Q2 2020 Earnings Call
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I'd like to hand, the conference over to your speaker today Tanya Chen.
Vice President Investor Relations and corporate Communications. Please go ahead.
Thank you good afternoon, and welcome to today's conference call to discuss the results of our second quarter fiscal 2020. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the new tax website, joining me today or do you ever Japan day, <unk> CEO and Dustin Williams.
<unk> CFO.
After the market close today, you have issued a press release announcing financial results for the second quarter fiscal 2020, if you'd like to read the release. Please visit the press releases section of the new Tannic website.
During today's call management will make forward looking statements, including statements regarding our business plan and financial targets in future periods.
Timing and impact of our transition to a subscription business model.
Factors, driving our growth and the benefits and capabilities of our new and existing products. These forward looking statements involve risks and uncertainties some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements.
For a detailed description of these factors please refer to our Sep filings, including our most recent quarterly report on form 10-Q, as well as our earnings press release.
These forward looking statements apply as of today and we undertake no obligation to update these statements. After this call as a result, you should not rely on them as representing our views in the future.
Please note unless otherwise specifically referenced all financial measures. We use on today's call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We've provided to the extent available reconciliations to these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earning.
The press release.
Turning to our upcoming conferences, you Tech management will be at Morgan Stanley TMT Conference on March 2nd and the Keybanc emerging technology Summit on March Threerd conferences are in San Francisco, We hope to see many of you. There lastly, we'll be hosting our Investor Day 2020 in New York City on Thursday March 26.
Yes that will be webcast or on our investor relations website, institutional investors and sell side analysts interested in attending and person should contact IR at Investor day at New Chantix Dot com for registration information and with that I'll turn it over to dirt.
Thanks.
Q2 was another strong quarter and I'm pleased to see continued execution from across our organization.
Or TCV billings came in on the high end before guidance range in our TCV revenue gross margin in Es, all exceeded our guidance despite a soft for U.S. federal business.
Further our deferred revenue surpassed a billion dollars for the first time this quarter right 35%.
Business is robust and our transition is well ahead of foreign conference.
Also in an environment that is more key due to the impact of the corner wires.
Dealing with young ones for the first time in the company's decade long history.
Hence we are cautious about are sick enough gardens, which duston go delved into soon.
Since we began her transition to a subscription business model in Q1 up at 49 team.
Irregularly highlighted the areas if a business that are evolving along the way.
After another strong quarter, a progress I would like to emphasize a few areas of the business that stood out in the quarter.
Source was a faster than expected transformation to subscription second a growing number of large deals and the continued adoption of new products and solutions beyond or poor.
Sure the momentum you're seeing a commercial business and finally, a promising partnership with H.B., which continues to bring those new customers and once again.
Expectations during the quarter.
A key driver for improved sales execution over the past your has been the strong leadership of Chris good hours in the Americas and EMEA in the years before that.
Chris joined Us as in EMEA sales leader more than three years ago.
Right one when we went public.
We were tiny company back said almost one third the revenue.
One for the number of customers, an appliance business model and the single product in that portfolio.
We've come a long way since then.
Sales force and this time has endured a dramatic transitioning the business model learn to so software and really strive to mass to the portfolio selling approach that most companies could only agreement.
Chris is also expected a careful segmentation of the up market business in the last two years, both in EMEA and in Americas. If you recall, we set out to segment or business almost three years ago.
The muscle to go beyond a billion if annual sales required large customers a profound customer success culture and a strong portfolio of products that are secure and reliable.
Large customers do not by point products, they buy a platform and operating system that can be used for multiple use cases.
I'm happy to report that a large enterprise business has flourished in the last 18 months ever since we started down the path of the subscription transition.
We now have 18 customers is lifetime spend greater than $20 million up from 12, a year ago.
I will get lifetime spend is almost $600 million up 56% your where you're.
The largest three cohorts of lifetime spend 10 to 15 million 15 to 20 million and 20 million plus dollars.
Have now collectively grew more than 60% your where you're both in number of Google account and in aggregate dollars spent.
There are 60 customers that fall into those cohorts and those 60 customers now accounts for more than a billion dollars of lifetime spend with us.
We now have 220 accounts to eat spent more than 4 million lifetime spend.
Accounting for more than $2 billion lifetime, and this quarters ago nearly 50%.
Subscription compression notwithstanding.
And finally, the Florida for million dollars, plus customers is going in lifetime spend but more than 40% year over year.
Subscription compression notwithstanding.
Specifically in Q2, we closed 52 deals was over a million dollars in the quarter, including 11 deals worth over $3 million.
Which includes three deals we will $5 million.
11 of these customers also spend at least a million because last quarter and more than half substantially increased didn't know Congress does during the quarter, notably TCV bookings from our top 10 customers in Q2 increased approximately 30% from the previous core.
We now have 1060 customers with at least a million dollars in lifetime spend up 36% year over year.
880 of the global 2000 as customers, including three of the Forbes will be five aided the full global pen and 70 of the full school hungry.
All in all done a pretty good job of selling competing in large account segment profoundly disrupting the hardware and perpetual software incumbents.
This is why I'm, so happy to announce the thoughtful architect of this enduring transition Chris Cadaverous is now going to be a global leader of the company is the executive Vice President of worldwide sales.
Equally passionate about the commercial Midmarket and has been busy working on the other end of the go to market barbell use commercial.
Speaking of for ongoing subscription transition, which Chris is also big jump you know, we outperformed our own internal plans seeing or percentage of billings are attributed to subscription increased to 79% up from 73% in Q1.
That will surpass the guidance of 75% by Q4 off if I 20, we laid out earlier this year.
Our large deals in our existing large customers are moving to subscription and rapid pace casing point to the largest lifetime customer was spent $78 million lifetime with us. This full stack customers spark the idea of building our own hypervisor, each EBITDA was more than six years ago.
The spent more than 5 million this quarter to convert some of the renewal subscription.
Similarly, a large fortune 500 insurance company that has an existing customer which is an additional $1.5 million worth of our software subscription, bringing their lifetime purchase to more than 6 million.
Just repeat purchase purchase is due in part to new tonics delivering on its commitment to mission critical availability and disaster recovery escalators.
The simplicity for solution is the reason why government agencies as such large repeat customers of new clinics.
Constantly challenge and talent and skill sets.
Agencies, and now embracing subscription without friction one such example is our existing customer and agency in EMEA that supports asylum seekers would spend a minute and a half dollars this quarter.
Bringing their lifetime spend more than $4 million.
New customers also looking at subscription terms by default casing point.
Large multinational backing for adopt and global 2000 company due to subscription do that was worth $1 billion. This quarter as a first time customer.
Our biggest deal in the quarter exemplify the partnership's subscription model and new products altogether in the same opportunity. This repeat fortune 10 company invested more than 17 million in subscription licenses this quarter to continue modernizing their infrastructure.
This value customer, which now has nearly $58 million lifetime bookings with does just in the last 18 months.
We views us as a critical part going their journey to hybrid cloud, which requires secure reliable easier to manage cloud services to purchase also included new tonics files are softer defined scale out filer and life screen or desktop as a service offering.
Speaking of portfolio selling.
We saw continued momentum in the adoption of new products in the quarter.
31% of deals on a rolling four quarter basis intuited at least one product outside of the company's core itself freeing up from 21% in Q2 last year.
In addition.
TCV billings from new products reached a record high in the quarter growing 99% year over year.
We believe one of the reasons would increase attach rate of new products to our core software is increased focus and packaged solutions.
Solutions to others about offering our customers a choice between good better invest and more often than not speaking the language, which many of time as vertical specific.
For example in an end user computing solution. We now offer our customers are progressively cured experience modernizing the only from three to your hardware selling one click filers and data protection to selling one click disaster recovery to selling data network security with this approach we are working to whole body, if I do transformation two simple.
Yes, profound teams simplicity and reliability.
Keith and point in our simple reliable message is resonating is a net new fortune 50 telecom customer would spent more than 3 million with us all HV in files to modernize their call center infrastructure, a similar customer win that highlights attraction for solution selling was with the financial services provider in EMEA to subscribe to more than 3 million of for.
Xively cloud services this quarter for the end user computing and disaster recovery needs.
This solution based will include driven approach also drove traction with an existing customer leading bank in Mexico, we spent more than 1.5 million in subscription licenses.
The purchase of product for operations management, multicoloured orchestration and multi cloud cost covenants, but a large part of the purchase decision was to use new clinics era to offer who databases service experience for them to flow era was also a big reason why we won large $1.5 million with the government.
Industry in Saudi Oracle databases extremely popular and private cloud is in high demand.
In a world that is rethinking globalization and doubling down on data sovereignty.
Private clouds and customers premises are becoming a pervasive discussion and example is down to the deal in Europe, a $1 million with one of the busiest airports in the war, who selected us to be the standard for the private cloud as they transition from legacy hardware and perpetual license software to a true web scale software defined infrastructure driven.
Subscription licensing.
Our multi cloud control cleans for automation security compliance and cost covenants.
Common beam, respectively were instrumental in our sales campaign here.
Our automation and multi cloud artist fission products Com is all about Dev ops, the going deeper into Dev ops with application lifecycle management containers databases and object storage.
And existing global 2000 customer in the aerospace and defense industry brought their lifetime spend with new tactics to more than two and half million by purchasing your tonics says new products to support the organizations develops the big uses of calm and also slow.
For consumer group networking and security.
Flow and subscription licensing will also the two big reasons why we did a large 2 million dollar deal with that mission critical communications customer in EMEA.
Not only to select our core at CIA software and native Hypervisor HV. The selected a number for new products, including flow has the simplicity of Microsegmentation was key to their cyber security modernization.
Security has become a core value proposition for our overall portfolio both on criminal from as the Zero Trust Cyber security culture becomes pervasive in the enterprise.
Zero Trust is security concept centered on paranoia.
A belief that organization should not automatically trust anything outside or inside its parameters and that machines in applications are already compromised recently hired a chief product security officer into carry with vast experience in cyber security from his past life.
In do is bringing encrypt everything micros segment, everything and audit and analyze everything in an integrated approach towards zero Trust security posture.
Our DNA and simplicity and reliability is now key to making security invisible.
Just like I predict with its devices.
On top of our software customers, not just running Splunk security and Virtu firewalls, but also building fraud detection applications.
As illustrated by more than a 5 million dollar deal with the large credit card financial services from this quarter.
This fortune 500 company as nearly $13 million of lifetime, TCV spend with us and values are ease of use simple up rig process and most importantly platform security.
Which was core to their decision making.
On the subject of innovation and reliable unsecured products, we continue to make steady progress across a multi cloud multi product portfolio.
In Q2, Hyperconverged backup product Lutonix mine.
With volume and high COO generally available this integrated due to prediction solution combines the power of leading backup software offerings. The all the benefits of our platform, including at CPI for computing block storage and files and object for deep storage.
Backup and Splunk, our killer use cases for our semi and unstructured data offerings files in objects.
Our optics products has come out resoundingly well in its first full quarter since general availability.
In a deal worth nearly a million dollars managed service provider in the USA chose our full stack to create their own cloud offering backup and archive will services that provide a simple consumption model for Dev ops disaster recovery and analytics will groups.
Your tonics objects was a critical factor in their decision to go all end with those into place multiple competitors.
We also launched carbon twod auto carbon with the key.
Which dramatically simplifies the configuration deployment and lifecycle management coupon or does containers clusters.
Carbon brings the simplicity of containers in the public cloud commodity price environment.
Based on top of our core at Cie. It delivers a full cloud native environment, all competing locations public private storage.
Response from customers, including a major us airline and leading consumer packaged goods company has been very positive.
Carbon has enabled them to fast track that production equipment. It is deployments and is unable to public cloud user experience.
Beyond the Devops ecosystem during the quarter. We also announced that are softer the optimizer on Epyx operational database. The most prevalent data, but database system for healthcare companies in the us.
We are going deep in the epic healthcare TMR community.
At a time and epic is very carefully choosing its cloud partners.
On partnerships, while we've done a good job with Dell Lenovo Fujitsu and others are synergy with HP year looking strong in our first full quarter joint selling.
Under our Chief commercial Officer Tarkan, My there's leadership, both party, the bringing deals and customers to each other to learn co selling and co marketing.
As an example in a wind worth more than $4 million, a global 2000, healthcare company, which has a lifetime spend of.
$14 million took advantage of for subscription licensing to run our cloud services and HP servers. This is one of the three deals greater than 3 million in the pharmaceutical industry vertical that is increasingly turn into new clinics to boot secure private clouds.
Financial services, we took a similar approach with HP at one of the big for accounting firms in a deal worth a million dollars into an account that has spent almost 12 million with us lifetime on the strength of our core software and our multi cloud automation offering.
And we also saw another $4 million of subscription deal this quarter with HP at a fortune 100 financial services customer that has spent more than $23 million lifetime with us.
Similar to Q1, well over half of the H.B. customer the new logos to new tonics customers clearly see the value working with two world class Technology partners and together, we are winning competitive deals nearly one quarter for new customers into commercial segment purchase new Tunick software HP servers.
As we've mentioned before the other end of the bar Bell E. The commercial Midmarket is extremely important for a company that has done so well in large enterprises.
And aspires to go to its third billion annual subscription sales.
We saw solid quarter in terms of new customers, but we could do better.
Approximately 920, new customers raises our total customer count of 15880.
Im happy to report that are focusing the commercial segment has produced positive returns on investment the hard work, we've done to ramp partners is paying off.
Strong as you saw strong uptick in partner initiative deals in the segment.
Our commercial business focus is also leading to more predictable revenue streams that complement a larger chunkier enterprise deals.
Midmarket accounts can be very large as well, especially newest commercial and both Chris and our newest commercial leader John nor this will.
A leading provider of business legal tax and digital brands services to companies around the globe.
That has spent more than 30 million with those over the course of a relationship converts on the renewals to subscription in a deal worth an incremental $3 million this quarter.
The using our multi cloud orchestration services com, our databases service offering era, and our COO, but it is platform carbon the commercial segment is proving to be fertile ground for new product adoption, particularly.
He and files.
One of the reasons why partnerships, such as HP and Citrix, a flourishing because we've built a reliable platform that had an extremely good business profile.
The large much multinational pharmaceutical company.
And existing customer of ours spent $3.5 million with us this quarter, bringing their lifetime spend were 10 million has become a strategic partner to them as our platform runs most of their primary applications that helped them discover develop and launch breakthrough medicines.
Reliability for our products is also the reason why another for large existing customers a fortune 500 healthcare company. We're just spent nearly $35 million the test lifetime bought $4 million with traditional software to build their dispersed private cloud across more than 100 hospitals.
The exact same story with the large electric utility company in the us which doubled down with our softer with a $3 million deal this quarter to bring the lifetime spend to $14 million.
The using new tonics to build applications and services to help their customers reduce power consumption.
Reliability of web scale applications and commodity services. The reason why we had yet another of our large fintech customers in the U.S spend two and half million dollars this quarter, bringing their overall spend to $16 million lifetime.
Reliability of customer service as reflected in the average net promoter score or NPS of 90 was a big reason for one or for other large existing fortune 500 customers a large professional services from dealing with risk and strategy spend an additional one and half million in our software for the end user computing needs, bringing their lifetime.
Spend to $15 million.
Reliability and simplicity for disaster recovery and business continuity solutions with the primary reason.
Why we won another $2 million deal at a large EMEA government agency dealing with public pensions, bringing their lifetime spend to $11 million.
The voices of these happy repeat customers at a big part of the reason why they had been recognized leader for the 30 are enrolling the Gartner magic quadrant for hyper converged infrastructure.
Scoring the highest to follow evaluated and the ability to execute access our obsession with simplicity design and customer delighted what sets US. Apart. This is also why we were water Champ patents in the 2019 can Alice EMEA channel leadership matrix.
This honor was the result of partner the rack new tonics, the highest amongst all hyper converged infrastructure company than channel management to EMEA based in our can continued investments in channel incentives enablement resources and customer support.
Our culture principles of being our internal compass to help us through the highs and lows of company building.
And have helped us navigate the complexities of growth and global presence. Despite 2019 being the toughest you're in our 10 year history.
And business motor transitions in public markets do make your tough.
We were thrilled to be on the Fortune 100, best companies to work for list.
We tonics was one of only eight new companies to be added to the list.
In 2020, and one of only two information technology companies. The best part about achieving the certification is that it's predominantly play feedback.
And our employees resoundingly voltaren, the CAD for the mission.
Speaking of the mission the cloud into new silver for us.
Has evolved from making on prem infrastructure visible to making cloud relocations invisible. Our two most remained steadfast deliver simplicity choice in July to our customers with that I'll turn it over investing Dustin.
Thank you dirt.
In Q2, we made outstanding progress on our continued shift to a subscription business.
Subscription billings increased significantly and now account for 79% of total billings up from 73% in Q1.
And subscription revenue now accounts for 77% of total revenue and that's up from 69% in Q1.
We repeatedly stated that it's our desire to move forward through the subscription transition as fast as possible and we made great progress on this goal in the quarter.
Our execution in this area far exceeded our expectations in Q2 significantly surpassing RF why 2000 Q4 goal of 75% and.
And almost equaling our stated see why 21 goal of 80% mentioned at last year's Investor Day.
It should come as no surprise that the short term downside to this faster than expected push to subscription is the impact of the topline.
It's both on term compression when compared to life of device deals in some pricing differential between our life of device licenses and our term based offerings.
We expect to recover this topline impact as renewals come in over time.
This impact of the faster than expected pushed to subscription as reflected in our Q3 in fiscal year Twentytwenty topline guidance.
Exclusive of professional services billings, our goal is to ultimately drive our subscription billings to 100% of total billings.
The average dollar weighted term length in Q2 20, including renewals.
It was 3.9 years flat with the 3.9 years, we reported in Q1 20.
As with last quarter. This calculation assumes life of device licenses or our five year terms.
Some specific Q2 financial highlights TCV revenue, our software and support revenue for the second quarter exceeded our guidance range of $330 million to $335 million coming in at 338 million up from 14% a year ago and up 11% from their previous.
This quarter TCV billings, our software and support billings were 420 million versus our guidance of 410, the 420 million up 12% from the year ago quarter and up 13% from the prior quarter.
The TCV billings were negatively impacted by approximately 5 million due to the faster than expected shift to subscription.
CV booked in the quarter was 130 million and was up 18% from the year ago quarter.
As a reminder, with our discussion in Q1, we define HCV as the annual contract value of new business plus the annual contract value of renewals and we calculate HCV by taking the value of each transaction booked in the quarter, including renewals, but excluding professional services divided by its term.
Length, and then summing the total of those values.
While we saw a number of positives to our expectations, our federal business underperformed our expectations in the quarter. This business has always been somewhat lumpy in terms of timing in a significant portion of the federal Miss was related to large deals that we believe we're not lost but rather pushed out to future quarters whoever the time to close these deals.
Is uncertain.
New customer bookings represented 24% of total bookings in the quarter versus 23, 26% in Q2, 19 and up 20 from 23% in Q1 20.
Our HP Dx related business continued its strong performance and accounted for 117 new customers.
For the second quarter in a row, the Americas was our best performing region in Q2.
TCV bookings, our software and support bookings from our international regions represent 49% of total bookings versus the same 49% in Q2 19.
Our non-GAAP gross margin in Q2 was 81.4% exceeding our guidance of 80%.
We expect gross margins to hover in the 80% range plus or minus a little bit over the next several quarters.
Operating expenses were $396 million below our guidance range of 400 to 410 million in our non-GAAP net loss was 116 million for the quarter or a loss of 60 cents per share.
Looking at few quick things on the balance sheet, we closed the quarter with cash and short term investments of 819 million.
We used 52 million of free cash.
Cash flow from operations in Q2, which was positively impacted by 19 million of SPP inflow and free cash flow during the quarter was negative 74 million and this performance was also positively impacted by the 19 million of SPP inflow.
Now turning to the details of our fiscal Twentytwenty guidance on a non-GAAP basis for fiscal 2020, TCV, we expect TCV billings to be between 1.6 and 1.67.
Billion versus our previous guidance of between 1.65 and 1.75 billion.
TCV revenue to be between 1.29, and 1.36 billion versus our previous guidance of 1.3 to 1.4 billion gross margin of approximately 80.5%.
Operating expenses between 1.63, and 1.65 billion versus our previous guidance of $1.65 billion to $1.7 billion.
This guidance is impacted by our much faster than expected transition to subscription and a more cautious view on our business activities in the greater PJ region due to the anticipated impact of the Corona buyers.
Further this f. why twentytwenty guidance yields an operating loss in free cash flow of usage that is roughly in line with current consensus estimates of 550 million and 250 million respectively.
The implied HCV based on the F. why 20 guide is approximately 505 million.
The guidance for F. Why 2020 assumes no change to the current dollar weighted average deal terms currently a 3.9 years.
And our guidance also does not assume any meaningful disruption to the global server unrelated supply chain linked to the temporary factory closures in China.
For additional clarity of the $50 million to $80 million decrease in TCV billings guidance range.
Approximately $25 million to $30 million related to the faster than expected transition to subscription with the remaining amount attributed to the reduction in our APC Jay region sales plan.
Our eight PJ region as more dependent on new business in any given quarter and with the shutdown in China, and the slowness and uncertainty being exhibited and other ATP Jay countries. We believe it's prudent to take a cautious view of our APC Jay performance for the next few quarters.
Our cautious H.P.J. for our view also includes Japan, which generally operates under a March fiscal year end period.
We have a few large deals pending in Japan, and which we assume a reduced portion will close in Q3.
Based on our current outlook, both the Americas in EMEA region seem to be in a good position to deliver their expected results for the second half of fiscal Twentytwenty.
This of course assumes that the business interruptions in the DJ region from the kroner buyers does not spread to these regions too.
As our updated operating guidance suggest excluding sales teams and a few other select roles. We have recently, taking a pause on a significant portion of our planned headcount in the second half of our fiscal year contributing to 20 to 50 million expense reduction from our previous.
Guidance range.
Regarding our hiring we have slowed headcount for the following two reasons first we would like to have more clarity to see if there might be further potential disruption related to the impact of the corona virus and whether that disruption spreads to other portions of the world.
And secondly, quite honestly it puts us in a better position to more efficiently integrate the 1400 of so employees, we have added over the last year.
Regardless of this head count pause, we still plan to hire for critical roles on an as needed basis.
We view this selected have come pause as simply the right thing to do and is in no way related to any change to our overall positive view of our business going forward.
Now turning to our Q3 guidance on a non-GAAP basis for Q3, we expect.
TCV billings to be between 365, and 385 million, reflecting a year over year growth of 13% to 19%.
TCV revenue to be between 300, 320 million, reflecting year over year growth of 13% to 20% gross margin of approximately 80% operating expenses between 420, and 430 million in a per share loss of approximately 89 cents using weighted average shares outstanding of approximately 196 million.
The Q3 guidance also reflects the much faster than expected transition to subscription and a more cautious view on our business activities in the greater eight PJ region due to the Corona virus consistent with my comments on our fiscal year Twentytwenty guidance.
Additionally, the sequential decline in RF, why 20, Q3 implied booking guidance, which at the midpoint of the guide assumes a 7% sequential decline is actually better than what we experience for our actual F 18 F. Why 19 Q2 Q3 sequential.
Oracle bookings performance, which was approximately a 10% sequential decline.
Furthermore, the sequential increase and RF, why 20, Q4 implied booking guidance, which at the midpoint of the guide assumes a 25% sequential increase is also in line with our FY 18 in our F. why 19 actual Q3 to Q4 sequential historical bookings performance.
Which was a sequential increase of 33% and 25% respectively.
The current consensus numbers for TCV sequential growth from Q2 to Q3 in from Q3 to Q4 are quite Miss aligned to the historical averages.
Our Q3 guidance in the applied Q4 guidance brings the sequential growth rates back in line with historical averages.
As you aware for a 20 was our first year, providing annual guidance with this approach the yearly guidance gets updated each quarter and we also give quarterly guidance for the upcoming quarter.
For example, during Q1 earnings call, we provided updated annual guidance as well as our guidance for the upcoming quarter that being Q2.
At this time, we obviously did not a pine on Q3 in Q4, which put the shaping and the sizing of these quarters in the hands of the analyst community.
Going forward during our initial annual guidance setting at the start of any fiscal year, we will add some additional clarity on how we see the fiscal year shaping up specifically around quarterly seasonality.
If we had provided this insight at the beginning of the fiscal year the sequential growth rate for the Q3 in Q4 topline consensus might have been more in line with historical trends and with our current guidance.
And one last comment before we open the call up for questions clearly that the company has been through a tough a couple of tough transitions over the last few years with significant top line impact related to the hardware elimination and the current subscription transition.
Although when you cut through all the maecenas and go back and focus on one simple metric that being total revenue.
It is nice to see like so many other companies that have been through subscription transitions that finally, the year over year growth rate has now started to reaccelerate once again.
Our total revenue year over year growth rate appears to have bottomed out in Q3 in Q4, FY 19 growing at a negative 1%.
That growth accelerated to 1% in Q1 for 23% in Q2 fight 20, and based on the midpoint of the Q3 guidance and implied Q4 guidance.
We anticipate that the year over year growth rate will further accelerate.
To approximately 10% in Q3 and 25% in Q4.
With that operator, if you could now please open the call up for questions that'd be great. Thank you.
Thank you at this time I would like to remind everyone in order to ask quick question.
And the number one on your telephone keypad, well pause for just a moment to compile the Q and a roster.
Your first question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Thank you. This is RK on behalf of fraud I wanted to ask about TV, you reported 18% growth versus your guidance for 24%. So it was the delta all driven by the federal business or any other factors to think about then could you give us more color there and I have a follow up.
Sure. So you have a vast majority was.
Was driven by the federal underperformance in the quarter and don't and also just the subscription impact and we mentioned 5 million of TCV. So theres some.
CV in there.
And if you look at this HCV metric it is a.
A real time metric of the business and we decided to provide that last quarter, because I thought it was important to.
To give that kind of metric that you can't hide from anything that is what it is and I think it it's important metric during a subscription transition that things are messy and you can't really get a good feel for the business going forward, but I think we'll continue that through this fiscal year, and then probably end up transitioning to a more convention.
No.
CV, which is more of a waterfall kind of four quarter waterfall type HCV metric that most most companies.
Show, there, but yes, it was mostly clearly mostly federal and a little bit of the subscription topline impact.
Thank you.
I wanted to take a step back and talk about your subscription transition you had some problems with fitting the pricing right then the sales promotion and the discounting. So could you talk about value RV. Each of these challenges and how do you see that going forward.
Sure David you want to having you know bookless should probably chime in.
I think pricing with a big change almost a year on half of what I would say and mostly passed it.
Sales and customers have been surprisingly vary.
Receptive I think in oil customers, we talked at the large customer to probably not move to subscription this quickly.
But we have been pleasantly surprised at how.
How much they have actually been forthcoming and willing to actually moved from the over license murder to the new license motor.
Even the channel for that matter, including the global system integrators of actually moved in that direction quite growth.
I think we had a conservative view on when we'd get to 80% deck was in December January 2020, 2021 has been we said we'd get to 80%, but one of the things we learned along the way that we have to plow through this as fast as possible.
As we realized that the large customers are willing to take this we went ahead and said, let's get to 80, 80% even if it means it's your and a half ahead of time extreme.
And on the on the discounting that you asked about there we continue to focus that obviously a lot in the back office work, there and changed some.
Some processes and things so thats ongoing will continue to be ongoing I think we've made some pretty good progress there, but clearly we have some more progress to go and then we've realigned some of the pricing.
List pricing and things like that but it takes a while for that to to flush through but we continue to focus on both those.
Thanks, guys. Good luck.
Your next question comes from the line of Aaron Rakers from Wells Fargo. Your line is open.
Aaron Your line is open.
Hey, guys. Thanks for thanks for taking the question I want to I want to go back to the sales kind of promotion.
Can you talk a little bit about with your plans to kind of that paused spending or the investments in the sales organization. How we should think about you know the guidance relative to the productivity ramp you're seeing at some of the new sales hires.
And I think if I calculate productivity right. It looks like you're down 20, or 25% versus what you were caught a year ago ought to billings basis do you think that we can see productivity back at the levels that we've seen a back a year plus ago.
I have a follow up.
Let me start and dealers can chime in here.
Two things first of all we mentioned that were not pausing sales teams. So thats very important that.
That that comes across clearly, we'll continue to the higher sales teams because it in any.
Downturn period, the worst thing in my mind, you can do is halt sales teams because so you have low pause in this case, it's completely out of our hands I think we're being prudent.
But if you start pausing on sales teams and it takes you twice as long to get back.
To an accelerated growth because then you gotta go higher folks and ramp up and things like that so we'll continue with the vast majority of our sales teams.
Hiring there and then the productivity you mentioned I'm not sure how you're calculating that but it's not close to what we've seen from a productivity.
Degradation of came down a little bit 19.
Came pretty close to what we expected here in Q2.
In Q1 was up from Q4, so can ACB, yes, and we really look at it on an HCV basis, because it takes Eddie.
Term change out of the equation and it puts it on a equal playing hey, if anything that has only state better yeah, yeah yeah.
Okay Fair enough and then as a quick follow up you talk you talked again this quarter about the engagement with HP Enterprise I think it's 117, new customers I think last quarter. You did 25. So as you kind of continue to deepen the engagement. There. How are you seeing that relationship evolve is there more to pick.
Actually come or deepened with regard to the HP go to market when might that.
Happen if there is thank you.
It's an ongoing partnership discussion every quarter, we get into.
No more about.
Their aspirations as well and obviously, a primarily to have a pretty large silver centric business and.
While we as a setting that we've done a pretty good job with Dell and Lenovo and Fujitsu and others I think HP is becoming a pretty.
Substantial portion of our both enterprise and commercial go to market. So.
I don't want to speculate anything about the future, but all I can say that.
It's it's looking like it's a win win for both sides and there might be more things to come with subscription of.
Our software in their hands with Green Lake and.
Especially some things around how we can go go to market together and sell together, including that existing products.
Thank you.
Your next question comes from the line of Jason Adder from William Blair. Your line is open.
Thanks.
Dustin just on the PJ impact from the virus.
It is the right to think Thats, all demand and not supply at this point.
Correct, Yes, we'll have to look at the supply thing I think Q3 is.
From what I see and what I'm told here is that Q3 looks looks to be okay, and and maybe a little tight and then depending on what happens with the factories and folks coming back to work here.
That's a little bit.
Okay.
We'll have to see there, but yes thats.
That's not us not a supply issue and what's happening in the region quite honestly is is if you look at us nothing happening in China.
Theres really no meetings happening and several other countries and and.
We've got to you know if you look at the impact too.
To the Protivitis in general in the end the the verticals that it hits its retail transportation and manufacturing hospitality travel and all that stuff. So it's kind of a ripple effect of this we got our initial roll up from our a P.J. folks and.
As I mentioned, we've got a couple of very intriguing interest.
In Japan that we feel really good about but the timing of those we just can't taking aggressive stance on that at this point.
All right because Microsoft just preannounced.
That's the same as you saw that but pay they tie it I think like I said that Jason I think the important thing to understand here is we feel good about the business. There's two things happening one that's up 100% completely in our control and there's another thing it was 100% out of our control and we're really happy about the subscription transition.
And because again the quickly we get through here the better it sets up the model.
When the recent renewals come start to flow in here. So we're really pleased on that and we'll take the hit on the on the topline any day to go that faster there and then hopefully we're taking a reasonably prudent view on on on some unknown factors.
Related to the virus. So we'll see how that plays out but UNFI on the business itself, which we talked about in the script and everything else. We feel good large customers repeat purchases big global 2000, new products.
Everything is tilted in the right direction, except you know we've got one big unknown here that we can't control, yes, so quality it and Thats why we keep asserting that business is robust and.
Quantitatively, we just have to be a little bit more cautious.
And on the subscription transition do you have a forecast by you. Originally you were at 75, obviously, you're going to far surpass what would what would you say would be a good guesstimate for Q4 right now in terms of percentage of borrowings from subscription yellow is probably going to bounce around a little bit we had a pretty good accelerate.
In this quarter so.
Probably not too much different but well again update a couple of these bonds at Investor day here coming up on a on March 26, So for the first time you put this.
New sales comp.
Yes, and we're starting to want to tweak our sales comp we've put a roadmap in over the next several years for sales comp and how we end up morphing the sales comp ultimately to take advantage.
The leverage effectively of this of a subscription business in the renewals and things like that and this is the first.
First.
Period that we've actually put a negative multiplier on some melodie business and and the next six months, we'll put a negative multiplier on any yellow de business. So I think that naturally there will start shifting some of our bigger legacy customers over.
To subscription over the next six months here too.
Thank you.
Your next question comes from the line of Ramsey Monaghan from Bank of America. Your line is open.
Hi, Thank you just a follow up a little more on on the Corona wires situation can you give us some color on how you're coming up with that estimate I mean, you. When you say that it's based purely on a BJ demand. It seems like demand in other regions is also getting impacted.
This situation remains quite fluid and secondarily.
Supply.
For the server supply chain seems like that might be impact the.
Very near term so is there more.
Larry can you give us some clarity on why you think supply might not really be an issue.
In the near term and I will follow.
No what I mentioned this Q3 from what we're being told that doesn't it looks tight but it doesn't look at this point to be a serious.
Issue.
From our perspective Q4, I don't know it depends on how this progress is here I think the reason why we have a little bit more point of view on on a BJ is that.
Theres been a longer issue there.
And we've had chance to kind of digest that and get some forecast and things like that we mentioned that EMEA we.
Looks good and we've got good pipeline, there and the second half looks really good but this assumes that there is not significant impact that migrates into there and we just can't at this point guests what might happen our guests what might happen with the.
With this service supply chain and they do I think HP hasn't told us anything to the country and some of our legacy supply chain is Taiwan, North China. So I think it's not in the list of countries that people are keys to have talked about in the past.
So I mean, we're making an educated guess install this stuff as well, but we do feel like.
This is a pretty good guess for the next half.
Okay. Thanks for that and then Dheeraj there've been some high profile changes in management, IBCM and Google cloud or how do you think this changes the competitive landscape do you think it does or not and also the M&A landscape around this thank you.
Well I think you know we definitely feel like.
No, we will be becoming more and more of a software company running I mean as I mentioned this in the last paragraph of the script the cloud becomes the new sogo for us.
The big issue with the public cloud right now its enterprise workloads I'll have a tough time to lift and shift.
And all started if our software can bring that level of virtualization, where it doesn't matter with running on commodity so it was on prem.
Our commodity so was off Prem I think you really opens up new surface area for our software and I think we're looking at the next two to four years to be.
So just transmission no different than when we transitioned from pure appliances to OEM incur delve back in 2014.
I mean over the course of the next three four years.
Cuattro for business.
Was running on bell nodes, and I think a lot of that stuff.
We expect to see from Hyperscalers to actually in a so.
I became with the Red hat Ting will definitely be a partnership opportunity for us, especially around containers and hybrid cloud and I and I am cloud as well and also some of the work that you're doing with them on their power and X software to have an operating system in a ex that we believe can we can modernize.
Oh, I think an Amazon on Azure really good.
I would say engineering work going on you will see this year to be that eurobond, hyperscalers get really close to us and we do the soon with them.
And we think that will actually prepare them for a true lift and shift that is not entered the more CFO just global system integrators coming in trying to re architect because re architecting the app.
To go move it to the public cloud is really really hard and risk pool.
Thanks here.
Your next question comes from the line of Patty therapy from Morgan Stanley. Your line is open.
Thanks for the question going back us into your reference to Salesforce compensation changes what are you doing around shifting compensation from TCB to ACB.
And then related you mentioned that you're confident that you can close the gap between term in life of device pricing on on renewal.
Is it the salesforce compensation changes they can they can help you around pricing have you seen renewals yet such that you have confidence that you can you could raise prices is as customers.
Come up on there on the renewal.
Well, we haven't seen many renewals quite honestly on true subscription into most of these havent.
Haven't timed out yet on on it from from that perspective, we do know, though I mean, if we just in will show a.
A graph here at Investor Day, a few simply take.
Average three year CBL deal.
And assume that renews for another three years, so two three per year CBL deals.
Compared to a five year life of device and if you read and if that renewed for one year or support till you had comparable six year periods that the twos three than the two three years CBL deals clearly exceed the value of that life of device five year, plus one year renewal so theres no doubt.
You look at the averages of what we're pricing things. It's just that we take a hit upfront, but through that six year period, where were much better off.
So we just have to have to wait a little bit there and on the sales comp. We I think the good news about the sales comp is that we can again, we do commissions and six month periods, which is really great in a period like this that we can kind of more things every six months instead of a year. So we will.
Highly likely more to HCV.
Way before we need to.
And because it will kind of be seamless from that perspective, we believe and then we'll kind of run would that mentality and quota setting and things like that so when the renewals flow in I think we'll be in pretty good shape to actually get some some leverage from from those renewals because just like any subscription business.
Those renewals have to come in at a much higher efficiency factor and hopefully we can.
Show this in a reasonably thoughtful interesting way how this more so over time over the next several years at Investor day in how we see leverage playing in once these subscription renewals comment various efficiency factors and how it puts the percentage of the business becomes.
Pretty large portion in the outer years as subscription renewals and things like that so I mean, we're really happy about the faster pace to subscription.
But a lot of the benefits are going to come in a couple of years.
So that the shift to HCV thatll be six mentality or more that's not in the current.
Sales compensation changes correct, yeah, what we've done in the current sales comparably started to put some negative multiplier is on Ellie LSD business.
Okay and then just lastly from me, yes, sorry, the next phase will probably have some type of.
The transition.
Okay and.
And just lastly, you surpassed margin guidance and took it up for the full year can you just talk about drivers have upside on gross margin.
Yeah, it's pretty simple when you look at it because right now that the cost of bucket that we operate within obviously software as a 100%.
Margin, but the cost bucket now is it with the support model at the Port teams.
Historically done a pretty good job of gaining leverage there and so in this case, we had a pop up in topline.
And we can leverage that support structure. So is it just more top line on.
Small increase in the support cost and other cost internally here so.
We guided at 80% next quarter, but thats, just because it's a smaller topline based on a similar cost structure, but as I think we can continue to leverage that slightly as the topline continues to increase.
Great. Thank you yes.
Your next question comes from the line of Mehta Posidonia from subs Q1 of your line is open.
Hi, guys. This is Nick filling in for Mehdi.
So turning to the.
The full stack of your next solutions, how much is that impacting your billings.
Specifically is that what percentage of the billings are actually for the entire sac.
I think we mentioned.
Last quarter was 11 this quarter is 13% of far.
Bookings.
There are new new products on top of the core product itself.
I think they're fairly accretive in many ways. There's a lot that we talked about in my earnings script as well.
We are many of these customers actually are buying our entire stack.
Because there really comparing it to cloud the private cloud has to look like the public cloud and many which ways. If anything we are really pleasantly surprised to see that this attach and the overall contribution in global 2000, and higher than though overall company average.
That number 13% of higher in the global 2000, which basically tells US that this is not one of those conventional midmarket forced a sort of portfolios that we'd actually selling compared to let's say or hypervisor, which really started more in the mid market for the first three four years before it went up market I think menu for new products.
Especially the ones around automation and databases and security there to really starting.
Equally if not better actually in the global 2000.
For and do you break on that 13% base off of new customers versus maybe existing customers or upgrading Perry do not have those numbers. We don't mean, the only interesting statistic there and the on the 13% when you look at the global 2000 that 13% is actually a little bit bigger.
So you might have some perception that this might be.
Midmarket type customers trying things out.
Actually playing very well and our these new product to playing well with within our big customers.
Okay Perfect and then just one follow up on cash burn is that something that's concerning you guys in the near term I know that.
Balance sheet looks a little bit better, but maybe talking about that a little bit.
Yes no.
Even with the the change in the topline guide we still believe we're in the same range that we've been talking about what the consensus is roughly today were up 250 million or so so we'll try to continue to kind of manage that bucket.
Okay perfect. Thank you.
Your last question comes from the line of Jack Anders from Needham Your line is open.
Okay, great. Thanks for squeezing me in here I was wondering you could shed some additional light on just where things stand with your solutions based approach on the go to market side.
Nice to hear that you're seeing some success, but could you provide some broader context in terms of just how much of your salesforce is fully enabled with this approach and similarly, where do you stand with your partners in terms of getting them to embrace this solutions based approach.
Yes, great question I mean, there's two parts to this one is the way we talked to our customers, which are new customers or new campaigns call it more north south.
And there we had really leading with.
Things like.
Databases and end user computing and private cloud.
And.
Remote slash edge.
And things like that.
And all our seller, especially in though I would say global 10000, where you really go so solutions because when you start to get lower end. The midmarket, it's hard soda solution to a first time commercial customer. So obviously, there's a lot of Ittai plus files.
Maybe.
Little bit of operations management Thats going on in the mid market. So the answer is a little bit more and the ones because the segment, but I would say that all our enterprise sellers has really been doing this and that's the way. They actually can go create a pipeline the pipe if not created which is doing a bottom up selling off infrastructure, it's more wilco driven and solutions.
And actually you know.
The challenge is getting there I think.
We have not yet circle track pipeline for solutions, that's where the next sort of evolution of this solution driven approach is when we start to really track entire funnels that are driven by plan itself, but thats. The next phase in the Jenny.
Got it thank you very much.
This concludes todays earnings call. We thank you for your participation have a great day.
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