CommVault Systems, Inc. Aktie

Hello, and welcome to the Commvault Q4 Full Year 2026 Earnings Conference Call. [Operator Instructions] Now I would like to turn the call over to Mike Melnyk, Vice President of Investor Relations. Please go ahead, Mike.

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 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. All 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. We had a strong finish to the fiscal year, delivering results at or above our guided metrics while continuing to build momentum across the business. In the fourth quarter, subscription ARR increased 27% to $989 million. This was led by another quarter of strong growth from our SaaS business, which grew 42% to reach $400 million in ARR milestone for Commvault -- subscription revenue grew 20% to $208 million, and we generated a record free cash flow of $132 million in Q4, resulting in $237 million for the fiscal year. We're growing at scale while also generating strong profits and cash flow.

We believe this combination reflects the health of the industry, the strength of our platform and the durability of our model. Now let me take a step back and talk about what's driving this momentum. In 1 word, its data. Data is the lifeblood of every organization. When it's down due to an outage cyber attack or human era, business comes to a halt.

Organizations today are facing a variety of challenges with their data. First, data is scattered across environments, on-premise, at the edge and in the cloud, expanding the surface for bad actors. Second, cyber attacks continue to grow in volume and sophistication. -- adversaries are getting smarter and stronger. Compromise is almost certain. Third, Identity has become 1 of the hottest new threat factors. This is compounded by AI as nonhuman identities outnumber human identities by 50 to 1.

Commvault helps organizations address today's challenges by protecting, identifying, securing and when needed, rapidly recovering their data. But these challenges aren't static. With the rise of AI, we're in the most important technology shifts in modern history. AI creates more data, more access and more risk directly increasing demand for protection, governance and trusted recovery. We see AI as a powerful tailwind for Commvault because it -- the importance of what we do. In an AI-driven world, if your data is compromised, your AI is compromised.

Commvault provides the picks and shovels that empower customers to adopt AI security and responsibly. We do this in a variety of ways. We protect the data sets used for AI and a broad spectrum of AI workloads. help customers leverage AI to detect threats faster, recover at greater scale and automate resilience operations. We help customers activate AI data security for use with models and agents, and we bring governance to AI data. For example, with our Satori acquisition now fully integrated to the Commvault Cloud, customers can monitor and enforce agents at the data.

Additionally, as customers embrace and deploy AI, they're also focused on simplifying their technology stack. Enterprises don't want a patchwork of fragmented tools and products. They want the best unified platform to bring it all together, Commvault Cloud. Combo Cloud unifies data protection, data security, identity resilience and recovery all on 1 scalable control plane.

Increasingly, more customers are standardizing on our platform as evidenced by growth we see across the business. Let me shine a light on some of the major growth drivers for Commvault, which will extend into fiscal year 2017 and beyond. First, we continue to add new subscription customers to our platform. Second, we're expanding and driving multiproduct adoption across our SaaS states. And third, we're seeing strong momentum with emerging revenue streams, including identity resilience.

Now I'll discuss each of these in more detail. First, we added over 2,500 subscription customers in fiscal year '26. The growth-oriented investments we made over the past 2 years paid off. In the on-prem market, we're winning against other vendors while seeing customers return to Commvault after upstarts failed to live up to the high. For example, in Q4, 1 of the world's top 50 law firms returned to Commvault because enough start overpromised and underdelivered on products that quote on the road map and did not work.

This customer is now leveraging our software and SaaS solutions, including a complete suite of data security, identity resilience and recovery offerings. Second, we're making steady progress in driving multiproduct adoption. A core pillar of our growth strategy. This is especially true in our SaaS business. The percentage of Commvault managed SaaS customers using more than 1 offering increased to 48% and PAUSE a 500 basis point improvement from Q4 of last year. For example, in Q4, we added a large virtual charter school that could not securely or efficiently manage its multi-cloud architecture with native hyperscaler tools.

Lithos Commvault to help manage their multi-cloud estate with the addition of airgap, threat scan and cleanroom recovery to meet the resiliency requirements. In fiscal -- we're doubling down and incentivizing our sales force to build on this multiproduct momentum. Third, in terms of monetizing new offerings, we're seeing healthy momentum as identity becomes we target for actors.

Our active directory enter ID and office solutions are landing new customers and expanding existing. In Q4, Active Directory was once again 1 of our fastest-growing SaaS offerings with AR more than doubling year-over-year. And collectively, our identity resilience and data security offerings represented 33% of net new ARR in Q4. For example, after a competitor suffered a crippling ransom or attack, a Fortune 500 retailer determined its resilience posture was too complex and costly.

In Q4, they purchased Commvault's active retro protection because it provides lower TCO and reduced recovery time from 2 days to under 90 minutes. As identity threats continue to evolve, this will continue to be an area of focus and innovation for us in fiscal year 2017. In closing, Commvault provides customers with a single unified platform that it's essential for today's diverse data environments and tomorrow's AI-driven applications.

Let me leave you with a few key takeaways. First, the market is getting bigger by the minute. AI is driving more data, more complexity and more risk, increasing the need for resilience as data grows, so as combo. Second, Combo Cloud is the differentiator. Customers are consolidating fragmented tools and standardizing on a single platform for data protection, data security, identity resilience and recovery. And third, we're delivering durable high-quality growth. We're scaling SaaS, expanding within our customer base and doing so with improved margins and strong cash flow.

That is why we believe we are well positioned to win in the AI era. And now I'll turn it over to Gary Merrill, who's back as our CFO, to discuss our results and outlook. We welcome him and Jeff Hayden as our new President of Customer and Field Operations. Gary?

Good morning, and thank you for joining us. For those who have not yet met, I served as Commvault's CFO from 2022 through 2024 before moving into the Chief Commercial Officer role. I'm excited to return as a -- especially as we close fiscal year '26 with strong momentum. I look forward to working with you as we continue to drive disciplined execution to capitalize on the growth opportunities ahead.

Our Q4 results demonstrated accelerating SaaS growth, improved profitability and record free cash flows. I will discuss our Q4 and fiscal year 2026 financial metrics using our existing reporting definitions. Additionally, please note that we will transition to the new financial reporting effective fiscal 2021 that was discussed later in my prepared remarks.

Turning to our fiscal Q4 results. I'll start by discussing ARR and free cash flow, which we believe are the North Star metrics. We encourage you to evaluate these metrics on an annual basis, which is aligned to how we plan and manage our business. In Q4, subscription ARR increased 27% and to $989 million. On a constant currency basis, using FX rates for March 31, 2025, we added $53 million of net new subscription error. Our strongest performance of the fiscal year.

Within subscription, our SaaS ARR had a major milestone, growing 42% to $400 million, reflecting both new customer growth and healthy expansion from existing customers. We continue to make meaningful progress in multiproduct adoption, a core pillar of our growth strategy. As Sanjay noted, 48% of Commvault managed SaaS customers are using more than 1 product. This adoption is supported by a strong uptake of our identity resilience and data security solutions, which represented 33% of net new ARR.

Our SaaS net dollar retention improved to 122%, highlighting our ability to expand within existing accounts. Total ARR, which includes subscription ARR and the maintenance associated with perpetual licenses increased 21% to $1.12 billion. On a constant currency basis, using FX rates as of March 31, 2025, we added $44 million of net new total ARR during fiscal Q4. Moving to free cash flows. Q4 rebounded to a record $132 million, reflecting strong collections aligned with focused working capital management.

Full year fiscal 2026 free cash flows were $237 million, growing 16% year-over-year. In Q4, we accelerated our stock repurchases to 3 million shares for total consideration of $259 million, reflecting our confidence and focus on delivering long-term shareholder value. This brings total fiscal year 2026 fixed repurchases to $446 million, representing over 4 million shares.

Now I'll discuss our income statement performance. Q4 total revenue increased 13% to $312 million. Subscription revenue grew 20% to $208 million, led by a robust 43% growth in SaaS revenue to $93 million. Pure software license revenue grew 6% against a challenging comparison driven by strong renewals and existing customer business. We continue to see strength in large enterprise accounts, with revenue from transactions over $100,000, increasing 9%, driven by higher deal volumes. Turning next to profitability. Q4 consolidated gross margin -- expanded 30 basis points sequentially to 81.8%. This reflects continued improvement in SaaS hosting margins driven by scale efficiencies and ongoing product optimization.

Q4 operating expenses increased 11% to $187 million, representing 60% of revenue, an improvement of 100 basis points year-over-year. This reflects benefits of our past optimization program aimed to expand margins and allow for reinvestment in strategic growth initiatives. Non-GAAP EBIT in Q4 was $66 million, representing a non-GAAP EBIT margin of 21.3%. Looking ahead, we are entering fiscal year 2027 with strong momentum. With our subscription transformation largely complete, our financial priorities are to scale subscription ARR, expand margins and increased free cash flow.

Before reviewing our outlook for fiscal year 2027, I will briefly discuss 3 updates to our financial reporting that will be effective in fiscal Q1. These changes are outlined in our earnings press release and on Slides 25 to 27 in our earnings presentation. First, we have recast certain revenue and ARR classifications. The primary adjustment removes all term sulfur-related support revenue into subscription revenue alongside term software licenses and SaaS revenue. Perpetual support revenue is now presented on its own line in our P&L, which directly correlates to our nonsubscription-based revenue and ARR offerings.

These recast changes are being made to, one, provide a consistent view of our offerings across subscription revenue and subscription ARR. Secondly, align financial reporting with our subscription-based business model. And finally, they reflect how we manage internally. There are no changes to the total revenue or total ARR for any period presented.

Under the recast presentation for fiscal year 2026 Subscription revenue was 82% of total revenue and subscription ARR was 90% of total ARR. To assist with year-over-year comparability, of our new financial reporting effective in fiscal year 2027, we have provided a 2-year quarterly look back in our earnings press release and earnings presentation, all of all recast events.

For modeling purposes, an excelled download is also available on the Investor Relations website. The second change in our financial reporting is to streamline our KPI framework with emphasis on 4 key guided metrics, subscription ARR, free cash flow, subscription revenue and non-GAAP EBIT. We will also provide supplemental total revenue and diluted share count guidance to assist with P&L modeling. Going forward, we will no longer disclose the total ARR as the remaining perpetual maintenance stream will be less than 10% of our business. In addition, our subscription ARR guidance will no longer peg to the beginning of the fiscal year FX rate.

The final change to our fiscal year 2020 reporting will be a transition to subscription net dollar retention measured on an annualized basis. This includes both our term software and SaaS offerings and will align net dollar retention metrics with our subscription ARR and revenue disclosures. For context, fiscal year 2026 subscription net dollar retention measured on an annualized basis was 114%. I'd like to reiterate that we will guide subscription ARR and free cash flow annually, which matches our business planning and management approach. Perm software accounts for most of our ARR and upfront revenue. So quarterly results may fluctuate due to factors such as the mix between software and SaaS transactions, renewal timing and shift in contract duration in any discrete quarter.

Typically, these fluctuations even out over the fiscal year. Now moving to our fiscal 2027 outlook using our new financial reporting. For fiscal Q1, we expect subscription revenue of $263 million to $265 million, representing approximately 15% year-over-year growth at the midpoint. This would result in approximately $310 million of total revenues.

We also expect EBIT margins of approximately 19% and a diluted share count of approximately 42 million shares. For the full fiscal year 2027, we expect subscription ARR growth of 18% to 19% year-over-year, representing a range of $1.20 billion to $1.21 billion. Our subscription ARR growth percentage will continue to be led by our SaaS offerings, which we expect to exceed $0.5 billion of ARR by the end of fiscal 2020.

We expect subscription revenue in the range of $1.115 billion to $1.125 billion. representing approximately 15% year-over-year growth at the midpoint. As I mentioned earlier, we will also guide total revenue to assist with financial models. We expect total revenue of $1.30 billion to $1.31 billion. PAUSE In addition, for fiscal 2027, we expect non-GAAP EBIT margin of 20.5%, free cash flows of $250 million to $260 million weighted towards the second half of the fiscal year and diluted share count of approximately 42 million shares.

Finally, our Board refreshed our share repurchase authorization for $250 million. We currently expect to allocate approximately 60% of annual free cash flow to share repurchases, subject to market conditions. In closing, I'm excited to return the CFR role and look forward to working with you as we continue to execute with discipline and capitalize on our growth opportunities ahead. We operate in a large and growing addressable market. There is meaningful potential to acquire new customers and expand with our installed base to increase multiproduct adoption. I'm focused on executing those opportunities with a clear path to continued margin expansion and strong free cash flow generation while driving shareholder value.

With that, I'll open the call for questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Todd Weller with Steve.

Thanks for the question. You mentioned kind of the success with multiproduct sales and changes in compensation. Could you walk us through at a high level, your FY '27 kind of sales comp structure and kind of what behaviors you're trying to drive differently versus FY '26..

Todd, it's Gary. Thanks, Amit. I will take this. I'll hit the multiproduct question that you were asking. But before I do that, I'll hit sales compensation. First, we don't disclose the discrete components of our compensation plan. But what I can tell you is that our compensation plan in the field is geared towards 2 items specifically. The first is new customer acquisition.

And the second is cross-sell. So platform expansion in our hybrid environment. So these are the 2 key pillars of our compensation plan for FY '27. As we look back to FY '26, we're seeing great progress that we want to build off on multiproduct expansion, especially with our customers that are now licensing at least 2 of our SaaS products. PAUSE that's now approaching 50% of our SaaS customers and our ability to cross-sell and the opportunity to drive growth and cross-sell is a key pillar of our FY '27 strategy.

And our next question comes from the line of Aaron Rakers with Wells Fargo.

Yes. I have 2 real quick. I guess maybe going back to late last year, I'm curious with your cloud Unity platform, what you've been seeing in terms of customer engagements, customer interest? Any kind of metrics you can share on those platforms? Obviously, the Satori acquisition. And just curious as we think about these multiproduct platforms do -- what you've seen in terms of the products introduced late last year.

Sure. Again, when we think about what we announced at unit -- the objective number 1 is to drive customer engagement. So to give the ability for our customers to leverage our platform now truly across any workload, whether it's on-premise or in the cloud. And our primary measurement of that is really driving new subscription customer growth, okay? So we've added about 2,500 new subscription customers in the past months. This quarter alone, it was roughly 600. And then how we start to monitor and measure that going forward will be across metrics of multiproduct adoption.

As well as our ability to cross-sell. So not just upsell because now we're starting to see the acceleration on the cross-sell motion as well.

Let me -- Aaron Sanjay here. Let me just add a little bit more to that. So the platform, if you remember, the Unity in the platform was about making sure we could give customers a singular capability to take data security, identity resilience and data recovery as 1 unified offer, whether they deploy it in SaaS or they deploy it on-premise.

Just -- and identity resilience and security, as an example, represented 33% of our net new ARR last quarter. And we also added hundreds of Active Directory customers. Our ARR on Active Directory doubled year-on-year, and it's 1 of our fastest-growing offers in the history of the company. So without getting into absolute specifics, it gives you a sense that the design of Unity is exactly where customers are leaning in.

Yes. And then maybe as a quick follow-up. Gary, now that you're back in the CFO seat. I'm curious, I know you gave guidance for the full year at 20.5%. And operating margin. How do you think about the leverage that you see in this model? Is there any kind of thoughts of driving incremental operating margins? Could we see maybe mid-20-plus percent operating margin in the Commvault story as we look forward?

Eric, thanks for the second poll question. First, Guidance for FY '27 to 20.5%. Our belief when thinking about guidance is setting our guidance at the level that we believe and that we're confident that we contain, as we think about long term, especially as we scale our SaaS platform, there is leverage in this business model. AI from both an internal perspective and a customer's objective, will give us great operating leverage opportunity. AI is driving data growth.

It's driving efficiencies in our product, and it's driving efficiencies in how we talk to customers every single day. So the short answer is yes. We're not at the point where I'm ready to give multiyear guidance, but at baseline of 2.5 is a good starting point, and we look to expand on that from there.

And our next question comes from the line of Michael Romanelli with Mizuho Securities.

Just maybe on the '27 guide, can you walk through some of the top line puts and takes for us? And as part of that, you announced some recent leadership changes, obviously. How does that factor into the thought process and logic around setting guidance? And I have a follow-up.

This is Gary. I'll take the first part. If I zoom up and maybe go very at the macro level and as we thought about our plan for FY '27, our objective is to build durable growth, okay? So the plan is built along the foundation of durable growth. There's 3 pieces that will help us drive those growth vectors. First is AI data growth. So AI is driving massive amounts of data growth. That becomes a tailwind to our business.

When you combine that with the complexity of hybrid environments, it makes what we do from a resiliency perspective, even more important. And then when you add the third vector of AI cyber-led attacks, which brings in the resiliency and security aspects, you have 3 growth vectors that build the foundation of the plan. As we think about how we measure that success, you heard in my prepared remarks about our North Star metrics of subscription. So that is the key way we will measure it. We're a hybrid business, and we're expecting continued momentum in that business.

And as we serve our customers, whether they're on-premise or in the cloud, we expect acceleration to continue to come, especially from our SaaS business.

Yes. And I'll add a little bit on the leadership transition. So Gary was our Chief Commercial Officer, helped build the plan was intricately involved in all aspects of both the guidance as well as where the revenue numbers we were forecasting. And then Jeff was a Board member and on the inside was had full visibility as to what we were -- what our assumptions were and how we were thinking all through the process. We were able to synchronize the leadership transition at the start of our fiscal year and had both of them at our sales kickoff, which is very important from a handover point of view and consistency point of view.

And for all the important things like comp plans, territory planning, forecasting methodology, it was 2 in the box, getting it done. So I feel pretty good about -- I feel very good actually about the timing and the leadership that we brought into the company to take 7 and beyond.

Got it. Super clear and helpful. So Sanjay you've laid out what is a pretty clear AI resilience vision and more recently unveiled data activate the Protect and AI studio. How are you just thinking about the commercial opportunity there, a significant growth driver for you guys in fiscal '27? Or is the real monetization perhaps beyond that? Just would love to person on that.

We're not pinpointing the exact number that we're attributing to AI because it's still early days, but it's definitely a tailwind. And it's -- to oversimplify it. We believe, and obviously, a bias to believe that data is at the heart of AI and is driving AI models is driving how customers use AI in the enterprise. And what we're trying to do is make sure that we're giving them not only the products and the capabilities you mentioned, which is the latest. But doing what we've done for the better part of 30 years, which is protecting the components that build up the systems they use.

So whether it's a better databases, whether it's the Deep S3 bucket that they're storing data in, whatever it may be, where every day we're supporting more and more of the component fee that builds up the AI apps that they're building. And we'll continue to do that to give them all the availability. Plus, with the capabilities that we've just announced. We give them a genetic access to our workflows. We give agenetic access to single policy engines. We're giving them everything they need to really protect their environments with the right guardrails and be able to recover as they roll out these fairly complex AI capabilities inside their enterprise.

So early days for us in quantifying it externally, but we feel today pretty good about the fact that it will -- as long as the data keeps growing, which we think it does because of AI, what we do by way of resilience becomes front and center.

Our next question comes from the line of Eric Heath with KeyBanc. Eric?

Great. Congrats on the results, gentlemen, strong AR acceleration and Gary welcome back to the seat. So can you just talk about what you saw from a macro perspective, both in the quarter given just some macro headwinds out there? And also, memory is also an issue. So anything you could speak to about memory impact in the quarter.

And then, Gary, just coming back to some of the guidance philosophy and the assumptions there, but just -- any change in the philosophy we should be thinking about it? I know you addressed some of it already, but just given the leadership changes, any additional prudence there?

And similarly, along the earlier question, any assumptions on macro or memory pricing that you're assuming in the guidance?

Eric, -- thanks and good to hear from you. I'll hit it specifically. I'm going to start with the last on the macro and the memory pricing. We had to look at them as a combined we're managing that in our pipeline. And from an outlook perspective, the current trends are baked into our guidance. Now we've been successful in being able to navigate that with our platform. We have 3 primary ways how we navigate supply chain or macro related to memory. First is we have a broad technical partnership with all the major storage providers.

So we're able to leverage those partnerships, whether it's on supply or technical alignment as well. So the depth and breadth of our platform integration is a key competitive differentiator. Secondly, we work with our customers to use sweat the assets. So even if it's a competitive takeout and it's a fresh install working with our customers to leverage their existing infrastructure. And the third, which we think is one of our best competitive ability is our SaaS platform.

So we have the ability from a workload perspective to migrate customers to our SaaS platform and which is kind of where we see our ability to then manage these work close regardless of what's happening in the broader economy.

On your second question which I believe is guidance philosophy. Fundamentally, I've been a part of the leadership team now for many years. So as we think about how we run the business day to day, nothing's changed, I would say, right? The collaboration between myself with Sanjay and now Jasin, the broader team is consistent regardless of what role that I was in -- so the way we think about guidance is taking a look at the market opportunity and then providing a number externally that we feel confident in.

And I'll just say this, and everything. But having a CFO who's been a -- is one heck of an asset because you get a very pragmatic point of view on how to look at things. So we're very happy with that.

And our next question comes from the line of Jason Ader with William Blair.

Yes. Thank you. Good morning. First, I want to just applaud you guys for the shift of the term support to the subscription line. It's something that Mike, I've mentioned to you many times. So I think that just cleans things up, and we -- I think we all appreciate that.

For Sanjay, you talked a little bit about -- or I guess, Gary, you talked about the hardware pricing. I'm just wondering, has it actually impacted deals where some of your competitors are more tied to hardware, specific hardware and therefore, it sort of shifted deals like that were late in process towards you because of the supply availability and your sort of hardware agnosticism.

I'll take the first. I'll take the first shot at it. We -- I will say this, we have probably -- we are probably at the place in this -- in our company's history, where have the strongest relationships with our technology partners. We work with them very closely on the pipeline. We work with them very closely on the customer requirements. And so as much as availability and pricing does cause a little bit of revisits as part of the process. We've been so far, I'm going to say, so far, been able to manage the forecast pretty tightly in conjunction with our partners.

And one of the things -- almost more importantly, that we can do, that Gary mentioned that holds us in good stead is allowing customers because of the way our platform is architected to sweat the asset a little longer, till they can get the right setup that they need and the timing that they want and the project kick off the way they acquired. But if they need the resilience we provide, in many cases, we've been able to go in and just sped out the asset.

And without getting super technical, we can also let them run the control plane in any way they want so that they could -- they're not beholding to a particular piece of hardware. So we've got that flexibility in the architecture, and it's been used every single day as a hybrid company. So whether they're using the SaaS piece of it or they're running it in the cloud, we're letting them work through this present sort of situation to start.

Jason, to go back to your first comment about the recast. I appreciate the call out. One of the key priorities with that is aligning our P&L today are -- so now you can specifically see how the AR momentum is translating into acceleration on the top line within the subscription. And then it's also important to give the clarity to our shareholders about the actual size now of the perpetual business now that it's become nominal to the overall business.

That's fair.

Great. And 1 follow-up. On the comment, the 33% of new ARR coming from identity and data security. Can you just give us a quick report card, Sanjay, on some of the data security products, like what's going well? Where do you still feel like you've got some work? I know you have a handful of different products there, some acquisitions. Just it would be great to get a quick report card.

Yes. I think with Unity, we really upped the ante, if you would, on how our policy engine operates across the product. So when you look at Satori and what it does with data security being integrated, so those capabilities, the implied capabilities are in the product, right in the product. If you look at Threat Scan, which has been something that has done really, really well for us. Now it's been completely revamped and taken inputs from a variety of sources, including our own IP and third-party IP to really give customers deep scanning capabilities to look at what happened.

You tie that back to clean room, which we brought to market 2 years ago, this generation of cleanroom has tight integration with AGT and all the risk analysis that we could do to tell customers what happened, who touched it. Now when you fast forward this to a genetic capabilities. A lot of companies are fixated on what the rolling back in agent, which is fine. But that is one threat vector in the overall scheme of things that needs to be looked at in sort of cohesion to bring back -- to really have resilience.

So that's where we're going. And the numbers we shared sort of bode well for where customers' minds are and where -- how they're thinking about resilience because you have to look at it in an integrated way, data security, identity resilience and true single-click recovery on large platforms.

And our next question comes from the line of James Fish with Piper Center.

Topic that's coming up, of course, is hardware and cloud. Maybe just to go back to that, are you seeing customers initially actually start with the on-prem for either a net new or new deal completely, but then evaluate or turn to you guys to see what kind of cloud equivalent pricing would be, just given the rising hardware costs. And how are customers handling that sort of messaging how are they handling that overall exposure to you? And is there a way to understand that penetration of cloud within subscription entirely at this point?

Jim, it's Gary. I'll start on this. So as it relates to thinking about navigation. So what customers want is they want the diligence at the end of the day. So if you start with the macro theme of what we provide as resilience, so when you get into, I'll say, Tier 2, Tier 3 apps, maybe not like the mission-critical Tier 1, the flexibility is there to think about the ability to be agnostic between whether they use on-premise infrastructure or they use cloud and to structure their own storage or even our own ubstores. So that's kind of where we see it.

And when you combine that with the flexibility with the hardware partners that we have as well as helping us with the assets, if it becomes about the options that they have to make sure that we can keep their projects on track. Now to quantify what I'd say that shift has been material to our SaaS business, not yet. Okay, not yet. But what it does is it keeps our project top of mind and it allows us to continue to execute with a close plan.

Because we're very unique in what we can deliver in that true hybrid capability, letting customers truly mix and match how they wish to deploy. Now of course, it's a regulated industry. They have their own policy. There's a lot of things that come into play. But that we give them a very unique flexibility that nobody else can to do what they need to do. And over time, they can mix and match. and some do.

Yes. Just to follow back up. I know I asked a long question there, but what's the customer penetration of cloud within subscription entirely? And can you just remind us what optimizations on the product setting and where cloud gross margins are now today?

I'll take the first part, you take the second.

Okay. So penetration of cloud. So cloud native workloads. So if you think about workloads that are now running the cloud, whether there's databases Monoject, even our -- and we think about contribution, okay, to our growth, that bucket of our cloud, digital native cloud native offerings from Q3 to Q4 was our fastest-growing segment that contributed to ARR, okay, which shows what the ability is to move and protect cloud applications with our cloud product. So a major contributor, Jim, to our success sequentially.

From a margin perspective, continued optimization. I don't have the margins in front of me, but we can get them back to you. I would say sequential improvement on margins are North Star is driving well north of 70% and we're on pace for that over the next couple of years. So that's where we're focused on is the product optimization and building that durable business of in the cloud.

And our next question comes from the line of Param Singh with Oppenheimer. Param?

Maybe, Sanjay, I wanted to understand the buying persona for identity resilience, is that more focused towards. And are you investing more in your security focused sales teams, not just find resilience but for some of the other workload opportunities, particularly around ransomware and then lastly, in that vein, are you also investing in R&D to sell some of the technical gaps on the ransomware side? Or do you feel you have a robust portfolio today?

Param. I'll take the last part first. I think we've got a world-class platform when it comes to not just ransomware as a threat vector, but broader and making sure that -- and I don't need to say this in any way, but serious, which is regardless of the threat vector or what causes the damage of the data our focus is to be able to bring customers back to life, recover them. So it's broader than ransomware, but it definitely does ransomware if that makes sense, okay? And it does it very well. Every day, we're helping customers with it.

On your -- on the first part of your question, on the buying persona of identity, Identity is quickly becoming because of AI, is quickly becoming sort of a joint decision between the CSO organization and the classic CIO organization, because, in some cases, identity is managed by the IT organization and now with AI applications being developed by teams or new teams sometimes, it's sort of going up in visibility. So we're seeing both.

We think both. I'm not adding more security specialists, if you would. But over the past couple of years, a lot of the folks that have come into the company have come in from a security patron. In fact, Jeff Hayden, our President also has a deep security background because today, like I keep saying, data security, identity and recovery are implicitly high. So we're cross training our people. There's a lot of enablement we're doing going to make sure that they can talk to the different personas, identify the right kind of conversations to have. I feel pretty good about the progress we've made. I mean we don't -- it's rare that we lose a deal because we didn't have a security capability.

Understood. Great. And as a follow-up, if I could, -- not to get into the memory side. I know you're managing the supply chain well, but a different question, right? The higher memory and component pricing does constrain budget dollars a little bit. Have you had concern from customers where they're picking and choosing what workloads are mission critical and more important to secure now and potentially pushing off certain workloads through the next year? Or do you feel that the entire data state is crucial enough today where dollars would primarily be spend on cyber resilience first and then something else. Any clarity there would be really appreciated.

I'll take the first shot. The -- anecdotally, use -- customers are focused on resilience because you're only as good as the breadth of your coverage, okay? And your resilience capability increases with pretty much you have to protect everything that runs your business mission critical. For that, if customers are doing refreshes, they prioritize that in whatever architecture their industry allows them or their policies allow them to do.

So in some cases, it's not about pushing it off to next year. It's saying, I think we can run this through a SaaS capability that -- so we look at your sat, Oh, we could have it hosted, and we'll write the data on-premise. So again, it comes back to the architecture, which we think gives customers the choices they need to be able to prioritize both the cost increases and the availability of memory and servers, et cetera.

So it comes back to that. There's no single answer. But yes, obviously, if things are in scarce supply or more expensive people do prioritize and we're right there with them to help them through that.

And our next question comes from the line of Yun Kim with Low Capital Markets.

Congrats on a strong thing to finish to the year. If you can update us on the overall partner ecosystem that you're expanding, especially around service providers. I think you had some announcements on that recently with Google and whatnot. How important is that securing that close in ship with the major hyperscalers in your go-to-market especially around cyber resiliency and then especially with much of the Agent framework running on those agree platforms?

Yun, it's Sanjay. I'll try and address that. So our relationships with the hyperscalers are pivotal. It's very important as customers truly embark upon not just hybrid cloud, but multi-cloud deployments our ability to protect customers with a single platform across multiple cloud and on-premise capabilities is unique. So our hyperscaler relationships are something that we invest deeply in, okay, both from an engineering point of view, and a go-to-market point of view.

So access, if a customer wants to purchase off of a marketplace, we have deep integrations into all the marketplaces. And then we continue to evolve the platform as customers make choices around Atento your point, whether it's the vector databases, whether it's the agent framework that they have, identity systems that they use. We're continuing to build out our resilience capabilities on that so that when the customer makes that choice, we're right there with them. okay?

And we've done that for years, and that's obviously held us in good set, so we continue to do that. What was the other part of your question. Resilience. Yes. And what we do, for example, that makes us, again, very unique from a resilience point of view is customers can write their data into our air gap immutable capabilities on any of the 4 major hyperscalers today. So they can mix and match as they need to. And for whatever for economic reasons, commercial reasons, resilience reasons, redundancy reasons, we can -- we allow them through the same control plane very seamlessly to be able to protect their data and their capabilities on any of the hyperscalers. So the abstraction is what we bring, TCOs, what we bring.

And you mentioned, Google, our Compal Cloud platform supports Google. but our Fumio platform, which is designed for cloud natives, which has thus far been an Amazon, AWS sort of protection has now expanded into Google. So Google Cloud is also supported by Glumio,hirwhich is quite the favorite with the cloud natives.

Okay. Great. Sanjay. Gary, in regard to probably a question that I probably wanted to avoid so far. But in regard to seasonality of your SaaS business for -- in your outlook, is there any big renewal quarter where you're expecting a certain upsell or even a conversion of term license to SaaS.

Yes. Thank you. I'll hit it. The average contract length of our SaaS deals is 1 to 2 years, so we're in that midpoint of 1 to 2 years. So what that means is as you see that they are accelerate and grow every quarter, that means that our renewal base is growing every single quarter. So what happens is and what you'll see is some of the acceleration in the second half of fiscal year '26, is that it's our renewal population natural opportunity for that cross-sell opportunity that you see and that's coming through in some of our prepared remarks. So we expect that trend to continue with our typical seasonality.

So as we build out and think about renewals in the second half of fiscal year '27, the opportunity will be that much bigger on incremental cross-sell as well.

Our next question comes from the line of Howard Ma with Guggenheim Securities.

I'll keep it short. And Gary, welcome back to the speed. My question is, are there any trends to call out in terms of new and renewal procurement decisions? And what I'm really getting at is how comfortable are you in the initial subscription revenue and margin guide. Did you appropriately bake in -- I kind of think there's 3 things. There's higher memory prices. There's cloud modernization that are happening broadly and then there is the potential impact of -- cloud Unity on shorter contract duration. So did you appropriately take in potential contract duration compression?

Howard, glad to talk to you again. I'm glad to be back working with you. Couple of different pieces there. If you look at the renewal pool, I would say, on the software side in FY '27 relative to FY '26. It's roughly the same or slightly bigger, but not significant. And so we have factored in our expectations on new full term like Term link.

What we saw in some fiscal Q3 to 4 is roughly no change to term link, but we've modeled that out now into FY '27. I think if I think about the way we've built the guidance around subscription ARR. We expect the vast majority of subscription ARR driven from our business, okay, similar to the trends that you saw for FY '26.

So therefore, we'll continue to see acceleration in the SaaS business, our software business and our hybrid environment is a roughly plus or minus similar renewal pool. And then the difference will be what we expect to take from the new logo acquisition on-premise.

Our next question comes from the line of Rudy Kessinger with the D.A. Davidson. Rudy, please go ahead.

Great. Gary, certainly looking forward to working closer with you again going forward. Gary, you said in response to a question on memory earlier, 1 of the 3 reasons we're able to navigate this is the ability to maybe cover some of those -- both from the cloud, and I just want to clarify that with respect expect how much of a driver of your SaaS and Nene in fiscal Q4 was from customers protecting on. premise workloads via your SaaS offering as opposed to purchasing new hardware. Was that a material driver? And do you expect that to be a material driver of SaaS going forward this year just given the memory price increases?

Rudy, Nice to talk to you again as well. Not significant in Q4. What it does, it gives us the ability to make sure that our project with the customer to help meet the resilience you need stays on track. To give them that option if they need to go that way in the future that they've scoped out the technical considerations. So not a significant contributor to Q4 acceleration that is not factored into my guide. For FY '27 either. My guidance related FY '27, exceeding $500 million of DAS ARR would exclude any significant impact from that.

Our next question comes from the line of Joseph Gallo with Jefferies. Joseph?

Subscription NRR was really impressive at 114%. Just given the broadening portfolio, how should we think about how that trends in fiscal '27 versus your sub-A guide of 18.5%?

It's Gary, Joseph. Nice to meet you, and thanks for asking the question. Yes. So one of the retail items that I made thinking about going in FY '27 is hopeful thing on that subscription NRR as a key measure because -- you're right, it aligns to both our revenue and subscription and the ARR. We're not modeling significant upside in that number in the guidance. So in the guidance generally reflects that steady state. And that keeps our SaaS NRR very healthy and gives us opportunity to improve also on the software piece as well.

Awesome. And just as a quick follow-up. I mean it was great to hear the potential competitive differentiation with higher memory prices versus other vendors. I'm just curious, broadly, have you seen any changes in the pricing environment competitively?

No significant. If I look at discounting trends that we had during the quarter, they were consistent with the last couple of quarters. It is a competitive market, obviously, as you guys do your research, but we're not seeing any incremental pricing pressure. It's more, I think, as Sanjay outlined and you even emphasized it's navigating those cost challenges relative to the resilience budget and making sure that resilience budget is maintained as a priority versus traded off as just storage costs.

Our next question comes from the line of Shrenik Kothari with Baird. Shrenik?

Welcome back, Gary. Sanjay, just in relation to oral outlook and guide. I know in prior calls, you have talked about AI as a big growth driver, but it was mostly is proof of concept within your customers. It seems now you're pushing harder, AI is driving more data, more risk. You mentioned the market is getting bigger by the minute. Just which of the use cases that you are most excited about and you're seeing real enterprise budget pull today compared to sort of what you talked earlier, if you can sort of elaborate more across protecting data sets versus model flows as the recovery of agent-driven workloads, also governing data access and cloud native recovery. Any thoughts there? And I had a quick follow-up.

Sure, sure. Shrenik, I'd say in the enterprise, enterprise-grade applications we're in the early days. There's a lot of trials. There's a lot of models being used. So what we're doing is getting back to, like I said in an earlier response, is making sure that we can broadly protect the componentry that customers will use -- are using or will use to build these apps. To the databases, the vector database is where the data is stored, exposing that data so they can use it in pipelines to the newer products we have, giving them agent capabilities to quickly get resilience built day 0 into the apps as opposed to an afterthought because what we believe is critical in this new sort of new types of apps, AI-enabled apps that have been mild is that protection and resilience needs to be active and not passive. It needs to be on the front end of as you build the app as opposed to in the back end of when you've got the app. So we're -- so you mentioned many things. It's like is it risk? Is it data? Is it recovery policy, cloud-native full all of it. So we're helping them through the process. But again, our focus is data and recovering the data regardless of what may have touched it, agenetic nonagentic, human nonhuman, all of that. So we're -- it's early days. It's a journey, but our goal is to be able to give customers through Commvault Cloud, a single click recovery of the entire AI stack. That's where we're driving to.

Great. Very helpful. Just very quickly, again, Gary, in relation to -- I know you did mention there's field comps are geared for the next year towards both new logos as well as cross-sell platform. Just -- it sounds great, right, especially given the stronger identity and multiproduct momentum. But just how different is this in practice from fiscal '26 in terms of how you are sort of fine-tune that incentives, any success metrics around AI, atenty. Just anything that you can provide there granularity.

Yes. I can summarize this for you. So if I -- the comp plan design for our field teams for FY '27 is roughly consistent with '26. So what we do is tweak a cross-sell incentives, on the products that we believe have the greatest opportunity for growth. And then obviously, our customers need to stay resilient. So it's a tweet in the -- where we point them as it relates to the specific products, but new logo acquisition has always been a fundamental pillar of our complaint.

Our next question comes from the line of Junaid Siddiqui with Truist.

Sanjay, as frontier area models become increasingly embedded across cybersecurity workflows. And as the model providers themselves potentially push further into security, how do you see Commvault role evolving to remain core to cyber resilience and how are you partnering with these platforms to protect customers in a more agentic world?

Junaid, it's these models used right, will to make for better software, okay, more secure software. So I think I think we're seeing the start of this in the industry. Our focus has always been a combination, making sure that the platform we provide the combo capabilities we provide or equal parts, data security, identity resilience and recovery. I'd probably take that back. I'd say more recovery. And we specialize on the recovery capabilities. But it's with the same policy engine that gives you the providence of what happened to the data to allow customers to truly recover. So whether the agent caused something to happen, or a cyberattack cause something to happen or human error cost something to happen or a corruption case something to happen, our focus always is data out, making sure we can get the data recovered for the business.

So the models we'll make for most secure software, I believe. But what we need to do is stay focused on and what we're focusing on is just getting customers back from anything that may have happened to their systems. -- especially when you're looking at the pace at which AI changes things. So I'm kind of giving you a 10,000-foot response on it, but we're obviously looking at it's a multipronged capability, whether it's Agentic or cyber or just system providence. We're looking at all of that and making sure that our capabilities can bring all of them back with single policy.

Our next question comes from the line of Joe Vendre with Deutsche Bank. Joe?

Sanjay, you called out multiproduct adoption as a driver of growth and also touched on the momentum in your identity protection products. Can you talk about the typical deal size for identity and maybe the ACV uplift when a customer adds on that identity protection. And also, is there a way to think about what percentage of the base has adopted identity protection today, and should that adoption rate eventually get to 100%?

It's Gary. I'll jump in and answer this for you. So what -- we don't disclose the actual ASP of our denting solution. However, what I can provide to help is that it's a good land or a would expand motion to drive the stickiness in the platform. to how we think about it internally is that it's less about the individual ASP of the offering. It's more how we're driving the adoption of the platform, okay?

And when you get multiproduct adoption, as you would expect in any business, our ARPA goes up significantly, okay? And we'll start to give color on that in the out quarters as we get going and get more penetration. To the positive side on opportunity, we've had great success on our identity year-over-year. The business grew about 100% year-over-year. and it's still a very small proportion of our installed base that have adopted it. So we still have a long runway of opportunity to drive that as we continue to enhance the platform with even more identity solutions. So just not about the traditional active directory when we get into other offerings like Ostend other and ID, it's the whole platform approach across multi identity solutions which will drive multiproduct adoption and then drive our PARP, which we'll continue to talk about as we build those measures.

Right. Joe, just to close, I mean, just to give you a typical scenario -- use case scenario, outcome-based scenario that a customer would look at. They would start with identity they would look at clean room to be able to test that identity and they would look at AGP, our Air Gap Protect capabilities to be able to restore data from that secure location, whether it's for test purposes or production purposes. So without identity resilience, you are -- it's an incomplete solution.

So that's how we think about it. In and of itself, it's a starting point. It's a good land spot. It's a good expense part of a customer already using our technology, but it really shines when you look at the life cycle of how a customer would use it.

Mark, we'll take our last question, please.

Our last question comes from the line of Tom Blakey with Cantor Fitzgerald.

Well, thanks for in here, Michael. Sanjay and Gary, great to be working with you again. I guess my first question is on this net new ARR in constant currency metric that we've heard from the company in the past. It seems like with AI increasing data, very successful push here in terms of organic growth from a new product perspective as well as M&A. It seems like if I'm looking at the moving pieces here, the new target of $1.205 billion in subscription ARR. Just maybe kind of talk about what we're kind of expecting here and embedding in the guide for net new ARR on a constant currency basis into fiscal '27? That's my first question.

Tom, it's Ger. I'll jump in. So how we'll be guiding that new ARR going forward? It's really tied to subscription error, the overall subscription ARR. That will be an annual guide. So we set up the annual guide for FY '27 at the midpoint, that's 18% and 18.5%, okay? If you quantify that, that means that the amount of subscription net new ARR for the full fiscal year 2017 will be roughly $190 million. Okay.

So that's kind of a key base part. Now what I won't be doing is giving a discrete guide on any individual quarter, okay? As you've seen in our business in the past, there's to be puts and takes from quarter-to-quarter. But we'll continue to provide -- and I'll continue to provide the updated view of the annual number, how we're trending against that annual number and also empty relative mix between the software and SaaS pieces of the business. For FY '27, we continue to expect majority of that $190 million of net new ARR for the full year to continue to be led by acceleration in our SaaS platform, which should exceed about $500 million by the end of FY '27.

Super, super helpful. And good to see the uptick there on the net new ARR basis that we could just maybe imply for fiscal '27? And just maybe a look back at as it relates to look forward -- could you maybe expand on the market share gains that you experienced at some of the -- at the expense of some of the legacy players in fiscal '26 and what you're embedding in the fiscal 2027 guide, that would be helpful just given the dynamics there.

Overall, FY '26 was a strong net new customer, right? There was some fluctuation quarter-to-quarter. Q3 was an extremely strong piece of the business on net Blue. Q4 was more tied to our existing installed expansion business. But overall, when you look out at the full fiscal year, we saw strong growth. And it's beyond I would say now the legacy players that only have on-premise because our value prop is the hybrid. It's the hybrid and managing those workloads on-premise or across multiple clouds.

So what you see in our subscription ARR, whether it shows up in software or in SaaS, it's our hybrid approach that's giving us the competitive advantage. So we may swap out a legacy install on-premise and that new deal will end up likely being hybrid across both on-premise and cloud. So that's why the combined subscription era becomes the North Star metric because it will show the penetration and success of that hybrid

New logo acquisition.

That's key. The hybrid is key. And we believe that as AI gets rolled out broadly in the enterprise, it will continue to be hybrid.

Mark, [indiscernible].

Okay. So there's no further questions at this time. That concludes today's conference call. You may now disconnect.

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 Commvault Q3 Fiscal 2026 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Mike Melnyk, 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 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. 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 expand quarter with the addition of 700 new subscription customers. Subscription ARR increased 28% to $941 million. SaaS 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 reflects 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 1,600th 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 cyberattack. Customer partner and industry feedback has been overwhelmingly positive.

Dave Novak, Deloitte Cyber Resilience Lead said, "The Commvault 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 joint customers respond faster, reduce risk, and confidently adopt AI and cloud at scale while advancing resiliency."

IDC further validated this approach stating, "We believe ResOps has an opportunity to resonate with customers as it is concise with powerful implications and operational value." ResOps 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 nonhuman 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 Commvault's Metallic AI fabric with our multipoint Threat Scan, Synthetic Recovery and Cleanroom Recovery offerings, customers can secure data as a 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, UNC 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 side risk. Commvault Cloud's growing Identity Resilience capabilities enable enterprises to ease and track and mitigate unauthorized or accidental changes to identity systems like Active Directory, Entra ID and Okta.

As Eric Bayer of Jazwares, a Berkshire Hathaway company explained "Commvault 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 embrace our Identity Resilience capabilities. And ARR from just our Active Directory offering has more than doubled year-over-year. In just 2 years, it has become one of our largest SaaS offerings. And finally, we cannot discuss resilience operations without addressing recovery, particularly for cloud native and cloud bound enterprises. In Q3, we saw accelerated momentum with our cloud native offerings, including Clumio. For example, Klarity, a pioneer in AI-driven predictive health chose Clumio to safeguard sensitive AI data that fuels next-generation risk prediction models. Our ongoing innovation with Clumio 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 storage, 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 Commvault Cloud, the solution will support Pinecone deployments across AWS, Azure and Google Cloud. It's targeted for 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. It 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 Commvault is a launch partner for the AWS European Sovereign Cloud. Together, our plans are to provide European organizations with a secure solution that is purpose-built for cloud, delivering cost-optimized resilience at scale for AWS customers. We are working closely with other partners in 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 Commvault Cloud Unity is the breakthrough platform customers need in the AI era. And we anticipate we will finish the year with solid results that reflect both our leadership in the market and the trust our customers place in Commvault. Thank you. Now I'll turn it over to our Chief Accounting Officer, Danielle Abrahamsen, to discuss the financial details. Danielle?

Thanks, Sanjay, and good morning, everyone. As Sanjay highlighted, our Q3 results reflect the growing demand for our Commvault 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 strength 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 net 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 28% 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% 1 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 installed 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 mix shift of some product capabilities with certain early adopter customers.

We saw solid momentum across our identity and resilience offering, which collectively represented approximately 30% of net new ARR. Now I'll discuss our profitability and free cash flow. Fiscal Q3 gross 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 SaaS to be in the range of $203 million to $207 million. This represents 18% growth at the midpoint. We expect total revenue to be in the range of $305 million to $308 million with growth of 11% at the midpoint. As a reminder, Q4 fiscal year '25 benefited from several multiyear strategic land transactions. At these revenue levels, we expect Q4 consolidated gross margins to be approximately 81%. We expect Q4 non-GAAP EBIT margin 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 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 million 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 gross margins to be 81% to 81.5%. This increased range reflects continued growth in our SaaS platform. And we are increasing our non-GAAP EBIT margin guidance to a range of 19% to 20%. We now expect our full year free cash flow outlook to range from $215 million to $220 million. This guidance reflects approximately $12 million to $15 million in onetime 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. 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 resilient provider of choice for large enterprises. Commvault Cloud Unity 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?

[Operator Instructions]

Your first question comes from the line of Aaron Rakers of Wells Fargo.

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 later in the quarter kind of receivable collection. So can you unpack that, just help me understand why DSO has gone up so much and what you saw towards the end of the quarter, just given linearity.

Yes. Aaron, this is Danielle. Good to talk to you again. So I know I talked about this in my prepared remarks, and you kind of hit on it, right? But one of the things we saw this quarter, and it's not uncommon in Q3, I'll be honest. Q3 has a tendency to be one of our most pressured free cash flow quarters. And it's really just because of 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 U.S. and Canada. That's not normal for us in a quarter. And obviously, the U.S. is one of our largest payrolls, right? So both of those things are putting pressure on free cash flow. I do want to highlight our free cash flow guidance for the year, if you normalize for the onetime payments that we're making in Q4 tied to the cost optimization program remains unchanged.

Yes. And then as a quick follow-up, I can appreciate you're not giving 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 when you're asked about kind of the longer-term growth narrative, is the 12% a good underpinning 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 TAM growth expectation?

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

Okay. Aaron, this is Sanjay. Again, just to reiterate, the business is in a good place. We had our best land software quarter ever. We had a second best land SaaS quarter ever. Our rule of 40 continues to be consistent. Across the board, the platform -- the new platform releases bodes really well based on everything we've seen. So we will, obviously, at the right time, share more of that. So -- but we are -- we have no -- I think we will definitely outpace market.

Your next question comes from the line of Jason Ader with William Blair.

Yes. Just first on the currency situation. With 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. Which metric are you referring to?

Well, you gave guidance on a reported basis, right? And I just want to know...

You're talking about for revenue?

And ARR, both. Was currency in line with your expectations?

Yes. So on a reported basis for revenue, currency was in line with our expectation. From an ARR perspective, we actually give -- we don't give -- 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 wanted to understand, was that below what your expectations were? And if so, why?

Yes. 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 2 to 3x what we would land a software customer with. And so what you're seeing in the ARR is just a reflection of that math. 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 land 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 million, something must have not played out as you expected?

Yes. So this is Sanjay. Jason, it's really just -- we sold a lot of SaaS deals, land deals this quarter. And when you -- that's why you 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 land quarter for us. So when you take -- you take that together, it's -- that kind of explains the delta, if you would. But by every stretch of the imagination, it was a very strong quarter.

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 2 to 3x smaller ASP than software, that does have a significant impact on ARR.

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

Yes.

Correct.

And larger software deals as well.

Planned software deals with longer duration, yes.

Your next question comes from the line of James Fish with Piper Sandler.

I 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 that the base is getting bigger and we're anniversarying Clumio, but why the 4% sequential drop in cloud net retention rate this quarter?

Okay. Jim, it's Sanjay. So Unity -- so we announced it in November. So it's what, you know, shy of 3 months ago. And what Unity really does, if I could just reiterate is it brings together workloads, data wherever they live under 1 control plane. So we're giving customers the ability to manage anything in -- what we call in the AI era under 1 control plane. And that is something that is -- we see as being the future. Now what we do is we also, as you know, cater to customers with large on-premise software and growing SaaS capabilities. And that is their decision on how they wish to implement and the journey they take. So they work in tandem.

So as far -- at this point, 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 of things went into our SaaS NRR this quarter. So the first thing, and you kind of -- 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 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 1 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 we -- these customers are still our customers. We're not seeing uptick churn. This is really just our business going through natural maturity.

There's no churn impact here. Any unusual that's important.

Got it. If I could follow up on that 9,000 SaaS as my question here. You have over 9,000 SaaS customers, 14,000 total subscription customers plus, where does SaaS penetration get to? And how much are stand-alone SaaS customers?

Yes. So we -- 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.

Yes, on a growing base.

And one that I had closely also is that nearly 50% of our enterprise SaaS customers use more than 1 offering, okay? That's up 8, 9 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 journey, hybrid cloud journeys.

Your next question comes from the line of Eric Heath with KeyBanc Capital Markets.

I just want to follow up on some of the prior questions. But on the SaaS NRR, is there anything from a go-to-market perspective incentive-wise to shift the sales force focus over to landing new logos as opposed to expansion? Is that some of the reason to potentially explain why the SaaS new logos is maybe a little bit stronger while the NRR was a little bit softer.

We do our comp plans on an annual basis, Eric. And so there's been no mid-quarter or midyear change to that. It's just between the fact that what we're delivering to our customers in SaaS as part of the platform in conjunction with our software capabilities is what they need. And so we're seeing a healthy pickup 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 capability stand on its own.

Got it. And then just one more maybe clarification. Just 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.

Yes. So the way to think about it is what really affects term within a quarter is the number of large deals. That's the biggest contributor to that. And this quarter, the term was heavily influenced by some large new customer deals. So in Q3, we saw a modest pickup and sort of an uptick in the duration quarter-on-quarter. And we're winning large customers that are multiyear, which is a darn good thing. What's also important that -- for 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 -- Yes. Your next question comes from the line of Howard Ma with Guggenheim.

I want to follow on the -- on the constant currency net new ARR threads, the $39 million in the quarter. So it's just given -- Sanjay and Danielle, given your comments earlier, net adds were strong. I think we have more clarity on the SaaS NRR decline. But on the term side, the term net new ARR was -- I think it was about $17 million. So it seems like maybe there was a shortfall in term net 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 it's average term expansion ARR was in aggregate. And I understand that there were some large multiyear deals, but maybe the expansion was a little weaker than expected. And -- and really more importantly, how should we think about it? I guess is $17 million kind of a baseline going forward? Like what gives you confidence, especially in light of 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 million. I'm just trying to understand where to -- where you're getting the $17 million from?

Maybe I -- look, maybe my number is incorrect, but whatever that number was, I'm seeing $18 million. So I guess on a constant currency basis, is that correct that term constant currency net ARR was $18 million, and that average expansion was maybe weaker than you expected and what to think going forward?

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 -- I talked about this before, but maybe let me make sure I'm clear on that. 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 durations. 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, 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 add that we've had in the history of the company, organic, right? You 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 where we'll be for the year.

And we could follow up on the one on the other callbacks.

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

Howard, I'm not sure where you're getting that from. That's -- 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, this was -- this exercise was no exception.

Now without getting in 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 -- 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 got it from -- in your -- in the press release, it says business technology is the unit. So can you just expand on what these business technology, that function entail?

No, no, no, Howard. Sorry. So there's 2 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 are making in our business technology team, that's not our R&D team. That's our internal business technology team.

IT.

IT. The second restructure plan, which is really the one that we talked about in the press release this time and I made the comments on related to some of the cash flow impacts. That one is a company-wide initiative.

Yes. And Howard, 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 the opportunity lies. So just aligning the business. This is -- it's a good thing.

Your next question comes from the line of Param Singh with Oppenheimer.

I had a couple. First, look, this ARR question has been beaten to dead, but I had a slightly different question on it. As I look to 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 -- should we assume that there will be some re-acceleration 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 should we think about it logically in the longer term.

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 customer, that cross-sell. 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 1 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, Param, 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 we think that being able to cross-sell over time is definitely part of our strategy, as we've shared before.

So let me go into my second -- yes, 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%.

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 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, at SHIFT, you saw how much we shared. The platform is just literally, 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 the industry, I shared some on my prepared comments, is very positive.

And 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 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.

Right. Okay. And do you feel you need to update your sales team a little bit to pivot to some of these expanding capabilities? Or do you feel...

They just delivered -- Param, they just delivered an amazing quarter. You guys are doing a great job. We're executing well. And of course, enablement of our team is job 1. 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.

Your next question comes from the line of Rudy Kessinger with D.A. Davidson.

So on the net new ARR, last quarter, you said you expected 60% of net new ARR to come from SaaS. And 60% of $45 million would be $27 million, and you did $27.1 million of SaaS net new ARR in Q3. And so from that lens, it would look like SaaS net ARR is kind of in line with expectations. And then back to Howard's point, it would thus look like term license net new ARR was below expectations or the primary 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 ARR 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 SaaS 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 multiyear, 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, as I've shared this over like repeatedly, 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 projects that they embark upon, the mix of software versus SaaS, there will be a little bit of variability in how this stuff gets land. 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 it's -- yes, the number is off a little bit, but it's -- 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, we're talking 22% rough tough growth on $167 million year-on-year increase. So it's actually very handsome. 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 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.

Yes. 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 of quarters has been consistent. We actually saw a decline. The decline almost doubled quarter-over-quarter, and that's really tied to some of our conversions. 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 sold maybe more SaaS deals and I seem to maybe interpret that as meaning that prohibits 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 comes from is calculated from consumption in the current quarter times 4 versus TCV over duration. And I'm curious if you were to look at the quarter, your SaaS and the ACV bookings standpoint relative as opposed to ARR, how much stronger might that number have been if you were calculating all of your SaaS ARR as TCV over duration.

That's a tough question. Maybe give us a little time to get the exact number around that. But let me take the first part of your question. But our sales team -- the reason -- the reason we have our go-to-market team, the way it is, is because our platform delivers 2 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 Cleanroom 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 they're buying capabilities and their needs. So we internally don't trade off 1 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 my question is like if I just take your $364 million of SaaS ARR, how much of that is calculated from like Clumio products that are just consumption times 4 versus how much is just TCV over duration, the same way you calculate your term license ARR. Because I'm trying to -- you're talking about the ASPs being much lower and the ARR not necessarily showing up yet from some strong bookings. And so I'm trying to understand how much of your net new SaaS bookings come from products that are going to have ARR calculated on a consumption basis as opposed to TCV over duration.

Yes. 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.

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

Yes. So yes, I guess I was just wondering if there are any regions and/or verticals that performed better than your internal expectations this quarter? And maybe conversely or any more challenged than you were anticipating?

What was the second part, sorry, Michael?

Yes. If any regions or verticals were perhaps more challenged than you were anticipating?

Yes, it was -- actually, as a quarter is very evenly distributed and almost by design. So we've -- over time, we've worked to derisk the business in both geography as well as in particular verticals. This quarter was -- our international business did very well as did our U.S. business was very, very even. Our SaaS business did well, our software business did well. So there was no particular call out. I think, overall, a well-delivered quarter from my point of view.

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

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

Your next question comes from the line of Tom Blakey with Cantor.

Just a couple quick ones. On this duration topic, Danielle, what is the -- I guess, just bluntly, what is the expectation for duration in the guide for fiscal 4Q?

Yes. So we're continuing to assume that duration remains specifically, and Sanjay called this out in his earlier remarks, median duration will remain in a normal range. So that's what we're assuming in our guide.

So basically, just quarter-on-quarter a downtick in duration, so to speak. And then -- go ahead.

No, no. Yes, 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 meet.

And frankly, we're getting better at this as customers deploy more complex scenarios, we have to internally be spending a lot of time really finessing how we look at this. And we'll be completely transparent about that.

No, you have always, Sanjay. I just said duration was an impact ARR this quarter. So I was just trying to understand.

I know because it's a tale of 2 cities, right? Here, we get larger duration more land deals and it affects the other side. So -- and then we got a lot of new SaaS deals and smaller duration. And so the -- a little bit of a variability is to be expected, we're getting better. I hope at being able to tell you what that is.

Yes. 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 -- a year or 2, Sanjay. So maybe if you could talk about these increasing hybrid deals, the sales cycles, maybe talk about on a like-for-like basis, where a sales cycle is going this last fiscal quarter 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.

No worries. So hybrid deals, if you start on the software side, if you look at large enterprise customers, and they have technology that goes back sort of legacy technology. The process of 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 want -- they have a timeline under which to move it to the cloud. So then you start working through that. And we've gotten good at it because we've been doing this now -- the cyber resilience conversation, security conversation for a couple of years.

We think the new platform and the bringing together of the capabilities under 1 pane of glass will just allow customers, especially with our discovery capabilities, to quickly get up and understand what they have and what is protected, what isn't at what level, what policy. So 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 protect. And so that's kind of how we look at it. These deals, when you start can -- it's a very sophisticated sales process, and it's a -- and you have to -- the customers are open to it, 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.

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 record additions. Again, I just wanted to just triple click on -- is this maybe -- in addition to all these records and solid results, is there an element of pipeline building related to this possibly a sales elongation going on.

No. So I was going to -- I think that, firstly, you said discounting earlier in your earlier part of your question, there is no -- we keep a very tight control on that. Our Chief Commercial Officer was our Chief Financial Officer. So there's a very high degree of discipline that goes into discounting inside of our company. So that I don't worry about day in and day out. 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 Commvault Cloud Unity platform will reduce the time it takes for customers to understand resilience the way we 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 operationalize it, we call that ResOps. We released that -- we announced that in tandem with the platform. And the collective capabilities in there, we think, will allow our team, our partners and our customers prospects in this case, to truly understand how fast they can get up and running with true resilience. So I'm very hopeful about where the platform is.

Your next question comes from the line of Shrenik Kothari with Baird.

So Danielle, you noted, of course, strong new SaaS customers this quarter, but that 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 like how you recognize your SaaS ARR sort of ramping off actual usage, consumption versus potentially some of the peers who use and kind of use that linearity around duration and TCV. So that's part one, and I had a follow-up on Unity.

Yes. So I just want to make sure I understand because I think you're asking 2 different things. So you mentioned SaaS NRR, right? And I had made the comment, one of the things we saw is we had a really strong SaaS new customer quarter. And so obviously, the way that we calculate NRR is we take that 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. Does that help answer your question? I think that's what you're getting at, but if I'm missing it, let me know.

No, that was it, thanks.

It's all future value -- future value -- lifetime value of the customer.

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

So 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 ARR is tied to what I'll say is true subscription SaaS customers in that they buy a fixed amount for 1 year, and then that amount is annualized. So I don't know if there's -- I hope that answers your question.

Your last question comes from the line of Junaid Siddiqui with Truist.

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 in these ransomware driven valuations? And what specific capabilities within Satori are proving most differentiating in these competitive wins? And how do you think about its contribution to growth over the next, let's say, 12 to 18 months?

Okay. Sounds good. So where we are with Satori is -- we are 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 stand-alone capability, but the value -- the true value of Satori was giving our customers the ability to inspect and look at their data, structured, unstructured, and really have a policy-related compliance capability. So 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 stand-alone, 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 the compliance requirements and policies across the board.

So 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 in-field integrations with third-party products. And we think that's going to raise the value. And it is already raising the value and conversations that we're having. So it's early days, but kind of where we expected it to be.

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.

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Commvault Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Michael Melnyk, Head 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 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, Commonwealth'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.

And now I'll turn it over to our CEO, Sanjay Mirchandani, for his opening remarks. Sanjay?

Good morning, and thank you for joining today's call. Commvault had another strong quarter and an excellent start to the first half of the fiscal year. Highlights include: in constant currency, we added a record $47 million net new ARR. Subscription ARR rose 30% to 894 loan Total revenue grew 18% to $276 million. Additionally, we hit a major milestone earlier than expected. Total ARR grew 22%. And with that, we achieved $1 billion in total ARR 2 quarters earlier than our original March 2026 target. In Q2, SaaS ARR grew 56%, hitting $330 million. This was also 2 quarters earlier than projected. And for the fiscal first half, we achieved 42 on a rule of 40 basis. We couldn't have done it without the support of our customers and partners and the unwavering commitment to innovation and excellence in the compute.

Looking ahead, there are 3 key business drivers that continue to fuel our growth. One, strong demand for our Commvault Cloud cyber resilience platform from our hybrid cloud customers. Two, as I mentioned in prior quarters, the continued move to the cloud, which our platform is tailor-made to support, and three, customers rely on our innovation engine to meet their complex and evolving readiness and resilience requirements. I'll discuss each in more detail. First, Hydro cloud customers are embracing our cyber resilience platform. New attack vectors are constantly emerging. And with AI, data is more distributed and is being used in new ways which introduces more threat vectors for organizations to grapple with. The need for best-in-class detection, protection and recovery is terabit.

Traditional data protection approaches don't cut. Customers need a platform that makes them ready to withstand the worst to keep their business continuous. We do this better than anyone else. This quarter, we saw strong momentum across our identity and data security focused offerings which grew double digits sequentially and represented nearly 40% of net new ARR. Our fastest-growing SaaS offering this quarter rapidly restores active directory and entry ID to identity protection services. In Q2, a large bank in Asia Pacific chose Commvault's Active Directory offering to quickly recover its identity operations after a cyber attack. They also leverage [indiscernible] to validate clean recovery points and unified its hybrid workloads to close gaps and meet its regulatory requirements.

This is cyber resilience in action. As we shared last quarter, we also continue to invest in our partner ecosystem, which makes our platform even stronger. This quarter, we announced a new partnership with Beyond Trust, a global leader in identity security. By integrating their capabilities with the Commvault Cloud platform, we can help joint customers advanced recovery while reducing unauthorized access to credentials, systems and data. We believe the momentum we're seeing across our identity and data security focused offerings will continue in the second half of the year, which brings us to our second growth driver, the continued move to the cloud. Cloud borne and cloud-bound data is accelerating at a tremendous pace, and this is only going to increase with the rapid proliferation of AI.

Today, Commvault has moved and protects approximately 8 exabytes of customer data into the cloud. This represents a greater than 40% CAGR over the past 5 years. We expect this rapid pace of growth to continue fueled by the fact that customers are increasingly storing AI data in the cloud. It makes our [indiscernible] portfolio of offerings for AWS more relevant than ever. Over the past year, we introduced [indiscernible] unique recovery capabilities of DynamoDB [indiscernible]. We are transforming the speed, scale and efficiency in which cloud data can be restored. This quarter, we saw healthy sequential growth in ARR from Clumio and continue to have new customers to the platform, including 100 customers and 2 Fortune 500 customers. And BBVA, one of the world's largest financial institutions chose Commvault to reduce its cloud-native complexity, strengthen its DORA compliance requirements and protects its mission-critical AWS data.

Commvault cloud unified its data protection across 3 major hyperscalers, and [indiscernible] unlock a 40% cost savings. Additionally, we made tremendous progress with cloud-bound enterprises. In Q2, the number of SaaS customers grew nearly 9,000, representing a 40% increase year-over-year. Net dollar retention remains healthy at 125%, and we continue to see strong adoption of our SaaS offerings from existing customers. A global Fortune 1000 system manufacturer fills Commvault to support its hyper cloud journey. Today, Commvault safeguards is virtual machines, databases, file systems and Microsoft 365 data. The customer also leverages Airgap protect and our integration with Azure Government Cloud to streamline operations and support its compliance initiatives, which brings me to our third growth driver, Commvault's Innovation Engine.

Our innovation engine has never been better. Time and again, we've been first to market with unique capabilities that address our customers' most critical use cases. Innovations like clean room recovery, active directories and cloud rewind are closing the gap for customers evolving readiness and resilience requirements. Top industry analysts are taking notice. We are one of the few companies to be named a leader in the Forrester Wave, the Gartner Magic Quadrant and just this quarter, the IDC Marketscape on cyber recovery. The IDC MarketScape report highlighted our platform's comprehensive cyber recovery architecture, broad workload support and deep data security integrations for delivering enterprise-grade resilience. This is why customers choose Compo.

As enterprises embrace AI, we will help them address evolving resilient requirements. That's why we acquired Satori Cyber, which closed during the quarter and is being integrated into our Commvault Cloud platform. This acquisition is timely as it provides monitoring and front protection for large language models as well as automated discovery, classification and access management restructure data. We will discuss the evolution of resilience in the age of AI and introduce a richer set of innovations ever at Shift, our premier customer event on November 12 in New York City. I hope you can join us.

And with that, I would like to turn the call over to our CFO, Jen DiRico, to discuss our results in more detail. Jen?

Thanks, Sanjay. Good morning, and thank you for joining us today. Our solid Q2 results confirm that data is moving to the cloud at an accelerating pace. Our Commvault cloud platform is well situated to benefit from this shift. Case in point, in Q2, we set new records by adding $47 million in net new ARR and $29 million in net new SaaS ARR on a constant currency basis and we exceeded $1 billion in total ARR, reaching this milestone 2 quarters earlier than our initial target.

Now I'll discuss our Q2 results and operating metrics followed by an update on Q3 and FY '26 guidance. Please note that all growth rates are on a year-over-year basis unless otherwise specified. On a reported basis, total annual recurring revenue increased by 22% to $1.04 billion or 21% on a constant currency basis. Subscription ARR increased 30% to $894 million, representing 29% growth on a constant currency basis. This was led by 56% growth in SaaS ARR to $336 million. And I'm excited to share that we exceeded our original $330 million SaaS ARR target 2 quarters earlier than planned. Subscription ARR now constitutes 86% of total ARR compared to 81% 1 year ago. Subscription ARR is the best indicator of the company's growth.

Let's discuss Q2 revenue trends. Total revenue grew by 18% to $276 million led by a 29% increase in subscription revenue, including 61% growth from our SaaS platform. Term Software revenue rose 10% to $93 million. Strong double-digit growth in transaction volume was tempered due to a shift in term duration, which reduced average deal size. In Q2, customers chose shorter contract duration to maintain flexibility between software and SaaS as they evaluate the timing of their transition to cloud. Q2 SaaS net dollar retention was steady at 125%, benefiting from both successful upsell and cross-sell initiatives. We saw solid momentum across our identity and resilience offerings such as Air Gap Protect, Active Directory, Cleanroom, [indiscernible], risk analysis and [indiscernible] reskin which collectively grew double-digit percentages sequentially and represented almost 40% of net new ARR.

Active Directory, a mission-critical identity tool for an effective resilient strategy saw usage more than triple year-over-year as IT leaders adopt our data and identity recovery solution. In just 2 years, Active Directory is on pace to become one of our largest SaaS offerings. For example, we expanded our footprint with a large U.S.-based health care services customer who thought to address concerns around identity and resilience as one of its largest competitors suffered a crippling cyber attack. With the addition of Cleanroom, Active Directory enterprise and M365 backup, we are securing this customer against accidental deletion, corruption and providing peace of mind in being able to rapidly recover in case of an event.

Additionally, we closed several 7-figure SaaS transactions during the quarter. Further evidence that Commvault Cloud is the gold standard for enterprise-grade resilience at scale. SaaS customers over $100,000 in ARR grew 55% year-over-year outpacing growth of the overall SaaS base. Due to the complexity of their requirements, this segment typically demonstrates a higher rate of multiproduct adoption than our overall SaaS base.

Now I'll discuss our profitability and free cash flow. Fiscal Q2 gross margins were 80.5%, which reflects the acceleration in the mix of SaaS and shift in average software duration. Operating expenses of $170 million represented 61% of total revenue, consistent with the prior quarter and prior fiscal year. Q2 operating expenses reflected continued investments to support our strong ongoing growth trajectory. Non-GAAP EBIT was $51 million. resulting in a margin of 18.6%, which reflects the increased mix of SaaS bookings and the integration costs from Satori. For the first half of fiscal '26, we achieved a 42% on a rule of 40 basis, reflecting a healthy balance between revenue and profitability.

Turning to key balance sheet and cash flow indicators. On September 5, we closed a private offering of $900 million of convertible senior notes with a coupon of 0%. This capital raise allows us to optimize our balance sheet and provide additional flexibility for capital allocation decisions. We achieved very favorable terms on this financing, reflecting strong investor demand against a solid market backdrop. We repurchased $131 million of stock during the quarter, of which $118 million was executed in conjunction with the convert. We ended the quarter with a diluted share count of approximately 45 million shares. Q2 free cash flow grew 37% year-over-year to $74 million primarily driven by continued strength in deferred revenue from SaaS contracts and strong cash functions against Q1 sales. We ended Q2 with over $1 billion in cash.

Now I'll discuss our outlook for Q3 and our updated outlook for fiscal year '26. For fiscal Q3 '26, we expect subscription revenue which includes both the software portion of term-based licenses and SaaS to be in the range of $195 million to $197 million. This represents 24% growth at the midpoint. We expect total revenue to be in the range of $298 million to $300 million with growth of 14% at the midpoint. At these revenue levels, we expect Q3 consolidated gross margins to be in the range of 80% to 81%. We expect Q3 non-GAAP EBIT margins of approximately 18% to 19%, which reflects continued strong growth from our SaaS platform and ongoing shift in term software duration.

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 Page 30 of our Q2 earnings presentation. We now expect constant currency fiscal '26 total ARR growth of 18% to 19% year-over-year. This will be driven by subscription ARR which we now expect to increase by 24% to 25% year-over-year. That represents an increase of 50 basis points at the midpoint for both metrics. From a full year fiscal '26 revenue perspective. We continue to expect subscription revenue to be in the range of $753 million to $757 million, growing 28% at the midpoint.

Our guidance assumes a continued shift in term duration during the second half of the year. We reiterate total revenue of $1.61 billion to $1.165 billion, an increase of 17% at the midpoint.

Moving to our full year fiscal '26 margin, EBIT and cash flow outlook. We now expect gross margins to be 80.5% to 81.5%. This range reflects continued growth in our SaaS platform, which carries a different gross margin profile than software. We now expect non-GAAP EBIT margins of approximately 18.5% to 19.5%. Non-GAAP EBIT margins reflect our ongoing investments in additional growth driving initiatives. We are raising our full year free cash flow outlook to a range of $225 million to $230 million. This guidance reflects benefits from recent federal tax loss changes.

To summarize, our first half results are evidence of strong market demand that we believe will continue throughout the year. Thanks to our leadership in innovation, our growth-focused investments and strong execution, we are well positioned to continue taking share of the expanding cyber resilience market.

Now I will turn it back to the operator to open the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Aaron Rakers with Wells Fargo.

I guess maybe to start, Jen, can you talk a little bit about -- a little bit more about the shift in term duration? I guess -- if I look at the guidance and the reiterated guidance for the full year, it kind of implies a deceleration of growth, call it into the 11% total range. Can you just unpack that a little bit why we would expect to see growth decelerate in fiscal 4Q? And maybe that's tied back to that shift in term?

Absolutely. Thanks for the question, Aaron. First, let me just start by saying, I would say this is the -- this is our second best term software ARR quarter. and that was coupled by the fact that we saw strong volume as well. So this is the second best net new customer addition quarter for term software. When we unpack the kind of variance in subscription revenue. It really came down to that shift in term duration and effectively back to the levels that we saw a couple of quarters ago. And so when we double click, what we really saw was customers wanting to maintain their flexibility, as I thought about the -- their anticipation move to the cloud.

But ultimately, what we were really pleased with was the volume that we saw in our software term business. From a volume perspective, deals greater than $100,000 actually increased 17%. So ultimately, that's really where we see the strength coming from an ARR perspective, and we do believe that is the best indicator of growth. As we zoom out and think about the second half of the year, right, what we have seen is the continued acceleration of SaaS really meeting the moment from where customers are, and we have the best platform to do that. And ultimately, when we look at the pipeline for the second half of the year, we've been prudent as we think about the pipeline and ultimately have carried through the same trends that we saw in Q2 through the rest of the year.

But I would just end by saying the growth in our business really is dictated by the ARR that we see, and we've raised both the subscription ARR and total ARR by 50 basis points.

Yes. And then as a quick follow-up, I'm curious, kind of sticking on the growth theme a little bit. The slide deck highlights your expectations on a TAM growing I think it's 12% CAGR over the next couple of years. I guess as we think forward, I mean, Commvault seems to be in a pretty good position is still possibly a share taker. Can you talk about the competitive landscape and whether or not we should take 12% kind of a baseline, and there's the ability to continue to grow above that?

Sure. Aaron, it's Sanjay. Let me just take the competitive landscape. So when you look at our growth, healthy double digits has been for a few quarters. This quarter included overall both SaaS and software and when you break down the TAM at least on the more classic data protection side, you'll see that the SaaS market is growing double digits and we're fast outpacing it at 55%-ish ARR growth. This quarter on just our SaaS product. And when you look at the software TAM, that's probably growing 0 to low single digits and has been again for a while.

Our software business is growing at a healthy double digit, which brings you to -- we're taking share and we continue to take share. So I would say that the way we're growing, at least on the software side is the customers are consolidating, desperate platforms over the years. They're rethinking their resilience strategy with us in the wake of all the ransomware cyber attacks, and we continue to innovate on our platform. I'll let Jen flesh out the rest of your question.

Yes, sure. And in response to the TAM growing 12%, I would point you back to our overall ARR growth in our subscription error. So fundamentally, we still believe we have the continued opportunity to take share in the market and grow faster than the TAM.

Our next question comes from the line of Jason Ader with William Blair.

So some investors have asked whether we might be seeing the backup modernization cycle kind of winding down after a few years of elevated investments, how do you respond to that, Sanjay? Do you feel like we are sort of, call it, in the back line of some of that modernization activity in response to ransomware?

I don't think so, Jason. I think we haven't seen a slowdown in cyber attacks or new threat vectors and/or the scale at which this is happening. So there's a lot of work to do. It's -- and we're working with customers around the world on very similar types of cyber resilience programs. I don't think so. You may see different implementations in the -- as we go into what I'm affection to calling the AI era. And there'll be different needs. There will be different threat factors. And we're working really hard to make sure that we're one step ahead of what customers are going to encounter.

In fact, shameless plug it at our shift event on the 12th of November, we're going to unveil probably the most rich set of capabilities on our platforms ever. And so you'll see a lot more of where we believe the world is headed. And I don't want to give it all the way.

Okay. Okay. Good. And then just as a follow-up for you, Sanjay. Could you offer any comments on the deal announced last week between Beam and security AI?

I guess [ Anand ] will be the right person to ask that question. But the way we look at it is we've been saying this for a while. What we've been saying, if you -- I mean, I'm going to guess I've said this for the past years, where the world of data security and the world of data protection, as we know it has to come together if you want to be truly cyber-resilient. And what you're seeing with our acquisition, for example, of Satori Cyber was along the lines, I think, of what we may have done with their acquisition.

The -- where identity observability okay, policy enforcement on all things within your enterprise when it pertains to data. All of these things have to work together because as cyberattacks get more sophisticated, if there's like between your data security elements and your data protection elements, you're exposed. And this is the bringing together of it. We announced our acquisition last quarter.

Next question comes from the line of Eric Heath with KeyBanc Capital Markets.

Yes, I would say just looking at some of the net new ARR, it does look like it's still accelerating over the last quarter. So it doesn't really seem like a slowdown, but -- maybe a question for Jen. Just curious what's giving you the confidence to kind of make the step up in investments and maybe how you're thinking about that trade-off and what a 50 basis point raise to growth, but a 150 basis point reduction in margin relative to your prior guidance?

Yes. Thanks for the question, and it's the right one. Ultimately, what we look at is what has and hasn't changed for the year as we think about guidance and our ability to continue to invest. And fundamentally, what has not changed is our ability to continue to take share. We see that in the fact that the volume and ARR is up the volume number of customers and our overall rep productivity continues to increase.

We're also seeing the fact that our net new offerings continue to contribute more and more to our ARR, right? So across the board, when I think about the opportunity to invest we go back and when we started this year, there were a couple of key things that we needed to see. And effectively, we're continuing to see them, right? And so ultimately, we said '26 is going to be a year of investment, and we're going to continue on that path because all signals say that the market has not changed.

And Eric, this is Sanjay, it's a very competitive landscape. We have to be ahead of what is going on in the market. We run a very responsible business as you're probably tired of hearing me say, where we worry about the top, we worry about the bottom, we want to make sure that we build a sustainable company. So within those constraints, we continue to invest both in product. We're seeing a lot of accolades on our platform, and you haven't seen what we're bringing out yet. And obviously, we have to be where the customers are.

So that's the thinking. And just on that point, I mean, and a follow-on to Jason's earlier question, but do you perceive the competitive landscape getting more competitive? And how do we think about that high in terms of legacy displacement opportunities? Is it starting to shrink, and that's driving a more competitive environment? It's always been competitive, and it's just getting -- now with cyber being more relevant, more visible in boardrooms and with AI, it becomes a spot where it becomes more visible and more competitive.

Now what we've always done -- and we -- and the reason we've been business for 30 years and continue to get accolades on our platform is we out-innovate our competitors. And it's the formula's worked for us and we meet our customers exactly where they are, whether it be on-premise, on the edge, in the cloud, back and forth, and we want to make sure that we deliver the technology to keep our customers protected. And that's how we win. I think there is still ample opportunity to consolidate and there's ample opportunity for us to get customers more resilient.

Next question comes from the line of Howard Ma with Guggenheim.

Congrats on reaching the $1 billion ARR milestone earlier than you expected. For Sanjay, can you remind investors of the drivers of your term subscription business? You mentioned the share gains and the TAM earlier, but I imagine on-premise data growth is still the single biggest driver and perhaps underappreciated by investors. You gave the 40% CAGR for data with in cloud. Not sure if you have a sense of the on-prem data growth? And what is to is the identity and data security that you gave, that's 40% of ARR. So I wonder to what extent is that also benefiting the on-premise part of your business? .

Yes. So Howard, good to hear from you. Our play has always been from the day we dreamed up metallic our SaaS offering. Our dream has always been to have the singular platform for hybrid customers. And I've said it over and order again. I don't know how fast the dial will turn on where they move things to the cloud but we want to give them that complete flexibility to be able to do that as well. And as the platform has evolved, we continue to see customers whose primary disposition is on-premise.

So we work with our partners whether it be HBE, whether it be pure whether it be NetApp to continue to work with our customers on-premise, but the workloads that matter there. And as they start moving more workloads or doing more things with the public cloud, our platform is the natural journey. It's a natural platform. It's the way in which they move things over and protect them on the other side. So for us, on-premise continues to be, and we're very proud of it, continues to be a growth driver.

Now if you look at your second part of your question, on identity and security, that has to be -- that is a valuable thing that has support you don't have separate things going on in the cloud versus on-prem, especially when you have a hybrid environment. And our offerings, whether it be active directory or our partnership with Beyond Trust or the other things we're doing around that allows customers to have an integrated protection capability for their identities as they move more workloads into the hybrid growth. Now it's very important because when your identity is integrated closely with your protection, resilience is a lot deeper. It's a lot better. And we've been doing this for a while. And yes, we're seeing our [indiscernible] our identity capabilities, we're starting to become a significant contributor to a net new ARR. So that is a positive sign.

A follow-up for Jen, given the appreciation for Commvault's hybrid strength, are you seeing increased cross-sell between your term customers and SaaS customers? I recall you all gave us that it's probably from 2 years ago. I think it was like 40% of SaaS customers are also term customers. So I wonder if that percentage has gone up. And then specifically with respect to the change in term duration with compression, are higher mix of SaaS customers influencing the -- those that also use terms, is that causing them to drag down the contract duration?

Yes. So first, let me answer your first question around the mix between software and also using staff. The stat we gave a little while ago was about 30% that continues to tick up flight, but we're seeing that traction. And as Sanjay and I both shared in our script around the fact that customers are really wanting to maintain their flexibility, right? Whether they're starting with us on software or SaaS, the most important thing is that as customers continue to transition their workloads, we have that opportunity. So I think we're seeing that in the numbers. Sanjay, you can add. .

And Howard, we obviously help customers with the workhorse logically. So there are some that overlap like virtual machines between cloud-driven and SaaS driven or on-premise driven, that's a choice to give our customers, but things like protecting Microsoft 365 is all cloud. So what ends up happening is, as customers -- as we work closely with customers on their journey on their workloads and their priorities on their timing we meet them where they are. And that's just how it works. And sometimes there's a shift where they make the cloud a priority over on-premise. But the good news part all the way. The good news of the way is that they commit to our platform, and then we enable them all the way, whether they're on us on the cloud or on yet. So I look at this movement as something we've been expecting and something that we're ready for with a tailor-made platform for our enterprise hybrid customers.

Next question comes from the line of Rudy Kessinger with D.A. Davidson.

Congrats on a strong quarter. When I look at ARR which obviously matters much more than revenue. Obviously, record net new ARR and by my math, organic growth constant currency accelerated a point to 19%. Jen, you talked about ongoing investments in growth initiatives as Part of the reason for the EBIT margin guidance coming down in addition to the gross margin compression. Could you just talk about where you're making those incremental investments? And could we see further ARR growth acceleration over the next year or so as a result of those investments?

Yes, sure. So let me start by saying what we did was continue to keep operating expenses at about 61% of revenue that's consistent with prior quarter and prior year. The overall gross margin pressure that we saw really came down to the fact that our SaaS business continues to accelerate, which as we all know, is a great gray thing and ultimately just has a different margin profile. And then overall, the shift in term duration. So ultimately, this quarter, the pressure really came down to gross margin. .

As we think about the back half of the year, ultimately, what I would say to you is the investments we started out with the year in terms of continuing to accelerate our SaaS motion, right? We're still making those plays. As evidenced by the guidance for the back half of the year implies a $45 million of net new ARR on a constant currency basis, which, as you remember, is above that $40 million that I first started the year with. And so ultimately, our investments are paying off, and we're going to continue to exist.

Got it. And then any parameters, I guess, for the second half, obviously, you have the total implied there guidance. But just any parameters in terms of what we should expect from SaaS. I think the prior commentary was $20 million plus. Obviously, you did I think $29 million in Q2. Should we expect $25 million plus in SaaS net new era now in the second half? Or just any kind of guardrails around the SaaS and term license split in the second half?

Yes. As you think about the split, the best way to think about it is approximately 60% of our net new ARR will be safe.

Very helpful. Congrats.

Next question comes from the line of James Fish with Piper Sandler.

I wanted to go back on the contract duration. Is the shorter contract duration being seems more on the existing installed base is the assumption I'm making? Or are you seeing it on new deals as well, a combination of 2? Jen, is there a way to think about where we're at on adverse duration at this point? And is there a vertical or 2 that's sticking out with this, such as obviously, we're talking federal generally this quarter, but now we're talking about it even more so given the shutdown.

Yes. So first, what I would say to you is it's actually across the board, where customers are really wanting to maintain that flexibility as they think about either accelerating or just anticipating their journey to the cloud. quantifying that, we were down 9% from a shift to term quarter-over-quarter. But again, I would go back to really normalize to what we were seeing 3 or 4 quarters ago. And so ultimately, I think that is the -- that's how we're thinking about it. Did you have a second part of your question?

I was asking you guys historically have talked about duration here and there. And it used to be about 3%, and then you started talking about new customer lands being, I want to say, 2 to 3 can correct me. But where is average duration now trying to understand like how much of a headwind duration is right now to term license?

Yes. I think I would say I would just go back to the fact that I think we've shared that in the new deals, it kind of creeping up towards Three years. Overall, we've seen that go down about 9% ultimately. And that's how we're quantifying the impact.

James, [indiscernible] Sanjay, it's [indiscernible]. I just want to add to that. I understand that the other metric that I look at very closely or we look at very closely is the number of new deals that we're bringing into the business. okay? And this was the second the largest number of deals of new deals that we brought in on term software, okay, in this quarter. So if you look at that, the volume and it's significant, okay? And as customers move to hybrid, it's very logical that they have different implementation plans, and you have to meet them where they are. And then I look at this as is something that the transition customers have to go through, and we are ready for it, and we help them while they're going through it on the on-premise side, and we pick it up completely on the cloud side. And that's the way to think of it.

So look, I understand that there's greater SaaS mix and some term duration headwind here. But if I look at the gross margin, SaaS being sort of mid-60s at this point, the other kind of growth -- I'll say the remainder gross margin was down decently sequentially. Why isn't this just competitive pressures or further discounting in the space?

Really, I would just go back to what I shared. It really is around the fact that the bulk of this is very much the acceleration of stats and the shift to terms. There's really nothing else to talk about there.

Nothing major.

Nothing major.

Next question comes from the line of Junaid Siddiqui with Truist Securities.

Great. Sanjay, as the pace of innovation increases and the cadence of new products that you launch accelerates and I'm sure we're going to hear a lot more in a couple of weeks at shift. What are some of the things that you are doing on the pricing and packaging front that can help customers consume more of that platform? .

Great question. And without giving it all away, there is a maybe you and I met in 2 weeks and I take you through some of the innovation and how we're thinking about it. But the bottom line is a lot of work we're doing in there to make it super easy for customers to take additional services and capabilities as they get the core. So I mean, it's a very logical approach. In other words, if they start with software, we're going to make it super easy for them to consume any service that we have inside of the platform, be it delivered through the cloud or on-premise or on the edge. And we've given customers -- we've always given customers because of our architecture, the ability to really run our control plane the way they want.

And so if you extrapolate what I'm saying into packaging and ease of consumption, we're working really hard behind the scenes to make this super easy for customers to land some place and then continue to logically build their resilience with new services over time. What's implicit in what we're doing, which is which is not your question, but I think it's important to understand is we're building a ton of testing tasks that customers have to do to be ready in the face of a cyberattack or an event and making sure that we're building that capability, that automation into the product platform and into the packaging and that becomes really important. So without getting into the details, and I'm happy to spend time with you at Shift and walk you through it. But when you see the portfolio, I think it will be quite logical how it all comes together.

Great. And Jen, just in terms of capital allocation, I know you mentioned you bought some shares, especially in conjunction with the convert. But historically, I think you've talked about allocating north of 75% of free cash flow to buying back shares. Is that still the case? Is that how should we should think about in terms of buyback?

Yes. Thanks for the question. So I would say our capital allocation strategy remains consistent. It's on the 3 pillars of share buybacks, M&A, investment and organic investment back into the business. As it relates to share buybacks, you're right, we purchased $118 million of share buybacks with -- conjunction with the convert to date, that's been $146 million we've repurchased -- we have not had a big guide, but what I will say is that we expect to be opportunistic and active and ultimately, what we said is from a modeling perspective, that share count should remain approximately flat at about 45 million shares.

[Operator Instructions] There are no further questions at this time. I would like to turn the call over to Mr. Michael Melnyk for closing remarks.

Thanks, Desiree. I just want to remind everyone that the invitations to Shift, which is happening on November 12 in New York City have been e-mailed if you didn't registration or opportunity to register, e-mail me @melnykcommvault.com. We look forward to seeing you. You'll be able to see a very innovation-rich day and to hear from our customers, partners and spend some more time with management. So we encourage you to attend, and we look forward to seeing you in New York. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Good morning, and welcome to the Commvault Systems 2025 Annual Shareholder Meeting.

I would now like to turn the call over to Michael Melnyk, Head of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen. I want to welcome you to Commvault's Annual Meeting of Stockholders. I'm Michael Melnyk, Head of Investor Relations at Commvault, and I'll be presiding over and serving as secretary for the meeting.

With us today are Adela Foresight from Computershare who has been appointed to act as the election inspector; and Maureen Bashara from E&Y. I would also like to welcome members of the company's management team and Board of Directors who are present at this meeting.

Please note that the Corporate Secretary has delivered an affidavit of mailing, establishing that notice of this meeting was duly given. All stockholders of record at the close of business on June 20, 2025, the record date, are entitled to vote at this annual meeting. As of the record date, there were approximately 44.5 million shares of stock entitled to vote at this meeting.

We're informed by Computershare that they are represented in person or by proxy at least 41.9 million shares of common stock or approximately 94% of all the shares entitled to vote at this meeting. As this constitutes a majority, the meeting is duly convened for purposes of transacting such business as may properly come before it.

The matters to be voted on at today's meeting are: the first proposal is to elect 9 nominees as directors to serve 1-year terms. The nominees for election are Sanjay Mirchandani, Nicholas Adamo; Martha Bejar, Keith Geeslin, Vivie “YY” Lee, Charles Moran, Allison Pickens, Shane Sanders and Arlen Shenkman.

The second proposal is to approve, on an advisory basis, Commvault's executive compensation. The third proposal is to ratify the appointment of Ernst & Young LLP as the company's independent auditors for the fiscal year ending March 31, 2026. And the final proposal is to approve 1.3 million additional shares for issuance under Commvault's 2016 Omnibus Incentive Plan as amended. The Board of Directors recommends that stockholders vote for proposals 1 through 4. If any stockholder would like to make a comment regarding any of the proposals, please do so at this time as the polls will close momentarily.

If you previously voted by proxy, you do not need to vote today unless you wish to change your vote. If you've not yet voted, you may do so at this time by completing the ballot available on our website and e-mailing it to [email protected].

I'll now pause to see if there's any questions. And there are no questions being phoned or by e-mail. Now that everyone has had the opportunity to vote, I hereby declare the polls closed. We have been informed by the election inspector that the preliminary results have been counted and with over 94% of stockholders voting, all proposals have been approved. Final results will be publicly available once the votes have been certified by the election inspector.

Thank you all for attending today's meeting. It is now adjourned.

This concludes the meeting. You may now disconnect your lines. Have a pleasant day, everyone.

Ladies and gentlemen, thank you for standing by. My name is Tejeri, and I will be your conference operator today. At this time, I would like to welcome everyone to the Commvault First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mike Melnyk, Head 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 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 be materially different from those contemplated in these forward-looking statements. Commvault does not assume any obligation to update these statements.

During this call, Commonwealth'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.

And now I'll turn it over to our CEO, Sanjay Mirchandani, for his opening remarks. Sanjay?

Good morning, and thank you for joining today's call.

Commvault had a tremendous start to our fiscal year. Some highlights in the quarter include: Total ARR grew 24% to $996 million. Subscription ARR grew 33% to $844 million. Total revenue grew 26% to $282 million. Subscription revenue increased 46% to $182 million, and we received 47 on a rule of 40 basis. Our execution has never been better across the business. We continue to see hypergrowth with our SaaS platform. SaaS ARR sore 63% to $307 million. And in Q1, we surpassed 8,000 customers and reset to surpass our $330 million ARR target well ahead of schedule.

Those stats also speak to our overall land and expand business. In fact, in Q1, across software and SaaS, we had our best land and expand quarter ever. A few notable wins include Honeywell, Equifax, U-Haul, NTT Data Services and Insurance Group, Chaucer Lloyds.

Additionally, we've seen tremendous success in emerging routes to market, including cloud marketplaces. During the quarter, we achieved triple-digit growth in marketplace transactions with multiple 6-figure and [indiscernible] 7-figure deals.

And lastly, in terms of execution, we posted healthy growth across geographies, industries and customer segments, from enterprise to [ S&B. ] Jen will share more details about this later. None of this would have been possible without the trust of our customers and partners and the hard work and dedication of our team members globally. Thank you all.

The strength we demonstrated in Q1 provides us with a solid foundation for the rest of the fiscal year. As we reported in previous quarters, there are 3 critical drivers that continue to underpin [indiscernible] long-term sustainable growth. First, the cyber resilience market is booming. As CIOs and CISOs alike strive to keep their businesses offering continuously in a world of relentless sweat in attacks, Commvault is front and center in this market, and we continue to see healthy growth in our engagement with CISOs. Combos offerings uniquely fill the preparedness gap that security and IT teams are so concerned about today. CISOs can enhance resilience by proactively assessing risks, scenario planning and running simulations as part of our platform. That's what we do, and we do it better than anyone else.

Case in point, we continue to see growth with our clean room recovery offering that enables customers to test their resiliency in good times, so they're prepared for the hard times. In Q1, a government institution in the Middle East chose Commvault cloud and plenum recovery to regularly test the cyber preparedness. The customer also added Airgas detect, Active Directory and Cloud REWIND for enhanced security and rapid recovery following an outage of cyber attack. This quarter, we brought cyber preparedness to a new level with the introduction of recovery range. This hands-on in-person experience enables security and IT teams to simulate the pressure of real-world attacks in a setting that models their own production environment. Unlike other simulations, defenders can practice their responses, recovery and put their preparedness skills to the test.

Our second critical market driver is the breadth of our partner ecosystem. Q1 was a phenomenal quarter for Commvault in terms of extending our reach with partners. In addition to doubling down on cloud marketplaces, we announced major partnerships across the ecosystem. We formed a strategic alliance with Deloitte to help enterprises around the world, fortify the defenses and swiftly recover from outages and cyberattacks. We took our partnership with Cross Strike to the next level, announcing an expanded collaboration that brings together their elite incident spans services with our industry-leading recovery expertise. These services help customers improve readiness, respond faster and achieve cleaner recoveries. From the main stage at HPE Discover conference, HPE and Commvault announced a strategic partnership to deliver advanced cyber resilience, data protection and disaster recovery capabilities for enterprise hybrid cloud environments.

Lastly, in partnership with Kindra, we announced incident recovery services. This holistic solution helps customers mitigate risk, avoid the high cost of downtime and regulatory fines improve cyber resilience and enable continuous business in the face of cyber threats.

And finally, our third driver is our market-leading innovation, which continues to receive major accolades. For the 14th consecutive time, Commvault was named a leader in the Gartner Magic Quadrant for backup and data protection platforms. In Gartner's critical capabilities reports, we were ranked number 1 in 5 out of 6 use cases, including multi-cloud and SaaS, and we received the highest rating for the AI and ML critical capability. Additionally, this feel Gartner recognized Commvault as a sample vendor in the Gartner 2025 hike cycle for data security technologies.

In Q1, Commvault also won the outstanding Cyber Resilience award from Cyber Defense magazine. We will continue to innovate so our customers can address their most critical resilience challenges, protecting AI data as part of that. As the Gartner Security and Risk Management Summit in June, panelists reported by 2028, 25% of enterprise breaches will be traced back to AI agent abuse from both external and malicious internal actors. To directly address threats posed by AI and to further advance data security, Commvault recently announced its intent to acquire Satori Cyber, a data and AI security company. This strategic acquisition will add powerful capabilities that strengthen Commvault's data security offerings and empower customers to use AI in a better governed and more responsible way. The transaction is expected to close later this quarter, so we'll share more on our next earnings call.

The bottom line. We have an industry-leading cyber resilience platform, an aggressive AI minded innovation road map and the proven execution customers rely on to keep their businesses uninterrupted. We hope you can join us in New York City at Commvault shift on November 11 and 12 as we usher in a whole new era of cloud native and cyber resilience readies.

Now I'll turn it over to our Chief Financial Officer, Jen DiRico, to discuss our results.

Thanks, Sanjay.

As Sanjay mentioned, we delivered a strong start to the fiscal year. The momentum in the cyber resilience market remains strong. Our brand message continues to gain traction. Customer demand is increasing, and our team is effectively leveraging a record number of opportunities. I would like to express my gratitude to all the vaulters whose efforts contributed to our outstanding first quarter results, positioning us for continued success throughout the fiscal year.

Now I'll discuss our Q1 results and operating metrics, followed by a discussion of guidance for Q2 and FY '26. Please note that all growth rates are on a year-over-year basis unless otherwise specified. Total annual recurring revenue increased by 24% to $996 million on a reported basis. On a constant currency basis, opine March 31, FX rates. Organic net new ARR grew by $40 million quarter-over-quarter, a new quarterly record. For a comparison of FX adjusted ARR with previous quarters, please refer to our earnings presentation. Subscription ARR grew 33% to $844 million, representing 30% growth on a constant currency basis. This was led by an impressive 63% increase in SaaS ARR to $307 million or 60% growth in constant currency. Subscription ARR now constitutes 85% of total ARR compared to 79% 1 year ago. As a reminder, we view subscription ARR as the best indicator of the company's growth profile.

Now I'll discuss Q1 revenue trends. Total revenue increased by 26% to $282 million, driven by a 46% rise in subscription revenue. This growth was supported by an exceptionally strong land and expand quarter for both term software and SaaS, with gains across regions, industries and transaction sizes, including a significant increase in software transactions exceeding $1 million. Revenue from term software transactions exceeding $100,000, increased by 39%, reflecting robust growth in both transaction volume and average deal size. Also, we acquired approximately 700 net new subscription customers, and total subscription customers are now approaching 13,000. Customer expansion remained robust with Q1 SaaS net dollar retention of 125%. As a result of both successful upsell and cross-sell initiatives, our leading solutions, M365 and Airgap Protect continued to achieve double-digit quarter-over-quarter growth, complemented by substantial contributions from new products that support customers' business continuity strategies, such as clean room and active directory.

During the quarter, we worked closely with a North American aerospace company to modernize its cyber resilience strategy, while remaining audit ready for FAA and aircraft manufacturer compliance. The customer implements Commvault's autonomous recovery, Airgap Protect and Active Directory to back up their critical data and support their regulatory requirements. The number of SaaS customers utilizing 2 or more products increased by 45%.

As Sanjay highlighted, SaaS continues to be the preferred route to market for many customers. And this quarter, we observed exponential growth through the hyperscaler marketplaces. Another positive development is 70% increase in customers generating over $100,000 in SaaS ARR during Q1. These larger SaaS customers now constitute more than 30% of our SaaS customer base. Due to the complexity of their requirements, this segment typically demonstrates a higher rate of multiproduct adoption than our overall SaaS base. For example, a Fortune-500 life insurance company adopted Commvault after experiencing limitations with native tools for cloud application protection and recovery. The organization standardized M365, files on objects and VMs on Commvault Cloud, resulting in the elimination of silos and changes in recovery time. With the implementation of Airgap Protect, Active Directory and Cloud REWIND, the company adjusted its data security approach, address compliance requirements and enhance the process of environmental rebuilds. This example underscores the long-term monetization potential of our platform. As I mentioned in previous calls, we will continue to lean into this cross-sell motion in the coming quarters.

Now I'll discuss our profitability and free cash flow, which demonstrates our commitment to a responsible growth philosophy. Fiscal Q1 gross margins were 82.4%, consistent with our previously shared expectation for total gross margins to remain in the low 80% range. Operating expenses of $173 million, represented 61% of total revenue, consistent with the prior quarter and prior fiscal year. Q1 operating expenses included planned headcount growth, previously disclosed investments to support our strong ongoing growth trajectory and higher commission and bonuses on record sales results. Non-GAAP EBIT grew 21% to $58 million and non-GAAP EBIT margin was 20.7%. In Q1, we achieved 47 on a rule of 40 basis, which reflects a healthy balance between revenue and profitability.

Turning to key balance sheet and cash flow indicators. We ended Q1 with no debt and a cash position of $363 million. Free cash flow was $30 million, primarily driven by continued strength in deferred revenue from SaaS contracts and solid software subscription renewals. During the quarter, we repurchased $15 million of stock and our diluted share count remained flat at 45 million shares. As Sanjay mentioned, we announced our intention to acquire Satori Cyber, a data and AI security company. We believe there are extensive opportunities to help customers responsibly utilize AI in their production environments. And Satori can help Commvault accelerate this vision. The transaction will be funded from our international cash balance. We expect the transaction to close later this quarter and to be modestly dilutive to margins for the next several quarters.

Now I'll discuss our outlook for Q2 and our updated outlook for fiscal year '26. For fiscal Q2 '26, we expect subscription revenue, which includes both the software portion of term-based licenses and SaaS to be in the range of $174 million to $176 million. This represents 31% year-over-year growth at the midpoint. We expect total revenue to be in the range of $272 million to $274 million, with growth of 17% at the midpoint. At these revenue levels, we expect Q2 consolidated gross margins to be in the range of 81% to 82%. We expect Q2 non-GAAP EBIT margins of approximately 20% including the integration of Satori Cyber.

Now I'm happy to share that we are raising our fiscal year 2026 guidance. As a reminder, ARR guidance is in constant currency using FX rates as of March 31, 2025. For historical comparison, please refer to our Q1 earnings presentation. We expect constant currency FY '26 total ARR growth of 18% year-over-year. This will be driven by subscription, which we expect to increase by 24% year-over-year. From a full year fiscal '26 revenue perspective, we expect subscription revenue to be in the range of $753 million to $757 million, growing 28% at the midpoint with strong contributions from both term software licenses and SaaS. We expect total revenue of $1.161 billion to $1.165 billion, an increase of 17% at the midpoint.

Moving to our full year fiscal '26 margin, EBIT and cash flow outlook. We continue to expect gross margins to be 81% to 82%. This range reflects continued growth in our SaaS platform, which carries a different gross margin profile than software. We now expect non-GAAP EBIT margins of approximately 20.5%, including the dilutive impact of Satori. Non-GAAP EBIT margins also reflect our ongoing investments in additional growth driving initiatives. We continue to expect full year free cash flow of $210 million to $215 million. This guidance reflects our transition to a cash taxpayer following the full utilization of our tax carryforward credits in fiscal 2025.

In closing, our Q1 results underscore the strong and accelerating demand for our cyber resilience platform. This momentum, combined with our focused investments positions us well to capture a greater share of the market in FY '26 and beyond. While we remain mindful of the broader macro environment, our updated guidance reflects our confidence in the opportunity ahead and our ability to execute against it.

Now I will turn it back to the operator to open the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Aaron Rakers with Wells Fargo.

Congrats on the results, continued solid execution. I guess 2 quick questions for me. I know, Jen, you had mentioned the operating margin in both this quarter as well as through the full fiscal year. does reflect the dilution impact of Satori. I'm curious, from a revenue perspective, are you factoring in any kind of contributions from that acquisition? And then as a second question, a lot of commentary around the cross-sell, upsell opportunity. I think last quarter, you talked about roughly 30% of your SaaS customers purchasing more than 1 solution. I'm just curious, I know you mentioned 45% growth, but how do we think about that as we move forward? How successful have you been? And where do you think that can ultimately get to?

Yes, thanks so much for the question, Aaron. I'll start with the first 1 around Satori. So we're incredibly excited about the Satori acquisition. It absolutely adds technology and talent as we think about expanding the breadth and depth of our platform. From an overall top line perspective, it is immaterial and not really -- does not factor into any sort of uplift in revenue guidance. As it relates to the cross-sell, we have made really good progress. It's early innings -- you heard me say last quarter, this is the first quarter we're actually focused on it as a company. You heard me say in my prepared remarks that we saw an increase of 45% from a customer perspective using 2 or more. The other things I would add to you is the fact that you heard my script that we're seeing numerous customers purchase 5 or 6 offerings, right? So there's great progress there. Another stat I'll share with you is within the SaaS net dollar retention rate, historically, and I've shared with you that, that mix has been 1/3 cross-sell. This past quarter, it was 40%. And so ultimately, I think we're seeing really good traction. And then in addition to that, our security SKUs grew double digits quarter-over-quarter, contributing into that cross-sell and made up 20% of our net new ARR.

Our next question comes from the line of Jason Ader with William Blair.

Can you guys talk about the bundling strategy that you have right now. You have a lot of different products, obviously, seeing good success with cross-sell. What is the sort of kind of high level bundling strategy? Is it still a work in progress, or are you feeling good about where you sit with bundles today?

Hi, Jason, it's Sanjay. Good to hear from you. So there are some logical bundles that we offer customers today that just make sense together like clean room and Active Directory or Office 365 in active directory, so we have those sort of packages that customers tend to avail of naturally because they work better together. As a cyber resilience platform, continues to evolve, you'll see more of these logical capabilities coming together with the value proposition. And in November, as I said in my prepared comments, we have shift, and you will hear a lot more about how we're looking at our platform there. So hold that question for a little longer, and you'll see a lot more there.

Our next question comes from the line of Howard Ma with Guggenheim Securities.

Great, and excellent quarter, guys. I have 1 for Sanjay and then 1 for Jen. For Sanjay, when you think about supplementing future growth through M&A, what are some of the key categories by which you can evaluate opportunities? And then Adi, Satori acquisition, are you seeing strong evidence that customers want to procure governance and policy enforcement for AI training from their data protection vendor as opposed to other infrastructure software providers?

Howard, so how are we -- if you look -- it's going to be hard for me to tell you what I'm going after, but I'll tell you what I've gone after. So if you look at the sort of history of acquisitions we've made, they've been really -- if you look at [ TrapX ] and what [ TrapX ] brought to us, if you look [ Atranix, ] these were core security and cloud native capabilities as the platform evolves. So as customers started moving more complicated workloads, building cloud negative workloads in the cloud in a multi-cloud environment, we wanted to make sure that the way we protected those and gave resilience, 1 size doesn't fit all. So they flesh out our ability, for example, to be to keep customers more secure at the front and then in turn, protect them in the cloud native way. Now when we took on Tomio, Tomio gave us very good large AI data protection capabilities. Now with Satori, you're seeing that we're bringing those 2 things together, you've got you've got the whole visibility, observability and policy enforcement across semi structured and structured data that tacks on very well to the unstructured data pieces that our platform has, and also, as customers start training models and using AI internally, policy enforcement and observability on LLM and other things and the data that train those models naturally fits that. So it's not -- I'll answer both your questions together. So it's not about separate policy enforcement on a separate tool set for just like -- and they will be for that. But this is really as the models get trained internally and your employees are using the technology, it gets -- you have the same level of visibility what's being fed used was being per so you get to import policy that way. And it will all be natural. It will all be part of the platform, so it will be -- we're going to integrate it very aggressively so that it's just a natural way to work with the platform or what we do already. We give you policies already. This is an enhancement. That's how I think about it.

Got it. That makes a lot of sense, Sanjay. For Jen, when we look at the full year revenue guidance being raised by [indiscernible] Q1 side, how much the quality and the size of your renewal base this year versus last year play a factor, including, I guess, potential for seat expansion and security cross-sell?

Yes. Thanks for the question, Howard. Actually, as we think about overall revenue guidance, the overall rent base has been already considered. And ultimately, what you're seeing in the guide is the strength of [indiscernible] both on the software and the SaaS side of things.

Next question comes from the line of Rudy Kessinger with D.A. Davidson.

Great. Very strong results all around. I want to dig in to maybe just the net new ARR in Q1 does look like it's skewed much more towards term license relative to that just versus the trend over last year, very strong net new ARR. Anything to call out there in terms of how deal dynamics shaped up? Or any color on maybe what was a bit weaker of a SaaS net new ARR quarter.

Yes. So first of all, I would say our SaaS business performed as expected and in line, and we're very pleased with that. The delta to come from overperformance in the software side of things. At the very, very end of the quarter, we did benefit from higher close rates on a few software deals. As it relates to as we think about the SaaS business overall and overall net new ARR on a quarterly basis, we believe going forward that you can see north of $20 million in the SaaS net new ARR. And then on the go-forward around $40 million total net new ARR quarter-over-quarter for the remaining of the year.

I wasn't going to ask about kind of the sequencing of net new ARR for the course that kind of answers that. I guess maybe a follow-up on that comment you just made about some higher close rates towards the very very end of the quarter. Could you just talk about the linearity of the quarter at large, and how things trended month-to-month?

Yes. I think, first of all, when we started the quarter, we always affected that we'd be between $30 million and $35 million of net new ARR. And at the very, very end, close rates kind of improved quite honestly in like the last week or so of the quarter on a few large deals, and that's really what you saw from a linearity perspective.

Next question comes from the line of Eric Heath with KeyBanc Capital Markets.

Congrats, Sanjay and Jen as well. I'll ask maybe on Fed, if I could, Sanjay, just maybe some of the assumptions you're embedding in the guide both for Sanjay and Jen and feedback you're hearing because I know it is a big quarter for you fed for 2Q.

Yes, I'll start. And then, of course, Sanjay, feel free to chime in. From a federal perspective, we feel incredibly good about our Fed business. It performed in line with our expectations in Q1. And overall, we expect to see similar seasonality for the first half of the year because we do know that overall, the Fed is stronger in the first half of the year, and ultimately, I think what we're seeing is that our FedRAMP high certification continues to be a competitiveness for us.

You sound it up.

You were hard to hear, Eric, your question was just around Fed, right?

Right.

Okay. Yes. Jen...

And if I could ask a follow-up, Jen, just on the margins. I know you covered some of it, the reasons for OpEx in the quarter, but just anything you can share why we're not seeing more drop to the bottom line and maybe just help a little bit more on granularity on organic operating margins for the year.

Sure. So let me just start by saying, I think we're incredibly proud of the overall performance. The business performed in line with our expectations. We had a record quarter and that related to not only increased bonus and commitments as well as our regular planned headcount additions associated with the investments we plan to make. Now I would just highlight the fact that we landed at our 47 on a rule of 40. So I think overall, we are balancing with business and profitability and growth quite well. As we think out for the rest of the year, like I said, the diluted -- Satori is the only dilutive impact. It's about 50 bps, although than that, the business is performing exactly how we expected to my original guidance from overall EBIT.

And just 1 more element of color on that is a SaaS business is growing. And it grew 63% year-on-year on an ARR basis, and we're seeing more workloads, and if that has a different margin profile, which in the overall scheme of things is reflected. So [indiscernible] the growth is there, and we had a -- and particularly proud of the 47 rule of 40.

And I would just close out with saying that from a guidance perspective, our original guidance showed a rule of 36 to 40, and our -- my updated guidance shows a rule of 38. So there's already performance and strong balance there.

Our next question comes from the line of James Fish with Piper Sandler.

I wanted to go back to something, Jen. You said Microsoft 365 has been sort of a killer application, the lion's share of metallic. But what are you seeing there with either a number of protected or however you want to talk about it -- what are you seeing with some of those newer solutions like Cloud REWIND as you mentioned, some of them have certainly become substantial. So in other words, what I'm really asking is, is a way to slice sort of the contribution of, I think you said Microsoft 365 in Airgap versus some of the other newer products.

Sure. So from an M365 and Airgap protect right, those are our oldest products and our most mature, and so they continue to carry the lion's share of the ARR. However, our security offerings, Threat Wise, Threat Scan, Clean Room, Pranex, Risk Analysis, those grew double digits quarter-over-quarter and made up 20% of our net new ARR.

And we're happy with that.

Yes. Understood, understood. And then, Sanjay, conversations we always have is just shots on goal. I guess are you feeling about what you're getting for shots on goal? I know there's been a lot more marketing programs going on. And Jen related to that, we're about 85% subscription now. So is there a way to think about how much is left for migrations within the base?

Do you want to go in, Jen?

Sure. So I would -- first of all, I'll start by saying we're really pleased with the overall performance of 85% of the business being on the recurring base of subscription. As we think about migrations, right, and overall, like our perpetual business continues to be a small amount of the overall revenue, we saw that come down this quarter. We're focusing the business on subscription, right? But ultimately, what we're seeing is more and more of our ARR is coming from our land business, right? And so ultimately, the growth is not really coming from the conversion. It's much more about land in particular on the SaaS side.

From a conversion point of view, we've always held the line that we don't want to do anything unnatural that customers have choices and we give them the choice, we lean into our subscription platform, be it SaaS or term license. But if for whatever reason customers switch to co-perpetual, they have that choice with them.

And then as it relates to your question on more shots on goal, right, we said this year was another year of investment to continue to maintain our momentum and growth, and you're seeing that in the top line because it's absolutely leading to more shots on goal and our execution continues to remain incredibly high.

Our next question comes from the line of Tom Blakey with Cantor.

Congratulations to stellar fiscal 1Q here. Maybe for starters, 2 questions. Sanjay, can you just maybe give us an update on the potential competitive displays and maybe consolidating workloads on Commvault this growth is pretty dynamic, and we've been talking about that for a while. I'd love to get a kind of update there in terms of the sustainability of this dynamic growth. And then Jen, thank you for that color on the north of $20 million net new ARR from SaaS. Can you just maybe talk about any maybe changes there in terms of competition or maybe pricing or whatnot. We talked about bundling, I think, in a prior question or is it just kind of net new conservatism because that doesn't imply a lot of growth on a year-on-year basis from net new ARR that occurred in the last kind of 4 or 5 quarters, that would be helpful.

Yes. So Tom, from a displacement point of view, if you look at just the software on-premise set of capability, that's a market that's growing low single digits. So we're growing in a healthy pattern, which means we are taking share. We're taking share because of a few things. One, our technology continues to lead. I mean if you look at all the new Gartner reports, that technology continues to lead in every way. Our delivery model with the partner ecosystem has evolved and continues to evolve every quarter in my prepared comments, I shared the new partnerships and the impact they're going to have. The third piece is that the problem we solve, the hard problem we solve for customers goes beyond data protection. We're now looking at entire environments on cloud native. We're looking at true multi-cloud, we're looking at SaaS environments. And so when you -- and we make protection for customers, be it a SaaS work or a cloud native work with our on-premise work we're completely transparent. So when you take those factors and the customers have -- customers are definitely consolidated. More in this case is not better, having more vendors, more policies, more feet on the street to make things work is actually harder. And so there is a definite direction of consolidation to our advantage because our platform uniquely provides that capability at scale and does it in a hybrid environment.

And Tom, regarding your overall SaaS, ultimately, what you're seeing is the strength in our overall organic business. Yes, Sanjay, just said on the competition element. We're not really seeing too many changes there. Ultimately, customers want or platform and our SaaS platform absolutely meets the moment. So ultimately, it's just got in the organic business.

And our last question comes from the line of Ittai Kidron with Oppenheimer.

Again, congrats on a great quarter. I had, I guess, a couple for me. First of all, Jen, there's some of the things we inherited from the channels that there are customers who are pulling forward calendar '26 budget plans into '25. I'm kind of wondering as you look at your strong performance, clearly, the market is doing very well. But is there a way for you to build if there's a pull-forward activity within your customers right here right now?

Yes. Thanks for the question. We spent a lot of time with our go-to-market team here, and we're not seeing any poor. It's just strength in the overall market and our products, meeting the needs of customers and our team executing incredibly well.

Excellent. And then maybe as a follow-up, you started the new year. Can you talk about the comp plans? How have they changed? If anything, are you revising more or less of this year?

Sure. So we don't give a lot of details [Audio Gap]. But what I can tell you is our team is incentivized to absolutely go after our overall recurring revenue, and we are balancing the need between what -- meeting the needs of what customers want. So ultimately, it's all...

Paper performance.

It's just a paper performance.

That concludes the question-and-answer session. I would like to turn the call back over to Mike Melnyk for closing remarks.

Thank you, everyone, for joining this morning. If you have any additional questions, please feel free to follow up with me imply e-mail. And also, as Sanjay mentioned, we encourage everyone to register for the Shift user event in New York City November 11 and 12 and visit our website for details. Thanks very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.