Commvault Systems Inc

NASDAQ:CVLT

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Commvault Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in 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 today, Mike Melnyk. Please go ahead.

[Mike Melnyk, Head, IR]

Thank you, Gerald. Good morning, and welcome to our earnings conference call. I'm Mike 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 to the Investor Relations website for your 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 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 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. We delivered strong Q4 results ending the fiscal year with renewed momentum. Let me share some highlights. Total ARR increased 15% year-over-year. Our subscription and SaaS ARR, which represents 71% of total ARR, grew 38% year-over-year. Metallic, our three year old SaaS offering exceeded $100 million in ARR, placing it among the fastest growing SaaS applications in history. We had another strong quarter of new customer additions, adding over 600 subscription and SaaS customers and we did all of this profitably, delivering 22% EBIT margins while continuing to return cash to shareholders.

Gary will share more detail shortly, but today marks the next phase of our strategic evolution to become the leading cloud first data protection company in the industry. Our mission is twofold. First, we will continue to deliver industry-leading data protection to gain share in the mature on-premise market, while simultaneously taking share in the rapidly growing SaaS market. Second, we remain intently focused on accelerating our growth in a responsible and lasting way, which should result in continued operating margin expansion over time.

Let's discuss priority number one, strengthening our leadership position. To do this, we are laser focused on helping customers solve today's biggest IT challenges, manageability, security and cost. As our customers modernize and move to the cloud, they must also protect and manage data that is distributed and fragmented across clouds, regions, applications, services and datacenters. In tandem, new SaaS applications are rapidly becoming the mission critical systems of tomorrow. In fact, IDC recently reported that SaaS spending for enterprise applications is growing at 17% pace.

If managed improperly, these applications will become onerous and costly to manage. Even with this fast SaaS growth, on-premise data will continue to grow and remain an IT priority. You see on-prem and SaaS are not mutually exclusive. They are complementary components of the hybrid cloud. This is why we deliver industry-leading data protection that provides our customers with dynamic choices and best-in-class capabilities through software and SaaS. This is the power of one platform. Unlike our competitors, we don't make misleading claims about our technology leadership, we don't have to. We were rated number one across all three of Gartner's critical capabilities report for data protection, data center, edge and cloud.

Through enhance manageability and reduce costs, we've built automation, intelligence, proactive monitoring and security and compliance capabilities deeply into our platform. This gives our customers a more simplified approach to data protection across all workloads environments and locations.

Now let's discuss security. The world of data protection and security up are blurring. As a result CIOs, CISOs, executive teams and Boards are making holistic decisions across their entire IT environment and the wrong decision can have lasting and costly consequences. After all no one is immune to cyber threats that exploit the vulnerability of fragmented environments, we are the only company with a single platform with built-in security to proactively monitor and assess risks, mitigate cyber threats and protect critical workloads. It's why more customers are turning to Commvault for their data protections.

For example, where security matters most, federal agencies, including US Army Fort Sam and the Department of Veteran Affairs chose Commvault during the quarter to evolve the data protection. And Metallic was also the first data protection SaaS offering to achieved FedRAMP high status, as the only vendor in our space with advanced cyber deception for early ransomware detection. We help customers protect their data before it is compromised.

In Q1, we plan to introduce several new capabilities to defend customers from exfiltration risks and dormant threats. This includes industry leading integrations with companies like Microsoft Sentinel, CyberArk and others, which brings us to the next fundamental IT challenge. With increasing complexity and risks comes additional costs for constrained organizations. To address this low touch as a service models like Metallic solve their IT problems more efficiently. But that's only part of the solution. Automation is critical.

We embrace AI several years ago to help our customers manage their costs and while also simplifying and enhancing their experience. This helps enable us to deliver a five times better total cost of ownership than our closest competitor and it is imperative in the future. So we will continue to engineer it into our offerings.

This continuous innovation is why customers turn to Commvault for the data protection needs. For instance, we recently displaced the legacy incumbent and increased our footprint at the Fortune 100 retailer. Where thousands of stores serving millions of customers worldwide, data protection is paramount in their decision. Commvault offer what the other vendors could not, a modern and proven data protection solution on one platform, managed with a single pane of glass. Which brings us to our second strategic priority around lasting and responsible growth. To achieve this, we're accelerating our discrete focus on our land, expand and renew motions while also reallocating investments towards the high growth areas. Gary will discuss in more detail.

We have also been working hard to remove friction across the customer journey to make it even easier and more cost-efficient for customers to engage and be successful. Lastly, we are relentlessly focused on our own cost of operations, including people, technology, resources and facilities. While the macro environment remains unsettled in the near term, we believe that our responsible growth strategy enables us to focus on investing in and delivering a data protection platform that elegantly solves our customers' hard problems. We believe this bodes well for accelerating growth in fiscal year 2024.

Before I turn the call over to Gary, I want to point out a key financial reporting change that he will discuss. We've been in a multi-year evolution which is paying off. Now with the success of our subscription software and Metallic SaaS offerings, it's time to open the aperture on this part of our business and give you more insight into our progress.

With that, I'll turn it over to Gary to discuss the numbers. Gary?

[Gary Merrill, CFO]

Thanks, Sanjay. Good morning, and thank you for joining us. As you saw in Table 5 contained in our earnings press release this morning, we provided supplemental revenue and cost of revenue captions for our P&L as we transition our financial reporting to align with our business model and go-to-market strategy. This new P&L presentation is led by our term license software and SaaS offerings, which are now approaching 50% of total revenue.

The revenue from these arrangements will be referred to as subscription and combining them in a single line item will allow the investment community to have enhanced understanding of our results. As a reminder, term license software is generally recognized as revenue at the time of the transaction. SaaS revenue, which is recognized ratably over time has historically been included in services revenue along with other offerings recognized over time, like customer support and professional services.

The supplemental financial tables in this morning's earnings press release on Table 5 included two-year look back on a quarterly basis to provide business trends, using the new revenue and cost of revenue caption. Lastly, we are introducing a new quarterly earnings presentation that can be found on our Investor Relations website.

Now, let's discuss our financial results. We are pleased with our Q4 performance, beating all of our guided metrics. Total revenue was $204 million, up 2% year-over-year on a constant currency basis. This includes software revenue of $90 million. Revenue from large software deals which we define as transactions with greater than $100,000 represented 72% of software revenue in the quarter compared to 73% a year ago. The average deal size in the quarter for large software deals was $347,000.

Under our new reporting structure, Q4 subscription revenue, which includes the software portion of term licenses and SaaS, increased 9% year-over-year to $95 million and represented 46% of total revenue compared to 42% a year ago. Q4 customer support was $77 million compared to $85 million a year ago. Customer support includes software updates, phone and web-based support for a term-based and perpetual software licenses. The year-over-year decline in customer support revenue was driven by foreign exchange headwinds and from the strategic conversion of certain perpetual customers to our subscription offerings. A reconciliation from our current P&L revenue line items to our new reporting is contained on slides 23 to 26 in our new quarterly earnings presentation.

Now I'll discuss ARR. Total ARR in Q4 was $668 million, an increase of 15% year-over-year and 17% in constant currency. In Q4, total subscription ARR, including term based licenses and SaaS contracts grew 38% year-over-year to $477 million. Subscription ARR represents 71% of total ARR, up from 59% in Q4 of the prior year. We are quickly nearing a key milestone for the company with subscription ARR approaching $500 million. This includes $101 million of SaaS ARR which doubled from fiscal year 2022. These impressive subscription metrics provide confidence in our future growth opportunity.

From a customer perspective, our land and expand strategy is working as we added over 600 new subscription customers during fiscal Q4. We drove strong net dollar retention numbers of 107% for term-based software licenses and 125% for SaaS. Our Metallic SaaS offerings are a primary driver of customer expansion. Approximately 40% of Metallic customers used Commvault software solution and 30% of Metallic customers have multiple SaaS offerings. While M365 and our Air Gap storage offerings remain the most popular use cases, we're also seeing broader adoption of our other offerings like Kubernetes and dynamics backup and recovery and ThreatWise.

Now, I'll discuss expenses and profitability. Fiscal Q4 gross margins were 83.4%, an increase of 40 basis points sequentially and continue to reflect an increased mix of SaaS revenue which carries a higher cost of sales and software. Fiscal Q4 operating expenses were $123 million, down 3% year-over-year. We ended the quarter with a global headcount of approximately 2,800 employees, down 5% over the past two quarters. 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 for Q4 was $45 million and non-GAAP EBIT margins were 22.3%, well ahead of our guidance and the strongest EBIT margin result of the fiscal year, driven by operating expense discipline and strategic prioritization of resources.

Now, I'll discuss full year fiscal 2023 results. On a constant currency basis, software revenue was $355 million, up 4% and total revenue of $785 million increased 6%. Under our new reporting structure, subscription revenue was $348 million, an increase of 30% year-over-year. Within that, term license software increased 15% and SaaS revenue nearly tripled year-over-year. Fiscal year 2023 operating expenses were 62% of total revenue compared to 64% in the prior year. We drove operating leverage primarily through sales and marketing which finished at 38% of total revenue, aligned with our fiscal year 2023 target.

Full year non-GAAP EBIT was $160 million and non-GAAP EBIT margins were 20.4%. This includes approximately 250 basis points of gross margin headwinds, primarily from our accelerating SaaS revenue.

Moving to some key balance sheet and cash flow metrics for the quarter. We ended the quarter with no debt and $288 million in cash. $105 million of this balance is in the United States. Free cash flow was $67 million for Q4 and $167 million for the full year fiscal 2023. As a reminder, our second half fiscal year 2023 cash flows were burdened by approximately $7 million of federal tax payments related to the TCJA capitalization R&D provisions. In Q4, we accelerated our stock repurchases to approximately 1 million shares for $61 million, representing 91% of free cash flows. For the full fiscal year, we repurchased $151 million of our stock, representing 90% of free cash flows, well ahead of our existing 75% target.

Now, I would like to spend a few minutes to discuss how we are approaching the future. With our subscription software evolution nearly complete, we are focused on our next growth vector, scaling our Metallic SaaS platform, while continuing to improve profitability, generate strong free cash flow and provide in a capital -- attractive capital return. We are amplifying or discrete focused on our land and expand opportunities as we scale our growing subscription renewal base.

Secondly, we plan to hire additional insight sales reps focused solely on the SaaS velocity market as we refine our segmentation model. We expect that these go-to-market refinements to drive enhanced field sales productivity as we exit the fiscal year. We are also transitioning our financial reporting in guidance towards ARR and free cash flow as primary KPIs of our underlying business momentum. For fiscal Q1, we expect subscription revenue, which includes both the software portion of term based licenses and SaaS, of $95 million to $98 million, representing 10% year-over-year growth at the midpoint. We expect total revenue of $195 million to $199 million.

At these revenue levels, we expect Q1 consolidated margins to be 82.5% for gross margin and EBIT margins of approximately 20%. Our projected diluted share count for Q1 is 45 million shares. For the full year fiscal 2024, we are expanding our guidance metrics to include ARR and free cash flow. We except fiscal year 2024 total ARR growth of 13% year-over-year, driven by strong subscription ARR, which we expect to increase 27% year-over-year. As a reminder, subscription ARR includes term based licenses and SaaS.

We expect subscription revenue to be in the range of $420 million to $430 million, growing 22% year-over-year at the midpoint. At these levels, subscription revenue should cross over 50% of total revenue, which we expect to be in the range of $805 million to $815 million. We also expect consolidated gross margins of 82% to 83%, non-GAAP EBIT margin expansion of 50 basis points to 100 basis points year-over-year, and free cash flow of $170 million.

Finally, our Board recently approved a refresh of our stock repurchase authorization for up to $250 million of stock. We expect to continue with our existing practice of repurchasing more than 75% of our annual free cash flow.

Before I close, I want to highlight what we believe are the core investment attributes of Commvault including, we are a technology leader in the critical data protection space that remains an IT spending priority even in an unsettled macro environment. We have a large and growing installed base of customers, a recurring revenue model underpinned by approximately $500 million of subscription ARR. We drive consistent profitability with room for margin expansion. We have a debt-free balance sheet, healthy cash flow and a demonstrated history of capital returns.

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

[Sanjay Mirchandani, CEO]

Thank you, Gary. We continue to redefine data protection for our customers because it has never been more important for them. The law firm BakerHostetler recently published in its Data Security Incident Response Report which includes data from 1,160 security ransomware incidents that the firm handled in 2022. The findings showed that 40% of organizations hit with ransomware paid an average ransom of $600,000. But that percentage dropped to just 16%, if the targeted organization was able to restore their systems.

Data protection has never been more critical. We believe our strategy, roadmap, go-to-market motion and increasing focus on ARR will showcase our momentum in the year ahead. We look forward to updating you along the way.

Now we'll take your questions.

[Operator]

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Howard Ma of the Guggenheim Partners. Your line is now open.

[Howard Ma, Guggenheim]

Great. Thank you. It is certainly encouraging to see the top line outperformance as well as the new IR deck and the Metallic disclosures and also be the focus on ARR. Sanjay, given the ongoing delays in IT spending on large projects that's affecting nearly every software company, is there a good way to think about perhaps -- and maybe perhaps quantify the mix of pipeline that's dependent on large multi-year projects, since those will carry more and more uncertainty versus deals that are, what I'll call, more normal course of business, such as expansion that's levered to just data growth and new logos that are not tied to large projects.

[Sanjay Mirchandani, CEO]

For sure. That's at the heart of how we've been evolving our forecasting and our pipeline disciplines in the company. The last year has been -- we've had to re-learn our models between the way in which -- the delays in the purchasing, the scrutiny around deals, the size of deals. So we've -- I think, we've done a decent job of being able to really fine-tune our forecasting models.

I think Gary mentioned the size of large deals in our business over the last quarter and the characteristics of that increasing while the average ASP was also higher. So we are keeping a very close eye on deal volume, deal size, and then, as part of our comments we shared that our discrete focus around the land, expand and renew motions with investment around a velocity business around Metallic, are all wheels in motion. These are things that are happening. So I think we've got -- the last year was a good learning year and we are re-learning -- retraining our models to be more specific around that.

[Howard Ma, Guggenheim]

Okay. That's totally understandable and it's helpful color. I just have a quick follow-up for Gary. So, Gary, it's nice to see that you guys are now breaking out term and perpetual license separately and also giving the full-year guide for total and subscription ARR. Can you double click into the drivers of subscription ARR growth of 27% between Metallic and subscription specifically. And if you could -- like any comment on your new business expectations around Metallic and Subscription would be helpful. And also the rate of decline for perpetual license that we should expect going forward. Thank you.

[Gary Merrill, CFO]

Hey, Howard, good morning and thanks for joining us today. We're now highlighting that subscription revenue and ARR, which combines our term-based software licenses and SaaS, because that's also how customers want to buy. And as customers move and continue on their cloud journey, they are looking for that flexibility of the best of software and the best of SaaS, especially related to their cloud journey.

As I look out into the guidance that I gave which was total ARR of about 13% year-over-year growth and subscription ARR, which was 27%. Relative to the 27%, we'll see greater momentum risks on that ARR related to Metallic. Metallic is our fastest contributor to ARR. We nearly or we did double ARR year-over-year. We expect to continue on that momentum, especially on the dollar value of the Metallic increase. So Metallic will play the majority of the increase, combined with our newer refined focus on that software land, expand motion.

[Howard Ma, Guggenheim]

Okay, great, thanks so much.

[Operator]

Thank you. One moment please while I prepare the next question. Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open.

[Aaron Rakers, Wells Fargo]

Yes, thanks, guys. I appreciate you let me ask the question and also appreciate all the details with today's announcements with regard to the model changes, et cetera. So a couple of questions, if I can, real quick. So first of all, I just, I kind of want to go back to kind of just the macro environment, the current demand environment you're seeing. Can you talk about the pace of deal closures throughout the quarter, the linearity of the quarter? Were there any deals that you saw pushout? Just trying to get a updated view, let's say, relative to what it was three months ago as far as how you're seeing the demand environment shape up.

[Gary Merrill, CFO]

Aaron, it's Gary. I'll take this one and thanks for joining us. The macro environment, I think continues to be challenging for a lot of companies. And for us it's -- where we see it primarily, it's really around the scrutiny on the budgets and the purchasing decision. We're not losing deals. We did see some of the sales cycles that reflected of it.

Specifically related to your question about what's changed kind of quarter-over-quarter? Our business has stabilized nicely in the current quarter. We spoke last quarter about some of that deal lengthening, especially into our Americas and we're really pleased with the rebound that our Americas had. They had a very strong quarter sequentially where they saw 20% increase in our Americas business just sequentially.

So what it’s showing us is, the stabilization has occurred. We did not see any further deterioration at all. As Sanjay mentioned, right, we're learning to manage the business with some of the current headwinds that happened around scrutiny. But we're pleased with the performance. We're pleased how the business stabilized. And while we continue to see some push deals, it's reflected in kind of what our guidance suggests in dealing with those timelines. But at this point, we haven't seen any sequential and we're actually -- we're in a good place as we move into fiscal Q1.

[Aaron Rakers, Wells Fargo]

Yeah. That's great detail. The second question is that, I know it's been a couple of years you guys gave a longer term model framework a couple of years ago. What I'm particularly interested in is, how you're thinking about, I know you talked about 50 to 100 basis points operating margin expansion this year. I think back a couple years ago, you talked about kind of driving towards a mid-20%, I want to say it was EBITDA or EBIT number. How do you think about kind of the trajectory of operating margin, maybe not just this year, but as we go forward, do you think that, that mid 20% is still achievable or could we see something more than that over time?

[Gary Merrill, CFO]

Aaron. Good question. So sitting here today, we're not giving kind of that long-term multiyear guidance. We're really focused on what's ahead of us which is Q1 and fiscal 2024. But to give you a little perspective and maybe to set a baseline, we finished FY 2023 at about 20.5% and -- on EBIT margin and that includes absorbing about 300 basis points of gross margin related to our accelerating Metallic business.

So we're relatively pleased with where we're at, considering how much we've absorbed. We're at the OpEx percent of revenue targets that we laid out. We did make a strategic investment in Metallic. We invested for the future. And we're coming out with the best enterprise SaaS platform that's on the market.

So for FY 2024, I'm confident that we can deliver that 50 to 100 basis points EBIT margin. But as I think about where we go from here, Metallic margins are improving every year. You can kind of see that now in our revised disclosure on gross margin. So we're getting the lift slowly on Metallic margins. We're still headed towards what we believe is that roughly 70% Metallic margin over the next few years.

We can get incremental leverage in the business, especially as the top line improves. So as I think about, Aaron, long-term and where we can go with the business, we obviously want to continue to grow ARR in that mid double-digit growth. Right? We have that demonstrated history of doing that. We think we can continue to grow and we're confident in our ability to keep delivering that mid-teens double digit ARR growth and getting to that mid 20% EBITDA margin should also be within our size as we kind of scale the business year-over-year.

[Aaron Rakers, Wells Fargo]

That's helpful. Finally, the real quick question is, just as we think about the subscription business growing as we look forward, the other flywheel effect would be is, obviously, the renewal cycle. Is there anything you could share with us as far as what you're seeing on the renewal of that subscription business, any KPIs or metrics around that? And I'll cede the floor.

[Gary Merrill, CFO]

Yes. Absolutely. So Aaron, a couple of metrics that we also introduced this quarter which kind of show that the strength of this land, expand, renew motion. One is the net dollar retention for subscription, which was 107%. But the other number that we're very pleased with is the Metallic net dollar retention of 125%, which really strong -- shows that strong renewal motion.

Now, I think, most of our shareholders and analysts are aware, we have a growing renewal base on the subscription, the term basis -- term-base license model. And at this point, that's part of our normal business motion. We expect it to be greater in fiscal 2024 versus fiscal 2023. That will give us some good tailwinds and some predictability in our model.

Historically, the average term of those deals is between two to three years. Historically it rounded up to three years. In the current environment, we see some term length compression which impacts maybe in period P&L, Aaron, but overall for ARR, there is no impact and it actually helps us deliver a stronger velocity.

So our average term length is probably closer to two years now than three years and we're focused on scaling that. So it will give us some good predictability into FY 2024 and it helps us with the confidence we have in our guidance.

[Aaron Rakers, Wells Fargo]

Thank you very much.

[Operator]

Thank you. One moment as I prepare the next question. Jim Fish from Piper Sandler. The floor is now yours.

[Jim Fish, Piper Sandler]

Hey, guys, thanks for the questions. Working a little bit of -- off of Aaron's here. Historically Commvault, we've seen kind of good growth kind of fits and starts, but how long the visibility do you guys think you have in the business today versus where you may have been a few years ago? Is it now because we're crossing that 50% coming from Subscription and SaaS that were less dependent on new term, especially that your visibility to kind of achieve numbers is beyond a few quarters or do you still view it as we're working through this and that really we should think about visibility around six months?

[Gary Merrill, CFO]

Hey, Jim, it's Gary. It's the former. In today's business model where we have the subscription business, which combines the software and the SaaS and I'll break it up. On the term license, we have more visibility now than we've ever had as a company, because we now have this for people sales motion on the software, relative to what we had a couple of years ago when it was primarily perpetual and we were starting empty every year. Now we have a nice tailwind that's predictable and we're focused not just on renewing it, but more importantly expanding it. So it goes beyond just the visibility to renewal and it goes to the expansion motion, which this year is a key focus on that expansion motion of that renewal base.

The beauty of, as everybody knows on SaaS is the ratable recognition. So now that Metallic revenue and it was disclosed in our presentation, right, it was about $70 million for the year, right, it’s about 10% of revenue which is ratable perspective, which gives us not only visibility of the business, but it gives us much more predictability into forecast our revenue amounts. So when we combine the subscription and the SaaS together and their individual attributes, it gives us that visibility that as a company we really never had before.

[Jim Fish, Piper Sandler]

And that's a good segue, Gary, into my next question. We appreciate the breakout that you're giving today, especially term versus Metallic, be it revenue, net retention rates, how should we think about what metrics that you gave out today that you're going to give quarterly is really what I'm asking about and how does the net retention rate specifically for subs and Metallic compared to last year at this time?

[Gary Merrill, CFO]

So the SaaS that we gave today, especially around the subscription business which combines the software and the SaaS and the KPI metrics around it, we'll continue to give every quarter. The net dollar retention, we think they are key metrics of the business, right, and we'd expect to continue to talk about our net dollar retention.

The Metallic net dollar retention, when you look year-over-year, it's really not comparable because the base last year was so small, right? We were just starting out in basically year two of the business. So therefore, now that we're in year three, we actually have a base that's meaningful and we have expansion opportunity that's meaningful.

And even within that Metallic net dollar retention of 125%, which is really strong, it even excludes the 40% Metallic customers that are also software customers, which is even at a whole another expansion opportunity that we have. So with this growing installed base where 50% of our customers are now subscription, SaaS or a combination of both, it really allows us to drive that renew and expand motion, and we'll continue to keep it as part of the forefront.

I'll also continue to update the annual guidance, Jim, that I gave to give our shareholders a perspective about how we're seeing the full-year change as the year goes as well as some of the quarterly guidance as well, that we gave today. So virtually everything that you saw today will continue to get on a quarterly basis.

[Jim Fish, Piper Sandler]

Great. Thanks, Gary.

[Operator]

One moment as I prepare the next question. Welcome Thomas Blakey from KeyBanc Capital Markets. Your line is now open.

[Thomas Blakey, KeyBanc]

Thanks, guys, for taking my question and congratulations on the results. I'm going to stick, I guess with the NDR kind of line of questioning. Lovely disclosure. Just -- these products are new. And I'm just wondering maybe any color in terms of use cases, what's driving expansion? Is this consumption based, but in much do both, right. So what's driving the Metallic NDR expansion, so we understand what that kind of looks like in fiscal 2024 and 2025, and what are those expansion opportunities look like from a term perspective? When you come back to me as a customer, what are you selling more of to me? We'll start there.

[Sanjay Mirchandani, CEO]

Let me, Tom, let me take a stab at. It's Sanjay. I'll give you the sort of the broad flows of how I see the expansion and the portfolio mapping to that expansion. Let's take Metallic. Metallic being one platform and being integrated into our software as well, customers use our MRR on Metallic recovery reserve, our air gapped capabilities from the software using Metallic. And so you bring the two things together. That's a classic expansion, okay, where they want another copy of their data off-premise.

You've got customers who start with Office 365 and quickly realized that we can do Kubernetes and we can do other things around virtual machines, all from the same console and very quickly they started embracing new services within the Metallic portfolio. So the uniqueness of our approach is our ability to really take the software platform and the SaaS platform in the power of one platform to be able to give our customers that seamless extensibility. And we're seeing that in not only the number of services more than one service that our customer has within the Metallic platform, but also the fact that 40% plus of our Metallic customers also have Commvault software. So that's the mutually sort of enhancing capability within our expansion.

Now, more classic expansion scenarios of capacity or additional capabilities continue to be there in our portfolio as we add security capabilities, as we add data disaster recovery capabilities into our technology. These -- our software customers can avail of that but, just literally but snap-ins into their core platform.

So the portfolio strategy we've taken for last couple of years of making it absolutely seamless for our customers is showing in the numbers, I think that we shared with you today and I think we'll continue to be important because as customers are in transition, I said, it's not like the on-premise is going to go away. As they in transition between their on-premise world and the public cloud world or either hybrid world, they're going to want both sides and they're going to want best of breed on both sides. But you can't go a piecemeal and sort of patchwork of this. It needs to be one uniform platform and we're the only ones to do that.

[Thomas Blakey, KeyBanc]

That's very helpful, Sanjay. Is there any -- just a follow-up there quickly in terms of breaking out capacity expansions and new services, is that too granular or just some sort of subjective understanding about 107% or 125%, how much is capacity and how much is new services?

[Gary Merrill, CFO]

I'll jump in. It's too granular to give the specifics, but I'll give you a little bit maybe on the qualitative perspective, especially as it relates to Metallic, helping maybe frame is, in the -- 125% which is very strong, the majority of that is coming from upsell which I -- what I would say generally more of the same product. So even being able to deliver 125% with the majority coming from that. The number that you will see that we really have the opportunity to accelerate and as I mentioned, is that 30% -- only 30% of our Metallic customers have more than one SaaS offering. So we still have a huge opportunity as Sanjay mentioned, to really expand the number of products and use cases even now across Metallic base and to really focus on driving that expansion at the time of renewal, tied to more use cases to work on that 30% multi-product Metallic customer metrics.

[Thomas Blakey, KeyBanc]

No, that's very helpful. And that's what you'd want to hear in terms of the majority coming from capacity now and you have a cadre of things to sell to them. Just a last follow-up and I'll cede the floor about gross margin, solid uptick here in the services and support, the old way of reporting it at 250 basis points. Just, Gary, I always bother you about an update in terms of the scaling of Metallic here, have we reached bottom finally here and just some color there would be helpful.

[Gary Merrill, CFO]

Yes, we're tracking. I would say the typical SaaS gross margin trajectory that other companies have gone through now that we're in year three. We're actually made really significant improvements that you can kind of back into based on the reported results and we're seeing improvement in our gross margin for Metallic quarter-over-quarter and we expect that to happen as we kind of march towards that magic maybe 70% mark over the next couple of years, and we'll get that incremental margin expansion on Metallic as we scale it. We're solely focused on infrastructure efficiencies. We're coming out with some new packaging and pricing enhancements.

As I mentioned on the net dollar retention, as we start to drive on multiple use cases, and having customers that are using more than one Metallic product, that will also bring along margin expansion. So I think what you'll see is that continued improvement over the next couple of years on the Metallic specific. That then gives us a little more predictability, I think, maybe where you're going on our consolidated gross margin. Right. And it reflects kind of the guidance I gave of that 82% to 83%, where we're kind of at that point now where we have the opportunity to start to scale. Now that we're at that 300 basis points of -- kind of our old business model format and we can now work back towards it.

[Thomas Blakey, KeyBanc]

Very helpful. Congratulations, guys.

[Gary Merrill, CFO]

Thank you.

[Sanjay Mirchandani, CEO]

Thank you.

[Operator]

[Operator Instructions] One moment as I prepare the next question. Welcome, Eric Martinuzzi from Lake Street Capital Markets. The floor is yours.

[Eric Martinuzzi, Lake Street Capital]

You talked about growth initiatives for FY 2024. We've dug into the land and expand. But I wanted to explore the hiring on the inside sales reps, because it sounds like you're pretty comfortable with where your headcount is, the 2,800 employees that you finished out the year with. Do we expect that to go up in FY 2024 or is it going to be kind of where shifting headcount around to maybe lower cost areas, while growing inside sales reps?

[Gary Merrill, CFO]

Eric, it's Gary. I can handle that one. I talked a little bit about some of the refinements that we're making. And specifically related to the ISR on that is, what we're looking at is, there is a piece of the Metallic philosophy market that we think there is a massive opportunity for us and attacking that from an ISR perspective, driven by a velocity motion where we can see time to close, right, just the one quarter instead of multi-quarter, it's a huge opportunity that will have quite a nice payback.

Tied to that, you've heard us talking about some more discrete focus on our land and expand business, generally what that means is, yes, we're pleased with the headcount levels that we have. And as we combine the resources we have broadly throughout the company, not just in sales and marketing, this is reflective of broadly throughout the company, as we try and segment our businesses with discrete focus, we think we can continue to drive productivity metrics in sales and marketing, but also other parts of the business -- businesses as well. And all of that is reflective in the guidance that we gave, especially with our top line relative to the EBIT margin improvement we expect.

[Eric Martinuzzi, Lake Street Capital]

[indiscernible] down for me, is headcount going up, down or sideways?

[Gary Merrill, CFO]

Yes. Eric, we don't give specific headcount guidance. As I said, we brought our headcount down 5% in the second half. And as we continue to grow revenue at a pace faster than OpEx, that means our headcount, right, is in a relatively good place.

[Eric Martinuzzi, Lake Street Capital]

Okay, all right. And then the -- there was a source of the services outperformance in Q4. It seemed like there was a jump in the non-recurring there. Was that tied to any special projects, professional services?

[Gary Merrill, CFO]

Yes, I'll hit this one again. We had a really strong performance from our professional services. If you go back over the past few years, it was one of our strong -- our strongest results. As you know, we're now well out of the pandemic, we were able to really identify and really work through the backlog that we have on the services and really help our customers as they continue to really drive cost efficiencies in their infrastructure, leveraging our professional services. So it was more just to some good project completion in professional services.

[Eric Martinuzzi, Lake Street Capital]

Got it. Thanks for taking my questions.

[Gary Merrill, CFO]

Sure.

[Operator]

One moment as I prepare the next question. Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open.

[Aaron Rakers, Wells Fargo]

Yes. Thanks for taking a quick follow-up. We talked a lot about the growth in subscription and the recurring revenue contribution. I'm just curious as we look at the revenue for the full-year, the guidance that you've given, how do we think about, I guess, the two other buckets; the decline that we've continued to see in the perpetual, does that get to a level where that becomes steady state? Is that something you expect over the next year? And on that customer support line which I think declined around 9% this last quarter, how do we think about that kind of getting to a point as kind of that perpetual burns off and that may be stabilizing at some certain level?

[Gary Merrill, CFO]

Hey Aaron, it's Gary. I can kind of wrap up with [indiscernible] for you. Because you kind of think about the other revenue line items, right, we now provide three additional line items outside of subscription revenue. The perpetual license and you can really see, if you look at some of our recast financials, the transition model that it has, I think that's been declining about $25 million a year.

We probably have about another year of that and I kind of think I can get out to like a $40 million to $50 million run rate over time. It's probably where it kind of fits maybe long-term as we still have an installed base that still lies on that way. But you will see continued downward movement in that revenue item in FY 2024, again, probably at similar levels to FY 2023.

The customer support line, which includes both our customer support for both subscription and for perpetual and I think as well for FY 2024, you'll see similar trends. You'll see similar trends in that line as well related similar to FY 2023. And I think as well then that should start to stabilize as we get to the point in the base where we have the vast majority of our customers on subscription and SaaS, right. We're about half now and I think as you roll that out another year, we'll start to get to a more steady state over time. Perpetual is still roughly a little more than half of that balance on that perpetual maintenance line. So that will just give a little perspective of what the concentration is between subscription and perpetual.

The last line, which is the other services. I think as I think about that, I think that number is probably give or take $40 million on an annual basis. We've done a lot of work on product automation and partner leverage. So, what that allows us to do is kind of keep that services business optimize. It also helps us drive channel leverage and a steady state of that business is good for us because it means, we're making the enhancements in the product to make our product easier to use and also leverage our channel partners more effectively as well.

[Aaron Rakers, Wells Fargo]

Yeah. Thanks, Gary. I appreciate that.

[Gary Merrill, CFO]

Welcome.

[Operator]

Thank you for your questions. At this time, I would like to turn it back to Mike Melnyk for closing remarks.

[Mike Melnyk, Head, IR]

Thank you all for joining our call this morning. For your reference, we will be posting an updated version of the earnings presentation inclusive of the Q1 and fiscal year 2024 guidance shortly after the conclusion of the call. Thank you for joining. We look forward to following up with you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.