CommVault Systems achieves $1 billion in total ARR ahead of schedule, driven by 30% subscription growth and robust demand for its cloud cyber resilience platform.

Desiree - Operator - (00:01:11)

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press STAR followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. I would now like to turn the conference over to Michael Melnick, Head of Investor Relations.

Michael Melnick - Head of Investor Relations - (00:01:49)

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 Systems'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 Systems's most recent periodic reports or 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 Systems does not assume any obligation to update these statements during this call. CommVault Systems'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 Merchandami for his opening remarks. Sanjay Sanjay, Good morning and thank you for joining today's call. CommVault Systems 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 million. 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 2/4 earlier than our original March 2026 target. In Q2 SaaS, ARR grew 56% hitting 330 million. This was also 2/4 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 from the CommVault Systems team. Looking ahead, there are three key business drivers that continue to fuel our growth 1 Strong demand for our CommVault Systems Cloud cyber resilience platform from our hybrid cloud customers 2 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, hybrid 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 paramount. Traditional data protection approaches don't cut it. 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 Entra ID identity protection services. In Q2, a large bank in Asia Pacific chose CommVault Systems's Active Directory offering to quickly recover its identity operations after a cyber attack. They also leveraged ThreatScan 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 combo cloud platform, we can help joint customers advance 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 Systems has moved and protects approximately 8 exabytes of customer data into the cloud. This represents a greater than 40% CAGR over the past five 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 Clumio portfolio of offerings for AWS more relevant than ever. Over the past year we introduced Clumio backtrack for S3 and brought Clumio's unique recovery capabilities to DynamoDB and Apache Iceberg. We are transforming the speed, scale and efficiency to in which cloud data can be restored. This quarter we saw healthy sequential growth in ARR from Clumio and continue to add new customers to the platform, including three Fortune 1000 customers and two Fortune 500 customers and BPVA, one of the world's largest financial institutions, chose CommVault Systems to reduce its cloud native complexity, strengthen its DORA compliance requirements and protects its mission critical AWS data. CommVault Systems Cloud unified its data protection across three major hyperscalers and Cloomio unlocked a 40% cost savings. Additionally, we made tremendous progress with cloud bound enterprises. In Q2, the number of SaaS customers grew to 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 chose CommVault Systems to support its hybrid cloud journey. Today, CommVault Systems safeguards its virtual machines, databases, File Systems and Microsoft 365 data. The customer also leverages Air Gap 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 Systems'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 Directory and Cloud Rewind are closing the gap for customers. Evolving readiness and Resilience requirement 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 commvol. As enterprises embrace AI, we will help them address evolving resilience requirements. That's why we acquired Satori Cyber, which closed during the quarter and is being integrated into our commvol cloud platform. This acquisition is timely as it provides monitoring and prompt protection for large language models as well as automated discovery, classification and access management for structured data. We will discuss the evolution of resilience in the age of AI and introduce our richest set of innovations ever at Shift, our premier customer event on November 12th 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.

Jen Dirico - Chief Financial Officer - (00:10:16)

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 arrangements and $29 million in net new SaaS ARR on a constant currency basis and we exceeded $1 billion in total ARR reaching this milestone 2/4 earlier than our initial target. Now I'll discuss our Q2 results and operating metrics followed by an update on Q3 and FY26 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 2/4 earlier than planned. Subscription ARR now constitutes 86% of total ARR compared to 81% one year ago. Subscription ARR is the best indicator of the company's growth. Now I'll 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, Clean Room, Cloud Rewind, Risk Analysis and Threat Scan, which collectively grew double digit percentage sequentially to and represented almost 40% of net new ARR. Active Directory, a mission critical identity tool for an effective resilience strategy, saw usage more than triple year over year as IT leaders adopt our data and identity recovery solution. In just two years, Active Directory is on pace to become one of our largest SaaS offerings. For example, we expanded our footprint with a large US based healthcare services customer who sought to address concerns around identity and resilience after one of its largest competitors suffered a crippling cyber attack. With the addition of Clean Room, 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 seven figure SaaS transactions during the quarter, further evidence that CommVault Systems 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 multi product 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 5th 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 collections 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 SAs, to be in the range of 195 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 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 1.161 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 to 230 million dollars. This guidance reflects benefits from recent federal tax law 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 thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press Star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press Star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute. When asking your question again, press Star one to join the queue. Our first question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.

Aaron Rakers - Equity Analyst - (00:21:36)

Yeah, thanks for taking the questions. 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.

Jen Dirico - Chief Financial Officer - (00:22:06)

Absolutely. Thanks for the question, Aaron. First, let me just start by saying I would say 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 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 when we double click. What we really saw was customers wanting to maintain their flexibility as they thought about 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 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, 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.

Aaron Rakers - Equity Analyst - (00:23:51)

Yep. Thanks Jen. 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 at, 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 as still possibly a share taker. Can you talk about the competitive landscape and whether or not we should think 12% is kind of a baseline and there's the ability to continue to grow above that. Oh, sure. Aaron, it's Sanjay. How are you? Great. Good. 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 going 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 digits. Which, 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 that customers are consolidating desperate platforms over the years. They're rethinking their resilience strategy with us in the wake of all the ransomware and cyber attacks, and we continue to innovate on our platform. I'll let Jen flesh out the rest of your question.

Jen Dirico - Chief Financial Officer - (00:25:33)

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

Aaron Rakers - Equity Analyst - (00:25:49)

Yep. Thank you, guys.

Jason Ader - Equity Analyst - (00:25:55)

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

Sanjay Merchandami - Chief Executive Officer - (00:26:01)

Thank you. Good morning, guys. 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 nine 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. 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 as we go into what I'm affectionately calling the AI era. And there'll be different needs, there'll 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. 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. I don't want to give it all away. Okay, good. And then just as a follow up for you, Sanjay, could you offer any comments on the deal announced last week between Veeam and Security AI? I guess Anand would be the right person to ask that question. But the way we look at it is we've been saying this for a while would be been saying, I'm going to guess I've said this for the past three years where the world of data security and the world of data protection as we know it have to come together if you want to be truly cyber resilient. And what you're seeing with our acquisition, for example of Satori Cyber, Inc. was along the lines, I think of what Veeam may have done with their acquisition where identity observability, policy enforcement on all things within your enterprise when it pertains to data, all of these things have to work together because as cyber attacks get more sophisticated, if there's light 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. Thank you. Good luck. Thank you sir.

Eric Heath - Equity Analyst - (00:28:52)

Next question comes from the line of Eric Heath with Keybanc Capital Markets. Your line is open.

Jen Dirico - Chief Financial Officer - (00:28:58)

Hey guys, thanks for taking the question. And yeah, I would say just looking at some of the net new ARR, it does look like it's still accelerating over last quarter. So it doesn't really seem like a slowdown but maybe question for you, Jen. I'm just curious what's given you the confidence to kind of make the step up in investments and maybe how you're thinking about that trade off and what is a 50 basis point raise to growth but 150 basis point reduction in margin relative to your prior guidance? Yeah, 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. So 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 across the board. When I think about the opportunity to invest when 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 was going to be a year of investment and we're going to continue on that path because all signals say the market has not changed.

Sanjay Merchandami - Chief Executive Officer - (00:30:23)

Got it, 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. Thanks, andrej and just on that point, 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 pie 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 more visible in boardrooms and with AI, it becomes a spot where it just becomes more visible and more competitive. Now what we've always done and the reason we've been in business for 30 years and continue to get accolades on our platform is we out innovate our competitors and it's the formula that'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. Awesome. Thanks, Andre. Thanks, Jen.

Howard Ma - Equity Analyst - (00:32:18)

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

Sanjay Merchandami - Chief Executive Officer - (00:32:26)

Great. Thanks for the question. And congrats on reaching the billion dollar AR 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 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 growth in cloud. Not sure if you have a sense of the on prem data growth. And one more piece too is the identity and data security stat you gave. That's 40% of net new ARR. I wonder to what extent is that also benefiting the on premise part of your business? Yeah. So you know Howard, good to hear from you. Our play has always been from the day we dreamed of Metallic our SaaS offering. Our dream has always been to have the singular platform for hybrid customers. And I've said it over and over 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 at will. 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 HPE, whether it be Pure, whether it be NetApp, to continue to work with our customers on premise, premise for their workloads that matter there as they start moving more workloads or doing more things with the public cloud. Our platform is the natural journey. It's the 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 the second part of your question on identity and security, that has to be that is a malleable thing that has to port. You don't have separate things going on in the cloud versus on premise, 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 world. Now it's very important because when your identity is integrated closely with your protection, resilience is a lot deeper, is a lot better. And we've been doing this for a while and yes, we're seeing our AD and entra ID and our identity capabilities be starting to become a significant contributor to our net new ARR. So that is a positive sign. Thanks, Sanjay. As a follow up for Jen, given the appreciation for CommVault Systems's hybrid strengths, are you Seeing increased cross sell between your term customers and SaaS customers, I recall you all gave a stat, it's probably from two years ago. I think it's 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 or with compression, are higher mix of SaaS customers influencing those that also use terms, is that causing them to drag down the contract duration?

Jen Dirico - Chief Financial Officer - (00:35:49)

Yeah. So first let me answer your first question. Around the mix between software customers also using SaaS, the stat we gave a little while ago was about 30%. That continues to tick up slowly. Right. 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 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 you can add.

Sanjay Merchandami - Chief Executive Officer - (00:36:20)

Howard. We obviously help customers with the workloads logically. So there are some that overlap, like virtual machines between cloud driven SaaS driven or on premise driven as a choice we give our customers. But things like protecting Microsoft 365 is all cloud driven. So what ends up happening is as customers, as we work closely with customers on their journey, on their workloads, on 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 all the way is that they commit to our platform and then we enable them all the way, whether they're on premise, on the cloud or on the edge. 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. Great, thanks so much.

Rudy Kassinger - Equity Analyst - (00:37:23)

Next question comes from the line of Rudy Kassinger with DA Davidson. Your line is open.

Jen Dirico - Chief Financial Officer - (00:37:29)

Hey, great. Thanks guys. 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 ARR growth at 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 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. Yeah, 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, a great 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 continuum 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 exit.

Rudy Kassinger - Equity Analyst - (00:39:09)

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

Jen Dirico - Chief Financial Officer - (00:39:36)

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

Rudy Kassinger - Equity Analyst - (00:39:44)

Very helpful. Thank you and congrats again.

James Fish - Equity Analyst - (00:39:46)

Yeah, thanks again, Rudy. Appreciate it. Next question comes from the line of James Fish with Piper Sandler. Your line is open. Hey, guys. Wanting to go back on the contract duration, is the shorter contract duration being seen more on the existing install base is the assumption I'm making or are you seeing it on new deals as well? Combination the two. Jen, is there a way to think about where we're at on average duration at this point? And is there a vertical or two 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.

Jen Dirico - Chief Financial Officer - (00:40:26)

Yeah. So first of all, what I would say to you is it's actually across the board 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 term quarter over quarter. But again, I would go back to it really normalized to what we were seeing three or four 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?

James Fish - Equity Analyst - (00:40:58)

I was asking you guys historically have talked about duration here and there and it used to be about three and then you start talking about new customer lands being. I want to say two to three, Mike, and can correct me but you know, where's average duration now? Trying to understand like how much of a headwind duration is right now to term license.

Jen Dirico - Chief Financial Officer - (00:41:23)

Yeah, I think I would say I would just go back to the fact that I think we've shared that in a new deal it kind of was creeping up towards three years. Overall we've seen that go down about 9% ultimately and that's how we're quantifying the impacts.

Sanjay Merchandami - Chief Executive Officer - (00:41:43)

Sanjay, one second. I just want to add to that, 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 largest number of deals, new deals that we brought in on term software 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 I look at this as 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 about 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, you know, SAS being sort of mid-60s at this point, the other kind of gross, I'll say the remainder gross margin was down, you know, decently, sequentially. You know, why isn't this just, you know, competitive pressures or further discounting in the space?

Jen Dirico - Chief Financial Officer - (00:42:58)

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 staff and the shift to terms. There's really nothing else to talk about. Nothing major. Nothing major.

James Fish - Equity Analyst - (00:43:11)

Thanks. Thank you.

Junaid Siddiqui - Equity Analyst - (00:43:17)

Next question comes from the line of Junaid Siddiqui with Trui Securities. Your line is open.

Sanjay Merchandami - Chief Executive Officer - (00:43:25)

Great. Thanks for taking my question, 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? Hi, Junaid, great question. And without giving it all away, there is a maybe you and I meet in two weeks and I take you through some of the innovation and how we're thinking about it. But the bottom line, there's 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 the 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 someplace and then continue to logically build their resilience with new services over time. What's implicit in what we're doing, 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 cyber attack or an event, and making sure that we're building that capability, that automation, into the product platform and into the packaging that becomes really important without getting into the 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, thank you. 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 we should think about in terms of buybacks?

Jen Dirico - Chief Financial Officer - (00:45:47)

Yeah, thanks for the question. So I would say our capital allocation strategy remains consistent. It's the three pillars of share buybacks, MA investment and organic investment back into the business as it relates to share buybacks. You're right. We purchased 118 million of shares buybacks conjunction with the convert year. To date, that's been 146 million we've repurchased. We have not had a specific guide, but what I will tell you 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.

Junaid Siddiqui - Equity Analyst - (00:46:30)

Great. Thank you.

Desiree - Operator - (00:46:31)

Yeah. Thank you. And again, if you would like to ask a question, press star, then the number one on your telephone keypad. There are no further questions at this time. I would like to turn the call back over to Mr. Michael Melnick for closing remarks.

Michael Melnick - Head of Investor Relations - (00:46:53)

Thanks, Desiree. I just want to remind everyone that The Invitations to Shift, which is happening on November 12th in New York City, have been emailed. If you didn't have a registration or opportunity to register, please email me@mmelnickomvault.com we look forward to seeing you. You'll be able to see a very innovation rich day and you get 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.

Desiree - Operator - (00:47:23)

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