Commvault Systems Inc

NASDAQ:CVLT

Earnings Call Analysis

Fiscal Q3 and FY2024 Revenue and ARR Up

For the upcoming fiscal Q3, subscription revenue is anticipated to grow 24% year-over-year to $106-$110 million, contributing to a total revenue forecast of $206-$210 million. The third quarter is expected to boast consolidated gross margins around 82.5% and EBIT margins of approximately 21%. Looking ahead to the full fiscal year 2024, the company has raised its total revenue and ARR projections. The annual total ARR now envisages a 14% year-over-year growth, with subscription ARR, which includes term-based licenses and SaaS, set to increase by 24%. Consequently, subscription revenue is predicted to reach $408-$418 million, growing by 19% and surpassing 50% of the total revenues for the year. This increase in full year 2024 revenue guidance from $805-$815 million to $812-$822 million reflects strong renewal trends and SaaS business momentum. The company maintains its gross margin forecast of 82%-83% and an EBIT margin expansion of 50 to 100 basis points, reaffirming a full year free cash flow expectation of $170 million.

Strong Subscription Growth Amidst Strategic Shifts

The company reported solid growth, projecting Q3 subscription revenue to reach $106 million to $110 million, which signals a 24% year-over-year increase at the midpoint. This growth trajectory underscores a foundational shift in the company's go-to-market strategy, emphasizing the expansion of their subscription renewal base and a refined focus on high-velocity SaaS markets. As the company adapts, it continues to invest in internal sales and field resources, which is reflected in an EBIT margin projection of approximately 21% and gross margins around 82.5%.

Raising the Revenue and ARR Bar for FY 2024

For the full fiscal year 2024, the company has raised total revenue and total ARR expectations, now forecasting a 14% year-over-year growth in total ARR. This improvement reflects a 100 basis point increase over previous guidance and suggests a positive outlook on the company's financial health.

Subscription Revenue Surpassing Half of Total Revenues

The updated guidance for fiscal year 2024 anticipates subscription revenue in the range of $408 million to $418 million, marking a 19% year-over-year increase. This significant segment of the company's revenue pool indicates its successful pivot towards a subscription-based model, with over 50% of total revenues now generated from subscriptions.

Adjusting for Market Realities

In response to the current high interest rate environment and changing customer behaviors, the company observes fewer conversions from perpetual support contracts to term software licenses. While this has affected revenue mix and led to a cautious spending strategy for multi-year transactions, the assurance of a subscription revenue exceeding 50% of total revenue along with a strong renewal activity provides a counterbalance. Total revenue for fiscal year 2024 is, therefore, expected to range between $812 million and $822 million, showing an upswing from prior forecasts.

Stable Trends in Business Operations

Despite modifying guidance, the company maintains consistent business trends in terms of close rates and sales linearity, ensuring that current business operations align with historical performance. This steadiness is a positive signal for investors concerned about stability in an uncertain economic climate.

Continued Commitment to Share Repurchases

The company shows a strong commitment to shareholder return, planning to repurchase at least 75% of annual free cash flows. With $174 million remaining in share repurchase authorization as of September 30 and an expected continuation of repurchase momentum, investors can glean confidence in the company's management of excess cash and its dedication to long-term value creation.

Navigating Macro Challenges

Acknowledging the impact of bigger market trends and macroeconomic conditions, the company has taken a cautious approach. It is closely monitoring spending environments and procurement cycles, which can sway the outcomes of potential mega-deals and influence revenue projections. Despite this watchful stance, the company remains optimistic due to its ARR boost from the SaaS business, which reached $131 million even though it does not immediately reflect in reported revenue.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Commvault's Second Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the conference over to Michael Melnyk, Head of Investor Relations. You may begin.

[Michael Melnyk, executive]

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's CEO; and Gary Merrill, Commvault's 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 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 Sanjay for his opening remarks. Sanjay?

[Sanjay Mirchandani, executive]

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 12th consecutive time in the 2023 Gartner Magic Quadrant. We also ranked highest in 6 out of 7 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 stereo cyber threats. Significantly reducing ramp at hybrid task 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 theoretically 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, the 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 timing has never been better. According to a recent IDC study, most enterprises expected imminent attack. 61% of respondents believe the data loss in the next 12 months is likely 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.4 years ago, we challenged ourselves to address an emergent 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 hypergrowth SaaS platform. We vastly simplified how we secure and defend data for any workload regardless of where it is and in the process. We revolutionize 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 sonar report. The authors noted "Metallic protects a very broad range of cloud workloads that will be tedious to fully enumerate."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 the exciting event.Now I'll turn it over to Gary to discuss the numbers. Gary?

[Gary Merrill, executive]

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% 1 year ago. Term software license growth was driven by strong performance in renewals and its 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. So perpetual license sales are generally sold in certain verticals and geographies. At the current perpetual license revenue run rate, we believe the headwind to our reported total revenue growth from these perpetual license sales to 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 '24 customer support revenue had 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 '23 and 70% in fiscal year '22. At this trajectory, we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue next fiscal year.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 was 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, [ renewals ] and related customer success teams to support the customer journey in 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 point 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 within the United States. Our Q2 free cash flow was $40 million and our first half fiscal year '24 free cash flow was $78 million, up 10% year-over-year. The biggest driver of free cash flow is SaaS deferred revenue and the strength of our software subscription renewals, which typically includes upfront payments on multiyear contracts. In Q2, we repurchased an additional $31 million of stock under our repurchase program and at the halfway point of fiscal year '24, we had 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 '24. 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 to $110 million. This represents 24% year-over-year growth at the midpoint. We expect total revenue to be $206 million to $210 million with year-over-year growth of 7% at the midpoint. At these revenue levels, we expect Q3 consolidated gross margin 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 includes 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 SaaS 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 '24, which includes raising both our total revenue and total ARR expectations for the full year. We expect fiscal year '24 total ARR growth of 14% year-over-year, which reflects a 100 basis point increase over our prior guidance. We 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 to $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 lowered multiyear transactions in a relative high interest rate environment. As a result, we expect total revenue to be in the range of $812 million to $822 million. This is an increase compared to our prior total revenue range of $805 million to $815 million. Our improved fiscal year '24 total revenue outlook reflects strong renewal activity, the ongoing momentum in our SaaS velocity business and the seasonally stronger trends that we historically see in the second half of the fiscal year.Moving to full year fiscal '24 margin EBIT and cash flow outlook. We continue to expect consolidated gross margins of 82% to 83% and non-GAAP EBIT margin expansion of 50 to 100 basis points year-over-year. We are also maintaining our expected full year free cash flow 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]

[Operator Instructions] The first question comes from the line of Aaron Rakers from Wells Fargo.

[Aaron Rakers, analyst]

Congratulations on the execution in the quarter. I guess my question is I just -- help me understand a little bit more. It looks like clearly, your ARR updated guidance is a little bit lower than your prior guide, 24% on the subscription side, I should say, relative to 27%. And then obviously, revenue a little bit lower at the midpoint. Can you just -- I know you made some comments in our prepared remarks, but could you unpack that change in the guidance a little bit further?

[Gary Merrill, executive]

Aaron, it's Gary. Please to talk to you this morning. And I think specifically, I think you're asking about the Q3 outlook or the full year outlook first. Let me just clarify that on --

[Aaron Rakers, analyst]

Yes, I'm talking more full year. The 24% versus prior 27% and $408 million to $418 million versus the prior $420 million to $430 million.

[Gary Merrill, executive]

Got it. Okay. Awesome. Well, first of all, let me just reflect a little bit on the first half. We're really pleased with the first half, especially where we ended up at fiscal Q2 on all of our guided metrics, making sure we accelerate it 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% increase 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 that we're seeing on the SaaS business as well, right? When we drive that success, that at that 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 of things that are going on there. We are seeing fewer conversions, so conversions from our existing perpetual support contracts being converted to term software licenses. In today's interest rate environment, those conversions usually come with a multiyear commitment, doing a 3-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 conversion piece as well as the continued trend on term subscription length. So when we sell term subscriptions, our average term is now down to about 2 years. So while that keeps ARR hold and we see the momentum on ARR, it could 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 the spending environment and being cautious on the performance and approval cycles that are out there today.

[Aaron Rakers, analyst]

Yes. That's very helpful. I appreciate that color. So maybe just the final question, sticking with that topic. How would you characterize the linearity in this quarter, the demand? Have you seen any customers push out projects or delay spending in this environment at this point? Or is it just more cautionary on the macro, the geopolitical environment as more so we look forward?

[Gary Merrill, executive]

More cautionary. We do not see trends that deteriorated. Our trends that we're seeing in 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.

[Operator]

Your next question comes from the line of Howard Ma from Guggenheim Securities.

[Howard Ma, analyst]

So I also want to better understand the lower subscription ARR and revenue guidance because that seems to be the only negative in an otherwise stellar print. Is the -- so I understand the change in the lower migrations from perpetual maintenance to subscription, I didn't think the impact was that big. Can you comment -- I guess for Gary, can you comment, are there any other factors such as -- I mean did you -- were there any deal pull forwards in Q2 in the back half, are you expecting any renewal pushouts? Because I believe this year, it's a pretty back-end weighted or second half weighted rather renew here. And then just given the Metallic strength too, I 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 perpetual migrations?

[Gary Merrill, executive]

Yes. Howard, maybe first, quickly on the SaaS side of the Metallics. 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. So you can kind of see that as we turned out the SaaS ARR and the acceleration there, coupled with, Howard, 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 strong overperformance on the customer support side, right? So if you look at the custom support revenue and you see the acceleration there, meaning the acceleration relative to the prior expectations, that's where you kind of see -- that's where you see the offset. So that's where you see the offset on the positive side there. And it's just the few conversions. We're doing about pay for about half of what we did last year is what I kind of see just based on current pipeline metrics, we're in basically 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 2 years on average.

[Sanjay Mirchandani, executive]

Howard, it's Sanjay. We're just trying to be realistic given we're looking out for the whole year. If there's -- it's just a mix shift. In my mind, there's nothing -- we added, what, 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 this isn't -- don't read into this in anything, but we're just looking at the pipeline and being very pragmatic about what the mix shift might be. And that's it. I mean 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, analyst]

And I do want to -- as a follow-up, I do want to hone in in Metallic because as you guys mentioned, it was a really strong quarter for Metallic ARR per rating to 130%, which is up from, I believe, 118% a quarter ago and then 125% is the 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. Is it -- should we expect this kind of variability going forward?

[Gary Merrill, executive]

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 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 mature renal motion. So when we get 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 customers' success teams are driving the adoption with the field teams combined driving the expansion. So it all starts on accelerating the time to first back up and the time to consumption. As I think about the split between I'll use cross-sell and upsell, we're seeing the majority of the expansion being derivative by at this point, upsell, 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 sales force dynamics, threat-wise, 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 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 upsell. So we're getting it from all ends. Just in summary, we're getting that mature rental motion. We're getting the upsell, getting them adopted so we can get expand on more of the same products. And now we're starting to see the cross-sell start to kick in as well.

[Sanjay Mirchandani, executive]

And Howard, I'd like to add a little bit on just overall some color on the SaaS business. It is a driver of growth. It is growing well. It's the vehicle by which we land hundreds of new customers a quarter. Our security capabilities that we've integrated the Security IQ, which is our delivery platform inside of Metallic for our customers is doing well. Gary talked about the go-to-market capabilities. And we're investing for the future with mission-critical workloads. We thought if I quoted, I think it was Giga that talked in the Sonar report about having -- we had more hybrid cloud and more mission-critical workloads out there that are too tedious to compete.You have to be one step ahead of the customer. You have to be ready for the workload they want to protect. And that is exactly what we've been doing. And we -- the NRR, we sort of -- we mentioned last quarter that it was -- we thought it was an anomaly and we would get it back to normal sort of pattern. And I think we got that, and we'll keep focusing on it. So it's still a young business. It's 3 years old, in effect, we're very happy with where it is, but there's a lot to do.

[Howard Ma, analyst]

Sanjay, it's great to see the Metallic growth engine kicking in and congrats on the strong quarter.

[Operator]

Your next question comes from the line of James Fish from Piper Sandler.

[James Fish, analyst]

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? Just trying to understand that some of this material boost in net retention rate is just catch up from like last quarter, for example, or sustainable. And 2 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, executive]

James, 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 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 130% is a little on the high end on a sustainable piece that we delivered this quarter, especially as the base continues to grow every quarter. If we're somewhere in that range of 100% to 125%, right, so bracketed somewhere between last quarter and this quarter on a consistent basis and working towards that, I think that's probably -- I think that's a good measure. We are seeing --

[Sanjay Mirchandani, executive]

100 -- 120% to 125%.

[Gary Merrill, executive]

Yes. Sorry, sorry, 120% to 125%. Sorry, just to clarify that, sorry about that, Jim. And then from a -- 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 measure it with what they see in the near term.

[James Fish, analyst]

Got it. Helpful. And just remind me here, what really happened at the end of the quarter that essentially SaaS ARR accelerated, but we saw a deceleration secondly, a Metallic revenue that now revenue is actually outpacing ARR. Was it more of a back-end loaded quarter for Metallic? With it being about 77% ARR growth should we be expecting stable Metallic revenue growth for fiscal Q3 essentially versus Q2?

[Gary Merrill, executive]

Yes. No, I think stable. Any Metallic contracts that we signed in the second half of the quarter have very, very little revenue impact. So linearity has less of an impact because you just don't get anything -- not much of anything, sorry, not much of anything, once you get past the first half of the quarter or linear Metallic was relative to prior quarters. So nothing unusual, nothing unusual there.

[Operator]

Your next question comes from the line of Rudy Kessinger from D.A. Davidson.

[Rudy Kessinger, analyst]

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 point of growth basis, it was down this quarter versus last quarter. I know your subscription customer adds continue to be about 5.5%. 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, executive]

Rudy, it's Gary. I'll hit that. And good to hear from you. At the first half of the year, we're in good shape with Metallic on the new customer. I think probably some of your math hit 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 the business this young, it's hard to look at just one quarter as a long-term trend. We look back over 2, 3, 4, 5 quarters to make sure that our trajectory on both our new existing or happening, and we're pleased with where that is. So we're not reading into the 1 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 ASPs or 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 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, executive]

And this is Sanjay, Rudy. The smaller ASPs is kind of part of the plan because we have a velocity business where we lend smaller deals. We have marketplace business, with a smaller deal. 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. We said we've got the whole range.

[Rudy Kessinger, analyst]

Okay. Got it. That's fair. And then I hear you on the conversion, seeing for your 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 of quarters ago for this year. But ex conversions, 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 the near to intermediate term?

[Gary Merrill, executive]

Yes. So 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 Q2, you can time interrelate that our term license software grew double digits, right? So within subscription, our term software license grew double digits. And that's with our conversion 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 an outlook based on currently what we see and where we see customers kind of in that journey.

[Sanjay Mirchandani, executive]

There's definitely -- customers are in that hybrid cloud journey where they've got -- they've got to make some tough calls, rearchitect, rebuild, shift, migrate, mission-critical workloads, not just independently but stacks into the cloud. And that's hard. And as -- and part of what we're going to talk about next week is how we're going to help customers through that. So when you look at the complexity of that, it's -- you have to look at it and say, if I am the 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 if you look at the term, when you look at the license model or you look at going from software to SaaS, these are important decisions in the journey with the hybrid cloud. After that, security and cyber risk.So there's a lot of factors, and we are very well positioned to help customers with that, and we are, which is why we see the momentum in our security capabilities and customers using that, adding up 500 new plus new customers on the software subscription and SaaS platform. So I wouldn't read into it too much. I would say it's -- 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, analyst]

That's helpful. Congrats on the good SaaS figures in the quarter.

[Operator]

[Operator Instructions] Your next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets.

[Eric Martinuzzi, analyst]

Yes. The perpetual license for the year, I think in past quarters, you've talked about expectation for $40 million to $50 million for fiscal '24. Given you're at about $27 million here at the midpoint, are you still thinking that $40 million to $50 million range?

[Gary Merrill, executive]

Yes. 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 bi-perpetual, but those verticals become limited every single day. So the range of $40 million to $50 million is still fair.

[Eric Martinuzzi, analyst]

Okay. But given the $27 million in the front half, that would mean $23 million would be the mass you would expect?

[Gary Merrill, executive]

Yes, it will be the high end of the range. Yes, it will be at the high end of range. Yes.

[Eric Martinuzzi, analyst]

All right. And then it looks like outperformance international revenue, I think, was up 12% in the quarter. Just curious to know if you expect that -- is that just kind of a reversion to the mean? Or are we expecting that to outperform for the remainder of the year?

[Gary Merrill, executive]

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, 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 growth. We're now seeing some really good acceleration on as well the subscription option. 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 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.

[Operator]

Your next question comes from the line of Jason Ader from William Blair.

[Jason Ader, analyst]

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 decline to start to subside? You're down 9% in customer support in fiscal '23 this year is going to be something, I guess, slightly lower than that. But do you expect as we move forward into '25 and '26, that we should see that continue to -- the declines continue to subside?

[Gary Merrill, executive]

Yes. Jason, it's Gary. I'll take this question as well. So you've already started to see that even if you look at fiscal Q2 actual, it's one of the smallest declines we've had in quite some time. And the key driver to that is now a higher percentage of that customer support revenue is being driven by 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, it should be the crossover year, cross other 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 had 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 decline to be significantly less than we've seen in prior years, including this year.

[Jason Ader, analyst]

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 million to $50 million sort of towards the high end of that range this year in perpetual license revenue as we move forward into '25 and '26 without pinning you down on specific guidance, do you think that will sort of continue to trail off sort of modestly? Or do you think it will actually be more of a sharp falloff?

[Gary Merrill, executive]

Modest. I think it will be modest. They will be similar to the impact 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 we get into next year, we're likely to be in that range, but probably more towards the lower end of that range. So you're talking variability is not significant on a revenue number that's obviously over $800 million.

[Jason Ader, analyst]

Got you. Got you. Okay. Great. And then Sanjay, I got one for you. Just on the SMB and mid-market dynamics, 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, executive]

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 and many customers, as you mentioned, like to work through that. The third is marketplaces as the hyperscalers sort of promote their marketplaces, we see customers being able to sort of tap into that motion and develop software or SaaS right through that. So those are just some examples of how we're enabling our technology can be more accessible to our customers in the way they like to purchase.

[Jason Ader, analyst]

Okay. And one quick follow-up, and then I'll see the floor. On the Metallic business, Sanjay, can you give us a sense of how much of that business is coming from sort of SMB mid-market customers versus enterprise?

[Sanjay Mirchandani, executive]

I think if the trend has been fairly consistent, the enterprise side of our business is about 1/3 enterprise, roughly 1/3 mid-market and 1/3 SMB. It's not by design necessarily. It seems to be following that. And I'm much quite pleased with it because it de-risks our business, but it also gives us a chance to grow in the areas that we haven't historically like the SMB and the lower mid-market.

[Operator]

You next question comes from the line of Tom Blakey from KeyBanc Capital Markets.

[Thomas Blakey, analyst]

Just a couple. Sanjay, if you could go back to that hybrid cloud journey answer you gave a prior call questioner, is that company-specific? Or could you talk to just the greater kind of view in the industry in terms of things being complex and there seems to be a bit of a pause, hybrid cloud spend has 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. I just wanted to kind of maybe if you could clarify that or give any the color would be helpful.And then just secondly, for -- on the NRR for Metallic, the split up between capacity growth and new services, if you could? And if security is, maybe it's a premature question, but its security impacting that kind of NRR, that would be helpful.

[Sanjay Mirchandani, executive]

Okay. Let me process those. So the hyper count journey, my thinking there is the fault. There was -- the customers -- think of us a little bit, first of all, as a trailing indicator. So it's about utilization. It's about workloads that use the commitments that customers have made in 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 stack 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.And we're helping customers, whether it be through moving that data, whether it's their infrastructure, whether it's their data security, whether it's applying intelligence incentive data management across that stack data is flight. There's a lot of things that move into the hyper cloud sort of open up and we're across a lot of those use cases and a lot of those outcomes. So that's kind of where I was going.And it's not so much a -- whether it's increasing or decreasing in spend from a public cloud capability, it's really the utilization and making sure that customers are getting the value that they anticipated from the journey to the cloud. I was 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 thought for listing the right choices. And that's what we're trying to help our customers with. So that's why -- I want to pause there. Did I cover your question?

[Thomas Blakey, analyst]

Yes, yes. Just maybe a follow-up there before we get to the NRR. Does that imply from a trailing indicator perspective that there might be some pent-up demand for Commvault in that regard?

[Sanjay Mirchandani, executive]

The short answer to that 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 where we see the customer journey, where we see them sort of having to make tough decisions where -- what are the hard problems are helping them with on data? Do they have to make choices between software and SaaS. The security models using AI. These are recovery capabilities when -- in the life of cyber resilience, these are all important decisions that have to be made as the journey to the cloud becomes more and more pervasive for our customers. And we're trying to be 1 to 2 steps ahead of them in anticipating that. So I would hope so.

[Thomas Blakey, analyst]

And then just on the 130 is a strong number. Just any type of commentary on the mix of capacity growth and new services there and possibly if securities impacting that, that would be helpful.

[Gary Merrill, executive]

Tom, it's Gary. I'll take that one. Relative to the 130% of net dollar retention. As you think about the drivers of what drove that from an upsell versus cross-sell, about 2/3 of that comes from upsell, meaning upsell more of a similar capacity or licenses or seats and about 1/3 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 1/3 of that expansion and/or driven from cross-sell.

[Operator]

We have no further questions at this time. I will now turn the call over to Michael Melnyk for closing remarks.

[Michael Melnyk, executive]

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 8 in New York City, and then the replay for SHIFT will be on November 9, visit commvault.com to register. Thanks for joining. Appreciate it.

[Operator]

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