Shorter SaaS Contracts And Rising Cyber Threats Will Challenge Execution Yet Support Long-Term Potential

Catalysts

About Commvault Systems

Commvault Systems provides data protection and cyber resilience software and SaaS for hybrid and multi cloud environments.

What are the underlying business or industry changes driving this perspective?

• Although demand for the Commvault Cloud Cyber Resilience platform is tied to rising cyber threats and more distributed data, customers shifting to shorter term contracts to preserve cloud flexibility could cap visibility on long term commitments and introduce variability in subscription revenue growth.
• While SaaS ARR of about $336 million and 56% growth in Q2 signal strong interest in cloud delivered offerings, the lower gross margin profile of SaaS compared with software and the 0% coupon convert financing could pressure EBIT margins if expected scale efficiencies in cloud delivery and go to market do not materialise.
• Although identity and data security offerings now contribute nearly 40% of net new ARR and usage of Active Directory recovery has more than tripled, rapid expansion into adjacent security use cases may increase R&D and integration spend, which could weigh on net margins if cross sell into the existing base slows.
• While the company now manages about 8 exabytes of customer data in the cloud and has seen very large multi year growth in that figure, reliance on large cloud providers, complex hybrid deployments and potential pricing pressure around offerings like Clumio could limit the translation of data volume growth into higher revenue and free cash flow.
• Although recognition from Forrester, Gartner and IDC and early integration of Satori Cyber point to strong positioning around AI related data risks, competitors are also tying security and backup together, and if Commvault’s newer AI and identity services fail to gain traction, that could slow ARR growth and temper earnings expansion from premium priced resilience bundles.

Assumptions

This narrative explores a more pessimistic perspective on Commvault Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Commvault Systems's revenue will grow by 11.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.3% today to 10.2% in 3 years time.
• The bearish analysts expect earnings to reach $153.2 million (and earnings per share of $3.57) by about January 2029, up from $80.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 53.9x on those 2029 earnings, down from 69.1x today. This future PE is greater than the current PE for the US Software industry at 32.7x.
• The bearish analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Customers are choosing shorter contract terms to keep flexibility between software and SaaS. This could limit long term visibility on commitments and make revenue growth less predictable, especially for subscription revenue and ARR.
• The business mix is tilting further toward SaaS, which currently has a different gross margin profile than software. A faster SaaS ramp without enough scale efficiencies could weigh on gross margins, EBIT margins and free cash flow.
• Commvault is increasing investments in product development, go to market and acquisitions like Satori Cyber at a time when competition in cyber resilience and data protection is intense. If these investments do not translate into sufficient ARR growth, EBIT margins and earnings could be pressured.
• As more workloads move to the cloud and offerings like Clumio are used to manage growing data volumes across major hyperscalers, pricing pressure or higher cloud delivery costs could limit the benefit from data growth. This could affect revenue growth and free cash flow.
• The company is positioning around AI driven data usage, identity and data security. If new AI, identity and resilience services do not gain the expected traction or if rivals match them quickly, cross sell into the existing base and net new ARR from these services could fall short, affecting ARR growth and long term earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Commvault Systems is $144.0, which represents up to two standard deviations below the consensus price target of $187.33. This valuation is based on what can be assumed as the expectations of Commvault Systems's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $220.0, and the most bearish reporting a price target of just $144.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.5 billion, earnings will come to $153.2 million, and it would be trading on a PE ratio of 53.9x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $125.69, the analyst price target of $144.0 is 12.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.