Commvault Systems Lifts Outlook on Subscription and SaaS Momentum

Commvault Systems ((CVLT)) has held its Q3 earnings call. Read on for the main highlights of the call.

Commvault Systems Earnings Call Highlights Broad-Based Growth, Margin Expansion, and Rising Confidence

Commvault Systems’ latest earnings call struck an upbeat tone, underscored by strong subscription and SaaS growth, accelerating revenue and ARR, and clear margin expansion. Management leaned into a narrative of durable product momentum and innovation—backed by record customer additions, new platform launches, and third‑party recognition—while treating near-term cash flow and ARR noise as manageable side effects of a deliberate shift toward a hybrid, subscription-heavy model. The company capped this with a guidance raise, signaling confidence in its fiscal 2026 trajectory despite some short-term volatility in cash conversion and ARR metrics.

Subscription and SaaS Engines Drive Core Growth

Subscription and SaaS remained the primary growth engines for Commvault, reshaping the company’s revenue mix. Subscription revenue jumped 30% year-over-year to $206 million, while subscription ARR climbed 28% to $941 million. SaaS ARR led the pack, rising 40% to $364 million. Subscription ARR now comprises 87% of total ARR, up from 83% a year ago, reinforcing Commvault’s successful transition away from legacy models. This shift not only improves revenue visibility but also positions the company to benefit from ongoing cloud and security spending trends.

Revenue and ARR Growth Accelerate Across the Portfolio

Commvault posted a strong top-line performance, with total revenue increasing 19% year-over-year to $314 million. Total ARR advanced 22% to $1.085 billion, pointing to broad-based demand across product sets and geographies. This acceleration suggests the company is gaining share in data protection and resilience, and that its subscription strategy is converting into consistent, recurring growth. The combination of double-digit revenue growth and even faster ARR expansion signals healthy underlying demand and a robust pipeline.

Record Customer Acquisition and Deeper SaaS Penetration

Customer acquisition momentum was a standout theme. Commvault added roughly 700 net new subscription customers in the quarter, bringing its subscription base to more than 14,000 customers. Its SaaS install base now exceeds 9,000 customers, with rising penetration among larger enterprises. Nearly half of enterprise SaaS customers now use more than one offering, up about 700 basis points from last year, reflecting a strengthening land-and-expand motion. This expanding footprint increases the company’s upsell and cross-sell opportunities and underpins future ARR growth.

Term Software Remains a Strong Growth Contributor

Despite the strategic focus on SaaS and subscriptions, term software continues to deliver. Term software revenue grew 22% to $119 million, helped by solid demand for larger transactions. Revenue from term software deals over $100,000 increased 25%, driven by both higher deal volume and rising average deal sizes. Management also highlighted growth in the number and total value of million‑dollar software deals year-over-year, indicating that Commvault remains relevant in large, complex enterprise deployments even as it scales its cloud offerings.

Profitability, Margins and Rule of 40 Achieved

Profitability stepped up alongside growth. Gross margin improved by roughly 100 basis points sequentially to 81.5%, reflecting the benefits of scale and a higher mix of software and SaaS. Non‑GAAP EBIT reached $61 million, yielding a 19.6% margin. Importantly for investors tracking software efficiency metrics, Commvault achieved the Rule of 40 in the quarter and a Rule of 41 year-to-date—showing that it is managing to balance solid growth with disciplined cost control rather than pursuing expansion at the expense of margins.

Upgraded Full-Year Outlook Signals Confidence in Fiscal 2026

The company raised its fiscal 2026 outlook, signaling increased confidence in its trajectory. Commvault now expects subscription revenue of $764–$768 million, implying roughly 30% growth at the midpoint, and total revenue of $1.177–$1.180 billion, about 18% growth at the midpoint. The full-year gross margin guidance was lifted to 81–81.5%, while the non‑GAAP EBIT margin guide moved up to 19–20%. Free cash flow is forecast at $215–$220 million, even after absorbing one-time cost-optimization payments, underlining management’s conviction in the underlying cash-generating power of the business.

Capital Returns: Share Repurchases Remain a Priority

Commvault continues to actively return capital to shareholders. The company repurchased $41 million of stock in the quarter and $187 million year-to-date. In a further show of confidence, the Board recommitted the share repurchase authorization to $250 million. This reinforces a shareholder-friendly capital allocation approach that complements the company’s organic growth investments, indicating that management sees the current valuation as attractive relative to its growth and margin profile.

Product Innovation, Partnerships and Industry Recognition Strengthen the Moat

Product innovation and ecosystem partnerships featured prominently on the call. Commvault launched its Commvault Cloud Unity platform, continued to build intellectual property with its 1,600th lifetime patent, and strengthened its positioning in cloud and resilience. The company earned an AWS resilience competency and was named the 2025 AWS Global Storage Partner of the Year, while analyst firm GigaOM recognized Commvault as a leader in cloud data protection. A new partnership with vector database company Pinecone—targeting general availability in 2026—expands its opportunities in AI-driven use cases. Additionally, strong customer and analyst feedback on ResOps and identity resilience capabilities is translating into business momentum: Active Directory-related ARR more than doubled year-over-year, highlighting demand for identity-centric data protection.

Q3 Free Cash Flow Hit by Timing and One-Off Factors

Despite strong earnings, free cash flow in the quarter was soft, coming in at $2 million. Management attributed this primarily to timing issues: a large number of deals closed late in the quarter, delaying cash collections, and an extra payroll cycle in the U.S. and Canada temporarily elevated operating expenses. While cash conversion was weak, the company indicated it expects normalization in the fourth quarter, framing Q3 as an outlier rather than a trend shift.

Late-Quarter Deals Drive Higher Receivables and DSO

The concentration of deal closings late in the quarter had knock-on effects on working capital. Management noted that over 60% of deals landed in the final weeks, driving up accounts receivable and inflating days sales outstanding (DSO). This pattern weighed on reported free cash flow for Q3 but is largely a timing issue: revenue was recognized, but cash will follow in subsequent periods. Investors should monitor whether deal timing remains lumpy, as it can continue to cause quarter-to-quarter noise in cash metrics.

Net New ARR Slightly Below Prior Expectations

Net new ARR came in a bit softer than prior commentary suggested, but for reasons management characterized as mix-related rather than demand-related. Constant-currency net new ARR was $39 million, versus a previously implied expectation in the mid-$40 million range, creating roughly a $6 million gap. The shortfall largely reflected a heavier mix of lower average selling price SaaS landings and longer-duration software deals, both of which dampen immediate ARR without necessarily signaling weaker long-term revenue potential.

Lower-ASP SaaS Landings Add Customers but Temper Near-Term ARR

The company’s strategy of expanding its SaaS footprint is reshaping ARR dynamics. About 70% of net new ARR in the quarter came from SaaS, up from 61% previously. Newly landed SaaS customers, however, tend to start smaller—management indicated SaaS landings are two to three times lower in ASP than comparable software deals. This leads to more customers but less ARR per new logo in the near term, creating variability in reported ARR growth per customer. Over time, management expects these smaller SaaS landings to ramp via expansions, consistent with the land-and-expand model.

SaaS Net Dollar Retention Dips but Remains Strong

SaaS net dollar retention remained robust at 121%, though there was a roughly 4-point sequential decline in cloud net retention. Management attributed this moderation to a combination of factors: a growing base, a surge in new customers that have not yet had time to expand, and some modest mix shifts among early adopters. While the sequential dip is notable, the overall level of net retention is still healthy and consistent with a sticky, expanding customer base.

Term ARR Impacted by Longer-Duration Contracts

Term ARR saw some compression due to contract structuring rather than demand. Some new term software customers signed longer-duration deals, which spread revenue over a longer period and reduce immediate ARR contribution. This duration elongation pressured term net new ARR relative to prior-quarter assumptions, even though it can be positive for long-term visibility and customer lock-in. The trade-off is more predictable multi-year commitments at the expense of short-term ARR optics.

Cost Optimization Program Brings One-Time Charges

Commvault is initiating a cost optimization program designed to streamline operations while preserving growth investments. Management expects $12–$15 million of one-time payments tied to this effort, which are included in the full-year free cash flow guidance. While these charges weigh on near-term cash flow, the program is positioned as a way to support sustained margin expansion and efficiency—key levers for maintaining Rule-of-40 performance as the company scales.

Managing Variability Amid a Hybrid Business Model

Management repeatedly emphasized that quarter-to-quarter variability in ARR, duration, and certain cash metrics is a natural byproduct of its hybrid go-to-market model. The mix of software versus SaaS, consumption versus fixed subscription, and the timing of large enterprise deals can all introduce noise into interim metrics. The message to investors was to focus on multi-quarter trends—growing ARR, expanding margins, strong customer additions—rather than over-interpreting single-quarter swings driven by deal timing or mix.

Guidance Underscores Sustained Growth and Margin Strength

Looking ahead, Commvault’s updated guidance points to sustained double-digit growth with attractive margins. For Q4 FY26, the company expects subscription revenue of $203–$207 million, implying about 18% growth at the midpoint, and total revenue of $305–$308 million, around 11% growth. Consolidated gross margin is projected at roughly 81%, with non‑GAAP EBIT margin around 19%. For the full fiscal year, Commvault forecasts constant-currency total ARR growth of about 18%, with subscription ARR growing roughly 24%. The company now targets subscription revenue of $764–$768 million (around 30% growth at the midpoint) and total revenue of $1.177–$1.180 billion (about 18% growth). Gross margins are expected in the 81–81.5% range, with non‑GAAP EBIT margins of 19–20%, and free cash flow of $215–$220 million, inclusive of $12–$15 million in one-time cost-optimization payments. The Board’s recommitment of a $250 million buyback authorization adds another layer of support for shareholder returns within this framework.

In sum, Commvault’s earnings call painted a picture of a company executing well on a strategic shift toward subscription and SaaS, while maintaining impressive margin discipline. Strong revenue and ARR growth, record customer additions, and deepening product and partner ecosystems are balanced against short-term cash and ARR variability that management framed as largely timing- and mix-driven. With raised guidance and a renewed capital return program, the company positioned itself as a resilient, growing player in data protection and resilience—an increasingly critical segment for investors tracking cloud and cybersecurity trends.