CommVault Systems Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

Key Takeaways

  • Commvault closed FY23 with total ARR of $668 million (+15% YoY), with subscription & SaaS ARR comprising 71% of the mix and growing 38% YoY, including Metallic SaaS surpassing $100 million ARR.
  • Q4 revenue was $204 million (+2% YoY on a constant currency basis), with subscription revenue of $95 million (+9% YoY) driving a non-GAAP EBIT margin of 22.3%, the highest of the fiscal year.
  • The company added over 600 subscription & SaaS customers in Q4, achieved net dollar retention rates of 107% on term licenses and 125% on SaaS, and delivered improved operating leverage.
  • Commvault ended the quarter debt-free with $288 million in cash and generated $67 million in Q4 free cash flow, returning 91% of that to shareholders via share repurchases against a refreshed $250 million buyback authorization.
  • Strategically, Commvault is advancing its “Power of 1” cloud-first data protection platform—enhancing automation, security integrations (FedRAMP High, early ransomware detection), and focused investment in high-growth SaaS and land-expand motions.
AI Generated. May Contain Errors.
Earnings Conference Call
CommVault Systems Q4 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the CommVault 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Malnik.

Operator

Please go ahead.

Speaker 1

Thanks, Gerald. Good morning, and welcome to our earnings conference call. I'm Mike Melnick, Head of Investor Relations, and I'm joined by Sanjay Mirjandani, Commvault's CEO and Gary Merrill, Commvault's CFO. An earnings presentation with key financial and operating metrics is posted to the Investor Relations website for your reference. Statements made on today's call will include forward looking statements about Commvault's future expectations, plans and prospects.

Speaker 1

All such forward looking statements are subject to risks, uncertainties and assumptions. 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 different from those contemplated in these forward looking statements. Commvault does not assume any obligation to update these statements. During this call, Commvault's financial results are presented on a non GAAP basis. A reconciliation between non GAAP and GAAP measures can be found on our website.

Speaker 1

Thanks again for joining us. Now I'll turn it over to Sanjay for his remarks. Sanjay?

Speaker 2

Thank you, Mike. We delivered strong Q4 results, Ending the fiscal year with renewed momentum. Let me share some highlights. Total ARR increased 15% year over year. Our subscription and SaaS ARR, which represents 71% of total ARR, grew 38% year over year.

Speaker 2

Metallic, our 3 year old SaaS offering exceeded $100,000,000 in ARR, placing it amongst the fastest growing SaaS applications in history. We had another strong quarter of new customer additions, adding over 600 subscription and SaaS customers. And We did all of this profitably, delivering 22 percent EBIT margins while continuing to return cash to shareholders. Gary will share more details shortly, but today marks the next phase of our strategic evolution to become the leading Cloud first data protection company in the industry. Our mission is twofold.

Speaker 2

First, we will continue to deliver Industry leading data protection to gain share in the mature on premise market, while simultaneously taking share in the rapidly growing SaaS market. 2nd, we remain intently focused on accelerating our growth in a responsible and lasting way, which should result in continued operating margin Let's discuss priority number 1, strengthening our leadership position. To do this, We are laser focused on helping customers solve today's biggest IT challenges, manageability, security and cost. As our customers modernize and move to the cloud, they must also protect and manage data that is distributed and fragmented Across clouds, regions, applications, services and data centers. In tandem, new SaaS applications are rapidly The mission critical systems of tomorrow.

Speaker 2

In fact, IDC recently reported that SaaS spending for enterprise applications is growing at a 17% pace. If managed improperly, these applications will become onerous and costly to manage. Even with this fast growth, On premise data will continue to grow and remain an IT priority. You see on prem and SaaS are not mutually exclusive. They are complementary components of the hybrid cloud.

Speaker 2

This is why we deliver industry leading data protection that provides our customers with dynamic choices And best in class capabilities through software and SaaS. This is the Power of 1, 1 platform. Unlike our competitors, we don't make misleading claims about our technology leadership. We don't have to. We were rated number 1 across All three of Gartner's critical capabilities report for data protection, data center, edge and cloud.

Speaker 2

To enhance manageability and reduce costs, we built automation, intelligence, proactive monitoring and security and compliance capabilities deeply into our platform. This gives our customers the most simplified approach to data protection across all workloads, environments and locations. Now let's discuss security. The worlds of data protection and security are blurring. As a result, CIOs, CISOs, executive teams and Boards are making holistic decisions across their entire IT environment And the wrong decision can have lasting and costly consequences.

Speaker 2

After all, no one is immune to cyber threats that exploit the vulnerability of fragmented environments. We are the only company with a single platform with built in security to proactively monitor and assess risks, mitigate cyber threats and protect critical workloads. It's why more customers are turning to Commvault for their data protection. For example, Where security matters most, federal agencies, including U. S.

Speaker 2

Army Force Am and the Department of Veteran Affairs chose Commvault during the quarter to evolve the data protection. And metallic was also the 1st data protection SaaS offering to achieve FedRAMP high status. As the only vendor in our space with advanced cyber deception for early ransomware detection, we help customers protect their data before it is compromised. In Q1, we plan to introduce several new capabilities to defend customers from exfiltration risks and dormant threats. This includes industry leading integrations with companies like Microsoft Sentiment, CyberArk and others, which brings us to the next fundamental IT challenge.

Speaker 2

With increasing complexity and risks comes additional costs for constrained organizations. To address this, Low touch as a service models like metallic solve their IT problems more efficiently, but that's only part of the solution. Automation is critical. We embraced AI several years ago to help our customers manage their costs, while also simplifying and enhancing their experience. This helps enable us to deliver a 5 times better total cost of ownership than our closest competitor and it is imperative in the future.

Speaker 2

We will continue to engineer it into our offerings. This continuous innovation is why customers turn to Commvault for their data protection needs. For instance, We recently displaced the legacy incumbent and increased our footprint at a Fortune 100 retailer. With thousands of stores serving millions of customers worldwide, Data protection is paramount in their decision. Commvault offered what the other vendors could not, a modern and proven data protection solution On one platform managed with a single pane of glass, which brings us to our second strategic priority around lasting and responsible growth.

Speaker 2

To achieve this, we're accelerating our discrete focus on our land, expand and renew motions, while also reallocating investments towards our high growth areas. Gary will discuss in more detail. We have also been working hard to remove friction across the customer journey to make it even easier and more cost for customers to engage and be successful. Lastly, we will relentlessly be focused on our own cost of operations, including people, technology, resources and facilities. While the macro environment remains unsettled in the near term, we believe that our responsible growth strategy enables us to focus on investing in and delivering a data protection platform that elegantly solves our customers' hard problems.

Speaker 2

We believe this bodes well for accelerating growth in fiscal year 2024. Before I turn the call over to Gary, I want to point out a key financial reporting change that he will discuss. We've been in a multi year evolution, which is paying off. Now with the success of our subscription software and metallic SaaS offerings, it's time to open the aperture on this part of our business and give you more insight into our progress. With that, I'll turn

Speaker 3

it over to Gary to discuss the numbers. Gary? Thanks, Sanjay. Good morning and thank you for joining us. As you saw in Table 5 contained in our earnings press release this morning, we provided supplemental revenue and cost of revenue captions For our P and L, as we transition our financial reporting to align with our business model and go to market strategy.

Speaker 3

This new P and L presentation is led by our term license software and SaaS offerings, which are now approaching 50% of total revenue. The revenue from these arrangements will be referred to as subscription and combining them in a single line item will allow the investment community to have enhanced understanding of our results. As a reminder, term license software is generally recognized as revenue at the time of the transaction. SaaS revenue, which is recognized ratably over time has historically been included in services revenue along with other offerings recognized over time like customer support and professional services. The supplemental financial tables in this morning's earnings press release on Table 5 included 2 year look back on a quarterly basis to provide business trends using the new revenue and cost of revenue caption.

Speaker 3

Lastly, we are introducing a new quarterly earnings presentation That can be found on our Investor Relations website. Now let's discuss our financial results. We are pleased with our Q4 performance, beating all of our guided metrics. Total revenue was $204,000,000 Up 2% year over year on a constant currency basis. This includes software revenue of $90,000,000 Revenue from large software deals, which we define as transactions with greater than $100,000 represented 72% of software revenue in the quarter compared to 73% a year ago.

Speaker 3

The average deal size in the quarter for large software deals was $347,000 Under our new reporting structure, Q4 subscription revenue, which includes the software portion of term licenses and SaaS increased 9% year over year to $95,000,000 and represented 46% of total revenue compared to 42% a year ago. Q4 customer support was $77,000,000 compared to $85,000,000 a year ago. Customer support includes software updates, phone and web based support for our term based and perpetual software licenses. The year over year decline in customer support revenue was driven by foreign exchange headwinds and from the strategic conversion of certain perpetual customers to our subscription offerings. A reconciliation From our current P and L revenue line items to our new reporting is contained on Slides 23 to 26 in our new quarterly earnings presentation.

Speaker 3

Now I'll discuss ARR. Total ARR in Q4 was $668,000,000 an increase of 15% year over year and 17% in constant currency. In Q4, total subscription ARR, Including term based licenses and SaaS contracts grew 38% year over year to $477,000,000 Subscription ARR represents 71% of total ARR, up from 59% in Q4 of the prior year. We are quickly nearing a key milestone for the company with subscription ARR approaching $500,000,000 This includes $101,000,000 of SaaS ARR which doubled from fiscal year 2022. These impressive subscription metrics provide confidence in our future growth opportunity.

Speaker 3

From a customer perspective, Our land and expand strategy is working as we added over 600 new subscription customers during fiscal Q4. We drove strong net dollar retention numbers of 107% for term based software licenses and 125% for SaaS. Our metallic SaaS offerings are a primary driver of customer expansion. Approximately 40% of metallic customers use a CommVault software solution and 30% of metallic customers have multiple SaaS offerings. While M365 and our Airgap storage offerings remain the most popular use cases, We're also seeing broader adoption of our other offerings like Kubernetes and Dynamics Backup and Recovery and ThreatWise.

Speaker 3

Now, I'll discuss expenses and profitability. Fiscal Q4 gross margins were 83.4 percent, an increase of 40 basis points sequentially and continue to reflect An increased mix of SaaS revenue, which carries a higher cost of sales and software. Fiscal Q4 operating expenses were $123,000,000 down 3% year over year. We ended the quarter with a global headcount of approximately 2,800 employees, down 5% over the past 2 quarters. We are managing our people, facilities and third party expenses by focusing investment on our most critical priorities.

Speaker 3

We will continue to evaluate our resource base against the market demand environment. Non GAAP EBIT for Q4 was $45,000,000 and non GAAP EBIT margins were 22.3 percent, well ahead of our guidance and the strongest EBIT margin results of the fiscal year driven by operating expense discipline and strategic prioritization of resources. Now I'll discuss full year fiscal 2023 results. On a constant currency basis, Software revenue was $355,000,000 up 4% and total revenue of $785,000,000 increased 6%. Under our new reporting structure, subscription revenue was $348,000,000 an increase of 30% year over year.

Speaker 3

Within that, term license software increased 15% And SaaS revenue nearly tripled year over year. Fiscal year 2023 operating expenses were 62% of total revenue compared to 64% in the prior year. We drove operating leverage primarily through sales and marketing, which finished at 38% of total revenue aligned with our fiscal year 2020 3 target. Full year non GAAP EBIT was $160,000,000 and non GAAP EBIT margins were 20.4%. This includes approximately 250 basis points of gross margin headwinds, primarily from our accelerating SaaS revenue.

Speaker 3

Moving to some key balance sheet and cash flow metrics for the quarter. We ended the quarter with no debt and $288,000,000 in cash, dollars 105,000,000 of this balance is in the United States. Free cash flow was $67,000,000 for Q4 $167,000,000 for the full year fiscal 2023. As a reminder, our second half fiscal year 2023 cash flows We're burdened by approximately $7,000,000 of federal tax payments related to the TCJA capitalization R and D provisions. In Q4, we accelerated our stock repurchases to approximately 1,000,000 shares for $61,000,000 representing 91% of free cash flows.

Speaker 3

For the full fiscal year, we repurchased $151,000,000 of our stock, representing 90% of free cash flows well ahead of our existing 75% target. Now, I would like to spend a few minutes to discuss how we are approaching the future. With our subscription software evolution nearly complete, We are focused on our next growth sector scaling our metallic SaaS platform, while continuing to improve profitability, Generate strong free cash flow and provide an attractive capital return. We are amplifying our discrete focus on our land and expand opportunities as we scale our growing subscription renewal base. Secondly, we plan to hire additional inside sales reps focused solely on the SaaS velocity market as we refine our segmentation model.

Speaker 3

We expect that these go to market refinements should drive enhanced deal sales productivity as we exit the fiscal year. We are also transitioning our financial reporting and guidance towards ARR and free cash flow as primary KPIs of our underlying business momentum. For fiscal Q1, we expect Subscription revenue, which includes both the software portion of term based licenses and SaaS of $95,000,000 to $98,000,000 representing 10% year over year growth at the midpoint. We expect total revenue of $195,000,000 to $199,000,000 At these revenue levels, we expect Q1 consolidated margins to be 82.5% for gross margin and EBIT margins of approximately 20%. Our projected diluted share count for Q1 is 45,000,000 shares.

Speaker 3

For the full year fiscal 2024, we are expanding our guidance metrics to include ARR and free cash flow. We expect fiscal year 2024 total ARR growth of 13% year over year driven by strong subscription ARR, which we expect to increase 27% year over year. As a reminder, subscription ARR includes term based licenses and SaaS. We expect subscription revenue to be in the range of $420,000,000 to $430,000,000 growing 22% year over year at the midpoint. At these levels, subscription revenue should cross over 50% of total revenue, which we expect to be in the range of $805,000,000 to $815,000,000 We also expect consolidated gross margins of 82% to 83%, Non GAAP EBIT margin expansion of 50 basis points to 100 basis points year over year and Free cash flow of $170,000,000 Finally, our Board recently approved a refresh of our stock repurchase authorization for up to $250,000,000 of stock.

Speaker 3

We expect to continue with our existing practice of repurchasing more than 75% of our annual free cash flow. Before I close, I want to highlight what we believe are the core investment attributes of Commvault, including we are a technology leader In the critical data protection space that remains an IT spending priority even in an unsettled macro environment. We have a large and growing installed base of customers, a recurring revenue model underpinned by approximately $500,000,000 of subscription ARR. We drive consistent profitability with room for margin expansion. We have a debt free balance sheet, healthy cash flow and a demonstrated history of capital returns.

Speaker 3

I will now turn the call back to Sanjay for his closing remarks. Sanjay?

Speaker 2

Thank you, Gary. We continue to redefine data protection for our customers because it has never been more important for them. The law firm, Basker Hostetler, recently published in its Data Security Incident Response Report, which includes data from 11 The security ransomware incidents that the firm handled in 2022. The findings showed that 40% of organizations hit with ransomware Paid an average ransom of $600,000 but that percentage dropped to just 16% if the targeted organization was able to restore their systems. Data protection has never been more critical.

Speaker 2

We believe our strategy, roadmap, go to market motion and increasing focus on ARR We'll showcase our momentum in the year ahead. We look forward to updating you along the way. Now, we'll take your questions.

Operator

Our first question comes from Howard Ma of the Guggenheim Partners. Your line is now open.

Speaker 4

Great. Thank you. It is certainly encouraging to see the top line performance as well as the new IR deck and the metallic disclosures and also the Focus on ARR. Sanjay, so given the ongoing delays in IT spending on large projects that's Affecting nearly every software company. Is there a good way to think about perhaps and maybe perhaps quantify the mix Pipeline that's dependent on large multiyear projects and since those will carry more uncertainty versus deals that What I'll call more normal course of business such as expansions that's leveraged to just data growth and new logos that are not tied to large projects?

Speaker 2

For sure. That's at the heart of how we've been evolving Our forecasting and our pipeline disciplines in the company, the last year has been we've had to relearn our models Between the way in which the delays in the purchasing, the scrutiny around deals, The size of deals. So I think we've done a decent job of being able to really fine tune our forecasting models. I think Gary mentioned The size of large deals in our business over the last quarter and the characteristics of that increasing, While the average ASP was also higher. So we are keeping a very close eye on deal volume, Deal size and then as part of our comments we shared that our discrete focus around the land, expand and renew motions With investments around our Velocity business, around metallic, all wheels in motion.

Speaker 2

These are things that are happening. So I think we've got the last year was a good learning year and we are relearning our retraining our models to be more specific around that.

Speaker 4

Okay. That's totally understandable and it's helpful color. I just have a quick follow-up for Gary. So Gary, it's nice to see that you guys are now breaking out term and perpetual license separately and also giving the full year guide for total and subscription ARR. Can you double click into the drivers of subscription ARR growth of 27% between metallic and subscription specifically and if you could like any comments on your new business expectations around metallic and subscription would be helpful.

Speaker 4

And also The rate of decline for perpetual license that we should expect going forward? Thank you.

Speaker 3

Yes. Hey, Albert, good morning and thanks for joining us Today, we're now highlighting that subscription revenue in ARR, which combines our term based software licenses and SaaS Because that's also how customers want to buy. And as customers move and continue on their cloud journey, They're looking for that flexibility of the best of software and the best of SaaS, especially related to their Good afternoon. As I look out into the guidance that I gave, which was total ARR of about 13% year over year growth And subscription ARR, which was 27%, relative to the 27%, we'll see greater momentum On that ARR related to metallic. Metallic is our fastest contributor to ARR.

Speaker 3

We nearly or we did double ARR year over year, we expect to continue on that momentum, especially on the dollar value of the metallic increase. So, Metallica will play the majority of the increase combined with our new refined focus on that software land expand motion.

Operator

Thank you. One moment please and I'll prepare the next question. Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open.

Speaker 5

Yes. Thanks, guys. I appreciate you letting me ask a question. And also appreciate all the details with today's announcements with regard to the model changes, etcetera. So A couple of questions if I can real quick.

Speaker 5

So first of all, I just I kind of want to go back to kind of just the macro environment, the current demand environment you're seeing. Can you talk about the pace of deal closures throughout the quarter, the linearity of the quarter? Were there any deals that you saw push out? Just trying to get an updated view, let's say, relative to what it was 3 months ago as far as how you're seeing the demand environment shape up?

Speaker 3

Hey, Erinn, it's Gary. I'll take this one and thanks for joining us. The macro environment I think continues to be challenging For a lot of companies and for us it's where we see it primarily is really around the scrutiny on the budgets and the purchasing decision. We're not losing deals. We just see some of the sales cycles that are reflected of it.

Speaker 3

Specifically related to your question about which change kind of quarter Our business has stabilized nicely in the current quarter. We spoke last quarter about some of that deal lengthening especially into our Americas. And we're really pleased with the rebound that our Americas had. They had a very strong quarter Sequentially, where they saw 20% increase in our Americas business just sequentially. So, what it's showing us is stabilization has occurred.

Speaker 3

We did not see any further deterioration at all. As Sanjay mentioned, right, we're learning to manage the business With some of the current headwinds that happen around scrutiny, but we're pleased with the performance. We're pleased how the business stabilized And while we continue to see some push deals, it's reflective in kind of what our guidance suggests in dealing with those timelines. But at this point, we haven't seen any sequential and we're actually figure we're in a good place as we move into fiscal Q1.

Speaker 5

Yes. That's great detail. The second question is that I know it's been a couple of years, You guys gave a longer term model framework a couple of years ago. What I'm particularly interested in is you're thinking about I know you talked about 50 to 100 basis points operating margin expansion this year. I think back a couple of years ago, you talked about kind of driving towards a mid-twenty I want to say it was EBITDA or EBIT number.

Speaker 5

How do you think about kind of the trajectory of operating margin? Maybe not just this year, but as we go forward, do you think that that mid-twenty is still achievable or could we see even something more than that over time?

Speaker 3

Aaron, good question. So sitting here today, we're not giving kind of that long term multi year guidance. We're really focused on what's ahead of us, which is Q1 and fiscal 2024. But to give you a little perspective and maybe to set a baseline, We finished FY 2023 at about 20.5 percent and on EBIT margin and that includes absorbing about 300 basis Point of gross margin related to our accelerating metallic business. So, we're relatively pleased with where we're at Considering how much we've absorbed, we're at the OpEx percent of revenue targets that we laid out.

Speaker 3

We did make A strategic investment in metallic. We invested for the future and we're coming out with the best enterprise SaaS platform that's on the market. So, FY 24, I'm confident that we can deliver that 50 to 100 basis points EBIT margin. But as I think about where we go from here, metallic margins are improving every year. You can kind of see that now in our revised disclosures on gross margin.

Speaker 3

So we're getting the lift slowly on metallic margins. We're still headed toward what we believe is that roughly 70% metallic margins Over the next few years, we can get incremental leverage in the business, especially as the top line improves. So as I think about, Aaron, long term and where we can go with the business. We obviously want to continue to grow ARR in that mid double digit growth, Right. We've had that demonstrated history of doing that.

Speaker 3

We think we can continue to grow and we're confident in our ability to keep delivering that mid teens double digit ARR growth And getting to that mid-twenty percent EBITDA margin should also be within our sights as we kind of scale the business year over year.

Speaker 5

Yes, that's helpful. Finally, the real quick question is, just as we think about the subscription business growing as we look forward, The other flywheel fact would be is obviously the renewal cycle. Is there anything you can share with us as far as what you're seeing on the renewal Of that subscription business, any KPIs or metrics around that? And I'll cede the floor. Yes.

Speaker 3

Absolutely. So Aaron, a couple of metrics that we also introduced this quarter, which kind of show that the strength of this land expand renew motion. 1 is the net dollar retention For subscription, which was 107%. But the other number that we're very pleased with is the Impellent net dollar retention 125%, which really strong shows that strong renewal motion. Now, I think as most of our shareholders and analysts are aware, we have a growing renewal base on the subscription, the term base License model.

Speaker 3

And at this point that's part of our normal business motion. We expect it to be greater in fiscal 2024 Chris, it's fiscal 2023. That will give us some good tailwinds and some predictability in our model. Historically, The average term of those deals is between 2 to 3 years. Historically, it rounded up to 3 years.

Speaker 3

In the current environment, we see some term length compression, which impacts maybe in period P and L Aaron, But overall for ARR, there's no impact and it actually helps us deliver a stronger velocity. So our average term length It's probably closer to 2 years now than 3 years and we're focused on scaling that. So it will give us some good predictability into FY 2024 and it helps us with the confidence we have in our guidance.

Speaker 5

Thank you very

Operator

much. Jim Fish from Piper Sandler, the floor is now yours.

Speaker 6

Hey guys, thanks for the questions. Working a little bit off of Aaron's here, Historically, CommVault, we've seen kind of good growth kind of fits and stops. But How long the visibility do you guys think you have in the business today versus where you may have been a few years ago? Is it now because we're Crossing that 50% coming from subscription and SaaS, that were less dependent on new term, especially That your visibility to kind of achieve numbers is beyond a few quarters or do you still view it as we're working through this And that really we should think about visibility around 6 months.

Speaker 3

Hey, Jim, it's Gary. It's the former. In today's business model where we have the subscription business, which combines The software and the SaaS and I'll break it up. On the term license, We have more visibility now than we've ever had as a company because we now have this for people sales motion on the software. Relative to what we had a couple of years ago when it was primarily perpetual and we were starting empty Every year.

Speaker 3

Now we have a nice tailwind that's predictable and we're focused not just on renewing it, but more importantly expanding it. So it goes beyond just the visibility of renewal And it goes to the expansion motion, which this year is a key focus on that expansion motion, has that renewal base. The beauty of as everybody knows on SaaS is the rateable recognition. So now that metallic revenue And it was disclosed in our presentation, right, was about $70,000,000 for the year, right, about 10% of revenue, which is ratable perspective, which gives us not only visibility of the business, but it gives us much more predictability and forecast our revenue amounts. So when we combine the subscription and the SaaS together and their individual attributes, it gives us that visibility that as a company we weren't really never

Speaker 6

And that's a good segue, Gary, into my next question. We appreciate the breakout that you're giving today, especially Term versus metallic, be it revenue, net retention rate, is how should we think about what metrics that you gave out Day that you're going to give quarterly is really what I'm asking about. And how does the net retention rate specifically for Subs and metallic compare to last year at this time?

Speaker 3

So the stats that we gave today, Especially around the subscription business, which combines the software and the SaaS and the KPI metrics around it, we'll continue to give every quarter. The net dollar retention, we think they're key metrics of the business, right, and we'd expect we'd continue to talk about our net dollar retention. The metallic net dollar retention, when you look year over year, it's really not comparable because the base Last year was so small, right? We were just starting out in basically year 2 of the business. So therefore, now that we're in year 3, We actually have a base that's meaningful and we have expansion opportunity that's meaningful.

Speaker 3

And even within that metallic net dollar retention of 125, which is really strong. It even excludes The 40% of metallic customers that are also software customers, which is even in a whole another expansion opportunity that we have. So, with this growing installed base where 50% of our customers are now subscription fast or a combination of both, it really allows us to drive that renew and expand motion and we'll continue to keep it as part of the forefront. I'll also continue to update the annual guidance, Jim, that I gave to give our shareholders a perspective on how we're seeing the full year changes the year goes as well as some of the Quarterly guidance as well that we gave today. So virtually everything that you saw today will continue to give on a quarterly basis.

Speaker 6

Great. Thanks, Gary.

Operator

One moment as I prepare the next question. Welcome, Thomas Blakely from KeyBanc Capital Markets. Your line is now open.

Speaker 7

Thanks guys for taking my question and congratulations on the results. I'm going to stick, I guess, with the NDR kind of line of questioning. Love the disclosure, just these products Arneu, and I'm just wondering maybe any color in terms of use cases? What's driving expansion? Is this consumption based?

Speaker 7

And let's do both, right? So, what's driving the metallic NDR expansion, so we understand what that kind of looks like in fiscal 2425 and what do those expansion opportunities look like from a term perspective? When you come back to me As a customer, what are you selling more of to me? We'll start there.

Speaker 2

Let me Saum, let me take a stab at it, Sanjay. I'll give you the sort of the broad flows of how I see the Expansion and the portfolio mapping to that expansion. Let's take metallic. Metallic Being one platform and being integrated into our software as well, customers use our MRR, our metallic recovery reserve, our air gapped Capabilities from the software using metallic. And so you bring the 2 things together.

Speaker 2

That's a classic expansion, Okay. Well, they want another copy of their data off premise. You've got customers who start with Office 365 And quickly realized that we can do Kubernetes and we can do other things around virtual machines all from the same console And very quickly, they start embracing new services within the metallic portfolio. So the uniqueness of our approach It's our ability to really take the software platform and the SaaS platform and the power of 1 platform to be able to give That seamless extensibility and we're seeing that in not only the number of services, more than one service that our customer has within the metallic platform, But also the fact that 40% plus of our metallic customers also have combo software. So that's the mutually Sort of enhancing capability within our expansion.

Speaker 2

Now more classic expansion scenarios of capacity or additional capabilities Continue to be there in our portfolio as we add security capabilities, as we add data disaster recovery capabilities into our technology. These Our software customers can avail of that, but just literally with snap ins into their core platform. So the portfolio strategy we've taken for the last So making it absolutely seamless for our customers is showing in the numbers I think that we shared with you today and I think will continue to be important because As customers are in transition, I said, it's not like the on premise is going to go away. As they're in transition between their on premise world and The cloud world, I. E.

Speaker 2

The hybrid world, they're going to want both sides and they're going to want best of breed on both sides, but you can't do a piecemeal and sort of patchwork of this. It needs to be one uniform platform and we're the only ones to do that.

Speaker 7

That's very helpful, Sanjay. Is there any, just a follow-up there quickly in terms of Breaking out capacity expansions in new services, is that too granular or just some sort of subjective understanding about In that $107,000,000 or $125,000,000 how much is capacity and how much is new services?

Speaker 3

Yes. I'll jump It's too granular, to give the specifics, but I'll give you a little bit maybe on the qualitative perspective, especially relates to metallic. It'll help me maybe frame is in the 125%, which is very strong, the majority of that is coming from upsell, which is What I would say, generally more of the same product. So even being able to deliver 125% with the majority coming from that, The number that you'll see that we really have the opportunity to accelerate and as I mentioned, is that 30% only 30% of our metallic customers Have more than one SaaS offering. So we still have a huge opportunity, as Sanjay mentioned, to really expand the number of products and use cases Even now across the metallic base and to really focus on driving that expansion at the time of renewal tied to more use cases to work on that 30% Multi product and all the customer metrics.

Speaker 7

No, that's very helpful. And that's what you'd want to hear in terms of the majority coming from capacity now and you have Cadre of things to sell to them. Just as last follow-up and I'll feed the floor about gross margin, solid up Tech here on the services and support, the old way of reporting it at 2 50 basis points. Just to carry, I always bother you about an update in terms of The scaling of Metallica, have we reached bottom finally here? And just some color there would

Speaker 3

be helpful.

Speaker 2

Yes.

Speaker 3

Where I'm tracking, I would say the typical SaaS gross margin trajectory that other companies have gone through now that we're in year 3, We're actually made really significant improvements that you can kind of back into based on the reported results. And we're seeing improvement in our gross margin for metallic quarter over quarter and we expect that to happen As we kind of march towards that magic maybe 70% mark over the next couple of years. And we'll get that incremental margin Expansion on metallic, as we scale it, we're solely focused on infrastructure efficiencies. We're coming out with some new packaging and pricing Enhancements, as I mentioned on the net dollar retention, as we start to drive on multiple use cases and having customers that are using more than 1 metallic product, will also bring along margin expansion. So, I think what you'll see is that continued improvement, over the next couple of years On the metallic specific, that then gives us a little more predictability, I think, maybe where you're going on our consolidated gross margin, Right.

Speaker 3

And it reflects kind of the guidance I gave of that 82% to 83%. We're kind of at that point now where we have the opportunity to start to scale. Now that we're that 300 basis points off kind of our old business model format and we can now work back towards it.

Speaker 7

Very helpful. Congratulations guys.

Speaker 3

Thank you. Thank you.

Operator

One moment as I prepare the next question. Welcome, Eric Martinuzzi from Lake Street Capital Markets. The floor is yours.

Speaker 8

Yes, you talked about growth initiatives for FY 'twenty four. We've dived into the land and expand, but I wanted to explore The hiring on the inside sales reps, because it sounds like you're pretty comfortable with where your headcount is, the 2,800 employees that you finished out the year with. Do we expect that to go up in FY 'twenty four or is it going to be kind of shifting headcount around to maybe lower cost areas While growing inside sales reps.

Speaker 3

Eric, it's Gary. I can handle that one. I talked a little bit about Some of the refinements that we're making at. And specifically related to the ISRs on that is What we're looking at is there is a piece of the metallic velocity market that we think there is a massive opportunity for us. And Attacking that from an ISR perspective, driven by velocity motion where we can see time to close, right, just the 1 quarter instead of multi quarters, It's a huge opportunity that will have quite a nice payback.

Speaker 3

Tied to that, You heard us talking about some more discrete focus on our land and expand business. Generally, what that means is, yes, we're pleased with the headcount levels that we have. And as we combine the resources we have broadly throughout the company, not just in sales and marketing, this is reflective of broadly throughout the company As we try and segment our businesses with discrete focus, we think we continue to drive productivity metrics In sales and marketing, but also other parts of the businesses as well. And all of that's reflected in the guidance that we gave, especially with our Top line relative to the EBIT margin improvement we expect?

Speaker 8

And you've done that down for me, is headcount going Up, down or segway?

Speaker 3

Yes. Eric, we don't give specific headcount guidance. As I said, we brought our headcount down 5% in the second half. And as we continue to grow revenue at a pace faster than OpEx, that means our headcount It's in a relatively good place.

Speaker 8

Okay. All right. And then, There was a source of the services outperformance in Q4. It seemed like there was a jump in the non recurring there. Was that Cai, any special projects, professional services?

Speaker 3

Yes. I'll hit this one again. Yes, we had a really strong performance from our professional services. If you go back over the past few years, it was one of our strongest results. As you know, we're now well out of the pandemic.

Speaker 3

We were able to really identify and really work through the backlog that we have on the services And really help our customers as they're trying to really drive cost efficiencies in their infrastructure, leveraging our professional Professional Services. So it was more just to some good project completion in Professional Services.

Operator

One moment as I prepare the next question. Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open.

Speaker 5

Yes. Thanks for taking

Speaker 8

the quick follow-up. We talked a

Speaker 5

lot about the growth in subscription and The recurring revenue contributions. I'm just curious as we look at the revenue for the full year, the guidance that you had given, How do we think about, I guess, the 2 other buckets, the decline that we've continued to see in the perpetual, does that get to a level where that becomes steady state? Is that Something you expect over the next year. And on that customer support line, which I think declined around 9% this last quarter, How do we think about that kind of getting to a point as kind of that perpetual burns off and that may be stabilizing at some certain level?

Speaker 3

Hey, Aaron, it's Gary. I can kind of wrap that one up for you. As you kind of think about the other revenue line items, right, we now provide 3 additional line items Outside of subscription revenue, the perpetual license, and you can really see if you look at some of our recast financials, the transition model that it has. I think that's been declining about $25,000,000 a year. We probably have about another year of that.

Speaker 3

And I kind of think I'd dig it out to like $40,000,000 to $50,000,000 run rate over time is probably where it kind of sits maybe long term, as we still have an installed base that still buys on that way. But you'll see continued downward movement in that revenue item in FY 2024, again, probably at similar levels to FY 2020 FY 2023. The customer support line, which includes both our customer support for both Subscription and for perpetual. And I think as well for FY 2020 for 2024, you'll see similar trends. You'll see similar trends in that line as well relate similar to FY2023.

Speaker 3

And I think as well then that Should start to stabilize as we get to the point in the base where we have the vast majority of our customers on subscription and task, Right. We're about half now. And I think if you roll that out another year, we'll start to get to a more steady state over time. Perpetual is still roughly a little more than half of that balance on that perpetual maintenance line. So that would just give a little perspective of what the concentration is between Subscription and perpetual.

Speaker 3

The last line, which is the other services, I think as I think about that, I think that number is probably give or take $40,000,000 on an annual basis. We've done a lot of work on product Automation and partner leverage. So what that allows us to do is kind of keep that services business optimized. It also helps us drive channel leverage And a steady state of that business is good for us because it means we're making the enhancements in the product to make our product easier to use And also leverage our channel partners more effectively as well.

Speaker 5

Thanks, Gary. Appreciate that.

Speaker 2

Welcome.

Operator

Thank you for your questions. At this time, I would like to turn it back to Mike Melnick for closing remarks.

Speaker 1

Thank you all for joining our call this morning. For your reference, we will be posting a updated version

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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