Q2 2021 Cloudera Inc Earnings Call
Good afternoon. My name is Jason and I will be your conference operator today welcome to the <unk> second quarter fiscal 2021 quarterly results conference call. All personal lines have been please you may listen only mode to prevent background noise.
After the speaker's remarks, there will be an opportunity to ask questions. If you would like to ask a question. During this time simply press Star then one number one on your telephone keypad. If you would like to withdraw your question first the pound key. Please note. This conference is being recorded.
Your host, it's Kevin Cook, VP finance corporate development and Investor Relations.
You may begin your conference.
Thank you operator, good afternoon, and welcome to clutter as second quarter fiscal 2021 financial results Conference call.
We will be discussing the results announced in our press release issued after market closed today.
We've also posted today's prepared remarks, and supplemental materials on clutter as Investor Relations website, which in combination with our press release provide additional information as well as greater accessibility.
Today's quarterly conference call from Clutter with me are Rob Bearden, President and Chief Executive Officer, Jim friend Cola, Chief Financial Officer run Murthy, fraught, Chief product Officer, and Mickelson Chief Marketing Officer.
During the course of this call we will make forward looking statements regarding future events and the future financial performance of the company generally these statements are identified by the use of words, such as expect believe anticipate intend in other words that denoting future events. These forward looking statements are subject to material risks and uncertainties that could cause actual.
So the differ materially from those in the forward looking statements.
We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward looking statements in the press release and on this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors in our annual report on form 10-K, our quarterly reports on form 10-Q.
And our other filings with the FCC.
During this call we will present, both GAAP and non-GAAP financial measures non-GAAP financial measures exclude stock based compensation expense amortization of acquired intangible assets, an extraordinary noncash real estate impairment charges if any.
These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results. When we encourage you to consider all measures when analyzing clutters performance all references to operating income or to non-GAAP operating income for complete information regarding our non-GAAP financial information.
The most directly comparable GAAP measures and a quantitative reconciliation of those figures. Please refer to todays press release regarding our second quarter results for fiscal 2021. The press release has also been furnished to the FCC as part of a current report on form 8-K. In addition, please note that the date of this conference call the September 2nd.
2020, and any forward looking statements that we may make today are based on assumptions that we believed to be reasonable as of this date, including those related to the impacts of cobot 19 on our business and global economic conditions. The forward looking guidance, we will provide today's based our assumptions as to the macroeconomic environment in which we will be operating.
Those assumptions are based on the facts as we know them today. Many of these assumptions relate to matters that are beyond our control in changing rapidly, including but not limited to the time frames for and severity of social distancing another mitigation requirements related to covert 19, and the impact of cobot 19 on our customers and partners and its impact on the economy as a whole significant.
Changes in the future weather related to go, but 19 or other factors could cause us to modify or guidance. We undertake no obligation to update these statements as a result of new information or future events now Rob Bearden CEO.
Thank you Kevin Good afternoon, everyone. Thank you joining us to discuss our second quarter fiscal 2021 results.
As with last quarter's call robbery from separately occasion, so we will do our best assure key information and respond to questions.
We will provide a quick update on or quarterly performance discuss customer buying behavior and market trends and of course highlight clot everyday to platform progress in public and private cloud.
Q2 was an excellent quarter, which we continue to outperform on many of our financial and operational goals.
Beginning with financial results.
Total revenue in the second quarter was $214 million subscription revenue was 192 million.
And non-GAAP operating income was $30 million each of these results exceeded expectations.
Annualized recurring revenue. It was also stronger than planned reaching $739 million at the conclusion of the quarter, representing 12% year over year organic growth.
Total number of customers you exceeded $100000 they are or increased to 1007.
The number of customers you generate a are greater than a million dollars grew impressively again in Q2.
172.
25% year over year.
This outcome is especially gratifying reflects great execution.
As we discussed last quarter were not immune to the economic downturn caused by coded I'd put her business is more resilient than most enterprise software companies.
We believe this is true because we're offering support digital transformation initiatives and mission critical use cases and.
In addition, our sales organization has that affected and engaging in supporting customers remotely.
By contrast, our services business has been impacted by the pandemic.
The team responded quickly by delivering virtual consulting and implementation services whenever possible, but professional services consulting and training revenue is down in line with our forecast from last quarter.
Turning now to our new product offerings.
Adam continues to build for CDP with significant new innovation and customer adoption.
We more than doubled the number of CDP public cloud customers in the quarter and had a similarly strong bookings result.
Although recognize revenue is currently modest recurring spot market reception to CDP public cloud.
These offerings are differentiated as discrete services it was still over time.
GDP public clouds immediate strategic value, that's primarily units enablement of hybrid data architectures, playing in a central role in creating an enterprise data cloud drug customers.
CDP, we're participating in the fastest growing segment of the market through cloud native surfaces, and uniquely we expect to benefit from demand from hybrid multi cloud solutions.
Wow enterprise to optimize the performance cost and security.
Workloads and use cases.
And now brings us to the Big news.
In August we announced a general availability of our CGP private cloud solution.
CDP private cloud as a major milestone in our enterprise stated club strategy.
It's a powerful hybrid architecture.
Separates compute and storage, while maintaining data context for greater agility ease of use and more efficient infrastructure construction.
CDP private cloud takes advantage of our shared data experience stx, providing persistent security and governance and creating a consistent analytic experience for the end user across public and private cloud environments.
The other CDP public cloud and CDP private cloud create a modern data architecture that spans multiple public clouds and private clouds.
Uses any data and supports the full data lifecycle from the edge the young.
In addition to consider performance and cost advantages what are the key benefits as an enterprise data cloud is the enterprises ability to secure and governed this environment holistically and to manage it from a single pane of glass.
With unparalleled interoperability between CDP public and private cloud.
Customers can now be agile.
Seamlessly directing workloads that benefit from advanced scalability and last adjusting to the public cloud and directing those workloads that require superior security and predictable cost to the private cloud.
The ability to optimize any workload in this manner as highly differentiated.
Utilizing CP, our customers experienced the simplicity and ease of use of public cloud services.
Without interlocken.
Again enterprise grade security and governance and lowered their total cost of ownership.
Well this is what our target customers expect Columbus independent industry analyst have also validated our strategy.
Example, the I'd see cloud pull survey in Q1 2020.
Indicates that 67% of enterprise workloads run on public and private cloud implementations today.
Among the various cloud models, 84% of enterprise. This report repatriating some workloads from public cloud.
And that does repatriated workloads, 52% plan to move to private clouds with performance security costs and availability as the top reasons for repatriation.
To be sure new applications will be implemented on public cloud infrastructure, but it appears that enterprises will now be more selective about which workloads they run in public cloud.
Similarly responses to for 51 researches voices enterprise cloud hosting and managed services inter evaluations and a 29000 study indicates that 58% of enterprises are using or plan to use hybrid environments.
Consistent with these industry trends.
Customer reception and interest in our new CDP offerings has been very encouraging so far.
In simple terms CDP private cloud opens up new workloads and use cases, and it's designed to drive additional CDP public cloud usage.
Field organizations already been trained on CDP private cloud through specialized virtual cells get call and is now actively engaging with customers on the enterprise steady cloud this.
Since we believed that were only modestly penetrated the installed base our sales nation for the balance of the fiscal year will be to focus first on migrating our existing customer base to CDP.
An existing customers are expected to be primarily on premise workloads to CDP private cloud with most new workloads and select on premise workloads being directed the CDP public cloud for full hybrid enablement.
And with the advent of CDP private cloud comes greater focus on site as our key partnerships.
We did a joint preview of CDP private cloud with Fivepm Red hat in June and introduced it on Red hat Openshift Kubernetes container platform.
The Soviet went extremely well when we believe there are significant demand for private cloud among the IB in in Red hat customer base.
In addition to jointly marketing to these customers are alliance with Red hat enables us to bundle openshift ready customer that does not already run the platform.
Red hat Openshift is merely to start.
GDP private cloud is designed to be portable across multiple platforms and in the future. We plan to make available on alternative container technologies.
Likewise since the development of enterprise data cloud based on their customer base is expected drive increased public cloud infrastructure as a service construction.
GDP private cloud fuels, our public cloud partnerships, we pay Ws Azure and Google.
We estimate that the cloud providers will generate four to $5 compute and storage revenue for every dollar software revenue earned by cloud era.
This potential Ais revenue is the focus of or Hyperscale cloud partners and drives our interactions with them.
As we discussed on last quarter's call, we've expanded our partnership with Microsoft Azure and Google Cloud platform.
Most recently, we've agreed to expand our partnership with yes.
This multiyear strategic collaboration agreement will make CDP available on a ws marketplace.
Thereby streamlining procurement.
And integrated with eight advanced billing and driving adoption through the use with customers existing annual Klaus and commitments.
The east migration, we jointly developed workload migration playbook and ate up yes, this offering credits to mitigate infrastructure cost.
So now let's quickly discuss how these developments were playing out back from customers.
Our first case studies, a deep customer and one of the largest operators of mobility and logistics hubs in North America.
There are challenges a rapidly growing network of partner companies and the associated increasing volume the datasets as a global entity with operations in Europe. They also needed to comply with GDPR in <unk> regulations.
Placed their existing cloud data warehouse with CTP public cloud because it offers superior scale security and governance.
Next example is a leading global provider risk reinsurance retirement and health services.
This customer is struggling with patchwork of ingest date engineering streaming in analytics cloud products they needed to rapidly support both internal use propensity to buy applications and external data intelligence services.
They choose CDP public cloud for its integrated data lifecycle, eliminating the need for ongoing costly integration, a third party data services and enabling rapid response to the revolving business needs.
Our next customer is a large biopharmaceutical company.
They had a corporate mandate that neither broad range of patient therapeutic and clinical trial applications to the public cloud.
As with any regulated entity security and governance requirements are paramount.
The the flexibility to operate anywhere, which means that 40 unintentional walk in any one particular cloud provider.
This customer churn CVP public cloud for its enterprise data cloud attributes the multiple data functions multiple public cloud support and comprehensive Stx security and governance.
These customer case studies are consistent with industry analyst research on market dynamics, they've observed that many organization to abuse Standalone cloud point products now for burden integrated data lifecycle solution rather than to deal with the cost risk and uncertainty of Cobbling together with cloud products and bolt on security the trend is clearly too.
George Enterprise data clouds.
Before Jim reduced the number so I want to taking that reflect on my first two quarters of CEO quite era, I was decided that seem to chief executive role in January but I could never imagined the progress that are leadership team additions with bacon, such a short period of time.
No doubt we have more do we want to accomplish that on genuinely impressed with management and happy to be part of the organization.
It's clear that our opportunity a significant within market demanding hybrid multi cloud solutions and enterprise is embracing private cloud.
We're executing well and now have the product set that meets the needs of our target customers.
In addition to the digital transformation that they call. Since then leading force has begun to change the way that we engage with prospective customers to increase the sales velocity in lower our customer acquisition cost.
We've demonstrated that we can dare generate substantial cash flow and achieve high operating margins.
While remaining committed our operating margin targets. We believe these initiatives and continued progress on or enterprise stated cloud vision will enable us to manage towards faster revenue growth.
And as Jim will detail wanted them. It we've revised our forecast higher for fiscal 2021 revenue as a result over.
Over the course of the last five or six months I've been hands on with as many customers and partners as possible.
I'm encouraged by my interactions with them at more excited than ever about Clatters positioning.
So Jim as you please take us through the financials.
Thanks, Rob Hello, everyone.
Q2, with another outstanding quarter, reflecting stability in the business and consistently strong execution on all measures.
Total revenue was $214 million, an increase of 9% year over year.
Subscription revenue was 192 million, an increase of 17% year over year annualized recurring revenue for fiscal Q2 was 739 million up 12% versus last year.
The outperformance on a our was driven by increased growth in both new bookings and expansion bookings also one quarter does not make a trend that in Q2, we did have a record quarter for non paying users of the software becoming subscribers. These wins were a direct result of the distribution changes we made earlier in the year note.
Information regarding definitions and trends can be found in today's press release or the supplemental materials on cutters Investor Relations website.
As Rob indicated we concluded Q2 with 1007 customers, who started at or have grown to more than $100000 today or are we.
We increased customers representing greater than $1 million today or are to 172 from 164 last quarter.
As I review the remainder of the income statement note that unless otherwise stated all references to expenses at operating results are on a non-GAAP basis.
Historical non-GAAP results are reconciled to GAAP results in the press release issued earlier today.
Our non-GAAP measures exclude stock based compensation.
Amortization of M&A related intangible assets and any extraordinary noncash real estate impairment charges.
Total gross margin for Q2 was 81% compared to 77% in Q2 as last year.
Given by subscription gross margin of 89% up from 86% in a year ago period.
Total operating expenses were $145 million for the second quarter, continuing a post merger trend toward a lower operating expense structure.
These operating expenses were 68% of total revenue in Q2 fiscal 21 as compared to 80% of total revenue in Q2 of last year.
<unk> expense improvements were evident across all lines, the pinedale and were driven by ongoing merger synergies as well as process improvement and cost reduction initiatives.
Overall operating income was $30 million for the second quarter, representing an operating margin of 14% a substantial improvement of 18 percentage points compared to Q2 last year.
Operating cash flow for the second quarter was $32 million.
Cash flow benefited from top line growth.
Good collections and strong expense management.
Diluted earnings per share with 10 cents in the second quarter compared to a loss per share of two cents in the second quarter fiscal 2020.
Now turning to the balance sheet, we exited Q2 with $569 million in cash cash equivalents marketable securities and restricted cash upfront 519 million at the conclusion of Q1.
Capital expenditures were $3 million in the quarter total contract liabilities, which comprise deferred revenue and other contract liabilities were $486 million at the end of the second quarter.
Our BPO with $820 million up 16% year over year hurt our PEO grew 10% year every year.
I will conclude by providing initial guidance for fiscal Q3 and updated guidance for the fiscal year, which is subject to the disclaimers provided at the beginning of the call regarding forward looking information.
We expect Q3 total revenue to be between 207, and $210 billion, representing approximately 5% growth compared to Q3 of last year.
With subscription revenue in the range of 187 million to 190 million up approximately 13% year over year.
Similar to Q2 the difference in growth rates is driven primarily by a projected slowing in professional services revenue, which is due to the pandemic and associated global recession.
Specifically, we expect services revenue to remain at or close to Q2 levels until the economy recovers.
This flattening of services revenue was anticipated we took actions in Q1 in Q2 to adjust our cost structure appropriately.
Non-GAAP operating income is our primary bottomline metric, we expect operating income for the third quarter to be in the range of $27 million to $31 million or roughly 14% of revenue.
Earnings per share for Q3 is projected to be eight cents to 10 cents.
For fiscal year 2021, we expect total revenue to be between 839 and $853 million, representing approximately 7% growth with subscription revenue in the range of $755 million to $765 million approximately 14% year over year.
Although we are raising our outlook and it is higher than originally planned. These updated forecast are based on a per longing of the macro economic impact of the croda virus through Q4.
We expect operating income for fiscal 2021 to be in the range of $102 million to $112 million or roughly 13% of revenue.
Earnings per share for fiscal 21 is projected to be 32 to 35 says.
As is evidenced from the Q2 results and our projected outlook for the remainder of the year. We have achieved our operating income margin objectives much more quickly than anticipated.
This is a function of scale and natural operating leverage as well as strong cost discipline and new operational efficiencies.
As such we expect the operating margin improvements to date to be sustainable, but do not anticipate dramatic increases from Q2 levels for the next two quarters.
Operating margins are expected to increase gradually for the remainder of fiscal 21 inline with prior forecast with that I'll turn it over to Rob for some concluding remarks.
Thanks, Jim.
Although Q2 was very strong quarter for the company in many ways. They feels like a new beginning for cloud era.
We've been working on our enterprise data cloud strategy since the merger with Hortonworks, having you that thing it so significantly with the availability of CDP private cloud reflects tremendous effort innovation on the part of our engineering and product teams and I want to express my sincere appreciation for all their hard work.
We now have the foundational elements of an enterprise data cloud in place and can begin to further build it out also want to acknowledge the fine execution on the part of our field organization.
They faced product transition as well as limitations on pursuing new customers and as always thank you to our partners customers in the community for their continued support this pause here and take some questions. As a reminder, reimburse the chief product Officer, Nicholson, Chief marketing officer, or they will for acute Tonight.
Operator, please begin the Q and a portion of the call.
At this time as reminder.
If you would like to ask your question. Please press Star then that number one on your telephone keypad once again to the Star then the number one on your telephone keypad to ask your question, we will pause for just a moment chicken barbecue and air roster.
Your first question comes from the line of Pat Walravens from JMP Securities. Your line is open.
Oh, great. Thank you very much in congratulations so I have one question for each of you Rob can you help us just architecturally, particularly because theres going to be so much attention paid to.
Data clouds and the next few months, what is so important about separating compute and storage and which of your products do that.
Sure Great so actually.
I'm going to have a rune come in and just amendment give a little more color on it.
But.
So important about CDP is that it does that exactly as you've outlined it separate storage and compute.
And the reason that's important is it gives us the ability to manage and enable hybrid data architecture and be able to apply all the SAS like experiences in a in a private cloud and that gives our customers the ability.
To get that 100% isolation of the tenets and that gives the the IP organization the ability to deliver much better filets.
And what that does is it really drives a much better elasticities platform and lower total cost of ownership.
So Randy you want to add to that.
Absolutely. Thanks, Rob Thanks, a question but.
Yeah, Rob colored stones.
Just going a bit more Florida technically what that also seeing is.
As customers are buying hardware bolt on Prem and the way they are getting used to public cloud, which obviously separates compute and storage.
We are really pushing on that consistent architecture, both on Prem.
Private cloud and the public node right specifically.
What this allows customers to do is scale their storage and compute needs independently.
And now they don't have to in the past that have to buy bulk storage and compute silver's are paying for them equally now what to do is especially with the advent of Cuba notice. It allows us to scale the compute layer independently from the storage layer and allow faster and better expansion of workloads on platform. So.
Storage, our FERC of good itself. So that is by having that separation of compute and storage is so critical for us, but again fundamentally.
If you're not going back to what what we've had to be limited has been sdx right, making sure we have stx, the consistent level security and governance to actual about that blue between disorder dispute has been fundamentally barn, and that's why you see us talk so much more stx, whether it's on Prem are on private cloud are in the public clouds.
Okay Awesome. Thank you yeah, no, it's great and as Jim I, just how how do you feel about the CRP show growth rate of 10% because it seems like that's below what your subscription.
Revenue guidance is so is there is there something that was pushing on that or is there. Some way we should think about that.
Yes, I feel good about the balance sheet movements RPL is up around 16%.
See our PEO, if I were ARPU in general does not include contracts that have termination provisions and some of our oldest customers contract that we had signed eight 910 years ago do have some termination provisions where when we signed the contract.
We exclude the.
Yep.
Beyond the first year. So if we normalize for that RCR PEO growth rate is actually higher than our a our growth rate for the quarter. So when you get into the details I'm perfectly fine with where the balance sheets Kelly.
Okay. Thank you look very much for all three of the thank you.
Thank you joining the call.
Your next question comes from the line of Phil Winslow from Wells Fargo. Your line is open.
Hi, Thanks, guys, you're taking my question, obviously, a big shot to run for delivering the private cloud. The addition of CDP.
A question I have is obviously CVP minds.
Components, the CDH and HTP and sort of takes it doesn't both worlds. It also has a obviously a new you why I guess question for the year round, Andy you, Rob I mean, what's the feedback from call. It the legacy CDH and HCP customers about the recall that the new components are different components and also just the you why anything that sort of jumping out as you have these conversations with existing customers.
[music].
Yeah, right shortened and you can pick it up and add some color. So for sure. The feedback has been very positive we've been we've been very engaged with customer base, making sure that.
One we're delivering updates consistently on what the Roadmaps gonna be but we've also conducted.
At this point going on over 500 workshops with their customers to take them through with the CDP environment looks like how it applies there.
To their current environment and what the what the transition will look like to go from their current legacy environment over to CDP, the kind of leverage points, they get kind of benefits they get it and the feedback has just been astounding.
And we're seeing great interest in moving to CDP.
The the design partners and and early adopters have gone extraordinarily well and most of those are very large environments. So we're very encouraged by the induction really want to add to that you've obviously with the with the team has been very engaged here.
Oh for short thanks, and thanks for the question Phil.
Obviously kudos goes into our team.
Building CDP b the fundamental thing that we and customers are the currency to be like you said you talked about is sufficient compute storage and you life.
But fundamentally we have gone a little bit deeper right part of the reason we've embraced technologies like keeping it is that we can now.
Fundamentally change the way customers engaged with our product in the past they had to have these sort of large shared infrastructure with CDP, especially with private cloud we can now stand up.
Isolated completely private instances for every every sub tenant that big customer right I stepped in and out of customer ticket, making for example cycle works about whos.
Invest in a couple of minutes and get a lot of value with lot of strict isolation and guarantees in terms of performance and they can do have consistently both on the public load and on track to work fundamentally what's happened to.
The the entire administrative and operational experience, but on CDB, that's fundamentally change and then that translates into sort of ease of use right. So no when customers come in and use the product that experience is a lot more magical if you both right they don't get into interference with other tenants.
They can get that worked on obviously, it's a more appealing utilized and user experience, but fundamentally it's a completely brand new experience and be provide them, whether it's on prem, but private cloud or in the public load. We saw that it would be staff experiences, which they kind of need and demand.
That helps and I was just and I would just wrap up with this fill on that on that part.
It's really delivered as.
The ease of use capability, but it's been the foundational enablement to really getting to the hybrid multi cloud data architecture that they're trying to get too.
And that's been the that's been the really big.
Adoption point that our enterprise customers have been asking us to deliver and this is really the unable to that and thats a very very strategic an important differentiator that were delivered here. We are a quite frankly I think the only enterprise software company the world doing it today.
Got it thanks, guys and then just one quick follow up obviously I Love me some data flow. So hopefully just wonder if you could you give us an update on a.
Dataflow.
Yes, again rented out but take this on but it's one of the fastest growing pieces or segments of our product suite.
Especially as we moved into a hybrid architecture being able to bring data under management from the point of origination be able to bring that under management apply machine learning models to it take.
As events change in half and be able to take prescriptive action in real time, and then pulled analytic off that and then just bring the that the macro analytics risk.
And all the prescriptive action happened in real time.
And that's really what our customers had been asking for and our streaming team continues to deliver customers, we're seeing great benefit value from it.
And the dot the adoption share very strong so.
Sort of from a market, except its customer acceptance and adoption around you want to touch base from a technical standpoint.
Yes, absolutely and.
Again, let me talk more digital ads to AI right.
Uniquely positioned to start with data at the point of large mission and data Floyd fundamental things that helps us there and frankly, you know going further.
As you were you've been there it was something thats been be above the two companies together, we had a huge opportunity for himself cross sell.
Cross legacy basis, right, and Maryland and.
Data flow, we've been able to really make progress on both sides of it for both legacy sets of customers.
Yeah.
I would just wrap up that around streaming and this point.
What our customers wanted an enterprise data architecture, leveraging in enterprise data cloud they want to be able to manage the entire life cycle of data. They don't want to have to put together point solutions. They want to be able to manage that entire data lifecycle in streamlines the underlying enablement.
For that and so that's why we're seeing such embrace mid across our customer base and the large enterprises because as they move towards managing an end to end data lifecycle streaming is the underpinning to that.
Okay.
Got it often thanks guys.
[laughter].
Your next question comes from the line of pre Gaddy from Barclays. Your line is open.
Hey, guys.
Congrats on the strong numbers again.
So I wanted to ask you know two quarters. Good execution, you got increased guidance I was hoping you kind of walk through the drivers.
What's happening at the fundamental level, whether it's better than expected churn.
Expansion from CDP public cloud.
Hi, just kind of kept but kind of walk through the drivers.
The better optimism.
Sure Jim in Oregon to going to take this together I'll start Jim if that's okay.
Yes.
Super Thanks for joining the call appreciate your time today.
It's really about execution and I think it a it really speaks to.
How well the management team did building the plan moving into the year.
How well the business had been operationalized across every line of business.
We were very fortunate that.
We were able to get our sales kickoff in our global sales kickoff and.
Just before the shutdown happened and into sales kick off we were the team did a great job of really defining.
What our coverage model is what our sales initiatives across each of the product offerings.
Methodology had been sorted through very very granularly.
Had a very very good.
Grasp on our customer base or coverage model.
Jim and team have done a phenomenal job havent.
Very very good granular financial model and plan that we knew we could execute against obviously the pandemic.
Forced us into a high level of discipline.
In a room that working environment that our team really raise the occasion across every line of business from sales execution through marketing driving pipeline and digital engagement.
Really accelerating the digital transformation that they call since been leading.
Engineering continued to execute extraordinary well as evidenced by the great releases.
CDP private coming out.
Just recently and then the sport organizations been able to deliver on World class.
See sat at numbers and and then our pre sales team and professional services team have been able to do a great job remotely.
Focusing with our customer base is showing in the journey to CDP as I mentioned, we did as we've done over 500 workshops and so we just got strong momentum it's certainly carry through.
Ended the customer base showing up in the numbers, but also showing up in the and the quality of release of innovation around our tax. So I think it's it's a number of things that all fall underneath grain or operating and financial plans very strong.
Management discipline, and how big operationalize are lot of business and follow through and execution.
Down to every individual contributor not there have been not only impressed very proud of the team.
So Jim on the on the financial models, you want to talk about some of the levers that we've had especially on the expense.
Yes.
I'll focus on the topline first so the it's important to note that our success to date. This year has been on the back of predominantly our existing product line, including.
CTP seven dot ex the new new release that came up earlier and there isn't yet much contribution from CDP public cloud or CTP private cloud that obviously, the new announcements. So all of those are upside and very specifically what we're seeing is yes, we're seeing reduce churn we're seeing greater expansion.
It's important to note, we're seeing that in our.
Key customer groups. So we've talked to you about well in fact, we do very well with large enterprises, you've seen that in our growth and million dollar plus accounts with grown more year to date. This year than we did all of last year.
Drilling down we're still doing very well in financial services telecom public sector.
Segments that are more resilient to the pandemic than those so we think we're very well positioned as Rob said, we're not immune to the economic effects, but we're very resilient and then all that top line.
Improvement.
Coupled with expense actions that we've taken earlier. This year has translated to obviously, an acceleration of our bottomline margin improvement and cash flow.
Great. Thank you.
I guess just a quick question on on the guidance on the Q3 subscription revenue guide.
Assumes a deceleration.
Quarter over quarter, which is pretty atypical for subscription company.
That's conservatism conservatism is anything else to point out on acuity guide.
Yes so.
We don't guide a are but we certainly expect are to be up sequentially quarter over quarter. So what's going on is a decline in our non recurring revenue streams. So what you have there is strategically post merger, we have been ramping down our nonrecurring engineering amount of work.
We do there.
Second thing is we're moving our product line to 100% open source as part of that the amount of upfront revenue that we recognize in any given quarter decreases and both those factors.
We'll be slight drags on a quarter over quarter basis.
And that's why we focus on air our because it normalizes it out and I do expect a our to grow sequentially.
Thank you.
Your next question comes from a line of Chad Bennett from Craig Hallum. Your line is open.
Great nice job again on the quarter in in a tough environment.
Maybe for Rob just I mean di di di excitement around private cloud seems to be.
All around whether it's within cloud era or within your partner I B M. Red hat I guess, just from your perspective, and I and I understand it's very early here, but how do you think about you know the incremental opportunity.
In your base.
In terms of private cloud.
You know when I think about it.
Are you is your current customer by customer base, primarily shifting workloads from bare metal to private cloud or are these incremental workloads.
On top of bare metal that are just moving that private cloud for the flexibility and public cloud like experience and.
Secondarily to that would be.
No I assume the IB M opportunity potential opportunity would be all incremental for private cloud any any commentary you can provide there.
Sure absolutely. So yes, there's been a theres been great excitement around private cloud generally and the reason there's a lot of drivers to that.
A root hit and we won't rehash in interest the time.
All the.
Architectural efficiencies that it brings by separating storage and compute.
But but what the real issue is that it enables that hybrid date architecture.
And the efficiencies that that brings the flexibility to that brings.
And private as the fundamental in the private has the fundamental basis to that inefficiencies that it drives and our particular implementation of private cloud.
That delivers hybrid.
With the comp with one common security and governance framework in a single pane of glass to manage it manages bi directional workloads across private and multi cloud.
Only environment in the world that can deliver on that as an enterprise software company today.
And so that that opens up not only.
Many more workload opportunities in our legacy customer base, but also then goes to the IP in the Red hat customer base because as you know we adopted Openshift is the primary is there is our kubernetes platform and so that it's extraordinarily well with their openshift customer base in the data layering that we can be.
And then the value that we can create.
Beyond the App player for their Openshift community.
And so what we're seeing now as our customer base largely wants to move probably 80% of our customer base that that is legacy clatter hortonworks to the private cloud.
And then add new workloads to the public cloud.
And then some select workloads that are on Prem today also the to the public cloud, but then it gives them the ability to bring the expansion of datasets onto the environment, which obviously represents more incremental tam opportunity for us and that remains very consistent from an idea then read.
Matt.
Customer base as well, so we're seeing a great reception.
Expanding our town and.
The more important thing is we're creating a lot more value for our customers and hide the red hat customers with private and hybrid than the old traditional legacy platforms and so that's why they Wanna docket, they want to get there as quickly as possible.
Great Fairpoint and then maybe secondly.
Real quick for Jim Jim I think in your commentary you talked about the air are in the quarter, both our and our PEO year over year growth accelerated again.
This quarter, which is great to see but you indicated in your commentary.
That what drove the B was both new and expansion bookings I know going into this year you weren't expecting a ton from net new but just <unk> are we seeing net new public cloud customers can any color on that.
Yes, we are seeing net new public cloud customers and we're very pleased with that.
Those are relatively small dollars at this point since we're landing and expanding them.
What drove the new this quarter was actually pretty interesting. So we made changes to licensing and pay wall several quarters ago and the first benefits that we saw from that was in in terms of reduce churn so existing customers that had thought about self supporting.
Understanding what the cost would be in deciding to stay with us when we saw this quarter and I don't want to over emphasize it we saw some very significant wins, where customers large customers who were using the software as non.
I think of customers non paying users we're using the software.
And as they saw our roadmap and the value that we are creating decided to become customers. So at this point.
As we add up the saves versus the winds from new customers as of Q2, we now have more new customers coming on board due to the changes in licensing pay wall than we've had saved so that was that was the surprising piece of the new story this quarter not sure how long it will repeat.
But we're confident that it will be a net add for a long period of time.
That's really good to hear congrats and kudos on the quarter.
Thank you Chad thanks for joining the call appreciate it.
Your next question comes from the line of Jack Anders from Needham and company. Your line is open.
Hi, its content for Jack. Thank you for taking my question I was wondering if you could talk a bit more about the migration model customers to CDP that you've touched on in your prepared remarks, Rob it's been a mixed bag of results from other companies migrated so how should we be thinking about migration ramp and what percentage of your sales base will be dedicated to migration versus net new.
Sure. So really you want to start on that and then I can talk about I'll follow it up how about that.
Yes for sure. Thanks, Hey, Thanks for the question obviously.
This is something that we've been very cognizant offered lending into two companies team together, we had CDH NFC VNB had to make sure be parkland carefully designed a path for both both sets of customers are going to CDP.
And today with CTP private in the market.
We see this there you know.
So the only state of this but the early signs of being very encouraging in terms of of designed to an approach where we can dig both sets of legacy customer basis, Cvs, Mississippi and give them a fairly.
Scripted.
Course, our production services on is done them on this.
You can get them or to what he calls CDP private base right and that has some of the form factor and feel as before but obviously has all of the new it can produce starting with stx. They get to take advantage off and that's why customers are really excited about getting for CDP with Stx. Furthermore, then be stand up.
Now Cuban at US best private cloud instances right next to them. So they can actually get all the value we talked about suppression of being storage. The net new SAS experience if the market ventana solution, but they can get thought value of fat really really fast and very very aggressively. So we've actually you know the weighted all sort of this was we started does.
Im talking program.
Which is incredibly well run Andy chose.
Five to 10 customers, who went through this one of the early feedback regardless I think it was like the second customer we did the David able to stand up you know seem to be private cloud in under 30 minutes and get value right. We just go unheard of and.
Especially on the on Prem so the host is something that you're expecting the public load, but doing that in private an on prem private cloud on Prem was great validation.
Dr. Rob.
And just round that out so.
I've mentioned, we run a number of workshops over 500 at this point.
Year to date with our customer base and the vast majority want to take the existing on Prem workloads, new does over to CDP and then enable private cloud.
Keeps me hybrid data architecture.
Leveraging the next year across multiple public cloud.
And and then and then some of those may actually, but it's a much much smaller percentage will actually go directly to the public cloud.
And then round back out to the private so.
We're seeing adoption of hybrid generally, but the biggest migration going directly to the on premise legacy.
Directly to the private cloud.
Thank you that makes a lot such and for you. Jim can you talk little bit more about the impact of public and private on gross margins as these products still overtime are there any fundamental differences that lead to differences in gross margins between public and private versus dotcom licenses.
At this point, we believe that the public and private.
Offerings as they mature will lead to higher gross margins, it's a more homogeneous environment that the products, especially the experiences are easier to use have a simpler you I. So we believe that they will be a net add to gross margin.
As they develop.
Thank you.
Your next question comes from the line of review jewelry off from D.A. Davidson. Your line is open.
Hi, This is still big be entre Rishi jaluria. Thanks for taking my question.
So it looks like stock based comp increased in the quarter can you talk about what the driver was there and then just to expand on that could you give us an update on how you're looking at hiring in this environment.
Jim you, what I am going to pick that up.
I'll take this stock based comp you can take the hiring.
I actually thought stock based comp decline in the quarter some.
Yes, and the macro story there is in the merger we didn't number of things in terms of making sure employees were retained between the two companies. We've had some executive changes I think Q1 is actually a peak in terms of stock based comp for the foreseeable future Q2.
It was less than Q1, but I think Q3 in Q4 will be less than Q2, So I expect you'll see a declining trend on both dilution and stock based club.
Okay, perfect and then.
Go ahead I'm sorry.
[noise] introduction to heighten, but certainly been interesting and lineman right.
Like the rest of the water they've been so getting getting a hang the fed but it's actually been helpful. Given opens or foods like if you go back to the move to both the companies, we've always had community spread across the board.
And frankly this environment as we reiterated and reinforce some of the lessons we've learned for the last do you get or so so overall exciting I would say and attrition. That's on has been much attrition of the lesser having been.
He has done for most other companies.
Great. Thank you so much guys.
Your next question comes from the line No No hall.
Chuck He from Northland Your line is open.
Thank you.
You guys talked about how are you know, it's still a difficult environment out there I was wondering could you give us a sense as to how much of the impact to have on the QQ air our growth, which was a about 2.5% here with you.
Oh the Jim.
Yes.
What I'd say is it's modest.
Less than a percent when we look at the details we do have some customers, especially in the hospitality industries travel entertainment that and are under severe budget pressure and.
Our.
Either deferring expansion or in some cases moving to sell support at least for very short period of time just to manage through this crisis now Fortunately for us that's a very very small percentage of our business. So I'd call. It.
Can lessen that percentage point drag due to the impacts in the quarter.
Great. Thank you and a follow up question is that what the changes through licensing and pay wall and now that you saw a record number of non paying customers become subscribers do you expect the greater and one her take customers too.
Structure progress from what has been flash over the past three quarters.
Yes, I'll circle ahead so.
In the short run so for this fiscal year. The answer is no from a business model standpoint, our focus this year has been predominantly.
Our existing customers, bringing CDP to them.
Early adopters early maturity and getting a more successful than that in the product line as we think about fiscal year 22 beyond for sure. We have a product line, that's emerging especially CDP public cloud that will be much better place for new customers to start so I do see an increase in the.
Total customer account and the over 100000 dollar customer count, but not so much. This year, that's really going to be something that's going to impact next year.
Thank you.
Your next question comes from the line of not cross from JP Morgan Your line is open.
Hi, Good afternoon. Thank you for taking my questions I'm last quarter, you cited the possibility of growing at market rates, which you mentioned was about 20% pre coded once fully transitioned to CDP is there any change in that thinking based on what you've seen during the last quarter.
No from from what Weve exactly we talked about.
Embracing the rule 40.
And that is we see our town and where we're positioned in our product suite against the Tam.
And where the public clouds growing versus that the on Prem environment.
We stated that we felt like we could get back to sort of a market growth rate in that low to mid 20 point and that what we're seeing.
And that we would leg into that growth rate and so what we're seeing from reception on CDP, we're very comfortable that we're going to continue to leg in.
And to that growth rate.
Over the next few quarters and are seeing that as a natural motion very comfortable with that.
Great. Thank you.
And then perhaps you can share refresher on ultimately where you think operating margins can go over time I know youve sort of said, we don't expect dramatic changes that for the rest of this year, but you know as you look maybe in the intermediate term kind of what's that operating margin.
Threshold.
Yes, Jim.
Yes, so our our business model the first level Profanation says.
Once we get through CDP transition topline growth around 20% operating profit around 20% as well.
To the extent that we have an offering that allows us to grow at faster than 20% then our operating margin may hover slightly below 20%.
For whatever reason a 20% growth is not in our cards, we see the ability to have significant leverage.
On the bottom line and take operating profits to 25% or more so there is theres a lot of flexibility in the business model, we're positioning ourselves for transition to growth and we think it'll be a very balanced approach on growth and profitability.
Thank you.
Your next question comes from a line of Sangita Singh from Morgan Stanley. Your line is open.
Hi, Mark Randy on for US and just thing thanks for taking my question.
So I just want to you asked to want to maybe one on products and one on the guidance.
So in terms of you know, what's the adoption today, a CDB cloud looking like from an actual workload perspective, I guess I'd differently, our customers just kind of transitioning workloads from legacy cloud era platform onto CDP or are they currently actually using it for like net new workloads and if if if if workloads just transport is there.
In ASP uplift with that from the legacy to the so the new platform.
Great CNG. Thank you for the for the question.
A few things wrapped up in there so what we've seen as the basin for our customer base.
Is that.
They want them the existing legacy workloads.
The vast majority to private cloud and then take net new workloads and put on public cloud and that's been very consistent with what we're seeing with public cloud usage that.
Its customers that do you plan to move their legacy environments predominantly wholesale plus expansion.
The private and now they're taking in starting with that the workloads on CDP public.
And so promote promote expansion standpoint, what we see is for workloads that go to public it tends to be more cost effective than the cloud native services.
But but an uptick to an on premise price point. So it's sort of represents an uplift to our existing on premise environment, but still more cost effective than the native cloud environment.
Did that hit your question.
Yes.
That's very helpful. And then maybe one other I could sneak in here on the guidance I know the assumptions that you.
You know coded continues to kind of impact through Q4 versus kind of last quarter. It was expected. So maybe moderate in Q4, if I look back at the release.
From last quarter, but if I look at kind of net new they are in this quarter. It was like $16 million versus about 13 million last quarter. So maybe to put a little bit contacts around on kind of guidance and over the next two quarters. Like are you guys thinking about you know the worst is behind us or it's kind of still a bumpy road in Q3.
He is a little that Q3 Q4 might vary a little bit lift with coated and just the kind of.
The new product portfolios, while kind of what are your thoughts internally I guess in terms of that air our trajectory.
Yes, Jim Yes, yes so.
Clearly depend delek impact on us so far has been less than we had originally modeled.
Speak let's go into the resiliency of the business, but this is a very uncertain environment and well talk about is it a V is a W. Is it's another letter that will describe the economic recovery, we want to be prudent in this.
This very uncertain environment and so to paraphrase. Your words, yes, we expect there will continue to be some bumps in the road economically and we've factored that into our guidance.
Got it thank you.
Your next question comes from the line of caution RIN Don from Bank of America. Your line is open.
Hey, gentlemen, thank you so much.
Rob Kevin and the team.
Jim as well.
My question for you as menu.
When you look at your existing customer base. The offering that you have is set presumably very attractive you've got the upshot I get your migrate to the than your platform.
But thats private cloud public cloud.
When you look at the next evolution in the market generally and software.
Piece about application centric standpoint, the pitch for the incumbents has been that they've got this hybrid optionality. So you can deploy on crime on the cloud pure cloud native guys.
Don't have that option, but they tend to participate in the market growth in a certain way right. As you look at this next evolution in the market as if it's the exist that next tranche of customers start to make decisions.
Native cloud first mentality.
What what is the cloud or a differentiation and that's great granted that you have a great compelling pitch for existing customers, but as you enter the new customer a new phase of market adoption.
How should we think about the differentiation versus other cloud native guys like us know fleet.
Sure.
So we'll start with.
Our core customer base.
What Dave we want to do is.
Our current base, obviously as the Fortune 2000, <unk> enterprise data architecture enablement, and what they want to do and that's what we and our current phase are very focused on giving them the ability to truly enable that hybrid multi cloud data architecture be able to manage the data across each.
This year from the edge.
On print private cloud and across multi public clouds with a common security and governance framework managed from a single pane of glass.
That's what that's what the fortune 2000.
Enterprise is looking to accomplish.
From an enterprise architecture standpoint, that's what CDP address is very very cleanly very squarely with high value.
That gives our existing customers in their existing offer more close the ability to very flexibly.
Migrate to that environment.
In April their data architecture, and then leverage our experiences.
To manage that entire lifecycle of data for streaming within a mill.
With ml templates applied to their take it through a date engineering ultimately to a data warehousing and do that across CDP private cloud and public cloud.
So that really truly gives LTE the ability to have that enterprise architecture enablement.
And then it gives US then the ability to come back now and the next phase into de able to bring those experience that end to end data lifecycle experience.
In a cloud native environment and I think it's very it's that then becomes a win win where I T. Can now go to the line of business user and provide that made it service capability.
In.
And enterprise grade hybrid data architecture.
With all of the disciplines in the single security governance.
Framework managed from a single pane of glass.
And that's very different than trying to focus on very specific SaaS point solutions.
That you didn't have to stitch together multiple point solutions to enable that in the overall enterprise data lifecycle.
Very helpful.
Cash.
My apologies I thought it was done then you would please re queue.
Well you're for.
Cash.
Once again, please re queue.
As I removed your line from the Q.
No I was wondering again open we can hear you know okay, great Yeah, Kash, let me apologize.
Oh, no there's no worries that I'll.
Probably worth it thanks for that somebody that gets gives good clarity, but if a customer would it make up a pure cloud native valuation.
That case, there is no consideration for legacy private and public hybrid et cetera, how should we think about the competitive advantage that.
The platform has been a pure public cloud only architecture, we said, we the likes of smells like.
Yes, again, let me let me hit it if the macro then arrangement will jump in.
Keep in mind.
It is a head to head against a point SaaS provider that typically tends to be it a line of business.
In light of this important all environment.
Where we have focused on with our product strategy.
Has been to enable an overall data architecture.
For hybrid and multi cloud and then the de able to bring the entire lifecycle of data under management.
Thats been a that's been for this current phase our strategy it and its model.
Next phase will be then.
Look at how we then enable IP to bring very specific.
Data workflows to the line of business. So so with that Irene you want to augment on that a bit.
Absolutely.
Hey, guys.
Part of what we see customers, let me talk in a pivotal pick of sort of pure cloud play right what fundamentally come to understand working with the customer base. We have is Doug when they try to solve a business you skus today take something for XIAFLEX head I just want to show a pattern.
You know a real time been off something they're charging a customer floor to do that use guys need interestingly, a set of technologies, who need to be able to get data under dime, you need to be able to sort of transform a report on it and even predict on that data right. So just as one musica symbol is because it talked about these like four or five things that need.
So what we do we see to being a pure pure so folks know there was a VSL pollution b.
Multiple experiences we have we have also for one class that whole solution. They have a great machine learning solution we have.
Data engineering, we have streaming technologies. The fact that they can put together that end to end use good.
And still have grid security and governance, Doug rather than have to put to good. All these points solutions themselves is a big differentiator and that is what we started to see as Jim talked about that is vitor, sorry to see some of the net new customers start directly.
Purely on the public load, let's start with CDP either on Amazon on Azure.
And do so obviously in the early says this but.
We're really excited with the possibly is and what the.
Thanks, everyone catch up.
Cash I would just wrap up with this.
Now that we delivered CDP private that completes the enterprise data cloud strategy ambition that we've had and now we're now we've delivered the enterprise hybrid data architecture.
It's going to be much easier for us to go down market to address those workflows for the line of business.
Against that enterprise data architecture than as opposed to trying to start with a point solution and enable and enterprise data architecture. So we're very very happy with our positioning and where we are within.
The solutions that we're bringing to the enterprise.
Wonderful, Thanks, again, very clear give us a.
Good kitchenette.
There are no further questions at this time I turn the call Bob to management for closing remarks.
Well great. Thank you very much Oh, we appreciate all your attending and look forward to talking with you again next quarter have a great day. Thank you.
That concludes today's conference call you may now disconnect.
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