Apptio, Inc. (APTI) CEO Sachin Gupta on Q2 2018 Results - Earnings Call Transcript

Apptio, Inc. (NASDAQ:APTI) Q2 2018 Earnings Conference Call August 1, 2018 5:00 PM ET

Executives

Kurt Shintaffer - Co-Founder & CFO

Sachin Gupta - Co-Founder, CEO, President

Susanna Morgan - SVP of Finance & IR

Analysts

John DiFucci - Jefferies

Ross MacMillan - RBC

Brad Sills - Bank of America Merrill Lynch

Matt Coss - JPMorgan

Brian Schwartz - Oppenheimer

Jess Hulsing - Goldman Sachs

Mohit Gogia - Barclays

Greg McDowell - JMP Securities

Operator

Good day, ladies and gentlemen, and welcome to the Apptio Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Susanna Morgan, SVP, Finance and Investor Relations. Ma'am, you may begin.

Susanna Morgan

Thank you. Good afternoon, everyone, and welcome to Apptio's Second Quarter 2018 Earnings Call. Joining me on the call today are Sunny Gupta, our CEO; and Kurt Shintaffer, our CFO. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. The webcast replay of this call will be available under the Investor Relations link of our website at investors.apptio.com.

We will make forward-looking statements on this conference call such as those using the words will, believe, expect, anticipate and similar phrases to convey the information is not historical fact. These statements include our future expectations regarding our financial results and guidance, applications, customer demand, operations, our acquisition of Digital Fuel and the potential benefits of such acquisition and other matters. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent periodic filing for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

During today's call, we will review our second quarter 2018 financial results and discuss our guidance for Q3 and full year 2018. All financial figures we will discuss are non-GAAP, except for revenues and balance sheet data. These non-GAAP financial measures, which we believe are useful in measuring Apptio's performance and liquidity, should be considered in addition to, not as a substitute for, or in isolation from, GAAP results. Our non-GAAP measures, except for free cash flow, exclude the effects of stock-based compensation expense, acquisition-related expenses and amortization of acquisition-related intangible assets. We define free cash flow as cash used in operating activities, less purchases of property and equipment. To see the reconciliation between the historical non-GAAP and GAAP results, please refer to our earnings press releases which are posted on the Investor Relations page of our website.

With that, I'll hand it over to Sunny.

Sachin Gupta

Thanks, Susanna, and welcome, everyone. In the quarter-ending June 30, we reached total revenues of $59 million and grew subscription revenue by 32% to $49 million. This growth was due to strength across our product portfolio, the public sector, renewals and upsells and Digital Fuel.

We firmly believe that every business is becoming a technology business, enabled by cloud and agile, fueling our momentum further. We also continue to drive significant operating leverage, generating $2 million in non-GAAP operating income in the quarter.

I'll discuss three areas in detail today: an update on IT Financial Management Foundation; our momentum in the public sector; and our continued innovation in cloud and hybrid IT.

In Q2, we saw a significant uptick in momentum for IT Financial Management Foundation, or ITFMF, an application we launched last fall. This application allows technology and finance leaders to automate technology planning at a granular level, including vendors, cloud, labor and assets, manage variance to plan, update monthly or quarterly forecasts and deliver insights by providing what-if analysis and scenario planning.

This is a must-have foundation application for companies of all sizes. It integrates with existing corporate planning systems and represents an easy way to get started with Apptio's suite of applications, including Cost Transparency.

This application helps organizations fund new digital initiatives by reducing budget planning, find discretionary dollars with more accurate variance analysis and drastically reduces the pain associated with a complex IT planning process.

Our new go-to-market is exceeding. Online marketing is driving most of the demand. In addition, sales cycles are 1/3 faster than Cost Transparency. Almost half of these prospects use an online test drive process to try the offering before buying, eliminating the need for resource-intensive product evaluations.

ITFMF deployments are also faster than the full Cost Transparency application. We've had customers reach production in as little as 2 weeks, and on an average, it takes 12 weeks. This quarter, we also saw early evidence of expansion opportunities following these faster deployments.

I'm excited about the initial signs of success. We believe this will be a growth driver for our business going forward, especially in the lower part of our target market.

We also saw strong continued momentum in the public sector this quarter, following the receipt of our FedRAMP certification. In the U.S. public sector alone, IT spending exceeds $200 billion, including $90 billion in the U.S. federal government. Earlier this quarter, we closed a large deal with the Department of Veteran Affairs.

Their goal is to better understand the existing spend on operational and maintenance activities and free up funding for modernization and enhancement. They chose Apptio due to our proven track record, scalable analytics platform, automation and cleansing of the strata data sources, federal TBM model and FedRAMP certification.

In July, close to 400 IT and finance leaders joined the Public Sector Summit in Washington, D.C. hosted by the TBM Council, with support from the U.S. Federal CIO, the Office of Management and Budget and the General Services Administration. On the heels of the summit, Apptio hosted a public sector product session, where we demonstrated our latest technology, including monthly cloud optimization and hybrid IT.

We also launched an early adaptor program for federal agencies looking to leverage machine learning, to automatically extract and map technology costs from their general ledger and invoicing systems. Based on our learnings from hundreds of Apptio deployments, we developed algorithms to automatically map general ledger data to the costful level of the ATUM model.

This innovation significantly reduces the time it takes for customers to get started with Apptio. We are rolling out these new capabilities to the public sector first due to the complexity and variety of data sources for federal agencies. We plan to introduce these capabilities to our private sector customers as well.

In addition to these machine learning capabilities, we are continuing to innovate in the cloud and hybrid IT area. Monthly cloud and the transition to hybrid IT continues to be a large driver for Apptio's Cost Transparency and Cloud Cost Management applications.

Customers are struggling to get visibility and control of cloud spending across multiple providers and optimize cloud resources like reserve instances. They also want to model enterprise discount programs, make data-driven decisions, including cloud migration, and provide governance through show-back and charge-back.

Cloud wins in Q2 included a European manufacturing company sold to a partner as well as a U.S.-based manufacturing company that bought our Cloud Cost Management offering several weeks after IT Financial Management Foundation. Deployment of this offering can be very rapid, less than a day, and the value proposition is compelling. Beyond the Q2 wins, we are seeing broad adoption of our new cloud capabilities and Cost Transparency deployments.

The data volumes of cloud builds in our systems have grown exponentially, and we are now processing about 60 billion rows of cloud builds a month. One case study involved an Apptio insurance customer that started using Cloud Cost Management earlier this year.

This provided an easy way to analyze spend across over a million lines of builds from multiple public cloud providers. By looking at cloud spend on a daily and hourly basis, this customer was able to save 60% on their big data initiative.

Due to strong customer demand, we are also launching a new application called Apptio for Hybrid IT. This product empowers technology leaders with the data and insights needed to manage infrastructure spend and usage across cloud and on-premise, drive greater efficiency and accelerate digital transformation.

Unlike other cloud cost management and optimization offerings, Apptio allows users to integrate and transform any data source, including an ability to tie into cloud billing, general ledger and utilization data, along with differentiated tagging for cloud resources.

Apptio is uniquely positioned for 3 phases of cloud maturity. Apptio can help customers who just want to manage cloud utilization, cost and capacity. More complex scenarios involve customers who want visibility into hybrid infrastructure spending.

The most mature customers can take advantage of full Cost Transparency, which includes a holistic view of infrastructure and applications across on-premise and cloud. This includes Software as a Service, Infrastructure as a Service and Platform as a Service.

Turning back to the quarter. In addition to the items I've already discussed, we saw a strong contribution from Digital Fuel. We continue to partner well with VMware in existing Digital Fuel accounts. In Q2, we converted the first Digital Fuel customer to Apptio Cost Transparency, while expanding the relationship to include our IT Planning application. This relatively small shared services organization clearly saw the enhanced value of Apptio's integrated platform to increase transparency, optimize technology spending and automate IT planning.

I wanted to touch on a few other items before passing it to Kurt. In early June, we completed the fifth TBM European Summit in London. This event drew more than 400 prospects and customers to hear incredible stories of TBM's success, from global CIOs, CEOs and CFOs and companies like Unilever, [indiscernible], UBS and Mastercard.

During his presentation, the President of Operations and Technology at MasterCard shared that the company had used Apptio to digitize 2/3 of the company's 500 million credit cards. We also announced the first-ever European TBM Executive Committee, a regional extension of the global TBM Council board, evidence of our increasingly global footprint. I'm energized by the success we are seeing in the global adoption of TBM and Apptio.

Finally, I wanted to welcome Rebecca Jacoby to the Apptio Board of Directors and Audit Committee. Rebecca has a unique combination of operations and technology expertise, having served as Senior Vice President of Operations at Cisco and CIO for 12 years before that.

She was also an early Apptio customer and has been a big advocate for the value we create. I would like to thank Ravi Mohan, Managing Director and Cofounder at Shasta Ventures, for serving as an Apptio board member over the last 8 years. Ravi's insights have helped us grow Apptio to the organization we are today.

In summary, I'm pleased with our performance in the second quarter of 2018. Revenue growth accelerated even as we generated positive non-GAAP operating income. We continue to innovate using machine learning to change the way new customers deploy and implement Apptio.

Cloud adoption increased, and we launched our new Hybrid IT product. We continue to have a differentiated position in the market for both our Cost Transparency application and for our newer offerings. The growth of cloud spending, the complexity of Hybrid IT and the shift towards digital and agile are all serving as market tailwinds for Apptio. And I'm excited about the value we can add in these areas.

With that, I'll turn things over to Kurt to give you more color on our Q2 financial results and guidance.

Kurt Shintaffer

Thanks, Sunny, and welcome. I'll start by commenting on our Q2 results and then talk about guidance for Q3 in 2018. As Sunny mentioned, we were pleased with the performance of the business in Q2. We had very strong subscription revenue growth and reached positive non-GAAP operating income.

Q2 subscription revenue grew to $49.2 million, up by 32% on a year-over-year basis. This top line growth was a result of solid new customer acquisition, a strong contribution from Digital Fuel and robust customer retention. This resulted in a trailing 12-month net retention rate of approximately 102%.

We also benefited from some nonstandard items that had an approximately $1 million positive impact on subscription revenue this quarter. This positive impact was due primarily to customer transactions with accelerated revenue recognition and some large deals that closed early in the quarter. Excluding these items, normalized subscription revenue was approximately $48.2 million or 29% year-over-year growth.

Services revenue grew by 23% on a year-over-year basis to $9.8 million due to strong performance in our core business as well as Digital Fuel. In total, Q2 revenue increased 31% on a year-over-year basis to $59 million.

For the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results, which exclude the effects of stock-based compensation expense, acquisition-related expenses and amortization of acquisition-related intangible assets.

In Q2, Apptio's total gross margin was 70%, an increase from last year due to a higher subscription revenue mix and an increase in subscription gross margins, which reached 83% as we realized efficiencies in our hosting operations and customer success organizations.

Moving down the P&L, we continue to show increased operating leverage. Q2 2018 R&D expense was 18% of revenue, lower than last year even with increased investments in product innovation. Sales and marketing expense was 38% of revenue, down from 44% last year as we efficiently scaled that part of the business.

G&A expense was 11% of revenue as compared to 12% a year ago. In Q2 2018, we generated $2 million of positive operating income, a margin of 3% as compared to an operating margin at negative 8% in Q2 of last year.

Net income per share was $0.01 in the second quarter of 2018 as compared to a net loss of $0.08 in the second quarter of 2017.

Turning to cash flows. Our Q2 free cash flow was negative $2.4 million as compared to negative $10.9 million in Q2 2017. Our year-to-date free cash flow is $6.7 million as compared to negative $500,000 in the first half of 2017.

Finally, we ended Q2 2018 with $255 million in cash and investments.

Moving on to guidance. I'd like to update you regarding our outlook for the third quarter and full year of 2018. For Q3, we expect total revenue of $57.5 million to $58.5 million, with approximately 84% of that coming from subscription revenue. Consistent with last year, we expect Q3 services revenue to decline slightly as compared to Q2 due to the seasonality of implementations and vacation schedules. We expect to generate Q3 non-GAAP operating income of $1 million to $2 million. Due to the strong first half, we are raising our 2018 guidance to total revenue of $230 million to $233 million.

As a reminder, Q4 is typically a strong services quarter due in part to the TBM Conference. For the full year, we anticipate that approximately 83% of revenue will come from subscriptions. We expect $3 million to $5 million of non-GAAP operating income for the year and are well on our way to achieving this goal.

Free cash flow, year-to-date, has increased significantly from last year, and we expect full year free cash flow to be greater than last year as well.

In conclusion, I'm pleased by the revenue growth and operating leverage that we saw in our business this quarter. In the second half of 2018, I see an opportunity to continue to balance growth with improvements in margins and cash flow even while we invest in the large TBM market opportunity.

And with that, let me turn it back over to the operator for questions.

Question-and-Answer Session

Operator

Operator

[Operator Instructions] And our first question comes from the line of John DiFucci with Jefferies.

John DiFucci

My first question is for Sunny. Sunny, in the press release, you've mentioned the new application, Apptio for Hybrid IT. I guess I just want to know what's the difference - what's different from your ability to accommodate Hybrid IT in the - from what you see in the past?

I mean, I'd assume that most of your customers, especially the roots of Apptio, come from large customers. I know you're going downmarket now too. But I would assume most of them have a hybrid IT environment. So if you can just talk about this new product and what's different about this. I assume it brings in Digital Fuel, but...

Sachin Gupta

Yes, I'm happy to. So really, multi-cloud and hybrid IT is kind of what - are great market tailwinds for Apptio. As we launched the Cloud Cost Management capability last November and we started engaging with customers, both large and small, we started to find that customers are in different stages of maturity.

Customers can start with Cloud Cost Management, but practically, every customer we deal with has some level of hybrid infrastructure. So a lot of the feedback we got from our customers was a purpose-built application just to manage their hybrid infrastructure.

So the Hybrid IT product includes all the Cloud Cost Management capabilities. It also includes the on-premise infrastructure costs. Those capabilities you can also find in the Cost Transparency applications, but there are additional capabilities which we've innovated for specifically managing utilization metrics.

And a lot of that innovation did come from some of the work which the Digital Fuel team have been doing with VMware and as well as providing additional financial analysis, OpEx, CapEx migration analysis capabilities. So it's a combination of cost, capacity, utilization metrics, focused on, really, infrastructure. And it's the next stage of maturity from Cloud Cost Management, and obviously, some of those capabilities are included in Cost Transparency, but not all.

Kurt Shintaffer

With that Hybrid IT product, there remains an upsell to additional Cost Transparency capabilities which aren't a part of that offering.

John DiFucci

Okay. Great. That's really helpful, since it sounds like it was more - mostly, anyway, customer-driven, though a lot of things came into play. And I guess my second question is, I think, for Kurt, but maybe Sunny can weigh in too. Like the results this quarter look really strong, right, and that's great to see.

But I know I'm just trying to anticipate the questions I'm going to get tomorrow, and you are too. It sounds like business is going very well, but how much did - can you tell us how much Digital Fuel contributed in the subscription line this quarter? It sounds like it was strong. It sounds like everything was good across the whole business.

But I think you had said that it was going to contribute $7 million to $8 million in total revenue for the year, but just curious if you can tell us about how much was in that subscription line this quarter?

Sachin Gupta

Yes. Let me take that, John. This is Sunny. So look, Digital Fuel had a strong contribution to Q2. It exceeded our internal forecast and expectations. But the thing I just wanted to clear on your mind is that it's still a pretty small part of our overall business.

So while it had a positive impact, our core business continued to do extremely well and we are obviously not breaking down the Digital Fuel contribution to - versus the Apptio. One of the things which I felt pretty good about was the single conversion deal, which I talked about.

We had - our first customer was a Digital Fuel SaaS customer, who converted into Apptio Cost Transparency and Planning application. And we were able to uplift that customer, so they certainly saw the value of the integrated platform. And so really, net-net, I would say, we feel pretty good about the combined business. And again, Digital Fuel is relatively small as a part of our overall business.

Operator

And our next question comes from the line of Ross MacMillan with RBC.

Ross MacMillan

Sunny, I just wondered if you could talk about the cross-sell efforts around Digital Fuel as we look into the second half. I think you had alluded to maybe some products in the portfolio that are less tied to the ATUM model. You can actually go in and sell those to the base. And I just wondered where we stand on that. And is it something you think could be a contributor in the second half?

Sachin Gupta

Yes. Hi, Ross. So really, what we saw was - what we are starting to see is our efforts are very focused on customer retention and satisfaction. And frankly, the results exceeded our expectations around retention and so forth in Q2, right? Now as we look at the rest of the year, what we are really finding is upsell opportunities around the portfolio of products who don't have ATUM, specifically, I think, the Planning portfolio of products. So we're seeing a lot of good interest in that.

We're also seeing good interest in the Cloud Cost Management, Vendor Insights, capability. And obviously, we've just launched the Hybrid, that's very early, but I believe we'll see interest there.

So that pipeline is building well, but we are not - it's still early, I would say, so we're not really counting on a huge part of the contribution, at least, in our guidance, coming from that part of the business. And if those upsells are to happen sooner, then that would be kind of good upside to our model.

Ross MacMillan

That's clear. And then maybe I jumped on a little late, so maybe Kurt. I thought there was a comment around a onetime benefit to subscription. Could you just - was that a correct statement? And if it is, could you elaborate on that?

And then maybe related. As we think about the cadence for our models around - especially around billings, anything we should be thinking about either in Q3 or Q4 as we model out either onetime payment items or other things we should think about?

Kurt Shintaffer

Yes. Hey, Ross. So as to the comment I made about some nonstandard subscription revenue in Q2, it relates to a couple of things. First, we closed a few large deals early in the quarter, one of them being the publicly known Department of Veterans Affairs deal.

So that had - those deals had some nonstandard impact on Q2 just based on where they fell in the quarter. And we also closed a few renewals in Q2 with subscription term start dates from prior quarters, which led to both Q2 revenue and the catch-up revenue from the prior quarters. So that's why we're suggesting that you look to a normalized number of about $1 million less than the reported Q2 number if you're thinking of sort of the run rate Apptio business.

Sachin Gupta

The only thing I'm going to add on it is, look, I'm, Ross, I think from my perspective, just super thrilled about even that that's like hitting kind of pretty high-growth targets and while we continue to drive operating leverage in the business.

Kurt Shintaffer

Yes. And then, Ross, your other question about billing. So we talked before about how Q2 was going to be - Q2 billing was going to be impacted by the absence of a billing for a 3-year contract that started 2 years ago, but there was no billing in the third year. So that's all part of Q2. As we look forward to Q3 and Q4, there's nothing specific that I'd call out at this point. We don't have any visibility into anything so nonstandard that it's worth considering for your models.

Ross MacMillan

Yes. That's helpful. And yes, I just - I mean, I guess we should emphasize that that's a tough comp on the Q2 and you came in nicely ahead. So that's a great number to see.

Operator

And our next question comes from the line of Brad Sills with Bank of America Merrill Lynch.

Brad Sills

I just wanted to ask about the federal opportunity. Obviously, with the FedRAMP program now and the win that you've had, are you seeing a different competitive environment here? I guess the question is really what are these federal agencies running today, if anything? And is there an easier opportunity here to displace versus staying in the enterprise?

Sachin Gupta

Yes, hi, Brad. This is Sunny. So look, I think massive spend on federal government of $90 billion. We've talked about that a few times. I think the mandate from the government is very clear on reporting against the TBM taxonomy. But the mandate is not a law. A mandate does not mean that they - there are other mechanisms. So our efforts on - in the public sector are focused on converting the mandate into Apptio demand. And we saw a really nice progress against that in Q2.

Nothing is easy, if you will, as you know, in the public sector. So we have work to do, but from a competitive perspective, we are - we have a very solid, strong position. We have close to a couple dozen agencies already. We do expect deals to start smaller, even though we closed a large deal in the early part of Q2 and then, over time, grow.

And so the machine learning technology, which we delivered and showcased, and I was there a few weeks ago, to the agencies, I mean, it was really, really well-received because their data is in public systems and procurement systems, and we can really make it much easier for the federal agencies to deploy it.

So yes, we are excited. We definitely think public sector will be a growth driver for the business, but timing can certainly be unpredictable. And the last thing I would say is, coming into Q3, we feel good about kind of the early pipeline coming into federal government, and we continue to make incremental progress.

Brad Sills

That's great. And then one more, if I may, please. Any commentary you can provide on the mix of business in that high end of the market. I think you - I think it's the Global 1000. And then the next 10,000 below that, I know that, that segment below has been an increasing focus. Was it a balanced result in those two segments? Or how would you describe it?

Sachin Gupta

Yes, Brad. We saw a really balanced execution in both segments: the strategic, which is the top-tier accounts; and then the next Global 10,000, so that's where I was pleased. And we are - one of the dynamics is IT Financial Management. As I mentioned, we are seeing significant uptick in the - especially in the Global 10,000, the smaller customers. And that's - IT financial Management is certainly a leading application in those segments, but very balanced execution, and that's something we should be very pleased by.

Operator

And our next question comes from the line of Mark Murphy with JPMorgan.

Matt Coss

This is Matt Coss on for Mark Murphy. Can you talk about the potential to apply the TBM model to other national governments? And have you had any conversations with other public sector prospects outside the U.S.?

Sachin Gupta

Yes, hi. I can take this. This is Sunny again. So the short answer is yes. We've had, I would say, already some early success in a couple of other agencies and a couple of other governments, both in, I would say, some European markets, but also in the Asian market. So also, we've had some inbound interests, where some public sector agencies are taking notice of what the U.S. federal government is doing around TBM. And so we are getting kind of demand from that.

But with that said, I think our efforts, certainly in the short run, are very focused on serving the U.S. public sector and kind of really increasing our penetration. And the reason I'll say that is there tends to be different certification requirements as you start dealing with the different public sector agencies.

But even with that said, I think we are seeing success. I do believe Apptio and Technology Business Management is very applicable to every government agency around the world. So that remains a really good long-term growth driver for Apptio.

Matt Coss

And one for Kurt. Maybe help me check my math. If I look at the midpoint of your Q3 revenue guidance, I know that was sort of done year-to-date, it seems like, at least from my model, it seems like Q4, maybe the sequential growth in Q4, it is not going to be as strong. Is there anything we should think about for Q4? Is it - should we expect normal sequential growth patterns for that quarter?

Kurt Shintaffer

Yes. So I think I'd say we feel really good about where we put our guidance. We think that's - at this part of the year, it's the right way to think about how we're going to finish the year. We've got some growth in front of us that we want just to make sure that we execute on before we suggest that the business is going to grow at a different level.

The midpoint of our guidance for 2018 has subscription revenue growth of about 24%, which is something that we feel really good about. So I think your - the math that you're doing is right, and we're comfortable with that outlook on the business.

Operator

And our next question comes from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz

Kurt, I wanted to ask you - I see that you're raising the operating income guidance here this year. So you're feeling good about that. And then if I look at the numbers, even on the low end, it looks like the operating leverage is going to accelerate from last year. Now there is some 606 running around through that.

But I was just wondering if you could parse out the operating margin outperformance. How much is coming from expense synergies that you're seeing from Digital Fuel versus the outperformance such as coming from scaling the core business?

Kurt Shintaffer

Yes. Hey, Brian. So predominantly, the operating margin expansion we're seeing is coming from scaling of the core business. One of the things that we talked about reaching breakeven from a profitability perspective related to the Digital Fuel business as a standalone. We might do a little better than that based on how that business is trending. But it's really not what's driving the - our change in outlook for non-GAAP operating income for the year.

Brian Schwartz

Okay. And then one follow-up I had for you, Kurt, and then one for Sunny. It was just in terms of any impact from foreign currency, if there was any, either positive or negative impact in the quarter results or in the forward guidance you're issuing today.

Kurt Shintaffer

Yes. It was immaterial on both, immaterial on our impact - the impact in Q2 and not material enough to call it out as a factor in our guidance.

Brian Schwartz

Great. And then, Sunny, what I wanted just to ask you was just any update that you can share with us in terms of the channel, how that is growing and how that shape is coming. And specifically, maybe if you can give us an update in terms of the enablement of the VMware partnership and any other color that you could provide in regards to some of those larger system integrators that are building practices around Apptio.

Sachin Gupta

Yes. I would say, our traction in the large strategic system integrators continues to be really good. We had another really good quarter of that. And certainly, we are also seeing great leverage of system integrators coming into the public sector deals. As you would expect, in the large deals, most of customers have some strategic adviser which is engaged with the CIO or the CFO communities. So I think those individuals are becoming our champions and influencing Apptio as a very key driver, and we saw continued steady progress against that.

The other area where I think there is opportunity for Apptio is really in the Global 10,000, the smaller customers. Other companies have established reseller channels. While we are not there yet, but there is effort we are putting into, so it's very early days, but we think there is opportunity for us to create kind of additional leverage in that part.

And then the last question, on VMware, our relationship with VMware continues to be strong on the existing Digital Fuel customers. And also, number two, we are continuing to work and deepen the capabilities around the hybrid infrastructure stack because that's a very important use case, and a lot of those capabilities we've introduced into our Hybrid IT kind of package.

But a lot of that relationship today is centered around, I would say, the existing customers. And we'll continue to explore other go-to-market avenues to see if we can expand that a lot to new business, but that's more kind of - that's not like immediate, I would say. But very pleased with the relationship to date, now 2 quarters underneath our belt.

Operator

And our next question comes from the line of Jess Hulsing with Goldman Sachs.

Jess Hulsing

Sunny, question, how many of your new customers are coming from the TBM Council? And I guess, if you look at the total TBM membership, how penetrated are you right now?

Sachin Gupta

Yes. So maybe let me take the last question first, in terms of how penetrated are we in terms of - look, we have a - the TBM community is continuing to go - grow strong. And that's greater than 6,000 members, and that has a lot of different professionals across finance, infrastructure, CIO kind of community.

And that continues to be pretty strong for us. Now not all customers who are - not all people who are TBM Council members are Apptio customers. We have many customers who are not, so we're pretty underpenetrated,

I would say, from that perspective. And look, in terms of our lead flow, the TBM community certainly is a driver for deals coming in because that's a good way for us to educate the market in the need for TBM.

But I would say the real change in the momentum in the first half of the business has been, for us, really driving towards new logos through very discrete pain points like cloud, like financial management.

As we all know, like planning is a very strategic play - space, and IT Planning, everybody does budgeting, forecasting, actual management. So the more discrete pain points we target a customer, that's going to yield into good results from a new logo perspective, even more so than the TBM Council.

Jess Hulsing

That's fair. It makes sense. And then, Kurt, I'm wondering, the net retention, it looks like it hovered kind of in the same range that it has for the last couple of quarters. But as you sell into smaller deals and in some cases, smaller customers, how's gross dollar retention trending? Are you seeing any change there from historical levels?

Kurt Shintaffer

Yes. So as we transition from 100% net retention to 102% net retention, that really was the result of increases in both the upsell component and the gross piece. So as our net retention has trended up, we've seen positive trends on - in both metrics. We don't break it out specifically, but what I think you're seeing is the result of some of our - some of the operational work we've done around retaining our base customers, having an impact and as well as we have more time with this LAN-and-expand model under our belt. We're seeing that show through on the upsell metric. So it's really - it's the combination of both of those metrics that's moved.

Sachin Gupta

Yes, the one color I wanted to add onto that, what Kurt said is, look, I mean, if you take IT Financial Management, we have 4 quarters in, it's proving out to be a great LAN motion. And we really believe, in time, it will be a great LAN-and-expand motion.

We've already seen some early signs of success. The product deployed much faster. It's much sticky. And really, we believe that it will lead to much better lifetime customer value around those cohorts of customers. Obviously, it's a - a bulk of the customers, we really acquired in the last 6 months, so it's pretty small today. But from a long-term perspective, it gives us a lot of confidence.

Jess Hulsing

Yes. Yes. And then last one for me. And by my calculation, even if you adjust for some of the current acquisition and then onetime stuff, you're getting more efficient on the sales productivity front. Sunny, any plans to invest into that improving productivity? You've got more stuff for your salespeople to sell, and you're still a pretty small company. What's the plan for sales hiring over the next 12 months or so?

Sachin Gupta

Yes. So I think you're absolutely right. A big lever has been continuing to incrementally make our sales force more productive by smaller LAN packages and with continued traction, I would say, in the strategic segment.

So those have been all kind of drivers, which are leading to better productivity. And we believe this is the single-biggest lever we have, both for operating leverage, but also continued growth.

Those are the two vectors we are balancing. But I would say, at least for the near term, we are much more focused on just continuing to drive even more efficiency through our existing sales force and continuing to look at new opportunities, which are investment opportunities for us.

For example, that could be things like the public sector, that could be things like some emerging geographies in even the - even in Europe and Asia as well as looking at additional opportunities. So that's more likely where we're going to probably make some forward investments.

Operator

And our next question comes from the line of Raimo Lenschow with Barclays.

Mohit Gogia

It's Mohit Gogia on for Raimo. It seems like healthy execution across the board. So I wanted to just drill down on the Apptio for Hybrid IT. Apparently, it was just announced. So can you just discuss as to what the sales motion and the sales go-to-market do you expect around that part? Would you expect it to be focused on the lower end of the market, sort of more like an ITFM, where the sales cycle tends to be shorter? Or is it also sort of like the higher end of the market that you are trying to sell that to?

And the follow-up to that is from the - around the ITFM solution, for example, more focus, sort of like sales motion, focused on the different persona. Have you also seen customers that, initially, LAN with ITFM eventually move to your Cost Transparency and other sort of like more comprehensive solutions? Or is that something that you are sort of like still trying to figure out within the customer base?

Sachin Gupta

Yes. No, thank you. Those are great questions. So let me take the first one around Hybrid IT. Yes, so the best way to think about it is, if you think about our traditional offerings, right, which is really around Cost Transparency, Bill of IT, a lot of these offerings were, I would say, oriented towards the CIO, with the CFO and the Head of Infrastructure, playing a key role in the decision-making criteria.

Then we introduced the IT Financial Management offering, which is very much oriented around the IT, CFO, so more financial management for technology, and that's - we've seen great uptick. Similarly, if you think about our cloud and infrastructure, Hybrid - Apptio for Hybrid IT product, these are oriented towards the infrastructure by the Chief Technology Officer. So what I'm excited by is, now we have multiple LAN points and different discrete personas to start a conversation with a customer, we absolutely believe Cloud Cost Management or Hybrid IT are oriented towards both small customers as well as large customers.

Our existing large customers, I would say, already have license to some of those capabilities. So this is primarily for upsell into the smaller customers, also to drive net new logos through a different persona, like what we've done. And so this is a big - I mean, multi-cloud and Hybrid IT is something which we are very big on, but again, we've just released a product so we need some time to kind of prove out the volume on those products. In terms of your IT Financial Management and upsell questions, the short answer is yes.

It's still early days because most of the deals were acquired, as you know, in the last 6 months, even though we've been selling for the last 4 quarters. We really believe we've seen some upsells already happen towards our other suite of applications. The great part about IT Financial Management is that it has capabilities from planning, it has foundational capabilities from cost analytics.

So our entire product portfolio is available from an upsell perspective. We have seen customers buy Cost Transparency who started with IT Financial Management. We have seen customers buy Cloud Cost Management. We have seen customers buy additional planning modules.

And over time, we believe, the economics and the lifetime customer value from a basis point is going to be much better. But obviously, there's a lot of execution ahead of us to really prove it out in these cohorts of customers.

Mohit Gogia

Understood. That's very helpful, Sunny. And just a follow-up, a quick question for Kurt. So on the $1 million one-off impact on subscription this quarter, so I just want to make sure that this is not a pull-forward of deals from Q3 in the second half of the year because your guidance did go up by a beat on the high end this quarter. So the one-off is not the - it isn't about that, it's more about revenue recognition and all those things, right?

Kurt Shintaffer

That's exactly right. It's not a pull-forward of deals from Q3 into Q2.

Operator

[Operator Instructions] And our next question comes from the line of Greg McDowell with JMP Securities.

Greg McDowell

Just one question. I'm really curious about the conversion deal and was hoping to just get an update on your view on handling the Digital Fuel customers. Moving forward, how active are you in trying to convert those customers to the Apptio platform? And maybe just an update on sort of the integration road map between Apptio and Digital Fuel.

Sachin Gupta

Yes. So this is Sunny. I'll take that. Again, there are a few questions there, but let me just kind of take it one at a time. So number one, I would say, our focus as a business has been around retention, getting to know these customers. We have spent a lot of time. I personally have spent a lot of time. I have a direct report, who's the General Manager of this business, and basically, the #1 charter had been go get to know these customers deeply.

So I feel really good about the state of the customers as we exit Q2. So we made a lot of progress there. Our focus with them have been primarily to upsell and create an upsell pipeline. So we have the pipeline building, even though we are normally short around the timing a little bit, and we'll continue updating you. The conversion conversation has started with a handful of accounts as we would have expected. And the conversion conversation is, one, driven by value rather than by cost, if you will.

And we don't anticipate a whole lot of contribution from a conversion perspective for the second half of the year. So if something happens, that we would consider that to be an upside. And the integration road map has started, so the first step we took was bringing in a lot of the deep VMware integration capability into the Apptio Hybrid IT package.

So that part we've kind of completed. And we are - and this one specific deal which we've converted, from Digital Fuel SaaS to Apptio SaaS, that's gone really well. And we were able to uplift moderately the customer subscription, but they also will become a key advocate for us around the conversion because they saw value in the combined platform.

So again, I would say, early days on conversion. Don't expect too much for the remainder part of the year, but we should probably have some upsells to talk about, and then conversion becomes a bigger conversation as we go into '19.

But frankly, I think it may take us as longest, '20 or '21, right, when it is in full swing. But it's fair to say, look, it's a - we feel really good about the combined business. I mean, this was a - I think two quarters in, we call it a very successful acquisition for Apptio, and it's been really good and customers have reacted really well and VMware has reacted really well.

Operator

And at this time, we're not showing any further questions. I would now like to hand the call back over to management for any closing remarks.

Sachin Gupta

I think, at this time, we'd like to conclude the call. Thank you so much for joining us.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.