Item 1B.
Unresolved Staff Comments
None.
Our principal administrative, sales, marketing, customer support and research and development facility is located at our headquarters in Oceanport, New Jersey. We currently occupy approximately 182,000 square feet of office space in the Oceanport facility under the terms of an operating lease expiring in July 2015.
On January 29, 2013, we closed on a purchase of land located in Tinton Falls, New Jersey for our future corporate campus headquarters to support the long-term growth of our business. We are in the process of completing the design and construction of the headquarters, which we expect to finalize in the next 12 months. Our estimate of the build-out, including the land purchase, building and campus infrastructure, is approximately $135 million.
In addition, we have offices in the United States in Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Massachusetts, Minnesota, New York, North Carolina, Ohio, Oregon, Tennessee, Texas, Virginia and Washington; and outside the United States in Kanata, Ontario; Toronto, Ontario; Calgary, Alberta; Montreal, Quebec; Vancouver, British Columbia; Reading, United Kingdom; Oberhausen, Germany; Utrecht, Netherlands; Milan, Italy; Stockholm, Sweden, Zurich, Switzerland; Istanbul, Turkey; Paris, France; Madrid, Spain; Dubai, United Arab Emirates; Moscow, Russia; Johannesburg, South Africa; Riyadh, Saudi Arabia; Tel Aviv, Israel; Beijing, China; Shanghai, China; Guangzhou, China; Chengdu, China; Hong Kong; Sydney, Australia; Melbourne, Australia; Canberra, Australia; Auckland, New Zealand; Tokyo, Japan; Singapore; Mexico City, Mexico; Kuala Lumpar, Malaysia; Bangkok, Thailand; Sao Paulo, Brazil; Seoul, South Korea; Mumbai, India; New Delhi, India; Bangalore, India; and Hyderabad, India.
Item 3.
Item 3.
Legal Proceedings
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.
Item 4.
Item 4.
Mine Safety Disclosures
Not Applicable
PART II
Item 5.
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 Global Market under the symbol “CVLT.” The following table sets forth, for the periods indicated, the high and the low closing sales prices of our common stock, as reported on The NASDAQ Global Market.
On April 25, 2014, the last reported sale price of our common stock as reported on The NASDAQ Global Market was $47.56 per share.
Stockholders
As of April 25, 2014, there were approximately 59 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, 2009 and March 31, 2014, with the cumulative total return of (i) The NASDAQ Computer Index and (ii) The NASDAQ Composite Index, over the same period. This graph assumes the investment of $100,000 on March 31, 2009 in our common stock, The NASDAQ Composite Index and The NASDAQ Computer Index, and assumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on March 31, 2009 was the closing sales price of $10.97 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, 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.
Issuer Purchases of Equity Securities
During the fourth quarter of fiscal 2014, we repurchased $50.0 million of common stock (775,000 shares) under our share repurchase program bringing the cumulative repurchases under our current program to $167.2 million.
A summary of our repurchases of common stock during the fourth quarter of fiscal 2014 is as follows:
(1)
On April 24, 2014, our Board of Directors authorized a $50.0 million increase to the existing stock repurchase program which expires on March 31, 2015. After these fourth quarter repurchases and the increase to the plan by the Board of Directors, $150.0 million remains under our current stock repurchase authorization.
Item 6.
Item 6.
Selected Financial Data
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.
Item 7.
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.
Overview
We are a leading provider of data and information management software applications and related services in terms of product breadth and functionality and market penetration. We develop, market and sell a unified suite of data and information management software applications under the Simpana® brand. Simpana software is built from the ground up on a single platform and unified code base for integrated data and information management. The Simpana platform contains licensable modules that work together seamlessly, sharing a single code and common function set to deliver Backup and Recovery, Archive, Replication, eDiscovery and Analytic capabilities across physical, virtual and cloud environments. With a single platform approach, Simpana software is specifically designed to protect, manage and access data throughout its lifecycle in less time, at lower cost and with fewer resources than alternative solutions. Our product features and capabilities enable our customers to deploy solutions for data protection, business continuance, corporate compliance and centralized management and reporting. We also provide our customers with a broad range of professional services that are delivered by our worldwide support and field operations. As of March 31, 2014 we had licensed our software applications to approximately 20,000 registered customers.
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, such as Dell, HP, Hitachi Data Systems, Microsoft, Network Appliance, Fujitsu, Novell and Oracle, 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.
Our Simpana software suite is one product that contains the following licensable modules, all built on a single unified code base and platform to protect, manage and access data and information: Backup and Recovery, Archive, Replication, eDiscovery, and Analytics. In addition to Backup and Recovery, the subsequent release of our other software application modules has substantially increased our addressable market. Each application module can be used individually or in combination with other application modules from our single platform suite.
In August 2010, our CommVault Simpana 9.0 software suite (“Simpana 9”) was made available for public release. We believe that Simpana 9, which built on and significantly expanded Simpana 8, allows customers to deploy a modern data management solution to achieve gains in efficiency, cost optimization and scale. We believe that Simpana 9 solves real-world IT challenges with major technology advancements, including increased virtualization scalability and performance, integrated source and target data deduplication, automatic and transparent integration with hardware array-based snapshots, as well as new tools that ease migration to our next generation Simpana 9 platform.
In January 2012, we released enhancements to our existing Simpana 9 software suite. These enhancements included new capabilities that converges backup, archive and reporting processes; additional SnapProtect technology that delivers hardware snapshot integration; enhancements to virtual server protection; new innovations to protect data on laptops and desktops with embedded source deduplication for optimized efficiency; and new integration with Microsoft SharePoint.
In February 2013, our CommVault Simpana 10.0 software suite (“Simpana 10”) was made available for public release. We believe Simpana 10 extends our data protection and archiving leadership to deliver secure, self-service access from mobile devices, speed the adoption of cloud computing and extract value from Big Data. Simpana 10 includes major technology advancements such as Enhanced IntelliSnap™ snapshot management; Simpana OnePass™ with Exchange; tighter integration with Microsoft Hyper-V, VMware vSphere 5.1 and vCloud Director 5.1; workflow automation; fourth-generation parallel deduplication; and customizable web-based reporting, dashboards and cloud-based analytics. Our Simpana 10 architecture efficiently stores all protected data in a virtual repository, called ContentStore, and opens access to simplify the way end users search, analyze and repurpose data across an enterprise.
Our software licenses typically provide for a perpetual right to use our software and are sold on a capacity basis, on a per-copy basis or as site licenses. During the fiscal year ended March 31, 2014, approximately 80% of software license revenue was sold on a capacity basis. Capacity based software licenses provide our customers with unlimited licenses of specified software products based on a defined level of terabytes of data under management. As a result, when we sell our platform through a capacity license, many of the various Simpana functionalities are bundled into one capacity based price. We anticipate that capacity based licenses will continue to account for the majority of our software license revenue for the foreseeable future.
Historically, an insignificant amount of our revenue has been sold under subscription, or term based, license arrangements. In these arrangements the customer has the right to use the software on either a capacity basis or per-copy basis over a designated period of time. Revenue in these arrangements is recognized ratably over the term of the agreement. Over the next several years we expect revenue from these types of arrangements to become a more significant portion of our total revenue.
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 management 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 Simpana 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.
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.
Given the nature of the industry in which we operate, our software applications are subject to obsolescence. As noted above, 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. 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. We do not customize our software for a specific end-user customer. We sell our software applications 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 revenue was 50% of our total revenues for fiscal 2014, 51% for fiscal 2013 and 50% for fiscal 2012.
In recent fiscal years, we have generated approximately two-thirds of our software revenue from our existing customer base and approximately one-third of our software revenue from new customers. In addition, our total software revenue in any particular period is, to a certain extent, dependent upon our ability to generate revenues from large customer software deals, which we refer to as enterprise software transactions. We expect the number of enterprise software transactions (transactions greater than $0.1 million) and resulting software revenue to increase throughout fiscal 2015, although the size and timing of any particular software transaction is more difficult to forecast. Such software transactions represented approximately 57% of our software revenue in both fiscal 2014 and fiscal 2013 and approximately 52% of our software revenue in fiscal 2012.
Software revenue generated through indirect distribution channels was 87% of total software revenue in fiscal 2014, 89% in fiscal 2013 and 84% in fiscal 2012. Software revenue generated through direct distribution channels was 13% of total software revenue in fiscal 2014, 11% in fiscal 2013 and 16% in fiscal 2012. The dollar value of software revenue generated through indirect distribution channels increased approximately $33.2 million, or 15%, in fiscal 2014 compared to fiscal 2013. The dollar value of software revenue generated through direct distribution increased $9.7 million, or 34%, in fiscal 2014
compared to fiscal 2013. The increase in the dollar value of software revenue growth generated through our indirect distribution channels compared to our direct sales force in fiscal 2014 is primarily the result of an increase in software revenue from our international operations, which is almost exclusively transacted through indirect distribution. The increase in the dollar value of the software revenue generated through our direct sales channel is due to a higher value of direct enterprise transactions in the United States in fiscal 2014 compared to fiscal 2013. Deals initiated by our direct sales force are sometimes transacted through indirect channels based on end-user customer requirements, 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 revenue generated through our direct distribution channels from time to time. We believe that the growth of our software revenue, derived from both our indirect channel partners and direct sales force, are key attributes to our long-term growth strategy. We will 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 currently have a worldwide reseller agreement with Dell. Our reseller agreement with Dell provides them the right to market, resell and distribute certain of our products to end user customers. Historically, we also had an original equipment manufacturer agreement with Dell, which was terminated in December of 2013. We believe the termination of this agreement will not have a material effect on our business.
Sales through both of our agreements with Dell accounted for 15% of our total revenues for fiscal 2014 and 20% of our total revenues for fiscal 2013. We expect revenue transacted through Dell as a percentage of our total revenue to continue to decline as we transition our Dell related end-user customers to alternative distribution channels.
We have a global original equipment manufacturer agreement with NetApp under which NetApp will integrate elements of our Simpana software suite with NetApp SnapShot™ and replication technology, under the NetApp SnapProtect ® brand. We also have an original equipment manufacturer agreement with Hitachi Data Systems for them to market, sell and support our software applications and services on a stand-alone basis and/or incorporate our software applications into their own hardware products. Hitachi Data Systems and NetApp have 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 agreements, including the terminated Dell original equipment agreement, accounted for 13% of our total revenues for fiscal 2014 and 15% of our total revenues for fiscal 2013.
We also have non-exclusive distribution agreements 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., and Avnet Technology Solutions (“Avnet”), a subsidiary of Avnet, Inc. Pursuant to these distribution agreements, these distributors’ 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 31% of our total revenues through Arrow in fiscal 2014, approximately 29% of our total revenues in fiscal 2013 and approximately 26% of our total revenues in fiscal 2012. If Arrow or Avnet were to discontinue or reduce the sales of our products or if our agreement with Arrow or Avnet 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 or Avnet, then it could have a material adverse effect on our future business.
We derive approximately half of our total revenues from services revenue. Our services revenue is made up of fees from the delivery of customer support 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. 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 services revenue was 50% of our total revenues for fiscal 2014, 49% for fiscal 2013 and 50% for fiscal 2012.
The gross margin of our services revenue was 75.4% for fiscal 2014, 74.6% for fiscal 2013 and 75.3% for fiscal 2012. Overall, our services revenue has lower gross margins than our software revenue. The gross margin of our software revenue was 99.1% for fiscal 2014, 98.9% for fiscal 2013 and 98.6% for fiscal 2012. An increase in the percentage of total revenues represented by services revenue may adversely affect our overall gross margins.
Description of Costs and Expenses
Our cost of revenues is as follows:
•
Cost of Software Revenue, consists primarily of third-party royalties and other costs such as media, manuals, translation and distribution costs; and
•
Cost of Services Revenue, consists primarily of salary and employee benefit costs in providing customer support and other professional services.
Our operating expenses are as follows
•
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
•
Depreciation and Amortization, consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs.
We anticipate that each of the above categories of operating expenses will increase in dollar amounts, but will decline as a percentage of total revenues in the long-term.
Foreign Currency Exchange Rates’ Impact on Results of Operations
Sales outside the United States were approximately 43% of our total revenue for fiscal 2014, 42% for fiscal 2013 and 39% for fiscal 2012. 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 the corresponding fiscal 2013 period, our total revenues, cost of revenues and operating expenses from non-U.S. operations for fiscal 2014 would have been higher by approximately $1.3 million, $0.4 million and $1.8 million, respectively.
Using the average foreign currency exchange rates from the corresponding fiscal 2012 period, our total revenues, cost of revenues and operating expenses from non-U.S. operations for fiscal 2013 would have been higher by approximately $5.1 million, $0.6 million and $3.2 million, respectively.
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 gains of $0.3 million in fiscal 2014, and net foreign currency transaction losses of $0.3 million, and $0.2 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Critical Accounting Policies
In presenting our consolidated financial statements in conformity with U.S. generally accepted accounting principles, 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. The following is a description of our 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.
Revenue Recognition
Our revenue recognition policy is based on complex rules that 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 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 sales of undelivered services when sold on a stand-alone basis, our pricing policies, the credit-worthiness of our customers and resellers, accounts receivable aging data 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.
Currently, we derive revenues from two primary sources: software licenses and services. Services include customer support, consulting, assessment and design services, installation services and training. A typical sales arrangement includes both of these sources.
For sales arrangements involving multiple elements, we recognize revenue using the residual method. Under the residual method, we allocate and defer revenue for the undelivered elements based on fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple-element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective evidence (“VSOE”).
Our software licenses typically provide for a perpetual right to use our software and are sold on a per-copy basis, on a capacity basis or as site licenses. Software licenses sold on a capacity basis provide the customer with unlimited licenses of specified software products based on a defined level of terabytes of data under management. Site licenses give the customer the additional right to deploy the software on a limited basis during a specified term. We recognize software revenue through direct sales channels upon receipt of a purchase order or other persuasive evidence and when the other three basic revenue recognition criteria are met as described in the revenue recognition section in Note 2 of our “Notes to Consolidated Financial Statements.” We recognize software revenue through all indirect sales channels on a sell-through model. A sell-through model requires that we recognize revenue when the basic revenue recognition criteria are met and these channels complete the sale of our software products to the end-user. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report or purchase order from that original equipment manufacturer partner.
Services revenue includes revenue from customer support 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. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, we primarily use historical renewal rates. Historical renewal rates are supported by a rolling 12-month VSOE analysis in which we segregate our customer support renewal contracts into different classes based on specific criteria including, but not limited to, dollar amount of software purchased, level of customer support being provided and distribution channel. The purpose of such an analysis is to determine if the customer support element that is deferred at the time of a software sale is consistent with how it is sold on a stand-alone renewal basis.
Our other professional services include consulting; implementation and post deployment services; and education services. Other professional services provided by us are not mandatory and can also be performed by the customer or a third-party. In addition to a signed purchase order, our consulting, assessment and design services and installation services are, in some cases, evidenced by a Statement of Work, which defines the specific scope of the services to be performed when sold and performed on a stand-alone basis or included in multiple-element sales arrangements. Revenues from consulting, assessment and design services and installation services are based upon a daily, weekly or monthly rate and are recognized when the services are completed. Training includes courses taught by our instructors or third-party contractors either at one of our facilities or at the customer’s site. Training fees are recognized as revenue after the training course has been provided. Based on our analysis of such other professional services transactions sold on a stand-alone basis, we have concluded we have established VSOE for such other professional services when sold in connection with a multiple-element sales arrangement.
In summary, we have analyzed all of the undelivered elements included in our multiple-element sales arrangements and determined that we have VSOE of fair value to allocate revenues to services. Our analysis of the undelivered elements has provided us with results that are consistent with the estimates and assumptions used to determine the timing and amount of revenue recognized in our multiple-element sales arrangements. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method. We are not likely to materially change our pricing and discounting practices in the future.
Our sales arrangements generally do not include acceptance clauses. However, if an arrangement does include an acceptance clause, we defer the revenue for such an arrangement and recognize it upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period.
Stock-Based Compensation
As of March 31, 2014, we maintain two stock incentive plans, which are described more fully in Note 7 of our “Notes to Consolidated Financial Statements.” We account for our stock incentive plans based on the grant date fair value recognition provisions in accordance with ASC 718. We estimated the fair value of stock options granted using the Black-Scholes formula. The fair value of restricted stock units awarded is determined based on the number of shares granted and the closing price of our common stock on the date of grant. Compensation for all share-based payment awards is recognized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Forfeitures are estimated based on a historical analysis of our actual stock award forfeitures. We anticipate that future grants under our stock incentive plans will include both non-qualified stock options and restricted stock units.
The average expected life for fiscal 2012 was determined according to the “simplified” method, which is the mid-point between the vesting date and the end of the contractual term. During fiscal 2013, we began incorporating our historical data into the expected term calculation for stock options granted. Starting in fiscal 2013, we were able to demonstrate significant stock option exercise activity for options granted subsequent to our initial public offering to provide a reasonable basis for incorporating historical data into our expected term of future stock option grants. As a result, for the fiscal year ended March 31, 2013, and 2014 our calculation of expected term includes a combination of actual exercise data and an assumption on when the remaining outstanding options with similar characteristics will be exercised based on our historical data. In determining expected life, we separate employees into groups that have historically exhibited similar behavior with regard to option exercises.
Expected volatility through September 30, 2012 was calculated based on a blended approach that included the historical volatility of a peer group, the implied volatility of the our traded options with a remaining maturity greater than six months and the historical realized volatility of our common stock. Effective October 1, 2012, we excluded the historical volatility of a peer group in our expected volatility calculation due to the fact that our common stock has been publicly traded for a period that approximates our weighted average expected term. As a result, expected volatility subsequent to October 1, 2012 was calculated based on a blended approach that included the implied volatility of our traded options with a remaining maturity greater than six months and the historical realized volatility of our common stock.
The risk-free interest rate is determined by reference to U.S. Treasury yield curve rates with a remaining term that is approximately the expected life assumed at the date of grant. Forfeitures are estimated based on our historical analysis of actual stock option forfeitures.
The assumptions used in the Black-Scholes option-pricing model in the fiscal years ended March 31, 2014 and 2013 are as follows:
The weighted average fair value of stock options granted was $41.70 per option during the year ended March 31, 2014 and $27.28 per option during the year ended March 31, 2013. In addition, the weighted average fair value of restricted stock units awarded was $84.66 per share during the year ended March 31, 2014 and $57.01 per share during the year ended March 31, 2013.
As of March 31, 2014, there was approximately $130.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock option and restricted stock unit awards that is expected to be recognized over a weighted average period of 2.60 years. The intrinsic value of the options outstanding as of March 31, 2014 was $190.4 million, of which $166.8 million related to vested options and $23.6 million related to unvested options. We anticipate that future grants under our stock incentive plans will include both non-qualified stock options and restricted stock units.
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of March 31, 2014, we had net deferred tax assets of approximately $46.7 million, which were primarily related to federal and state research tax credit carryforwards, stock-based compensation and deferred revenue. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that we believe recovery is not likely, we establish a valuation allowance. As of March 31, 2014, we maintain a valuation allowance against our deferred tax assets totaling $1.4 million. Substantially all of the valuation allowance we have recorded at March 31, 2014 is against New Jersey state research tax credits due to uncertainties related to the ability to utilize such state research tax credits before they expire. We based our valuation allowance on our estimates of taxable income by legal entity and the period over which our state research tax credits will be recoverable.
At March 31, 2014, we have foreign net operating loss (NOL) carryforwards of approximately $3.3 million. At March 31, 2014, we have federal and state research tax credit (R&D) carryforwards of approximately $5.2 million and $4.8 million, respectively. The federal research tax credit carryforwards expire from 2032 through 2034, and the state research tax credit carryforwards expire from 2016 through 2029. At March 31, 2014, we have federal Alternative Minimum Tax credit carryforwards of $1.6 million.
As of March 31, 2014, we had unrecognized tax benefits of $4.1 million, all of which, if recognized, would favorably affect the effective tax rate. In addition, we have accrued interest and penalties of $0.6 million related to the unrecognized tax benefits. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense. Components of the reserve are classified as either current or long-term in the Consolidated Balance Sheet based on when we expect each of the items to be settled. Accordingly, our unrecognized tax benefits of $4.1 million and the related accrued interest and penalties of $0.6 million are included in Other Liabilities on the Consolidated Balance Sheet. We believe that it is reasonably possible that approximately $1.5 million of our currently remaining unrecognized tax benefits and approximately $0.3 million of related accrued interest and penalties may be realized by the end of fiscal 2015 as a result of the lapse of the statute of limitations.
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. Our Federal income tax return for the year ended March 31, 2011 is currently under audit. Our German subsidiary’s income tax returns for the fiscal years ended March 31, 2006 through March 31, 2011 are currently under audit by the German tax authorities. The following table summarizes the tax years in the major tax jurisdictions that remain subject to income tax examinations by tax authorities as of March 31, 2014. The years subject to income tax examination in our foreign jurisdictions cover the maximum time period with respect to these jurisdictions. Due to NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOLs.
Software Development Costs
Research and development expenditures are charged to operations as incurred. Based on our software development process, technological feasibility is established upon completion of a working model, which also requires certification and extensive testing. Costs incurred by us between completion of the working model and the point at which the product is ready for general release are immaterial.
Results of Operations
The following table sets forth each of our sources of revenues and costs of revenues for the specified periods as a percentage of our total revenues for those periods (due to rounding numbers in column may not sum to totals):
Fiscal year ended March 31, 2014 compared to fiscal year ended March 31, 2013
Revenues
Total revenues increased $90.5 million, or 18%, from $495.9 million in fiscal 2013 to $586.3 million in fiscal 2014.
Software Revenue. Software revenue increased $42.9 million, or 17%, from $251.5 million in fiscal 2013 to $294.4 million in fiscal 2014. Software revenue represented 50% of our total revenues in fiscal 2014 compared to 51% in fiscal 2013.
The overall increase in software revenue was primarily driven by higher enterprise software transactions (transactions greater than $0.1 million), which increased by $26.3 million, or 19% in fiscal 2014 compared to fiscal 2013. Enterprise software transactions represented approximately 57% of our software revenue in both fiscal 2014 and fiscal 2013. The increase in enterprise software transactions is due to both a 16% increase in the number of transactions of this type and a 2% increase in the average dollar amount of such transactions. The average dollar amount of enterprise transactions was approximately $272,000 in fiscal 2014 and approximately $266,000 in fiscal 2013. Software revenue derived from transactions less than $0.1 million increased $16.6 million, or 15%, in fiscal 2014 compared to fiscal 2013.
Software revenue derived from our international operations in fiscal 2014 increased 19% compared to fiscal 2013. The growth in software revenue in our international locations is primarily due to increases in Europe as we expand our international operations. Software revenue derived from the United States in fiscal 2014 increased 16% compared to fiscal 2013
Software revenue derived from our indirect distribution channel (resellers and original equipment manufacturers) increased $33.2 million, or 15% in fiscal 2014 compared to fiscal 2013, and software revenue through our direct sales force increased $9.7 million, or 34% in fiscal 2014 compared to fiscal 2013. The increase in the dollar value of the software revenue through our indirect distribution channel is primarily due to the increase in software revenue generated in foreign locations, which sold almost exclusively through indirect channels. The increase in the dollar value of the software revenue generated through our direct sales channel is due to a higher value of direct enterprise transactions in the United States in fiscal 2014 compared to fiscal 2013. Software revenue that is derived from both our indirect channel partners and direct sales force are key attributes to our long-term growth strategy. We will 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 as more fully discussed above in the “Sources of Revenue” section.
Services Revenue. Services revenue increase $47.6 million, or 19%, from $244.3 million in fiscal 2013 to $291.9 million in fiscal 2014. Services revenue represented 50% of our total revenues in fiscal 2014 compared to 49% in fiscal 2013.
The increase in services revenue is primarily due to a $40.3 million increase in revenue from customer support agreements as a result of software sales to new customers and renewal agreements with our installed software base.
Cost of Revenues
Total cost of revenues increased $9.3 million, or 14%, from $65.0 million in fiscal 2013 to $74.3 million in fiscal 2014. Total cost of revenues represented 13% of our total revenues in both fiscal 2014 and fiscal 2013.
Cost of Software Revenue. Cost of software revenue decreased approximately $0.3 million, or 10%, from $2.9 million in fiscal 2013 to $2.6 million in fiscal 2014. Cost of software revenue represented 1% of our total software revenue in both fiscal 2014 and fiscal 2013.
Cost of Services Revenue. Cost of services revenue increased $9.6 million, or 16%, from $62.1 million in fiscal 2013 to $71.7 million in fiscal 2014. Cost of services revenue represented 25% of our services revenue in both fiscal 2014 and fiscal 2013. The increase in the dollar amount of cost of services revenue is primarily the result of higher employee compensation and travel expenses totaling approximately $7.0 million as well as a $1.2 million increase in third-party outsourcing costs to facilitate our delivery of services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased $35.6 million, or 14%, from $247.7 million in fiscal 2013 to $283.3 million in fiscal 2014. The increase is primarily due to a $19.7 million increase in employee compensation and related expenses attributable to the expansion of our sales force from the prior year. The increase in sales and marketing expenses also includes a $7.3 million increase in stock-based compensation expenses and a $3.2 million increase in advertising and marketing related expenses as we continue to build brand awareness for our Simpana products. Sales and marketing expenses as a percentage of total revenues decreased to 48% in fiscal 2014 compared to 50% in fiscal 2013, primarily due to lower compensation costs as a percentage of total revenues related to our field sales teams.
Research and Development. Research and development expenses increased $7.8 million, or 16%, from $47.4 million in fiscal 2013 to $55.1 million in fiscal 2014. The increase is primarily due to higher compensation and related expenses resulting from the expansion of our engineering group totaling approximately $5.1 million. The increase in research and development also includes a $1.5 million increase in stock-based compensation expenses. Research and development expenses as a percentage of total revenues decreased to 9% in fiscal 2014 compared to 10% in fiscal 2013. 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 management software applications.
General and Administrative. General and administrative expenses increased $17.0 million, or 34%, from $50.1 million in fiscal 2013 to $67.1 million in fiscal 2014. This increase is primarily due to a $9.8 million increase in stock-based compensation expenses, a $3.8 million increase in employee and related compensation due to higher headcount and a $1.7 million increase in professional fees. General and administrative expenses in fiscal 2014 also includes $0.3 million of net foreign currency transaction gains compared to $0.3 million of net foreign currency transaction losses recognized in general and administrative expenses in fiscal 2013. General and administrative expenses as a percentage of total revenues increased to 11% in fiscal 2014 compared to 10% in fiscal 2013.
Depreciation and Amortization. Depreciation expense increased $1.2 million, from $4.8 million in fiscal 2013 to $6.1 million in fiscal 2014. This reflects higher depreciation associated with increased capital expenditures primarily over the past 12 months as we continue to expand our worldwide operations. We expect depreciation expense to increase within the next 12 months due to our new corporate campus headquarters which is currently under construction.
Interest Income
Interest income decreased $0.2 million, from $1.1 million in fiscal 2013 to $0.9 million in fiscal 2014. The decrease in interest income is primarily due to decreased yield on our investment portfolio.
Income Tax Expense
Income tax expense was $37.2 million in fiscal 2014 compared to $28.7 million in fiscal 2013. The effective tax rate in fiscal 2014 was 37% as compared to 35% in fiscal 2013. In fiscal 2014, the effective tax rate approximated the statuary rate but was benefited by the impact of domestic production deduction, foreign tax credits and release of reserves, which were offset by state income taxes and permanent differences in both the United States and foreign jurisdictions. Additionally, the research and development credit expired on December 31, 2013; therefore, the effective tax rate only reflects nine months of a benefit.
In fiscal 2013, the effective rate was benefited by the reenactment of the research and development credit which had previously expired on December 31, 2011 and includes an additional benefit related to periods prior to March 31, 2012 as tax law is accounted for in the period of enactment. In addition, the effective rate was benefited by foreign tax credits, offset by state income taxes and permanent differences in both the United States and foreign jurisdictions.
Fiscal year ended March 31, 2013 compared to fiscal year ended March 31, 2012
Revenues
Total revenues increased $89.2 million, or 22%, from $406.6 million in fiscal 2012 to $495.9 million in fiscal 2013.
Software Revenue. Software revenue increased $49.7 million, or 25%, from $201.8 million in fiscal 2012 to $251.5 million in fiscal 2013. Software revenue represented 51% of our total revenues in fiscal 2013 compared to 50% in fiscal 2012.
The overall increase in software revenue was primarily driven by higher enterprise software transactions (transactions greater than $0.1 million), which increased by $37.0 million, or 35% in fiscal 2013 compared to fiscal 2012. As a result, enterprise software transactions represented approximately 57% of our software revenue in fiscal 2013 and approximately 52% of our software revenue in fiscal 2012. The increase in enterprise software transactions is due to both a 23% increase in the number of transactions of this type and a 10% increase in the average dollar amount of such transactions. The average dollar amount of enterprise transactions was approximately $266,000 in fiscal 2013 and approximately $241,000 in fiscal 2012. Software revenue derived from transactions less than $0.1 million increased $12.7 million, or 13%, in fiscal 2013 compared to fiscal 2012.
Software revenue derived from our international operations in fiscal 2013 increased 40% compared to fiscal 2012. The growth in software revenue in our international locations is primarily due to increases in Canada, Europe and Australia as we expand our international operations. Software revenue derived from the United States in fiscal 2013 increased 14% compared to fiscal 2012.
Software revenue derived from our indirect distribution channel (resellers and original equipment manufacturers) increased $53.2 million, or 31% in fiscal 2013 compared to fiscal 2012, and software revenue through our direct sales force decreased $3.5 million or 11% in fiscal 2013 compared to fiscal 2012. The increase in the dollar value of the software revenue through our indirect distribution channel is primarily due to the increase in software revenue generated in foreign locations, which is substantially sold through our channel partners. The decrease in the dollar value of the software revenue generated through our direct sales channel is due to a lower value of direct enterprise transactions in the United States. Software revenue that is derived from both our indirect channel partners and direct sales force are key attributes to our long-term growth strategy. We will 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 as more fully discussed above in the “Sources of Revenue” section.
Services Revenue. Services revenue increased $39.5 million, or 19%, from $204.8 million in fiscal 2012 to $244.3 million in fiscal 2013. Services revenue represented 49% of our total revenues in fiscal 2013 compared to 50% in fiscal 2012. The increase in services revenue is primarily due to a $34.1 million increase in revenue from customer support agreements as a result of software sales to new customers and renewal agreements with our installed software base.
Cost of Revenues
Total cost of revenues increased $11.5 million, or 22%, from $53.4 million in fiscal 2012 to $65.0 million in fiscal 2013. Total cost of revenues represented 13% of our total revenues in both fiscal 2013 and fiscal 2012.
Cost of Software Revenue. Cost of software revenue increased approximately $0.1 million, or 4%, from $2.7 million in fiscal 2012 to $2.9 million in fiscal 2013. Cost of software revenue represented 1% of our total software revenue in both fiscal 2013 and fiscal 2012. The increase in cost of software revenue is primarily due to higher third party royalty costs associated with our Simpana software suite in fiscal 2013 compared to fiscal 2012.
Cost of Services Revenue. Cost of services revenue increased $11.4 million, or 23%, from $50.7 million in fiscal 2012 to $62.1 million in fiscal 2013. Cost of services revenue represented 25% of our services revenue in both fiscal 2013 and fiscal 2012. The increase in the dollar amount of cost of services revenue is primarily the result of higher employee compensation
and travel expenses totaling approximately $6.1 million as well as a $2.8 million increase in third-party outsourcing costs to facilitate our delivery of services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased $28.7 million, or 13%, from $219.0 million in fiscal 2012 to $247.7 million in fiscal 2013. The increase is primarily due to a $15.7 million increase in employee compensation and related expenses attributable to the expansion of our sales force from the prior year. The increase in sales and marketing expenses also includes a $4.6 million increase in advertising and marketing related expense as we continue to build brand awareness for our Simpana products and a $3.7 million increase in stock-based compensation expenses. Sales and marketing expenses as a percentage of total revenues decreased to 50% in fiscal 2013 compared to 54% in fiscal 2012, primarily due to cost containment in our field operations, as well as our sales segmentation strategy that we implemented at the beginning of fiscal 2013, which aligned our sales and marketing team as we penetrate the enterprise segment.
Research and Development. Research and development expenses increased $7.4 million, or 19%, from $39.9 million in fiscal 2012 to $47.4 million in fiscal 2013. The increase is primarily due to higher salary and related expenses resulting from the expansion of our engineering group and higher fiscal 2013 bonus expense totaling approximately $4.8 million. The increase in research and development also includes a $0.7 million increase in stock-based compensation expenses and a $0.7 million increase in legal fees. Research and development expenses as a percentage of total revenues remained flat at 10% in both fiscal 2013 and fiscal 2012. 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 management software applications.
General and Administrative. General and administrative expenses increased $9.5 million, or 23%, from $40.6 million in fiscal 2012 to $50.1 million in fiscal 2013. This increase is primarily due to a $3.9 million increase in stock-based compensation expenses, a $2.9 million increase in employee and related compensation due to higher headcount and higher fiscal 2013 bonus expense and a $1.2 million increase in settlement reserves. General and administrative expenses in fiscal 2013 includes $0.3 million of net foreign currency transaction losses compared to $0.2 million of net foreign currency transaction losses recognized in general and administrative expenses in fiscal 2012. General and administrative expenses as a percentage of total revenues remained flat at 10% in both fiscal 2013 and fiscal 2012.
Depreciation and Amortization. Depreciation expense increased $0.5 million, from $4.4 million in fiscal 2012 to $4.8 million in fiscal 2013. This reflects higher depreciation associated with increased capital expenditures primarily over the past 12 months as we continue expand our worldwide operations.
Interest Income
Interest income increased $0.3 million, from $0.8 million in fiscal 2012 to $1.1 million in fiscal 2013. The increase in interest income is primarily due to higher balances in our cash and related investment accounts.
Income Tax Expense
Income tax expense was $28.7 million in fiscal 2013 compared to $18.1 million in fiscal 2012. The effective tax rate in fiscal 2013 was 35% as compared to 36% in fiscal 2012. In fiscal 2013, the effective rate was benefited by the reenactment of the research and development credit which had previously expired on December 31, 2011 and includes an additional benefit related to periods prior to March 31, 2012 as tax law is accounted for in the period of enactment. In addition, the effective rate was benefited by foreign tax credits, offset by state income taxes and permanent differences in both the United States and foreign jurisdictions. In fiscal 2012, the effective rate was higher than the expected federal statutory rate of 35% primarily due to state income taxes and permanent differences in both the United States and foreign jurisdictions, partially offset by income tax benefits from recording research and foreign tax credits; domestic production activities deductions; and reversing $1.6 million of our valuation allowance against New Jersey state research tax credits due to the passage of state laws.
Liquidity and Capital Resources
As of March 31, 2014, our cash and cash equivalents balance of $457.7 million primarily consisted of money market funds. In addition, we have approximately $25.0 million of short-term investments invested in U.S. Treasury Bills at March 31, 2014. In recent fiscal years, our principal sources of liquidity have been cash provided by operations.
As of March 31, 2014, the amount of cash and cash equivalents held outside of the United States by our foreign legal entities was approximately $114.7 million. These balances are dispersed across many international locations around the world. We believe that such dispersion meets the current and anticipated future liquidity needs of our foreign legal entities. In addition, it is our intention to indefinitely reinvest undistributed earnings of our foreign legal entities. In the event we needed 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 or U.S. income taxes. It is not currently practical to estimate the legal restrictions or tax liability that would arise from such repatriations.
During the fourth quarter of fiscal 2014, we repurchased $50.0 million of common stock (775,000) under the share repurchase program bringing the cumulative repurchases under the current program to $167.2 million. On April 24, 2014, the Board of Directors authorized a $50.0 million increase to the existing stock repurchase program which expires on March 31, 2015. After these fourth quarter repurchases and the increase to the plan by the Board of Directors, $150.0 million remains under the current stock repurchase program. Under our stock repurchase program, repurchased shares are constructively retired and returned to unissued status. 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 primary business reason for our stock repurchase program is to reduce the dilutive impact on our common shares outstanding associated with stock option exercises and our previous public and private stock offerings. Under our stock repurchase program, we have bought back approximately 16% of the common stock that was outstanding at the time the stock repurchase program was announced. Our future stock repurchase activity 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.
At the fiscal 2013 Annual Meeting of Stockholders of the Company held on August 21, 2013, the Company’s stockholders approved the formation of the Employee Stock Purchase Plan (the “ESPP”) to provide eligible employees the opportunity to become stockholders through the purchase of shares of the Company’s common stock. The ESPP is a shareholder approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s salary and employees may not purchase more than $25,000 of stock during any calendar year. As of March 31, 2014, 3.0 million shares were reserved for future issuance under the Purchase Plan. The first purchase date of the ESPP is August 1, 2014.
On January 29, 2013, we closed on a purchase of land located in Tinton Falls, New Jersey for our future corporate campus headquarters to support the long-term growth of our business. We are in the process of completing the design and construction of the headquarters, which we expect to finalize over the next 12 months. Our estimate of the build-out, including the land purchase, building and campus infrastructure, is approximately $135 million. We expect to fund this capital expenditure from our existing cash and cash equivalent balances and our cash generated from operations.
Our summarized annual cash flow information is as follows (in thousands):
Net cash provided by operating activities was $119.1 million in fiscal 2014, $112.7 million in fiscal 2013 and $100.0 million in fiscal 2012. In both fiscal 2014 and fiscal 2013 cash generated by operating activities was primarily due to net income adjusted for the impact of non-cash charges; an increase in deferred services revenue as a result of customer support agreements from new customers and renewal agreements with our installed software base; and an increase in accrued liabilities. These increases were partially offset by an increase in accounts receivable due to higher revenues and timing of cash receipts. In fiscal 2012, cash generated by operating activities was primarily due to net income adjusted for the impact of non-cash charges; an increase in deferred services revenue as a result of customer support agreements from new customers and renewal agreements with our installed software base; and an increase in accrued liabilities.
Net cash used in investing activities was $90.2 million in fiscal 2014, $15.8 million in fiscal 2013 and $7.8 million in fiscal 2012. In fiscal 2014, cash used in investing activities was due to the purchase of property and equipment in the amounts of $62.2 million for purchases relating to our new corporate campus headquarters and $4.9 million of capital expenditures as we continue to invest in and enhance our global infrastructure. These increases were partially offset by net purchases of short-term investments of $23.0 million. In fiscal 2013, cash used in investing activities was due to the purchase of property and equipment in the amounts of $9.2 million for purchases relating to our new corporate campus headquarters and $7.8 million of capital expenditures as we continue to invest in and enhance our global infrastructure. These increases were partially offset by net proceeds from the maturity of short-term investments of $1.2 million. In fiscal 2012, cash used in investing activities was due to the purchase of property and equipment of $5.8 million related to growth in our business as well as the net purchases of short-term investments of $2.0 million.
Net cash provided by (used in) financing activities was $(4.1) million in fiscal 2014, $41.2 million in fiscal 2013 and $(11.5) million in fiscal 2012. The cash used by financing activities in fiscal 2014 was due to $50.0 million used to repurchase shares of our common stock under our repurchase program, partially offset by $28.3 million of excess tax benefits recognized as a result of stock option exercises and $17.6 million of proceeds from the exercise of stock options. The cash provided by financing activities in fiscal 2013 was due to $23.1 million of excess tax benefits recognized as a result of stock option exercises and $18.1 million of proceeds from the exercise of stock options. The cash used in financing activities in fiscal 2012 was due to $45.6 million used to repurchase shares of our common stock under our repurchase program, partially offset by $18.1 million of proceeds from the exercise of stock options and $16.0 million of excess tax benefits recognized as a result of stock option exercises.
A summary of the cash used for the stock repurchase program consists of the following:
Working capital increased $43.9 million from $343.1 million as of March 31, 2013 to $387.0 million as of March 31, 2014. The increase in working capital is primarily due to a $46.8 million increase in cash and short-term investments and a $33.5 million increase in accounts receivable. These increases were partially offset by a $20.6 million increase in accrued liabilities and a $13.2 million increase in short-term deferred revenue. The increase in cash and short-term investments is primarily due to net income generated during the period, cash received from the collection of account receivables and cash received from the exercise of stock options. The increase in deferred revenue is primarily due to higher deferred services revenue from customer support agreements from software sales to new customers and renewal agreements with our installed software base. The increase in accrued expenses is primarily due to higher employee and related compensation accruals.
Working capital increased $120.8 million from $222.3 million as of March 31, 2012 to $343.1 million as of March 31, 2013. The increase in working capital is primarily due to a $135.7 million increase in cash and short-term investments and a $17.2 million increase in accounts receivable. These increases were partially offset by a $27.7 million increase in deferred revenue and a $9.7 million increase in accrued liabilities. The increase in cash and short-term investments is primarily due to net income generated during the period, cash received from the collection of account receivables and cash received from the exercise of stock options partially offset by the use of cash for share repurchases. The increase in deferred revenue is primarily due to higher deferred services revenue from customer support agreements from software sales to new customers and renewal agreements with our installed software base. The increase in accrued expenses is primarily due to higher employee and related compensation accruals.
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, capital expenditures (including our planned new corporate campus headquarters) and potential stock repurchases for at least the next 12 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. We recognize rent expense under leases on a straight-line basis. 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, 2014 (dollars in thousands):
We generally do not enter into binding purchase obligations. The purchase obligations above relate primarily to marketing and software development services, IT infrastructure costs and costs associated with the design and construction of our corporate campus headquarters. The contractual obligations table above excludes unrecognized tax benefits, plus related interest and penalties, recorded in Other Liabilities totaling $4.7 million because we cannot reasonably estimate in which future periods these amounts will ultimately be settled. The $4.7 million is classified as a long-term liability in our consolidated balance sheet as of March 31, 2014 as none of these obligations are anticipated to be paid within one year from April 1, 2014.
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 revenues, was $1.4 million in fiscal 2014, $2.1 million in fiscal 2013 and $1.6 million in fiscal 2012.
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, 2014 and 2013, other than our operating leases, we do 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 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
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This amendment requires an entity to present, either on the face of the financial statement or in the notes, the effects on the line items of net income due to significant amounts reclassified out of accumulated other comprehensive income, as well as provide cross-references to other required reclassification disclosures, where applicable. The adoption of the new pronouncement on April 1, 2013 did not have an impact on our consolidated financial position, results of operations or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when
a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position; the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments in this standard are effective for reporting periods beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our financial statements.
There have been no other accounting pronouncements issued but not yet adopted by the Company which are expected to have a material impact on the Company’s financial position, results of operations or cash flows.
The FASB also continues to work on a number of significant accounting rules which may impact our accounting and disclosures in future periods. Since these rules have not yet been issued, the effective dates and potential impact are unknown.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of March 31, 2014, our cash, cash equivalent and short-term investment balances consisted primarily of money market funds and U.S. Treasury Bills. Due to the short-term nature of these investments, we are not subject to any material interest rate risk on these balances.
Foreign Currency Risk
Economic Exposure
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 43% of our sales were outside the United States in fiscal 2014 and 42% were outside the United States in fiscal 2013. 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 $8.2 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.
Transaction Exposure
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.
Foreign currency transaction gains and losses are recorded in “General and administrative expenses” in the Consolidated Statements of Income. We recognized net foreign currency transaction gains of approximately $0.3 million in fiscal 2014, and net foreign currency transaction losses of approximately $0.3 million in fiscal 2013 and $0.2 million in fiscal 2012. The net foreign currency transaction gains and losses recorded in “General and administrative expenses” include settlement gains and losses on forward contracts disclosed below.
To date, we have selectively hedged our exposure to foreign currency transaction gains and losses on the balance sheet through the use of forward contracts, which were not designated as hedging instruments. The duration of forward contracts utilized for hedging our balance sheet exposure is generally one to three months. As of March 31, 2014 and March 31, 2013, we did not have any forward contracts outstanding. We recorded net realized losses in general and administrative expenses of $0.1 million in fiscal 2014 and $0.2 million in fiscal 2013. 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.
Item 8.
Item 8.
Financial Statements and Supplementary Data
CommVault Systems, Inc.
Consolidated Financial Statements
Fiscal Years Ended March 31, 2014, 2013 and 2012
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
CommVault Systems, Inc.
We have audited the accompanying consolidated balance sheets of CommVault Systems, Inc. as of March 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CommVault Systems, Inc. at March 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects in the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CommVault Systems, Inc.’s internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated May 2, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
MetroPark, New Jersey
May 2, 2014
CommVault Systems, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
CommVault Systems, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
CommVault Systems, Inc.
Consolidated Statements of Comprehensive Income
(In thousands, except per share data)
CommVault Systems, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
CommVault Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
CommVault Systems, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
1. Nature of Business
CommVault Systems, Inc. and its subsidiaries (“CommVault” or the “Company”) is a leading provider of data and information management software applications and related services. The Company develops, markets and sells a suite of software applications and services, primarily in North America, Europe, Australia and Asia, that provides its customers with high-performance data protection, including backup and recovery; data migration and archiving; snapshot management and replication of data; integrated source, and target data deduplication; eDiscovery and compliance solutions; self-service access; a secure virtual repository using Simpana ContentStore; enterprise-wide search capabilities; protection, recovery and discovery of data in virtual server and cloud environments; and robust built-in analytics and troubleshooting tools. The Company’s unified suite of data and information management software applications, which is sold under the Simpana brand, shares an underlying architecture that has been developed to minimize the cost and complexity of managing data on globally distributed and networked storage infrastructures. The Company also provides its customers with a broad range of professional and customer support services.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company. All intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments and estimates that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of revenues and expenses reported for each of its periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, allowance for doubtful accounts, income taxes and related reserves, stock-based compensation and accounting for research and development costs. Actual results could differ from those estimates.
Revenue Recognition
The Company derives revenues from two primary sources: software licenses and services. Services include customer support, consulting, assessment and design services, installation services and training. A typical sales arrangement includes both licenses and services.
For sales arrangements involving multiple elements, the Company recognizes revenue using the residual method. Under the residual method, the Company allocates and defers revenue for the undelivered elements based on fair value and recognizes the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple-element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence, or VSOE.
The Company’s software licenses typically provide for a perpetual right to use the Company’s software and are sold on a capacity basis, on a per-copy basis or as site licenses. Software licenses sold on a capacity basis provide the customer with unlimited licenses of specified software products based on a defined level of terabytes of data under management. Site licenses give the customer the additional right to deploy the software on a limited basis during a specified term. The Company recognizes software revenue through direct sales channels upon receipt of a purchase order or other persuasive evidence and when all other basic revenue recognition criteria are met as described below. The Company recognizes software revenue through all indirect sales channels on a sell-through model. A sell-through model requires that the Company recognize revenue when the basic revenue recognition criteria are met as described below and these channels complete the sale of the Company’s software products to the end-user. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report or purchase order from that original equipment manufacturer partner.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
Services revenue includes revenue from customer support 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. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, the Company primarily uses historical renewal rates. Historical renewal rates are supported by performing an analysis in which the Company segregates its customer support renewal contracts into different classes based on specific criteria including, but not limited to, the dollar amount of the software purchased, the level of customer support being provided and the distribution channel. As a result of this analysis, the Company has concluded that it has established VSOE for the different classes of customer support when the support is sold as part of a multiple-element sales arrangement. The Company’s determination of fair value for customer support has not changed for the periods presented.
The Company’s other professional services include consulting services, implementation and post-deployment services and education services. Other professional services provided by the Company are not mandatory and can also be performed by the customer or a third-party. In addition to a signed purchase order, the Company’s consulting services and implementation and post-deployment services are, in some cases, evidenced by a Statement of Work, which defines the specific scope of such services to be performed when sold and performed on a stand-alone basis or included in multiple-element sales arrangements. Revenues from consulting services and implementation and post-deployment services are based upon a daily or weekly rate and are recognized when the services are completed. Education services include courses taught by the Company’s instructors or third-party contractors either at one of the Company’s facilities or at the customer’s site. Education services fees are recognized as revenue after the course has been provided. Based on the Company’s analysis of such other professional services transactions sold on a stand-alone basis, the Company has concluded it has established VSOE for such other professional services when sold in connection with a multiple-element sales arrangement. The Company generally performs its other professional services within 90 days of entering into an agreement. The Company’s determination of fair value for other professional services has not changed for the periods presented.
The Company has analyzed all of the undelivered elements included in its multiple-element sales arrangements and determined that VSOE of fair value exists to allocate revenues to services. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method.
The Company considers the four basic revenue recognition criteria for each of the elements as follows:
•
Persuasive evidence of an arrangement with the customer exists. The Company’s customary practice is to require a purchase order and, in some cases, a written contract signed by both the customer and the Company, or other persuasive evidence that an arrangement exists prior to recognizing revenue related to an arrangement.
•
Delivery or performance has occurred. The Company’s software applications are either physically or electronically delivered to customers with standard transfer terms such as FOB shipping point. Software and/or software license keys for add-on orders or software updates are typically delivered in an electronic format. If products that are essential to the functionality of the delivered software in an arrangement have not been delivered, the Company does not consider delivery to have occurred. Services revenue is recognized when the services are completed, except for customer support, which is recognized ratably over the term of the customer support agreement, which is typically one year.
•
Vendor’s fee is fixed or determinable. The fee customers pay for software applications, customer support and other professional services is negotiated at the outset of a sales arrangement. The fees are therefore considered to be fixed or determinable at the inception of the arrangement. The Company evaluates instances when extended payment terms are granted to determine if revenue should be deferred until payment becomes due.
•
Collection is probable. Probability of collection is assessed on a customer-by-customer basis. Each new customer undergoes a credit review process to evaluate its financial position and ability to pay. If the Company determines from the outset of an arrangement that collection is not probable based upon the review process, revenue is recognized at the earlier of when cash is collected or when sufficient credit becomes available, assuming all of the other basic revenue recognition criteria are met.
The Company’s sales arrangements generally do not include acceptance clauses. However, if an arrangement does include an acceptance clause, revenue for such an arrangement is deferred and recognized upon acceptance. Acceptance occurs
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options, vesting of restricted stock units and shares to be purchased under the Employee Stock Purchase Plan. The dilutive effect of such potential common shares is reflected in diluted earnings per share by application of the treasury stock method.
The following table sets forth the computation of basic and diluted net income per common share:
The following table summarizes the potential outstanding common stock equivalents of the Company at the end of each period, which have been excluded from the computation of diluted net income per common share, as its effect is anti-dilutive.
Software Development Costs
Research and development expenditures are charged to operations as incurred. Based on the Company’s software development process, technological feasibility is established upon completion of a working model, which also requires certification and extensive testing. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release are immaterial.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to the Company from normal business activities. The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company estimates uncollectible amounts based upon historical bad debts, evaluation of current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
Accounting for Income Taxes
As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of March 31, 2014, the Company had net deferred tax assets of approximately $46,703, which were primarily related to federal and state research tax credit carryforwards, stock-based compensation and deferred revenue. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent that the Company believes recovery is not likely, the Company establishes a valuation allowance. As of March 31, 2014, the Company maintains a valuation allowance against its deferred tax assets totaling $1,343 primarily related to the uncertainty of the Company’s ability to utilize New Jersey state research tax credits before they expire. The Company based its valuation allowance on its estimates of taxable income by legal entity and the period over which its state research tax credits will be recoverable.
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in each of its tax jurisdictions. The number of years with open tax audits varies depending on the tax jurisdiction. A number of years may lapse before a particular matter is audited and finally resolved. The Company applies the guidance issued to address the accounting for uncertain tax positions. This guidance clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements as well as provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
As of March 31, 2014, the Company had unrecognized tax benefits of $4,113, all of which, if recognized, would favorably affect the effective tax rate. In addition, the Company had accrued interest and penalties of $555 related to the unrecognized tax benefits. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense. Components of the reserve are classified as either current or long-term in the Consolidated Balance Sheet based on when the Company expects each of the items to be settled.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with maturities of three months or less at the date of purchase to be cash equivalents. As of March 31, 2014, the Company’s cash and cash equivalents balance consisted primarily of money market funds.
Short-term Investments
Short-term investments consist of investments with maturities of twelve months or less that do not meet the criteria to be cash equivalents. The company determines classification of the investment as trading, available-for-sale or held-to-maturity at the time of purchase and reevaluates classification whenever changes in circumstances indicate changes in classification may be necessary. The Company’s current short-term investments are classified as held-to-maturity. Held-to-maturity investments consist of securities that the Company has the intent and ability to retain until maturity. Held-to-maturity investments are initially recorded at cost and adjusted for the amortization of discounts from the date of purchase through maturity. Income related to investments is recorded as interest income in the Consolidated Statement of Income. Cash inflows and outflows related to the sale, maturity and purchase of investments are classified as investing activities in the Company’s Consolidated Statements of Cash Flows.
Concentration of Credit Risk
The Company grants credit to customers in a wide variety of industries worldwide and generally does not require collateral. Credit losses relating to these customers have been minimal.
Sales through the Company’s distribution agreement with Arrow Enterprise Computing Solutions, Inc. (“Arrow”) totaled approximately 31%, 29% and 26% of total revenues for the years ended March 31, 2014, 2013 and 2012, respectively. Arrow accounted for approximately 41% and 39% of total accounts receivable as of March 31, 2014 and 2013, respectively.
The Company has a non-exclusive distribution agreement covering our North American markets with Avnet Technology Solutions (“Avnet”), a subsidiary of Avnet, Inc. Avnet accounted for 11% of accounts receivable as of March 31, 2014.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
The Company currently has a worldwide reseller agreement with Dell Inc. (“Dell”). The reseller agreement with Dell provides them the right to market, resell and distribute certain of the Company’s products to end user customers. Historically, there was also an original equipment manufacturer agreement with Dell, which was terminated in December of 2013. The Company believes the termination of this agreement will not have a material effect on the business.
Sales through both agreements (reseller and original equipment manufacturer) with Dell accounted for 15% and 20% of total revenues for the years ended March 31, 2014 and 2013, respectively. Revenue transacted through Dell as a percentage of total revenue is expected to continue to decline as the Company transitions Dell related end-user customers to alternative distribution channels.
Fair Value of Financial Instruments
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short-term maturity of these instruments. As of March 31, 2014, the Company’s short-term investments balance consisted of U.S. Treasury Bills. At of March 31, 2013, the Company’s short-term investments balance consisted of certificates of deposit.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for such asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table summarizes the composition of the Company’s financial assets measured at fair value on a recurring basis at March 31, 2014 and March 31, 2013:
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company provides for depreciation on a straight-line basis over the estimated useful lives of the assets. Computer and related equipment is generally depreciated over eighteen months to three years and furniture and fixtures are generally depreciated over three to five years. Leasehold improvements are amortized over the shorter of the useful life of the improvement or the term of the related lease. Expenditures for routine maintenance and repairs are charged against operations. Major replacements, improvements and additions are capitalized.
Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for its intended use. Depreciation for equipment commences once it is placed in service and
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
depreciation for buildings and leasehold improvements commences once they are ready for intended use. Land is not depreciated.
Asset Retirement Obligation
A liability for the fair value of an asset retirement obligation and corresponding increase to the carrying value of the related leasehold improvements are recorded at the time leasehold improvements are acquired. The Company maintains certain office space for which the lease agreement requires that the Company return the office space to its original condition upon vacating the premises. Accordingly, the balance of the asset retirement obligation was $577 as of March 31, 2014 and $525 as of March 31, 2013.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the estimated future undiscounted cash flows that are directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of the long-lived asset. If the estimated future undiscounted cash flows demonstrate that recoverability is not probable, an impairment loss would be recognized. An impairment loss would be calculated based on the excess carrying amount of the long-lived asset over the long-lived asset’s fair value. The fair value would be determined based on valuation techniques such as a comparison to fair values of similar assets. There were no impairment charges recognized during the years ended March 31, 2014, 2013 and 2012.
Deferred Revenue
Deferred revenues represent amounts collected from, or invoiced to, customers in excess of revenues recognized. This results primarily from the billing of annual customer support agreements, as well as billings for other professional services fees that have not yet been performed by the Company and receipt of license fees that are deferred due to one of the revenue recognition criteria not being met. The value of deferred revenues will increase or decrease based on the timing of invoices and recognition of revenue. The Company expenses internal direct and incremental costs related to contract acquisition and origination as incurred.
Deferred revenue consists of the following:
Accounting for Stock-Based Compensation
The Company utilizes the Black-Scholes pricing model to determine the fair value of non-qualified stock options on the dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the date of grant. The Company recognizes stock-based compensation using the straight-line method for all stock awards.
The Company classifies benefits of tax deductions in excess of the compensation cost recognized (excess tax benefits) as a financing item cash inflow with a corresponding operating cash outflow. For the years ended March 31, 2014, 2013 and 2012, the Company included $28,337, $23,080, and $16,009, respectively, as a financing cash inflow.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
Share Repurchases
The Company considers all shares repurchased as canceled shares restored to the status of authorized but unissued shares on the trade date. The aggregate purchase price of the shares of the Company’s common stock repurchased is reflected as a reduction to Stockholders’ Equity. The Company accounts for shares repurchased as an adjustment to common stock (at par value) with the excess repurchase price allocated between Additional Paid-in Capital and Accumulated Deficit. As a result of the Company’s stock repurchases in the fiscal year ended March 31, 2014, the Company reduced common stock and additional paid-in capital by $5,837 and increased accumulated deficit by $44,193.
Sales Tax
The Company records revenue net of sales tax.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses were $6,174, $4,646, and $4,582 for the years ended March 31, 2014, 2013 and 2012, respectively.
Shipping and Handling Costs
Shipping and handling costs are included in cost of revenues for all periods presented.
Foreign Currency Translation
The functional currencies of the Company’s foreign operations are deemed to be the local country’s currency. Assets and liabilities of the Company’s international subsidiaries are translated at their respective period-end exchange rates, and revenues and expenses are translated at average currency exchange rates for the period. The resulting balance sheet translation adjustments are included in Other Comprehensive Income (Loss) and are reflected as a separate component of Stockholders’ Equity.
Foreign currency transaction gains and losses are recorded in “General and administrative expenses” in the Consolidated Statements of Income. The Company recognized net foreign currency transaction gains of $324 and net foreign currency transaction losses of $275 and $232 in the years ended March 31, 2014, March 31, 2013 and March 31, 2012, respectively. The net foreign currency transaction gains and losses recorded in “General and administrative expenses” include settlement gains and losses on forward contracts disclosed below.
To date, the Company has selectively hedged its exposure to foreign currency transaction gains and losses on the balance sheet through the use of forward contracts, which were not designated as hedging instruments. The duration of forward contracts utilized for hedging the Company’s balance sheet exposure is generally one month to three months. As of March 31, 2014 and March 31, 2013, the Company did not have any forward contracts outstanding. The Company recorded net realized losses of $82 and $152 in general and administrative expenses related to the settlement of a forward exchange contracts in the years ended March 31, 2014 and 2013, respectively. In the future, the Company may enter into additional foreign currency-based hedging contracts to reduce its exposure to significant fluctuations in currency exchange rates on the balance sheet.
Comprehensive Income
Comprehensive income is defined to include all changes in equity, except those resulting from investments by stockholders and distribution to stockholders.
Impact of Recently Issued Accounting Standards
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This amendment requires an entity to present, either on the face of the financial statement or in the notes, the effects on the line items of net income due to significant amounts reclassified out of accumulated other comprehensive income, as well as provide cross-references to other required reclassification disclosures, where applicable. The adoption of the new pronouncement on April 1, 2013 did not have an impact on the Company’s consolidated financial position, results of operations or cash flows. There have been no amounts reclassified out of accumulated other comprehensive income in any periods presented.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position; the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments in this standard are effective for reporting periods beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Consolidated Financial Statements.
There have been no other accounting pronouncements issued but not yet adopted by the Company which are expected to have a material impact on the Company’s financial position, results of operations or cash flows.
3. Property and Equipment
Property and equipment consist of the following:
Construction in process at March 31, 2014 and 2013 is comprised of the purchase of land and related design and construction cost for the Company’s planned corporate campus headquarters, which the Company expects to finalize over approximately the next twelve months. The value of land included in construction in process at March 31, 2014 is $5,915. The Company recorded depreciation and amortization expense of $6,207, $4,939, and $4,484 for the years ended March 31, 2014, 2013 and 2012, respectively.
4. Accrued Liabilities
Accrued liabilities consist of the following:
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
5. Commitments and Contingencies
Leases
The Company leases various office and warehouse facilities under non-cancelable leases, which expire on various dates through September 2019. Future minimum lease payments under all operating leases at March 31, 2014 are as follows:
Rent expenses were $11,405, $10,037, and $8,498 for the years ended March 31, 2014, 2013 and 2012, respectively.
Rent expense is calculated by amortizing total rental payments (net of any rental abatements, allowances and other rental concessions), on a straight-line basis, over the lease term. Accordingly, rent expense charged to operations differs from rent paid resulting in the Company recording deferred rent.
Purchase Commitments
The Company, in the normal course of business, enters into various purchase commitments for goods or services. Total non-cancellable purchase commitments as of March 31, 2014 are approximately $5,936 for fiscal 2015, $4,273 for fiscal 2016, $1,053 for fiscal 2017, $171 for fiscal 2018 and $12 for fiscal 2019, totaling $11,445 for all periods through fiscal 2019. These purchase commitments primarily result from contracts for the acquisition of IT infrastructure, marketing and software development services and the design and construction of the Company’s corporate campus headquarters.
The Company has 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 revenues, was $1,350 in fiscal 2014, $2,081 in fiscal 2013 and $1,611 in fiscal 2012.
Indemnifications
The Company offers a 90-day limited product warranty for its software. To date, costs related to this product warranty have not been material.
Legal Proceedings
In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions. As of March 31, 2014, the Company is not aware of any asserted or unasserted claims, negotiations and legal actions that are both considered reasonably possible of occurring and also would require disclosure under the guidance.
The Company provides certain provisions within its software licensing agreements to indemnify its customers from any claim, suit or proceeding arising from alleged or actual intellectual property infringement. These provisions continue in perpetuity, along with the Company’s software licensing agreements. The Company has never incurred a liability relating to one of these indemnification provisions, and management believes that the likelihood of any future payout relating to these provisions is remote. Therefore, the Company has not recorded a liability during any period for these indemnification provisions.
6. Capitalization
As of March 31, 2014 and 2013, the Company had 250,000 shares of common stock and 50,000 shares of preferred stock authorized. As of March 31, 2014 and 2013 there were no shares of preferred stock outstanding.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
On November 13, 2008, the Board of Directors of the Company adopted a Rights Plan and declared a dividend distribution of one Right for each outstanding share of common stock to shareholders of record on November 24, 2008. Each Right, when exercisable, entitles the registered holder to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of eighty dollars per one one thousandth of a share, subject to adjustment. Of the 50,000 shares of preferred stock authorized under the Company’s certificate of incorporation, 150 have been designated as Series A Junior Participating Preferred.
The Rights will become exercisable following the tenth business day after (i) a person or group announces the acquisition of 15% or more of the Company’s common stock or (ii) commencement of a tender or exchange offer, the consummation of which would result in ownership by the person or group of 15% or more of the Company’s common stock. The Company is also entitled to redeem the Rights at $0.001 per right under certain circumstances. The Rights expire on November 14, 2018, if not exercised or redeemed.
Common Stock
The Company had 47,094 and 46,397 shares of common stock, par value $0.01, outstanding at March 31, 2014 and March 31, 2013, respectively.
During fiscal 2014, the Company repurchased $50,030 of common stock (775 shares) under its share repurchase program bringing the cumulative repurchases under the current program to $167,155. As of March 31, 2014, $100,002 remained in the stock repurchase authorization.
Shares Reserved for Issuance
The Company has reserved 7,590 shares to allow for the exercise of all outstanding options and vesting of restricted stock units at March 31, 2014.
7. Stock Plans
As of March 31, 2014, the Company maintains two stock incentive plans, the 1996 Stock Option Plan (the “Plan”) and the 2006 Long-Term Stock Incentive Plan (the “LTIP”).
Under the Plan, the Company may grant non-qualified stock options to purchase 11,705 shares of common stock to certain officers and employees. Stock options are granted at the discretion of the Board and expire 10 years from the date of the grant. At March 31, 2014, there were 572 options available for future grant under the Plan.
The LTIP permits the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance stock awards and stock unit awards based on, or related to, shares of the Company’s common stock. On each April 1, the number of shares available for issuance under the LTIP is increased, if applicable, such that the total number of shares available for awards under the LTIP as of any April 1 is equal to 5% of the number of outstanding shares of the Company’s common stock on that April 1. As of March 31, 2014, approximately 895 shares were available for future issuance under the LTIP.
As of March 31, 2014, the Company has granted non-qualified stock options and restricted stock units under its stock incentive plans. Equity awards granted by the Company under its stock incentive plans generally vest quarterly over a four-year period, except that the shares that would otherwise vest quarterly over the first twelve months do not vest until the first anniversary of the grant. However, from time to time the company grants equity awards that vest between one and three years. The Company anticipates that future grants under its stock incentive plans will continue to include both non-qualified stock options and restricted stock units.
The Company estimated the fair value of stock options granted using the Black-Scholes formula. The Company’s calculation of expected term life for fiscal 2014, and fiscal 2013 included a combination of actual exercise data and an assumption on when the remaining outstanding options with similar characteristics would be exercised based on the Company’s historical data. In determining expected life, the Company separates employees into groups that have historically exhibited similar behavior with regard to option exercises. The Company’s calculation of expected term life for fiscal 2012 was determined according to the “simplified method”, which is the mid-point between the vesting date and the end of the contractual term.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
Expected volatility through September 30, 2012 was calculated based on a blended approach that included the historical volatility of a peer group, the implied volatility of the Company’s traded options with a remaining maturity greater than six months and the historical realized volatility of the Company’s common stock. Effective October 1, 2012, the Company excluded the historical volatility of a peer group in its expected volatility calculation due to the fact that the Company’s common stock has been publicly traded for a period that approximates its weighted average expected term. As a result, expected volatility from October 1, 2012 to March 31, 2014 was calculated based on a blended approach that included the implied volatility of the Company’s traded options with a remaining maturity greater than six months and the historical realized volatility of the Company’s common stock.
The risk-free interest rate is determined by reference to U.S. Treasury yield curve rates with a remaining term that is approximately the expected life assumed at the date of grant. Forfeitures are estimated based on the Company’s historical analysis of actual stock option forfeitures.
The assumptions used in the Black-Scholes option-pricing model are as follows:
The following summarizes the activity for the Company’s two stock incentive plans from March 31, 2011 to March 31, 2014:
The weighted average fair value of stock options granted was $41.70 per share, $27.28 per share, and $18.77 per share during the years ended March 31, 2014, 2013 and 2012, respectively. The total intrinsic value of options exercised was $59,509,
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
$65,973, and $51,145 in the years ended March 31, 2014, 2013 and 2012, respectively. The Company’s policy is to issue new shares upon exercise of options as the Company does not hold shares in treasury.
The following table summarizes information on stock options outstanding under the Plan and LTIP at March 31, 2014:
Restricted stock unit activity is as follows:
The total fair value of the restricted stock units that vested during the years ended March 31, 2014, 2013 and 2012 was $37,584, $25,649 and $18,579, respectively.
The following table presents the stock-based compensation expense included in cost of services revenue, sales and marketing, research and development and general and administrative expenses for the years ended March 31, 2014, 2013 and 2012.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
The Company recognized a tax benefit related to stock-based compensation of $15,940 in the year ended March 31, 2014, $8,901 in the year ended March 31, 2013 and $7,276 in the year ended March 31, 2012.
As of March 31, 2014, there was approximately $129,964 of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock option and restricted stock unit awards that is expected to be recognized over a weighted average period of 2.60 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s salary and employees may not purchase more than $25 of stock during any calendar year. As of March 31, 2014, 3,000 shares were reserved for future issuance under the Purchase Plan. The Purchase Plan is considered compensatory and the fair value of the discount and look back provision are estimated using the Black-Scholes formula and recognized over the six month withholding period prior to purchase. The total expense associated with the Purchase Plan for fiscal 2014 is $395 and represents two months of the initial six month purchase period. As of March 31, 2014, there was approximately $800 of unrecognized cost related to the current purchase period of our Employee Stock Purchase Plan.
8. Income Taxes
The components of income before income taxes were as follows:
The components of income tax expense (benefit) were as follows:
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
A reconciliation of the statutory tax rates and the effective tax rates for the years ended March 31, 2014, 2013 and 2012 are as follows:
Deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent that the Company believes recovery is not likely, the Company establishes a valuation allowance. The significant components of the Company’s deferred tax assets are as follows:
At March 31, 2014 the Company maintained valuation allowances totaling $1,382 against its deferred tax assets. Specifically, the Company has a valuation allowance of $1,343 against New Jersey state research tax credits due to uncertainties related to the ability to utilize such state research tax credits before they expire. The Company based its valuation allowance on its estimates of taxable income by legal entity and the period over which its state research tax credits will be recoverable. In addition, the Company has a valuation allowance of $39 against foreign net operating loss carryforwards in a certain international jurisdiction. In assessing the need for a valuation allowance against its net operating loss carryforwards in such international jurisdiction, the Company considered projected future income as part of its analysis.
It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby infinitely postpone their remittance. As a result, deferred U.S. income taxes have not been provided on undistributed earnings of foreign subsidiaries of the Company. In the event we needed 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 or U.S.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
income taxes. It is not currently practical to estimate the legal restrictions or tax liability that would arise from such repatriations. The cumulative amount of unremitted earnings from the foreign subsidiaries that is expected to be permanently reinvested was approximately $14,124 on March 31, 2014.
Excess tax benefits related to share-based payments are credited to equity. When determining this excess tax benefit, the Company elected to follow the tax law approach. As a result, the Company’s excess tax benefit which was recorded to equity was approximately $28,416 and $23,126 for the years ended March 31, 2014 and 2013, respectively.
At March 31, 2014, the Company has foreign net operating loss (NOL) carryforwards of approximately $3,332. At March 31, 2014, the Company has federal and state research tax credit (R&D credits) carryforwards of approximately $5,241 and $4,782, respectively. The federal research tax credit carryforwards expire from 2032 through 2034, and the state research tax credit carryforwards expire from 2016 through 2029. At March 31, 2014, the Company has federal Alternative Minimum Tax credit carryforwards of $1,586.
The Company conducts business globally and as a result, files income tax returns in the United States and in various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Australia, Canada, Germany, Netherlands and United Kingdom. The Company's Federal income tax return for the year ended March 31, 2011 is currently under audit. Additionally, the Company’s German subsidiary’s income tax returns for the fiscal years ended March 31, 2006 through March 31, 2011 are currently under audit by the German tax authorities. The following table summarizes the tax years in the Company’s major tax jurisdictions that remain subject to income tax examinations by tax authorities as of March 31, 2014. The years subject to income tax examination in the Company’s foreign jurisdictions cover the maximum time period with respect to these jurisdictions. Due to NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOLs.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in each of its tax jurisdictions. The number of years with open tax audits varies depending on the tax jurisdiction. A number of years may lapse before a particular matter is audited and finally resolved. A reconciliation of the amounts of unrecognized tax benefits is as follows:
All of the Company’s unrecognized tax benefits at March 31, 2014 of $4,113, if recognized, would favorably affect the effective tax rate. Components of the reserve are classified as either current or long-term in the Consolidated Balance Sheet based on when the Company expects each of the items to be settled.
Accordingly, the Company has recorded its unrecognized tax benefits of $4,113 and $4,570 and the related accrued interest and penalties of $555 and $842 in Other Liabilities on the Consolidated Balance Sheet at March 31, 2014 and March 31, 2013, respectively. The Company believes that it is reasonably possible that approximately $1,507 of its currently remaining unrecognized tax benefits and approximately $253 of related accrued interest and penalties may be realized by the end of the fiscal year ending March 31, 2015 as a result of the lapse of the statute of limitations. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. In the years ended March 31, 2014, 2013 and 2012, the Company recognized $89, $107 and $117, respectively, of interest and penalties in the Consolidated Statement of Income.
9. Employee Benefit Plan
The Company has a defined contribution plan, as allowed under Section 401(k) of the Internal Revenue Code, covering substantially all employees. Effective January 1, 2012, the Company makes contributions equal to a discretionary percentage of the employee’s contributions determined by the Company. During the years ended March 31, 2014 and 2013, the Company made contributions of $1,451 and $1,132, respectively.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
10. Segment Information
The Company operates in one reportable segment, storage software solutions. The Company’s products and services are sold throughout the world, through direct and indirect sales channels. The Company’s chief operating decision maker, the chief executive officer, evaluates the performance of the Company presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of tracking distribution of resources and analyzing overall return on investment for both domestic and international operations. The chief operating decision maker does not receive discrete financial information about asset allocation, expense allocation or profitability from the Company’s storage products or services.
Revenues by geography are based upon the billing address of the customer. All transfers between geographic regions have been eliminated from consolidated revenues. The following table sets forth revenue and long-lived assets by geographic area:
No individual country other than the United States accounts for 10% or more of revenues in the years ended March 31, 2014, 2013 and 2012. Revenue included in the “Other” caption above primarily relates to the Company’s operations in Europe, Australia, Canada and Asia.
At March 31, 2014 no other individual country, other than the United States, accounts for 10% or more of long-lived assets.
CommVault Systems, Inc.
Notes to Consolidated Financial Statements - (Continued)
(In thousands, except per share data)
11. Selected Quarterly Financial Data (unaudited)
(1)
Per common share amounts for the quarters and full year have been calculated separately. Accordingly, quarterly amounts do not add to the annual amount because of differences in the weighted average common shares outstanding during each period used in the basic and diluted calculations.
12. Subsequent Event
On April 24, 2014, the Company’s Board of Directors authorized a $50,000 increase to the Company’s existing stock repurchase program. As a result, the Company may repurchase an additional $150,002 of its common stock through March 31, 2015.
Item 9.
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable
Item 9A.
Item 9A.
Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
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, 2014. 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, 2014.
(b)
Management’s Report on Internal Control over Financial Reporting
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, 2014. In making this assessment, management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992).
Based on our assessment, using those criteria, our management concluded that, as of March 31, 2014, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of March 31, 2014 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.
(c)
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors and Stockholders of CommVault Systems, Inc.
We have audited CommVault System, Inc.’s internal control over financial reporting as of March 31, 2014 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). CommVault Systems, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, CommVault Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CommVault Systems, Inc. as of March 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2014 of CommVault Systems, Inc. and our report dated May 2, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
MetroPark, New Jersey
May 2, 2014
Item 9B.
Item 9B.
Other Information
Not applicable
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
We will furnish to the SEC a definitive Proxy Statement not later than 120 days after the close of the fiscal year ended March 31, 2014. Information with respect to this Item is incorporated herein by reference from our 2014 Proxy Statement, including in the sections captioned, “Our Board of Directors” and “Corporate Governance”.
Our Board of Directors has adopted a code of business ethics and conduct, which applies to all our employees. The code of business ethics and conduct is in addition to our code of ethics for senior financial officers. The full texts of our code of business ethics and conduct and our code of ethics for senior financial officers can be found on our website, www.commvault.com.
Information with respect to this Item is incorporated herein by reference from our 2014 Proxy Statement, including in the section captioned “Compensation Discussion and Analysis”.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to this Item is incorporated herein by reference from our 2014 Proxy Statement, including in the section captioned “Security Ownership of Certain Beneficial Ownership and Management”.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of March 31, 2014 with respect to the shares of our common stock that may be issuable upon the exercise of options, warrants and rights under or existing equity compensation plans. The following information is as of March 31, 2014:
(1)
Consists of shares of common stock to be issued upon exercise of outstanding options and vesting of restricted stock awards under our 1996 Stock Option Plan and 2006 Long-Term Stock Incentive Plan. These amounts do not include potentially issuable shares under the Employee Stock Purchase Plan. The company has reserved 3,000,000 shares for the future issuance of shares under the Employee Stock Purchase Plan.
(2)
On each April 1, the number of shares available for issuance under the 2006 Long-Term Stock Incentive Plan is increased, if applicable, such that the total number of shares available for awards under the 2006 Long-Term Stock Incentive Plan as of any April 1 is equal to 5% of the number of outstanding shares of our common stock on that April 1.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information with respect to this Item is incorporated herein by reference from our 2014 Proxy Statement, including in the section captioned, “Transactions with Related Persons”.
Item 14.
Item 14.
Principal Accountant Fees and Services
Information with respect to this Item is incorporated herein by reference from our 2014 Proxy Statement, including in the sections captioned “Audit, Audit-related, Tax and All Other Fees”.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
Financial Statements
See “Index to Consolidated Financial Statements” set forth in Item 8 for a list of financial statements filed as part of this report.
Financial Statement Schedules
The following financial statement schedule should be read in conjunction with the Consolidated Financial Statements set forth in Item 8 and appears below:
Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2012, 2013 and 2014.
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
Schedule II - Valuation and Qualifying Accounts
Exhibits
The following exhibits are incorporated by reference or filed herewith.
*
Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Oceanport, State of New Jersey, on May 2, 2014.
COMMVAULT SYSTEMS, INC.
By:
/s/ N. ROBERT HAMMER
N. Robert Hammer
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on May 2, 2014.
Signature
Title
/s/ N. ROBERT HAMMER
Chairman, President and Chief Executive Officer
N. Robert Hammer
/s/ BRIAN CAROLAN
Vice President, Chief Financial Officer
Brian Carolan
/s/ GARY MERRILL
Vice President, Chief Accounting Officer
Gary Merrill
/s/ ALAN G. BUNTE
Director
Alan G. Bunte
/s/ FRANK J. FANZILLI, JR.
Director
Frank J. Fanzilli, Jr.
/s/ ARMANDO GEDAY
Director
Armando Geday
/s/ KEITH GEESLIN
Director
Keith Geeslin
/s/ F. ROBERT KURIMSKY
Director
F. Robert Kurimsky
/s/ DANIEL PULVER
Director
Daniel Pulver
/s/ GARY SMITH
Director
Gary Smith
/s/ DAVID F. WALKER
Director
David F. Walker