Cloudera, Inc.
Q3 2021 Earnings Call Transcript

Published: 4 Dec 2020

[Operator:]

Good afternoon. My name is Chris and I will be your conference operator today. Welcome to the Cloudera Third Quarter Fiscal 2021 Financial Results Conference Call. All participant 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. . Please note this conference is being recorded. Your host is Mr. Kevin Cook, VP Finance, Corporate Development and Investor Relations.

[Kevin Cook:]

Thank you, operator. Good afternoon and welcome to Cloudera's third quarter fiscal 2021 financial results conference call. We will be discussing the results announced in our press release issued after market close today. We have also posted today's prepared remarks and supplemental materials on Cloudera's Investor Relations Web site, which in combination with our press release, provide additional information as well as greater accessibility to today's quarterly conference call. From Cloudera with me are Rob Bearden, President and Chief Executive Officer; Jim Frankola, Chief Financial Officer; Arun Murthy, Chief Product Officer; and Mick Hollison, Chief Marketing Officer. During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. 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 on this conference call. These risk factors are described in our press release, and are more fully detailed under the caption Risk Factors in our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our other filings with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP financial measures exclude stock-based compensation expense, amortization of acquired intangible assets, and extraordinary non-cash real estate impairment charges, if any. 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. All references to operating income are to non-GAAP operating income. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today’s press release regarding our third quarter results for fiscal 2021. The press release has also been furnished to the SEC as part of a Current Report on Form 8-K.

[Rob Bearden:]

Thank you, Kevin. Good afternoon, everyone. Thank you for joining us to discuss our third quarter fiscal 2021 results. Today we’ll focus on CDP momentum with customers, strategy and the rationale for our planned share repurchases and debt issuance as announced a short time ago in our quarterly results press release. We continued to execute extremely well in Q3. Total revenue in the third quarter was $218 million, subscription revenue was $197 million and non-GAAP operating income was $49 million. Annualized recurring revenue reached $756 million at the conclusion of the quarter, representing 12% year-over-year organic growth. The total number of customers who exceeded $100,000 of ARR was about level at 1,008. The number of customers who generate ARR greater than $1 million grew from 172 last quarter to 179 in Q3. It was an excellent performance in the midst of what remains a difficult operating environment based on the pandemic. It’s especially encouraging that, even while we wait for the CDP product cycle to be reflected in the financials, growth in subscription revenues and ARR has been consistent for several quarters. Also, we delivered another extraordinary result on the bottom line, evidencing significant operating leverage in the business, and Jim will spend more time on operating profitability in a few minutes. Now let’s turn to an update on the Cloudera Data Platform. It may be useful to outline our priorities and expectations for CDP. CDP represents the next generation of data management and advanced analytics as a hybrid multi-cloud platform. It’s the industry’s first enterprise data cloud, driven by the rapid innovation of the open source community and enterprise data cloud supports both public and private cloud implementations across the complete data lifecycle in a secure environment. That means CDP can solve real business problems for a wide variety of use cases ranging from data collection to reporting and artificial intelligence.

[Jim Frankola:]

Thanks, Rob. Hello, everyone. Q3 was another very good quarter for Cloudera, reflecting stability in the business and consistently strong execution on all measures. Total revenue was $218 million, an increase of 10% year-over-year. Subscription revenue was $197 million, an increase of 18% year-over-year. Annualized recurring revenue for fiscal year Q3 was $756 million, up 12% over last year. Note, information regarding definitions and trends can be found in today’s press release or the supplemental materials on Cloudera’s Investor Relations Web site. As Rob indicated, we concluded Q3 with 1,008 customers who started at or have grown to more than $100,000 of ARR. We expanded customers representing greater than $1 million of ARR to 179 from 172 last quarter, which represents a 23% increase year-over-year. Also, gains in Q3 were similar to Q2 with respect to non-paying users of the software becoming subscription customers. The third quarter was marked by record profitability for the company. Greater operating profit is a reflection of a core merger thesis as well as outstanding execution and sustained revenue growth. In addition, like many other companies, we have seen short-term financial benefits and costs associated with the pandemic. In Q3, our operating margin came in at roughly 6 percentage points higher than normalized levels due to lower travel, field marketing and facilities costs. 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. Our non-GAAP measures exclude stock-based compensation, amortization of M&A-related intangibles, and any extraordinary non-cash real estate impairment charges. Total gross margin for Q3 was 85% compared to 77% in Q3 of last year driven by subscription gross margin of 91%, up from 86% in the year-ago period. Total operating expenses were $135 million for the third quarter, continuing a post-merger trend toward a lower expense structure. These operating expenses were 62% of total revenue in Q3 of fiscal 2021 as compared to 81% of total revenue in Q3 of last year. Overall, operating income was $49 million for the third quarter, representing an operating margin of 23%, a substantial improvement of 27 percentage points compared to Q3 of last year. Operating cash flow for the third quarter was $18 million, bringing year-to-date operating cash flow to $119 million. Top line growth, good collections and ongoing operational efficiencies are driving our strong cash flow. Diluted earnings per share was $0.15 in the third quarter compared to a loss per share of $0.03 in the third quarter of fiscal 2020. Now, turning to the balance sheet, we exited Q3 with $568 million in cash, cash equivalents, marketable securities, and restricted cash, flat from $569 million at the conclusion of Q2. Capital expenditures were $3 million in the quarter. Total contract liabilities, which comprise deferred revenue and other contract liabilities, were $468 million at the end of the third quarter. RPO was $827 million, up 21% year-over-year. Current RPO grew 14% over last year. I will conclude by providing initial guidance for fiscal Q4 and updated guidance for the fiscal year, which is subject to the disclaimers provided at the beginning of the call regarding forward-looking information. We expect Q4 total revenue to be between $219 million and $222 million, representing approximately 4% growth compared to Q4 of last year with subscription revenue in the range of $199 million to $202 million, up approximately 10% year-over-year. Non-GAAP operating income is our primary bottom-line metric. We expect operating income for the fourth quarter to be in the range of $35 million to $40 million, or roughly 17% of revenue. Earnings per share for Q4 is projected to be $0.10 to $0.12. For fiscal year 2021, we expect total revenue to be between $862 million and $865 million, representing approximately 9% growth with subscription revenue in the range of $775 million to $778 million, up approximately 16% year-over-year. We expect operating income for fiscal 2021 to be in the range of $131 million to $136 million. As discussed, we do not anticipate a dramatic increase in operating profit in Q3 to be repeated. We expect our operating expenses to increase modestly in Q4 relative to Q3, resulting in operating income margin of approximately 15% for fiscal year '21. Operating margin is projected to remain at approximately these levels for the foreseeable future. We will continue to see the benefits of scale and increasing operational efficiencies offset by a resumption of certain expenses to pre-pandemic levels coupled with a modest increase in product, sales and marketing expenses as CDP continues to gain traction. Earnings per share for fiscal 2021 is projected to be $0.40 to $0.42. And I’ll now turn it back to Rob for some concluding remarks.

[Rob Bearden:]

Thanks, Jim. As you can tell from the financials and our outlook, the business is doing well. We’ve exceeded all internal and external expectations for several quarters now. We’ve executed on the merger rationale with Hortonworks, achieving substantial operating income margins and increasing cash flow through strong management, operational efficiency gains and cost discipline. We’ve innovated at a remarkable rate, having launched cloud-native services as well as private cloud offerings this fiscal year. We believe that we are the only vendor that can provide true hybrid multi-cloud solutions and deliver on the enterprise data cloud vision. Our customer base is large and loyal, and continues to expand its usage of our offerings. We’ve built strategic relationships including expanding our hyperscale cloud provider partnerships. Our new CDP products are being widely embraced by customers, existing and new. As a result, the Board and I have never felt more confident about our competitive positioning and strategy and we believe that our shares represent an attractive investment opportunity. Based on this conviction, we are announcing today a share repurchase authorization of $500 million in addition to the existing $74 million authorization that’s outstanding. We intend to fund this return of capital primarily through borrowings under an institutional term loan, which we believe can be closed during the current quarter based on the strength of our business and the leveraged loan and debt market conditions. Even after completion of the $500 million of share repurchases, we would have substantial balance sheet flexibility with more than $500 million in cash. And as evidenced by our recent operating income performance, we expect to continue to generate significant cash flow. We plan to use the cash balance and future cash generation for targeted investment in products, growth initiatives and technology acquisitions. My thanks to our employees for the accomplishments that I just outlined and many more. I also want to thank our partners, customers and the community for their continued support. As a reminder, Arun Murthy, Chief Product Officer; and Mick Hollison, Chief Marketing Officer are available for Q&A with Jim and I. Operator, please begin the Q&A portion of the call.

[Operator:]

. Our first question comes from Chad Bennett with Craig-Hallum. Your line is open.

[Chad Bennett:]

Great. Thanks for taking my questions. Nice job on the quarter. And the guide looks great. So just a couple of things. Now that we're seeing pretty material migrations to the private cloud, Rob, what – kind of what are the expectations as we look out? And I know it's still early, but we look out 6 to 12 months with the existing customers that are migrating. What's the potential for expansion just on the private cloud side from a use case standpoint? Can you elaborate on that?

[Rob Bearden:]

Hi, Chad. Thanks for joining us. So we're going through and quite frankly find the pattern recognition on what that looks like. The good news is, we now have the public and private out in the market and that's very helpful, because that now lets our customers define and establish what their data architecture looks like, what the migration of workloads are going to be, what the order and sequencing are going to be, what's going to be on private, what's going to be on public. The typical pattern that we're seeing right now is biggest majority of the existing workloads go to private and then they will, in many cases, expand and add incremental workloads; some of those will be private, some of those will be public, and then will tend to be stored on public and then leveraged on-prem data sets for better views, more holistic views of data.

[Chad Bennett:]

Perfect. And then maybe one quick follow up for Jim. Just in terms of – obviously interesting times right now still in the pandemic, but just in terms of how you're thinking about seasonality of bookings in the current quarter, relative to prior years? And maybe a follow up if I can on that for either one of you, just kind of your level of or IBM's level of interest in activity that you expect in this quarter, especially around the private cloud product? Thanks.

[Jim Frankola:]

So I'll start with the seasonality piece and then I'll turn it to Rob to talk about IBM’s interest. So, typically we do around 35% to 40% of our bookings in Q4. So we're a seasonal business like most enterprise software. This Q4, it's a tough question to model. So we initially anticipated back when the pandemic started that the life would potentially start resuming normalcy in Q4, that's clearly not the case. And we're looking at obviously a second wave of virus impact. So we've modeled the Q4, it looks a lot like Q3 and Q2 in terms of customer demand. Seasonality, that might mean that that is on the lower end of that 35% to 40% range, but it's tough to call right now.

[Rob Bearden:]

I’ll pick up the question then on IBM. Very similar story actually with our just core customer base. As you know, we got a number of joint customers with IBM. It's been a great relationship, great partnership. Go to market continues to strengthen. And those customers tend to be the high end enterprises that have very, very strong interest in leading the biggest portion of workloads right now to CDP private. It's a really big value proposition, not only in terms of just being able to separate storage, compute, the value that brings, but just the ease of use, the ease of admin and the value creation that OpenShift brings to the CDP product platform. And on a holistic basis where we have over 150 customers that are in motion right now to CDP and many, many more than that that are in the detailed planning phase, how that splits between our independent customers and joint customers with IBM and other partners, I honestly can't tell you. But the big migrations to CDP private are really happening and that starts to also now open up and enable adoption to CDP public as well. So hopefully that captured your question.

[Chad Bennett:]

It does. Thanks much. Nice job.

[Rob Bearden:]

Thanks, Chad.

[Operator:]

Your next question is from Mark Murphy with JPMorgan. Your line is open.

[Mark Murphy:]

Yes. Thank you very much and I will add my congrats. Jim, I'm curious which metric you think we should index to as a best indication of Cloudera’s growth in Q3? I'm looking across ARR growth of 12%, the CRPO growth I think you said was 14%, subscription revenue growth of 18%? Which one do you think is best representing it? And then do you have any thoughts on how to model the ARR growth, specifically in Q4, which probably kind of ties in with what you were talking about a moment ago?

[Jim Frankola:]

Yes. So for sure, ARR is the single best metric to look at our top line growth. Once again, it's a representation of the economic value of customers at the last day of the quarter. It normalizes for the effects of the merger accounting changes, the shift to 100% open source software. CRPO is pretty close, but there are some artifacts in RPO. For example, you have customers that may have cancellation provisions in their contract that get excluded from RPO, but are still valued in ARR and we get the economic value. So I’d always point you to ARR. And by the way, if you look at ARR over the past four quarters as compared to CRPO over the past four quarters, the average is essentially the exact same number. So ARR is by far the best metric. Going back to how to model ARR, from our perspective, since ARR is a surrogate for bookings, that's one reason why it's a great number. It captures almost all the economic activity that occurs in the quarter and therefore it's hard to offer the same level of prediction as you would for some of the other numbers. What I’ll say is ARR should trend very similar to software revenue trends over time, and I'll leave it at that.

[Mark Murphy:]

Okay. And then I had a quick follow up in terms of the consumption revenue we're layering into the model for CDP public. Rob, I know you said it's a small amount, but just curious how materially you think that could become if we’re looking at that a few years down the road?

[Rob Bearden:]

Yes, let me turn that to Jim.

[Jim Frankola:]

Yes. So in the very long run, we look at some of the same models that you probably look at as well that says a portion of our customers workloads will be running on prem, fortunately running in the private cloud and fortunately public in the public cloud. The public cloud portion will probably be a third to maybe 50% over time. The consumption piece is difficult to estimate at this time in terms of exactly how fast we're going to get there. But we do believe that the public cloud will be a significant portion of our business and the primary way that we're going to be pricing there is on consumption.

[Mark Murphy:]

Great. Thank you very much.

[Operator:]

Our next question is from Tyler Radke with Citi. Your line is open.

[Tyler Radke:]

Thanks and good afternoon. I wanted to follow up on your comments on some of the customer momentum you're seeing with CDP private. I think you talked about 10% of the overall customer base starting to move and 50% of $1 million plus. Can you just give us a sense for how far through the migration those customers are? When do you think they will be completely migrated? And what kind of financial impact, uplift, up-sells have you seen thus far?

[Rob Bearden:]

Okay, sure. Thanks for joining the call today. I appreciate it. So, as you can imagine, there are varying states of where they are in their migration. Just from a grounding standpoint, our customers, especially the big enterprises, $1 million plus customers, they're truly running major portions of their business in mission critical workloads, high value creation applications, big data sets typically that they grow and expand fairly aggressively. So there has to be a very methodical process for moving them to the new environment, whether it's public or private. And so we've been engaged with all the customers in varying degrees of capacity to make sure that there's a very clean migration plan that they could go through, and the goal is to make it really look and feel like an upgrade. But again, that depends on which release of Cloudera-Hortonworks legacy they're running and various things. But the goal is to be able to make that move as an upgrade. But even as an upgrade, they will still have to go through a dev/test process, make sure that all the security processes are clean, all the queries run correctly, all the data moves over. And they tend to do it in phases. So with that as the backdrop, I think we'll see of the 150, probably 20%, 25% of those have more than 50% of their existing legacy environment in production in first quarter next year, and then an acceleration of the balance of the customer base in the second and third quarter. And also beyond that first 10% that we have moving right now, that will accelerate because there's a number of others that are in the planning phase, they've just not started the actual migration. And we'll be able to bring more tooling forward over the next 90, 120 days that will also ease those migrations and help move those migrations forward a little faster. I hope that answered your question.

[Tyler Radke:]

Yes. Thanks, Rob. I appreciate the detail. I guess to clarify one thing, and then I have a follow up. When you say you want to treat these migrations as an upgrade, is that – does that mean an upgrade in terms of financial impact in terms of higher revenue, or is it just you're trying to obviously pitch that you have a much stronger product and theoretically, the customer is more willing to expand if there's more features. So I just wanted to clarify if that was meant as a financial comment.

[Rob Bearden:]

Okay. No, I'm sorry. It was really more of a technical reference, if you will, of upgrading from one release to the next. That was really the context I meant from an upgrade standpoint. Of course, it represents opportunity because there's pretty strong value creation of moving from the legacy to CDP private or public. They also tend to want to expand and consume more experiences, whether that's the entire full lifecycle of data management or if it's just one experience whether that be streaming or machine learning, AI or our data engineering, data warehousing solutions. So it represents an opportunity not only to as we move into CDP, they can expand the amount of data under management but also then there's a tremendous amount of value creation of bringing and consuming and leveraging more the lifecycle experiences on top of that, and it's great value exchange and obviously represents more monetization for us.

[Tyler Radke:]

Got it. And if I could just sneak in one more kind of a higher level question, but I don't know if Jim or Rob or Arun wants to take it. But obviously you've seen your expenses come down a lot. Part of that is driven by lower T&E because of COVID. I think headcount has been kind of trending down as well. It sounds like you're really going after a lot of different markets where there's a lot of competition, whether it's data warehousing, now getting into streaming SQL where you have obviously a large kind of player in that space. You're going up against folks in data science. And I guess how are you thinking about just balancing, investing in those very lucrative but highly competitive markets with the need to kind of continue to show leverage in the financial model? And I guess how should we think about your headcount hedges? Do you think you have enough folks to kind of make the investments and build the products in those markets today? Thanks.

[Rob Bearden:]

A lot wrapped in that question, so let me do my best to make sure I hit it correctly and inclusively. So what we've done is made a very concerted effort to be efficient in our headcount and we've moved a lot of headcount offshore from the dev and support standpoint, but also from the back office standpoint in the lower cost geo regions. And we've been very successful in that model. And so that allows us to bring very, very highly skilled resources that are cost efficiencies. And we were able to concentrate those skill sets in particular areas that suit our category very nicely. So from a personnel financial model leverage, we’re seeing the benefit of that leverage being picked up in the OpEx line. On the markets that we serve, recognize that what we're very focused on is enabling the enterprise data cloud capability. And so that means being able to provide a hybrid multi-cloud data platform that manages the entire lifecycle of data. So bringing that data under management from point of origination through the stream, be able to take it through an engineering process so then it's stored in either an operational store or a traditional data warehouse and do that across a hybrid multi-cloud platform leveraging a single pane of glass to manage one framework for security, governance, managing metadata, and all the lineage that comes with that. And so while that does cross many of the point solution departmental level areas, we believe we're the most competitive and really only true enterprise data cloud provider that enables that full lifecycle of data across a hybrid multi-cloud platform with one framework for security and governance. And that's really what our enterprises that we serve in the Global 2000 demand. It's not – they're more interested in having a holistic data architecture strategy that encompasses hybrid and multi-cloud and can manage that end-to-end data lifecycle. And that's what we're bringing forward with CDP. And the reception we're getting from our customer base is great. And as we're introducing that to new customers and prospects, we're getting really, really strong reception.

[Jim Frankola:]

And let me just jump in on some of the financial elements. So one of the things that we're certainly trying to signal with this quarter is the almost unprecedented improvement in operating margins that you've seen in Cloudera over the past two years, or even the past year, won't continue for the foreseeable future. So we've reached our interim target of profitability. And from a business standpoint, CDP is at a level where we can start investing for growth. And as you're well aware, things move slowly in terms of the investment cycle to the bookings cycle in the subscription software industry. You have to invest early in sales and products. Then you have to sell it and then eventually it shows up in revenue. So going back to one of your questions on the financial model, our profitability is pretty much where we think it should be for right now. And we're looking to invest in the success of CDP. Therefore, as we continue to get operational efficiencies in the business, we’ll reinvest them on a go-forward basis.

[Arun Murthy:]

Yes. And this is Arun, Tyler. Just to add on to the question. The fundamental advantage we have or the competitive edge we have is the integration within the process. We feel like that integration, especially with the security and downplays and the fact that you can do streaming with engineering or single machine learning, these four or five markets we don't think of ourselves as having to go like head-to-head with every single feature or function out there on a standalone basis. Our sort of advantage on the competitive – overall, we represent a better value proposition by purely the virtue of integration. In some ways, you can think of it as sort of why Microsoft Teams is doing well compared to a standalone product. The integration itself is the value proposition, especially for the customer base we go after which is the high end of the enterprise.

[Tyler Radke:]

Thanks again for all the color, guys.

[Operator:]

Our next question is from Jack Andrews with Needham. Your line is open.

[Khanh Ngo:]

Hi. Good afternoon. It’s Khanh in for Jack. Thanks for taking my questions. Rob, you talked about how customers can easily switch between and consume your discrete cloud services. How do you envision the long-term profile of discrete services should look like within your 100,000 customers? And how should we be thinking about the up-sell impact as customers consume cloud services?

[Rob Bearden:]

Yes. Hi. How are you doing? Thanks for joining. So yes, it really goes back to a comment we just made. Those customers are going to consume those services. Many of those want to be able to consume multiple services. In fact, most of our customers are not just consuming one, but they're consuming multiple of the services. They want to provide streaming with ML and streaming with ML all the way down through our data engineering solutions. And so what the real goal is, is to make it easy for them to get started, bring the data under management and then let them be able to turn each of those services on continuously. And the reason that's so cost effective – excuse me, not cost effective, so efficient for them is the integration that Arun is talking about. They don't have to bring and stitch together multiple point solutions. They can just continue to turn those individual services on as a continuous flow and then be assured that it has a common security and governance framework that goes through the entire lifecycle data. And so that just opens up a number of different use cases that they can apply and make sure that they do it consistently and repeatedly across the enterprise.

[Khanh Ngo:]

Great. Thank you. That makes sense. And in the past you've talked about how your sales team’s focus in FY '21 will be to migrate customers to CDP. Can you talk about the calories that it takes to migrate your customers from your sales team and how should we be thinking about FY '22 as more of your sales team gets unlocked, given that migrations are going well?

[Rob Bearden:]

Okay, great. So the goal – this is one of the things just touching on the earlier question, one of the things that we're really focused on is making those migrations as straightforward as possible. And that's going to come in downstream tools that we're going to be delivering. We're very focused on providing tooling that's going to help those migrations move forward. The goal was to make it feel like an upgrade from a release to a release. Now that has a lot of variable factors to it, depending on what release they’re running in some of their environmental conditions. But we're aggressively focused on how we get that customer base to move over. We're also very focused on ease of use of the platform so that a lot of the functions that may have required professional services can actually be done on a self-service basis. We're very, very focused on that, the digital transformation that Mick’s been leading and we're getting a lot of good success there and seeing good progress and uptake with the customers and things they're able to do in their migrations now to CDP, both private and public. So hopefully that answers your question.

[Khanh Ngo:]

Thank you. That's very helpful.

[Operator:]

Our next question is from Zane Chrane with Bernstein Research. Your line is open.

[Zane Chrane:]

Hi, gentlemen. Congrats on a great quarter. A question for Arun. If I look at the TCO, you’ve commented on how you have TCO advantage or lower TCO with CDP public and private than the alternatives? How do you – can you help me understand how you have a lower total cost ownership versus some of the mega scale cloud vendors that have such a large scale advantage and can bundle in the infrastructure? And then secondly, if you could help me kind of quantify what does the actual TCO difference look like in dollar percentage terms both in a private cloud and public cloud versus alternatives? Thank you.

[Ar1:]

Great questions and thanks for joining. So a few ways to look at this, right. We've got products coming to this in the past, we see this every day. Then we have this conversation with customers. If you look at kind of cloud providers, right, typically what we see, much like whether you go to a single cloud provider and buy a bunch of services, right, you have to buy a monitoring service, a warehouse service, an engineering service, and security service, and so on. Here you see all of this kind of comes bundled in, right. So what happens is, if you look at the overall package, it's a fully integrated platform. And the even better part is that it's available on every cloud you might want to care and now typically an enterprise will care about one, maybe two, but also a lot of our existing customers have massive footprint. So the fact that if you can think of it in terms of not just the product costs, but also the people and the skills that you need to manage this infrastructure and security and governance and their functionality, the fact that you can do this in one go versus buying either two different vendors and integrating them yourself and paying integration tags, or having to buy from one cloud provider but then buy different services at different price points. And the fact that they're all bundled into CDP provides a massive sort of lift in the CDP. Then, what we also see is typically they go head to head against one of the, let's say, the out there. Remember that we had a couple of years of investment now, which are highly differentiated, whether it's our security pieces or performance basis. So, not very commonly now when you go head to head against one of the services, one of the open source loop services there purely from just the performance standpoint will come out anywhere from 2x to 8x faster based on individual workloads. Now that when you combine – when you think of that and that compounds with the infrastructure cost, the overall TCO from people scale and just pure software look really attractive proposition, especially for the customers we serve today. And that's what keeps us all super excited.

[Zane Chrane:]

Very helpful context, I appreciate that. Just a quick follow up. Now that you're shifting to usage-based pricing, it seems like the volume of data growth in existing enterprise customer workloads, just that sheer data volume increasing kind of exponentially alone should be a pretty notable tailwind to your revenue growth. Just wondering if you have a sense of kind of across your entire install base of customers, what the average growth rate is of data across those workloads?

[Rob Bearden:]

Yes. So your specific question is average rate of data? In the world, it’s growing at 50% to 100% a year. Within our customer base, I don't know the exact rate. It’s probably at that or maybe slightly less. In terms of the ability to monetize it, we are shifting to usage-based pricing. We're shifting to consumption-based pricing for processing, which in some respects is as important if not more important in the long run. And by consumption-based, I mean pricing per core versus per node that allows us to share the benefit of Moore's Law with the customers. With all that said, we're still at the very early stages. So I would expect it in the long run to have a – be a modest tailwind in terms of opportunity, a few percentage points every year for many years in a row. But we're just started getting started.

[Zane Chrane:]

That’s great, super helpful. Congrats, guys. Really nice quarter.

[Rob Bearden:]

Thank you.

[Operator:]

Our next question is from Pree Gadey with Barclays. Your line is open.

[Pree Gadey:]

Hi there. I want to ask you on the subscription revenue guide. For 3Q, you guided to a sequential decline. And I know it was a conservative guide. But this quarter, your midpoint of the guide implies about a 2% sequential increase. So I'm wondering if you guys are seeing something in the pipeline that you're a little bit more excited about. How is the demand environment this quarter versus last quarter?

[Jim Frankola:]

I'll start and Rob can chime in if he wants to. So, the overall demand environment is very similar in Q4 as it was in Q3. So we're still in the middle of the pandemic. It's still a headwind, although we believe we're more resilient than most against that headwind. Regarding the sequential ups and downs, that goes to the seasonal nature of our business. So Q4 is our biggest quarter of the year. Therefore, we tend to see a sequential increase in revenue and ARR heading into Q4, Q3 to Q4 and then into Q1 as well, Q4 to Q1. So it's the seasonality that’s driving the sequential changes more than anything else.

[Pree Gadey:]

Got it. On CDP private cloud, from some of your early customers I was hoping if you could share kind of expansion rates that you're seeing from those initial customers? And just as a follow up to that as well, can you give us an idea of what type of time commitment and cost commitment it takes for customers to roll over to the new CDP private cloud?

[Rob Bearden:]

Yes. So appreciate you joining the call as well today. So, again, it goes back to we are – we want this to, as much as possible, feel like an upgrade from release to release for our customers when they go from either the legacy Cloudera-Hortonworks platform to CDP that has a lot of different factors and in some cases, it's more complex. In some cases, it's even more straightforward. And so time and cost will vary depending on where they are in their existing legacy platform, which release and – but what we've done is we’ve focused on making sure that we have dedicated teams that will help them through both the planning process and the implementation process so that we make sure we have very, very clean blueprints for them. And as time goes by, we're going to give them more and more tooling that will actually help them through that process and very thorough migration guides that will help them implement those blueprints and move through it. So time and cost vary, but our goal is to help them get there very cleanly and as quickly as possible. So does that hit the question you were looking for?

[Pree Gadey:]

Yes, thank you. And I guess the expansion rates that you're seeing from some of your earlier CDP private cloud customers that are a little bit more mature.

[Rob Bearden:]

Yes. So on the expansion rate, it's both expansion on private and that's got a couple of dimensions to it. And what it really does is it opens up to the public. And so on the private, obviously, after they move from the legacy environments to CDP private, they can expand not only incremental data under management, but they can begin to apply more and more use cases to that environment, because recognize it's a much easier environment to operate, it's much easier to scale, because what we've done with separation of storage and compute and all the other things in value that brings from a scale up and down standpoint, the efficiencies of hardware usage that that clearly brings. So it makes it much easier to bring more use cases on, more data under management in a much more cost effective way than running in the traditional on-prem legacy environments. What it also does is it gives them the ability to very cleanly embrace that management of the entire lifecycle of data, leveraging, streaming and machine learning through the data engineering and ultimately into the warehousing capabilities, all leverage. And then what that does then is open up the public cloud for expansion use cases and being able to bring several kinds of workloads up and down quickly and to be able to achieve quick scale out, and CDP is very, very well suited for that. And it begins then to the public tier expansion much faster than just organically. So that's the pattern that we're now seeing.

[Jim Frankola:]

And let me just add. If you're looking for a quantification of that expansion rate, I'll repeat what Rob said earlier. We're too soon in the cycle to get that pattern recognition. CDP private cloud communities came out in August. Our customer set, as we've told you, the majority of them are in heavily regulated industries, which has made them very resilient. It also makes them very careful as they adopt new technologies. So many of our customers are evaluating the software, putting it through security, having it running on a single set of servers right now. So it will take us a little bit of time before we have enough data to really be able to quantify the answer to that question.

[Pree Gadey:]

Great. Thank you and congrats on the awesome quarter.

[Rob Bearden:]

Thank you very much.

[Operator:]

Our next question is from Sanjit Singh with Morgan Stanley. Your line is open.

[Mark Rende:]

Hi. This is Mark Rende on for Sanjit Singh. Thanks for taking our question. In terms of marketing CDP, going to market with it, are you targeting certain use cases or kind of specific solution sales, whether it be IoT or data warehousing or selling CDP as a kind of general data management platform? Color on that would be really helpful. Thanks.

[Rob Bearden:]

Yes, sure. Hi, Mark. Thanks for joining. We have a very broad set of use cases that get applied onto the platform. Clearly CDP is designed and architected to enable the hybrid multi-cloud data management platform capability, but then the use cases that get leveraged across it probably 50% of the time are data engineering and machine learning. The balance then is heavily weighted towards streaming and data warehousing. We've seen great adoption in the life science and healthcare verticals. Predictive Analytics, leveraging from an IoT standpoint tend to be areas that we're seeing great traction in. As we’ve talked about in the prepared remarks, we’re getting great traction from real-time streaming analytics that's playing across multiple verticals. Oil and gas actually is one of those that's really coming on strong. Healthcare is another vertical where those use cases are becoming more widespread. And what we're learning now is we’ve introduced CDP in the value proposition and customers really understand how quickly they can get up to speed, the ease of use and flexibility that brings the new kinds of use cases they can begin to apply. So we're continuing to learn as well.

[Mick Hollison:]

Rob, it’s Mick. I’ll jump in a little bit there as well. So you hit it on the head. The primary motion is around the enterprise data cloud, hitting the whole lifecycle with hybrid multi-cloud offerings, Mark. And the one other area I would add is that our marketing is very targeted at specific accounts and specific verticals. So we do a great deal of account-based marketing where we get very close to the customer to understand their specific use cases, and then deliver those up not just in what we offer the customer the product and services, but even the way that we market to them in a very specific way. So hopefully, that’s a little added color.

[Mark Rende:]

Great, that's super helpful. Thanks so much, guys.

[Operator:]

Our next question is from Nehal Chokshi with Northland Capital Markets. Your line is open.

[Nehal Chokshi:]

Great. Thank you and congratulations on the sustained ARR growth of 12% nicely above the base rate of 10% that you talked about. What will it take for ARR to accelerate even more above this 12% year level to say 20% beyond the potential pressure on OpEx to fund that growth? Meaning like if you can maybe divvied up between ASP uplift from CDP migrations, customers adopting more CDP SKUs or customer adds driven by public CDP and if all, parse it up then for me as well?

[Rob Bearden:]

Sure. Thanks for joining the call. There's a few things there. Recognize where we've been and a bit of the migration that we've gone through in this fiscal year. We've been very focused on making sure we're bringing the customer base through a planning process to be able to be in a position to adopt CDP public and/or private as we've been able to make that available. As you know, we continue to evolve progress with CDP public. CDP private came out in August. We continue to make good progress for CDP private and we've been able to bring truly that interoperability between public and private to achieve our enterprise data cloud vision for hybrid multi-cloud. And so now that we have those in market, now that we have production environments that customers can truly move and begin to move their workloads on to in real time, that's begin to, as you've seen in the numbers, pick up some momentum behind it. There's some other things that you're aware of that we've been doing, like variable pricing, like moving the bits behind the paywall that are also working and contributing to growth. As we move into next year, the way we will continue to expand is we’ll see more and more benefit from variable pricing. We'll see more and more benefit from leaving the bits behind the paywall. We're going to be able to now maintain the operating margin that Jim talked about earlier in the call. We think we'll be able to maintain that at the traditional levels that he mentioned. It will still have the ability to invest in things that will help drive growth. We're going to add more capacity into the deal for next year so that we can move beyond just our customer base. And now that we have CDP hybrid in the market, both public and private, we're going to be able to now take that to prospects beyond the customer base. We're seeing benefit from the digital transformation that Mick’s led to where we can now engage digitally with customers that we've not traditionally been able to touch, because we've had limited capacity. We've done a great job of being able to get our product to be able to be consumable on a full digital basis versus we were days, maybe even weeks before the environment could be run. Now we're literally minutes. And that pledges now being able to go down market in very targeted sectors and be able to get the benefit of digital engagement from awareness all the way through consumption and monetization. So it's a number of these things that we're going to be doing that are going to begin to move this into a higher – consistently higher growth mode where we're eventually back to growing at the market rate that I think we're very well positioned to be growing at.

[Nehal Chokshi:]

Is it too early to start talking about percent of ARR that's coming from public or hybrid?

[Rob Bearden:]

It is. We’ll clearly learn what the patterns are and what the distribution will be between public and private. What our customers want is CDP hybrid. They really want to be able to have a true hybrid environment, as mentioned earlier, slightly differently. We think most of the existing workloads move over to private, they'll expand some on private, some to public. Net new workloads will begin on public and then they'll be able to leverage the private capabilities. And then they'll also be able to also expand to the lifecycle of data experience beyond just the management of data as a single platform.

[Nehal Chokshi:]

All right. Thank you.

[Operator:]

Our last question comes from the line of Brad Reback with Stifel. Your line is open.

[Brad Reback:]

Great. Thanks very much. Jim, the 315 million of bookings you guided to for 4Q implies a fairly significant sequential decel, anything going on there?

[Jim Frankola:]

Are you talking about the footnote in the fillings – billings are fairly immaterial for us. Our focus is on ARR. What I'll say is billings hasn't been a very good measure partly because of how we change the billing practice for Hortonworks from a multiyear prepaid to annual upfront, and that is still being washed out. So you have business that would normally be billed in Q4 that was billed Q4s ago. So that's part of what's going on. In addition, in any given quarter, you have deals that are pulled forward or postponed that dramatically affects billings. And once again, I’m not overly focused on the billings number for Q4 because it's all about ARR. And ARR will much more closely approximate revenue growth than it will billings.

[Brad Reback:]

Got it. And then maybe one just quick follow up for Rob. Given the multitude of growth vectors that you've talked about on the call, why is buying back $500 million of stock the right opportunity versus funding those more aggressively? Typically, we don't see growth software companies buying back that magnitude of stock relative to market cap. Thanks.

[Rob Bearden:]

Yes. So we're very comfortable we can fund those growth initiatives within the parameters of the operating margins that we guided to and Jim mentioned. But look, with the status of the debt market and the multiple of our stocks trading right now, we think it just represents a great opportunity to buy back here. We're very confident in CDP. We're very confident with our customer adoption, what we're seeing on a go-forward basis. And we are very confident in our competitive positioning. And if the share price where it is coupled with our competence, we think it's a great buying opportunity and we fully intend to execute on it.

[Brad Reback:]

Great. Thanks very much.

[Rob Bearden:]

Absolutely. Thanks for joining the call. I appreciate it.

[Operator:]

This concludes the Q&A session. And I'll turn it back to Rob Bearden for any closing remarks.

[Rob Bearden:]

We very much appreciate your participation and have enjoyed having a call with you. We look forward to seeing you next quarter and having another great quarter. You all take care.

[Operator:]

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