A lot of that does not show up in reported revenue or reported revenue expectations. But as I think about the subscription revenue specifically, I think, directly at your question, there’s a couple of things that are going on there. We are seeing fewer conversions, so conversions from our existing perpetual support contracts being converted to term software licenses. In today’s interest rate environment, those conversions usually come with a multiyear commitment, doing a three-year commitment and some of the interest rate factors and the cost of money as well as where customers are in their cloud journey at the same time. So we’re seeing just some declines year-over-year modestly on the conversion fees as well as the continued trends on term subscription length.
So when we sell term subscriptions, our average term is now down to about two years. So while that keeps ARR total, and we see the momentum on ARR, it could have a little bit of a short-term impact on the reported revenue results And then thirdly, just keeping in mind that we’re watching the mega deal, the real big deal trends in the spending environment and being cautious on the procurement and approval cycles that are out there today.
Aaron Rakers: Yes. That’s very helpful. I appreciate that color. So maybe just the final question, sticking with that topic. How would you characterize the linearity in this quarter, the demand? Have you seen any customers push out projects or delay spending in this environment at this point, or is it just more cautionary on the macro, the geopolitical environment as more so we look forward?
Gary Merrill: More cautionary. We do not see trends that deteriorated. Our trends that we’re seeing in the business on close rates and linearity are consistent with what we’ve seen over the past few quarters. But relative to the geopolitical nature of what’s going on and just being cautionary on the time it takes to close some of those big deals.
Aaron Rakers: Thank you, Gary
Operator: Your next question comes from the line of Howard Ma from Guggenheim Securities. Please go ahead.
Howard Ma: Great. Thank you for taking the question. So I also want to better understand the lower subscription ARR and revenue guidance because that seems to be the only negative in an otherwise stellar print. Is the — so I understand the change in — the lower migrations from perpetual maintenance to subscription, I didn’t think the impact was that big. Can you comment — I guess for Gary, can you comment, are there any other factors such as — I mean did you — were there any deal pull forwards in Q2? Are you like in the back half, are you expecting any renewal push outs? Because I believe this year, it’s a pretty back-end weighted — or second half weighted rather renewal year. And then just given the Metallic strength, too, I wouldn’t — wouldn’t continued strength in Metallic at least on the ARR side, I understand it takes time for ARR to transit over to revenue, but wouldn’t that offset some of the perpetual migrations? Thanks.
Gary Merrill: Yes. Thanks, Howard. Maybe first, quickly on the SaaS side of the Metallics. So the ARR accelerated actually higher than we’ve seen in current periods, right? If you look at the ARR for SaaS, we went from $113 million to $131 million of ARR. That sequential increase we’re seeing on the SaaS side is accelerating faster than we’d actually seen over the past prior quarters. So, you can kind of see that as you turned out the SaaS ARR and the acceleration there, coupled with Howard, the — what we saw on the net salary retention rate of 130%. So, really a good focus on driving that net dollar retention. When I look at the guidance on subscription, it’s — the biggest factor is fewer conversions and how you can see that also is you’ll see the strong overperformance on the customer support side, right?
So if you look at the custom support revenue, and you see the acceleration there, meaning the acceleration relative to the prior expectations, that’s where you kind of see — that’s where you see the offset. And that’s where you see the offset on the positive side there. And it’s just the fewer conversions we’re doing about — on pay for about half of what we did last year is what I kind of see just based on current pipeline metrics, we’re on basically about half of the conversions that we did last year, which is just a transitional in the customer environment as well as monitoring the term length of our deals, right? So, getting it down to about two years on average.
Sanjay Mirchandani: Hey Howard, it’s Sanjay. We’re just trying to be realistic given we’re looking out for the whole year. If there’s — it’s just a mix shift. In my mind, there’s nothing — we added, what, over 500 customers in the subscription mix in Q2. Metallic is growing at a very healthy clip. We grew 77% ARR year-on-year. So, this isn’t — don’t read into this in anything, but we’re just looking at the pipeline and being very pragmatic about what the mix shift might be and that’s it. I mean business — we had a very good quarter, and we’ve raised ARR for the year, and we’ve raised revenue for the year. So, it’s in my mind, as straightforward as a mix shift inside of the customer buying patterns, whether it be interest rate or where they are in their cloud migration journey.
Howard Ma: Thank you, Sanjay, and Gary. I do want to — as a follow-up, I do want to hone in on Metallic because as you guys mentioned, it was a really strong quarter for Metallic and are accelerating to 130%, which is up from, I believe, 118% a quarter ago and then 125% is the quarter prior. Can you just remind us what is the rank order of drivers of growth for Metallic between workload expansion and cross-sell of additional Metallic products? And then on the growth rate, again, very strong, but it has been pretty variable. Is it — should we expect this kind of variability going forward?
Gary Merrill: Hey Howard, it’s Gary. I’ll hit that. So, there’s really good key things. The acceleration that we saw in Metallic’s net dollar retention drove by a few things. There’s the foundation, first of all, what I mean by the foundation is we’re at the point now that we have a matured renewal motion. So, when we get that mature renewal motion and we see really strong renewal rates, it limits any of the downside on the net dollar retention. So, it’s built with the foundation. And that foundation is really the focus on what we’re doing on onboarding and adoption. So, driving to get the customers onboarded, get them to their first back up, get them fully adopted, then that drives the expansion opportunity. The other thing that we now have is an integrated motion between our customer success and our field sales teams.
So, their customers’ success teams are driving the adoption with the field teams combined driving the expansion. So, it all starts on accelerating the time to first back up and the time to consumption. As I think about the split between, I’ll use cross-sell and upsell, we’re seeing the majority of the expansion being driven by, at this point, upsell, which is generally more of the same product. However, we’re now seeing more than 2x growth on some of those mission-critical or the emerging workloads that we see whether it’s sales force dynamics, threatwise, hybrid cloud, databases. The dollar value of those are now up 2x year-over-year. So it’s less of a contribution because it’s less of a percent of the total, but the contribution now is starting to become material, even though the majority of it is driven by upsell.
