Earnings Call Transcript - CVLT Q4 2023

Mike Melnyk, Head of Investor Relations

Good day, and thank you for standing by. Welcome to the Commvault Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Mike Melnyk. Please go ahead. Thank you, Gerald. Good morning, and welcome to our earnings conference call. I'm Mike Melnyk, Head of Investor Relations, and I'm joined by Sanjay Mirchandani, Commvault's CEO; and Gary Merrill, Commvault's CFO. An earnings presentation with key financial and operating metrics is posted to the Investor Relations website for your reference. Statements made on today's call will include forward-looking statements about Commvault's future expectations, plans and prospects. All such forward-looking statements are subject to risks, uncertainties and assumptions. Please refer to the cautionary language in today's earnings release and Commvault's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be different from those contemplated in these forward-looking statements. Commvault does not assume any obligation to update these statements. During this call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between non-GAAP and GAAP measures can be found on our website. Thank you again for joining us. Now I'll turn it over to Sanjay for his remarks. Sanjay?

Sanjay Mirchandani, CEO

Thank you, Mike. We delivered strong Q4 results, ending the fiscal year with renewed momentum. Let me share some highlights. Total ARR increased 15% year-over-year. Our subscription and SaaS ARR, which represents 71% of total ARR, grew 38% year-over-year. Metallic, our three-year-old SaaS offering, exceeded $100 million in ARR, placing it among the fastest-growing SaaS applications in history. We had another strong quarter of new customer additions, adding over 600 subscription and SaaS customers, and we did all of this profitably, delivering 22% EBIT margins while continuing to return cash to shareholders. Gary will share more detail shortly, but today marks the next phase of our strategic evolution to become the leading cloud-first data protection company in the industry. Our mission is twofold. First, we will continue to deliver industry-leading data protection to gain share in the mature on-premise market, while simultaneously taking share in the rapidly growing SaaS market. Second, we remain intently focused on accelerating our growth in a responsible and lasting way, which should result in continued operating margin expansion over time. Let's discuss priority number one: strengthening our leadership position. To do this, we are laser-focused on helping customers solve today's biggest IT challenges: manageability, security and cost. As our customers modernize and move to the cloud, they must also protect and manage data that is distributed and fragmented across clouds, regions, applications, services and datacenters. In tandem, new SaaS applications are rapidly becoming the mission-critical systems of tomorrow. In fact, IDC recently reported that SaaS spending for enterprise applications is growing at a 17% pace. If managed improperly, these applications will become onerous and costly to manage. Even with this fast SaaS growth, on-premise data will continue to grow and remain an IT priority. You see, on-prem and SaaS are not mutually exclusive. They are complementary components of the hybrid cloud. This is why we deliver industry-leading data protection that provides our customers with dynamic choices and best-in-class capabilities through software and SaaS. This is the power of one platform. Unlike our competitors, we don't make misleading claims about our technology leadership; we don't have to. We were rated number one across all three of Gartner's critical capabilities report for data protection, data center, edge and cloud. Through enhanced manageability and reduced costs, we've built automation, intelligence, proactive monitoring and security and compliance capabilities deeply into our platform. This gives our customers a more simplified approach to data protection across all workloads, environments and locations. Now let's discuss security. The world of data protection and security is blurring. As a result, CIOs, CISOs, executive teams and boards are making holistic decisions across their entire IT environment, and the wrong decision can have lasting and costly consequences. After all, no one is immune to cyber threats that exploit the vulnerability of fragmented environments. We are the only company with a single platform with built-in security to proactively monitor and assess risks, mitigate cyber threats and protect critical workloads. It's why more customers are turning to Commvault for their data protections. For example, where security matters most, federal agencies, including US Army Fort Sam and the Department of Veteran Affairs, chose Commvault during the quarter to evolve their data protection. Metallic was also the first data protection SaaS offering to achieve FedRAMP high status, as the only vendor in our space with advanced cyber deception for early ransomware detection. We help customers protect their data before it is compromised. In Q1, we plan to introduce several new capabilities to defend customers from exfiltration risks and dormant threats. This includes industry-leading integrations with companies like Microsoft Sentinel, CyberArk and others, which brings us to the next fundamental IT challenge. With increasing complexity and risks comes additional costs for constrained organizations. To address this, low-touch as a service models like Metallic solve their IT problems more efficiently. But that's only part of the solution. Automation is critical. We embraced AI several years ago to help our customers manage their costs while also simplifying and enhancing their experience. This helps enable us to deliver a five times better total cost of ownership than our closest competitor, and it is imperative in the future. So we will continue to engineer it into our offerings. This continuous innovation is why customers turn to Commvault for their data protection needs. For instance, we recently displaced the legacy incumbent and increased our footprint at a Fortune 100 retailer. Where thousands of stores serving millions of customers worldwide, data protection is paramount in their decision. Commvault offered what the other vendors could not: a modern and proven data protection solution on one platform, managed with a single pane of glass. Which brings us to our second strategic priority around lasting and responsible growth. To achieve this, we're accelerating our discrete focus on our land, expand and renew motions while also reallocating investments towards the high growth areas. Gary will discuss in more detail. We have also been working hard to remove friction across the customer journey to make it even easier and more cost-efficient for customers to engage and be successful. Lastly, we are relentlessly focused on our own cost of operations, including people, technology, resources and facilities. While the macro environment remains unsettled in the near term, we believe that our responsible growth strategy enables us to focus on investing in and delivering a data protection platform that elegantly solves our customers' hard problems. We believe this bodes well for accelerating growth in fiscal year 2024. Before I turn the call over to Gary, I want to point out a key financial reporting change that he will discuss. We've been in a multi-year evolution which is paying off. Now with the success of our subscription software and Metallic SaaS offerings, it's time to open the aperture on this part of our business and give you more insight into our progress. With that, I'll turn it over to Gary to discuss the numbers. Gary?

Gary Merrill, CFO

Thanks, Sanjay. Good morning, and thank you for joining us. As you saw in Table 5 contained in our earnings press release this morning, we provided supplemental revenue and cost of revenue captions for our P&L as we transition our financial reporting to align with our business model and go-to-market strategy. This new P&L presentation is led by our term license software and SaaS offerings, which are now approaching 50% of total revenue. The revenue from these arrangements will be referred to as subscription, and combining them in a single line item will allow the investment community to have enhanced understanding of our results. As a reminder, term license software is generally recognized as revenue at the time of the transaction. SaaS revenue, which is recognized ratably over time, has historically been included in services revenue along with other offerings recognized over time, like customer support and professional services. The supplemental financial tables in this morning's earnings press release included a two-year look back on a quarterly basis to provide business trends, using the new revenue and cost of revenue caption. Lastly, we are introducing a new quarterly earnings presentation that can be found on our Investor Relations website. Now, let's discuss our financial results. We are pleased with our Q4 performance, beating all of our guided metrics. Total revenue was $204 million, up 2% year-over-year on a constant currency basis. This includes software revenue of $90 million. Revenue from large software deals, which we define as transactions with greater than $100,000, represented 72% of software revenue in the quarter compared to 73% a year ago. The average deal size in the quarter for large software deals was $347,000. Under our new reporting structure, Q4 subscription revenue, which includes the software portion of term licenses and SaaS, increased 9% year-over-year to $95 million and represented 46% of total revenue compared to 42% a year ago. Q4 customer support was $77 million compared to $85 million a year ago. Customer support includes software updates, phone and web-based support for term-based and perpetual software licenses. The year-over-year decline in customer support revenue was driven by foreign exchange headwinds and from the strategic conversion of certain perpetual customers to our subscription offerings. A reconciliation from our current P&L revenue line items to our new reporting is contained on slides 23 to 26 in our new quarterly earnings presentation. Now I'll discuss ARR. Total ARR in Q4 was $668 million, an increase of 15% year-over-year and 17% in constant currency. In Q4, total subscription ARR, including term-based licenses and SaaS contracts, grew 38% year-over-year to $477 million. Subscription ARR represents 71% of total ARR, up from 59% in Q4 of the prior year. We are quickly nearing a key milestone for the company with subscription ARR approaching $500 million. This includes $101 million of SaaS ARR, which doubled from fiscal year 2022. These impressive subscription metrics provide confidence in our future growth opportunity. From a customer perspective, our land and expand strategy is working as we added over 600 new subscription customers during fiscal Q4. We drove strong net dollar retention numbers of 107% for term-based software licenses and 125% for SaaS. Our Metallic SaaS offerings are a primary driver of customer expansion. Approximately 40% of Metallic customers used Commvault software solutions, and 30% of Metallic customers have multiple SaaS offerings. While M365 and our Air Gap storage offerings remain the most popular use cases, we're also seeing broader adoption of our other offerings like Kubernetes and Dynamics backup and recovery and ThreatWise. Now, I'll discuss expenses and profitability. Fiscal Q4 gross margins were 83.4%, an increase of 40 basis points sequentially and continue to reflect an increased mix of SaaS revenue, which carries a higher cost of sales than software. Fiscal Q4 operating expenses were $123 million, down 3% year-over-year. We ended the quarter with a global headcount of approximately 2,800 employees, down 5% over the past two quarters. We are managing our people, facilities and third-party expenses by focusing investments on our most critical priorities. Non-GAAP EBIT for Q4 was $45 million, and non-GAAP EBIT margins were 22.3%, well ahead of our guidance and the strongest EBIT margin result of the fiscal year, driven by operating expense discipline and strategic prioritization of resources. Now, I'll discuss full year fiscal 2023 results. On a constant currency basis, software revenue was $355 million, up 4%, and total revenue of $785 million increased 6%. Under our new reporting structure, subscription revenue was $348 million, an increase of 30% year-over-year. Within that, term license software increased 15% and SaaS revenue nearly tripled year-over-year. Fiscal year 2023 operating expenses were 62% of total revenue compared to 64% in the prior year. We drove operating leverage primarily through sales and marketing, which finished at 38% of total revenue, aligned with our fiscal year 2023 target. Full-year non-GAAP EBIT was $160 million, and non-GAAP EBIT margins were 20.4%. This includes approximately 250 basis points of gross margin headwinds, primarily from our accelerating SaaS revenue. Moving to some key balance sheet and cash flow metrics for the quarter. We ended the quarter with no debt and $288 million in cash. $105 million of this balance is in the United States. Free cash flow was $67 million for Q4 and $167 million for the full year fiscal 2023. As a reminder, our second-half fiscal year 2023 cash flows were burdened by approximately $7 million of federal tax payments related to the TCJA capitalization R&D provisions. In Q4, we accelerated our stock repurchases to approximately 1 million shares for $61 million, representing 91% of free cash flows. For the full fiscal year, we repurchased $151 million of our stock, representing 90% of free cash flows, well ahead of our existing 75% target. Now, I would like to spend a few minutes to discuss how we are approaching the future. With our subscription software evolution nearly complete, we are focused on our next growth vector, scaling our Metallic SaaS platform, while continuing to improve profitability, generating strong free cash flow and providing attractive capital returns. We are amplifying our discrete focus on our land and expand opportunities as we scale our growing subscription renewal base. Secondly, we plan to hire additional inside sales reps focused solely on the SaaS velocity market as we refine our segmentation model. We expect that these go-to-market refinements to drive enhanced field sales productivity as we exit the fiscal year. We are also transitioning our financial reporting in guidance towards ARR and free cash flow as primary KPIs of our underlying business momentum. For fiscal Q1, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS, of $95 million to $98 million, representing 10% year-over-year growth at the midpoint. We expect total revenue of $195 million to $199 million. At these revenue levels, we expect Q1 consolidated margins to be 82.5% for gross margin and EBIT margins of approximately 20%. Our projected diluted share count for Q1 is 45 million shares. For the full year fiscal 2024, we are expanding our guidance metrics to include ARR and free cash flow. We expect fiscal year 2024 total ARR growth of 13% year-over-year, driven by strong subscription ARR, which we expect to increase 27% year-over-year. As a reminder, subscription ARR includes term-based licenses and SaaS. We expect subscription revenue to be in the range of $420 million to $430 million, growing 22% year-over-year at the midpoint. At these levels, subscription revenue should cross over 50% of total revenue, which we expect to be in the range of $805 million to $815 million. We also expect consolidated gross margins of 82% to 83%, non-GAAP EBIT margin expansion of 50 basis points to 100 basis points year-over-year, and free cash flow of $170 million. Finally, our Board recently approved a refresh of our stock repurchase authorization for up to $250 million of stock. We expect to continue with our existing practice of repurchasing more than 75% of our annual free cash flow. Before I close, I want to highlight what we believe are the core investment attributes of Commvault, including that we are a technology leader in the critical data protection space that remains an IT spending priority even in an unsettled macro environment. We have a large and growing installed base of customers, a recurring revenue model underpinned by approximately $500 million of subscription ARR. We drive consistent profitability with room for margin expansion. We have a debt-free balance sheet, healthy cash flow and a demonstrated history of capital returns. I will now turn the call back to Sanjay for his closing remarks.

Sanjay Mirchandani, CEO

Thank you, Gary. We continue to redefine data protection for our customers because it has never been more important for them. The law firm BakerHostetler recently published its Data Security Incident Response Report, which includes data from 1,160 security ransomware incidents that the firm handled in 2022. The findings showed that 40% of organizations hit with ransomware paid an average ransom of $600,000. But that percentage dropped to just 16% if the targeted organization was able to restore their systems. Data protection has never been more critical. We believe our strategy, roadmap, go-to-market motion and increasing focus on ARR will showcase our momentum in the year ahead. We look forward to updating you along the way. Now we'll take your questions.

Operator, Operator

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

Howard Ma, Analyst

Thank you. It’s really encouraging to see the strong performance in revenue, along with the new investor relations presentation and the disclosures on Metallic, especially with the focus on annual recurring revenue. Sanjay, considering the ongoing delays in IT spending on large projects that are impacting nearly all software companies, how can we think about and possibly quantify the portion of our pipeline that relies on large multi-year projects? Those projects come with increasing uncertainty compared to more typical business deals, like expansion driven by data growth and new clients that are not associated with large projects.

Sanjay Mirchandani, CEO

For sure. That's central to how we've been enhancing our forecasting and pipeline practices within the company. Over the past year, we've had to adjust our models due to delays in purchasing, increased scrutiny around deals, and changes in deal sizes. I believe we've done a solid job of fine-tuning our forecasting models. Gary noted the size and characteristics of large deals in our business over the last quarter, which have been on the rise while the average selling price was also higher. We're closely monitoring deal volume and size. As we mentioned, our focused strategy on land, expand, and renew initiatives, along with investments in a high-velocity business model around Metallic, are all in progress. These efforts are actively happening. The previous year provided valuable learning experiences, and we're refining our models to be more precise in this area.

Howard Ma, Analyst

It's great to see that you are now distinguishing between term and perpetual licenses and providing the full-year guidance for total and subscription ARR. Could you elaborate on the factors contributing to the 27% growth in subscription ARR specifically for Metallic and subscription? Additionally, any insights on your expectations for new business in relation to Metallic and subscription would be appreciated, as well as the anticipated rate of decline for perpetual licenses moving forward. Thank you.

Gary Merrill, CFO

Hey, Howard, good morning and thanks for joining us today. We're now highlighting that subscription revenue and ARR, which combines our term-based software licenses and SaaS, because that's also how customers want to buy. And as customers move and continue on their cloud journey, they are looking for that flexibility of the best of software and the best of SaaS, especially related to their cloud journey. As I look out into the guidance that I gave, which was total ARR of about 13% year-over-year growth and subscription ARR, which was 27%. Relative to the 27%, we'll see greater momentum risks on that ARR related to Metallic. Metallic is our fastest contributor to ARR. We nearly or we did double ARR year-over-year. We expect to continue on that momentum, especially on the dollar value of the Metallic increase. So Metallic will play the majority of the increase, combined with our newer refined focus on that software land, expand motion.

Operator, Operator

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

Aaron Rakers, Analyst

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

Gary Merrill, CFO

Aaron, it's Gary. Thanks for joining us. The macro environment continues to be challenging for many companies. For us, the main issue lies in the scrutiny surrounding budgets and purchasing decisions. We're not losing deals, but we did notice some sales cycles reflecting this situation. Regarding your question about changes quarter-over-quarter, our business has stabilized nicely in the current quarter. Last quarter, we discussed the lengthening of some deals, particularly in our Americas region, and we're very pleased with the rebound there. The Americas had a strong quarter, seeing a 20% sequential increase in business. This indicates that stabilization has occurred, and we did not witness any further deterioration. As Sanjay mentioned, we're adapting to the current headwinds related to scrutiny, but we're happy with our performance and how the business has stabilized. Although we continue to experience some delayed deals, this is accounted for in our guidance concerning timelines. Overall, we have not seen any sequential decline and are in a good position as we approach fiscal Q1.

Aaron Rakers, Analyst

That's great detail. I know it's been a couple of years since you provided a longer-term model framework. I'm particularly interested in how you view the operating margin expansion this year, which you mentioned could be between 50 to 100 basis points. A few years back, you indicated a target of reaching a mid-20% EBITDA or EBIT figure. How do you see the trajectory of operating margins going forward? Is that mid-20% still achievable, or could we potentially see something higher over time?

Gary Merrill, CFO

Aaron. Good question. So sitting here today, we're not giving kind of that long-term multiyear guidance. We're really focused on what's ahead of us which is Q1 and fiscal 2024. But to give you a little perspective and maybe to set a baseline, we finished FY 2023 at about 20.5% on EBIT margin and that includes absorbing about 300 basis points of gross margin related to our accelerating Metallic business. So we're relatively pleased with where we're at, considering how much we've absorbed. We're at the OpEx percent of revenue targets that we laid out. We did make a strategic investment in Metallic. We invested for the future. And we're coming out with the best enterprise SaaS platform that's on the market. So for FY 2024, I'm confident that we can deliver that 50 to 100 basis points EBIT margin. But as I think about where we go from here, Metallic margins are improving every year. You can kind of see that now in our revised disclosure on gross margin. So we're getting the lift slowly on Metallic margins. We're still headed towards what we believe is that roughly 70% Metallic margin over the next few years. We can get incremental leverage in the business, especially as the top line improves. So as I think about, Aaron, long-term and where we can go with the business, we obviously want to continue to grow ARR in that mid double-digit growth. Right? We have that demonstrated history of doing that. We think we can continue to grow and we're confident in our ability to keep delivering that mid-teens double-digit ARR growth and getting to that mid 20% EBITDA margin should also be within our size as we kind of scale the business year-over-year.

Aaron Rakers, Analyst

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

Gary Merrill, CFO

Yes, certainly. This quarter, we introduced a couple of metrics that highlight the strength of our land, expand, renew strategy. One of these is the net dollar retention for subscriptions, which stands at 107%. We’re also very pleased with the Metallic net dollar retention of 125%, indicating a strong renewal process. Most of our shareholders and analysts know that we have a growing base for subscription renewals under our term-based license model. We expect this to improve in fiscal 2024 compared to fiscal 2023, providing us with favorable conditions and predictability in our model. Historically, the average duration of these deals has been two to three years, typically rounding up to three years. However, given the current environment, we are experiencing some compression in term length, which may impact the period P&L. Despite this, there is no effect on ARR, and it actually contributes to stronger velocity. Currently, our average term length is likely closer to two years than three, and we are concentrating on scaling that. This will offer us good predictability heading into fiscal 2024 and enhances our confidence in our guidance.

Aaron Rakers, Analyst

Thank you very much.

Operator, Operator

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

Jim Fish, Analyst

Thank you for the questions. Building on what Aaron mentioned, historically Commvault has experienced growth in fits and starts. How much visibility do you think you have in the business today compared to a few years ago? Since we are now over 50% revenue coming from Subscription and SaaS, are we less reliant on new term contracts, which would allow for longer visibility in achieving our targets, or do you still believe we should consider visibility as being around six months?

Gary Merrill, CFO

Hey, Jim, it's Gary. It's the former. In today's business model where we have the subscription business, which combines the software and the SaaS, and I'll break it up. On the term license, we have more visibility now than we've ever had as a company, because we now have this repeatable sales motion on the software, relative to what we had a couple of years ago when it was primarily perpetual and we were starting empty every year. Now we have a nice tailwind that's predictable and we're focused not just on renewing it, but more importantly, expanding it. So it goes beyond just the visibility to renewal, and it goes to the expansion motion, which this year is a key focus on that expansion motion of that renewal base. The beauty of, as everybody knows on SaaS is the ratable recognition. So now that we're on Metallic revenue and it was disclosed in our presentation, right, it was about $70 million for the year, right, it’s about 10% of revenue which is ratable perspective, which gives us not only visibility of the business, but it gives us much more predictability into forecast our revenue amounts. So when we combine the subscription and the SaaS together and their individual attributes, it gives us that visibility that as a company we really never had before.

Jim Fish, Analyst

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

Gary Merrill, CFO

So the SaaS that we gave today, especially around the subscription business which combines the software and the SaaS and the KPI metrics around it, we'll continue to give every quarter. The net dollar retention, we think they are key metrics of the business, right, and we'd expect to continue to talk about our net dollar retention. The Metallic net dollar retention, when you look year-over-year, it's really not comparable because the base last year was so small, right? We were just starting out in basically year two of the business. So therefore, now that we're in year three, we actually have a base that's meaningful and we have expansion opportunity that's meaningful. And even within that Metallic net dollar retention of 125%, which is really strong, it even excludes the 40% Metallic customers that are also software customers, which is even a whole another expansion opportunity that we have. So with this growing installed base where 50% of our customers are now subscription, SaaS or a combination of both, it really allows us to drive that renew and expand motion, and we'll continue to keep it as part of the forefront. I'll also continue to update the annual guidance, Jim, that I gave to give our shareholders a perspective about how we're seeing the full-year change as the year goes as well as some of the quarterly guidance as well that we gave today. So virtually everything that you saw today will continue to get on a quarterly basis.

Thomas Blakey, Analyst

Thank you for taking my question and congratulations on the results. I would like to focus on the NDR topic. The disclosure is great. These products are new, and I am curious about the use cases and what is driving the expansion. Is it consumption-based? What is driving the Metallic NDR expansion so we can understand what it may look like in fiscal 2024 and 2025, and what are the expansion opportunities from a term perspective? When I return as a customer, what will you be selling more to me? Let's start with that.

Sanjay Mirchandani, CEO

Let me, Tom, let me take a stab at. It's Sanjay. I'll give you the sort of the broad flows of how I see the expansion and the portfolio mapping to that expansion. Let's take Metallic. Metallic being one platform and being integrated into our software as well, customers use our MRR on Metallic recovery reserve, our air-gapped capabilities from the software using Metallic. And so you bring the two things together. That's a classic expansion, okay, where they want another copy of their data off-premise. You've got customers who start with Office 365 and quickly realized that we can do Kubernetes and we can do other things around virtual machines, all from the same console and very quickly they started embracing new services within the Metallic portfolio. So the uniqueness of our approach is our ability to really take the software platform and the SaaS platform in the power of one platform to be able to give our customers that seamless extensibility. And we're seeing that in not only the number of services, more than one service that our customer has within the Metallic platform, but also the fact that 40% plus of our Metallic customers also have Commvault software. So that's the mutually sort of enhancing capability within our expansion. Now, more classic expansion scenarios of capacity or additional capabilities continue to be there in our portfolio as we add security capabilities, as we add data disaster recovery capabilities into our technology. Our software customers can avail of that but, just literally but snaps into their core platform. So the portfolio strategy we've taken for the last couple of years of making it absolutely seamless for our customers is showing in the numbers, I think that we shared with you today and I think we'll continue to be important because as customers are in transition, I said, it's not like the on-premise is going to go away. As they're in transition between their on-premise world and the public cloud world or either hybrid world, they're going to want both sides and they're going to want best of breed on both sides. But you can't go a piecemeal and sort of patchwork of this. It needs to be one uniform platform, and we're the only ones to do that.

Thomas Blakey, Analyst

That's very helpful, Sanjay. Is there any follow-up regarding the breakdown of capacity expansions and new services? Is that too detailed or just a subjective interpretation of how much of the 107% or 125% relates to capacity and how much to new services?

Gary Merrill, CFO

I'll jump in. It's too detailed to provide specific numbers, but I can share a qualitative perspective, particularly regarding Metallic. The 125% growth, which is impressive, primarily comes from upselling, mostly of the same product. Achieving this 125% with such a significant portion from upselling is noteworthy. An area we can accelerate is that only 30% of our Metallic customers have more than one SaaS offering. This presents a substantial opportunity, as Sanjay mentioned, to increase the range of products and use cases within the Metallic customer base and to focus on driving this expansion during renewal periods, particularly related to the 30% multi-product metric among Metallic customers.

Thomas Blakey, Analyst

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

Gary Merrill, CFO

Yes, we are closely monitoring our progress. I would say we are following the typical gross margin trajectory that other SaaS companies experience as we enter year three. We have achieved significant improvements, which can be observed in the reported results, and we are witnessing an upward trend in our gross margin for Metallic on a quarterly basis. We anticipate this trend will continue as we aim for the goal of around 70% over the next few years, with incremental margin expansion for Metallic as we grow. Our focus is entirely on improving infrastructure efficiencies, and we are introducing new packaging and pricing enhancements. As I mentioned concerning net dollar retention, driving multiple use cases and having customers engage with more than one Metallic product will also contribute to margin expansion. Therefore, you can expect to see continued improvements in Metallic specifically over the next couple of years. This will provide us with greater predictability for our overall gross margin, which aligns with the guidance I provided of 82% to 83%. We are now in a position where we can begin to scale, having improved from our previous business model format by 300 basis points, and we can work our way back towards stronger performance.

Thomas Blakey, Analyst

Very helpful. Congratulations, guys.

Gary Merrill, CFO

Thank you.

Sanjay Mirchandani, CEO

Thank you.

Operator, Operator

One moment as I prepare the next question. Welcome Eric Martinuzzi from Lake Street Capital Markets. Your line is yours.

Eric Martinuzzi, Analyst

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

Gary Merrill, CFO

I can take that one, Gary. I've already mentioned some of the adjustments we are making. Specifically regarding the inside sales reps, we see a significant opportunity in a segment of the Metallic market that we plan to target. Our strategy focuses on accelerating the sales process so that we can complete deals within a single quarter rather than over several quarters, which presents a substantial opportunity with a favorable return. Additionally, we've been emphasizing a targeted approach for our land and expand strategy. We're satisfied with our current employee count and, as we integrate our resources across the entire company—not just in sales and marketing—we believe that by having a more focused strategy, we can enhance productivity in sales and marketing as well as in other business areas. This approach is reflected in our guidance, particularly regarding our expectations for revenue growth and improvements in EBIT margins.

Eric Martinuzzi, Analyst

Is headcount going up, down or sideways?

Gary Merrill, CFO

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

Eric Martinuzzi, Analyst

Okay, all right. There was a notable increase in the services performance in Q4. It appears there was a rise in the non-recurring revenue. Was that associated with any special projects or professional services?

Gary Merrill, CFO

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

Eric Martinuzzi, Analyst

Got it. Thanks for taking my questions.

Gary Merrill, CFO

Sure.

Operator, Operator

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

Aaron Rakers, Analyst

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

Gary Merrill, CFO

Hey Aaron, it's Gary. I can summarize for you. If you think about the other revenue line items, we now provide three additional line items beyond subscription revenue. The perpetual license has been declining by about $25 million a year based on some of our recast financials. We likely have another year of that trend, and I estimate it could reach a run rate of about $40 million to $50 million over time, fitting that long-term picture as we still have an installed base relying on it. However, you will see continued downward movement in that revenue item in FY 2024, likely at similar levels to FY 2023. The customer support line, which covers our support for both subscription and perpetual, will also show similar trends in FY 2024 as it did in FY 2023. Eventually, we expect that to stabilize as most of our customers transition to subscription and SaaS. We're currently at about half, and as we continue this rollout for another year, we should see a more steady state over time. Perpetual maintenance still comprises a little more than half of that balance. Regarding the other services line, that number is probably around $40 million annually. We've focused on product automation and partner leverage, which helps us optimize our services business. It also assists in driving channel leverage, and maintaining a steady state in that business is beneficial as it indicates we're making product enhancements to improve usability and leverage our channel partners more effectively.

Aaron Rakers, Analyst

Yeah. Thanks, Gary. I appreciate that.

Operator, Operator

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

Mike Melnyk, Head of Investor Relations

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

Operator, Operator

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