Commvault Systems Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 14 speakers on the call.

Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CommVault Second Quarter Fiscal Year 20 24 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question and answer session.

Operator

Followed by the number one on your telephone keypad. Thank you. I will now turn the conference over to Michael Melnyk, Head of Investor Relations. You may begin.

Speaker 1

Good morning, and welcome to our earnings conference call. I'm Michael Melnick, Head of Investor Relations, I'm joined by Sanjay Mirchandani, CommVault's CEO and Gary Merrill, CommVault's CFO. An earnings presentation with key financial and operating metrics is hosted on the Investor Relations website for reference. Statements made on today's call will include forward looking statements about CommVault, future expectations, plans and prospects. All such forward looking statements are subject to risks, uncertainties and assumptions.

Speaker 1

Please refer to the cautionary language in today's earnings release and CommVault's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in the forward looking statements. CommVault does not During this call, CommVault's financial results are presented on a non GAAP basis. A reconciliation between the non GAAP and GAAP measures can be found on our website. Thank you again for joining us. Now I'll turn it over to Sanjay for his opening remarks.

Speaker 1

Sanjay?

Speaker 2

Thank you, Mike. Good morning, everyone, and thanks for joining us today. I am pleased to report our Q2 results exceeded expectations And we improved across our most important KPIs. Total ARR, the primary metric we use to measure underlying growth, Accelerated 18% year over year to $711,000,000 Subscription ARR grew 32% year over year to 5 And is now nearly 75% of total ARR. SaaS momentum accelerated with metallic ARR up 77% Year over year to $131,000,000 MetallicsaaS net dollar retention rebounded to an impressive 130%, And we delivered improved profitability while continuing to return cash to shareholders through share repurchases.

Speaker 2

Beyond these impressive financial results, we also received numerous industry accolades, including Being named the leader for the 12th consecutive time in the 2023 Gartner Magic Quadrant. We also ranked highest in 6 of 7 categories in Gartner's latest critical capabilities for enterprise backup and recovery software solutions report. And once again, Gigaohm names us a leader and an outperformer in its most recent Gigaohm Radar for Hybrid Cloud Data section for large enterprises. We're extremely proud of this recognition. We laid the focus on being a trusted partner to our customers By protecting their data from the scourge of cyber threats, significantly reducing rampant hyper task complexity and infusing AI enabled automation to tackle new and evolving data protection and security challenges.

Speaker 2

And we're just getting started. Next week, at our CommVault Shift customer and partner event, we will highlight how we are shifting from data protection to leading the charge in cyber resilience. We're going to introduce a radically new approach that empowers customers to stand up to today's nonstop and escalating cyber threats. We're bringing together what we're known for, best in class data protection and combining it with exceptional data security, recovery and AI driven data intelligence. Cyber resilience like this has never been possible until now.

Speaker 2

The time has never been better. According to a recent IDC study, Most enterprises expect an imminent attack. 61 percent of respondents believe that data loss in the next 12 months is likely It occurred due to an increasingly sophisticated attack. It's clear a new standard in cyber resilience is required And that's what we're going to deliver. CommVault has always prided itself on delivering the best technology that customers need at the right time, case in point.

Speaker 2

4 years ago, we challenged ourselves to address an emerging need in the market, enterprise grade cloud native data protection as a service. We made some bold moves, disrupted from within and took a new modern approach to launch metallic, our industry leading hypergrowth SaaS platform. We've vastly simplified how we secure and defend data for any workload regardless of where it lives and in the process. We revolutionized data protection as a service. Since then, we've gained over 4,000 customers and surpassed $130,000,000 in ARR.

Speaker 2

And just last week, CommVault was named the leading vendor in Giga Ohms Cloud Based Data Protection Sonar Report. The authors noted, Metallic protects a very broad range of cloud workloads that will be tedious to fully enumerate. Building on the overwhelming success of our platform, we're now taking the opportunity to apply everything we've learned in data protection and combining it with powerful new innovations data security, AI and recovery to deliver the most advanced cyber resilience platform in the industry. Next week at Shift, we will unveil this to the world along with some exciting new ecosystem partnerships that will enable us to transcend the category. Today's problems cannot be solved with yesterday's approach.

Speaker 2

It's time to shift how we think about resilience. We hope that you can tune into this exciting event. Now, I'll turn it over to Gary to discuss the numbers. Gary?

Speaker 3

Thanks, Sanjay, and good morning, everyone. I am pleased to report that our strong revenue and earnings outperformance in Q2 Was driven by acceleration across our key KPIs during the quarter. Q2 total revenue was $201,000,000 an increase of 7% year over year. Our total revenue growth was led by subscription revenue of $98,000,000 an increase of 25% year over year. As a reminder, subscription revenue includes both our term software licenses and our SaaS offerings.

Speaker 3

We saw double digit growth in term software licenses combined with accelerating contribution of SaaS revenue, which was up over 80% year over year. Subscription revenue is now approaching 50% of total revenue compared to 42% 1 year ago. Term software license growth was driven by strong performance in renewals and existing customer expansion during the quarter With our subscription net dollar retention remaining within its historical range. Overall term software deal volume Increased year over year driven by continued improvements in our velocity motion. Q2 perpetual license revenues for $14,000,000 As a reminder, our go to market motion is led by subscription.

Speaker 3

The perpetual license sales are generally sold in certain verticals and geographies. At the current perpetual license revenue run rate, We believe the headwind to our reported total revenue growth from these perpetual license sales should start to normalize as we exit current fiscal year. Q2 customer support revenue was $77,000,000 which includes support for both our term based and perpetual software licenses. Fiscal year 'twenty four customer support revenue Has benefited from fewer conversions of perpetual support contracts to term software licenses compared to prior year. Year to date, customer support revenue from perpetual licenses represents 55% of total customer support, with the balance coming from term software licenses.

Speaker 3

This compares to approximately 60% in fiscal year 'twenty three and 70% in fiscal year 2022. At this trajectory, we expect customer support revenue from term based software licenses to become the majority of our customer support revenue next fiscal year. Moving from revenue to ARR. Q2 ARR growth accelerated 18% year over year to $711,000,000 and subscription ARR, which includes term based software arrangements And SaaS contracts grew 32% year over year to $530,000,000 These growth metrics reflect the underlying strength of our business when our revenue is presented on an annualized basis Without the impact of subscription software term length compression, SaaS ARR Finished the quarter at $131,000,000 an increase of 77% year over year. We saw healthy growth in new customers as well as expansion within our existing customer base.

Speaker 3

SaaS net dollar retention rate for Q2 accelerated to 130% versus 118% we reported last quarter. Now, I'll discuss expenses and profitability. Fiscal Q2 gross margins were 82% and reflect a 150 basis point year over year impact from our accelerating SaaS revenue, which carries a higher cost of sale than software. Fiscal Q2 operating expenses were $121,000,000 up 2% year over year. As a percentage of total revenue, operating expenses declined 310 basis points Year over year, the 60% of total revenue, driving EBIT margin leverage as we manage our people, facilities and 3rd party expenses by focusing investment on our most critical priorities.

Speaker 3

We ended the quarter with a global headcount of 2,900 employees, reflecting a 1% decline year over year. Our current headcount balance includes additional inside sales teams, renewal and related customer success teams to support the customer journey and our accelerating velocity sales motion. Non GAAP EBIT for Q2 Increased 19% year over year to $42,000,000 and non GAAP EBIT margins were 20.9%, a 210 basis point improvement year over year. The strong earnings and EBIT margin expansion Was driven by continued operating expense discipline relative to our top line revenue. Moving to some key balance sheet and cash flow metrics.

Speaker 3

We ended the quarter with no debt and $283,000,000 in cash, of which $93,000,000 was in the United States. Our Q2 free cash flow was $40,000,000 and our first half Fiscal year 'twenty four free cash flow was $78,000,000 up 10% year over year. The biggest driver of free cash flow is SaaS deferred revenue and the strength of our software subscription renewals, which typically includes upfront payments on multiyear contracts. In Q2, we repurchased an additional $31,000,000 of stock Under our repurchase program, and at the halfway point of fiscal year 'twenty four, we have repurchased $82,000,000 of stock, representing 106 percent of our first half free cash flow. Now, I'll discuss our outlook for fiscal Q3 and the full fiscal year 2024.

Speaker 3

We continue to believe that ARR and free cash flow to be viewed as primary KPIs of our underlying business momentum. All of our following guidance metrics Based on current foreign currency exchange rates. For fiscal Q3, we expect Subscription revenue, which includes both the software portion of term based licenses and SaaS to be 106 to $110,000,000 This represents 24% year over year growth at the midpoint. We expect total revenue to be $206,000,000 to $210,000,000 with year over year growth of 7% at the midpoint. At these revenue levels, we expect Q3 consolidated gross margins to be approximately 82.5 percent and EBIT margins of approximately 21%.

Speaker 3

As I mentioned on our last earnings call, we are executing some foundational go to market changes, Which includes amplifying our discrete focus on our land expand opportunities, while also scaling our motion to secure our growing subscription renewal base. We will continue to hire field resources and additional inside sales reps focused solely on the SaaS velocity market as we refine our segmentation model. These continuing investments are reflected in our margin guidance. Our projected diluted share count for fiscal Q3 is 44,700,000 shares. Now, I would like to give an updated outlook on the full fiscal year 2024, which includes raising both our total revenue and total ARR expectations for the full year.

Speaker 3

We expect fiscal year 2024 total ARR growth of 14% year over year, which reflects a 100 basis point increase over our prior guidance. We now expect subscription ARR, which includes term based licenses and SaaS to increase 24% year over year. From a revenue perspective, we now expect subscription revenue to be in the range of $408,000,000 to $418,000,000 Growing 19% year over year at the Midpoint. At these levels, subscription revenue will exceed over 50% of our total revenues. Our updated guidance reflects a mix shift from subscription revenue Due to a lower number of conversions from perpetual support contracts to term software compared to the prior year, As well as continued measured spending for large multi year transactions in a relative high interest rate environment.

Speaker 3

As a result, we expect total revenue to be in the range of $812,000,000 to $822,000,000 This is an increase compared to our prior total revenue range of $805,000,000 to $815,000,000 Our improved fiscal year 'twenty four total revenue outlook reflects strong rental activity, The ongoing momentum in our SaaS Velocity business and the seasonally stronger trends that we historically see in the second half of the fiscal year. Moving to full year fiscal 'twenty four margin, EBIT and cash flow outlook. We continue to expect consolidated gross margins of 82% to 83% and non GAAP EBIT margin expansion of 50 to 100 basis points year over year. We are also maintaining our expected full year free cash flows of $170,000,000 As of September 30, we had $174,000,000 remaining on our existing share repurchase authorization, And we expect to continue with our existing practice of repurchasing at least 75% of our annual free cash flows. We view share repurchases as a primary use of excess cash.

Speaker 3

Year to date, we are pacing well ahead of our annual share repurchase target and we intend to continue the share repurchase momentum during the current quarter. For additional details and trends on all of our key metrics, please take time to review our investor deck contained in the Investor Relations section of our website. In closing, we've built a durable and multifaceted revenue model that should allow us to exceed ARR, total revenue and earnings objectives over the long term. We are excited about the future and we look forward to hosting many of you at our Shift event in New York City next week. Operator, you can now open the line for questions.

Operator

Your first question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead.

Speaker 4

Yes. Thanks for taking the questions. Congratulations on the execution in the quarter. I guess my question is, I just Help me understand a little bit more. It looks like clearly your ARR updated guidance is a little bit lower Then your prior guide 24% on the subscription side, I should say, relative to 27%.

Speaker 4

And then obviously revenue a little bit lower at the midpoint. Can you just I know you've made some comments in your prepared remarks, but could you unpack that change in the guidance a little bit further?

Speaker 5

Hey, Erinn, it's Gary. Good to talk to you this morning. And I think specifically, I think you're asking about Q3, the Q3 outlook or the full year outlook first,

Speaker 4

Yes, I'm talking more full year, the 24% versus prior 27% and 408 to 418 versus prior 420 to 430.

Speaker 5

Got it. Okay, awesome. Well, first of all, let me just reflect a little bit on the first half. We're really pleased with the first half, especially where we ended up at fiscal Q2 on all of our guided metrics, making sure we accelerated past everything. From a full year perspective, as kind of I thought about the second half in particular coming off of the first half, I'm also pleased that we did raise our AR guidance.

Speaker 5

Previously, we were guiding to 13. I've increased that to 14 as well as our total revenue, Also increasing our guidance on total revenue. A lot of that is reflective of a lot of the success even we're seeing on the SaaS business as well, right? When we Drive that success, that fast success and we're able to hit $131,000,000 of ARR. A lot of that does not show up in reporting revenue or reported revenue expectations.

Speaker 5

But as I think about the subscription revenue specifically, I think directly at your question, There's a couple of things that are going on there. We are seeing fewer conversions. So conversions from our existing perpetual support contracts Being converted to term software licenses. In today's interest rate environment, those conversions usually come with a multiyear commitment, doing a 3 year commitment and some of the interest rate factors and the cost of money as well as where customers are in their cloud journey at the same time. So we're seeing just some declines year over year modestly on the conversion piece, as well as The continued trends on term subscription length.

Speaker 5

So when we sell term subscriptions, our average term is now down to about 2 years. So while that keeps ARR whole and we see the momentum on ARR, it can have a little bit of a short term impact on the reported revenue results. And then thirdly, just keeping in mind that we're watching the mega deal, the real big deal trends in this spending environment And being cautious on the procurement and approval cycles that are out there today.

Speaker 4

Yes, that's very helpful. So maybe just the final question sticking with that topic. How would you characterize the linearity in this quarter, the demand? Have you seen any Customers push out projects or delay spending in this environment at this point? Or is it just more Cautionary on the macro, the geopolitical environment as more so we look forward?

Speaker 5

More cautionary, we do not see trends that deteriorated. Our trends that we're seeing in the business on close rate and linearity are consistent with what we've seen over the past few quarters. But relative to The geopolitical nature of what's going on and just being cautionary on the time it takes to close some of those real big deals.

Speaker 1

Yes.

Speaker 5

Thank you, Gary.

Operator

Your next question comes from the line of Howard Ma from Guggenheim Securities. Please go ahead.

Speaker 6

Great. Thank you for taking the question. So I also want to better understand the lowered subscription ARR and revenue guidance, That seems to be the only negative in an otherwise stellar print. Is the so I understand the change In the lowered migrations from perpetual maintenance to subscription, but I didn't think the impact was that big. Can you comment I guess for Gary, can you comment if are there any other factors such as I mean did you were there any Deal pull forwards in Q2, are you in the back half, are you expecting any renewal push outs?

Speaker 6

Because I believe this year it's a pretty back end weighted Or second half weighted rather renewal year. And then just given the metallic strength too, I wouldn't continue to strengthen metallic at least on the On the ARR side, I understand it takes time for ARR to translate over to revenue, but wouldn't that offset some of the perpetual migrations? Thanks.

Speaker 5

Yes. Thanks, Howard. Maybe first quickly on the TAS side of the metallic. So The ARR accelerated actually higher than we've seen in current periods, right.

Speaker 6

If you look

Speaker 5

at the ARR for SaaS, We went from $113,000,000 to $131,000,000 of ARR. That sequential increase we're seeing on the SaaS side It's accelerating faster than we'd actually seen over the past prior quarter. So you can kind of see that as we trend out the SaaS ARR and the acceleration there. Coupled with Howard, what we saw on the net dollar retention rate of 130%, so really a good focus on driving Net dollar retention. When I look at the guidance on subscription, it's the biggest factor is fewer conversions.

Speaker 5

And how you can see that also is you'll see the strong over performance on the customer support side, right. So if you look at the customer support revenue And you see the acceleration there, meaning the acceleration relative to the prior expectations, that's where you kind of see that's where you see the offset. That's where you see the offset on the positive side there. And it's just the fewer conversions. We're doing about on pay for about half of what we did last year It's what I kind of see, just based on current pipeline metrics, we're on pace with about half of the conversions that we did last year, which is just a transitional in the customer environment as well as monitoring the term length of our deals, right.

Speaker 5

So getting it down to about 2 years on

Speaker 7

Hey, Howard, it's Sanjay. We're just trying to be realistic given we're looking out for the whole year. It's just a mix shift. In my mind, there's nothing we added over 500 customers in the subscription mix in Q2. Metallic is growing at the PeriHealth and Cliffs grew 77% ARR year on year.

Speaker 7

So this isn't Don't read into this in anything, but we're just looking at the pipeline and being very pragmatic about what the mix shift might be. And that's it. I mean, business we had a very great good quarter and we've raised ARR for the year and we've raised revenue for the year. So it's in my mind as straightforward as a mix shift inside of the Customer buying patterns, whether it be interest rate or where they are in the cloud migration journey.

Speaker 6

Thank you, Sanjay and Gary. And I do want to hone on as a follow-up, I do want to hone in on metallic because as you guys mentioned, It was a really strong quarter for metallic and are accelerating to 130%, which is up from, I believe, 118% a quarter ago and then 125% a quarter prior. Can you just remind us what is the rank order of drivers of growth for metallic between workload expansion and Cross sell of additional metallic products. And then on the growth rate, again, very strong, but it has been pretty variable. Is it Should we expect this kind of variability going forward?

Speaker 5

Hey, Howard, it's Gary. I'll hit that. So there's really good Key things. The acceleration that we saw in metallic net dollar retention, I'm just driven by a few things. There's The foundation, first of all, what I mean by the foundation is we're at the point now that we have a matured renewal motion.

Speaker 5

So when we get to that mature renewal motion and we see really strong renewal rates, it limits any of the downside on the net dollar retention. So it's built with the foundation. And that foundation is really the focus on what we're doing on onboarding and adoption. So driving to get the customers onboarded, get them to their 1st backup, get them fully adopted, then that drives the expansion opportunity. The other thing that we've now have is an integrated motion between our customer success and our field sales teams.

Speaker 5

So their customer success teams Driving the adoption with the field teams combined driving the expansion. So it all starts on accelerating the time To first backup and the time to consumption. As I think about the split between, I'll use cross sell and upsell, We're seeing the majority of the expansion being driven by at this point upsell, which is generally more of the same products. However, we're now seeing more than 2x growth on some of those mission critical or the emerging workloads that we see, Whether it's Salesforce, Dynamics, ThreatWise, Hybrid Cloud, state databases, the dollar value of those are now up 2x year over year. So it's less of a contribution because it's less of a percent of the total, but the contribution now is starting to become material, Even though the majority of it is driven by upsell.

Speaker 5

So we're getting it from all ends, just in summary, we're getting that mature renewal motion. We're getting the upsell, getting them adopted, so we can get expand on more of the same product. And now we're starting to see the cross sell start to kick in as well. Yes.

Speaker 2

And

Speaker 7

Howard, I'd like to add a little bit on just overall some color on the SaaS business. It is the driver of growth. It is growing well. It's a vehicle by which we land hundreds of new customers a quarter. Our security capabilities that we've integrated, the SecurityIQ, which is our delivery platform inside of metallic Our customers is doing well.

Speaker 7

Gary talked about the go to market capabilities and we're investing for the future with mission critical workloads. We thought, I quoted, I think it was Giga that talked in the SONA report about having we had more hyper cloud and more mission critical workloads out there That are too tedious to repeat. It's you have to be one step ahead of the customer. You have to be ready for the workout they want to protect. And that is exactly what we've been doing.

Speaker 7

And we the NRR, we sort of we mentioned last quarter that it was we thought it was an anomaly and We would get it back to normal sort of patterns. And I think we got that and we'll keep focusing on it. So it's still a young business. It's 3 years old. In effect, we're very happy with where it is, but there's a lot to do.

Speaker 6

Sanjay, it's great to see the metallic earth engine kicking in and congrats on a strong quarter.

Speaker 3

Thank you, Howard. Thanks, Howard.

Operator

Your next question comes from the line of James Fish from Piper Sandler. Please go ahead.

Speaker 8

Hey, guys. Thanks for the questions. Maybe building off of the past couple here. I guess, how should we be thinking about net Pension rate for metallic this year and sustainably, like what are you guys internally kind of targeting for the next couple of years. Just trying to understand if some of this material boost in net retention rate is just catch up from something like last quarter, for example, And to kind of the points you both have made here, what makes you confident that some of the metallic strength here isn't due to substitution of your term business, Especially if we're talking more mission critical workloads moving on to metallic.

Speaker 1

Yes. Hey, Jim,

Speaker 5

it's Gary. I'll start it off. I think We're not guiding explicitly to the SaaS that are. I think if you see what's kind of at our level of of our SaaS business, meaning in that $130,000,000 ish of ARR. I think world class ARR rates are somewhere between 100 and 130%.

Speaker 5

I think the 130% is a little on the high end on the sustainable piece that we delivered this quarter, especially as the base Continues to grow every quarter. If we're somewhere in that range of 100 to 125, right, so bracket is somewhere between last quarter and this quarter On a consistent basis and working towards that, I think that's probably I think that's a good measure. We are seeing We have 100 and 20 to 125. Yes, sorry, 120 to 125. Sorry, just to clarify that, sorry about that, Jim.

Speaker 5

And then from a More of the hybrid cloud mission critical workloads. We are starting seeing some very good growth on that on the ZAP business. Now that growth Right now, it's incremental. It's not enough to be truly cannibalizing the term based software licenses from an actual deal perspective, though Customers are in the early innings of their cloud journey, right. So they are taking the time and that shows up in ASPs And the length of deals were in the early part of their cloud journey and cloud innings of migration.

Speaker 5

They're taking the time to make sure they measure their spending And they're only committing to period rate to measuring with what they see in the near term.

Speaker 8

Got it. Helpful. And just Remind me here, what really happened at the end of the quarter that essentially SaaS ARR accelerated, but we saw a deceleration In metallic revenue that now revenue is actually outpacing ARR. Was it more of a back end loaded quarter for metallic? With it being about 77% ARR growth, should we be expecting stable metallic Revenue growth for fiscal Q3 essentially versus fiscal Q2?

Speaker 5

Yes. No, I think stable. Any metallic contracts that we signed in the second half of The quarter had very, very little revenue impact. So linearity has less of an impact because you just don't get anything once Not much of anything, sorry, not much of anything once you get past the first half of the quarter. Our linearity and metallic was relative to prior quarter.

Speaker 5

So nothing unusual, Nothing unusual there.

Speaker 9

Okay. Thanks, guys.

Operator

Your next question comes from the line of Rudy Kissinger from D. A. Davidson. Please go ahead.

Speaker 10

Hey, thanks for taking my questions, guys. It's great to see the dollar based net retention rate rebound on metallic. I guess the flip side of that is when I look at The growth in metallic ARR from new customers, both on a dollar basis or as a percentage points of growth basis, is down this quarter versus last I know your subscription customer adds continued to be about 500 a quarter. But if you look at your new customers on metallic, are you seeing customers start Smaller, just given the macro conditions and financial constraints that customers have or what are you seeing from a new perspective on metallic?

Speaker 5

Hey Rudy, it's Gary. I'll hit that and good to hear from you. At the first half of the year. We're in a good shape with Metallica on the new customer. I think probably some of your math We were probably a little stronger in Q1 on new customer and then in Q2, existing customer was relatively a little stronger than new.

Speaker 5

But over the first half, that's kind of now evened out. And at a business this young, it's hard to look at just 1 quarter as a long term trend. We look back over 2, 3, 4, 5 quarters to make sure that our trajectory on both our new existing are happening and we're pleased with where that is. So we're not reading into the 1 quarter. We still saw over 500 subscription new customers added during the quarter and the vast majority of those are SaaS.

Speaker 5

So we're still seeing it. Now, yes, the deal sizes and ASPs are smaller. They're smaller, but we're okay with that because if I go back The commentary I made on the net dollar retention and that focus on adoption, time to first backup or recovery And then driving expansion and workload expansion, we're betting on the future and our ability to drive that expansion as well.

Speaker 7

And this is Sanjay, Rudy. The smaller ASPs is kind of part of the plan because we have a velocity That's where we land smaller deals. We have marketplace business, which is smaller deals. We have MSPs that bring in smaller deals that we expand over time. So it's a mix.

Speaker 7

We sell to the enterprise and we sell through MSPs. We said we've got the whole range.

Speaker 10

Okay, got it. That's fair. And then I hear you on the conversion, seeing fewer conversions. I guess just if we look at your term license subscription business. If you strip out conversions, as we start to tweak our models for next fiscal year.

Speaker 10

I know we got a couple of quarters to go for this year, but ex conversions, a subscription license, a Single digit growth business going forward, is that a low double digit growth business going forward? What should we be expecting there Just over the near to intermediate term.

Speaker 5

Yes. So we're not giving up say the longer term guidance, but even if I talk a little bit about What we saw in Q2 and what we saw in Q2, you can kind of interpret that our term license software grew double digits, Right. So within subscription, our term software license grew double digits and that's with Our conversion is down substantially year over year. If you look at the guidance that I gave for Fiscal Q3, the quarter that we're currently in, it's a very similar trend. We're guiding to roughly double digit within there will be double digit term software growth year over year with same situation conversions down year over year.

Speaker 5

So we're driving that growth And we're doing that regardless of the conversions. The conversions are a little variable in there, which is fine. I think they'll stabilize over time. We're just kind of giving some outlook based on currently what we see and where we see customers kind of in that journey.

Speaker 9

There is

Speaker 7

definitely customers are in that hybrid cloud journey where they've got They've got to make some tough calls, re architect, rebuild, shift, migrate mission critical workloads, not just independently, but stacks into the cloud and that's hard. And as

Speaker 2

part of what we're going to talk about next week is

Speaker 7

how we're going to help customers through that. So when you look at the complexity of that, it's you have to look at it and say, if I was a customer, how would I think about it? I'd say, okay, I got to get the other side before

Speaker 2

I make a shift on something. So if you look at the

Speaker 7

term or you look at the license model or you look at going from software to SaaS, These are important decisions in the journey with the hybrid cloud. After that security and cyber risk. So there's a lot of factors and we are very well positioned to help customers with that and we are, which is why we see the momentum In our security capabilities and customers using that, adding up 500 plus new customers on the software subscription and SaaS platform. So I wouldn't read into it too much. I would say it's a they're in the crosshairs of sort of getting from one side to the other In critical mass and that's what you're kind of seeing there.

Speaker 10

That's helpful. Thanks Thanks for taking my questions and congrats on the good SaaS figures in the quarter. Thank you, Rudy. Thanks, Rudy.

Operator

Your next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Please go ahead.

Speaker 9

Yes, the perpetual license For the year, I think in past quarters, you've talked about expectation for $40,000,000 to $50,000,000 for Fiscal 'twenty four, given you're at about $27,000,000 here at the midpoint, are you still thinking in that $40,000,000 to $50,000,000 range?

Speaker 5

Yes. Hey, Eric, it's Gary. That's correct. The trend we've seen in the first half of the fiscal year, I think our trend for the second half will be at similar. We'll be at similar paces, maybe slightly less As the motion is fully now dedicated to drive the term subscription and SaaS business, we still have some verticals that are out there That's still by perpetual, but those verticals become limited every single day.

Speaker 5

So the range of 40 to 50 is still fair.

Speaker 9

Okay. But given the 27 on the front half, that would mean 23 would be the math you would expect?

Speaker 5

Yes. It would be the high end of the range.

Speaker 2

Yes, it

Speaker 5

will be the high end of the range. Yes.

Speaker 9

All right. And then, it looks like outperformance international revenue, I think, was up 12% In the quarter, just curious to know if you expect that is that just kind of a reversion to the mean or are we Expecting that to outperform for the remainder of the year?

Speaker 5

Yes. Eric, I'll take that. It's Gary again. So very pleased with both of our regions. Our Americas business in total was up about 4% and our international business was up, as you said, 12%.

Speaker 5

So both This is returning to growth, which is that acceleration of total revenue growth of about 7% year over year, which we're pleased with. Our EMEA business is driving some strong growth. We're now seeing some really good acceleration On as well the subscription adoption, the Americas was more mature first and now the international business is driving with some of that really strong subscription adoption. The deal sizes in international are a little bit smaller relative to the Americas. So some of the lumpiness that you can get On the mega deals and some of the term length topics we've talked about is less prevalent international.

Speaker 5

So we're able to drive a really strong velocity business in the international

Speaker 9

Thanks for taking my questions. Thanks, Eric.

Operator

Your next question comes from the line of Jason Ader from William Blair. Please go ahead.

Speaker 11

Yes. Thank you. Good morning, everyone. Just wanted to ask you first on the outlook for customer support revenue. As more of that mix comes from term, do you expect the year over year declines Start to subside.

Speaker 11

You're down 9% in customer support in fiscal 'twenty three this year. It's going to be something, I guess slightly lower than that, but do you expect as we move forward into 2025 and 2026 that we should see that continue to The declines continue to subside?

Speaker 5

Yes. Hey, Jason, it's Gary. I'll take this question as well. So you've already started to see it. Even if you look at fiscal Q2 actual, it's one of the smallest declines we've had in quite some time.

Speaker 5

And the key driver to that is now a higher percentage of that customer support revenue is being driven by term. This year, we're on a pace where we'll get that amount of customer support related to term Software license is probably to be somewhere 45 ish to 50 percent roughly. And as we enter into next fiscal year, should be the crossover year. Cross over year meaning that as next fiscal year, the majority of customer support revenue will be derived from the term related software contracts. That natural motion will then start to flatline the impact.

Speaker 5

And then what that does, it will start to alleviate Some of the headwinds that has on the total revenue growth. A big piece of our total revenue growth becomes the impact of the customer support. And as we get into next fiscal year and the fiscal year after that, that will start to moderate and you would expect the impact year over year or the declines to be Significantly less than we've seen in prior years, including this year.

Speaker 11

Got you. So the only Let's call it the only sort of more significant headwind will be perpetual license line. Do you have any like you About 40 to 50 sort of towards the high end of that range this year in perpetual license revenue. As we move forward into 2025 and 2026 without pinning you down on specific guidance, Do you think that will sort of continue to trail off sort of modestly or do you think it will actually be More of a sharp fall off.

Speaker 5

Modest. I think it will be modest. They'll be similar to The impacts on total revenue as the customer support does, if we end up somewhere, say, this year at the high end of that $40,000,000 to $50,000,000 or roughly $50,000,000 Then as we get into next year, we're likely to be in that range, but probably more towards the lower end of that range. So you're talking variability is not significant On a revenue number that's obviously over $800,000,000

Speaker 11

Got you. Okay, great. And then Sanjay, I've got one for you just on the SMB and Mid Market Dynamics, less about competition, but just more about how SMB and mid market customers are actually purchasing and procuring backup software And backup services. Can you just talk through how you guys have, let's call it, adapted your strategy because it does seem like more of that market is shifting towards as a service offerings.

Speaker 2

Sure.

Speaker 7

So for that particular segment, we've I think we mentioned in a couple of calls prior to this, Jason, that we've invested in a velocity motion, which loosely translates to ISRs plus a channel motion that allows us to go up the velocity of the smaller customers. That's number 1. In addition, we've also been working with a growing MSP community And many customers, as you mentioned, like to work through that. The third is Marketplaces, as the hyperscalers sort of promote their marketplaces, we see customers being able to sort of tap into that motion And available software or SaaS right through that. So those are just some examples of how we're enabling Our technology can be more accessible to our customers in the way they like to purchase.

Speaker 11

And one quick follow-up and then I'll See the floor. But on the metallic business, Sanjay, can you give us a sense of how much of that This is coming from sort of SMB mid market customers versus enterprise.

Speaker 7

I think If the trend has been fairly consistent, the enterprise side of our business is about About a third enterprise roughly, a third mid market and a third SMB. It's not by design necessarily, but It seems to be following that. And I'm actually quite pleased with it because it derisks our business, but also gives us a chance to grow in the areas that we haven't Historically like the SMB and the lower mid market.

Speaker 11

Great. Thank you.

Operator

Your next question comes from the line of Tom Blakely from KeyBanc Capital Markets. Please go ahead.

Speaker 12

Hey, guys. Thanks for taking my question. Just a couple. Sanjay, if you could go back to that Hybrid cloud journey answer you gave a prior call questioner. Is that company specific or could you talk to The greater kind of view in the industry in terms of things being complex and there

Speaker 6

seems to be a bit of

Speaker 12

a pause, hybrid cloud Spend

Speaker 6

is kind of received a bit of

Speaker 12

an uptick in the last few quarters, if not longer, as there's been Deceleration in public cloud spend in general. Just wanted to kind of maybe if you could clarify that or give any extra color, it would be very helpful. And then just secondly for On the NRR for metallic, the split up between capacity growth and new services, if you could? And if security is Maybe it's a premature question, but if security impacting that kind of NRR, that'd be helpful. Thank you.

Speaker 7

Okay. Let me process those. So the hyper account journey, my thinking there is the following. The customers think of us a little bit, first of all, as a trailing indicator. So it's about utilization.

Speaker 7

It's about workloads that use the commitments that customers have made in the hybrid cloud or the public cloud services. And what we're doing is helping customers through those Difficult journeys because as the easy workloads move to the cloud, it gets harder and harder to move entire stacks of mission critical capabilities and run them entirely On public cloud services or hybrid cloud capabilities. And that's what I was kind of referring to. And we're helping customers, whether it be So moving that data, whether it's their infrastructure, whether it's their data security, whether it's applying intelligence and sensitive data management across that stack, data into flight, There's a lot of things that moving to the hyper cloud sort of open up and we're across a lot of those use cases and a lot of those outcomes. So that's kind of where I was going.

Speaker 7

And it's not so much a whether it's It's increasing or decreasing in spend from a public cloud capability. It's really the utilization and making Make sure that customers are getting the value that they anticipated from their journey to the cloud. I'm a CIO. It's moving mission critical Workloads into a cloud or any other platform is it requires a lot of it is complex and requires a lot of thought to listen to right choices. And that's what we're trying to help our customers with.

Speaker 7

So that's my I want to pause there. Did I cover your question?

Speaker 12

Yes. Just maybe as a follow-up there before we get to the NRR. Does that imply from a trailing indicator perspective that there might be Yes, some pent up demand for CommVault in that regard?

Speaker 7

Short answer is I would hope so, because as customers move to the And a lot of what we're going to talk about next week, Tom, is about where we see the customer journey, where we see them sort of having to make tough What are the hard problems you're helping them with on data? Do they have to make choices between software and SaaS? The security models using AI, these are recovery capabilities In the light of cyber resilience, these are all important decisions that have to be made as the journey to the cloud becomes more and more A pervasive for our customers and we're trying to be 1 to 2 steps ahead of them in anticipating that. So I would hope so.

Speaker 12

And then just on NRR, the 130 is a strong number. Just any type of commentary on the mix of capacity growth and new

Speaker 5

Hey, Tom, it's Gary. I'll take that one relative to the 130% of net dollar retention. If you think about the drivers of what drove that from upsell versus cross sell, about 2 thirds of that comes from upsell, Meaning upsell more of similar capacity or licenses or seats and about a third or roughly there comes from cross sell, which Benefits of the cross sell motion, whether it be Dynamics, whether it be our security offerings, the hybrid cloud for VMs or databases, they're all contributing factors. Absolutely, security is part of that, but we're seeing a little bit more on the upsell and about a third of that expansion on the NRR driven from Rossum.

Speaker 12

Thanks, Gary. Thanks, guys.

Operator

We have no further questions at this time. I will now turn the call over to Michael Melnick for closing remarks.

Speaker 13

Thank you for joining the

Speaker 1

call today. If you have any follow-up questions, feel free to reach out to me. Also, just a reminder, if

Speaker 13

you haven't yet registered, the live event will be November 8 in New York City and then

Speaker 1

the replay for Shipt will be on November 9. Visit convault.com to register. Thanks for joining. Appreciate it.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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Key Takeaways

  • CommVault reported Q2 total ARR of $711 M (up 18% YoY), with subscription ARR rising 32% to $530 M—nearly 75% of the total—while Metallic SaaS ARR jumped 77% to $131 M and achieved a 130% net dollar retention rate.
  • Q2 revenue reached $201 M (up 7% YoY), driven by $98 M in subscription revenue (up 25%) and over 80% growth in SaaS, with subscription revenue nearing 50% of the total.
  • Profitability improved with non-GAAP gross margins at 82%, non-GAAP EBIT margins at 20.9% (up 210 bps), free cash flow of $40 M for the quarter, and $31 M returned to shareholders via share repurchases.
  • Management raised its guidance, now expecting Q3 subscription revenue of $106–110 M (+24% YoY) and full-year ARR growth of 14% (up 100 bps), with total revenue guidance increased to $812–822 M and subscription revenue to exceed 50% of total.
  • CommVault will launch a new cyber resilience platform at its Shift event on November 8, combining data protection, security, AI-driven intelligence, and recovery to address escalating cyber threats.
A.I. generated. May contain errors.
Earnings Conference Call
Commvault Systems Q2 2024
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