Red Hat's (RHT) CEO James Whitehurst on Q4 2017 Results - Earnings Call Transcript

Red Hat, Inc. (NYSE:RHT) Q4 2017 Earnings Conference Call March 27, 2017 5:00 PM ET

Executives

Tom McCallum - VP, IR

Jim Whitehurst - President & CEO

Eric Shander - Acting CFO

Analysts

Matt Hedberg - RBC Capital Markets

Raimo Lenschow - Barclays Capital

Mark Murphy - JP Morgan

Brian White - Drexel Hamilton

Walter Pritchard - Citigroup

Kirk Materne - Evercore ISI

Michael Turits - Raymond James

Karl Keirstead - Deutsche Bank

Keith Weiss - Morgan Stanley

Keith Bachman - Bank of Montréal

Ben McFadden - Pacific Crest

Abhey Lamba - Mizuho Securities

Siti Panigrahi - Wells Fargo

Operator

Good day, everyone, and welcome to today's program. And at this time, all participants are in listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session [Operator Instructions].

It is now my pleasure to turn the call over to Tom McCallum, Vice President of Investor Relations. Please go ahead, sir.

Tom McCallum

Thank you, Keith. Hello everyone, and welcome to Red Hat's Earnings Call for the Fourth Quarter of Fiscal '17. Speakers for today's call will be Jim Whitehurst, President and CEO, and Eric Shander, Acting CFO.

Our earnings press release was issued today after the market closed and may be downloaded from redhat.com on the Investor Relations page. Also on this page you'll be able to find a copy of today's prepared remarks, a schedule of currency rates and a slide deck with financial highlights and supplemental metrics that, along with our earnings press release, include a reconciliation of GAAP to non-GAAP financial results.

During this call, we will make forward-looking statements about our future financial performance and other future events or trends, including guidance for our first quarter and full fiscal year 2018. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks, uncertainties, assumptions and other factors that could affect our financial results and the performance of our company business which are discussed in detail in our financial filings with the SEC, including today's press release and the risk factors and other information contained in our most recently filed Form 10-K and Form 10-Q. Red Hat assumes no obligation to update any of these forward-looking statements that we may make on today's call.

And with that, let me turn the call over to Jim.

Jim Whitehurst

Thanks Tom, and let me add my welcomes to all of you joining us on today's call. I also want to welcome Eric Shander, our acting CFO, to the call to discuss our financial results and our outlook for fiscal year '18. Our exceptional fourth quarter capped-off a strong year for Red Hat as we continued to see adoption of our technologies across hybrid cloud environments.

As customers embrace digital transformation, they are turning to Red Hat as a strategic partner to deliver solutions that help them realize the benefits of these initiatives. Enterprises and service providers are increasingly adopting hybrid cloud infrastructures and open source technologies, which is fueling our growth and positioning Red Hat for the long-term. The fourth quarter enabled us to set new records and milestones for the fiscal year which reflect our growing strategic position as we continued to focus on the pressing IT challenges facing our customers. Here are just a few of the record highlights; first, the fourth quarter marked our 60th consecutive quarter of total revenue growth; second, we exceeded the $2 billion mark in subscription revenue for the fiscal year; third, strong sales execution and larger, multi-year commitments from our customers drove annual bookings to the $3 billion milestone level for the first time; and fourth, this strong sales execution led to a record total backlog of over $2.7 billion at fiscal year-end including our first fiscal year of crossing the $2 billion in total deferred revenue mark.

Evidence of our increasing strategic position with our customers is seen in the remarkable growth of our large deals over the course of FY17. In every quarter this year, we saw strength in customer commitments as it related to the volume of large deals, the size of the deals, as well as the breadth of the technologies that were purchased. Every quarter this fiscal year we delivered in large deals, which contributed to record bookings, billings, backlog and revenue. Let me provide you some full year metrics. First, we closed more than 280 deals over $1 million, up approximately 30% year-over-year. Within this group, we closed a record 35 deals over $5 million and a record seven deals over $20 million. In addition, we closed our first deal of approximately $100 million in the fourth quarter with a global service provider.

Now looking specifically at the 30 largest deals in Q4, here are some highlights. All of the top 30 deals were greater than a $1 million, in fact all the top 30 were $3.5 million or greater in size. We also had a record 16 deals in Q4 that were in excess of $5 million, of these four were more than $20 million. Both our middleware and our emerging cloud technologies had strong traction with our customers. Cross selling in Q4 was the highest it has ever been in a quarter, with 90% of the deals including one or more components from our group of Application Development-related and other emerging technologies offerings. Our emerging technologies accelerated the momentum we saw in Q3 with approximately one-third of our largest deals in Q4 containing an OpenStack private cloud component, approximately one-third had an OpenShift container platform component and more than a third of the deals contained Ansible, our automation management technology. In addition more than half our deals contained five or more technologies from across our portfolio.

Similar to Q4 last year, the top vertical for the quarter was telecommunications where we closed a number of new, large deals with several global telecom providers. Part of our overall investment strategy was to position our portfolio of technologies and expand our go to market capabilities to further address this market. Our Q4 wins clearly demonstrate the success of our offerings, including the approximately $100 million agreement that I noted a moment ago. The second largest vertical for the largest Q4 deal was financial services followed by a broad segment of mainstream customers.

Let me discuss a couple of highlights related to OpenStack and OpenShift technologies. In the fourth quarter, we continued to expand our list of top partners that offer OpenStack for their customers. We announced NFV collaborations with HP and Huawei and we recently announced an expanded cloud computing partnership with IBM to sell Red Hat's distribution of OpenStack as a private cloud offering to their customers. In the fall, IDC published a Red Hat commissioned study of customers using OpenShift. They interviewed several organizations that are using OpenShift and quantified a number of benefits these customers realized including: five-year average ROI of more than 500%; average annual benefits of nearly $1.3 million per 100 developers; more than 60% faster Application Development life cycles; and time savings in IT staff and cost savings in infrastructure, as well as millions of dollars of higher revenue per organization. These types of business benefits reinforce our view that we are operating in a hybrid cloud world for many years and that Red Hat is well positioned to expand our wallet share as we provide choice, consistency and meaningful value to customers across all four footprints: physical, virtual, private cloud and public cloud.

In summary, the trends shaping the next generation of IT and business capabilities are a positive for Red Hat. As I look at opportunities in digital transformation, hybrid cloud and open source, I believe Red Hat is important across all these powerful trends. Before I turn the call over, I want to congratulate and thank our 10,000 plus Red Hat associates around the globe for their contributions to an outstanding quarter and fiscal year. Together, I believe we will continue to win in the market place that we are well positioned to deliver further growth next year and beyond. On a final note, I hope many of you will be able to join us on May 2 for Analyst Day at the Red Hat Summit in Boston. It will be a great opportunity to learn more about our strategic direction and innovative technologies. You will hear directly from our customers and partners including technology visionaries from Dell Technologies, Intel, Azure, and Google Cloud Platform.

With that, let me turn the call over to Eric.

Eric Shander

Thank you for the introduction, Jim. I would also like to take this opportunity to thank our Red Hat associates around the world for their contributions to delivering a strong quarter both operationally and financially. On last quarter's call we indicated that we expected to close the year on a strong note. I'm pleased to share that we did just that. Our fourth quarter revenue results were well above our guidance, the accelerated growth of our billings in Q4 drove our FX adjusted rolling four quarter average billings proxy metric to the highest level in five quarters and we ended the year with a record backlog. We are seeing our customers increasingly building out hybrid cloud environments and implementing digital transformation initiatives, which we believe help drive these results. Red Hat is benefitting due to our broad portfolio of solutions and proven history of delivering business value and innovation.

Let me begin with the financial highlights of our Q4 performance, followed by a summary of our full fiscal year results and our outlook for FY18. For a more detailed view of our results and reconciliations of our non-GAAP measures to GAAP, please refer to our earnings press release. I am pleased to announce total revenue of $629 million, approximately $7 million above the high-end of our guidance and representing growth of 16% in USD and constant currency. Although currency rate volatility continued in Q4, the exchange rates stabilized to a point where many of our USD and constant currency growth rates are essentially equivalent. So, for this quarter I will keep my prepared remarks focused on our reported USD results where appropriate and you will find a table of constant currency results in our press release.

Subscription revenue continued to be the largest driver of our total revenue at $560 million for the quarter, an increase of 17% year-over-year. This renewable revenue stream was 89% of the total revenue for the quarter. We continued to drive growth across our technology portfolio. Subscription revenue for our Infrastructure-related offerings was $435 million, an increase of 11% year-over-year. Our Application Development-related and other emerging technologies subscription revenue was $125 million, an increase of 40% year-over-year. Application Development-related and other emerging technologies revenue was approximately 20% of total revenue, up 340 basis points from the year ago quarter.

On a non-GAAP basis, operating income of $153 million grew 23% year-over-year and non-GAAP operating margin of 24.3%, which was 30 basis points higher than guidance. As a reminder, non-GAAP operating income adjusts for non-cash share-based compensation expense, amortization of intangible assets and transaction costs related to business combinations. Our non-GAAP effective tax rate of 29.2% was higher than expected due to a higher than expected level of income being generated in higher tax jurisdictions. As such, our non-GAAP diluted earnings per share came to $0.61, in line with our guidance and up 17% year-over-year. We ended the quarter with cash and investments of approximately $2.1 billion.

We returned $139 million to shareholders in the quarter through the repurchase of approximately 1.9 million shares of stock. Our repurchase program has reduced our fully diluted, weighted average shares by more than 3 million shares year-over-year. Operating cash flow was $318 million for the quarter and increased 27% from the year-ago-quarter. Strong billings growth, a modest improvement in monthly linearity and strong collections contributed to this result. The FX-adjusted days sales outstanding was at 58 days, improving from 61 days a year-ago quarter. Total deferred revenue at quarter end was $2.1 billion, an increase of $347 million or 20% over the same quarter a year ago. The total change in deferred revenue from our cash flow statement which neutralizes most of the impact of currency fluctuations increased by $357 million compared to the end of Q3. The rolling four quarter average billings proxy which is calculated by adding FX adjusted revenue plus the change in deferred revenue on the cash flow statement for the last four quarters was $690 million, up 19% year-over-year.

Next, let me discuss our backlog which as a reminder, we disclose at the end of each fiscal year. Total backlog was up 28% year-over-year for a record balance in excess of $2.7 billion in USD. We define total backlog as the value of non-cancellable subscriptions and service agreements, including total deferred revenue, which is billed, plus the value of non-cancellable subscriptions and service agreements to be billed in the future not reflected in our financial statements. Here are the components; as I mentioned a moment ago, the billed portion of the backlog is total deferred revenue which was $2.1 billion at the end of fiscal 2017. The other portion of total backlog, which is yet to be billed and as such is not included in our balance sheet, was in excess of $650 million at the end of fiscal 2017, up nearly 60% compared to in excess of $410 million last fiscal year. This is the highest growth rate we have reported on this metric since we first disclosed it in FY08.

It is worth noting that the portion of off-balance sheet backlog to be billed in the next twelve months was in excess of $330 million, up approximately 20% on a year-over-year basis, which is consistent with the growth in this metric for the prior two years. The backlog contributes to a significant portion of next year's revenue as well as giving us forward visibility of revenue beyond FY18. I will now review the metrics for business momentum and large deals in the quarter. We had strong bookings growth across our major geographies even with many of our largest deals being attributed to the Americas. This quarter 67% of bookings came from the Americas, 21% from EMEA and 12% from Asia-Pacific versus a 64%, 23%, 13% split in Q4 last year.

The Q4 route-to-market mix was 69% from the channel and 31% from our direct sales force, compared to a 71%, 29% split in Q4 last year. The increase in the direct channel contribution was driven by the increase in large deals that closed in the quarter. Our proxy for bookings duration was approximately 25 months. This is higher than our historic duration of 21 months. Going forward, we would expect duration to move closer to the historic 21 months level. While the short term component will not be impacted by the shorter deal duration, we believe the growth rate of long term component could be impacted by the smaller pool of out-year deals.

Now to briefly recap and summarize highlights for the full fiscal year; total revenue grew to $2.4 billion, up 18% in US dollars or up 17% year-over-year in constant currency and near the high-end of guidance from last March. Subscription revenue grew to $2.1 billion, an increase of 18% in both US dollars and constant currency. Subscription revenue for Infrastructure related offerings was $1.7 billion, up 15% in US dollars and 14% in constant currency. Subscription revenue for Application Development-related and other emerging technologies was $439 million, up 36% in both US dollars and constant currency.

For FY17, Application Development-related and related emerging technologies subscriptions constituted 18% of total revenue, up from 16% last fiscal year. Non-GAAP operating income grew by 15% year-over-year. Non-GAAP diluted EPS for the full year was $2.27, up 19% over the prior year.

Now I would like to turn to guidance. Our outlook assumes current business conditions and current foreign exchange rates. Our outlook is in US dollars but on a constant currency basis, we would expect a 1% headwind to Q1 revenue growth and a 2% headwind to full year FY18 revenue growth. We are forecasting our full year revenue guidance to be $2.72 billion to $2.76 billion in US dollars, up approximately 14% at the high end of the range. In FY18, we will be balancing investment in our growth initiatives and operating leverage.

Our plan includes adding approximately 1,000 net new associates or approximately 10% headcount growth compared to 19% in the previous fiscal year. Given this level of investment, we expect operating margin to expand by 50 basis points to approximately 23.6% in FY18 compared to 23.1% in FY17. We expect full year non-GAAP earnings per share to be approximately $2.60 to $2.64 per share, assuming approximately $2 million per quarter forecast for net other income, and annual effective tax rate of 28% and approximately 180 million diluted shares. On a GAAP basis, we estimate annual stock compensation expenses of approximately $200 million and annual amortization expense of approximately $30 million. GAAP fully diluted EPS guidance includes non-cash interest expense related to the convertible debt discount of approximately $19 million.

We estimate the capital expenditures to be in a range of $75 million to $85 million. Operating cash flow is expected to grow in a range from $850 million to $870 million and includes an incremental $25 million of cash paper taxes. For those of you who try to model billings metrics and quarterly cash flows, we would expect the same business flow in our model as in the past. Along with our assumption of deal duration moving to the historic 21 months level, we also expect bookings and billings to repeat their historical pattern of being lowest in Q1 and growing going forward to end at the highest level in Q4.

In addition, we have also seen a continuation of sales towards the fourth quarter. For modeling purposes, we would factor in an approximate 2% increase in the percentage of full year sales that occurs in Q4 when estimating billings. Our operating cash flow guidance for FY18 has factored in this continued shift and the timing lag on collections.

For Q1 specifically, we offer the following outlook; we expect revenue to be in the range of $643 million to $650 million, which is up 15% in US dollars at the high end of the range. We expect a non-GAAP operating margin of approximately 20% and a non-GAAP earnings per share of $0.52 to $0.53. Our assumption on Q1 expenses including further investing in our emerging technologies as well as expenses for a number of important events in Q1 including our annual Sales and Partner Kick-off events, the opening of our Executive Briefing Center and Innovation Lab in Boston, the OpenStack Summit and our premier user event, Red Hat Summit which is moved into Q1 which was in Q2 last year.

Consistent with prior practices here at Red Hat, I will not be providing a forecast for quarterly cash flow but please note that it can be variable depending upon individual payments or collections. Overall, we are very pleased with our financial performance in the fourth quarter. We are excited about the company's long-term growth opportunity in the hybrid cloud digital transformation and modernizing data centers with open source solutions.

At Analyst Day in May, we will have the opportunity to have deeper discussions on our plans to realize this large, growing opportunity. I personally look forward to meeting many of you at Analyst Day. Keith, I would now like to turn it back over to you for our first question.

Question-and-Answer Session

Operator

We'll take our first question from Matt Hedberg with RBC Capital Markets. Please go ahead.

Matt Hedberg

Hi guys, thanks for taking my question and congrats on the quarter and strong close to the year. I'm wondering can you comment on how quickly your hybrid customers are growing, I know in the past you said they are growing faster than your on-prem customers but any color on that. And then maybe how quickly you your Azure partnership is processing relative to when - size? Thanks.

Jim Whitehurst

Yes. So coupling of things. We do have done measures of our customers who are using subscriptions on public cloud and those customers are growing substantially faster than our traditional customers. Its survey data, so I'd be hesitant to say it's perfect, but I would say substantially faster. If people are looking to leverage modern infrastructure which is often public cloud that requires modern application infrastructure and more and more of that's open source and that's Red Hat via whether it's JBoss or whether it's OpenShift. So those customers are typically growing faster than the traditional customers. Traditional workload -- we're growing single digit. So the traditional [indiscernible] workloads for customers who aren't trying to build a new portfolio on the cloud are obviously growing a bit slower. The second part of the question?

Tom McCallum

Azure.

Jim Whitehurst

Azure, has now moved into I believe our number five spot. So in terms of clouds in our raking, so it's growing really fast but you know it's off the base it started at zero, now watch it go. So hard to say whether it's growing fast or slower or not than Amazon at this point because all the numbers are kind of triple-digits, but also such a little basics. Hard to say, I do think we're pleased with the customers that are in the types of workloads that are moving. These are large sophisticated customers with production type workloads are looking to move to Azure. And so, yes, we've been very pleased with both the customer counts and the traction we're starting to make there.

Tom McCallum

Great next question please. [Technical Difficulty].

Operator

And we can take our next question now from Mark Murphy with JP Morgan. Please go ahead. Then we'll go next to Jason Adler [ph]. Please go ahead.

Unidentified Analyst

Hi. Can you hear me okay? [Technical Difficulty]

Operator

Let's go next to Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow

Hi, it's Raimo here. Can you hear me?

Jim Whitehurst

Yes, we can hear you. Can you hear us?

Raimo Lenschow

Yes, fine. Great. Thank you.

Jim Whitehurst

Must be a Windows phone system.

Raimo Lenschow

Right. Yes, okay. A quick question from me, Jim it was interesting to see the partnerships with HP and IBM this quarter. Can you talk a little bit about what you see in that OpenStack and that whole OpenStack community and the evolution there? Couple of quarters ago, we were all like maybe OpenStack is not that hot and interesting because in the way that's - it seems to be changing now. Can you guys kind of help us a little bit to understand this?

Jim Whitehurst

Yes look, I think a few quarters ago there were a lot of people thinking that OpenStack was going to be their savior against public cloud and OpenStack is a scale-out private infrastructure. It's not directly competitive with a public cloud and since the public cloud offers a lot of other services. And so, I think a lot of people misconstrued what OpenStack is and was. So we're now starting to see a more pragmatic view of OpenStack and people who need to have a scale on-premise infrastructure OpenStack is really the only alternative. We now have over 500 customers running OpenStack. We have a lot of very good large deal traction.

I think the other thing that people are finding out is there needs to be a Red Hat of OpenStack, right. You need to have a vendor that does certification and confidently allow both hardware and software vendors to participate in the ecosystem. So I believe Red Hat is emerging as the Red Hat of OpenStack. So a lot of the traditional other people in the IT ecosystem and the same way we work with them on RHEL, want to work with us on OpenStack. HP is around NFV, we jointly want to serve our customers in the telco and service provider space.

Deals with IBM again serving customers who want to have the consistency of experience they have with RHEL and again with OpenStack across the whole set of deployment models. So, I think we're really starting to see growing traction with OpenStack as Red Hat is emerging as the Red Hat of OpenStack.

Tom McCallum

Great. We're going to try this again. Operator, can we have the next question please. And if you see Mr. Murphy or Jason out there please bring them in as well.

Operator

We can take our next question from Mark Murphy with JP Morgan.

Mark Murphy

Yes. Thank you very much. Jim congrats on a very solid quarter. I think the magnitude of billings acceleration, it's pretty breathtaking to reach 29% here. And it's your fastest rate of billings growth, I believe in about five years.

Jim Whitehurst

Thank you.

Mark Murphy

Yes. So, I think we understand that the two government transactions. They probably shifted a few points around, but what is it that just drove so much acceleration in the broader base of business? And then I wanted to ask as well, a question for Eric. If you could just comment maybe on the relative size of OpenStack compared to OpenShift? And forgive me if prior person happen to ask anything along those lines but just which one is larger in terms of bookings or revenue run rate -- which one is larger in terms of engineering footprint etcetera? Thank you.

Jim Whitehurst

Alright. Well, let me start across those and then Eric, if you can dive in a little more into specifics. So first off, the two government deals we think maybe a two to three point difference, we have to do the exact math, difference in billing; so two to three points of billings growth would have moved from Q4 into Q3. Noted that $100 million plus navy deals that was public, less than $10 million of that actually build this quarter because it's the first year and their budget kill terms and other things and that does not show up at our backlog because government deals happen when you're at a time they are not committed. So that was about $9 million and the other deal is kind of $20 million, all in; that would have moved; so again a couple of points of growth either way.

I should also note that the $100 million service provider deal we talked about also its building one year at a time. So really the traction was just strong bookings growth across the board. We added a lot of people in the first half of the year that we talked about last year that we're going to make significant investments and those people got up speed and you know, certainly about three quarters in, we start seeing real productivity out of -- especially sales resources that we've hired and so those resources are upto speed and so kind of hit nicely across the board.

Related to OpenStack and OpenShift, Eric probably has a little more numbers but a couple of comments around that, recognize that we - and we talked about large service provider deals; the $100 million deal was not OpenStack but the next three largest deals were all primarily OpenStack. So there was a lot of OpenStack traction this quarter, recognize it does munch a little bit with RHEL because when you buy OpenStack, you get RHEL. So those numbers right now will be bigger than the OpenShift deals because of that. In terms of engineering, part to say which is larger, the reason we feel confident of OpenStack and OpenShift is they are both Linux based technologies. So much of the work that we do with OpenStack is around KVM and changes in the Linux funnel [ph] which is why we feel like we're positioned to win an OpenStack. The same is true in containers, right, these are Linux containers; so all the work around C groups and security and other things and containers around Linux.

So it's not really easy to tease out exactly what the OpenStack versus OpenShift versus Linux engineering is, but with that it's context. Eric, do you…

Eric Shander

Sure. So Mark just in terms of the actual number of deals that we had -- so we had 11 deals with -- they had open stack in them and then we had another nine with OpenShift. And back to your point in terms of the overall growth of the billings; I mean clearly, that we did what we said we were going to do. A lot of focus was put on longer term deals so that our teams can continue to focus in on newer clients and opportunities. So we -- I think are very proud of what the team executed in terms of the quarter and we set out to do that at the beginning of the fourth quarter and that's exactly what we did.

Jim Whitehurst

One last note on billings, so if you look at our Top 10 deals; eight of those deals were multi-year deals, half of those build upfront and half didn't. If all of our Top 10 deals build upfront, our billings would have $100 million higher. So to give you a sense, our short-term billings also group quite nicely, it's not just collections of the long-term.

Mark Murphy

Thank you.

Tom McCallum

Next please? Keith, next question please? Sorry folks, we're shouldn't be having a problem with the operator. Operator, please, next question? We don't seem to have him on here. Keith?

Operator

Important interruption. Now Jason Adler [ph], your line is open.

Jim Whitehurst

Alright, thank you. Jason can you hear us?

Unidentified Analyst

This is fine. How you guys doing?

Jim Whitehurst

Started up with the question. Thanks, Jim.

Unidentified Analyst

Great. Yes, it was nice to see the operating margin guide up for fiscal '18. Should we expect operating margin expansion is going to be the gameplan beyond fiscal year '18, in other words, you're now on a path of some modest operating margin expansion every year going forward; is that going to be the strategy?

Jim Whitehurst

So Jason, I mean as we -- as we mentioned back last year during Analyst Day, it is our view to take a balanced approach. We continue to be very focused, as we look at the investments, you know, this year we're going to continue to invest in sales, services, support and our engineering services; that are obviously driving the future. We feel that the available timeout there is significant. So we're going to assess each year as it comes but you know right now we are starting to see a payback from the investments that we've made in the emerging technologies which has allowed us to provide some expansion this year. So at this point it's early but you know, certainly we're going to continue as we go throughout this year and into future years, maintain a balanced approach in terms of both growth as well as leverage.

Unidentified Analyst

Great.

Jim Whitehurst

Yes, not trying to be cute on answering that. I mean just frankly, we feel very, very good about our position and the momentum we have; OpenStack and OpenShift which have been our kind of significant investments over the last several years, are showing real payback. And so naturally one would assume kind of course and speed therefore the margin expansion because it that those businesses have similar or better margin characteristics than the core RHEL business given the stickiness. That said, we have to look at size of opportunity, investments we need to make around sales and so we'll - obviously we can have more dialogue at Analyst Day about that in more detail and kind of as we go forward and see the relative momentum, we'll continue to update you on it.

Tom McCallum

Afraid to do this, maybe you should just let keeping Jason ask questions but operator, please next question?

Operator

And we will take the next question from Brian White with Drexel. Please go ahead.

Brian White

Yes, I'm wondering if you could talk to a little bit about how 5G is starting to impact or could impact your OpenStack business. And if it has any repercussions for Linux? Obviously, Mobile [ph] Congress's was a few weeks ago, NFE was a huge theme, OpenStack was part of that; so maybe you can tie it together, 5G with Red Hat? Thanks.

Jim Whitehurst

Well, we see this as a very significant opportunity for us. 5G and just the increase in the amount of data being communicated will require new infrastructure and I think it's pretty safe to say that that new infrastructure will be commodity hardware running OpenStack. One of the reasons we've been so excited about the opportunity is just like with Linux, there needs to be an industry standard that every piece of hardware can certify too and in this case every VNF, every virtual network function can certify too. Red Hat is that natural player, we've done it before with Linux, we've demonstrated we can do it with mission critical workloads; that needs to happen with OpenStack and I think that Red Hat is emerging as that leader. You know, three of our big four deals were eight figure OpenStack deals, two of those were with telco services providers.

So I think we're making really good progress there, I think that market could be very, very large for us as we go forward and telco start rolling out that infrastructure scale. The two eight figure telco deals that happened this quarter and OpenStack, those are for tiny, tiny components of their network at this point; as those things expand they can get quite large.

Tom McCallum

Great. Next question Keith, please.

Operator

Yes, we'll go next to Walter Pritchard with Citi. Please go ahead.

Walter Pritchard

Hi, thanks. Question for Eric I guess. Last quarter there was talk of cash collection and some uncertainty around sort of the collection you expected on transactions you signed in Q3 and or guess some variance in that and it worked to the negative side in Q3. And it looks like that wasn't an issue here but as you look at your guidance for next year, what you've embedded in terms of cash collection term on deals and if you expect some of the issues on Q3 to repeat there?

Eric Shander

So sure, Walter. So I mean as you can imagine -- I mean linearity continues to be something that we focus in on. The team did a great job this past quarter in terms of addressing linearity but you know, as we've mentioned in the past, trying to address linearity or completely eliminate linearity wouldn't be necessarily something that financial makes sense because a lot of times clients certainly know in terms of negotiating, you know, getting deals to the very end. So what we've essentially done in our guidance as well as the cash flow modeling is we've assumed this was the 2% that I'd had mentioned in my prepared remarks. We've assumed the 2% shift of business into Q4 and we've rippled that through the cash flow statement. So we continue to be very focused in terms of collecting our cash timely, there is no change to any of our payment terms, it's not our desire to change the payment terms but certainly we're going to stay very focused in our linearity as we go into next year.

Walter Pritchard

Great, thanks.

Tom McCallum

Next question, please.

Operator

And we'll go next to Kirk Materne with Evercore ISI. Please go ahead.

Kirk Materne

Hi, thanks very much. I was wondering if you talk just about -- a little bit more about open shift, specifically just where you're seeing the momentum for this product. I was just curious from -- is there any sort of demand coming from specific vertical or geography at this point in time, just trying to get a little bit more color on where you're seeing demand from that for OpenShift right now? Thanks.

Jim Whitehurst

Yes, so I would say the largest vertical at this point is for us right now is financial services. You know, I think there is several reasons for that. First off we've had historically strong relationships with financial services. So we have good relationships already built there. Also I think financial services recognizes the need for long-term support, a life-cycled OS, a commitment around binary compatibility, all things that RHEL's always done. And so as the large financial services companies have evaluated container platforms, I think we could transact kind of that default choice. Third, I think there -- as these enterprises look to run stake-full applications and migrate existing Web Logic, Web Sphere [ph] type workloads onto a scale out infrastructure, OpenShift is the only solution to do that. The competitors in the container platform world don't support staple application or JEE. And so I think that allows us to specially with kind of industry like financial services to different ourselves. But again we have strengths, we had public reference as we had speaking in our last Analyst Day, on the days and we have across the whole set of verticals but without a data and say right now financial services is the strongest.

Tom McCallum

Great, next question please.

Kirk Materne

And just as a quick…

Tom McCallum

Quick follow-up? Go ahead.

Kirk Materne

Just to get a quick follow-up, just anything on a geographic basis. I assume you're talking about financial services in the Americas or is it OpenShift pretty…

Jim Whitehurst

No, we have a lot in Europe as well. I would call it pretty balanced between Europe and the U.S. on OpenShift and financial services. Some of the big banks in London or quite large users as well.

Kirk Materne

Thanks.

Tom McCallum

Great, next question please.

Operator

We'll go next to Michael Turits with Raymond James. Please go ahead.

Michael Turits

How was the cloud on a full year basis last year, you gave it at $100 million? We're trailing and any -- can we get a sense of what it was this year and also is that starting to -- is that going to continue to have a negative impact at all on billing or invoicing duration?

Jim Whitehurst

Yes. Well, I'll start. We said last quarter that we will update you when we hit the $200 million milestone which is either one being Q1 or Q2 of this year. I still think we feel very confident, that it will be in either Q1 or Q2. In terms of billings, it is a headwind obviously in terms of billings because of the impact on duration. So I don't -- do we have a…

Eric Shander

Yes. So we approximate it to be about $120 million headwind, a theoretical headwind to billings for the year. As Jim mentioned, I mean it's an area that continues to grow. It's a nice business for us. And yes, but we would say it's about $120 million headwind to billings. That's the crazy cloud access component. The CCSP program, our cloud access to our customers just take their subscriptions to Amazon or other clouds that bills the normal. So it only to CCSP piece that they are [indiscernible].

Michael Turits

Sure. Thanks.

Tom McCallum

Great. Thanks. Next question please.

Operator

We'll go next to Karl Keirstead with Deutsche Bank. Please go ahead.

Karl Keirstead

Good. Thanks maybe one for Jim and one for Eric. Jim the emerging bucket, up 40% is a big acceleration you mentioned in your remarks about better cross selling. But do you mind elaborating on that were there any one-time things in there because that stood out to me? And then for Eric; if we could just return to the operating cash flow guide, I think the high end of revs and high end of operating cash flow implies a 31.5% margin roughly equal to what you did in fiscal year '17. But that's still well below the 35% operating cash flow margin level you were putting up year-after-year. And I'm wondering is the guide just heading for fiscal '18, does that have upside potential or is there some change in perhaps the use of working capital that's worth pointing out? Thank you.

Jim Whitehurst

So I'll start. As we said, we had three big OpenStack deals in the top four deals, so not the $100 million deal which was primarily middleware and well I guess that was in there too then. A lot of that -- but the next three were significant OpenStack deal, so obviously those are emerging. That largest deal we did the $100 million deal, well there was a reasonable amount of RHEL, there was a lot of middleware in that as well as that telco is looking to migrate from web logic and Web Sphere to JBoss. So those had a significant impact, as well as just begin at the size of the OpenStack deals can kind of move those numbers around.

Eric Shander

Yes, and just in terms of the operating cash flow, as we mentioned that the big focus that we have is certainly linearity and as I mentioned the 2% shift that was essentially down from the quarters one, two, three and quarter four. I mean obviously you are going to see that in the accounts receivable and clearly something that we're continuing to focus in on that to the extent that we can obviously make sure that that is minimized as we go forward and we well but, it's certainly, it's a business reality that we see and also at some of the larger deals as you would expect, they are only billing one year in advance. So that's pretty common and pretty expected and that's not all of our transactions but certainly as deals get bigger, we'll become a larger portion of the IT wallet share spend, that's going to be something that we're going to continue to deal with.

Karl Keirstead

Okay. Thank you, both.

Eric Shander

You are welcome.

Tom McCallum

Great. Thank you. Next question please, operator.

Operator

We'll go next to Keith Weiss with Morgan Stanley. Please go ahead.

Keith Weiss

Excellent. Thank you guys for taking the question on very next quarter. I was hoping to dig in on that cash flow question a little bit more, because there seems like there are lot of moving pieces that are all working against you for operating cash flow. Correct me if I am wrong, it seems like billings, like the $120 million billings headwinds. That should be negative to cash flow, you were talking about the seasonality that was negative to cash flow. You're talking about increasing cash taxes, am I thinking about this right, as just it just seems like there's a lot of things stacked against operating cash flow versus sort of the maybe the -- where we should be focusing, while our margins are actually in the right direction.

Jim Whitehurst

Yes. I mean so, certainly all of the items that you mentioned that they certainly do have an impact to cash flow for sure Keith. And as I mentioned these are items that were actively working and certainly where we can get efficiencies on the margin side to kind of help offset some of that we certainly are. But there are certainly several items that are impacting cash flow as we continue to go forward.

Keith Weiss

And then if I could just one follow-on. Jim you never commented earlier about the economics of OpenStack and OpenShift, as the higher value solutions you expect them to have better margin. Is that - I am assuming there are better margins over time just given the scale of the real business and the ability to have very high margins?

Jim Whitehurst

Yes. So what I mean by that is the price points are dramatically higher, which also helps spring sales up-down. So like OpenShift is literally almost 20X the price of RHEL on the same two-socket server. Right now, though we have massive investments in those and they're both without fully allocated basis losing a lot of money because we're putting more sales and R&D effort against than that we are generating in revenue in the short run. So that's more to say that, I think those are stickier technologies. I think you will not have the same dynamics we have with RHEL, while RHEL is great. You do get customers who threaten the self-support, that's probably the primary kind of competitor for us on a renewal where with something like OpenShift and OpenStack we get many more technologies. It's not just kind of one easy go download sent off kind of thing.

I think the renewal rate is likely to be quite a bit higher and again the deal sizes are larger because the ASP's are so much higher, which was -- for us to believe adding more study state that those should actually have better margins than RHEL.

Keith Weiss

Excellent. Thank you very much Jim.

Jim Whitehurst

Thank you, Keith. Next question please operator.

Operator

We'll go next to Keith Bachman with Bank of Montreal. Please go ahead.

Keith Bachman

Hi. Thank you very much. One good thing based on the communications issue, every time you kept saying Keith are you there I thought you guys were asking for me. So I felt pretty good about that. Perhaps the previous speaker as well. I did want to ask two quickies. Number one, in the context of your guidance with revenues in the past you've talked about at the last Analyst Meeting infrastructure, growth potential as you didn't get specific but you called it team. Should we be thinking about that as it relates to an underlay within the context to your revenue guidance for FY18?

Jim Whitehurst

Yes.

Keith Bachman

Okay, thank you. And the second one is the renewal rate. You had another really strong renewal rate quarter, but it's been bouncing around between 105% to start the year and you finished at 120%. How are you thinking about that renewal rate as you look at FY18 guidance?

Jim Whitehurst

Yes. So we ended up the fourth quarter in excess of 120% and that would be our expectation as we go into next year as well.

Keith Bachman

So sorry, just to be clear. Is it 120% you're thinking for the year or is it that you're saying ending the year in that kind of renewal rate?

Jim Whitehurst

Yes. For the year.

Keith Bachman

Okay, alright, great. Thanks very much. Congratulations on a solid quarter.

Tom McCallum

Thanks, Keith. Next question, please.

Operator

We'll go next to Ben McFadden with Pacific Crest.

Ben McFadden

Hi guys, thanks for taking my question. I just wanted to ask questions going back to these emerging businesses. You said a third of the top deals in OpenShift, OpenStack or Ansible. I wonder if you could address kind of how we should be thinking about how often these emerging solutions get sold together, especially as we relate to Ansible is that being sold with OpenShift or OpenStack or any metrics you can give on the cross sell rates of some of your emerging solutions in your portfolio.

Eric Shander

Yes. I'll start and let me actually look through the numbers to tell. But Ansible is often sold as part of a broader solutions. One of the reasons we acquired the company is it's a great standalone automation solution, but in a scale out world automation becomes increasingly important. So our customers who want to buy cloud forms often also acquire Ansible. Most of it, I would bet that most of our OpenStack and OpenShift customers buy at least a degree of Ansible as well. It really does just -- it becomes a core component of the way you're going to manage an automating modern infrastructure. So Ansible especially is in many of those same deal.

OpenStack and OpenShift is kind of a mix often OpenShift will run on top of OpenStack, but some of the largest deals that I mentioned are over telco deals that were just OpenStack. One of those big top four was OpenShift running on OpenStack just kind of looking down. It really is a mix. So they are often sold together because you got to have a deployment target for OpenShift. The sale point we use over-and-over again is you can run it on Amazon, you can run it on Azure, you can run it on VMware, you can run it on OpenStack and it really is a mix. In this quarter, actually a fair number of the OpenShift deals also weighed in on OpenStack. So there's a reasonable amount of cross sell there.

Ben McFadden

Great. Thank you.

Tom McCallum

Great. Next question, please.

Operator

Next we'll go to Abhey Lamba with Mizuho Securities.

Abhey Lamba

Yes, thank you. Great quarter. Jim as you are signing these mega deals. Can you talk what it was in the marketplace in fiscal '17 that drove such an acceleration in number of large teams and their sizes? We saw this big uptick in last year in fiscal '15 and this year seems to be another big step up. What's driving this acceleration?

Jim Whitehurst

I think its couple of things. One is often times those include OpenStack or OpenShift, which are just a very - they do a lot more than our independent technology in terms of the size and scope of the customer problems they address. So there are higher price points and so those deals get to be larger as people are putting those in their infrastructure. Second one is just as enterprises are accelerating their application migration to more modern architecture there is a need for the technologies to help them do that. So the largest $100 million deal, really that was our middleware portfolio, but a lot of that with the customer looking to migrate from some of their traditional heavyweight JEE stuff to our portfolio to save money. But also make it easier to land that on more modern platform.

So I guess, more and more enterprises are saying, “Oh, I may want to use public cloud in the future. I want to use it now”. There now have a bunch of applications that are capable of running on a public cloud. So they need to partner with someone like Red Hat who can get those applications without massive modifications on scale out infrastructure. And those deals just become bigger because of the size of the value and the scope of the technologies involved.

Tom McCallum

Hi everyone. I'm afraid, we have time for one more question. I want to apologize on behalf of the team here apparently we had some service provide issue. So we will try to follow-up with everybody who has additional questions. I'm afraid for the official call, we have a hard stop at six. So we have time for one more operator.

Operator

And we'll go to Siti Panigrahi with Wells Fargo. Please go ahead.

Siti Panigrahi

Thanks for taking my question. It's good to see such a large number of $5 million plus deals. And also you talked about five or more technology in half of the deals include. Just wondering if you could give some color about storage business. We heard about CCSP [ph] a couple of years ago it was getting good traction, I'm wondering at what percentage of your emerging technology now storage and what's your expectation going forward.

Jim Whitehurst

So, let me give a little bit of contact. I think in terms of standalone storage five deals had standalone storage components in that top 30 deals. But just a little bit of contact there, we see CCSP [ph] project sold often with OpenStack and Gluster and much of the Gluster roadmap is around adding capability into OpenShift. So we can talk about standalone storage and again there were five deals that had standalone storage components in there. But it's a pretty important part of both our OpenStack and our OpenShift products as we are needing to offer whether it's state in OpenShift or broadly easy access to storage in OpenStack.

So again, five on a standalone basis. But those technologies are wrapped in the OpenShift and OpenStack components of our business and one of the reasons that those businesses are growing so nicely.

Tom McCallum

Great. Operator, that's all the time we have today. I want to thank everyone for joining us. We will try to reach out to everybody. If there are any additional questions, feel free to reach out to Sarah and I and we'll try to get back to you as soon as possible. We also have Analyst Day coming up in early May and if you haven't been invited and you want to come, please let us know as well. Thank you everyone for your time.

Operator

This will conclude today's program. Thanks for your participation. You may now disconnect.