Why Shares of CommVault Systems Are Surging Today

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What happened

Shares of CommVault Systems Inc. (NASDAQ: CVLT) jumped on Monday after an activist investor disclosed a major stake in the data management company. The stock was up about 11.3% at 12:30 p.m. EDT.

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So what

In a filing with the SEC, Elliott Management disclosed a 7.4% stake in CommVault, split between Elliott Associates, L.P. and Elliott International, L.P. Purchases were made between early February and mid-March. Along with the disclosure of the stake, Elliott nominated four candidates for CommVault's board of directors.

In a letter sent to CommVault's board and included in its filing, Elliott laid out its rationale for accumulating a stake in the company. Elliott believes the current value of the stock doesn't reflect the company's leadership position in the data management software market, and that the stock represents a significant value opportunity. Elliott pointed to declining operating margins, negative profitability inclusive of stock-based compensation, corporate governance issues, and other problems as justification for a new strategy.

Elliott is proposing various steps, including removing layers of management, cutting unproductive spending, expanding the share-buyback program, and replacing board members with its own nominees at the 2018 annual meeting of shareholders.

Now what

CommVault responded to the filing from Elliott via a short press release: "Commvault conducts open communications with its stockholders, and the Board of Directors and management team values their input. Commvault has had initial discussions with Elliott and we go into these discussions with an open mind, a goal of enhancing stockholder value, and optimistic for Commvault's future."

Shares of CommVault are down nearly 30% from their multiyear high, even after Monday's gain. GAAP profitability has plunged over the past few years, with the company essentially breaking even in fiscal 2016 and 2017. Operating costs have grown faster than revenue, and Elliott sees an opportunity to reverse that trend and return the company to robust profitability.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.