Cloudera, Inc.
Q1 2020 Earnings Call Transcript

Published: 6 Jun 2019

[Operator:]

Good afternoon. My name is Chantal, and I will be your conference operator today. Welcome to the Cloudera First Quarter Fiscal 2020 Quarterly Results Conference Call. All participant lines have been placed in a listen-only mode to prevent any background noise. After the speakers' remarks, there will be an opportunity to ask questions [Operator Instructions]. Please note this conference is being recorded.Your host is Kevin Cook, VP, Corporate Development and Investor Relations. Kevin, you may begin your conference.

[Kevin Cook:]

Thank you, Chantal. Good afternoon. And welcome to Cloudera's first quarter fiscal 2020 conference call. We will be discussing the results announced in our press release issued after market close today. From Cloudera with me are Marty Cole, Chairman; 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 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 report 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 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 2020. 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 numbers reported for prior periods are presented for Cloudera on a standalone basis since the merger report was closed on January 3, 2019. And as such, there is no comparative year-over-year financial information for combined company. 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 first quarter 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 June 5, 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.Now, Marty Cole, Chairman of Board of Directors.

[Marty Cole:]

Thank you, Kevin. It’s good to be here with all of you today. Although, today’s call is focused on our fiscal first quarter results, I want to address briefly the other news we announced today.In a separate release, we announced that Tom Reilly will be retiring effective July 31, 2019, and that the Board has appointed me Interim-CEO. I will work closely with Tom over the coming weeks to help ensure a smooth transition and to lead the company’s executive team, while the Board conducts a search for a permanent CEO.The Board has formed a search committee and engaged a leading executive recruiting firm to identify Cloudera's next Chief Executive. I want to take this opportunity to express my thanks to Tom for all of his contributions to Cloudera over the past six years. Tom has been an important part of Cloudera's growth, and he has led us through many major milestones. We certainly wish him well in his future endeavors. I look forward to working more directly with our talented employees, supporting our customers and expanding our key partnerships. I continue to be very excited about Cloudera’s future.Tom, over to you to discuss this quarter's results.

[Tom Reilly:]

Thank you, Marty for the kind words. Likewise, I'm very excited about Cloudera's future and the innovation we're bringing to market. However, for several reasons, I’ve decided that this summer is the right time for me to retire. I've reached agreement with the Board, and I will resign from my role as CEO of Cloudera at the end of our fiscal quarter. Cloudera is well positioned with the merger integration largely complete, an exciting roadmap in place, and an aligned and seasoned executive team. The company will benefit from a new leader who will bring a different perspective and experience with large scale operations.All right. Let’s turn to discussion of our first quarter fiscal year 2020 results. With respect to Q1, we’ll cover three topics in addition to providing detailed financial information. First, we'll offer quick update on the merger with Hortonworks. Second, we'll discuss the factors that are affecting customer buying behavior and impact our full-year outlook. And lastly, we'll update our progress in delivering the Cloudera Data Platform, CDP, our next-generation cloud offering.Total revenue in the first quarter was $187 million. Subscription revenue was $155 million. And operating cash flow was positive $11 million. The year-over-year comparisons on these numbers are not meaningful as Q1 results benefit from the merger with Hortonworks. Annualized recurring revenue was $672 million at the conclusion of the quarter, representing 21% year-over-year growth.Now, let's get to the details with a quick merger update. Integration and execution of the merger continues to go well. We're now operating as one company with one strategy and one vision. People related integration work is done, and we are pleased with the way that the merged executive team is functioning. The cost synergies that we estimate at the time of the merger announcement have been validated and are being realized ahead of plan. The only remaining work is integrating several back-office systems, and this will be an ongoing process.Now, let me share what did not go well in Q1, and what our plans are for addressing it. In our first quarter as a merged company, we experienced headwinds in bookings from existing customers. These customers generally represent more than 90% of our growth who are the focus of the quarter's activity. We've analyzed the challenges encountered in the quarter, and believe that two factors primarily contributed to the bookings impact.First, the announcement of our merger in October 2018 created uncertainty, particularly regarding the combined company roadmap, which we rolled out in March of this year. During this period of uncertainty, we saw increased competition from the public cloud vendors. Second, the announcement in March of Cloudera Data Platform, our new hybrid and multi-cloud offering, created significant excitement within our customer base. CDP is compelling as it addresses many of our customers' most pressing needs. However, our rapid execution on the cloud data platform has caused some customers to wait until it’s released to renew and expand their agreements.Our conviction about the company's market opportunity and customer demand for hybrid and multi-cloud solutions remained strong. Customer feedback on CDP and its differentiating features validates our belief in Cloudera's competitive position as well as our ability to innovate in our target markets. Indeed, now that we have trained our sales reps and clearly articulated our detailed product roadmap, we are seeing significant pipeline growth.Fundamentally, we believe that our vision for an enterprise data cloud that extends from the Edge to AI is spot on. Large global enterprises have complex business use cases requiring multiple analytic functions. These enterprises require hybrid cloud services that have data and workloads in both their data centers and in the public cloud. What they're asking for is the ability to seamlessly move their data workloads to the optimal location to minimize costs and maximize efficiency. They also want one consistent model for security, governance, compliance, and management.Finally, they plan to use multiple public clouds and open-source software to avoid vendor lock-in. We believe that CDP uniquely addresses all of these customer requirements in an elegant and differentiated way. CDP development is on plan and timing for its release this summer has not changed.Arun Murthy, our Chief Product Officer, will now provide an update on CDP and some of its many innovative features.

[Arun Murthy:]

Thanks Tom. Hello, everyone. As discussed last quarter, the merging of the engineering teams came together quickly and frankly, better than expected. All major product and component rationalizations and roadmap decisions were made swiftly, and I'm proud of how fast the team has begun to execute.For example, in the first 30 days following the merger, we made Cloudera Data Science Workbench available to legacy Hortonworks customers. Similarly, we delivered the Cloudera data flow for legacy Cloudera customer base within the first 90 days. In the same time frame, we also delivered a brand new product, Cloudera Edge Manager, which opens up new IOT use cases for all our customers.Our product portfolio continues to broaden and deepen, which leads me to the most significant update initiatives, the Cloudera Data Platform. The element of CDP is going remarkably well. The engineering team is laser focused on vision for the enterprise data cloud. CDP remains on track for availability to customers this summer in the public cloud as a hybrid SaaS offering and later this year as a private cloud offering.As previously mentioned, we have already seeing encouraging signs from customers who're excited about the new cloud native platform. Like Tom, I have met many customers recently and their collective feedback is that CDP is differentiated and superior to what in the market today, particularly this leverages newer industry standard such as Kubernetes and containers for key workloads. It also addresses key needs and pain points with them as they make public cloud a key component of their enterprise architecture.Cloudera Data Platform is more than just new release for the cloud. In fact, CDP leads products to competition in a number of key areas, particularly around security, automation and cloud migration. In order to help you all understand what our customers care about, I will spend a minute to highlight three unique differentiators about CDP among the main.First, CDP offers intelligent migration, which uses powerful policy based controls to automate data movement between on-premise cloud systems and cloud object stores. This enables not only one time migration, but also ongoing incremental movement of both data and uniquely metadata, such as schema, security policies, leading edge and provenance. Furthermore, CDP provides seamless role-based and attribute based active control for data movement across security, domains in hybrid and multi-cloud environment.Second, cloud bursting. CDP addresses unpredictable business or user demand by bursting analytical workloads in public clouds, along with the relevant data to complement data center capacity. Third and importantly to cost conscious customers, CDP performs adaptive scaling. This allows us to adjust cloud resources automatically used by analytical workloads by scaling them up when demand increases and even more crucially, scaling them down for dynamically optimizing costs, all in a completely automated manner without any performance impact.Developing these innovations this quickly would not have been possible without the combined talent, technology and experience of the new Cloudera. As one company, we're proud to develop the industry's first enterprise data cloud with thoughtful analytics across hybrid and multi-cloud environment, controlled with sophisticated security and governance policies, making it easier and safer to roll out new use cases from the Edge to AI.With that, back to you, Tom.

[Tom Reilly:]

Thank you, Arun. We're excited about CDP and so our customers. Our customers' interactions regarding CDP clearly validate our vision, strategy and current competitive position. In the end, it all comes down to customers and helping them gain insights and extract value from data.This past quarter, we won 59 new customers, all of which were competitive battles, but we're advantaged by our merger and our enterprise data cloud vision. After training our new filed organization on the new products and roadmap, our rate of pipeline generation has accelerated, more than doubling from the beginning of the quarter to the end.We have presented our roadmap in one-on-one executive briefings or group sessions to well over 1,000 enterprises, representing more than half of our customer base. These interactions are invaluable from removing uncertainty, gaining substantial feedback and developing engagement on new used cases and expansion opportunities. And finally, our largest customers are all eager to participate in our CDP data program.Additionally, we also have customers who have some amazing new use cases with significant business impact. Let we share some of these customer stories and how our current cloud capabilities help them. First, ATV Financial, there're the largest financial institution in Alberta, Canada with over $54 billion in assets. They chose Cloudera running on Google Cloud for secure data management.Our platform is being used and in just framework to move data between on-premises and cloud storage for transparent data ownership and trusted data operations. Adopting a hybrid cloud data platform has resulted in 90% faster data analytics, improving key collaboration through faster embedded decision making, and also increasing operational efficiency. With CDP intelligent migration, use cases like ATV can further benefit from the secure and automated data movement across on-premises and public clouds.Next Clearsense, a Florida based healthcare analytics provider has developed a cloud based HIPAA compliant healthcare data ecosystem running on Cloudera. Clearsense selected us for our secure open source hybrid cloud architecture. This has enabled us to deliver multi-tenant subscription based predictive analytics services to smaller, rural and underserved healthcare providers.Using Cloudera, we are able to provide near instant access of patient information that previously took weeks to assemble and deliver. CDP is sophisticated and our security and government policies are indented to benefit use cases like Clearsense's, providing increase enterprise control without compromising user experience.Lastly, one of our more exciting case studies involve Lufthansa Technik, a leading provider of technical aircraft services. We introduced this use case on a call last year, shortly after having been selected during the initial planning. They've showed Cloudera running on Microsoft Azure for their cloud based analytics platform, because we provide the scalability and availability their customers need.I’m proud to share that their deployment is now in production and is delivering 40% reduction in predicted components removal. I encourage you to check out the Lufthansa Technik video on our website to get the full story, and how they're disrupting aviation industry with data. Going forward, CDP's adaptive scaling is intended to benefit use cases like Lufthansa Technik with automated performance optimization.Finally, our partner community has responded very favorably to both our merger and more importantly, our road map. They view the new Cloudera as a market standard, aligning us to focus our efforts on a single partner rather than two or three. I’m pleased to announce that we've expanded our relationship with a very important global partner, IBM. This partnership was significant for Hortonworks and one of the factors driving Cloudera's desire to merge the companies. Our partnership with IBM is now more significant in several aspects.We've amended the terms of agreement with IBM to soon include our complete portfolio of product offerings and services. For example, IBM sales force for the first time is able to resell our enterprise data. Likewise, the Cloudera sales force can now resell many of IBM's products, including Big SQL. I am very encouraged by momentum that our companies have continued to generate together since the merger. We had a number of significant joint wins this past quarter. And with our new agreement in place, we expect that only to continue.Now, I’d like to turn it over to Jim to review our financials. Jim?

[Jim Frankola:]

Thanks, Tom. Hello everyone. I’ve previously shared, revenue for the first quarter was $187 million and subscription revenue was $155 million. Operating cash flow for the quarter was positive $11 million. Because of the merger, comparative year-over-year information on these items is not meaningful. As Tom highlighted, it was a difficult quarter for us from a bookings perspective and I will discuss this in connection with annualized recurring revenue in a moment.We concluded Q1 with 929 customers who started at or have grown to more than $100,000 of ARR. The number of customers spending more than $1 million is in excess of 140. Both of these numbers are roughly flat with Q4 and are reflective of the customer wait and see attitude that Tom described. It is important to note that our largest customers continue to bring workloads to the platform. Annualized Q1 dollar-based churn for this cohort is substantially better than average at approximately 6%, and these customers continue to expand.In Q1, we completed the work to determine end of quarter annualized recurring revenue rather than the adjusted ARR number that we shared in connection with Q4 results. As expected, ARR and adjusted ARR growth rates were similar. ARR for fiscal Q1 was $672 million, up approximately 21% year-over-year. Whereas adjusted ARR was $668 million, up approximately 20%. Details with respect to ARR definition and trends can be found in the supplemental materials on our investor relations website.As I review the remainder of the income statements, 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 adjustments from GAAP to non-GAAP are limited to stock-based compensations and amortization of M&A related intangibles.Total gross margin for Q1 was 73%, driven by subscription gross margin of 85%, both leveled with Q1 of last year. Operating expenses were $172 million for the first quarter or 92% of revenue, including in operating expenses are $25 million of merger related expenses. Excluding these amounts, operating expenses were 79% of revenues in Q1. This is a significant improvement from 98% of revenue in Q1 of last year. It reflects the rapid achievement of our planned cost synergies and increased operating leverage since the merger.In particular, sales and marketing expense dropped from 54% of revenue in the year ago period to 47% of revenues this quarter, and R&D fell from 33% of revenue to 25%. The $25 million of merger related expenses include severance and retention costs and third party fees associated with integrating the systems and processes of the combined company.Overall, operating loss was $35 million in Q1, representing an operating margin of negative 19%, burdened by 13 percentage points of merger related expenses. Excluding these expenses, operating margin would have been negative 5% for the first quarter, a substantial improvement over Q1 '19's operating margin of negative 25%. Loss per share was $0.13 in the first quarter based on 271 million weighted average shares outstanding compared to a loss per share of $0.18 in the first quarter of fiscal year 2019.Now, turning to the balance sheet and cash flow. We exited Q1 with $547 million in cash, cash equivalents and marketable securities and restricted cash, up from $541 million at the end of Q4 '19. Operating cash flow for the first quarter was $11 million, which includes $25 million of merger related spending.Cash flow performance was better than expected due to strong execution of merger synergies in both headcount and non-headcount related spending and higher than planned collections. Every functional area is on track or ahead of plan with respect to the operational elements of the merger. Capital expenditures were $3 million in the quarter. Total contract liabilities, which comprised deferred revenue and other contract liabilities, were $486 million at the end of the first quarter. RPO was $720 million.I will conclude by providing initial guidance for fiscal Q2 and updated guidance for fiscal year 2020. We expect Q2 total revenue to be between $180 million and $183 million, and subscription revenue in the range of $155 to $157 million. Net loss per share is projected to be $0.11 to $0.08 based on $274 million weighted average shares outstanding. For fiscal year 2020, we expect total revenues to be between $745 million and $755 million and subscription revenue in the range of $635 million to $645 million.As you'll recall from our discussion last quarter, our intention is to show Cloudera's organic quarterly performance and top line momentum in the most transparent way possible. Annualized recurring revenue based on the book-of-business at the end of the quarter removes the effects of the merger, including accounting changes, billings durations and licensing extension, and is the best representation of underlying economic activity.Based on our sales pipeline in a typical length of an enterprise software sales cycle, we believe that Q2 will be the trough for bookings growth. Coupled with soft Q1 bookings, first half bookings performance will weigh on growth rate through the balance of the year. We expect ARR growth in Q2 to be between 10% and 12%, declining to 0% to 10% in Q4.We continue to believe that modest improvements in subscription gross margin can be achieved by Q4 as we integrate customer support. Services margins will turn down over the next couple of quarters as we apply more technical resources to support customer success.Total operating expenses will continue to decline over the course of the year as merger-related expenses moderate. Non-merger related operating expenses will roughly flat. Our investments are in place, allowing us to deliver on the CDP roadmap and position us for sustained growth.For fiscal year 2020, net loss per share is projected to be $0.32 to $0.28 based on $280 million weighted average shares outstanding. We expect operating cash flow for fiscal year 2020 to be negative $95 million to negative $75 million. While merger cost synergies are coming in greater than planned, operating cash flow will be impacted by the bookings softness that we are now forecasting for the first half.I would like to note two factors that impact cash flow this year, projected OCS includes approximately $59 million of merger related payments. Additionally, as discussed on last quarter's call, billings and cash flow will continue to be impacted by the adoption of Cloudera annual billings convention for their former Hortonworks business. Bookings growth is expected to accelerate in the second half this year. This will be evident in the sequential ARR growth in Q3 and Q4.Although, CDP will be available in the second half, we do not have adequate data or pipelines model or trades out adoption. And given the nature of the subscription business, we believe that the revenue impact from CDP bookings and deferred customers' expansions will take several quarters to pair and GAAP revenue. Until the trajectory of that growth and the investment levels necessary to support become clear, we will not attempt to project an intermediate term operating model for the combined company.I will not return the call to Tom.

[Tom Reilly:]

Thank you, Jim. Before we take your questions, I'd like to offer some concluding comments. I'm very encouraged by the rapid progress we're making with our merger. The new Claudera has the resources scale, customer base and partnerships to compete extremely well in the modern era of data analytics.We have a roadmap that is only exciting to our customers, but it's significantly accelerated as compared to either company could have achieved independently. We believe that we are well positioned for the second half with merger integration behind us and a competitive cloud offering in market very soon.I want to thank our employees for their commitment and perseverance in joining ranks, aligning behind the single strategy and staying customer focused. I also thank our partners for rallying behind our strategy and delivering great value in the market together. I thank the open source developer community for their innovative and collaborative spirit. My thanks to our many customers and the amazing solutions they're developing with our platform. And finally, on behalf of all Clauderans, I would like to extend a thank you to my friend and colleague, Claudera’s Co-Founder, Mike Olson, who is also retiring this summer.As a reminder, Arun Murthy, our Chief Product Officer, will join Jim and my-self for the Q&A portion of the call. Operator, let's begin the Q&A portion of the call please.

[Operator:]

[Operator Instructions] Your first question comes from Phil Winslow with Wells Fargo. Your line is open.

[Phil Winslow:]

Actually, just two questions. First, you mentioned a slower expansion than you've been anticipating. Wondering if you can comment on just renewal rates though, what did you see during the quarter and what are you thinking about them going forward? And then second question just in terms of re-accelerating net expansion, what are the key milestones that you're looking for or that you're hearing from customers that you think would -- that they believe would re-accelerate that?

[Jim Frankola:]

This is Jim. I'll take the first part of that question, and I’ll let Tom handle the reacceleration. So dollar churn in the quarter spiked for us, it's about 16%. Typically, it’s averaged about 10% or slightly above that. If we decompose that, we see relative strength with our large customers, million dollar plus customers have a churn rate that is close to historical average and substantially less than the 16%. Most of the churn occurred in our customers at the earlier stages of their journey. We expect to see that sort of rough dynamic into Q2. Once we get beyond Q2, we expect renewal rates and churn rates to return to approximately where they have been historically.

[Tom Reilly:]

This is Tom. Here's what I'm really encouraged about the second half. So, large enterprises want and benefit from moving workloads to the public cloud. There's a class of use cases where it's very beneficial. CDP this summer is designed for us to capture those workloads in that journey, and that strengthened our renewals and creates expansion opportunities. Second, later after the CDP public cloud version, our private cloud version comes out. And the number one thing large enterprises are expecting from us is that private cloud version. And a lot of excitement that we're getting in our roadmap is not only for the hybrid capabilities, but delivering that cloud experience to data centers. And those two things where we are very encouraged about our second half.

[Operator:]

Your next question comes from Chad Bennett with Craig Hallum. Your line is open.

[Chad Bennett:]

So, I’m just trying to understand, I guess the logic behind customers effectively waiting, and maybe it ties into, Tom, your comment about the public cloud vendors being more competitive. If you could define that, that would be great after you guys made the merger announcement. I can't imagine their data growth is slowing, their workload expansion is slowing, their analytics investment is slowing. How can they afford to wait or are they actually and maybe it's evident in the churn dollar rate you just gave. Are they just shifting those workloads off your platform? Is that what's really going on.

[Tom Reilly:]

Chad, you've covered quite a bit there. So, let me just break it down a bit. From the time we announced the merger to where we got our roadmap out was about a five-month period. In that period, our sales force was a bit handicap without giving clarity of what the roadmap would be. And without that clarity, we were at a competitive disadvantage, and we saw a number of opportunities taken by the public cloud guys. We’re already turning that around, because we’ve trained on our roadmap. But now -- let’s say -- now the customers sees our roadmap what causes them to pause yet again.They are trying to understand how they will take advantage of CDP, both public and private, they are trying to see how we're going to move those workloads, it is just a different motion than traditionally just buying more of what they had on-prem. We're trying to encourage all of our customers to move to cloud architecture, both in the data center and public cloud. And so, that’s just an education process.

[Chad Bennett:]

And just maybe a quick follow-up, if I may. So I know you don’t want to touch on the longer-term model. But if our growth expectations have changed in terms of long-term growth, in Chad's words, maybe not yours, shouldn’t the operating model or level of investment change, especially considering, I know you are seeing some synergies from the merger. But your sales and marketing as a percent of revenue is still fairly high for a company that effectively is not growing this year, but even if you were to grow, let's just say 10 to 20, I would say that line item is still egregiously high, just care to comment on that.

[Jim Frankola:]

This is Jim. From our prospective, we believe that the long-term growth model of seeing sustained software growth in excess of 20% is still there. All the secular trends supported our product strategy of multi-cloud hybrid, we believe is the right answer for our target customer set. The growth that is happening this year is not what we initially anticipated. We have curtailed the rate of future expense growth in a short run through the balance of the year and the guidance that we put in front of you reflects a lower level of spending than 90 days ago. So we do understand the top line dynamics and how it will impact expenses.With that said, though, we believe that it is critical to get CDP out, and we’ve retained the level of investment that would allow us to develop CDP, public cloud, private cloud and be able to sell it and build pipeline over the course of this year. We think the benefits of that will start accruing in bookings later this year, and you’ll start seeing it in accelerated revenue growth next year.

[Operator:]

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

[Jack Andrews:]

Good afternoon. Thanks for taking my questions. I was wondering if you could shed some more light on the pricing model around CDP, in particular. I mean is this viewed as an upgrade for customers, given that I would imagine this is a superior product and something that they’ve been historically using?

[Tom Reilly:]

Jack, this is Tom. Yes, CDP is a superior product in many fashions, whether it’s going to be deployed in the public or private cloud. And we planned to change our pricing to reflect that. We are not announcing those pricing changes at this time, but we will expect a cloud consumption based pricing model that gives the customer the flexibility to take advantage of bursting and the auto scaling capabilities, and have that consumption base model. And we’ll be announcing that at the time we release CDP.

[Jack Andrews:]

And as a follow up, maybe a question for Arun. I was wondering if there’s any lessons learned just from the HTP3.0 released last summer, which I believe was a major release from the Hortonworks side. Any lessons learned in terms of customer behavior in advance and post that release that you can apply to what’s happening here with the CDP launch?

[Arun Murthy:]

So like you said, we released HTP3.0 in summer of last year. And we’ve seen customers updated with lot of enthusiasm. We’ve learned a lot of lessons, which are now absolved into CDP. A lot of this has to be around things like there’s a real demand for separation of computer and storage that is largest focus of CDP and private cloud. We’ve also done a lot of work. We plan for a lot of new product -- customer is using features like TensorFlow using containers. So all the benefits you're seeing in CDP, whether its technologies like Kubernetes and containers are just ideas of storage and compute, which we're going to use both on-prem and public cloud have all been informed by the collective feedback we’ve got, both on HTP-3 and CDS6.

[Operator:]

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

[Tyler Radke:]

Can you talk about maybe little more specifically what gives you the confidence in the second half of the year? Is it simply just update of the public cloud version, or are there other elements here operating?

[Tom Reilly:]

Tyler, you're very faint, but I think your question was what gives us confidence of the uptake in the second half of the year. There's a number of things there. We have been aggressive getting out, talking about our public hybrid capabilities and our private cloud capabilities. And as Jack mentioned earlier, this is a substantial value added increase from our current platforms. And the response we’re getting from customers is very powerful.Our sales force just got trained in March to start talking about our second half and our roadmap, and we are seeing our pipeline reflect the excitement. As Jim mentioned, our sale cycle vary longer than six months, but we're seeing the pipeline grow, not only for the CDP and growing workloads but also our cross-sell capabilities that were enabled by the merger, what we call from Edge to AI.So we see it in our pipeline. We see it in the response we're getting from the market. And CDP is not designed to be like a V2 clod offerings. CDP is truly unique capabilities and puts us in a very, very competitive advantage. And we're the only company delivering these hybrid multi-cloud capabilities at the data management at its layer.

[Tyler Radke:]

And then maybe you could just reflect on the quarter. Obviously, the outlook for the rest is coming down pretty substantially. But maybe just order of magnitude, what's the product you more -- or was it the weakness in bookings, was it higher churn rate, was it the competitive environment? Maybe just talk about those three dynamics independently.

[Tom Reilly:]

I'll talk about it and then Jim may have some specifics. We saw increased competition from the public cloud vendors. And so just increased desire for customers to understand how they can move workloads into the public cloud environment. And during that period of uncertainty, we worked very competitive during that period. Secondly, with respect to the merger, we got on things like pursuing our renewals later in the quarter than we traditionally would. So that was just the complexities of bringing together two sales force systems, pursuing hundreds of our renewals, and so some of those slipped out of the quarter.And then our customers would normally expand would ask us many questions around CDP, and if they expand now, was it mean to migrate later. And so are some of those caused some of the challenges in the quarter. All of those things we think we have addressed and we resolved and we're seeing improvement. But that’s I think the best assessment have to be, Tyler.

[Operator:]

Your next question comes from Raimo Lenschow with Barclays. Your line is open.

[Unidentified Analyst:]

This is [indiscernible] for Raimo Lenschow. I want to ask you about competition with the cloud companies. We've seen AWS and Azure move more onto on-prem and provide hybrid capabilities. And we saw today that Azure and Oracle providing interoperability. Do you think competitive environment with car companies is changing going forward?

[Arun Murthy:]

This is Arun, I'm happy to take your questions. Great questions. So we've seen Google and Amazon get into this more of the hybrid message, which frankly is very encouraging to us, because that's a main plan for our strategy. When we look at some of the offerings, the hybrid offerings we get from Google and Amazon and Microsoft, a lot of are just focused on infrastructure layers, whether it's Azure stack, whether it's AMBOSS from Google, AWS Outposts and so on. Where differentiate is that the data there.So having a hybrid multi-cloud approach at the layer puts us in a unique position. And that's really why as you heard from me in the prepared remarks, things like bursting workloads to the cloud, adaptive scaling and so on, are the key features you need to be able to leverage that world in a hybrid fashion. So in a nutshell, it's very complementing to the approach we're taking. And we really, really, welcome the fact that now you're going to have consistent infrastructure layers, which makes our job easier at the data layer.

[Tom Reilly:]

And I'll pile on too. Here's the other thing where we're noticing. The cloud vendors are all trying to close off their challenge in not having hybrid offering, you see them entering the market. But frankly, when they put something on-prem, it's really more of an on-ramp to the public cloud versus trying to give customers the flexibility to move workloads between clouds, where they get the lowest cost and best performance. And so are our strategy is an adjuring differentiator. We really don't care where workloads run. We want them to run out of cloud architecture, allow the customers to have flexibility.

[Unidentified Analyst:]

And want to ask you about a private company, some rumblings around private company close to shutting its doors. Want to ask you if you saw any additional opportunities come to you from customer of this company?

[Tom Reilly:]

Yes. So basically, here's the backdrop. We saw the need to get more resources, more scale so that we can deliver a competitive cloud offering and replatform into cloud architecture. And that's why we did the merger. And so Claudera now has the resources, the scale, the employees, the engineers, to very quickly replatform our business. Our competitor, in this case, it's MapR, could not mask the resources or the scale to make a similar transition. And I think they have some challenges. We view their customer base as an opportunity for us, and it is part of our growing pipeline.

[Operator:]

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

[Rishi Jaluria:]

Let me start, Jim, with you. Two quick ones and I'll have a follow-up for Arun. But just thinking about 90 days or so ago when we provided guidance and for simplicity, let's look at ARR. I mean, at least it seemed to a lot of us that you had made some very conservative assumptions, especially when it came to revenue dis-synergies and delays in bookings. Just help me understand what was it that you did not anticipate, and then putting aside the competition from cloud vendors. But besides that, what was it that you didn't anticipate? Because it seemed like you understood and acknowledged that there was going to be a potential wait and see dynamic from customers. Was it just more intense than you expected or what? And then maybe as a housekeeping one on 100k customers metric, it actually looks like it declined sequentially, which I don't think I've seen in the model before going from 943 last quarter to 929 this quarter. And it looks like the definitions of that maybe have changed. So maybe just walk through both of those? And I've got a product question for Arun.

[Jim Frankola:]

Yes, there's a lot there so hopefully, I can unpack it. So relative to expectations 90 days ago, first of all, that was shortly after the two companies had merged. We were still operating somewhat blind in terms of pulling in pipeline from both sides, scrubbing the numbers, putting together our predictive models. So you had a general level of uncertainty. And then the new news in the quarter, certainly, what Tom described in terms of cloud. Certainly, our customers are taking a wait and see attitude. We did not anticipate that from level extent that it was.The fact that our churn rate increased that was certainly unanticipated. And those few things are all interrelated. Now, very specifically, the way the prescription model works is that resulted in bookings that were very light for Q1 relative to expectations. We now have much greater confidence in our pipeline and visibility, and that pipeline for Q2 is pointing to another soft quarter. So essentially, we're factoring in two quarters in a row of soft bookings. Now, we are seeing pipeline growth that has resumed, several weeks work, couple of months work, we hope that remains a good trend. But the pipeline that we're building today isn’t going to be delivered in Q2, it's going to be delivered in Q3, Q4 and a little bit in Q1.So the nature of the subscription model means that we're going to have a trough in bookings in the first half of the year that will show up as a trough in ARR growth rates in Q4, and then accelerate beyond. You will see the resumption of underlying bookings growth most clearly in sequential dollar ARR growth, and that’s one reason why we're disclosing ARR. So as we execute in Q3 and especially Q4, we hope to put a lot of ARR dollars on the books and that will be reflective of the success of the strategy.Your second question customer count less than $1000 or over $100,000. That is all part in parcel the same thing. So, where we saw relative weakness was in our customers that cost $100,000 of revenue up to $500,000 or so. So post merger, as you'd expect, we put our resources first and foremost on our large accounts. That was a little bit softer than we'd like but we still saw really good expansion rates, pretty good churn rates in our largest accounts. We saw the relative weakness in our smaller accounts. And unfortunately, more of them churned out this quarter than we brought on. So that’s the other artifact of the cloud competition, high churn and merger execution.

[Rishi Jaluria:]

Arun, just maybe a little bit of a clarifying question in terms of product and strategy around CDP. When you talk about CDP being cloud native, does that mean fully managed cloud capabilities where you're handling that side of the business, because that’s one of the feedback I think I've heard from customers is they don't like having to manage the cloud stack on their own. And maybe alongside that, CDP seems like most of work is done, maybe just in terms of strategy. Why not publicly share what exactly that roadmap is, especially now that Edge to AI toward that you had is fully wrapped up, and actually put out a proper release date on that versus end of summer and private cloud by end of the year. And anything you could offer that I think would be really helpful. Thanks.

[Arun Murthy:]

So like we said, CDP is going to be a cloud native path offering, platform as a service offering. There are nuances around when we say to managed offering and past offering, there are nuance around what infrastructure goes on and so on. And the customers who chose to run this in infrastructure they own versus a software that is managed by Cloudera. So that's the model we see. And going in that world, we continue to leverage our cloud storage, cloud compute and so on.So effectively, CDP is a platform as a service offering that customers manage very, very little of. The second question on the timing, we’ve shared specific timings with the customer base of this line in terms of we’ve got data programs ongoing, we’ve got an on-boarding program as we go right now. So there’s a fair amount of clarity in terms of when we know we can expect customers to on-board and go from -- and leveraging that production setting.

[Operator:]

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

[Zane Chrane:]

Can you give us an update on the fiscal year '21 guidance and specifically the operating cash flow margin? I'd imagine there’s a lot of negative operating leverage in the operating cash flow, given you just lowered your ARR guidance this year by almost $100 million. That’s the first part. The second part is lot of customers we spoke with, even those that are expanding aggressively in terms of their spending with Cloudera, have indicated that even new workloads that they put on cloud vendors is more due to total cost of ownership benefit. They already say that Cloudera is better than the cloud vendors on a cost of compute basis. So I was just wondering what have you done, or can you do, or plan to do to maybe be more competitive on the total cost of ownership front. Thank you.

[Jim Frankola:]

I’ll take the first one, and turn over to Arun for the second one. So in fiscal year '21, it’s premature. You saw that we had to significantly change our guidance for this year. We’re still in the middle of this transition. I’d like to get at least in the quarter under our belt of seeing the pipeline that we’re building to-date and its ultimate conversion rate before reissuing fiscal year '21 guidance.

[Arun Murthy:]

So, on the second question in terms of overall, we believe that our incentives are aligned much with the customers' incentives. Some of the work we've done in terms of adaptive scaling make. So that the overall -- total cost of ownership is cheaper compared to the cloud vendors service. And frankly that this, like better capabilities in terms of, if you want to take -- if you want to identify a workload and then burst it to the cloud, remember we have thousands of petabytes of data on our platform. That is something that we leverage to be able to actually help these workloads move back and forth.

[Zane Chrane:]

And just to make sure I understand, you’re saying that the Cloudera platform is lower total cost of ownership than the cloud vendors?

[Arun Murthy:]

Exactly, because of the fact that they have a offering, which automatically scales the cost up based on loans.

[Zane Chrane:]

And is that true now or are you saying that it'll be true for the CDP offering coming out in the summer?

[Arun Murthy:]

This is part of CDP.

[Zane Chrane:]

And just a quick follow up for Jim. The framework for how we should think about the operating cash flow or operating margin potential. Is there a framework maybe around customers over a million in ARR or customers of $100,000, if you were to allocate the cost and revenue respectively? Can you give us some sense for what each one of those customer segments might look like on operating margin or OCF basis?

[Jim Frankola:]

At this point, no. We’ve done that once before in our Analyst Day, which we’re targeting in September of this year. The model is dynamic right now. So I’d like to settle it down before releasing numbers like that. So I think September was a good target for that. And I’ll go back to your first question on fiscal year '21. What I will say is we laid out a model that said we expect our top line to be able to grow more than 21% a year.And for us to throw off 15% operating cash flow margin on a sustained basis at those growth rates. So that would equate to a rule of 40 square of 35 or higher. That hasn't changed at all. The only question is timing. And whenever I'm not getting used to precise numbers on fiscal year '21, it's not any change in where the model is going to be, it's just a timing change. And that's where we need another quarter or two to get a better assessment of the timing to get to that ultimate model.

[Operator:]

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

[Michael Turits:]

I just want to make sure that I understand the churn on the customers who did not renew. Did they take their on-premise workloads and move those workloads to cloud? Or did they move to a community non-paid version? Or does they simply move off of what's this broadly called the Hadoop ecosystem?

[Tom Reilly:]

Michael, this is Tom and I'll answer some of that and pretty smooth all those scenarios, a combination of first two. So, we do see class of customers who want to move workloads to take advantage of a cloud. And so that's where we saw some of the churn, because we aren’t really competitive against what the public cloud guys are offering. And we had this period of uncertainty. So, that's one scenario. And the whole renewal won't go away, but a portion of that renewal will go away.And then, we saw some workloads go to sales support predominantly in the tech industry, and that's the combination. And then we had a number of renewals that just didn't close in the quarter, because of the merger execution and delays in getting to that. And then finally, the CDP caused some people just to pause. And whether, especially if we have a renewal that we're working on the expansion and there's asked some questions about do they make that investment and how does it migrate CDP that caused some delays.

[Michael Turits:]

So, you think it's not the last thing. How does they ask it also, because of the troubles that MapR had versus similar types of solutions you have that’s broadly called Hadoop. So is there any sense that customers are simply migrating to different form of data architecture?

[Tom Reilly:]

No, the only different architecture is the cloud architecture, which we are addressing with CDP as it has native cloud architecture offerings. But there is no other analytic platform out there that that we find challenging us.

[Michael Turits:]

And is the bulk of it that movement to the cloud, or is it -- how do you split it between basically saying it's moving to cloud or non-renewals around going to sales support, or just delays, which essentially...

[Tom Reilly:]

The bulk of it is the delays followed by workloads moving to public cloud vendors native house offerings. And that's why we also -- we didn’t share earlier. But the reason we prioritize CDP public cloud first is we want to close off that competitive disadvantage with our public home cloud hybrid offering. CDP private cloud is what our largest customers are most demanding, but we wanted to close off those workloads that are moving to public cloud. So we want to control that with our customers.

[Michael Turits:]

Sorry to squeeze this last clarification, but if they're delaying their past renewal. Is that just saying they're simply willing to go on to support it, whatever the reason, whether it's because of CDP, or mis-execution on your part?

[Tom Reilly:]

So we have a number of rules that we just include the quarter, because we didn't execute against them. And that was just we got a late start to the merger. Secondly, when a renewal has an expansion, we are better off closing them together. And we will let our customers slip while we're asking their questions addressing their concerns versus trying to do two transactions.

[Operator:]

Next question comes from Mark Murphy with JPMorgan. Your line is open.

[Matt Coss:]

This is Matt Coss on behalf of Mark Murphy, thanks for taking my question. You mentioned you're seeing significant pipeline growth for CDP, more than doubling from the beginning of the year to the end. What are customers telling you and how well is this pipeline scrubbed? And what do you see in it that gives you the confidence that you're talking about here?

[Tom Reilly:]

So Matt, this is Tom again. So first off, in the first half of the quarter, we were not generating much pipeline, because we hadn't trained the sales force, we didn't have our strategy line, we're doing a lot of our integration work. In the second half when we got everyone trained up and the customer started seeing our roadmap and the cross-sell up-sell opportunities, we started seeing better expansion opportunities, better cross-sell opportunities, even our new opportunity pipeline, all start growing in the second half.And we lost four to six weeks of pipeline generation in the first part of the quarter just because we closed our Q4, bringing teams together and systems. We weren't generating pipeline at the rate we were in the second half. Our pipeline metrics, we have internal metrics of what they need to be. Our pipeline metrics are exceeding our internal goals. And that means our second half was strong generation to make up for the first half shortfall. And we see it continuing here in our new quarter.

[Jim Frankola:]

And just to make one point. You started your question, CDP pipeline. We’re actually not generating CDP pipeline yet. So that will really start in the second half, maybe late Q2. The pipeline generation that we've seen is for all the legacy products that we have with those customers.

[Matt Coss:]

And then, what's your confidence level at Q2? Is it bookings trough quarter? And then is there anything else that could derail the current outlook? Or alternatively, what has the highest chance of going better than expected from here?

[Jim Frankola:]

So the level of confidence in Q2 to trough is pretty high. So we have the pipeline in front of us. And we see the growth is clearly aimed at Q3 and Q4 and not in Q2. So our confidence is high that Q2 is the bottom. And what was the second part of your question?

[Matt Coss:]

Just if there's anything that could go one way or the other positively or negatively and what has the highest chance of happening of where is the highest chance?

[Jim Frankola:]

So clearly, if we execute on our internal plans, which as you would expect are a lot more aggressive than the numbers we've shared with you. We will see upside. We'll see upside with our partnership with IBM, with the uptake of CDP across our opportunities that are in the pipeline but really haven't materialized yet. So all the elements that we have talked about are the drivers for performance above and beyond what we guided.

[Matt Coss:]

Thank you.

[Tom Reilly:]

All right. Operator, I think we are over our time. So, we are going to wrap up this. Thank you for the great question. Thank you for joining our earnings call. The team will be reporting back to you in a quarter. Thank you for joining us.

[Operator:]

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