Commvault Systems Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 13 speakers on the call.

Operator

Hello, and welcome to the Commvault Q3 Fiscal Year 20 24 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. I will now turn the conference over to Mike Melnyk, Head of Investor Relations. Please go ahead.

Speaker 1

Good morning and welcome

Speaker 2

to our earnings conference call. I'm Michael Melnik, Head of Investor Relations and 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 posted 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 2

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 than those contemplated in the 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 the non GAAP and GAAP measures can be found on our website. Thank you again for joining us.

Speaker 2

Now I'll turn it over to Sanjay for his opening remarks. Sanjay?

Speaker 3

Thank you, Mike. Good morning and thank you for joining us today. I am pleased to report our Q3 results exceeded expectations, including double digit year over year growth across our most important KPIs. By our own metrics, this was an exceptional quarter. We also set the stage for the future by introducing market leading innovation with CompoCloud, our revolutionary platform for cyber resilience.

Speaker 3

Some financial highlights include total revenue increased 11% year over year to 217,000,000 This was driven by a 31% increase in subscription revenue, which now represents more than half of our total revenue. Total ARR, the primary metric we use to measure underlying growth, grew 17% year over year to over $0.75 billion Subscription ARR grew 29% year over year to $571,000,000 and is now over 75% of total AMR. SaaS ARR increased 77% year over year to $152,000,000 And We expanded operating margins by 180 basis points year over year while continuing to repurchase shares. These results reinforce that Commvault's products and services are in more demand than ever, especially as companies grapple with how to keep their data secure, compliant and resilient in a world increasingly under threat of cyber attacks. For 2 years now, we've discussed how the volume, intensity and sophistication of cyber attacks would require a radically different approach to cyber resiliency.

Speaker 3

Gone are the days when perimeter security alone were suffice. It's just a matter of time until the bad actors get in. So rather than just looking at prevention, CIOs and CSOs alike are putting a heavy emphasis on recovery and resilience. This transition has fueled the most important pivot in our 27 year history. In November, We introduced ComboCloud Howard by metallic AI.

Speaker 3

This platform brings together the best of all worlds, industry leading data protection combined with data security, data intelligence and recovery. Tomball Cloud offers the fastest, most reliable recovery of any solution in the market today. With our platform, data can be restored from anywhere to anywhere rapidly, reliably and at massive scale. The platform provides AI capabilities, giving customers automated and predictive recovery, threat intelligence and operational efficiencies to deliver true Cyber resilience. No longer will organizations need to make unnatural choices between SaaS and other data center workloads.

Speaker 3

With our platform, we support more workloads than any other vendor in our space, and we do all of this at the lowest total cost of ownership. We scaled the platform, integrating with major hyperscalers as well as leading cybersecurity and AI companies like Avira, Darktrace, Databricks, Microsoft Sentinel and Palo Alto Networks among others. I'm pleased to share that customers, partners and industry analysts have been raving about. For instance, one customer told Analyst Firm Enterprise Strategy Group, We are a highly regulated industry. Commvault Cloud was the only solution we found that gives us the flexibility and assurance that satisfied our auditors.

Speaker 3

Because of Commvault Cloud, I can assure our leadership team that we are protected and we all sleep better at night. IDC Research Vice President, Phil Goodwin said, This announcement realigns Commvault's products to meet customer preferences and sets the company on a path to be very competitive in cyber resilience. And we continue to introduce major innovations in the platform that solve critical customer challenges. For example, with our clean room recovery offering, we are closing the gap that exists between incident response planning and readiness. Our new clean room recovery capabilities enables customers to thoroughly and cost effectively test their recovery plans.

Speaker 3

It also provides them with a safe on demand environment to recover. It is this kind of groundbreaking innovation that sets us apart from the competition and helps us take share and land new business. In fiscal Q3, we added another 500 subscription customers, bringing our total to almost 9,000. Subscription customers now represent well over half of our total active customer base. A couple of examples include.

Speaker 3

A large state agency that detected security gaps with its incumbent vendor. This new customer turned to Commvault for immutable air gap ransomware protection, anomaly detection and an improved cyber resilience posture. And we also helped the Fortune 500 Capital Equipment Company eliminate its patchwork of vendors and move their workloads onto our unified platform. This allows them to modernize and improve their cyber resilience posture, better protecting them from ransomware with a lower total cost of ownership. To expand our perspective and keep us at the forefront of innovation, We also established a Cyber Resilience Council comprised of security visionaries from top cyber, cloud and government organizations.

Speaker 3

The Council would advise on security trends and cyber threats, which will shape product development, strategy and partnering opportunities. It is chaired by Melissa Hathaway, a thought leader in cybersecurity and digital risk management who served in 2 presidential administrations. We're 2 months away from closing our fiscal year and I couldn't be more excited about our momentum as we approach fiscal year 2025. With that, I'll turn it over to Gary to discuss our results. Gary?

Speaker 4

Thanks, Sanjay, and good morning, everyone. I am pleased to report strong revenue and earnings outperformance in Q3. Starting with the top line. Total revenue was $217,000,000 an increase of 11% year over year and significantly outpaced our Q3 expectations. Our total revenue growth was highlighted by a 31% year over year increase in subscription revenue to $114,000,000 reflective of both solid double digit growth in term software licenses and an accelerating contribution of SaaS revenue.

Speaker 4

Our execution was strong as large software deal close rates improved sequentially and we delivered against our largest Term subscription renewal quarter of the fiscal year. This execution resulted in term software deals over $100,000 up 25% year over year, driven by increases in both average selling price and deal volume. Q3 perpetual license revenue was $15,000,000 as these perpetual licenses are generally sold in limited verticals and geographies. At the current run rate, we believe that the headwinds to our reported total revenue growth for perpetual license sales are normalizing as we exit the current fiscal year. Q3 customer support revenue, which includes support for both our term based and perpetual software licenses, was $77,000,000 down just 1% year over year.

Speaker 4

Q3 fiscal year 2024 continue to benefit from the continued trend of fewer conversions of perpetual support contracts to term software licenses. Year to date, customer support revenue from perpetual licenses represents 54% of total customer support, with the balance coming from term software and related arrangements. This compares to approximately 60% in fiscal year 2020 75% 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 results to ARR.

Speaker 4

Q3 ARR was $752,000,000 representing 17% year over year growth and continues to reflect the underlying strength of our business when our revenue is presented on an annualized basis. Subscription ARR, which includes term based software arrangements and fast contracts, increased 29% year over year to $571,000,000 Within subscription, SaaS ARR grew 77% year over year to $152,000,000 driven by new customer acquisitions and strong expansion with existing customers. Q3 SaaS net dollar retention rate or NRR was a healthy 125%. Now, I'll discuss expenses and profitability. Fiscal Q3 gross margins increased 90 basis points sequentially to 82.9% and includes continued improvement in our SaaS gross margins.

Speaker 4

Fiscal Q3 operating expenses were $132,000,000 up 9% year over year, reflecting the impact of our planned go to market investments throughout fiscal year 2024 and higher marketing spend during the quarter, including our shift event in New York City. Overall, operating expenses as a percentage of total revenue was 61%, representing 100 basis points of leverage year over year, consistent with our objective to manage expenses relative to revenue results. We ended the quarter with a global headcount of approximately 2,900 employees, flat sequentially and up 3% 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 Q3 increased 21% year over year to $47,000,000 And non GAAP EBIT margins increased 180 basis points year over year to 21.5%.

Speaker 4

Moving to some key balance sheet and cash flow metrics. We ended the quarter with no debt and $284,000,000 in cash, of which $88,000,000 was in the United States. Our Q3 free cash flow grew 45% year over year to $43,000,000 Through the 1st three quarters of the fiscal year, we generated $121,000,000 of free cash flow, an increase of 20% year on year. The biggest drivers of free cash flow are SaaS deferred revenue and the strength of our software subscription renewals, which typically include upfront payment on multiyear contracts. In Q3, we repurchased $51,000,000 of stock under our repurchase program, resulting in year to date repurchases totaling $134,000,000 representing 111% of year to date free cash flow.

Speaker 4

Now I'll discuss our outlook for fiscal Q4 and the full fiscal year 2024. All of the following guidance metrics are based on current foreign currency exchange rates. For fiscal Q4, we expect subscription revenue, which includes both the software portion of term based licenses and SaaS to be $111,000,000 to $115,000,000 This represents 20% year over year growth at the midpoint. This Q4 subscription revenue outlook reflects continued momentum in our new customer and expansion business, but a smaller renewal pool in fiscal Q4 relative to Q3. As a result, we expect total revenue to be $210,000,000 to $214,000,000 At these revenue levels, we expect Q4 consolidated gross margins to be in the range of 81% to 82% and EBIT margins in the range of 20% to 21%.

Speaker 4

We continue to execute some foundational go to market changes, which include amplifying our discrete focus on our land and expand opportunities, scaling our motion to secure our growing subscription renewal base and investing to capitalize on our fiscal year 2025 growth objectives. These investments are reflected in the range of our Q4 margin guidance. Our projected diluted share count for fiscal Q4 is approximately 44,500,000

Speaker 1

shares.

Speaker 4

Now I want to give an updated outlook On the full fiscal year 2024, which includes once again raising our total revenue and total ARR expectations for the full year. We expect fiscal year 2020 4 total ARR growth a 15% 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 25% year over year and reflects a similar 100 basis point increase over our prior guidance. From a revenue perspective, we now expect subscription revenue to be in the range of 420 to $424,000,000 growing 21% year over year at the midpoint, Reflecting the continued momentum in our business ended a $9,000,000 increase at the midpoint compared to our prior guidance. At these revenue levels, subscription revenue will exceed over 50% of our total revenues for the full year.

Speaker 4

We expect total revenue to be in the range of $826,000,000 to $830,000,000 reflecting an $11,000,000 increase at the midpoint compared to our prior guidance. Our improved fiscal year 2024 Total revenue outlook reflects the seasonally stronger subscription software trends that we usually experience in the second half of the fiscal year, combined with the ongoing momentum of our FaaS offerings. Moving to full year fiscal 2024 margin, EBIT and cash flow outlook. We continue to expect 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 December 31, we had $122,000,000 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.

Speaker 4

Year to date, we are pacing well ahead of this target and we intend to continue the share repurchase momentum during the current quarter. For details and trends on all of our key metrics, please take time to review our investor deck contained on the Investor Relations section of our website. Operator, you can now open the line for questions.

Operator

Thank Your first question comes from the line of Aaron Rakers of Wells Fargo. Your line is open.

Speaker 5

Yes. Thanks guys for taking the question and congrats on the good quarter. I guess the first question and I appreciate that you're not going to give guidance looking out into fiscal 'twenty five, but I'm just curious with the momentum you're seeing in subscription And obviously the SaaS business as well, how do you guys start to think about seasonality and in particular thinking about the March quarter? And I guess I'll layer into that. How do we think about the customer support growth as that starts to the rate of decline start to ease and maybe we return to growth as we look into next fiscal year?

Speaker 1

Hey, Aaron, good morning. It's Gary. Nice to hear from you and I'll start off. It's a couple of different things. Maybe I'll start with the Q4 piece of it, the current March quarter perspective.

Speaker 1

So Q3, just looking back at quarter, we just finished was a really significant quarter for us. By our own measures, It's one of the best, if not the best quarter we've ever had. And we're really starting to see that cyber is changing the way that people are buying. So some of the trends we saw during that quarter gave us the confidence to raise both our Q4 and full year numbers. And as you mentioned about specifically subscription revenue, right, our guidance is less about 20% growth year over year at the midpoint.

Speaker 1

And what we're seeing and what we're expecting in fiscal Q4 is continued momentum in that land and expand motion. Also, the SaaS revenue that we're now generating is a tailwind and provides more predictability to our P and L. Those together, we'll see a slightly smaller renewal opportunity in fiscal Q4 relative to Q3. So that's also reflected into our guidance as fiscal Q3 had the largest Renopal we've ever had in our history. So we think those trends Along with continued execution and some really good acceleration in our partner ecosystem is really going to help us set the foundation for next year.

Speaker 1

What's also helping, as you mentioned, relative to our total revenue is what's happening in the customer support revenue. And what you see there is that The declines year over year are starting to get mitigated and now down into the low single digits. Some of that's reflective of fewer conversions that I mentioned on last call, we continue to see fewer conversions that then eliminate some of the headwinds we see in support. So some of those headwinds will get mitigated building into next fiscal year, which would also provide some of that continued momentum we'll see.

Speaker 5

Gary, I appreciate that. Let me maybe kind of double click on that and just ask more succinctly. Do you think the customer support revenue can turn to growth As we look into next fiscal year?

Speaker 1

No, I would say, as I look into next fiscal year, I would say flat The slightly down is what I would expect on a full year basis, Aaron, is what I would expect at this point. I think by the end of next fiscal year, The term component like the maintenance and support piece from our term licenses will become the majority of that customer support, but I think that will take us into the back half of next year, which means that on a full year basis, we'll slightly be kind of

Speaker 5

Talk about what you're seeing from a term perspective, the term length of the deals you're engaged with. It sounds like large deals have improved. The macro might have eased. So just kind of any updated thoughts on what you're seeing, any kind of term links or term compression dynamics?

Speaker 1

Yes, absolutely. So what we continue to see now is stabilization in our term length. Last quarter, We saw I'd say the 1st quarter stabilization. This quarter, we saw another quarter stabilization. On the subscription side, our average term is still rounding till about 2 years, but that stabilization, which is also demonstrated by good execution, but also demand for our cyber resilient products is also giving a little more predictability in there.

Speaker 1

The other piece there and that's also critical to this is how we align with the partner ecosystem, right. Those bigger deals and larger transformational projects are tied with some of the new modern partner ecosystem, whether it be hyperscalers or others. And they also provide some foundational support for keeping that term length healthy.

Speaker 6

Hey, Aaron, it's Sanjay. I'll just add one more point. As customers start really moving and pivoting to the hybrid model and Hybrid cloud workloads, our platform allows them to do that mitigation and move their workloads and have the same Technology support them both in the cloud and data centric. So we're seeing that as well. That's helping as well.

Speaker 3

Thanks guys.

Operator

Your next question comes from the line of Howard Ma with Guggenheim Securities. Your line is open.

Speaker 7

Great. Thanks and impressive results. I have a question first for Sanjay. Sanjay, if you were to dissect the outperformance in the quarter, I guess between the general spending environment maybe improving, it looks like it might be in secular tailwinds of consolidating or increasing infrastructure and security budgets. That versus your own internal execution, so new product initiatives and go to market execution.

Speaker 7

And I understand it might be hard to separate the internal from external. But if you could if you were to force the stack rank, The internal versus external, I'm curious what your thoughts would be?

Speaker 6

Well, I'd say, I would say it's probably 75% for this quarter that passed 75% internally. And I would say that because really Howard, Gary touched on this, our own business transformation, Moving our installed base of customers and our new customers into a more ratable format as well as a subscription oriented format is actually working. Our subscription renewal tailwind is kicking in. So the stuff that was a headwind for us 2, 3 years ago is actually becoming A nice tailwind, and this last quarter was testimony to that. We've also been We've talked about our execution internally, really aligning our sales force, our marketing campaigns, our demand generation campaigns, all the things that you'd expect to avail of the opportunity in front of us around cyber.

Speaker 6

So that's kicking in nicely as well and green shoots on some of the demand we're seeing on cyber resilience. And the third is the new platform, the platform, the actual ComboCloud powered by metallic AI platform that we're seeding into customers at this point. Technologies like Clean Room Recovery are really beginning to get customers' attention. So if you come it's not perfect math, but I'd say 75% of what we're seeing is The combination of what we're doing and good execution alongside the fact that we're solving the challenges. Certainly, we're solving a really hard problem for customers.

Speaker 6

Cyber threats are real and what we're able to do for them is meaningful.

Speaker 7

Okay. That's really good color and thank you for quantifying that, Sanjay. I have a follow-up for Gary. Gary, with the recent launch of Commvault Cloud and these new security bundles, can you give us some numbers around initial traction in cross selling these security modules to existing customers as well as adoption by net new logos? Thanks.

Speaker 1

Yes. Good morning, Howard. I'd like to talk to you again this morning. So a couple of things is, as you know, our announcements related to our new platform combo cloud just hit the market just a couple of months ago. Okay.

Speaker 1

So where we're focused now is on demand gen. So in starting to see some of the early benefits that we start to see in our pipeline and in the funnel that we're creating, that's also reflected in our Q4 outlook, Okay. What this will do is it's going to give us an amazing opportunity for expansion as well. None of that is reflected in our results for Q3. So our results in Q3, as Sanjay said, was about executing against the pipeline.

Speaker 1

We had strong close rates that accelerated quarter on quarter. And what we're seeing now is building that demand gen for next fiscal year and the ability to cross sell through our installed base. We finally have a platform that makes the buying process for our customers easy between software and SaaS and facilitate that expansion opportunity to go from our foundational model that we have today all the way through this cyber resilience offering that we've announced.

Speaker 6

Yes. And Howard, Sanjay here. It's quite honestly, it's still early to quantify in dollar terms the impact, but we're very positive about it from what we see as the pipeline builds. I'll give you some I'll just give you An anecdotal point of view, the number of conversations I've had with security teams and CISOs since we launched on November 8 has been unprecedented. We're seeing really deep dives on the fact that, what we call Shift Right.

Speaker 6

Our ability to really take the customer journey and make sure that protection and then resilience are at the core of how they think about cyber recovery is key. And we're having deep conversations, proof of concepts, more than we ever have because we've been able to really bring to light the completeness of the platform.

Speaker 7

Thanks guys. Really exciting stuff. Thanks.

Speaker 6

Thanks, Howard. Thank you, Howard.

Operator

Your next question comes from the line of James Fish with Piper Sandler. Your line is open.

Speaker 8

Hey guys, Rick Porter. Just building off the last few that we've asked around cyber resiliency strength. Look, I know it can be hard to really parse out, but what percentage of customers are buying the cyber buying for Cybersecurity use cases at this point or what's really the exposure to cyber budgets rather than kind of the traditional backup and recovery? How often is a Chief Information Security Officer, for example, in the room as you guys are in that final pitch?

Speaker 6

Hey, Jim, it's Sanjay. I just sort of touched on that in the previous Howard's question. We're seeing a lot of security conversations. And by the way, this wasn't our first foray into security. We've had security in our product for a long time.

Speaker 6

Last June, we announced a series of Innovations and then we followed that up in November and we continue to follow that up now. Even before cyber resilience, Data protection without information security was pointless. There was nothing there. So we had security built into our overall data protection platform, which we've extended end to end with our cyber resilience capabilities. Okay.

Speaker 6

Let me give you an example. And I've said this for a long time, data protection and data are merging and I think they've officially come together. So if you're recovering from a breach or a threat or an attack and you're recovering data, you can't just blindly bring data back. You have to make sure that you're threat scanning that data for any vulnerability that may have been, that may have been added since you backed up, okay, or new in the environment. So threat scanning, which was a typical Security shift less capability is completely integrated with recovery capabilities.

Speaker 6

So that's what we've been doing. And so it's very hard to sort of segregate and say this is Security versus this is protection, it is resilient. And we've been doing this for a while. I mean, I can't I mean, yes, customers may talk and say, hey, we want to talk about data protection, but it's really with light of the fact that the threat that they're protected against the cyber. So it's all one platform, one capability.

Speaker 8

Makes sense, Sanjay. I appreciate that. And Gary, you had mentioned you guys are looking to invest on the go to market side. Just can you elaborate a little bit more on the details there? How many heads should we be looking for you guys to add in this upcoming quarter in order to hit those objectives, is it going to be mainly on the inside sales team or looking more at kind of field?

Speaker 8

Thanks guys.

Speaker 1

Yes. Thanks, Jim, and good morning. Yes, in some of my prepared remarks, I'd like to talk about investment. So I think foundational to what Sanjay and I've always Talked about it's about profitable and responsible growth. So that's always that is our foundation.

Speaker 1

But as I look out in the next year, some of the investments that we're starting to make is that is to really be able to capitalize on the growth opportunity that's in front of us. We're seeing the world of Cyber Intelligence come together to give us this amazing opportunity to hopefully accelerate growth. And with that does require some level of investments, Okay. And it's more about making sure that we continue to generate the demand around cyber resilience, make sure that we are targeting the right buyers and the decision makers that can help drive the decisions related to cyber resilience and more and most importantly, continue to make sure we have the right Resources and campaigns around accelerating our SaaS model, okay. What some of these investments require is that alignment, especially into the partner ecosystem, okay.

Speaker 1

So if I look at the partner ecosystem, There's really 3 key pieces that we're focused on. Number 1 is hyperscalers. We're starting to see some great acceleration with hyperscalers. We did the largest amount of revenue ever through your marketplaces this quarter and we want to capitalize on that momentum. It's also building out the MSP route, especially with our SaaS focused, product.

Speaker 1

And third is a lot of these large transformational cyber Projects are tightly integrated with GSIs and alliances, okay. So if you're trying to think about some of the areas that are reported to us to capitalize on the growth, They're the key areas we're focused on.

Speaker 8

Makes sense. Great quarter, guys.

Speaker 1

Thank you. Thank you.

Operator

Your next question comes from the line of Rudy Kessinger with D. A. Davidson. Your line is open.

Speaker 9

Hey guys, thanks for taking my questions and I'll add my congrats to what looks like a great quarter, some really good numbers here. On SaaS, Growth reaccelerated last quarter a bit, sustained this quarter at 77% SaaS ARR growth. The net new SaaS ARR is just really impressive. Could you talk about just when you look at the growth in metallic quarter over quarter, Just what percent of that new SaaS ARR is coming from cross sells versus new customers? And also do you have any conversions in there yet or is it still mostly true organic ARR growth?

Speaker 1

Hey, Rudy, it's Gary. Good morning and nice to hear from you today. One of the key things that we look at to related to SaaS is how we look at sequentially from an ARR basis, okay. And hitting the $152,000,000 ARR, the sequential growth we had from last quarter to this quarter was an all time high. So in a numerical, we had the highest sequential increase in SaaS ARR, which just shows to the acceleration we're seeing in the as a service delivery model, okay.

Speaker 1

And it's a combination of 2 things as you highlighted. 1 is, I'll call our land and expand new business And we're still seeing the majority of that from upsell, okay. Upsell meaning more and more of the same workloads, our primary workloads. We're starting to see the cross sell start to commit, but it's still the relatively less than the additional workloads of similar functionality. Now introducing with the new cyber resiliency offerings, we're setting ourselves up for that cross sell opportunity as we get into next fiscal year.

Speaker 1

So we look to next fiscal year for that. But the key driver on the 125% NRR has been upsell. The other key piece though is the maturing renewal cycle and driving to really strong gross remover. So we're doing a very good job of now maturing and have a fully mature renewal cycle as well. So those pieces are help driving that momentum.

Speaker 6

And Rudy, it's Sanjay. I know you didn't directly ask the question, but New customer as part of our land, our new customer acquisition momentum with our SaaS workloads is growing in the 100 every quarter. And the attach the cross sell of software with SaaS is actually quite That's something we appreciate and are working on because our customers which is also testimony to our single platform strategy as customers move to the hybrid cloud. So they start with one workload and then quickly move into a data center based workload Because you may have products that you want to back up in a different way in the data center. So not only do we look at Cross sell within the SaaS offers, but also cross selling between software and SaaS and having a singular platform with the capabilities we have enables that hybrid journey for customers.

Speaker 6

So they can start anywhere either in the cloud or on premise and then go both ways. And that's a key differentiator for us.

Speaker 1

So Rudy, that's all true growth. There's one last piece of your question I wanted to finish on is that, what we're seeing in metallic is not cannibalizing over from converting our installed base. You asked that specific you asked that question specifically and we're not that's not part of the current play or what's driving the business. This is all about net new business.

Speaker 9

Great. That's all very helpful color. I guess just one Quick last one on SaaS. Again, you mentioned the record net new SaaS ARR in Q3. If I look back last year at seasonality, your net new metallic ARR in Q4 was a good step up from Q3.

Speaker 9

Should we expect to see that play out again this year? I know you're not guiding specifically to SaaS ARR, but Just given your month into the quarter, how should we expect net new SaaS ARR to come in for the March quarter versus December?

Speaker 1

I'll take that, Rudy. It's Gary again. I think the seasonality you saw last year from fiscal Q3 to Q4 is fair for something like we would expect for this year. Think we saw roughly $18,000,000 or so sequential growth. I think sometimes I think that or slightly more is what our objective would be, is to keep that momentum going.

Speaker 1

We have a strong pipeline going into the quarter and we're seeing our close rates continue to improve as well. So we're about where we're going to land for the fiscal year.

Speaker 6

We're not calling it, but we're trying to get.

Speaker 9

Yes. Okay, great. That's it for me. Thanks for taking my questions again and congrats, Kevin.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Eric Martinuzzi with Lake Street. Your line is open.

Speaker 10

Yes, I noticed a nice pickup on the Americas region, up 16% year on year. Was that kind of broad based across verticals or was there any particular verticals that stood out for you?

Speaker 1

Yes. Hey, Eric, it's Gary. I'd like to hear from you again this morning as well. Our Americas had a really strong quarter. From a total perspective, our Americas business was up 15% year over year really driven by that subscription revenue as well.

Speaker 1

Just the total subscription revenue in the Americas was up 43% year over year. And what we're seeing is really strong traction on some of the large on the larger deals. The larger deals on renewals as well as kind of larger land and expand deals. Our new I'm sorry, Our big deal, so what we say is kind of those term software deals over $100,000 were up almost 50% year over year. So it's all tied to driving the cyber resilience message and making sure that we are helping Our customers solve those difficult problems.

Speaker 1

Not vertical specific, last quarter we talked a lot about Fed. This quarter it was more broad based across the vertical stream tied to executing against the renewal stream and the larger deals.

Speaker 10

Got it. And then the buyback program, I know you haven't given us a view for FY 'twenty five, but You've been relatively consistent over at least the past couple of years about this greater than 75% of the annual free cash flow. Is that the intent going forward here? Or are you going to revisit that when you've offset the current plan?

Speaker 1

Yes. So Our current guidance will continue to hold. We believe right now that our buybacks are a key part of our responsible growth strategy and Our publicly facing stated guidance of at least 75% of free cash flow is a good modeling trend. As you can kind of tell through the 9 months, we're well ahead of that. We're north of 100% of free cash flow, because we're opportunistic also in the market and we see the value that we have as a company and our ability to continue to drive shareholder value.

Speaker 10

Got it. Thanks for taking my questions.

Operator

Your next question comes from the line of Jason Ader with William Blair. Your line is open.

Speaker 11

Thank you. Good morning, guys. Just wanted to ask about revenue growth outlook. I know you've talked about, I think, it's about 6% to 7% growth CAGR from the 2021 Analyst Day. I'm not sure Maybe you've updated that, but just wanted to get a sense of whether you are reiterating that, you think it could be higher?

Speaker 11

And then more specifically, as we think about 2025, FY 2025, without pinning you down on guidance right now, do you think the growth could be higher in revenue growth could be higher in 2025 than 2024.

Speaker 2

Okay.

Speaker 1

Hey, Jason, it's Gary. Good morning. I'll get a couple of these points. So first, revenue growth for us is ultimately an output of what we're seeing from an ARR perspective. So let me start there and we're seeing really strong growth.

Speaker 1

If you look at our ARR growth of 17% This quarter is really strong and we're seeing that across all of our businesses, okay. Our Q4 guidance implies that we'll end up this fiscal year on the top line, right, roughly in that 6% revenue growth. We have an amazing opportunity to accelerate as we move forward. Obviously, We have not given guidance for FY 2020 5 yet. Clearly, our expectation that FY 2025 growth will be higher than FY24, right.

Speaker 1

And as we start to get work towards our next call next quarter, we will give a little more clarity on full year FY 2020 actual results, but most importantly is we see the opportunity in the market. That's key. As we see the opportunity in the market, we can continue to build on momentum from the quarter we just had. And clearly, our expectation is that our growth next year will be higher than this year on the

Speaker 11

Got you. Okay, great. And then another one for you, Gary. Can you give us a sense of how much revenue in a given quarter is actually effectively, let's call it, in the bag on kind of day 1 of the quarter in terms of and that would include renewals, let's just assume you're going to get the renewal there. I know you don't always get 100%, but let's just assume you're going to get the renewal and then committed contracts, which I guess would be support and SaaS.

Speaker 11

So those two things combined, how much of your revenue in a given quarter was actually coming from those sources today?

Speaker 1

We don't quantify specifically, right. I'll say with the contractual revenue we had in the bag on Q1 Day 1 of the quarter. Though as you look at a couple of key pieces, we disclosed our SaaS ARR. So you can take our SaaS ARR and divide it by roughly 4 That's almost guaranteed to get that piece. And the other piece is customer support, right, that's very predictable.

Speaker 1

When you look at just those two pieces, SaaS and customer support, you have a very strong starting point to the quarter. It's how we see it. The renewal piece then we strive leverage and the incremental that goes over our land to expand business. I think where I'll close is that on a relative basis, Each quarter becomes more and more predictable than the previous with some of these foundational pieces and that's what we kind of focuses on increasing predictability sequentially as each quarter goes.

Speaker 11

Okay. Let me just ask this in a slightly different way. I don't know if you're going to answer Of your $100,000 plus deals today, how much are actual Renewals versus basically new business or upsell business?

Speaker 1

Yes. Both are healthy contribution.

Speaker 8

Both are.

Speaker 6

We can't get into the specifics.

Speaker 1

Yes. We're not getting into those specifics, but they're both very healthy contributions.

Speaker 11

And it's obviously a lot higher today than it was a couple of years ago.

Speaker 3

Yes. That's fair.

Speaker 11

All right. Thank you, guys.

Operator

Your next question comes from the line of Tom Blakey with KeyBanc Capital Markets. Your line is open.

Speaker 12

Good morning, guys, and great execution here and solid results. Congratulations. Just want to maybe piggyback on Jason there on the potential renewal opportunity. You're pretty clear about saying that fiscal 3Q we just passed was A very large opportunity for the company. I think the one of the largest, I think Gary said, in that fiscal 4Q would be Lower, maybe Jason literally just asked this, but will the renewal opportunity that it seems like you have Solid grasp around this, will the renewal opportunity in fiscal 2020 5 be bigger or the same as fiscal 2024?

Speaker 1

Got it. So, hey, Tom, it's Gary. And I'll jump in and let me give you a little maybe just Foundational pieces that will help now to start by 2025. Fiscal Q3 is typically our largest because it's tied to all the calendar year end, right, deals we've done over a period. And fiscal Q4 will be modestly lower.

Speaker 1

So not significantly, but lower, okay. So that means that the seasonality of the second half is always stronger than the first half of any fiscal year. And that trend as I look into next year will continue. On an overall basis, I would expect the renewal population next year to be larger than the rental population this year, but not by the same amount that we saw this year, right. This year had a larger sequential year over year.

Speaker 1

Next will be larger, but to a much lesser extent.

Speaker 12

Much less from fiscal 2022 to fiscal 2024, But higher than fiscal 24, that's helpful. Hey, Bert. Maybe this thank you, Garrett. And maybe this is Sanjay. In the context of The expanding opportunity set that you have here with regard to cyber resilience, we agree with you in terms of the convergence of data recovery and data security Last couple of years here.

Speaker 12

Talk to us about like maybe incentives and the capacity that you have internally to have Commvault in terms of attacking the opportunities as you climb up to the CISO kind of suite there?

Speaker 6

Sorry, what was the last part of your question?

Speaker 12

So in terms of in addition to incentives, what kind of capacity do you have or need to be continued build out to kind of approach the CISO suite in terms of discussions?

Speaker 6

I mean, incentives, I mean, there we continue to fine tune that as needed obviously within the comp plans. But really what's more important is the Investment and focus we've put around enabling our sales force and our ecosystem on our new capabilities around cyber resilience. Kind of unprecedented how much time and effort we've put and cost we've put into getting that right and that's an ongoing journey. We've also brought in some really, really seasoned security, We call them field CTOs to really enable our customer conversations alongside our field. We've got some specialists as well that and security inside now practitioners.

Speaker 6

We've also announced recently a cyber our Cyber Resilience Board, which has which is a Board of Absolute Luminaries in the field of cybersecurity, headed by Melissa Hathaway, who was an advisor and part of 2 presidential administrations on security and cybersecurity. So we're really amping not just the product, but also the capabilities, the thought leadership around it and enablement within that. So there's a lot of work going on. And yes, I'd be It'd be wrong for me to forget. We've also as part

Speaker 3

of the platform, it's a subtlety, but it's

Speaker 6

an important piece, which is we've actually gone We've shifted left. In other words, we have integrated and continue to integrate and continue to increase the ecosystem of connections into what we call the identify and defend, the perimeter and making sure that the technology our customers use to defend the perimeter and manage it It's something we integrate with because it makes both sides, the recovery and resilience side, which we do and the defend and identify side that our partners do and working together we make the customer safer. And so there's a lot of work that we've been At, we announced it all in November, but we've been at this thing for a long, long time. And lots to do. And lots to Lots to do.

Speaker 6

Everybody we hire, we try and bring in with a security background, quite simple, as simple as that as a listening test. Okay.

Speaker 12

The follow-up there would just be with regarding to the security Your budgets at firms have had been ever expanding probably for the last decade or more. Do you envision that this is Your initial conversations are along those lines. You mentioned TCO and your preamble. Is this a CommVault kind of like taking wallet share and consolidating vendors? Or is this more of a and who would those vendors be or is this more of just a continued expansion?

Speaker 6

I think, Tom, I think the fact that the two pieces that have traditionally been separate are coming together from a solution point of view like our platform. Just we've seen customers at the table with The IT organization, the infrastructure team as well as the security team and they're working together rightfully so to solve A complex issue, a hard problem. And I think they're quite we're seeing the budget sort of munched together in many customers to say this is not just a data protection piece or a data security piece, it has to be together. So we're I think we're actually seeing efficiencies for customers with the approach we're taking. It does make it easier because you're not you don't have internal sort of friction Inside of customers.

Speaker 4

Okay. Yes,

Speaker 12

that's helpful. And just one very quick one. Sorry to have 4 questions here. But the gross margin guidance was impressive, Gary. Just maybe talk about the moving pieces there, specifically with regard to metallic and the cloud scaling here.

Speaker 12

That would be helpful. And that's it

Speaker 1

for me.

Speaker 12

Thank you, guys.

Speaker 1

Yes, for sure. And I can wrap up with that question with you. So from a gross margin perspective, getting stability in the gross margin is important and there's 2 pieces. One is when you see acceleration in our subscription and a chunk of that driven by subscription term software, they're very high gross margins. So when we get good renewal and good land expand growth, we're going to see gross margin momentum.

Speaker 1

The key piece though to our gross margin is getting stability and leverage on our SaaS gross margins, okay. We're working very clearly towards our goal of getting into that 70% plus range of gross Margins, a year ago, we were in the 50s and we're now well on our way towards that objective over time of getting to 70% plus. And you're starting to see the leverage that we're getting right now on driving improvements in the gross margin on SaaS.

Speaker 3

Very true.

Speaker 12

Great. Thanks guys. Great quarter.

Speaker 7

Thank you.

Operator

My apologies. Your next question comes from the line of Aaron Rakers of Wells Fargo. Your line is open.

Speaker 5

Thanks guys. Thanks for the quick follow-up. I'll be brief here. Obviously, a lot of momentum around the cybersecurity and the resilience attributes of the business. I'm just curious like architecturally as we think about the data center and what's evolving overall around AI, Are you starting to see any engagements with customers that you could distinctly say that AI is actually driving this kind of change of sentiment or investment cycle for your business as enterprises kind of scrub through and think about their data and how they're going to leverage that more from an AI perspective going forward?

Speaker 6

I mean the answer the short answer is you can't have a conversation without AI coming up. That's just a fact. Now what we've done is Aaron, we've kind of turned I'll turn your question on its head a little bit. And what we've done is look at what we can do for customers that makes their life Better because of AI. Now we've had AI in our technology for many years, but mostly in machine learning type and automation type scenarios.

Speaker 6

Now with the newer generation of AI, our first foray into really delivering value, not just AI washing, not technology, but truly delivering value falls into 3 primary buckets. 1 is operational scale and resilience, giving them the ability to really work with large volumes data with deep degrees of automation. Okay. And so the operational AI just enables that and that's in the product today. The second is really threat and risk management and assessment.

Speaker 6

So with the number of risks, the threats and the volume of data that's been written and restored, AI can do a wonderful job helping customers really do the anomaly detection, really do the cyber get real cyber resilient. So we've built a lot of that into the product. And the one that I think is getting great traction, which I think has immense value is predictive recovery. The complexity of recovering data with absolutely solid clean backups for our customer who's just been breached is very complex because of the sophistication of the breaches and the time span between entry and payload. And so We're using AI to help customers really get a great starting point and then applying AI across a clean room recovery scenario to really help customers Truly be resilient and recover.

Speaker 6

At the end of the day, that's what matters. And so these are the 3 I'm oversimplifying it, but these are the 3 Big buckets under which we've applied AI enough in the first avatar of our technology and it's continuing. We have a very rich and robust roadmap And everything I've talked about exists. So there's no AI washing it, of which there's a lot going on right now. And we have to be very we take a very conservative approach around this because at the end of the day, it's mission critical data that we're working with for our customers.

Speaker 4

Thank you. Thanks, Aaron.

Operator

This concludes the question and answer session. I will turn the call over to Mike Melnick closing remarks.

Speaker 2

Thanks, everyone, for joining this morning. As a reminder, the Investor Relations website has a presentation summarizing our key KPIs. Feel free to reach out to me during the quarter with any questions. Thanks very much.

Speaker 6

Thank you.

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Earnings Conference Call
Commvault Systems Q3 2024
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