Description

Introduction

Value investors have an opportunity to invest in a company which has purposely contracted margins over the past 3 years (and seen their stock languish) in order to set themselves up for solid growth for the for the next several years.  While not "cheap" on the surface, Commvault has significant operating leverage and is mission critical for the enterprises who use their software and services.  Furthermore, we believe that CVLT is an acquisition target for stategic and private equity buyers and is ripe for activists given their pristine balance sheet and recurring revenue.  Trading at $42, we believe that CVLT can reach $65.

Description

Commvault is a leading provider of data management software and services.  Its products are mission critical for enterprises across the world who have growing needs to manage its corporate data in complex and changing environments.  We believe that the company is now coming out of 2-3 year period during which time it has evolved its core product and go-to-market strategy to better to position itself for a changing market as more companies are utilizing the cloud for their data and applications.  The stock has been underperforming for the past 2 years as public investors have gotten frustrated with the transformation during which time management has been focusing more on R&D and building the sales/ marketing team and less on short term sales results.  

The company is based in New Jersey and has 2,200 employees.  Commvault's data protection and information management solutions provide mid and enterprise level organizations worldwide with the best way to get value from their data.

Commvault was created 100% organically with no acquisitons, unlike most large software companies.  All of the applications in Commvault's end-to-end data protection and information management solutions offer flexible options and are build from the ground up, on the same platform.  As a result, they talk to each other and work with eachother.

The Cloud is their Friend

There is no question that more companies are increasing their adoption of public and private cloud infrastructures.  The growth of on premise infrastructures is actually declining as more companies utilize the cloud.  So while cloud infrastructures are growing 10-20%, companies are spending less in building their own data centers.  In the past, Commvault had benefitted from traditional on-premise data center buildouts, but as that growth has slowed so has Commvault's business until now.  However, due to moves made by management over the past 2 years, Commvault customers are now using them to deploy both public and private cloud infrastructures.

Commvault's products allow customers to backup on-premise data into the cloud.  It also can be used for disaster recovery enterprise wide with backups taking place in the cloud.  It's product integrates with multiple public cloud players (Amazon, Azure) making them agnostic.  It products allow companies who use the cloud do data recovering, storage and backup in an efficient way that enables companies leverage their existing infrastructure.

Inflection Point Begins Now

As mentioned earlier, Commvault has spend the last 2-3 years improving their core product offering, introducing additional products, introducing stand-alone products for the first time (a la carte), introduced a SAAS offering, bolstered the sales organization, expanded the distribution channels, and focused on key verticals like healthcare.  Now it is the time for the company to reap the rewards of this investment.  Last quarter the sequential increase in software revenue iwas the highest growth in 5 years.  Overall revenues were up YOY after 4 consecutive quarters of declines.  Commentary during last quarters conference call gives additional colar that the pipeline is strong and getting stronger.

Of note, Commvault is releasing its latest software which has cloud capabilities that it didn't have in previous editions. 

Competitors in a State of Flux

Commvault's main competitors Veritas (acquired by Carlisle) and EMC (being acquired by Dell) are in a state a flux given their ownership and leadership transitions.  Customers would rather work with a steady company like Commvault.

WIN/WIN Setup

If the company does not execute on sales growth, it is highly likely that the company will the target of activists and be sold.  The CEO is 73 years old with a private equity background and has alluded to the potential sale of the company during recent conference calls.  It has just recently aggressively spent $135mm on a new corporate headquarters in Northern New Jersey.  If the company gets put in play in the near term, the company could see $45-50/share or about 3X sales or 20% higher.  If the company is successful in restarting growth it could see a multiple of 4-5X sales or $65-75/share or 70-80% upside over time.  We believe the bar is set very low with where the stock is trading.

Financials

The fiscal year ends in June.  When looking at the financials, the operating margin expands dramatically as sales growth catches up to the investment in sales and marketing to support the new product launch.  We see the operating margin trending towards the mid twenties over time.  We view this as not a total stretch.  This is a level that the company saw when they were doing the same amount of sales before they invested hitting 28% margin.  This is also the margin that Veritas was running at before being acquired by private equity.

Valuation

Currently Commvault trades at an EV/Sales of 2.4X Fiscal 2017 (June).  We believe that CVLT is worth $65/share which represents a 4X multiple.  Software takeouts historically have taken ranged from 3-4X sales.  Carlisle acquiring Veritas was about 3X.  Vista acquiring Tibco was 3.8X.  Informatica was bought last year for 4.5X.  SLH was acquired by Vista by about 6X this year.  A 4X multiple represents a mid to higher multiple which is deserved by (mission-critical-best-in-class software, growth-if they execute). 

Catalysts

-Execution on their sales pipeline.  Sales growth returning to double digits.

-Operating margin expanding again 

-Realization that data moving to the cloud is good for their business not bad.  This will lead to multiple expansion.  Sentiment is still low.

-Stock Buybacks

-Take over by a strategic or private equity

-Activists pressuring company to buy back more stock agressively or put the company in play.

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Catalyst

The most important and biggest catalyst I see is the the company returning to double digit sales growth again.  This will bring operating margin expansion.  I model this occuring during their fiscal 2018 year.