All right. We're going to get started here. Good morning. Thanks for joining us. I'm Jason Ader from William Blair. I'm pleased to announce, or introduce, Gary Merrill, who's the CFO of Commvault. Also, Mike Melnyk, who's VP of IR, sitting at the front table there. Before we begin, I'm required to inform you that a complete list of research disclosures or potential conflicts of interest is available on our website at williamblair.com. Gary's going to go through a handful of slides, and then we'll have some fireside chat.
Awesome. Thanks, Jason. It's great to be here. I am going to spend just a couple of minutes on a handful of slides, maybe five minutes, just to give a little bit of overview for those of you who aren't aware about Commvault, what we do, the value we provide to our customers, and to the market as it relates to cyber resilience. Then I'm going to take a seat with Jason, and we'll do a little bit of a chat side- by- side. First, I always like to start with what's the challenge we are trying to solve as a company. Okay, what is Commvault? Commvault is cyber resilience. What that means is, when a company gets hacked, we bring you back to business. We bring you back to life.
If you think about why cyber resilience is relevant and what's important as it relates to our customer base, you can see a quick slide on the screen. It starts with data. At the foundation of our market, it's always been about data, and it's been about protecting our customers' data. In recent years, the complexity around data as it relates to identities, who has access to data, governance over data, the compliance with data, specifically outside the U.S., all the emerging compliance trends, the ability to figure out where your data is on a hybrid environment, and then the latest thing that's significantly impacting our space is when you bring AI into all of that, and the impact that AI has on the data state of a company, ability a company to recover their data, protect their data, identify their data, and govern their data.
AI becomes, once again, another massive tailwind to our space. Commvault, cyber resilience, helping our customers protect their data in the world of AI and security perspective. Okay. We are a platform. Our strength is our platform. We serve the enterprise space. When it comes to why Commvault, it's simple. Scale, simplicity, speed across any environment, whether it's on-premise, public cloud, private cloud, multi-cloud. Think about a platform approach to protecting your data. In the world of ransomware, when you need to recover, you want a platform, you want one spot across your entire environment. A little about Commvault. Our addressable TAM, massive TAM. We believe our TAM is roughly $24 billion. Okay? If you think about an install base that's large, we have roughly 14,000 and growing subscription customers that we service, and we're driving quite strong growth.
Our subscription ARR grew 27%, and we're driving free cash flow margins of 20%. Large addressable market, enterprise platform, large customer base for cross-sell opportunity, and growth and profitability at scale. A few highlights from our most recent quarter. Our subscription ARR, which is our on-premise term software, combined with our cloud SaaS application, roughly $1 billion, growing 27%. The true growth engine of our company is our SaaS platform. That SaaS number is contained within subscription. It's a subset. That's true SaaS applications, cloud workloads. That business is growing at 42% year-over-year. We're the only public company that actually talks about our actual SaaS ARR as it relates to workloads. We're driving 20% growth in the previous quarter on subscription revenue while doing it responsibly and profitably, driving 21% EBIT margins and $132 million in the quarter of free cash flow.
Responsible growth driving accelerated top line, supported by strong earnings and free cash flow. I came back into the CFO in this previous quarter, and one of the primary functions that I did was simplify our guidance framework and our guidance metric. We used to disclose significant amount of metrics, significant guidance items, narrowed it down to four key guidance metrics. Subscription ARR, which is the combination of our term software licenses and SaaS. Subscription revenue, which is the revenue implications of that, supported by free cash flow and non-GAAP EBIT. Primarily measured on an annualized basis, but bringing it down to the four key metrics that are truly the output of our business. As I think about our guide for fiscal 2027, we're an off-calendar year company, so our fiscal Q1 will be the June quarter, so our fiscal 2027 ends next March.
A couple of key highlights on here, I would say subscription ARR at roughly 19% at the midpoint, supported by non-GAAP EBIT margins of 20.5%, and making sure that we're generating free cash flows, as you can see, in the range of $250 million-$260 million. Strong forward-looking guidance. All of the slides I just showed in more detail are on our website, but I just want to give a brief overview of who we are, what we serve, and what our financial profile looks like. With that, I was going to take a seat with Jason, and we'll hit a few Q&As.
Okay, awesome. I think the first question on my mind is, You're like a renaissance man. You can do any job at the company, it seems like. You've had multiple roles. How many years have you been at Commvault now?
20. I've been here 20 years. I've seen it all.
Congrats. Maybe just talk about why you've moved over from CRO to CFO and who's taking over as CRO.
Yeah. A great question, Jason. Thanks. As Jason said, longevity at Commvault's one of my strengths, but more importantly, is trying to get the experience to add value and create shareholder value at the end of the day. I spent about two years as our CRO out in the field, kind of making sure I got that flavor of the operating rhythm of the company, understand what drives our customers' buying decisions, making sure our products are relevant, making sure that we're continuing to land with the right message. More recently, I came back as CFO. I just came back as CFO, geez, maybe a little bit more than one month ago. I came back as CFO, but bringing with me that operational experience that I gained out in the field. I'm a finance guy and finance person by background.
Making sure that I can bring the operational discipline to make sure that we're critically focused, both externally with our messaging on the problems that we solve, but also aligning that to the internal business plans to help that we're driving this platform approach tied to cyber resilience. Now I got that unique experience of kind of the operational experience back in the CFO side.
Okay. CRO, who's taking over there?
Geoff Haydon came off our Board. Geoff was on our Board. The unique thing about Geoff, he will come back in and take over complete accountability over the customer life cycle. One of the things we've talked about as an imperative for the company is retention, customer retention, customer engagement. Geoff's remit will include both the, I would say, traditional go-to-market sales, as well as the customer, the retention, the customer success, and support functions as well. Geoff brings a unified approach back as President of our Field Operations. Yeah. We're glad to have Geoff on board, and he comes off our board, so he already has the knowledge and the strategy to run with.
Nice. All right. First business question for you, and I'm asking all the companies that are presenting here on my list, which is frame the case for investors for why Commvault is an AI winner.
Yeah. Commvault fundamentally is about data. Okay? Why is Commvault a winner in the AI world? It's all about data. Data and AI go together. Okay? Our pricing mechanism, how we monetize, is around volumes of data. I think everybody expects data to grow exponentially in the world of AI. If you think about AI tailwinds for Commvault, one is amount of data that needs to be protected. Number two, it's the governance of that data. It's just not about the data itself and the volumes of it's about the governance of that data, the access rights to that data, the identity of what's happening with that data. Number three is AI will bring unprecedented acceleration anticipated as it relates to threat actors attacking companies' security posture.
That brings back to the core of our strength, which is recovery and helping companies recover and fighting the agentic world as it relates to recovery. If you think about why AI is a tailwind for Commvault, volume of data, governance, and insights over your data, and the agentic abilities of related to recovery of that data.
Great. Just given your 20-year track record at Commvault.
Can you talk about the evolution of the backup market?
Yeah
As you've seen it over those 20 years and where we are today, you talked about how big the market is, I think you said $24 billion.
How fast is it growing? Are we in a new phase of the market right now, in your mind?
We're absolutely in a new phase of the market. If I was sitting here 10 years ago, we'd be talking about backup as an insurance policy. If there was a natural disaster and one of your data centers was flooded or hit by a hurricane, you need to rebuild that. That was the old days. What we've seen, rapid acceleration, is if you think about what is driving demand at the top of the funnel as it relates to Commvault and our space. We now have many tailwinds that are driving market demand. Let me just summarize quickly. If you think about security, everybody thinks now about security. Commvault is part of the security chain. I always think about security as kind of ends of a spectrum. You have the threat detection companies at one end, you have recovery at the other.
They're all related now in security. You have a tailwind of our space of security. You have a tailwind of governance, especially outside the U.S. If you think about DORA and all the other access governance on securing your data, and data sovereignty is a tailwind. Number three massive tailwind are spaces, hybrid complexity. Data is now contained on-premise, public cloud, private cloud, multi-cloud. That hybrid complexity is a tailwind for our space. I already talked about AI as the biggest tailwind of all for our space. We're not a space and a company that relies on just one demand vector to kind of drive pent-up demand and need for what we produce. We have multiple areas that are driving tailwinds, not only for Commvault, for the space that we operate as it relates to security, governance, multi-cloud, and AI. Multiple aspects.
You'll see different aspects of data market size and market growth. Conservatively speaking, if you think about the cloud, like the cloud side of the market, easily growing double digits, easy double-digits market growth on that side. If you think about some of our emerging offerings, whether it's identity, data security, cloud native type workloads, estimates are 20% plus that you see market growth on some of those type of offerings that we provide. When you sit in this robust market, now it's about capitalizing the opportunity that we have in front of us to basically protect our customers' data.
Okay. Among your newer offerings maybe talk about which ones you're seeing the most traction with, the most revenue contribution. What are your thoughts going forward? Where are you going to see some of that contribution from newer products?
I start off a lot of these type of discussions about platform. It starts with a platform, and platform's an easy concept that many enterprise technologies talk about. As it relates to cyber resilience, the enterprise customer really requires a platform. It's a platform because in the event of a recovery event, they don't want to have to deal with multiple vendors to deal with to help them recover their business to get back online so they can avoid losing money, okay, at the end of the day. The platform is resonating in data and cyber resilience, where we operate. When you think about a platform, it brings over the ability to cross-sell the functionality. You think about what we're doing from an identity and data security perspective, they're the biggest growth drivers to our net new ARR.
In the last quarter, I think it was somewhere between a 30% and 40% of our net new ARR was driven by these emerging products of identity, like Active Directory or data security offerings. When you throw in cloud native, like what we're doing with Clumio on helping customers in last quarter protect even large AI workloads, you'll start to see this multi-product adoption that we're driving tied to the platform. It's not like a Commvault push, it's a customer pull, where they're demanding a platform approach that gives us easy conversations on cross-sell multi-product adoption. We still have a long way to go. Of our Commvault Managed customers, still slightly less than 50% of our customers use more than one product.
To think about the opportunity that we have through this cross-sell in this era of cyber resilience, a key foundation of our growth will be driven by these newer offerings, which are cross-sell multi-product adoption.
Are you starting to sell more into the actual security teams inside the organization, or is it still mainly an IT backup administrator that's your customer?
What we see today is that when we walk into an enterprise customer, we have CISOs and CIOs that are sitting in Board meetings, and Boards are asking them, when we get hacked, can you recover? That conversation and that answer is not answered just by an infrastructure team or, at times, just a CISO. It's that combination of the CISO and the CIO. CISOs and their teams are involved in virtually every single one of our enterprise deals. Now, do they always have the budget ownership? Not always the budget ownership. Often, the budget will sit within an infrastructure budget. The influence and the ability to help CISOs get comfortable with the ability to recover as part of their remit and being able to have a security posture is relevant in virtually every single large enterprise and enterprise customer.
In today's space, cyber resilience, whether you call it recovery, backup, cyber resilience, it's still widely regarded as still a top-three spending priority across IT. If you look at BARC surveys, if you look at the feedback you get from the market and some of the analyst reports that get published, still a very strong buying signal and still a very top-three priority as it relates to broad IT buying.
Okay, good. Let's switch gears over to competition. When I think about the backup market, I think it's fair to say it's relatively crowded. There's a bunch of really good players. Maybe there's some players that are kind of shared donors, but I think about Rubrik, they certainly owned a lot of the security first narrative. You've got Veeam, which is number one, I think in the latest market share, primarily historically mid-market, but trying to move more up market, and now they have this big acquisition they made in the data security space. You got Cohesity that acquired Veritas. They have substantial scale. I think they're about $2 billion in ARR, so they're bigger than you. How do you help investors think about your differentiation and why you guys are the horse to bet on in this space?
First, on the space. One, we have some great competitors, obviously, that are in the market. When you have a fair amount of competitors and you have a space that has a fair amount of number of players, most of them private and not publicly traded, or they're parts of larger companies, having a lot of players means you're in a relevant space. That's the first thing we always think of. It's good to be in a space that's light, okay? We focus on where we're competitively different. Where's Commvault strong? Where do we shine? We're in enterprise. Enterprise, higher end of commercial, we're very strong. Why are we strong there? If you think about the depth, the breadth, the scale that we can offer, okay? Jason, as you mentioned, some of the competitors we have are very good in certain segments, but only those segments.
Other competitors seem to be relatively strong in only certain markets, meaning maybe primarily the on-premise market. When you think about Commvault and the value add that we provide our customers on their ability to stay secure, it's that complex hybrid environment where you have on-premise workloads, you have cloud workloads, it could be public cloud, private cloud, multi-cloud, and their data state is diverse and spread out. In the world of needing a provider that can give them the peace of mind that they can recover at the time that they require to recover and recover fully and cleanly across all of those environments, regardless of the outcome, that's where we shine. Okay? We're hardware agnostic, we don't rely on a limited number of certified partners. We don't rely on only a two-tier architecture where you're tied potentially to a file system or something else.
The agnostic view we take of a software-led, IP-led approach across that diversified hybrid and complex environment keeps us battle-tested and shine, especially when you sit in the enterprise.
Talk about that hardware-agnostic differentiation. Based on the deals gotten visibility to from your sales folks, has it actually been an advantage right now because of the high server prices and the tight supply?
It's really the question, and it's a question that I get on every one of these meetings, the impact on the current supply chain market. The positive for Commvault, okay, as I think about it's consistent with what I said on our last earnings call, is that the flexibility that we provide with the partner ecosystem, since our technology doesn't rely on a limited number of hardware certifications, so our ability to partner across the storage ecosystem is seconded on when it comes to the partner ecosystem because we're software-led and we're IP-only led. If you think about the growth of the company, Commvault's growth, I talked about on some of these slides, is our SaaS or cloud business. That business now is a $400 million business.
It'll be a $500 million business is what we guided to as it relates to the end of the next fiscal year. There's no hardware, no supply chain constraints, right? Our ability to work with the hyperscalers to help continue to accelerate that cloud business and that cloud footprint gives more predictability into our business and gives the opportunity to really continue to accelerate that, while at the same time on the on-premise business, working with the broad ecosystem we have to navigate the supply chain constraints that may be out there broadly in the market.
Got you. Okay, on the go-to-market strategy how has that changed over the last several years?
[audio distortion] sales for a couple of years.
Yeah.
Have you guys changed anything significantly?
Yeah
on the go-to-market side?
The foundation of every company is generating new customers. New customer growth is similar for every company you're probably talking to here today here at Growth Conference. It's a Growth Conference, right? You need net new business. I think where we've spent significant time investment, not necessarily dollar investment, but mindshare investment is a couple areas. One is retention. Now we have over 14,000 subscription customers. Retaining those customers is priority one. One of the key moves I talked about from an executive standpoint, as Geoff came off our Board to run all of the go-to-market and customer aspects, accountability now sits with one person across the entire customer life cycle, including retention. Retention is a major priority for Commvault because retention drives expansion. That's the key. One of our near-term growth levers is cross-sell and expansion. I just talked about it a couple times.
Strong retention drives cross-sell. Cross-sell is driven by multi-product adoption, driven by our platform. While I'll say evolution of go-to-market, our evolution of go-to-market is now accelerating toward the platform approach, multi-product adoption, and driving not only a land mentality, but also an expand tied to multi-product adoption. That's where we're extremely focused, and we're organizing even our leadership accountability around that concept.
Great. Can you talk about net retention rate a bit? Because I know that a lot of investors focus on that metric. How important do you think that metric is? Is that something that you obsess over? Where could that go over time?
Yeah. Net retention is the output metric of what I've just talked about from a business and organizational and market penetration perspective, and the way I thought about NRR is we've always talked about our SaaS NRR, which is just that cloud business NRR, and strongly over 120%. I'm starting to think about that metric in subscription terms, subscription meaning the combination of our on-premise and our SaaS business in one, because that will tie in the subscription ARR guidance, subscription revenue guidance, and wrap around the subscription NRR. That metric sits roughly at 114%, all in subscription, both on-premise and SaaS, 114%, which we believe is a strong metric. The opportunity for that is through, as I mentioned, cross and multi-product adoption.
A path to get customers into two, three, four products when you start with maybe air gap on a secondary copy, and then getting our Identity Resilience or Active Directory recovery as an easy cross-sell, and then tying in M365 or Threat Scan to get additional malware detection. The platform is set now to facilitate that cross-sell across multi-product, where the objective is to go from not talking about customers with more than one product. The objective is to talk about customers with more than two products, three products, four products. That's where we could see the potential for the opportunity and net dollar retention, and the whole go-to-market motion is being organized around that, Jason.
You see potential upside to the NRR?
I see opportunity. Okay, opportunity. From a modeling perspective, as I talked on public calls about guidance, right? We're not guiding towards anything significantly higher, we do have opportunity.
Great. On the guidance slide, you talked about the revenue growth this year. Guidance of about 10%, which compares to the ARR, which is much higher. ARR growth. Can you talk about the dynamic?
Yeah
between ARR and revenue growth and why it's different?
Subscription ARR will be our North Star metric as I think about from a revenue-generating type, because it really neutralizes the accounting behind it, and I'll explain that in a second. Our guidance projects about $190 million of net new subscription ARR. Last year, we did roughly $190 million. The year before, we did $170 million. Strong continued momentum in subscription net new ARR. When you translate that into revenue, our business model is accelerating on a higher basis on the SaaS side or the cloud side. From a rev rec perspective, that's all ratable revenue. It's a positive, and it's a tailwind that we see on the ARR. The revenue lags. If you think about the revenue, what the revenue would look like on a recognized basis, it's just math. Right?
As more of your business goes to cloud and SaaS and becomes ratable, it can be viewed as a headwind to recognized revenue only because the recognition under ASC 606. The underlying fundamentals of subscription ARR maintain very healthy and strong with our guidance at $190 million of net new subscription ARR.
Don't focus so much on the
Yeah
revenue growth because it's a lagging indicator.
It's a lagging indicator. We're trying to really organize ourselves around that subscription net new ARR, which also brings the business model of the hybrid together as well, and it neutralizes them on a like-for-like comparison on annualized value, not rev rec.
Yeah. thank you for moving the support into the.
Yes
into the subscription. That was on my mind for a long time.
Yeah. Yes, Jason. Yes.
Last topic here, we got a few minutes left, is operating margin.
Yes.
Non-GAAP operating margin or EBIT margin as you guys refer to it. It's been steady around 20%-21% for quite a while, I think about five years. That great consistency, but I think a lot of investors have hoped that you would show more leverage especially as the revenue growth has been so strong. Can you just talk about the puts and takes there, and where does that operating margin go over time in your mind?
Yep. We guided to, or I guided to, for FY 2027, we're in for 20.5%. A modest improvement, about 40 basis points. That's the extent of what we've guided. Maybe to give you the color, specifically on your question, Jason, about opportunity. Opportunity, there are a handful of opportunities. One is maintaining operating expense growth at levels below revenue, obviously, and that's a key focus for myself and the entire company. There's other things that we're working on, which is continued optimization of our SaaS hosting margin. Okay, that's important. As more of our business moves to SaaS, which can include the cloud infrastructure component as well, it's a natural headwind on gross margin. Okay, accelerating ARR, a little more of a headwind on gross margin. We're driving efficiencies in the SaaS gross margin.
As we drive those efficiencies, you would see those efficiencies drop down to EBIT margin. There's some operating leverage potential there for sure. We'll continue to work on operating leverage within sales and marketing as well. As we become more productive, we drive more channel leverage. There's opportunity for operating margin in that aspect as well. We have opportunity. What we're trying to balance is near-term subscription ARR growth, making sure that we maintain the right level of operating leverage, and building the model so as we scale, we can grow into potential operating leverage
Do you have a long-term target for operating margin?
We do not yet. I'm just back in the CFO role now for a month. I think one of the priorities will be to work through that to get that long-term algorithm here at some point.
That's great. Okay, maybe in the minute we have left, I'll just ask, you've been meeting with investors for many years. What do you think as we sit here today, what's the most underappreciated aspect of the Commvault story?
The underappreciated aspect of the Commvault story right now is the impact that AI actually can have on this company as it relates to accelerating our market share because of the things I said. For us, it's all upside and opportunity in the terms of data growth tied to AI, governance tied to AI, and the complexities of security and ransomware tied to AI. Therefore, if we think about protection of AI workloads lags sometimes what you hear in the news, right, as well, by the time you get to protection. Getting the articulation of why AI truly, not only for Commvault but for our space, AI will be a sustained tailwind similar to other tailwinds that we've seen, is trying to get that message out there as a supporter for the resiliency space.
Okay.
Right on time.
Thank you very much, Gary.
Perfecto. Thanks, Jason.
Thanks for being here, Mike, and thanks everybody for joining.
Thank you. Thank you, everybody.
We're going to go upstairs.