Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Convote Q3 Fiscal 2026 Earnings Conference Call. All lines have been placed on mute to prevent any backward 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, then the number one on your telephone keypad. To withdraw your question, press R1 again. I would now like to turn the conference over to Mike Melnick, Vice President of Investor Relations. You may begin.

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 Commonwealth'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 Merchandani, for his opening remarks. Sanjay?

Good morning, and thank you for joining us. Q3 was another solid quarter for Commvault. We reinforced our position as an innovation leader and garnered accolades from partners and industry analysts. Some financial highlights in the quarter include, subscription revenue grew 30% to $206 million. This was fueled by a record land and expanse quarter with the addition of 700 new subscription customers. Subscription ARR increased 28% to $941 million. SAS ARR increased 40% to $364 million, and we achieved the Rule of 40 with a healthy balance between growth and profitability. Our momentum in Q3 and year-to-date reflect the growing need for next-generation cyber resilience. In an AI-driven, hybrid, and multi-cloud world, resilience cannot be reactive, manual, or fragmented. It needs to be continuous, always on, and unified through a single control plane. Commvault uniquely delivers this innovation. I'm proud to share that in Q3 we were awarded our 1600th Lifetime patent. I want to thank our engineering and IT teams for their continued commitment to excellence and innovation focused on customers. At our shift event in November, we took innovation to the next level. With the Commvault Cloud Unity platform release, Unity brings together data security, identity resilience, and cyber recovery on one platform, all enabled by the metallic AI fabric. With Unity, customers are now equipped to drive their ResOps or resilience operations. ResOps is a discipline that unifies operations, security, and infrastructure across the business. by bringing these silos together organizations can plan prepare and recover from a disruption or cyber attack customer partner and industry feedback has been overwhelmingly positive Dave Novak Deloitte cyber resilience lead said the combo cloud unity platform brings these elements together in a way we don't see elsewhere in the market we're pleased to team with Commvault to help join customers respond faster reduce risk and confidently adopt AI and cloud at scale while advancing resiliency IDC further validated this approach stating we believe Redops has an opportunity to resonate with customers as it is concise with powerful implications and operational value Redops is a fundamentally different approach from what legacy vendors provide today. Resilience in the age of AI requires us to, one, continuously secure data at the source and monitor for anomalies. Two, control the identities, human and non-human, that access and use the data autonomously. And three, predictably recover data applications and operations at massive scale with the lowest total cost of ownership. Let's take a moment to discuss each starting with data security as enterprises embrace AI and move to the cloud they must also grapple with evolving and more sophisticated attacks by combining combos metallic AI fabric with our multi-point threat scan synthetic recovery and clean room recovery offerings customers can secure data at the source identify analyze and quarantine suspicious files monitor for anomalies and conduct recoveries with precision so they're ready for an inevitable attack case in point by embracing our threat scan and risk analysis capabilities you will see health a long-standing customer is now able to scale its security with its data growth saving time reducing risk supporting compliance and advancing cyber resilience next let's talk about identity resilience. According to CrowdStrike, approximately 80% of breaches involve compromised identities. Attackers don't start by encrypting data. They compromise valid credentials and escalate privileges, putting identity at the center of cyber risk. Commonwealth Cloud's growing identity resilience capabilities enable enterprises to easily track and mitigate unauthorized or accidental changes to identity systems like active directory entry ID and after as Eric Bayer of jazz where's a Berkshire Hathaway company explained combos innovation with identity resilience will allow us to detect and roll back malicious identity changes as they happen so that we can maintain reliable authentication and access control while strengthening our overall cyber resilience in Q3 hundreds of customers embraced our identity resilience capabilities an ARR from just our active directory offering has more than doubled year-over-year in just two years it has become one of our largest that's office and finally we cannot discuss resilience operations without addressing recovery particularly the cloud native and cloud-bound enterprises In Q3, we saw accelerated momentum with our cloud-native offerings, including Plumio. For example, Clarity, a pioneering AI-driven predictive health, shows Plumio to safeguard its sensitive AI data that fuels next-generation risk prediction models. Our ongoing innovation with Plumio also speaks to our long-standing collaboration with Amazon Web Services. In Q3, we achieved AWS resilience competency in the recovery category. and we were named the 2025 AWS Global Storage Partner of the Year. Additionally, GigaOM named Commvault a leader in its cloud data protection radar. Commvault Cloud also supports recovery of massive AI workloads and pipelines like object stores, data lakes, analytics platforms, and vector databases. In Q3, we announced a new partnership with Pinecone that will bring greater resilience to the vector databases within enterprise AI stacks. Delivered via COBOL Cloud, the solution will support Pinecone deployments across AWS, Azure, and Google Cloud. Its target is the general availability in Q2 of calendar 2026. We believe that AI is an emerging tailwind for us. It dramatically increases the volume of data that needs to be protected, introduces new threats that need to be addressed, and requires a solution that brings resilience to the services, models, and databases that power AI. Our Commvault Cloud Unity platform is ideally suited to help customers address these evolving AI requirements. I'd be remiss if I didn't discuss our focus on data and cloud sovereignty. Over the years, we've always met our customers' evolving needs, including their data sovereignty requirements. Now, we're taking it a step further by supporting regional sovereign clouds. in December we announced that combo is a launch partner for the AWS European sovereign cloud together a plan to provide European organizations with a secure solution that is purpose-built for cloud delivering cost optimized resilience at scale for AWS customers we're working closely with other partners and cloud sovereignty as well this is an emerging space and we'll have more to say about this soon let me close with this this quarter we continue to capitalize on strong market growth through innovation leadership and execution excellence and we're seeing record customer engagement and adoption we believe combo cloud unity is the breakthrough platform customers need in the AI era and we anticipate we will finish the year with solid results that reflects both our leadership in the market and and the trust our customers place in common. Thank you. Now I'll send it over to our Chief Accounting Officer, Danielle Abrahamson, to discuss the financial details. Danielle?

Thanks, Sanjay, and good morning, everyone. As Sanjay highlighted, our Q3 results reflect the growing demand for our Convolt Cloud Platform, as customers continue to rely on us to keep them resilient in the face of attacks while advancing their hybrid cloud and AI journey. I'll recap our Q3 results and operating metrics, followed by an update on Q4 and Fiscal 26 guidance. As a reminder, all growth rates are on a year-over-year basis unless otherwise noted. For Q3, total revenue growth accelerated 19% to $314 million, driven by a 30% increase in subscription revenue, which reached $206 million. Subscription revenue was led by a robust 44% increase in SaaS revenue and one of our strongest customer acquisition quarters in years. Term software revenue grew a healthy 22% to $119 million. We saw strong growth across all geographies and customer sizes with notable strengths from large enterprise accounts. Revenue from term software transactions over $100,000 rose 25%, driven by notable gains in both transaction volume and average deal size. Additionally, the volume and dollar value of million-dollar software deals increased year-over-year, underscoring our standing as the preferred vendor for enterprise customers. We added approximately 700 new subscription customers, and we ended the quarter with over 14,000 subscription customers. Q3 was our best quarter ever for next new term software customer additions and our second best ever SaaS customer acquisition quarter. Now, I'll discuss ARR. Subscription ARR, which we believe is the best indicator of the company's health and growth, increased 20% to $941 million. This was driven by 40% growth in SaaS ARR to $364 million. Subscription ARR now represents 87% of total ARR, compared to 83% one year ago. Total ARR increased by 22% to $1.085 billion. Existing customer expansion was healthy in Q3, with SaaS net dollar retention of 121%, consistent with best-in-class SaaS platforms. Our SaaS net dollar retention reflects a few things. One, a growing install base, which is now over 9,000 customers. Two, the impact of rapidly adding new SaaS customers, which is forward-looking and not yet reflected in our net dollar retention. And three, a mixed shift of some product capabilities with certain early adopter customers. We saw solid momentum across our identity and resilience offerings, which collectively represented approximately 30% of net new ARR. Now, I'll discuss our profitability and free cash flow. Fiscal Q3 growth margins improved 100 basis points sequentially to 81.5%, which reflects a higher mix of software sales. In addition, we saw improved economies of scale and product efficiencies that we expect to continue in Q4. Operating expenses of $193 million represented 62% of total revenue. Operating expenses reflect higher commission and bonuses on strong year-to-date sales performance and the trailing run rate of initiatives to support our ongoing growth trajectory. Non-GAAP EBIT was $61 million, reflecting in a margin of 19.6%. In Fiscal Q3, we achieved the Rule of 40, reflecting a healthy balance between revenue and profitability. Year-to-date, we're operating at a rule of 41, consistent with our responsible growth philosophy. In line with this approach, at the end of Q3, we initiated a cost optimization program aimed to align our cost structure to the evolving needs of the business. Turning to key balance sheet and cash flow indicators. We repurchased $41 million of stock during the quarter, bringing the year-to-date amount to $187 million. We ended the quarter with a diluted share count of approximately 45 million shares. Year-to-date, we have generated $105 million of free cash flow. Q3 free cash flow of $2 million was impacted by the timing of collections from sales made later in the quarter and an additional payroll cycle for both the U.S. and Canada. We expect this to normalize in Q4. Now, I'll discuss our outlook for Q4 and our updated outlook for fiscal year 26. For fiscal Q4 26, we expect subscription revenue, which includes both the software portion of term-based licenses and stats, to be in the range of $203 to $207 million. dollars. This represents 18 percent growth at the midpoint. We expect total revenue to be in the range of 305 to 308 million dollars with growth of 11 percent at the midpoint. As a reminder, Q4 fiscal year 25 benefited from several multi-year strategic land transactions. At these revenue levels, we expect Q4 consolidated gross margins to be approximately 81%. We expect Q4 non-GAAP EBIT margins of approximately 19%. 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 our Q3 earnings presentation. We expect constant currency Fiscal 26 total ARR growth to be approximately 18%, driven by an estimated 24% growth in subscription ARR. This guidance reflects the flow-through of our Q3 results and is within our prior range. From a full-year Fiscal 26 revenue perspective, we are raising subscription revenue to be in the range of $764 to $768 million, growing 30% at the midpoint. We are also increasing total revenue to a range of $1.177 billion to $1.18 billion, representing growth of 18% at the midpoint. Moving to our full-year Fiscal 26 margin, EBIT, and free cash flow outlook. We now expect growth margins to be 81 to 81.5%. This increased range reflects continued growth in our SaaS platform. And we are increasing our non-DAP EBIT margin guidance to a range of 19 to 20%. We now expect our full-year free cash flow outlook to range from $215 to $220 million. This guidance reflects approximately $12 to $15 million in one-time payments related to our cost optimization program. Finally, from a capital allocation perspective, our Board of Directors approved recommitting our share repurchase authorization back to $250 million. dollars. Share repurchases remain an important part of our capital allocation philosophy and we intend to remain active and opportunistic in the market. To summarize, the scale and product initiatives we undertook over the last 18 months have contributed to our improved momentum and positioned us as the cyber resilience provider of choice for large enterprises. Conval Cloud's further extends our innovation leadership and we are excited to capitalize on the strong customer reception to our enhanced platform in fiscal 27 and beyond now I will turn it back to the operator to open the line for questions operator at this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad we will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Aaron Rickers of Wells Fargo. Your line is now open. Please go ahead.

Yeah, thank you very much for taking the question. I have two if I can real quick. First, I was wondering if you could unpack the, I guess it's the free cash flow, but particularly the accounts receivable increase and the DSO increase in the quarter.

I know you had alluded to, you know, later in the quarter kind of receivable collection so you know can you unpack that just help me understand why dso has gone up so much and you know what you saw towards the end of the quarter just given linearity yeah hey aaron this is danielle good to talk to you again um so i know i talked about this in my prepared remarks and and you kind of hit on it right but one of the things we saw this quarter um and it's it's not uncommon in q3 i'll be honest one q3 has a tendency to be one of our most pressured free cash flow quarters. And it's really just because the way the sales cycles work with the calendar year end, we have a tendency to see more deals close in the last few weeks of the quarter. And this quarter was no exception to that. I can tell you over 60% of our deals actually closed in the last few weeks of the quarter. And so what you see in free cash flow is really the reflection of that the other thing I'll call out is we had an additional payroll cycle for both the US and Canada that's not you know normal for us in a quarter and obviously the US is one of our largest payrolls right so both of those things are putting pressure on free cash flow I do want to highlight free cash flow guidance for the year if you normalize for the one-time payments that we're making in Q4 tied to the cost optimization program remains unchanged.

Yep, and then as a quick follow-up, you know, I can appreciate you're not giving a guidance beyond this fiscal year, but I know in your slide deck you highlight again kind of the TAM expectations growing at a 12% CAGR, I think 38 billion kind of the longer term total addressable market opportunity. I'm curious, you know, when you're asked about kind of a longer-term growth narrative, is the 12% a good underpinning, you know, growth rate to think about as we look out beyond this year? How are you thinking about the competitive landscape, the ability to take share in the context of that PM growth expectation? Thank you.

Yeah, no, thanks for the question again. We're not going to talk about next year right now, right? We will obviously, alongside, you know, the new CFO conversations, we will talk about what we're thinking for next fiscal year at a later time.

Hey, Erin, and just this is Sanjay. You know, again, just to reiterate, the business is in a good place. You know, we had our best land software quarter ever. We had our second best land SaaS quarter ever. You know, our rule of 40 continues to be consistent. you know across the board the platform the new platform releases both really well based on everything we've seen so you know we will obviously have the right time share more of that so you know but we we are you know we we have no I think we will definitely outpace market yeah thank you thanks your next question comes from the line of Jason with William Blair.

Please go ahead.

Yeah, thank you. Just first on the currency situation, was this in line with your expectations? I know you gave guidance, you had a nice beat on the revenue and the ARR. Was there an extra benefit relative to your expectations from currency.

Sorry Jason I think I'm a little confused by your question or which metric are you referring to?

Well you gave you gave guidance on a reported basis right I just wanted to know.

You're talking about for revenue?

And ARR both. Is currency in line with your expectations?

Yeah so on a reported basis for revenue currency was in line with our expectation. From an ARR perspective, we only give annual guidance on ARR, and we do that on a constant currency basis.

Okay, I got you. All right. And then the net new ARR, I think constant currency was, for total, net new ARR was $39 million. I believe on the last earnings call, You guys talked about mid-40s, so just want to understand, was that below what your expectations were, and if so, why?

Yeah, so let me unpack that a little bit, right? So, and as we mentioned on the call, we had a really strong new customer quarter. It was actually our top-term software new customer quarter and our second highest customer acquisition quarter for SaaS. For SaaS in particular, I will tell you, 70% of our net new ARR was driven by SaaS. As a reminder, we land those customers at lower ASPs, on average, typically two to three times what we would land a software customer with. And so what you're seeing in the ARR is just a reflection of that mass. We're still very happy about that because what that does is give us the opportunity to go out, cross-sell, and gain further value with those customers. The other comment I'll make is going back to the software LAN piece. We have a tendency to land those customers at a longer duration, so that does have some modest dilution on ARR.

Okay. I guess what I'm getting at, guys, is just what was the delta versus the 45 million that you guys had talked about? You ended up with 39. Something must have not played out that you expected.

Yeah, so this is Andre. Jason, it's really just we sold a lot of SaaS deals, land deals this quarter. And, you know, that's why we have to look at it on an annual basis because there will be variation quarter to quarter. We sell a lot of software, and it was also a big software quarter for us. So when you take that together, it's, you know, that kind of explains the, you know, the delta, if you would. But by every stretch of the imagination, it was a very strong quote.

And, Jason, let me just add a little bit more with the numbers, too, which I think might help. Last quarter, for perspective, 61% of our net new ARR was SaaS. This quarter, that's 70%. Again, when you're talking, landing these customers at a, you know, two to three times smaller ASP than software, that does have a significant impact on ARR.

Okay, so the explanation, if I can summarize, is just you're seeing a bigger shift to SAS than maybe you expected at the beginning, you know, when you gave the guidance, and that had an impact on the number.

Yes. And larger software deals as well.

Plan software deals with longer durations, yeah.

Okay, thank you.

Thank you.

So, your next question comes from the line of James Fish with Piper Sandler.

Hey, guys.

Appreciate the questions here.

First, how much does Unity impact this shift from sort of term to SaaS, if at all?

And second, can you just help us understand if SaaS is so strong, and I get it the base is getting bigger and more anniversary in Clumio, But why the 4% sequential drop in cloud net retention rate this quarter? Okay. Jim and Sandra, so Unity, so we announced it in November. So it's, what, you know, shy of three months ago. And what Unity really does, if I could just reiterate, is it brings together workloads, data, wherever they live under one control plane. So we're giving customers the ability to manage anything in, you know, what we call in the AI era under one control plane and and and that is something that is we you know we see as being the future now what what we do is we also as you know cater to customers that large on-premise software and growing staff capabilities and and that is their decision on how they wish to implement and the journey they take so they work and they work in tandem so as At this point, you know, we're not committing to change the model unilaterally in any way next fiscal year. It's a natural thing. We'll meet customers where they are, and what we've really done is take away any kind of complexity a customer may face in the journey to the hybrid and multi-cloud and really make it seamless.

And, Jim, I can take the second part of your question. So as it relates to our SaaS NRR, and I talked a little bit about this in my prepared remarks, but let me double-click into it, right? So a couple things went into our SaaS and our artist quarter. So the first thing, and you kind of, you know, you briefed this on your question, right, is that we're dealing with a much larger customer base. So our SaaS customer base is now exceeding 9,000 total customers. So from an absolute dollar perspective, right, adding those same numbers of dollars, you're not getting the same level of uplift that you have, you know, historically. The second thing, and again, you'll hear this, right? It's a theme this quarter. We have such a strong new SaaS customer quarter. Obviously, those dollars don't show up in our NRR number yet. And I'll remind you, right? We have one sales force that's doing both, right? So that's number two. The last thing I will call out is there was a modest mix shift in some of our product capabilities among certain early adopter customers, right? We have the benefit of having customers adopt our different innovation early. But with that, we also deal with changes that need to happen over time. That's the beauty of what we offer customers and what Sanjay was describing with the Unity platform that we'll be able to take to a different level next year. But these customers are still our customers. We're not seeing uptick churn. This is really just, you know, our business going through natural maturity.

There's no trend impact here. Any unusual. That's important. You got it. If I could follow up on that 9,000 staff as my question here.

You have over 9,000 staff customers, 14,000 total subscription customers plus. Where does SAS penetration get to and how much are standalone SAS customers?

Yep, so I think we've said before, but of those over 9,000, roughly 30% of them also have software tied to them. On a growing base? Yeah, on a growing base.

And one that I closely also is that nearly 50% of our enterprise SaaS customers use more than one offering, okay? That's up eight, nine points from last year. So that also shows you that as the hybrid journey becomes real for our customers, the advantage of our platform becomes apparent, especially in the larger, complicated enterprise journeys, hybrid cloud journeys.

Question, Bella?

Thank you. Your next question comes from the line of Eric Heath with KeyBank Capital Markets. Please go ahead.

Hey, Sanjay, Daniel. Thanks for taking the question. I just want to follow up on some of the prior questions, but on the SAS NRR, is there anything from a go-to-market perspective incentive-wise to shift the Salesforce focus over to landing new logos as opposed to expansion? Is that some of the reasons to potentially explain why the SAS new logos is maybe a little bit stronger while the NRR is a little bit softer?

We do our compliance on an annual basis, Eric, and so there's been no mid-quarter or mid-year change to that. But it's just, you know, between the fact that what we're delivering to our customers in SaaS as part of a platform in conjunction with our software capabilities is what they And so we're seeing a healthy pick up there. And also the work we're doing with our ecosystem partners is also making it easy for customers to get access to and use it. So I think the product stands on its own, the SaaS capabilities stand on its own.

Great. Thanks. And then just one more clarification, just to help understand what drove some of the term duration elongation this quarter after being on the shorter side of the last quarter or two, and then just anything on expectations for duration on term for next quarter. Thanks.

Yeah. So, you know, the way to think about it is what really affects term within a quarter is a number of large deals. That's the biggest contributor to that. And this quarter, the term was heavily influenced within large new customer deals. So in Q3, we saw a modest pickup and sort of an uptake in the duration quarter and quarter, and we're winning large customers that are multi-year, which is a darn good thing. What's also important to me to underscore is that our median duration remains in a normal range, okay? And I guess we could have done a better job explaining term last quarter.

Your next question comes from the line. Your next question comes from the line of Howard with Eugenheim. Please go ahead.

Thanks. I want to follow on this concurrency net UAR thread. It's the 39 in the quarter. So, Sanjay and Danielle, given your comments earlier, net ads were strong. I think we have more clarity on the SAS and our decline. But on the term side, the term that new ARR was, I think, was about 17 million. So, it seems like maybe there was a shortfall in term that new ARR. And last quarter, average duration compressed. This quarter, average duration, it seemed like an upside a little bit. So, I'm deducing that maybe its average term expansion ARR was an aggregate. And I understand that there were some large multi-year deals, So, maybe the expansion was a little weaker than expected, and really more importantly, how should we think about it? I guess is 17 kind of a baseline going forward, like what gives you confidence, especially in light of the unity coming out that you can sustain this level of term expansion?

And I'm sorry, Howard, I want to make sure I understand the question. You're suggesting that the net new ARR for subscription was 17? I'm just trying to understand where you're getting the 17 from.

Yeah, maybe my number is incorrect, but whatever that number was, I'm seeing 18. So, I guess on a constant currency basis, is that correct? That term constant currency net UAR was 18 and that average expansion was maybe weaker than expected and what to think going forward.

Oh, I understand what you're saying. So, you're just looking at the term software piece. So, this isn't about expansion. I'm going to – right, I talked about this before, but maybe let me make sure I'm clear on this. What we saw this quarter is land customers. And, again, we had our strongest land term software customer quarter. We saw land customers come in at much longer duration. Now, them coming at a longer duration is part of the business. We've talked about this historically, too. Actually, I think if you look at Q4 of last year, we had kind of a similar type pattern here. But that's really what's driving that change. I mentioned already the SaaS, you know, the growth in the new SaaS customers. I also want to highlight our subscription ARR, if you look at it, It's actually our second best subscription ARR net new ad that we've had in the history of the company. Organic, right? You've got to look organic. So, again, I talked about the pieces with the new customers, but overall we're really happy with where we're at and, you know, where we'll be for the year.

And we can follow up on the one on the call next.

Okay. And maybe just a quick follow-up for you, Sanjay, the restructuring efforts that were, I should say, the incremental restructuring efforts, it seems to be entirely focused in your R&D org and perhaps operations, so R&D and operations, is that so, you know, number one, is that true, and what gives you confidence that these cutbacks won't impact your growth process?

Hey, Howard, I'm not sure where you're getting that from. No, we, time and time again, as part of our regular process, as we get closer to the fiscal year and we look at what our priorities for the next year are and align our P&L to prioritize what we think is going to be part of the future, this quarter, you know, this exercise was no exception. Now, you know, without getting into too much of the detail, some of it is recurring, some of it is not recurring. We ran a voluntary retirement program that was well-received, and, you know, so it wasn't on one group or another. It was something we offered up to the whole company. And some of the savings you saw on the EBIT line this quarter and beyond, and then others are going to be put back into the business where we need it.

Just because I've gotten from – in the press release it says business technology is the unit. So can you just expand on what does business technology, that function, entail?

No, no, no, Howard, sorry. So there's two restructuring plans that we have throughout the year. The first one we actually talked about in the beginning of the year, and that was tied to some changes we were making in our business technology team. That's not our R&D team.

That's our internal business technology team, IT. the second restructure plan which is really you know the one that we talked about in the press release this time and you know I made the comments on related to some of the cash flow impacts that one is a company-wide initiative yeah and Howard you know actually to be more direct what this does is strengthen where we want to go not weaken so we're not cutting back on R&D or any such thing this is really about strengthening where we think that you know the opportunity lies so just aligning the business this is it's a good thing okay

thank you for clarifying absolutely thanks Howard your next question comes from the line of Param Singh with Oppenheimer please go ahead yeah hi thank you and thanks for taking my questions I had a couple first look you you know, this ARR question, but I had a slightly different question on it. As I look in the future, and again, I'm not asking for guidance, but as I look forward, typically these lower ARR SaaS customers will scale, right? And then based on historical trends, do you think it is, you know, should we assume that there will be some reacceleration with these customers as they come back with the potential of higher NRR, different from this lower baseline and potential increase in net new ARR? Or do you think that since there's a systemic shift towards more SaaS customers coming into the ecosystem, that this will kind of be a new baseline for the next few years until you have a larger SaaS base? How can we think about it logically?

Hi, Param. So I'm going to – I think I understand your question, so I'm going to answer it. But if I'm not answering what you're asking, please feel free to clarify, right? So, yes, so we land these customers at lower ASPs, as I talked about. Historically, and I think we've said this, historically, we land at roughly $40,000. That's our ASP for these customers. Right now, we see anywhere from 30% to 40%, depending on the quarter, right, of our customers that cross out. I will tell you, actually, we're seeing even better traction in our enterprise customers. Our enterprise customers, we're approaching 50% of them having more than one SaaS product. That's up 700 basis points from a year ago. Without giving you specific guidance for next year, what I can tell you is we have a history of growing the lifetime value of these customers, and we aspire to continue to do that.

And I think, I think, Bharam, that with the Unity platform, it will make it even easier for customers to absorb new capabilities seamlessly. That is part of the design of the technology. So, you know, we think that being able to cross all over time is definitely part of our strategy, as we've shared before. So let me wait a second.

Yeah, go ahead, Danielle.

No, I just wanted to add one more thing, which I thought would maybe be helpful. Our SaaS customers over $100,000 are actually up over 45%.

Great. So let me segue into my second part of my question, which is on Unity. Obviously, it's very early days, but if you could share some feedback. And how should we think about, you know, based on that feedback, the adoption of Unity driving higher, basically, SaaS ARR over time? Is there any way to conceptualize that?

We have conceptualized many things around that platform. We're very excited about it, Param, as you can imagine. You know, at SHIFT, you saw how much we shared. The platform is just literally, you know, we announced it in November. It was broadly, most of it was broadly available end of the year, we're in the early days of it. The pipeline looks great. The feedback from industry, I shared some on my prepared comments. is very positive, and, you know, it's early days to put out any pattern matching on it, but everything in the product, especially around its AI capabilities and our ability to bring together data security, identity resilience, you know, and true recovery is second to none. My goal, our goal when we built and designed this product was to make it super easy for customers to embrace logical extensions of their resilience capability. So, translated into a go-to-market piece, cross-sell becomes friction-free.

Okay. And do you feel you need to update your sales team a little bit to pivot to some of these, you know, expanding capabilities? Or do you feel you have the right part? They just delivered an amazing quarter.

These guys are doing a great job. We're executing well. And of course, the influence of our team is job one. They're only as good as how confident they are with the technology. So we continue to invest in our people. It's a big part of how we do things. And I'll be honest with you, I'm very proud of our sales team. Okay.

I'll get back in line. Thank you so much for asking my questions.

Thanks, Karam.

Your next question comes from the line of Rudy Kizinger. with the DA, David Sun. Please go ahead.

Hey, guys. Thanks for taking my question. So on the net new ARR, you know, last quarter you said you expected 60% of net new ARR to come from SAS, and 60% or $45 million would be $27 million, and you did $27.1 million of SAS net new ARR in Q3. And so from that lens, it would look like SAS net new ARR is not a big line with that And then back to Howard's point, it would thus look like term license net new ARR was below expectations or the primary, you know, reason for the $6 million delta versus the $45 million kind of baseline that was expected. So could you just, again, follow up on maybe the term net new ARR, was that below expectations? What was the impact of maybe longer duration on some deals than expected that resulted in some price compression, that's AR compression? I'm just not understanding how, based on these numbers, term was not below expectations.

No, I understand what you're asking, Rudy. And you're spot on with the fast net new ARR. So I'm glad you called that out specifically. So, what we were assuming for term is that duration would remain consistent with Q2. What we saw is because of these large multi-year, quite frankly, like just long durations, new software customers, we did see some pressure on term ARR tied to that. You are correct.

And, Rudy, I've shared this over repeatedly, you know, we have to look at this on a broader term basis. Quarter to quarter, because of the type of business we do, the kinds of customers we cater to, the complexity of the project that they embark upon, the mix of software versus that, there will be a little bit of variability in how this stuff gets and lands. The good news is we're adding a ton of new customers in SaaS, which bodes well for the long term, and we had a record, absolute record quarter of software land customers with longer durations. So, yes, the number is off a little bit, but we need to expect a little bit of variability in this over time because this is an annualized thing. Now, if you look at overall ARR for the year, you know, we're talking 22% rough-tough growth on a $167 million year-on-year increase. So it's actually very handsome. I just, you know, I just feel like there will be a little bit of quarter-to-quarter variability because we sell hybrid solutions for customers. And they have the option of being able to deploy it in the manner in which they want. So, you know, I guess we could have done a better job explaining that last quarter. It comes back to the term and that stuff, but I'll keep explaining it until we get it right.

Yeah, the only other thing I would call out, the only other thing I would call out, Rudy, to your point is, and we've talked about this other ARR, right, other ARR the last couple quarters has been consistent. We actually saw its decline, the decline almost doubled quarter over quarter, And that's really tied to some of our conversion. So that was the other piece, just to kind of bring it all together.

Okay. And then as a follow-up, I'm curious, there was some commentary about, you know, you sold maybe more SaaS deals, and I seem to maybe interpret that as meaning that prohibited you from also selling some term deals. So I guess I'm curious, like, in your pipe for the quarter, Did you have a lot of customers where reps were working with them on both potential SaaS and term deals and more of the land tilted towards SaaS than term in the quarter? And then, sorry for a two-parter here, but on your SaaS ARR, what percentage of your SaaS ARR comes from or is calculated from consumption in the current quarter times four versus PCV over duration? And I'm curious if you were to, you know, look at the quarter of your staff on the ACV bookings, you know, standpoint relative as opposed to AR, you know, how much stronger might that number have been if you were calculating all of your SAS AR as TCV over duration?

Yeah, that's a tough question. Maybe give us a little time to get the exact number on that. But let me take the first part of your question. Our sales team, the reason we have our go-to-market team the way it is is because our platform delivers two sets of capabilities. So you can't segment them and say, do this versus that or that versus that. It really depends on where the customer is and how we meet them, where they are. So if a customer wants to start with air gap protect and clean room and then move backwards into our on-premise capabilities, that's what we'll do. So the sales team is absolutely aligned to the customer buying model and their buying capabilities and their needs. So we internally don't trade off one license type versus another. That's not ever what we do. It's what the customer needs and how we best align to it. Could you repeat the second part of your question?

The second part of the question, again, like if I just take your 364 million of that there are, how much of that is calculated from like Umeo products that are just consumption times four versus how much is just TCV over duration, the same way you calculate your term license there are? Because I'm trying to, you know, you're talking about the ASCs being much lower and the ARR not necessarily showing up yet from some strong bookings. And so I'm trying to understand, you know, how much of your NET New SAS bookings come from products that are going to have ARR calculated on a consumption basis as opposed to TCP over duration.

Yeah. So I'm not going to give the exact breakout, Rudy. What I can tell you, though, is it's small. It's immaterial on the whole ARR number. So you're not – it's not overly meaningful in the percentage. Thanks, Rudy.

Your next question comes from the line of Michael Romanelli with Mizuho Securities. Please go ahead.

Yeah. Hi. Thanks for – yeah, thanks for taking the question. So, yeah, I guess I was just, you know, wondering if there are any, you know, regions and or verticals that perform better than your internal expectations this quarter and maybe, you know, conversely, were any more challenged than you were anticipating?

What was the second part? Sorry, Michael.

Yeah, if any, you know, regions or verticals were perhaps more challenged than you were anticipating.

Yeah, it was actually as a quarter very evenly distributed and almost by design. You know, we've over time, we've worked for de-risk the business in both geography as well as in particular verticals. So this quarter was, you know, our international business did very well, as did our U.S. business. It was very, very even. Our SaaS business did well. Our software business did well. So there was no particular callout. I think overall a well-delivered quarter from my point of view.

Got it. Okay, that's helpful. And then maybe just building on, you know, prior question, I apologize if I missed it. But, you know, you guys have, you know, obviously noted that you expect SaaS to comprise about 60% of total net new ARR for the fiscal year. Or just how should we be thinking about that next shift for the 4Q?

Yeah, I would – even this quarter, we talked about this. I think Rudy called this out, right? From a staff perspective, we're still about 60%. So, I think that 60% baseline is the right way to think about it.

Got it.

That sounds cool. your next question comes from the line of Tom Blakey with cancer please go ahead hey guys thanks for squeezing me in here just a couple quick ones on this duration topic Danielle what is the oh I guess just bluntly what is the expectation for duration and the guide for fiscal 4q yeah so so we're continuing to um assume that duration remains um specifically and sanjay called this out in his earlier remark remark right median duration will remain in normal range so that's what we're assuming in our guide so a doubt so basically just quarter to quarter a downtick in duration uh so to speak um and then go ahead no no yeah i i i would say again that the duration median will remain the same and the guide is neither aggressive nor conservative right we wanted to give you where we feel like we can eat and frankly we're getting better at this as customers deploy more complex scenarios we have to you know internally be spending a lot of time really really finesse in how we how we look at this you know and we'll be completely transparent about that yeah no you have always Sanjay I just said you know duration was an impact to ARR this

quarter so I was just trying to understand I know because you know it's a tale of two cities right here we get you know we get larger duration more land deals and it affects the other side so and then we got a lot of new staff deals you know and smaller duration and so the you know a little bit of a variability is to be expected we're getting better I hope at being able to uh tell you what that is.

Yeah, and this goes hand in hand with the complexity and the expanding kind of sales motion that you guys are going to market with in terms of adding cyber resiliency the last year or so, year or two, Sanjay, so maybe if you could talk about, you know, these increasing hybrid deals, the sales cycles, maybe talk about, you know, on a like-for-like basis, you know where are sales cycles going you know this last fiscal quarter or maybe going forward in your mind are they expanding and maybe if you could touch on discounting for everybody on the call is there an element of discounting just to address that topic with the extended durations and that's it for me thank you so much no worries no worries so that you know so hybrid deals if you start on

the software side you look at large enterprise customers and they have a they have a you know they have technology that goes back to the legacy technology. The process of getting, you know, getting that conversation going where it becomes a combination now in resilience terms of really looking at data security of all data types, looking at identity resilience, and then attaching that to world-class recovery, that becomes a fairly sophisticated conversation, and that takes time. And when we get into it, then you realize that some of the workloads, they want to start the cloud. They want to keep on-premise. They have a timeline in which to move into the cloud. So then you start working through that. And we've gotten good at it because we've been doing this now, you know, the cyber resilience conversation, security conversation for a couple of years. We think the new platform and the bringing together of the capabilities and the one pane of glass will just allow customers, especially with our discovery capabilities, to quickly get on, get up and understand what they have and what is protected, what isn't, at what level, what policy. So, you know, I think the new platform in time will help shrink our ability and the customer's decision points, I think, to do things. Now, the sales force is taking this to market comprehensively, okay, if we try not to go and talk about workloads, because that's not a resilient solution. Resilience, in my simple way of thinking about it, is only as good as the entirety of the workload that you – the workloads you protect. And so, that's kind of how we look at it. These deals, when you start, can, you know, it's a very sophisticated sales process, and you have to – but customers are open to it. You know, cyber threats aren't going down. AI, in a good way, generates more data, and that data needs to be protected, and we're good at that. Okay, so that's kind of how we think about it.

Go ahead. You saw that, Sanjay. Sorry, as a follow-up to that. Sorry, I thought I was done there. But you saw that in your net new term, you know, record additions. Again, I just wanted to just triple click on is this maybe, you know, in addition to all these records and solid results, is there an element of pipeline building related to this, you know, possibly a sales elongation going on?

No, so I was going to, you know, I think that first thing you said discounting earlier in your earlier part of your question there is no you know we keep a very tight control yeah you know our chief commercial officer was our chief financial officer so there's a very high degree of discipline that goes into discounting inside of a company so that I don't I don't worry about day in and day out that's not that's not my concern at all the sales cycle we believe and it's early days so we can talk about it over the quarters to come we believe that our community platform will reduce the time it takes for customers to understand resilience the way we've designed it and get up and running with us faster and then we also released a framework for them to sort of look at to to operationalize it we call that res ops we released that we announced that in tandem with a platform and the collective capabilities in there we think will allow our team our partners and our customers our prospects in this case to to truly understand how fast they can get up at running with to resilience so I'm very hopeful about where the platform is thank you very much thank you your next question comes up from the line of Janik

Kassari with Baird please go ahead yeah thanks for taking my question so Daniel You know that, of course, saw new SaaS customers this quarter, but these dollars, of course, haven't flowed into NRR yet. Can you just clarify, and I believe Sanjay was getting to that in terms of the lag effect, is it purely a function of how you recognize your SaaS ARR, sort of ramping off actual usage consumption versus potentially all the peers who use and kind of use that linearity around duration and tcv so that's part one and i had to follow up uh on unity thanks yeah so so i just want to make sure i understand because i i think you're asking two different things so you mentioned sas nrr right and i had made the comment um you know one of the things we saw is we had a really strong

SAS new customer quarter and so obviously the way that we calculate NRR is we take the same customer cohort from last year and look at where they are this year so any new customers would not be considered in that calculation it does that help answer your question I think that's what you're you're getting at but if I'm if I'm missing it let me know okay yeah Got it.

And so my follow-up then is, of course, you have the SAS AR recognition due to this kind of ramps. And I was just curious, would, in that case, kind of the SAS ACV bookings offer, like, a much cleaner, better lens into your – I think you were getting to that, and with Unity gaining traction, should help improve your overall DCV and AR dynamics. Just curious, and also the net new ARR coming from SAS, has there been any internal discussion around looking at some of those metrics, kind of ACV or backlog RPO?

Hey, sorry, this is Danielle again. So I just want to make sure it's clear, right? So we do have some consumption and some utility. It's a small portion of our ARR. most of our error is tied to what I'll say is true subscription fast customers and that you know they buy a you know fixed amount for one year and then that amount is annualized so I I I don't I don't know if there's I hope that answers your question your last question comes from the line of Junaid the Siddique web truest.

Please go ahead.

Great um good morning and thank you for taking my question um I just wanted to ask about Satori Sanjay I know it's in early days but could you just discuss how Satori is influencing customer adoption and deal sizes yeah you know in these ransomware driven evaluations and you know what specific capabilities within Satori you know are proving most differentiating and these competitive wins and and how do you think about his contribution to growth over the next, let's say, 12, 18 months.

Okay, sounds good. So where we are with Satori is we're in the throes of integrating the product into our platform. And when we acquired Satori, we were, I think, very clear that this would not be a standalone capability, but the value, the true value of Satori was giving our customers the ability to inspect and look at their data structured unstructured you know and and really have a policy related compliance capability so that that that was the premise that work we are in the throes of incorporating into the platform our belief is the customers need that capability as part of the platform unlike some others in the business because standalone it's another integration point and with us it's a feature you just turn on and then you are protected and you're looking at you know the compliance requirements and policies across the board so it's it's an you know it's an implicit part of the platform okay we believe that the value comes for customers being better protected out of the box without having to do more infield integrations with third-party products and and we think that's going to raise the value and it is already raising the value in conversations that we have. So it's early days, but kind of where we expected it to be.

Great, thank you.

All right, there are no questions at this time. Ladies and gentlemen, that does conclude our conference call for today. Thank you all for joining, and you may now disconnect. Everyone, have a great day.