Commvault Systems - Earnings Call - Q2 2021
October 27, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Commvault Q2 FY twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Melnick, Director of Investor Relations.
Please go ahead, sir.
Speaker 1
Good morning and thanks for dialing in today for our call to discuss our fiscal second quarter twenty twenty one earnings results. Before we begin, I'd like to remind everyone that the statements made during this call, including the question and answer session at the end of the call, may include forward looking statements, including statements regarding financial projections and future performance. All the statements that relate to our beliefs, plans, expectations or intentions regarding the future are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Actual results may differ materially due to risks and uncertainties such as competitive factors, difficulties and delays inherent with development, manufacturing, marketing and sale of software products and related services and general economic conditions. For a discussion of these and other risks and uncertainties affecting our business, please see the risk factors contained in our annual report on Form 10 ks and our most recent quarterly report on Form 10 Q and in our other SEC filings and in the cautionary statement contained in our press release and on our website.
The company undertakes no responsibility to update the information in this conference call under any circumstance. In addition, the development and timing of any product release as well as features or functionality remain at our sole discretion. Our press release related to today's announcement was issued over the wire services earlier this morning and has also been furnished to SEC as an eight ks filing. The press release is also available on our Investor Relations website. On this conference call, we refer to non GAAP financial measures.
A reconciliation between the non GAAP and GAAP measures can be found on our website. This conference call is being recorded and a replay is available for the webcast. An archive of today's webcast will be available on our website following the call. With me on the call this morning are Sanjay Merchandani, President and Chief Executive Officer of Commvault and Brian Carillon, Chief Financial Officer of Commvault. Sanjay and Brian will each share opening remarks and commentary before we open the call for Q and A.
Now I'll turn the call over to Sanjay. Sanjay?
Speaker 2
Thank you, Mike. Good morning and thank you for joining us today. I'm pleased to share that we delivered another quarter of balanced top line growth and improved profitability. Key elements of our vision are coming together. In Q2, we saw continued adoption of our portfolio driving total revenue growth.
Metallic, our SaaS platform crossed into multimillion dollar ARR. The net dollar retention rate for our subscription business exceeded 100% for the second quarter in a row. With our focus on go to market execution, just as we had in Q1, we landed multiple 7 figure deals in The Americas. Additionally, Europe had a solid quarter with year on year and quarter on quarter growth. Adding to this, our focus on operating efficiency drove healthy margin and profit growth.
Our strategy, as evidenced by these results is working. When I talk to customers, two things continue to be on top of mind, navigating their journey to the cloud and securing the data in face of threats like ransomware. Our goal is to provide solutions that make it easier for customers to address these challenges. Regarding cloud, our newly introduced solutions and partnerships are helping customers move to the cloud faster. Each quarter, we're seeing double digit sequential growth in the amount of customer data moving to the public cloud.
Our Metallic SaaS offerings are also off to a strong start. Metallic now protects tens of thousands of Office three sixty five mailboxes and endpoints and more than five petabytes of data for paying customers with 80% of those customers being net new to Commvault in Q2. And we're excited by the many accolades and awards it has received, most recently coveted Best of VMworld award. Between Metallic's rich innovation roadmap, strategic partnership with Microsoft and the upcoming expansion into new markets and geographies, we look forward to sharing more updates in the quarters to come. Regarding security, security conscious customers dealing with the scourge of ransomware are trusting Commvault to ensure they can recover their data and get their businesses back up and running.
Ransomware incidents appear to be at an all time high. The FBI estimates a 400% increase in ransomware attacks over pre pandemic levels, and we're seeing this too across our customer base. In September alone, our customer success team performed more than 1,000 business critical restores worldwide for our customers following ransomware and malware attacks. We are proud to be the trusted partner customers turn to when ransomware strikes. The rise in ransomware is one of the reasons we launched a security dashboard in Q2 to help customers identify security risks.
Additionally, with Ransomware top of mind, we introduced Convolve Disaster Recovery, a standalone product that simplifies the customer experience. We believe these trends in cloud and security represent a tailwind for us because we have the innovative solutions to help customers address both these critical needs. While innovation is our lifeblood, I also understand how raw innovation can sometimes act complexity and undermine value. I saw this when I was a CIO. This is why we know that innovation with simplicity is the key combination.
In July, we launched new flagship product, the next generation Commvault Hyperscale X. It encapsulates the power of all things Commvault, world class protection, Hedvig distributed storage and seamless connection to the cloud via Metallic delivered as an integrated scale out appliance, all managed under a single simple and elegant pane of glass. This is the vision we laid out a year ago and delivered on it in Q2. In addition, with Hyperscale X, encapsulates we introduced DevOps oriented multi cloud container data management and expanded data protection capabilities with Kubernetes workloads. While our competitors are struggling to pull together their container strategy and making pre announcements, our customers already confidently using Commvault storage and data protection for containers in production.
Further bringing together the priorities around cloud and ransomware, Metallic Cloud Storage Service is the next exciting new offering in our rapidly expanding SaaS business. This new service makes access to secure cloud storage as simple as a click of a button within the Commvault Command Center, our single pane of glass. It is built with layered air gap cloud security and we believe it is the ultimate cloud based solution for ransomware recovery. We believe this cloud first strategy is driving our return to growth. Our industry leading technology paired with newly packaged products and modern licensing options is making it easier for customers to accelerate the cloud journeys, embrace new workloads, reduce mass data fragmentation and manage security threats.
Commvault has once again become the leading force in our industry, whether it is the most urgent topics of the day such as cloud or security, critical emerging areas such as containers or formidable partnerships that like that of Commvault and Microsoft that add value for customers. Our approach is not only best in class, it's becoming the industry playbook. Bottom line, we have the right vision. Customers and prospects are seeing the value of our portfolio and we are executing. With that, let me turn it over to Brian to provide some financial highlights and our Q3 'twenty one outlook.
Over to you, Brian. Thanks, Sanjay,
Speaker 3
and good morning, everyone. We're pleased to report for a second quarter in a row, we were able to deliver top and bottom line growth. Specifically, we successfully executed on subscription renewals, added more new subscription and SaaS customers, posted healthy ARR growth and had another quarter of solid margin expansion. I'll briefly review the results. Total revenue was approximately $171,000,000 up 2% year over year.
Software and products revenue increased 5% year over year to $72,300,000 Software revenue growth was driven by large deal revenue and continued success in our subscription business. Large deals represented 66% of software revenue in the quarter compared to 64% a year ago. Revenue from software transactions over $100,000 increased 8% year over year to approximately $48,000,000 The volume of these transactions increased 11% year over year. Average deal size was approximately $319,000 Revenue from these large deals grew across all three regions. We closed multiple 7 figure deals in the quarter with The Americas leading the way.
We're encouraged by the growth in the large deal pipeline as we enter the second half of our fiscal year. We also saw a rebound in deals under $100,000 Revenue from these transactions grew both sequentially and year over year with solid improvements in The Americas and EMEA regions. Fiscal second quarter services revenue was approximately $99,000,000 or flat year over year as we strategically transition certain perpetual maintenance customers to subscription licensing arrangements. These conversions benefit us over the longer term because of the associated opportunity to drive higher lifetime value with an active customer. Let me now discuss our continued transition to a more recurring revenue based model.
As a reminder, FY 'twenty one marks the first significant year of our subscription renewal cycle, which represents a positive inflection point for our business. We expect the renewal cycle will continue to be a revenue tailwind for the next several years. As our business moves more toward recurring revenue over time, we will be increasingly focused on the following three operating metrics to align our reporting with the way customers consume our products and services. They are subscription as a percentage of software and products revenue, recurring revenue as a percentage of total revenue and annual recurring revenue or ARR. Now I'll take a moment to discuss each of these three metrics.
In Q2 FY21, subscription revenue represented 53% of total software revenue. We added approximately 200 subscription customers and our subscription net dollar retention rate exceeded 100% for the second consecutive quarter, which indicates we're executing on expansion opportunities across our base. Our total recurring revenue increased 6% year over year to $129,000,000 and represented 75% of total revenue in the quarter. Last quarter, we introduced annual recurring revenue or ARR. We define ARR as the annualized value of Commvault's recurring revenue streams at a point in time.
As of September 30, our ARR increased 9% year over year to approximately $483,000,000 Now I'll discuss expenses and profitability. Q2 FY 'twenty one total expenses, including both cost of sales and operating expenses were flat year over year at $140,000,000 Growth in software and products revenue combined with our discipline around expenses resulted in EBIT of approximately $29,000,000 a 17% year over year increase. EBIT margin expanded two ten basis points year over year to 16.9%. Let me now shift gears and discuss cash flow and the balance sheet. For the quarter, we generated approximately $25,000,000 of free cash flow.
We ended the quarter with $394,000,000 in cash and cash equivalents and continue to have no debt on the balance sheet. I'd like to address the noncash impairment charge that was included in our press release issued earlier this morning. This accounting charge is primarily due to the revenue performance of the standalone Hedvig product, which did not meet our initial assumptions. As a reminder, this storage technology is absolutely strategic to our portfolio, was the primary motivation behind our acquisition and was integrated into our Hyperscale X offering in less than a year. The integration of this technology gives us capabilities that remove reliance on third party vendors, will drive meaningful gross margin expansion on our hyperscale platform and improve the overall customer experience.
Now I'll discuss our financial outlook for Q3 FY 'twenty one. For the third quarter of FY 'twenty one, we expect total revenue of approximately $174,000,000 to $176,000,000 We expect software and products revenue of 77,000,000 to $79,000,000 I'll take a moment to provide some additional color on Q3 revenues. With the launch of Hyperscale X in Q2, we will start to see the elimination of pass through hardware revenue from appliance sales. The absence of this pass through hardware revenue represents a fiscal third quarter top line headwind of several million dollars. On the expense side, we expect to start seeing gross margin benefit from reduced third party royalties associated with Hyperscale X, the reduction of the aforementioned hardware pass through revenue and cost efficiency measures that we have implemented in our customer support function.
We remain disciplined in aligning our underlying operating expense base to current revenue levels. We expect Q3 expenses to be down modestly year over year, resulting in EBIT margins of approximately 17%. Our projected share count for Q3 is approximately 47,500,000.0 shares. Now I will update you on share repurchases. Our Board recently increased the share repurchase authorization amount to $200,000,000 and extended the program for another year to 03/31/2022.
The enhanced authorization reflects the confidence that we have in the momentum of the business and the return potential we see from current price levels. We plan to be active with the repurchases this quarter. It is also our expectation that share repurchases will be the primary use of cash for the foreseeable future. Finally, we look forward to providing long term financial targets and additional details around our capital allocation policy in the near future. Stay tuned for additional details.
Now I'll turn the call back over
Speaker 2
to Sanjay for some closing remarks. Sanjay? Thanks, Brian. Organizations need to embrace data differently in the world of multi cloud. They need to be the best data protection, the best storage management and the best SaaS experience.
And all of that has to be simple, seamless, integrated and extensible. We've been on this path for more than a year and have solutions to these challenges today. And as you've seen lately, our competitors are scrambling to keep up. We are confident in the opportunity ahead. We have the right playbook, right vision, right portfolio and the focus on execution that we believe will drive sustainable and profitable growth in fiscal year twenty twenty one and beyond.
Our renewed commitment to share repurchases and our intention to provide long term financial targets in the near future underscores our confidence. With that, let's open it up for questions.
Speaker 0
And your first question is from the line of Jason Ader with
Speaker 4
Hi, good morning guys. I wanted to ask a few questions about some go to market. So the some of the channel folks that we talked to mentioned that you guys will be implementing some pricing changes starting November 1. Can you elaborate on those first? And then I have a follow-up.
Speaker 3
Jason, it's Brian here. Thanks for dialing in. Yes, so we actually as part of our launch in July, we came out with some simplified pricing and packaging to align to more customer usage. So it's going to be more cloud consumption based. And we think this is going to actually smooth the go to market efforts and also the sell through the channel.
It's early days, but we've gotten some good feedback on it.
Speaker 2
We've just made it more granular for customers to really align to the workload as well as to getting on board with us.
Speaker 3
And it really just supports our continued move to more recurring subscription based, consumption based offerings.
Speaker 4
Okay. And Sanjay for you, what are some of the areas on the go to market side that you still feel like you guys could be doing a better job of?
Speaker 2
We've done a lot of the work in that space as you've been tracking with us, Jason. Think we're going to just continue to make sure that our offerings are subscription related offerings, our SaaS related technologies, our newer products like our Doctor product are understood and easy to adopt. So it's just really fine tuning if anything. I think we've got a pretty good handle on where we want to be. Most of the stuff we want to do, we've already put in place.
I'd say we had and let's say if I had to pick a theater, just I'd say we continue to work on our Asia Pacific and Japan business. So those are sort of broadly broad strokes. By and large, I think things are as you can see from the results, things are beginning to happen.
Speaker 4
And just on the large deal side, are you happy with where the mix of the business is right now? Mean, it still seems like you're pretty dependent on these large deals, but maybe there's more of them. So maybe just a quick comment on your comfort level with sort of the mix of large deals today.
Speaker 3
Jason, it's Brian here. So I think it's about balanced growth. I mean, we're pretty pleased with our ability to perform in that large deal segment right now, especially in the current environment. The Americas and EMEA and even APJ all scored seven figure deals in the quarter with Americas having multiple. So I think that's goodness for us.
But we also start to see some stabilization, as I said, in the deals under $100,000 with solid contributions from The Americas and EMEA. So I think that was good. Thank you.
Speaker 0
Your next question is from the line of Aaron Rakers with Wells Fargo.
Speaker 3
Hi, this is Jake on for Aaron. Congrats on a great quarter. I was wondering if you could talk a little bit more about your subscription ramps, specifically the upsell opportunities you're seeing there? Sure. Thanks for dialing in.
So we're as I said on the call, we're pretty pleased with the start in terms of our subscription renewal business. It's our second full quarter in for a meaningful subscription cycle. And what's reassuring and gratifying is that the upsell and cross sell motions are starting to show up, with the net dollar retention rate on all of our subscription business being firmly over 100%. That also goes for ARR. And what's also reassuring is that the second half opportunity for our subscription renewals is going to be greater than the first half.
So that gives us further confidence in the second half.
Speaker 2
And the other thing I'd just say, more from a product point of view, everything we brought to market just about everything we brought to market in the recent past, whether it's our metallic offerings, Doctor, our workload based pricing and our ability to sort of deliver all of that from a single pane of glass vastly simplifies customers' ability to pick and choose what they want to use with us, and that's in a subscription basis. So ease of consumption becomes key in that model. And we're also, for example, selling off the marketplace with Azure. All of these things make adoption super easy and all directed towards subscription.
Speaker 3
Great. And just as a follow-up, I was wondering if you could give us a little bit more color on what you're seeing in the enterprise market right now?
Speaker 2
I can give you something, Jason. Enterprise, as you can without going back into the numbers, it's we're seeing incumbency continues to be important at this time. Knowing the technology, knowing the skills, having the skills, knowing our roadmap, these sort of things help customers make better decisions in the enterprise and especially in times like this. Ransomware is top of mind to customers, rightfully so. And our technology, even though what we do is data protection, lends itself really well to ransomware type attacks.
Our new metallic cloud service ties into our core product, giving customers more capability. So we think the enterprise really lean towards that And our new Doctor product, which we brought out a couple of months ago, sort of launched a couple of months ago, also seeing good traction from a POC, even sales. So all in all, I'd say that enterprise customers are doing fine. I think we're the structural shifts that we saw that had to happen a few months ago are in place, and hopefully holds us in good stead as our technology is super relevant to the segment. So it's we think we're in a good place there.
Speaker 3
Great. Thanks so much.
Speaker 0
Your next question is from the line of Brent Hill with Jefferies.
Speaker 5
Hey, guys. This is Joe on for Brent. Appreciate the question.
Speaker 3
It's good to see the commitment to the growth on
Speaker 5
the top line and discipline on the bottom line, but your cash flow for the first half
Speaker 3
of the year is down year over year. So when should we
Speaker 5
see cash flow start to track more evenly with EBITDA?
Speaker 3
Joe, it's Brian here. Just to touch on that, we typically are back end loaded in terms of our cash flow. So with improving profitability in the second half, we'll become increased cash flows. So just keep in mind that, that will still happen and it's it tends to be coming off also a weaker Q4. That was the COVID impact from Q4 FY 'twenty that impacted our Q1 cash flows.
But again, we'll see accelerating momentum in the back half of the year.
Speaker 5
Okay. But there's nothing else that stood out as of normal? No.
Speaker 2
No, no, no. No. Okay. And then
Speaker 5
you touched on it a little bit already, but just in regards to guidance, how should we think about the renewal opportunity Maybe you can just size it relative to 1Q or 2Q. And then, I think we talked about it a little bit last quarter, but any commentary on the rough opportunity size in fiscal 'twenty two relative to 'twenty one?
Speaker 3
Yes. So we haven't we'll stay tuned for that. As part of our longer term targets, we will issue longer term color around the subscription renewal opportunity beyond FY 'twenty one. So just big picture, we had approximately $50,000,000 of software opportunity related to subscription renewals in FY 'twenty one. About 60% of that sits in the second half of the year.
And that's something we've said on prior calls.
Speaker 2
Okay. Thank you, guys. Welcome.
Speaker 0
Your next question is from the line of Alex Kurtz with KeyBanc Capital Markets.
Speaker 6
Thanks for taking the questions. Just on the net retention rate, Brian, can categorize it as over 110%? Is that a fair starting point? And I know you might fill fills in later on that. Obviously, a very important metric to track.
Can we start there?
Speaker 3
We're not ready to kind of disclose that level of specificity, but I would say it's firmly above 100%.
Speaker 6
Okay. And then the subscription business, 53% rate of software. Is there a way to accelerate that and accelerate the decline in pass through hardware or and maybe assess through sales compensation or channel alignment on certain marketing programs. But I guess, is that just a function of the renewals and customers coming up for more capacity than transitioning? And then I guess, what's the path to 100%?
How long could that take?
Speaker 3
So let me unpack that because there's a couple of different One concepts in
Speaker 2
is just let me
Speaker 3
get the hardware component out of the way. I did mention that for this fiscal quarter, when you do a year on year compare, there's several million dollars of a headwind to top line growth because we are going to start ending the pass through hardware. We're going to begin that this quarter. It will continue on and basically be out of our P and L almost by the end of this fiscal year, I'd say, but significantly reduced. So with respect to subscription, however, all of our efforts now are leaning more towards subscription and consumption based offerings.
And we're going to emphasize that in terms of our go to market motions. We're going to lead with subscription offerings. I don't know if we ever get to 100% of software because there are certain industries and geos that just don't consume that way. But we are going to continue that migration as part of our longer term targets that we'll issue. We'll talk to that guidance.
But we've come a long way in just a couple of years. I mean, just back in 2017, this was less than 10% of software. Now it's firmly over 50%. We continue to see that increase, and it will increase, and it's aligning to the more modern way that customers want to consume. And keep in mind, when we start also selling more metallic, which is off to a great start, by the way, we've got a solid 7 figures of Metallic ARR that's built into our numbers.
That will also drive more repeatable revenue, not necessarily on the software line, but total revenues will continue to become more repeatable.
Speaker 6
And I guess the renewal cycles obviously accelerate the subscription percentage, right, Brian?
Speaker 3
Absolutely. So yes, so FY 'twenty two will be greater than FY 'twenty one, and this will be a revenue tailwind for us the foreseeable.
Speaker 6
A couple just to clarify a couple of things, and I'll jump off here. The pass through hardware business, you've never have added margin to the pass through business, the pass through revenue?
Speaker 3
Very little margin on that component. So we're excited about this Hyperscale X launch, because it reduces our reliance upon pass through appliance sales, and it's going to drive lower overall costs, because there's less royalties. There's no royalties on that.
Speaker 6
Okay. Last thing. I think you typically give enterprise deals percentage of license revenue or maybe some function of that. Did you disclose that this quarter?
Speaker 3
Yes, I did. That was it was 66% of our software revenue. The deal count was up 11% and the average deal size was $319,000
Speaker 6
Your
Speaker 0
next question is from the line of Jack Andrews with Needham.
Speaker 7
Good morning and congratulations on the results. I want to ask, maybe Sanjay, you could just reflect on it's been slightly over a year since you first introduced Metallic. Just what's been the biggest surprise to you around the introduction of this product and what still needs to be done from your perspective?
Speaker 2
Jack, so firstly, we built the product in record time, brought it out, put it on and then sort of the pandemic climate hit us. We turned around and made the product available to anyone, any business in The United States that wanted to avail of our endpoint capabilities. And we gave that to them till September. In parallel, we've had some of those, I would say customers, some of the folks that used it become customers. And then we've seen patterns of customers buy one service and expand into more than one service.
We're very pleased. I mean, we're very pleased. That's it this last quarter was probably the full quarter where we were in the marketplace with Microsoft, where the partnership was signed and we're starting to see traction. We launched more services. We're getting into new markets very, very, very soon, substantial new markets and increasing the portfolio.
This is a big part of our future. This is a big part of how customers wish to consume technology from everything we're seeing. And I am and the team and I are super glad we made the decision last year to build it and bring it to market.
Speaker 7
Great. And thanks for the perspective around that. And just as a follow-up, I was wondering if
Speaker 6
you could touch a little
Speaker 7
bit more on the value proposition of Hyperscale X. Trying to think from a go to market strategy, are you going to need to perhaps have more of a developer led go to market strategy around this? Is this going to touch into different buying centers?
Speaker 2
Sure. But just the way I look at Hyperscale X is it's our flagship product that brings everything that we're building brings our vision in one place. So as much as customers could consume staff separately or parts of our technology in and of themselves, Hyperscale X is a converged capability that brings our data protection, our storage capabilities and extending into the cloud through Metallic all in one place. You can plug on top of that Doctor, you can plug on top of that our file optimization capabilities. And we make it available in pretty much every way that a customer may want to consume it.
For example, if they want to use it in DevOps oriented workflows, we have the richest set of REST APIs that allows them to do it. So we are getting queries from customers to say, hey, can we we're building this thing in a DevOps model, can we use data protection or storage capabilities in that model? And the answer is a resounding yes. And if they want to continue using it in the way in more traditional ways or through SaaS, we've got that too. So that's why Hyperscale is such an important platform for us, because that is the cornerstone.
That is where we bring everything together and deliver in a way that customers can use it either through their own workflows or ours.
Speaker 3
Got it. That's really helpful. Thanks for taking my questions.
Speaker 2
Pleasure.
Speaker 3
Operator, is Yes, there another
Speaker 0
sure. Next question is from the line of James Fish with Piper Sandler. His line may be muted.
Speaker 3
Hey, guys. Thanks for the question.
Speaker 6
Brian, you had mentioned a strategic maintenance change. Can you walk us through what that was and how that might have impacted revenues this quarter? And maybe if possible, how it could flow through for the rest of the next year or so?
Speaker 3
Sure. So good morning, James. So you saw how our software growth is 5%, services growth is somewhat muted. This has been strategic for us over time is that we're proactively working with customers to convert their historical legacy perpetual maintenance contracts into a more modern subscription offering. And this helps us greatly on a number of different fronts.
One is it adds more certainty to our revenue streams over time. It's a more modern way to consume our products. It aligns with the way customers want to consume it, with cloud workloads and more offerings that we have that are going be more consumption based. And also, we're able to drive the cross sell and upsell opportunities with that and grow with them. So that net dollar retention rate that I spoke about for our subscription business, that exceeds firmly over 100%.
That's testament to our ability to grow the overall lifetime value with the customer. So we're pleased with that. The services revenue will be muted because of it. But I think over time, this will continue to add to our ARR growth. And it also will be an incentive for customers to continue to expand their product portfolio with Commvault.
Speaker 6
Got it. And then as part of these transitions, we're about three quarters of the way to you mentioned you won't get to 100%, but we're roughly 75% coming from software today. But at what point do you think we actually start removing kind of the revenue headwind related to the transition and we don't have kind of the pricing impact in this kind of movement?
Speaker 3
So let me just clarify, James. It's actually it's 53% of our software is subscription based recurring and 75% of our total revenue is recurring in nature. Again, we'll issue more longer term targets as part of an Investor Analyst Day. So stay tuned for that. But it will continue to track north of where it is today.
And as opportunities in FY 'twenty two and FY 'twenty three, it will become a headwind for us. We're squarely focused on this. I think it's a really good thing for our business model and also aligns to the way customers want to consume our products.
Speaker 0
Your final question is from the line of Eric Martinuzzi with Lake Street.
Speaker 8
I wanted to dive a little bit deeper on the revenue opportunity from the kickoff on the Hyperscale X. Obviously, we've got a capacity need expansion going on with your largest customers, but you also talk about kind of the cross sell and upsell opportunity. As you look at the rollout of this of the launch of the new flagship offering, where do you see the biggest opportunity? Is it really more on the capacity expansion of your customers as they consume and need more data information management capability? Or is it cross sell or upsell?
Speaker 2
Specifically to hyperscale, the hyperscale X Eric? See that for me hyperscale X is a one stop shop for the various use cases customers want. So capacity is one, but it's really ease of use. It's the ease for them to be able to deploy this data protection, the built in workflows, the Doctor if they want it, Cloudburst for ransomware, we've got everything in one place. And this it gives you sort of it has new functionality, new workloads, obviously more capacity containers.
So it's a one stop shop and it's the easiest way for customers to get started or expand. So I'd say the answer is both.
Speaker 8
Okay. All right. And then margin question for you. You had talked about the operating expenses inching up, and I'm kind of jumping back to the Q1 earnings call. You had expected them the operating expenses to rise throughout the year.
We were actually at least based on my math, looks like the non GAAP operating expenses were roughly flat in Q2 versus Q1. Do we still expect those operating expenses to rise now in the out quarters?
Speaker 3
So at least for Q3, we're guiding that it's going to be slightly down year over year. This is a matter of just we're trying to fight any expenses trying to come back in terms of the temporary ones that we're able to reduce, such as lower T and E and event costs and things like that from the new world order. And we're maintaining a discipline around all nonessential costs and prioritizing our investments right now. So we're kind of pleased with where we are right now. More to come on the longer term margin profile and expense profile of the company, but we're maintaining our discipline internally right now.
Speaker 8
Okay. That's good to see. Congratulations on the quarter. That's it for me.
Speaker 3
Thanks, Eric. Thank you.
Speaker 0
Thank you, ladies and gentlemen. This concludes today's conference call for today. We thank you for participating and ask that you now disconnect your lines.