Cloudera, Inc. (NYSE:CLDR) Q4 2019 Earnings Conference Call March 13, 2019 5:00 PM ET
Kevin Cook - VP, Corporate Development and IR
Tom Reilly - CEO
Jim Frankola - CFO
Arun Murthy - Chief Product Officer
Mike Olson - Co-Founder and Chief Strategy Officer
Conference Call Participants
Philip Winslow - Wells Fargo
Jack Andrews - Needham
David Rainville - Barclays
Zane Chrane - Bernstein Research
Tyler Radke - Citi
Mark Murphy - JP Morgan
Chad Bennett - Craig Hallum
Michael Turtis - Raymond James
Karl Keirstead - Deutsche Bank
Rishi Jaluria - DA Davidson
Josh Baer - Morgan Stanley
Good afternoon. My name is Sheryl, and I will be your conference operator today. Welcome to the Cloudera Fourth 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, Vice President, Corporate Development and Investor Relations. Kevin, you may begin your conference.
Thank you, Sheryl. Good afternoon and welcome to Cloudera's fourth 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; Arun Murthy, Chief Product 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 in 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.
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 fourth quarter and fiscal year 2019 results. The press release has also been furnished to the SEC as part of a form 8-K.
In addition, please note that the date of this conference call is March 13, 2019. And any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.
I'll turn the call over to Tom Reilly.
Hello, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2019 financial results. It has been a remarkable quarter and year for both Cloudera and Hortonworks. In fiscal Q4, we closed our merger and began executing as one company. The merger closed on January 3rd.
The results we’re reporting today are for new Cloudera, the combined company, but we will share additional information so that the performance of standalone Cloudera is apparent. Finally, we will provide our initial outlook for the combined company in fiscal 2020 and an updated near-term model.
Our financial performance reflect substantial customer and partner enthusiasm for the merged entity and our strategy. The company has experienced minimal merger impact in Q4. Both companies delivering strong results in their respective fourth quarters. For new Cloudera, total revenue in the fourth quarter was $145 million, subscription revenue was $123 million and operating cash flow was positive $40 million. There is no comparative year-over-year financial information for the combined company.
For standalone Cloudera year-over-year subscription revenue growth for the fourth quarter was 24%. To make it easy for investors to track the performance of the combined company, we're going to begin to provide adjusted annualized recurring revenue each quarter as many of you have requested. Jim will share much more on this later. But ARR will eliminate the vagaries of billings and accounting policies. ARR is intended to show our organic quarterly performance and top-line momentum in the most transparent way possible.
On a combined company basis, adjusted ARR grew 24% year-over-year. Cloudera now has the scale of resources to address the growing opportunity in large enterprises. We began the fiscal year with more than 2,000 enterprise customers, less than 10% of those customers have broadly adopted our platform reflected an ARR greater than $1 million, while there's still significant upside in those large customers. The key takeaway is that more than 90% of our customer base is right for expansion via the enhanced up sell and cross sell motions enabled by the merger.
In addition, we have grown our customer base adding 140 new enterprise customers since we announced the merger on October 3rd. This growing base of enterprise customers represents an increased addressable market opportunity.
Let me provide a little more color on the status of the merger. Merger integration has been very straightforward. We've taken advantage of the commonality between the businesses moving quickly to make decisions. In the first two months as a combined entity most key integration items have been completed. All significant people related decisions have been implemented and from an operations perspective only back office systems integration and facilities consolidation remain. We have moved quickly to capture the strategic and financial benefits of the combination.
We're also beginning to see the advantages of scale, including greater financial operating leverage, broader and deeper account coverage, improving channel relationships and an accelerated product roadmap. On the product front, our engineering teams have been energized by joining forces and have already determined the near-term and long-term product roadmap. They have quickly developed a merge roadmap that is inspiring, innovative and in-line with enterprise customers’ needs for the future.
Enterprises are demanding a modern analytic experience across public, private, hybrid and multi-cloud environments. They want the agility, elasticity and ease of use of cloud infrastructure. But they also want to run analytic workloads wherever they choose, regardless of where their data may reside. They want open architectures and the flexibility to move those workloads to different cloud environments, public or private to avoid vendor lock-in.
Lastly, they want to run multiple analytic functions on the same data set with a common security and governance framework, enabling data privacy and regulatory compliance. These are not nice to have features. There are foundational requirements for enterprises that want to use data for competitive advantage.
In summary, what enterprise customers want is an enterprise data cloud. This is a new term for our industry and a new market category we are uniquely positioned to lead. An enterprise data cloud is different than anything enterprises have ever experienced. The four defining characteristics of an enterprise data cloud or EDC are first, let's be hybrid and multi-cloud. This gives enterprises flexibility, and EDC must operate with equivalent functionality on and off premises, supporting all major public clouds as well as the private cloud.
Second, multi-function, an EDC must solve an enterprise’s most pressing data and analytic challenges in a streamlined fashion. Addressing real world business problems generally requires the application of multiple analytic functions working together on the same data. For example, autonomous vehicles require the application of both real time data streaming and machine learning algorithms.
Third, secure and governed, an EDC has to be secure and compliant, meaning the strict data privacy, governance, data migration and metadata management needs of large enterprises across all their environments. And lastly, an EDC must be open. Of course, this means open source, but it also means open compute architectures and open data stores like Amazon S3 and Azure data link storage. Ultimately, enterprises want to avoid vendor lock-in, and favor open end platforms, open integrations and open partner ecosystems.
The market is clearly moving from a public cloud versus on-premises debate to cloud everywhere, private, hybrid and multi-cloud. We see many companies riding this trend and employing an enterprise cloud strategy. As the open source data management analytics standard, Cloudera is uniquely suited to invest and deliver enterprise cloud capabilities at the data layer. As a result, we are well positioned to take advantage of this ongoing shift in consumption model.
Our EDC replicates the public cloud experience everywhere. We're able to do this by capitalizing on enterprise adoption of Kubernete and container technology standards. These new technology standards allow us to effectively separate compute and storage and deliver an elastic cloud experience consistently across public and private cloud environments.
Our customers need a consistent data platform everywhere, and they view Cloudera as their trusted partner to guide them on their journey to the cloud. Cloudera is well equipped to be that partner and to win the race to the enterprise data cloud. We now count more than 2,000 enterprises as our value customers, including many of the largest players in the most data intensive industries, such as the top 10 auto manufacturers, the top 10 telecommunication companies, and eight of the top 10 banks.
These customers must solve complex data management analytics used cases that span from the edge to AI. Common examples include, connected and autonomous vehicles, optimizing 5G networks for increased capacity and satisfying regulators, whether for AML, fraud, risk modeling or privacy.
It is these type of enterprises that will adopt the enterprise cloud model and will expect our help to make it possible. Only Cloudera can offer customers an integrated platform with the breath of capabilities required to perform complex enterprise used cases, while preserving customer choice across cloud deployment models. With the expanded resources of our new company, we aim to be the clear leader in the enterprise data cloud.
We are well on our way to delivering the first instantiation of enterprise data cloud, which combines the best of Hortonworks and Cloudera’s platforms. We call this new offering the Cloudera data platform or CDP.
In the next two quarters, we plan to deliver CDP as a public cloud service, later in the year we will offer CDP for the public cloud -- for the private cloud bringing a public cloud like experience directly into the data center for enterprise customers. With CDP our existing enterprise customers will be able to easily extend their current HDP and CDH data center deployments to a native cloud service in the two most popular public clouds, AWS and Azure.
The initial release of CDP will also offer a full complement of open source data management analytic functions, including data warehousing and machine learning, all delivered as native cloud services. Ultimately, CDP will also provide a single control plane to manage all the infrastructure, data and workloads across hybrid and multi-cloud environments.
As data is migrated between cloud environments, addressing data privacy regulatory requirements in cyber security becomes increasingly difficult. CDP will tackle these challenges with a set of shared services that provide consistent security, governance and metadata across all cloud environments, we call these shared services SDX or the Shared Data Experience.
SDX technology allows customers to set policies and rules once and having to persist through any range of workloads without regard to where the analytic is run. This ensures that enterprise data is consistently secured and governed, while also saving IT organizations time and money. While SDX does deliver cost savings, its highest value is portability. Portability that provides customers the freedom and control to run their analytics anywhere without public cloud lock-in, or data privacy concerns.
We are the only vendor to deliver this enterprise grade functionality in a coherent data management layer. The introduction of SDX functionality across all data workloads and cloud environments is valuable for enterprise customers and builds an enduring competitive advantage for us.
Lastly, we plan to make CDP 100% open source. Given the heritage and commitment of both Cloudera and Hortonworks to open source software, this is natural for us. Also, most enterprises are passionate about open source software because it provides rapid innovation, minimizes risk of vendor lock-in and supports an ecosystem for data stores and compute.
We believe that introducing CDP in open source is consistent with customers objective to avoid vendor lock-in and will accelerate enterprise adoption. CDP delivers on our vision for the Enterprise Data Cloud from the Edge to AI and is an enduring differentiator. Creating a comprehensive solution step set from the Edge to AI was the primary motivation for the merger.
As soon as the merger closed, we launched our Edge to AI cross sell campaign that brings Edge computing capabilities to Cloudera customers with a new Cloudera data flow product and ML and AI capabilities to Hortonworks customers with the new Cloudera science workbench product.
Today we are the only company offering an integrated suite for all data management and analytic requirements from the Edge to AI. A large Cloudera healthcare customer was the first to embrace the value of analytics from Edge to AI, a long-term enterprise customer, they rely on Cloudera data science workbench to support data science and machine learning project in their digital innovation center.
Shortly after the merger closed they chose a new Cloudera data flow offerings to ingest data for real time claims processing. They selected Cloudera for scalability, extensibility and our ability to manage data lineage from the Edge to AI. This customer expanded by more than a quarter of a million dollars of ARR in Q4 representing the cross sell opportunity that stems from having these complimentary technologies.
Customers are relying on us to accompany them to the cloud. This past quarter, we saw strong demand for our hybrid and multi-cloud capabilities. A large Hortonworks financial services customer wanted to expand their in production applications to multiple public clouds, both Google and AWS. They chose Cloudera over the public cloud house offerings because we offered faster time to value and better security and governance key for meeting their GDPR compliance requirements.
Our solution enabled expansion to multiple public clouds without rewriting existing applications and providing shared security and governance capabilities. Public cloud extension is a significant growth opportunity for us as evidenced by this customer who grew our relationship with a new commitment greater than $10 million.
To complete the review of strategy and merger execution, let's touch on go to market and field integration. Our account representatives receive their account assignments last month and we have complete our sales kickoff with extensive training on the new roadmap and product offerings added in the merger.
Compensation is set and the incentives for the team are clear. You may recall that standalone Cloudera made refinements in its go-to-market model, last fiscal year. Hortonworks had only started similar work. We have applied our learnings to our larger install base of customers and we consider this transition complete.
While every cycle of merger requires some transition period, we're off to a fast start to the new fiscal year with more to offer customers a compelling vision that aligns squarely with their demands, and a motivated sales force to carry the message. Our go-to-market motion is accelerated by partners rallying around the combined company and we're building on great partnerships with IBM, Microsoft, Amazon, Google, Intel, Accenture and others.
Having established ourselves as a standard for open source data management analytics, partners are consolidating their investments in engineering and go to market with us. Likewise, we can now be more selective about which partners we choose to prioritize and invest alongside. With more than 2,000 customers, many of which are the largest companies in the world, and a full set of Edge to AI solutions, we and our partners will put emphasis on expanding existing customers and leading them to the cloud in fiscal 2020.
Our goal this year is twofold. First, to fulfill the strategic rationale of the merger by delivering differentiated innovation for the future; and second, achieving the financial benefits contemplated by the combination.
Based on the enterprise data cloud vision with innovative new product and technology already into development, we're entering this year with significant optimism. We're participating in an exciting and dynamic market, the data age has only just begun.
Jim will now review the financials in more detail and discuss our outlook for fiscal 2020. Jim?
Thanks, Tom. Hello everyone. I'm excited to share Cloudera’s Q4 and fiscal year 2019 results, as well as our outlook for the first quarter 2020, fiscal year 2020 and beyond.
We had a strong Q4 on both a standalone Cloudera basis and as a combined company, especially when one considers that we were in the midst of closing the merger. These results reflect good demand from both customers and partners as well as solid execution.
We adopted ASC606 under the full retrospective method on January 31, the last day of our fiscal year. 606 is now reflected in both our fiscal year 2019 results and our fiscal year 2020 outlook. Also, we received the benefit of 29 days of Hortonworks revenue from the merger closing date of January 3rd through quarter end.
Unless otherwise stated, all numbers are reported on a combined company basis under ASC606. We have provided additional disclosure in the quarterly materials on our Investor Relations website to help investors understand the impact of the merger and accounting changes on fiscal year 2019 and 2020.
Let’s begin with revenue for the fourth quarter, it was $145 million. The Hortonworks business, which closed its fiscal year on December 31, 2018, and its books as a standalone entity on January 2, 2019, contributed $20 million of total revenue to the combined company's results in the fourth quarter.
Subscription revenue for the fourth quarter was $123 million, of which Hortonworks contributed $15 million. For reference, standalone Cloudera year-over-year total revenue growth for the fourth quarter was 18% and year-over-year subscription revenue growth for the fourth quarter was 24%.
Total revenue for fiscal 2019 was $480 million. Subscription revenue for fiscal year 2019 was $406 million. We began fiscal year 2020 with 976 customers who have started at or have grown to more than $100,000 of ARR. We increased the number of customers in this class by more than 85, since we announced the merger on October 3rd to the end of the quarter on January 31st.
There are a number of factors, which affect results and the outlook, please see the quarterly materials on our website for details. I'd like to highlight two of them. First merger accounting. Not only does the merger affects our results due to the addition of Hortonworks results, but also through purchase price adjustment entries.
There are two primary P&L adjustments. The first reduces the amount of Hortonworks deferred revenue added in the merger and therefore the amount of revenue to be recognized over the remaining life of the related transaction. This haircut will reduce fiscal year 2020 GAAP revenue by $62 million. We do not intent to report non-GAAP revenue. Nevertheless, slide 17 provides the write-down amount by quarter for those who want to normalize their models for this accounting adjustment.
The other significant purchase accounting impact is a write-down of deferred commission expenses, which will cause the corresponding sales commission expense to be $28 million less in fiscal year 2020 than this amount would have been on a standalone basis.
Second, billings duration. Billing practices differ materially between Cloudera and Hortonworks. Hortonworks had a practice of billing multi-year deals upfront, which accelerates billings and cash flow as compared to annual billings. Cloudera practice with the bill annually regardless of contract duration, resulting in lower upfront billings and steadier cash flow at both a transactional and corporate level.
Historically Hortonworks billing duration has averaged 19 months, whereas Cloudera’s has average 13 months. Given the sizeable cash balance and strong expected future cash flow of the combined companies, we have adopted Cloudera’s pre-merger billing practices. This shift in billing practices will reduce billings and cash flow by approximately $125 million in fiscal year 2020. Please see slide 18.
This is a lot to consider and most of it does not relate to the fundamentals. We want investors and analysts to be able to easily determine the momentum in the business. A cleanest measure of organic performance is annualized recurring revenue based on the book of business at the end of the quarter. ARR removes the effects of accounting changes, billings durations and licensing convention and is a better representation of the periods’ underlying economic activity.
It is our intention to disclose contracted quarter end ARR when the information becomes available. Until this work can be completed, we are providing annualized recurring revenue based on reported revenue or adjusted ARR. Adjusted ARR as Hortonworks’ pre-merger results to quarterly subscription revenue reverses the effects of purchase price adjustments and subtracts non-recurring partner revenue and related party revenue.
Adjusted ARR growth for the fourth quarter was 24%. We believe that adjusted ARR better reflects organic growth than reported revenue. For a complete definition of ARR please review today's press release. 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.
I would like to remind everyone that our adjustments from GAAP to non-GAAP have not changed and are limited to stock-based compensation and amortization of M&A related intangibles. Total gross margin for Q4 was 78%, driven by subscription gross margin up 88%. For reference on a standalone basis, total gross margin for the fourth quarter of fiscal 2018 was 75% and subscription gross margin was 87%. Total gross margin for the full year was 77%, while subscription gross margin for the full year was 88%.
Sequential operating expense growth relative to Q3 was driven by one month of Hortonworks expenses, merger costs and the usual Q4 seasonal increase in sales commissions. Standalone expense growth was modest in the fourth quarter as we curtail hiring in anticipation of closing the merger.
As a percent of total revenue for the fourth quarter sales and marketing expense was 44%, research and development expense was 26%, and G&A was 29%. The increase in G&A expense is primarily attributable to merger related spending. Merger related expenses in Q4 amounted to $30 million. These expenses included advisory and legal fees, as well as employee related termination and retention costs.
Cloudera has experienced significant year-over-year improvement in operating expense ratios and operating margins. This is driven by both scale and efficiency, including the go-to-market refinements made earlier in the year.
Net loss per share was $0.15 in the fourth quarter based on 190 million weighted average shares outstanding. For reference net loss per share for standalone Cloudera was $0.05 in the year ago period. Net loss per share was $0.41 for the fiscal year 2019 based on 160 million weighted average shares outstanding. For reference net loss per share for standalone Cloudera was $0.57 in fiscal year 2018.
Now turning to the balance sheet and cash flow, we exited Q4 with $541 million in cash, cash equivalents, marketable securities and restricted cash. As Tom suggested we are well ahead of schedule in realizing the operational synergies contemplated by the merger. Despite $29 million of fiscal year 2019 merger related payments, we accelerated achievement of our operating cash flow goals, delivering positive OCS for the quarter and for the fiscal year a full year ahead of target.
Operating cash flow for the fourth quarter was $40 million. Cash flow benefited from both the early capture of some merger synergies, as well as strong collections. Operating cash flow was $34 million for the year based on our strong Q4, together with the fact that Cloudera was nearly cash flow breakeven through the first nine months of fiscal 2019. For reference, operating cash flow for standalone Cloudera was negative $42 million in fiscal year 2018.
Capital expenditures were $1 million for the quarter and $10 million for all of fiscal 2019. Total contract liabilities, which comprise deferred revenue and other contract liabilities were $526 million at the end of the fourth quarter.
I will conclude by providing initial guidance for fiscal Q1 and for fiscal 2020, as well as an update on our near-term model. Before getting into the numbers, I want to share some longer term perspective on how the merger is incorporated in our projections and how we are handling merger related uncertainty. As reflected in our strong results, the merger did not significantly impact Hortonworks or Cloudera businesses in the fourth quarter. However, as expected, we do see the merger impacting the first half of fiscal year 2020, as we integrate the field and roll out new products.
We are pleased that despite the effects of this merger, we believe that adjusted ARR growth for Q4 2020 will be in the range of 18% to 21%. ARR growth in Q2 and Q3 may be slightly lower due to the actions we were taking in the first half of the year to integrate the two companies.
We expect Q1 total revenue to be between $187 million and $190 million and subscription revenues to be between $154 million and $156 million. Net loss per share is projected the $0.25 to $0.22 based on 271 million weighted average shares outstanding. For fiscal year 2020, we expect that total revenues to be between $835 million and $855 million, representing approximately 76% growth, with subscription software revenue in the range of $695 million to $705 million, up approximately 72% year-over-year. Again, we expect Q4 fiscal year 2020 ARR growth of 18% to 21%.
Excluding one-time merger related costs, we anticipate significant improvements in R&D, sales and marketing and G&A expense ratios as we complete our merger synergy actions. Individually Hortonworks and Cloudera. Each headstrong gross margin profiles. We expect to see modest improvements in subscription gross margin and a slight decrease in services gross margin during fiscal year 2020 as we apply more technical resources to support customer success.
Net loss per share is projected to be $0.36 to $0.32 based on 279 million weighted average shares outstanding. We expect operating cash flow for fiscal 2020 to be negative $40 million to negative $30 million. Note that operating cash flow projections for fiscal year 2020 include approximately $66 million of non-recurring payments relating to the merger, of which approximately $36 million will occur in Q1. These costs include employee termination and retention related expenses, as well as third party fees associated with integrating systems and processes. We do not provide OCS guided by quarter due to the variability of cash flows.
Cloudera’s cash flows vary seasonally, with Q1 and Q4 being the strongest quarters in Q2 and Q3, typically around breakeven or modest cash burn. Given merger integration activities, we do expect some inflections that would normally occur in Q1 to shift to Q2.
When we announced the merger, we suggested that we expected the resulting company to have a certain profile in fiscal year 2021, including $1 billion of revenue, 20% revenue growth and a 15% operating cash flow margin that continues to be our target, albeit with a timing adjustment to operating cash flow margin.
Moving all Cloudera to an annual billings convention will cause billings and cash flow to be more than $125 million lower in fiscal year 2020 and more than $75 million lower in fiscal year 2021. Then if we were to preserve legacy Hortonworks multi-year prepaid convention. This change in billings practices means that we do not expect to achieve 15% operating cash flow margin until fiscal year 2022. In fiscal year 2021, the OCS margin is projected to be roughly 10%.
Because of the factors affecting billings, revenue and cash flow I outlined earlier, ARR will be the truest indication of our progress against plan. As we move past merger integration in the first half, we expect to start accruing the top-line synergies of the merger. Cross sell and has product offerings and the benefits of category leadership. We believe these activities will enable ARR growth to return to our long-term target of at least 20% for fiscal 2021.
I will now turn the call back to Tom, for concluding remarks.
Thank you, Jim. I'm really pleased with our performance in Q4, both as standalone and combined companies. Merger integration is going well and ahead of schedule. We've accomplished a lot in a short amount of time.
Most of all we're executing as one company now and our customers, partners and the community have embraced the new Cloudera and align with our enterprise data cloud strategy. This year is about merger execution and producing innovation that sets Cloudera for long-term success. We have a unique set of assets and competitive advantages to capitalize on the enterprise cloud trend and we're well positioned to guide customers on this journey.
We are enthusiastic about the prospects for the next few years with more scale, more resources, more new product and a stronger more talented team. Thank you for joining this call and I welcome you to the new Cloudera, the enterprise data cloud company.
As we head into the Q&A portion of the call, I am pleased to introduce Arun Murthy our new Chief Product officer. Arun leads all of our development and support efforts and is the former Co-Founder and CTO of Hortonworks. We're also joined by my colleague Mike Olsen, our Chief Strategy Officer, as well as our Co-Founder of Cloudera.
Sheryl, we're ready to begin the Q&A portion of the call.
[Operator Instructions] The first question comes from the line of Philip Winslow of Wells Fargo. Please go ahead, your line is open.
Yes, thanks for taking my question and congrats on a great Q4 and closing the merger. Really just two questions here, I guess, the first one for Mike and Arun, it was great to hear about the impending data cloud services that was coming out at some point this year run across two different clouds obviously going down the sort of the multi-cloud path here.
What do you think about your ability hybrid cloud multi-cloud? How do you think about sort of positioning this within customers? And then maybe, if you think about how we kind of roll this out going forward with the second release of CDP. And then just one follow-up for -- on the financials.
Thanks, thanks for the question. We absolutely believe that going into the public cloud and offering CDP as a hybrid cloud service is key for the enterprise. It really delivers on our vision of the enterprise data cloud. It allows the customers to leverage data and applications regardless of where they will chose to run this. And this will be available as a native hybrid service both on the public cloud Amazon and Azure as we discussed and later in the year we’ll bring it back on-prem to the private cloud offering.
Great. And then also just in terms of the synergies and dis-synergies because on slide 19 of the supplemental, it shows negative $52 million of merger impact, I believe from the S-4 you were looking for sort of a net positive one in terms of $21 million of revenue synergy $20 million dis-synergy, it looks like you've got 52 million of dis-synergy only here. Wondered if you can just kind of walk through what's in that assumption?
Yes. So in S-4, and I can speak to the Cloudera assumption, we assume $45 million of revenue, dis-synergies in fiscal year 2021 or calendar year 2020. We assume a little bit less than that at that moment in terms of fiscal year 2020, calendar year 2019. So the revenue dis-synergies are associated with the act of putting together two companies.
So you are merging two fields, you are implementing new processes, you're implementing new systems, it takes time to do all that and at time that is taken away from the normal management of the business. So from a Cloudera perspective, when you look at the bridge from the S-4 to our guidance, there aren't any significant surprises.
So merger disruption synergies, dis-synergies are a little bit more than we anticipated, the purchase price adjustment is the other big thing other than those two things it’s all noise.
Got it. All right, thanks guys.
Your next question comes from the line of Jack Andrews of Needham. Please go ahead, your line is open.
Good afternoon. Thanks for taking my question. Tom, I was wondering if you could give maybe some feedback on the vision that you’ve outlined of this enterprise data cloud. You mentioned that this is a new market category it's perhaps different than what most enterprises have been experiencing. So are you spending time sort of evangelizing this vision to customers? Or is this exactly the vision that they've been looking for? Could you help clarify what the feedback has been around this?
Yes, so here's what we’ve heard as the biggest demands from our enterprise customers. First and foremost, they want to take advantage of public cloud and have the ability to extend their workloads into the public cloud on a bursting capacity and there's huge pressure for us to deliver our software in a private cloud environment with the same ease of use, elasticity, separation of computing storage that they experienced in the public cloud.
So -- and then increasingly, we're hearing that they don't want vendor lock-in or cloud lock-in, instead they want multi-cloud hybrid experience. [Indiscernible] continually saying hybrid multi-cloud experience the industry, and we're not alone, is terming this an enterprise cloud. What enterprise want is the ability to take advantage of multiple cloud environments, both on-prem and in the public environment. And other large vendors are on that path. I mean, that's what IBM’s acquisition of Red Hat is all about is to drive an enterprise cloud strategy.
So the market is moving from a public cloud versus on-prem debate, to a hybrid and multi-cloud expectation. And this is where we're uniquely -- when we see we’re the Enterprise Data Cloud. We're the only ones delivering this capability at the data layer that allow our customers to migrate data with the security context or the privacy controls and take advantage of all the native cloud offerings, whether on-prem or across public cloud environments.
Right. Well appreciate the perspective on that. And can I just sneak in a financial question as well, which is, are you planning on disclosing the net customer expansion rates moving forward?
Under 606, net expansion rate loses much of its meaning. So the short answer is no, least for the fiscal year 2020, while we're going through the transition. We are intending to disclose ARR, which we think is actually a much better representation of underlying growth in the business. And by the way, you can impute NER from that because in any given year, we pick up about 5 points of growth from new customers being added.
Got it. Thanks for taking my questions. Congrats on the results.
Thank you, Jack.
Your next question comes from the line of Zane Chrane of Bernstein Research. Please go ahead. Your line is open.
Hi, congratulations on the merger. Question on your ARR guidance. It looks like you added about $134 million in incremental ARR in fiscal 2020. And the midpoint of your guidance for fiscal 2021 implies $132 million in incremental ARR. I was just wondering why the slight decline or kind of flattish incremental ARR I would have expected more leverage in the growth model at this stage just given the volume of data growth in your customer base and how many customers you're adding? Can you give us a little more detail on that?
Let me let me start with that one. So, the underlying market the underlying long-term trends of the business are still quite positive. What that reflects is the revenue dis-synergies, which are incorporated in the ARR numbers as well.
So very specifically, as we look at this year, especially in the first half, the actions that are required to bring two companies together take time away from our normal activities of selling and developing products and so forth. We reflected that in our business case and our guidance that is why the ARR growth is less than what you'd otherwise expect it to be.
Makes sense. And would you expect the net new ARR to grow post fiscal 2021?
Got it. Thanks very much. Congrats.
The next question comes from line of Raimo Lenschow of Barclays. Please go ahead, your line is open.
Hey guys, this is David Rainville on for Raimo, tonight. Thanks for taking our question. So I have two questions. One on the product front and the opportunity you are seeing in AIML and then a follow-up on competition if that's okay. So I’ll start with product, just looking for some color about the opportunity ahead you see for AIML and data flow or IoT just more generally. How do you see -- and I know that's not how you sell the products, but how do you see the penetration within your install base for those used case specifically? And how do you see that evolving over the next few quarters, few years?
Good. David, this is Arun, I can take your question. Typically, one of the benefits of bringing the combined company together is that, legacy Cloudera was really strong with the AIML used cases and Hortonworks for the Edge.
The benefit of bringing these together is that as we go into the market now and talk to every single customer and look at every one of the most sort of the common and the modern used cases, we see this opportunity to put together the entire sort of end-to-end flow all the way from ingestion of data all the way up to the Edge bringing it in do more sort of the legacy warehouse like analytics, but also bring in AI and ML. So help doing predictive maintenance and predictive [building][ph] and so on.
This allows us to literally go into every single customer and we see these used cases every day where we actually add value for the end-to-end used case. And this was really one of the key parts of the merger was that this allowed us to put together this flow across both companies.
Understood. Thanks. And quickly a follow-up on the competition -- competitive front for Tom here, with the merger, you're really the elephant in the room in the Hadoop market now and the Big Data market going forward. Curious to hear what has changed in terms of pricing dynamics and competitive landscape since you announced the merger? And who do you see as your main competitor going forward and how is that evolving over the next 18 to 24 months?
Yes, David. So last year, our number one competitor was always Hortonworks. And the inverse Hortonworks it was Cloudera. Now that we are one combined company, it will do many benefits. We believe that we don't have to discount as aggressively, because we're not as directly competitive. We believe that we will shorten sales cycles. A lot of companies are already -- if we even just look at the number of new customers we added this last quarter, other than acceleration because we're viewed as kind of this standard.
And now, who is our number one competitor? It's Amazon. And we quickly, just even in Q1 as we look at our competitive roadmap, it’s Amazon, the company, Amazon is a partner. But it’s Amazon’s house offerings in the data management and analytic space. And we believe, we are well positioned to compete against them. Because our value proposition is to be an enterprise data cloud company, giving our customers are multi-cloud, hybrid cloud fashion is one enduring differentiator.
And then our capabilities from the Edge -- our capabilities -- our integrated capabilities from the Edge to AI, we're the only company that’s offering that today. And so we feel very strong that market is moving in our direction around hybrid multi-cloud. And then our functionality is best in class.
Makes sense. Thanks, guys and congrats on the merger.
Your next question comes from the line of Tyler Radke of Citi. Please go ahead, your line is open.
Hey, thanks. Good afternoon. Could you talk about kind of your outlook for revenue synergies here in FY20? Kind of what are you assuming in any types of offsets on the revenue dis-synergies and where are you finding the most effective areas of cross sell so far? Thank you.
So, I'll start with that and then Tom can add color on cross sell if he wants. So from our perspective, we've tried to build a very prudent model. So we can see the first half, dis-synergies in front of us. In the second half, we do believe that there are significant opportunities for cross selling products, optimizing our pricing model and or packaging of our products. Getting the halo benefits of category leadership and then quite frankly as these new offerings roll out being able to better monetize those. Those are reflected in our guidance at I'll say a modest levels to the extent that we get more traction on them or faster traction that would be upsized to the guidance we've provided.
And Tyler, this is Tom. Just to add a little more specific color. On day one of our new fiscal year February 1, we introduced for our sales force a number of new things that they can cross sell and up sell. So the Cloudera customers have a lot of pent up desire for what was Hortonworks data flow now Cloudera data flow. And likewise we are introducing Cloudera data science workbench into the Hortonworks customer base. Those cross sell activities are happening immediately.
We have four additional tools I won't go into the detail, but we package those up and over the course of this quarter we’ll be introducing them to the sales force as cross sell, up sell opportunities. Another revenue synergy that we're already starting to see the early signs up is shorten sales cycles as we no longer have to do a Bake Off against two companies that offer similar strategies. We are proceed as the standard bearer.
Partnerships like IBM are gaining great momentum, we're super excited about our partnerships. And finally, we expect to see less discounting pressure and all these should be revenue synergies that we capitalize on this year.
Great. And then a follow up maybe Jim you could talk about what you're seeing now that the merger is closed from a churn perspective. I think you had previously talked about how customers below 100k, were maybe they didn't have the product fully deployed where you were seeing kind of 20%, 25% churn rate on the smaller customers? What does that look like from a combined company perspective and how much of the revenue at this point is coming from the customers above a 100k? Thank you.
Yes, so it's really too soon to tell. We close Q4 with literally 29 days as a combined company and our churn rates in Q4 were slightly better than Q3, it could be a trend, it could be noise, we saw a slight improvement. Regarding the second question, we still can see the vast majority of our revenue coming from customers over $100,000 in size that represents at this point about 94% of our revenue base.
Your next question comes from the line of Mark Murphy of JP Morgan. Please go ahead, your line is open.
Yes. Thank you very much. Jim, I was curious based on your prior commentary that we would be able to appear the net dollar retention by assuming roughly 5 points is coming from the new customer additions. Should we be concluding that the net dollar retention was somewhere around 119% in Q4, just using that math?
Roughly. I mean, to be precise on a standalone basis and we won’t report it again, our trailing 12 months net expansion rate for Q4 was 122%. So yes, the Q4 number was roughly at that level and that would get you very close to it.
Okay. And at a high level Jim and I do understand that you’re -- I understand you’re steering us more to the ARR metric going forward. But I guess I'm interested in how high is your confidence level in being able to sustain or drive a net dollar retention or just existing customer spend growth at somewhere around that level, say 120% or 120% plus for Cloudera for the next year or two. Is it something where your customer inputs are allowing you to make a pretty reliable forecasts on that metric.
Whenever we look at the macro and we look at the total database market and the subset that we operate it in. When we look at our customer cohort analysis, including what the Hortonworks team has experienced everything bodes that we should be able to grow our business more than 20% so call at least 20% to 25% range over the long-term. And even our -- we've number times even our oldest cohorts, even as our largest cohorts are growing at roughly that rate. So the underlying long-term trend still look extremely positive for that more than 20%, 20% to 25% growth rate.
Okay, thank you for that. And then Tom, what are the most important product rationalizations that you think you need to decide on? Where, for instance, where there were competing redundant projects like Century [ph] and Ranger? How many of those situations are there? And what do you think are the most important ones?
Thanks, Mark. All those decisions are behind us. And I commend Arun and the engineering team for making those decisions within a matter of weeks. Our roadmap is complete. All the overlapping products have been rationalized fingers are on keyboard. And for the most often we didn't pick one or the other, we're combining the best of both and I'll let Arun add some further thoughts.
Yes, thanks, Tom. Thanks for the question, Mark. Like Tom said, all these issues are behind us. In fact, it was really heartening to see the two engineering teams come together and make decisions quickly on an aggressive putting. As always, it's helpful that we've known each other even though we’ve competed we’ve known each other through the work we’ve done in the community so it's actually been really great.
And specifically in the questions you asked, we’ve looked at whether we looked at the operations or security or governance or management, we've been able to make those decisions quickly and in large cases we’ve picked one or the other in some cases we’ve picked the fact that we can actually put them together and make a better whole of it.
Thank you very much.
Your next question comes from the line of Chad Bennett of Craig Hallum. Please go ahead, your line is open.
Great. Thanks for taking my questions. I guess, a couple questions. Second, one a financial, but first one relative to the IBM relationship, Tom you mentioned -- I think briefly mentioned it a couple questions go. But can you speak to how strong the IBM business was for Hortonworks in their calendar fourth quarter, which I think is traditionally a pretty strong IBM quarter?
And then kind of expectations I guess, if you will, on that relationship, especially around converting or transferring those IoT [ph] customers over to your base, which I think technically was supposed to be completed by mid-year? And I think that contract maybe renews then I'm not sure that, but just kind of general overview of IBM in that relationship would be great.
Thank you, Chad. I won't be able to give you the details of IBM’s contribution in Q4, but let me share this broader picture. As CEO of legacy Cloudera. I was envious of the IBM relationship. When I had the opportunity to get under the covers. I was extremely impressed with the partnership that IBM and Hortonworks had and the great traction.
The first executive I reached out to post announcement on October 3rd was the CEO of IBM, I reached out to Ginni, within a matter of days, I was talking with their executive sponsor. We've had many meetings and I expect this relationship to build on the great success that Hortonworks had and to be even stronger relationship.
And I am now -- Rob Bearden was the executive sponsor. I am now the new executive sponsor and just returned from meeting. I was in Armonk just last week. And I'm even further excited about this partnership once the Red Hat merger is complete. IBM plus Red Hat strategy is to drive the enterprise cloud, which is a hybrid multi-cloud environment for enterprise customers the affordability. And we will be one of the premier partners with an application layer at the data part building on that partnership.
Got it. Thanks. Good color. Maybe a quick one for Jim, maybe this is implied in the guidance and the outlook and targets. But you guys spoke about $125 million in cost synergies realized when you announce merger. I guess, I assume we're on track with that number, that's the right number to think about. And I think possibly since you announced the merger, maybe you were potentially maybe this is my words more optimistic that there's upside to that $125 million. Can you give us an idea of where you are there? Thanks.
Yes. So, we are well long in terms of executing those synergies. All the people related elements of the synergies, the actions associated that have already been taken. So therefore, as you think about your model, the cost structure that we have today is pretty much what we're going to see through the remainder of this year. So we'll see slight increases in expense, but the team is now in place that is able to execute to the plan for this year. So I think flattish cost with obviously ARR growth being around 20%.
To the extent that we're finding synergies above and beyond $125 million target. We are generally reinvesting those synergies to accelerate growth with a focus of technical resources to help our customers some that embedded in our professional services margin, more dollars for R&D to accelerate innovation and some additional technical resources on the sales side to help in the sales cycle. So, there's a reinvestment strategy to the extent that we see more than the $125 million.
Your next question comes from the line of Michael Turtis of Raymond James. Please go ahead, your line is open.
Hey, guys. Good afternoon. Just to clarify, so to make sure that we have the right pro forma growth rate being calculated fiscal 2020. What's the dollar amount of the pro forma revenue for last year on a 606 basis? And can you -- just to make it clear again, what the revenue write-down for this accounting was for fiscal 2020 and the exact revenue dis-synergy for this year?
Yes. So the second two questions are on slide 19. So the purchase price adjustments in fiscal year 2020 is $52 million. The merger impacted due to revenue dis-synergies is $52 million. Regarding the -- we're not pro forming the revenue in the past. On slide seven we did show annual recurring revenue on an adjusted basis by quarter from Q4 fiscal year 2018 through Q4 fiscal 2019 and that will give you a baseline to build your model for fiscal year 2020.
And then would you imagine is there any write-down impact that continues in the fiscal 2021 or is that pretty much over in fiscal 2020?
It's modest. So the amount of revenue haircut in fiscal year 2021 will be less than 2% of total.
Okay. Thanks, Jim. And then if I get a fundamental question. As you guys start to think about the machine learning and data science, as well as the data flow what are really the incremental areas of investment that you have to make? And how much of that could conceivably be inorganic?
Hey, Michael, this is Arun. Definitely, you mentioned the two main areas for us to invest, which is AI and also data flow. Obviously at any point we will continue to evaluate the market for opportunities for sort of inorganic growth. But right now organically, that's the two main areas, where we see investing. Along with all the work we have to do in terms of the FDX there [ph] that Tom talked about, that's really is our sort of a -- we think of as our secret sauce and we expect to invest a lot. So common security, governance, privacies or regulation capabilities in the platform.
This is Mike. Let me just come in behind Arun briefly. You asked, as well, how much of that feature addition, how much of that innovation might be inorganic? Of course, we don't pre-announce M&A plans and I’ll let Tom talk to the general strategy. But I think we're well capitalized in order to execute on such a thing. And certainly there are a lots of interesting properties in the market. It's an area that we will continue to watch closely to see what inorganic opportunities might be there.
Your next question comes from the line of Karl Keirstead of Deutsche Bank. Please go ahead, your line is open.
Thank you. Maybe two for Jim. Jim, I'm trying to take a shot at figuring out what normalized to cash flow would be in fiscal 2020. So your guidance is negative $30 million to $40 million. But you mentioned that there's a $66 million of non-recurring payments. And you also mentioned that there's $125 million hit you're taking from adopting the billing practices of Cloudera. So if I take your negative $30 million, $40 million add back $66 million add back $125 million, is that the right math to take a guesstimate as to what normalized cash flow would be for Cloudera pro forma?
Yes, yes. So if there were no merger related spending and if we kept the Hortonworks business at 19 months contractor net duration, yes, that would get you to approximately the normalized cash flow. And by the way, going back to some of the earlier points on mergers synergies, you can clearly see a phenomenal increase in normalized cash flow from where we are today to where we will be a year from now.
Got it. Okay. And then maybe a second one, Jim, you highlighted a couple of times that you're taking into account some merger disruption in the first half. So on the margin it makes us want to model, second half a little stronger, first half a little weaker. So, I'm just wondering if you could give us some guidance, where in the first half numbers, would we see evidence of merger disruption that perhaps we should cool a little bit on our estimates. Because I look at your subscription revenue guidance for Q1 and it's actually the same percentage of the full year subscription revs as Cloudera used to post in the past. So the subscription revenue guidance doesn't look at first blush like it's seasonally light and therefore reflecting merger disruption. So maybe just where in the model should be, should we be a little bit careful to account for this? Thank you.
Yes, it'll be it'll be in Q2 and Q3 software growth rates whether on a total basis or more importantly on an ARR basis. So the bookings impact of the dis-synergies in the first half tend to lag in terms of revenue. So we'll see bookings disruptions in Q1 and Q2, they will be reflected mainly in Q2 and Q3 ARR growth.
Okay, got it. That's helpful, Jim, thank you.
Your next question comes from the line of Rishi Jaluria of DA Davidson. Please go ahead, your line is open.
Thank you guys for taking my questions. One partner question and one financial question. Tom appreciate the clarity on the IBM side. Just wanted to maybe specifically since you've talked about the roadmap decisions being made, how does the DS factors or data science workbench from a partner standpoint worked out? And alongside that, you did mention Microsoft in your prepared remarks, is just HD Insight going to be now on the combined Cloudera platform or if you could share any specifics around there, that would be helpful? And I've got a follow up for Jim?
Okay, Rishi. So with IBM this is a very collaborative relationship. Our teams are looking at the complementary strengths of CDSW and DSX, on identifying ways that we can leverage both in a strengthening position. I also fail to mention earlier that we are continuing with IBM to do the migration of their IoT platform to our platform so that work continues as well.
And finally on the Microsoft, we are also very excited about the strong partnership that both Hortonworks and Cloudera had with Microsoft in very different ways. And now we can have an even stronger relationship. One of the things I didn't share, our sales kick-off this year which had over 1,200 attendees was held in Seattle and joined by Microsoft and IBM. And so those are partnerships we'll be building on, Rishi.
Got it. Thank you, that’s helpful. And Jim, just a clarification, because I know we're going to have a lot of these conversions with the clients tomorrow. But your operating cash flow being brought down or target being brought down from 15% to 10% in calendar year 2020. That is purely the billings duration from Hortonworks doing longer and bringing that in line with the 13 months that you have that's correct, there is no other moving pieces and are resulting in that margin coming down.
Absolutely. So if you take that target of 10%, and by the way in my script I talked about the billings impact in fiscal year 2021 is going to at least $75 million call that roughly 7% of revenue. If you add those two together you would get a normalized OCF of 17%. So on a normalized basis, we're right where we expect it to be.
Perfect, that's helpful. Thank you guys so much.
Your next question comes from the line of Sanjit Singh of Morgan Stanley. Please go ahead, your line is open.
Hi, this is Josh Baer for Sanjit. I was hoping if you could talk a little bit about the potential for improved renewal rates post-merger given the change in the competitive environment?
This is Tom. We expect -- we are pursuing improving renewal rates. This goes back to a lot of the work that Cloudera began a year ago what we called our transition work, which we have completed. We have introduced more technical resources into our install base, we're in line with our partners more on delivering outcome based capabilities and allows focuses to improve our renewal rates.
And of course, we don't have the dynamic of customers playing off how Hortonworks and Cloudera against one another and try to move workloads and lower the prices. So factor into our renewal rates is also shrinkage of renewals not just losing a customer. And we expect less of that.
Great, thank you.
Thank you, Josh.
There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Well, thank you all for very thoughtful questions and joining us on this first earnings call as the New Cloudera, the Enterprise Data Cloud Company. We are very excited about the journey ahead of us, we are very excited to meet with you on a quarterly basis as you follow this journey. This market is moving in our direction. We now have a team that is stronger, innovative faster and positioned to lead this market. So thank you for your time today, we look forward to talking to you in 90 days.
This concludes today's conference call. You may now disconnect.