TFD9 Pre-work: Commvault

Tech Field Day 9 is fast approaching, so I thought I’d do some prep work before I head over.

In what is becoming a bit of a tradition for me, I thought I’d fire up my spreadsheets and do some analysis of the companies I can get data for, starting with their financials and then seeing where that leads. It’s probably not possible for several of the companies, because they’re privately held, but I’ll do some digging anyway and see what turns up.

First up is Commvault, so let’s take a look.

Commvault is interesting, because I’ve only got public data for about 3-4 years.

Update: I went to the SEC EDGAR service and grabbed data from 2006 to 2013 while I was getting data for my next post. I’m going to post this anyway, because it makes for an interesting followup post with more data.

It’s fun to look at how good my analysis was with the data available. For example, what happened in 2013 and did it line up with my thoughts? It’s also interesting to see what more historical data highlights about a company’s operations.

DuPont Analysis

I always like to start with DuPont analysis. It helps me to get my bearings before I delve into the notes to the financial statements.

Commvault DuPont Analysis

Commvault DuPont Analysis

Commvault have no long-term debt (they’re entirely equity funded). Their leverage is pretty low, and most of their liabilities are unearned income: services (or products) they’ve sold but haven’t yet delivered. About half their revenue is from services, and the other half from products.

The big issue for me here is the excess cash they’re holding, which is dragging down asset turnover. Basically this means they’re not making their assets work hard enough to generate revenue. Operating efficiency is improving a lot, up from 0.0491 in 2009 to 0.0775 in 2012, which is nearly double. Really they could afford to take on some debt, or just spend some cash, to buy more productive assets. With interest rates at historic lows in the US, I’d have to dig into the financial statements to work out why they’re not using any debt at all, because it’s cheaper than equity.

Because according to my calculations, Return on Equity is only 13.89% in 2012, which is pretty low. Looking at my spreadsheet closer, I see an effective tax rate of 36.11%. That’s kinda high, though it’s down from 43.89% in 2009. Whoa! What’s going on there? I’d have to dig into that in more detail to figure out why there’s so much tax on their income statement. I use the NOPAT method for working out ROE, which is why the tax rate has such an impact.

General Operations Impressions

Commvault have a product that customers want to buy, and they are indeed buying it: sales for 2012 are up nearly 30% on 2011. That’s fantastic.

R&D costs as a percentage of sales is down from 13.1% in 2009 to 9.8% in 2012, which I reckon is from economies of scale rather than a deliberate reduction. General and administrative costs are also down, from 11.2% to 10.0%.

Operating Income is up from 8.7% of sales to 12.1%, and Net Income is up from 5.3% of sales in 2009 to 7.9%. Both very healthy indeed.

However, and there’s always a however, Commvault need to keep an eye on their costs. Sales and marketing costs dipped in 2010, but have crept back up to more than in 2009, at 53.9% of sales. They’ll need to make sure they aren’t just buying customers. Looking at the COGS breakdown, products COGS/products sales has come down from 2.03% in 2009 to 1.36%, so that’s quite impressive, except when you compare it to services COGS: down from 24.97% to 24.73%. With roughly equal amounts of sales from products and services, services COGS is where the focus should be. A 0.7% reduction in services COGS/services sales would bring in an extra $1.4 million in profit, or about 2.9% of current income before taxes. That’s a significant boost.

There are positive signs, in that the average receivables collection period is down from 85.68 days in 2011 to 60.85 in 2012. Weirdly, payables period is also down, from 19 days to 12.6. Commvault are paying their bills really quickly, but their customers are given a couple of months to pay, on average. I’d want to see that brought in a bit.

Right now, the improvement in operating income as a % of sales is all coming from the relative reduction in R&D spend, and that’s not sustainable in a fast-moving industry like technology.

The other issue I see is sales growth outstripping the sustainable growth rate, which is pretty much ROE (since there are no dividends being paid). In 2012, sales growth was nearly 30%, but with Return on previous year’s equity of only 17%, that means they have to eat into cash to fund the growth. Now, that’s actually not bad, because right now ROE is low precisely because of all the excess cash, so it may well correct itself. Still, I’d want to get the operations working a bit more effectively.

Stock Price

People clearly love Commvault’s future prospects. Their stock price has climbed steadily from $10.97 in 2009 to $49.64 in 2012, and $70.06 at time of writing. That’s pretty mammoth growth given the fairly ordinary ROE numbers.

Commvault are a relatively new company, so there’s still a lot to sort out, particularly in this high growth phase of their existence. Overall I’d say their future looks pretty bright if they can keep bringing products and services into a market that so clearly wants to buy them. All the operational stuff I’ve talked about is standard stuff for any halfway decent manager, so it’s not like they’re hard problems to solve.

Still, it’s easy to ignore your costs when new sales are pouring in the door and you almost can’t help but make money. They thing is, that’s precisely the time you want to look carefully at efficiencies. Setting up a well run company takes money to do, and if you wait until you’re in trouble to go looking for cost savings, it’s too late. You always need to be preparing for the future.

I look forward to seeing what Commvault are like in the flesh, and I’ll do some more casual digging over the next couple of weeks for some appropriate questions to ask to hopefully shed some light on how things are run over there.

None of this is investment advice. For the love all that is sane, go and see your own financial advisers before taking stock tips from some random person on the Internet. I mean, honestly. If you lose a bunch of money because of this blog post, it’s your own stupid fault. Don’t say you weren’t warned. It’s sad that I feel I have to put this here.

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