Q2 2024 Commvault Systems Inc Earnings Call
Good morning, My name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the Commvault.
Speaker 1: Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Commvault
Speaker 1: Second quarter fiscal year 2024 earnings conference call.
Second quarter of fiscal year 'twenty 'twenty four earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you would like.
Speaker 1: All lines have been placed on mute to prevent any background noise.
Speaker 1: After the speaker's remarks, we will have a question and answer session. If you would like to ask a question during that time, simply press star, followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one.
Or withdraw your question again press Star one. Thank you I will now turn the conference over to Michael Melnyk head of Investor Relations you may begin.
Speaker 1: Thank you. I will now turn the conference over to Michael Melnick, head of investor relations. You may begin.
Good morning, and welcome to our earnings Conference call on Michael Melnyk head of Investor Relations and I'm joined by Sanjay Mirchandani, Commvault, CEO and Gary Merrill Commvault, CFO and earnings presentation with key financial and operating metrics posted on the Investor Relations.
Speaker 2: Good morning and welcome to our earnings conference call. I'm Michael Melnik, head of Investor Relations, and I'm joined by Sanjay and Richandani, come both T.E.L. and Gary Merrill, come both C.F.
Speaker 2: An earnings presentation with key financial and operating metrics is posted on the investor relations website for that.
Website for reference.
Speaker 2: Statements made on today's call will include forward-looking statements about Commvault, future expectations, plans, and processes.
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.
Speaker 2: All such forward-looking statements are subject to risk, uncertainties, and assumptions.
Certain fees and assumptions please refer to the cautionary language in today's earnings release Commvault. Most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results could be materially different from those contemplated in the forward looking statements.
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 discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in the forward-looking statement.
Speaker 2: Combolt does not assume any obligation to update these states.
<unk> does not assume any obligation to update these statements.
Speaker 2: During this call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between the non-GAAP and GAAP measures can be found on our website. Thank you again for joining us. Now I'll turn it over to Sanjay for his opening remarks. Sanjay?
During this call Commvault 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.
Thank you again for joining US now I'll turn it over to Sanjay for his opening remarks Sanjay.
Speaker 3: Thank you Mike. Good morning everyone and thanks for joining us today. I am pleased to report our two two results, exceeded expectations and we improved across our most important KPIs.
Thank you Mike Good morning, everyone and thanks for joining us today I am pleased to report our Q2 results exceeded expectations and we improved across our most important kpis.
Total error the primary metric, we use to measure underlying growth accelerated to 18% year over year to $711 million.
Speaker 3: Total ARR, the primary metric we use to measure underlying growth, accelerated 15% year-over-year to 711 million.
Speaker 3: Subscription ARR grew 32% year over year to 530 million and is now nearly 75% of total ARR.
Subscription <unk> grew 32% year over year to $530 million and is now nearly 75% of total <unk>.
SaaS momentum accelerated with metallic IRR up 77% year over year to 131 million.
Speaker 3: fast momentum accelerated with metallic ARR up 77% Euro-Vleur to 131.
Okay.
Speaker 3: Metallic fast net dollar retention rebounded to an impressive 130
Metallics SaaS net dollar retention rebounded to an impressive 130%.
Speaker 3: And we delivered improved profitability while continuing to return cash to shareholders through share repurchase.
We delivered improved profitability, while continuing to return cash to shareholders through share repurchases.
Speaker 3: Beyond these impressive financial results, we also received numerous industry accolades, including
Beyond these impressive financial results. We also received numerous industry accolades, including.
Speaker 3: being named the leader for the 12th consecutive time in the 2023 Gartner Magic Quadrant.
Being named a leader for the 12th consecutive time in the 2023 Gartner Magic quadrant.
Being named a leader for the 12th consecutive time in the 2023 Gartner Magic quadrant.
Speaker 3: We also ranked highest in six of seven categories in Gartner's latest critical capabilities for enterprise backup and recovery software solutions report. And once again, gig on home.
We also ranked highest in fixed up seven categories in Gardner's latest critical capabilities for enterprise backup and recovery software solutions report.
Once again <unk> named US a leader.
Speaker 3: and an out performer in its most recent giga-ohm radar for hybrid cloud data protection for large enterprises.
And an outperformer in its most recent giga <unk> radar for hybrid cloud data protection for large enterprises.
Extremely proud of this recognition.
Speaker 3: We laid the focus on being a trusted partner to our customers by protecting their data from the stirs of cyber threats.
Laser focus on being a trusted partner to our customers by protecting their data from the scourge of cyber threats.
Speaker 3: Significantly reducing ramp at hyper-trust complexity and infusing AI-enabled automation to tackle new and evolving data protection and security challenges.
Significantly reducing ramp in hybrid cloud complexity, and infusing AI enabled automation to tackle new and evolving data protection and security challenges.
Speaker 3: and we're just getting started. Next week at our Compault Shift Customer and Parker event, we will highlight how we are shifting from data protection to leading the charge in cyber resistance.
We're just getting started next week at our Commvault ship customer and partner event. We will highlight how we are shifting from data protection to leading the charge and cyber resilience.
We're going to introduce a radically new approach that empowers customers to stand up to today's nonstop and escalating cyber threats.
Speaker 3: We're going to introduce a radically new approach that empowers customers to stand up to today's nonstop and escalating cyber threats.
Speaker 3: We're bringing together what we're known for, best-in-class data protection, and combining it with exceptional data security, recovery, and AI-driven data intelligence.
Together, we've been known for best in class data protection and combining it with exceptional data security recovery in AI driven data intelligence.
Speaker 3: Cyber-resilience like this has never been possible until now.
Cyber resilience like this has never been possible until now.
Speaker 3: The time has never been better. The coins were recent IDC study, most enterprises expected imminent attack. 61% of respondents believe that data laws in the next 12 months is likely to occur due to an increasingly sophisticated attack. It's clear, a new standard in cyber resilience is required, and that's what we're going to do.
The time has never been better according to a recent IDC study most enterprises expected imminent attack.
61% of respondents believe the data loss in the next 12 months is likely.
So look our do it with increasingly sophisticated attack.
A new standard in cyber resilience is required.
That's what we're going to deliver.
Commvault has always prided itself on delivering the best technology that customers need at the right time case in point.
Speaker 3: Compult is over-sprited itself on delivering the best technology that customers need at the right time. In case you're...
Four years ago, we challenged ourselves to address an emerging need in the market.
Speaker 3: Four years ago, we challenged ourselves to address an emerging need in the market, enterprise-grade cloud-native data protection as a service. We made some bold decisions.
Enterprise grade cloud native data protection as it serves.
We made some bold moves disrupted from within.
Speaker 3: and took a new modern approach to launch Metallic, our industry-leading, hyper-growth SaaS platform.
And took a new modern approach launch metallic our industry, leading hyper growth SaaS platform.
We vastly simplified how we secure and defend data for any workload, regardless of where it lives and in the process, we revolutionize data protection or the strips.
Speaker 3: We vastly simplified how we secure and defend data for any workload regardless of where it lives and in the process. We revolutionize data protection as a service.
Speaker 3: Since then, we've gained over 4,000 customers and surpassed 130 million in ARR.
Since then we've gained over 4000 customers and surpassed the $130 million.
And just last week Commvault was named the leading vendor in Giga <unk> cloud based data protection sonar report.
Speaker 3: And just last week, ComBalpus named the Leading vendor in GigaOms, Cloud-based data protection zone hour.
The authors noted quote metallics protects a very broad range of cloud workloads that will be tedious to fully enumerate end quote.
Speaker 3: The authors noted, quote, metallic protection, very broad range of cloud workloads that will be tedious to fully enumerate and quote.
Speaker 3: Building on the overwhelming success of our platform, we're now taking the opportunity to apply everything we've learned in data protection and combining it with powerful new innovations in data security, AI, and recovery to deliver the most advanced cyber resilience platform in the industry.
Building on the overwhelming success of our platform. We're now taking the opportunity to apply everything we've learned in data protection and combining it with powerful new innovations and data security AI and recovery to deliver the most advanced cyber resilience platform in the industry.
Speaker 3: Next week at SHIFT, we will unveil this to the world along with some exciting new ecosystem partnerships that will enable us to transcend the categories.
Next week at shift we will unveil this to the world along with some exciting new ecosystem partnerships that will enable us to transcend the category.
Speaker 3: Today's problems cannot be solved with yesterday's approach. It's time to shift how we think about resilience. We hope that you can tune into this exciting event. Now, I'll turn it over to Gary to discuss numbers. Gary?
Today's problems cannot be solved with yesterday's approach, it's time to shift how we think about resilience. We hope that you can tune into this exciting event now I'll turn it over to Gary to discuss the numbers.
Hi.
Thanks, Sanjay and good morning, everyone.
Speaker 4: I include the report that are strong revenue and earnings outperformance in Q2, which is driven by acceleration across our key KPIs during the course.
I am pleased to report that our strong revenue and earnings outperformance in Q2.
It was driven by celebrating across our key kpis during the quarter.
Q2, total revenue with $201 million.
Speaker 4: Q2 total revenue was $201 million dollars, an increase of 7%.
An increase of 7% year over year.
Our total revenue growth was led by subscription revenue of $98 million.
Speaker 4: Our total revenue growth was led by subscription revenue of $98 million, an increase of 25%.
An increase of 25% year over year.
As a reminder.
Speaker 4: As a reminder, the description revenue includes both our terms software licenses and our SAP offering.
Revenue includes those are term software licenses and our SaaS offerings.
Speaker 4: We saw double-digit growth in terms of software licenses combined with an accelerating contribution of SAS revenue which was up over 80% year over year.
We saw double digit growth in term software licenses combined with an accelerating contribution of SaaS revenue, which was up over 80% year over year.
Speaker 4: The prescribing revenue is now approaching 50% of total revenue compared to 42% one year ago.
Subscription revenue is now approaching 50% of total revenue compared to 42% one year ago.
Speaker 4: Terms of our license growth was driven by strong performance in renewals and existing customer expansion during the quarter, with our subscription net dollar retention remaining within the historical range.
Total software license growth was driven by strong performance in renewals and existing customer expansion during the quarter with our subscription net dollar retention remaining within its historical range.
Speaker 4: Overall term software field volume increased year-over-year, driven by continued improvements in our velocity motion.
Overall term software deal volume increased year over year, driven by continued improvement in our philosophy motion.
Speaker 4: Cuting for petrol license revenues for $14 million.
Q2, perpetual license revenue of $14 million.
Speaker 4: As a reminder, our go-to-market motion is led by the description.
As a reminder, our go to market motion is led by subscription.
So perpetual license sale are generally sold in certain verticals and geographies.
Speaker 4: So perpetual license sales are generally sold in certain verticals and geographies.
At the current perpetual license revenue run rate.
Speaker 4: We believe that as we move to a reported total revenue growth from these perpetual actual flight and sales start to normalize as we exit the current fiscal year.
We believe the headwind to our reported total revenue growth from these perpetual license sales.
And normalized as we exit the current fiscal year.
Speaker 4: Q2, customer support revenue with $77 million.
Q2 customer support revenue was $77 million.
Speaker 4: would include support for both our term-based and perpetual software light images.
Which includes support for both our term based and perpetual software licenses.
Fiscal year 'twenty for customer support revenue has benefited from fewer conversions are perpetual support contracts to term software licenses compared with the prior year.
Speaker 4: Fiscal Year 24, customer support revenue, had benefited from fewer conversions of perpetual support contracts to term software licenses compared to prior year.
Speaker 4: Year to date, customer support revenue from perpetual licenses represents 55% of total customer support, with the balance coming from TermSaultWriteLicence.
Year to date.
<unk> revenue from perpetual licenses represent 55% of total customer support.
With the balance coming from term software licenses.
This compares to approximately 60% in fiscal year 'twenty three.
Speaker 4: This compares to approximately 60% in fiscal year 23 and 70% in fiscal year 23.
And 70% in fiscal year 2002.
Speaker 4: At this trajectory, we expect customer support revenue from per based software licenses to become the majority of our customer support revenue next fiscal year. Moving from revenue.
At this trajectory, we expect customer revenue from term based software licenses.
To become the majority of our customer support revenue next fiscal year.
Moving from revenue to <unk>.
Q2, AOR growth accelerated 18% year over year to $711 million.
Speaker 4: Q2 AR growth accelerated 18% year over year to $711 million.
Speaker 4: and subscription error, which includes term-based software arrangements and fast contracts grew 32% year-to-year to $530 million.
Subscription error, which.
Which includes term based software arrangements and the SaaS contracts grew 32% year over year to $530 million.
These growth metrics reflect the underlying strength of our business.
Speaker 4: These growth metrics reflect the underlying strength of our business when our revenue was presented on an annualized basis without the impact of subscription solver term-length compression.
Our revenue is presented on an annualized basis without the impact of subscription software term length compression.
Speaker 4: SAS ARR finished the quarter at $131 million, an increase of 77%.
SaaS IRR finished the quarter at $131 million.
An increase of 77% year over year.
We saw healthy growth in new customers.
Speaker 4: We saw healthy growth in new customers, as well as expansion within our existing customer base.
As well as expansion within our existing customer base.
Speaker 4: SAS net dollar retention rate for Q2 accelerated to 130% versus 118% we reported flash quarter. Now I'll just go up the.
SaaS net dollar retention rate for Q2 accelerated to 130%.
<unk> is 118% we reported last quarter.
Now I'll discuss expenses and profitability.
Fiscal Q2 gross margins were 82%.
Speaker 4: The school Q2 gross margins were 82% and reflect a 150 basis point year over year impact from our accelerating fast revenue, which carried a higher cost of sale than software.
And reflect a 150 basis point year over year impact from our accelerating SaaS revenue, which carried a higher cost of sale and software.
Speaker 4: The School Q2 operating expenses for $121 million of 2% year over year. Happy birthday.
Fiscal Q2 operating expenses were $121 million up 2% year over year.
As a percentage of total revenue.
Speaker 4: Operating expenses declined 310 basis points year over year to 60% of total revenue to rising even margin leverage as we manage our people, facilities, and third party expenses by focusing investment on our most critical priorities.
Operating expenses declined 310 basis points year over year to 60% of total revenue driving EBIT margin leverage as we manage our people facilities and third party expenses.
Continued investment on our most critical priorities.
We ended the quarter with a global head count of 2900 employees.
Speaker 4: We ended the quarter with a global headcount of 2009 Klingring employees.
Speaker 4: reflecting a 1% decline year over year.
Reflecting a 1% decline year over year.
Our current hedge account balance includes additional inside sales teams.
Speaker 4: Our current head-to-count balance includes additional inside cell teams, renewal and related customer success teams to support the customer journey and accelerating velocity sales moves.
<unk> and related customer success team to support.
The customer journey, and excel and our accelerating velocity sales motion.
Speaker 4: NONGAEBIT for Q2 increased 19% year-over-year to $42 million.
non-GAAP EBIT for Q2 increased 19% year over year to $42 million.
Speaker 4: In non-GAPEbit margins, we're 20.9 percent a 210 basis point improvement year over year.
And non-GAAP EBIT margin or 29%.
210 basis point improvement year over year.
The strong earnings and EBIT margin expansion was driven by continued operating expense discipline relative to our topline revenue.
Speaker 4: to strong earnings and even more than expansion with driven by continued operating expense disciplines relative to our top line revenue. Moving to
Moving to some key balance sheet and cash flow metrics.
We ended the quarter with no debt and $283 million in cash.
Speaker 4: We ended the quarter with no debt and $283 million in cash.
Speaker 4: of which $93 million within the United States.
Of which $93 million within the United States.
Our Q2 free cash flow was $40 million.
Speaker 4: Our Q2 free cash flow was $40 million, and our first half fiscal year 24 free cash flow was $78 million, up 10% year over year.
And our first half fiscal year 'twenty for free cash flow was $78 million up 10% year over year.
The biggest driver of free cash flow is SaaS deferred revenue.
Speaker 4: The biggest driver of free cash flow is staffed to third revenue and the strength of our software subscription rentals, which typically includes up from payments on multi-year contracts.
And the strength of our software subscription renewals.
Which typically include upfront payments on multiyear contracts.
In Q2, we repurchased an additional $31 million of stock under our repurchase program.
Speaker 4: In Q2, we repurchased an additional $31 million of stock under our repurchase program.
And at the halfway point of fiscal year 'twenty four we.
Speaker 4: And at the halfway point of fiscal year 24, we have repurchased $82 million of stock, representing 106% of our first half, three cash low.
We have repurchased $82 million of stock representing 106% of our first half free cash flow.
Speaker 4: Now I'll discuss our outlook for fiscal Q3 and the full fiscal year 24.
Now I'll discuss our outlook for fiscal Q3, and the full fiscal year 'twenty four.
Speaker 4: We continue to believe that ARR and free cash flow to be viewed as primary KPIs of our underlying business moment.
We continue to believe that IRR and free cash flow should be viewed as primary kpis of our underlying business momentum.
All of our follow on guidance metrics are based on current foreign currency exchange rates.
Speaker 4: All of our following guidance metrics are based on current foreign currency exchange rates.
For fiscal Q3, we expect.
Speaker 4: subscription revenue, which includes both the software portion of turn-based licenses and SAS to be $106 to $110 million.
Subscription revenue, which includes both the software portion of term based licenses and SaaS TB.
<unk> $106 million to $110 million.
Speaker 4: This represents 24% year-over-year growth at the midpoint.
This represents 24% year over year growth at the midpoint.
We expect total revenue to be $250 million to $210 million with year over year growth of 7% at the midpoint.
Speaker 4: We expect total revenue to be $206 to $210 million with year-over-year growth of 7% at the midpoint.
Speaker 4: At these revenue levels, we expect Q3 consolidated gross margins to be approximately 82.5% and EBIT margins of approximately 21%.
At these revenue levels, we expect Q3 consolidated gross margin to be approximately 82, 5% and EBIT margin of approximately 21%.
As I mentioned on our last earnings call when you're executing some foundational go to market changes we can.
Speaker 4: As I mentioned on our last earnings call, we are executing some foundational go-to-market changes.
Speaker 4: which includes amplifying or discrete focus on our land expand opportunities while also scaling our motion to secure our growing subscription renewal base.
Concludes amplifying our discrete focus on our land expand opportunity while also scaling our motion to secure growing subscription renewal base.
Speaker 4: We will continue to hire field resources and additional inside sales reps focused solely on the SAS Velocity Market as we refine our segmentation model.
We will continue to hire field resources and additional inside sales reps focused solely on the SaaS velocity market as we refined our segmentation model.
These continuing investments are reflected in our margin guidance.
Speaker 4: these continuing investments are reflected in our margin guys.
Our projected diluted share count for fiscal Q3, and 44 7 million shares.
Speaker 4: Our projected diluted share count for fiscal Q3 is 44.7 million shares.
Speaker 4: Now, I would like to give an updated outlook on the full fiscal year 24, which includes raising both our total revenue and total ARR expectations for the full year.
Now I would like to give you an updated outlook on the full fiscal year 'twenty four.
Which includes raising both our total revenue and total IRR expectations for the full year.
Speaker 4: we expect fiscal year 24 total ARR growth of 14% year-over-year, which reflects a 100-basis point increase over our prior guidance.
We expect fiscal year 'twenty, four total AOR growth up 14% year over year.
Which reflects a 100 basis point increase over our prior guidance.
We now expect subscription IRR, which includes term based licenses and fast to increased 24% year over year.
Speaker 4: We now expect subscription ARR, which includes term-based licenses and FAS, to increase 24% year-over-year.
From a revenue perspective.
We now expect subscription revenue to be in the range of $408 million to $418 million.
Speaker 4: We now expect subscription revenue to be in the range of $408 to $418 million.
Speaker 4: growing 19% year-over-year at the midpoint.
Growing 19% year over year at the midpoint.
At these levels subscription.
Speaker 4: Subscription revenue will exceed over 50% of our total revenue.
Revenue will exceed over 50% of our total revenues.
Our updated guidance reflects a mix shift from subscription revenue.
Speaker 4: Our updated guidance, reflecting Nick's gift from subscription revenue, due to a lower number of conversions from perpetual support contracts, the term software compared to the prior year.
A lower number of conversions from perpetual support contracts.
Term software compared to the prior year.
Speaker 4: as well as continued measured spending for large multi-year transactions in a relative high interest rate environment.
As well as continued measured spending for large multi year transactions in a relative high interest rate environment.
Speaker 4: As a result, we expect total revenue to be in the range of $812 to $822 million.
As a result, we expect total revenue to be in the range of $812 million to $822 million.
This is an increase compared to our prior total revenue range of $805 million to $815 million.
Speaker 4: This is an increase compared to our prior total revenue range of $805 to $815 million.
Speaker 4: Our improved fiscal year 24 total revenue outlook reflects strong overall activity, the ongoing momentum in our staff velocity business, and the seasonally stronger trends that we historically see in the second half of the fiscal year.
Our improved fiscal year 'twenty for total revenue outlook reflects strong renewal activity.
Ongoing momentum in our SaaS velocity business and the seasonally stronger trends that we historically see in the second half of the fiscal year.
Moving to full year fiscal 'twenty, four margin EBIT and cash flow outlook.
Speaker 4: Moving to full year fiscal 24 margin EBIT in cash flow outlaw.
We continue to expect consolidated gross margins of 82% to 83%.
Speaker 4: we continue to expect consolidated gross margins of 82% to 83%.
Speaker 4: and non-gap even more expansion of 50 to 100 basis points year over year.
non-GAAP EBIT margin expansion of 50 to 100 basis points year over year.
Speaker 4: We are also maintaining our expected full year free cash flows of $170 million.
We are also maintaining our expected full year free cash flows of $170 million.
As of September 30, we had $174 million 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: As of September 30th, we had $174 million remaining on our existing share repurchase authorization.
Speaker 4: And we expect to continue with our existing practice of repurchasing at least 75% of our annual free cash flows.
Speaker 4: We view share repurchases as a primary use of excess cash.
We view share repurchases as a primary use of excess cash.
Speaker 4: You today, we are pacing well ahead of our annual share repurchase target. And we intend to continue the share repurchase momentum during the current quarter.
Year to date, we are pacing well ahead of our annual share repurchase target and we intend to continue the share repurchase momentum during the current quarter.
Speaker 4: for additional details and trends on all of our key messages.
For additional details and trends on all of our key metrics. Please take time to review our investor deck contained in the Investor Relations section of our website.
Speaker 4: Please take time to review our Investor Deck, contained in the Investor Relations section of our website.
Speaker 4: including we've built a durable and multi-faceted revenue model that should allow us to exceed ARR total revenue and earnings objectives over the long term.
In closing.
We have built a durable and multifaceted revenue model that should allow us to exceed our total revenue and earnings objectives over the long term.
We are excited about the future and we look forward to hosting many of you at our <unk> event in New York City next week.
Speaker 4: We are excited about the future and we look forward to hosting many of you at our shift event in New York City next week.
Operator, you can now open the line for questions.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Speaker 1: As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
Speaker 1: The first question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead.
Your first question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead.
Speaker 5: Yeah, thanks for taking the questions. Congratulations on the execution in the quarter. I guess my question is, help me understand a little bit more. It looks like clearly your ARR updated guidance is a little bit lower than your prior guide, 24%, on the subscription side, I should say, relative to 27, and then obviously revenue a little bit lower at the midpoint. Can you just – I know you made some comments in your prepared remarks, but could you unpack that change in the guidance a little bit further? Hey, Ernie.
Yes, thanks for taking the questions congratulations on the execution in the quarter.
I guess my question is I, just help me understand a little bit more it looks like clearly your IRR.
Updated guidance is a little bit lower than your prior guide 24% on the subscription side I should say relative to 2007, and then obviously revenue a little bit lower at the midpoint can you just.
I know you've made some comments in your prepared remarks, but could you unpack that change in the guidance a little bit further.
Hey, Aaron it's Gary.
Speaker 5: and I think specifically I think you're asking about Q3, the Q3 outlook or the full year outlook first. Let me just clarify. I'm talking more full year. The 24% versus prior 27 and 408 to 418 versus prior 420 to 430.
Good to talk to you. This morning, and I think specifically I think youre asking about Q.
Q3, Q3 outlook for the full year outlook first let me just clarify.
Yes, Im talking more for a full year of the 24% versus prior 27 and.
400 to 418 versus the prior $4 20 to $4 30.
Speaker 4: Yep, got it. Okay, awesome. Well, first of all, let me just reflect a little bit on the first half. We're really pleased with the first half, especially where we ended up at this school queue too on all of our guided metrics, making sure we accelerated past everything.
Got it okay.
First of all let me just reflect a little bit on the first half we're really pleased with the first half, especially where we ended up at fiscal Q2 on all of our guided metrics, making sure we accelerated path everything.
Speaker 4: From a full year perspective, it's kind of, I thought about the second half in particular, coming off of the first task.
Full year perspective, Thats kind of I thought about the second half in particular coming off of the first half.
Speaker 4: I'm also pleased that we did raise our air guidance previously we were guiding to 13.
I'm also pleased that we did raise our guidance previously we were guiding to 13 being freed up that to 2014 as well as our total revenue.
Speaker 4: I've increased that to 14, as well as our total revenue, also increasing our guidance on total revenue. A lot of that is reflective of a lot of the success even we're seeing on the SaaS business as well, right? When we drive that success, that SaaS success, and we're able to hit 131 million of ARR, a lot of that does not show up in reported revenue or reported revenue expectations.
So increasing our guidance on total revenue a lot of that is reflective of a lot of the success, even we're seeing on the SaaS business as well right when we drive that success.
Our success in.
And we're able to pay $131 million of there are a lot of that does not show up in reported revenue our reported revenue expectations.
Speaker 4: But as I think about the subscription revenue specifically, I think directly at your question, there's a couple of things that are going on there. We are seeing fewer conversions. So conversions from our existing perpetual support contracts being converted to term software licenses.
But as I think about the subscription revenues, specifically I think directly at your question. There is a couple of things that are going on there. We are seeing fewer conversions, so conversions from our existing perpetual support contracts being converted to term software licenses in today's.
Speaker 4: In today's interest rate environment, those conversions usually come with a multi-year commitment, doing a three-year commitment, and some of the interest rate factors and the cost of money, as well as where customers are in their cloud journey at the same time. So we're seeing just some declines year-over-year, modestly, on these conversions.
Interest rate environment, those conversions, usually come with a multiyear commitment.
Doing it three year commitment and some of the interest rate factors in the cost of money as well as where customers are in their cloud journey at the same time. So we're seeing just some declines year over year modestly on the on the conversion piece.
Speaker 6: as well as the continued trends on terms of scripting length. So when we fell terms of scriptions, our average term is now down to about two years.
As well as the continued trends on subscription length. So when we sell term subscriptions. Our average term is now down to about two years. So why that keeps IRR hole and we see the momentum on IRR. It can have a little bit of a short term impact on the reported revenue results and then thirdly just.
Speaker 6: So a lot of that keeps ARR whole and we see the momentum on ARR. It can have a little bit of a short term impact on the reported revenue result.
Speaker 6: And then thirdly, just keeping in mind that we're watching the mega deal, the real big deal trends in the spending environment and being cautious on the procurement and approval cycles that are out there.
Keeping in mind that we are watching the mega deal the real big deal trends in this spending environment and being cautious on the Victoria and approval cycles that are out there today.
Speaker 5: Yep, that's very helpful. I appreciate that color. So, you know, maybe just the final question, you know, sticking with that topic, you know, how would you characterize the linearity in this quarter? The demand? Have you seen any customers, you know, push out, you know, projects or delay, you know, spending in this environment at this point? Or is it just more, you know, cautionary on the macro, the geopolitical environment as more so we look forward?
Yes, that's fair.
Very helpful. I appreciate that color. So maybe just the final question sticking with that topic, how would you characterize the linearity in this quarter. The demand have you seen any custom.
Customers push out projects are delayed.
Spending in this environment at this point or is it just more.
<unk> on the macro the geopolitical environment is more so we look forward.
More cautionary we did not see trends that deteriorated or trends that we're seeing the business on close rates and linearity are consistent what we've seen over the over the past few quarters, but relative to the geopolitical nature of what's going on and just being cautionary on the time it takes to close some of those royalty deals.
Speaker 6: More cautionary, we did not see trend that deteriorated. Our trend that we're seeing the business on close rates and linearity are consistent what we've seen over the past few quarters, but relative to the geopolitical nature of what's going on and just being cautionary on the time it takes to close some of those real big deals.
Yes, Thank you Greg.
Your next question comes from the line of Howard MA from Guggenheim Securities. Please go ahead.
Speaker 1: Your next question comes from the line of Howard Ma from Google Himes Security. Please go ahead.
Great. Thank you for taking the question.
Speaker 6: So, I also want to better understand the lower subscription AR and revenue guidance, because that seems to be the only negative in an otherwise stellar print.
I also want to better understand the lower subscription.
Revenue guidance, because that seems to be the only negative in an otherwise stellar print.
Speaker 6: So I understand the change in the lowered migrations from from perpetual maintenance and subscription. But I didn't think the impact was that big. Can you comment, I guess for Gary, can you comment, are there any other factors such as, did you, were there any deal pull forwards in Q2? Are you in the back half? Are you expecting any?
So I understand the change in the lowered migrations from from perpetual maintenance and subscription I didn't think the impact of that big or can you comment I guess for Gary can you comment are there any other factors such as.
Were there any deal pull forwards in Q2.
In the back half are you expecting any any renewal push outs because I believe this year, it's a pretty back end weighted.
Speaker 6: any renewal pushouts because I believe this year is a pretty back-end weighted or second half weighted, rather, renewal year. And then just given the metallic strength too, wouldn't continued strength in metallic, at least on the ARR side, I understand it takes time for ARR to translate over to revenue, but wouldn't that offset some of the perpetual migrations?
Half weighted rather renewal year, and then just given the metallics ranked too.
Wouldn't continued strengthen metallic at least on the air on the <unk> side, I mean, I understand it takes time for AAR to translate over to revenue, but wouldn't that offset some of the.
The perpetual migrations.
Speaker 6: Thanks. Yes. Thanks, Howard. Maybe first quickly on the, on the, on the satellite. So the, the air are accelerated actually higher than we've seen in current periods, right? If you look at the air, our first app.
Yes.
Thanks, and thanks, Howard maybe quickly on the on this outside of the metallics.
<unk> accelerated actually higher than we've seen in current periods right. If you look at the <unk> SaaS.
Speaker 6: We went from 113 million to 131 million of ARR. That sequential increase we're seeing on the SAS side is accelerating faster than we'd actually seen over the past prior quarters. You can kind of see that as you trend out the SAS ARR and the acceleration there, coupled with Howard, the, what we saw on the net dollar retention rate of 130%. So really a good focus on driving that net dollar retention.
We went from 113 million to $131 million of IRR that sequential increase we're seeing all in the SaaS side is accelerating faster than we'd actually seen over the past prior quarters, you can kind of see that as he turned out the SaaS and the acceleration there coupled with Howard Dean.
What we saw on the net dollar retention rate of 130%. So really a good focus on driving that net dollar retention.
Speaker 6: When I look at the guidance on subscription, it's the biggest factor is fewer conversions. And how you can see that also is you'll see the strong overall performance on the customer's sport type.
When I look at the guidance on subscription.
It's the biggest factor is fewer conversions and how you can see that also is you'll see the strong over performance on the customer support side right. So if you look at the customer support revenue and you see the acceleration there, meaning deceleration relative to the prior expectations, that's where you can kind of see that's where you see the opposite.
Speaker 6: So if you look at the CUSSIS Sport Revenue, and you see the acceleration there, meaning the acceleration relative to the prior expectations, that's where you see the outfit. That's where you see the outfit on the positive side there. And it's just the beautiful version for doing about on pace for about half of what we did last.
Unknown Executive: Good morning, my name is Krista, and I'll be your conference operator today.
So thats, where you see the offset on the positive side, there and it's just the conversion for Dana about pay for about half of what we did last year.
Unknown Executive: At this time, I would like to welcome everyone to the CommVault 2nd quarter fiscal year 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Speaker 6: is what I kind of see, just based on current pipeline metrics, we're on pace to do about half of the conversion that we did last year, which is just a transitional in the customer environment, as well as monitoring the term length of our deals. Right, so getting it down to about two years on now.
What I kind of see just based on current pipeline metrics were on patients about half of the conversions that we did last year, which is just a transitional in the customer environment as well as monetary and the term length of our guests right.
Unknown Executive: After the speaker's remarks, we will have a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you.
And that was about two years on average.
Speaker 7: Hey, Howard, Sanjay, we're just trying to be realistic given we're looking out for the whole year. It's just a mix shift. In my mind, there's nothing—we added, what, over 500 customers in the subscription mix.
Hey, Howard Sanjay. We're just we're just trying to be realistic given were looking out for the whole year.
Michael Melnyk: I will now turn the conference over to Michael Melnyk, Head of Investor Relations. You may begin. Good morning, and welcome to our earnings conference call. I'm Michael Melnyk, Head of Investor Relations, and I'm joined by Sanjay Mirchandani, CommVault CDL and Gary Merrill, CommVault CFO. An earnings presentation with key financial and operating metrics is posted on the Investor Relations website for reference. The statements made on today's call will include forward-looking statements about CommVault, future expectations, plans, and prospects.
If there is it's just a mix shift in my mind, there's nothing we added over 500 customers in the subscription mix.
Speaker 7: in Q2. Metallic is growing at a very healthy, it's reduced 77% year or year or year or year. So, you know, this isn't, don't read into this and anything, but we're just looking at the pipeline and being very pragmatic about what the mix shift might be.
You too.
Metallic is growing at a very healthy clip, we grew 77% year on year. So.
Don't read into this anything but we're just we're just looking at the pipeline.
Being very pragmatic about what the mix shift might be.
Speaker 7: And that's it. I mean, you know, business, we had, you know, we had a very great, good quarter and we've raised ARR for the year and we've raised revenue for the year. So it's in my mind, as straightforward as a mix shift inside of the customer buying patterns, whether it be interest rate or where they are in the cloud migration journey.
And that's it.
Michael Melnyk: All such forward-looking statements are subject to risk uncertainties and assumptions. Please refer to the cautionary language in today's earnings release and CommVault's most recent periodic reports filed with the SEC for discussion of the risk uncertainties that could cause the company's actual results to be materially different from 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-GAP basis. A reconciliation between the non-GAP and GAT measures can be found on our website. Thank you again for joining us.
We had we had a very good quarter and we have raised for.
For the year and we've raised revenue for the year. So.
In my mind.
As straightforward as a mix shift inside of the customer buying patterns, whether it be interest rate or.
Where they are in the cloud migration journey.
Speaker 6: Oh, thank you, Sanjay and Gary, and I do want to hone, as a follow up, I do want to hone
Thank you Sanjay and Gary and I.
I do want to hold on as a follow up I just want to hone in on our metallic as you guys mentioned.
Speaker 6: because as you guys mentioned, you know, he was a really strong quarter from metallic and our cell rating to 130%, which is up from, I believe, 118 a quarter ago and then 125 is a quarter prior.
Really strong quarter for metallic and our accelerating to 130%, which is up from I believe $1 18, a quarter ago and $125 at the quarter prior.
Speaker 6: Can you just remind us what is the rank order of drivers of growth for metallic between workload expansion and cross-cell of additional metallic products? And then on the growth rate, again, very strong, but it has been pretty variable. Is it, should we expect this kind of variability going?
Can you just remind us what is the rank order of drivers.
Sanjay Mirchandani: Now I'll turn it over to Sanjay for his opening remarks. Sanjay? Thank you, Mike.
For metallic between workload expansion and cross sell of additional metallic products in and then on the growth rate again, very strong, but it hasnt pretty variable is it.
Sanjay Mirchandani: Good morning, everyone, and thanks for joining us today. I am pleased to report a few two results, exceeded expectations, and we improved across our most important KPIs. Total ARR, the primary metric we used to measure underlying growth, accelerated 18% year-over-year to 711 million. Subscription ARR grew 32% year-over-year to 530 million, and is now nearly 75% of total ARR. SAS momentum accelerated with Metallic ARR up 77% year-over-year to 131 million. Metallic SAS net-dollar retention rebounded to an impressive 130%.
Should we expect this kind of variability going forward.
Speaker 4: Hey, Howard, it's Gary. I'll hit that. So there's really good key things. The acceleration that we saw in net dollar retention, I'm sure by a few things. There's foundation, first of all. What I mean by the foundation is we're at the point now that we have a matured renewable economy.
Hey, Edward it's Gerry I'll hit that.
Really good key things the acceleration that we saw in metallic net dollar retention by a few things. There is the foundation first of all that what I mean by the foundation is we're at the point now that we have a matured hurdle election, so when we get that mature at renewal motion and we see really strong renewal rates.
Speaker 4: So, when we get to that mature renewal motion and we see really strong renewal rates, it limits any of the downside on the net dollar retention. So, it's built with the foundation, and that foundation is really the focus on what we're doing on onboarding and adoption. So, it's driving to get the customers onboarded, get them to their first backup, get them fully adopted, then that drives the expansion opportunity.
And limit any of the downside on the net dollar retention. So it's built with the foundation and that foundation is really that focused on what we're doing on onboarding and adoption so driving to get the customers onboard it get up to their first backup to get them fully adopted then that drives the expansion opportunity.
Sanjay Mirchandani: And we delivered improved profitability while continuing to return cash to shareholders through shared repurchases. Beyond these impressive financial results, we also received numerous industry accolades, including being named a leader for the 12th consecutive time in the 2020 Speedgarten Magic Quadrant. We also ranked highest in six of seven categories in Gartner's latest critical capabilities for enterprise backup and recovery software solutions report. And once again, GigaOm named us a leader, and an outperformer in its most recent GigaOm radar for hybrid cloud data protection for large enterprises.
Speaker 4: The other thing that we've now has is an integrated motion between our customer success and our field sales.
Other thing that we've now had is an integrated motion between our customer success and our field sales teams. So their customers success teams are driving the adoption with the field teams combined driving the expansion. So it all starts on accelerating the time to first backup and the tie to consumption.
Speaker 4: So, their customer success teams are driving the adoption with the field teams combined driving the expansion. So, it all starts on accelerating the time to first backup and the time to consumption.
Speaker 4: As I think about the split between, I'll use cross-cell and up-cell, we're seeing the majority of the expansion.
As I think about the split between all use cross sell and up sell we're.
We're seeing the majority of the expansion being driven by at this point after.
Speaker 4: being driven by, at this point, upsell, which is generally more of the same product.
Which is generally more of the same products. However, we are now seeing more than two X growth on some of those mission critical or the emerging workloads that we see where their sales force dynamics Heartwise hybrid cloud.
Sanjay Mirchandani: We're extremely proud of this record. Inc. We're laser focused on being a trusted partner to our customers by protecting their data from the stirreds of cyber threats, significantly reducing rampant hybrid trust complexity and infusing AI-enabled automation to tackle new and evolving data protection and security challenges.
Speaker 4: However, we're now seeing more than two X-Road.
Speaker 4: on some of those mission critical or the emerging workloads that we see where there's sales for a dynamic, start-wise hybrid cloud.
Speaker 8: databases, the dollar value of those are now up 2x year-over-year. So it's less of a contribution because it's less of a percent of the total, but the contribution now is starting to become material, even though the majority of it is driven by money.
Please state databases.
Value of those are now up <unk> year over year. So it's less of a contribution because it's a less of a percent of the total but the contribution now is starting to become material, even though the majority of it is driven by.
Sanjay Mirchandani: And we're just getting started. Next week, at our Compault Shift Customer and Partner event, we will highlight how we are shifting from data protection to leading the charge in cyber resilience. We're going to introduce a radically new approach that empowers customers to stand up to today's non-stop and escalating cyber threats. We're bringing together what we're known for, best-in-class data protection and combining it with exceptional data security, recovery, and AI-driven data intelligence.
So we're getting it from all and just in summary, we're getting that in short renewal motion, we're getting the upsell getting them adopted so we can expand on more of the same product and now we're starting to see the cross sell start to kick in as well.
Speaker 8: So we're getting it from all ends, just in summary. We're getting that mature renal motion. We're getting the up-cell, getting them adopted so we can get expand on more of the same product. And now we're starting to see the cross-cell starting.
Speaker 7: Yeah, and thank you. And Howard, I'd like to add a little bit on just overall, you know, some color on the...
Okay. Thank you Howard.
I'd like to add a little bit on just overall some color on the.
Sanjay Mirchandani: Cyber resilience like this has never been possible until now. The time has never been better. According to a recent IDC study, most enterprises expect an imminent attack. 61% of respondents believe that data laws in the next 12 months is likely to occur due to an increasingly sophisticated attack.
On the SaaS business. It is the driver of growth it is growing well.
Speaker 7: It is the driver of growth. It is growing well. It's a vehicle by which we land hundreds of new customers a quarter.
It's the vehicle by which we <unk> hundreds of new customers a quarter.
Speaker 7: Our security capabilities have integrated the security IQ, which is our delivery platform inside of Metallic or our customers is doing well. Gary talked about the go-to-market.
Our security capabilities that we've integrated the security IQ, which is our delivery platform inside of metallic floor for our customers is doing is doing well Gary talked about the go to market.
Sanjay Mirchandani: It's clear, a new standard in cyber resilience is required, and that's what we're going to deliver. Compault has always provided itself on delivering the best technology that customers need at the right time, case in point. Four years ago, we challenged ourselves to address an immersion in the market, enterprise-grade cloud-native data protection as a service. We made some bold moves, disrupted them within, and took a new modern approach to launch metallic, our industry-leading hyper-grill fast platform.
Speaker 7: capabilities. And we're investing for the future with mission-critical workloads. We've got, you know, I quoted...
Capabilities and we're investing for the future with mission critical workloads, we got.
I quoted.
Speaker 7: I think it was Giga that talked in the Sona report about having, you know, we had more hybrid cloud and more mission-critical workloads out there that are too tedious to repeat. It's, you know, you have to be one step ahead of the customer. You have to be ready for the workload they want to protect. And that is exactly what we've been doing.
I think it was <unk> talked in the sonar report about having we had more hybrid cloud and more more mission critical workloads out there.
<unk> Pete.
If you have to be one step ahead of the customer you have to be ready for the work they want to protect and that is exactly what we've been doing in.
We.
Sanjay Mirchandani: We vastly simplified how we secure and defend data for any workload regardless of where it lives and in the process. We revolutionized data protection as a service. Since then, we've gained over 4,000 customers and surpassed 130 million in ARR. And just last week, Compault was named the Leading Vendor in Giga OMS Cloud-based Data Protection Sonar Report. The authors noted, quote, metallic protection, a very broad range of cloud workloads that will be tedious to fully enumerate, end quote.
The NLRB, we sort of as we mentioned last quarter that it was we thought it was an anomaly.
Speaker 6: The NRA, we mentioned last quarter that we thought it was an anomaly and we would get it back to normal patterns. And I think we got that and we'll keep focusing on it. So it's still a young business, it's a three-year-old, in effect. We're very happy with where it is, but there's a lot to do. Sounds like a great defeat in the talent for attention.
We would get it back to normal sort of patterns.
And I think we got that and we'll keep we'll keep focusing on it. So it's still a young business are three years old.
In effect we.
We're very happy with where it is but there's a lot to do.
It's great to see the pallet growth engine opening.
Congrats on the same quarter.
Thank you Albert.
Sanjay Mirchandani: Building on the overwhelming success of our platform, we're now taking the opportunity to apply everything we've learned in data protection and combining it with powerful new innovations in data security, AI, and recovery to deliver the most advanced cyber resilience platform in the industry. Next week at SHIFT, we will unveil this to the world along with some exciting new ecosystem partnerships that will enable us to transcend the category.
Your next question comes from the line of James Fish from Piper Sandler. Please go ahead.
Speaker 1: Your next question comes from the line of James Fish from Piper Sandler, please go ahead.
Hey, guys. Thanks for the questions maybe building off of the past couple here I guess, how should we be thinking about net retention rate for metallic.
Speaker 9: I guess how should we be thinking about
Speaker 9: rate for metallic viscose.
This year and sustainably like what are you guys.
Speaker 9: like what are you guys internally kind of targeting for the next couple of years? You know, just trying to understand if some of this material boosts and net retention rate is just catch up from some like last order for example or sustainable. And two kind of the points you both have made here what makes you confident that some of the metallics strength here isn't due to substitution of your term business, especially if we're talking more mission critical workloads moving onto metallics.
Internally kind of targeting.
For the next couple of years, just trying to understand if some of this material boost in net retention rate is just catch ups from someone like last quarter for example, or sustainable and to kind of the points. You. Both have made here what makes you confident that some of the metallic strengths here isn't due to substitution of your term business, especially if we're talking more.
Sanjay Mirchandani: Today's problems cannot be solved with yesterday's approach. It's time to shift how we think about resilience.
Sanjay Mirchandani: We hope that you can tune into this exciting event.
Gary Merrill: Now, I'll turn it over to Gary to discuss the numbers. Gary? Thanks, John Jay, and good morning, everyone.
Mission critical workloads moving on some metallic.
Gary Merrill: I am pleased to report that our strong revenue and earnings outperformance in Q2, which are from by acceleration across our key KPIs during the quarter. Q2 total revenue was $201 million, an increase of 7% year over year. Our total revenue growth was led by a subscription revenue of $98 million, an increase of 25% year over year. As a reminder, the prescription revenue includes both our term software licenses and our SAC offerings.
Speaker 8: H.I.V.S. Fairytale, I'll start it all. I think we're not guiding explicitly to the staff that are. I think...
Hey.
Hey, Jeff It's Gerry I'll start it off I think the we're not guiding explicitly to the SaaS IRR.
If you see what's kind of at our level of maturity of our SaaS business, meaning in that $130 million is.
Speaker 8: You see what's kind of, you know, at our level of maturity of our SaaS business, meaning in that $130 million ish of a banner art. I think world-class NRA race are somewhere between 120 to 130%.
<unk>.
Zinc world class enter our rates are somewhere between 120% to 130% I think.
Speaker 8: I think 130% is a little on the high end on a sustainable piece that we delivered this quarter, especially at the base.
30% is a little on the high end sustainable beef that we delivered this quarter, especially as the base continues to grow every quarter. If we're somewhere in that range of 100 to 125 Brightcove.
Speaker 8: continues to grow every quarter. You know, if we're somewhere in that range of 100 to 125, right, so bracketed somewhere between last quarter and this quarter on a consistent basis and working towards that, I think that's probably, I think that's a good measure.
Gary Merrill: We saw a double digit growth in term software licenses combined with an accelerating contribution of SAC revenue, which was up over 80% year over year. The prescription revenue is now approaching 50% of total revenue compared to 42% one year ago. Term software license growth was driven by strong performance in renewals and existing customer expansion during the quarter, with our subscription net dollar retention remaining within its historical range. Overall, term software deal volume increased the year over year driven by continued improvements in our velocity motion.
Bracketed somewhere between last quarter and this quarter on a consistent basis and working towards that I think thats, probably I think that's a good measure.
Speaker 8: We are seeing – You said 120 to 125. Sorry, 120 to 125. Sorry, just to clarify that. Sorry about that, Jim. And then from more of the hybrid cloud mission-critical workloads, we are starting to see some very good growth on that business.
We are seeing.
No you said 100 to 120 to 100, sorry, 120 to 125 sorry.
Sorry, just to clarify that number that Jim and then from a it's.
More of the hybrid cloud mission critical workloads, we are start seeing some very good growth on that on SaaS business now that growth right now is incremental it's not enough to be truly cannibalizing. The term based software licenses from an actual deal perspective customers are in the early innings of their cloud journey right.
Speaker 8: Now that growth right now is incremental. It's not enough to be truly cannibalizing the term-based software licenses from an actual deal perspective.
Speaker 8: though customers are in the early innings of their cloud journey. Right. So they are taking the time and that shows up in ASPs.
They are taking the time and that shows up in Asps and the length of deals were in the early part of their cloud journey.
Gary Merrill: Cuting perpetual license revenues for 14 million dollars. As a reminder, our go-to-market motion is led by prescription. The perpetual license sales are generally sold in certain verticals and geographies. At the current perpetual license revenue run rate, we believe the headway to a reported total revenue growth from these perpetual license sales to start the normalize as we exit the current fiscal year. Q2, customer support revenue with $77 million, which includes support for both our term-based and perpetual software licenses.
Speaker 8: and the length of deals were in the early part of their cloud journey and cloud innings of migration. They're taking the time to make sure they measure their spending and they're only committing to period right to measure and with what they see in the near term.
Cloud earnings that migration Theyre, taking the time to make sure they measure their spending and they are only committing to periods rate to measure it with what they see in the near term.
Got it helpful.
Just remind me here, what really happened at the end of the quarter that essentially SaaS IRR accelerated but we saw deceleration secondly in metallic revenue that now revenue is actually outpacing IRR.
Speaker 9: remind me here what really happened at the end of the quarter that essentially staff error accelerated but we saw a deceleration technically in metallic hell cropping in
Speaker 9: ARR, you know, was it more of a back-end loaded quarter for Metallic?
<unk>.
Was it more of a backend loaded quarter for metallic.
<unk>.
Speaker 9: you know, with the being about 77% ARR growth should we be expecting, you know, stable metallic red new growth for physical cues.
With that being about 77% IRR growth should we be expecting stable metallic revenue growth for fiscal Q3 essentially.
Gary Merrill: Fiscal year 24, customer support revenue has benefited from fewer conversions of perpetual support contracts to term software licenses compared to prior year. Year to date, customer support revenue from perpetual licenses represents 55% of total customer support, with the balance coming from term software licenses. This compares to a approximately 60% in fiscal year 23 and 70% in fiscal year 22. 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.
You too.
Speaker 8: I think stable. Any metallic contract that we signed in the second half of the quarter have very, very little revenue impact. So linearity has less of an impact because you just don't get anything. Not much of anything, sorry, not much of anything. Once you get past the first half of the quarter, or the narrative metallic was relative to product quarters. So nothing unusual, nothing unusual there.
I think stable any any metallic contracts that we signed in the second half of the quarter has very very little revenue revenue of XO linearity as less of an impact because you just don't get anything.
Much of anything sorry, not much of anything once you get past the first half of the quarter our linearity metallic.
Relative to prior quarters, so nothing unusual nothing unusual there.
Okay. Thanks, guys.
Speaker 1: Your next question comes from the line of Rudy Kissinger from D.A. Davidson. Please go ahead.
Your next question comes from the line of Rudy Kissinger from D. A Davidson. Please go ahead.
Hey, Thanks for taking my questions guys.
Speaker 10: Hey, thanks for taking my questions, guys. You know, it's great to see the dollar-based net retention rate rebound on Metallic. I guess the flip side of that is when I look at the growth in Metallic ARR for new customers, but...
Gary Merrill: Moving from revenue to ARR, Q2, ARR growth accelerated 18 percent year over year to $711 million and subscription error, which includes term-based software arrangements and fast contracts, grew 32 percent year over year to $530 million. These growth metrics reflect the underlying strength of our business when our revenue was presented on an annualized basis without the impact of subscription software term-length compression. SAP ARR finished a quarter at $131 million, an increase of 77 percent year over year. We saw healthy growth in new customers as well as expansion with our existing customer base. SAST net dollar retention rate for Q2 accelerated to 130% versus 118% we reported last quarter.
It's great to see the dollar based net retention rate rebound on metallurgy against the flip side of that is when I look at the growth in metallic AAR for new customers. Both on a dollar basis or as a percentage points of growth basis. It was down this quarter versus last quarter I know your subscription customer adds continued to be.
Speaker 10: growth basis is down this quarter versus last quarter. I know your subscription customer ads continue to be about 500 quarter, but if you look at your new customers on Metallic, are you seeing customers start smaller, just given the macro conditions and finance for constraints that customers have, or what are you seeing from a new perspective on Metallic?
About 500, a quarter, but.
If you look at your new customers on metallic are you seeing customers start smaller.
Just given the macro conditions in financial constraints that customers have or what are you seeing from a new perspective on the tablet.
Okay.
Speaker 8: favorities, Garrett. I'll hit that and visit to the here from you. At the first half of the year.
Hey, Rudy it's Gary.
And good to hear from you.
At the first half.
Of the year.
We're in a good shape with metallic on the new customer.
Speaker 8: We're in a good shape with Metallic on the new customer. I think probably some of your math hits it on. We were probably a little stronger in Q1 on.
I think probably some of your math hits at all and we were probably a little stronger in Q1.
Speaker 8: new customer, and then in Q2, existing customer was relatively a little stronger than new. But over the first half, that's kind of now evened out.
New customer and then in Q2 existing customer was relatively a little stronger than new but over the first half that's kind of now evened out and at a business. This young it's hard to look at just one quarter as a long term trend, we look back over 2345 quarters. It makes sure that.
Speaker 8: At a business this young, it's hard to look at just one quarter as a long-term trend. We look back over two, three, four, five quarters to make sure that our trajectory on both our new existing are happening, and we're pleased with where that is. So, we're not reading into the one quarter. We still saw over 500 subscriptions, new customers added during the quarter, and the vast majority of those are fast.
Gary Merrill: Now I'll discuss expenses in profitability. The school Q2 gross margins were 82% and reflect a 150 basis point year over year impact from our accelerating SAST revenue which carried a higher cost of sale than software. The school Q2 operating expenses were $121 million a 2% year over year. As a percentage of total revenue operating expenses declined 310 basis points year over year to 60% of total revenue to rising even margin leverage as we manage our people, facilities and third party expenses by focusing investment on our most critical priorities.
Our trajectory on both our new existing are happening and we're pleased with where that is so we're not reading into the one quarter. We still saw over 500 subscription new customers added during the quarter and the vast majority of those are SaaS. So we're still seeing it now yes the deal sizes in the Asps.
Speaker 7: So we're still seeing it. Now yes, the deal sizes in the SPs are smaller. They're smaller, but we're okay with that because if I go back to the commentary I made on the next dollar retention and that focus on adoption, time to first back up a recovery and then drive the expansion and workload expansion. We're betting on the future and our ability to drive that expansion as well. And this is found to be the smaller, the smaller ASPs is kind of
Or are smaller the smaller but we're okay with that because if I go back to the commentary I made on the net dollar retention and that focus on adoption time deferred first backup a recovery and then driving expansion in workload expansion, we're betting on the future and our ability to drive that expansion as well small and this is Sanjay Rudy.
The small the smaller Isps.
<unk> is kind of part of the plan because we have a velocity business, where everyone smaller smaller deals we have marketplace business, which is smaller deals we have MSP that bring in smaller deals that we that we expand over time. So it's a mix we sell to the enterprise and we sold through MSP. We said, we've got the whole range.
Gary Merrill: We ended the quarter with a global head count of 2,900 employees reflecting a 1% decline year over year. Our current head count balance includes additional inside sale teams, renewal and related customer success teams to support the customer journey and accelerating velocity sales motion. Non-gap EBIT for Q2 increased 19% year over year to $42 million and non-gap EBIT margins were 20.9% a 210 basis point improvement year over year to strong earnings and even margin expansion was driven by continued operating expense disciplines relative to our top line revenue.
Speaker 7: part of the plan because we have a velocity business where we land smaller, you know, smaller deals. We have marketplace businesses, which are smaller deals. We have MSPs that bring in smaller deals that we, that we expand over time. So it's a mix. We sell to the enterprise and we sell through MSPs. We said, we've got the whole range.
Okay.
Speaker 10: Okay, got it. That's fair. And then hear you on the conversions, seeing fewer conversions. I guess just if we look at your term license subscription.
Okay got it.
Fair.
And then you hear you on the conversions seeing fewer conversions I guess, just if we look at years.
Term license subscription business, if you strip out conversions as we start to tweak our models for next fiscal year I know, we got a couple of quarters ago, this year, but ex conversions.
Speaker 10: As we start to tweak our models for next fiscal year, I know we got a couple quarters to go for this year, but X conversions, you know, a subscription license, a, a single digit growth business going forward. Is that a low double digit growth business going forward?
Subscription license.
Double digit growth business going forward is that a low double digit growth business going forward.
Speaker 10: what should we be expecting there just over?
Gary Merrill: Moving through some key balance sheets and cash flow metrics. We ended the quarter with no debt and $283 million in cash of which $93 million within the United States. Our Q2 free cash flow with $40 million in our first half fiscal year 24 free cash flow with $78 million, up 10% year over year. The biggest driver of free cash flow is that the third revenue and the strength of our software subscription rentals would typically include upfront payments on multi-year contracts.
What what should we be expecting there just over the near to intermediate term.
Speaker 8: Yeah, I felt like we're not giving up. Say the longer term guidance, but even if I talk a little bit about
Yes.
We're not giving I would say the longer term guidance, but even if I talk a little bit about.
What we saw in Q2 and what we saw Q2, you can kind of interrelated or term license software grew double digits right. So within subscription.
Speaker 8: what we saw in Q2 and what we saw in Q2, you can kind of interpolate that our term license offer grew double digits, right? So within subscription, our term software license grew double digits. And that's with our conversion down substantially year over.
Gary Merrill: In Q2, we repurchased additional $31 million of stock under our repurchase program and at the halfway point of fiscal year 24, we have repurchased $82 million of stock representing 106% of our first half free cash flow.
Our term software license.
Grew double digits and that's with our.
Our conversion down substantially year over year. If you look at the guidance that I gave for fiscal Q3 quarter of that we're currently in it's a very it's a very similar trend, where we're guiding to roughly double digit within there will be double digit terms software growth year over year with <unk>.
Speaker 8: If you look at the guidance that I gave for fiscal Q3, the quarter that we're currently in, it's a very similar trend. We're guiding to roughly double digit within, there will be double digit terms offered year over year with...
Speaker 8: Same situation, conversions down to your rear. So we're driving that growth, and we're doing that regardless of the conversions. The conversions are a little variable in there, which is fine. I think they'll stabilize over time. We're just kind of giving some outlook based on currently what we see and where we see customers kind of in that journey.
Situation conversion is down year over year. So we're driving that growth and were doing that regardless of the conversions conversions are a little variable in there which is fine I think it will stabilize over time.
We're just kind of giving us an outlook based on currently what we see and where we see customers kind of in that in that journey.
Gary Merrill: Now I'll discuss our outlook for fiscal Q3 and the full fiscal year 24. We continue to believe that ARR and free cash flow to be viewed as primary KPIs of our underlying business momentum. All of our fund-long guidance metrics are based on current or in currency exchange rates. For fiscal Q3, we expect Subscription Revenue, which includes both the software portion of term-based licenses and SAS to be 106 to 110 million dollars.
Speaker 7: There's definitely, you know, customers are in that hybrid cloud journey where, where they've got to, you know, they've got to make some top calls, re-architect, rebuild, shift, migrate, mission critical workloads, not just independently, but stacks into the cloud. And that's hard. And as a, as a, as a part of what we're going to talk about next week, and how we're going to help customers through that.
Okay.
No.
Definitely.
Customers are in that hybrid cloud journey, where they've got a.
They've got to make some tough calls re architect rebuild shift migrate mission critical workloads, not just independently, but but stacks into the cloud and that's hard.
As they as their.
Part of what we're going to talk about next week is how they are going to help customers through that so when you. When you look at the complexity of that.
Speaker 7: So, when you, when you look at the complexity of that.
Gary Merrill: This represents 24% year-over-year growth at the midpoint. We expect total revenue to be 206 to 210 million dollars with year-over-year growth of 7% at the midpoint. At these revenue levels, we expect Q3 consolidated growth margins to be approximately 82.5% in EBIT margins of approximately 21%. As I mentioned on our last earnings call, we are executing some foundational go-to-market changes, which includes amplifying or discrete focus on our land-expand opportunities while also scaling our motion to secure our growing subscription revenues.
Yes.
Speaker 7: You know, it's, you have to look at and say, if I was a customer, how would I think about it? I'd say, okay, I've got to get to the other side before I make a shift on something. So, you know, if you look at the term, or you look at the license model, or you look at going from software to fast, these are important decisions in the journey with the hybrid cloud. After that security, and...
You have to look at it and say if I was a customer how would I think about it I'd say, okay I've got to get to the other side before I make a shift on something so.
If you look at the term or you look at you look at the license model or you look at going from software to SaaS. These are important decisions in the journey.
With with the hybrid cloud after that security.
And cyber risk.
Speaker 7: So, you know, there's a lot of factors and we are very well positioned to help customers with that and we are, which is why we see the momentum in our security capabilities and in customers using that, adding up 500 new customers on the software subscription and FastClap.
<unk>.
A lot of factors and we are very well positioned to help customers to that end, we are which is why we see the momentum in our security capabilities and customers using that.
Adding a 500 plus new customers on the software subscription and SaaS platform.
Speaker 7: So, you know, I wouldn't read into it too much. I would say it's a, it's a, they're in a, uh, in the cross hairs of sort of getting from one side to the other in critical mass. And that's what you're kind of.
No.
I wouldn't read into it too much I would say.
Fair enough.
Gary Merrill: We will continue to hire field resources and additional inside sales reps focused solely on the SAS velocity market as we refine our segmentation model. These continuing investments are reflected in our margin guidance. Our projected to lose share count for fiscal Q3 is 44.7 million shares.
In the crosshairs of sort of getting from one side to the other and critical mass and Thats, what youre kind of sitting there.
Speaker 10: That's helpful. Thanks for taking my questions and congrats on the good fast figures in the quarter
That's helpful. Thanks for taking my questions and congrats on the good.
Figures in the quarter.
Thanks Rudy.
Speaker 1: If you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Please go ahead.
If you'd like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Eric <unk> from Lake Street Capital markets. Please go ahead.
Gary Merrill: Now, I would like to give an updated outlook on the full fiscal year 24, which includes raising both our total revenue and total ARR expectations to the full year. We expect fiscal year 24 total ARR growth of 14% year-over-year, which reflects a hundred basis point increase over our prior guidance. We now expect subscription ARR, which includes term-based licenses and SAS to increase 24% year-over-year. From a revenue perspective, we now expect subscription revenue to be in the range of $408 to $418 million, growing 19% year-over-year at the mid-point.
Yes, the perpetual license for the year I think in past quarters, you've talked about an expectation for reported a $50 million.
Speaker 11: Yeah, the perpetual license for the year, I think in past quarters, you've talked about expectation for a 40 to 50 million.
For fiscal 'twenty or given you're at about $27 million year at the midpoint are you still thinking that 40% to $50 million range.
Speaker 11: for fiscal 24. Given year at about 27 million here at the midpoint, are you still thinking in that 40 to 50 million range?
Yes.
It's Gary that's correct.
Speaker 8: That's correct. The trend we've seen in the first half of the fiscal year, I think our trends for the second half will be similar. Will be at similar paces, maybe slightly less.
A trend we've seen in the first half of the fiscal year I think our trend for the second half will be at we will be at similar will be at similar paces, maybe slightly less as as the motion is fully now dedicated to drive the term subscription and SaaS business. We still have some verticals that are out there.
Speaker 8: As the motion is fully now dedicated to drive the term subscription in SaaS business, we still have some verticals that are out there that still buy perpetual, but those verticals become limited every single day. So the range of 40 to 50 is still
Gary Merrill: At these levels, subscription revenue will exceed over 50% of our total revenues. Our updated guidance reflects a mixed gift from subscription revenue due to a lower number of conversions from perpetual support contracts to term software compared to the prior year. As well as continued measured spending for large multi-year transactions in a relative high interest rate environment. As a result, we expect total revenue to be in the range of $812 to $822 million.
That's still by perpetual, but those verticals become limited every single every single day. So the range of 40 to 50 still fair.
Speaker 11: Okay, but given the 27 in the front half, that would mean 23.
Okay, but given the 27 in the front half, but that would mean 23 would be the math you would expect.
Speaker 8: Yeah, it'll be at the high end of the range. Yeah, we'll be at the high end of the range.
The high end of the range, yes, it will be at the high end of the range.
Alright, and then it looks like outperformance international.
Speaker 11: All right, and then it looks like our performance, international, international revenue, I think we've got 12.
International revenue I think was up 12%.
In the quarter, just curious to know.
Speaker 11: order. Just curious to know if you expect that is that just kind of a you know reversion to the mean or are we expecting
Do you expect that.
Just kind of a.
Reverted to the mean or are we expecting that to outperform for the remainder of the year.
Gary Merrill: This is an increase compared to our prior total revenue range of $805 to $815 million. Our improved fiscal year 24 total revenue outlook reflects strong overall activity, the ongoing momentum in our staff philosophy business, and the seasonally stronger trends that we historically see in the second half of the fiscal year.
Yes, Eric.
Speaker 8: Eric, I'll take that it's scary again. So very pleased with both of our regions. Our America's business in total was up about 4%, and our international business was up, as you said, 12%. So both businesses returning to growth.
Eric I'll take that it's Gary again, so very pleased with both of our regions.
Our Americas business in total was up about 4% and our international business was up as you said as you said, 12% so both businesses returning to growth which.
Speaker 8: which is that acceleration of total revenue growth about 7% year-over-year, which we're pleased with. Our media business is driving some strong growth. We're now seeing some really good acceleration on as well the subscription adoption. The Americas was more mature first and now the international business is driving with some of that really strong subscription adoption.
Which is that acceleration of total revenue growth of about 7% year over year, which we're pleased with our EMEA business is driving some strong strong growth. We're now seeing some really good acceleration on as well the subscription adoption. The Americas was more mature burst and now the international business is driving with some of that really strong.
Gary Merrill: Moving through full year, fiscal 24 March and EBIT in cash-load outlook. Works. We continue to expect consolidated gross margins of 82% to 83% and non-gap even margin expansion of 50 to 100 basis points year over year. We are also maintaining our expected full year free cash flows of $170 million. As of September 30, we had $174 million remaining on our existing share repurchase authorization. And we expect to continue with our existing practice of repurchasing at least 75% of our annual free cash flows. We do share repurchases as a primary use of excess cash. Here today, we are pacing well ahead of our annual share repurchase target.
<unk> subscription adoption the deal sizes and international are a little bit smaller relative to the Americas. So some of the Lumpiness that you can get on the Americas on the Mega deals and some of the term the term length topics. We've talked about is less prevalent international so we're able to drive the really strong velocity business in the international <unk>.
Speaker 8: The deal sizes in international are a little bit smaller, relative to the Americas. So some of the lumpiness that you can get on the Americas on the mega deals and some of the term length.
Speaker 8: topics we've talked about is less prevalent international. So we're able to drive a really strong velocity business in the international markets.
<unk>.
Yeah, Thanks for taking my questions.
Thanks, Eric.
Your next question comes from the line of Jason Ader from William Blair. Please go ahead.
Speaker 1: Your next question comes from the line of Jason Ader from William Blair. Please go ahead.
Yes. Thank you. Good morning, everyone. Just wanted to ask you first on the.
Speaker 12: Yeah, thank you. Good morning. Everyone just wanted to ask you 1st on the outlook for customer support revenue.
Outlook for customer support revenue.
As.
More of that mix comes from term.
Speaker 12: More of that next comes from term. Do you expect the year of the year declines to start to subside? You know, you're down 9%.
Gary Merrill: And we intend to continue the share repurchase momentum during the pandemic for additional details and trends on all of our key methods. Please take time to review our investor debt contained in the investor relations section of our website. Including, we've built a durable and multifaceted revenue model that should allow us to exceed ARR total revenue and earnings objectives over the long term.
The year over year declines can start to subside.
Down 9%.
Speaker 12: customer support in fiscal 23 this year is going to be something, I guess, slightly lower than that, but do you expect as we move forward into 25 and 26 that we should see that continue to, the declines continue?
Customer support in fiscal 'twenty three this year is going to be something.
I guess slightly lower than that but do you expect as we move forward into 'twenty five and 26 that we should see that continue to.
The declines continue to supply.
Speaker 4: Yes, hey Jason, it's Gary. I'll take this question as well. So you've already started to see it. If even if you look at physical to actual, if one of the smallest declines we've had in quite some time, and the key driver to that is now a higher percentage of that customer support revenue is being driven by term.
Yeah, Hey, Jason It's Gerry I'll take this question as well so you've already started to see that even if you look at fiscal Q2 actual it's one of the smallest declines we've had in quite some time and the key driver to that is now a higher percentage of that customer support revenue is being driven by by term.
Sanjay Mirchandani: We are excited about the future and we look forward to hosting many of you at our shift event in New York City next week.
Unknown Executive: Operator, you can now open the line for questions. As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
This year, we're on a pace, where we'll get that.
Speaker 8: This year, we're on a pace where we'll get that amount of customer support related to term software licenses probably to be somewhere 45-ish to 50% roughly. And as we enter into next fiscal year, it should be the crossover year. Crossover year meaning that as next fiscal year, the majority of customer support revenue will be derived from the term-related software contract.
Aaron Rakers: Your first question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead. Yeah, thanks for taking the questions. Congratulations on the execution in the quarter. I guess my question is, I just help me understand a little bit more. It looks like clearly your ARR updated guidance is a little bit lower than your prior guide 24% on the subscription side. I should say relative to 27. And then obviously revenue a little bit lower at the midpoint.
Customer support related to term software licenses, probably to be somewhere 45% to 50% roughly and as we enter into next fiscal year. It should be the crossover year across every year, meaning that as next fiscal year. The majority of customer support revenue will be.
Derived from from the term related software contracts that natural motion will then start to flat line the impact and then what that does it will start to alleviate some of the headwinds that has on the total revenue total revenue growth.
Speaker 4: That natural motion will then start to flat line the impact.
Gary Merrill: Can you just I know you've made some comments that are prepared remarks, but could you unpack that change in the guidance a little bit further? Hey Aaron, it's Gary. Good to talk to you this morning. And I think specifically I think you're asking about Q3. The Q3 outlook? Or the full year outlook first. Let me just clarify. Yeah, I'm talking more full year. The 24% versus prior 27 and 408 to 418 versus prior 420 to 430.
Speaker 8: And then what that does, it will start to alleviate some of the headwinds that have on the total revenue growth. A big piece of our total revenue growth becomes the impact of the customer support. And as we get into next fiscal year and the fiscal year after that, that will start to moderate. And you would expect the impact year over year or the declines to be significantly less than we've seen in prior years, including this year.
Piece of our total revenue growth becomes the impact of the customer support and as we get into next fiscal year in the fiscal year. After that that will that will start to moderate and you would expect the impact year over year are the declines to be significantly less than we've seen in prior year, including this year.
Got you so the only let's call it the only sort of a more significant headwind will be protection will license line do you have any.
Speaker 12: So the only, let's call it, the only sort of more significant headwind will be perpetual license line. Do you have any, like you talked about 40 to 50, sort of toward the high end of that range this year in perpetual license route when you, as we move forward into 25 and 26 with that, with opinion you down on specific guidance, do you think that we'll sort of continue to trail off sort of modestly, or do you think it'll actually be more, more of a show?
Gary Merrill: Got it. Okay, awesome. Well, first of all, let me just reflect a little bit on the first half. We're really pleased with the first half, especially where we ended up at fiscal Q2 on all of our guided metrics, making sure we celebrated past everything. From a full year perspective, it's kind of I thought about the second half in particular coming off of the first first half. I'm also pleased that we did raise our error guidance.
You talked about 40% to 50 sort of towards the high end of that range. This year in perpetual license revenue as.
As we move forward into 'twenty five 'twenty six.
Dan on specific guidance do you think that will.
We will sort of continue to trail off sort of modestly or do you think it will actually be more.
More of a sharp fall off.
Gary Merrill: Previously, we were guiding to 13. I've increased that to 14. As well as our total revenue also increasing our guidance on total revenue. A lot of that is reflective of a lot of the success even we're seeing on the SaaS business as well, right? When we drive that success, that SaaS success and we're able to hit 131 million of error. A lot of that does not show up in reporting revenue or reporting revenue.
Speaker 8: Modest I think I think will be modest. They'll be similar to the the impacts on total revenue as the customer support does if we end up somewhere Save this year at the high end of that that 40 to 50 million dollars called roughly 50 million dollars then as they get into next year We're likely to be in that range, but probably more towards the lower end of that range So you're talking variability is not significant on a on a revenue number. That's obviously, you know over 800
I think I think it will be modest there'll be similar.
The impact on total revenue as the customer support that if we ended up somewhere save this year at the high end of that $40 million to $50 million, while roughly $50 million then as we get into next year.
Likely to be in that range, probably more towards the lower end of that range. So youre talking variability is not significant.
On a revenue number that's obviously.
Gary Merrill: But as I think about the subscription revenue specifically, I think directly at your question, there's a couple of things that are going on there. We are seeing fewer conversions. So conversions from our existing perpetual support contracts being converted to term software licenses. In today's interest rate environment, those conversions usually come with a multi-year commitment, doing a three-year commitment, and some of the interest rate factors and the cost of money, as well as where customers are in their cloud journey at the same time.
The $800 million.
Gotcha Gotcha, Okay, Great and then Sanjay I wanted to you just on the SMB and mid market dynamics.
Speaker 12: So I'm going through you just on the SMB and mid market dynamics.
Gary Merrill: So we're seeing just some declines the earlier modestly on the conversion piece, as well as the continued trends on term subscription length. So when we sell term subscriptions, our average term is now down to about two years. So while that keeps Aaron whole, and we see the momentum on Aaron, it can have a little bit of a short term impact on the reported revenue results. And it's thoroughly just keeping in mind that we're watching the mega deal, the real big deal trends in this bending environment and being cautious on the procurement and approval cycles that are out there today.
Yeah.
Yes.
Speaker 12: Less about competition, but just more about how SMB and mid market customers are actually purchasing and procuring backup software and backup services. Can you just talk through how you guys have...
Less about competition, but just more about how SMB and mid market customers are actually purchasing and procuring.
Backup software.
Backup.
Services.
Can you just talk through how you guys have.
Speaker 12: Let's call it adapted your strategy because it does seem like more of that market is shifting towards as a service offer.
Let's call it.
Adapted your strategy because it does seem like more of that market is shifting towards as a service offerings.
Sure.
Speaker 7: So for that particular segment, we've, I think we mentioned in a couple of calls, prior to this, Jason, that we've invested in a velocity motion, which loosely translates to ISRs plus a channel motion that allows us to go off the velocity of the smaller customers. In addition, that's number one. In addition, we've also,
So for that for that particular segment.
I think we mentioned in a couple of calls prior to this Jason.
Jason that we've invested in.
Philosophy motion, which is which loosely translates to ISR plus channel motion that allows us to go up the velocity of the smaller customers. In addition, US number one in addition, we have.
Also.
Speaker 7: be working with a growing MSP community, and many customers, as you mentioned, like to work through that. The third is marketplaces, as the hyper-staylers, that have promote their marketplaces, BC customers, being able to sort of tap it to that most.
We are working with.
Growing MSP community.
Gary Merrill: Yeah, that's very helpful. I appreciate that color. So maybe just the final question sticking with that topic, how would you characterize the linearity in this quarter, the demand? Have you seen any customers push out projects or delay? Are they spending in this environment at this point, or is it just more cautionary on the macro, the geopolitical environment as more so we look forward? More cautionary. We did not see trends that deteriorated.
And many customers as you mentioned like to work through through that the third is marketplaces as the hyperscale or so to promote their marketplaces, we see customers being able to sort of tap into that motion.
Speaker 7: and develop software or SaaS right through that. So we, you know, those are just some examples of how we're enabling our technology to be more accessible to our customers and the way they like to purchase.
And.
Available software SaaS right through that so those are just some examples of how we're enabling.
Our technology to be more accessible to our customers and the way they like to purchase.
Gary Merrill: Our trends that we're seeing the business on close rates and linearity are consistent with what we've seen over the past few quarters, but relative to the geopolitical nature of what's going on and just being cautionary on the time it takes to close some of those real big deals. Yep.
Okay, and then one quick follow up.
Yes.
Speaker 12: see the floor, but on the metallic business.
The Florida.
The talc business.
Speaker 12: Sanjay, can you give us a sense of how much of that is coming from sort of SMB mid market customers versus interp...
Sanjay.
Can you give us some sense of how much of that business is coming from sort of SMB mid market customers versus enterprise.
Unknown Executive: Thank you, Eric.
Howard Ma: Your next question comes from the line of Howard Ma from Google Himes Securities. Please go ahead. Great. Thank you for taking the question.
I think it's.
Speaker 7: I think it's the trend has been fairly consistent. The enterprise side of our business is about a third enterprise roughly, a third mid-market, and a third SMB. It's not my design necessarily, but it seems to be following that. And I'm actually quite pleased with it because it de-risks our business, but also gives us a chance to grow in the areas that we haven't historically, like the SMB and the lower mid-market.
The trend has been fairly consistent the enterprise the enterprise side of our business is about.
Gary Merrill: So I also want to better understand that the lower subscription AR and revenue guidance because that seems to be the only negative and an otherwise stellar print. So I understand the change in the lower migrations from from perpetual maintenance and subscription, but I didn't think the impact was that big. Can you comment, I guess for Gary, can you comment, are there any other factors such as, I mean, did you, were there any deal pull forwards in Q2?
About a third enterprise roughly a third mid market and the third SMB.
Not my design message.
It seems to be following that.
I'm actually quite pleased with it because it's a de risks our business, but also it gives us a chance to grow in the areas that we haven't historically led to the SMB.
In the lower mid market.
Great. Thank you.
Okay.
Speaker 1: Your next question comes from the line of Tom Blakely from KeyBank Capital Markets. Please go ahead.
Your next question comes from the line of Tom Blakely from Keybanc capital markets. Please go ahead.
Gary Merrill: In the back half, are you expecting any renewal pushouts? I believe this year is a pretty back and weighted or second half weighted rather renewal year. And then just given the metallic strength too, I wouldn't wouldn't continue to strengthen metallic at least on the air on the air our side. I understand it takes time for AR to translate over revenue, but wouldn't that offset some of the, you know, the perpetual migrations?
Hey, guys. Thanks for taking my question just a couple.
Speaker 13: Hey, guys, thanks for taking my question. Just a couple.
Speaker 13: Sanjay, if you could go back to that hybrid cloud journey, answer you gave a prior call, a questioner.
Sanjay if you could go back to that hybrid cloud journey answer you gave a prior call questioner.
Speaker 13: Is that company specific or could you talk to just the greater kind of view in the industry in terms of things being complex and it seems to be a bit of a pause. Hybrid cloud spend is kind of received a bit of an uptick in the last few quarters if not longer.
That company specific or could you talk to just the greater kind of view in the industry in terms of things being complex and there seems to be a bit of a pause to hybrid cloud spend is.
Gary Merrill: Thanks. Yes. Thanks, thanks, Howard. Maybe first quickly on the on this side of the metallic. So the the AR are accelerated actually higher than we've seen in current periods, right. If you look at the ARR for SAS, we went from 113,000,000 to 131 million of ARR, that sequential increase we're seeing on these side is accelerating faster than we'd actually seen over the past prior quarters. You can kind of see that as you turned out, the SAS ARR and the acceleration there coupled with Howard, the what we saw on the net follower retention rate of 130 percent.
I've received a bit of an uptick in the last few quarters if not longer.
Speaker 13: as there's been a deceleration in public cloud spend in general. Just wanted to kind of maybe, if you could clarify that or give any extra call, it'd be very helpful. And then, and then just secondly, for
There's been a deceleration in public cloud spend in general I, just wanted to kind of maybe if you could clarify that or give any extra color would be helpful.
And then and then just secondly for.
Speaker 13: I'm the NRR from Metallic. You have the split up between capacity growth and new services if you could, and if security is, maybe it's a premature question, but if security impacting that kind of NRR, that'd be helpful.
On the NR for metallic split up between capacity growth and new services, if you could and if and if security is maybe it's a premature question, but security impacting that kind of an IRR that'd be helpful. Thank you.
Speaker 7: Let me process those. So the hybrid cloud journey, my thinking there is the following. You know, the customers, think of us a little bit, first of all, as a trailing indicator. So it's about utilization. It's about workloads that use the commitments that customers have made to the hybrid cloud or the public cloud services.
Okay, Let me let me processes.
So the hybrid cloud journey.
My thinking there is default.
Gary Merrill: So really a good focus on driving that net follower retention. When I look at the guidance on subscription, it's the biggest factor is fewer conversions. And how you can see that also is you'll see the the strong overall performance on the customer support side, right. So if you look at the cost of support revenue and you see the acceleration there, meaning the acceleration relative to the prior expectations, that's where you kind of see that's where you see the all set.
There was the customers think of us a little bit first of all.
As a trailing indicator so.
It's about utilization thats about workloads that use the commitments that customers have made for the hybrid cloud public cloud services and what we're what we're doing is helping customers through those difficult journeys because as I think easy workloads move to the cloud it gets harder and harder to move the entire stack of mission critical capabilities and run.
Speaker 7: And what we're doing is helping customers through those difficult journeys, because as the easy workloads move for the cloud, it gets harder and harder to move entire stacks of mission critical capabilities and run them entirely on public cloud services or hybrid cloud capabilities. And that's what I was going to refer to. And
Gary Merrill: So that's where you see the all set on the on the positive side there and it's just the the fuel conversion for doing about on pace for about half of what we did last year. And it's what I kind of see just based on current pipeline metrics, we're on pace to do about half of the conversion that we did last year, which is just a transitional in the customer environment, as well as monitoring the term length of our deals, right.
Them entirely on public cloud services are hybrid cloud capabilities, and that's what I was kind of referring to it and we're helping customers whether it be through moving that data whether it's their infrastructure, whether it's their data security, whether it's applying intelligence incentive data management across that stack data at flight. There is a lot of things that that.
Speaker 7: And we're helping customers, whether it be through moving that data, whether it's their infrastructure, whether it's their data security, whether it's applying intelligence intensive data management across that stack data in flight.
Speaker 7: There's a lot of things that that moving to the hybrid cloud sort of open up and we're we're across, you know, a lot of those use cases and a lot of those outcomes.
Moving to the hybrid cloud sort of open up and we are.
Gary Merrill: So getting it down to about two years on average. Yeah, we're just trying to be realistic and we're looking out for the whole year. If, you know, there's it's just a mixture in my mind, there's nothing it's we added what over 500 customers in the subscription mix in Q2. Metallic is growing at a very healthy clip, recruit 77% year on year. So, you know, this isn't don't read into this and anything, but we're just we're just looking at the pipeline and being being very pragmatic about what the mixture might be.
Yes.
A lot of those use cases and a lot of those outcomes. So.
Speaker 7: So, you know, that's that's kind of where I was going and and it's not so much a.
That's kind of where I was going and it's not so much.
Whether it's increasing or decreasing in spend from a from a from a public cloud capability, it's really the utilization.
Speaker 7: you know, whether it's increasing or decreasing in spend from a public cloud capability, it's really the utilization and making sure that customers are getting the value that they anticipated from their journey to the cloud. I was a CIO. Moving mission-critical workloads into a cloud or any other platform is complex and requires a lot of thoughtfulness and the right choices. And that's what we're trying to help our customers with.
Making sure that that.
Customers are getting the value that we anticipated from there on their journey to the cloud.
CIO moving mission critical workloads into the cloud or any other platform.
Is it requires a lot of it is complex and requires a lot of thoughtful listen the right choices.
Gary Merrill: And, and that's it. I mean, you know, business we had we, you know, we had a very great good quarter and we've raised AR for the year and we've raised revenue for the years. So it's it's in my mind as straightforward as a mix shift inside of the customer buying patterns, whether it be interest rate or where they are in the cloud migration. Thank you, Sanjay and Gary.
And that's what we're trying to help our customers work.
Speaker 13: So that's my, that's my, I want to pause there. Did I, did I cover your question? Yeah, yeah, yeah. Just maybe the follow-up there before we get to the NRR. Is that, does that imply from a trailing indicator perspective that there might be some pent-up demand for Commvault in that regard?
So that's my best.
That's why.
I want to pause there did I did I cover your question, Yes, just maybe as a follow up there before we get to the IRR is that does that imply from a trailing indicator perspective that there might be.
There is some pent up demand for Commvault in that regard.
Speaker 7: As short answers, I would hope so. Because as customers move to the, and a lot of what we're going to talk about next week, Tom is about.
The short answer is I would hope so because as customers move to the.
Sanjay Mirchandani: I do want to hone as a follow-up, I do want to hone in on Metallic because, as you guys mentioned, you know, it was a really strong quarter from Metallic and our tail rating is 130% which is up from, I believe, 118 a quarter ago and then 125 is a quarter prior. Can you just remind us what is the rank order of drivers of growth from Metallic between workload expansion and cross-cell of additional Metallic products and then on the growth rate, again, very strong but it has been pretty variable, should we expect this kind of variability going forward?
A lot of what we're going to talk about next week Tom is about.
Speaker 7: you know, where we see the customer journey, where we see them sort of having to make tough decisions, where, you know, what are the hard problems they're helping them with on data? Do they have to make choices between software and SaaS?
We see the customer journey wherever you see them sort of having to make tough decisions, where what are the what are the heart problems, we're helping them with.
On data do they have to make choices between software and SaaS.
Speaker 7: you know, the security models, using AI. These are, you know, recovery capabilities when in the light of cyber resilience. These are all important decisions that have to be made as the journey to the cloud becomes more and more pervasive for our customers. And we're trying to be one, two steps ahead of them in anticipating that. So I would hope so.
Security models using AI these are.
Recovery capabilities.
In the life of cyber resilience. These are all important decisions that have to be made as the journey to the cloud becomes more and more pervasive for our customers and we are trying to be one or two steps ahead of them and anticipating that so I would hope so.
Sanjay Mirchandani: Howard is scary, I'll hit that. So there's really good key things. The acceleration that we saw in Metallic net dollar retention, I'm sure by a few things. There's foundation, first of all, what I mean by the foundation is we're at the point now that we have a matured renewal motion. So when we get that matured renewal motion and we see really strong renewal rates, it limits any of the downside on the net dollar retention.
Speaker 13: And then just I know all the 130's is a strong number. Just any type of commentary on the mix of capacity growth and new services there in possibly security.
And then just on right around the 130 is a strong number just.
Sanjay Mirchandani: So it's built with the foundation, and that foundation is really the focus on what we're doing on onboarding the adoption. So it's driving the customers onboarding, get them to their first backup, get them fully adopted, then that's the expansion opportunity. The other thing that we've now have is an integrated motion between our customer success and our field sales teams. So our customers success teams are driving the adoption with the field teams combined driving the expansion.
Any type of commentary on the mix of capacity growth in new services, there and possibly a securities impacting that that'd be helpful. Thanks, Sure Hey, Tom It's Tom It's Gerry I'll take that one relative to 130% of net dollar retention.
Speaker 8: Hey Thomas, Thomas Gary, I'll take that one. Relic to 230% of net dollar returns.
Speaker 8: As you think about the drivers of what you're drawing that from a upsell versus cross-sell, about two thirds of that comes from upsell, meaning upsell more of similar capacity or licenses or seats, and about a third or roughly there comes from cross-sell, which...
If you think about the drivers.
Drove that from our upsell versus cross sell about about two thirds of that comes from upsell, meaning upsell more above similar capacity or licenses or seats and about a third are roughly there comes from cross sell which benefits of the cross sell motion whether it be dynamics, whether it be our secure.
Speaker 8: benefits of the cross-cell motion, whether it be dynamics, whether it be our security offerings, the hybrid cloud for VMs or databases, they're all contributing factors. Actually, security is part of that.
The offering the hybrid cloud for BMS or databases, they're all considering factors absolute security as part of that.
Sanjay Mirchandani: So it all starts on accelerating the time to first backup and the time to consumption. As I think about the split between our huge cross sell and up sell, we're seeing the majority of the expansion being driven by at this point up sell, which is generally more of the same products. However, we're now seeing more than 2x growth on some of those mission critical or the emerging workloads that we see where their sales forest dynamics, start wise, hybrid cloud, date databases, the dollar value of those are now up 2x year or year.
Speaker 8: But we're seeing a little bit more on the up-cell and about a third of that expansion on the NRR driven from cross-cell.
But we're seeing a little bit more on the upsell and about a third of that expansion on the IRR driven compressor.
Thanks, Karen Thanks, Scott.
Speaker 1: And we have no further questions at this time. I will now turn a call over to Michael Melnick for closing remarks.
And we have no further questions at this time I will now turn the call over to Michael Nelson for closing remarks.
Thank you for joining the call today, if you have any follow up questions feel free to reach out to me also as a reminder, if you haven't yet registered the live event will be.
Speaker 2: Thank you for joining the call today. If you have any follow up questions, feel free to reach out to me. Also, as a reminder, if you haven't yet registered, the live event will be November 8th in New York City, and then the replay for shift will be on November 9th. Visit convault.com to register. Thanks for joining. Appreciate it.
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Sanjay Mirchandani: So it's less of a contribution because it's less of a percent of the total, but the contribution now is starting to become material, even though the majority of it is driven by up sell. So we're getting it from all ends, just in summary, we're getting that insurbanal motion, we're getting the up sell, getting them adopted, so we can get expand on more the same product, and now we're starting to see the cross sell starting to kick in as well.
Speaker 14: This concludes today's conference call. Thank you for your participation, and you may now disconnect. some of us.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
Okay.
Sanjay Mirchandani: Thank you. And Howard, I'd like to add a little bit on just overall some color on the fast business. It is the driver of growth, it is growing well, it's a vehicle by which we land hundreds of you customers of quarter. Our security capabilities that we've integrated, the security I can, which is our delivery platform inside metallic for our customers is doing well, Gary talked about the go-to market capabilities, and we're investing for the future with mission critical workloads.
Sanjay Mirchandani: We thought, you know, if I quoted, I think it was Giga that talked in the sauna report about having, you know, we had more hypercloud and more mission critical workloads out there that are two tedious to piece. It's, you know, you have to be one step ahead of the customer, you have to be ready for the workload they want to protect, and that is exactly what we've been doing. And, you know, we, the NRR, we sort of, we've mentioned last quarter that it was, we thought it was an anomaly, and we would get it back to normal sort of patterns.
Sanjay Mirchandani: And I think we got that, and we'll keep, you know, we'll keep focusing on it. So it's still a young business, it's three years old, in effect. We're very happy with where it is, but there's a lot to do. Sounds great to see the metallic Earth Engine taken in and it can grasp Mr. Encore. Thank you, Howard. Thank you.
James Fish: Your next question comes from the line of James Fish from Piper Sandler. Please go ahead. Hey, guys. Thanks for the questions. Maybe building off of the past couple here.
Sanjay Mirchandani: I guess how should we be thinking about net retention rate for metallic this year and sustainably? Like what are you guys internally kind of targeting for the next couple of years? You know, just trying to understand if some of this material boost and net retention rate is just ketchup from some like last order, for example, or sustainable. And to kind of the points you both have made here, what makes you confident that some of the metallic strength here isn't due to substitution on your term business, especially if we're talking more mission critical workloads moving on to metallic. Yes.
Sanjay Mirchandani: Hey, Jerry, I'll start it off. I think the we're not guiding explicitly to the SAS NRR. I think if you see what's kind of, you know, at our level of maturity of our SAS business, meaning in that $130 million is of a bear or I think world class NRR rates are somewhere between 120 to 130%. I think 130% is a little on the high end on a sustainable piece that we delivered this quarter, especially as the base continues to grow every quarter.
Sanjay Mirchandani: You know, if we're somewhere in that range of 100 to 125, right? So bracket is somewhere between last quarter and this quarter only consistent basis and working towards that. I think that's probably I think that's a good measure. We are seeing 100, you said 120, 200, sorry, 120 to 125, sorry, just to clarify that.
Sanjay Mirchandani: And then from a more of the hybrid cloud mission critical workloads, we are starting seeing some very good growth on that on the SAS business. Now that road right now is incremental. It's not enough to be truly cannibalizing the database software licenses from an actual deal perspective, though customers are in the early innings of their cloud journey, right? So they are taking the time and that shows up in ASPs and the length of deals were in the early part of their cloud journey and cloud innings of migration. They're taking the time to make sure they measure their spending and they're only committing to period right to measure and with what they see in the near term.
Sanjay Mirchandani: Got it helpful and just remind me here, what really happened at the end of the quarter that essentially SAS error accelerated. But we saw a deceleration, technically, in metallic revenues that now revenue is actually outpacing ARR, you know, was it more of a back-end loaded quarter for metallic. You know, with the being about 77% ARR growth should we be expecting, you know, stable metallic revenue growth or fiscal queue tree, essentially, first and second half of the quarter.
Sanjay Mirchandani: I think stable any metallic contracts that we signed in second half of the quarter have very, very little revenue impact. So linearity has less of an impact because you just don't get anything, not much of anything, sorry, not much of anything, once you get past the first half of the quarter or the narrative metallic was relative to product quarters. So nothing unusual, nothing unusual there.
Unknown Executive: Okay, thank you.
Rudy Kessinger: Your next question comes from the line of Rudy Kessinger from DA Davidson. Please go ahead. Hey, thanks for taking my questions, guys. You know, it's great to see the dollar based network tension rate rebound on metallic. I guess the flip side of that is when I look at the growth in metallic AERR for new customers both on a dollar basis or as a percentage points of growth basis is down this quarter versus last quarter.
Rudy Kessinger: I know your subscription customer ads continue to be about 500 quarter, but if you look at your new customers on metallic, are you seeing customers start smaller just given the macro conditions and financial constraints that customers have or what are you seeing from a new perspective on metallic? Hmm. Hey, Rudy Kessinger. I'll hit that and get you to hear from you. At the first half of the year that we're in a good shape with metallic on the new customer, I think probably some of your math hits it on.
Rudy Kessinger: We were probably a little stronger in Q1 on new customer and then in Q2 existing customer was relatively a little stronger than new, but over the first half that's kind of now evened out. And at a business this young, it's hard to look at just one quarter as a long-term friend. We look back over two, three, four, five quarters to make sure that our trajectory on both our new existing are happening.
Rudy Kessinger: And we're pleased with where that is. So we're not reading into the one quarter. We still saw over 500 subscription new customers added during the quarter and the vast majority of those are fast. So we're still seeing it. Now, yes, the deal sizes in the SPs are smaller. They're smaller, but we're okay with that because if I go back to the commentary I made on the next dollar retention and that focus on adoption time to first back up our recovery and then drive the expansion and workload expansion.
Rudy Kessinger: We're betting on the future and our ability to drive that expansion as well. And this is found to be the smaller ESPs is kind of part of the plan because we have a velocity business where we land smaller deals. We have marketplace businesses for smaller deals. We have MSPs that bring in smaller deals that we expand over time. So it's a mix. We sell the enterprise and we sell through MSPs. We've got the whole range.
Rudy Kessinger: Okay, got it. That's fair. And then hear you on the conversion, seeing fewer conversions. I guess just if we look at your term license subscription business, if you strip out conversion, as we start to tweak our models for next fiscal year, I know we got a couple quarters go for this year, but X conversions, you know, a subscription license, they've a single-digit growth business going forward. Is that a low double-digit growth business going forward?
Rudy Kessinger: What should we be expecting there just over the near to intermediate term? Yeah, so if we're not giving up say the longer term guidance, but even if I talk a little bit about what we saw in Q2 and what we saw Q2, you can kind of interpolate that our term license offers through double digits, right? So that's with our conversion down to the standard year, for a year. If you look at the guidance that I gave for fiscal Q3, the quarter that we're currently in, it's a very, it's a very similar trend.
Rudy Kessinger: We're guiding to roughly double digit within their redoubled visits, terms of growth year over year with the situation conversions down year year. So we're driving that growth and we're doing that regardless of the conversions, the conversions are a little variable in there, which is fine. I think those stabilize over time. We're just kind of giving some outlook based on currently what we see, and where we see customers kind of in that journey.
Rudy Kessinger: There's definitely, you know, customers are in that hybrid cloud journey where they've got to, you know, they've got to make some top calls, re-architect, rebuild, shift, migrate, mission critical workloads, not just independently, but tax into the cloud. And that's hard. And as a part of what we're going to talk about next week is how we're going to help customers through that. So when you look at the complexity of that, you know, it's, you have to look it and say, if I was a customer, how would I think about it?
Rudy Kessinger: I'd say, okay, I've got to get to the other side before I make a shift on something. So, you know, if you look at the term or you look at the license model or you look at going from software to fast, these are important decisions in the journey with the hybrid cloud after that security and cyber risk. So, you know, there's a lot of factors and we have very well positioned to help customers through that.
Rudy Kessinger: And we are, which is why we see the momentum in our security capabilities and in customers using that. Adding up 500 new customers on the software subscription and fast platform. So, you know, I wouldn't read into it too much. I would say it's a there in the crosscares of sort of getting from one side to the other in critical mass. And that's what you're kind of seeing there. That's helpful. Thanks for taking my questions and congrats on the good fast figures in the quarter. Thank you. Thanks, Rudy. If you would like to ask a question, please press star one on your telephone keypad.
Eric Martinuzzi: Your next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Please go ahead. Yeah, the perpetual license for the year. I think in past quarters, you've talked about expectation for 40 to 50 million for fiscal 24. Given your at about 27 million here at the midpoint, are you still thinking that 40 to 50 million range? Yes. Hey, Eric, it's Gary. That's correct. The trend we've seen in the first half of the fiscal year.
Eric Martinuzzi: I think our trend for the second half will be at, will be a similar, will be a similar pace is maybe slightly less as as the motion is fully now dedicated to drive the term subscription and fast business. We still have some verticals that are out there that that's still by perpetual, but those verticals become limited every single every single day. So the range of 40 to 50 still fair. Okay, but given the 27 on the front half, that would mean 23 would be the matter.
Eric Martinuzzi: You would expect to be the high end of the range. Yeah, we'll be at the high end of the range. All right, and then look like our performance international international revenue. I think about 12% in the quarter. Just curious to know if you expect that is that just kind of a, you know, reverse into the mean or are we expecting that to perform for the remainder of the year? Yes. Eric, I'll take that it's Gary again.
Eric Martinuzzi: So very pleased with both of our region. Our America's business in total was up about 4% and our international business was up as you said, as you said, 12%. So both businesses returning to growth, which is that acceleration of total revenue growth about 7% year over year, which, which we're pleased with. Our media business is driving some strong growth. We're now seeing some really good acceleration on as well the subscription option.
Eric Martinuzzi: The America was more mature first and now the international business is driving with some of that really strong subscription adoption. The deal sizes in international are a little bit smaller relative to the Americas. So some of the lumpiness that you can get on the Americas on the mega deals and some of the term, the term length topics we talked about is less prevalent international. So we're able to drive the really strong velocity business in the international markets. Thanks for taking my questions. Thanks, Eric.
Gary Merrill: Your next question comes from the line of Jason Aider from William Blair. Please go ahead. Yes, thank you. Good morning, everyone. Just wanted to ask you first on the outlook for customer support revenue. As more of that mix comes from term, do you expect the year of the year declines to start to subside? You know, you're down 9% customer support and fiscal 23 this year is going to be something. I guess slightly lower than that, but be expected as we move forward into 25 and 26 that we should see that continue to declines continue to subside.
Gary Merrill: Yes, yes. Hey Jason, it's Gary. I'll take this question as well. So you've already started to see it. If even if you look at fiscal to actual, if one of the smallest declines we've had in quite some time. And the key driver to that is now a higher percentage of that customer support revenue is being driven by by term. This year we're on a pace where we'll get that amount of customer support related to term software licenses probably to be somewhere 45 to 50% roughly.
Gary Merrill: And as we enter into next fiscal year should should be the cross over year. Cross over year, meaning that as next fiscal year, the majority of customer support revenue will be derived from from the term related software contract. That natural motion will then start to flat line the impact. And then what that does, it will start to alleviate some of the headwinds that has on the total revenue growth. A big piece of our total revenue growth becomes the impact of the customer support.
Gary Merrill: And as we get into next fiscal year and the fiscal year after that, that will start to moderate. And you would expect the impact year over year or the declines to be significantly less than we've seen in prior years, including this year, here. Gotcha.
Sanjay Mirchandani: So the only, let's call it, the only sort of more significant headwind will be perpetual license line. Do you have any, like you talked about 40 to 50 sort of toward the high end of that range this year in perpetual license route view? As we move forward into 25 and 26 with that opinion, you down on specific guidance, do you think that we'll sort of continue to trail off sort of modestly or do you think it'll actually be more of a sharp fall off?
Sanjay Mirchandani: Modest. I think it'll be modest. It'll be similar to the impacts on total revenue as the customer support does. If we end up somewhere, say this year at the high end of that 40 to 50 million dollars, called roughly 50 million dollars, then as they get into next year, we're likely to be in that range, but probably more towards the lower end of that range. So you're talking variability is not significant on a revenue number, that's obviously over 800 million.
Sanjay Mirchandani: Gotcha. Okay. Great. And then Sanjay, if I want through you just on the SMB and mid market dynamics, you know, less about competition, but just more about how SMB and mid market customers are actually purchasing and procuring backup software and backup services. Can you just talk through how you guys have with call it adapted your strategy because it does seem like more of that market is shifting towards as a service offerings?
Sanjay Mirchandani: Sure. So for that particular segment, we've, I think we mentioned in a couple of calls, prior to this, Jason, that we've invested in a velocity motion, which loosely translates to ISRs plus a channel motion that allows us to go up the velocity of the smaller customers. In addition, that's number one. In addition, we've also been working with a growing MSP community, you know, and many customers, as you mentioned, like to work through through that.
Sanjay Mirchandani: The third is, you know, marketplaces as the hyper-staylers set to promote their marketplaces. We see customers being able to sort of tap into that motion and and develop software, our staffs right through that. So we, you know, those are just some examples of how we're enabling our technology to be more accessible to our customers in the way on the metallic business. Sanjay, can you give us a sense of how much of that business is coming from sort of SMB mid-market customers versus enterprise?
Sanjay Mirchandani: I think it's, the trend has been fairly consistent. The enterprise side of our business is about, you know, but a third enterprise roughly, a third mid-market and a third SMB. It's not by design necessarily. It seems to be following that, and I'm actually quite pleased with it because it's a de-risk service, but also gives us a chance to grow in the areas that we haven't historically, like the SMB and the lower. Okay. Great. Thank you.
Tom Blakeley: Your next question comes from the line of Tom Blakeley from Keybank Capital Markets. Please go ahead. Hey guys, thanks for taking my question. Just a couple of funds.
Sanjay Mirchandani: If you could go back to that hybrid cloud journey, answer you gave a prior call questioner. You know, is that company specific or could you talk to just the greater kind of view in the industry in terms of, you know, things being complex and it seems to be a bit of a pause. Hybrid cloud spend is kind of received a bit of an uptick in the last few quarters, if not longer, as there's been a acceleration and public cloud spend in general.
Sanjay Mirchandani: Just wanted to kind of maybe if you could clarify that or give any extra color to be helpful. And then, and then just secondly for for on the NRR for metallic, you know, the split up between capacity growth, and new services, if you could, and if, and if security is maybe it's a premature question, but if it's security impacting that kind of NRR, that'd be helpful. Thank you. Okay, let me, let me process those.
Sanjay Mirchandani: So the hybrid cloud journey, my, my, my thinking there is the fault, you know, the, there was the customers were thinking of us a little bit, first of all, as a, as a trailing indicator. So it's about utilization. It's about workload that used the command. It's about maintenance that customers have made in the hybrid cloud or the public cloud services. And what we're, what we're doing is helping customers through those difficult journeys, because as, as the easy workloads move for the cloud, it gets harder and harder to move entire stacks of mission critical capabilities and run them entirely on, on public cloud services or hybrid type capabilities.
Sanjay Mirchandani: And that's what I was going to refer to. And, and we're helping customers whether it be through moving that data, whether it's their infrastructure, whether it's their, you know, their data security, whether it's applying intelligence and expensive data management across that stack data in flight. There's a lot of things that that moving to the hybrid cloud to open up. And we're, we're across, you know, a lot of those use cases and a lot of those outcomes.
Sanjay Mirchandani: So, you know, I, that's, that's kind of where I was going. And, and it's not so much a, you know, whether it's, it's increasing the decreasing and, and spend from a, from a, from a public cloud capability. It's really the utilization. They're, and making sure that, that customers are getting the value of the anticipated from their, from their journey to the cloud. I will see. I know it's moving mission critical workloads into the, into a cloud or any of the platform is, it requires a lot of, it is complex and requires a lot of thoughtfulness and the right choices.
Sanjay Mirchandani: And, and that's what we're trying to help our customers with. So, that's, that's my, that's my, I want to pause there. Did I, did I cover your question? Yeah, yeah, yeah, just maybe the five there before we get to the NRR. Is that, does that imply from a trailing indicator perspective that there might be, you know, some pent up demand for, for combat and that regard. As, as, as, as short answers, I would hope so because as customers move to the, and a lot of what we're going to talk about next week.
Sanjay Mirchandani: Tom is about, you know, where we, we see the customer journey, where we see them sort of having to make tough decisions, where, you know, what are the, what are the hard problems they're helping them with with on data? Do they have to make choices between software and that, you know, the security models using AI? These are, you know, recovery capabilities when, when in the light of cyber resilience. These are all important decisions that have to be made as the journey to the cloud becomes more and more.
Sanjay Mirchandani: That's why we're, we're, we're trying to be one, two steps ahead of them in anticipating that so I, I would hope so. So, and then just I know all the 130s is a strong number, just any type of commentary on the mix of capacity, growth and new services there and possibly of securities impacting that, that be helpful. Hey Thomas, Thomas Gary, I'll take that one, relative to 130% of net dollar retention.
Sanjay Mirchandani: As you think about the drivers of what you're drawing that from a upsell versus cross-sell, about two thirds of that comes from upsell, meaning upsell more of similar capacity or licenses or seats and about a third or roughly there comes from cross-sell, which benefits of the cross-sell motion, whether it be dynamics, whether we are security offerings, the hybrid cloud for VMs or databases, they're all contributing factors. Actually, security is part of that, but we're seeing a little bit more on the upsell and about a third of that expansion on the interarger from cross-sell. Thanks Gary, thanks guys.
Michael Melnyk: We have no further questions at this time.
Unknown Executive: I will now turn the call over to Michael Melnyk for closing remarks. Thank you for joining the call today. If you have any follow-up questions, feel free to reach out to me. Also, Mr. Reminder, if you haven't yet registered, the live event will be November 8th in New York City, and then the replay for shift will be on November 9th. Visit convault.com to register. Thanks for joining. Appreciate it. This concludes today's conference call. Thank you for your participation and you may now disconnect.