Q4 2019 Earnings Call
At this time I would like to welcome everyone to <unk> Q4, and fiscal year 2019 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press hockey. Thank you Tony Chan Vice President of corporate Communications and Investor Relations you May begin your conference.
Good afternoon, and welcome to today's conference call to discuss the results of our fourth quarter and full year of fiscal 2018.
This call is also being broadcast over the web and can be accessed in the Investor Relations section of the website.
Joining me today are geared to candidates.
Turning to the CEO and Duston Williams, each having since the Uh huh.
After the market close today, you issued a press release announcing the financial results for its fourth quarter and fiscal year 2019.
Like a copy of the release you can find it in the press releases section of the company's website.
We'd like to remind you that during today's call management will make forward looking statements within the meaning of the safe Harbor provisions of federal Securities laws regarding the company's anticipated future financial performance in various areas, including anticipated revenue.
Software and support revenue hardware revenue fillings offering support feelings hardware doing gross margin operating expenses net loss net loss per share and free cash flow.
The assumptions underlying our anticipated future financial performance.
Our plans to provide future projections and financial guidance, our business plan initiatives and objectives, including our plans for pipeline and demand generation expansion.
Our focus on growing our commercial business.
Potential go to market transition.
Our continued investment in technology, including our subscription based products talent and sales and marketing efforts.
You did impact with these investments and our plans to manage operating expenses you for future financial performance did not meet our expectations.
Our ability to achieve such products business plan initiatives and objectives successfully in a timely manner.
And the impact as much business plan initiated an objective on our business competitive position and financial performance.
Demand for and customer adoption of our products and services and our ability to retain and expand upon existing customer relationships.
Our plans and timing for and the impact of our transition to a subscription based and recurring revenue business model.
And our ability to compete complete the transition successfully in a timely manner.
The impact of recent leadership changes our plans for and the timing of the release of new products technology and services.
The benefits of capabilities for our platform.
Competitive industry dynamic market size and potential market opportunities and other financial and business related information.
These financial these forward looking statements involve a number of 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. These forward looking statements apply as of today and you should not rely on them as representing our views in the future.
We undertake no obligation and explicitly disclaim any obligation to update alter or otherwise revise these statements. After this call for a more detailed description of these risks and uncertainties. Please refer to our Form 10-Q for the third quarter of fiscal 2019 filed with the FTC on June 29 team as well as our earnings release posted a few minutes ago on our website.
Copies of these documents may be obtained from the FCC or by visiting the Investor Relations section of our website.
Also please note that unless otherwise specifically referenced all financial measures. We use on this call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of the website and in our earnings press release.
Lastly, you tennis match, Matt will be at the Deutsche Bank 2018 Technology Conference on Tuesday September 10 in Las Vegas, and we hope to see many of you there with that I'll turn the call over to George George.
Thank you Tanya.
Good afternoon, everyone.
Q4 was a good quarter for us as we beat the street expectations on total billings and revenue.
And by 15 million each for software and support billings and revenue.
Moving forward, we'll be guiding on software and support billings and revenue for Dupont truck Sally TCV as we call it.
For Q1, billings and revenue even as our business top line has been impacted by the subscription transition.
From Dustin.
For the past two quarters, you've highlighted how we needed to rebuild the pipeline as we continue transformer business to subscription.
Pleased to report that our Q4 results demonstrated.
Measurable progress in a subscription transmission.
Our pipeline funnel, our sales, we enablement or some through messaging on the platform versus new apps and or hybrid cloud journey.
All this has enabled us to close our fiscal 2019 on a high note.
Well, we still have much work left in our business transition towards a hybrid cloud model and licensing.
Encouraged by our progress to date and believe that our solid quadruple for billings and revenue growth.
As well as our progress and sales hiring a clear indicators that I think Houston is improving and our market remains strong.
Im, particularly pleased to see such strong growth in our deferred revenue balances in Q4 with 44% year over year growth.
On remaining performance obligations or Rpos would remain a strong proxy of the underlying health of our business, especially of the life of device licenses transition time based licenses.
Our subscription transition continues to move along at a rapid pace and just like our hardware to software transition in fiscal 18, we are shutting significant top line for a future proof business architecture, how does position us well in the Aero.
Our sellers and customers have responded well to the model change and we believe that subscription and infrastructure software business. Both on premise and off premise will quickly become a core competitive advantage for the company.
Our customers will be able to buy portable software licenses that can run both in the private CLO.
And on bare metal offerings in the public cloud.
Make a strong push for why hyper convergence matters, even more into public cloud virtual networks and why did an application seemed to be close together.
Preferably on the scene machines and physically you wouldn't have seen racks.
Just like this last decade, the sheer amount of detail, we'll make the network, an even bigger enemy of applications.
It's the laws of physics that make it CIA such a powerful architecture, even for Hyperscale data centers.
The flexibility affordable licensing will enable our customers to create a private infrastructure as availability zones more easier.
That appears to be visibility loans or easier in the public cloud.
More importantly, they will be able to move applications freely and redeploying new tonics licenses back and forth, thus, creating a true hybrid cloud.
With a virtual private cloud or Bbcs as public cloud developers called him experience on both sides.
Renting softer it wouldn't be the domain of public cloud alone as proven by the business model transitions of many large software company. This last weekend.
Customer success with the King as rehab hospital like SaaS companies to work on customer retention and churn annual contract values or you see the net expansion rate and lifetime value.
These metrics will be the new vocabulary of mechanics, once you've moved the majority for life of device in vitamins.
This is the wife of subscription transition. This is the wire for our own digital transformation from appliances to Oems to software to subscription.
And eventually to ratable as you hear from Boston.
This is the wife bits to journeys within our customers as they grapple with the trade offs in technology or ownership versus axis.
Our digital transformation continues to be ahead of our expectations that subscription revenue up 16% from Q3.
And now representing 71% of total billings strong progress towards our previously stated goal of 75% by the end of calendar 2021.
Reflecting on Q4 and more broadly on slide 19.
As our platform continues to make inroads into a hardware centric world of on Prem infrastructure, we've made meaningful progress with our new apps.
He essentially as an enterprise that drawn on top of our core platform. We now see these new apps and 26% for deals on a rolling four quarter basis up nicely from 23% last quarter and 17% in Q4 or for your team.
This quarter also saw the addition of approximately 919, new customers or highest new customer infusion in the past six quarters.
These new customers included 31, new global 2000 logos renewing our news talk and number two 810.
In Q4, we continued to see strong large deal momentum with 58 deals worth more than $1 billion 11 of which spent more than 1 million with us in Q3.
Boots, 58 deals 26, where with customers in the global 2000 and people with more than $5 million. We now have 16 customers spent over $20 billion itself in lifetime bookings up from nine customers at the end of Fyeighteen.
Those sixteensix, what would 30 million lifetime bookings you have 46 customers with over 10 million less than bookings up from 26 at the end of fiscal 2018 more importantly, these metrics continue to show robust schools, even boots apples to oranges between the order TCV deal values and the newer tone based do values.
A broader product portfolio drove large opportunities with new and existing customers.
A great example of this would that be worth more than $10 million in Q4 alone with the global 500, holding company for insurance reinsurance and investment operations. This customer was looking to adopt a hybrid cloud strategy and gain a price performance advantage words existing legacy infrastructure.
After seeing both the simplest deal for enterprise platform and the value, we bring to a to hybrid cloud solution.
Database and automation offering such as it real calm.
This customer decided to reset the entire data center strategy using our technology.
Additionally across our customer base.
Files fluent prism proved are becoming strong additions to our portfolio.
On the theme of deepening our penetration within GE to King.
The question why new comics would come up to a casual observer.
If you look closer at the JP Morgan Chase 2019 CIO survey.
You know why have you gradually becoming a trusted invisible infrastructure brand within the largest enterprise is going through their own bits to journeys.
The words friction less reliable.
And invisible are synonymous with new tenants, we don't sell deeper bear speaking rich I, specifically want to emphasize the Q4 deal with a total contract value of PCB of over $15 million this quarter.
On how a fortune 25 customer selected our platform as the backbone powering its infrastructure across the U.S.
This customer with a lifetime spend of nearly $30 million since the first purchase 18 months ago selected our core platform with each be virtualization or an incumbent that took over promised and under delivered on two enterprise reliability with software defined infrastructure.
Last quarter, we told you about a win with a new customer wants to blow before counting forms that was booked nearly 6 million in Q4. Our team worked closely with this customer to understand the unique challenges, we platform and infrastructure for the hybrid cloud.
In a trend we are seeing trade or business one for essential offerings com is allowing us to learn with our customers and the real meaning of hybrid cloud.
This customer shared with us that the legacy approach it would take them viewers to realize the multi cloud vision.
Calm together with of course, the critical combination that meet this when possible.
We are particularly pleased with our strong uptick in gross margins, which grew 80% this quarter.
Even as we carve out more bookings into deferred revenue that goes through a balance sheet.
Most importantly, our support and customer success organizations continued differentiator solution from the competition, but being authentic and the approach to problem solving.
Speaking of apps versus the platform our database as a service offering arrow helped us win new opportunity with a major American airline in the global 2000.
In a deal worth more than 3 million. This existing customer that has a lifetime spend more than 10 million decided to replace its proprietary heavily engineered due to be system for ecommerce with era backed by our Lipskin core running on commodity servers.
In another win this quarter was more than a million with a global 2000, multi national Health care company, we were able to expand our existing premise presence because of for rich product portfolio and data services automation and security.
Speaking of security our federal government business is top of mind for us as we build or hybrid cloud offerings.
Earlier this month, the new time exercise government cloud was listed in the federal marketplace as federal in process.
Federal because the government wide program that maybe with federal agencies to rapidly adopt cloud based I'd solutions that meet stringent standardized security quick queue.
Federal agencies are already taking advantage of some of the service has been designed government cloud as part of the civil in entities.
This is a significant step towards the full federal Modric authorization.
Which will enable federal agencies to take advantage of fore sight government cloud solutions.
At our Investor Day in March we spoke about our need to invest in focus and pipeline as we hire hundreds of sellers every year.
We are particularly pleased to see strong pipeline creation or enterprise segment, yielding a surge in new opportunity for will include expansion in existing accounts and new bluebird withheld and prospects.
For the first five years that is our first billion, we mostly selling to the commercial midmarket and large federal agencies.
In the last three years with an intense go to market focus segmentation of the sales force and expansion of the product portfolio to put it to work class Enterprise focused company.
Now in the next three years, we have to prove that we can balance the two ends of the barbell equally well selling both within the enterprise and to the commercial midmarket skill.
With that in mind, we have segmented commercial completely out for enterprise sales heaters and building a focus to use commercial sales leadership and organization on to them.
We're also emphasizing hired these two touch at the top of the funnel so prospects can cool without any human touch from digital ads to our clusters in the cloud with a few clicks.
Before I conclude I'd like to take a minute to reflect the highlights for past fiscal year.
Fiscal 19, Revpas entered a new phase of development for this company as we leaned into or hybrid cloud vision, an expanded beyond our core infrastructure platform I'm pleased that like cloud services generally available to the public.
And they have helped create significant opportunities for us in both new and existing accounts. This year also saw or multi cloud multi stack approach validated by the market with new partnerships with H.B.E. and others.
Delivering customers more freedom to choose the hardware platforms that best fit their environment.
We also grew our customer base, 34% year over year with new logo additions.
Finally, this year Weve made tremendous progress in the subscription transition.
Having made a painfully had fundamentally changed pricing.
For a new software and services motor duplicate skill, we grew our subscription billings, 57% in fiscal 19 fiscal 18, where the gross margins increased from 60% in fiscal 18% to 78% in fiscal 90.
This last year, we as we were adding new employees at a brisk pace.
Brisk pace.
We also party fighter and visible cultural principles and how we maintain high standards of ownership.
He also t. I'm listening.
We also featured in the Forbes just 100.
List of the 100 companies that are doing right by America.
We are pleased to end the fiscal year and a resilient note as we ploughed through one of the toughest transitions in the history like tea went from hardware to software subscription.
I'm proud of the hard work and commitment demonstrated by a team members around the world.
As we move into the new fiscal year, we will continue to work through the business model transition.
Foremost among them is educating our hardware centric ecosystem, both the new subscription economy.
Contract values and bite sized selling.
Case in point is the way the channel is reporting our numbers to wall Street analyst.
Not realizing that you're not selling hardware anymore, nor the impact of our subscription transition.
This burden of proof and education lies in us.
As we are one of the first infrastructure companies to disrupt the harbor neighborhood pure software portable licenses and consumption economics.
Subscriptions because value will be complete segmentation of feed activities.
That is sales hunting for new HCV versus customer success farming for the residual is TCV.
And the two teams maximizing customer lifetime value or LTV in tandem not focus and clarity of purpose and becoming even 24 months is how will unlock the biggest efficiency gains in our remarks.
I look forward to continued but Uh huh.
The new fiscal year.
As we completed a hardware to software transition this last quarter.
Because the seminal moment for the company to start guiding to soften support billings and revenue.
We hope our investors find this to be a simpler way to model our business going forward.
Speaking of simplistic, there's one more thing.
You're going to start giving out annual guidance well subscription transition makes it harder to project the full year.
Thus the mill introduced a tradition of annual guidance, because we believe we can tell a simpler more compelling story for two aspirationally areas of investment our commercial business and our new apps and how the unfold over the coming year in the future.
Talk more about this quarter and the fiscal year.
And now turning to Organise, Justin Thank you dirt.
I was pleased to see or fiscal year close out with a stronger Q4 performance versus the performance of the prior few quarters. The business is starting to show some results of improved execution.
With good momentum in bookings, new customer growth large deals and global 2000 traction.
Additionally, as Dheeraj I, just noted the shift to a recurring subscription business exceeded our expectations during the quarter and we continue to expand our pipeline.
In Q4 subscription billings accounted for 71% of total billings up from 65% in Q3 and subscription revenue now accounts for 65% of total revenue up from 59% in Q3.
The faster than expected a transition in Q4 was buoyed by some larger deals in the quarter in Q4, our new term based subscription bookings increased 67% to 150 million up from 90 million in the prior quarter.
And we expect these subscription percentage to fluctuate a bit plus or minus for the next couple of quarters.
We are very pleased with the speed that we're working through our subscription transition and as more of our business move to subscription it gives us more data to review for trends.
This allows us to gain incremental insight relative to the topline impact relating that to the transition.
During our Q4, we saw additional total contract value and balances between our five year term deals and life of device license deals, which resulted in less total contract value received on these five year term deals versus what would have been realized iron equivalent life of device transaction.
To adjust for this were altering our pricing structure this quarter on five year deals to try to correct. This imbalance. However for the we've assumed that this value differential will continue for the foreseeable future.
We also saw the average duration of our new subscription contracts fall to 3.7 years in Q4 versus a duration of approximately 3.9 years last quarter.
This was the result of seeing more five year deals moved to three year terms, rather than an acceleration in one year deals.
This contract duration shipped result in less upfront billings for the initial deal with the difference being captured when the term renews.
As a result of these trends, we're now planning for a negative top line impact relating to the subscription transition to be approximately 20% versus the prior assumption of 10%.
And as we stated in the past, we do not believe that any of the prior transitions to subscription in our industry.
Have been quite as complicated as the one that we are now working through which includes two very different pricing mechanisms between the prior life of device licenses and the new term.
Based licenses.
Despite this negative subscription impact to the top line in Q4.
Our bookings performance rebounded quite well as we exited Q4 with over 2.5 times more backlog than the prior quarter.
I'll move onto some specific Q4 highlights, but before I go into the specific details for the quarter when analyzing the absolute numbers and growth rates. Please keep in mind that we believe the total billings and total revenue as well as the software and support billings and software and support revenue performance for the quarter were all compressed by between 20 to 25 million due to our subscription transition.
Total billings and revenue performance was also impacted by 8 million as we shipped less hardware than planned.
Revenue for the fourth quarter was was within our guidance range of 280 to 310 million coming in at 300 million down 1% from a year ago and up 4% from the prior quarter.
Hardware accounted for 4% of total revenue.
Down from 8% in the prior quarter.
Software and support revenue was 287 million in Q4 up 7% from the year ago quarter and up 8% from the prior quarter.
Total billings were $372 million in the quarter within our guided range of 350 to 380 million, representing a 6% decrease from the year ago quarter, and a 7% increase from Q3.
Software and support Billings were 359 million flat from the year ago quarter and up 11% from the prior quarter.
Our bill to revenue ratio in Q4 was 1.24 up from 1.2 last quarter.
New customer bookings represented 26% of total bookings in the quarter.
Down from 31% in Q4, 18 and up from 25% in Q3.
In Q4, our software and support bookings from our international regions represented 45% of total bookings versus 40% in Q4 18.
Our non-GAAP gross margin in Q4 rose nicely to 80% three percentage points better than our guidance of 77%.
Operating expenses were 344 million and our non-GAAP net loss was 106 million for the quarter or a loss of 57 cents per share.
A few balance sheet highlights we closed the quarter with cash and short term investments of 909 million Thats down $32 million from Q3.
We use 10 million of cash flow from operations in Q4, which was positively impacted by $12 million of SPP inflow and free cash flow for the quarter was negative 33 million. This performance was also positively impacted by the 12 million of SPP inflow in the quarter.
Now turning to the details of our Q1 guidance.
Hardware has become an insignificant percentage of our total billings and revenue and therefore going forward rather than providing guidance for total billings and total revenue, we will only specifically guide to software and support billings and software and support revenue.
We will also provide an estimate of hardware as a percentage of total billings.
So on a non-GAAP basis for Q1, we expect software and support billings to be between 360 and $370 million software and support revenue to be between 290 and 300 million.
Hardware billings in hardware revenue to be 3% or less of total billings.
Gross margin of approximately 80% operating expenses between 385 and $390 million on a per share loss of approximately 75 cents using a weighted average shares outstanding of approximately $190 million.
The guidance for Q1 assumes the following.
An estimated 20% or 25 to 30 million topline compression related to our subscription transition.
Approximately $10 million less than hardware billings and revenue versus current street estimates.
In a build to revenue ratio 1.23 versus current street estimates of 1.20 impacting total revenue and software and support revenue by approximately 10 million.
The 20% topline compression related to the subscription transition impacts the Q1 year over year growth rates by approximately seven percentage points the software and support billings guidance of 360 to 370 million compares to the current street estimates of 355 million.
The software and support revenue guidance of 290 to 300 million compare so the current street estimates of $290 million.
Our planned increase of 40 to 45 million in operating expenses in Q1 is primarily coming from the following expense categories.
Planned increases in head count, particularly in sales and engineering and regular course and merit increases that are effective Q1.
Cost associated with our annual global sales training and enabled me to meeting enablement meeting.
And continued growth in our demand generation spending to fuel our plan to growth for F Y 2020 , including our annual EMEA Dot next conference in Copenhagen, which was moved up from Q2 last year to Q1 and fiscal 2020.
Now turning to the details of our fiscal 2020 guidance.
This is the first time that we have provided annual guidance. Our subscription transition has clearly added complexity to the business, which has made it tougher for the investment community the model.
We hope that this top level view of F. Y 20 will help provide some clarity on our expectations for the year.
For fiscal 2020, we expect software.
And support billings between $1.65 billion, and 1.75 billion software and support revenue between 1.3 and 1.4 billion.
Hardware billings and hardware revenue to be 2% or less of billings.
Gross margin of approximately 80% and operating expenses between 1.65 and 1.7 billion.
This guidance for fiscal 2020 assumes no major economic downturn during the fiscal year and no material change to the current average subscription term of 3.7 years.
This guidance also assumes assumes an estimated 20% or approximately 170 to 200 million topline compression related to our subscription transition as well as approximately 45 million less than hardware billings in hardware revenue versus the current street estimates.
The estimated 20% top line compression related to the subscription transition impacts of fiscal 2020 year over growth year over year growth rate by about eight percentage points.
The soccer and support billings guidance of $1.65 billion to $1.75 billion compares to the current street estimates of 1.6 billion and reflects a year over year growth rate of 17% to 24%.
The software and support revenue guidance of 1.3 to 1.4 billion compares to the current street estimates of 1.3 billion and reflects a year over year growth rate of between 15 and 24%.
We will continue to push through our transition to subscription.
As as quickly as practical we have targeted our subscription based billings to be greater than 75% by the end of F y 20.
We are also aware that as our business increasingly transitions to subscription our go to market cost structure must also transition to a more efficient model that resembles the efficiencies of other subscription or SaaS models. Although this will take some time to accomplish some of the early thinking and work has already begun.
We remain bullish on several of our newer products as they are starting to become a bigger deciding factor in winning large enterprise type deals and therefore, we will continue to significantly fund. These newest subscription based products throughout 40 20.
We believe these newer product offerings will ultimately enhance our topline growth and protect our value proposition in the years to come.
If why 20 will also be a year they'll have renewed focus on investing and growing our commercial business. Our enterprise business is showing good signs of strength from the investments and therefore in 19, and we expect an improved commercial performance and F Y 20.
Our expectations for F Y 20, clearly reflects the impacts of the impact of the subscription transition as well as the continued funding of newer products and our solution set. These two factors alone account for well over 50% of the projected negative operating margin and Thats why 20.
And this transitory year, we would expect cash usage in the low to mid 200 million range versus the current street estimate of $190 million with the subscription transition accounting for a vast majority of this cash usage.
And lastly, if the estimated growth rates roughly 20 do not materialize as planned we will prudently manage operating expenses accordingly.
In summary, we continue the tough work of transforming the business model with a view on the long term. Despite the short term impact to the business.
It's been nearly two years since we started the transition from an all hardware model to an all software model.
It was this transformation that laid the foundation for our current transition from an all software model to an all subscription model.
And it will be the all subscription model that will ultimately lay the foundation to our third and final phase of transforming the company with the final phase being the all ratable model.
Well once again, despite the significant short term optical impacts to the business.
We're already planning, how we might make this next and final phase the all ratable phase a reality at some point in the future.
And with that operator, if you could now open the call up for questions that'd be great. Thank you.
Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile acuity roster.
Your first question comes from Jason Ader from William Blair. Your line is open.
Yeah. Thanks.
Justin I think you mentioned, two and a half X on the backlog.
Versus the prior quarter can you just talk about.
I guess what drove that specifically.
Well I think it was good execution.
Obviously in the.
In the field.
We knew that was going to.
Rebound eventually after two quarters that we weren't very proud off and.
We ended up with some with some good backlog build in the quarter and.
We'll see how this quarter goes, but we would hope to do the same thing, but we'll see how it goes.
Okay and then there is just for you.
When we think about the kind of hybrid cloud pitch from new 10 actually wants to say on on a company that's.
Got a an on prem infrastructure that's.
Okay transitioning to a T.I. and I've also got to public cloud strategy.
And I'm working with.
Let's just say azure.
To move apps overtime from my private cloud, which is based on you see eye to public cloud, which is obviously a.
A different.
Architecture today.
Is the pitch.
That.
Stay with Azure, but chess move to the bare metal mechanics, offering on whichever public cloud and just kind of keep everything consistent does that ultimately what you're trying to convince customers to do.
Yes, I think that so thanks for the question, yes, and there's two parts to this one as well.
There's the GDP data plane the control plane and then the management plan. This three layers of the of the stock here.
And customers really like our data plane, because its reliable highly available and when I said it disciplined I'm not doing just mean software defined storage, I mean, filers and object storage and even our.
Segmentation microsegmentation kind of like a network products at the end of the B when they want to take this to Azure in fact go to talk in some of our largest customers to take mechanics to azure they want to use as yours billing clean and identity and data centers and things like that so there will be a certain blurring of the lines between.
What they want to use from Azure, which could be agile credits and how they can bundles credits by using new techniques like technology I think that's where the world is really headed for us.
Okay. Thanks.
Your next question comes from Lindsay Lohan from Bank of America. Your line is open.
Hi, yes. Thank you.
Thanks for sharing the fiscal year guide I was curious about your confidence in putting this out there given just that there is so much macro uncertainty using some very material misses in storage and server land and just curious if you're baking in a tougher macro backdrop in your guide.
Versus sort of the last couple of quarters. When you talk most of this was was execution related and that will follow.
Yeah. Thanks, Wamsi good question I'm going to take a stab at it and understand you should too I mean, there's basically two macros. One is the macro micro and one is our own subscription macro and right. Now we are very very much focused on that one macro that we can at least get a better handle on and we think that if we can keep that in control I mean, I've Duston mentioned about 3.7 year term I mean model of that I think we believe that.
We have things in our control and we are obviously investing towards growth as well, but at the same time of the macro reaching use.
Then overall our investments in sales and marketing will also reduce and we'll adjust accordingly.
Yes.
We havent since we last updated you on our thoughts there.
There's really been no.
Additional signs are signals that we've seen now who knows what the future brings.
But over the last three months there is in our view anyway now again.
At a billion five we don't have this massive view of the world here, but from our perspective, there is really no change from from our view three or three quarters ago or three months ago.
Okay. Thanks for that and theater as you say you need to balance the large enterprise focused versus yours commercial sales segmentation. Why is this the right time to re segment the sales force and where do you think the incremental investments that you are going to make over the next year, where will those be more geared toward thank you.
Yeah I think.
The question of right timing, we have a much better.
Sort of grass, both segmented enterprise salesforce.
We've been doing it for the last two and half years now.
If you recall our February 2017 call, we talked about segmentation segmentation segmentation, we did that for almost two years I think we have a pretty good grasp on it and.
Now our sales leadership actually believes that we can now focus on commercial that has a better marketing engine for commercial we think that we have a better brand as well that can see from the enterprise down to commercial and digital delivery model is now coming together, where as I mentioned in our banner ads week, one with a couple of clicks you can actually get to doing a pure C and kick the tires on new tonics without having to really ship a boxing.
Do all sorts of things that appliance company used to do I think we'd love to do more and more digital touch.
With our prospects before they even pick up the phone and call a human being in the sales force.
Thanks, a lot guys.
Your next question comes from Jackie Andrews from Needham Your line is open.
Hi, Good afternoon. Thanks for taking my question I was wondering if you could drill down a little bit more on the commentary around 26% of deals, including a product outside your core offering you talked about some of these newer products, becoming a deciding factor in winning larger deals could you provide a little more color on any one of them in particular, that's that's really helping you move the needle on this front.
[noise].
Obviously, we understand the data really wells have filed has taken off in a big way. So we are going after application data now and files to me the system of record so with capacity, we'll actually see that.
One product actually make a lot of progress in terms of dollars that we make on files.
Our flow is a little bit more for.
Control plane. So we wouldn't see the exact same kind of dollars, but the fact that flow is.
Pulling HV, if think about when people really like microsegmentation extremely lightweight easy to use they start pulling or hypervisor as well, even though our high provider is license free.
And on the systems of engagement and intelligence and think about.
Era and calm they've done a pretty good job of really having a more of a solution sale approach. So arrow is more for database workloads, and we going and talking a language to the database folks and including to the Devops.
Outside of the West coast about how they should manage databases and that pulls the core as well along with it. So as you start thinking about the workflows, they're not thinking more infrastructure workloads or virtualization workflows are thinking more database workforce.
And similarly calm is now the system of.
Engagement.
That we think we can integrate would beam and a POC to make the system of intelligence as well.
Which is basically multi cloud workforce, how do you really think about.
The private cloud water, new clinics stack as well as a Vmware stack and how do you think about Amazon and Azure and then how do you start to drag and drop of these applications between different clouds I think the the future of multi cloud will depend on how easy do make mobility.
I'd of motion of applications across different cloud, so I think between Com era files and flow, we're making tremendous progress and there's another system of.
Intelligence called Prism Pro which show, we are going and upselling to our customers about around operations management and that's our about monitoring alerting.
Doing a lot of machine learning around or machines.
And making sure that our support actually doesn't have.
As painful and experience when it comes to debugging customers problems.
Great really appreciate the commentary around that just as a follow up question to rush. It you talked about.
How you've been disrupting the channel market.
Which which is historically hardware centric market I was wondering if you could expand a little bit more on your on your thoughts there as you think about trying to gain a broader presence with channel partners do you think it's better to maybe go deep with a smaller number of relationships, who really understand your products or do you think you can gain enough significance and market presence with a larger number of vendors, who maybe you'd be selling.
Dollar volumes of competing products essentially.
No I think less is more with any relationship and we've done a good job with a few and we believe that at least in the US we have a good handle on this.
Obviously internationally there is a lot of fulfillment that channel actually does beyond just lead generation and at the end of the day. We are lucky if you actually get a few of them to really go deep and Thats, where the focus has really been sometimes the customers bring their preference to like I would like to do business with this channel partner and we basically work with the customers interest there, but mostly we worked with fewer partners and try to give them more business as the quid pro quo from that actually from them translates to us too.
Great. Thanks for taking my questions.
Your next question comes from Rod Hall from Goldman Sachs. Your line is open.
Yes, hi, guys. Thanks for the question I wanted to start off I guess and ask about the.
The margin trajectory here, if you look at the if you back out the hardware pass through and you just look at the software margins in the quarter and the support margins the software Martin seemed to dip quite a bit and then the support margins are up a lot and I'm, assuming maybe that is related to the success you've had with the contract sales, but I just wanted to check that does that and see if you can bridge that for us at all so we understand those dynamics in those underlying margins and then I've got a follow up.
Yes, it's a little more confusing than that and.
I was internally, we kind of look at it in its entirety, just because the way in some things work here, but in Q4, we actually had a year to date adjustment.
There was no impact to total margins.
But a a year to date adjustment.
That flowed through in Q4, Cogs coming out of support.
And going into our product.
And I think if you do the kelk there it's probably.
4.5% or sell pick up to the to the support margins and probably about 2.5% decline and the progress from that make up now is kind of a.
A change for the entire year there. So it would do some of our cloud based offerings and is probably in the Cogs are more appropriate into into the product category. There. So again, we kind of look at that in its entirety anyway from a margin perspective. So hopefully that gives you. Some some clarity. There are you are you, saying that thats just a one off that doesn't carry forward as we look into next year really it just affects that Q4.
Yes, now those cargoes on a quarterly basis now will go up into.
Into product and out of support so there'll be a little ongoing shift there, but again there is no impact of the total.
To that but the shift is what you loaded then there is the whole year loaded into one quarter. So the impact going forward won't be quite as big as what we see there and the yet.
Correct, Okay, great. Okay, and then the other.
The other question that I had for you guys is on the.
Just looking at the full year guide in the rule 40, obviously, we calculate a pretty low number there I just wondered how you're thinking about the rule 40 now in the context of all this.
Yes. This is a transition.
And now you see the growth rates from.
The guidance perspective, and the impact that we see on the on the subscription piece and once we actually get to see the rate I mean, right now we can do that because performer yeah. So there's there's a lot of complexities in here, but we've got work to do on that and.
And.
It's going to be a while obviously before we get back to that in this as say this transition you've got some apples and oranges going on from a comparative perspective too.
But its still a governing kind of principle. The way that you guys are running the business or is it sort of something that youre tabling for now and maybe revisit in 21 or how are you thinking about that yeah. I mean, it's hard to in a transition year like that so impactful, it's kind of hard to govern that obviously, we'd like to get the cash back into a neutral position here as soon as we can.
And the growth rates accelerated and I think ultimately the rest takes care of itself here, but we'll need to flush through a few things.
Okay, Alright, thank you guys.
Your next question comes from Aaron Rakers from Wells Fargo. Your line is open.
Yes, thanks for taking the questions I have two as well if I can so on the first question I just want to understand and then just a clarification if you will.
The two point Fivex increase then and what you're calling backlog is that his gaslog remaining performance obligations are kind of tracking.
Jason Thank you.
Sit on top of the deferred balance are you referring to pipeline I'm, just I want to be clear because it seems like just a massive number considering that I think you're contracting guy. He was like 845 million exiting last quarter can you can you just give us exactly the context behind that two and a half.
EPS increased.
Simply in order that we have not build.
Okay. So is that is that and what will be disclosed this contract and not yet revenue recognized balance.
No.
Yeah.
I think youre, probably looking at two numbers deferred revenue, which obviously lourenco.
And then there is a very very short term stuff, which is for the next quarter.
It's just deferred billings actually I mean, this is simply bookings that just haven't haven't been we got the order in from a customer, but it simply hasn't been built.
Okay. So maybe a different way asking and I think you raised at the beginning you said the remaining performance obligations will be an important metric to consider as far as your business trajectory going forward.
That that is something that's actually disclosed in the 10 shoes I believe so that that number is actually something well north of deferred revenue correct.
[noise].
Uh huh.
Yeah, I'm getting confused on your question here.
But again this this backlog that we're referring to again as orders that have come in.
Might have been and end of the quarter whenever that we simply haven't.
Billed the customer or done anything with that order.
But the deferred revenues nine 910 million 910 for the quarter.
Okay, and if we can follow up.
Yes, we will disclose it at the same stuff we've always done in this case the Q, but in this case now the K here.
Okay, Okay, and then I guess thinking about the model in the operating expense trajectory the guidance was quite a bit higher than what I think the street was looking for.
Can you just help us understand how you think about kind of the path to profitability or what kind of level of breakeven you think about from a modeling perspective.
Yes, we've got some work to do on that again through this transition time here.
We've got some investments and I think ultimately you have to believe that these investments will pay off in the future for higher growth rates and I think we started to see that I think if you look at the new products I wouldn't expect us to disclose this every quarter, but I think if you just look at new products that we define is essential in enterprise and you look at it you have to really kind of down to ACB in annual contract value and F.Y. 19, those new products.
Represented about 10% of our total annual contract value and Fynineteen.
So I mean that should give you some feel that these products are getting traction.
That's no bundling by the way. This is these are kind of being sold by themselves at some point, we'll actually even start doing some thoughtful bundling on these products.
And it doesn't say, obviously everything else, they're dragging along with them, but you've got to have a belief that what were investing not only in the product side of the house, but the go to market side of the house.
It's going to pay off in the future.
And also at Investor Day will probably come back and talk about the three year view as well yeah. Yeah. It's hard to do obviously on a call like this but it's fair questions, but we'll give a clearly a renewed view.
Okay. Thank you.
Your next question comes from Alex Kurtz from Keybanc. Your line is open.
Thanks, Thanks for taking a couple of questions here dust and when we look at the North America sales organization and and what's been going on their last couple of quarters.
How would you characterize productivity across different cohorts.
Any kind of metrics around how I know you just gave out this backlog number as a signal of that but is there anything else. We can kind of dig into and then drive your largest competitors, obviously, having a big event. This week and there's a lot of discussion around kubernetes being integrated into their core compute product and just some high level thoughts about where new tactics stands today on that on that topic.
Sure in fact was duston looks up that stuff for adjusted numbers of TCV.
I will take the call a question around the corner it is and the rest. So if you think about our strength we are foundationally based on Linux.
And the core contain range and is really Linux based.
And that's our core competitive advantage, we actually getting a lot of benefits because our hypervisor and our entire stack, including our control Rosy all Linux based actually you know.
And now the real Magic will come around is how do you make an enterprise grade and all reliable available high performance.
And then and circled the compute engine, which is the bulker engine of Linux with storage and networking and security and management planes and being able to drag and drop them across clouds daspit real monetization opportunity of equipment. It is really is so we are coming from our strength because we are Linux based and then there is coming from its strength, which is its installed base, but this still have these fear that is not Linux space. So I think.
We are more aligned with the cloud Hypervisors, if you think about Amazon and if you look at what even Azure is doing now on Google has they are all based on Linux and we think we can get a lot of advantage of really taking linux to everybody rather than having to build a proprietary corbis around that.
And I think you know also competitively speaking you know we have been a company thats really about data and design Thats, how we lead with.
There's a lot of products if you build in the last four or five years that really both for our data position around not just data for virtual machines, but data for containers filer data object storage. We just came out recently and then finally database as a service there is a lot of things that we're doing around data and making them really simple which is around design, which is very differentiated.
And on your question outs on North America, It's still early but I think Chris and team have have have made some really good progress in a in a very short period of time I think.
We always look again on productivity at a wrap our ramped rep basis on a rolling two quarters and clearly that productivity in North America, we always take that out because it's so lumpy.
But from a from a Christmas territory without fed.
Improved on a rolling two quarters, so lots of good things happening there and Chris has taken a disciplined approach obviously to running the business. So.
Lots of lots of good stuff happening there, but it's early.
And you know we are particularly proud of what's happening in APAC I think the team there has done a really good job their productivity again on a rolling two quarters basis on a ramp rep have gone up.
Three or four quarters in a row here now so they are on a pretty good run what they're doing there and we're happy to have Sami take over the leadership in EMEA. So I think we've got three great.
Leaders here now that.
We'll kind of perform and harmony here and I think the execution.
We will continue to.
To improve Q1's always a tougher quarter.
In general, but we're excited.
To to have some good focused on all three of these regions.
Alright, thanks, guys.
Your next question comes from Katy Huberty from Morgan Stanley .
Your line is open.
Thank you. Good afternoon, just looking at Slide 15, you show a lifetime bookings multiples, which have moved up into the right over the past three years in for Q that that metric leveled off does that tie to the subscription transition or is there another.
Explanation for that the expansion of that multiple flowing.
Well there.
Our topline compression obviously, 20%.
Doesn't help that multiple.
But we'd have to get back to you on enclave exact specifics if you're talking about the glow anytime a global 2000 repeat multiple.
Yeah, then on slide 15, the lifetime bookings multiples that they provide us maybe like the past three years every quarter. They have increased and then there was a leveling out maybe even last quarter. There was a big jump in in the multiple even with the weaker revenue trends, but we can talk about it offline, yes, clearly, taking 20 or $25 million or the topline.
But we'll get you will get you some sort of cancer.
Okay, and then dhiraj earlier in response to a question you talk about.
Some of the apps that are driving engagement and revenue it sounds like files in prison pro are contributing the most revenue now is that correct and then when you think that to fiscal 20 are there.
New apps that you think can hit an inflection point in terms of revenue contribution.
Yeah, you are right I think files and prism pro or two and we are thinking about a top down pricing model change for both era, and ER and frame around for desktop or user for your kind of for license, which will basically pull through the core other than us pricing core differently from frame itself and similarly for arrow it could be a beast and sockets as well. So there's there's some pricing simplification that will actually help us have that solution based approach, which will help. These two products not have two separate discussions in a one is what I sort of view the core now I'm going to slowly from control planes or management plans I think those are the kinds of discussions we are having but I think era and.
Common Freeman the three that we believe could really take off from here.
That's great. Thank you.
Your next question comes from Mark Murphy from Jpmorgan. Your line is open.
Hi. Thank you. This is pendulum from Mark Thanks for taking my question.
But on on the next year guidance.
As we go into the 75% subscription revenue mix.
Do you perceive any risk in duration.
For the time based licenses contract a little bit better.
Is there any specific incentives that's being given sales reps to drive a three four year deal or maybe it could it.
In terms of flexibility I mean could it go towards that one year level.
When you think next year I believe we'll probably number one here, but is there more risk in that number.
Well you know a one of the things that we are still trying to learn from the market is how infrastructure still considered capex.
Oh for a lot of our customers, especially in the large enterprise.
And until a commercial becomes like really really you know large for us.
I would assume that infrastructure will still be consumed in a three to four year kind of horizon simply because.
A lot of Cfos to look at it as Capex actually you know so there's some sort of understanding of how the market perceives infrastructure to be because our competitors are still selling hardware.
And that's going to be one of the balancing acts that will actually have to play with now if the market wants to do one year terms, we should will not come in the way we should not just be if anything unnatural.
To say look don't sell one youre I mean definitely want to do three year contracts and question is how do we collect them how do we actually concentrate for.
Okay.
I see I understood, Okay and.
Secondly on the sales.
New group that you talked about on the enterprise side.
Do you perceive any kind of any kind of disruption around that and it seems like it's in the U.S. and if that is baked into the numbers that you gave us.
Yeah, I think in the last 12 to 18 months, we have done a lot of segmentation for the enterprise anyways. So a lot of the territories, we're talking about in the commercial space is white space and.
You know, Chris really believes that we can get the flywheel going if you were methodical with commercial and investments in commercial as well.
Okay. Thank you.
Our last question comes from Karl Keirstead with Deutsche Bank. Your line is open.
Okay, great. Thank so two for dust and us and on the operating cash flow I just want to make sure I heard you correctly I think you guided for fiscal 20 negative 200 to 250 million. So I just want to confirm that that's correct and I wanted to ask you as we look out into the following year fiscal 21 do you think you are on a trajectory to realist realistically get to operating cash flow neutral that year or given the ratable transition and the weight on cash flows.
That could be a stretch.
I will let me clarify the first thing that.
Kind of cash range, we gave for for F. Y 20 is free cash flow not operating cash flow okay.
Okay. So it includes all the capex in that number so.
Obviously, the operating cash flow would be a lot better than that than the number that we had mentioned.
And you know we'll work through this you know.
I think.
Ah you know as we get a majority of the business transition to subscription that obviously the cash usage has to come down it when it will come down over time, whether it gets neutral a you know in fiscal 21 again, it's kind of a our yearly look that will give investors again at investor day, and some other thoughts I'm sure and again about collections, whether we should collect three year upfront in order to use all the questions that are we going to right now.
Okay that makes sense and then just my second and last question doesn't back to the question around the Opex guide for fiscal 20.
And how you might start to moderate that you mentioned that you are beginning efforts to make your sales structure more efficient it sounded like those are actions different then the split between commercial and enterprise, but you just mentioned so without getting into too much detail I'm sure it'll come later, but just broad strokes what is the vision to get your sales efficiency, a little bit more in line to enhance that opex number under a little bit more control just maybe high level thoughts would be great. I think it's you know it's similar to other types subscription businesses. How do you take advantage of renewals and how do those play into the equation and ER and how did you get some efficiencies how do you get the productivity a you know in theory, these renewals or take on a little different I'm feeling look from simplicity perspective, and does that enhance productivity. There's a lot of things that we need to go look at we realize we need.
To look at it and Ah we understand that it's there's some efficiencies that neither there we're in the early stages quite honestly.
And you know, we'll it will take some time, but we understand we need to do that and we're we're thinking through it.
Yeah, I mean, okay, you know the Investor day would be a good place to talk about some of these things.
Got it okay. Thank you very much.
There's no further time for questions I'll now turn the call back over to the presenters.
Thanks, very much for joining us today and as we said earlier, we'd love to see some of you at the Deutsche Bank Conference with OCTEON. Thanks.
This concludes today's conference call you may now disconnect.