Commvault Systems, Inc. (CVLT) 2027 Q2 法說會逐字稿

Hello, and thank you for standing by. My name is Danny, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Commvault second-quarter fiscal-year 2027 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Michael Melnick, Vice President of Investor Relations. You may begin.

Good morning, and welcome to our earnings conference call. Before we begin, I'd like to remind you that the statements made on today's call will include forward-looking statements about Commvault's 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 discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these 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 our CEO, Sanjay Mirchandani, for his opening remarks. Sanjay?

Good morning, and thank you for joining us. Before reviewing the results, I'll take a minute to discuss the broader context. We believe that Commvault fits at the intersection of long-term market trends that are driving our momentum, massive data growth, IT complexity, and AI accelerating innovation, and risk at scale. All of this makes the need for resilience more critical than ever.

Our platform, which unites data protection, data security, identity resilience, and recovery, helps us win customers, deepen relationships, and meet evolving enterprise needs. Our strategy is working. We delivered solid results ahead of our guided metrics and build momentum across the business. A few highlights from the second-quarter include: subscription ARR grew 20% to $1.104 billion, SaaS ARR grew 35% to $454 million, subscription revenue grew 21% to $269 million, and we generated free cash flow of $71 million in the quarter.

We're growing at scale, expanding margins, and generating strong cash flow. We believe the combination reflects the strength of our platform and the durability of our model. And as we'll hear from Gary, we're raising our full-year outlook, which demonstrates our confidence in what lies ahead for Commvault.

Before we get into that, let's discuss the growth drivers that featured prominently in our Q2 results. First, subscription customer growth. In Q2, we added over 500 subscription customers, representing 17% growth year on year. Enterprises are prioritizing investments in cyber resilience and recovery. Customers are telling us that when disruptions occur, they must be able to operate in a state of continuous business. That's why organizations continue to move away from legacy endpoint solutions and embrace innovation from Commvault.

Case in point, a Fortune 500 insurance carrier wanted to advance resilience and stay ahead of evolving security requirements. The customer chose Commvault over the legacy vendor in this multimillion-dollar subscription deal for three reasons. One, our cyber resilience solution demonstrated exceptional time to recovery at scale, which competitors could not match. We enable the customer to consolidate incumbent vendors and other point solutions on our platform. And three, we help the customer reduce risk and complexity.

This leads to our next growth driver, multi-product adoption. Today, more than half of our managed SaaS customers are using more than one offering from Commvault. This is an important indicator of the opportunity ahead. Our strategy is to add customers and deepen relationships over time. With nearly half of our managed SaaS customers using just one product, we believe significant expansion potential remains. And as our customers look to reduce complexity and risks, we see more opportunities to deliver value on our platform. We believe this land and expand motion can drive durable, long-term growth.

In addition to foundational products like M365 Protection and Air Gap Protect, customers are rapidly embracing our cloud-centric protection offerings, like Clumio for AWS and Google Cloud, and protection for SAP apps like Azure DevOps, Microsoft Dynamics, and Google Workspace. As a result, customers are realizing greater value as they expand to Commvault.

For example. After assessing its recovery objectives and cost requirements, a top 50 global asset management company expanded its portfolio and SaaS footprint with Commvault. This transaction included Clumio, Operational Recovery, and Air Gap Protect. The customer realized greater storage flexibility and better TCO than its prior multi-vendor solution.

In another example, an existing Clumio customer wanted to consolidate its fragmented data protection architecture. The goal? Improve visibility and recovery times while reducing costs. To support the customer's evolving needs, we signed a multi-year expansion agreement to protect workloads, including M365, Hyper-V, as well as Okta and Active Directory.

That takes us into our third growth driver, which is focused on identity resilience and data security. As we stated in previous quarters, identity is a primary entry point for attackers and a growing area of enterprise risk. Recent data shows that more than 80% of ransomware attacks start with compromised identities. At the same time, non-human identities exponentially outnumber human identities. That's why customers are adopting our solutions to make sure that critical systems are resilient and available after an attack.

For example, an existing Commvault customer, one of the nation's largest integrated healthcare systems, added our Active Directory offering across its global data centers for faster automated recovery. This was our largest Active Directory transaction to date and contributed to the ARR growth we're seeing with identity, which nearly doubled year over year.

When you look at our growth drivers, the common theme is the same. Customers need to keep critical data, identities, agentic workflows, and applications protected, and recoverable. This is where Commvault thrives. We're also seeing that our conversations with customers and prospects continue to evolve. They want to know how we can help them deploy AI with confidence while mitigating risks. We'll share more about the growing importance of AI resilience and cyber recovery at our upcoming SHIFT conference in Nashville from November 10 to 12.

We will also unveil groundbreaking innovations, new partnerships, and feature prominent AI visionaries from Anthropic, AWS, Databricks, Microsoft, NVIDIA, and others. We hope you can join us in person or virtually. Before I turn it over to Gary to discuss the financials, I'll leave you with this. We believe that AI creates opportunities to expand our total addressable market as enterprises wrestle with more data, more identities and more agentic activity. It's also a great moment to participate in initiatives that advance resilience across the industry.

To that end, we are proud to be part of Anthropic's Project Springfield. This expands our use of Frontier AI models to improve our solutions. Finally, we believe our relentless focus on execution will continue to deliver durable, profitable growth and strong free cash flow. This gives us the confidence to raise our full year guidance. With that, I will turn it over to Gary to walk through our results and outlook in more detail.

Thank you, Sanjay, and good morning everyone. Q2 was a strong quarter. With solid execution and continued momentum across our SaaS and term software businesses. All three growth pillars contributed to the quarter: new customer additions, upsell and cross-sell, and continued momentum from our newer offerings. First, let me walk through our fiscal Q2 results in more detail. Starting with subscription ARR and free cash flow, our North Star metrics.

As a reminder, we believe these metrics are best evaluated on an annual basis, which aligns with how we plan and manage the business. Subscription ARR increased 20% to $1.104 billion on a constant currency basis. We delivered $51 million of net new subscription ARR, driven by continued strength in our SaaS offerings and improved performance in our term software business. Notably, our term software business net new ARR improved to $21 million on a constant currency basis.

This was driven by continued strength in new customer wins. As well as conversions improving to normalized levels. Our SaaS business contributed $30 million to our net new subscription ARR. As a result, SaaS ARR grew 35% year-over-year to $454 million, reflecting new customer growth, multi-product expansion from existing customers. In double-digit growth in ARPA, or average revenue per account. We continue to make steady progress in multi-product adoption, a core pillar of our growth strategy. As of Q2, 53% of Commvault-managed SaaS customers are using two or more products, up from approximately 45% a year ago.

Subscription ARR growth continues to be supported by the uptake of our identity resilience and data security offerings, which represented approximately 30% of net new subscription ARR. We're also seeing increased contribution from emerging cloud-centric and application-based protection offerings. Subscription net dollar retention or subscription NRR was 113% within our normal operating range. This reflects stronger contribution from new customers relative to expansion across the install base. Cross-sell remains a key growth driver as both our new and existing customers broadly adopt our platform. Now turning to free cash flow. Q2 free cash flow was $71 million, driven by strong collections and continued discipline across the business.

For the fiscal year-to-date period, free cash flow grew 18% to $122 million. Now I will discuss our second quarter income statement performance. Subscription revenue grew 21% to $269 million, fueled by SaaS revenue, which grew 33% year-over-year to $106 million. Subscription revenue represented 86% of total revenue compared to 81% in the prior year. Our other revenue lines performed in line with expectations. Resulting in total revenue growth of 13% to $312 million. Turning to profitability, gross margins improved 110 basis points year-over-year to 81.6%.

SaaS gross margins expanded 650 basis points to 70%. Reflecting ongoing product optimization and our strategic agreements with our hyperscale partners. Operating expenses increased 9% to $185 million, representing 59% of total revenue compared to 61% one year ago. We continue to invest in go-to-market capacity and strategic product initiatives. Including our AI recovery roadmap, while maintaining disciplined cost management across the business.

Non-GAAP EBIT was $68 million and non-GAAP EBIT margin expanded 330 basis points year-over-year to 21.9%. Turning to capital allocation. We repurchased approximately 808,000 shares for $109 million during the quarter. We are on track to return at least 60% of annual free cash flow to shareholders while preserving balance sheet flexibility. Now, I will outline our guidance for the remainder of fiscal year '27. For fiscal Q3, we expect subscription revenue of $293 million to $297 million, representing approximately 15% year-over-year growth at the midpoint, resulting in approximately $339 million of total revenue.

And EBIT margins in the range of 20.5% to 21.0%, including costs associated with their annual SHIFT user conference that occurs in a couple of weeks. For the full fiscal year 2027, we are raising our guidance. Subscription ARR to the range from $1.205 billion to $1.215 billion, representing growth of approximately 19.2% at the midpoint. Our increased full year subscription ARR guidance implies approximately $195 million in net new subscription ARR. Please refer to our earnings presentation for a constant currency reconciliation of our net new ARR guidance.

Subscription ARR will continue to be led by our SaaS offerings, which we expect will exceed $500 million of ARR by the end of the fiscal year. We are also raising our subscription revenue guidance to a range of $1.127 billion to $1.133 billion, representing approximately 16% year-over-year growth at the midpoint. This will result in total revenue of $1.30 billion to $1.31 billion. Reflecting the strategic decline of our legacy perpetual software and maintenance revenue streams. Non-GAAP EBIT margins are now projected to be in the range of 21.0% to 21.5%.

We also now expect free cash flow of $255 million to $265 million for the full year. As a reminder, Q4 is generally our strongest free cash flow quarter, reflecting the collection of calendar year-end renewals. And finally, from a share count perspective, we project a diluted share count of approximately 42 million shares. In closing, our strong first half results demonstrate our ability to scale the business with discipline. We remain focused on growing net new subscription ARR, expanding margins and generating strong free cash flow as we pursue the opportunity ahead. With that, I will open the call for questions. Operator.

(Operator Instructions) Todd Weller, Stephens.

Thanks. Good morning, and thanks for taking the question. Gary, can you talk about the improvement in term license net new ARR you saw in the quarter? And then how are you thinking about the second-half of the year and maybe frame for us in 3Q versus 4Q from that perspective?

Hey, Todd, thank you. It's Gary. I'll answer that. We're pleased with the performance of the improvements we've made on the term software ARR. As we think about the drivers was driven by new customers, so what we're seeing in an AAI-first world are now customers that are prioritizing cyber resilience and we're seeing that flow through both our on-premise business as well as our term software business. So the strength in the new customer and then the second tailwind that we're seeing strong execution from our go-to-market team is now being able to execute and sell our more advanced side of resilience bundles. So no longer is traditional backup even acceptable in the market. Customers want the highest-tier protection that we offer.

Param Singh, Oppenheimer.

Yeah, hi. Thank you for taking my question. I wanted to understand, what's the cost that opportunity still left on the identity resilience side and still see this early days? And if so, shouldn't we see a little bit more of acceleration in ARR? Thank you.

Yeah. It's Gary, I'll jump in and get this one on identity, so one, yes, a key foundational pillar of our growth strategy is executing against identity and identity maintains to be the primary threat factor that the bad actors will penetrate as they start to get into our customers' environment. A growth driver perspective, what we saw in the first half was strong results from our identity business, specifically Protecting Active Directory. It was up nearly 100% year over year. So really strong performance there. Now, as we think about the second-half of the fiscal year is when we see larger renewals and is where we expect to accelerate the momentum on the cross-sell opportunity that you're talking about.

Yeah, Param, it's Sanjay, so just giving you a little more color on the how, see what happens and this is we announced our identity resilience strategy two years ago, almost two years ago and our premise then and our premise now more than ever has been that identity, you have to protect identity. Because that's the front door that usually gets exploited. Over 80% of the time, an identity compromise is what causes a downstream breach. Our strategy is not just about protecting Active Directory or Okta or any other directory system. Strategy is tying together the cause effect, what happened at the front end of the identity compromise and what did it do all the way through to the business. So it's the implication. Now with AI, that becomes even more prevalent and visible because the aagentic capabilities of non-human identities can cause significant activity inside an organization. Our separation from the pack is our ability to tie those together and roll it back to the last known good state with the click of a button.

Thanks so much for that, Sanjay and Gary. I really appreciate it. If I could really, as a follow-up, I'm starting to see very early evidence of agentic AI traffic picking up in the enterprise. Of course, everyone saw this traffic as over the last cycle. I want to get a sense from you. Is there a time lag for backup and recovery to see that kind of evidence as well in customer adoption? And how should we be thinking about this?

One of the things that we're going to share quite. Quite a high decibel in a couple of weeks at our Shift conference is that resilience, recovery and resilience can't be what it used to be. It has to be active discovery and active recovery. And in the era of AI, time is not your friend when things go sideways. So we believe that there is a little bit of time lag as people start looking at aagentic rollouts, but our message to our customers is think about recovery. As you build the AI stack. That's what we're doing internally as well. That's what we're sharing with our customers as well. And the product announcements that we're going to bring out in a couple of weeks around the AI stack are going to be in this mold, in this form. Because the days of saying, I have a backup are long gone. What you really need to say is, I know how to recover my business.

Tammy, we'll take the question, please.

Thanks, bro.

Thank you, Brown.

Howard Ma, Guggenheim Securities.

Thank you and good morning. Sanjay, one for you and then I have one for Gary. Where would you say we are as an industry on the demand curve for core data protection and resilience driven specifically by AI projects being done more on-prem? Because if you look at the adjacent markets of server and storage, I mean, demand for real-time operational use cases has clearly seen in inflection. So should we I mean, this is. Kind of related to the last question, but more on timing, do you expect us to see a similar inflection point for data protection, operational resilience, but just with the lag?

I think, Howard, good to hear from you too. I think that the... So first and foremost, we believe that AI deployments in the enterprise, as our customers, we see our customers building AI stacks internally and using them for mission-critical capabilities internally, those will be hybrid. We sense they will be hybrid. The data estate that they use to train their models to build their applications is hybrid. And our solutioning is hybrid by design. We've always been that way.

So what we see is that a very sustainable flow as the TAM increases, because we do believe that with AI, there's going to be more data protected, more workloads protected, new types of data and applications to be protected, and they have to be protected almost near real time. So we believe that. Is that's a natural tailwind inside of the enterprise as new applications are built. When you look at what the Frontier models are doing, they're generating a whole new slew of things for customers to deal with, which is not just discovering vulnerabilities and applying patches, but really making sure that you have.

Sort of a bulletproof infrastructure because if you believe that the odds are not in your favor and something might happen, whether it's malicious or not, the best security you can have is your ability to recover. And that's the singular premise by which we are working, and we believe that's a tailwind. We think this is going to have an impact for us. For sure, right now we're seeing it sort of indirectly, if you would, which is more workloads, more frequently, more capabilities about getting your data in order for AI applications. And I think in a couple of weeks when we announce our new AI-enabled product capabilities, we should see more of a pickup there, an actual pickup there.

Thanks, Sanjay. That's really helpful. For Gary. Can you help us think about the variability in SaaS net new ARR? Because if you look at the last three quarters, including this one, I believe Q4 was $38 million, and that's a seasonally stronger quarter, but it also had some one-time benefit, I believe, related to Clumio. And then Q1 was seasonally lighter at $25 million, and then you just put up this $30 million or $30.5 million quarter, which, by the way, if you add up the $25 million and $30 million, that's in line with your comments about. The stronger back half, so back half seasonality. But as we look into the back half, just kind of help us think about what are the puts and takes and given that there's more of a consumption, it's still small, but there is a consumption element to the SaaS line now, like essentially how much potential upside or downside could there be in the back half?

Great question. Thanks, Howard. We're extremely pleased with that business. ARR is up 35% year-over-year. There is some variability quarter-to-quarter. It's foundational to why we guide our ARR business on an annual basis. And that primary reason is our customers are hybrid. So depending on the workflows and the projects will drive the timing. So even if now you just look at the first half of the fiscal year, so just do half over half. The net new ARR driven by SaaS is up, I think, roughly 18% on a constant currency, first half to first half. I think that's a key metric. The other key metric is we're tracking ahead of our guidance. We believe we will exceed the $500 million target on SaaS ARR by the end of the year. The foundation of the guidance raise, so as we've raised guidance for the second-half, the foundation of that race was built on both the momentum and the visibility that we have of our SaaS system. So we expect that is going to lead where we will end up as we drive in the second-half.

Thank you.

Demi, we'll take the next question, please.

Michael Romanelli, Mizuho.

Yeah, hi, thanks for taking the question. So it sounds like execution improved from a go-to-market perspective and you highlighted just better adoption of these advanced cyber resilience bundles. I guess can you just elaborate on that a bit and then. I guess how would you assess the current go-to-market engine, including pipeline generation, sales productivity and coverage, in your view, where does the go-to-market still have the greatest opportunity to improve and I guess are there any changes to coverage or specialization planned for the second-half and then I have a follow-up.

Gary, I'll jump in and Sanjay if there's anything you want to add, you can finish it off. A bunch of things unpacked there on the go-to-market, so first, we exceeded our expectations for Q2, so the beat on Q2 actuals was driven solely to go-to-market execution, okay. Higher close rates year-over-year. So therefore, really proud of the momentum we had, especially in a period where our fiscal Q2 can be seasonally our lightest quarter. We executed through it and delivered really strong.

So we're in a good space. We will continue to strategically invest in capacity because we think the opportunity that is out there in the market to continue to accelerate growth is there. So we will continue to continue to see it, especially on the cloud. Cloud-native side, we will continue to invest in our Clumio product as Clumio expands workloads and we look to drive those cloud-native workloads, that will be a key area of investment and continued investment for us.

Yeah, Michael, I think Gary summed it up. I would just say that we are really focused on making sure our field, our go-to-market organization is squarely focused on helping customers really build that harness to deploy AI as they build AI stack inside of the enterprise. So we're working with them to make sure that right from day zero that they have resilience or even recovery.

Built right into their pipelines, so that becomes important and all customers are building these applications are starting with making sure that they have the data staged in exactly the way they need it and there again we play a part given what we do, so we're spending time with customers really helping them see. How to accelerate their journey with enterprise-grade AI applications, but in a way that protects them from day zero. And that's the important thing because as I said at an earlier question, you can't look at this the way you could maybe five years ago, which is you have a backstop. Here, you've got to be actively discovering and actively recovering.

Got it. Okay. Super helpful color. And then as a follow-up, you've discussed the growing role of hyperscaler ecosystems and cloud marketplaces. As those channels mature, how should investors think about their longer-term contribution to potentially new logo acquisition and just overall deal sizes for Commvault? Thanks.

So hyperscalers specifically, I think what we were focused on, if you think about prioritization of the partner ecosystem, right now we are investing significantly in co-build,-market and co-sell with all of the hyperscalers, our cloud growth. Is driven solely through the big three hyperscalers. And we are no longer relying just on the Microsoft ecosystem. With the momentum that we now have with our Clumio business and what we're seeing there from AWS and GCP, we now have best-in-class cloud offerings for our hybrid customers and cloud-native customers across all three hyperscalers.

And on the marketplace, it's all about meeting customers where they are. If that's the. Customer once we're completely enabled across all platforms and all clouds.

Demi, we'll take the next question, please.

Joseph Gillo, Jefferies.

Hey guys, thanks for the question. I just wanted to follow-up on the new customer strength. Any trends or geos or product plans or who you're displacing to call out and should we expect that to continue in the second-half or will that be more renewal weighted?

Hey, Joe, it's Gary. Very strong new customer across both of the on-premise and the SaaS business. So to give you a little more color, I'm going to give you the next click down. On the on-premise business, it's driven mainly this quarter. I'll just talk about the recently primarily through the Americas, really driven by the large, complex fortune-type companies. Now that drags along with it also. And cloud business because those deals get done as a hybrid arrangement. So excellent momentum there. On the SaaS business, we are now actually accelerating the percentage of SaaS customers that are net new to Commvault. So in Q2, about 40% of our SaaS. Of our SaaS customers were net new to Commvault. And I think that's up compared to like 30% a year ago. So what we're seeing is our ability to land not only on premise, hybrid, but also straight to the cloud. We have all three motions going.

And I'll supplement that by saying that as customers look at AI across the enterprise, the realization that having point solutions or multiple solutions is not the right answer. And so we're seeing a renewed conversation, set of conversations around platform consolidation and hybrid capabilities and that plays right to our strength.

Joe, I can hit probably the second part of your question too, I think was about second-half contribution as it relates pricing to the mix between new customer and existing. The guidance was raised based primarily on the expectation on the cross-sell and longer renewals. So if we keep the momentum up and accelerate new customer along with the anticipated cross-sell expansion opportunity we have in our seasonally stronger second-half, that would be a great result.

Gary, that was perfect. It leads into what I wanted to follow-up on, which was, okay, you feel like you have great visibility into the second-half. Within that renewal, especially on term, like are you seeing customers sweat assets or just given all the AI talk and strategic importance, are people actually pulling forward?

No, so I'll hit the last piece first. There was no change in the dynamics of the quarter on either push out or pull in. So we track seasonal metrics on both of those patterns and we were within our historical norms. So nothing unusual that happened in fiscal Q2. It was excellent sales execution. From a capital expenditure perspective related to hardware, that ultimately becomes our competitive strength because we work with all of the major storage providers.

Helping our customers prioritize hardware if they need it to match their projects is becoming a natural process for now, right? We're now into now a year almost of some of these supply chain headwinds and now it becomes support of our sales motion. The last piece I want to mention to complement that is also now the flexibility to start to take customers straight to the cloud. So there's many applications now depending on supply and hardware availability that we can also help our customers bypass the on-premise and take those workloads straight to the cloud. So we're also seeing some of that contribution as well.

Next question comes from the line of (inaudible). Your line is open.

Yeah, thanks for taking my question. So, Sanjay, just a follow-up to an earlier question on identity. I mean, you highlighted this largest Active Directory deal and also identity are doubling your. And then also cluming of customers are consolidating Active Directory. Just wanted to understand previously, you had characterized identity as a relatively lower ASP opportunity. Are you starting to see customers beginning to scale either resilience at a broader sort of enterprise scale? And how often are like cloud native customer relationship expanding into identity and have a quick follow-up.

Let me, I was scribbling away. Let me parse down your question. So the first part is around, do we see identity really being, let me paraphrase, a growth driver? Would that be a fair statement?

Yeah, absolutely.

Okay, so the short answer is absolutely. We are investing in R&D rapidly with. Around the identity resilience because it's fortuitous timing. We believed identity was, when ransomware was prevalent as a core thing, as a core worker that we were trying to protect against, identity became the place that we had to start. We've invested heavily, ground up building capabilities.

On identity resilience and it's multi-platform. And we'll continue to grow that. Then we've made sure that the value we bring to customers is integrating our ability to discover what the vulnerability or the situation with the identity is and the effect it has on the rest of the organization, data, non-data applications, what have you. So the cause effect becomes very important. In light of the aagentic enterprise. The non-human identities are proliferating exponentially faster than human identities.

Some different studies will show you 1 to 150, or 1 to 200 may be growing, and I believe that will keep growing. And as identities grow and they act on your behalf and they have privileges and they can do things autonomously, the ability for us to have full discoverability and not just say what happened, but be able to tie back to what you need to roll back and the ability to do a bulletproof rollback becomes the value. And we believe that is where things are going. I don't know if I answered your question, but that's what I tried to do.

That's super helpful. And just a quick follow-up for Gary. You highlighted double-digit ARPA growth and, of course, multi-product adoption increasing to just looking at the consolidated subscription NDR. It was 130% still very strong, but a modest moderation versus this prior quarter, if I saw that right. Just how to sort of reconcile those and if you can highlight how the larger multi-product customers are expanding, if there's anything around the term or renewal timing, just wanted to hear your thoughts.

Yes, I can give you a little clarity and dig down in there. So yes, subscription net dollar retention was 113%. So remember that I talked about a baseline of 114 plus or minus 200 basis points on either side for this fiscal year. So we're operating right in the historical range that we've talked about. We put the definition of net dollar retention in the appendix, it's a cohort analysis from one year ago, so therefore all the momentum we would have seen even over the last two fiscal quarters on new customer does not that that calculation does not benefit from. So what we've seen, which is a little bit of a mix in the first half, the mix has gone more weighted toward new customer. Relative to the expansion on a relative basis, which drives the minor variability in the number. But we are still comfortable with that 114%, plus or minus 200 basis points, depending on the new versus existing maximum.

Eric Heath, KeyBanc.

Hey, thanks for taking the question. Maybe two, just on the SaaS Cross one on the guidance, if I could. Maybe first on the SaaS adoption at 53% of customers with 2+ products, I think that was a considerable jump up quarter-over-quarter from 50% last quarter. So maybe just specifically highlight some of the stuff you're doing to drive that nice sequential improvement.

Eric, I'll hit it, it's Gary. So a couple of things. One is. On the multi-product. We crossed over 50%, as you said, of our SaaS-managed Commvault customers with more than one product. And what we are seeing right now is that our fastest-growing cohort are like the three to eight customer products. So is it not only relying on identity and data security, but now we're even getting contribution. I think we even put it in our prepared remarks about the cloud-centric offerings. We said the cloud-centric is offering for up. Year over year. So now we're bringing things, which includes Clumio. It includes protections for like Azure DevOps, Google Workspace. So now some of more of these cloud-centric and straight to cloud and cloud-native options are also start contributing. So from a cross-sell perspective, we now have the identity, the data security, the threat scan, and now the more cloud-centric offerings that are contributing. Our SaaS. Close cycles are much shorter and our customers now view the platform as a benefit to their overall resilience options. And all of this comes together within aligning our field teams with the right resources and compensation incentives to drive the motion.

Awesome. I appreciate that, Gary. And then maybe just on the guidance. So I think when we look back on the first half of this year, I think you'd be cumulatively by $10 million or $11 million on subscription ARR in the first half on a constant currency basis. But raising the guidance for the year at about $8 million, I know it might be splitting hairs a little bit, but just curious maybe why we're not seeing a little bit more of a raise to the second half guidance.

Fair question. Sanjay and I's approach is to give clarity the guidance that we're comfortable with not only hitting but achieving. So I think that's the foundation to how we think about setting guidance and the half point is the best time to revisit that and we obviously would take another revisit at the end of fiscal Q3. In the first half, so kind of let's talk half over half. In the first half of the fiscal year, on a constant currency basis, we did a little bit over $90 million of net new ARR, and the raised guidance assumes we'll do a little bit over $100 million in the second half. So think about that as the foundation that we're working toward as we move into the second half.

James Fish, Piper Sandler.

Hey guys, I did want to ask on that SaaS piece and maybe just to follow-up there, that 53% is up four points. Understand, we're talking about the fastest growing products, but where are we at in terms of the largest penetrated products? What sort of left to kind of grab here and how to think about really what that 3 to 8 product cohort is really growing?

Yes. So good to hear from you, James. It's Gary. I cannot hit it. The runaway on the cloud is long, very long ago. And some of the metrics that we look at internally, it's the industry report that we rely on, is that still only about 30% of cloud workloads are protected by third parties, like Clumio versus maybe basic native tools. That tells you that the fastest part of the market, which is cloud, still has massive greenfield that is. Is out there. And where we see the highest growth rates is exactly where we want it. We see the highest growth rates in identity. We see it in the cloud native workloads, especially related to the offerings we have with Clumio. Now, as we start introducing even new terms and new metrics, like we talked about this quarter, some cloud-centric, because we're now starting to see that adoption that's adding to that three to five product customer cohort, it's a lifetime value play. James, as in that a lot of these add-ons we talk about as we get into identity in the cloud and the cloud native, right, they are singles and doubles that will drive consistent ARPA growth, but not one time a big bang.

Makes sense there, Gary. And just because you guys are one of the ones that have exposure here, any update or any color as to how federal spending in that vertical was this quarter?

No problem. So Fed continues to operate as a percent of revenue at a consistent level. That means that our Fed business grew roughly in line with the overall business. So I'll give you that perspective. The interesting piece on Fed what's happening is we're now seeing the Fed business accelerate more on the cloud side. So this quarter, even from like a bookings or billings concept, we finally crossed over half of our Fed business being SaaS and cloud. So I think that's the dynamics we're seeing. It's now showing up on the cloud side.

Jason Ader, William Blair.

Yeah, thank you. First one for Sanjay. Sanjay, where would you say you have the most differentiation in the cloud SaaS protection area and how would you describe that?

I would say the way we've approached our. Our cloud offerings has been initially, we built a Metallic platform that had breadth, so we gave customers full hybrid capabilities overtime on what they had on-premise to what they might have required from a cloud point of view. Then a couple of years ago with Clumio investment, we went very deep. These are. This is protection initially for AWS, now we do GCP, where I internally like to say we apply the laws of cloud economics. We can do recoveries at scale and at cost points that are very attractive for customers. And so now we have the depth and the breadth. So we continue to use that as our way. Now around that, what we do that. That the native providers want to is we give you multi-cloud abstraction. So you can protect workloads regardless of which cloud they are. We give you full lifecycle management on the data that you have with us. We have full policy application, full compliance capabilities. So we build up ransomware protection. So we were able to give a complete suite of capabilities, which in light of AI. Holds us in good stead.

And then for Gary, I have to ask the operating margin questions, I always do. You guys are still kind of in this 20% to 21% range, I guess this quarter was a little higher than that, but the guidance implies kind of in the 20% to 21% range. What's it going to take for you guys to really kind of break out of that 21% zone and when might we expect that breakout to happen?

Excellent question. If you think about the operating leverage, Jason, that we produced in the first half, I think that's a good metric to think about the potential of the company from a foundational perspective. I think we were clearly over, I think, 21% in both quarters. We're heading into our seasonally strongest quarter or strongest quarters in the second half, right, where we would expect sequential acceleration first half to second half on the top-line. So we're demonstrating. That we can drive margin expansion in this business because we've done it in the first half. I think EBIT margins were up 330 basis points year over year. So we're demonstrating we can do it. Now it's the balance of that versus. Investing for the opportunities ahead. And there's a couple important investment areas that we are focused on. Two primary investment areas. Number one is making sure that we have the capacity in the field selling teams to deliver the number. The only other area from a resource perspective is making sure that we are innovating on AI recovery and are innovation ahead. That ties with making our company more efficient from an AI perspective internally. We'll keep the investments focused there and we've demonstrated that our ability to drive margin expansion we can do. Now, we haven't given guidance into next year yet, so I can only talk about the second half and you're correct, it assumes we hover around that 20%. We have our shift event in Q3, but we'll update next year probably in the quarter or so.

Rudy Kessinger, D.A. Davidson.

Hey, great. Thanks for taking my questions, guys. First one is for Sanjay, then I have a follow-up, Gary. Sanjay, you talked about, I think, in response to a question earlier, AI, you believe it will be a tailwind. It's kind of indirectly a tailwind right now with your workloads and whatnot that you expect it to pick up. I guess, are we seeing that yet in the second half guide this year? Is that all yet to come in terms of AI being a tailwind for the business? And what is it that's giving you that confidence that it will? Is it conversations, is it a pipeline? Trying to level set when we might see that tailwind actually flow through into the numbers here.

Rudy, it is conversations, it is pipeline, but it is data. Right now what we're seeing is an increase in workloads, increase in volume, the types of workloads that need to be protected. We've built connectors into platforms like Databricks that customers are using to really mine their data for. For AI. And so the conversations all lead to the fact that indirectly we're looking at volume increase and workflow type increase. Without getting ahead of our launch because our CMO will absolutely crucify me, in two weeks, we're going to unveil a whole set of capabilities that are AI-enabled for AI recovery. Because we believe that it's not about throwing in the towel and saying, Oh, the security isn't going to work. The frontier models are powerful. Things are going to happen. Customers need to embrace AI, and we want to enable that. But we're enabling that by saying that we give you the ability to be able to have, in time, a single click recovery on your AI applications, not just the data, but also the applications and all the discovery around it. I don't want to get ahead of the actual product announcements, but we're going to, it's going to be a lot about AI and where customers are and the issues that customers are grappling with right now.

Yeah, fair enough. Okay, looking forward to this announcement. Gary, yes, I'll be there for sure, looking forward to seeing you guys. Gary, on the second half era guide, kind of a two-parter, firstly on SaaS. Just as a percentage of net new ARR in the second half, it's 60% to 70% range, still kind of the right framework that we should have in mind. And then secondly, a question I've been getting a lot leading up to this print this morning is just how much larger is the renewal pool in the second half versus the first half, any quantification you can share on that?

Good to talk to you, Rudy. On the first question was SaaS net new ARR contribution. We've talked about or I've talked about specifically 60% at least as a minimum of the SaaS contribution for the year that holds. And we are tracking probably slightly ahead of the initial thinking on SaaS guidance crossing hopefully well over $500 million. So the guidance is more anchored toward the. SaaS side of the business as the anchor to guidance. And much of that is driven by the renewal pool, especially on the units. Remember, because the SaaS business is sometimes. Less about the dollars, but more about the number of customers and if you look at the growth we're seeing in the number of SaaS and subscription customers and we have an average contract length that's significantly shorter than the software, it would kind of imply that the renewal pool and available customers to cross-sell to is significantly larger.

Demi, we'll take the next question, please.

Yun Kim, Loop Capital Markets.

Alright, thank you. Just a quick question around sales cycle, around some of these newer products, cyber resiliency. The data security and AI-related products. Are the sales cycle for these type of products much longer than the traditional backup and recovery offerings? Are you finding yourself doing a lot of education when you're involving these sales cycle for these newer products, especially as it relates to AI?

Gary, I'll jump in and take this one. On the advanced innovation that we're talking about, things like identity or even our other cyber data security and resilience offerings, our sales cycles are typically shorter than we've seen historically because we have the compelling event related to resilience in an AI-first world. If we're dealing with an on-premise RFP that's basic backup only, that's probably our longest sales cycle because it's a traditional workload. So what we see and what it shows up in the numbers, we're seeing our close rates. Improve year-over-year because the advanced innovation, whether it's identity, it's cloud native, it's with Clumio where we can drive consumption within 30 to 60 days, we're actually seeing the growth happen in the product set that has the shortest time to develop.

Okay, great. That's good to hear. And then also, Gary, real quick, any trend around different geographies? Looks like the growth in international lag America for the first time.

Yeah, that's correct. Think about it from a seasonality. Fiscal Q2 is... the summer holiday period in Europe. So therefore, it traditionally could be a later quarter related to just the holiday schedules in Europe as we plan for in the business and we have the seasonally strongest new customer business in the Americas, so it's that combination. But overall, if you did constant currency, both the Americas and international, both through. Double-digits year over year. So it's not like one is falling behind in the single-digits. It's seasonality with continued double-digit growth.

Thank you.

Junaid Siddiqui, Truist.

Great. Thank you for taking my question. Sanjay, as enterprises move AI workloads and data into production, are you seeing a distinct new resilience budget emerge around AI infrastructure or is AI protection still largely being absorbed into existing data protection deployments?

Early days, Junaid, early days, but we're seeing a higher awareness for protection earlier in the cycle. I can say that quite definitively. How it translates over time to be determined. I mean, it's no different than how different companies are deploying AI. Some of them have created AI officers. Some of them it's part of IT. Some of them it's a project for someone in the company. So it's still formulating, in my opinion. It is high levels of awareness. I will say to you that protection, the way in recovery, the way we position it is top of mind. Will be hard for me to quantify which budget necessarily we see coming out of right now. I'd say if I had to pick one, I'd say it's still core data protection.

Got it. Thank you. And just as a follow-up, since the launch. Commvault Cloud Unity, you talk about stronger adoption of identity resilience, data security, and recovery capabilities under this unified control plane. How much of the recent cross-sell success can you maybe attribute to the Unity architecture?

Yes, I can wrap up with this one. It's that Unity architecture provides the experience for both the customer and Commvault. To make sure they have visibility across their entire estate on what workflows are protected enough. So when you combine that kind of like product-led type growth opportunity that we have with customers with the visibility that we give them. Which is the foundation of what Unity is as the foundation of cross-sell. And then you combine that Junaid with the go-to-market organization and sales plays and incentives. It's a combination of both that are driving the multi-product adoption stats that we talk about, especially getting over 50% of SaaS customers managed by Commvault with more than one product. So it's the Commvault.

Demi, we'll take our last question, please.

Patrick O'Neill, Wolfe Research.

Hey guys, thanks for taking my question.

Just wanted to follow-up on an earlier question on displacements and landing new customers. Who are you displacing the most and then maybe are you seeing any of that strength come from an acceleration in customers looking to move off of legacy solutions ahead of a heightened threat environment? Thanks.

Short answer, yes, I mentioned that, consolidation, especially in light of as customers Patrick, as customers are looking at their data estates to sort of get it ready, prepared for models and training and usage within the enterprise. Having recovery be a disaggregated thing across multiple point solutions, generational solutions is not the right answer. So that is a definite tailwind that's driving the consolidation conversations. So we're seeing a resurgence in that conversation. We're displacing the usual legacy vendors that have been around for a while.

And that concludes the Q&A session. I will turn it back to Michael Melnick for any closing comments.

Thanks, everyone, for joining the call this morning. If you have additional questions, feel free to e-mail me or reach out, and we'll make sure to get back to you. And for those of you who can't join us at SHIFT on November 10th to 12th, in person, we will have a virtual stream on November 18th. We encourage you to tune in. Thanks very much.

This concludes today's conference call. Thank you all for joining, and you may now disconnect.