Q3 2020 Earnings Call
After the market close today, you can issued a press release announcing financial results for the third quarter fiscal 2020, if you'd like to read the really please visit the press release section of the new tenants website.
During today's call management will make forward looking statements, including statements regarding our business plan and financial targets in future periods, the timing and impact of our transition to a subscription business model.
Doctors driving our growth.
It benefits the capabilities of our new and existing products.
And the current and anticipated impact of the coded 19 pandemic.
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 FCC 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 measure for use on today's call or expressed on a non-GAAP basis have been adjusted to exclude certain targets. We've provided to the extent available reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release.
And with that I'll turn the call over to George George.
Thank you Tania and good afternoon, everyone. I appreciate you joining us today and hope that you wouldn't your loved ones were safe and healthy during this time.
Since we spoke during our second quarter earnings call in late February.
We live has fundamentally changed.
At that time, you were just beginning to see the impact on people know Lars.
It was largely guys later to just easier.
We tried to estimate the potential impact if the virus.
We provided Q3 guidance did reflect the worsening business conditions in Asia.
No shipping we didn't didn't predict what would happen in the rest of the war.
Today, just 90 days later.
We find ourselves nearly two months into appeal the pending.
You don't talk by covering a response to credit 19, including the trends you're seeing across our customers in end markets.
Oh for talk about where we are finding opportunities to better serve customers as the pandemic meaningfully or to the future work.
And I hope makes us a stronger company as we come out on the other side of this.
Oh the tone.
Talk about this quarter.
And discuss how the steps you have taken recently enabled us to deliver a strong Q3 performance.
And finally, I'll provide an update and the progress you've made no subscription business model transformation.
Before turning the call Boston to discuss our results in more detail.
[noise] getting with Gordon 19.
In February it was business as usual and by the end of the month, we anticipated that could be a demand issue DPG as we noted on our Q2 earnings call beginning in March and continuing through April.
We saw an increase in demand for our end user computing offerings.
Which include both.
Hi.
And desktop as a service solutions.
Well in the rest of her business you saw some modernization project spill over into future quarters.
Customers fades rapidly changing financial circumstances.
Well this is a time abroad and uncertainty.
So what time agreed opportunity.
Most long lasting companies that went past their first decade.
When two and annealing process during a recession and came out stronger.
We have been neighbor to quickly assess the situation and make informed real time changes to how we operate a business.
With that and your Texas has been focused in the wellness or for employees customers and core products, why revisiting productivity and cash efficiency.
We talked in each of these in more detail starting and employees.
By mid March as the pandemic began impacting India and the U.S., our global employee beats began working from home.
Well, we had never envision such an abrupt change to a working in mind and this was an extremely smooth transition because we were ready to enable our workforce to work remotely thanks to our own technology within a two week period, we moved from having girlfriend, 30% afford global team members what can be more Pete.
And 70% working in our offices to nearly 100% working remotely it's no service interruptions.
With a walk from home systems firmly in place our employee productivity and held steady and even improved in some cases.
Employee engagement has also seen a slight pocketbook.
Some of our product to the advantage of the due in part to.
<unk> drinking their own Champagne unquote, as our CIO, who likes to see.
Citrix VDI.
And autonomous U.S. and each we powered infrastructure with the were touch operations.
As I leap disaster recovery as a service you kind of files for application data and frame desktop as a service or the necessary pillars of for companies like piece right did you that is beating the war for several years before this pandemic in many ways. This digital infrastructure is now the biggest reason why we found just discontinuity.
To be so much less painful than many other businesses.
Turning to our customers. During this time, we also put to the test our ability to part D. Exemplary service customers and partners have come to expect from new Chantix, even as our entire team works from home.
Early March we communicated I intend to continue to provide 24 by seven support.
Remotely.
Thanks to the hard work and dedication to for employees, we've been able to achieve Jeff that we've received numerous unsolicited positive responses from our customers. Thank them for our attention to their needs at this time.
Sorry, our industry, leading customer support NPS score has actually increased with a third quarter scores, reaching the highest level.
He has been in the past four years.
As beautiful thing on the health of for employees and customers. We also focusing on the held for business.
While financial strength and flexibility are always a priority.
We are taking proactive steps to manage operating expenses in cashews.
A better positioned the business wouldn't be navigate through the pandemic and beyond duston will provide more detail, but in summary be implemented to non consecutive single week up on paid time off for many for employees and award one week in each of Q4, if I 20 in Q1 is by 21.
We also believe in sharing the board and across all levels of the organization and as such our executive team took a 10% reduction in salary starting in April.
Our effort to not stopping there as we continue to look for areas to save an operating expenses more broadly.
Other areas, where we are driving smart savings are within our marketing organization by pivoting to innovative and engaging virtual solutions.
We have been encouraged by the early returns in our shift to what truly been from traditional enforce uneven but to the regional dark next and tourism.
Did you boot camps.
We have gone completely Butch.
And are seeing comparable yields in terms of qualified leads and virtual meeting for a sales organization, that's less than half the cost.
Another key digital initiative to further improve and ease of use.
Doing business is our test drive product and offer.
Nearly doubling down on the syndicate demand generation initiative.
Which is designed to enable our prospects to experienced new tonics products via the zero touch. So so this Google cloud powered platform.
With that let me talk to the quarter.
We were pleased with our Q3 performance and in fact, despite challenging market conditions. Our final results came in modestly ahead.
The preliminary ranges, we pre announced several weeks ago TCT billings were $380 million up 17% year, where your and TCV revenue was 340 million up 18% year over year. Both metrics also came in above the midpoint of guidance, we provided in our last earnings call.
Good revenue was up 318 million has returned to double digits, you ever where your growth.
Oh, 11%.
Despite revenue compression, resulting from our continued subscription water transmission.
And harder elimination.
We also delivered a strong performance on E. P S.
Customers over the lifetime spend because of more than $10 million have once again growing more than 60% your where you're both in number of total accounts at an aggregate dollar spend.
There's 64 customers in this category and the now account for more than $1.2 billion, if lifetime spend because.
Our customer cohorts with a minimum lifetime spend a $3 million grew 37% given where your two or 329 accounts and they have collectively spent more than 2.5 billion in lifetime spend.
40% year, where are you.
And the number of customers. It spent more than $1 billion, we talked in lifetime spend has increased to 1122.
<unk>, 32% you are you.
Moreover, once again these customers grew nearly 40% your where you're in total lifetime spend.
In Q3, we closed 59 deals what were $1 billion.
Growing 31% your where you're in TCV bookings 11 of these 50 nineth councils to spend at least 1 million because last quarter.
And then aggregate purchase of notes increased or 40% from last quarter.
We now comp nearly 910 of the global 2000 as customers and these customers have collectively spent 37% more in Q3 that in the same quarter a year ago.
In 2000 customers continued to be approximately 30% for business. We now privileged to serve a total of 16580 customers in over 140 countries.
Why do people, ensuring our employees could effectively unproductively work from home.
Launched programs aimed at helping our customers to quickly set up remote work environments for their employees.
I'm proud to report that many of the big pharma companies both in the U.S. in Europe.
Or using new China's infrastructure could make progress on medical research to fight this fires.
We also launched fast track for end user computing or you see.
Especially program to help companies quickly expand capacity or set up a new VDI or desktop and so this environment.
The boardroom won't work.
Over the past decade, we've delivered millions of desktops reliably to enterprise is large and small.
We believe the future work because of the meaningfully or two due to this pandemic.
As has the future of healthcare and education.
How work healthcare and education get delivered in the coming years, depending largely computing environments that get delivered the club.
But without the burden of writing older applications.
But converged infrastructure now serving as a multi cloud infrastructure the service or I guess.
Plays a critical role in the lift and shift the club both private and public.
As Bush inhibition did more than a decade ago by providing a new operating margins without any change to legacy apps or operating systems.
Well many for deals in the quarter, where a continuation of longstanding dependent modernization project.
We did see demand for our end user computing solutions increased significantly during the quarter.
You see related sales increased to 27% of TCV bookings up from 20% last quarter.
And from 18% that you're.
You see deals also brought in 20% for new customers during the quarter.
Yes, I frame, our desktop in service offering daz.
Demonstrated solid momentum and had a record quarter.
In some cases things to extraordinary efforts well informed by our customer service in sales teams, we were able to get some customers set up with remote work solutions in record time, our customers' expectations include having remote work as a necessary component of their own did you do transmission.
This focus and end user computing is bringing us back two or who were in a much larger piece of our business was supporting what's your desktop workloads, primarily the U.S. based government organizations.
10 years ago, we took a contrarian approach Tibetans VDI is the killer app for our scale out architecture <unk> data center.
It was contrarian because pundits thought windows was dead in the area of mobile computing.
We had a long lived windows montral for the enterprise.
I was also a mission critical the entire front office would not even have a browser if you suffer downtime.
[noise] overtime as we grew our portfolio media remain important those smaller percentage of for business. When we acquired Freeman 20, ATM, we broadened our end user coverage to as a service and last year, we combined or VDI and as groups under one organization.
Looking back this pandemic has made us realize how critical that reconciliation has been between digital let's see I platform supporting citrix and be in their VDI and our SaaS based desktop service.
Our largest deal this quarter totaling over $7 million one of the largest financial services holding companies in the U.S. came to us for a highly agile digital infrastructure to bring that problem.
You too recent merger the deal we'll be talking company needed to share desktop seamlessly getting a bit too large and Keith.
The ease of deployment for softer significantly reduce the bottleneck of storage and compute in time sensitive walk through what determines the girls offers so easy to use.
Do you see team has been able to take ownership of the entire stock.
We have a similar steroid shared about large American financial services company that purchase nearly $5 million so far softer this quarter.
During their lifetime spend with us to over 18 million.
Now, they're using Utac score software or H.B. hypervisor for all employees working from home.
As well as using AWS four three large business critical applications.
Both of these large financial institutions of immense respect for a customer service.
I've mentioned that our support organization with a key factor in the decision to go all in with new tenants.
We agreed Freeport, sorry team for all obsessing with a customer in front line.
On the topic of going all in we saw robustness in overall part of portfolio this quarter.
But before I talk about a portfolio limit attempt to describe our portfolio to you one more time.
You should think of course Cie with our E. H E B U S and prism products as the digital infrastructure that assumes the role of portable.
Yes in a multi cloud ward.
As I mentioned before we make a strong case in the next two to five years for how it's he I becomes a killer app for all things lift and shift it's no change to applications are operating systems.
Similar to virtualization 15 years ago.
What sits on top of this quarter's onto foundation is three D.A. Davidson Center services, which includes unified storage disaster recovery operations management networking and security services.
Debooked services, which includes multi cloud automation database services containers and alike.
And desktop services, which includes cloud based Hsas and overall end user computing solutions for the future digitally workspace in summary.
Our portfolio 64 days.
Core digital it's YY platform on top of which said datacenter devolves and desktops.
But your akin to apps running on top of the platform together the platform in the apps.
You will each other's adoption as wouldn't goes and office did in their symbiosis.
See you momentum at that three deals on a rolling four quarter basically attach rate of these products in Q3 was 32% up from 23% you're good corporate.
On a rolling four quarter basis, the transactional volume of these treaty products in Q3 increased 16% year, where your and 35% quarterly report.
At the end of Q3, 28% for customers have bought at least one of these long core products up from 20% into your quarter.
Q3 lifetime bookings of non core products grew 160% year, where you're now make up 13% of movies TV and 15% of overall HCV.
We also saw good momentum with our Devops offering you Phenix era, which is our databases and so the solution.
One of the largest automobile insurers in the United States spent nearly $1.5 million and testing this quarter.
Not only for era.
They had been having performance and scalability problems with Oracle, which had the most critical workload during a proof of concept we were able to show them a significant performance increasing the ability to make database operations in visible with era.
Your Chinese arrows to databases, what new clinics com is to be EMS containers and all mordant.
Yes.
E. One click so service orchestration.
Multi cloud automation and autonomous operations, one of the largest professional services.
Comes in the world spend $5 million. He talks to continue their build out if a private cloud infrastructure based in our software in and native H.B. Hypervisor. This porches brought their lifetime spend up to nearly 17 million as part of the digital infrastructure initiatives.
We believe that this trend of zero touch 80.
So this delivery and streaming cloud based infrastructure will hasten in the post overboard.
Our customer base continues to be highly diversified the biggest vertical in Q3 was financial services, which represented less than 25% for business consistent with historical levels. The sector is pretty globally for us as well one of the largest financial institutions in Europe made the decision to use or go to use and each ANNEXA. This strategic due to send a platform for all new into.
Good thing workloads and applications.
Global 2000 companies and existing customer with $18 million of lifetime spend with us.
With three and half million of that in Q3 alone.
Because they're a bit let's see I foundation provides them to agility and because they had capacity ready for disaster scenario, they're able to scale up to get all of their 7000 employees working from home in about a week.
And even provide data be services like a public cloud provider. The board of directors were extremely appreciative of this preparedness.
Regarding capital allocation and other industries, our exposure to energy and hospitality verticals, you mean small.
Even though we are ready for them as they removed their operations both Goldman.
Well the retail industry as a whole it's been impacted by corporate 19, we have some retail customers. We've seen such a significant increase in online purchases. They didn't have to fortify the IP infrastructure to support Bloom.
And existing customer in large retailer in the U.S. came to us because if a major shift to online sales in clubs I'd pick up.
[noise], which put added pressure in the right infrastructure. They said that the pandemic was making quote everyday like black Friday and cool.
They purchased an additional 1.5 million for software and we were able to quickly get them set up with a solution to support this additional <unk>.
This customer lifetime spend to more than $24 million because.
In health care give supported customers, who have had to quickly make the transition to tell you held or to enable their non frontline work goes towards remotely and.
An existing customer was a large health care provider in hospital system on the east coast tripled their deployment access so that they could set at the solution for the non essential employees, who work from home.
In addition, a nonprofit health care system and East Coast, where it's just a core softer in prison Pro management console in a subscription do worth 1.3 million.
Running VDI will upwards as well as the healthcare industries.
Epic operational database, which Vietnam certification for in Q2 this year.
This crisis machine not just the future work in future health care with telemedicine, but also the future of education through more than a statewide school district in the east coast needed to quickie set up a solution for their students to be set up the loan remotely due to covert 19.
This new customer needed an IP infrastructure solution that can be set of quickly.
And we're unsure of the capacity that needed.
And it all needed to be set up remotely to shelter in place orders.
There are challenges to scale the remote long as from 200000 to 2.8 million.
The purchase 1 million afar clubs software as well as our Dev ops and data center services, such as Com files school in prison Pro.
And how does deployed in weeks, enabling millions of students to embrace digital learning.
Speaking of digital let me now spend some time in our ongoing transmission to subscription based business model.
Along with our customers.
During this time of uncertainty, we're even more resort in our move to the smaller.
Not only will it give us more recurring revenue or time. It also provides our customers are the flexibility. They may require departure this offering them opex versus capex. This is.
We're seeing large deals in large customizable to subscription U.S. based financial services company continued their digital journey with us by purchasing nearly $4 million if additional software for must be a subscription bringing their lifetime spend up to over 11 million.
Similar story with the large utility company on the U.S. West Coast was one of our top 25 lifetime customers with total spend with us at 18 million porches, nearly $4 million and tough in Q3 as part of their ongoing but your transmission.
So if our largest and most tenured customers girls embracing subscription earlier than we had imagined.
One of the largest automobile manufacturers in the U.S. was spent more than 37 million because over the years, which is another 3.5 million in software for most in Q3 and switched from life of device to subscription.
This new entitlement to far softer has made this organization nearly 100% new tenants with only a small amount of infrastructure residing in mainframe.
Subscription is also being embraced by U.S. Federal agency new honest.
Federal entity in the U.S. has been working with us to modernize the data center and added more product in their order this quarter to pull to nearly $2 million worth of software.
On a subscription basis for lifetime spend of nearly $40 million.
Your next if they're on Prem private cloud solution for mission critical woke huge using H.B. servers.
Another wonderful large subscription deals in the quarter was with one of the leading offered as a general acute care hospitals in the U.S., who has been a customer since 2016 and has a lifetime spend with us or 15 million.
In Q3, we sold them, an additional 2 million or for software to help them under lift and shift to private club.
They're working toward a zero touched provisioning model and both our core it CIA software and new clinics calm for orchestration automation, a critically could that strategy.
As customers look to the future, we expect a corporate initiatives around the more work.
Hands free I T automation disaster recovery and lift and shift to private and public cloud infrastructure will be some of the pillars of digital transformation.
And we believe we didn't get the central these conversations.
As we contemplate the future work our developers are deeply grasping the meaning of subscription economics cloud engineering and container based microservices.
Our new products like lifecycle manager objects in prison poor completely based equipment or just containers as an adjunct delivery model.
Most importantly.
Howard is like cloud services are designed to be 24 by 70 365 and that is a huge shift towards that devops mindset. As we tried to bring a signature and piece of 92 cloud escalators of security available it can performance.
As we've discussed in the past.
Core engineering is working closely with Cws and Azure on new tenants clusters, so that our entire portfolio can deliver that customers want to private cloud in the public cloud data centers integrated seamlessly with their cloud comments and credits.
In conclusion.
We've been focusing the collective held for employees customers and partners and overall business.
Quickly and efficiently shifted a business to match the changing times.
Our business has proven resilient.
And we've seen bright spots and you see as well as our core business.
We do not see the shift is temporary and in fact, we see the future work changing permanently.
Reported this month from industry analysts from Gartner the predicted by 2024 impersonated pride meetings will drop from 60% to 25% driven by remote work and changing workforce demographics in a separate sport forced her stated that even after a vaccine is available.
I will never return to the pre pandemic normal as knowledge workers demand. These new found highly flexible commute free productivity improvements to the component.
We believe a product portfolio and our customer centric culture keeps us well positioned to navigate this crisis.
And evolve with this dislocation tour stakeholders advantage I E customers employees and investors.
Speaking of the crisis and are imminent opportunities around efficiency than prudence over to best.
That's correct.
Thank you do rich.
With all the disruption and uncertainty that covert 19 has caused we were pleased to be able to deliver solid Q3 results in line with or in the case of D. P S better than our expectations heading into the quarter.
As you May recall, when we issued our Q3 guidance in late February we saw our early indications that covert 19 would cause a demand issue for 80, Jay operations and we adjusted our guidance Accordingly.
We did not adjust our outlook for Americas or EMEA operations as the viruses impact on these regions was uncertain at that time.
Virus clearly ended up affecting all three regions and despite this our teams did an excellent job executing and I'm very turbulent environment.
We also mentioned that we were starting to prudently manage our operating expenses during our Q2 earnings call.
This proactive and timely approach was based on our view that it was possible that the current demand environment could deteriorate due to the impact of covert 19.
[noise] once our initial premise several weakening demand environment began to play out we immediately took even further actions to reduce expenses, which I will return to a bit later.
Our subscription journey continues to move forward selling term based subscriptions have clearly become the norm.
Subscription billings now account for 84% of total billings up from 79% in Q2.
And subscription revenue now accounts for 82% of total revenue up from 77%.
In Q2.
The average dollar weighted term length in Q3 20, including renewals was 3.9 years.
Well the 3.9 years, we recorded in Q2 20.
As with last quarter. This calculation assumes life of device licenses, our five year terms.
Now I'll move onto some specific Q3 financial highlights.
TCV revenue or software and support revenue.
For the third quarter came within our initial guidance range of 300 to 320 million in above our amazed to estimate the preliminary results range of 307 to 312 million coming in at 314 million up 18% from a year ago quarter.
TCV billings, our software and support Billings also came within our initial guidance range of 365 to 385 million and above our may fit estimated preliminary results range of 371 to 376 million coming in at 380 million up 70.
<unk> percent from the year ago quarter.
He sees be booked in the quarter exceeding our expectations was 130 million and was up 22% from year ago quarter.
Additionally, total revenue also exceeded our may fit estimated preliminary results range of 312 to 317 million coming in at 318 million up 11% from the your go quarter.
We used a modest amount of backlog during the quarter.
This marks the third consecutive quarter that we've experienced year over year growth in total revenue.
The revenue growth rates are starting to reflect more meaningful comparisons as the revenue impacting hardware elimination that's been effectively complete for the last six months.
HCV of our H.P.E., the extra related business increased 16% in the quarter versus Q2.
We exceeded our pipeline generation goal for Q3 that was set before the quarter started.
As expected new customer bookings lagged a bit in the quarter, representing 19% of total TCV versus 24% in Q3 19 down from 24% in Q2 20.
The Americas EMEA regions performed well.
As expected the H.P.J. regional performance reflected more pronounced impact from Covance 19 related issues.
TCV bookings are software and support bookings from international reasons represented 44% of total bookings versus 45% in Q3 90.
Our non-GAAP gross margin in Q3 was 80.7%.
Above our guidance of 80%.
Operating expenses were 390 million significantly below our guidance range of 420.
430 million.
The lower than expected expense number for the quarter was mostly due to the hiring pause implemented early in the quarter reduced travel as well as overall expense management.
And our non-GAAP net loss was 135 million for the quarter or a loss of 69 cents per share versus our guidance of a loss of 89 cents per share.
Now a few balance sheet highlights we closed the quarter with cash and short term investments of 732 million.
Dsos in Q3 were 67 days versus 76 days in Q3, 19, and 65 days in Q2 20.
Free cash flow during the quarter was negative 117 million. This performance was negatively impacted by 23 million of SPP outflow in the quarter higher than we expected due to the lowered them tannic stock price.
Free cash flow was also negatively impacted based on its somewhat higher than expected accounts receivable balance and higher capital expenditures.
Our Q4 capital expenditures should be substantially less than the Q3 total.
33 million.
Now a few comments are turning to the future.
As we had mentioned a few times despite all the economic uncertainty that most companies are dealing with in today's environment. We we're generally pleased with our Q3 results.
As we look forward to Q4 and beyond we remain very excited of what the future holds for new tenants.
We are much stronger and better company today than we were just 12 months ago.
We continue to aggressively move forward with our subscription journey, our non core products are starting to get serious traction in some of our largest accounts and our sales leadership continues to improve.
All with the backdrop of a pipeline that is significantly larger than just one year ago.
Although the future clearly looks encouraging the short term comes with a high degree of uncertainty.
We are still in an unprecedented volatile time period.
And importantly, we are still in the early innings of transforming our business to a subscription model fueled by low cost renewals.
Well, we're making great progress on the transformation, we have not yet reached the point, where the predictable renewal business makes up a substantial portion of our quarterly results.
We are getting there, but for now new business and upsell business.
Areas with greater inherent uncertainty still account for a vast majority of our quarterly billings.
Accordingly, we do not believe it's prudent to provide guidance for Q4.
But as I said, we're encouraged with the progress we're making we spent the last year in half building a subscription business that will ultimately lead to a much more predictable business.
With 84% of our billings in the quarter now coming from subscriptions combined with a customer retention metric of 97%.
At this point, we believe it's largely a matter of time until the business matures to a new level predictability.
As such at this time, we plan to issue annual guidance for 21 during our Q4 conference fall with any top line guidance, most likely focused on HCV and with growth rates appropriately correlated to the current macro environment.
What we do know about up by 21 is that our teams will be ready our product will be ready and our subscription model will be ready to take full advantage of any economic recovery that might take place.
In the meantime, and Louis specific guidance for Q4.
Ill provide a few thoughts around specific areas that we're focusing on and in which investors frequently show interest.
Expense management.
As David noted, we had been aggressively manage the expense structure since mid Q2, and we'll continue to do so moving forward.
Hiring has been extremely limited merit increases and bonuses have been paused executive salaries have been reduced and we've implemented to non consecutive single weeks of and paid time off from most of our employees worldwide. One we couldn't Q4 and one week in Q1.
Major events, such as dock next and our worldwide sales meetings will go virtual along with many other cost saving initiatives.
Early in aggressive action to control expenses in the near term all while keeping relentless focus on the customer have clearly paid off based on the Q3 operating expenses coming in 40 million lower than the high end of our range our previous guidance.
Going forward.
We'll continue to actively manage the expense structure as the macro environment dictates.
Well the immediate future, we would expect operating expenses to hover at somewhere around 375 to 400 million per quarter.
Cash management free cash flow again, our early an aggressive expense management has put us in a pretty good position to control the cash burn over the next several quarters.
Hiring has been very limited whatever hiring that will take pace will involve around highly critical roles as well as some hiring around customer facing roles such a sales teams professional services and support.
Going forward, we would expect the cash usage decreased significantly from Q3, and we will continue to do what is required to minimize cash usage in the future.
A few comments on sales compensation, we continue to move aggressively to align our sales compensation plans to support a subscription based model.
And starting in the first half of that fly 21, we will move to either a partial or full HCV sales comp model.
This is the first step and setting up the comp structure to take advantage of the natural leverage a subscription model affords.
[noise] renewals.
Renewals have become a major focus area for the company and will be the foundation to build it profitable business going forward.
We are in the process of setting up roles and responsibilities within the various organizations and make sure renewals are sufficiently transacted.
The available to renew pool of subscription transactions is just starting to come into play in Q3, we transact at about 5 million and non support related subscription renewals and the pool available to renew will grow to approximately 10 million in Q4.
A few thoughts on operating leverage.
The subscription business model and operating leverage go hand in hand, many investors routinely ask us why our sales and marketing cost structure does not lineup closely with other subscription businesses.
Before we answer this question some context as needed.
As you recall, we started our subscription journey back in the first half and that's why 19 when the company was approaching a billings run rate of 1.5 billion.
Since then we've transitioned a substantial portion of our business to a term based subscription model with average term duration of less than four years.
Subscription based businesses derived considerable operating leverage from their renewal base and most mature subscription companies probably have a renewal base that comes close to 50% of their total billings.
Today, all of our subscription renewals account for less than 10% of the Texas total billings.
Or to put it another way more than 90% of our business today is still composed of new and upsell business business that is costly to transact.
Compare this to renewals, which are transacted at a low cost much lower than new business or up sell business.
As such it is reasonable to expect a wide gap and operating leverage profiles from two different subscription companies.
And with less than 10% of that total business derived from renewals and the other with 50% of their total business coming from renewals.
As our subscription business matures and our renewals also become a substantial percentage of our total business.
We believe it is realistic to assume that new tenants overtime will begin to display somewhat similar operating leverage characteristics as other mature subscription companies.
To date, only the negative aspects of our subscription transition, mostly around topline compression related to terms and pricing had been well documented and have carried the headlines.
We refer to these negative aspects as the investments into our subscription transition.
Much of the financial content for previously postponed Investor day was aimed to focus on the future positive aspects of our subscription transition mostly around why the renewal inflow will naturally provides significant operating leverage overtime.
Just like every other subscription company.
We refer to these positive aspects of the transition as the return on our subscription investments and the afterward mentioned moved to HCV based compensation for our Salesforce will ultimately position us to garner this leverage from the renewal inflow.
After all every substantial investment requires a substantial return on that investment.
We look forward to sharing a more detailed view of our go forward operational plan and corresponding financial targets at an appropriate time in the future.
With that operator, you can now open the call for questions. Thank you.
[noise]. Thank you at this time I'll remind everyone that into our Tosic question. Please press Star then one layer telephone keypad. There are parts just moments I can call the cure they roster.
Your first question comes from Katy Huberty with Morgan Stanley. Your line is open.
Thank you good afternoon garage as he mentioned what we're seeing in the current environment is accelerating adoption of public clouds. I was wondering if you can just walk through what you have in the pipeline and on the product roadmap in terms of any solutions that will be distributed on on the Amazon and Mike.
Our SaaS platform and whether you see that is incremental revenue opportunities or is that just a new features layered on top of the current product portfolio.
Thank you gave for the question Yeah. In fact, just take a step back at all or.
Ideal freely blurring the lines between on criminal Prim is to take all our products and run them in the public cloud as is and that we believe is going to be the biggest differentiation when it comes to lift and shift just like what virtualization did 15 years ago.
But you know probably public cloud also has some elasticity capabilities that for you now putting as part of our product so things like ER auto scale in auto scale out more autonomous infrastructure that is policy based and somewhat intend full as the correct.
In product or terms also commerce I think you know doing it in the marketplace and having people go buy something for three months or one year as opposed to really meeting a salesperson or do things. There's lot of good things that we can actually going availed, there as well and finally this idea of hybrid you know where you want.
Part of your infrastructure dropped off trend in a public cloud what parts of it actually run on Prem I think it's Dave Paulson for our customers because they're going to make some decisions about public versus private based on.
Due to sovereignty and data gravity and economics reasons, which is laws of physics and losses, the London and laws of economic. So we really are looking forward to the next to the six month. So there's some a big sort of a announcements coming but you want to make should we do it in a differentiated way as opposed to just be.
The first to market being the best to market is very important to us.
Thank you for that and Dustin just as a follow up and new customer count accelerated in the quarter to 970, how would you characterize the deal pipeline heading into July persist for instance, a year ago.
Yeah can you make sure understood you new customers you have referencing.
Yeah, I mean that the April quarter, new customers.
970, what was an acceleration from the prior quarter. So so clearly good performance just curious what they know pipeline for new business looks like going into July person.
This time last year.
Yeah, just on that new customers around 700 in the quarter.
So well have to sync up with you on.
Those two numbers okay.
But yet the pipeline and and I guess, maybe a question is more kind of Q4 in general.
And where we haven't given any.
Specific guidance, it's probably a.
A question that will come up sooner or later, so why don't I kind of.
The answer your question, then maybe a little bit bigger question.
Q4 again in my comments I mentioned pipeline for Q3 generation exceeded our targets and it was the biggest in court a pipe that we generated.
In our history. So that's clearly encouraging and if you look at.
Q4.
Now, we're only roughly three weeks into the quarter. So.
You know take that what it's worth but you know on the surface theres not many things that look terribly out of line.
Now you know the results won't be as good as we thought they would be creek covert.
But if you go down to look at conversion rate, you know, where we shouldn't be no three plus weeks into the quarter, where we are from you know what's converted from pipeline that looks okay, the loss rates or actually a little bit lower.
On the sales call for month, one linearity is within the.
The bounce up what we would expect historically months to cumulative.
Same thing.
We closed several million dollar deals I think.
At least three this week and.
A couple of though it was were spill over is that we thought was going to close in Q3 actually close this week to fed deals you know that pushed from Q3.
You know if you look at immediately some good stuff going on there with new customers and partners started to be they get engaged there's some public sector activity that looks really encouraging and.
So H.B. not surprisingly is getting I think some renewed attention.
From a cost savings perspective, because somebody wants to save some costs, we've clearly got.
Something there for them with.
Well, they see H.B. and APEC you know was first the first impacted and you know that's starting to open up in there some reasonable news within some countries, there I think India and China still obviously struggling.
But no not too bad and you know to get your question about pipe in the pipeline is there.
There's no doubt about it.
The sales capacity is there.
There's no doubt about that.
But deals and volatile and they're still volatile so.
No that's not giving Q4 guidance, we mentioned that we wouldn't be doing this.
Yes, so there's really no surprise there.
And then you know the comment was that again, it's just a little tougher in a volatile period for us to give.
Specific guidance, just because we're getting less than.
10% of our business is true renewal business at this point, but when you go all through the metrics and stuff.
There's some really good stuff happened the products performing really well.
Sales teams are executing all that it's just a very very volatile period.
That's great color. Thank you.
<unk>.
[noise]. Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Hi, This is all Kian Ross Thanks for taking my question.
Yes, opex came in nicely lower than expectations I'm, just talked about John cost cuts and for those insulet hiring so wanted to ask it you could you give us some confidence that these opex cuts are making don't affect revenue growth looking out into future.
Yes.
Yeah, one I couldn't start on that one.
You can't do this work without without.
Worrying about.
Not f. wide 21, but that's why 22 also.
To your point, because you know the easiest thing for us to do again would be no two completely.
Stop everything and not worry about the future growth that we can't do that so we've done a lot of scenario planning downside base case best case.
And within that environment, you have to have a view on F. Why 22.
Or those scenarios don't work well so I think the other comment there is I don't.
Ignore the fact that we have excess sales capacity coming into this downturn also so it's not like no. We were razor thin on capacity. So we've clearly got more capacity so.
You know, it's a fine line, we walk and that's why I think we've done some pretty prudent.
Things that Oh, Okay, again kind of affect everybody and not a you know singling folks out because everybody is going and take part in the growth going forward. So I think we've done the thoughtfully.
And we'll adjusted every week every month every quarter.
We need to based on what's happening.
Yeah, Thanks, well said dust and I just wanted to add just the fact that I'm you know I mentioned this.
In my script as well.
About a 10 years later, we have a recession. This is our first recession as a company and I use delivered a very deliberately annealing, it's a process of re crystallization than getting more strength.
You know when we went public we had 1800 employees, which is a Korean half years ago, maybe close to four years and now we have more than 6000 employees about 70% of a walk for certain never seen a private new clinics and I think it behooves us to actually look back and think about every dollar they'd be used to spend.
For five years ago, how do we go back to basics and become a startup again sort of using this opportunity to really go to that.
Thank you I also wanted to ask about your cash flow and liquidity position is there a minimum amount of cash that you have in mind to run the business and what you're thinking about potentially accessing the capital markets again.
Yeah again this is something that we look at all the time with.
Scenarios and they say this downside base case best Okay.
And based on our you know you are those scenarios topline potential.
And what we have done with expenses and the levers that we can pull with expenses.
We feel really good about you know a cash balance throughout a flight 21.
Based on what Weve scenario it out in those are those three cases, there you know the markets are reasonably open.
You know the terms a young some of these the terms are reasonably good.
But again you know what we've looked at we feel pretty good going forward I think.
If we were at some point to raise cash in the future would be more.
Around.
Tilted to giving us some optionality with our continued subscription transition would be more tilted to that rather than day to day stuff.
And this would be more potentially around nor do we want to have averaged terms you know shrink down a little bit.
Further from where they are well today about 3.9, because we know two things happen a that makes the business much more profitable with some a little bit lower terms.
And that's lower discounting because the lower the term lowered the discounting that's highly leverageable from a business model perspective.
And the shorter the term the quicker that deal comes up for renewal and where the 97% retention rate the quicker that deal comes up for renewal quicker, we get an efficient deal levered into the business coming at a much much lower cost. So you know if we were going to do something would be more around again that.
The optionality to make the business.
Much more profitable and we've got the current debenture out there. That's you know January 23 timeframe. So there's lots of optionality around that too.
Great. Thank you.
Okay.
Your next question comes from Alex Kurtz with Keybanc capital markets. Your line is open.
James said, a hope everyone safe and healthy over there.
Justin just to revisit your earlier comment about the pipeline I.
I think you said, it's like the largest intra quarter pipeline growth in company history, something along those lines I guess.
The both of you.
What are the workloads that are driving that it is just the continuation do you see VDI.
Trends that you saw last quarter or you kind of going back to [laughter].
Heavier mix, a big digital transformation projects I guess.
What's driving that and is it sort of a continuation of last quarter.
And you want take Oh, so yeah, let me tell me at least a beacon attempted to.
Thanks, a lot of the pipeline in Q3 that.
Got converted to you see views, which we reported as 20, 27% of heart TCV bookings.
A lot of that got created in closed in the same quarter.
And the numbers the desks and talked about was overall creation in the quarter, which is helpful for Q4 in Q1.
I think the mix is very similar I mean, as I said in my.
Call script as well that's you see used to be a much larger percentage of our business five years ago. It has come down 18% year ago, and I was 20% a quote trigger a blended become art I became 27%. This quarter. So I think our pipeline isn't the same ranges our bookings in Q3.
Hi, Thanks, guys.
Your next question goes some Jay side or with William Blair. Your line is open.
Yeah, good afternoon guys.
My first question is just on the on the guidance I'm sure. This is.
Been hotly debated internally, but why not just give a range you know that's where most companies are doing.
To completely pull your guidance after some of the comments that you made on the month of May and.
In the metrics being reasonable and the pipeline growth that you saw in Q3, it's just it's a bit odd to me that you did not give any Q4 guidance. So just walk us through the thought process there.
Yeah again.
Things are.
Yeah, a volatile and you know we're early into.
Q4.
Three now weeks or so.
Into our Q4 and again you know a lot of companies then you know with the subscription base business are giving that guidance with the substantial portion of their business coming up for renewals that they know it's done a renewed me. We're we're dealing with you know a chunk less than 10% of our business.
Ah in that category so.
It's kind of apples and oranges comparison, there and I gave you some pretty good thoughts about Q4, but no for us to go no put a range in there now.
You know with only no less than 10% of the business.
Coming in naturally.
We just thought the we pause for a quarter and then let things play out macro wise, the little bit and then come back with a fresh new Uh huh, Okay. That's why 21.
<unk>.
Oh, yeah, but I mean like companies like Cisco.
That don't have a lot of subscription.
Provided a range I mean, I I guess.
You know you're.
You are comparing yourself against some of the pure you know ratable type models and renewal model. So again no justification, even even for even for conventional businesses. If you look at let's say beyond the 60% of the businesses renewal.
For us, it's a less than much less than 10%.
So it's not just about subscription company, that's about most companies that Oh actually happened in new business.
Right, but don't you have.
Around 30% that's recurring support.
Oh, not not of the not of the quarterly bookings no no. It's an in its entirety, Jason that percentage of recurring whether you want to call support or are now subscription renewals is less than 10%.
So substantially different.
And that's what we're building up that's the whole story here, which we're talking about is that we know those renewals that percentage or the total business. Those renewals are going to increase like an increase over time and almost 5 million last quarter. We got a pool of 10 million for this quarter, that's going to continue to accelerate but today because we started this only a year and Uh huh.
The goal we just these renewals just haven't timed out that's why a little lower term.
It is probably a good thing ultimately because those renewals slow in.
Quicker than they normally would huh.
Oh, sorry, no we have a big international exposure.
Making things a bit more unpredictable as to when governments and.
Caught them, even businesses are going to open compared to many other companies actually you know who.
Our younger maybe 10 years old, but don't have as much international business.
And at the same time I think you know to keep these question does tend to widen a lot of color about what commuting Q4 is looking like right now so I mean, it's a fine balance Jason and there's no right or wrong answer we could have two I did a pretty wide range or we said look it's a metro for quarter and given the fact that we announced this already.
On may 15th.
There should be we do you go and reconcile this with ER.
All of you.
Okay, and then one one quick follow up on the billings.
Coming from renewals so that was helpful that got that.
Magnitude that we have a Q3 in Q4, how could you give us a sense of what the percentage of billings will come that will come from renewals.
In fiscal 21, 22, sorry for school 21, and 22 might look like just kind of ballpark numbers there.
Yeah, we had that all laid out for investor They will do that probably when we give a 21 guidance.
You can actually it's very simple for folks to go model because you know our average deal length and you know what we've done a subscription perspective, so it's pretty easy that's kind of mix I think it's pretty easy to go see this and touch and feel it.
Because it does by definition become a pretty substantial.
For the business going forward and again those renewals just like every other subscription based company come in.
With a very high a Christian some factors. So that's kind of the exciting stuff going forward just get back to Q4 Guy I wouldn't read anything specific into us not thought and we just think that there's some volatility.
That you know we.
Prudently, probably shouldn't guide, but things look reasonably okay right now, but it's early in its a period that's never happened before I'd certainly never seen it so.
Well, that's the view, but I wouldn't read anything specifically into that.
Okay. Thank you guys.
<unk>.
[noise] [noise]. Their next question comes from Jack Andrews with Needham Your line is open [noise].
Okay. That's it thanks for taking my question I guess I had a two part question I was wondering first of all if you could just talk about the significance of your partnership with why pro to launch digital database services and then the how how big could that be overtime and then the related question is just broadening it out you know more generally speaking I'm sure.
We expect other practice areas to be built with global or size around some of your other emerging subscription products.
Thanks for the question Yeah in fact.
We did announce two products with approval in the last six months one around.
End user computing and one around databases, both of which are powered by either infrastructure with citrix or with.
Our control cleaner and B to B side, which is era.
You know these are two massively large workloads databases and desktops and we've done a pretty good job with booties.
You know they probably are equal sized businesses.
If you exclude things like Splunk and other such things that we actually do tend more to apps like no secret databases, and Hadoop and so on excluding all of that I think it's a pretty big business for us.
We foresee that many of these will actually have a troubled going to lift and shift to the public cloud and that's been a lot of far value comes in because they didn't compute sit next to meet need to sit next to each other for databases and virtual desktops need to be delivered anywhere and everywhere, but people are so I think boobies workloads.
Excluding what we're doing with dead products.
Driving our products will be very important part of for GSK strategy, well be working very closely with tap Gemini our tools at T. L.
And Oh, Infosys as well in fact, I need a very large customers of new clinics as they think to the opex moderate for themselves because many of these are also actinic service providers to their global 2000 customers and we become the infrastructure build out because those so.
Very excited about or did you say opportunities and we feel like it's barely begun to scratched the surface of this.
Great. Thanks for your perspective.
[noise]. Your next question comes from Simon Leopold with Raymond James Your line is open.
Hi, This is a victory chewing for Simon you mentioned that all three regions were impacted incrementally relative to your expectation. So you can you just help us understand what.
You know, what's the offset the kind of I'll provide some upside relative to your previous guidance expectations.
Yes. So we don't know was Oh, sorry go ahead.
No I'm sorry go ahead Sir.
Sitting there globally, the the yen Yang and they'll be called puts and takes the takes from our side were end user computing.
The fact that we were able to do this globally.
Not just in the U.S. and federal but also in India and EPG. It was actually a good tailwind for us.
And I think.
Obviously, the puts from our side were more on the large deals that could be were all the C. Tracking for the last six months that people have come to postpone every visit for now.
But we do believe that you see alone provided a big children.
Okay. That's helpful. Thank you.
Yeah.
[noise]. Your next question goes from Mehdi Hosseini with SFG. Your line is open.
Yes.
Hey, guys. This is Nick on Permian.
I didn't hear I just wanted to.
Hi second.
When we look forward.
More incremental upside.
<unk>.
Anyone who are those still switching from customers like don't they need they need assistance coming online is going to this work from home and up or is that opportunity too much closed.
And Oh I think there we're early in this thanks for the question being relatively early in this obviously the global 2000, maybe the global 5000 it takes to this.
But even there the penetration is killed 30% even if you look at Citrix is a data you know the enterprise seats, not just seem as number of employees in these large enterprises.
And I think.
Large accounts are probably one third penetration rate, but the mid market is yet another day large market and.
Outside the U.S. I think there's a lot more that we'll get digikey.
So I believe that this end user computing bijan workspace.
Well actually get to be defined and that's probably in its early innings, maybe the second it makes more so than the sister successful and it's hard just to future work. It's also feature of health care and future if education today there was a.
Very good.
Piece on CNN about you anywhere confuse you know div.
Basically grown their fee structure like Oh, 1400% 14 calendar, 1400% I can't remember the exact number but when the last 40 years and nothing has changed in terms of there.
Of course, there and the weighting part education. So there's a lot of things that are up here for grabs in higher education.
State and local as well as a you know Middle School in High School education, plus in health care and work as well.
Perfect. That's now I'm going to squeeze in one more.
So the 97 just essentially.
Obviously.
No no decline that we live in now so can you just provide a little bit more color about what you're thinking about churn retention rates going forward, especially as renewals start coming online.
Definitely but I wouldn't fixed sure yeah, I wouldn't expect all that much difference quite honestly. The product is is very compelling the value add is compelling I mentioned, you know about how age be becomes even more compelling in.
In a.
Cost conscious environment, which were starting to see there we've run those numbers through Q3, a quarter just ended.
And there was a it's probably still rounds to around 47 are 97, I'm sorry, So no I wouldn't expect to see.
Too much change they have over the next several quarters, but we'll see.
Okay. Thank you.
Yeah.
[noise] or last question comes from can draw more.
Bora with JP Morgan Your line is open.
Hey, guys. Thanks for squeezing me in.
The average we have heard a lot of Commons Pos has gone into Belgium pitch P. partnership. This Ah. This if Q3, how could you tell us how did you perform maybe versus your expectation and it did the the pay as you can zoom construct a for green light help in this current environment and then lastly, do you see any value in Peru.
Writing a pay as you can zoom kind of a model yourself, that's all I had.
Yeah. Thanks to the question HP are very good partnership by speaking about two and a half quarters I would say since it began.
You know they.
Our definitely have a global presence and our sellers are working together a hand in hand, many of these accounts.
The PZ goes a little earlier I would say simply because we haven't put all our products in there, but some of the large customers, especially after covert we've started to see questions in mortgage macro questions emerged about can be tick and tie new clinics portfolio and habits run through Green Lake I think it's a pretty normal concept and ER.
There's some interesting partnership opportunities, but nature you know as.
Actually in the war design are we talking about tacos and many of these service providers currently by hardware the topics.
I think greenleaf needs, a killer app and new clinics can be that killer app and pulp.
ER and especially as we take this to GE has size and technicals and service providers, all of whom actually a very willing to look at a hardware Nick I'll pick smarter rather than capex.
[noise] [noise]. This concludes today's conference call you may now disconnect. Thank you for participating.
[music].