Commvault Systems - Q2 2024
October 31, 2023
Transcript
Operator (participant)
Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to Commvault's Second Quarter Fiscal Year 2024 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. If you would like to 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.
Michael Melnyk (Head of Investor Relations)
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 CEO, and Gary Merrill, Commvault CFO. An earnings presentation with key financial and operating metrics is posted on the investor relations website for reference. Statements made on today's call will include forward-looking statements about Commvault, future expectations, plans, and prospects. All such forward-looking statements are subject to risks, uncertainties and assumptions. Please refer to the cautionary language in today's earnings release and Commvault's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different 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-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?
Sanjay Mirchandani (President and CEO)
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 ARR, the primary metric we use 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. SaaS momentum accelerated, with Metallic ARR up 77% year-over-year to $131 million. Metallic SaaS net dollar retention rebounded to an impressive 130%, and we delivered improved profitability while continuing to return cash to shareholders through share repurchases. Beyond these impressive financial results, we also received numerous industry accolades, including being named the leader for the twelfth consecutive time in the 2023 Gartner 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. We're extremely proud of this recognition. We're laser-focused on being a trusted partner to our customers by protecting their data from the scourge of cyber threats, significantly reducing rampant hybrid cloud complexity, and infusing AI-enabled automation to tackle new and evolving data protection and security challenges. And we're just getting started. Next week, at our Commvault 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 nonstop 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. 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 loss in the next twelve 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 deliver. Commvault has always prided 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 emerging need in the market, enterprise-grade cloud-native data protection as a service.
We made some bold moves, disrupted from within, and took a new modern approach to 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 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, Commvault was named the leading vendor in GigaOm's cloud-based data protection Radar report. The authors noted, quote, "Metallic protects a very broad range of cloud workloads that would be tedious to fully enumerate," end quote.
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. 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. Gary?
Gary Merrill (CFO)
Thanks, Sanjay, and good morning, everyone. I am pleased to report that our strong revenue and earnings outperformance in Q2 was driven 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 subscription revenue of $98 million, an increase of 25% year-over-year. As a reminder, subscription revenue includes both our term software licenses and our SaaS offerings. 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. Subscription 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 year-over-year, driven by continued improvements in our velocity motion. Q2 perpetual license revenues were $14 million. As a reminder, our go-to-market motion is led by subscription. 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 our reported total revenue growth from these perpetual license sales should start to normalize as we exit the current fiscal year. Q2 customer support revenue was $77 million, which includes support for both our term-based and perpetual software licenses.
Fiscal year 2024 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 approximately 60% in fiscal year 2023 and 70% in fiscal year 2022. At this trajectory, we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue next fiscal year. Moving from revenue to ARR. Q2 ARR growth accelerated 18% year-over-year to $711 million, and subscription ARR, which includes term-based software arrangements and SaaS contracts, grew 32% year-over-year to $530 million.
These growth metrics reflect the underlying strength of our business when our revenue is presented on an annualized basis without the impact of subscription software term length compression. SaaS ARR finished the quarter at $131 million, an increase of 77% year-over-year. We saw healthy growth in new customers, as well as expansion within our existing customer base. SaaS net dollar retention rate for Q2 accelerated to 130% versus 118% we reported last quarter. Now, I'll discuss expenses and profitability. Fiscal Q2 gross margins were 82% and reflect a 150 basis point year-over-year impact from our accelerating SaaS revenue, which carries a higher cost of sale than software. Fiscal Q2 operating expenses were $121 million, up 2% year-over-year.
As a percentage of total revenue, 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 by focusing investment on our most critical priorities. We ended the quarter with a global headcount of 2,900 employees, reflecting a 1% decline year-over-year. Our current headcount balance includes additional inside sales teams, renewal and related customer success teams to support the customer journey and our accelerating velocity sales motion. Non-GAAP EBIT for Q2 increased 19% year-over-year to $42 million, and non-GAAP EBIT margins were 20.9%, a 210 basis points improvement year-over-year. The strong earnings and EBIT margin expansion was driven by continued operating expense discipline relative to our top-line revenue.
Moving to some key balance sheet and cash flow metrics. We ended the quarter with no debt and $283 million in cash, of which $93 million was in the United States. Our Q2 free cash flow was $40 million, and our first half fiscal year 2024 free cash flow was $78 million, up 10% year-over-year. The biggest driver of free cash flow is SaaS deferred revenue and the strength of our software subscription renewals, which typically include upfront payments on multi-year contracts. In Q2, we repurchased an additional $31 million of stock under our repurchase program, and at the halfway point of fiscal year 2024, we have repurchased $82 million of stock, representing 106% of our first half free cash flow.
Now, I'll discuss our outlook for fiscal Q3 and the full fiscal year 2024. We continue to believe that ARR and free cash flow should be viewed as primary KPIs of our underlying business momentum. All of our following guidance metrics are based on current foreign currency exchange rates. For fiscal Q3, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS, to be $106 million-$110 million. This represents 24% year-over-year growth at the midpoint. We expect total revenue to be $206 million-$210 million, with year-over-year growth of 7% at the midpoint. At these revenue levels, we expect Q3 consolidated gross margins to be approximately 82.5% and EBIT margins of approximately 21%.
As I mentioned on our last earnings call, we are executing some foundational go-to-market changes, which include amplifying our discrete focus on our land expand opportunities, while also scaling our motion to secure our growing subscription renewal base. We will continue to hire field resources and additional inside sales reps focused solely on the fast velocity market as we refine our segmentation model. These continuing investments are reflected in our margin guidance. Our projected diluted share count for fiscal Q3 is 44.7 million shares. Now, I would like to give an updated outlook on the full fiscal year 2024, which includes raising both our total revenue and total ARR expectations for the full year. We expect fiscal year 2024 total ARR growth of 14% year-over-year, which reflects a 100 basis point increase over our prior guidance.
We now expect subscription ARR, which includes term-based licenses and SaaS, to increase 24% year-over-year. From a revenue perspective, we now expect subscription revenue to be in the range of $408 million-$418 million, growing 19% year-over-year at the midpoint. At these levels, subscription revenue will exceed over 50% of our total revenues. Our updated guidance reflects a mix shift 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 million-$822 million.
This is an increase compared to our prior total revenue range of $805 million to 815 million. Our improved fiscal year 2024 total revenue outlook reflects strong renewal activity, the ongoing momentum in our fast velocity business, and the seasonally stronger trends that we historically see in the second half of the fiscal year. Moving to full year fiscal 2024 margins, EBIT and cash flow outlooks. We continue to expect consolidated gross margins of 82%-83% and non-GAAP EBIT margin expansion of 50-100 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 view share repurchases as a primary use of excess cash. 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. 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. In closing, 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.
... 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.
Operator (participant)
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Your first question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead.
Aaron Rakers (Managing Director and Senior Equity Research Analyst)
Yeah, thanks, for taking the questions. Congratulations on the execution in the quarter. Yeah, I guess my question is, help me understand a little bit more. It looks like, you know, clearly your ARR, you know, updated guidance is a little bit lower, you know, 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've made some comments in your prepared remarks, but could you unpack that change in the guidance a little bit further?
Gary Merrill (CFO)
Hey, 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.
Aaron Rakers (Managing Director and Senior Equity Research Analyst)
Yeah, I'm talking more full year. The 24% versus prior 27% and $408 to 418 versus the prior $420 to 430.
Gary Merrill (CFO)
Got it. Okay, awesome.
Aaron Rakers (Managing Director and Senior Equity Research Analyst)
Yeah.
Gary Merrill (CFO)
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 accelerated past everything. From a full year perspective, as kind of I thought about the second half, in particular, coming off of the first half, I'm also pleased that we did raise our ARR guidance. Previously, we were guiding to 13, I 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, 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. But as I think about the subscription revenue specifically, I think directly at your question, there's a couple 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.
So we're seeing just some declines year-over-year, modestly on the sub- 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 ARR whole and we see the momentum on ARR, it can have a little bit of a short-term impact on the reported revenue results. And then thirdly, just keeping in mind that we're watching the mega deal, the real big deal trends in this spending environment, and being cautious on the procurement and approval cycles that are out there today.
Aaron Rakers (Managing Director and Senior Equity Research Analyst)
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?
Gary Merrill (CFO)
More, more cautionary. We do not see trends that deteriorated. 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.
Aaron Rakers (Managing Director and Senior Equity Research Analyst)
Yep. Thank you, Gary.
Operator (participant)
Your next question comes from the line of Howard Ma from Guggenheim Securities. Please go ahead.
Howard Ma (Director and Equity Research Analyst)
Great. Thank you for taking the question. So I also want to better understand the lower subscription ARR and revenue guidance, 'cause that seems to be the only negative in an otherwise stellar print. So I understand the change in the lowered migrations from perpetual maintenance to subscription, but I didn't think the impact was that big. Or can you comment, I guess, for Gary, can you comment. Are there any other factors? I mean, were there any deal pull forwards in Q2? Like, in the back half, are you expecting any renewal pushouts? 'Cause I believe this year is a pretty back-end weighted or second half-weighted rather renewal year.
Then just given the Metallic strength too, like, wouldn't continued strength in Metallic, at least on the ARR side, I mean, I understand it takes time for ARR to translate over to revenue, but wouldn't that offset some of the, you know, the perpetual migrations? Thanks.
Gary Merrill (CFO)
Yes. Thanks, Howard. Maybe first, quickly on the SaaS side of the Metallic. So the ARR accelerated actually higher than we've seen in current periods, right? If you look at the ARR for SaaS, we went from $113 million to 131 million of ARR. That sequential increase we're seeing on the SaaS side is accelerating faster than we'd actually seen over the past prior quarters. You can kind of see that as we trend out the SaaS 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. When I look at the guidance on subscription, it's the biggest factor is viewer conversions.
And how you can see that also is you'll see the, the strong overperformance on the customer support side, right? So if you look at the customer support revenue, and you see the acceleration there, meaning the acceleration relative to the, the prior expectations, that's where you kind of see, that's where you see the offset. So that's where you see the offset on the, on the positive side there, and it's, it's just the, the viewer conversions. We're doing about on pace for about half of what we did last year, is what I kind of see, just based on current pipeline metrics. We're on pace to do about half of the conversions 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 average.
Sanjay Mirchandani (President and CEO)
Yeah, we're. Hey, Howard, it's Sanjay. We're just, we're just trying to be realistic, given we're looking out for the whole year. If, you know, it's just a mix shift. In my mind, there's nothing. We added over 500 customers in the subscription mix in Q2. Metallic is growing at a very healthy clip. We grew 77% ARR year-on-year. So, you know, this isn't. Don't read into this as anything, but we're just, we're just looking at the pipeline and being, being very pragmatic about what the mix shift might be. And that's it. I mean, you know, business, 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 their cloud migration journey.
Howard Ma (Director and Equity Research Analyst)
Oh, thank you, Sanjay and Gary. I do want to hone in on Metallic, 'cause as you guys mentioned, you know, it was a really strong quarter for Metallic, the NRR accelerating to 130%, which is up from, I believe, 118% a quarter ago, and then 125% just a quarter prior. Can you just remind us what is the rank order of drivers of growth for Metallic between workload expansion and cross-sell of additional Metallic products? And then on the growth rate, again, very strong, but it has been pretty variable. You know, should we expect this kind of variability going forward?
Gary Merrill (CFO)
Hey, Howard, it's Gary. I'll hit that. So there's really good key things. The acceleration that we saw in Metallic Net Dollar Retention is driven by a few things. There's the 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 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 driving to get the customers onboarded, get them to their first backup, get them fully adopted, then that drives the expansion opportunity.
The other thing that we now have is an integrated motion between our customer success and our field sales teams. So as our 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. As I think about the split between, I'll use 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, whether it's Salesforce, Dynamics, ThreatWise, hybrid cloud, databases. The dollar value of those are now up 2x 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 up-sell. So, we're getting it from all ends, just in summary. We're getting that mature renewal motion. We're getting the up-sell, getting them adopted, so we can get expand on more of the same product. Now we're starting to see the cross-sell starting to kick in as well.
Sanjay Mirchandani (President and CEO)
Yeah, and-
Howard Ma (Director and Equity Research Analyst)
Okay. Thank you.
Sanjay Mirchandani (President and CEO)
Howard, I'd like to add a little bit on just overall, you know, just some color on the, on the SaaS business. It is a driver of growth. It is growing well. It's a, you know, it's a, it's the vehicle by which we land hundreds of new customers a quarter. Our, our security capabilities that we've integrated, the Security IQ, which is our, our delivery platform inside of Metallic for, 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. We've got, you know, if I quoted, I think it was GigaOm that talked in the Radar report about having, you know, we had more hypercloud and more mission-critical workloads out there that are too tedious to compete.
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. You know, we, the NDR, we sort of mentioned last quarter that it was, we thought it was an anomaly, and we would get it back to normal sort of patterns. And I think we got that, and we'll keep our, 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.
Howard Ma (Director and Equity Research Analyst)
Sanjay, it's great to see the Metallic growth engine kicking in, and congrats on a strong quarter.
Sanjay Mirchandani (President and CEO)
Thank you, Howard.
Gary Merrill (CFO)
Thanks, Howard.
Operator (participant)
Your next question comes from the line of James Fish from Piper Sandler. Please go ahead.
James Fish (Managing Director and Senior Research Analyst)
... 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 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 in net retention rate is just catch up from some, like, last quarter, for example, or sustainable. And two, 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 of your term business, especially if we're talking more mission-critical workloads moving on to Metallic?
Gary Merrill (CFO)
Yeah. Hey, Jim, it's Gary. I'll start it off. I think the... We're not guiding explicitly to the SaaS ARR. I think if you see what's kind of, you know, at our level of maturity of our SaaS business, meaning in that $130 million-ish of ARR, I think world-class NRR rates are somewhere between 120% to 130%. I think the 130% is a little on the high end on the sustainable piece that we delivered this quarter, especially as the base continues to grow every quarter. You know, if we're somewhere in that range of 100%-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. We are seeing, we have-
Sanjay Mirchandani (President and CEO)
You said 100, 120 to 125.
Gary Merrill (CFO)
Yeah, sorry, 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 start seeing some very good growth on that, on the 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, 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 periods, right, to measuring what they see in the near term.
James Fish (Managing Director and Senior Research Analyst)
Got it. Helpful. And just remind me here, what, what really happened at the end of the quarter that essentially SaaS ARR accelerated, but we saw-
Gary Merrill (CFO)
Mm-hmm
James Fish (Managing Director and Senior Research Analyst)
... a deceleration technically in Metallic revenue, that now revenue is actually outpacing ARR. You know, was it more of a back-end loaded quarter for Metallic? You know, should we, with it being about 77% ARR growth, be expecting, you know, stable Metallic revenue growth for fiscal Q3 essentially, versus Q2?
Gary Merrill (CFO)
Yeah. No, I think stable. Any Metallic contracts that we sign 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 once... not much of anything, sorry, not much of anything, once you get past the first half of the quarter. Our linearity in Metallic was relative to prior quarters, so nothing unusual, nothing unusual there.
James Fish (Managing Director and Senior Research Analyst)
Okay. Thanks, guys.
Operator (participant)
Your next question comes from the line of Rudy Kessinger from D.A. Davidson. Please go ahead.
Rudy Kessinger (Equity Research Analyst)
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 from new customers, both on a dollar basis or as a percentage points of growth basis, is down this quarter versus last quarter. I know your subscription customer adds continued to be 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 and financial constraints that customers have? Or what are you seeing from a new perspective on Metallic?
Gary Merrill (CFO)
Mm-hmm. Hey, Rudy, it's Gary. I'll hit that, and good to hear from you. At the first half of the year, that we're in 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 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 two, three, four, five quarters to make sure that our trajectory on both our new and 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 and the ASPs are, are smaller. They're 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 to first backup or recovery, and then driving expansion and workload expansion, we're betting on the future and our ability to drive that expansion as well.
Sanjay Mirchandani (President and CEO)
And this is Sanjay, Rudy. The small, you know, the smaller ASPs is kind of part of the plan-
Gary Merrill (CFO)
Yeah
Sanjay Mirchandani (President and CEO)
because we have a velocity business where we land smaller, you know, smaller deals. We have marketplace business, which are smaller deals. We have MSPs that bring in smaller deals that we expand over time. So it's a mix. We sell to the enterprise, and we sell through MSPs. So we've got the whole range.
Rudy Kessinger (Equity Research Analyst)
Okay, got it. That's fair. And then I hear you on the conversion, seeing fewer conversions. I guess just if we look at your 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 quarters to go for this year, but ex conversions, you know, a subscription license, a single-digit growth business going forward, is that a low double-digit growth business going forward? What should we be expecting there just over, you know, the near to intermediate term?
Gary Merrill (CFO)
Yeah, so if I-- We're not giving, obviously, the longer-term guidance, but even if I talk a little bit about what we saw in Q2, and what we saw in Q2, you can kind of interpolate that our term license software grew double digits, right? Well, so within subscription, our term software license grew, grew, grew double digits, and that's with our conversions down substantially year over year. 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, where we're guiding to roughly double digit within there will be double-digit term software growth year over year, with same situation, conversions down year over 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 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.
Sanjay Mirchandani (President and CEO)
But there is-
Rudy Kessinger (Equity Research Analyst)
Thank you.
Sanjay Mirchandani (President and CEO)
There is definitely. You know, customers are in that hybrid cloud journey where they've got to, you know, make some tough calls, rearchitect, rebuild, shift, migrate mission-critical workloads, not just independently, but stacks into the cloud. And that's hard. And part of what we're gonna talk about next week is how we're gonna help customers through that. So when you look at the complexity of that, you know, it's. You have to look at it and say: If I was a customer, how would I think about it?
I'd say, "Okay, I got to get to the other side before I make a shift on something." So, you know, if you see, 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, in the journey with the, with, with, with, with the hybrid cloud. Add to that security and, and cyber risk. So, you know, there's a, there's a lot of factors, and, and we are very well positioned to, to help customers with that, and we are, which is why we see the momentum in, in our security capabilities and, and customers using that, adding up 500 new plus new customers on the, on the software subscription and, and SaaS platform. So, you know, I wouldn't read into it too much.
I would say they're in the crosshairs of sort of getting from one side to the other in critical mass, and that's what you're kind of seeing there.
Rudy Kessinger (Equity Research Analyst)
That's helpful. Thanks, taking my questions, and congrats on the good SaaS figures in the quarter.
Sanjay Mirchandani (President and CEO)
Thank you.
Gary Merrill (CFO)
Thanks, Rudy.
Operator (participant)
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 Martinuzi from Lake Street Capital Markets. Please go ahead.
Eric Martinuzzi (Senior Analyst)
Yeah, the perpetual license for the year, I think in past quarters, you've talked about an expectation for $40 million to 50 million for fiscal 2024. Given you're at about $27 million here at the midpoint, are you still thinking in that $40 million to 50 million range?
Gary Merrill (CFO)
Yeah. Eric, it's Gary. That's correct. The trend we've seen in the first half of the fiscal year, I think our trend for the second half will be at similar paces, maybe slightly less, as the motion is fully now dedicated to drive the term subscription and 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 fair.
Eric Martinuzzi (Senior Analyst)
Okay, but given the 27 in the front half, that would mean 23 would be the max-
Gary Merrill (CFO)
That-
Eric Martinuzzi (Senior Analyst)
you would expect?
Gary Merrill (CFO)
Yeah, that it'd be the high end of the range. Yeah, it will be at the high end of the range.
Sanjay Mirchandani (President and CEO)
On the amount.
Gary Merrill (CFO)
Yeah.
Eric Martinuzzi (Senior Analyst)
Okay. All right. Then, it looked like outperformance international, international revenue, I think, was up 12% in the quarter. Just curious to know if you expect that... Is that just kind of a, you know, reversion to the mean, or are we expecting that to outperform for the remainder of the year?
Gary Merrill (CFO)
Yes. 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 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 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 length topics we've talked about is less prevalent international. So we're able to drive a really strong velocity business in the international markets.
Eric Martinuzzi (Senior Analyst)
Yeah. Thanks for taking my questions.
Gary Merrill (CFO)
Thanks, Eric.
Operator (participant)
Your next question comes from the line of Jason Aider from William Blair. Please go ahead.
Jason Ader (Partner, Co-Group Head of Technology, Media & Communications)
Yeah, thank you. Good morning, everyone. I 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-over-year declines to start to subside? You know, you're down 9% in customer support in fiscal 2023. This year is going to be something, I guess, slightly lower than that. But do you expect as we move forward into 2025 and 2026, that we should see that continue to, the declines continue to subside?
Gary Merrill (CFO)
Yes. Hey, Jason, it's Gary. I'll take this question as well. So you've already started to see it. 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 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-ish to 50%, roughly. And as we enter into next fiscal year, 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 contracts. That natural motion will then start to flatline 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. 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.
Jason Ader (Partner, Co-Group Head of Technology, Media & Communications)
Got you. 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 revenue. As we move forward into 2025 and 2026, without pinning 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?
Gary Merrill (CFO)
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 million to 50 million, call it roughly $50 million, 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, you know, over $800 million.
Jason Ader (Partner, Co-Group Head of Technology, Media & Communications)
Gotcha. Gotcha. Okay, great. And then, Sanjay, I've got one for 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, let's call it, adapted your strategy? Because it does seem like more of that market is shifting towards as-a-service offerings.
Sanjay Mirchandani (President and CEO)
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 after the velocity of the smaller customers. 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 that. The third is, you know, marketplaces. As the hyperscalers sort of promote their marketplaces, we see customers being able to sort of tap into that motion and avail 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 in the way they like to purchase.
Jason Ader (Partner, Co-Group Head of Technology, Media & Communications)
One quick follow-up, and then I'll cede the floor. But just on the Metallic business, Sanjay, can you give us a sense of how much of that business is coming from sorta SMB mid-market customers versus enterprise?
Sanjay Mirchandani (President and CEO)
I think it's... If the trend has been fairly consistent, the enterprise, the enterprise side of our business is about, you know, about a third enterprise, roughly, a third mid-market, and a third SMB. It's not by 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 into areas that we haven't historically, like the SMB and the lower mid-market.
Jason Ader (Partner, Co-Group Head of Technology, Media & Communications)
Great. Thank you.
Sanjay Mirchandani (President and CEO)
You're welcome.
Operator (participant)
Your next question comes from the line of Tom Blakely from KeyBanc Capital Markets. Please go ahead.
Tom Blakey (Equity Research Analyst)
Hey, guys, thanks for taking my question. Just a couple. Sanjay, if you could go back to that hybrid cloud journey, answer you gave a prior call, questioner. You know, is that, 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 there seems to be a bit of a pause? You know, hybrid cloud spend is, you know, kind of received a bit of an uptick in the last few quarters, if not longer, 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 color, it'd be very helpful.
Sanjay Mirchandani (President and CEO)
Yeah.
Tom Blakey (Equity Research Analyst)
Then just secondly, for the NDR from Metallic, you know, the split up between capacity growth and new services, if you could, and if security is, maybe it's a premature question, but is security impacting that kind of NDR? That'd be helpful. Thank you.
Sanjay Mirchandani (President and CEO)
Okay. Let me process those. So the hybrid cloud journey, my thinking there is the following. You know, 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. And what we're doing is helping customers through those difficult journeys, because as the easy workloads move to 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 kind of referring to.
We're helping customers, whether it be through moving that data, whether it's their infrastructure, whether it's their, you know, data security, whether it's applying intelligence and sense of data management across that stack, data in flight. There's a lot of things that moving to the hybrid cloud sort of open up, and we're across the, you know, a lot of those use cases and a lot of those outcomes. So, you know, that's kind of where I was going. It's not so much a, you know, whether it's increasing or decreasing in spend from a public cloud capability. It's really the utilization, the... and making sure that customers are getting the value that they anticipated from their journey to the cloud. I was a CIO.
It's moving mission-critical workloads into a cloud or any other platform. It requires a lot of—it is complex and requires a lot of thoughtfulness and the right choices. And that's what we're trying to help our customers with. So that's my... I want to pause there. Did I cover your question?
Tom Blakey (Equity Research Analyst)
Yeah. Yeah, yeah, just maybe to follow up there before we get to the NRR. Does that imply, from a trailing indicator perspective, that there might be, you know, some pent-up demand for, for Commvault in that regard?
Sanjay Mirchandani (President and CEO)
The short answer is, 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, 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 what are the hard problems we're helping them with on data? Do they have to make choices between software and SaaS? You know, the security models, using AI. These are, you know, recovery capabilities 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.
We're trying to be one to two steps ahead of them in anticipating that. So I would hope so.
Tom Blakey (Equity Research Analyst)
And then just on NRR, the 130 is a strong number. Just, you know, any type of commentary on the mix of capacity growth and new services there, and possibly if security is impacting that, that'd be helpful. Thank you.
Gary Merrill (CFO)
Sure. Hey, Tom, it's Thomas Gary. I'll take that one. Relative to the 130% of Net Dollar Retention, if you think about the drivers of what drove that from a upsell versus cross-sell, about 2/3 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 it be our security offerings, the hybrid cloud for VMs or databases, they're all contributing factors. Absolutely, 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 NDR driven from cross-sell.
Tom Blakey (Equity Research Analyst)
Thanks, Gary. Thanks, guys.
Operator (participant)
We have no further questions at this time. I will now turn the call over to Michael Melnyk for closing remarks.
Michael Melnyk (Head of Investor Relations)
Thank you for joining the call today. If you have any follow-up questions, feel free to reach out to me. Also, just a reminder, if you haven't yet registered, the live event will be November eighth in New York City, and then the replay for Shift will be on November 9th. Visit Commvault.com to register. Thanks for joining. Appreciate it.
Operator (participant)
This concludes today's conference call. Thank you for your participation, and you may now disconnect.