Commvault Systems Inc

NASDAQ:CVLT

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Commvault Third Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded.

I would now like to hand the conference over to your speaker host today, Michael Melnyk, Head of Investor Relations. Please go ahead.

[Michael Melnyk, Head, IR]

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; Gary Merrill, Commvault's CFO. An infographic 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'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 a discussion of the risks and uncertainties that could cause the Company's actual results to be materially different from those contemplated in the forward-looking statements. Commvault does not assume any obligation to update those statements.

During this call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between 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 remarks. Sanjay?

[Sanjay Mirchandani, CEO]

Thank you, Mike. Good morning and thank you for joining us today.

Earlier this month, we noted delays and deferrals in our customer spending, which were particularly acute in December. We are not alone. It's increasingly clear that customers and prospects are more calculated and cautious around spending decisions in the current macroeconomic environment.

That said, we have built our company on a foundation of responsible growth for the long run, which we expect will allow us to navigate the current economic environment. There are several solid indicators in the quarter that reflects strength in our future growth potential.

For starters, Q3 was the best quarter for new customer wins in five years. Total ARR increased 18% year-over-year in constant currency. More importantly, subscription and SaaS ARR grew 43% and now represent 70% of total ARR. This bodes well for future expansion possibilities. And we delivered healthy free cash flow growth while steadily returning cash through share repurchases.

I'll discuss Metallic in more detail shortly. But during the quarter, Metallic approached 3,000 customers and is proving to be a powerful customer acquisition and expansion. We also saw very healthy growth in Metallic ARR, which sets up nicely for our next milestone, $100 million in SaaS ARR. The large software deals came in below our initial expectations for Q3. We are confident in our long-term future, because first, data protection remains a strategic priority as customers transition to the hybrid cloud, while dealing with the challenges of ransomware and other risks to their business. Second, the market views our portfolio as best-in-class. And our customers see us as critical on their journey to the cloud.

Perhaps, let's discuss data protection of the strategic customer priority. The journey to the hybrid cloud is different for every customer and it will be ongoing for years. The pace of change and innovation is constantly accelerated, creating uncertainty for those charts of protecting the data. This is even more pronounced in today's uncertain environment. Ransomware, skill shortages, supply chain and the evolving macro, these are all threats to organization's ambitions and objectives.

Customers need the flexibility to balance costs and risks to maximize business outcomes. We are uniquely positioned to give them choice and flexibility in how they consume technology required to protect the critical data in this difficult world.

This brings me to my second point. Our portfolio is leading edge and future proof. This has enabled us to win new customers and expand our footprint by offering industry-leading capability, capacity, scalability, and solutions. Our support for new workloads and new environments is unmatched.

For instance, as customers build cloud-native workloads and applications, they often use Kubernetes. Our support for Kubernetes is best-in-class. In fact, just last week, Commvault was named a leader and outperformer in the new GigaOm Radar for Kubernetes Data Protection for the third year running.

It's a matter of pride for us that we engineer our products to support and integrate with the broadest ecosystem in the industry. This gives customers peace of mind as they protect the data for applications in the cloud today and as they evolve in the future. We do this, so our customers don't have to, and we give our customers the choice of software and SaaS on one platform under a single pane of glass.

For instance, the breadth of our Metallic SaaS platform helped us land a new customer, [VistaJet]. VistaJet was exploring a significant multi-cloud strategy. Rather than relying in adequate native tools within the cloud, this VistaJet chose multiple Metallic offerings, including Kubernetes backup to strengthen its cyber resilience in the cloud, simplify, and reduce its costs and enable them to pursue their growth ambitions.

We also landed a multi-million dollar deal with a large European energy company. We displaced an incumbent vendor to protect on-prem workloads like Oracle and SQL server and safely migrate data to the public cloud, all while reducing the risks of a ransomware attack. Our competitors could not scale to protect the customers' vast amount of data.

You see these are two customers at different stages of their hybrid cloud journey. One focused on existing on-premise workloads, the other one on multi-cloud. We met them both where they were and we'll be able to take them to where they want to go.

Now a little bit more on Metallic. Our Metallic offerings continue to gain momentum with 70% of Metallic additions in the quarter being new to Commvault. This sets the stage for our robust, cross and upsell motions as we are laser-focused on driving world-class in ARR. In fact, 30% of Metallic customers now have more than one Metallic offering such as our newly released ThreatWise, which is showing good early traction.

Metallic customers are also expanding to new offerings as the workloads grow a change. For instance, Linamar Corporation, a global manufacturing company and an existing Metallic customer recently expanded with Metallic to protect up to 15,000 Microsoft Exchange mailboxes. This is another notable example of how Commvault helps customers protect their data, accelerate their cloud journey, simplify their environment and minimize TCO, be it with software or SaaS or both.

Metallic is increasing contribution to customer and ARR, growth is a positive indicator that reinforces that our bet on SaaS is the right long-term move for Commvault. As we close the year, and Metallic becomes a more material part of our business, we look forward to providing more detail at an upcoming investor event.

Now, I'll turn it over to Gary for a discussion of our financial results.

[Gary Merrill, CFO]

Thanks, Sanjay, and good morning everyone.

I will start with a quick recap of the quarter with growth rates on a year-over-year basis unless otherwise stated. Total revenues for the quarter were $195 million, an increase of 1% on a constant currency basis. Software and products revenue for the quarter was approximately $90 million, a decline of 5% on a constant currency basis.

The variance against our Q3 guidance was the result of a weaker-than-forecasted enterprise market and execution on close rates. Revenue from large deals, which we define as transactions with greater than $100,000 of software and products revenue was down $10 million versus the prior year and represented 72% of software revenue in the current quarter compared to 76% in Q3 of the prior year.

The average deal size in the quarter for large deals was $312,000. This shortfall in large deals was particularly evident in the Americas, with total software revenue was down 20%. Our international region delivered strong software revenue results increasing 17% on a constant currency basis.

On a consolidated view, software revenue transactions under $100,000 increased 6% as we saw a modest acceleration in the velocity side of our software business, driven by new customer transactions. Now that I've discussed the large deal headwind, I'd like to provide more color on some positive trends in the quarter, particularly around our subscription and SaaS momentum.

Subscription software revenue was approximately $70 million and represented 78% of total software revenue, which compares to only 71% of total software revenue in Q3 of the prior year. Our subscription transition has been driven by new customer acquisition and the strategic conversion of existing perpetual customers to a subscription model.

Services revenue, which includes revenue from our customer support agreements, professional services and Metallic was $106 million, an increase of 7% on a constant currency basis, driven by the continued acceleration of Metallic revenue.

From a customer perspective, we had our best quarter for new customer count in many years. We saw new customer growth in subscription software customers, Metallic SaaS customers and the combination of both. As Sanjay noted, we are the only provider that can offer customers the best of software and the best of SaaS.

I will now give some insights into our annualized recurring revenue or ARR metrics. Our total ARR increased 14% to $641 million as reported and 18% year-over-year growth in constant currency. Subscription and Metallic software revenue ARR increased 43% to $443 million and now represents approximately 70% of our total ARR balance.

Moving on, I will discuss expenses and profitability. Gross margin for the third quarter of 83% reflects a lower mix of software revenue, first is our Q3 expectations. Total operating expenses were $121 million, down 5% year-over-year.

During Q3, our global headcount was down 4% to 2,820 employees compared to 2,933 at the start of the quarter. We are managing our people, facilities and third-party expenses by focusing investments on our most critical priorities. We will continue to evaluate our resource base against the market demand environment. Non-GAAP EBIT was $38.5 million resulting in an EBIT margin of 19.7%. The decline in non-GAAP EBIT was primarily attributable to our lower software revenue results.

Moving on to some key balance sheet and cash flow metrics for the quarter. We ended the quarter with no debt and $273 million in cash, $117 million of this balance or 43% of total cash is now in the United States. Quarter-end deferred revenue was up 20% on a constant currency basis, driven by the continued acceleration of Metallic. Q3 free cash flow was $29 million, up 15%. On a nine month year-to-date basis, we generated $100 million of free cash flow, an increase of 16% versus the same nine month period of the prior year.

As a reminder, fiscal second half cash flow will be burdened by approximately $7 million of federal tax payments related to the TCJA capitalization of R&D provisions. While our software and Metallic models diverge and how they are accounted for in our P&L, they're both strong cash flow generating businesses. As our Metallic business becomes a more meaningful part of our results, we believe ARR growth and cash flow will be key operating metrics to demonstrate the strength of our business model.

During Q3, we repurchased 507,000 shares of our common stock for $31 million. Fiscal year-to-date, we've repurchased 1.5 million shares of common stock, returning $90 million to our shareholders, representing 90% of free cash flow. Today, we're also announcing our intent to sell our corporate headquarters in Tinton Falls, New Jersey and leaseback only a small footprint of the existing space. We believe this is fiscally responsible.

Like many companies in our industry, we have evolved into a more flexible, hybrid workplace. The sales transaction is expected to close in the first half of fiscal 2024 with proceeds of approximately $40 million.

Now, I will discuss our outlook for the fiscal fourth quarter. We are diligently monitoring the macroeconomic outlook and customer spending on large transformational projects. We believe, new business may continue to take longer to close, especially if it is part of larger IT consolidation and transformation projects. We expect Q4 software revenue will be flat quarter-on-quarter at approximately $89.5 million. Services revenue, which includes revenue from our customer support agreements, professional services, and Metallic is expected to be approximately $107.5 million with sequential revenue growth driven by our Metallic business.

As a result, fiscal Q4 total revenue is expected to be approximately $197 million. At these revenue levels, we expect Q4 consolidated gross margins to be approximately 82%. We will see some incremental pressure on our gross margins due to the forecasted increase in services revenue, which includes Metallic SaaS as lower margins relative to our current software outlook.

Q4 operating expenses are expected to be approximately $122 million, down 3% year-over-year. We expect Q4 EBIT margins will be approximately 19%. We continue to be maniacally focused on managing people, facilities and third-party expenses, balancing profitability, while investing in growth initiatives such as Metallic.

Moving to cash flows and share repurchases. We expect cash flows will sequentially improve in Q4 and continue to believe that share repurchases currently represent the best use of excess cash. Given the year-to-date cash flow results and current U.S. cash balance, our Q4 share repurchases will increase from Q3 levels. Our projected share count for Q4 is approximately 45 million shares. Our team is focused on execution, and we will maintain our responsible growth operating philosophy.

I will now turn the call back to Sanjay for his closing remarks. Sanjay?

[Sanjay Mirchandani, CEO]

Thanks, Gary.

As a longstanding market leader, we've endured economic and technology cycles like this, by supporting our customers wherever they are in their journey. They need the flexibility that only Commvault can provide in today's difficult world.

Over the past two years, we've made significant progress in delivering a subscription and SaaS-based recurring revenue model, while continuing to innovate and build our industry-leading products. I'm confident that we're on track to continue to deliver shareholder value and look forward to sharing more with you at an upcoming Investor Day.

Now let's open it up for questions.

[Operator]

[Operator Instructions] Now, first question coming from the line of Aaron Rakers with Wells Fargo. Your line is open.

[Aaron Rakers, Wells Fargo]

Yes, thanks for taking the questions. I guess, I want to start with maybe just thinking about what's going on in the macro and kind of the impact to your business. Specifically around the renewal opportunity as we start to think about fiscal '24. What assumptions or what have you seen from a renewal perspective in the business as some of those opportunities come to fruition? Are you seeing any changes of renewal rates, any changes of net dollar retention, or anything you can share on that front?

[Gary Merrill, CFO]

Hi, Aaron, it's Gary. Good morning. A couple of things.

[Aaron Rakers, Wells Fargo]

Good morning.

[Gary Merrill, CFO]

Our renewals, especially related to the software subscription business, they largely met our expectations for fiscal Q3. So, we're on track with some of the metrics around renewals, both our retention rates that we've discussed historically. We are still in those historical ranges, which is good. And as we look forward into fiscal Q4, we have a slightly bigger renewal population quarter-on-quarter, Q3 versus Q4 as well. So, we're on track there.

What really drove the mix, as we talked about in the prepared remarks was really some of those large IT enterprise transformational projects, driven really on the land and expense business.

[Aaron Rakers, Wells Fargo]

And as far as kind of those opportunities that pushed out this last quarter kind of delayed, maybe you can help us appreciate what is underlying your assumptions with regards to the guide this quarter around that? Are you expecting those deals to come in into revenue this quarter, or do you see further pushouts embedded in your guidance?

[Gary Merrill, CFO]

Yes. Aaron, so the expectations that we have as we look out into fiscal Q4 is that, the current dynamics that we saw during fiscal Q3 as it relates to the software side of the business. We're expecting them largely to continue as we move into fiscal Q4.

The impact that we saw in some of the multi-year big deal purchasing decisions, we expect that will continue. The deals that pushed in our fiscal Q3, the good news is they're not lost. The vast majority of them are still in play. We continue to work on them. We continue to dialog with our customers and we expect a good portion of actually to close in this fiscal Q4.

[Aaron Rakers, Wells Fargo]

Great. And then just real quickly, the final question. As I look at kind of Metallic, what's interesting is, you're talking about what sounds like an acceleration of the ARR momentum relative to, I think last quarter you said 75 and I think exiting fiscal '21, it was 50 on ARR balanced. If I look at your total kind of recurring services revenue and I strip out the support piece of it, it looks like the Metallic is growing well north of 100%. I just level set us, is that a good way to think about how quickly Metallic is actually growing within that services line?

[Gary Merrill, CFO]

Aaron, actually relative if you look at quarter-on-quarter from a Q3 even versus Q2, the sequential growth we saw Metallic accelerated in fiscal Q3, so that makes us really happy with the results that we're seeing.

Last quarter, we mentioned that our next milestone for Metallic on the ARR basis was that kind of $100 million ARR. We're well on track to be able to hit that in the near term. The Metallic business continues to provide us an amazing new customer acquisition engine as well.

Now the deal sizes are smaller, right. So they show up, it's lower ASPs. Obviously, they are not recognized in period from a P&L perspective. But if you look at that combination of what's happening sequentially in ARR, which was up, I think even 6% sequentially combined with our deferred revenue growth, which was 20% year-over-year, it shows you that we're capturing great financial stability through that Metallic business, that would kind of drive that future predictability in our revenue stream, which makes us really excited about what's to come as we kind of continue to build that business out?

[Aaron Rakers, Wells Fargo]

Thanks, Gary. Very helpful.

[Operator]

Thank you. One moment, please for our next question. Our next question coming from the line of Jim Fish with Piper Sandler. Your line is open.

[James Fish, Piper Sandler]

Hi, guys. Thanks for the questions. Maybe on the cost side, trying to understand the impact of the headcount reduction, as well as the OpEx savings you get from the sale of the headquarters there. Separately, is there a way to think about both? And then additionally, with this kind of headcount reduction that you talked about in the pre-announcement, how are you guys thinking about the impact to the top-line in fiscal '24, what amount was kind of quota-carrying?

[Gary Merrill, CFO]

Yes. Jim, it's Gary. Good to hear from you again. A couple of things I'll hit, especially on the cost side. As we mentioned, our headcount was down sequentially about 4%. Some of the benefits we will see related to those produced salary levels will start in fiscal Q4. What we have here in fiscal Q4 though is, there's a couple of things that offset it just kind of temporarily. This quarter is to start over for our employer FICA related portion of the taxes.

So, some of the savings we naturally would see this quarter are offset by some of the -- just a calendar year payroll reset and last quarter was also our merit increase review for existing employees. So we had a little bit of bump up there. So, some of the muted impact does happen in Q4. But really, when I look out into fiscal '24, that's when we start to see the benefit, the benefit of that.

[James Fish, Piper Sandler]

Right.

[Gary Merrill, CFO]

So, go ahead.

[James Fish, Piper Sandler]

Towards fiscal '24 rather than fiscal Q4.

[Gary Merrill, CFO]

Yes. So, I mean, you can big model out what you would expect in that fiscal '24 perspective based on that 4% reduction. We'd expect to see those savings as we roll into fiscal '24. As it relates to the building, it's going to take one to two quarters to close. Jim, we have to go through some regulatory approval even with the state to get consent on a few things related to the building. So, therefore, we will see a modest kind of savings impact when we get into maybe the second quarter of fiscal '24. It won't be material but it will be modest. That will start to see some savings as well there.

[Sanjay Mirchandani, CEO]

On the quota-carrying, this is Sanjay. Jim, just to touch on that. The quota-carrying heads, we're obviously very focused on making sure we don't affect the top-line.

[Gary Merrill, CFO]

Yes. Nothing, Jim we've done will impact our outlook for fiscal '24 and the top line. This is about efficiency across the business.

[James Fish, Piper Sandler]

Okay, fair enough. Thank you, guys. Last one from me, we're kind of hearing different things across tech around duration of contracts, are you guys seeing customers look to lock in term deals for longer at all or shorter and how often when a customer is renewing a term deal? Are you seeing that contract deal from, let's say a three year term down to one year term on the renewal?

[Sanjay Mirchandani, CEO]

In our business Jim, it's happening, I think the fringes. We do see pressure on term length. Our average term, we've talked about somewhere between two to three years on an average term and we're holding pretty well. We do see some pressure in certain spots. But we're managing through it which gives us some confidence that our renewal businesses continue to meet expectations in the quarter and even in the outlook.

[James Fish, Piper Sandler]

Thanks, guys.

[Operator]

Thank you. One moment please for our next question. And our next question coming from the line of Howard Ma with Guggenheim. Your line is open.

[Howard Ma, Guggenheim]

Thank you. I have one question for Sanjay and one for Gary. So first for Sanjay. We acknowledge that increased budget scrutiny and deal pushouts, those were certainly not unique to Commvault in this environment. We also acknowledge that data protection has become an increased priority in recent years as you pointed out in your prepared remarks. But in your customer conversations, and as we consider near-term purchasing decisions, are there any signs that more recently Commvault or data protection general is being put on the back burner relative to other IT projects. I understand you said that data protection is part of broad larger IT transformations, but within the relative ranking, has there been any change in the - so that's kind of one part. And then how are you factoring those potential demand changes in evaluating your pipeline and close rates. Thank you.

[Sanjay Mirchandani, CEO]

Got it. Hi, Howard, good to talk to you. So let me see if I was to part your question - and if I look at, if you looked at some of the metrics we shared on Metallic, you'll see that the demand on Metallic is healthy. The business is growing well. We're growing sequentially. Obviously, we'll be growing year-on-year. We're adding - we've had one of the best quarters of customer additions.

So the Metallic business, which is largely cloud-based workloads, is doing really - is in a good place. And if I - and if I was to sort of give you a Sanjay thesis on where I think things are broadly with data protection to your question. I think customers - we saw as an industry, we saw a lot of tailwind over the past, let's say, two years because of the pandemic customers' journey to the cloud being accelerated, ransomware being at an all-time high.

That caused - we saw a lot of large transformation projects where data protection was looked at after many years from a left-to-right point of view to make sure that the entire sort of fleet of technology that was being protected was modern - it was easily [ph] protected with the modern suite like ours. Where I think we are is the first phase of ransomware protection for many customers is done. They feel like they've got their defenses at some level in.

And now it's a matter of optimizing and really going up the stack with the rest of the fleet. So that - so there is that, if you would, change in momentum. The second piece is a lot of customers - brought into the cloud and brought into the futures and capacity and where they were seeing their architecture go - infrastructure go. And I think they're at the point where at least in - calendar Q4, fiscal Q3, we saw customers stop, pause and say.

We routinely see a budget flush. You see sort of are we using what we purchased from a storage point of view, from a cloud provisioning point of view, from a capacity point of view. And I think there was a little pause there. So I - we think that the demand and the future for data protection continues to be top of mind to customers - in my conversation, I don't see that in any way being less of a priority.

What I think customers are doing is like most companies at this point with the macro where it is, it's like where are we with what we've already committed to? Are we using it right? Are we well covered, and there's a little bit of that look and see going on. I think things will, as Gary said, come back to where things were shortly. But on the second part of your question, I'll let Gary take - I'll let Gary take that, on - I guess on how we'll be factoring some of that into our....

[Gary Merrill, CFO]

Yes, yes. So Howard, how we thought about factoring that into our Q4, our outlook for Q4 assumes that the dynamics that we saw, especially a little bit of the uptick we saw in the Americas quarter-on-quarter continues at those levels. So from a close rate perspective, we assume roughly similar close rate projections. And now we're focused on the pipeline we have in front of us for Q4 and making sure we do the inspection to basically ensure that we have the ability to close it and exceed our expectations.

[Howard Ma, Guggenheim]

Okay, thanks Gary. My follow-up for you is that - I mean the total ARR 80% constant currency growth - that held pretty strong, right? And that implies that both subscription and services were pretty strong. But can you help us reconcile that with total revenue growth of only 1% and the 5% constant currency decline and soften products?

And specifically, I mean, does that mean that the license shortfall was weighted more right like the difference really is licensed. So was that weighted more towards perpetual or in subscription license, you called out the lower contract duration, like were there any other factors that would have impacted subscription license? So really just trying to reconcile - because the overall business with ARR?

[Gary Merrill, CFO]

That's fair. So ARR continues to be very strong, as you see at that 18% year-over-year growth. The biggest contributor to our ARR 18% is Metallic. So Metallic becomes the biggest contributor, which has no in-period recognition on our P&L. That will help us as we move forward. So when you look back at reconciling the software revenue results tied to ARR, it comes down to basically a handful of large IT transformational projects.

We talk frequently here I mean Sanjay just stated about maybe a little bit of a slowing and a pause on optimization. We still did over 200 of those large deals. So we're still seeing great momentum in that space. It comes down to about a $10 million population that drove the shortfall. And many of our larger IT enterprise transformational projects or multiyear transactions, right? So the impact of that is actually 3x when you look at it on an in-period recognition.

[Sanjay Mirchandani, CEO]

Yes and again, coming back to the earlier part of your question, Howard. It's - a lot of the low-hanging fruit of the lifted shift workloads are done or customers feel like they've gotten through that. Now it's the tougher workload, the mission-critical workloads. It's the stuff that runs the business day-to-day that you have to be more cautious about and it takes more time. So I think in many conversations we have with customers, they're sort of working through that and those are obviously more complicated and take longer.

[Howard Ma, Guggenheim]

Okay, this is really helpful color guys. Thank you so much.

[Sanjay Mirchandani, CEO]

Welcome.

[Operator]

Thank you. And our next question coming from the line of Eric Martinuzzi with Lake Street Capital. Your line is open.

[Eric Martinuzzi, Lake Street Capital]

Yes. Just looking to see if there was any indication in the month of January as far as what you would have seasonally expected given the shortfall in December, was January an improvement in buyer sentiment or was it in line with the December?

[Gary Merrill, CFO]

Hi Eric, it's Gary good morning. What we start to see to the fiscal year is reflected kind of in our outlook in the guidance. And I think the best way to frame it continued on at similar levels from fiscal Q4. It started the new calendar year. Many companies are refreshing their budgets. We were in line with what we thought we would do in month of January, but it's more of a continuation of some of the buying patterns we saw during the last quarter.

[Eric Martinuzzi, Lake Street Capital]

Okay. And then you - in the press release, you talked about just trying to navigate the current macro conditions but still committed to a philosophy of responsible growth. If we look at the December quarter, roughly flat I guess we're plus 1% on a constant currency basis. But the guidance for Q4 would be down 4%. And then seasonally, Q1, not that I'm looking for a FY '24 guide here, but seasonally, Q1 is down from Q4. So when you talk about a responsible growth when do we see that growth?

[Gary Merrill, CFO]

Yes, so Eric, we're not going to comment yet in fiscal '24. As we are in through the end of the current quarter we're in, we'll talk about some of our outlook at that point in time. We're keeping our guidance tied to now is, what we see in fiscal Q4 - our fiscal Q4 reflected in some of the continuing. So we continue to maniacally focus on all of our expenses - right?

So whether it's the people cost, our third-party facility costs like we talked about today, and been contractors we'll make sure that we continue to optimize our expense base relative to the top line demand that we see. Even on a nine month basis from a Q3 perspective as well, our revenues in the nine month period are up 3%. Our OpEx is flat. So we're trying to make sure we keep our OpEx growth muted relative to the top line. And in Q4, OpEx will obviously be down year-over-year.

[Eric Martinuzzi, Lake Street Capital]

Got it, thanks.

[Operator]

Thank you. One moment is our next question and our next question coming from the line Jason Ader with William Blair. Your line is open.

[Jason Ader, William Blair]

Yes, thank you good morning guys. I just want to play devil's advocate here just because everyone is talking about macro, and obviously, that's a challenge for everybody. But from the [VAR checks], you talked to folks in the channel, I mean, it definitely seems like guys like guys [Rubrik and Cohesity] are gaining a lot of ground in this market?

So just wanted to get your thoughts on what you're seeing out of those guys today versus maybe a year or two ago? How are you competing head-to-head because those guys are getting pretty big and they're growing very well. And I just want to - I don't want to sidestep the competitive pressure here just because it does seem like it could be a factor in the current environment.

[Sanjay Mirchandani, CEO]

Hi Jason, it's Sanjay. I'll - we haven't seen anything marked different from a competitive landscape from a year ago or even a couple of quarters ago. If anything, we're winning some really good business against the ones you mentioned quite all the time. Actually, we were up against them all the time and we win. The -- it's hard to know -- I have to take your word for it as to how they're growing and how well they're growing because I don't have that information readily available as you may, okay? So it's kind of hard for me to say what of it is real and what is -- and I will say to you that if you look at the combined business, if you look at how our -- notwithstanding the shortfall on the software side this quarter and you look at our new customer additions and you look at the SaaS growth that we've got with Metallic, and you look at the combined 40% to 50% of our customers have both, you're seeing the momentum that we've got in the business.

I also think that we are in larger transformational deals, which take longer because the low-hanging fruit, like I said, has been done. Now the big mission-critical workloads that need to be ported to the cloud are just more complicated. They need more time. And we are continuing to win those. If you look at our renewal rate, there's nothing there that sets us backwards. So I have to take your word for it that they're growing at better than us. But as far as we're concerned, we're doing just right.

[Jason Ader, William Blair]

Okay. And then the -- I guess the follow-up question for me is just on execution and field coverage. You guys have been on a path to become more efficient for multiple years now. So I guess have you identified anything because it's through this process of kind of macro weakening and some of the workforce changes that you've made, where you've said, okay, well, we just -- we need to fix this or change this or I don't know if it's a coverage issue. But where are you on sort of thinking about execution and coverage and making sure you have all the right players on the field.

[Gary Merrill, CFO]

Thanks, Jason. It's Gary. So for us, it comes down to driving the right segmentation and inspection, right? So making sure that in this macro environment, what we're focused on is we can control the pipeline we have, and then we can control to make sure that as a broad go-to-market teams, that we are doing the inspection to make sure that we have the compelling event that we have the economic buyer and that we can work through the reverse time line with the customers. So in a tough macro environment for us, it's actually going back to the basics, going back to the basics on deal inspection and controlling the pipeline that we have.

The other key point that's really important in this, especially in this environment, is also working really closely with the partner community, right? 90-plus percent of our transactions go through partners. And where we will double down in all environments, especially macro environment, is making sure we're building those business plans with our partners globally.

[Jason Ader, William Blair]

Very good. Thanks guys.

[Operator]

Thank you. [Operator Instructions] Our next question coming from the line of Thomas Blakey with KeyBanc. Your line is open.

[Thomas Blakey, KeyBanc]

Hi, thanks guys. Thanks for taking my questions here. Just wanted to take on some of these macro questions, dive a little bit deeper on this maintenance to subscription transition. What you kind of saw in the quarter last quarter from a linearity perspective that seemed to have stepped up the transition. I think the subscription, if you kind of take-out Metallic estimations for ARR accelerated just again, just subscription alone ARR, while maintenance continues to decelerate to the downside, but that ratio seem to have gotten better.

Just want to know what the impact was from the macro, maybe customers are looking to save money or something. I don't know how that -- I know there was discounting in the past on maintenance -- I'm sorry, on non-subscription to maintenance transition. But I just wanted to understand the dynamics there and how that could like lead to continued strength there in the coming quarters in this macro. I have a follow-up.

[Gary Merrill, CFO]

Good morning. It's Gary. I'll take this one. So as we've talked many times, we have a strategic program that converts and looks to work with our customers that our older perpetual customers and strategically convert them to a subscription-based software. A couple of trends you see. And largely, I would say, unchanged on steady state. And I'll kind of walk you through maybe the best way to think about it from a financial standpoint.

Even within our press release, we disclosed our customer support revenue. Our customer support revenue, which is -- it's mainly the renewals from our perpetual business. That revenue was down 10% year-over-year. Now the biggest driver for that decrease year-over-year is currency. If you strip out currency, on a constant currency basis, our customer support revenue was down 5%. That's three quarters in a row. It's been down 5% year-over-year.

So the best way to think about it, it's kind of trending at similar levels that it's always had in kind of that mid-single-digit year-over-year decline in that customer support revenue is probably the best way to think about it in a steady state model that we're working towards.

[Thomas Blakey, KeyBanc]

Okay. So there wasn't any -- just to be direct extra discounting in terms of switching over from maintenance to subscription in the quarter and -- okay.

[Gary Merrill, CFO]

No, from a recovery standpoint -- jump in from a recovery standpoint. So you did mention that in the initial part of the question, recovery standpoint, we were right on target.

[Thomas Blakey, KeyBanc]

Got it. Got it. Thank you. And then on Metallic, first of all, congrats on getting in the crosshairs that $100 million ARR that's kind of in line with our model here for next quarter, possibly. The parsing out the revenue piece there, so the decline of about 110 basis points in the services gross margin. pressured by Metallic. Can you just remind us where we are in terms of that transition with regard to Metallic as it grows nicely here again, smaller revenue, much larger ARR and where you expect those gross margins to be with revenue levels in the future? Thank you.

[Gary Merrill, CFO]

Yes, Tom, for sure. So we're pleased with where we're at. We're on track from a margin perspective with Metallic. To get to more of the best-in-class SaaS margins, we're still 12 to 24 months out, right? We're on that trajectory. If you look at other companies that have gone through this transition, we're all in the same line, the same line of trajectory. So we're pleased as we work towards getting through this fiscal quarter and into next fiscal year, there's more detail that we will share as it relates to the Metallic business and Metallic margins.

On a consolidated basis, we do have a little bit of a headwind, as I mentioned in the prepared remarks, on the acceleration of Metallic revenue relative to the outlook we gave for software. So there is some margin compression on a consolidated basis. But we view that as partly as a positive because that means we're seeing Metallic accelerate at a very fast clip.

[Sanjay Mirchandani, CEO]

Tom, Sanjay here. Just a little more color. I mean, the margin conversation is the number one priority for my engineering organization on how we optimize the service. So it's a young service. It's doing very well. It's growing very quickly. It's coming at scale. We've got a host of services that we keep adding. So there's a lot of work that we're doing proactively to be best of class. So rest assured that we'll share more, but more importantly, it is the top priority for my engineering team and my operations team on how we get better at that.

It's also scale. This is a business where we've got to scale it up. That's why Gary's point on needing 12 to 24 months to be truly best of class on that is a very normal journey. And if you look at what it took us to get to, let's say, when we get to $100 million, we're amongst the fastest-growing SaaS businesses in the history of SaaS businesses in the infrastructure space. So there's a lot there.

[Thomas Blakey, KeyBanc]

It's a good point, and you don't want to not invest against this opportunity. Two years ago, this business was $0 on a revenue basis. So give or take, along those lines, when do you expect -- will you just -- will you break this revenue out when it's 10% Metallic?

[Gary Merrill, CFO]

Where we're headed is that more to come when we get to our next earnings call at the end of fiscal Q4, I think there's a lot of interest in the Metallic business, not just from a revenue but a margin and introductory standpoint. So I think we'll work towards that at a future call.

[Thomas Blakey, KeyBanc]

Okay. And just my last question on churn. I know it's early in Metallic, but have there been any impacts on churn with the macro?

[Gary Merrill, CFO]

No. No. Our renewal rates are very strong both from a gross renewal rate and a net dollar retention, very strong rates and really are pleased with where we're headed on those as well.

[Thomas Blakey, KeyBanc]

Excellent. Thank you, guys.

[Operator]

Now I'm showing no further questions at this time.

[Sanjay Mirchandani, CEO]

Thank you, everyone, for joining the call today. We look forward to speaking with you following our fiscal year-end usually in the May time frame. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.