Q4 2023 Commvault Systems Inc. Earnings Call

Speaker 1: Welcome to the Comm BALP-4C-2023 Ernie's conference call.

Speaker 1: At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 in your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that the date conference is being recorded.

Speaker 1: I would love to hand the conference over to your speaker today, Mike Malnick. Please go ahead.

Speaker 2: Good morning and welcome to our earnings conference call. I'm Mike Malnick, head of Investor Relations and I'm joined by Sajjim Rajandani, Comvolt CEO and Gary Merrill, Comvolt CFO . And earnings presentation with key financial and operating metrics is posted to the Investor Relations website for your reference.

Speaker 2: Statements made on today's call will include forward-looking statements about compalt, future expectations, plans, and prospects. All such forward-looking statements are subject to risks, uncertainties, and assumptions. Please refer to the cautionary language in today's earnings release and compalt'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.

Speaker 2: We're Desson J. Fraser-Marx. Desson J.

Speaker 3: Thank you, Mike. We delivered strong Q4 results, ending the fiscal year with renewed momentum.

Speaker 3: Let me share some highlights.

Speaker 3: Total ARR increased 15% year-over year.

Speaker 3: Subscription and SAS ARR, which represents 71% of total ARR, grew 38% year over year.

Speaker 3: Metallic, a three-year-old SAS offering exceeded 100 million in ARR, placing it among the fastest-growing SAS applications in history.

Speaker 3: 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% EBIT margins, while continuing to return cash to shareholders.

Speaker 3: Gary will share more detail shortly, but today marks the next phase of our strategic evolution to become the leading cloud-first data protection company in the industry.

Speaker 3: Our mission is to fold. 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.

Speaker 3: Let's discuss priority number one, 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 becoming the mission-critical systems of tomorrow. In fact, IDC recently reported that SaaS spending for enterprise applications.

Speaker 3: and SAS. This is the power of one, one platform.

Speaker 3: Unlike our competitors, we don't make misleading claims about our technology leadership. We don't have to. We were rated number one across all three of Gartner's critical capabilities report for data protection, data center, edge, and cloud.

Speaker 3: To enhance manageability and reduce costs, we built automation, intelligence, proactive monitoring, and securing compliance capabilities deeply into our platform. This gives our customers a more simplified approach to data protection across all workloads, environments, and locations.

Speaker 3: the introduced costs. We built automation, intelligence, proactive monitoring, and securing compliance capabilities deeply into our platform. This gives our customers a more simplified approach to data protection across all workloads, environments, and locations. Now let's discuss security.

Speaker 3: The worlds of data protection and security of learning. As a result, CIOs, CISOs, executive teams and boards are making holistic decisions.

Speaker 3: across their entire IT environment, and the wrong decision can have lasting and costly consequences. Our far no one is immune to cyber threats that exploit the vulnerability of fragmented environments.

Speaker 3: We are the only company with a single platform with built-in security to proactively monitor and assess risks.

Speaker 3: mitigate cyber threats and protect critical workloads. It's why more customers are joining the combo for the data protection.

Speaker 3: For example, where security matters most, federal agencies, including US Army 4SAM and the Department of Veteran Affairs chose Commvault during the quarter to evolve the data protection. And Metallic was also the first data protection SaaS offering to achieve FedRAMP high status.

Speaker 3: As the only vendor in our space with advanced cyber deception for early ransomware detection, we help customers protect the data before it is compromised.

Speaker 3: In Q1, we plan to introduce several new capabilities to defend customers' maximum expectation risks and dormant threats. This includes industry leading integrations with companies like Microsoft Sentmen, CyberArc, and others.

Speaker 3: Which brings us to the next fundamental IT challenge.

Speaker 3: With increasing complexity and risks comes additional costs for constrained organizations.

Speaker 3: To address this, low touch as a service model like Metallic, solve their IT problems more efficiently.

Speaker 3: as a service model like Metallic. Sold their IT problems more efficiently, but that's only part of the solution.

Speaker 3: Automation is critical.

Speaker 3: We embraced AI several years ago that help our customers manage their costs, while also simplifying and enhancing their experience.

Speaker 3: This helps enable us to deliver a five times better total cost of ownership than our closest competitor.

Speaker 3: us to deliver a five times better total cost of ownership than our closest competitor. And it is imperative in the future.

Speaker 3: So we will continue to engineer it into our offerings. This continues innovation is why customers turn to Combo, but the data protection needs. For instance, we recently displaced the legacy incumbent and increased our footprint at a Fortune 100 retailer. The thousands of stores serving billions of customers worldwide, data protection is paramount in their decision. Combo offered, but the other vendors could not.

Speaker 3: A modern and proven data protection solution on one platform managed with a single pane of glass.

Speaker 3: which brings us to our second strategic priority around lasting and responsible growth. To achieve this, we're accelerating our discrete focus on our land, expand, and renew motions while alter reallocating investments towards a high growth areas.

Speaker 3: Gary will discuss in more detail. We have also been working hard to move friction across the customer journey to make it even easier and more cost efficient for customers to engage and be successful.

Speaker 3: Lastly, very lengthy deep focus on our own cost of operations, including people, technology, resources and facilities.

Speaker 3: While the Macri 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. We believe this both well for accelerating growth in fiscal year 2024.

Speaker 3: Before I turn the caller 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.

Speaker 3: 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.

Speaker 2: With that, I'll turn it over to Gary to discuss the numbers. Gary. Thanks, Sanjay. Good morning, and thank you for joining us.

Speaker 2: As you saw on Table 5, contained in earnings press release this morning, we provided supplemental revenue and cost of revenue captions for our P&L as we transition our finance reporting to align with our business model and go to market strategy. This new P&L presentation is led by our term life and software and SaaS offerings.

Speaker 2: which are now approaching 50% of total revenue.

Speaker 2: 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.

Speaker 2: As a reminder, term-liten software is generally recognized as revenue at the time of the transaction.

Speaker 2: That's revenue, which is recognized radibly over time, has historically been included in services revenue, along with other offerings recognized over time like customer support and professional services.

Speaker 2: The supplemental financial tables in this morning's earnings press release on table 5 included two year look back on a quarterly basis to provide business trends using a new revenue and cost a revenue caption. Lastly, we are introducing a new quarterly earnings presentation.

Speaker 2: That can be found on our Investor Relations website. Now let's discuss our financial results.

Speaker 2: We are pleased with our Q4 performance, feeding all of our guided metrics.

Speaker 2: Total revenue was $204 million, up 2% year-over-year on a constant currency basis.

Speaker 2: This includes software revenue of $90 million.

Speaker 4: Revenue from large software deals, which we define as transactions with greater than $100,000.

Speaker 4: represented 72% of software revenue in the quarter compared to 73% a year ago.

Speaker 4: which includes the software portion of term licenses and SAMHSA, increased 9% year-to-year to $95 million, and represented 46% of total revenue compared to 42% a year ago. Q4, customer support, with $77 million, compared to $85 million a year ago. Customer support includes software update, phone and web-based support for a 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.

Speaker 4: to our subscription offerings. A reconciliation from our current P&O revenue line items.

Speaker 4: To our new reporting, it contained on slides 23 to 26 in our new quarterly earnings presentation.

Speaker 4: Now, I'll discuss ARR. Total ARR in Q4 was $668 million.

Speaker 4: and increase the 15% year-over-year and 17% in constant currency.

Speaker 4: In Q4, total subscription error.

Speaker 4: including term-based licenses and SAS contracts grew 38% year-over-year to $477 million.

Speaker 4: 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.

Speaker 4: With subscription error approaching $500 million.

Speaker 4: This includes $101 million of SAS ARR, which doubled from fiscal year 22. These impressive subscription metrics provide confidence in our future growth opportunity.

Speaker 4: From a customer perspective, our LAN and expand strategy is working, as we added over 600 new subscription customers during fiscal Q4.

Speaker 4: We drove strong net dollar retention numbers of 107% for term-based software licenses and 125% for SAS. From a metallic SAS offerings or a primary driver of customer expansion.

Speaker 4: Approximately 40% of metallic customers use a convolt software solution and 30% of metallic customers have multiple staff offerings. While M365 and our air gap storage offerings remain the most popular use cases, we're also seeing broader adoption of our other offerings.

Speaker 4: We ended the quarter with a global headcount of approximately 2,800 employees, down 5% over the past two quarters. We are managing our people, facilities, and third party expenses by focusing investment on our most critical priorities. We will continue to evaluate our resource base against the market demand environment. Non-Gap EBIT for Q4 was $45 million. In non-Gap EBIT margins were 22.3%. Well ahead of our guidance and the strongest EBIT foreign results of the fiscal year.

Speaker 4: during by operating spent discipline and strategic prioritization of resources. Now I'll discuss full year fiscal 23 results.

Speaker 4: discipline and strategic prioritization of resources. Now I'll discuss full-year fiscal 23 results. On a constant currency basis.

Speaker 4: Sulfur Revenue was $355 million, up 4% and total revenue of $785 million increased 6%.

Speaker 4: Under our new reporting structure

Speaker 4: Subscription revenue was $348 million, an increase of 30% year-to-year.

Speaker 4: Within that, term-likement software increased 15 percent and SAS revenue nearly tripled year over year.

Speaker 4: This is your 23 operating expenses. We're 62% of total revenue.

Speaker 4: compared to 64% in the prior year.

Speaker 4: We drove operating leverage primarily through sales and marketing, which finished at 38% of total revenue, aligned with our fiscal year 23 target.

Speaker 4: 4 year non-GAP EBIT was 160 million and non-GAP EBIT margins were 20.4%.

Speaker 4: This includes approximately 250 bases points of gross margin headwinds, primarily from our accelerating sass-run.

Speaker 4: Moving to some key balance sheet and cash flow metrics for the quarter. We enter the quarter with no debt and $288 million in cash. 105 million of this balance is in the United States.

Speaker 4: 3 cashflow with $67 million for Q4.

Speaker 4: and $167 million for the full year fiscal 23.

Speaker 4: As a reminder, our second half of the school year 23 cash flows were burdened by approximately $7 million of federal tax payments related to the TCJA capitalization R&D provisions.

Speaker 4: In Q4, we accelerated our stock repurchases.

Speaker 4: to approximately 1 million shares for $61 million, representing 91% of free cash flows.

Speaker 4: For the full fiscal year, we repurchased $151 million of our stock.

Speaker 4: representing 90% of free cash flows well ahead of our existing 75% target.

Speaker 4: Now, I would like to spend a few minutes to discuss how we are approaching the future.

Speaker 4: With our subscription software evolution nearly complete, we are focused on our next growth vector, scaling our Metallic SAS platform.

Speaker 4: while continuing to improve profitability, generate strong recast flow, and provide any active capital return.

Speaker 4: We are amplifying our discrete focus on our land and expand opportunities as we scale our growing subscription renewal base.

Speaker 4: Secondly, we plan to hire additional inside sales reps focused solely on the SAS Velocity Market as we refine our segmentation model.

Speaker 4: We expect that these go-to-market refinements should drive enhanced field sales productivity as we exit the fiscal year.

Speaker 4: We are also transitioning our finance reporting in guidance towards ARR and Free Cash Flow as primary KPIs of our underlying business momentum.

Speaker 4: also transitioning our finance reporting in guidance towards error and free cash flow as primary KPIs of our underlying business momentum. For fiscal QUI –

Speaker 4: We expect subscription revenue, which includes both the software portion of term-based licenses and SAF of $95 to $98 million.

Speaker 4: representing 10% year-over-year growth at the midpoint. We expect total revenue of $195 to $199 million.

Speaker 4: At these revenue levels, we expect Q1 consolidated margins to be 82.5% for gross margin and even margins of our approximately 20%.

Speaker 4: Our projected diluted share count for Q1 is 45 million shares.

Speaker 4: for the full year fiscal 24.

Speaker 4: We are expanding our guidance metrics to include ARR and free cash flow. We expect fiscal year 24 total ARR growth of 13% year over year.

Speaker 4: are faining our guided metrics to include ARR and pre-cash blocks. That's basically your 24 total ARR growth of 13% year-to-year driven by strong subscription ARR.

Speaker 4: which we expect to increase 27% year over year. As a reminder, subscription error includes term-based licenses and SAS.

Speaker 4: We expect subscription revenue to be in the range of 420 to 430 million dollars.

Speaker 4: growing 22% year-over-year at the mid-pole. At these levels, subscription revenue should cross over 50% of total revenue.

Speaker 4: which we expect to be in the range of 805 to $815 million.

Speaker 4: We also expect consolidated gross margins.

Speaker 4: We also expect consolidated gross margins of 82 to 83 percent.

Speaker 4: non-GAAP EBIT margin expansion of 50 to 100 basis points year over year, and free cash flow of $170 million.

Speaker 4: Our board recently approved a refresh of our stock repurchase authorization for up to $250 million of stock. That's pretty much it for today.

Speaker 4: 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 CUMBLE, including

Speaker 4: We are a technology leader in the critical data protection space.

Speaker 4: that remains an IT spending priority, even in an unsettled macro environment. We've enlarged and growing installed base of customers.

Speaker 4: A recurring revenue model underpinned by approximately $500 million of subscription error.

Speaker 4: We drive consistent profitability with room for margin expansion.

Speaker 4: We've a debt free balance sheet, a healthy cash flow, and a demonstrated history of capital returns

Speaker 4: I will now turn the call back to Sanjay for his closing remarks. Sanjay. Thank you. Thank you.

Speaker 3: Thank you, Gary. We continue to redefine data protection for our customers because it has never been more important for them. The law firm, Vasca Hostetler, recently published in its Data Security Incident Response Report, which includes data from 1160 security ransomware incidents that the firm handled in 2022.

Speaker 3: The findings showed that 40% of organizations hit with ransomware paid an average ransom of $600,000.

Speaker 3: But that percentage dropped to just 16% if the targeted organization was able to restore the systems.

Speaker 3: Data protection has never been more critical. We believe our strategy, roadmap, go-to-market motion, and increasing focus on ARR will showcase on the momentum in the year ahead.

Speaker 1: We look forward to updating you along the way. Now, we'll take your questions. Thank you. At this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.

Speaker 1: Our first question comes from Howard Ma of the Guggenheim Partners. Your line is now open.

Speaker 5: Great, thank you.

Speaker 5: 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 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...

Speaker 5: And maybe perhaps quantify the mix of pipeline that's dependent on large multi-year projects. And you know, since those will carry more uncertainty versus deals that are what I'll call more normal course of business such as expansions that's lever to just data growth and new logos that are not tied to large projects.

Speaker 3: For sure, that's 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 that.

Speaker 3: 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. ()

Speaker 3: 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 investment around our velocity business around.

Speaker 3: metallic, all are wheels in motion.

Speaker 3: These are things that are happening. So I think we've got you know, it's that has to it was a good learning year and we're we're Relearning of you know retraining our models to be more specific around that

Speaker 5: Okay, that's totally understandable and it's helpful color. I just have a quick follow up for 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.

Speaker 5: Can you double click into the drivers of subscription AR growth of 27% between metallic and subscription specifically? And if you could, any comments on your new business expectations around metallic and subscription would be helpful. And also the rate of decline for perpetual license that we should expect going forward.

Speaker 4: Thank you. Yeah, we're good morning and thanks thanks for joining us today.

Speaker 4: We're now highlighting that subscription, revenue and 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.

Speaker 4: they're looking for that flexibility of the best of software and the best of SaaS, especially related to their cloud journey. 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.

Speaker 4: relative to the 27%. We'll see greater momentum on that AR related to the palette. The palette is our fast-paced contributor to ARR. We nearly or we did double ARR year-to-year. We expect to continue on on that momentum, especially on the dollar value of the Mimphalic increase.

Speaker 4: So, metallics will play the majority of the increase combined with our new refined focus on that software land expand, expand motion.

Speaker 1: Okay, great. Thanks so much. Thank you. One moment, please, and I'll prepare the next question.

Speaker 1: Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open.

Speaker 6: 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, etc. So a couple questions if I can real quick. So first of all, I kind of want to go back to the macro environment, the current demand environment you're seeing.

Speaker 6: You know, can you talk about, you know, the pace of deal closures throughout the quarter, the linearity of the quarter, you know, were there any deals that you saw push out? Just trying to get a, you know, updated view, let's say relative to what it was three months ago as far as how you're seeing the demand environment shape up. Hey, Aaron, it's Gary. I'll take this one and thanks for joining us.

Speaker 4: reflected of it. Specifically related to your question about which change kind of quarter over 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 sequentially.

Speaker 4: So what it's showing us is stabilization has occurred. 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. We're pleased how the business stabilized. We're pleased how the business stabilized.

Speaker 4: And why we continue to see some push deals, is reflective in kind of what our guide and suggest and dealing with those timelines. But at this point, we haven't seen any sequential and we're actually fear we're in a good place as we move into fiscal Q1. For this video I'm???zi, I, I

Speaker 6: Yep, that's great detail. The second question is that, I know it's been a couple years, you guys gave a longer-term model framework a couple years ago. What I'm particularly interested in is how you're thinking about, I know you talked about 50 to 100 basis points operating margin expansion this year.

Speaker 6: I think back a couple years ago, you talked about kind of driving towards a mid 20%. I want to say with EBITDA or EBIT number. 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 20 is still achievable or could we see even something more than that over time? Aaron, good question.

Speaker 4: 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 24. But to give you a little perspective and maybe to set a baseline, we finished FY 23 at about 20.5%.

Speaker 4: on even margin and that includes absorbing about 300 basis points 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.

Speaker 4: We're at the OPEX percent of revenue targets that we laid out. 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.

Speaker 4: So, for FY24, I'm confident that we can deliver that 50 to 100 basis points EBITS 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 explosions on gross margin. So we're getting the lift slowly on metallic margins.

Speaker 4: 70% in Gallic margin 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.

Speaker 6: We obviously want to continue to grow ARR in that mid-double digit growth. We have that demonstrated history of doing that. We think we can continue to grow, and we're confident in our ability to keep delivering that mid-team double digit ARR growth. And getting to that mid 20% EBIT margin should also be within our sights as we kind of scale the business year over year. Yeah, 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 effect 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 see the floor. Yes, absolutely. So we're in a couple of metrics that we also introduced this quarter.

Speaker 4: which kind of show the strength of this land expand renew motion. One is the net dollar retention for subscription, which was 107%. But the other number that we're very pleased with is the metallic net dollar retention of 125%, which really shows that strong renewal motion.

Speaker 4: Now, I think as most of our shareholders and analysts are aware, we have a growing renewal base on the subscription, the term-based, term-based, license model. And at this point, that's part of our normal business motion. Thank you.

Speaker 4: We expect it to be greater in fiscal 24 versus fiscal 23. That will give us some good tailwinds and some predictability in our model.

Speaker 4: Historically, the average term of those deals is between two to three years. Historically, it rounded up to three years. In the current environment, we see some term length compression.

Speaker 4: which impacts maybe in period P&L, Erin, but overall for ARR, there's no impact and it actually helps us deliver a stronger velocity. So our average term length is probably closer to two years now than three years, and we're focused on scaling that. So it will give us some good predictability into FY24.

Speaker 4: And it helps us with the confidence we have in our guidance. Thank you very much. Thank you. One moment as I appear the next question.

Speaker 4: Jim Fish from Piper Sandler. The floor is now yours. Hey, guys. Thanks for the questions. Working a little bit off of Erin's here. She's from Duke MEman, East

Speaker 5: 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 we're...

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 six months.

Hey, David Garrett. 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 repeatable sales motion on the software. Relative to what we had a couple years ago when it was primarily perpetual and we were starting empty every year. 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 the renewal and it goes to the expansion motion.

which this year is a key focus on that expansion motion, how does that run all based?

The beauty of, as everybody knows on staff, is the rateable recognition. So now that metallic revenue and it was disclosed in our presentation, right, was about $70 million for the year, right? It's about 10% of revenue, which is rateable perspective, which gives us not only visibility to business, but it gives us much more predictability and forecast our revenue amounts. So when we combine the subscription and the staff together and their individual attributes.

It gives us that visibility that as a company, we really never had before. And that's a good segue, Gary, into my next question. We appreciate the breakouts that you're giving today, especially term versus metallic, be it revenue, net retention rate. How should we think about what metrics that you gave out today?

it's really not comparable because the base last year was so small, right? We were just starting out in basically year two of the business. Therefore, now that we're in year three, we actually have a base that's meaningful and we have expansion opportunity that's meaningful. Even within that net dollar retention of 125, which is really strong, it even excludes the 40 percent of our new and metallic customers that are also software customers, which is even in a whole another expansion opportunity that we have. So with this growing install base where 50 percent of our customers are now subscription SaaS or a combination of both, it really allows us to drive that renew 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 change as 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 get on a quarterly basis.

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

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. I love the disclosure, these products are new and I'm just wondering.

Maybe any color in terms of use cases, what's driving expansion, is this consumption based? Let's do both, right? So, what's driving the metallic NDR expansion so we understand what that kind of looks like in fiscal 24 and 25 and

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. Let me take a stab at it, Sanjay. I'll give you the-

some of the broad flows of how I see the expansion and the portfolio mapping to that expansion. You know, let's think metallic. Metallic.

being one platform and being integrated into our software as well. Customers use our MRR, our metallic recoveries, our air gapped capabilities from the software using metallic. And so you bring the two things together. That's a classic expansion, okay? Where they want another copy of their data off premise.

You've got customers who start with Office 365 and quickly realize 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 is our ability to really take the software platform and the SaaS platform.

in the power of one platform to be able to give out customers that seamless extensibility. And we're seeing that in not only the number of services, more than one service that a 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. 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 disaster recovery capabilities into our technology. Our software customers can develop that but just literally with snap-ins into the into that core platform.

you know, the portfolio strategy we've taken for the last couple of years of 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, you know, it's not like the on-premise is going to go away. As they're in transition between their on-premise world and the public cloud world, i.e. the hybrid world.

They're gonna want both sides, and they're gonna 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. That's very helpful, Sanjay. Is there any, just to follow up there quickly in terms of breaking out capacity expansions and new services, is that too granular, or just some sort of subjective understanding about...

You know, that 107 or 125, how much is capacity and how much is new services? I'll jump in. 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 you maybe frame is...

opportunity to accelerate. And as I mentioned, that 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 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 allocustomer metrics. 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 a cadre of things to sell to them. Just those last follow-up and I'll see the floor about Gross Margin.

the typical SaaS gross margin directory that other companies have gone through now that we're in year three, we're actually made really significant improvements that you'll 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 years. And we'll get that incremental margin expansion on Metallic as we scale it. We're solely focused on infrastructure efficiency. 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 have

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 at that 300 basis points all kind of our old business model format and we can now work back towards it. very awesome. Thank incredibly for the question. Thanks.

Very helpful. Congratulations, guys. Thank you. Thank you.

And again, as a reminder, if you'd like to ask a question, please press star 1 1 on your telephone. One moment as I prepare the next question.

Welcome, Eric Martinuzzi from Lake Street Capital Markets. The floor is yours. Yeah, you talked about growth initiatives for FY24. We've dived into the land and expand, but I wanted to explore the...

the hiring on the inside sales reps because it sounds like you're pretty comfortable with where your head count is, the 2800 employees that you finished out the year with. Do we expect that to go up in FY24 or is it going to be kind of shifting head count around to maybe lower cost areas while growing inside sales reps?

Eric, it's Gary. I can handle that one. I talked a little bit about some of the refinements that we're making. And specifically related to the ISR 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 a velocity motion where we can see time to close, right, just be one quarter instead of multi-quarters, it's a huge opportunity that will have quite a nice payback. Tied to that, you heard us talking about more discrete focus.

on our land and expand business. Generally what that means is, yeah, 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 can continue to drive productivity metrics in sales and marketing, but also other parts of the business businesses as well. And all of that is reflective in the guidance that we gave, especially with our top line relative to the EBIT margin improvement we expect.

As I said, we brought our headscarf down 5% in the second half. And as we continue to grow revenue at a pace faster than all back, that means our headcount right is in a relatively good place.

There was a source of the services app performance in Q4. It seemed like there was a jump in the nonrecurring there. Was that tied to any special projects, professional services? Yes, I will hit this one again.

drive cost efficiencies in their structure, leveraging our professional professional services. So it was more just to some good project completion and professional services.

in their infrastructure, leveraging our professional services. So it was more just to some good project completion and professional services. Thanks for taking my questions.

Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open.

Yeah, thanks. Thanks for taking a quick follow-up. You know, we talked a lot about the growth and subscription and the recurring revenue contributions. I'm just curious as we look at the revenue for the full year, the guidance that you've given, you know, how do we think about, I guess, the two 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? That may be stabilizing at some certain level.

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 three 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, you know, that's been declining about $25 million a year. We probably have about another year of that.

And I kind of think I need to get out to like a 40 to $50 million run rate over time. It's probably where it kind of this maybe long term as we still have an install base that that still buys on that way, but you'll see continued downward movement in that revenue item in FY24. Again, probably a similar level FY20.

of FY23. The customer support line, which includes both our customer support for both subscription and for perpetual, and I think as well for FY24, you'll see similar trends. You'll see similar trends in that line as well related similar to FY23.

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 tasks, right? We're about half now, and I think as you roll that out another year, we'll start to get to a more steady state over time.

Perpetual is still roughly 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. 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 million on an annual basis.

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.

Thank you, Harry. Appreciate it. Hello.

Thank you, Eric. Appreciate it. Hello. Thank you for your questions.

For your reference, we will be posting an updated version of the earnings presentation inclusive of the Q1 and fiscal year 24 guidance shortly after the conclusion of the call. Thank you for joining. We look forward to following up with you. Thank you for your participation.

Goodbye!