Categories Earnings Call Transcripts, Technology

Commvault Systems, Inc.  (NASDAQ: CVLT) Q4 2020 Earnings Call Transcript

CVLT Earnings Call - Final Transcript

Commvault Systems, Inc.  (CVLT) Q4 2020 earnings call dated May 12, 2020

Corporate Participants:

Michael J. Melnyk — Director of Investor Relations

Sanjay Mirchandani — President and Chief Executive Officer

Brian Carolan — Chief Financial Officer

Analysts:

Aaron Rakers — Wells Fargo — Analyst

Alex Kurtz — KeyBanc Capital Markets — Analyst

Jason Ader — William Blair — Analyst

Joseph Gallo — Jefferies — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Commvault Fourth Quarter Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today’s call is being recorded.

I would now like to hand the conference over to your speaker today, Mike Melnyk, Director of Investor Relations. Please go ahead, sir.

Michael J. Melnyk — Director of Investor Relations

Good morning and thanks for dialing in today for our call to discuss our fourth quarter and fiscal year 2020 Earnings Results. Before we begin, I’d like to remind everyone that the statements made during this call, including in the question-and-answer session at the end of the call may include forward-looking statements, including statements regarding financial projections and future performance.

All the statements that relate to our beliefs, plans, expectations or intentions regarding the future are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Actual results may differ materially due to the risks and uncertainties, such as competitive factors, difficulties and delays inherent in the development, manufacturing, marketing and sale of software products and related services and general economic conditions. For a discussion of these and other risk factors and uncertainties affecting our business, please see the risk factors contained in our annual report on Form 10-K and our most recent Quarterly Report and Form 10-Q and in other SEC filings and in the cautionary statement contained in our press release and on our website.

The company undertakes no responsibility to update the information in this conference call under any circumstance. In addition, the development and timing of any product release as well as features or functionality remain at our sole discretion. A press release related to today’s announcement was issued over the wire services earlier this morning and is also been furnished to the SEC as an 8-K filing. The press release is also available on our Investor Relations website.

On this conference call, we refer to non-GAAP financial measures, a reconciliation between the non-GAAP and GAAP measures can be found on our website. This conference call is being recorded and a replay is available for the webcast an archive of today’s webcast will be available on our website following the call. With me on the call this morning are Sanjay Mirchandani, President and Chief Executive Officer of CommVault and Brian Carolan, Chief Financial Officer of CommVault. Sanjay and Brian will each share opening remarks and commentary, before we open the call for Q&A.

Now, I’ll turn the call over to Sanjay. Sanjay?

Sanjay Mirchandani — President and Chief Executive Officer

Thank you, Mike. Good morning and thank you for joining us today to discuss our fourth quarter and fiscal year 2020 results. I would like to begin by extending our thoughts of the million suffering from the Corona virus and the subsequent economic hardships. Across Commvault we remained focused on keeping our employees safe and healthy, while providing our customers with world-class products and services they expect.

In March, we began working from home to prioritize safety, our employees, many of whom were already workers quickly adjusted with minimal disruption to our operations. I would like to thank all our Vaulters, who are stepping up to ensure our business continues without interruption. I would also like to acknowledge the team’s creativity in helping our customers adjust to recognising the pandemic introduced new data challenges for a much larger remote workforce. We created a Commvault cares program to provide customers with additional software, support and education at no cost until September. This includes offering Metallic Endpoint Backup & Recovery with unlimited Azure backup storage from our good friends of Microsoft. To protect against data corruption, deletion, malware and ransomware attacks.

To date hundreds of customers have accessed free trials and are benefiting from the program. As you know, the pandemic presented some challenges for us. During the quarter and the economic picture is still evolving. However, we believe the progress we made last year and our ability to help our customers now, when they need us most will enable us to weather these — these challenges and continue leading our industry for the long term. This has reinforced by the improved performance we delivered in the two prior quarters, we expected to carry that momentum into Q4, but COVID impacted APJ and EMEA throughout the quarter then extended to the Americas in March.

Despite this, we closed multiple 7-figure deals and won many new customers, including McDonald’s, Blue Cross/Blue Shield of Minnesota, the City of Philadelphia, the Polish Ministry of Finance and Shared Services Canada, which provides IT services for the Canadian government. We launched a — the targeted competitive Switch campaign and kicked off our fiscal year 2021 subscription renewal cycle, and the two of our largest customers renewing their deals.

With that said, our current outlook for total software and product revenue is more measured than our pre-COVID expectations. We’ve seen a decline in the volume of smaller portfolio transactions, due to — likely due to this SMB customers that may be disproportionately challenged. Additionally, we believe customers may differ routine capacity add-ons until economic conditions begin — begin to stabilize. Even with the mission critical nature of our products, we expect new customer signings to remain challenged, because they require a higher touch sales process.

During the quarter, we made some prudent short-term adjustments to our expense structure to align with the current revenue environment, most notably a temporary reduction of salaries.

Our fiscal discipline and strong financials allow us to confidently make decisions that balance the needs of our customers, shareholders and employees, while remaining focused on our return to growth. Even with the expected pressure we believe, we have the staying power to emerge from this pandemic as a stronger company, because of our innovative product strategy, our large and loyal customer base and growing sub-software subscription and recurring revenue base.

Let’s discuss each of these. First our innovative product strategy, we advanced our storage and data management vision by integrating Hewlett with Commvault Complete to solve customers’ hardest data management problems. This provides customers more choice and flexibility with their data, without the large upfront investment. With more milestones and use cases coming. We will have additional capability to cross sell into our customer base. We’ll share more on the roadmap in the future. Additionally, we continue to rollout our SaaS Solution Metallic, customers increasingly want a flexible consumption-based and cloud-centric solution to support their infrastructure, remote operations in endpoint devices. Metallic meets it’s head off and is the ideal platform for our future SaaS offering. We also continue to lead, when it comes to migrating workloads to the cloud. Conservatively, we estimate that our software already manages more than an exabyte of customer data in multi-cloud environments. In Q4, we added support for several cloud native applications and expanded on our capabilities to enable customers to accelerate the cloud usage.

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One of our cloud success stories is McDonald’s, who’s Director of cloud services Douglas Leonard said “we are investing heavily in the cloud to keep our IT operations running.” The software solution from Commvault has got across every use case McDonald’s cloud services team has. Commvault Solution tunes performance across AWS and Microsoft Azure, cloud service and drives cost savings. But McDonald’s realize it’s value from a trusted innovative team with Commvault and and cloud. This is a premier example of how we’re helping our customers modernize their environments and accelerate that path to the cloud. Even in the midst of an unprecedented quarter.

The second reason we have staying power is our loyal world-class customer base. The majority of which are large, well-capitalized enterprises with whom we have long-standing relationships. The average tenure of our customers is nine years and our historical maintenance rates are approximately 90% across our customer base. More impressively it’s 97% percent among our top 100 customers. Given our diverse base, we are not disproportionately exposed to any one industry having nurtured our customer relationships for decades, we believe our incumbency is an asset, we have the right go-to-market strategy and are keenly focused on our customer success. We just hosted our first ever all virtual sales kick off and Q1 is off to a strong start.

The third reason we have staying power is our subscription recurring revenue streams. They are growth driver for us in fiscal year 2021. In Q4, we added approximately a 150 subscription customers and revenues now represent over 40% of our software and product revenue. With fiscal year 2021 as our first full renewal cycle, we are focused on this opportunity. Now let me turn it over to Brian to give you some detail on our fourth quarter and full year results as well as our outlook for the first quarter. Brian?

Brian Carolan — Chief Financial Officer

Thanks, Sanjay and good morning everyone. Before discussing our outlook. I’ll briefly recap our results, as Sanjay discussed, we have demonstrated continued success in our subscription transition by adding approximately 150 additional customers in the fourth quarter. For the full year subscription revenue exceeded 40% of software and products revenue compared to less than 10% in FY 2017. As a reminder, we began our transition to a more subscription-based recurring revenue model in FY 2018, we expect recurring software and products revenue to increase as a percentage of total revenue in FY 2021, as we capitalize on the renewal opportunity associated with our existing subscription customer base.

Services revenue with the majority of which is maintenance accounts for approximately 60% of total revenue. Fiscal fourth quarter services revenue was approximately $98.3 million declining 2% year-over-year and 1% sequentially. On a constant currency basis fourth quarter services revenue was down 1% both sequentially and year-over-year. For the full fiscal year services revenue was approximately $396 million, down 1% year-over-year. FY 2020 operating expenses declined 3% year-over-year to $459 million. Over the past several years, we’ve successfully reduced our underlying operating expense base, driven by our deliberate efforts to tighten the cost structure, while continuing to invest in strategic initiatives, such as Metallic and Hedvig unlike some of our competitors, we are able to fund our future through our profits and cash flows, free cash flow, which we define as cash flow from operations less capital expenditures was approximately $31.1 million for the quarter, representing our strongest cash flow quarter of the year.

For the full year free cash flow was $85.3 million, we repurchased 872,000 shares for $37.2 million during the fiscal fourth quarter and 1.7 million shares or $77.2 million during the full fiscal year. Over the past five years, we’ve repurchased over $600 million of our stock representing more than 125% of cumulative free cash flow. We have almost $163 million remaining on our existing share repurchase authorization, which expires in March 31, 2021.

Now I’ll discuss our financial outlook for Q1, FY 2021 given the uncertainty and limited visibility associated with COVID-19 we are being measured with our outlook. At this time, it’s simply not possible to predict, when we might return to a more normal business environment. Having said this, we have several factors that provide underlying support for our existing revenue base. For example, over 70% of our revenue is recurring in nature. Approximately two-thirds of new software sales are two existing customers and subscription renewals represent a growing and more predictable part of our sales motion.

As Sanjay noted, we did see a notable decline in smaller transactions in the last weeks of March as the virus spread and economic shutdowns intensified. We expect these trend to continue throughout the current quarter and to have a continued dampening effect on our business. For the first quarter of FY 2021, we expect total revenue of approximately $150 million to $155 million including $58 million to $62 million of software and products revenue. Our revenue outlook is underpinned by the successful renewal of two of our largest subscription customers. These renewals were signed in Q4 before their contract expirations and will represent combined software revenue of approximately $10 million in Q1, FY 2021. We are working diligently to exceed our guidance and to deliver year-over-year software revenue growth.

In response to COVID-19, we made temporary, but prudent adjustments to our expense structure to align with the current revenue environment. With these adjustments our underlying opex is down sequentially. With that, we expect Q1, FY 2021 EBIT margins to be approximately 5% to 7%, we’ll continue to one FY 2021 each of the situation and we’re prepared to make further adjustments if necessary. Lastly, our projected share count for Q1 is a player to make $46.4 million shares.

Now I’ll turn the call back over to Sanjay for some closing remarks. Sanjay?

Sanjay Mirchandani — President and Chief Executive Officer

Thank you, Brian. I joined Commvault with a commitment to return the company to responsible growth and this continues to be our number one priority. During this difficult time, our strong balance sheet, rich technology portfolio and customer — and loyal customer base position us well to weather the storm, more importantly, our resilience in response of the crisis is only deepen my conviction in Commvault’s success for the long run. I am confident we have the talented team and the focus needed to further strengthen our customer relationships and partnerships during this crisis and seize new opportunities in the future.

I look forward to updating you on our progress in the coming quarters. Now we’ll open up the call to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Aaron Rakers with Wells Fargo. Your line is now open. Aaron, if your phone is on mute. Please unmute.

Aaron Rakers — Wells Fargo — Analyst

Yeah. Sorry about that guys. Maybe the first question, if I can, as we start to get more vocal about the subscription renewal cycle into fiscal 2021 and kind of the framework that you just laid out for fiscal 1Q guide. Can you help us understand what the base of businesses that gives actually the subscription base that we should think about for the full fiscal 2021. I guess what we’re really thinking about is what was the base of subscription revenue that you generated in Fiscal 2018 that comes up for the renewal cycle in fiscal 2021?

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Brian Carolan — Chief Financial Officer

Sanjay, I can take that one if you want.

Sanjay Mirchandani — President and Chief Executive Officer

Sure.

Brian Carolan — Chief Financial Officer

Good morning, Eric. It’s Brian here, hope you’re well. Yeah, so as you know, it’s early days for us with the subscription renewals, but we’re off to a good start in our Q4 that will be recognized all we successfully renewed two of our fiscal Q1. And so just to frame out the opportunity. We believe there is about a $50 million software opportunity coming up in FY 2021, it’s mostly weighted towards the second half of the fiscal year. Obviously, this is a new motion for us, we’re trying to be prudent with our assumptions and pragmatic about it, but we’re on it. We have a dedicated team working hard as part of our customer success organization team works with customers to optimize their use of our platform and software and strives to strengthen that relationship and contacting that customer well in advance of — of when that renewal is coming due. So again, it’s a great opportunity for us, but we’re being measured at this point in time and we think this is going to help us drive more predictable results moving forward.

Aaron Rakers — Wells Fargo — Analyst

Okay, thank you. And it has a real quick second question through this last quarter, last month or so you announced some patent litigation against Cohesity and Rubrik Inc. Can you just help us understand what you’re exactly currently seeing in the competitive landscape and the measures you’re taking versus to competitors?

Sanjay Mirchandani — President and Chief Executive Officer

I’ll take that Brain. Aaron, I’ve — I hope you well as well. I — I’ve said this through the course of the year that I’ve been here that our portfolio, our technology portfolio is second to none and — and we continue to invest in our portfolio aggressively. We think we’ve spent in excess of $1 billion on our IP as a company and competitively we see not getting into details of the — of the lawsuit. But competitively, we take our portfolio, especially with our focus on cloud, our SaaS capabilities our software-defined storage abilities, our ability to truly help customers use data with activate, are all coming to the floor. These are all used cases, that are absolutely being — are super relevant and customers are talking to us and using our technology cohort.

So focused really on our technology, making sure that — making sure that we continue to lead in that space and — and on the lawsuit, really it’s — it’s I don’t want to compete against ourselves.

Aaron Rakers — Wells Fargo — Analyst

Thank you.

Operator

Thank you. And our next question comes from Alex Kurtz of KeyBanc Capital Markets. Your line is now open.

Alex Kurtz — KeyBanc Capital Markets — Analyst

Yeah, thanks for taking the question and hope everyone’s safe and healthy on year-end. Just a follow-up on — on Aaron’s question, how do you think about sales comp, sales structure if you go into this renewal opportunity this year and — and then may be behind that, given what you’re seeing in challenges in the SMB space. Are you going to on reevaluate that part of the business right now and how you work with channel partners maybe you can lean on them more and maybe refocus some of that selling capacity to the mid-market, so kind of two questions there. That the comp structural renewals and the approach and then how you’re thinking about SMB, the next six months and how you better market?

Brian Carolan — Chief Financial Officer

Sanjay. I could take the first piece, if you want to take the second piece. So good morning, Alex, it’s Brian here, hope you’re well as well.

Alex Kurtz — KeyBanc Capital Markets — Analyst

Good morning.

Brian Carolan — Chief Financial Officer

So with respect to the subscription renewal opportunity and — and compensation. We’ve got a very well organized approach internally here. There are incentives in place for our field to be involved and actively involved with these renewals, we have it well segmented in quarter two enterprise and SMB and that’s also working hand-in-hand with our customer success organization. So it’s a — it’s a multi-pronged approach and we’re well aligned and they are incentivized. So we believe this is going to be a good formula for hopefully the fiscal year.

Sanjay Mirchandani — President and Chief Executive Officer

And I’ll take the second part. Folks, we’re not all in the same location, obviously so it’s a little — it’s a little more hand holding than usual when we’re in the same room, so… Yeah.

Brian Carolan — Chief Financial Officer

Yeah.

Sanjay Mirchandani — President and Chief Executive Officer

Alex good to — good to hear from you. To your question SMB, non-SMB channel. What are we thinking, where are we applying resources. This is — this is a, it’s a great question, because all over, over the course of last year, we talked extensively, we shared extensively about our simplify, innovate, execute model and part of execute was really to make sure we had a customer segment model that, that lean on where the opportunity was and where the business was and where our partners were. And so for us, our enterprise business is one that be — we — like I shared we’ve been — we’ve been in that business a long time, we’ve got great relationships to continue to stay close. And as our customers come out of this, I think will be, we’ll be good.

On the SMB our product offering is much like Metallic, a very attractive they’re lightweight, they’re cloud-oriented, they help customers of that size, and our service providers are also doing a lot of work with — with customers in that segment and we are working with them. We’ve extended our portfolio and made it easy for them to sort of use the technology in this — during the course of this pandemic through our customer cares program and we think that our offer. I think that we’ve aligned well with that. And to support the partner channel, which is really leading in some of this, we have an ISR team that’s — that’s active in mobile app. So hopefully I answered your question. We feel good about that specs.

Alex Kurtz — KeyBanc Capital Markets — Analyst

Thank you.

Operator

Thank you. And our next question comes from Jason Ader of William Blair. Your lines now open.

Jason Ader — William Blair — Analyst

Yeah, hi guys, hope you’re well. First question for me. Is, we’re May 12th now. So you’re almost a month-and-a-half into the quarter. Can you talk about any change in trend versus March. I mean what do you see in the first six weeks of the quarter relative to what you saw in the month of March?

Brian Carolan — Chief Financial Officer

Let me.

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Sanjay Mirchandani — President and Chief Executive Officer

Sure. Hey, Jason.

Jason Ader — William Blair — Analyst

Hi.

Sanjay Mirchandani — President and Chief Executive Officer

It’s Sanjay. So you know, I think — I think it’s a great question and we are monitoring this all the time talking to channel partners, talking to — either talking to customers, the — they’ve been the — the structural shift in the market, if you would, when this — when all of this, the first started happening, the work from home scenario, our customers were adapting, we adapted. I think we’ve six weeks now into the quarter. I think people are sort of finding their feet in this new world order and the remote — and the remote environment. So what we did was, we put our cust — Commvault cares program into place, stayed closed with our customers, we’re helping them through, if there is an increase in say ransomware and security sort of threats at this stage, we’re helping them through that, we’re doing, we’re helping them with monitoring, because they can’t get to their, because they can’t get to their datacenter sometimes in full force.

And we internally pivoted very quickly as they have, as our customers and partners have. So we’re doing everything we can to stay close, but there is a lot of conversation about cloud now, more so I think — I think there has been a fundamental acceleration in customers plans to adopt and embrace public cloud scenarios, our products, our campaigns and our conversations are — are all aligned to that. So we feel — we feel pretty good right now, it’s — it’s — it’s a lightweight cloud-oriented, and that’s where — that’s the, that’s the next wave if you would have of conversations after the structural shift and work from home scenarios have been sort of mostly settled.

But no — but no material change in terms of the tone of business or anything that, well data protection is — is — is high on the list and then specially — especially has we have remote workers, and new data scenarios. This is bubbling to the top. But I think as customers initially have to respond. They have to sort of prioritize, what it is, and that was working from home, getting the endpoint sort of sorted out. And now we’re having, we’re having conversations again where — where our customers saying, okay, how can you help us and is our strategy valid. And do we have gaps there is expansion opportunities. So the conversations are begin again, but it varies. And it’s — it varies by geography and it varies by — by segment.

Jason Ader — William Blair — Analyst

Okay, great. And then secondly I think there has been some concern over the last couple of years of some of the very well-funded and aggressive upstarts coming after your base. Have you detected any change in the success rate of those, of those upstarts trying to go after year basis given that there is seems — there does seem to be an advantage of incumbency right now?

Sanjay Mirchandani — President and Chief Executive Officer

Going after new customers trying to trying to shift at this — in this time is hard, it’s hard because right now, what we’re telling our customers is, we’re here to help you, we’re in here to make sure you’re secure, we need to make sure that you’ve got what you need and incumbency matters. I think incumbency is king at these points and having — having those conversations with customers is what matters. Honestly, Jason. I’ve always — I’ve always — I’m a big believer and focusing on the fundamentals, run a good business get the right balance, have good free cash flow. We’ve all the strike to do the right thing and I’m running a good fundamental — fundamentally solid business at this point is — it’s key customers want us around and that’s what we’re focused on. I can’t speak for the competition.

Jason Ader — William Blair — Analyst

Okay, thank you.

Operator

Thank you. [Operator Instructions] And our next question comes from Brent Thill of Jefferies. Your line is now open.

Joseph Gallo — Jefferies — Analyst

Hey guys, this is Joe on for Brent. Thanks for the question. Given that net new logos will likely struggle in regards to that $50 million renewal opportunity, what are the renewal rate assumptions. And then maybe can you walk us through the opportunities for upsell is it three years of usage or is there an opportunity beyond the $50 million, what were the pricing dynamics of that two large deals already closed?

Sanjay Mirchandani — President and Chief Executive Officer

Sure. I’ll take that one, Sanjay. So, yeah, good morning. So as we framed out the opportunity, we are doing some what measured in our expectation [27.13] for us, just to be completely caded, this is the first year of a significant renewal cycle, they are typically are three-year contracts and with the way our recognition model works is that, when we secure that renewal, we recognize the upfront software value for the full-term of that upfront in the period of sale or upon when the contract comes through it. In the case of the two large ones that we’ve renewed in Q4. That will be recognized in — in Q1 we’re going to get into exact specifics, but I won’t say there are two of our largest more tenured customers. This all goes into the customer success discussion, we have regular dialog and QBRs with them active dialog whether the top, and we’re pleased with the — the result of those renewals. And as we look out over time we’ve got a strong product pipeline and our expectation is to have these up-sell and cross-sell opportunities with our new product portfolio that’s available, but also coming available later in the fiscal year.

So yes, we’re excited. But it’s early days.

Joseph Gallo — Jefferies — Analyst

Awesome. It’s helpful. And then, I know you guys have one million things to focus on, but maybe just talk about the conversations you had with an activist investor. Are there any incremental changes that you plan on enacting coming out of those conversations or any change in strategy between growth and profitability? And I think will be helpful. Thanks.

Sanjay Mirchandani — President and Chief Executive Officer

Sure, I’ll take that one. I’m Sanjay. If you want.

Brian Carolan — Chief Financial Officer

Yeah.

Sanjay Mirchandani — President and Chief Executive Officer

I mean we’ve had a number of constructive conversations with the investor that you might be referring to since learning of their investment. We’re always open to shareholder feedback and suggestions and we’ll continue to act in their best interest in our company’s best interest. We’re not going to get into specifics about those discussions, but I would say they are constructive. And I think there, their expectations and their wants are the same as ours. We’re aligned in terms of the long-term shareholder value and a balanced growth profile for the business and we’re excited about the opportunity once we get through this hopefully temporary period of time.

Joseph Gallo — Jefferies — Analyst

Awesome. Thanks, guys.

Operator

[Operator Closing Remarks]

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