Cloudera, Inc. (CLDR) CEO Tom Reilly on Q3 2019 Results - Earnings Call Transcript

Dec. 05, 2018 10:23 PM ETCloudera, Inc. (CLDR)1 Comment
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Cloudera, Inc. (NYSE:CLDR) Q3 2019 Results Earnings Conference Call December 5, 2018 5:00 PM ET


Kevin Cook - VP, Corporate Development and IR

Tom Reilly - CEO

Mike Olson - Co-Founder, Chairman and Chief Strategy Officer

Jim Frankola - CFO


Tyler Radke - Citi

Daniel Ives - Wedbush

Michael Turits - Raymond James

Jack Andrews - Needham

Chad Bennett - Craig-Hallum

Karl Keirstead - Deutsche Bank

Mark Murphy - JP Morgan

Brad Reback - Stifel

Sanjit Singh - Morgan Stanley


Good afternoon. My name is Christine, and I will be your conference operator today. Welcome to the Cloudera Third Quarter Fiscal 2019 Quarterly Results Conference Call. All participants’ lines have been placed in a listen-only mode to prevent background noise. After the speakers' remarks, there will be an opportunity to ask questions. [Operator Instructions] Please note, this conference is being recorded.

Your host is Kevin Cook, VP, Corporate Development and Investor Relations. Kevin, you may begin your conference.

Kevin Cook

Thank you, Christine. Good afternoon and welcome to Cloudera's third quarter fiscal 2019 conference call. We will be discussing the results announced in our press release issued after market closed today. From Cloudera with me are Tom Reilly, Chief Executive Officer; Mike Olson, Co-Founder, Chairman and Chief Strategy Officer; and Jim Frankola, Chief Financial Officer.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the Company, including those as merged with Hortonworks. Generally, these statements are identified by the use of words such as expect, believe, anticipate, intend, and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in our annual report on Form 10-K, our quarterly report on Form 10-Q, and our other filings with the SEC, including a registration statement on Form S-4 containing a joint proxy statement and prospectus of Cloudera and Hortonworks.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude stock-based compensation expense and amortization of acquired intangible assets. In addition, we provide a non-GAAP weighted average share count for fiscal 2018. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, and we encourage you to consider all measures when analyzing Cloudera's performance.

Additionally, our commentary today and the guidance we provide are under existing accounting standard ASC 605. Note that guidance is provided for Cloudera on a standalone basis. For a complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today's press release regarding our third quarter fiscal 2019 results. The press release will also be furnished to the SEC as part of a Form 8-K.

In addition, please note that the date of this conference call is December 5, 2018, and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

Now, I'll turn the call over to Tom Reilly.

Tom Reilly

Hello, everyone. Thank you for joining us to discuss our third quarter fiscal 2019 financial performance. I recognize today is very special, the national day of mourning for President Bush. Our thoughts and prayers are with the Bush family and the nation. Considering the markets are closed today, in honor of this special memory, I appreciate all of you joining us for this call.

I will quickly review Q3 results Cloudera standalone and then update you on our proposed merger with Hortonworks, our combined company strategy, and the progress we're making in integration planning.

Remember that the transaction was announced on October 3 in the midst of our third quarter. Despite this major development and all the groundwork we had to lay for the merger, we remained focused and executed well to deliver strong results in the quarter.

Total revenue for the third quarter was $118 million, representing year-over-year growth of 25%. Subscription software revenue grew 28% year-over-year. Recall that we are very focused on driving expansions at our existing customers and acquiring new customers in our target market. The sum of existing customers graduating to greater than $100,000 of annual recurring revenue and new customers beginning with annual recurring revenue above $100,000 is our measure of new business activity. We increased this number by 33 in the quarter for a total of 601 customers with more than $100,000 of ARR at the conclusion of Q3. Reflecting the significance of this measure, these 601 customers represented more than 90% of software revenue in the quarter.

While much of our focus is on long-term strategy and merger planning, it is reassuring to see continued favorable results from the go-to-market changes we initiated a few quarters ago. We added 63 new customers in Q3, predominantly in our target market. Increasingly, our new customer wins are being driven by our hybrid cloud offerings. We've noted from customer engagements the past few quarters that there is little interest in a public cloud versus on-premises deployment debate. Instead, the hybrid cloud and avoidance of cloud lock-in themes are amplified. Customers are demanding hybrid and multi-cloud capability, and our competitive advantages here are evident in their decision making.

Reinforcing our hybrid cloud strategy, even our partner AWS announced an on-premises appliance [ph] last week to drive -- to address the hybrid cloud expectations of large enterprises. Given our years of investment in both hybrid and multi-cloud capabilities, we have a strong competitive advantage in this rapidly evolving market.

Furthermore, the customer wins in our target market reinforce our field and go-to-market transformation efforts initiated earlier this year to drive strong net expansion rates. Existing customers continue to renew and expand, contributing to an expansion rate for Q3 of 127%. Workloads in the cloud as measured by instance hours are outpacing this growth. In all, we are pleased with our execution in the quarter.

Of course, the big news in Q3 was our announced plan to merge with Hortonworks. Each day, we get more excited to bring these complementary businesses together. Having received early termination of the antitrust waiting period and having filed our joint proxy statement with Hortonworks, we and Hortonworks plan to hold our respective shareholder meetings to vote on the proposed merger later this month with the completion of the merger to follow soon thereafter. If the closing occurs as planned, we'll complete the transaction ahead of schedule in less than 90 days.

I will now spend a few moments to review the strategic rationale for the combination and update you on our progress with respect to integration planning. As you can see in our S-4 registration statement, this is a transaction that Rob Bearden, CEO of Hortonworks, and I’ve been considering discussing for several years now. It is a natural alignment and it’s always made great business sense. The deal is highly strategic and will position the combined company for enhanced innovation, market expansion, and sustained long-term growth. It is about achieving the scale needed to compete with a new class of competitors and to service the ever-changing needs of some of the world's most demanding organizations. As a combined company, powered by open source innovation, we'll have the scale and the skills required for market leadership and to capture market growth.

To keep things simple, you can think about the merger rationale in two broad buckets. The first is innovation and growth, and the second is market leadership and financial synergies.

Let's talk innovation and growth. The combination of Cloudera and Hortonworks will fuel innovation at a greater rate and pace than we could have achieved as standalone companies. The new Cloudera will have the scale, resources, and talent to do more and do it faster. Our significant investments in engineers and committers to work with the open source community will enable us to innovate on key technologies ranging from real time streaming at the edge to an enterprise grade cloud native data warehouse and a new platform to industrialize AI, all delivering the industry's first enterprise data cloud.

The enterprise data cloud is the embodiment of our shared, cloud everywhere vision. Together, we plan to accelerate our cloud competitiveness and innovation, delivering the only data and analytics offering that is both hybrid and multi-cloud, supporting all five major public cloud vendors; AWS, Azure, Google, IBM, and Oracle. We aim to bring the right data analytics to data anywhere the enterprise needs to work.

The emergence of new open source standards, including Kubernetes and container technology, will play a significant role in the strategy, enabling the separation of computing storage and cloud-like architectures that customers can run anywhere. In fact, earlier today, at the AI Summit, we announced the preview of our next generation cloud native machine learning platform, powered by Kubernetes. Cloudera Machine Learning will deliver fast provisioning and auto scaling as well as containerized, distributed processing across multiple cloud environments.

As one company, we will also spark new growth by investing in a unified platform that spans the edge to AI, broadening the breadth of use cases we support in expanding the markets we serve. We’ll blend the strongest elements of each company's technology in this new platform and cross-sell the products that have represented competitive advantage for our respective companies.

In recent years, we have each invested in differentiated yet complementary areas. Hortonworks has invested in real time streaming and data ingest to support IoT use cases at the edge. Likewise, Cloudera has invested heavily in machine learning and AI to empower data scientists with the state of art tooling to automate machine learning workflows. The new Cloudera will become the only player to offer a complete solution from the edge to AI, increasingly use cases enable, expanding our addressable market and then locking great cross-sell opportunities.

Specifically, soon after our merger, we plan to sell Hortonworks edge offering, HDF, or Hortonworks DataFlow, to existing Cloudera customers. We plan to sell Cloudera Data Science Workbench to existing Hortonworks customers. These are the first and many cross-sell opportunities we have identified.

Okay. Now, let’s discuss bucket number two, market leadership and financial synergies. The combination of Cloudera and Hortonworks creates a clear market leader in industry standard for a modern data platform, producing significant advantages for customers and partners. Establishing the industry standard minimizes risk and improves clarity for customers. It simplifies customers’ evaluation processes and speeds decision making. The standard also focuses the open source communities’ innovative efforts.

In terms of the partner ecosystem, a standard streamlines go-to-market and development efforts. Partners have had a split resources and focus between our two platforms. Now, our partners will be able to commit more resources to the relationship and concentrate their investments in a unified platform. For example, we expect to enhance and expand our partnerships with the public cloud providers as we bring more enterprise customers with production workloads to their platforms.

Last but certainly not least, significant financial synergies produced by merging the two companies. We expect to generate substantially more cash in a shorter timeframe than if we have remained independent companies. We will also accelerate achievement of our long-term target model. Although the merger will generate large cost savings, it is important to note that we intend to invest some of those savings into enhanced go-to-market capabilities and the technological innovations mentioned previously.

So, in summary, the merger will deliver accelerated innovation growth and established clear market leadership. The strategic merit and financial benefits are apparent. While merging two companies is hard work, it has been really encouraging to have our plans validated by countless customers and partners since announcing the merger. This outpouring of support from our respective customers and partners reinforces the industrial logic of the merger. It also makes Rob and I wish we had found a way to join forces sooner. Perhaps the greatest area of enthusiasm has been around our new product roadmap. Customers love the idea of an enterprise data cloud that supports both hybrid and multi-cloud implementations with use cases that span from the edge to AI.

They also appreciate that much of our software from the two companies is common open source and also complementary code, thereby making our job as integrating the two platforms easier and less risky. Our customers also appreciate the glide path that we've created for them. And to-date we've seen no change in purchasing habits. As most of you are aware, Cloudera and Hortonworks are prohibited from operating as one company until the merger is closed. However, during this pre-closing period, we have made tremendous progress in planning post-merger integration, and many of our critical integration decisions have been made. We have consultants from top professional services firms, helping us get the planning and execution right. We also have a joint steering committee, integration management office and functional integration teams dedicated to merger integration.

My sincere thanks to all the individuals from both Hortonworks and Cloudera for their cooperation and commitment to achieving our shared vision for the new company.

Our merger integration teams are working extremely well together and are ahead of schedule. Here's a quick update on some of the concrete steps we’re taking in a pre-close merger, integration planning. Every business function has created their integration plans. This will enable a fast start to capturing the expected merger benefits.

The engineering and product teams have already agreed on our joint product vision and roadmap. We have independently completed the engineering works to ensure that soon after the merger closes, Cloudera Data Science Workbench, and Hortonworks DataFlow offerings will function with each other's platforms and can be cross-sold.

We have validated our specific cost synergy assumptions by functional area, and believe that we have identified the potential for even greater synergy than assumed, which we intend to reinvest in high growth areas including Hybrid Cloud, Machine Learning, IoT and Edge.

I could not be more pleased by the substantial work that has been done to date and the reception that our plan is receiving the market from our partner network. After working on integration planning for more than 60 days, so ultimately, [ph] is that our companies are more similar than we had appreciated.

Culturally, we share the same commitment to open source software, innovation and customer success. As we've highlighted in the past, our product roadmap and technology vision for the future are nearly identical.

Our go-to-market strategies, sales, channel and partnerships are the same. We are impressed at how well aligned we are already. We target similar customers with similar technology in a similar way. The things that differentiate us are mostly relative strengths that we want to preserve in the combined company for competitive advantage and customer benefit.

And on the practical front, integration is aided by both companies being headquartered in Silicon Valley and each was having development and support centers in both Hungary and India. This makes integration easier and increase the ability to capture more surgeries earlier. As the customers, we have very little overlap among our combined customer base with fewer than 5% of all customers in common.

This is enlarges t our opportunity, reduces the potential for disruption and sales motion and simplifies the assignments of account executives.

On the whole, we are happy with the integration planning and particularly feedback on our plans from ecosystem customers, partners and developers. To make sure there's plenty of work to do, but the challenges with integration that technology companies typically face are less apparent here.

Now, I'd like to ask Jim to provide more detailed on financial update. Please, Jim.

Jim Frankola

Thanks, Tom. Hello, everyone.

Across the board, we had another good quarter in Q3. Subscription software revenue was $100 million for the third quarter, an increase of 28% year-over-year. In total, revenue was $118 million for the third quarter, representing 25% growth over a year-ago period. Given that our merger announcement occurred mid-quarter, we are very satisfied with our execution in the face of this news.

Some highlights this past quarter, we increased by 33 in number of customers who started at or have grown to more than $100,000 of annual recurring revenue, bringing the total to 601 customers in this class. As of Q3, we had 74 customers with more than $1 million ARR, representing 52% of software revenue.

Finally, our net expansion rate in Q3 held relatively steady at 127%. Collectively, these measures reflect our ability to both acquire target customers and advance customers along a journey toward increasingly attractive unit economics. As I review the remainder of the income statement, note that unless otherwise stated, all references to expenses and operating results are on a non-GAAP basis. Historical non-GAAP results are reconciled to GAAP results in the press release issued earlier today.

Cloudera’s continued focus on operational efficiency was reflected in Q3 results as margins and expenses improved in nearly every respect. In particular, expenses were much better than expected. In anticipation of the leverage that the merger provides, we slowed hiring in areas that will be impacted by the merger and have gotten a fast start on achieving our cost savings target. Total gross margin for Q3 was 79% compared to 73% in Q3 of last year. This is driven by subscription gross margin of 89%, up from 86% a year ago.

As to operating expenses, sales and marketing expense was $49 million for the third quarter or 42% of total revenue. This compares to 57% of total revenue in the year-ago period. Research and development was $30 million for the third quarter or 25% of total revenue, improved from 31% a year ago. G&A was $18 million for the third quarter or 15% of total revenue versus 12% of total revenue in Q3 of last year. This increase was driven by $6 million of merger-related costs. Excluding these costs, G&A would have been 10% of revenue, better than a year-ago.

Overall, operating loss was $4 million in Q3, representing a negative operating margin of 3%. This was a substantial improvement of more than 22 percentage points compared to the year ago period. Loss per share was $0.03 in the third quarter, based on 152 million weighted average shares outstanding compared to a loss for share of $0.17 in the third quarter of fiscal 2018.

Please review the financial statements tables in today’s press release for additional information regarding historical and forward-looking stock-based compensation expense and shares outstanding.

Now, turning to the balance sheet and cash flow. We exited Q3 with $453 million in cash, cash equivalents, marketable securities and restricted cash. Operating cash flow for the third quarter was negative $7 million which includes $6 million of merger-related spending. Cash flow performance was better than expected due to strong collections and early achievement of the merger-related savings. Year-to-date, operating cash flow was negative $6 million compared to negative $20 million in the first three quarters of fiscal 2018. These results have us on track to meet our standalone company goals of being operating cash flow positive in Q1 of 2020 and for the full fiscal year 2020.

Capital expenditures were $2 million in the quarter. Total deferred revenue was $277 million at the end of the third quarter, up 19% year-over-year. Short-term deferred revenue was $243 million, up 23% year-over-year.

I will conclude by providing initial guidance for fiscal Q4 and updated guidance for fiscal 2019. Note that the guidance is provided for Cloudera on a standalone basis. We intend to provide guidance for the combined company after closing the merger and completion of Cloudera's fiscal fourth quarter.

We expect Q4 total revenue to be between $119 million and $120 million, representing approximately 17% growth compared to Q4 last year with subscription software revenue in the range of $101 million to $103 million, up approximately 21% year-over-year. Net loss per share its projected to be $0.12 to $0.10 based on 155 million weighted average shares outstanding.

For the fiscal year 2019, we expect total revenue to be between $450 million and $453 million, representing approximately 23% growth compared to fiscal year 2018 with subscription software revenue in the range of $380 million to $382 million, up approximately 20% -- sorry, up approximately 27% year-over-year. Net loss per share is projected to be $0.40 to $0.38 based on 151 million weighted average shares outstanding. We expect operating cash flow for this year to be negative $25 million to negative $20 million. Note that operating cash flow projections for fiscal 2019 include approximately $12 million of Q3 and Q4 expenses related to the announcement of and planning for the merger. Upon closing of the merger, there will be additional costs, which may be incurred as early as January 2019. These additional costs have not been included in our operating cash flow forecast for fiscal 2019.

To summarize, not only did we execute well on our standalone business, but we made a surprising amount of progress on the merger. By limiting hiring to areas that directly support growth, we have achieved more than 20% of merger synergies before the deal has closed. This combination of solid execution and focused hiring is driving our finance results for the year.

With that I'll turn -- return the call to Tom for some concluding remarks.

Tom Reilly

Thank you, Jim. Just a few thoughts before we take questions. We're really pleased with execution in Q3 and more importantly, in a strategic combination that we've announced with Hortonworks. Planning and pre-closing merger-integration work is going very well. All of us are encouraged by how the combined company will position in the next generation data management market. As one company, we will provide a comprehensive solution set for customers from the edge to AI, and accelerate our momentum in cloud innovation.

I'm sure, there may be tip note of IBM’s announced acquisition of Red Hat. Of course, the move by IBM underscores the importance of open source software as strategic data center technology. But the real significance of the deal from an industry point of view is its reinforcement of the macro trend towards hybrid and private cloud environments. This is the enterprise data cloud concept, a public cloud experience at the edge, in the data center, in private cloud, on-premises and of course across multiple public clouds, cloud everywhere. I’m especially looking forward to leveraging Hortonworks’ strategic partnership with IBM to take advantage of their Red Hat investments.

As soon as our merger closes, we will be the only next generation data management company to run across all major public cloud infrastructure. Amazon Web Services, Azure, Google, IBM and Oracle. We believe that operating across all clouds while also offering a public cloud experience everywhere, what we call the enterprise data cloud, is a powerful competitive advantage because it is what enterprises expect.

The team and I are grateful to our customers, our employees, our developer community, our partners, and of course to our investors. Thank you all for joining us on this special day. Operator, this is a great time for us to begin the Q&A portion of the call. Thank you.

Question-and-Answer Session


[Operator instructions] Your first question comes from line of Tyler Radke from Citi. Your line is open.

Tyler Radke

Thank you. Good evening, gentlemen. My first question, I was just hoping you could walk us through the outlook for Q4, especially as I look at net expansion rates, which came in at a 127%, which is pretty strong. And it looks like you're adding a healthy amount of new customers as well. So, I'm just curious why revenue growth would be below 20% in 2019 or subscription revenue growth I guess is around 21%? It just seems like the combination of customer additions and mid-to-high 20s net expansion rate would support higher growth.

Jim Frankola

Yes. Thanks, Tyler. This is Jim. Recall that net expansion rate is a lagging measure and that we initiated a go-to-market transformation earlier this year. So, we anticipated disruption in the first part of the year in bookings which we saw. It takes a while for those -- that disruption in bookings to be reflected in revenue. So, what you have reflected in our Q4 revenue guidance is the result of the transactions that we did in the first part of the year. It's basically that simple.

Tyler Radke

Okay. And I guess, where would you expect those to trough out? I think you originally said in the low 120s. Is that still your expectation?

Jim Frankola

Yes. That’s still the expectation. Once again, when you look at net expansion rate, it's helpful to look in an annual context. So, our guide for revenue for the year is 27% growth in software revenue, which is actually I think about 3 percentage points higher than our initial guidance for the year. So, the year has turned out to be better than we initially expected. So, of those 27 percentage points of growth, let's call roughly 5, 6 percentage points will come from new customers added over the course a year. So, therefore, call it, some number in the low 20s, 20, 21, 22, will come from our existing customers. And it's not a perfect correlation between that number and net expansion rate, but it's pretty good. So, that's the guidance that we gave earlier in the year. That's where we are today. I think, early in the year, I was expecting net expansion rate to trough out in the high 1 teens, like 118, 119. Obviously, it looks like it will be a little bit better than that.

Tyler Radke

Great. And then, if I could sneak one more in. Maybe just so as you think about heading into FY20, obviously you will be a combined company. But, just how you're thinking about execution and kind of return to growth now that you have the strategy laid out and the new Head of Sales and everything?

Tom Reilly

Tyler, this is Tom. I'll start with that and Jim might have further thoughts. So, one, I'm very pleased with our new Head of Sales, who has joined Cloudera. I'm excited that we are early in identifying revenue synergies from the merger. Those will come from immediately on almost day one, our cross-sell capabilities, we mentioned a couple during the call. We've already identified some that can follow in the subsequent quarters. And then the innovation that we're going to drive, especially around our enterprise data cloud strategy is going to be a strong differentiator. We think the market is moving towards us from it just being a public cloud versus on-premise to enterprises realizing that they want a hybrid multi-cloud strategy. So, all of this gives me great confidence that we see continued strong growth.


Your next question comes from the line of Daniel Ives from Wedbush. Your line is open.

Daniel Ives

Just to confirm, just you’re maintaining your targets on the combined company you gave when you announced the deal? Because I’m getting a few questions from investors, just to confirm.

Jim Frankola

I'm not sure I heard the question. If the question is when will we be releasing guidance and updating our model for the combined company, it will not be until we obviously close the transaction and close our Q4 business, because obviously Q4 is by far the biggest quarter of our year. That is what will allow us to set the guidance for fiscal year ‘20. So, we'll do it after our Q4 results are in.

Daniel Ives

Okay. And just the last question. So, you're maintaining the targets that you’d be on the combined company when you announced the deal, I just want to confirm that?

Jim Frankola

Yes. So, let me start with that and then I’ll let Tom take over. When we announced the deal, what I'll say is, we didn't issue guidance or targets. We wanted to describe what the profile of the company would look like. And as a combined entity, in fiscal year ‘21 or calendar year ‘20, we said that we would be more than $1 billion of revenue, growing faster than 20% a year with more than a 15% operating cash flow margin. There are literally only a handful of enterprise companies that fit that profile, and the companies that fit that profile are attacking large markets with disruptive technology and are well-managed.

Now, that does not mean we’re guiding to $1 billion of revenue, we're guiding to more than $1 billion of revenue. Exactly what that's going to be, we’ll have much better insight but then we’d need to close Q4. I need to understand how much of a deferred revenue haircut we will be taking on the Hortonworks revenue. So, don't take that as a guidance, take that as a profile of the type of company we will be.

Daniel Ives

Thanks for the clarity.


Your next question comes from the line of Michael Turits from Raymond James. Your line is open.

Michael Turits

Hey, guys. Good evening. It looks like very strong numbers in all respects. The billings number, Jim, I know not your favorite, was a growth rate of about 16% in the short-term, I calculated around 10%. So, you commented that bookings were weaker in the first half of the year. Are bookings still weak and should I think that 16% as more like a bookings number? And the broader context in which I ask that is what’s going on in terms of demand for on-premise, Hadoop? And as you probably know, another data management company talked about deceleration is on-premise, Hadoop demand to less than 20% this year and flat bookings next year. So, I was wondering if you could, as I said, comment on that mid teens billings number, and should we be concerned that that's an indication that that other companies thoughts about on-premise, Hadoop deceleration are correct?

Jim Frankola

Yes. We're going to break that question up in two pieces. What I’ll say is -- I am not going get on my fill box on billings, other than to say, it’s not a great measure on a quarterly basis. If you were to look at our trailing 12 months total billings, they’re up, I think about 80% year-over-year. We are seeing shorter contract durations and more importantly shorter billings durations. So, in fiscal year ‘17 and ‘18, our average billing duration was a little bit over 14 months; in Q3, it was 13 months. So, we’re getting closer and closer to upfront annual payment terms. So, that will be a drag on billings growth relative to bookings and revenue growth. But, then, with that said, If you compare that 18% growth in billings on a trailing 12-month basis, compared to our revenue guidance in Q4, compared to our growth in deferred revenue, short-term deferred revenue, all those numbers converge in roughly around 20. So, what you’re seeing here is a business that is positioned to grow roughly 20%, a little bit faster than on software come Q4. And clearly post Q4 is where we’re looking to see the benefits on a standalone basis of the go-to-market transition. And then, obviously, we’re going to accelerate that with the merger with Hortonworks. I’ll turn over it to Tom talk about the second part of your question.

Tom Reilly

Michael, good to hear your voice. Thank you for the question. And I know that another Michael, a CEO of one of our peer companies, made some comments about on-premises Hadoop slowing down. I don’t want to disagree with him. There’s some validity to what he says. But here’s a couple things I’d like to share with you. First off, we don’t view ourselves as an on-premise Hadoop customer -- or provider. Our capabilities have gone way beyond what it was traditionally called Hadoop. Our value proposition is managing data across multiple data stores, including cloud storage buckets and on-premise environments. And we do see traditional bare metal deployment slowing down, because customers want to move workloads to private cloud and public cloud, what we call the enterprise data cloud, and we are capturing those workloads.

So, as I said, the discussion no longer is it bare metal on-premise, our customers want cloud capabilities. And they want that cloud capabilities in most areas. They want it in the private cloud, and they want it across multiple public cloud players. No longer they just -- they want to avoid cloud lock-in, they’re not betting on just one public cloud provider. And Cloudera is in a very unique competitive position to capture the market growth where the market is headed. So, I hope that provides some clarity on the other Michael’s comments in his earnings call.

Michael Turits

Great. Thanks, Tom and Jim. I guess my follow-up in the same line of question. So, Jim, you just basically 20% of real economic growth in the fourth quarter. You’ve said over 20% growth combined companies in fiscal ‘20. You haven’t talked about the intervening years yet. But, I’d say, let’s just say, since the guide of over 20% that you gave on the merger call, and given some of those inputs that -- from that other management company in the quarters trend, any diminution at all in your confidence in those kinds of growth profiles?

Jim Frankola

I mean, from my standpoint, everything that I see, gives us conference -- I'll back it up for our long-term. Way back in -- we went through IPO, we noted that our net expansion rates in our customer set range between 120 and 150. And where we are today, we’re still above 120. More importantly, when we look at our target customer set, the G2K and companies like that, their net expansion rates continue to be well above that 120. So, as we are executing this go-to market transformation of which part of it is a refined target market, I see that as something that's going to help our net expansion rates over time. Clearly, everything that we see happening with the merger with Hortonworks, the ability to cross-sell product, I don’t need to go through the whole pinch of innovation and cloud and so forth. All of that will be a tailwind for positive growth in net expansion rates.

Now, we don't know exactly how much it will be. We also understand as we execute the merger for the first few months we got to bring two companies together. That's why we want to get past the merger close, get Q4 results under our belt before we give more guidance on both fiscal year ‘20 as well as the longer term business model, which I think would include fiscal year ‘21.


The next question comes from the line of Jack Andrews from Needham. Your line is open.

Jack Andrews

Good afternoon. Thanks for taking my question. I was wondering if you could rank order, either in terms of specific partner names or maybe just categories or partners. Who's most excited about this merger and maybe who has the most questions around it?

Tom Reilly

This is Tom. Good question, Jack. I haven’t thought it like in the rank order. But, let me go through who -- for most part, all partners are very excited. So, each of Hortonworks and Cloudera had over 3,000 partners in our programs, and they were complete overlap, say for two partners. And so, when you talk to the GSIs, they're very ecstatic because the GSIs have to invest skills, they have to train their teams, they're building solutions on top of the platforms. So, they like seeing industry standard emerge and have one platform I think they write to and it satisfies all the customers that they talk to.

The next one are the ISVs. So, we at Cloudera over 500 ISVs in our program. These ISVs all have to integrate their software to two platforms today. Quickly next year and as we deliver our first combined platform, they only have to integrate to one platform. That's going to make those integrations tighter. Now, customers benefit from both those things, SIs with better skills and deeper domain on one platform and ISVs that have done a better job of integrating.

Finally, we have been -- both Hortonworks and Cloudera have had a focus of bringing large enterprise customers in their workloads to the cloud platform, to public cloud platforms. In particular today, Amazon, Microsoft and to a degree Google, these partners have all expressed excitement about our merger because they too don't have to spread their time between two firms, two different sales forces that are competing. They want to put their energy behind us and help accelerate those migrations to their platforms as well.

And then, finally, I've always been envious of the work that Hortonworks has done with IBM. I'm pleased that IBM is very excited about this partnership. And we are going to embrace that partnership and take it to the next level. And finally, I certainly believe that my colleagues at Hortonworks are excited about the relationship with Intel and the strategic work that we've been doing there. But I can attest that Intel is also very excited about this merger because it helps them get more optimization upstream towards for their platform. So, Jack, I can't identified any partners to date that have expressed concerns, nor have I come across any customers that have expressed concerns. In fact, we're almost receiving lots of great momentum and support to bring two companies together.

Jack Andrews

Okay. I really appreciate that detail. If I could just ask a quick follow-up, Tom. I was wondering if you could drill down on the impact of this merger as it relates to the strategy you got lined at your Analyst Day, which was specifically around taking market share in the data warehouse segment, whether that kind of strategy is still intact in terms of the combined company or how you're thinking about what that particular initiative that you outlined several months ago?

Tom Reilly

Thank you, Jack. That strategy and initiative is alive, well, and growing extremely well. So, basically, SQL, capabilities on our platform are maturing very rapidly and customers are moving increasingly more workloads from traditional data warehouses to this platform. Our Altus Data Warehouse is particularly designed to capture these migrations that want to move to the cloud where you see a company like Snowflake or Amazon Redshift traditionally serving those cloud markets. But, we have strong competitive advantages in data warehousing. So, first and foremost, we offer the only data warehouse that combines both SQL and machine learning against the shared data experience, none of the other players are doing that today.

Secondly, we offer it in a hybrid fashion. We can do it both on-premise or in the public cloud and increasingly you want to do both if you're managing a migration. So, that's very powerful. And then, we can get technical, but we have years and years of experience of doing this at great scale. And so, we're bringing those years of experience to bear. We believe data warehouse workloads are naturally going to land on our platform, and we're well positioned to capture those.


Your next question comes from the line of Chad Bennett from Craig-Hallum. Your line is open.

Chad Bennett

Great. Thanks for taking my questions. Real quick probably for Jim. Jim, I think last quarter you talked about or at least gave a metric around initial deal sizes, considering the change in the go-to-market. Any update there? I guess, I didn't hear it this quarter.

Jim Frankola

This quarter, our initial deal size was much closer to historical average. As you'd expect that tends to bounce around quarter-to-quarter. We tend to want to focus on customers that ran at high -- greater than $100,000 of ARR or expand more than 100,000 of ARR. That's really our measure of a true new customer and engagement. Once again, this quarter, we did 33, up from 30 last quarter; we're pleased with our progress in landing and expanding customers at that greater than $100,000 level.

Chad Bennett

Okay. And then, for Tom, going back to the merger targets for 2020, if I'm hearing you correctly on your kind of pre-close integration execution here, revenue synergies, you believe you're already seeing or -- in terms of potential, and you've made headway in terms of HDF being capable to the Cloudera base and Data Science Workbench to that Hortonworks space. I don't believe revenue synergies were factored in that 1 billion plus or any meaningful revenue synergies in that 1 billion plus target. And then, secondly, you talked about financial cost synergies, so to speak, being ahead of plan, albeit you likely will reinvest that. So, I just want to make sure, in light of what you said on October 3rd to what you’re saying today, it seems to me that not only is that 2020 framework solid, but you potentially are ahead of the game there. Am I characterizing it correct?

Tom Reilly

Chad, I think there’s a lot to what you’re saying. It is true that our business case had no revenue synergies assumed. In fact, there are some energies expected. But, I will tell you, I am encouraged as how our teams are coming together. I’m encouraged of the little bit of a small overlap between our customer basis. I am encouraged by the fact that because we both have our platforms in open source, each for our teams, independently we’re able to test our cross sell opportunities now and get them ready for early -- since we announced this merger and close it. We’re going to show up at each our respective customers and give them capability that didn’t exist pre-close. So, I’m very encouraged.

I’m not in a position to say are there -- what we think was those revenue synergies are. But, I’m very encouraged with our opportunities to drive growth. And we do expect to have many more resources and opportunities to invest in growth. Our roadmap that we are laying out. At the time, we had that same -- we talked about strategy, we talked about our hybrid cloud roadmap that we were going to deliver independently. Hortonworks had a separate cloud [ph] they’re delivering. Together with the synergy we found in engineering overlap, we’re accelerating the delivery of that to the point now where we’re actually talking to customers about the capabilities that they will be receiving quite quickly. So, I’m encouraged is how I would frame it Chad. And I think by the time, Jim’s prepared after our Q4s and look at the plans to give guidance, I think, he’ll be able to deliver more accurate prediction there.

Chad Bennett

And then, just maybe one real quick, if I could. Tom, I believe you mentioned in the net new customer adds in the quarter, how well the hybrid architecture or pitch is going. Can you just provide more color on how -- I think the big trepidation here is, net new is going to kind of fall off a map, because they’re just going to bypass you and move straight to the cloud guys. Just kind of any color on how you’re winning deals and how the hybrid pitch is resonating, more details?

Tom Reilly

Chad, I’ll be -- let me get specific to help you here. So, what I said in my prepared remarks is the market is moving in our direction. If you look two years ago, enterprises were trying to figure out what this public cloud thing was. And they were spending time with the AWSs of world understanding those platforms and going right to public cloud. Large enterprises have moved to the public cloud just two years ago are wanting to move off public cloud. They do not like the cost, they do not like the lock-in that it poses; they certainly are stuck with one public cloud provider, all that they have to offer.

And so, they’re moving workloads back into private cloud or across multiple clouds to avoid that lock-in and have leverage over those infrastructure costs. When we hear from customers, public cloud is just the new hardware for them. If a complete stack was going to win the market, then Oracle plus Sun would have won long time ago in a data center. It’s not what customers want. They want the flexibility and they want this hybrid enterprise cloud capability.

Now, I'll talk, in the quarter, we won 63 new customers. Customers are coming to our platform, all of them are evaluating cloud, and it's our hybrid cloud capabilities are winning. Here's -- I'll give you the caliber of some names that we’re allowed to share. Indonesia's largest motorcycle manufacturer Astra’s Honda Motor, selected us for our cloud capabilities. Tufts Health Plan selected us in a competitive battle for our cloud capabilities. Mizuho Securities, here in the USA, a very conservative company, selected us for our cloud capabilities. In Michigan with our largest utility DTE Energy selected us for our cloud capabilities. These are new wins. I’ve got an equally long list of existing large enterprise customers that moved workloads to the cloud with Cloudera. And so, it is -- we are uniquely positioned to run where our customers want to run and give them a lot of flexibility.


Your next question comes from the line of Karl Keirstead from Deutsche Bank. Your line is open.

Karl Keirstead

Thank you. Maybe this question is for Jim. Jim, one of the takes from this calls for me anyway is that it feels like the costs of synergies are being realized faster than at least I expected. And so, I just wanted to return to your initial target for $125 million in annual cost synergies in calendar ‘19 or fiscal ‘20. Initially, when you gave that number, I would have assumed that perhaps in terms of the weighting first half ’19, second half ‘19, the cost synergies might be a little bit more weighted to the second half as it takes some time to execute on them. But, given the pace at which you are realizing these cost synergies, I'm now wondering whether those savings might land a little bit more in the first half. Any thoughts on how they'll be realized throughout the year, given the outperformance this past quarter? Thank you.

Jim Frankola

Yes. So, Karl, since I didn’t give any guidance on the quarter utilization [ph] of that, I'm not going to update my lack of guidance. What I will do is, is say that directionally what you're hearing from us is that as we've gotten into the merger planning, I’ll echo some of Tom’s comments, we are more alike than dissimilar, as one of the executives who's actively engaged in this process on a daily basis, the teams are working extremely well together. They are planning with the idea of the combined entity and optimizing for it. And because of that, decisions on our overall being made faster than what I've seen in the past. And I've done big acquisitions at IBM, I've done mergers of equals before in software companies. By far, this is going faster and better than anything I've ever been associated with. So, yes, whatever savings that you probably were assuming that we would get, we're probably going to get a little bit faster because so far the merger planning process is going extremely well. We're not done. There's always the chance for surprise, but we really like what we see so far.


Your next question comes from a line Rishi Jaluria from D.A. Davidson. Your line is open.

Unidentified Analyst

Hi, guys. This is actually, Hannah [ph] on for Rishi. Thanks for taking my questions. I was wondering if you could comment on the international traction you've seen this quarter, and if there have been any regions that have outperformed?

Tom Reilly

This is Tom. I will -- since I just returned from Southeast Asia, I'm kind of attuned to it. But, I'm very, very pleased with Southeast Asia's performance. And our international markets continue to be our strongest growing markets, led by Asia and then followed by Europe. And what we saw is basically 49% year-over-year growth in our international market. So, a very, very strong market for us and one that we are well-positioned, and one that the combined entity is going to be very strong in.

Unidentified Analyst

Perfect, thanks. And then, second question, I know you recently hired a Head of Sales, and I was wondering in the near-term, what the top priority for him will be?

Tom Reilly

Yes. So, our new Head of Sales, wonderful, wonderful individual, and he’s having a great impact. I always chuckle because he joined us two days before our merger was announced. So, we had a nice welcome party. His top priority is following through on the transition that we began three quarters ago, which was intended to continued our strong net expansion rate growth and focusing in on driving customer expansions and also building out our channel. And so, he's hit the ground running. What I find exciting is that a lot of the learnings that Cloudera has invested in over the last few quarters in understanding how to drive expansion, what's our target market, and how leverage channel is going to be directly applicable to the expanded customer base we have with our colleagues at Hortonworks. And so, they've been briefed on the work, they are as excited about it. And we look forward to driving that.


The next question comes from line of Mark Murphy from JP Morgan. Your line is open.

Mark Murphy

Yes. Thank you, Jim. How did the in-quarter net expansion rate compared to that 120% rolling four quarter number? Are you able to just comment on that directionally, or should we refer from your comment that it was a little below that in-quarter?

Jim Frankola

Yes. We were I think 128% last quarter, 127% this quarter on a rolling four-quarter basis, which means that the in-quarter rate, by definition is a little bit less than 127%.

Mark Murphy

Okay, great. Now, as Michael had pointed out, I think the short-term billings grew about 10%, and the short-term deferred revenue came down quite a bit sequentially or more than it normally would. Is that 10% growth a fair indication of the overall bookings, glide path that you've got? Currently, I guess, while you're producing these very rapid improvements in the margin structure on the P&L? Is that a fair way to think about it? And also, just did anything in particular drag down that short-term billings number in terms of where that -- maybe some of the headlines from the planned merger had a bit of an effect here or there?

Jim Frankola

Once again, the Q3 billings, to the extent that they are off our long-term trends are noise. So, once again, we did fewer multiyear deals with prepaid in Q3 than we did in previous years. So, that impacts the short-term billings. We also just have the normal ebbs and flows of when transactions are closed versus when they are invoiced. I’m not overly focused on the 10% or so growth year-over-year. I’m more focused on what’s once again trailing 12 months number, which is somewhat higher. And then from my standpoint, the sequential change in deferred revenue -- that’s fairly typical for us. I don’t have exact amount for last year. But we typically see sequential declines in deferred revenue in the middle part of year, given our high Q4 bookings, which then gets billed and collected in Q1. And then we had a trough and then it increases again in Q4.

Mark Murphy

And just to clarify, this theory on our side is that when we look at the short-term billings it’s kind of stripping out the noise of the multi-year prepays year-to-year. So that’s why we’re trying to do that. But anyway, the last thing I wanted to ask, Tom, could you help us get our arms around the growth trajectory of some of the various -- very promising products you’ve got, some of the areas like Kafka and Kudu and Spark itself? Are there some vectors within that portfolio that are growing 50% or 80% perhaps?

Tom Reilly

So, there’s a lot of exciting things in the Cloudera platform and also in the Hortonworks. So, you mentioned Kafka as one area. Kafka has been a strong grower for us, and it’s getting great attraction in the enterprise. With Hortonworks HDF, or the Hortonworks DataFlow offering, it combines Kafka, NiFi and Spark stream into a very elegant platform, and we expect that to be a big grower for us. The next one I’d like to highlight is what we’re doing in Data Science Workbench. So, we’re seeing enterprises after many years of talking about ML and AI, suddenly maturing and saying, hey, it’s -- now is the time to start investing in machine learning and AI.

And so we -- in the quarter, we added nearly 30 new customers in that area. Today, we just announced our machine learning capabilities powered by Kubernetes. So, that’s another great area. If you combine HDF an Kudu, that is going to be a strong driver in IoT workloads. And then finally, our Cloud Data Warehouse is gaining traction. So, we have a play, which we call the Netezza step-up program as customers want to migrate from their traditional Netezza platform and they’re looking to build a modern architecture. What we’re finding is move from an appliance to a cloud environment and to modern software. So, our Cloud Data Warehouse is growing well along with data warehousing in general. So, those are all big growth drivers, Mark

Mark Murphy

Thank you.

Tom Reilly

And you mentioned spark, Apache Spark is like we’ve captured nearly every one of our customers on Apache Spark. So, earlier to the question about Hadoop, Hadoop was defined by MapReduce in HDFS, Spark has subsumed MapReduce in that traditional sense. HDFS is just one of many data stores we support. We like object stores as we find in the cloud and other environments. So, -- and Kudu being is yet another store. So, Spark is the center of our platform.


Your next question comes from line of Brad Reback from Stifel. Your line is open.

Brad Reback

Great. Thanks very much. So, a couple of times during the call you guys have mentioned the idea of reinvesting upside synergies, cost synergies back into the business. How would you prioritize how much to reinvest back into the business versus letting fall to the bottom line? Thanks a lot.

Tom Reilly

I will tell you where we will reinvest and I’ll let Jim give you the balance. So from a product standpoint, number one priority is to accelerate our club roadmaps. Our two companies have the exact same roadmap and plans. So, we plan to accelerate that. Secondly when we talk from the edge to AI , we are going to invest in more on the edge capabilities and the AI capabilities. So, those from a product standpoint are really going to give you kind of a clear roadmap where we intend to differentiate and advance ourselves.

Jim will have the tough task of finding the right balance of how much goes to the bottom line versus how much we put forward to growth. And Jim, you can…

Jim Frankola

Just a little color. First of all, key thing, what we're signaling is that the growth synergies are looking good. The level of reinvestment will be a function of what we think the return on the incremental dollars are. So, step one is the build-up, call it a base case energy plan. Step two is to look in the various areas for investment, cloud, IoT, technical resources to accelerate customer adoption, assess what we think the returns are, both in short and long run and then deal that investment level appropriately.

So, you’ll hear more about that after we close Q4.


Your next question comes from the line of Sanjit Singh from Morgan Stanley. Your line is open.

Sanjit Singh

I had just a couple of questions actually related to next year. So, Jim, I don't think we've moved to 606 yet. So, wondering if you could just sort of review just from a high level, what the major impacts you expect on the various revenue lines and on the cost side, how we should think about that? You can provide a framework of that. And secondly in terms of the backlog, that’ a metric that software companies have increasingly reported. I was wondering if you could give us any color on where sort of software backlog stands today as we start to think about 606 going into next year.

Jim Frankola

Got it. Mike Olson is wrestling me to take this question. Okay. So, 606, we’ve completed our historical work for 606. It doesn't have a big impact on our software revenue, at least for the past year or two. It does accelerate services revenue into the earlier periods. So, let’s call for software revenue, it will be plus or minus one, two, three percentage points we think impact for services, it might be between 5% or 10% of either drag or tailwind, depending on what period you're looking at. And once again, we'll provide all the details and the bridges once we close Q4.

So, I don't think 606 is going to have a big impact. And by way more broadly, the way we recognize the revenue the fact that most of our software is at its core open source, means that in general, most of our software offerings have revenue with very little upfront recognition. So, that is one reason why there's not much impact on 606. Regarding backlog, too soon. We're not as focused on it right now as we're closing the books and focusing on the merger. Let us get through the year and we'll look to what sort of disclosures at what level in a 606 world we’ll give you on backlog.

Mike Olson

Sanjit, this is Mike. The only thing I'll add to Jim's pretty good comments is that I was sitting across the desk from him and read the paper upside down. I thought we were implementing 909.

Sanjit Singh

I appreciate that Mike. And then, Tom, maybe just to wrap up for me. Just as we think about the integration task, you've been around for a while, both you, Jim and Mike, have all seen on mergers before in your careers. In terms of mitigating that, disruption risk that we're all well aware of, and past big integrations, what do you -- what is sort of your game plan in terms of trying to mitigate any type of sales assumption as we start to implement this big merger here between two companies?

Tom Reilly

Yes. So, my experience is and Sanjit, mergers are always challenging and disruptive. I think, this is unlike most common mergers, because our companies are roughly the same age. We have much of the code we ship is nearly identical code. Much of the code that not identical is complementary, we continue to ship it. So, there's very few products where we have to rationalize in pick one or the other. So, our product teams have come together very, very quickly. As a matter of fact, they are equally impressed. What Hortonworks has done with data playing services is very creative, open our eyes some great possibilities. Likewise, what they’ve seen -- what we've done with share data experience.

So, I'm very pleased how the product teams are coming out. In fact, many of our engineers already know each other because they collaborate in the open source community. So that is very unique. Take the sales. We're all worried about sales disruption. With fewer than 5% of our customers overlap and the majority of our growth coming from existing customers, there'll be very little disruption to customers and the account execs that they know. Our goal is to drive that down. And our customers are telling us, they can't wait to get access to the cross sell offerings.

I do know that Cloudera customers are very interested in Hortonworks data flow. And we'll be able to bring that to them day one.

So, every mergers are -- this one has its unique challenges, but the integration teams are ahead of schedule. Everyone is working extremely well together. I think we can minimize fuel disruption and bring value to our customers nearly immediately. Our customers, our partners are all happy. The code seems that we can deliver our new integrated offering in short time order. So. I am quite pleased.

Sanjit Singh

Very good. Thank you for your time, Tom.

Tom Reilly

Sanjit, we look forward to talking to you again. So, we're going to wrap up here. Thank you all for joining us. I know the markets are closed. This is a very special day for the nation, and we're recognizing the President’s passing. I do appreciate that you guys joined us for your thoughtful questions and for following us on this journey. It is very exciting. Our future earnings call will be as a new company. And we will be joined by our colleagues at Hortonworks. I think all of them for the great work they've been doing with us in the pre-merger, I look forward to doing this call as a new company that combines the best of Cloudera and Hortonworks.

Thank you, all. And we look forward to talking to you in the quarter.


This concludes today's conference call. You may now disconnect.

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