Earnings call transcript: CommVault misses EPS forecast, shares fall

CommVault Systems Inc. (CVLT) released its Q2 2026 earnings report on October 28, 2025, showing a mixed performance. The company reported earnings per share (EPS) of $0.91, slightly below the forecast of $0.94, resulting in a negative surprise of 3.19%. Despite exceeding revenue expectations with $276 million against a forecast of $273.34 million, the stock saw a pre-market decline of 7.98%, trading at $160.25. According to InvestingPro data, the company is currently trading above its Fair Value, with analysts setting price targets ranging from $176.80 to $230.

Key Takeaways

• CommVault’s EPS missed expectations, leading to a significant pre-market stock drop.
• Revenue exceeded forecasts, growing 18% year-over-year.
• The company achieved $1 billion in total annual recurring revenue (ARR) ahead of schedule.
• Raised fiscal year 2026 ARR growth guidance to 18-19%.
• New product launches and strategic acquisitions highlight innovation efforts.

Company Performance

CommVault demonstrated solid revenue growth, driven by a robust increase in subscription and SaaS ARR. The company reached $1 billion in total ARR two quarters earlier than planned, showcasing strong operational execution. InvestingPro data reveals impressive revenue growth of 21.62% over the last twelve months, supported by industry-leading gross profit margins of 81.95%. The slight miss in EPS compared to forecasts has raised concerns among investors, contributing to a steep decline in stock price. For deeper insights into CommVault’s financial health and growth metrics, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Financial Highlights

• Revenue: $276 million, up 18% year-over-year.
• EPS: $0.91, below the forecast of $0.94.
• Subscription ARR: $894 million, a 30% increase.
• SaaS ARR: $330 million, up 56%.
• Free cash flow: $74 million, a 37% increase year-over-year.
• Gross margins: 80.5%.

Earnings vs. Forecast

CommVault’s actual EPS of $0.91 missed the forecast by 3.19%, while revenue surpassed expectations with a positive surprise of 0.97%. The earnings miss, though minor, contrasts with the company’s historical trend of meeting or exceeding EPS estimates, which may have contributed to the negative market reaction.

Market Reaction

Following the earnings announcement, CommVault’s stock fell by 7.98% in pre-market trading, reflecting investor disappointment over the EPS miss. The stock’s current price of $160.25 is significantly below its 52-week high of $200.68, highlighting market concerns despite strong revenue performance. InvestingPro analysis shows the company maintains strong financial health with a "GOOD" overall score, supported by robust cash flows and minimal debt. The platform offers 12 additional ProTips covering CommVault’s financial strength and market position.

Outlook & Guidance

CommVault raised its fiscal year 2026 total ARR growth guidance to 18-19% and increased subscription ARR growth guidance to 24-25%. The company expects Q3 subscription revenue to range between $195 million and $197 million, with total revenue projected at $298 million to $300 million. CommVault plans to continue investing in growth initiatives, targeting 60% of net new ARR from SaaS in the year’s second half.

Executive Commentary

CEO Sanjay Mirchandani emphasized the company’s early achievement of $1 billion in total ARR, stating, "We achieved $1 billion in total ARR two quarters earlier than our original March 2026 target." He also highlighted the importance of integrating data security and protection for cyber resilience, saying, "The world of data security and the world of data protection have to come together if you want to be truly cyber resilient."

Risks and Challenges

• Potential market saturation in the cyber resilience sector.
• Increased competition in SaaS offerings.
• Economic uncertainties affecting IT budgets.
• Integration challenges with recent acquisitions.
• Dependence on continued innovation to maintain market leadership.

Q&A

During the earnings call, analysts inquired about the shift in contract durations and the company’s continued investment strategy. CommVault addressed its hybrid cloud approach and provided insights into its competitive landscape and innovation efforts.

Full transcript - CommVault Systems Inc (CVLT) Q2 2026:

Desiree, Conference Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Commvault second quarter fiscal year 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star one. I would now like to turn the conference over to Michael Melnyk, Head of Investor Relations. You may begin.

Michael Melnyk, Head of Investor Relations, Commvault: Good morning and welcome to our earnings conference call. Before we begin, I’d like to remind you that 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 these forward-looking statements. Commvault does not assume any obligation to update these statements. During this call, Commvault’s financial results are presented on a non-GAAP basis. A reconciliation between the non-GAAP and GAAP measures can be found on our website. Thank you again for joining us. Now I’ll turn it over to our CEO, Sanjay Mirchandani, for his opening remarks. Sanjay?

Sanjay Mirchandani, CEO, Commvault: Good morning, and thank you for joining today’s call. Commvault had another strong quarter and an excellent start to the first half of the fiscal year. Highlights include: in constant currency, we added a record $47 million net new ARR. Subscription ARR rose 30% to $894 million. Total revenue grew 18% to $276 million. Additionally, we hit a major milestone earlier than expected. Total ARR grew 22%. With that, we achieved $1 billion in total ARR two quarters earlier than our original March 2026 target. In Q2, SaaS ARR grew 56%, hitting $330 million. This was also two quarters earlier than projected. For the fiscal first half, we achieved 42 on a rule of 40 basis. We couldn’t have done it without the support of our customers and partners and the unwavering commitment to innovation and excellence from the Commvault team.

Looking ahead, there are three key business drivers that continue to fuel our growth. One, strong demand for our Commvault Cloud Cyber Resilience platform from our hybrid cloud customers. Two, as I mentioned in prior quarters, the continued move to the cloud, which our platform is tailor-made to support. Three, customers rely on our innovation engine to meet their complex and evolving readiness and resilience requirements. I’ll discuss each in more detail. First, hybrid cloud customers are embracing our cyber resilience platform. New attack vectors are constantly emerging. With AI, data is more distributed and is being used in new ways, which introduces more threat vectors for organizations to grapple with. The need for best-in-class detection, protection, and recovery is paramount. Traditional data protection approaches don’t cut it. Customers need a platform that makes them ready to withstand the worst to keep their business continuous.

We do this better than anyone else. This quarter, we saw strong momentum across our identity and data security-focused offerings, which grew double-digit sequentially and represented nearly 40% of net new ARR. Our fastest growing SaaS offering this quarter rapidly restores Active Directory and Entra ID for identity protection services. In Q2, a large bank in Asia-Pacific chose Commvault’s Active Directory offering to quickly recover its identity operations after a cyber attack. They also leveraged ThreatScan to validate clean recovery points and unified its hybrid workloads to close gaps and meet its regulatory requirements. This is cyber resilience in action. As we shared last quarter, we also continue to invest in our partner ecosystem, which makes our platform even stronger. This quarter, we announced a new partnership with BeyondTrust, a global leader in identity security.

By integrating their capabilities with the Commvault Cloud Platform, we can help joint customers advance recovery while reducing unauthorized access to credentials, systems, and data. We believe the momentum we’re seeing across our identity and data security-focused offerings will continue in the second half of the year. This brings us to our second growth driver: the continued move to the cloud. Cloud-born and cloud-bound data is accelerating at a tremendous pace, and this is only going to increase with the rapid proliferation of AI. Today, Commvault has moved and protects approximately eight exabytes of customer data into the cloud. This represents a greater than 40% CAGR over the past five years. We expect this rapid pace of growth to continue, fueled by the fact that customers are increasingly storing AI data in the cloud. It makes our Plumio portfolio of offerings for AWS more relevant than ever.

Over the past year, we introduced Plumio Backtrack for S3 and brought Plumio’s unique recovery capabilities to DynamoDB and Apache Iceberg. We are transforming the speed, scale, and efficiency in which cloud data can be restored. This quarter, we saw healthy sequential growth in ARR from Plumio and continue to add new customers to the platform, including three Fortune 1000 customers and two Fortune 500 customers. BBVA, one of the world’s largest financial institutions, chose Commvault to reduce its cloud-native complexity, strengthen its DORA compliance requirements, and protect its mission-critical AWS data. Commvault Cloud unified its data protection across three major hyperscalers, and Plumio unlocked a 40% cost savings. Additionally, we made tremendous progress with cloud-bound enterprises. In Q2, the number of SaaS customers grew to nearly 9,000, representing a 40% increase year over year.

Net dollar retention remains healthy at 125%, and we continue to see strong adoption of our SaaS offerings from existing customers. A global Fortune 1000 system manufacturer chose Commvault to support its hybrid cloud journey. Today, Commvault safeguards its virtual machines, databases, file systems, and Microsoft 365 data. The customer also leverages AirGap Protect and our integration with Azure Government Cloud to streamline operations and support its compliance initiatives. This brings me to our third growth driver: Commvault’s innovation engine. Our innovation engine has never been better. Time and again, we’ve been first to market with unique capabilities that address our customers’ most critical use cases. Innovations like Clean Room recovery, Active Directory, and Cloud Rewind are closing the gap for customers’ evolving readiness and resilience requirements. Top industry analysts are taking notice.

We are one of the few companies to be named a leader in the Gartner Magic Quadrant and just this quarter, the IDC MarketScape on cyber recovery. The IDC MarketScape report highlighted our platform’s comprehensive cyber recovery architecture, broad workload support, and deep data security integrations for delivering enterprise-grade resilience. This is why customers choose Commvault. As enterprises embrace AI, we will help them address evolving resilience requirements. That’s why we acquired Satori Cyber, which closed during the quarter and is being integrated into our Commvault Cloud Platform. This acquisition is timely, as it provides monitoring and prompt protection for large language models, as well as automated discovery, classification, and access management for structured data. We will discuss the evolution of resilience in the age of AI and introduce our richest set of innovations ever at Shift, our premier customer event on November 12th in New York City.

I hope you can join us. With that, I would like to turn the call over to our CFO, Jen DiRico, to discuss our results in more detail. Jen.

Jen DiRico, CFO, Commvault: Thanks, Sanjay. Good morning, and thank you for joining us today. Our solid Q2 results confirm that data is moving to the cloud at an accelerating pace. Our Commvault Cloud Platform is well situated to benefit from this shift. Case in point: in Q2, we set new records by adding $47 million in net new ARR and $29 million in net new SaaS ARR on a constant currency basis. We exceeded $1 billion in total ARR, reaching this milestone two quarters earlier than our initial target. Now I’ll discuss our Q2 results and operating metrics, followed by an update on Q3 and FY2026 guidance. Please note that all growth rates are on a year-over-year basis unless otherwise specified. On a reported basis, total annual recurring revenue increased by 22% to $1.04 billion, or 21% on a constant currency basis.

Subscription ARR increased 30% to $894 million, representing 29% growth on a constant currency basis. This was led by 56% growth in SaaS ARR to $336 million. I’m excited to share that we exceeded our original $330 million SaaS ARR target two quarters earlier than planned. Subscription ARR now constitutes 86% of total ARR, compared to 81% one year ago. Subscription ARR is the best indicator of the company’s growth. Now I’ll discuss Q2 revenue trends. Total revenue grew by 18% to $276 million, led by a 29% increase in subscription revenue, including 61% growth from our SaaS platform. Term software revenue rose 10% to $93 million. Strong double-digit growth in transaction volume was tempered due to a shift in term duration, which reduced average deal size.

In Q2, customers chose shorter contract duration to maintain flexibility between software and SaaS as they evaluate the timing of their transition to cloud. Q2 SaaS net dollar retention was steady at 125%, benefiting from both successful upsell and cross-sell initiatives. We saw solid momentum across our identity and resilience offerings, such as AirGap Protect, Active Directory, Clean Room, Cloud Rewind, Risk Analysis, and ThreatScan, which collectively grew double-digit percentage sequentially and represented almost 40% of net new ARR. Active Directory, a mission-critical identity tool for an effective resilience strategy, saw usage more than triple year over year as IT leaders adopt our data and identity recovery solution. In just two years, Active Directory is on pace to become one of our largest SaaS offerings.

For example, we expanded our footprint with a large U.S.-based healthcare services customer who sought to address concerns around identity and resilience after one of its largest competitors suffered a crippling cyber attack. With the addition of Clean Room, Active Directory Enterprise, and M365 backup, we are securing this customer against accidental deletion, corruption, and providing peace of mind in being able to rapidly recover in case of an event. Additionally, we closed several seven-figure SaaS transactions during the quarter, further evidence that Commvault Cloud is the gold standard for enterprise-grade resilience at scale. SaaS customers over $100,000 in ARR grew 55% year over year, outpacing growth of the overall SaaS base. Due to the complexity of their requirements, this segment typically demonstrates a higher rate of multi-product adoption than our overall SaaS base. Now I’ll discuss our profitability and free cash flow.

Fiscal Q2 gross margins were 80.5%, which reflects the acceleration in the mix of SaaS and Shift in average software duration. Operating expenses of $170 million represented 61% of total revenue, consistent with the prior quarter and prior fiscal year. Q2 operating expenses reflected continued investments to support our strong ongoing growth trajectory. Non-GAAP EBIT was $51 million, resulting in a margin of 18.6%, which reflects the increased mix of SaaS bookings and the integration costs from Satori. For the first half of fiscal 2026, we achieved a 42 on a rule of 40 basis, reflecting a healthy balance between revenue and profitability. Turning to key balance sheet and cash flow indicators. On September 5th, we closed a private offering of $900 million of convertible senior notes with a coupon of 0%. This capital raise allows us to optimize our balance sheet and provide additional flexibility for capital allocation decisions.

We achieved very favorable terms on this financing, reflecting strong investor demand against a solid market backdrop. We repurchased $131 million of stock during the quarter, of which $118 million was executed in conjunction with the convert. We ended the quarter with a diluted share count of approximately 45 million shares. Q2 free cash flow grew 37% year over year to $74 million, primarily driven by continued strength in deferred revenue from SaaS contracts and strong cash collections against Q1 sales. We ended Q2 with over $1 billion in cash. Now I’ll discuss our outlook for Q3 and our updated outlook for fiscal year 2026. For fiscal Q3 2026, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS, to be in the range of $195 to $197 million. This represents 24% growth at the midpoint.

We expect total revenue to be in the range of $298 to $300 million, with growth of 14% at the midpoint. At these revenue levels, we expect Q3 consolidated gross margins to be in the range of 80% to 81%. We expect Q3 non-GAAP EBIT margins of approximately 18% to 19%, which reflects continued strong growth from our SaaS platform and ongoing shift in term software duration. Now I’ll discuss our updated fiscal year 2026 guidance. As a reminder, ARR guidance is in constant currency using FX rates as of March 31, 2025. For a historical comparison, please refer to page 30 of our Q2 earnings presentation. We now expect constant currency fiscal 2026 total ARR growth of 18% to 19% year over year. This will be driven by subscription ARR, which we now expect to increase by 24% to 25% year over year.

That represents an increase of 50 basis points at the midpoint for both metrics. From a full-year fiscal 2026 revenue perspective, we continue to expect subscription revenue to be in the range of $753 to $757 million, growing 28% at the midpoint. Our guidance assumes a continued shift in term duration during the second half of the year. We reiterate total revenue of $1.161 to $1.165 billion, an increase of 17% at the midpoint. Moving to our full-year fiscal 2026 margin, EBIT, and cash flow outlook. We now expect gross margins to be 80.5% to 81.5%. This range reflects continued growth in our SaaS platform, which carries a different gross margin profile than software. We now expect non-GAAP EBIT margins of approximately 18.5% to 19.5%. Non-GAAP EBIT margins reflect our ongoing investments in additional growth-driving initiatives.

We are raising our full-year free cash flow outlook to a range of $225 to $230 million. This guidance reflects benefits from recent federal tax law changes. To summarize, our first half results are evidence of strong market demand that we believe will continue throughout the year. Thanks to our leadership in innovation, our growth-focused investments, and strong execution, we are well positioned to continue taking share of the expanding cyber resilience market. Now I will turn it back to the operator to open the line for questions. Operator?

Desiree, Conference Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. Our first question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.

Yeah, thanks for taking the questions. I guess maybe to start, Jen, can you talk a little bit more about the shift in term duration? I guess if I look at the guidance and the reiterated guidance for the full year, it kind of implies a deceleration of growth, you know, call it into the 11% total range. You know, can you just unpack that a little bit? Why we would expect to see growth decelerate in fiscal four Q, and you know, maybe that’s tied back to that shift in term?

Jen DiRico, CFO, Commvault: Absolutely. Thanks for the question, Aaron. First, let me just start by saying I would say this is our second best term software ARR quarter. That was coupled by the fact that we saw strong volume as well. This is the second best net new customer addition quarter for term software. When we unpack the kind of variance in subscription revenue, it really came down to that shift in term duration, effectively back to the levels that we saw a couple of quarters ago. When we double-clicked, what we really saw was customers wanting to maintain their flexibility as they thought about their anticipation move to the cloud. Ultimately, what we were really pleased with was the volume that we saw in our software term business. From a volume perspective, deals greater than $100,000 actually increased 17%.

Ultimately, that’s really where we see the strength coming from, from an ARR perspective, and we do believe that is the best indicator of growth. As we zoom out and think about the second half of the year, what we have seen is the continued acceleration of SaaS really meeting the moment from where customers are, and we have the best platform to do that. Ultimately, when we look at the pipeline for the second half of the year, we’ve been prudent as we think about the pipeline and ultimately have carried through the same trends that we saw in Q2 through the rest of the year. I would just end by saying the growth in our business really is dictated by the ARR that we see, and we’ve raised both the subscription ARR and total ARR by 50 basis points.

Thanks, Jen. As a quick follow-up, I’m curious, kind of sticking on the growth theme a little bit, the slide deck highlights your expectations on a TAM growing at, I think it’s 12% CAGR over the next couple of years. I guess as we think forward, I mean, Commvault seems to be in a pretty good position, is still possibly a share taker. Can you talk about the competitive landscape and whether or not we should think 12% is kind of a baseline and there’s the ability to continue to grow above that?

Sanjay Mirchandani, CEO, Commvault: Oh, sure. Aaron, it’s Sanjay. How are you?

Great.

Let me just take the competitive landscape. You know, when you look at our growth, healthy double digits has been for a few quarters, this quarter included, overall both SaaS and software. You know, when you break down the TAM, at least on the more classic data protection side, you’ll see that the SaaS market’s growing double digits and we’re fast outpacing it at 55% ARR growth this quarter on just our SaaS product. When you look at the software TAM, that’s probably growing zero to low single digits and has been again for a while. Our software business is growing at a healthy double digits, which brings you to we’re taking share and we continue to take share. I would say that you know the way we’re growing, at least on the software side, is by customers are consolidating.

You know, disparate platforms over the years, they’re rethinking their resilience strategy with us in the wake of all the ransomware and cyber attacks, and we continue to innovate on our platform. I’ll let Jen flesh out the rest of your question.

Jen DiRico, CFO, Commvault: Yeah, sure. In response to the TAM growing 12%, I would point you back to our overall ARR growth and our subscription ARR. Fundamentally, we still believe we have the continued opportunity to take share in a market and grow faster than the TAM.

Thank you guys.

Desiree, Conference Operator: Our next question comes from the line of Jason Ader with William Bush. Your line is open.

Thank you. Good morning, guys. Some investors have asked whether we might be seeing the backup modernization cycle kind of winding down after a few years of elevated investments. How do you respond to that, Sanjay? Do you feel like you know we are sort of, call it in the back nine of some of that modernization activity in response to ransomware?

Sanjay Mirchandani, CEO, Commvault: I don’t think so, Jason. I think we haven’t seen a slowdown in cyber attacks or new threat vectors or the scale at which this is happening. There’s a lot of work to do. We’re working with customers around the world on very similar types of cyber resilience programs. I don’t think so. You may see different implementations as we go into what I’m affectionately calling the AI era. There will be different needs, there will be different threat vectors, and we’re working really hard to make sure that we’re one step ahead of what customers are going to encounter. In fact, shameless plug, at Shift, at our Shift event on November 12th, we’re going to unveil probably the most rich set of capabilities on our platforms ever. You’ll see a lot more of where we believe the world is headed. I don’t want to give it all away.

Okay. Good. Just as a follow-up for you, Sanjay, could you offer any comments on the deal announced last week between Veeam and Security AI?

I guess Anand would be the right person to ask that question. The way we look at it is we’ve been saying this for a while. What we’ve been saying, if you, I mean, I’m going to guess I’ve said this for the past three years, where you know the world of data security and the world of data protection, as we know it, have to come together if you want to be truly cyber resilient. What you’re seeing with our acquisition, for example, of Satori Cyber was along the lines, I think, of what Veeam may have done with their acquisition. Where identity, observability, policy enforcement on all things within your enterprise when it pertains to data, all of these things have to work together because as cyber attacks get more sophisticated, if there’s light between your data security elements and your data protection elements, you’re exposed.

This is the bringing together of it. We announced our acquisition last quarter.

Thank you. Good luck.

Thank you, sir.

Desiree, Conference Operator: Next question comes from the line of Eric Heath with KeyBank Capital Markets. Your line is open.

Hey, guys. Thanks for taking the question. I would say just looking at some of the net new ARR, it does look like it’s still accelerating over the last quarter, so it doesn’t really seem like a slowdown. Maybe a question for you, Jen. I’m just curious, what’s given you the confidence to kind of make the step up in investments and how you’re thinking about that trade-off and what is a 50 basis point raise to growth, but 150 basis point reduction in margin relative to your prior guidance?

Jen DiRico, CFO, Commvault: Yeah, thanks for the question, and it’s the right one. Ultimately, what we look at is what has and hasn’t changed for the year as we think about guidance and our ability to continue to invest. Fundamentally, what has not changed is our ability to continue to take share. We see that in the fact that the volume and ARR is up, so volume, number of customers, and our overall rep productivity continues to increase. We’re also seeing the fact that our net new offerings continue to contribute more and more to our ARR, right? Across the board, when I think about the opportunity to invest, when we go back and when we started this year, there were a couple of key things that we needed to see. Effectively, we’re continuing to see them, right?

Ultimately, we said 2026 was going to be a year of investment, and we’re going to continue on that path because all signals say the market has not changed.

Got it.

Sanjay Mirchandani, CEO, Commvault: Sorry, just Sanjay, it’s a very competitive landscape. We have to be ahead of what is going on in the market. We run a very responsible business, as you’re probably tired of hearing me say, you know, where we worry about the top, we worry about the bottom. We want to make sure that we build a sustainable company. Within those constraints, we continue to invest both in product. We’re seeing a lot of accolades on our platform, and you haven’t seen what we’re bringing out yet. Obviously, we have to be where the customers are. That’s the thinking.

Thanks, Sanjay. Just on that point, I mean, a follow-on to Jason’s earlier question, do you perceive the competitive landscape getting more competitive? How do we think about that pie in terms of legacy displacement opportunities? Is it starting to shrink and that’s driving a more competitive environment?

It’s always been competitive, and it’s just getting, you know, now with cyber being more relevant, more visible in boardrooms, and with AI, it becomes a spot where it becomes more, it just becomes more visible and more competitive. What we’ve always done, and the reason we’ve been in business for 30 years and continue to get accolades on our platform, is we out-innovate our competitors. It’s the formula that’s worked for us, and we meet our customers exactly where they are, whether it be on-premise, on the edge, in the cloud, back and forth. We want to make sure that we deliver the technologies to keep our customers protected. That’s how we win. I think there’s still ample opportunity to consolidate, and there’s ample opportunity for us to get customers more resilient.

Awesome. Thanks, Sanjay. Thanks, Jen.

Desiree, Conference Operator: Next question comes from the line of Howard Ma with Guggenheim. Your line is open.

Great. Thanks for the question. Congrats on reaching the billion-dollar ARR milestone earlier than you expected. For Sanjay, can you remind investors of the drivers of your term subscription business? You mentioned the share gains and the TAM earlier. I imagine on-premise data growth is still the single biggest driver and perhaps underappreciated by investors. You gave the 40% CAGR for data growth in cloud. I’m not sure if you have a sense of the on-prem data growth. One more piece, too, is the identity and data security stat you gave. That’s 40% of net new ARR. I wonder to what extent is that also benefiting the on-premise part of your business?

Sanjay Mirchandani, CEO, Commvault: Yeah. You know, Howard, good to hear from you. Our play has always been, from the day we dreamed up Metallic, our SaaS offering, our dream has always been to have the singular platform for hybrid customers. I’ve said it over and over again, I don’t know how fast the dial will turn on where they move things to the cloud, but we want to give them that complete flexibility to be able to do that at will. As the platform has evolved, we continue to see customers whose primary disposition is on-premise. We work with our partners, whether it be HPE, Pure, or NetApp, to continue to work with our customers on-premise for their workloads that matter there. As they start moving more workloads or doing more things with the public cloud, our platform is the natural journey. It’s the natural platform.

It’s the way in which they move things over and protect them on the other side. For us, on-premise continues to be, and we’re very proud of it, continues to be a growth driver. If you look at the second part of your question on identity and security, that has to be, that is a malleable thing. That has to port. You don’t have separate things going on in the cloud versus on-premise, especially when you have a hybrid environment. Our offerings, whether it be Active Directory or our partnership with BeyondTrust or the other things we’re doing around that, allow customers to have an integrated protection capability for their identities as they move more workloads into the hybrid world. It’s very important because when your identity is integrated closely with your protection, resilience is a lot deeper, is a lot better. We’ve been doing this for a while.

Yes, we’re seeing our AD and Entra ID and our identity capabilities be starting to become a significant contributor to our net new ARR. That is a positive sign.

Thanks, Sanjay. As a follow-up for Jen, just given the appreciation for Commvault’s hybrid strengths, are you seeing increased cross-sell between your term customers and SaaS customers? I recall you all gave a stat. It’s probably from two years ago. I think it was like 40% of SaaS customers are also term customers. I wonder if that percentage has gone up. Specifically, with respect to the change in term duration or compression, are a higher mix of SaaS customers influencing those that also use term? Is that causing them to drag down the contract duration?

Jen DiRico, CFO, Commvault: Yeah, so first, let me answer your first question around the mix between software customers also using SaaS. The stat we gave a little while ago was about 30%. That continues to tick up slowly, right? We’re seeing that traction. As Sanjay and I both shared in our script around the fact that customers are really wanting to maintain their flexibility, right? Whether they’re starting with us on software or SaaS, the most important thing is that as customers continue to transition their workloads, we have that opportunity. I think we’re seeing that in the numbers. Sanjay, you can add.

Sanjay Mirchandani, CEO, Commvault: Howard, you know, we obviously help customers with the workloads logically. There are some that overlap, like virtual machines between cloud-driven and SaaS-driven or on-premise-driven. That’s the choice we give our customers. Things like protecting Microsoft 365 is all cloud-driven. What ends up happening is as customers, as we work closely with customers on their journey, on their workloads, on their priorities, on their timing, we meet them where they are. That’s just how it works. Sometimes, you know, there’s a shift where they make the cloud a priority over on-premise. The good news all the way is that they commit to our platform, and then we enable them all the way, whether they’re on-premise, on the cloud, or on the edge. I look at this movement as something we’ve been expecting and something that we’re ready for with a tailor-made platform for our enterprise hybrid customers.

Great. Thanks so much.

Desiree, Conference Operator: Next question comes from the line of Rudy Kessinger with DA Davidson. Your line is open.

Michael Melnyk, Head of Investor Relations, Commvault: Hey, great. Thanks, guys. Congrats on a strong quarter. You know, when I look at ARR, which obviously matters much more than revenue, obviously record net new ARR, and by my math, organic ARR growth at constant currency accelerated at a point to 19%. Jen, you talked about ongoing investments in growth initiatives as part of the reason for the EBIT margin guidance coming down in addition to the gross margin compression. Could you just talk about where you’re making those incremental investments? You know, could we see further ARR growth acceleration over the next year or so as a result of those investments?

Jen DiRico, CFO, Commvault: Yeah, sure. Let me start by saying what we did was continue to keep operating expenses at about 61% of revenue. That’s consistent with prior quarter and prior year. The overall gross margin pressure that we saw really came down to the fact that our SaaS business continues to accelerate, which, as we all know, is a great, great thing and ultimately just has a different margin profile. Then overall, the shift in term duration. Ultimately, this quarter, the pressure really came down to gross margin. As we think about the back half of the year, ultimately, what I would say to you is the investments we started out with the year in terms of continuing to accelerate our SaaS motion, right? We’re still making those plays.

As evidenced by the guidance for the back half of the year, it implies a $45 million of net new ARR on a constant currency basis, which, as you remember, is above that $40 million that I first started the year with. Ultimately, our investments are paying off, and we’re going to continue to exit it.

Michael Melnyk, Head of Investor Relations, Commvault: Got it. Thank you. Any parameters, I guess, for the second half? Obviously, we have the total implied net new ARR guidance, but just any parameters in terms of what we should expect from SaaS? I think the prior commentary was $20 million plus. Obviously, you did, I think, $29 million in Q2. Should we expect $25 million plus in SaaS net new ARR now in the second half, or just any kind of guardrails around the SaaS and term license split in the second half?

Jen DiRico, CFO, Commvault: Yeah, as you think about the split, the best way to think about it is approximately 60% of our net new ARR will be SaaS.

Michael Melnyk, Head of Investor Relations, Commvault: Very helpful. Thank you and congrats again.

Jen DiRico, CFO, Commvault: Yeah, thanks again, Rudy. Appreciate it.

Desiree, Conference Operator: Next question comes from the line of James Fish with Piper Sandler. Your line is open.

Hey, guys. Wanting to go back on the contract duration. Is the shorter contract duration being seen more on the existing install base, the assumption I’m making, or are you seeing it on new deals as well, a combination of the two? Jen, is there a way to think about where we’re at on average duration at this point? Is there a vertical or two that’s sticking out with this, such as, obviously, we’re talking federal generally this quarter, but now we’re talking about it even more so given the shutdown?

Jen DiRico, CFO, Commvault: Yeah. First of all, what I would say to you is it’s actually across the board. Customers are really wanting to maintain that flexibility as they think about either accelerating or just anticipating their journey to the cloud. Quantifying that, we were down 9% from a shift term quarter over quarter. Again, I would go back to it really normalized to what we were seeing three or four quarters ago. Ultimately, I think that is how we’re thinking about it. Did you have a second part of your question?

I was asking, you guys historically have talked about duration here and there. You know, it used to be about three, and then you started talking about new customer lands being, I want to say, two to three. Mike can correct me, but you know, where’s the average duration now? Trying to understand like how much of a headwind duration is right now to term license.

I think I would just go back to the fact that I think we’ve shared that in the new deals, it kind of was creeping up towards three years. Overall, we’ve seen that go down about 9% ultimately. That’s how we’re quantifying the impact.

Okay.

Sanjay Mirchandani, CEO, Commvault: Jen, it’s Sanjay. It’s one thing. I just want to add to that. Understand that the other metric that I look at very closely, or we look at very closely, is the number of new deals that we’re bringing into the business. This was the second largest number of deals of new deals that we brought in on term software in this quarter. If you look at that, the volume, and it’s significant. As customers move to hybrid, it’s very logical that they have different implementation plans, and you have to meet them where they are. I look at this as something that’s a transition customers have to go through, and we’re ready for it, and we help them while they’re going through it on the on-premise side, and we pick it up completely on the cloud side. That’s the way to think about it.

I understand that there’s greater SaaS mix and some term duration headwind here, but if I look at the gross margin, you know, SaaS being sort of mid-60% at this point, the other kind of gross, I’ll say the remainder gross margin was down decently sequentially. You know, why isn’t this just competitive pressures or further discounting in the space?

Jen DiRico, CFO, Commvault: Really, I would just go back to what I shared. It really is around the fact that the bulk of this is very much the acceleration of SaaS and the shift to term. There’s really nothing else to talk about.

Sanjay Mirchandani, CEO, Commvault: Nothing major.

Jen DiRico, CFO, Commvault: Nothing major.

Okay. Thanks.

Sanjay Mirchandani, CEO, Commvault: Thank you.

Desiree, Conference Operator: Next question comes from the line of Junaid Siddiqui with Shari Securities. Your line is open.

Great. Thanks for taking my question. Sanjay, as the pace of innovation increases and the cadence of new products that you launch accelerates, and I’m sure we’re going to hear a lot more in a couple of weeks at Shift, what are some of the things that you are doing on the pricing and packaging front that can help customers consume more of that platform?

Sanjay Mirchandani, CEO, Commvault: Hi, Janeed. Great question. Without giving it all away, maybe you and I meet in two weeks and I take you through some of the innovation and how we’re thinking about it. The bottom line is a lot of work we’re doing in there to make it super easy for customers to take additional services and capabilities as they get the core. It’s a very logical approach. In other words, if they start with software, we’re going to make it super easy for them to consume any service that we have inside of the platform, be it delivered through the cloud or on-premise or on the edge. We’ve always given customers, because of our architecture, the ability to really run our control plane the way they want.

If you extrapolate what I’m saying into packaging and ease of consumption, we’re working really hard behind the scenes to make this super easy for customers to land someplace and then continue to logically build their resilience with new services over time. What’s implicit in what we’re doing, which is not your question, but I think it’s important to understand, is we’re building a ton of testing tasks that customers have to do to be ready in the face of a cyber attack or an event. Making sure that we’re building that capability, that automation into the product platform and into the packaging becomes really important. Without getting into the details, I’m happy to spend time with you at Shift and walk you through it, but when you see the portfolio, I think it’ll be quite logical how it all comes together.

Great. Thank you. Jen, just in terms of capital allocation, I know you mentioned you bought some shares, especially in conjunction with the convert. Historically, I think you’ve talked about allocating north of 75% of free cash flow to buying back shares. Is that still the case? Is that how we should think about in terms of buyback?

Jen DiRico, CFO, Commvault: Yeah, thanks for the question. I would say our capital allocation strategy remains consistent. It’s on the three pillars of share buybacks, M&A, investment, and organic investment back into the business. As it relates to share buybacks, you’re right. We purchased $118 million of share buybacks in conjunction with the convert. Year to date, that’s been $146 million we’ve repurchased. We have not had a specific guide, but what I will tell you is that we expect to be opportunistic and active. Ultimately, what we’ve said is from a modeling perspective that share count should remain approximately flat at about 45 million shares.

Great. Thank you.

Thank you.

Desiree, Conference Operator: If you would like to ask a question, press star then the number one on your telephone keypad. There are no further questions at this time. I would like to turn the call back over to Mr. Michael Melnyk for closing remarks.

Michael Melnyk, Head of Investor Relations, Commvault: Thanks, Desiree. I just want to remind everyone that the invitations to Shift, which is happening on November 12th in New York City, have been emailed. If you didn’t have a registration or opportunity to register, please email me at mmelnyk@commvault.com. We look forward to seeing you. You’ll be able to see a very innovation-rich day, and you’ll get to hear from our customers, partners, and spend some more time with management. We encourage you to attend, and we look forward to seeing you in New York. Thank you.

Desiree, Conference Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining, and you may now disconnect.

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