Q2 2026 Commvault Systems Inc Earnings Call
Speaker #3: Ladies and gentlemen , thank you for standing by . My name is Desiree , and I will be your conference operator today . At this time , I would like to welcome everyone to the Commvault second quarter fiscal Year 2020 earnings Conference call .
Speaker #3: All lines have been placed on mute to prevent any background noise . speakers remarks , there will be a question and answer session After the .
Speaker #3: If you would like to ask a question during this time , simply press star , followed by the number one on your telephone keypad .
Speaker #3: If you would like to withdraw your question again , press star one . I would now like to turn the conference over to Michael Melnyk , Head of Investor Relations .
Speaker #3: You may begin .
Speaker #4: Good morning and welcome to our earnings conference call . Before we begin , I'd like to remind you that statements made on today's call will include forward looking statements about Commvault future expectations , plans and prospects .
Speaker #4: All such forward looking statements are subject to risks , uncertainties and assumptions . Please refer to the cautionary language in today's earnings release and Commvault most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to materially different from those contemplated in these forward looking statements .
Speaker #4: Commvault does not assume any obligation to update these statements during this call. Commvault financial results are presented on a non-GAAP basis.
Speaker #4: 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 our CEO , Sanjay Mirchandani , for his opening remarks .
Speaker #4: Sanjay .
Speaker #5: Good morning and thank you for joining call . Commvault had another strong quarter and an excellent start to the first half of the fiscal year .
Speaker #5: Highlights include in constant currency , we added a record 47 million net new RR subscription . RR rose 30% to 894 million total revenue grew 18% to 276 million .
Speaker #5: Additionally , we hit a major milestone earlier than expected . Total RR grew 22% , and with that , we achieved a $1 billion in total RR , two quarters earlier than our original March 2026 target .
Speaker #5: In Q2 , SaaS AR grew 56% , hitting 330 million . This was also two quarters earlier than projected , and for the fiscal first half , we achieved 42 .
Speaker #5: On a rule of 40 basis . We couldn't have done it without the support of our customers and partners and the unwavering commitment to innovation and excellence .
Speaker #5: The team . Looking ahead , there are three key business drivers that continue to fuel our growth . One . Strong demand for our Commvault cloud cyber resilience platform from our hybrid cloud customers two as I mentioned in prior quarters , the continued move to the cloud , which our platform is tailor made to support , and three customers rely on our innovation engine to meet their complex and evolving readiness and resilience requirements .
Speaker #5: I'll discuss each in more detail first . Hybrid cloud customers are embracing our cyber resilience platform . New attack vectors are constantly emerging , and with AI , data is more distributed and is being used in new ways , which introduces more threat vectors for organizations to grapple with .
Speaker #5: The need for best in class detection , protection , and recovery is paramount . Traditional data protection approaches don't cut it . Customers need a platform that makes them ready to withstand the worst to keep their business continuous .
Speaker #5: We do this better than anyone else this quarter , we saw strong momentum across our identity and data security focused offerings , which grew double digits sequentially and represented nearly 40% of net new RR , our fastest growing SaaS offering this quarter .
Speaker #5: Rapidly restores Active Directory and ID to identity protection services in Q2 , a large bank and Asia Pacific chose Commvault Active Directory , offering to quickly recover its identity operations after a cyber attack .
Speaker #5: They also leveraged threat Scan to validate clean recovery points and unified its hybrid workloads to close gaps and meet its regulatory requirements . This is cyber resilience in action .
Speaker #5: As we shared last quarter , we also continue to invest in our partner ecosystem , which makes our platform even stronger . This quarter , we announced a new partnership with Beyondtrust , a global leader in identity security , by integrating their capabilities with a cloud platform , we can help joint customers advance recovery while reducing unauthorized access to credentials , systems and data .
Speaker #5: We believe the momentum we're seeing across our identity and data security focused offerings will continue in the second half of the year . Which brings us to our second growth driver .
Speaker #5: The continued move to the cloud . Cloud born and cloud bound data is accelerating at a tremendous pace , and this is only going to increase with the rapid proliferation of AI today .
Speaker #5: Commvault has moved and protects approximately eight exabytes of customer data into the cloud . This represents a greater than 40% kegger over the past five years .
Speaker #5: We expect this rapid pace of growth to continue , fueled by the fact that customers are increasingly storing AI data in the cloud .
Speaker #5: It makes our Clumio portfolio of offerings for AWS more relevant than ever . Over the past year , we introduced gloomier Backtrack for S3 and brought Clumio unique recovery capabilities to DynamoDB .
Speaker #5: And Apache Iceberg . We are transforming the speed , scale , and efficiency in which cloud data can be restored this quarter , we saw healthy sequential growth in AR from Clumio and continue to add new customers to the platform , including three fortune 1000 customers and two fortune 500 customers and BBVA , one of the world's largest financial institutions , chose Commvault to reduce its cloud native complexity , strengthen its Dora compliance requirements and protect its mission critical AWS data .
Speaker #5: Commvault cloud unified its data protection across three major hyperscalers and Clumio unlock a 40% cost savings . Additionally , we made tremendous progress with cloud bound enterprises in Q2 , the number of SaaS customers grew to nearly 9000 , representing a 40% increase year over year .
Speaker #5: Net dollar retention remains healthy at 125%, and we continue to see strong adoption of our SaaS offerings from existing customers. A Global Fortune 1000 system manufacturer chose Commvault to support its hybrid cloud journey.
Speaker #5: Today , Commvault safeguards its virtual machines , databases , file systems and Microsoft 365 data . The customer also leverages Airgap , protect and our integration with Azure Government Cloud to streamline operations and support its compliance initiatives .
Speaker #5: Which brings me to our third growth driver Commvault Innovation Engine . Our innovation engine has never been better . Time and again , we've been first to market with unique capabilities that address our customers most critical use cases .
Speaker #5: Innovations like cleanroom recovery , Active Directory and Cloud Rewind are closing the gap for customers evolving readiness and resilience requirements . Top industry analysts are taking notice .
Speaker #5: We are one of the few companies to be named a leader in the Forrester Wave . The Gartner Magic Quadrant and just this quarter , the IDC Marketscape on Cyber Recovery , the IDC Marketscape report highlighted our platforms comprehensive cyber recovery architecture , broad workload support , and deep data security integrations for delivering enterprise grade resilience .
Speaker #5: This is why customers choose compo as enterprises embrace AI , we will help them address evolving resilience requirements . That's why we acquired Satori Cyber , which closed during the quarter and is being integrated into our cloud platform .
Speaker #5: This acquisition is timely as it provides monitoring and prompt protection for large language models , as well as automated discovery , classification and access management for structured data .
Speaker #5: We will discuss the evolution of resilience in the age of AI and introduce our richest set of innovations ever at Shift . Our premier customer event on November 12th in New York City .
Speaker #5: I hope you can join us . And with that , I would like to turn the call over to our CFO , Jen DiRico , to discuss our results in more detail .
Speaker #5: Jen .
Speaker #6: Thanks , Andre . Good morning and thank you for joining us today . Our solid Q2 results confirm that data is moving to the cloud at an accelerating pace .
Speaker #6: Our Commvault cloud platform is well situated to benefit from this shift . Case in point , in Q2 we set new records by adding $47 million in net new RR and $29 million in net new SaaS IRR on a constant currency basis .
Speaker #6: And we exceeded $1 billion in total IRR . Reaching this milestone two quarters earlier than our initial target . Now , I'll discuss our Q2 results and operating metrics , followed by an update on Q3 and FY 26 guidance .
Speaker #6: Please note that all growth rates are on a year over year basis in otherwise specified on a reported basis . Total annual recurring revenue increased by 22% to $1.04 billion , or 21% on a constant currency basis .
Speaker #6: Subscription IRR increased 30% to $894 million , representing 29% growth on a constant currency basis . This was led by 56% growth in SaaS RR to $336 million , and I'm excited to share that we exceeded our original $330 million SaaS RR target two quarters earlier than planned subscription RR now constitutes 86% of total IRR , compared to 81% one year ago .
Speaker #6: Subscription IRR is the best indicator of the company's growth . Now , I'll discuss Q2 revenue trends , total revenue grew by 18% to $276 million , led by a 29% increase in subscription revenue , including 61% growth from our SaaS platform .
Speaker #6: Term software revenue rose 10% to $93 million . Strong , double digit growth in transaction volume was tempered due to a shift in term duration , which reduced average deal size in Q2 , customers chose shorter contract duration to maintain flexibility between software and SaaS , as they evaluate the timing of their transition to cloud .
Speaker #6: Q2 SaaS net dollar retention was steady at 125% , benefiting from both successful upsell and cross-sell initiatives . We saw solid momentum across our identity and resilience offerings such as Airgap protect active Directory , Cleanroom Cloud , Rewind , Risk Analysis and Threat Scan , which collectively grew double digit percentage sequentially and represented almost 40% of net new IRR .
Speaker #6: Active Directory, a mission-critical identity tool for an effective resilience strategy, saw usage more than triple year over year as IT leaders adopt our data and identity recovery solution.
Speaker #6: In just two years , Active Directory is on pace to become one of our largest SaaS offerings . For example , we expanded our footprint with a large US based healthcare services customer who sought to address concerns around identity and resilience after one of its largest competitors suffered a crippling cyber attack with the addition of Cleanroom Active Directory , Enterprise and M365 backup , we are securing this customer against accidental deletion , corruption and providing peace of mind in being able to rapidly recover in case of an event .
Speaker #6: Additionally , we closed several seven figure SaaS transactions during the quarter . Further evidence that Commvault cloud is the gold standard for enterprise grade resilience at scale .
Speaker #6: SaaS customers over $100,000 in IRR grew 55% year over year , outpacing growth of the overall SaaS base due to the complexity of their requirements , this segment typically demonstrates a higher rate of multiproduct adoption than our overall SaaS base .
Speaker #6: Now , I'll discuss our profitability and free cash flow . Fiscal Q2 gross margins were 80.5% , which reflects the acceleration in the mix of SaaS and shift in average software duration , operating expenses of $170 million represented 61% of total revenue consistent with the prior quarter , and prior fiscal year .
Speaker #6: Q2 operating expenses reflected continued investments to support our strong ongoing growth trajectory . non-GAAP Ebit was $51 million , resulting in a margin of 18.6% , which reflects the increased mix of SaaS bookings and the integration costs from Satori .
Speaker #6: For the first half of fiscal 26 , we achieved a 42 on a rule of 40 basis , reflecting a healthy balance between revenue and profitability .
Speaker #6: Turning to key balance sheet and cash flow indicators. On September 5th, we closed a private offering of $900 million of convertible senior notes with a coupon of 0%.
Speaker #6: This capital raise allows us to . Optimize our balance sheet and provide additional flexibility for capital allocation decisions . We achieved very favorable terms on this financing , reflecting strong investor demand against a solid market backdrop .
Speaker #6: We repurchased $131 million of stock during the quarter , of which $118 million was executed in conjunction with the convert . We ended the quarter with a diluted share count of approximately 45 million shares .
Speaker #6: Q2 free cash flow grew 37% year over year to $74 million , primarily driven by continued strength in deferred revenue from SaaS contracts and strong cash collections against Q1 sales .
Speaker #6: We ended Q2 with over $1 billion in cash . Now I'll discuss our outlook for Q3 and our updated outlook for fiscal year 26 .
Speaker #6: For fiscal Q3 , 26 , we expect . Subscription revenue , which includes both the software portion of term based licenses and SaaS , to be in the range of 195 to $197 million .
Speaker #6: This represents 24% growth at the midpoint . We expect total revenue to be in the range of 298 to $300 million , with growth of 14% at the midpoint .
Speaker #6: At these revenue levels , we expect Q3 consolidated gross margins to be in the range of 80 to 81% . We expect Q3 , non-GAAP Ebit margins of approximately 18 to 19% , which reflects continued strong growth from our SaaS platform and ongoing shift in term software duration .
Speaker #6: Now, I'll discuss our updated fiscal year 2026 guidance. As a reminder, AR guidance is in constant currency, using FX rates as of March 31, 2025.
Speaker #6: For a historical comparison , please refer to page 30 of our Q2 earnings presentation . We now expect constant currency fiscal 26 total AR growth of 18 to 19% year over year .
Speaker #6: This will be driven by subscription AR , which we now expect to increase by 24 to 25% year over year . That represents an increase of 50 basis points at the midpoint for both metrics .
Speaker #6: From a full year fiscal 26 revenue perspective , we continue to expect subscription revenue to be in the range of 753 to $757 million , growing 28% at the midpoint .
Speaker #6: Our guidance assumes a continued shift in term duration during the second half of the year . We reiterate total revenue of 1.161 to $1.165 billion , an increase of 17% at the midpoint .
Speaker #6: Moving to our full year fiscal 2026 margin, EBIT, and cash flow outlook, we now expect gross margins to be 80.5% to 81.5%.
Speaker #6: This range reflects continued growth in our SaaS platform , which carries a different gross margin profile than software . We now expect non-GAAP Ebit margins of approximately 18.5 to 19.5% , non-GAAP Ebit margins reflect our ongoing investments in additional growth , driving initiatives .
Speaker #6: We are raising our full-year free cash flow outlook to a range of $225 million to $230 million. This guidance reflects benefits from recent federal tax law changes.
Speaker #6: To summarize , our first half results are evidence of strong market demand that we believe will continue throughout the year thanks to our leadership in innovation , our growth focused investments , and strong execution .
Speaker #6: We are well positioned to continue taking share of the expanding cyber resilience market . Now I will turn it back to the operator to open the line for questions .
Speaker #6: Operator .
Speaker #3: Thank you . We will now begin the question and answer session . If you have dialed in and would like to ask a question , please press star One on your telephone keypad to raise your hand and join the queue .
Speaker #3: If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute.
Speaker #3: When asking your question again , press star one to join the queue . Our first question comes from the line of Aaron Rakers with Wells Fargo .
Speaker #3: Your line is open .
Speaker #7: Yeah , thanks for taking the questions . I guess maybe to start , Jen , can you talk a little bit about a little bit more about the shift in term duration ?
Speaker #7: I guess if I look at the guidance and reiterated guidance for for the full year , it kind of implies a deceleration of growth .
Speaker #7: You know , call it into the 11% total range . You know , can you just unpack that a little bit ? Why we would expect to see growth decelerate in fiscal four .
Speaker #7: Q and , you know , maybe that's that's tied back to that , that shift in term .
Speaker #6: Absolutely . Thanks for the question , Aaron . First , let me just start by saying I would say this is the this is our second best term software .
Speaker #6: RR quarter . And that was coupled by the fact that we saw strong volume as well . So this is the second best net new customer additions quarter for term software .
Speaker #6: When we unpack the variance and subscription revenue , it really came down to that shift in term duration . And effectively back to the levels that we saw a couple of quarters ago .
Speaker #6: And so when we double click what we really saw was customers wanting to maintain their flexibility as they thought about the their anticipation move to the cloud , but ultimately , what we were really pleased with was the volume that we saw in our software term business from a volume perspective , deals greater than $100,000 , actually increased 17% .
Speaker #6: So ultimately , that's really where we see the strength coming from , from an IRR perspective . And we do believe that is the best indicator of growth as we zoom out and think about the second half of the year , right .
Speaker #6: What we have seen is the continued acceleration of SaaS , really meeting the moment from where customers are . And we have the best platform to do that .
Speaker #6: And ultimately , when we look at the pipeline for the second half of the year , we've been prudent as we think about the pipeline and ultimately have carried through the same trends that we saw in Q2 through the rest of the year .
Speaker #6: But I would just end by saying the growth in our business really is dictated by the RR that we see , and we've raised both the subscription RR and total RR by 50 basis points .
Speaker #7: Yep , yep . Thanks , Jen . And then as a quick follow up , I'm curious , kind of sticking on the growth theme a little bit .
Speaker #7: The slide deck highlights your expectations on a Tam growing at I think it's 12% CAGR over the next couple of years . I guess as we think forward , I mean , Commvault seems to be in a pretty good position as still possibly a share taker .
Speaker #7: Can you talk about the competitive landscape and whether or not , you know , we should think 12% kind of a baseline . And , you know , there's there's the ability to continue to grow above that .
Speaker #5: Oh , sure . Aaron and Sanjay , how are you ?
Speaker #7: Great .
Speaker #5: So let me good . Let me just take the the competitive landscape . So , you know , when you look at our growth , healthy double digits has been for a few quarters this quarter included overall , both SaaS and and software .
Speaker #5: You know , and when you when you when you break down the the Tam at least on the on the more classic data protection side , you'll see that the SaaS , SaaS market is growing double digits .
Speaker #5: And we're fast outpacing it at 55% ish IRR growth this quarter on just our SaaS product . And when you look at the software Tam , that's probably growing zero to low single digits and has been again for a while , our software business is growing at a healthy double digits , which which brings you to we're taking share and we're continuing to take share .
Speaker #5: So I would I would say that , you know , the way we're growing , at least on the software side , is we're our customers are consolidating , you know , disparate platforms over the years .
Speaker #5: There are three thinking there . They're resilient strategy with us in the in the in the wake of all the all the ransomware and cyber attacks and we continue to innovate on our platform , you know , I'll let I'll let Jen flesh out the rest of your questions .
Speaker #6: Yeah , sure . And and response to the Tam growing 12% . I would point you back to our overall IRR growth and our subscription IRR .
Speaker #6: So fundamentally , we still believe we have the continued opportunity to take share in a market and grow faster than the Tam .
Speaker #7: Yep . Thank you guys .
Speaker #3: Our next question comes from the line of Jason Ader with William Blair . Your line is open .
Speaker #8: Yeah . Thank you . Good morning guys . So some investors have asked whether we might be seeing the back modernization cycle . Kind of winding down after a few years of elevated investments .
Speaker #8: How do you respond to that ? Sanjay ? Do you feel like , you know , we are sort of call it in the back nine of some of that modernization activity in response to ransomware ?
Speaker #5: I don't think so . Jason . I think we haven't seen a slowdown in cyber attacks or new threat vectors and , and or the scale at which this is happening .
Speaker #5: So there's a lot of work to do . It's , you know , and we're working with customers around the world on very similar types of , of cyber resilience programs .
Speaker #5: I don't think so . You may see different implementations know , in the as , as we go into what I'm affectionately calling the AI era and , you know , there'll be different , different , different needs .
Speaker #5: There'll be different threat vectors . And we're working really hard to to make sure that we're one step ahead of what customers are going to encounter .
Speaker #5: In fact , shameless plug , you know , at shift , at our shift event on the 12th of November , we're going to unveil probably the most rich set of capabilities on our platforms ever .
Speaker #5: And so you'll see a lot more of where we believe the world is headed . I don't want to give it all away .
Speaker #8: Okay , okay , good . And then just as a follow up for you , Sanjay , could you offer any comments on the deal announced last week between Veeam and Security AI ?
Speaker #5: I guess Anand would be the right person to ask that question , but the way we look at it is we've we've been saying this for a while .
Speaker #5: We've we've been saying , if I mean , I'm going to guess I've said it for the past three years where , you know , the world of data security and the world of data protection , as we know it has to come together .
Speaker #5: If you want to be truly cyber resilient and what you're seeing , you know , with our acquisition , for example , of of cyber was along the lines , I think of what we may have done with their acquisition .
Speaker #5: The the , you know , where identity observability . Policy enforcement on , on all things within your enterprise when it pertains to data , all of these things have to work together because as , as cyber attacks get more sophisticated , if there's light between your your data security elements and your data protection elements , you're exposed .
Speaker #5: And this is the bringing together of it . We we announced our acquisition last quarter .
Speaker #8: Thank you . Good luck .
Speaker #5: Thank you sir .
Speaker #3: Next question comes from the line of Eric Heath with KeyBanc Capital Markets. Your line is open.
Speaker #9: Hey guys . Thanks for taking the question . And yeah , I would say just looking at some of the net new RR does look like it's still accelerating over last quarter .
Speaker #9: So it doesn't really seem like a slowdown . But maybe question for for you Jen . Just curious what's given you the confidence to kind of make the step up in investments and maybe how you're thinking about that trade off and what is a 50 basis point raise to growth , but 150 basis point reduction in margin relative to your prior guidance ?
Speaker #6: Yeah , thanks for the question . And it's the right one . Ultimately what we look at is what has and hasn't changed for the year .
Speaker #6: As we think about guidance and our ability to continue to invest and fundamentally what has not changed is our ability to continue to take , share .
Speaker #6: We see that in the fact that the volume and RR is up . So volume , number of customers and our overall rep productivity continues to increase .
Speaker #6: We're also seeing the fact that our net new offerings continue to contribute more and more to our IRR . Right ? So across the board , when I think about the opportunity to invest , when we go back and when we started this year , there were a couple of key things that we needed to see .
Speaker #6: And effectively , we're continuing to see them . Right . And so ultimately we said 26 is going to be a year of investment , and we're going to continue on that path because all signals say the market has not changed .
Speaker #9: Got it .
Speaker #5: And Sanjay , you know , it's a very competitive landscape . We have to be we have to be ahead of of what what what is going on in the market .
Speaker #5: We run we run a very responsible business , as you probably tired of hearing me say , you know , where we worry about the top , we worry about the bottom .
Speaker #5: We want to make sure that we build a sustainable company . So within those within those constraints , we , you know , we continue to invest both in product , you know , we're seeing a lot of accolades on our platform .
Speaker #5: And you haven't seen what we're bringing out yet . And and obviously we have to be we we have to be where the customers are .
Speaker #5: So , you know , that's the thinking .
Our ad and and try ID and you know, our identity uh, capabilities, we starting to become a significant contributor to a net, new are so that is a positive sign.
Thanks anj as a follow-up for Jen, given the appreciation for conval's hybrid strengths.
Are you seeing increased crosselle between your term customers and SAS customers? I I I recall you all gave us that uh, it's probably from 2 years ago. I think it was like 40% of SAS. Customers are also termed customers. Uh so I wonder if that percentage has gone up and then specifically with respect to the to the change in term variation where it with compress compression are more are are higher mix of SAS customers influencing um, the you know the those that those that that also use terms, you know, is that causing them to drag down the the the contractor duration
Yes, so first, let me answer your first question around the mix between software customers. Also use,
Staff.
We gave a little while ago was about 30% that continues to tick up fully, right? But we're seeing that traction um and as Sanjay and I both shared in our scripts are on the fact that customers are really wanting to maintain their flexibility. Right? Whether they're starting with us in software or SAS the most important thing is that, you know, as customers continue to transition their workloads, we have that opportunity, so I think we're seeing that in the numbers so that you can add and and and and how we're, you know, we we we obviously, we obviously help customers
With the workouts logically. So there are some that overlap like virtual machines between between Cloud Drive and SAS driven or on premise driven, that's a short to give our customers, but things like protecting, Microsoft 365 is all Cloud driven. So what ends up happening is as customers as we work closely with customers on their Journey, on their workloads, on their priorities, on their timing, um, we we meet them where they are and that's and that's just how it works and and and sometimes you know, there's a there's a shift where they make the cloud a priority over on premise, but the good news part all the way, the good news all the way is that they commit to our platform and then we we we we enable them all the way whether they're on premise on the cloud or on the edge. So I look at this, I look at this movement as something we've been expecting.
And something that we're ready for with a tailor-made platform for our enterprise hybrid customers.
Great. Thanks so much.
next question, comes from the line of
Hey, great. Thanks guys. Um, congrats on a strong quarter. You know, when I look at ARR, which obviously matters much more than Revenue, um, obviously record net new ARR and by my math organic, our growth at constant currency accelerated at 0.99%. Um, Jen. We talked about ongoing investments in growth initiatives. As part of the reason for the E that margin guidance coming down in addition to the gross margin compression.
could you just talk about, you know, where you're making those incremental Investments and, you know, could we see further our growth acceleration, you know, over the next year or so, as a result of those Investments,
Yeah sure. So let me start by saying, what we did was continue to keep operating expenses at about 61% of Revenue, that's consistent with prior quarter and prior year, the, the overall, um,
Gross margin pressure that we saw really came down to the fact that our staff business continues to accelerate. Which as we all know, is a strong is a great, great thing, and ultimately just has a different margin profile. And then, overall the shift in term duration. So, ultimately this quarter, the pressure really came down to gross margin.
As we think about the back half of the year, um, ultimately what I would say to you is the Investments, we started out the year in terms of continuing to accelerate our SAS motion, right? We're we're still making those plays um, as evidenced by the guidance, for the back, half of the Year, implies a 45 million of net. New are on a constant currency basis, which as you remember, is above that 40 million, that I first started the year with. And so ultimately, our investments are paying off and we're going to continue to exit.
Got it. Thank you. And then any parameters, I guess for the second half. Obviously we we have the total implied, net new our guidance. But just any, um, parameters in terms of what we should expect from SAS, I think the prior commentary was 20 million. Plus, obviously it did I think 29 million in Q2, like should we expect 25 million, plus assassinate new Arrow. Now on the second half or just any kind of guard rails around the Assassin. Term license. Split in the second half.
Yeah, do you think about the split the best way to think about it is approximately 60% of our net. New ARR will be sat
very helpful.
Next question comes from the line of James fish with Piper Sandler. Your line is open.
Hey guys, wanting me to go back on on the contractor region. It's the shorter contractor agent being seen more on the existing install bases. The Assumption I'm making or are you seeing it on on New Deals as well? Combination of 2. Jen, is there a way to think about where we're at on average duration at this point? And is there a vertical or 2? That's sticking out with this such as obviously, we're talking Federal generally this quarter but now we're talking about it even more. So given the shutdown
Yeah. So first of all, what I would say to you is it's actually across the board. We're customers are really wanting to maintain that flexibility as they think about either accelerating or just anticipating their Journey to the cloud. Quantifying that we are down 9% from a shift term quarter over quarter but again I would go back to it really normalized to what we were seeing 3 or 4 quarters ago,
Um, and so ultimately, I think that is the, that that's how we're thinking about it. Um, did you have a second part of your question?
I I was asking uh you guys historically have talked about duration, um, here and there. And, you know, it used to be about 3 and um then you start talking about new customer lands. Being I want to say 2 to 3. Mike can can correct me. But you know, where's average duration now, trying to understand like how much of a headwind duration is
Right now to term license.
Yeah, I think I would say I would just go back to the fact that I think we've shared that in a new deal, is it, it kind of was a creeping up towards 3 years overall. We've seen that go down about 9% ultimately um and that's how we're quantifying the impact.
Okay, it's 1. Second, I just want to add to that, understand that the other metric that I look at very closely or we look at very closely is the number of new deals that we're bringing into the business.
Okay. And this was the second largest number of deals of a new deals that we brought in on on term software. Okay, uh, in this quarter. So if you look at that, the volume and the significant
Okay. Uh, you know, and and and ask customers move to hybrid. It's very logical that they have different implementation plans and you have to meet them where they are and and I'm I look at this as is something that that's a transition customer's have to go through and we are ready for it and we help them while they're going through it on the on, on the, on premise side. And we pick it up completely on the on the cloud side and that's the way to think about it.
So look, I understand that there's greater SAS mix and and some term duration headwind here. But if I look at the gross margin um you know SAS being sort of mid-60s at this point. Um
The other kind of gross, the I'll say the remainder gross margin was down, you know, decently sequentially, you know, why isn't this just, you know, competitive pressures or further discounting in the space?
Really I would just go back to what I shared. It really is around the fact that the bulk of this is very much the acceleration of theft and the shift to terms. There's really nothing else to talk about their nothing major, nothing major.
Okay, thanks.
Thank you.
Next question comes from the line of June need to be Securities. Your line is open.
Uh great. Uh, thanks for taking my question, um, Sanjay as the pace of innovation increases and and the Cadence of new products that you launch accelerates. And and I'm sure we're going to hear a lot more in a couple of weeks, a shift. Uh, you know, what are some of the things that you are doing on the pricing and packaging front? Uh, that can help customers consume more of that platform.
hi Janice, um, great question and
Without giving it all away, there is, uh, you know, maybe we, maybe you and I meet in two weeks and I take you through some of the innovation and how we're thinking about it. But the bottom line is, a lot of work we're doing in there to make it super easy for customers.
With new Services over time. What's implicit in what we're doing? Which is which is not your question but I think it's important to understand as we're building a ton of testing, you know, tasks that customers have to do to be ready in the face of a of a Cyber attack or an event and making sure that we're building that capability that automation into the product platform and into the packaging.
And that's becomes really important. So without without getting into the the details, and I'm happy to spend time with you at shift and and walk you through it. But when you see the portfolio, I think it'll be quite logical how it all comes together.
Great, thank you. And Jen, uh, just in terms of capital, allocation, I know you mentioned, you bought some, um, shares especially in conjunction with the convert. Uh, but, you know, historically, I think you've talked about, you know, allocating, you know, north of 75% of free cash flow to buying back shares. Is that still the case? Uh, is that? How should we? We we should think about, in terms of buyback.
Yeah, thanks for the question. So I would say our Capital, allocation strategy remains consistent, it's on the 3rd of share BuyBacks, m&a investment and organic investment back into the business.
As it relates to share buybacks, you are right. We purchased 118 million shares year to date in conjunction with the convert. That's been $146 million in weekly purchases. We have not had a specific guide, but what I will tell you is that we expect to be opportunistic and active.
And ultimately what we've said is from a modeling perspective that share, uh, count, it should remain approximately flat at about 45 million shares.
Great. Thank you.
Thank you.
And again, if you would like to ask a question, press star, then the number 1 on your telephone keypad,
There are no further questions at this time. I would like to turn the call back over to Mr. Michael Melnick, for closing remarks.
Thank you, Desiree. I just want to remind everyone that the invitations to shift which is happening on November 12th in New York City have been emailed if you didn't um, have a registration or opportunity. Um, to register these email me at mln at convalt cam. Uh we we look forward to seeing you, you'll be able to see a very Innovation Rich day and you will get to hear from our customers partners and spend some more time with management. So we encourage you to attend and we look forward to seeing you in New York. Thank you.
ladies and gentlemen, that concludes today's call, thank you all for joining and you may now disconnect