disruptions to our sales efforts and decreased customer spending, which may negatively impact our performance. The extent to which COVID-19 will impact our business is difficult to predict as it depends on factors outside of our control, including the duration of the pandemic and the impact on our customers’ businesses. We have taken precautionary measures to protect the health and safety of our employees and to preserve our cash position and we continue to monitor events.
Our business could be materially and adversely affected as a result of natural disasters, terrorism or other catastrophic events.
Any economic failure or other material disruption caused by natural disasters, including fires, floods, hurricanes, earthquakes, and tornadoes; power loss or shortages; environmental disasters; telecommunications or business information systems failures or break-ins and similar events could also adversely affect our ability to conduct business. If such disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending on IT, or impair our ability to meet our customer demands, our operating results and financial condition could be materially adversely affected.
In addition, our business has been and will likely be adversely affected by the impact of a widespread outbreak of contagious diseases, including the recent outbreak of COVID-19. This, or any other outbreak of contagious diseases, and other adverse public health developments, may cause us or our customers to temporarily suspend operations. Further, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products, our ability to collect against existing trade receivables and our operating results.
We have engaged, and may continue to engage, in strategic acquisitions or transactions, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
On October 1, 2019, Commvault completed the acquisition of Hedvig, Inc., a California-based developer of software-defined storage ("SDS").
Acquisitions involve a number of risks, including diversion of management’s attention, ability to finance the acquisition on attractive terms, failure to retain key personnel or valuable customers, legal liabilities and the need to amortize acquired intangible assets, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any additional future acquisitions may also result in the incurrence of indebtedness or the issuance of additional equity securities.
The intellectual property of an acquired business may be an important component of the value that we agree to pay for such a business. Although we conduct due diligence in connection with each of our acquisitions, such acquisitions are subject to the risks that the acquired business may not own the intellectual property that we
believe we are acquiring, that the intellectual property is dependent upon licenses from third parties, that the acquired business infringes upon the intellectual property rights of others or that the technology does not have the acceptance in the marketplace that we anticipated.
We could also experience financial or other setbacks if transactions encounter unanticipated problems, including problems related to execution, integration or underperformance relative to prior expectations. Our management may not be able to successfully integrate any acquired business into our operations or maintain our standards, controls and policies, which could have a material adverse effect on our business, results of operations and financial condition. Consequently, any acquisition we complete may not result in long-term benefits to us or we may not be able to further develop the acquired business in the manner we anticipated.
Following the completion of acquisitions, we may have to rely on the seller to provide administrative and other support, including financial reporting and internal controls, and other transition services to the acquired business for a period of time. There can be no assurance that the seller will do so in a manner that is acceptable to us.
Certain provisions of our certificate of formation and our amended and restated bylaws, Delaware law, and our short-term shareholder rights plan could prevent or delay a potential acquisition of control of our Company, which could decrease the trading price of our common stock.
Our certificate of formation, amended and restated bylaws and the laws in the State of Delaware contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the prospective acquirer and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover. Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. On April 3, 2020, the Board of Directors adopted a 364-day duration shareholder rights plan, which may cause substantial dilution to a person or group that attempts to acquire control of the Company on terms not approved by our Board of Directors.
We believe that these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by effectively requiring those who seek to obtain control of the Company to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition of control. However, these provisions could apply even if an acquisition of control of the Company may be considered beneficial by some shareholders and could delay or prevent an acquisition of control that our Board of Directors determines is not in the best interests of our Company and our shareholders.
Our industry is intensely competitive, and many of our competitors have greater financial, technical and sales and marketing resources and larger installed customer bases, than we do, which could enable them to compete more effectively than we do.
The data protection and information management softwarereplication market is intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards, changing customer requirements and frequent new product introductions. Competitors vary in size and in the scope and breadth of the products and services offered. Our primary competitors include Dell-EMC, IBM, Veritas, Veeam, Rubrik and Cohesity.
The principal competitive factors in our industry include product functionality productand integration, platform coverage, ability to scale, price, worldwide sales infrastructure, global technical support, namebrand recognition and reputation. The ability of major system vendors to bundle hardware and software solutions is also a significant competitive factor in our industry. If we are unable to address these factors, our competitive position could weaken and we could experience a decline in revenues that could adversely affect our business.
Many of our current and potential competitors have longer operating histories and have substantially greater financial, technical, sales, marketing and other resources than we do, as well as larger installed customer bases, greater name recognition and broader product offerings, including hardware. Some of these competitors can devote greater resources to the development, promotion, sale and support of their products than we can and have the ability to bundle their hardware and software products in a combined offering. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements.
It is also costly and time-consuming to change data and information management systems. Most of our new customers have installed data and information management software,systems, which gives an incumbent competitor an
advantage in retaining a customer because itthe incumbent already understands the network infrastructure, user demands and information technology needs of the customer, and also because some customers are reluctant to invest the time and money necessary to change vendors.
Our current and potential competitors may establish cooperative relationships among themselves or with third parties. If so, new competitors or alliances that include our competitors may emerge that could acquire significant market share. In addition, large operating system and application vendors, as well as some hardware manufacturers, have introduced products or functionality that includes some of the same functions offered by our software applications. In the future, further development by these vendors could cause our software applications and services to become redundant, which could seriously harm our sales, results of operations and financial condition.
New competitors entering our markets can have a negative impact on our competitive positioning. In addition, we expect to encounter new competitors as we enter new markets. Furthermore, many of our existing competitors are broadening their operating systems platform coverage. We also expect increased competition from OEMs, including those we partner with, and from systems and network management companies, especially those that have historically focused on the mainframe computer market and have been making acquisitions and broadening their efforts to include data and information management and storageprotection products. We expect that competition will increase as a result of future software industry consolidation. Increased competition could harm our business by causing, among other things, price reductions of our products, reduced profitability and loss of market share.
We rely on indirect sales channels, such as value-added resellers, systems integrators, corporate resellers, distributors, and OEMs, for the distribution of our software applications,solutions, and the failure of these channels to effectively sell our software applicationssolutions could have a material adverse effect on our revenues and results of operations.
We rely significantly on our value-added resellers, systems integrators and corporate resellers, which we collectively refer to as resellers, for the marketing and distribution of our software applications and services. Resellers are our most significant distribution channel. However, our agreements with resellers are generally not exclusive, are generally renewable annually, typically do not contain minimum sales requirements and in many cases may be terminated by either party without cause. Many of our resellers carry software applicationsdata protection solutions that compete with ours. These resellers may give a higher priority to other software applications, including those of our competitors, or may not continue to carry our software applications at all.data protection solutions. If a number of resellers were to discontinue or reduce the sales of our products, or were to promote our competitors’ products in lieu of our own, it could have a material adverse effect on our future revenues. Events or occurrences of this nature could seriously harm our sales and results of operations. If we fail to manage our resellers successfully, there may be conflicts between resellers or they could fail to perform as we anticipate, including required compliance with the terms and obligations of our reseller agreement, either of which could reduce our sales or impact our reputation in the market. In addition, we expect that a portion of our sales growth will depend upon our ability to identify and attract new reseller partners.resellers. Our competitors also use reseller arrangements and may be more successful in attracting reseller partners and could enter into exclusive relationships with resellers that make it difficult to expand our reseller network. Any failure on our part to maintain and/or expand our network of resellers could impair our ability to grow revenues in the future.
Some of our resellers possess significant resources and advanced technical abilities. These resellers, particularly our corporate resellers may, either independently or jointly with our competitors, develop and market products and related servicessolutions that compete with our offerings. If this were to occur, these resellers might discontinue marketing and distributing our software applications and services.solutions. In addition, these resellers would have an advantage over us when marketing their competing products and related services because of their existing customer relationships. The occurrence of any of these events could have a material adverse effect on our revenues and results of operations.
In addition, we have a non-exclusive distribution agreement covering our North American commercial markets and our U.S. Federal Government market with Arrow. PursuantArrow pursuant to this distribution agreement,which Arrow’s primary role is to enable a more efficient and effective distribution channel for our products and services by managing our reseller partnersresellers and leveraging their own industry experience. Many of our North American resellers buy from Arrow. Sales through our distribution agreement with Arrow accounted for approximately 37% of our total revenues for both fiscal 20202023 and 38%fiscal 2022 and 36% of our total revenues forin fiscal 2019.2021. If Arrow waswere to discontinue or reduce the sales of our productssolutions or if our agreement with Arrow was terminated, and if we were unable to take back the management of our reseller
channel or find another North American distributor to replace Arrow, then itthere could havebe a material adverse effect on our future revenues.business.
Our OEMs sell and integrate our software applications and in some cases incorporate our data and information management software into systems that they sell. Asolutions which represents a material portion of our revenues is generated through these arrangements. However, werevenues. We have no control over the shipping dates or volumes of systems these OEMs shipsell and they have no obligation to shipsell systems incorporating our software applications.solutions. They also have no obligation to recommend or offer our software applicationssolutions exclusively or at all, and theyall. They have no minimum sales requirements and can terminate our relationship at any time. These OEMs also could choose to develop their own data and information management software internally and incorporate those products into their systems instead of our software applications. The OEMs that we do business with alsoprotection solutions. Our OEM partners compete with one another. If one of our OEM partners views our arrangement with another OEM as competing, with its products, it may decide to stop doing business with us. Any material decrease in the volume of sales generated by OEMs we do business with, as a result of these factors or otherwise, could have a material adverse effect on our revenues and results of operations in future periods. Sales through our OEM agreements accounted for approximately 10% of our total revenues for fiscal 2020 and 11% of our total revenues for fiscal 2019.
We may not be able to respond to rapid technological changes with new software applications and services offerings, which could have a material adverse effect on our sales and profitability.
The markets for our software applications are characterized by rapid technological changes, changing customer needs, frequent new product introductions and evolving industry standards. The introduction of software applications embodying new technologies and the emergence of new industry standards could make our existing and future software applications obsolete and unmarketable. As a result, we may not be able to accurately predict the lifecycle of our software applications, and they may become obsolete before we receive the amount of revenues that we anticipate from them. If any of the foregoing events were to occur, our ability to retain or increase market share in the data and information management software market could be materially adversely affected.
We devote significant resources to the development of new products and the enhancement of existing products. To be successful, we need to anticipate, develop and introduce new software applications and services on a timely and cost-effective basis that keep pace with technological developments and emerging industry standards and that address the increasingly sophisticated needs of our customers. We may fail to develop and market software applications and services that respond to technological changes or evolving industry standards, experience difficulties that could delay or prevent the successful development, introduction and marketing of these applications and services or fail to develop applications and services that adequately meet the requirements of the marketplace or achieve market acceptance. Our failure to develop and market such applications and services on a timely basis, or at all, could have a material adverse effect on our sales and profitability.
If the cost for annual maintenance and support agreements, or our term-based subscription licenses, with our customers is not competitive in the market or if our customers do not renew their agreements either at all, or on terms that are less favorable to us, our business and financial performance might be adversely impacted.
Most of our support and maintenance agreements are for a one-year term. As the end of the annual period approaches,term and thereafter, we pursue the renewal of the agreement with the customer.thereof. Historically, maintenancesuch renewals have represented a significant portion of our total revenue. Because of this characteristic of our business, ifIf our customers do not renew their annual maintenance and support agreements either at all, or on terms that are less favorable to us, our business and financial performance might be adversely impacted.
Additionally, beginning in fiscal 2018 we began to increase a significant amount of our sales torevenues are from term-based, or subscription license arrangements. The arrangements are typically one to three years in duration. If at the end of the initial term, customers elect to not renew, their licenses, or they renew them on terms that are less favorable to us, our business and financial performance might be adversely impacted.
In periods of volatile economic conditions, our exposure to credit risk and payment delinquencies on our accounts receivable significantly increases.
Our outstanding accounts receivables are generally not secured. Our standard terms and conditions permit payment within a specified number of days following the receipt of our solution. Volatile economic conditions, including those related to the COVID-19 pandemic and its variants, the war in Ukraine and the global response, or the financial instability of banking institutions could result in our customers and resellers facing liquidity concerns leading to them not being able to satisfy their payment obligations to us, which would have a material adverse effect on our financial condition, operating results and cash flows.
In addition, we have transitioned a more significant percentage of our revenue to subscription, or term based, arrangements. In these arrangements, our customers may pay for solutions over a period of several years. Due to the potential for extended period of collection, we may be exposed to more significant credit risk.
We develop solutions that interoperate with certain products, operating systems and hardware developed by others, and if the developers of those operating systems and hardware do not cooperate with us or we are unable to devote the necessary resources so that our solutions interoperate with those systems, our development efforts may be delayed or foreclosed and our business and results of operations may be adversely affected.
Our solutions operate primarily on the Windows, UNIX, Linux and Novell Netware operating systems; used in conjunction with Microsoft SQL; and on hardware devices of numerous manufacturers. When new or updated versions of these operating systems, solution applications, and hardware devices are introduced, it is often necessary for us to develop updated versions of our solution applications so that they interoperate properly with these systems and devices. We may not accomplish these development efforts quickly or cost-effectively, and it is not clear what the relative growth rates of these operating systems and hardware will be.
We encounter long sales and implementation cycles, particularly for our larger customers, which could have an adverse effect on the size, timing and predictability of our revenues.
Potential or existing customers, particularly larger enterprise customers, generally commit significant resources to an evaluation of available solutions and require us to expend substantial time, effort and money educating them as to the value of our solutions. Sales often require an extensive education and marketing effort.
We could expend significant funds and resources during a sales cycle and ultimately fail to win the customer. Our sales cycle for all of our products and services is subject to significant risks and delays over which we have little or no control, including:
•our customers’ budgetary constraints;
•the timing of our customers’ budget cycles and approval processes;
•our customers’ willingness to replace their current solutions;
•our need to educate potential customers about the uses and benefits of our solutions; and
•the timing of the expiration of our customers’ current agreements for similar solutions.
If our sales cycles lengthen unexpectedly, they could adversely affect the timing of our revenues or increase costs, which may cause fluctuations in our quarterly revenues and results of operations. Finally, if we are unsuccessful in closing sales of our solutions after spending significant funds and management resources, our operating margins and results of operations could be adversely impacted, and the price of our common stock could decline.
We depend on growth in the data protection solutions market, and lack of growth or contraction in this market could have a material adverse effect on our sales and financial condition.
Demand for data protection solutions is linked to growth in the amount of data generated and stored, demand for data retention and management (whether as a result of regulatory requirements or otherwise) and demand for and adoption of new backup devices and networking technologies. Because our solutions are concentrated within the data protection market, if the demand for backup and data protection solutions devices declines, our sales, profitability and financial condition would be materially adversely affected.
Furthermore, the data protection solutions market is dynamic and evolving. Our future financial performance will depend in large part on continued growth in the number of organizations adopting data protection solutions for their environments. The market for data protection solutions may not continue to grow at historic rates, or at all. If this market fails to grow or grows more slowly than we currently anticipate, our sales and profitability could be adversely affected.
Our as-a-service offerings require costly and continual infrastructure investments and if these investments do not yield the expected return, our business and financial performance might be adversely impacted.
In order to deliver our as-a-service offerings via a cloud-based deployment, we have made and will continue to make capital investments and incur substantial costs to implement and maintain this alternative business model. In addition, as we look to deliver new or different cloud-based services, we are making significant technology investments to deliver new capabilities and advance our software to deliver cloud-native customer experiences. We expect that over time the percentage of our revenue attributable to our as-a-service offerings will continue to
increase. If these offerings do not garner widespread market adoption, or there is a reduction in demand for these services caused by a lack of customer acceptance, technological challenges, weakening economic or political conditions, security or privacy concerns, inability to properly manage such services, competing technologies and products, decreases in corporate spending or otherwise, our financial results and competitive position could suffer. If these investments do not yield the expected return, or we are unable to decrease the cost of delivering our cloud services, our gross margins, overall financial results, business model and competitive position could suffer.
We rely on third-party hosting providers to deliver our as-a-service offerings. Therefore, any disruption or interference with our use of these services could adversely affect our business.
Our use of third-party hosting facilities requires us to rely on the functionality and availability of the third parties’ services, as well as their data security, which despite our due diligence, may be or become inadequate. Our continued growth depends in part on the ability of our existing and potential customers to use and access our cloud services or our website to download our software within an acceptable amount of time. Third-party service providers operate platforms that we access, and we are vulnerable to their service interruptions. We may experience interruptions, delays, and outages in service and availability due to problems with our third-party service providers’ infrastructure. This infrastructure’s lack of availability could be due to many potential causes, including technical failures, power shortages, natural disasters, fraud, terrorism, or security attacks that we cannot predict or prevent. Such outages could trigger our service level agreements and the issuance of credits to our customers, which may impact our business and consolidated financial statements.
If we are unable to renew our agreements with our cloud service providers on commercially reasonable terms, an agreement is prematurely terminated, or we need to add new cloud services providers to increase capacity and uptime, we could experience interruptions, downtime, delays, and additional expenses related to transferring to and providing support for these new platforms. Any of the above circumstances or events may harm our reputation and brand, reduce our platforms’ availability or usage, and impair our ability to attract new users, any of which could adversely affect our business, financial condition, and results of operations.
We sell a backup appliance which integrates our solution with hardware. If we fail to accurately predict manufacturing requirements and manage our supply chain we could incur additional costs or experience manufacturing delays that could harm our business.
We generally provide forecasts of our requirements to our supply chain partners on a rolling basis. If our forecast exceeds our actual requirements, a supply chain partner may assess additional charges or we may incur costs for excess inventory they hold, each of which could negatively affect our gross margins. If our forecast is less than our actual requirements, the applicable supply chain partner may have insufficient time or components to produce or fulfill our solutions' requirements, which could delay or interrupt manufacturing of our products or fulfillment of orders for our solutions, and result in delays in shipments, customer dissatisfaction, and deferral or loss of revenue. If we fail to accurately predict our requirements, we may be unable to fulfill those orders or we may be required to record charges for excess inventory. Any of the foregoing could adversely affect our business, financial condition or results of operations.
Our complex solutions may contain undetected errors, which could adversely affect not only their performance but also our reputation and the acceptance of our solutions in the market.
Our complex solutions may contain undetected errors or failures, especially when they are made generally available or new versions are released. Despite extensive testing by us and customers, we have discovered errors in our solutions in the past and will do so in the future. As a result of past discovered errors, we experienced delays and lost revenues while we corrected those solutions. In addition, customers in the past have brought to our attention “bugs” in our software created by the customers’ unique operating environments, which are often characterized by a wide variety of both standard and non-standard configurations that make pre-release testing very difficult and time consuming. Although we have been able to fix these bugs in the past, we may not always be able to do so. Our solutions may also be subject to intentional attacks by viruses that seek to take advantage of these bugs, errors or other weaknesses. Any of these events may result in the loss of, or delay in, market acceptance of our solutions or damage to our reputation, which would seriously harm our sales, results of operations and financial condition.
We may not receive significant revenues from our current research and development efforts for several years, if at all.
Developing software is expensive, and the investment in product development may involve a long payback cycle. Our research and development expenses were $141.8 million, or 18% of our total revenues in fiscal 2023, $153.6 million, or 20% of our total revenues in fiscal 2022 and $133.4 million, or 18% of our total revenues in fiscal 2021. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not recognize significant revenues from these investments for several years, if at all.
Our ability to sell our solutions is highly dependent on the quality of our customer support and professional services, and failure to offer high quality customer support and professional services would have a material adverse effect on our sales and results of operations.
Our services include the assessment and design of solutions to meet our customers’ storage management requirements and the efficient installation and deployment of our software applications based on specified business objectives. Further, once our software applications are deployed, our customers depend on us to resolve issues relating to our software applications. A high level of service is critical for the successful marketing and sale of our software. If we or our partners do not effectively install or deploy our applications, or succeed in helping our customers quickly resolve post-deployment issues, it would adversely affect our ability to sell software products to existing customers and could harm our reputation with prospective customers. As a result, our failure to maintain high quality support and professional services would have a material adverse effect on our sales of software applications and results of operations.
We implemented a restructuring program in fiscal 2022, which we cannot guarantee will achieve its intended result.
In fiscal 2022, we initiated a restructuring plan to increase efficiency in our sales, marketing and distribution functions while reducing costs across all functional areas. We cannot guarantee the restructuring program will achieve its intended result. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets due to the loss of key employees, any of which may impair our ability to achieve anticipated results of operations or otherwise harm our business.
We have engaged, and may continue to engage, in strategic acquisitions or transactions, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Acquisitions involve a number of risks, including diversion of management’s attention, ability to finance the acquisition on attractive terms, failure to retain key personnel or valuable customers, legal liabilities, the need to amortize acquired intangible assets, and intellectual property ownership and infringement risks, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any additional future acquisitions may also result in the incurrence of indebtedness or the issuance of additional equity securities.
We could also experience financial or other setbacks if transactions encounter unanticipated problems, including problems related to governmental approval, execution, integration or underperformance relative to prior expectations. Acquisitions may not result in long-term benefits to us or we may not be able to further develop the acquired business in the manner we anticipated.
Following the completion of acquisitions, we may have to rely on the seller to provide administrative and other support, including financial reporting and internal controls, and other transition services to the acquired business for a period of time. There can be no assurance that the seller will do so in a manner that is acceptable to us.
Actual or threatened public health crises could adversely affect our business in a material way.
As a global company, with employees and customers located around the world in a variety of industries, our performance may be impacted by public health crises, including the COVID-19 pandemic, which has caused global economic uncertainty. The emergence of a public health threat could pose the risk that our employees, partners, and customers may be prevented from conducting business activities at full capacity for an indefinite period, due to
the spread of the disease or suggested or mandated by governmental authorities. Moreover, these conditions can affect the rate of information technology spending and may adversely affect our customers’ willingness to purchase our solutions, delay prospective customers’ purchasing decisions, reduce the value or duration of their contracts, cause our customers to request concessions including extended payment terms or better pricing, or affect attrition rates, all of which could adversely affect our future sales and operating results. The global spread of COVID-19 has created significant uncertainty, and economic disruption. We have undertaken measures to protect our employees, partners, and customers, including allowing our employees to work remotely; however, there can be no assurance that these measures will be sufficient or that we can implement them without adversely affecting our business operations.
A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.
Sales to global federal, state, and local governmental agencies account for a portion of our revenue, and we may in the future increase sales to government entities. This customer base experiences budgetary constraints or shifts in spending priorities regularly which may adversely affect sales of our solutions to government entities.
Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully sell our solutions. Government entities may require contract terms that differ from our standard terms and conditions including termination rights favorable for the customer, audit rights, and maintenance of certain security clearances for facilities and employees which can entail administrative time and effort resulting in costs and delays. Government demand for our solutions may be more volatile as they are affected by stringent regulations, public sector budgetary cycles, funding authorizations, and the potential for funding reductions or delays, making the time to close such transactions more difficult to predict.
We are subject to several local, state, federal and foreign laws and regulations regarding privacy and data protection, and any actual or perceived failure by us to comply with such laws and regulations could adversely affect our business.
We are currently subject, and may become further subject, to federal, state and foreign laws and regulations regarding the privacy and protection of personal data or other potentially sensitive information. In the United States, federal, state, and local governments have enacted numerous data privacy security laws, including data breach notification laws, data privacy laws, consumer protection laws, and other similar laws. For example, the California Consumer Privacy Act of 2018, as amended by the California Privacy Rights Act of 2020 (collectively, the "CCPA"), imposes obligations on certain businesses to provide specific disclosures in privacy notices and grant California residents certain rights related to their personal data. The CCPA imposes statutory fines for noncompliance (up to $7,500 per violation). Other states have enacted or proposed similar laws. These developments may increase legal risk and compliance costs for us and our customers.
Outside the United States, an increasing number of laws, regulations, and industry standards govern data privacy and security. For example, the European Union’s ("E.U.") General Data Protection Regulation ("E.U. GDPR"), and the United Kingdom’s ("U.K.") GDPR ("U.K. GDPR"), impose strict requirements for processing the personal data of individuals. Violations of these obligations carry significant potential consequences. For example, under the E.U. GDPR, government regulators may impose temporary or definitive bans on processing, as well as fines of up to €20 million or 4% of the annual global revenue, whichever is greater. Additionally, new and emerging data privacy regimes may be applicable in Asia, including China's Personal Information Protection Law, Japan's Act on the Protection of Personal Information, and Singapore's Personal Data Protection Act.
In addition, as a technology provider, our customers expect us to demonstrate compliance with current data privacy laws and further make contractual commitments and implement processes to enable the customer to comply with their own obligations under data privacy laws, and our actual or perceived inability to do so may adversely impact sales of our products and services, particularly to customers in highly regulated industries.
Our actual or perceived failure to comply with laws, regulations, contractual commitments, or other actual or asserted obligations, including certain industry standards, regarding personal information, or other confidential information of individuals could lead to costly legal action, brand and reputational damage, significant liability, inability to process data, and decreased demand for our services, which could adversely affect our business. In addition, any security breach that results in the release of, or unauthorized access to, personal information, or other confidential information of individuals could subject us to incident response, notice and remediation costs. Failure to
safeguard data adequately or to destroy data securely could subject us to regulatory investigations or enforcement actions under applicable data security, unfair practices or consumer protection laws which could have an adverse effect on our business, financial condition or operating results. The scope and interpretation of these laws could change and the associated burdens and our compliance costs could increase in the future.
Changes in senior management or key personnel could cause disruption in the Company and have a material effect on our business.
We have had, and could have, changes in senior management which could be disruptive to management and operations of the Company and could have a material effect on our business, operating results and financial conditions. Turnover at the senior management level may create instability within the Company, which could impede the Company’s day-to-day operations. Such instability could impede our ability to fully implement our business plan and growth strategy, which would harm our business and prospects.
We rely on our key personnel to execute our existing business operations and identify and pursue new growth opportunities. The loss of key employees could result in significant disruptions to our business, and the integration and training of replacement personnel could be costly, time consuming, cause additional disruptions to our business and be unsuccessful.
Borrowing against our revolving credit facility could adversely affect our operations and financial results.
We have a $100 million revolving credit facility. As of March 31, 2023, there were no borrowings under the credit facility. If we were to borrow substantially against this facility the indebtedness could have adverse consequences, including:
•requiring us to devote a portion of our cash flow from operations to payments of indebtedness, which would reduce the availability of cash flow to fund working capital requirements, capital expenditures and other general purposes;
•limiting our flexibility in planning for, or reacting to, general adverse economic conditions or changes in our business and the industry in which we operate in;
•placing us at a competitive disadvantage compared to our competitors that have less debt; and
•limiting our ability to fund potential acquisitions.
The credit facility also contains financial maintenance covenants, including a leverage ratio and interest coverage ratio, and customary events of defaults. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations. For further discussion on our revolving credit facility, see Note 17 of the notes to the consolidated financial statements.
Risks Related to our International Operations
If we are unable to effectively manage certain risks and challenges related to our India operations, our business could be harmed.
Our India operations are a key factor to our success. We believe that our significant presence in India provides certain important advantages for our business, such as direct access to a large pool of skilled professionals and assistance in growing our business internationally. However, it also creates certain risks that we must effectively manage. As of March 31, 2023, we had approximately 850 employees located in India. Wage costs differentiate depending on regions throughout the world. Wages in India are increasing at a faster rate than in the many other countries, including the United States. These increases could result in us incurring increased costs for technical professionals and reduced margins. There is intense competition in India for skilled technical professionals, and we expect such competition to increase. As a result, we may be unable to cost-effectively retain our current employee base in India or hire additional new talent. In addition, India has experienced significant inflation, low growth in gross domestic product and shortages of foreign exchange. India also has experienced civil unrest and has been involved in conflicts with neighboring countries. The occurrence of any of these circumstances could result in disruptions to our India operations, which, if continued for an extended period of time, could have a material adverse effect on our business. In recent years, India’s government has adopted policies that are designed to promote foreign investment, including significant tax incentives, relaxation of regulatory restrictions, liberalized import and export duties and preferential rules on foreign investment and repatriations. These policies may not
continue. If we are unable to effectively manage any of the foregoing risks related to our India operations, our development efforts could be impaired, our growth could be slowed and our results of operations could be negatively impacted.
Volatility in the global economy could adversely impact our continued growth, results of operations and our ability to forecast future business.
As our business has expanded globally,a global company, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. Uncertainty in the macroeconomic environment and associated global economic conditions have resulted in volatility in credit, equity, debt and foreign currency markets as well as government budgets worldwide.
markets.
These global economic conditions can result in slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, inflation, adverse business conditions and liquidity concerns. There has also been increased volatility in foreign exchange markets. These factors make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities. In addition, theseThese factors could cause customers to slow or defer spending on our software products and services,solutions, which would delay and lengthen sales cycles and negatively affect our results of operations. If such conditions deteriorate or if the pace of economic recovery is slower or more uneven, our results of operations could be adversely affected, we may not be able to sustain the growth rates we have experienced recently, and we could fail to meet the expectations of stock analysts and investors, which could cause the price of our common stock to decline.
We continue to invest in our business in the Asia-Pacific and Europe, Middle East, and Africa regions. There areinternationally where there may be significant risks with overseas investments and growth prospects in these regions.prospects. Increased volatility or declines in the credit, equity, debt and foreign currency markets in these regions could cause delays in or cancellations of orders. Deterioration of economic conditions in the countries in which we do business could also cause slower or impaired collections on accounts receivable. In addition, we could experience delays in the payment obligations of our worldwide resellers if they experience weakness in the end-user market, which would increase our credit risk exposure and harm our financial condition.
In periods of volatile economic conditions, our exposure to credit risk and payment delinquencies on our accounts receivable significantly increases.
Our outstanding accounts receivables are generally not secured. Our standard terms and conditions permit payment within a specified number of days following the receipt of our product. Volatile economic conditions, including those related to the recent COVID-19 pandemic, could result in our customers and resellers facing liquidity concerns leading to them not being able to satisfy their payment obligations to us, which would have a material adverse effect on our financial condition, operating results and cash flows.
In addition, in the future we may transition a more significant percentage of our revenue to subscription, or term based, arrangements. In these arrangements, our customers may pay for software and related services over a period of several years. Due to the potential for extended period of collection, we may be exposed to more significant credit risk.
We develop software applications that interoperate with certain software, operating systems and hardware developed by others, and if the developers of those operating systems and hardware do not cooperate with us or we are unable to devote the necessary resources so that our applications interoperate with those systems, our software development efforts may be delayed or foreclosed and our business and results of operations may be adversely affected.
Our software applications operate primarily on the Windows, UNIX, Linux and Novell Netware operating systems; used in conjunction with Microsoft SQL; and on hardware devices of numerous manufacturers. When new or updated versions of these operating systems, software applications, and hardware devices are introduced, it is often necessary for us to develop updated versions of our software applications so that they interoperate properly with these systems and devices. We may not accomplish these development efforts quickly or cost-effectively, and it is not clear what the relative growth rates of these operating systems and hardware will be. These development efforts require the cooperation of the developers of the operating systems, software applications, and hardware, substantial capital investment and the devotion of substantial employee or financial resources. For some operating systems, we must obtain some proprietary application program interfaces from the owner in order to develop software applications that interoperate with the operating system. Operating system and software owners have no obligation to assist in these development efforts. If they do not provide us with assistance, the contractual right, or the necessary proprietary application program interfaces on a timely basis, we may experience delays or be unable to expand our software applications into other areas.
We have started selling a backup appliance which integrates our software with hardware. If we fail to accurately predict our manufacturing requirements and manage our supply chain we could incur additional costs or experience manufacturing delays that could harm our business.
We generally provide forecasts of our requirements to our supply chain partners on a rolling basis. If our forecast exceeds our actual requirements, a supply chain partner may assess additional charges or we may incur costs for excess inventory, each of which could negatively affect our gross margins. If our forecast is less than our actual requirements, the applicable supply chain partner may have insufficient time or components to produce or fulfill our product requirements, which could delay or interrupt manufacturing of our products or fulfillment of orders for our products, and result in delays in shipments, customer dissatisfaction, and deferral or loss of revenue. Further, we may be required to purchase sufficient inventory to satisfy our future needs in situations where a component or product is being discontinued. If we fail to accurately predict our requirements, we may be unable to fulfill those orders or we may be required to record charges for excess inventory. Any of the foregoing could adversely affect our business, financial condition or results of operations.
We are, and may in the future become, involved in litigation that may have a material adverse effect on our business.
From time to time, we may become involved in various other legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because litigation is inherently uncertain, there can be no assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition.
We may experience a decline in revenues or volatility in our quarterly operating results, which may adversely affect the market price of our common stock.
We cannot predict our future quarterly revenues or operating results with certainty because of many factors outside of our control. A significant revenue or profit decline, lowered forecasts or volatility in our operating results could cause the market price of our common stock to decline substantially. Factors that could affect our revenues and operating results include the following:
the unpredictability of the timing and magnitude of orders for our software applications, particularly software transactions greater than $100,000 — in recent fiscal years, a majority of our quarterly revenues were earned and recorded near the end of each quarter;
the possibility that our customers may cancel, defer or limit purchases as a result of reduced information technology budgets;
the possibility that our customers may defer purchases of our software applications in anticipation of new software applications or updates from us or our competitors;
the ability of our OEMs and resellers to meet their sales objectives;
market acceptance of our new applications and enhancements;
our ability to control expenses;
changes in our pricing, packaging and distribution terms or those of our competitors; and
the demands on our management, sales force and services infrastructure as a result of the introduction of new software applications or updates.
Our expense levels are relatively fixed and are based, in part, on our expectations of future revenues. If revenue levels fall below our expectations and we are profitable at the time, our net income would decrease because only a small portion of our expenses varies with our revenues. Therefore, any significant decline in revenues for any period could have an immediate adverse impact on our results of operations for that period. We believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, our results of operations could be below expectations of public market analysts and investors in future periods, which would likely cause the market price of our common stock to decline.
We encounter long sales and implementation cycles, particularly for our larger customers, which could have an adverse effect on the size, timing and predictability of our revenues.
Potential or existing customers, particularly larger enterprise customers, generally commit significant resources to an evaluation of available software and require us to expend substantial time, effort and money educating them as to the value of our software and services. Sales of our core software products to these larger customers often require an extensive education and marketing effort.
We could expend significant funds and resources during a sales cycle and ultimately fail to win the customer. Our sales cycle for all of our products and services is subject to significant risks and delays over which we have little or no control, including:
our customers’ budgetary constraints;
the timing of our customers’ budget cycles and approval processes;
our customers’ willingness to replace their current software solutions;
our need to educate potential customers about the uses and benefits of our products and services; and
the timing of the expiration of our customers’ current license agreements or outsourcing agreements for similar services.
If our sales cycles lengthen unexpectedly, they could adversely affect the timing of our revenues or increase costs, which may cause fluctuations in our quarterly revenues and results of operations. Finally, if we are unsuccessful in closing sales of our products after spending significant funds and management resources, our operating margins and results of operations could be adversely impacted, and the price of our common stock could decline.
We depend on growth in the data and information management software market, and lack of growth or contraction in this market could have a material adverse effect on our sales and financial condition.
Demand for data and information management software is linked to growth in the amount of data generated and stored, demand for data retention and management (whether as a result of regulatory requirements or otherwise) and demand for and adoption of new storage devices and networking technologies. Because our software applications are concentrated within the data and information management software market, if the demand for storage devices, storage software applications, storage capacity or storage networking devices declines, our sales, profitability and financial condition would be materially adversely affected. Segments of the computer and software industry have in the past experienced significant economic downturns. The occurrence of any of these factors in the data and information management software market could materially adversely affect our sales, profitability and financial condition.
Furthermore, the data and information management software market is dynamic and evolving. Our future financial performance will depend in large part on continued growth in the number of organizations adopting data and information management software for their computing environments. The market for data and information management software may not continue to grow at historic rates, or at all. If this market fails to grow or grows more slowly than we currently anticipate, our sales and profitability could be adversely affected.
Our software applications are complex and may contain undetected errors, which could adversely affect not only our software applications’ performance but also our reputation and the acceptance of our software applications in the market.
Software applications as complex as those we offer contain undetected errors or failures, especially when products are first introduced or new versions are released. Despite extensive testing by us and by our customers, we have in the past discovered errors in our software applications and will do so in the future. As a result of past discovered errors, we experienced delays and lost revenues while we corrected those software applications. In addition, customers in the past have brought to our attention “bugs” in our software created by the customers’ unique operating environments, which are often characterized by a wide variety of both standard and non-standard configurations that make pre-release testing very difficult and time consuming. Although we have been able to fix these software bugs in the past, we may not always be able to do so. Our software products may also be subject to intentional attacks by viruses that seek to take advantage of these bugs, errors or other weaknesses. Any of these events may result in the loss of, or delay in, market acceptance of our software applications and services, which would seriously harm our sales, results of operations and financial condition.
Furthermore, we believe that our reputation and name recognition are critical factors in our ability to compete and generate additional sales. Promotion and enhancement of our name will depend largely on our success in continuing to provide effective software applications and services. The occurrence of errors in our software applications or the detection of bugs by our customers may damage our reputation in the market and our relationships with our existing customers, and as a result, we may be unable to attract or retain customers.
In addition, because our software applications are used to manage data that is often critical to our customers, they may have a greater sensitivity to defects in our products than to defects in other, less critical, applications. As a result, the licensing and support of our software applications involve the risk of product liability claims. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in our license agreements vary and may not be effective as a result of existing or future national, federal, state, or local laws or ordinances or unfavorable judicial decisions. Although we have not experienced any material product liability claims to date, the sale and support of our products entail the risk of such claims, which could be substantial in light of the use of our products in enterprise-wide environments. In addition, our insurance against product liability may not be adequate to cover all potential claims.
We may not receive significant revenues from our current research and development efforts for several years, if at all.
Developing software is expensive, and the investment in product development may involve a long payback cycle. Our research and development expenses were $110.0 million, or 16% of our total revenues in fiscal 2020, $92.6 million, or 13% of our total revenues in fiscal 2019 and $91.0 million, or 13% of our total revenues in fiscal 2018. Our future plans include significant investments in software research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not recognize significant revenues from these investments for several years, if at all.
Our international sales and operations are subject to factors that could have an adverse effect on our results of operations.
We have significant sales and services operations outside the United States and derive a substantial portion of our revenues from these operations. We also plan to continue to expand our international operations. We generated approximately 49% of our revenues from outside the United States in fiscal 2020 and 47% were outside the United States in fiscal 2019. International revenue decreased 1% in fiscal 2020 compared to fiscal 2019. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and might require us to add qualified management in these markets.
In addition to facing risks similar to the risks faced by our domestic operations, our international operations are also subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many countries, including:
adverse effects in economic conditions in the countries in which we operate related specifically to the COVID-19 outbreak and the governmental regulations put in place as a result of the virus;
difficulties in staffing and managing our international operations;
foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls;
difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations;
general economic conditions in the countries in which we operate, including seasonal reductions in business activity in the summer months in Europe and in other periods in other countries, could have an adverse effect on our earnings from operations in those countries;
imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements may occur, including those pertaining to export restrictions, privacy and data protection, trade and employment restrictions and intellectual property protections;
longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;
competition from local suppliers;
greater risk of a failure of our employees and partners to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010, and any trade regulations ensuring fair trade practices;
costs and delays associated with developing software in multiple languages; and
political unrest, war or acts of terrorism.
Our business in emerging markets requires us to respond to rapid changes in market conditions in those markets. Our overall success in international markets depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not continue to succeed in developing and implementing policies and strategies that will be effective in each location where we do business. Furthermore, the occurrence of any of the foregoing factors may have a material adverse effect on our business and results of operations.
We implemented a restructuring program in fiscal 2019, which we cannot guarantee will achieve its intended result.
In fiscal 2019 we initiated a restructuring plan to increase efficiency in our sales, marketing and distribution functions while reducing costs across all functional areas. We cannot guarantee the restructuring program will achieve its intended result. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets due to the loss of key employees, any of which may impair our ability to achieve anticipated results of operations or otherwise harm our business.
We may experience fluctuations in foreign currency exchange rates that could adversely impact our results of operations.
Our international sales are generally denominated in foreign currencies, and this revenue could be materially affected by currency fluctuations. Our primary exposure is to fluctuations in exchange rates for the U.S. dollar versus the Euro and, to a lesser extent, the Australian dollar, British pound sterling, Canadian dollar, Chinese yuan, Indian rupee, Korean won and Singapore dollar. Changes in currency exchange rates could adversely affect our reported revenues and could require us to reduce our prices to remain competitive in foreign markets, which could also have a material adverse effect on our results of operations. An unfavorable change in the exchange rate of foreign currencies against the U.S. dollar would result in lower revenues when translated into U.S. dollars, although operating expenditures would be lower as well.
In recent fiscal years, we have selectively hedged our exposure to changes in foreign currency exchange rates on the balance sheet. In the future, we may enter into additional foreign currency-based hedging contracts to reduce our exposure to significant fluctuations in currency exchange rates on the balance sheet, although there can be no assurances that we will do so. However, as our international operations grow, or if dramatic fluctuations in foreign currency exchange rates continue or increase or if our hedging strategies become ineffective, the effect of changes in the foreign currency exchange rates could become material to revenue, operating expenses, and income.
Our international sales and operations are subject to factors that could have an adverse effect on our results of operations.
We have significant sales and services operations outside the United States and derive a substantial portion of our revenues from these operations. We generated approximately 47% and 48% of our revenues from outside the United States in fiscal 2023 and fiscal 2022, respectively. International revenue decreased 1% in fiscal 2023 compared to fiscal 2022. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and might require us to add qualified management in these markets.
In addition to facing risks similar to the risks faced by our domestic operations, our international operations are also subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many countries, including:
•adverse effects in economic conditions in the countries in which we operate related specifically to the COVID-19 pandemic and the governmental regulations put in place as a result of the virus, the war in Ukraine, and the financial instability of banking institutions;
•difficulties in staffing and managing our international operations;
•foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls;
•difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations;
•general economic conditions in the countries in which we operate, including seasonal reductions in business activity in the summer months in Europe and in other periods in other countries, could have an adverse effect on our earnings from operations in those countries;
•imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements may occur, including those pertaining to sanctions, export restrictions, privacy and data protection, trade and employment restrictions and intellectual property protections;
•longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;
•competition from local suppliers;
•greater risk of a failure of our employees and partners to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010, and any trade regulations ensuring fair trade practices;
•costs and delays associated with developing solutions in multiple languages; and
•political unrest, war or acts of terrorism.
Our business in emerging markets requires us to respond to rapid changes in market conditions in those markets. Our overall success in international markets depends, in part, upon our ability to sell our software applications is highly dependent onsucceed in differing legal, regulatory, economic, social and political conditions. We may not continue to succeed in developing and implementing policies and strategies that will be effective in each location where we do business. The occurrence of any of the quality of our service offerings, and our failure to offer high quality support and professional services wouldforegoing factors may have a material adverse effect on our sales of software applications and results of operations.
Our services include the assessment and design of solutions to meet our customers’ storage management requirements and the efficient installation and deployment of our software applications based on specified business objectives. Further, once our software applications are deployed, our customers depend on us to resolve issues relating to our software applications. A high level of service is critical for the successful marketing and sale of our software. If we or our partners do not effectively install or deploy our applications, or succeed in helping our customers quickly resolve post-deployment issues, it would adversely affect our ability to sell software products to existing customers and could harm our reputation with prospective customers. As a result, our failure to maintain high quality support and professional services would have a material adverse effect on our sales of software applications and results of operations.
A portion of our revenue is generated by salesRisks Related to government entities, which are subject to a number of challengesInformation Technology and risks.
Sales to U.S. and foreign federal, state, and local governmental agency end-customers have accounted for a portion of our revenue, and we may in the future increase sales to government entities. However, government entities have recently announced reductions in, or experienced increased pressure to reduce spending. In particular, such measures have adversely affected European public sector transactions, and U.S. debt issues and budget concerns may adversely impact future U.S. public sector transactions. Such budgetary constraints or shifts in spending priorities of government entities may adversely affect sales of our products and services to such entities. In addition, sales to government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully sell our products to such governmental entity. Government entities may require contract terms that differ from our standard arrangements. Government contracts may require the maintenance of certain security clearances for facilities and employees which can entail administrative time and effort possibly resulting in additional costs and delays. In addition, government demand for our products may be more volatile as they are affected by public sector budgetary cycles, funding authorizations, and the potential for funding reductions or delays, making the time to close such transactions more difficult to predict. This risk is enhanced as the size of such sales to the government entities increases. If the use of our products expands to more sensitive, secure or mission critical uses by our government customers, we may be subject to increased scrutiny, potential reputational risk, or potential liability should our products fail to perform as expected or should we not comply with the terms of our government contracts or government contracting requirements.
Most of our sales to government entities have been made indirectly through providers that sell our products. Government entities may have contractual or other legal rights to terminate contracts with our providers for convenience or due to a default, and any such termination may adversely impact our future results of operations. Governments routinely audit and investigate government contractors, and we may be subject to such audits and investigations. If an audit or investigation uncovers improper or illegal activities, including any misuse of confidential or classified information by our employees, we may be subject to civil or criminal penalties and administrative sanctions.Security
We may be subject to information technologyIT system failures, network disruptions and breaches in data security.
Information technologyIT system failures, network disruptions and breaches of data security could disrupt our operations by causing delays or cancellation of customer orders, impeding the shipmentdelivery of software products,our solutions, negatively affecting our service offerings,customer support or professional services, preventing the processing of transactions and reporting of financial results. Information technologyresults, and disturbing our enterprise resource planning system. IT system failures, network disruptions and breaches of data security could also result in the unintentional disclosure of customer or our information as well as damage our reputation. There can be no assurance that a system failure, network disruption or data security breach will not have a material adverse effect on our financial condition and operating results.
Protection of our intellectual property is limited, and any misuse of our intellectual property by others could materially adversely affect our sales and results of operations.
Our success depends significantly upon proprietary technology in our software, documentation Cybersecurity breaches and other written materials. To protect our proprietary rights, we rely on a combination of:
patents;
copyright and trademark laws;
trade secrets;
confidentiality procedures; and
contractual provisions.
These methods afford only limited protection. Despite this limited protection, any issued patent may not provide us with any competitive advantages or may be challenged by third parties, and the patents of others may seriously impede our ability to conduct our business. Further, our pending patent applications may not result in the issuance of patents, and any patents issued to us may not be timely or broad enough to protect our proprietary rights. We may also develop proprietary products or technologies that cannot be protected under patent law. We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by outside
parties, or by our employees, which would cause us to lose the competitive advantage resulting from these trade secrets.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software applications or to obtain and use information that we regard as proprietary. Policing unauthorized use of our software applications is difficult, and we expect software piracy to continue to be a persistent problem. In licensing our software applications, we typically rely on “shrink wrap” or “click wrap” licenses that are not signed by licensees. We may have difficulty enforcing these licenses in some jurisdictions. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our attempts to protect our proprietary rights may not be adequate. Our competitors may independently develop similar technology, duplicate our software applications or design around patents issued to us or other intellectual property rights of ours. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and management attention. In addition, from time to time we are participants or members of various industry standard-setting organizations or other industry technical organizations. Our participation or membership in such organizations may, in some circumstances, require us to enter into royalty or licensing agreements with third parties regarding our intellectual property under terms established by those organizations, which we may not find favorable. In addition, many of our agreements with our customers and partners require us to indemnify them for certain intellectual property infringement claims against them, which would increase our costs as a result of defending such claims, and may require that we pay significant damages if there were an adverse ruling in any such claims. Furthermore, such customers and partners may discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenues and adversely impact our business.
On April 21, 2020, the Company filed suit against Cohesity, Inc. ("Cohesity") in the District of Delaware alleging that Cohesity has infringed and continues to infringe at least one claim of each of U.S. Patent Nos. 7,725,671, 7,840,533, 8,762,335, 9,740,723, 10,210,048, and 10,248,657. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate timing or outcome of this matter. The Company is unable at this time to determine whether the outcome of the litigation will have a material impact on its results of operations, financial condition, or cash flows.
On April 21, 2020, the Company filed suit against Rubrik, Inc. ("Rubrik") in the District of Delaware alleging that Rubrik has infringed and continues to infringe at least one claim of each of U.S. Patent Nos. 7,725,671, 7,840,533, 8,447,728, 9,740,723, 10,210,048, and 10,248,657. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate timing or outcome of this matter. The Company is unable at this time to determine whether the outcome of the litigation will have a material impact on its results of operations, financial condition, or cash flows.
Change in senior management could cause disruption in the Company and have a material effect on our business. Furthermore, the loss of key personnel or the failure to attract and retain highly qualified personnel could have an adverse effect on our business.
We have had, and could have, changes in senior management which could be disruptive to management and operations of the Company and could have a material effect on our business, operating results and financial conditions. Turnover at the senior management level may create instability within the Company, which could impede the Company’s day to day operations. Such instability could impede our ability to fully implement our business plan and growth strategy, which would harm our business and prospects.
Our future performance depends on the continued service of our key technical, sales, services and management personnel. We rely on our executive officers and senior management to execute our existing business operations and identify and pursue new growth opportunities. The loss of key employees could result in significant disruptions to our business, and the integration and training of replacement personnel could be time consuming, cause additional disruptions to our business and be unsuccessful. We do not carry key person life insurance covering any of our employees.
Our future success also depends on our continued ability to attract and retain highly qualified technical, sales, services and management personnel. Competition for such personnel is intense, and we may fail to retain our key technical, sales, services and management employees or attract or retain other highly qualified technical, sales, services and management personnel in the future.
Furthermore, in the past, we have experienced higher levels of turnover in our sales force compared to other employee groups in our company. Increases in the turnover rate of our sales force may affect our ability to generate license revenue growth. Although we have hired replacements in our sales force and are continuing to hire additional sales personnel to grow our business, we sometimes experience lower productivity from newly hired sales personnel for a period up to twelve months. In addition, we periodically make adjustments to our sales organization in response to a variety of internal and external factors, such as market opportunities, competitive threats, product introductions or enhancements and sales performance. Such adjustments could be temporarily disruptive and result in reduced productivity.
The volatility of our stock price may from time to time adversely affect our ability to attract or retain employees. If we are unable to hire or retain qualified employees across our organization, or conversely, if we fail to manage employee performance or reduce staffing levels when required by market conditions, our personnel costs would be excessive and our business and profitability could be adversely affected.
Our Omnibus Plan has approximately 2.1 million shares left available for grant until we will be required to ask our shareholders for additional shares. If our shareholders do not approve additional shares it could make it difficult to attract, retain and motivate our key personnel.
Claims that we misuse the intellectual property of othersexploited security vulnerabilities could subject us to significant liabilitycosts and disruptthird-party liabilities, result in improper disclosure of data and violations of applicable privacy and other laws, require us to change our business practices, cause us to incur significant remediation costs, lead to loss of customer confidence in, or decreased use of our products and services, damage our reputation, divert the attention of management from the operation of our business, result in significant compensation or contractual penalties from us to our customers and their business partners as a result of losses to or claims by them, or expose us to litigation, regulatory investigations, and significant fines and penalties.
Bad actors regularly attempt to gain unauthorized access to our IT systems, and many such attempts are increasingly sophisticated. The perception that the COVID-19 pandemic has made companies’ IT systems more vulnerable has increased the already significant volume of such attempts. These attempts, which might be related to industrial, corporate or other espionage, criminal hackers or state-sponsored intrusions, include trying to covertly introduce malware or ransomware to our environments and impersonating authorized users.
Third-party service providers that we may rely on to back up and process our confidential information may also be subject to similar threats. Such threats could result in the misappropriation, theft, misuse, disclosure, loss or destruction of the technology, intellectual property, or the proprietary, confidential or personal information, of us or our employees, customers, licensees, suppliers or partners, as well as damage to or disruptions in our IT systems. These threats are constantly evolving, increasing the difficulty of successfully defending against them or implementing adequate preventative measures. We seek to detect and investigate all security incidents and to prevent their recurrence, but attempts to gain unauthorized access to our IT systems or other attacks may be successful, and in some cases, we might be unaware of an incident or its magnitude and effects.
In addition, any failure to successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies in a timely manner could adversely impact our business, internal controls, results of operations, and financial condition.
Risks Related to Legal Matters
We have been, and may in the future become, involved in litigation that may have a material adverse effect on our results of operations and financial condition.business.
DueFrom time to time, we may become involved in various other legal proceedings relating to matters incidental to the natureordinary course of our business, we may become subject to material claims of infringement by competitorsincluding intellectual property, commercial, product liability, employment, class action, whistleblower and other third parties with respect to current or future software applications, trademarks orlitigation and claims, and governmental and other proprietary rights. We expect that software developers will increasingly be subject to infringement claims as the number of software applicationsregulatory investigations and competitors in our industry segment grows and the functionality of software applications in different industry segments overlaps. Future litigation may also involve third parties such as individuals, non-practicing entities, patent holding companies, and/or patent assertion entities that have no relevant product offerings or revenue in the marketplace, and against whom our own patents may provide little or no deterrence or protection.proceedings. Such parties may purchase or otherwise obtain intellectual property assets for the purpose of monetizing these assets; they often make broad and sweeping claims of infringement against product manufacturing companies such as Commvault and its customers, seeking a percentage of sales as license fees, seeking injunctions to pressure us into taking a license, or a combination thereof. Claims such as these have increased in recent years and may continue to do so. Any such claims, whether meritorious or not, couldmatters can be time-consuming, result in costly litigation,divert management’s attention and resources and cause shipment delays or require us to enter into royalty or licensing agreements with third parties, which may notincur significant expenses. Furthermore, because litigation is inherently uncertain, there can be available on termsno assurance that we deem acceptable, if at all. In addition, we may decide to settle a claim or action against us, which settlement could be costly. We may also be liable for any past infringement. If there is an adverse ruling against us in an infringement lawsuit, an injunction could be issued barring production or salethe results of any infringing product. It could also result in a damage award equal to a reasonable royalty or lost profits or, if there is a finding of willful infringement, treble damages. Any of these claims could disrupt our business andactions will not have a material adverse effect on our business, results of operations andor financial condition.
In addition, we licenseRisks Related to Tax and use software from third parties in our business. These third-party software licenses may not continue to be available to us on acceptable terms or at all, and may expose us to additional liability. This liability, or our inability to use any of this third-party software, could result in shipment delays or other disruptions in our business that could materially and adversely affect our operating results.
Our use of “open source” software could negatively affect our business and subjects us to possible litigation.
Some of the products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software, and we may incorporate open source software into other products in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses, including, for example, the GNU General Public License, the GNU Lesser General Public License, the Common Public License, “Apache-style” licenses, “Berkley Software Distribution or BSD-style” licenses and other open source licenses. We monitor our use of open source software to avoid subjecting our products to conditions we do not intend, but these efforts may not be successful. Although we believe that we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, and therefore the potential impact of these terms on our business is somewhat unknown and may result in unanticipated obligations regarding our products and technologies. The use of such open source software may ultimately subject some of our products to unintended conditions, which may negatively affect our business, financial condition, operating results, cash flow and ability to commercialize our products or technologies.
Some of these open source licenses may subject us to certain conditions, including requirements that we offer our products that use the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and/or that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third-party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations. If our defenses were not successful, we could be enjoined from the distribution of our products that contained the open source software and required to make the source code for the open source software available to others, to grant third parties certain rights of further use of our software or to remove the open source software from our products, which could disrupt the distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software. If an author or other third-party that distributes open source software were to obtain a judgment against us based on allegations that we had not complied with the terms of any such open source licenses, we could also be subject to liability for copyright infringement damages and breach of contract for our past distribution of such open source software.Accounting
Our effective tax rate is difficult to project, and changes in such tax rate or adverse results of tax examinations could adversely affect our operating results.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our results of operations would be adversely affected to the extent that our geographical mix of income becomes more weighted toward jurisdictions with higher tax rates and would be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions. Any change in our mix of earnings is dependent upon many factors and is therefore difficult to predict.
The process of determining our anticipated tax liabilities involves many calculations and estimates that are inherently complex and make the ultimate tax obligation determination uncertain. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. These estimates involve complex issues, require extended periods of time to resolve, and require us to make judgments, such as anticipating the outcomes of audits with tax authorities and the positions that we will take on tax returns prior to our actually preparing the returns. In the normal course of business, we are subject to examination by taxing authorities throughout the world. The final determination of tax audits and any related litigation could be materially different from our historical tax provisions and accruals. For further discussion on income taxes, see Note 12 of the notes to the consolidated financial statements.
Furthermore, our overall effective income tax rate and tax expenses may be affected by various factors in our business, including changes in our legalentity structure, changes in the geographic mix of income and expenses, changes in tax laws, and applicable accounting pronouncements and variations in the estimated and actual level of annual profits before income tax.
We also determine the need to record deferred tax liabilities and the recoverability of deferred tax assets. A valuation allowance is established to the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income and other factors in each jurisdiction. In assessing the need for a valuation allowance in fiscal 2018, we considered all available objective and verifiable evidence both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, expectations and risks associated with estimates of future pre-tax income, and prudent and feasible tax planning strategies. As a result of this analysis, we determined that it is more likely than not that we will not realize the benefits of our gross deferred tax assets and therefore have recorded a valuation allowance to reduce the carrying value of these gross deferred tax assets, net of the impact of the reversal of taxable temporary differences, to zero.
The 2017 Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that significantly impacted how we will apply the law and impact our results of operations in the period issued. The Tax Act required complex computations not previously provided in U.S. tax law.
Many of our key financial systems used for internal purposes are cloud-based solutions provided by third parties.
Our enterprise resource planning system as well as certain other stand-alone internal financial systems are cloud-based solutions provided by third parties. The use of cloud-based systems provided by third parties exposes us to certain risks of those third parties. If a disruption of services by these third party cloud financial system providers were to occur it could have a material adverse effect on our financial position, results of operations and cash flows.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change.
Risks from investing in growth opportunitiesRelated to our Common Stock
Goodwill represents a portion of our assets and any impairment of these assets could negatively impact our business.results of operations.
At March 31, 2023, our goodwill was approximately $127.8 million, which represented approximately 16% of our total assets. We test goodwill for impairment at least annually at the reporting unit level, or more often if an event occurs or circumstances change that would more likely than not reduce the fair value of its carrying amount. This quantitative assessment requires us to assess and make judgments regarding a variety of factors which impact the fair value of the reporting unit or asset being tested, including business plans, anticipated future cash flows, economic projections and other market data. Because there are inherent uncertainties involved in these factors, significant differences between these estimates and actual results could result in future impairment charges and could materially impact our future financial results. For additional information on our goodwill impairment testing, see Note 2 of the notes to the consolidated financial statements included in this Annual Report on Form 10-K. Any future impairment of this asset could have a material adverse effect on our results of operations.
We may investexperience a decline in growth opportunities, such as high-valuerevenues or volatility in our quarterly operating results, which may adversely affect the market segmentsprice of enterprise computing, managed servicesour common stock.
We cannot predict our future quarterly revenues or operating results with certainty because of many factors outside of our control. A significant revenue or profit decline, lowered forecasts or volatility in our operating results could cause the market price of our common stock to decline substantially. Factors that could affect our revenues and cloud computing. Even though we believe cloud computing,operating results include the following:
•the unpredictability of the timing and magnitude of orders for our solutions, particularly transactions greater than $100,000 in its various forms, representsrecent fiscal years, a long term industry trend inmajority of our quarterly revenues were earned and recorded near the way that applications are delivered, data is stored and information is retrieved, there can be no assuranceend of each quarter;
•the possibility that our investment in cloud, and related managed services and infrastructure management will be validated in customers may cancel, defer or limit purchases as a result of reduced information technology budgets;
•the marketplace. Similarly, there is no assurancepossibility that our investmentscustomers may defer purchases of our solutions in high-value anticipation of new solutions or updates from us or our competitors;
•the ability of our OEMs and resellers to meet their sales objectives;
•market segments will driveacceptance of our new solutions and enhancements;
•our ability to control expenses;
•changes in our pricing, packaging and distribution terms or those of our competitors; and
•the demands on our management, sales force and customer services infrastructure as a result of the introduction of new solutions or updates.
Our expense levels are relatively fixed and are based, in part, on our expectations of future revenues. If revenue growth orlevels fall below our expectations and we are profitable at the time, our net income would decrease because only a small portion of our expenses varies with our revenues. Therefore, any significant decline in revenues for any period could have an immediate adverse impact on our results of operations for that period. We believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. Our results of operations could be below expectations of public market share gains. Customer adoption ratesanalysts and viable economic models are less certaininvestors in high-value and rapidly-growing segments, and new product and services offerings may unfavorably impact demand forfuture periods which would likely cause the market price of our other products or services.
Risks Relatingcommon stock to Ownership of Our Common Stockdecline.
The price of our common stock may be highly volatile and may decline regardless of our operating performance.
The market price of our common stock could be subject to significant fluctuations in response to:
•variations in our quarterly or annual operating results;
•changes in financial estimates, treatment of our tax assets or liabilities or investment recommendations by securities analysts following our business or our competitors;
•the public’s response to our press releases, rumors, our other public announcements and our filings with the SEC;
•changes in accounting standards, policies, guidance or interpretations or principles;
•sales of common stock by our directors, officers and significant stockholders;
•announcements of technological innovations or enhanced or new products by us or our competitors;
•our failure to achieve operating results consistent with securities analysts’ projections;
•the operating and stock price performance of other companies that investors may deem comparable to us;
•broad market and industry factors;factors, including financial instability of banking institutions; and
•other events or factors, including those resulting from war, incidents of terrorism or responses to such events.
The market prices of softwaredata protection solutions companies have been extremely volatile. Stock prices of many softwareof those companies have often fluctuated in a manner unrelated or disproportionate to thetheir operating performance of such companies.performance. In the past, following periods of market volatility, stockholders have often instituted securities class action litigation. Securities litigation could have a substantial cost and divert resources and the attention of management from our business.
Although we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis, and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), and the rules and regulations promulgated by the SEC to implement SOX 404, we are required to furnish a report in our Form 10-K regarding the effectiveness of our internal control over financial reporting. The report’s assessment of our internal control over financial reporting as of the end of our fiscal year must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Management’s assessment of internal control over financial reporting requires management to make subjective judgments and some of our judgments will be in areasManagement has assessed that may be open to interpretation.
Although we currently believe our internal control over financial reporting is effective theand lacks any material weaknesses. Such assessment is made through subjective judgment of our management that may be open to interpretation. The effectiveness of our internal controlscontrol in the future periods is subject to the risk that oursuch internal controls may become inadequate or may not operate effectively.inadequate. In the future, years, if we fail to timely complete this assessment, or if our independent auditors are unable to express an opinion on the effectiveness of our internal controls, there may be a loss of public confidence in our internal controls,financial reporting, the market price of our stock could decline and we could be subject to regulatory sanctions or investigations by the NASDAQNasdaq Stock Market, the Securities and Exchange CommissionSEC or other regulatory authorities, which would require additional financial and management resources. In addition, anyAny failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations.
DuringCertain provisions of our certificate of formation and our amended and restated bylaws or Delaware law could prevent or delay a potential acquisition of control of our Company, which could decrease the trading price of our common stock.
Our certificate of formation, amended and restated bylaws and the laws in the State of Delaware contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the prospective acquirer and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover. Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.
We believe that these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by effectively requiring those who seek to obtain control of the Company to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition of control. However, these provisions could apply even if an acquisition of control of the Company may be considered beneficial by some shareholders and could delay or prevent an acquisition of control that our Board of Directors determines is not in the best interests of our Company and our shareholders.
General Risks
Our business could be materially and adversely affected as a result of natural disasters, terrorism or other catastrophic events.
Any economic failure or other material disruption caused by war, climate change or natural disasters, including fires, floods, hurricanes, earthquakes, and tornadoes; power loss or shortages; environmental disasters; telecommunications or business information systems failures or similar events could also adversely affect our ability to conduct business. If such disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending on IT, or impair our ability to meet our customer demands, our operating results and financial condition could be materially adversely affected.
There is also an increasing concern over the risks of climate change and related environmental sustainability matters. In addition to physical risks, climate change risk includes longer-term shifts in climate patterns, such as extreme heat, sea level rise, and more frequent and prolonged drought. Such events could disrupt our operations or those of our customers or third parties on which we rely, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility.
Our business may be adversely affected by the impact of the war in Ukraine and a widespread outbreak of contagious diseases, including the COVID-19 pandemic and its variants. These events may cause us or our customers to temporarily suspend operations and could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our solutions, our ability to collect against existing trade receivables and our operating results.
We currently, and may in the future, have assets held at financial institutions that may exceed the insurance coverage offered by the Federal Deposit Insurance Corporation (“FDIC”), the loss of which would have a severe negative affect on our operations and liquidity.
We may maintain our cash assets at financial institutions in the U.S. in amounts that may be in excess of the FDIC insurance limit of $250,000. Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past several years, our organizational structure has increasedand may in complexity duethe future lead to compliance with tax regulations and tax accounting requirements and other regulatory and compliance requirements, including compliance with anti-corruption and anti-bribery laws such asmarket-wide liquidity problems. For example, in response to the U.S. Foreign Corrupt Practices Act (the “FCPA”rapidly declining financial condition of regional banks Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”), the UK Bribery ActCalifornia Department of 2010 (the “UK Bribery Act”). Further, we have expanded our presence inFinancial Protection and Innovation and the Asia-Pacific region, where business practices can differ from those in other regionsNew York State Department of Financial Services closed SVB and Signature on March 10, 2023 and March 12, 2023, respectively, and the FDIC was appointed as receiver for SVB and Signature. In the event of a failure or liquidity issues of or at any of the worldfinancial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect upon our liquidity, financial condition and can create internal control risks. We provide business practices trainingour results of operations.
Similarly, if our customers or partners experience liquidity issues as a result of financial institution defaults or non-performance where they hold cash assets, their ability to pay us may become impaired and could have a material adverse effect on our employees worldwide. Overall,results of operations, including the combinationcollection of increased structural complexityaccounts receivable and the ever-increasing regulatory complexity make it more critical for us to attract and retain qualified and technically competent employees.cash flows.
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Item 1B. | Unresolved Staff Comments |
None.
None.
From time to time, we are subject to claims in legal proceedings arising in the normal course of our business. We do not believe that we are currently party to any pending legal action that could reasonably be expected to have a material adverse effect on our business or operating results.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market for our Common Stock
Our common stock is listed and traded on The NASDAQ GlobalNasdaq Stock Market under the symbol “CVLT”.
Stockholders
As of May 14, 2020,3, 2023, there were approximately 4943 holders of our common stock. The number of record holders does not represent the actual number of beneficial owners of shares of our common stock because shares are frequently held in street name by securities dealers and others for the benefit of individual owners who have the right to vote their shares.
Dividend Policy
We have never paid cash dividends on our common stock, and we intend to retain our future earnings, if any, to fund the growth of our business. We therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as any other factors that the Board of Directors, in its sole discretion, may consider relevant.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between March 31, 20152018 and March 31, 2020,2023, with the cumulative total return of (i) The NASDAQNasdaq Computer Index and (ii) The NASDAQNasdaq Composite Index, over the same period. This graph assumes the investment of $100,000 on March 31, 20152018 in our common stock, The NASDAQNasdaq Composite Index and The NASDAQNasdaq Computer Index, and assumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on March 31, 20152018 was the closing sales price of $43.70$57.20 per share.
The comparisons shown in the graph below are based upon historical data. The stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the future performance of our common stock. Information used in the graph was obtained from NASDAQ,Nasdaq, a source we believe to be reliable, but we are not responsible for any errors or omissions in such information.
The performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Commvault under the Securities Act or the Exchange Act.
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| 3/31/2018 | 3/31/2019 | 3/31/2020 | 3/31/2021 | 3/31/2022 | 3/31/2023 |
Commvault | 100.00 | | 113.18 | | 70.77 | | 112.76 | | 116.00 | | 99.20 | |
Nasdaq Composite Index | 100.00 | | 109.43 | | 109.01 | | 187.54 | | 201.33 | | 173.03 | |
Nasdaq Computer Index | 100.00 | | 111.52 | | 125.07 | | 219.28 | | 263.47 | | 235.80 | |
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| | | | | | | | | | | | |
| 3/31/2015 | 3/31/2016 | 3/31/2017 | 3/31/2018 | 3/31/2019 | 3/31/2020 |
Commvault | 100.0 |
| 98.8 |
| 116.2 |
| 130.9 |
| 148.1 |
| 92.6 |
|
NASDAQ Composite Index | 100.0 |
| 99.4 |
| 120.6 |
| 144.1 |
| 157.7 |
| 157.1 |
|
NASDAQ Computer Index | 100.0 |
| 105.8 |
| 132.9 |
| 167.5 |
| 186.8 |
| 209.5 |
|
Issuer Purchases of Equity Securities
During the three months ended March 31, 2020,2023, we repurchased $37.2$60.8 million of common stock, (0.9or approximately 1.0 million shares),shares, under our repurchase program. DuringAs a result, $99.1 million remained available under the year ended March 31, 2020, we repurchased $77.2 millioncurrent authorization. A summary of our repurchases of common stock (1.7is as follows:
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Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Approximate dollar value of shares that may yet be purchased under the program (in thousands) |
January 1-31, 2023 | | 284,000 | | | $ | 60.37 | | | 284,000 | | | $142,725 | |
February 1-28, 2023 | | 513,000 | | | 62.77 | | | 513,000 | | | 110,526 | |
March 1-31, 2023 | | 203,500 | | | 56.25 | | | 203,500 | | | 99,079 | * |
Three months ended March 31, 2023 | | 1,000,500 | | | $ | 60.76 | | | 1,000,500 | | | | |
*On April 20, 2023, the Board of Directors approved an increase in our share repurchase program so that $250.0 million shares), under our repurchase program.was available. The Board's authorization has no expiration date.
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Period | | Total number of shares purchased as part of publicly announced programs | | Average price paid per share | | Total of Purchases | | Approximate dollar value of shares that may yet be purchased under the program |
January 2020 | | 17,786 |
| | $ | 43.96 |
| | $ | 781,791 |
| | $ | 199,218,209 |
|
February 2020 | | 361,100 |
| | $ | 45.91 |
| | $ | 16,577,950 |
| | $ | 182,640,259 |
|
March 2020 | | 492,800 |
| | $ | 40.20 |
| | $ | 19,811,466 |
| | $ | 162,828,793 |
|
Three months ended March 31, 2020 | | 871,686 |
| | $ | 42.64 |
| | $ | 37,171,207 |
| | |
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Item 6. | Selected Financial Data[Reserved] |
The following selected financial data should be read in conjunction with our financial statements and related notes, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The selected statements of operations and the selected balance sheet data are derived from our audited financial statements. The historical results presented below are not necessarily indicative of the results to be expected in any future period.
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Statement of Operations Data | | Year Ended March 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (In thousands, except per share data) |
| | | | | | | | | | |
Revenues: | | | | | | | | | | |
Software and products | | $ | 275,308 |
| | $ | 309,899 |
| | $ | 311,745 |
| | $ | 290,668 |
| | $ | 258,091 |
|
Services | | 395,577 |
| | 401,058 |
| | 387,648 |
| | 354,337 |
| | 335,676 |
|
Total revenues | | 670,885 |
| | 710,957 |
| | 699,393 |
| | 645,005 |
| | 593,767 |
|
Cost of revenues: | | | | | | | | | | |
Software and products | | 28,082 |
| | 25,691 |
| | 7,223 |
| | 3,045 |
| | 2,385 |
|
Services | | 88,996 |
| | 91,315 |
| | 90,929 |
| | 82,147 |
| | 80,327 |
|
Total cost of revenues | | 117,078 |
| | 117,006 |
| | 98,152 |
| | 85,192 |
| | 82,712 |
|
Gross margin | | 553,807 |
| | 593,951 |
| | 601,241 |
| | 559,813 |
| | 511,055 |
|
Operating expenses: | | | | | | | | | | |
Sales and marketing | | 335,785 |
| | 370,088 |
| | 410,727 |
| | 383,933 |
| | 349,199 |
|
Research and development | | 110,020 |
| | 92,647 |
| | 91,030 |
| | 79,558 |
| | 66,936 |
|
General and administrative | | 92,130 |
| | 100,946 |
| | 90,709 |
| | 88,929 |
| | 81,199 |
|
Net change in contingent consideration | | (3,783 | ) | | — |
| | | | | | |
Restructuring | | 21,348 |
| | 14,765 |
| | — |
| | — |
| | — |
|
Depreciation and amortization | | 15,815 |
| | 10,597 |
| | 9,721 |
| | 8,635 |
| | 9,611 |
|
Total operating expenses | | 571,315 |
| | 589,043 |
| | 602,187 |
| | 561,055 |
| | 506,945 |
|
Income (loss) from operations | | (17,508 | ) | | 4,908 |
| | (946 | ) | | (1,242 | ) | | 4,110 |
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Other income and expenses: | | | | | | | | | | |
Interest income | | 4,962 |
| | 5,519 |
| | 2,228 |
| | 1,163 |
| | 862 |
|
Interest expense | | — |
| | — |
| | (1,161 | ) | | (957 | ) | | (933 | ) |
Equity in loss of affiliate | | — |
| | — |
| | (3,621 | ) | | (958 | ) | | (83 | ) |
Income (loss) before income taxes | | (12,546 | ) | | 10,427 |
| | (3,500 | ) | | (1,994 | ) | | 3,956 |
|
Income tax expense (benefit) | | (6,901 | ) | | 6,866 |
| | 58,400 |
| | (1,486 | ) | | 2,236 |
|
Net income (loss) | | $ | (5,645 | ) | | $ | 3,561 |
| | $ | (61,900 | ) | | $ | (508 | ) | | $ | 1,720 |
|
Net income (loss) per common share: | | | | | | | | | | |
Basic | | $ | (0.12 | ) | | $ | 0.08 |
| | $ | (1.37 | ) | | $ | (0.01 | ) | | $ | 0.04 |
|
Diluted | | $ | (0.12 | ) | | $ | 0.07 |
| | $ | (1.37 | ) | | $ | (0.01 | ) | | $ | 0.04 |
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Weighted average shares used in computing per share amounts: | | | | | | | | | | |
Basic | | 45,793 |
| | 45,827 |
| | 45,242 |
| | 44,700 |
| | 45,159 |
|
Diluted | | 45,793 |
| | 47,601 |
| | 45,242 |
| | 44,700 |
| | 46,489 |
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Note: Commvault adopted Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, in fiscal 2018 using the full retrospective method. As a result, all financial information in fiscal 2016 and fiscal 2017 were restated.
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Balance Sheet Data | | As of March 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (In thousands) |
| | | | | | | | | | |
Cash, cash equivalents and restricted cash (1) | | $ | 296,082 |
| | $ | 327,992 |
| | $ | 330,784 |
| | $ | 329,491 |
| | $ | 288,107 |
|
Short-term investments | | 43,645 |
| | 130,338 |
| | 131,637 |
| | 120,693 |
| | 99,072 |
|
Working capital | | 185,132 |
| | 328,656 |
| | 322,615 |
| | 318,142 |
| | 252,413 |
|
Total assets | | 845,076 |
| | 822,453 |
| | 818,642 |
| | 829,878 |
| | 714,573 |
|
Deferred revenue | | 326,220 |
| | 337,696 |
| | 325,774 |
| | 279,902 |
| | 244,866 |
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(1) Cash, cash equivalents and restricted cash as of March 31, 2020 includes $8,000 of restricted cash.
Note: Commvault adopted Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, in fiscal 2018 using the full retrospective method and as a result restated balance sheet information beginning with fiscal 2017. Previously reported information for 2016 has not been restated and is, therefore, not comparable to the other periods.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements. For discussion comparing the period ended March 31, 2022 to March 31, 2021, please refer to our Annual Report on Form 10-K, filed with the SEC on May 6, 2022.
Overview
Commvault is a leading provider of data protection and information management software applications and related services. Commvault was incorporatedIncorporated in Delaware in 1996, as a Delaware corporation. The Commvault software platform is an enterprise level, integrated data and information management solution, built from the ground up on a single platform and unified code base. All software functionality share the same back-end technologies to deliver the benefits of a holistic approach to protecting, managing, and accessing data. The software addresses many aspects of data management in the enterprise, while providing scalability and control of data and information. We also sell appliances that integrate the Commvault software with hardware and address a wide-range of business needs and use cases, ranging from support for remote or branch offices with limited IT staff up to large corporate data centers. Commvault alsoSystems, Inc. provides its customers with a broad range of professionaldata protection platform that helps them secure, defend and recover their most precious asset, their data. We provide these products and services thatfor their data across the following environments: on-premises, hybrid, or multi-cloud. Our data protection offerings are delivered via self-managed software, software-as-a-service (SaaS), integrated appliances, or managed by partners. Customers use our worldwide supporttechnology to protect themselves from threats like ransomware and field operations.recover their data.
Commvault software enables our customers to simply and cost effectively protect and manage their enterprise data throughout its lifecycle, from the mobile worker to the remote office, to the data center, covering the leading operating systems, relational databases, virtualized environments and applications. In addition to addressing today’s data and information management challenges, our customers can realize lower capital costs through more efficient use of their enterprise-wide storage infrastructure assets. This includes the automated movement of data from higher cost to lower cost storage devices throughout its lifecycle, and through sharing and better utilization of storage resources across the enterprise. We can also provide our customers with reduced operating costs through a variety of methods, including fast application deployment, reduced training time, lower cost of storage media consumables, proactive monitoring and analysis, and lower administrative overhead. We also provide our customers with a broad range of professional services that are delivered by our worldwide support and field operations.
History and Background
In early 2000, we launched Commvault Galaxy for backup and recovery, a storage industry award winner. In the years since, Commvault has forged numerous alliances with top software application and hardware vendors to enhance capabilities and to create a premiere suite of data and information management solutions. In 2002, we launched our single-platform technology that provides the foundation of our information management approach to storing, managing, and accessing data. Since that time we have continued to innovate and have been recognized by industry analysts as having the most comprehensive and powerful data management solution.
In the third quarter of fiscal 2020 Commvault completed the acquisition of Hedvig Inc., a California-based developer of software-defined storage solutions. The primary reason for the business combination is the complementary nature of Hedvig’s technology, with our other technology, which will expand our addressable market. Hedvig software allows customers to tailor their storage environment to their application and data demands through a software-defined storage platform. This transaction supports Commvault’s strategy of unified storage and data management. Hedvig’s technology enables a scalable, distributed software defined storage solution that is already multi-cloud enabled.
Industry
The industry in which we currently operate continues to go through accelerating changes as the result of compounding data growth and the introduction of new technologies. We are continuing to pursue an aggressive product development program in both data and information management solutions. Our data managementprotection solutions include not only traditional backup, but also new innovations in de-duplication, data movement, virtualization, snap-based backups and enterprise reporting. Our information management innovations are primarily in the areas of archiving, eDiscovery, records management, governance, operational reporting and compliance. We remain focused on both the data and information management trends in the marketplace and, in fact, a material portion of our existing research and development expenses are utilized toward the development of such new technologies discussed above. While we are confident in our ability to meet these changing industry demands with our Commvault suite and potential future releases, the development, release and timing of any features or functionality remain at our sole discretion and our solutions or other technologies may not be widely adopted.technologies.
Given the nature of the industry in which we operate, our software applications are subject to obsolescence. We continually develop and introduce updates to our existing software applications in order to keep pace with evolving industry technologies. In addition, we must address evolving industry standards, changing customer requirements and competitive software applications that may render our existing software applications obsolete. We also sell a backup appliance which integrates our software with hardware. If our forecast exceeds our actual requirements, a supply chain partner may assess additional charges or we may incur costs related to excess inventory, each of which could negatively affect our gross margins.
For each of our software applications, we provide full support for the current generally available release and one prior release. When we declare a product release obsolete, a customer notice is delivered twelve months prior to the effective date of obsolescence announcing continuation of full product support for the first six months. We provide an additional six months of extended assistance support in which we only provide existing workarounds or fixes that do not require additional development activity. We do not have existing plans to make any of our software products permanently obsolete.
Sources of Revenues
We derive a significant portion of our total revenues from sales of licenses of our software applications and related appliance products.applications. We do not customize our software or products for a specific end-user customer. We sell our software applications and products to end-user customers both directly through our sales force and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers and original equipment manufacturers. Our software and products revenue was 41%45% of our total revenues for fiscal 2020, 44%2023, 46% in fiscal 20192022 and 45% in fiscal 2018.2021.
During fiscal 2020, we continuedWe continue to focus on subscription and other repeatablerecurring revenue arrangements.arrangements and continue to generate revenue from the renewals of subscription licenses sold in prior years. Any of our licensingpricing models (capacity, instance based, etc.) can be sold via a subscription arrangement. In these arrangements, the customer has the right to use the software over a designated period of time. The capacity of the license is fixed and the customer has made an unconditional commitment to pay. Software revenue in these arrangements is generally recognized when the software is delivered. During the fiscal year ended March 31, 2020,2023, approximately 41%79% of software license revenue was sold under a subscription model. We expectSoftware license revenue from these types of arrangements assold under a percentage of our total revenue to continue to increasesubscription model was 69% and 59% in the next few years. Beginning in fiscal years ended March 31, 2022 and 2021, we also expect to generate material revenue from renewals of subscription licenses sold in prior years.respectively. We also sell to some customers, primarily managed service providers, via utility, or pay-as-you-go models. In these arrangements, there is no minimum commitment and actual usage is regularly measured and billed. Revenue in these utility arrangements is recognized as the software is used.
In recent fiscal years, we generated approximately three-quarters of our software and products revenue from our existing customer base and approximately one-quarter of our software and products revenue from new customers. In addition, ourOur total software and products revenue in any particular period is, to a certain extent, dependent upon our ability to generate revenues from large customer software and products deals, which we refer to as enterpriselarger deal transactions. EnterpriseLarger deal transactions (transactions greater than $0.1 million)million of software and product revenue) represented approximately 65%73% of our software and products revenue in both fiscal 20202023, and72% in fiscal 20192022 and 59% for69% in fiscal 2018.2021.
Software and products revenue generated through indirect distribution channels was 92%accounted for approximately 90% of total software and products revenue in recent fiscal 2020, 93% in fiscal 2019 and 86% in fiscal 2018.years. Software and products revenue generated through direct distribution channels was 8%accounted for approximately 10% of total software and products revenue in recent fiscal 2020, 7% in fiscal 2019 and 14% in fiscal 2018. The dollar value of software and products revenue generated through indirect distribution channels decreased $33.6 million, or 12%, in fiscal 2020 compared to fiscal 2019. The dollar value of software and products revenue generated through direct distribution decreased $1.0 million, or 4%, in fiscal 2020 compared to fiscal 2019.years. Deals initiated by our direct sales force are sometimes transacted through indirect channels based on end-user customer requirements and vice versa, which are not always in our control and can cause this overall percentage split to vary from fiscal year to fiscal year. As such, there may be fluctuations in the dollars and percentage of software and products revenue generated through our direct distribution channels from time to time. We believe that the growth of our software and products revenue, derived from both our indirect channel partners and direct sales force, are key attributes to our long-term growth strategy. We willintend to continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term. The failure of our indirect distribution channels or our direct sales force to effectively sell our software applications could have a material adverse effect on our revenues and results of operations.
We have a non-exclusive distribution agreement covering our North American commercial markets and our U.S. Federal Government market with Arrow Enterprise Computing Solutions, Inc. ("Arrow"), a subsidiary of Arrow Electronics, Inc. Pursuantpursuant to this distribution agreement,which Arrow's primary role is to enable a more efficient and effective distribution channel for our products and services by managing our reseller partners and leveraging their own industry experience. We generated approximately 37% of our total revenues through Arrow in both fiscal 2020, approximately 38% of our total revenues in2023 and fiscal 20192022, and approximately 36% of our total revenues in fiscal 2018.2021. If Arrow waswere to discontinue or reduce the sales of our products or if our agreement with Arrow was terminated, and if we were unable to take back the management of our reseller channel or find another North American distributor to replace Arrow, then itthere could havebe a material adverse effect on our future business.
Our services revenue was 59%55% of our total revenues for fiscal 2020, 56%2023, 54% in fiscal 20192022 and 55% in fiscal 2018.2021. Our services revenue is made up of fees from the delivery of customer support, SaaS, and other professional services, which are typically sold in connection with the sale of our software applications. Customer support agreements provide technical support and unspecified software updates on a when-and-if-available basis for an annual fee based on licenses purchased and the level of service subscribed. Metallic, our SaaS solution, allows customers to use hosted software over the contract period without taking possession of the software. Revenue related to Metallic is generally recognized ratably over the contract term as services revenue. Other professional services include consulting, assessment and design services, implementation and post-deployment services and training, all of which to date have predominantly been sold in connection with the sale of software applications. Our newly launched software-as-a-service solution, branded Metallic, is also included in services revenue. Revenue from Metallic, which has not been material to date, is recognized ratably over the contract period.
Most of our customer support agreements related to perpetual licenses are for a one-year term. As the end of the annual period approaches, we pursue the renewal of the agreement with the customer. Historically, maintenance renewals have represented a significant portion of our total revenue. Because of this characteristic of our business, if our customers choose not to renew their maintenance and support agreements with us on beneficial terms, or at all, our business, operating results and financial condition could be harmed.
The gross margin of our services revenue was 78%72% for fiscal 20202023, 76% for fiscal 2022 and 77%79% for both fiscal 2019 and fiscal 2018.2021. Overall, our services revenue has lower gross margins than our software and products revenue. The gross margin of our software and products revenue was 90%96% for both fiscal 2020,2023 and fiscal 2022, and 92% for fiscal 2019 and 98% for fiscal 2018.2021. The decreaseincrease in gross margin percentage of software and products is a result of the decrease inreduced sales of hardware associated with our appliance as well as reduced software royalties associated with sales of HyperScale appliances and software. With the launch of HyperScale X in the second half of fiscal 2021, we now typically sell software to a third party that sells an integrated appliance which includes hardware.to end user customers. As a result, our hardware revenues and cost of sales have been decreasing.
Description of Costs and Expenses
Our cost of revenues is as follows:
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• | Cost of Software and Products Revenue, consists primarily of the cost of appliance hardware, third-party royalties and other costs such as media, manuals, translation and distribution costs; and
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• | Cost of Services Revenue, consists primarily of salary and employee benefit costs in providing customer support and other professional services.
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•Cost of Software and Products Revenue, consists primarily of the cost of third-party royalties and other costs such as media, manuals, translation and distribution costs, and hardware associated with our appliances; and
•Cost of Services Revenue, consists of salary and employee benefit costs in providing customer support and other professional services as well as third-party hosting fees related to our as-a-service offerings.
Our operating expenses are as follows:
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• | •Sales and Marketing, consists primarily of salaries, commissions, employee benefits, stock-based compensation and other direct and indirect business expenses, including travel and related expenses, sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events (such as trade shows and advertising);
•Research and Development, which is primarily the expense of developing new software applications and modifying existing software applications, consists principally of salaries, stock-based compensation and benefits for research and development personnel and related expenses; contract labor expense and consulting fees as well as other expenses associated with the design, certification and testing of our software applications; and legal costs associated with the patent registration of such software applications;
•General and Administrative, consists primarily of salaries, stock-based compensation and benefits for our executive, accounting, human resources, legal, information systems and other administrative personnel. Also included in this category are other general corporate expenses, such as outside legal and accounting services, compliance costs and insurance; and
•Depreciation and Amortization, consists of depreciation expense primarily for our owned corporate campus headquarters location, computer equipment we use for information services and in our development and test labs and amortization of intangible assets. Sales and Marketing, consists primarily of salaries, commissions, employee benefits, stock-based compensation and other direct and indirect business expenses, including travel and related expenses, sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events (such as trade shows and advertising);
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• | Research and Development, which is primarily the expense of developing new software applications and modifying existing software applications, consists principally of salaries, stock-based compensation and benefits for research and development personnel and related expenses; contract labor expense and consulting fees as well as other expenses associated with the design, certification and testing of our software applications; and legal costs associated with the patent registration of such software applications;
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• | General and Administrative, consists primarily of salaries, stock-based compensation and benefits for our executive, accounting, human resources, legal, information systems and other administrative personnel. Also included in this category are other general corporate expenses, such as outside legal and accounting services, compliance costs and insurance; and
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• | Depreciation and Amortization, consists of depreciation expense primarily for our owned Corporate Campus Headquarters location and computer equipment we use for information services and in our development and test labs as well as amortization of intangible assets acquired through the purchase of Hedvig.
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Foreign Currency Exchange Rates’ Impact on Results of Operations
Sales outside the United States were approximately 49% of our total revenue for fiscal 2020, 47% of our total revenue for fiscal 20192023 and 46%48% for both fiscal 2018.2022 and fiscal 2021. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions generally results in increased revenue, operating expenses and income from operations for our non-U.S. operations. Similarly, our revenue, operating expenses and net income will generally decrease for our non-U.S. operations if the U.S. dollar strengthens against foreign currencies.
Using the average foreign currency exchange rates from fiscal 2019,2022, our software and products revenue would have been higher by $4.6$15.1 million, our services revenue would have been higher by $5.9$19.7 million, our cost of sales would have been higher by $1.6$4.2 million and our operating expenses would have been higher by $5.8$18.6 million from non-U.S. operations for fiscal 2020.2023.
In addition, we are exposed to risks of foreign currency fluctuation primarily from cash balances, accounts receivables and intercompany accounts denominated in foreign currencies and are subject to the resulting transaction gains and losses, which are recorded as a component of general and administrative expenses. We recognized net foreign currency transaction gainslosses of $0.4$1.2 million in fiscal 2020, $1.02023, insignificant losses in fiscal 2022 and losses of $1.9 million in fiscal 2019, and $0.1 million in fiscal 2018.2021.
Critical Accounting Policies
In presenting our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), we are required to make estimates and judgments that affect the amounts reported therein. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate. Actual results may differ significantly from these estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, significant judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We consider these policies requiring significant management judgment to be critical accounting policies. The following is a description of ourthese critical accounting policies that we believe require subjective and complex judgments, which could potentially have a material effect on our reported financial condition or results of operations.
policies.
Revenue Recognition
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. Our revenue recognition policies require us to make significant judgments and estimates. In applying our revenue recognition policy, we must determine which portions of our revenue are recognized currently (generally software and products revenue) and which portions must be deferred and recognized in future periods (generally services revenue). We analyze various factors including, but not limited to, the selling price of undelivered services when sold on a stand-alone basis, our pricing policies, the credit-worthiness of our customers, and contractual terms and conditions in helping us to make such judgments about revenue recognition. Changes in judgment on any of these factors could materially impact the timing and amount of revenue recognized in a given period. We record revenue net of sales tax.
We derive revenue from two primary sources: software and products, and services. Software and products revenue includes our software and integrated appliances that combine our software with hardware. Services include customer support (software updates and technical support), consulting, assessment and design services, installation services, customer education and customer education. A typical contract includesas-a-service, which is branded as Metallic.
We sell both perpetual and term-based licenses and services.
Our software licenses typically provide for a perpetual right to useof our software. We also sellrefer to our term-based software licenses that expire, which are referred to as subscription arrangements. We do not customize our 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. We have concluded that our software license islicenses (both perpetual and subscription) are functional intellectual property that is distinct, as the user can benefit from the software on its own. Software revenue for both perpetual and product revenuesubscription licenses 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. We do not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the new subscription period.
We also selloffer appliances that integrate our software with hardware and address a wide-range of business needs and use cases, ranging from support for remote or branch offices with limited IT staff up to large corporate data centers. Revenue relatedWe typically offer appliances via a software only model in which we sell software to appliancesa third party, which assembles an integrated appliance that is recognized when control ofsold to end user customers. As a result, the appliances passes to the customer; typically upon delivery.
revenue and costs associated with hardware are usually not included in our financial statements.
Services revenue includes revenue from customer support, SaaS, 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. We sell our 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.year on our perpetual licenses. The term of our subscription arrangements is typically three years but can range between one and five years.
Commvault's SaaS offerings, which are branded as Metallic, allow customers to use hosted software over the contract period without taking possession of the software. Revenue related to Metallic is generally recognized ratably over the contract term as services revenue.
Other
Our other professional services include consulting, assessment and design services, installation services and customer education. Customer education services include courses taught by our 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 our contracts with customers contain multiple performance obligations. For these contracts, we account 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 productsappliances 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.
Our typical performance obligations include the following:
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| | | | | | | | | | |
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 |
Other Services Revenue |
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 |
Software-as-a-serviceAs-a-service (Metallic) | Ratably over the course of the contract (over time) | AnnualAnnually or monthly paymentsat the beginning of the contract period | Observable in transactions without multiple performance obligations |
Accounting for Income Taxes
Under ASC 740, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts. Valuation allowances are established when, in our judgment, it is more likely than not that deferred tax assets will not be realized. In assessing the need for a valuation allowance, we weigh the available positive and negative evidence, including historical levels of pre-tax income, legislative developments, expectations and risks associated with estimates of future pre-tax income, and prudent and feasible tax planning strategies. During the year ended March 31, 2018, we concludedWe believe that based on the amount, and trend, of pre-tax loss in recent fiscal years it is more likely than not that we will not realize the benefits of itsour gross deferred tax assets and therefore have recorded a valuation allowance to reduce the carrying value of these gross deferred tax assets, net of the impact of the reversal of taxable temporary differences, to zero. The valuation allowance is material to our financial statements. In the future, changes to our estimates regarding the realizability of our gross deferred tax assets could materially impact our results of operations.
We conduct business globally and as a result, file income tax returns in the United States and in various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Australia, Canada, Germany, Netherlands and United Kingdom.
Goodwill and Purchased Intangible Asset
We test goodwill and indefinite-lived intangible assets for impairment at least annually, (January 1)on January 1, by performing a quantitative assessment of whether the fair value of each reporting unit or asset exceeds its carrying amount. We have one reporting unit. Goodwill is tested at this reporting unit level and indefinite-lived intangible assets are tested at the individual asset level. This requires us to assess and make judgments regarding a variety of factors which impact the fair value of the reporting unit or asset being tested, including business plans, anticipated future cash flows, economic projections and other market data. Because there are inherent uncertainties involved in these factors, significant differences between these estimates and actual results could result in future impairment charges and could materially impact our future financial results. During the fourth quarter of 2020,fiscal 2023, we
completed the annual impairment test for goodwill and determined that these assetsit had not been impaired as of the test date, January 1, 2020. No other events or circumstances changed during the year ended March 31, 2020 that would indicate that the fair values of our reporting unit and indefinite-lived intangible asset are below their carrying values.2023.
Intangible assets are recognized apart from goodwill whenever an acquired intangible asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset or liability. We determined the fair value of our intangible assets using the income method. This model utilizes certain unobservable inputs classified as Level 3 measurements as defined by ASC 820, Fair Value Measurements and Disclosures. The determination of fair value requires considerable judgment and is sensitive to changes in underlying assumptions, estimates and market factors. Estimating fair value requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. The fair values of the intangible assets will be amortized over their useful lives. Impairment losses are recognized if the carrying amounts of finite-lived intangible assets are both not recoverable and exceed the fair values.
Our purchased intangible assets were recently acquired in connection with the Hedvig Inc. transaction. The most material of these assets was developed technology. While our work to integrate this technology with our own is proceeding, the economic impact of COVID-19, or other factors, may delay our ability to meet the forecasts we used to estimate the fair value of this asset. If we were to identify an impairment indicator in the future, we may conclude that the carrying value of the asset is not recoverable within the remaining useful life of the asset and recognize a non-cash impairment charge. An impairment of this asset could have a material impact on our results of operations.
Results of Operations
Fiscal year ended March 31, 20202023 compared to fiscal year ended March 31, 20192022
Revenues (in millions)
- Total revenues decreased $40.1increased $15.0 million, or 6%2% as a result of the following:
- Software and products•An increase in services revenue decreased $34.6 million, or 11%, primarily due todriven by the following:year over year increase in revenue from Metallic as-a-service arrangements.
•Software and products revenue represented 41%45% of our total revenues in fiscal 20202023 and 44%46% of our total revenues in fiscal 2019.2022.
•Services revenue represented 55% of our total revenues in fiscal 2023 and 54% of our total revenues in fiscal 2022.
•Using the average foreign currency exchange rates from the fiscal year ended March 31, 2022, our total revenues would have increased 6% compared to the fiscal year ended March 31, 2022.
Software and products revenue decreased $1.4 million, primarily due to:
•The impact of the year over year strengthening of the U.S. dollar, particularly as compared to the Euro and British Pound. Using the average foreign currency exchange rates from the fiscal year ended March 31, 2022, our software and products revenue would have increased 4% compared to the fiscal year ended March 31, 2022.
•The foreign currency impact was partially offset by an increase of $3.2 million, or 1%, in larger deal transactions (deals greater than $0.1 million)million in software and products revenue). Larger deal transactions represented approximately 65%73% of our software and products revenue in both fiscal 20202023 and 72% of our software and products revenue in fiscal 2019.2022.
Decrease of $22.4 million in enterprise transactions
Decrease of 19% in the number of enterprise transactions, partially offset by an increase of 10% in the average dollar amount of such transactions
•The average dollar amount of enterpriselarger deal transactions was approximately $298,000$345 thousand in fiscal 20202023 and approximately $272,000$320 thousand in fiscal 2019.2022. There were 750 larger deal revenue transactions in fiscal 2023 compared to 799 deals in fiscal 2022.
Decrease•The increase in larger deal transaction revenue was partially offset by a decrease of $12.2$4.6 million in transactions less than $0.1 millionmillion.
- Services revenue decreased $5.5increased $16.4 million, or 1%4%, primarily due toto:
•An increase in other services revenue, driven primarily by the following:
Decrease of $6.9 millionyear over year increase in training and consulting service revenue
Partially from Metallic as-a-service arrangements, partially offset by an increase of $1.4 milliona decrease in revenue from customer support agreements as a result of software salesagreements.
•Using the average foreign currency exchange rates from the fiscal year ended March 31, 2022, our services revenue would have increased 9% compared to new customers and renewal agreements with our installed software base
Services revenue represented 59% of our total revenues inthe fiscal 2020 and 56% of our total revenues in fiscal 2019.year ended March 31, 2022.
We track software and products revenue on a geographic basis. The geographic regions that are tracked areOur International region encompasses Europe, Middle East, Africa, Australia, India, Japan, Southeast Asia, and China. Our Americas region includes the Americas (UnitedUnited States, Canada, and Latin America), EMEA (Europe, Middle East, Africa)America. Americas and APJ (Australia, New Zealand, Southeast Asia, China). Americas, EMEAInternational represented 60% and APJ represented 51%, 35% and 14%40% of total software and products revenue, respectively, for the fiscal year ended March 31, 2020. The2023. Software and products revenue was flat year over year decrease of Software and Products Revenue was 17% in the Americas and decreased 1% in EMEAInternational.
▪The decrease in International software and 13% in APJ.products revenue was primarily due to the year over year strengthening of the U.S. dollar, particularly as compared to the Euro and British Pound. Using the average foreign currency exchange rates from the fiscal year ended March 31, 2022, our International revenue would have increased 10% compared to the fiscal year ended March 31, 2022.
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▪ | The decrease in Americas software and products revenue was the result of a 28% decrease in the number of enterprise transactions partially offset by a 15% increase in the average deal size of enterprise revenue transactions. |
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▪ | EMEA software and products revenue decreased as a result of a 2% decline in non-enterprise transaction revenue partially offset by an increase of 1% in enterprise transaction revenue. On a constant currency basis, EMEA software and products revenue would have increased 2% versus the prior year. |
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▪ | The decrease in APJ was the result of a 23% decrease in revenue from non-enterprise revenue transactions that was partially offset by a 2% increase in enterprise revenue transactions. On a constant currency basis, APJ software and products revenue would have declined 9% compared to prior year. |
Our software and products revenue in EMEA and APJInternational is subject to changes in foreign exchange rates as more fullyfurther discussed above in the “Foreign Currency Exchange Rates’ Impact on Results of Operations” section.
Cost of Revenues and Gross Margin ($ in millions)
- Total cost of revenues increased $0.1$21.5 million representingand represented 17% and 15% of our total revenues in fiscal 2020 compared to 16% in2023 and fiscal 2019. The increase as a percentage of revenue is related to the cost of sales associated with our Hyperscale software and products.2022, respectively.
- Cost of software and products revenue increased $2.4$0.6 million representing 10%and represented 4% of software and products revenue in both fiscal 2020 compared to 8% in2023 and fiscal 2019. The increase is related to additional hardware and software royalty costs associated with our appliance and Hyperscale product offerings. As sales of our appliances and hyperscale products continue to ramp, we expect the cost of software and products as a percentage of software and products revenue will continue to increase.2022.
- Cost of services revenue decreased $2.3increased $20.9 million representing 22%and represented 28% of our services revenue in fiscal 2020 and 23%2023 compared to 24% in fiscal 2019.2022. The increase in cost of services revenue primarily related to an increase in the cost of infrastructure related to Metallic as-a-service offerings as they continue to scale.
Operating Expenses ($ in millions)
- –Sales and marketing expenses:expenses decreased $34.3$0.8 million, or 9%, primarily due to a decrease in employee compensation and sales commissions relative to the following:prior year period partially offset by increases in stock compensation and travel expenses.
Decrease of $33.6
- Research and development expenses decreased $11.8 million, or 8%, due to decreases in employee compensation and related expenses, mainly attributable to our restructuring initiatives
Decrease of $6.2including a $5.3 million decrease in travel and entertainment expenses
Increase of $3.9 million in marketing expenses.
- Research and development expenses: increased $17.4 million, or 19%, as a result of an increase in employeestock-based compensation, and the completion of payments related expenses attributable to the expansion of our engineering group.
The increase is primarily due to an increase in employee-related costs resulting from additional headcount due to the acquisition of Hedvig.
Additionally, certain Hedvig shareholders will receive cash payments totaling $14.1 million 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' ownershipkey employees of Hedvig, under GAAP they are accounted for as compensation expense overInc., which ended in the coursefourth quarter of the 30 month service period. Research and development expenses in 2020 includes $2.8 million of expense related to this arrangement.
fiscal 2022. Investing in research and development has been a priority for Commvault, and we anticipate continued spending related to the development of our data and information managementprotection software applications.
- General and administrative expenses: decreased $8.8expenses increased $1.2 million, or 9%1%, primarily due to the following:
Decrease of $16.6 million in stock compensation as a result of fiscal 2019 executive stock modifications partially offset by an increaseincreases in employee compensation and related expenses. Partexpenses compared to prior year, partially offset by a $0.9 million decrease in stock-based compensation.
- Restructuring: Our restructuring plan, initiated in the fourth quarter of the increasefiscal 2022, is related to the restructuring and centralization of certain activities across the company.
Decrease of $2.3 million of costs related to a non-routine shareholder matter. The costs are for professional fees related to our settlement agreement with the shareholder and consulting fees
incurred with the operational review which was agreed to as part of the settlement. Further, there is a decrease of $1.4 million related to a litigation settlement in fiscal year 2019, where no such charges were incurred in fiscal 2020.
Increase of $5.6 million in transaction costs related to the acquisition of Hedvig
- Restructuring: In fiscal 2019 we initiated a restructuring planaimed to increase efficiency in our sales, marketing and distribution functions as well as reduce costs across all functional areas. The plan also included a reorganization to combine our EMEA and APJ field organizations into our International region. Restructuring expenses were $21.3$15.5 million and $14.8$6.2 million for the years ended March 31, 20202023 and 2019,2022, respectively. These restructuring charges relate primarily to severance and related costs associated with headcount reductions. These charges include $1.8 million in fiscal 2020 and $2.6 million in fiscal 20192023 and $1.7 million in fiscal 2022 of stock-based compensation related to modifications of existing awards granted to certain employees included in the restructuring. We cannot guarantee the restructuring program will achieve its intended result. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets due to the loss of key employees, any of which may impair our ability to achieve anticipated results of operations or otherwise harm our business.
- Depreciation and amortization expense: increased $5.2expense decreased $0.4 million, from $10.6$9.7 million in fiscal 20192022 to $15.8$9.3 million in fiscal 2020,2023, driven by the amortizationreclassification of intangibleour owned corporate headquarters as assets acquiredheld for sale.
- Impairment charges: During the fourth quarter of fiscal 2023, we entered into an agreement to sell our owned corporate headquarters in Tinton Falls, New Jersey. The property was reclassified as assets held for sale and the previous carrying amount was written down to its estimated fair value, less estimated costs to sell, resulting in a resultnoncash impairment charge of the Hedvig business combination. Depreciation and amortization expense will increase in fiscal 2021 as a result of a full year of Hedvig intangible asset amortization.$53.5 million.
Interest Income
Interest income decreasedincreased $0.6 million, from $5.5$0.7 million in fiscal 20192022 to $5.0$1.3 million in fiscal 2020. The decrease was the2023 primarily as a result of an increase in long term receivables that include a decreasefinancing component.
Interest Expense
Interest expense increased $0.4 million as a result of entering into a revolving credit facility in short term investments and decreased yield on those investments. Our short-term investments are in U.S. Treasury Bills.late fiscal 2022.
Income Tax Expense
Income tax benefitexpense was $6.9$20.4 million in fiscal 20202023 compared to expense of $6.9$9.8 million in fiscal 2019. The income tax benefit for the year ended March 31, 2020 relates primarily to the impact of the U.S. CARES Act. As a result of the CARES act, we have estimated that we will receive an income tax refund of approximately $10.0 million related to the ability to carryback net operating losses. This benefit was partially offset by current foreign taxes.2022. The income tax expense for the year ended March 31, 20192023 relates primarily to current U.S. and foreign taxes. The increase in income tax expense relative to the prior year relates primarily to current federal and state taxes driven by the effects of capitalization and amortization of research and development expenses starting in fiscal year 2023 as required by the 2017 Tax Cuts and Jobs Act. Given we have recorded a valuation allowance against our deferred tax assets, there is no corresponding deferred tax benefit related to the current tax expense associated with the capitalization of research and development expenses.
Liquidity and Capital Resources
As of March 31, 2020,2023, our cash balance was $296.1 million, which included $8.0 million of restricted cash. In addition, we have approximately $43.6 million of short-term investments invested in U.S. Treasury Bills. In recent fiscal years, our principal source of liquidity has been cash provided by operations.
As of March 31, 2020, the$287.8 million. The amount of cash and cash equivalents held outside of the United States by our foreign legal entities was approximately $158.6$183.3 million. In recent fiscal years, our principal source of liquidity has been cash provided by operations. These balances are dispersed across manyapproximately 35 international locations around the world. We believe that such dispersion meets the current and anticipated future liquidity needs of our foreign legal entities. In the event we neededneed to repatriate funds from outside of the United States, such repatriation would likely be subject to restrictions by local laws and/or tax consequences including foreign withholding taxes.
On December 13, 2021, we entered into a five-year $100 million senior secured revolving credit facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A.. The Credit Facility is available for share repurchases, general corporate purposes, and letters of credit. The Credit Facility contains financial maintenance covenants including a leverage ratio and interest coverage ratio. The Credit Facility also contains certain customary events of default which would permit the lender to, among other things, declare all loans then outstanding to be immediately due and payable if such default is not cured within applicable grace periods. The Credit Facility also limits our ability to incur certain additional indebtedness, create or permit liens on assets, make acquisitions, make investments, loans or advances, sell or transfer assets, pay dividends or distributions, and engage in certain transactions with foreign affiliates. Outstanding borrowings under the Credit Facility accrue interest at an annual rate equal to Secured Overnight Financing Rate plus 1.25% subject to increases based on our actual leverage. The unused balance on the Credit Facility is also subject to a 0.25% annual interest charge subject to increases based on our actual leverage. As of March 31, 2023, there were no borrowings under the Credit Facility and we were in compliance with all covenants.
During the year ended March 31, 2020,2023, we repurchased $77.2$150.9 million of common stock, (1.7or approximately 2.5 million shares) undershares. On April 20, 2023, the Board of Directors approved an increase in our share repurchase program. Our future stock repurchase activityprogram so that $250.0 million was available. The Board's authorization has no expiration date. While we are not obligated to, our current practice is subject to the business judgment of our management and Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows and other anticipated capital requirements or investment alternatives. As of May 11, 2020, there is $162.8 million remaining in the share repurchase program which expires on March 31, 2021. Our stock repurchase program has been funded by our existing cash and cash equivalent balances as well as cash flows provided by our operations.
The following chart summarizes the cash used to repurchase shares using at least 75% of our common stock:
Our summarized annualfree cash flow information is as follows (in thousands):
(operating cash flow less capital expenditures).
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| | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2020 | | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 88,464 |
| | $ | 110,180 |
| | $ | 84,169 |
|
Net cash used in investing activities | | (74,005 | ) | | (5,261 | ) | | (17,991 | ) |
Net cash used in financing activities | | (39,403 | ) | | (90,713 | ) | | (82,104 | ) |
Effects of exchange rate — changes in cash | | (6,966 | ) | | (16,998 | ) | | 17,219 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | (31,910 | ) | | $ | (2,792 | ) | | $ | 1,293 |
|
- Net cash provided by operating activities was impacted by:
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• | Fiscal 2020: net loss adjusted for the impact of non-cash charges and decreases in accounts receivable
|
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• | Fiscal 2019: net income adjusted for the impact of non-cash charges and increases in deferred revenue and accrued expenses, partially offset by increase in accounts receivable
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• | Fiscal 2018: net loss adjusted for the impact of non-cash charges and increases in deferred services revenue as a result of customer support agreements from new customers and renewal agreements with our installed customer base, partially offset by an increase in accounts receivable
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- Net cash used in investing activities was impacted by:
Fiscal 2020: $157.5 million used for the acquisition of Hedvig and $3.2 million of capital expenditures, partially offset by $86.7 million of net proceeds of short-term investments of U.S. Treasury Bills
Fiscal 2019: $1.3 million of net proceeds of short-term investments of U.S. Treasury Bills and $6.6 million of capital expenditures as we continue to invest in and enhance our global infrastructure. Included in this balance was a purchase of land adjacent to our global corporate headquarters.
Fiscal 2018: $10.9 million of net purchases of short-term investments of U.S. Treasury Bills and $7.0 million of capital expenditures as we continue to invest in and enhance our global infrastructure
- Net cash used in financing activities was impacted by:
Fiscal 2020: $77.2 million used to repurchase shares of our common stock under our repurchase program, partially offset by $37.8 million of proceeds from the exercise of stock options and the employee stock purchase plan.
Fiscal 2019: $132.7 million used to repurchase shares of our common stock under our repurchase program, partially offset by $42.0 million of proceeds from the exercise of stock options and the employee stock purchase plan.
Fiscal 2018: $112.2 million used to repurchase shares of our common stock under our repurchase program, partially offset by $30.1 million of proceeds from the exercise of stock options and the employee stock purchase plan.
A summary of the cash used for the stock repurchase program consists of the following:
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| | Year Ended March 31, |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
Cash used for repurchases (in thousands) | | $ | 150,921 | | | $ | 305,239 | | | $ | 95,259 | | | $ | 77,198 | | | $ | 132,697 | |
Shares repurchased (in thousands) | | 2,521 | | | 4,307 | | | 1,643 | | | 1,701 | | | 2,115 | |
Average price per share | | $ | 59.90 | | | $ | 70.87 | | | $ | 57.97 | | | $ | 45.37 | | | $ | 62.74 | |
Our summarized cash flow information is as follows (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2023 | | 2022 |
Net cash provided by operating activities | | $ | 170,288 | | | $ | 177,180 | |
Net cash used in investing activities | | (5,286) | | | (24,444) | |
Net cash used in financing activities | | (135,579) | | | (276,088) | |
Effects of exchange rate — changes in cash | | (9,152) | | | (6,378) | |
Net increase (decrease) in cash and cash equivalents | | $ | 20,271 | | | $ | (129,730) | |
- Net cash provided by operating activities was impacted by:
•Fiscal 2023: net loss adjusted for the impact of non-cash charges, including the impairment of our owned corporate headquarters, and increases in deferred revenue partially offset by decreases in accrued expenses.
•Fiscal 2022: net income adjusted for the impact of non-cash charges and increases in deferred revenue and accrued expenses, partially offset by increases in accounts receivable and deferred commissions.
- Net cash used in investing activities was impacted by:
•Fiscal 2023: $3.2 million of capital expenditures and $2.1 million for the purchase of equity securities.
•Fiscal 2022: $16.9 million used for the acquisition of TrapX, $3.9 million of capital expenditures and $4.1 million for the purchase of equity securities partially offset by proceeds of $0.5 million related to the sale of an equity investment.
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| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Cash used for repurchases (in thousands) | | $ | 77,198 |
| | $ | 132,697 |
| | $ | 112,218 |
| | $ | 49,998 |
| | $ | 91,477 |
|
Shares repurchased (in thousands) | | 1,701 |
| | 2,115 |
| | 2,098 |
| | 982 |
| | 2,563 |
|
Average price per share | | $ | 45.37 |
| | $ | 62.74 |
| | $ | 53.49 |
| | $ | 50.91 |
| | $ | 35.69 |
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- Net cash used in financing activities was impacted by:•Fiscal 2023: $150.9 million used to repurchase shares of our common stock under our repurchase program, $0.1 million of debt issuance costs paid partially offset by $15.4 million of proceeds from the exercise of stock options and the Employee Stock Purchase Plan.
•Fiscal 2022: $305.2 million used to repurchase shares of our common stock under our repurchase program, $0.6 million of debt issuance costs paid partially offset by $29.7 million of proceeds from the exercise of stock options and the Employee Stock Purchase Plan.
Working capital decreased $143.6increased $50.8 million from $328.7$90.0 million as of March 31, 20192022 to $185.1$140.8 million as of March 31, 2020.2023. The decreaseincrease in working capital is primarily due to cash used to acquire the investment in Hedvig during the fiscal year.reclassification of our owned corporate headquarters as assets held for sale.
We believe that our existing cash, cash equivalents and our cash from operations will be sufficient to meet our anticipated cash needs for working capital, income taxes, capital expenditures and potential stock repurchases for at least the next 12twelve months. We may seek additional funding through public or private financings or other arrangements during this period. Adequate funds may not be available when needed or may not be available on terms favorable to us, or at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
Summary Disclosures about Contractual Obligations and Commercial Commitments
Our material capital commitments consist of obligations under facilities and operating leases. Some of these leases have free or escalating rent payment provisions. Refer to Notes 2 and 15 of the notes to the consolidated financial statements for further discussion on operating leases. We anticipate that we will experience an increase in our capital expenditures and lease commitments as a result of our anticipated growth in operations, infrastructure, personnel and resources devoted to building our brand name.
The following table summarizes our obligations as of March 31, 2020:
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| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less Than 1 Year | | 2-3 Years | | 4-5 Years | | More Than 5 Years |
Operating lease obligations | | 17,818 |
| | 7,520 |
| | 7,230 |
| | 2,393 |
| | 675 |
|
Purchase obligations | | 26,041 |
| | 18,590 |
| | 6,205 |
| | 1,246 |
| | — |
|
Total | | 43,859 |
| | 26,110 |
| | 13,435 |
| | 3,639 |
| | 675 |
|
We generally do not enter into binding purchase obligations. The purchase obligations above relate primarily to marketing and IT services. The contractual obligations table above excludes unrecognized tax benefits, plus related interest and penalties totaling $1.7 million because we cannot reasonably estimate in which future periods these amounts will ultimately be settled.
We have certain software royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a fixed cost per unit shipped or a fixed fee for unlimited units shipped over a designated period. Royalty expense, included in cost of software and products revenues, was $12.5$9.3 million in fiscal 20202023 and $12.3$11.2 million in fiscal 2019.2022.
We offer a 90-day limited product warranty for our software. To date, costs relating to this product warranty have not been material.
Off-Balance Sheet Arrangements
As of March 31, 2019, we had operating leases that were classified as off-balance sheet arrangements. Upon adoption of ASC 842, Leases on April 1, 2019, leases were classified as right of use assets and presented on the balance sheet as discussed in Note 15 of the consolidated financial statements. As such, as of March 31, 2020,2023, we did not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Indemnifications
Certain of our software licensing agreements contain certain provisions that indemnify our customers from any claim, suit or proceeding arising from alleged or actual intellectual property infringement. These provisions continue in perpetuity along with our software licensing and as-a-service agreements. We have never incurred a liability relating to one of these indemnification provisions in the past and we believe that the likelihood of any future payout relating to these provisions is remote. Therefore, we have not recorded a liability during any period related to these indemnification provisions.
Impact of Recently Issued Accounting Standards
See Note 2 of the notes to the consolidated financial statements for a discussion of the impact of recently issued accounting standards.
As a global company, we face exposure to adverse movements in foreign currency exchange rates. Our international sales are generally denominated in foreign currencies and this revenue could be materially affected by currency fluctuations. Approximately 49%47% of our sales were outside the United States in fiscal 20202023 and 47% were outside the United States48% in fiscal 2019.2022. Our primary exposures are to fluctuations in exchange rates for the U.S. dollar versus the Euro, and to a lesser extent, the Australian dollar, British pound sterling, Canadian dollar, Chinese yuan, Indian rupee, Korean won and Singapore dollar. Changes in currency exchange rates could adversely affect our reported revenues and require us to reduce our prices to remain competitive in foreign markets, which could also have a material adverse effect on our results of operations. Historically, we have periodically reviewed and revised the pricing of our products available to our customers in foreign countries and we have not maintained excess cash balances in foreign accounts.
We estimate that a 10% change in all foreign exchange rates would impact our reported operating profit by approximately $9.6$11.0 million annually. This sensitivity analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area.
Our exposure to foreign currency transaction gains and losses is primarily the result of certain net receivables due from our foreign subsidiaries and customers being denominated in currencies other than the functional currency of the subsidiary. Our foreign subsidiaries conduct their businesses in local currency and we generally do not maintain excess U.S. dollar cash balances in foreign accounts.
Commvault Systems, Inc.
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of March 31, 2020.2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.2023.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) of the Exchange Act. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of any internal control may vary over time.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of March 31, 2020.2023. In making this assessment, management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in the 2013 Internal Control—Integrated Framework.
Based on our assessment, using those criteria, our management concluded that, as of March 31, 2020,2023, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of March 31, 20202023 has been audited by Ernst & Young LLP, our independent registered public accounting firm, as stated in their report, which is included below in this Annual Report on Form 10-K.
There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 20202023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.