Q2 2020 Earnings Call
Welcome to the cloud era second quarter fiscal 2020, <unk> quarterly results conference call.
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Your host is Kevin Cook, Vice President corporate development and Investor Relations. Kevin You May begin your conference.
Thank you Elaine good afternoon, and welcome to clutter as second quarter fiscal 2020 conference call.
We will be discussing the results announced in our press release issued after market closed today from cloud era with me are Marty Cohen, Chairman and interim Chief Executive Officer, and Jim Frank Colon, Chief Financial Officer.
During the course of this call we will make forward looking statements regarding future events and the future financial performance of the company, including those as merged with Hortonworks. Generally. These statements are identified by the use of words, such as expect believe anticipate intend in other words that denote future events. These forward looking statements are subject to material risks and uncertainties that could cause actual results to 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 report on Form 10-Q , and our other filings with the SEC.
During this call we will present, both GAAP and non-GAAP financial measures measures non-GAAP financial measures exclude stock based compensation expense and amortization of acquired intangible assets. In addition, we provided a non-GAAP weighted average share count for fiscal 2020. These non-GAAP measures are not intended to be considered in isolation from a substitute for superior to our GAAP results and we encourage you to consider all measures when analyzing clutter as performance all numbers reported for prior periods are presented for clutter on a standalone basis since the merger with Hortonworks closed on January 3rd 2019, and as such there is no comparative year over year financial information for the combined company 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. The press release has also been furnished to the FCC is part of a form 8-K. In addition, please note that the date of this conference call is September 4th 2019 and any.
Forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date, we undertake no obligation to update these statements as a result of new information or future events, now Marty Cohen, chairman and interim CEO .
Thank you Kevin.
Hello, everyone and thank you for joining us to discuss our second quarter fiscal 2020 financial results.
It has been an exciting month since I became interim CEO on August Onest.
I am pleased to report that we executed well in Q2.
I want to thank my team for its continued focus on our customers and people during this period.
Among our recent accomplishments we delivered as promised and initial release of our cloud native data management and analytics offering cloudera data platform.
We also entered into an agreement to acquire certain assets of Arcadia data, including technology that accelerates time to insight for data analytics and we welcome two new board members as a result of the large stake that I can capital accumulated in cloud era stock.
During this call will cover these topics as well as important changes in our licensing and distribution strategies.
Beginning with Q2 financial performance.
Total revenue in the second quarter was $197 million.
Subscription revenue was $164 million.
Operating cash flow was negative $33 million.
Although the year over year comparisons on these numbers are not meaningful as a consequence of the merger with Hortonworks.
Each of these results exceeded expectations.
Annualized recurring revenue was $682 million at the conclusion of the quarter.
Representing 16% year over year organic growth again ahead of expectations. Finally, we had a good quarter in terms of adding new customers. We now have 953 customers, who exceed $100000 of A.R.R., a net increase of 24 for the quarter.
With that quick overview of our results, let me spend a moment on my priorities as interim CEO .
First.
I am focused on improving execution.
In particular, the execution of our enterprise data cloud strategy.
This strategy begins with a phase rollout of our new cloud Teradata platform.
We met the first milestone in the current quarter.
As last week, we delivered an issue releases of our CDP public cloud services.
I'm also very focused on the execution of our financial plans.
We are deliberately balancing our investments and continued growth and disciplined expense management to improve cash flow.
Second I am focused on retaining and growing as many of our customers as possible.
Well there is base of large customers is stable.
And has continued to expand each quarter, including in Q2.
I have gotten increasingly active with our customer base.
As was my practice at Accenture.
And all of my interactions have been positive.
Customers are enthusiastic about CDP and the enterprise data cloud.
Third.
I am focused on our employees and our culture.
We have a very talented group of people at cloud era distributed across the globe, who are driving real innovation for the benefit of our customers.
I'm working with the leadership team to create a more disciplined and action oriented culture and to make Cloudera a great place for current and future employees to advance their careers, while solving some of the world's biggest challenges through data.
And last but not least.
I'm focused on delivering greater value for our shareholders.
As we get the first three right and succeeded in producing hybrid and multi cloud solutions delighting customers and inspiring employees, we truly believe that our shareholders will benefit.
The board and I are committed to enhancing shareholder value.
Let me turn to some of the highlights for the second quarter and in recent weeks.
Since it was a feature of last quarters conference call I'd like to follow up on customer buying behavior and industry trends.
Our internal metrics and pipeline generation have materially improved from Q1 levels.
Together with solid execution of our second quarter, we are on plan for achieving our objectives for this fiscal year.
For example.
Basic renewal activity rebounded in Q2, we executed better.
Resulting in fewer slipped renewals and in Q1.
We believe the improvement in renewals was helped in part by more clarity regarding the new cloud era technology roadmap and greater certainty so the composition and functionality of CDP.
We demonstrated these capabilities to our customers publicly in mid June .
In particular.
Our class of 1 million dollar plus a our customers and its associated revenue remained stable.
In spite of already being at revenue scale. This group continues to expand on a net basis.
As far as competition.
In the second quarter, our metrics improved across the board and we saw an increase in our win rates against the cloud service providers as compared to Q1.
As CDP gets established we expect to gain further across this competitive dynamic.
That said.
The Hyperscale cloud providers remain our primary competitors.
This is all reflected in continued pipeline growth.
As discussed in connection with Q1 results in Q1, we experienced that booking shortfall due to weaker than expected pipeline entering the quarter and the impact of the merger integration.
The improvement we saw in pipeline generation at the conclusion of Q1 has persisted.
And we believe that we are building pipeline at a rate that supports our financial plans.
Overall, I'm pleased with our execution in Q2.
But.
We've got more work to do to restore higher topline growth.
In addition to better execution, we are focused on meeting customers' demands for hybrid and multi cloud solutions that support use cases from the edge to AI.
That is the promise of the enterprise data cloud and CDP.
I am very grateful to our team.
For his tremendous effort and releasing our initial CDP cloud native services.
We already have a select group of customers evaluating our CDP data hub data warehouse and machine learning services. These are the first in a regular cadence of cloud services, we expect to roll out over the next year.
We plan to launch CDP Dystrophin data conference in New York later this month.
It is a groundbreaking set of offerings that lay the foundation for the enterprise data cloud spanning multiple public and private clouds as well as data centers.
We believe cdps consistent data security governance.
Admitted data management across all of these environments.
Is a significant competitive advantage.
CDP offers broad functionality, including edge Aiotv Datawarehouse machine learning and they are high.
It makes it easy for diverse sets a business users to apply them across your data.
CDP will enable enterprise key to say, yes to business use cases that were simply not possible before.
CDP will enable enterprises I T to say, yes.
Getting control over short sighted and costly shadow IP projects that puts the business at risk.
And yes, CDP will be the industry's first enterprise data cloud.
The other major development in Q2 was the announcement of changes in our licensing and distribution model.
We've aligned our model what the industry standards set by Red hat.
Red Hat's practices are well understood and have been broadly accepted by enterprise customers in the open source community.
As a result of these changes.
All Cloudera software will be license under an oversight validated open source license.
We expect that proprietary cloud era software offerings will be provided under an open source license beginning early next year.
Applied to former proprietary products and new product innovation.
The terms of this license will serve to protect our intellectual property investments from encroach written by public cloud providers.
Secondly.
The distribution of our compiled software.
The binaries.
We'll be limited.
Specifically.
Access to these binaries.
As well as support services and technical expertise will be available only with a current subscription agreement.
The binaries contain cloudera specific intellectual property.
The testing securing and integration of various open source projects into an enterprise grade system that meets the requirements of our customers.
Consistent with the Red hat model.
Our binaries will no longer be freely available to non paying customers.
These changes the licensing and distribution will affect all subsequent versions of our current products as well as new products.
Ensuring their future development by Cloudera.
And the community.
It's better protected.
The net of our new licensing models that will be more open with respect to the customer and developer use of the software and more restrictive concerning non paying customers and efforts by others to take her innovation for their own commercial purposes.
We believe that this licensing and distribution framework will have a material benefit on caught derose business overtime.
With that update on product and licensing let me quickly touch on a couple of other important strategic matters.
Some of you will recall that we expanded our partnership with IBM in Q2.
We're very excited to be working much more strategically with RBS.
We had our best customer bookings quarter ever with IBM in Q2.
And believe that the launch of CDP will further the momentum of the partnership.
CDP and the enterprise data cloud is a natural complement to IB Adams and Red Hat's enterprise cloud initiatives.
Today.
We also issued a press release on our agreement to acquire certain assets customers and intellectual property of Arcadia data.
Our kids he was a partner and we had many joint customers its technology will greatly improve productivity and time to insight.
For business users when utilizing CDP with cloud object stores, such as Este Threed.
Hey, the LSW and with Apache Kafka.
Our Kt is our engine software uses machine learning to anticipate in pre compute common queries and reports for self service access to data.
An accelerated analytic response times.
We expect to Arcadia as technology to enhance the usability of our platforms and the experience for business users through higher performance and dramatic increases in user concurrency on large data volumes.
In addition.
I'm pleased to welcome the entire Arcadia engineering organization to cloud era.
Finally.
As you likely know.
I can capital built a large position in our stock.
We work constructively with Carl Icahn, and his associates to develop a standstill agreement with a number of important terms.
Consistent with that agreement, we're pleased to welcome Nick Razzie, Onno, and Jesse Lynn to our board of directors.
We look forward to working with Nick and Jesse to enhance value for all of our shareholders.
Let's now turn to Jim.
For the detailed financial discussion.
Before I return for some concluding remarks, Jim over to you.
Thanks, Marty Hello, everyone as Marty indicated Q2 was better than planned and positions us well for the remainder of the year.
Total revenue for the second quarter was $197 million and subscription revenue was $164 million.
Operating cash flow for the quarter was negative $33 million.
Because of the merger comparative year over year information or these items is not meaningful as always details concerning definitions and trends can be found in the supplemental materials cloud airs investor Relations web site.
Annual recurring revenue for fiscal Q2 was $682 million up 16% year over year.
Our growth is driven primarily by existing customers renewing and expanding agreements. It is encouraging that every our size cohort expanded in Q2 as compared with the second quarter of last year.
Revenue in a or benefited from stronger operational execution and improved field level functioning.
In Q2, we had fewer slipped renewals and converted some of Q1 slipped renewals.
Dollar based churn was in line with Q1 as forecasted.
With improved execution and the launch of CDP, we expect churn to decline to a 12% to 13% annualized rate in the second half of the year.
We concluded Q2 with 953 customers, who started at or have grown to more than $100000 than they are this with a net increase of 24 over the prior quarter.
As already highlighted our greatest customers remain our largest customers remained stable and continue to expand consumption of our offerings with more more than 140 customers spending in excess of $1 million of AOR.
As I review the remainder of the income statement note unless otherwise stated all references to expenses and 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 adjustments from GAAP to non-GAAP are limited stock based compensation and amortization of M&A related intangibles.
Total gross margin for Q2 was 77% driven by subscription gross margin of 86%.
Operating expenses were 158 million for the second quarter or 80% of revenue an improvement from 84% of revenue in Q2 of fiscal 2018.
Including in operating expenses are $13 million of merger related spending.
Excluding these amounts operating expenses were 74% of revenue in Q2.
These results reflect the rapid achievement of our planned cost synergies and increased operating leverage since the merger.
In particular sales and marketing expense declined from 45% of revenue in the year ago period to 41% of revenue in Q2, and R&D fell from 28% of revenue to 24%.
The $13 million of merger related expenses, including severance and retention costs as well as third party fees associated with integrating the systems and processes of the combined company.
Overall operating loss was $7 million in Q2, representing an operating margin of negative 4%.
Burdened by seven percentage points of merger related expenses. Excluding these expenses operating margin would have been positive 3% for the second quarter, a substantial improvement from Q2, Nineteens operating margin of negative 7%.
Loss per share was two cents in the second quarter based on 277 million weighted average shares outstanding.
Compared to a loss of five cents in the second quarter fiscal 19.
Now turning to the balance sheet and cash flow, we exited Q2 with $509 million in cash cash equivalents marketable securities and restricted cash down from 547 million at the conclusion of Q1.
Operating cash flow for the second quarter was negative $33 million, which includes $13 million of merger related payments.
Cash flow performance was better than expected due to strong execution on merger synergies in both headcount and non head count related spending.
As you May recall, we had planned to reach $125 million of annualized cost savings by the end of this fiscal year.
We are ahead of schedule and have already achieved this annualized target in Q2.
Capital expenditures were $2 million in the quarter.
Total contract liabilities, which comprise deferred revenue and other contract liabilities were $464 million at the end of the second quarter Archeo with 707 million.
I will conclude by providing initial guidance for fiscal Q3 and updated guidance for fiscal 2020.
We expect Q3 total revenue to be between 187, and $190 million and subscription revenue in the range of $162 million to $164 million.
Net loss per share is projected to be eight cents to six cents based on 283 million weighted average shares outstanding.
For fiscal year 2020, we expect total revenue to be between 765 and $775 million and subscription revenue in the range of $645 million to $655 million.
Since we are ahead of plan in capturing merger cost synergies. We now expect operating cash flow for fiscal year 2020 to be negative 82 negative $65 million.
And net loss per share to be 20 cents to 24 cents based on 280 million weighted average shares outstanding.
Projected operating cash flow for fiscal year 2020 includes approximately $60 million of merger related payments adjusting for these nonrecurring.
Merger related expenses the business is expected to be nearly lcs breakeven for the fiscal year.
As discussed last quarter soft Q1 bookings and pipeline will weigh on revenue in our growth in growth rates in the second half.
We believe that we have turned the corner from Q1, and we'll continue to consistently build pipeline in Q3 and Q4.
Given our typical sales cycle, we believe that the pipeline growth that we saw in Q2 will yield bookings in Q4 and Q1 of fiscal 21.
As such we are raising our subscription revenue in our guidance in the second half.
Specifically, we anticipate we anticipate Q3 a are to be in the range of $685 million to $695 million and Q4 are to be in the range of $685 million to $720 million.
With respect to components of revenue, we expect a continued mix shift in the second half of fiscal 2020 in favor of subscription revenue.
Services revenue should decline as a percentage of total revenue as subscription revenue outperformed and as some of our services personnel are deployed to assist with a smooth CDP rollout.
As a reminder, our fiscal 20 financial plans do not depend on CDP customer adoption. We believe the value of CDP in fiscal 2020 is the assurance that it provides to customers and prospective customers in the exact composition.
Functionality and performance of the next generation platform.
We expect our financial plans to be achieved through the purchase and expansion of our existing offerings through the balance of this fiscal year. The revenue impact of CDP from specifically CDP sales will occur primarily in fiscal 2021.
I will now return the call to Marty.
Thanks, Jim.
We are pleased to provide a straight forward clean report for the second quarter.
And to offer an improving outlook for the year.
We are executing according to our plans and exceeded expectations in Q2.
I've been underground over the past few months and have been pleased that our employees are responding well to the call to action.
Our team is focused on delivery and execution.
We completed a major milestone in August with the delivery of the first release of the CDP public cloud service.
And we're encouraged by the early reception of CDP by customers.
And apart from customer adoption.
The launch of CDP has instilled confidence in our buyers as they now know that they can invest toward an enterprise data cloud.
While recognizing the challenges ahead I am optimistic that we're on better footing today than when we entered the fiscal year.
Anticipating the question.
I have no news to share regarding a permanent CEO .
As discussed previously the board has formed a search committee.
And that committee is actively evaluating candidates.
These placements take time, and we're focused on finding the right individual for the job.
Until that process concludes.
I am on the ground.
Acting as interim CEO .
And keeping the team focused on executing our plans.
So, let's pause here and take some questions.
Operator.
Please begin the Q and a portion of the call.
At this time, if you would like to ask a question press.
Star one on your telephone keypad.
And you have a question from Jack Andrews from Needham.
Hi, good afternoon, Thanks for taking my question.
I was wondering if you could shed some light on the messaging to customers around CDP and this seems like clearly a superior product to what you have currently been offering. So is this considered an upgrade to their existing solution and may Therefore command a higher price or are you aiming to perhaps hold pricing steady through a different consumption based pricing models or any sort of thoughts you can share about this dynamic.
Yes, thank you the.
Yeah, we're going to we're going to certainly describe a lot more at strata later this month, particularly with respect to pricing and how that's going to be positioned but let me just take a moment and talk about why we're excited about the offering and the capabilities.
As we talked about this will be the only the first and only enterprise cloud in the marketplace enterprise data cloud in the marketplace, we're creating capabilities that support both hybrid and multi cloud needs.
Well, we're going to address the multifunctional analytics from the edge to the AI.
And also using our shared.
Data experience Sdx, we're going to have a consistent security and governance all of that and an open source environment. So.
I think our view is its unique it's what our customers are looking for.
And we're delivering it.
Great well. Thank you for that we'll look forward to some more details I guess in a couple of weeks just as a quick follow up you talked about.
The internal metrics and pipeline generation has improved markedly from one Q could you drill into that a little bit more outside of the clarity on the technology roadmap is there something else that's driving that improvement.
Whether it's a different approach youve taken on the sales front or is it just youve got everybody is the merger integration is more complete and everyone is just executing better overall.
Yeah. Our view is that certainly in Q2, we've seen an increasing pipeline. We believe our execution is better than it had been coming out of the early days of the merger and just as important.
We have clarity regarding the roadmap, we've been able to demonstrate CDP to customers. We did that in mid June which gave them more confidence as to the direction and capabilities we were delivering so it's.
And I would summarize it it's around delivery and execution is leading to better results.
Great. Thanks for taking my questions.
Thank you.
And your next question comes from Chad Bennett from Craig Hallum.
Great. Thanks for taking my questions. So.
Marty I just want to drill down into something you talked about in the new licensing and pricing model that I think is pretty important just the whole binary.
Functionality and.
I'm not sure how many people understand how important that is but can you give us a sense for just.
How much of the base, especially with your larger a our our base how important that binary functionality is and maybe even how how important.
That binary function LT is broadly to the open source community.
Yes so.
Chad Thanks for asking the question because this is an important area around licensing and sort of give you the context.
As the two companies came together.
We needed to make a decision in one of the decisions. We made in this quarter was that we were going to go and adopt the red hat model. We believed that was industry best practice and so we've done that.
And what happens in the binaries is this is where the proprietary capabilities sort of the stickiness the security the governance all comes together.
And.
As we spent time with customers even in the quarter. We've had some move said okay. This is important we want that capability.
We want your support we want your services.
And so we believe that does create an element of stickiness that was beyond what was previously available and in particular it also it recognizes that the public cloud providers cant just take the capability.
And commercialize it in an open source world without the capabilities that were delivering so we do believe this makes a difference.
And we've had customers who have been.
Appreciative of sort of the direction were taking.
Well being open source it yet moved beyond that and what the binaries behind the pay wall.
Great No that that's perfect. Thank you and then maybe one follow up for Jim. So so Jim the you know it's good to see the guidance improvement incrementally.
For the year and you just thinking about the drivers of that I mean, you mentioned, you're not really factoring in anything for CTP cloud.
And then it sounds like the churn rate.
Really didnt improve much at least in this quarter and you're expecting some improvement in the second half.
Which I think you probably would expect it in on the prior guide so I'm, just wondering kind of what what.
Kind of was the main or a couple of main drivers of have you guys.
Up in the target a little bit thank you yes.
Thanks, Chad I'll Echo Marty's point and execution, so solid execution in Q2 really helped us out financially. So in Q1, we were still operating through the fog of the merger. Many Q1 deals that were set to renew in Q1 slipped into Q2.
We had forecasted that some of that fog would continue into Q2 and quite frankly, we're back to normal operations with respect to the new renewal cycle. So we were able to renew many of those one slip to Q1 deals.
Our Q2 renewal cycles were essentially.
On our historical averages we executed to our internal plans actually beat our internal plans on new and expansion bookings so across the board, we basically executed to our objectives.
And that is what drove the performance in the quarter and allowed us to raise the software numbers for the back part of the year.
And an element of that is as Marty said, our pipeline generation got back on track.
Great perfect. Thank you.
And your next question comes from Dan I Am Wedbush security.
Yes, Thank you and solid quarter. Just so my question is in regards to customers sales force, what you're seeing talk about maybe some of the.
The changes in conversation that you're having today versus maybe even three four months ago and.
It does it feel like there's more clarity in terms of the product road map and just the type of conversations you're having with customers.
Yes, Dan this is Marty so.
You know as we talked about last quarter.
And that some of the challenges coming out of the merger, we had less visibility to our product road map. It was less clear, where we were going with the enterprise data cloud vision and capabilities.
So we continue to have strength with our on premise customers and what I would characterize as our current offerings.
And now we're able to advance those conversations to talk about where we're going and what will come next and so our ability to demonstrated to show what those capabilities are.
I understand what the migration path will be and we're in those are individual conversations with individual customers as to where do they go from there HTP or CDH capabilities products to where does that go with CDP and so I think that that clarity that availability of information.
Is very powerful because we're no longer they're no longer speculating, they're no longer wondering whether our future will be as bright as we believe it to be they can now see it.
And then in particular getting it out there in in store demonstrations and im releasing it as promised.
Two customers some customers over the last couple of weeks has been a very powerful.
Reinforcement.
Okay. Thanks, the second question was on a daily basis.
As you've gone through pipeline and just go into the integration process. What's what's may be surprising you guys thoughts on the positive and negative side one of each year. If I just think about where we are today going back to maybe the last three months.
Yes.
Surprises.
We're pleasantly surprised.
Feeling very good about customer adoption of our current products as we said.
Our certainly our customers over a million dollars remained very strong.
Well north of 140 customers overall number of customers. We said has gone up so that's that's a very positive statement and what I've been working to reinforces the customers are extremely important it's kind of a truism, obviously without it there's not much in the business one of the things we did in the quarter.
Is we put in place a chief customer officer.
To further emphasize the importance of customer success and to work around the adoption from here forward with CDP, probably the one area.
That maybe has surprised us a bit as well and then probably wouldn't say surprised because we saw this coming as we continue to compete with the public cloud providers.
On the one hand, our customers say to us that we don't want to lock in so we appreciate where you guys are taking us, but yet there's still some adoption that's occurring there among large enterprises and so we expect that there will be some normalization rationalization that occurs overtime as companies go to multi cloud they want their capability. They want to go hybrid some things will be on Prem somethings will be private some things will be public and we like that so maybe at a point in time that is viewed as less positive but were actually playing right into that position, that's where we're targeting our solution.
Thank you.
Thanks, Dan.
And your next question comes from the line of Mark Murphy from JP Morgan.
Hey, good afternoon. This is Matt costs on behalf of Mark Murphy, Jim guidance for Q3 revenue implies a sequential decline in Q3 total revenue now.
Never leave annual guidance would imply a single digit sequential increase in Q4 total revenue I know, we're not sort of apples to apples comparing.
Last year's seasonality, but it also sounds like.
You're a little bit more bullish coming out of Q2 and I'm wondering is this too conservative or is the level of conservativism, you're baking into your guidance similar to the levels you shared with us in your guidance last quarter.
Yeah, Matt why don't what I'll say is our forecasts are prudent and reflect.
Our best view of what the world looks like.
The level of conservatism hasn't changed much in terms of quarter over quarter, our visibility to that business has improved as you expect a another quarter post merger our systems and processes are more mature and we have greater visibility.
What else is in terms of old then see metric he mentioned.
Our our is the single best metric to look at what is going on in the business year over year or quarter over quarter, because it normalizes for purchase price accounting adjustment merger effects.
One of the dynamics that are going on is our recurring software revenue is growing faster than the nonrecurring software revenue or professional services revenue. So you have all those dynamics in play that that factor into the revenue numbers that are cleanse out of the air our number.
Got it that's helpful. Thanks, Jim and maybe can you drill down a little bit to what you've seen in the way of contribution from ideas I think that.
No agreement might have flown under the radar a couple of months ago, but.
Is there any comment or color you can give us on the lead generation.
Maybe what IP by what I deem customers are seeing in PDP.
Your first since some of your other partners.
Yes. This is Marty Matt so.
As I referenced earlier, we had a very strong quarter with IBM in Q2.
Is it was our best quarter ever.
And at the same time, we also our announcement the significance of our announcement is the relationship has expanded significantly now all of our products all of the cloud era products are available to the IBM salesforce to take to market.
So that is significant in that we went from a limited set of products to all products.
And as well as we work with I.B.M.
We share a sort of common bias towards large enterprise customers I mean, we're working together there. So we've now have the benefit of more of their feet on the street on a global basis. We also have the ability to take their products into the market and so we will be looking over time as to what's best for our customers is it something that we have built something that they've traditionally build other ways to merger integrate them together.
But it's a very powerful relationship and at this point, it's unique relationship. The other part that is very exciting to us.
As you look at I.B.M. strategy, particularly around the hybrid.
Environment.
Clearly there.
I'll say in my words, clearly their decision to move forward with Red hat.
Around the enterprise cloud is very complementary to what we're building with the enterprise data cloud and thus we're very excited by that.
Thank you.
And your next question comes from the line of Paul Walravens from J M. P Securities.
At our yellow annoyed.
Sorry, sorry, I was muted.
So here's a big picture question for you. So if you look at.
You know mongodb they weren't <unk> first database company right.
Three years ago, they introduce the.
Cloud based product that well.
Now, it's doing 150 million in revenue, it's 30%, 37% of total revenue grew 255% this quarter.
So how's your situation with the cloud or data platform similar and how is it different.
[noise].
Well in terms of you know.
Let me, let me start with the club their data platform sort of.
Fair.
Given your background.
You could take a shot at it.
Well I'm not going to spend a lot of time.
I learned a long time go don't spend a lot of time talking about specific competitors, but I will tell you is sort of what we're doing and maybe the areas where theres. Some differences I think in terms of.
Ultimately, we were making it clear in terms of where we're going with cloud era data platform in terms of the enterprise data cloud.
In terms of similarities we think the opportunity is big.
You know there's both it for US we have been in a very strong position on Prem.
As we deliver CDP and particularly the first set of releases around the public cloud.
We've now opening up that market to us as well.
So that's that's significant for us.
In terms of timing.
You know, maybe they're a bit ahead of where we have been.
But we believe that.
Our ability to catch up is significant and sort of an adoption because of the unique capabilities, we're offering which is beyond just the database.
We have the data hub the data warehouse machine learning all of these capabilities are part of our CDP offering.
So yeah I think the other aspect is you know we're going to be a similar experience.
And ease of use whether you're on Prem.
Public cloud.
Eventually private cloud so that's that's a unique aspects.
And I think just as I sit in.
Thank you for suggesting my experience is relevant but just as I reflect on it.
An understanding big enterprise customers, they like that flexibility they don't want to lock in they want the ability to move across platforms. That's what we're focused on.
All right great. Thank you and then Frank all at one for you I mean.
As you sort of sit back and look at all that what part of the story do you think is most misunderstood by investors.
I think the thing that's most misunderstood is that a lot of folks think theres a binary outcome is that there will either be a winner in the cloud or on Prem and the real answer is it's going to be both there are some customers and workloads that naturally naturally belong in the cloud. There's some that belong on premises. There are some that belong in private cloud and for our target market. The largest 2000 enterprises in the world. We believe based on what we hear from them that they will have hybrid solutions in all places and no value at vendor that brings that all together. So so I think the fact that that that lot of people think that it.
Fine area win or lose versus a much more nuanced how big is this market is the most mis understood thing.
Yes.
And your next question comes from the line of Michael.
Correct from Raymond James.
Good afternoon. This is actually Robert Magic on for Michael you made it clear that the pipeline approved how much of that benefit is due to the acquisition that bar or Alternatively, do you see an opportunity to win those customers down the line.
Yes at this point.
The Hps acquisition of map bar, we view as a positive but it has not yet become a material impact in the pipeline.
There are select customers that were focusing on.
As well focusing with our partners.
So were optimistic that that will lead to.
Improve results certainly more wins for us, but it's not something that we have modeled as material.
At this time.
And then just perhaps one more.
That's great. Thank you and then just perhaps one more from me you touched on earlier, but can you give us some more color on some specific initial customer feedback you've received on CDP.
Yes. It is.
There there.
Accessing it theyre, they're working with it they're starting to use use cases or deploy use cases and it's that's a detached reaction is very positive.
We're spending a lot of time and energy on the experience I think the key part is that the fact that they can have a common security and governance using the what we refer to as Stx is really powerful right. So they actually have the ability to do our capabilities. They've historically done on Prem now move dose of the clouds provision clusters much quicker that is like you know really really cool stuff to them.
And they want more often and so directionally, it's been very exciting our engineering team has done a phenomenal job getting us to this point.
Very positive.
Thanks, a lot.
And your last question comes from fan thing from Morgan Stanley .
He for taking the questions and nice to see.
Back to sort of beaten rate territory.
After a couple of quarters.
I just have another similar basic question similar to past which is.
What is required I want to be in the sense of who is going to be the target customer going forward and related to that.
What is that you know given the given the focus on whatever target segment of the market you're looking at what should we expect in terms of profitability and cash flow I mean coming out of this transition should we expect cloud dara to be focused on a narrow set of customers with better profitability cash flow and that should be expected I'm just trying to get sense of what the longer term strategy. Here is in terms of how you want balancing property and cash flow versus the opportunities in front of you.
Yes, So let me start and then I'll have Jim add some thoughts as well.
Let me begin with our strategy has not changed.
We so even as I've moved into the post and been running running the company for a period here. We remain the same strategy, we're investing in growth.
But at the same time as I commented in my prepared remarks, we're also going to be more disciplined on the cost side.
So we're going to determine where is the right place to make investments and where is the right place to be more efficient or optimize our cost structure. We're focused on the global 2000.
That has been our target market.
The largest global enterprise with the with complex Multifunction use cases.
We go from the edge to AI.
We have the capabilities in between in terms of Datawarehouse data hub. So the strategy remains the same.
And our focus is on restoring the.
Greater topline growth.
At the same time, managing our costs in a diligent fashion and as I think Jim can certainly comment.
Hopefully you will have seen in our Q2 results we've done a better job of that in Q2.
And certainly improving on our operating cash flow Jim maybe you can answer this a little dish digital color, yes. So.
We believe that our target customers that large customers.
Still represent a market opportunity measured in the tens of billions of dollars. So so from a market opportunity standpoint, it's enormous the segments that we play in are naturally growing 15, 2020, 5% a year, depending on which analyst survey you look at so with a large market rapidly growing which bodes well for us once we have CDP out in the market.
From a financial model standpoint, I'd be careful it's way premature to start giving guidance, but the way we think about the business model is if our topline is growing at 15% or 20% or even slightly more than 20%. We believe that we now have the leverage and the scale to throw off 20% or so cash flow margins. So once we get through the transition once we get CDP.
Out there and gaining traction we think that the opportunity is to grow substantially.
And throw off very healthy margins.
I guess, one follow up Jim on the cloud side, but on the scenario that CDP.
Does get well received by market, you're starting to see demand build over multiple quarters. What are the implications for the model are you gonna he CDP to grow within your target markets call. It. The global 2000, when is that going to be I think lunched into service other parts of the market I guess, that's part one of the question, but then what also but also to the model implications in terms of the cloud TV become a larger portion of revenue what does that do that to the model in terms of your customer acquisition costs. Your gross margin sort of the longer term impacts as we as we think about the potential for CTP over time.
Yes, so first of all CDP.
Encompasses several products encompasses a public cloud product and oak encompass products that work on premises.
Voters bare metal or in a private cloud.
So we're focused right now on talking about the public cloud.
That is going to create new market opportunities for us. So so we think that will stimulate growth overtime.
And to the extent it if it impacts our model it will be generally additive now with that said as you would expect in a public cloud environment.
We think that former purchase will be primarily in some form of prepaid credits that by definition have a contract duration or billings duration.
Less than.
It's typically subscription terms. So we do expect our durations to gradually fall overtime, but we think thats going to be very gradual because our billings duration is already roughly 13 months today. So we've moved from a multi year prepaid model to an annual front upfront model. So we don't think the billings model impacts will be negative we think the economic benefits will be positive with increased growth and then it's very hard to predict but we believe that it will also help us in terms of gross margins. Our gross margins are close to 90% today, we see this helping us take a path toward 90% and we think that over time, it will help us with our.
Engineering and sales ratios as well.
Good question I appreciate it.
Thank you.
Well I think that.
Concludes our call today I want to thank you all for joining us.
I appreciate your questions.
And we're on to Q3 C on our next call.
Thank you.
This does conclude today's conference call you may now disconnect.