Commault Systems, Inc. 2027 Q2 Earnings Call

You may begin. Good morning, and welcome to our earnings conference call.

Before we begin, I'd like to remind you that the statements made on today's call will include forward-looking statements about Commvault's future expectations, plans, and prospects. All such forward-looking statements are subject to risks, uncertainties, and assumptions. Please refer to the cautionary language in today's earnings release and Commvault's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward-looking statements. Commvault does not assume any obligation to update these statements. During this call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between the non-GAAP and GAAP measures can be found on our website. Thank you again for joining us. Now I'll turn it over to our CEO, Sanjay Mirchandani, for his opening remarks.

Sanjay? Good morning, and thank you for joining us.

Before reviewing the results, I'll take a minute to discuss the broader context. We believe that Commvault sits at the intersection of long-term market trends that are driving our momentum. Massive data growth, IT complexity, and AI accelerating innovation and risk at scale. All of this makes the need for resilience more critical than ever. Our platform, which unites data protection, data security, identity resilience, and recovery, helps us win customers, deepen relationships, and meet evolving enterprise needs. Our strategy is working. We delivered solid results ahead of our guided metrics and build momentum across the business. A few highlights from the second quarter include subscription ARR grew 20% to $1.104 billion. SaaS ARR grew 35% to $454 million.

Subscription revenue grew 21% to $269 million, and we generated free cash flow of $71 million in the quarter. We're growing at scale, expanding margins, and generating strong cash flow. We believe the combination reflects the strength of our platform and the durability of our model. As you'll hear from Gary, we're raising our full-year outlook, which demonstrates our confidence in what lies ahead for Commvault. Before we get into that, let's discuss the growth drivers that featured prominently in our Q2 results. First, subscription customer growth. In Q2, we added over 500 subscription customers, representing 17% growth year-on-year. Enterprises are prioritizing investments in cyber resilience and recovery. Customers are telling us that when disruptions occur, they must be able to operate in the state of continuous business.

That's why organizations continue to move away from legacy and point solutions and embrace innovation from Commvault. Case in point, a Fortune 500 insurance carrier wanted to advance resilience and stay ahead of evolving security requirements. The customer chose Commvault over the legacy vendor in this multimillion-dollar subscription deal for three reasons. One, our cyber resilience solution demonstrated exceptional time to recovery at scale, which competitors could not match. We enabled the customer to consolidate incumbent vendors and other point solutions on our platform. And three, we helped the customer reduce risk and complexity. This leads to our next growth driver, multi-product adoption. Today, more than half of our managed SaaS customers are using more than one offering from Commvault. This is an important indicator of the opportunity ahead. Our strategy is to add customers and deepen relationships over time.

With nearly half of our managed SaaS customers using just one product, we believe significant expansion potential remains. As our customers look to reduce complexity and risks, we see more opportunities to deliver value on our platform. We believe this land and expand motion can drive durable long-term growth. In addition to foundational products like M365 Protection and Air Gap Protect, customers are rapidly embracing our cloud-centric protection offerings like Clumio for AWS and Google Cloud and protection for SaaS apps like Azure DevOps, Microsoft Dynamics, and Google Workspace. As a result, customers are realizing greater value as they expand with Commvault. For example, after assessing recovery objectives and cost requirements, a top 50 global asset management company expanded its portfolio and SaaS footprint with Commvault. This transaction included Clumio, Operational Recovery, and Air Gap Protect.

The customer realized greater storage flexibility and better TCO than its prior multi-vendor solution. In another example, an existing Clumio customer wanted to consolidate its fragmented data protection architecture. The goal, improve visibility and recovery times while reducing costs. To support the customer's evolving needs, we signed a multi-year expansion agreement to protect workloads including M365, Hyper-V, as well as Okta and Active Directory. That dovetails into our third growth driver, which is focused on identity resilience and data security. As we stated in previous quarters, identity is a primary entry point for attackers and a growing area of enterprise risk. Recent data shows that nearly 80% of ransomware attacks start with compromised identities. At the same time, non-human identities exponentially outnumber human identities. That's why customers are adopting our solutions to make sure that critical systems are resilient and available after an attack.

For example, an existing Commvault customer, one of the nation's largest integrated healthcare systems, added our Active Directory offering across its global data centers for faster automated recovery. This was our largest Active Directory transaction to date and contributed to the ARR growth we're seeing with identity, which nearly doubled year over year. When we look at our growth drivers, the common theme is the same. Customers need to keep critical data, identities, agentic workflows, and applications protected and recoverable. This is why Commvault shines. We're also seeing that our conversations with customers and prospects continue to evolve. They want to know how we can help them deploy AI with confidence while mitigating risks. We'll share more about the growing importance of AI resilience and cyber recovery at our upcoming SHIFT conference in Nashville from November 10th to 12th.

We will also unveil groundbreaking innovations, new partnerships, and feature prominent AI visionaries from Anthropic, AWS, Databricks, Microsoft, NVIDIA, and others. We hope you can join us in person or virtually. Before I turn it over to Gary to discuss the financials, I will leave you with this. We believe that AI creates opportunities to expand our total addressable market as enterprises wrestle with more data, more identities, and more agentic activity. It is also a great moment to participate in initiatives that advance resilience across the industry. To that end, we are proud to be part of Anthropic's Project Glasswing. This expands our use of frontier AI models to include Mythos. Finally, we believe our relentless focus on execution will continue to deliver durable, profitable growth, and strong free cash flow. This gives us the confidence to raise our full-year guidance.

With that, I will turn it over to Gary to walk through our results and outlook in more detail.

Thank you, Sanjay, and good morning, everyone. Q2 was a strong quarter with solid execution and continued momentum across our SaaS and term software businesses. All three growth pillars contributed to the quarter: new customer additions, upsell and cross-sell, and continued momentum from our newer offerings. First, let me walk through our fiscal Q2 results in more detail, starting with subscription ARR and free cash flow, our North Star metrics. As a reminder, we believe these metrics are best evaluated on an annual basis, which aligns with how we plan and manage the business. Subscription ARR increased 20% to $1.104 billion. On a constant currency basis, we delivered $51 million of net new subscription ARR, driven by continued strength in our SaaS offerings and improved performance in our term software business. Notably, our term software business net new ARR improved to $21 million on a constant currency basis.

This was driven by continued strength in new customer wins, as well as conversions improving to normalized levels. Our SaaS business contributed $30 million to our net new subscription ARR. As a result, SaaS ARR grew 35% year-over-year to $454 million, reflecting new customer growth, multi-product expansion from existing customers, and double-digit growth in ARPA or average revenue per account. We continue to make steady progress in multi-product adoption, a core pillar of our growth strategy. As of Q2, 53% of Commvault Managed SaaS customers are using two or more products, up from approximately 45% a year ago. Subscription ARR growth continues to be supported by the uptake of our identity resilience and data security offerings, which represented approximately 30% of net new subscription ARR. We are also seeing increased contribution from emerging cloud-centric and application-based protection offerings.