Earnings Call Transcript - CVLT Q2 2024

Operator, Operator

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Commvault Second Quarter Fiscal Year 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question-and-answer session. Thank you. I will now turn the conference over to Michael Melnyk, Head of Investor Relations.

Michael Melnyk, Head of Investor Relations

Good morning, and welcome to our earnings conference call. I'm Michael 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 on the Investor Relations website for your reference. Statements made on today's call will include forward-looking statements about Commvault, 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 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 opening remarks.

Sanjay Mirchandani, CEO

Thank you, Mike. Good morning, everyone, and thanks for joining us today. I am pleased to report our Q2 results exceeded expectations, and we improved across our most important KPIs. Total ARR, the primary metric we use to measure underlying growth, accelerated 18% year-over-year to $711 million. Subscription ARR grew 32% year-over-year to $530 million and is now nearly 75% of total ARR. SaaS momentum accelerated with Metallic ARR, up 77% year-over-year to $131 million. Metallic-SaaS net dollar retention rebounded to an impressive 130%. And we delivered improved profitability while continuing to return cash to shareholders through share repurchases. Beyond these impressive financial results, we also received numerous industry accolades, including being named the leader for the 12th consecutive time in the 2023 Gartner Magic Quadrant. We also ranked highest in six of seven categories in Gartner's latest critical capabilities for enterprise backup and recovery software solutions report. And once again, GigaOm named us a Leader and an Outperformer in its most recent GigaOm Radar for Hybrid Cloud Data Protection for Large Enterprises. We're extremely proud of this recognition. We're laser-focused on being a trusted partner to our customers by protecting their data from cyber threats, significantly reducing ramp at hybrid cloud complexity, and infusing AI-enabled automation to tackle new and evolving data protection and security challenges. We're just getting started. Next week, at our Commvault Shift Customer and Partner event, we will highlight how we are shifting from data protection to leading the charge in cyber resilience. We're going to introduce a radically new approach that empowers customers to withstand today's nonstop and escalating cyber threats. We're bringing together what we're known for - best-in-class data protection - and combining it with exceptional data security, recovery, and driven data intelligence. Cyber resilience like this has never been possible until now. The time has never been better. According to a recent IDC study, most enterprises expect imminent attacks. 61% of respondents believe data loss in the next 12 months is likely to occur due to increasingly sophisticated attacks. It's clear a new standard in cyber resilience is required, and that's what we're going to deliver. Commvault has always prided itself on delivering the best technology that customers need at the right time, case in point. Four years ago, we challenged ourselves to address an emergent need in the market: enterprise-grade cloud-native data protection as a service. We made bold moves, disrupted from within, and took a new modern approach to launch Metallic, our industry-leading hypergrowth SaaS platform. We vastly simplified how we secure and defend data for any workload regardless of where it is, and in the process, we revolutionized data protection as a service. Since then, we've gained over 4,000 customers and surpassed $130 million in ARR. Just last week, Commvault was named the leading vendor in GigaOm's cloud-based data protection sonar report. The authors noted that "Metallic protects a very broad range of cloud workloads that will be tedious to fully enumerate." Building on the overwhelming success of our platform, we're now taking the opportunity to apply everything we've learned in data protection and combine it with powerful new innovations in data security, AI, and recovery to deliver the most advanced cyber resilience platform in the industry. Next week at Shift, we will unveil this to the world along with some exciting new ecosystem partnerships that will enable us to transcend the category. Today's problems cannot be solved with yesterday's approach. It's time to shift how we think about resilience. We hope that you can tune into the exciting event. Now I'll turn it over to Gary to discuss the numbers.

Gary Merrill, CFO

Thanks, Sanjay, and good morning, everyone. I am pleased to report that our strong revenue and earnings outperformance in Q2 was driven by acceleration across our key KPIs during the quarter. Q2 total revenue was $201 million, an increase of 7% year-over-year. Our total revenue growth was led by subscription revenue of $98 million, an increase of 25% year-over-year. As a reminder, subscription revenue includes both our term software licenses and our SaaS offerings. We saw double-digit growth in term software licenses combined with an accelerating contribution of SaaS revenue, which was up over 80% year-over-year. Subscription revenue is now approaching 50% of total revenue compared to 42% one year ago. Term software license growth was driven by strong performance in renewals and existing customer expansion during the quarter, with our subscription net dollar retention remaining within its historical range. Overall term software deal volume increased year-over-year driven by continued improvements in our sales motion. Q2 perpetual license revenues were $14 million. As a reminder, our go-to-market motion is led by subscription. So perpetual license sales are generally sold in certain verticals and geographies. At the current perpetual license revenue run rate, we believe the headwind to our reported total revenue growth from these perpetual license sales will start to normalize as we exit the current fiscal year. Q2 customer support revenue was $77 million, which includes support for both our term-based and perpetual software licenses. Fiscal year 2024 customer support revenue has benefited from fewer conversions of perpetual support contracts to term software licenses compared to the prior year. Year-to-date, customer support revenue from perpetual licenses represents 55% of total customer support, with the balance coming from term software licenses. This compares to approximately 60% in fiscal year 2023 and 70% in fiscal year 2022. At this trajectory, we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue next fiscal year. Moving from revenue to ARR, Q2 ARR growth accelerated 18% year-over-year to $711 million, and subscription ARR, which includes term-based software arrangements and SaaS contracts, grew 32% year-over-year to $530 million. These growth metrics reflect the underlying strength of our business when our revenue is presented on an annualized basis without the impact of subscription software term length compression. SaaS ARR finished the quarter at $131 million, an increase of 77% year-over-year. We saw healthy growth in new customers as well as expansion within our existing customer base. SaaS net dollar retention rate for Q2 accelerated to 130% versus 118% we reported last quarter. Now I'll discuss expenses and profitability. Fiscal Q2 gross margins were 82% and reflect a 150 basis point year-over-year impact from our accelerating SaaS revenue, which carries a higher cost of sale than software. Fiscal Q2 operating expenses were $121 million, up 2% year-over-year. As a percentage of total revenue, operating expenses declined 310 basis points year-over-year to 60% of total revenue, driving EBIT margin leverage as we manage our people, facilities, and third-party expenses by focusing investment on our most critical priorities. We ended the quarter with a global headcount of 2,900 employees, reflecting a 1% decline year-over-year. Our current headcount balance includes an additional inside sales teams for renewals and related customer success teams to support the customer journey and our accelerating velocity sales motion. Non-GAAP EBIT for Q2 increased 19% year-over-year to $42 million, and non-GAAP EBIT margins were 20.9%, a 210 basis point improvement year-over-year. The strong earnings and EBIT margin expansion were driven by continued operating expense discipline relative to our top line revenue. Moving to some key balance sheet and cash flow metrics, we ended the quarter with no debt and $283 million in cash, of which $93 million is within the United States. Our Q2 free cash flow was $40 million and our first half fiscal year 2024 free cash flow was $78 million, up 10% year-over-year. The biggest driver of free cash flow is SaaS deferred revenue and the strength of our software subscription renewals, which typically include upfront payments on multiyear contracts. In Q2, we repurchased an additional $31 million of stock under our repurchase program. At the halfway point of fiscal year 2024, we have repurchased $82 million of stock, representing 106% of our first half free cash flow. Now I'll discuss our outlook for fiscal Q3 and the full fiscal year 2024. We continue to believe that ARR and free cash flow should be viewed as primary KPIs of our underlying business momentum. All of our following guidance metrics are based on current foreign currency exchange rates. For fiscal Q3, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS, to be $106 million to $110 million. This represents 24% year-over-year growth at the midpoint. We expect total revenue to be $206 million to $210 million with year-over-year growth of 7% at the midpoint. At these revenue levels, we expect Q3 consolidated gross margins to be approximately 82.5% and EBIT margins of approximately 21%. As I mentioned on our last earnings call, we are executing some foundational go-to-market changes, which includes amplifying our discrete focus on our land expand opportunities while also scaling our motion to secure our growing subscription renewal base. We will continue to hire field resources and additional inside sales reps focused solely on the SaaS velocity market as we refine our segmentation model. These continuing investments are reflected in our margin guidance. Our projected diluted share count for fiscal Q3 is 44.7 million shares. Now I would like to give an updated outlook on the full fiscal year 2024, which includes raising both our total revenue and total ARR expectations for the full year. We expect fiscal year 2024 total ARR growth of 14% year-over-year, which reflects a 100 basis point increase over our prior guidance. We now expect subscription ARR, which includes term-based licenses and SaaS, to increase 24% year-over-year. From a revenue perspective, we now expect subscription revenue to be in the range of $408 million to $418 million growing 19% year-over-year at the midpoint. At these levels, subscription revenue will exceed over 50% of our total revenues. Our updated guidance reflects a mix shift from subscription revenue due to a lower number of conversions from perpetual support contracts to term software compared to the prior year, as well as continued measured spending for lower multi-year transactions in a relatively high interest rate environment. As a result, we expect total revenue to be in the range of $812 million to $822 million. This is an increase compared to our prior total revenue range of $805 million to $815 million. Our improved fiscal year 2024 total revenue outlook reflects strong renewal activity, the ongoing momentum in our SaaS velocity business, and the seasonally stronger trends that we historically see in the second half of the fiscal year. Moving to full year fiscal 2024 margin EBIT and cash flow outlook, we continue to expect consolidated gross margins of 82% to 83% and non-GAAP EBIT margin expansion of 50 basis points to 100 basis points year-over-year. We are also maintaining our expected full year free cash flow of $170 million. As of September 30, we had $174 million remaining on our existing share repurchase authorization, and we expect to continue with our existing practice of repurchasing at least 75% of our annual free cash flows. We view share repurchases as a primary use of excess cash. Year-to-date, we are pacing well ahead of our annual share repurchase target, and we intend to continue the share repurchase momentum during the current quarter. For additional details and trends on all of our key metrics, please take time to review our Investor deck contained in the Investor Relations section of our website. In closing, we've built a durable and multifaceted revenue model that should allow us to exceed ARR, total revenue, and earnings objectives over the long term. We are excited about the future, and we look forward to meeting many of you at our SHIFT events in New York City next week.

Aaron Rakers, Analyst

Thank you for the question and congratulations on the quarter's execution. I'm trying to gain a better understanding here. It appears that your updated guidance for ARR is slightly lower than your previous estimate of 24%, with the subscription side down to 27%. Additionally, revenue is also a bit lower at the midpoint. Could you elaborate on the reasons for this change in guidance?

Gary Merrill, CFO

Hey, Aaron, it's Gary. Good to talk to you this morning. I think specifically, I think you're asking about Q3, the Q3 outlook or the full year outlook first. Let me just clarify you are asking.

Aaron Rakers, Analyst

Yes, I'm talking more full year, the 24% versus prior 27 in the $408 million to $418 million versus the prior $420 million to $430 million.

Gary Merrill, CFO

Got it. Okay. Awesome. Well, first of all, let me just reflect a little bit on the first half. We're really pleased with the first half, especially where we ended up at fiscal Q2 on all of our guided metrics, making sure we accelerated past everything. From a full-year perspective, as kind of I thought about the second half in particular, coming off of the first half. I'm also pleased that we did raise our ARR guidance. Previously we were guiding to 13 instead of that to 14 as well as our total revenue also increasing our guidance on total revenue. A lot of that is reflective of a lot of the success even we're seeing on the SaaS business as well, right? When we drive that SaaS success and we're able to hit $131 million of ARR. A lot of that does not show up in reported revenue or reported revenue expectations. But as I think about the subscription revenue specifically, I think, directly at your question, there are a couple of things going on there. We are seeing fewer conversions, so conversions from our existing perpetual support contracts being converted to term software licenses. In today's interest rate environment, those conversions usually come with a multiyear commitment, doing a three-year commitment and some of the interest rate factors and the cost of money as well as where customers are in their cloud journey at the same time. So we're seeing just some declines year-over-year modestly on the conversion fees as well as the continued trends on term subscription length. So when we sell term subscriptions, our average term is now down to about two years. So while that keeps ARR total, and we see the momentum on ARR, it could have a little bit of a short-term impact on the reported revenue results. And then thirdly, just keeping in mind that we're watching the mega deal, the really big deal trends in the spending environment and being cautious on the procurement and approval cycles that are out there today.

Aaron Rakers, Analyst

Yes. That's very helpful. I appreciate that color. So maybe just the final question, sticking with that topic. How would you characterize the linearity in this quarter, the demand? Have you seen any customers push out projects or delay spending in this environment at this point, or is it just more cautionary on the macro, the geopolitical environment as more so we look forward?

Gary Merrill, CFO

More cautionary. We do not see trends that deteriorated. Our trends that we're seeing in the business on close rates and linearity are consistent with what we've seen over the past few quarters. But relative to the geopolitical nature of what's going on and just being cautious on the time it takes to close some of those big deals.

Howard Ma, Analyst

Thank you for the question. I would like to gain a clearer understanding of the lower subscription ARR and revenue guidance, as it appears to be the only negative aspect in an otherwise impressive report. I recognize the impact of fewer migrations from perpetual maintenance to subscription, but I didn't think this would have a significant effect. Can you provide insights on whether there are additional factors at play? For instance, were any deals pulled forward in Q2? Looking at the second half of the year, are you anticipating any delays in renewals? I believe this year has a heavy concentration of renewals in the second half. Additionally, with the ongoing strength in Metallic, wouldn't the continued performance in ARR help mitigate some of the losses from perpetual migrations? Thank you.

Gary Merrill, CFO

Thank you, Howard. First, I want to quickly address the SaaS aspect of Metallics. The Annual Recurring Revenue (ARR) has actually increased more than we've observed in recent periods. Specifically, the ARR for SaaS rose from $113 million to $131 million. This sequential increase is accelerating more than what we've seen in previous quarters. Additionally, the net dollar retention rate stands at an impressive 130%, which reflects our strong efforts in maintaining that figure. When I examine the subscription guidance, it's primarily influenced by fewer conversions. You can also see this in the robust performance in customer support revenue, which has surpassed our previous expectations. However, we are experiencing fewer conversions, about half of what we achieved last year based on our current pipeline metrics. This represents a transition in the customer environment and the average term length for our deals is now around two years.

Sanjay Mirchandani, CEO

Hey Howard, it's Sanjay. We're trying to be realistic about our outlook for the entire year. It’s just a mix shift. We added over 500 customers to the subscription mix in Q2. Metallic is growing very well, with a 77% year-on-year increase in ARR. So, don’t read too much into this; we’re just evaluating the pipeline and being practical about the potential mix shift. We had a strong quarter, and we've increased both ARR and revenue for the year. To me, it’s simply a matter of shifts in customer buying patterns, influenced by factors like interest rates or their cloud migration status.

Howard Ma, Analyst

Thank you, Sanjay, and Gary. I want to focus on Metallic because, as you mentioned, it had a really strong quarter with growth accelerating to 130%, up from 118% last quarter and 125% the quarter before that. Can you clarify the rank order of the growth drivers for Metallic between workload expansion and cross-sell of additional products? Also, while the growth rate is strong, it has been somewhat variable. Should we expect this kind of variability to continue going forward?

Gary Merrill, CFO

Hey Howard, it's Gary. I'll hit that. So, there's really good key things. The acceleration that we saw in Metallic's net dollar retention drove by a few things. There's the foundation, first of all, what I mean by the foundation is we're at the point now that we have a matured renewal motion. So, when we get that mature renewal motion and we see really strong renewal rates, it limits any of the downside on the net dollar retention. So, it's built with the foundation. And that foundation is really the focus on what we're doing on onboarding and adoption. So, driving to get the customers onboarded, get them to their first backup, get them fully adopted, then that drives the expansion opportunity. The other thing that we now have is an integrated motion between our customer success and our field sales teams. So, their customer success teams are driving the adoption with the field teams combined driving the expansion. So, it all starts on accelerating the time to first backup and the time to consumption. As I think about the split between, I'll use cross-sell and upsell, we're seeing the majority of the expansion being driven by, at this point, upsell, which is generally more of the same product. However, we're now seeing more than 2x growth on some of those mission-critical or the emerging workloads that we see whether it's sales force dynamics, threatwise, hybrid cloud, databases. The dollar value of those are now up 2x year-over-year. So it's less of a contribution because it's less of a percent of the total, but the contribution now is starting to become material, even though the majority of it is driven by upsell. So we're getting it from all ends. Just in summary, we're getting that mature renewal motion. We're getting the upsell, getting them adopted, so we can get expand on more of the same products. And now we're starting to see the cross-sell start to kick in as well.

Howard Ma, Analyst

Okay. Thank you.

Sanjay Mirchandani, CEO

I would like to provide some insights on the SaaS business. It is driving our growth and performing well, allowing us to acquire hundreds of new customers each quarter. Our integrated security capabilities within our delivery platform, Metallic, are also doing well. We're making investments for future mission-critical workloads. A recent report noted that we have more hyper cloud and mission-critical workloads available, which presents significant competition. It's important to stay ahead of customer needs and be prepared for the workloads they wish to protect, and that is precisely what we are striving to accomplish. Regarding our net revenue retention, we previously mentioned that it might have been an anomaly, but we believe we’ve returned to a normal pattern and will continue to focus on it. As this business is just three years old, we’re pleased with its current state, but we have much more to achieve.

James Fish, Analyst

Hey guys. Thanks for the questions. Maybe building off of the past couple here. I guess, how should we be thinking about net retention rate for Metallic this year and sustainably, like what are you guys internally kind of targeting for the next couple of years? Just trying to understand if some of this material boost in net retention rate is just catch-up from last quarter, for example, or sustainable. And two kind of the points you both have made here, what makes you confident that some of the Metallic strength here isn't due to substitution of your term business, especially if we're talking more mission-critical workloads moving onto Metallic?

Gary Merrill, CFO

Yes. Hey Jim, it's Gary. I'll start off by saying that we’re not providing specific guidance on this asset. If you look at our SaaS business, which is around $130 million in net revenue retention, world-class net revenue retention rates typically fall between 120% and 130%. I believe 130% is on the high end for what we can sustain, particularly as our base continues to grow each quarter. If we can maintain a range between 100% and 125%, which brackets last quarter and this quarter consistently while working towards that, I think that would be a reasonable expectation. We are observing...

Sanjay Mirchandani, CEO

We have – less than 120 to 125.

Gary Merrill, CFO

Yes, just to clarify that Jim, we are starting to see good growth in the hybrid cloud mission-critical workloads and in our SaaS business. Currently, this growth is incremental and not significant enough to cannibalize term-based software licenses from an actual deal perspective. Customers are still in the early stages of their cloud journey and are taking their time, which is reflected in the average selling prices and the duration of deals. They are carefully measuring their spending and only committing to short-term periods based on what they anticipate in the near term.

James Fish, Analyst

Got it. That's helpful. Can you clarify what occurred at the end of the quarter that led to an acceleration in SaaS ARR, while we noted a deceleration in Metallic revenue, which is now outpacing ARR? Was it primarily a back-end loaded quarter for Metallic? Given the 77% ARR growth, should we anticipate stable revenue growth for Metallic in fiscal Q3 compared to fiscal Q2?

Sanjay Mirchandani, CEO

No, I think it is stable. Any Metallic contracts we signed in the second half of the quarter have very little revenue impact. Therefore, linearity has less of an impact because there isn't much of anything after the first half of the quarter or linear to Metallic compared to prior quarters. So, nothing unusual there.

Rudy Kessinger, Analyst

Hey thanks for taking my questions guys. It's great to see the dollar-based net retention rate rebound on Metallic. I guess the flip side of that is when I look at the growth in Metallic ARR from new customers, both on a dollar basis or as a percentage point of growth basis, it was down this quarter versus last quarter. I know your subscription customer adds continue to be about five quarter. But if you look at your new customers on Metallic, are you seeing customers start smaller just given the macro conditions and financial constraints that customers have, or what are you seeing from a new perspective on Metallic?

Gary Merrill, CFO

Hey Rudy, it's Gary. I'll hit that and good to hear from you. At the first half of the year, we're in a good shape Metallic on the new customer. I think probably somebody your math hit it on. We were probably a little stronger in Q1 on new customers. And then in Q2, existing customers were relatively a little stronger than new. But over the first half, that's kind of now evened out. And a business this young, it's hard to look at just one quarter as a long-term trend. We look back over two, three, four, five quarters to make sure that our trajectory on both our new existing or happening, and we're pleased with where that is. So, we're not reading into the one quarter. We still saw over 500 subscription new customers added during the quarter, and the vast majority of those are SaaS. So, we're still seeing it. Now, yes, the deal sizes and the ASPs are smaller. They're smaller, but we're okay with that because if I go back to the commentary I made on the net dollar retention and that focus on adoption, time to first backup recovery and then driving expansion and workload expansion, we're betting on the future and our ability to drive that expansion as well.

Sanjay Mirchandani, CEO

And this is Sanjay, Rudy. The smaller ASPs is kind of part of the plan because we have a velocity business where we land smaller deals. We have marketplace business, which a smaller deal. We have MSPs that bring in smaller deals that we expand over time. So, it's a mix. We sell to the enterprise and we sell through MSPs. We said we've got the whole range.

Gary Merrill, CFO

Yes. So we're not giving obviously the longer-term guidance. But even if I talk a little bit about what we saw in Q2, what we saw in Q2, you can kind of interpolate that our term license offer grew double-digits, right? So within subscription, our term software license grew double-digits, and that's with are conversion down substantially year-over-year. If you look at the guidance that I gave for fiscal Q3, the quarter that we're currently in, it's a very similar trend, where we're guiding to roughly double-digit within there will be double-digit term software growth year-over-year with the same situation, conversions down year-over-year. So we're driving that growth and we're doing that regardless of the conversions. The conversions are a little variable in there, which is fine. I think they'll stabilize over time. We're just kind of giving scenarios based on currently what we see and where we see customers kind of in that journey.

Sanjay Mirchandani, CEO

There are certainly customers who are navigating the hybrid cloud journey, facing difficult decisions as they rearchitect, rebuild, shift, and migrate mission-critical workloads to the cloud. This process is challenging. Next week, we will discuss how we plan to support customers in this journey. Considering the complexity involved, if I were the customer, I would think about the need to reach the other side before making any decisions. When examining aspects like the license model or transitioning from software to SaaS, these are significant choices in the hybrid cloud experience. Additionally, security and cyber risk are important factors, and we are well-equipped to assist customers through this process, which is reflected in the momentum of our security capabilities, with 500 new customers added to our software, subscription, and SaaS platform. I wouldn't read too much into it; these customers are essentially in the midst of moving from one phase to the next, reaching critical mass, and that’s what you’re observing.

Rudy Kessinger, Analyst

That's helpful. Thanks for taking my questions and congrats on the good SaaS figures in the quarter.

Sanjay Mirchandani, CEO

Thank you.

Gary Merrill, CFO

Thanks, Rudy.

Eric Martinuzzi, Analyst

Yes. The perpetual license for the year, I think in past quarters, you've talked about expectation for $40 million to $50 million for fiscal 2024. Given you're at about $27 million here at the midpoint, are you still thinking in that $40 million to $50 million range?

Gary Merrill, CFO

Yes, Eric, it's Gary. That's correct. The trend we've observed in the first half of the fiscal year should continue similarly in the second half, possibly at a slightly reduced pace as our focus is now fully on driving the term subscription and SaaS business. We still have some verticals that continue to purchase perpetual licenses, but those verticals are becoming more limited each day. Therefore, the range of $40 million to $50 million remains intact.

Eric Martinuzzi, Analyst

Okay. But given the $27 million in the front half that would mean 23% would be the metric you would expect?

Gary Merrill, CFO

Yes, it would be the high end of the range. Yes, we'll be the high end of the range. Yes.

Eric Martinuzzi, Analyst

It seems that international revenue was up 12% this quarter. I'm curious to know if you think this is just a return to the average, or if we can expect it to continue outperforming for the rest of the year.

Gary Merrill, CFO

Yes, I'm happy to address that. It's great to see both of our regions performing well. Our Americas business increased by about 4%, and our international business saw a 12% rise. Both areas are experiencing growth, contributing to an overall revenue growth of around 7% year-over-year, which we are pleased about. Our EMEA business is also showing growth, and we are noticing a strong uptick in subscription adoption. Initially, the Americas market was more developed, but now international markets are showing robust subscription growth. The deal sizes in the international sector tend to be smaller compared to the Americas. Therefore, the volatility we experience with large deals in the Americas and the topics surrounding term lengths are not as pronounced in international markets, which allows us to maintain strong momentum in those areas.

Eric Martinuzzi, Analyst

Got it. Thanks for taking my questions.

Gary Merrill, CFO

Thanks, Eric.

Jason Ader, Analyst

Thank you. Good morning, everyone. I wanted to start by asking about the forecast for customer support revenue. As the proportion from term increases, do you anticipate the year-over-year decline to begin to level off? You experienced a 9% drop in customer support revenue in fiscal 2023, and the projection for this year may be slightly lower. However, do you expect that as we progress into 2025 and 2026, the declines will continue to moderate?

Gary Merrill, CFO

Yes, Jason, it's Gary. I'll address this question as well. If you look at the actual results for fiscal Q2, you'll see that the decline is one of the smallest we've experienced in a while. The main reason for this is that a larger portion of our customer support revenue is now coming from term software licenses. This year, we expect that customer support revenue related to term licenses will be around 45% to 50%. As we move into the next fiscal year, we anticipate that the majority of our customer support revenue will come from term-related contracts. This shift should help stabilize the impact on our overall revenue growth. A significant part of our revenue growth hinges on customer support. As we progress into the next fiscal year and the following one, we expect the decline year-over-year to be considerably less than what we've seen in previous years, including this year.

Jason Ader, Analyst

Got you. So the main significant challenge will be the perpetual license line. You mentioned that this year, perpetual license revenue is expected to be in the range of 40% to 50% at the higher end. Looking ahead to 2025 and 2026, do you anticipate that this will continue to decrease modestly, or do you think there will be a more pronounced decline?

Gary Merrill, CFO

Modest. I think it will be modest. There will be similar to the impacts on total revenue as the customer supports us. If we end up somewhere, say, this year at the high end of that $40 million to $50 million, call roughly $50 million. Then as we get into next year, we're likely to be in that range, but probably more towards the lower end of that range. So you're talking variability is not significant on a revenue number that's obviously over $800 million.

Sanjay Mirchandani, CEO

Sure. For that particular segment, we've previously mentioned that we've invested in a velocity motion, which involves both internal sales representatives and a channel strategy to enhance our engagement with smaller customers. Additionally, we've been collaborating with a growing managed service provider community, and many customers prefer to interact through that channel. Lastly, as major cloud providers promote their marketplaces, we see customers accessing software and SaaS offerings through those platforms. These are just a few examples of how we're making our technology more accessible to customers based on their purchasing preferences.

Jason Ader, Analyst

And one quick follow-up and I'll see the floor. But on the metallic business, Sanjay, can you give us a sense of how much of that business is coming from sort of SMB mid-market customers versus enterprise?

Sanjay Mirchandani, CEO

I think it's been fairly consistent that our business is approximately one-third enterprise, one-third mid-market, and one-third SMB. This isn't necessarily by design, but it appears to be the case. I'm actually quite pleased with it because it reduces risk for our business and also allows us to grow in areas we haven't historically focused on, such as SMB and the lower mid-market.

Tom Blakeley, Analyst

Thank you for taking my question. Sanjay, could you revisit your earlier comments about the hybrid cloud journey? Is this specific to our company, or can you discuss the broader industry perspective? It appears that things are getting more complex, and there's been a bit of a pause. However, hybrid cloud spending has increased in the last few quarters or longer, coinciding with a slowdown in public cloud spending generally. I would appreciate any clarification or insights you could provide. Additionally, for Metallic, could you break down the NRR between capacity growth and new services? Lastly, regarding security, is it affecting that NRR, or is it too early to tell?

Sanjay Mirchandani, CEO

Let me process those points. In terms of the hybrid cloud journey, I see it as a trailing indicator. It's primarily about utilization and the workloads that customers are committing to in the hybrid or public cloud services. We're assisting customers with these challenging transitions because as the simpler workloads migrate to the cloud, the process of moving entire mission-critical capabilities becomes increasingly complex when relying solely on public or hybrid cloud services. We're helping customers in various aspects, whether it's data migration, infrastructure, data security, or leveraging intelligence and data management across their systems. There are numerous opportunities that the hybrid cloud can provide, and we're involved in many of these use cases and outcomes. It’s not simply a matter of whether there is an increase or decrease in spending on public cloud services; it’s about ensuring that customers derive the expected value from their journey to the cloud. Having been a CIO, I understand that moving mission-critical workloads to the cloud or any platform is complex and requires careful planning and decision-making. That’s where we aim to support our customers. I want to pause here. Did I address your question?

Tom Blakeley, Analyst

Yeah. Yeah. Just maybe a follow-up there, before we get to the NRR, does that imply from a trailing indicator perspective that there might be some pent-up demand for Commvault in that regard?

Sanjay Mirchandani, CEO

I would hope so. As customers transition to the cloud, we will be addressing key aspects of their journey, including the tough decisions they face and the challenges they encounter with data. They may have to choose between software and SaaS solutions, and consider security models that utilize AI. These recovery capabilities are essential for cyber resilience, and they have to make important decisions as the shift to the cloud continues to grow for our customers. We aim to stay one to two steps ahead in anticipating their needs. So, I would hope so.

Gary Merrill, CFO

Sure. Hey Tom, Tom its Gary, I'll take that one. Relative to the 130% of net dollar retention, as you think about the drivers of what drove that from an upsell versus cross-sell, about two-thirds of that comes from upsell. Meaning, upsell more of a similar capacity or licenses or seats and about third or roughly there comes from cross-sell, which benefits from the cross-sell motion, whether it be dynamics, whether it be our security offering, the hybrid cloud for VMs or databases, they're all contributing factors. Absolutely, security is part of that. But we're seeing a little bit more on the upsell and about a third of that expansion is not driven from cross-sell.

Tom Blakeley, Analyst

Thanks, Gary. Thanks guys.

Michael Melnyk, Head of Investor Relations

Thank you for joining the call today. If you have any follow-up questions, feel free to reach out to me. Also just a reminder, if you haven't yet registered, the live event will be November 8, in New York City and then, the replay for shift will be on November 9, visit commvault.com to register. Thanks for joining. Appreciate it.

Operator, Operator

This concludes today's conference call. Thank you for your participation. And you may now disconnect.