Cloudera, Inc. (NYSE:CLDR) Q2 2021 Results Earnings Conference Call September 2, 2020 5:00 PM ET

Company Participants

Kevin Cook – VP Finance, Corporate Development and Investor Relations

Rob Bearden – President and Chief Executive Officer

Jim Frankola – Chief Financial Officer

Arun Murthy – Chief Product Officer

Mick Hollison – Chief Marketing Officer

Conference Call Participants

Pat Walravens – JMP Securities

Phil Winslow – Wells Fargo

Pree Gadey – Barclays

Chad Bennett – Craig-Hallum

Nehal Chokshi – Northland

Matt Coss – JPMorgan

Mark Rende – Morgan Stanley

Kash Rangan – Bank of America

Operator

Good afternoon, my name is Jason and I will be your conference operator today. Welcome to the Cloudera Second Quarter Fiscal 2021 Quarterly Results Conference Call. All participants’ lines have been placed in a listen-only mode to prevent background noise. After the speakers’ remarks, there will be an opportunity to ask questions. [Operator Instructions]

Please note, this conference is being recorded and your host is Mr. Kevin Cook, VP, Finance, Corporate Development and Investor Relations.

Kevin, you may begin your conference.

Kevin Cook

Thank you, operator. Good afternoon and welcome to Cloudera’s second 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 website, 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 second 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.

In addition, please note that the date of this conference call is September 02, 2020, and any forward‑looking statements that we make today are based on assumptions that we believe to be reasonable as of this date, including those related to the impacts of COVID-19 on our business and global economic conditions. The forward-looking guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating. Those assumptions are based on the facts as we know them today. Many of these assumptions relate to matters that are beyond our control and changing rapidly, including but not limited to the time frames for and severity of social distancing and other mitigation requirements related to COVID-19, and the impact of COVID-19 on our customers and partners and its impact on the economy as a whole.

Significant changes in the future, whether related to COVID-19 or other factors, could cause us to modify our guidance. We undertake no obligation to update these statements as a result of new information or future events.

Now, Rob Bearden, CEO.

Rob Bearden

Thank you, Kevin. Good afternoon, everyone. Thank you for joining us to discuss our second quarter fiscal 2021 results. As with last quarter’s call, we are operating from separate locations so we will do our best to share key information and respond to your questions. We will provide a quick update on our quarterly performance, discuss customer buying behavior and market trends, and of course highlight Cloudera Data Platform progress in public and private cloud.

Q2 was an excellent quarter in which we continued to outperform on many of our financial and operational goals. Beginning with financial results, Total Revenue in the second quarter was $214 million, Subscription Revenue was $192 million, and Non-GAAP Operating Income was $30million. Each of these results exceeded expectations.

Annualized recurring revenue was also stronger than planned, reaching $739 million at the conclusion of the quarter, representing 12% year-over-year organic growth. The total number of customers who exceed $100,000 of ARR increased to 1,007. The number of customers who generate ARR greater than $1 million grew impressively again in Q2 to172, up 25% year-over-year. This outcome is especially gratifying, and reflects great execution.

As we discussed last quarter, we are not immune to the economic downturn caused by COVID-19, but we believe our business is more resilient than most enterprise software companies. We believe this is true because our offerings support digital transformation initiatives and mission critical use cases.

In addition, our sales organization has been effective in engaging and supporting customers remotely. By contrast, our services business has been impacted by the pandemic. The team responded quickly by delivering virtual consulting and implementation services whenever possible but professional services, consulting and training revenue is down in-line with our forecasts from last quarter.

Turning now to our new product offerings. The momentum continues to build for CDP with significant new innovation and customer adoption. We more than doubled the number of CDP Public Cloud customers in the quarter and had a similarly strong bookings result. Although recognized revenue is currently modest, we are encouraged by market reception to CDP Public Cloud. These offerings are differentiated as discrete services and will scale over time.

CDP Public Cloud’s immediate strategic value lies primarily in its enablement of hybrid data architectures, playing an essential role in creating an Enterprise Data Cloud for our customers.

With CDP, we are participating in the fastest growing segment of the market through cloud-native services. And, uniquely, we expect to benefit from demand for hybrid and multi-cloud solutions that allow enterprises to optimize the performance, cost, and security of workloads and use cases. And that brings us to the big news.

In August we announced the general availability of our CDP Private Cloud solution. CDP Private Cloud is a major milestone in our Enterprise Data Cloud strategy. It is a powerful hybrid architecture that separates compute and storage while maintaining data context for greater agility, ease-of-use, and more efficient infrastructure consumption.

CDP Private Cloud takes advantage of our shared data experience, SDX, providing persistent security and governance and creating a consistent analytic experience for the end user across public and private cloud environments.

Together, CDP Public Cloud and CDP Private Cloud create a modern data architecture that spans multiple public clouds and private clouds, uses any data, and supports the full data lifecycle from the Edge to AI.

In addition to considerable performance and cost advantages, one of the key benefits of an Enterprise Data Cloud is the enterprises’ ability to secure and govern this environment holistically and to manage it from a single pane of glass.

With unparalleled interoperability between CDP Public and Private Cloud, customers can be agile — seamlessly directing workloads that benefit from advanced scalability and elasticity to the public cloud and directing workloads that require superior security and predictable cost to the private cloud. The ability to optimize any workload in this manner is highly differentiating.

Utilizing CDP, our customers experience the simplicity and ease of use of public cloud services without vendor lock-in, they gain enterprise-grade security and governance, and lower their total cost of ownership.

And while this is what our target customers expect from us, independent industry analysts have also validated the strategy. For example, the IDC Cloud Pulse Survey in Q1 2020 indicates that 67% of enterprise workloads run on public and private cloud implementations today. Among the various cloud models, 84% of enterprises report repatriating some workloads from public cloud, and of those repatriated workloads, 52% planned to move to private clouds with performance, security, cost and availability as the top reasons for repatriation.

To be sure, new applications will be implemented on public cloud infrastructure, but it appears that enterprises will be more selective about which workloads they run in public cloud. And similarly, responses to 451 Research’s Voice of the Enterprise, Cloud, Hosting & Managed Services, Vendor Evaluations in a 2019 study indicate that 58% of enterprises are using or plan to use hybrid IT environments.

Consistent with these industry trends, customer reception and interest in our new CDP offerings has been very encouraging so far. In simple terms, CDP Private Cloud opens up new workloads and use cases and is designed to drive additional CDP Public Cloud usage. The field organization has already been trained on CDP Private Cloud through a specialized virtual sales kick-off and is now actively engaging with customers on the Enterprise Data Cloud vision.

Since we believe that we have only modestly penetrated the installed base, our sales motion for the balance of the fiscal year will be to focus first on migrating our existing customer base to CDP and existing customers are expected to move primarily on-premises workloads to CDP Private Cloud, with most new workloads and select on-premises workloads being directed to CDP Public Cloud for full hybrid enablement.

And with the advent of CDP Private Cloud comes greater focus on some of our key partnerships. We did a joint preview of CDP Private Cloud with IBM Red Hat in June and introduced it on Red Hat OpenShift’s Kubernetes container platform. This event went extremely well and we believe there is significant demand for private cloud among the IBM and Red Hat customer base.

In addition to jointly marketing to these customers, our alliance with Red Hat enables us to bundle OpenShift for any customer that does not already run the platform, and Red Hat OpenShift is merely the start.

CDP Private Cloud is designed to be portable across multiple platforms. And in the future, we plan to make it available on alternative container technologies. Likewise, since the development of enterprise data clouds among our customer base is expected to drive increased public cloud Infrastructure-as-a-Service consumption, CDP Private Cloud fuels our public cloud partnerships with AWS, Azure and Google.

We estimate that the cloud providers will generate $4 to $5 in compute and storage revenue for every dollar of software revenue earned by Cloudera. This potential IAS revenue is the focus of our hyper scale cloud partners and drives our interactions with them.

As we discussed on last quarter’s call, we’ve expanded our partnerships with Microsoft Azure and Google Cloud Platform. Most recently, we have agreed to expand our partnership with AWS. This multi-year strategic collaboration agreement makes CDP available on AWS Marketplace, thereby streamlining procurement and integrated AWS billing and driving adoption through use of customers’ existing annual cloud spend commitments.

To ease migration, we’ve jointly developed a workload migration playbook and AWS is offering credits to mitigate infrastructure costs. So now let’s quickly discuss how these developments are playing out with actual customers.

Our first case study is a new customer and one of the largest operators of mobility and logistics hubs in North America. Their challenge is a rapidly growing network of partner companies and the associated increasing volume of data sets. As a global entity with operations in Europe, they also needed to comply with GDPR and PII regulations. They replaced their existing cloud data warehouse with CDP Public Cloud because it offers superior scale, security, and governance.

Our next example is a leading global provider of risk, reinsurance, retirement, and health services. This customer was struggling with a patchwork of ingest, data engineering, streaming, and analytics cloud products. They needed to rapidly support both internal-use propensity-to-buy applications and external data intelligence services. They chose CDP Public Cloud for its integrated data lifecycle, eliminating the need for on-going costly integration of third-party data services, and enabling rapid response to their evolving business needs.

Our next customer is a large biopharmaceutical company — they had a corporate mandate to move their broad range of patient, therapeutic, and clinical trial applications to the public cloud. As with any regulated entity, security and governance requirements are paramount. They also need the flexibility to operate anywhere, which means avoiding unintentional lock-in to any one cloud provider. This customer chose CDP Public Cloud for its enterprise data cloud attributes the multiple data functions, multiple public cloud support and comprehensive SDX security and governance. These customer case studies are consistent with industry analyst research on market dynamics. They’ve observed that many organizations who have used standalone cloud point products now prefer an integrated data lifecycle solution, rather than to deal with the cost, risk, and uncertainty of cobbling together point cloud products and bolt-on security. The trend is toward enterprise data clouds.

Before Jim reviews the numbers, I want to take a moment to reflect on my first two quarters as CEO of Cloudera. I was excited to assume the Chief Executive role in January, but I could never have imagined the progress that our leadership team and business would make in such a short period of time. No doubt, we have more that we want to accomplish, but I am genuinely impressed with management and happy to be a part of this organization. It is clear that our opportunity is significant, with the market demanding hybrid and multi-cloud solutions and enterprises embracing private cloud. We’re executing well, and now have the product-set that meets the needs of our target customers.

In addition, the digital transformation that Mick Hollison has been leading for us has begun to change the way we engage with prospective customers to increase the sales velocity and lower our customer acquisition costs. We’ve demonstrated that we can generate substantial cash flow and achieve high operating margins. And while remaining committed to our operating margin targets, we believe these initiatives and continued progress on our Enterprise Data Cloud vision will enable us to manage towards faster revenue growth. And as Jim will detail in a moment, we’ve revised our forecast higher for fiscal 2021 revenue as a result.

Over the course of the last five or six months, I have been hands on with as many customers and partners as possible. I am encouraged by my interactions with them and more excited than ever about Cloudera’s positioning. So Jim, as you please take us through the financials.

Jim Frankola

Thanks Rob, hello everyone. Q2 was another outstanding quarter, reflecting stability in the business and consistently strong execution on all measures. Total revenue was $214 million, an increase of 9%year-over-year.

Subscription revenue was $192 million, an increase of 17%year-over-year. Annualized recurring revenue for fiscal Q2 was $739 million, up 12%year-over-year. The outperformance on ARR was driven by increased growth in both new bookings and expansion bookings. Also, one quarter does not make a trend, but in Q2 we did have a record quarter for non-paying users of the software becoming subscribers. These wins were a direct result of the distribution changes we made earlier in the year. Note, information regarding definitions and trends can be found in today’s press release or the supplemental materials on Cloudera’s investor relations website.

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As Rob indicated, we concluded Q2 with 1,007 customers who started at or have grown to more than $100 of ARR. We increased customers representing greater than $1million of ARR to 172 from 164 last quarter.

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 intangible assets, and any extraordinary non-cash real estate impairment charges.

Total gross margin for Q2 was 81%, compared to 77% in Q2 of last year driven by subscription gross margin of 89%, up from 86% in the year-ago period. Total operating expenses were $145 million for the second quarter, continuing a post-merger trend toward a lower operating expense structure. These operating expenses were 68% of total revenue in Q2 of fiscal 2021 as compared to 80% of total revenue in Q2 of last year.

Expense improvements were evident across all lines of the P&L and were driven by on-going merger synergies, as well as process improvement and cost reduction initiatives.

Overall, operating income was $30 million for the second quarter, representing an operating margin of 14%, a substantial improvement of 18 percentage points compared to Q2 of last year.

Operating cash flow for the second quarter was $32 million. Cash flow benefited from top-line growth, good collections and strong expense management. Diluted earnings per share was $0.10 in the second quarter, compared to a loss per share of $0.02 in the second quarter of fiscal 2020.

Now, turning to the balance sheet, we exited Q2 with $569 million in cash, cash equivalents, marketable securities, and restricted cash, up from $519 million at the conclusion of Q1. Capital expenditures were $3 million in the quarter.

Total contract liabilities, which comprise deferred revenue and other contract liabilities, were $486 million at the end of the second quarter. RPO was $820 million, up 16% year-over-year. Current RPO grew 10% year-over-year.

I will conclude by providing initial guidance for fiscal Q3 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 Q3 total revenue to be between $207 and $210 million, representing approximately 5% growth compared to Q3 of last year, with subscription revenue in the range of $187 million to $190 million, up approximately 13% year-over-year.

Similar to Q2, the difference in growth rates is driven primarily by a projected slowing in professional services revenue, which is due to the pandemic and associated global recession. Specifically, we expect services revenue to remain at or close to Q2 levels until the economy recovers. This flattening of services revenue was anticipated; we took actions in Q1 and Q2 to adjust our cost structure appropriately.

Non-GAAP operating income is our primary bottom-line metric. We expect operating income for the third quarter to be in the range of $27 million to $31 million, or roughly14% of revenue. Earnings per share for Q3 is projected to be $0.08 to $0.10.

For fiscal year 2021, we expect total revenue to be between $839 million and $853 million, representing approximately 7% growth, with subscription revenue in the range of $755 million to $765 million, up approximately 14% year-over-year. Although we are raising our outlook and it is higher than originally planned, these updated forecasts are based on a prolonging of the macro-economic impact of the coronavirus through Q4.

We expect operating income for fiscal 2021 to be in the range of $102 million to $112 million, or roughly 13% of revenue. Earnings per share for fiscal 2021 is projected to be $0.32 to $0.35.

As is evident from the Q2 results and our projected outlook for the remainder of the year, we have achieved our operating income margin objectives much more quickly than anticipated. This is a function of scale and natural operating leverage, as well as strong cost discipline and new operational efficiencies.

As such, we expect the operating margin improvements to-date to be sustainable but do not anticipate dramatic increases fromQ2 levels for the next two quarters. Operating margins are expected to increase gradually for the remainder of fiscal 2021, in-line with prior forecasts.

With that, I’ll turn it over to Rob for some concluding remarks.

Rob Bearden

Thanks, Jim. Although Q2 was a very strong quarter for the company, in many ways today feels like a new beginning for Cloudera. We’ve been working on our Enterprise Data Cloud strategy since the merger with Hortonworks. Having it advance so significantly with the availability of CDP Private Cloud reflects tremendous effort and innovation on the part of our engineering and product teams. And I want to express my sincere appreciation for all of their hard work.

We now have the foundational elements of an Enterprise Data Cloud in place and can begin to build it out. I also want to acknowledge the fine execution on the part of our field organization as they have faced a product transition as well as limitations on pursuing new customers.

And as always, thank you to our partners, customers and the community for their continued support. Let’s pause here and take some questions. And as a reminder, Arun Murthy Chief Product Officer and Mick Hollison, Chief Marketing Officer are available for Q&A. Operator, please begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Pat Walravens of JMP Securities. Your line is open.

Pat Walravens

Oh great. Thank you very much and congratulations. So I have one question for each of you. Rob, can you help us just architecturally – there is going to be so much attention paid to data comps in the next few months. What is so important about separating compute and storage? And which of your products do that?

Rob Bearden

Sure, great. So actually I’m going to have Arun come in just a moment to give a little more color on it. But what’s so important about CDP is that it does that exactly as you that one, it’s separate storage and compute.

And the reason that’s important is it gives us the ability to manage an enable hybrid data architecture and be able to apply all the SaaS like experiences in a private cloud. And that gives our customers the ability to get that 100% isolation of the tenants and that gives the IT organization the ability to deliver much better SLAs. And what that does is it really drives a much better elasticity platform and lowers total cost of ownership. So Arun, you want to add to that?

Arun Murthy

Absolutely. Thanks Rob. Thanks for the questions Pat. Rob, tons of the just, going a bit more further, technically, what we’re also seeing is as customers are buying hardware both on-prem and the way they’re getting used to public cloud, which obviously separates compute and storage, we are really pushing on that consistent architecture, both on-prem with private cloud and under public clouds, right?

Specifically, what this allows customers to do is scale their storage and compute needs independently. And now they don’t have to — in the past, they had to buy bulk in our storage and compute servers, or pay for them equally. Now, what they do is, especially with the advent of Kubernetes, it allows us to scale the compute layer independently from the storage layer, and allow now faster and better expansion of workloads on a platform, whether it’s for storage or for compute itself. So that is why having that separation of compute and storage is so critical for us. But again, fundamentally if — coming back to what we’ve had to deal with is has been SDX, right making sure we have SDX with a consistent level security and governance to act sort of that glue between the storage and compute has been fundamentally important. And that’s why you see us talk so much about SDX, whether it’s on-prem or on, private cloud, or in the public clouds.

Pat Walravens

Awesome, thank you. Yes, I know, it’s great. And then Jim, I just how do you feel about the CRPO [ph] growth rate of 10%? Because it seems like that’s below what your subscription, revenue guidance is. So is there is there something that was pushing on that or is there some way we should think about that?

Jim Frankola

Yes, I feel good about the balance sheet movements. RPO is up around 16% CRPO and about RPO, in general, does not include contracts that have termination provisions, and some of our oldest customers contracts that we had signed eight, nine, ten years ago, do have some termination provisions where when we sign the contract, we exclude the points beyond the first year. So if we normalize for that our CRPO growth rate is actually higher than our growth rate for the quarter. So, when you get into the details, I’m perfectly fine with where the balance sheet is going.

Pat Walravens

Okay, perfect. Thank you very much for all three of you. Thank you.

Jim Frankola

Thanks for joining the call.

Operator

Your next question comes from the line of Phil Winslow from Wells Fargo. Your line is open.

Phil Winslow

Hey guys, thanks for taking my question. And obviously a big shout out to Ron for delivering the private cloud edition of CDP. A question I have is, obviously CDP demands — about a CDH and HDP and sort of takes the best of both worlds. It also has a obviously a new UI. I guess, question to you Arun and to you Rob, I mean what’s the feedback from call the legacy CDH and ACP customers about the call to the new components or different components and also just the UI, anything that sort of jumping out as you as you have these conversations with existing customers.

Rob Bearden

Yes, Arun I’ll start and then you can pick it up and add some color. So the feedbacks been very positive. We’ve been, we’ve been very engaged with customer base, making sure that one, we’re delivering updates consistently on what the roadmap is going to be. But we’ve also conducted at this point going on over 500 workshops with our customers, to take them through what the CDP environment looks like, how it applies to their, to their current environment, and what the what the transition will look like to go from their current legacy environment over to CDP. The kind of leverage points they get, the kind of benefits they get. And the feedback has just been astounding.

And we’re seeing great interest in moving to CDP. The design partners and early adopters had gone extraordinarily well and most of those are very large environments. So we’re very very encouraged by the investment. Arun, you want to add to that, you’ve obviously with [Indiscernible] very engaged here.

Arun Murthy

Sure. Thanks, Rob. And thanks for the question, Phil. Obviously, kudos goes to the entire team for delivering CDP. The fundamental thing that we and customers get cloud over CDP is like you said, we talked about the separation of compute and storage and the new UI. But fundamentally, we’ve gone a little bit deeper, right? Part of the reason we’ve embraced technologies like Kubernetes is that we can now fundamentally change the way customers engage with our product.

In the past, they had to have this sort of large shared, infrastructure. With CDP, especially with private cloud, we can now stand up isolated, completely private instances for every, every sub tenant every customer, right. Subtenant adds a customer so they can, for example, sign up a virtual warehouse, invest in a couple of minutes and get a lot of value with a lot of strict isolation and guarantees in terms of performance. And they can do that consistently, both on the public cloud and on private cloud.

So what fundamentally has happened is, the, the entire administrative and the operational experience around CDP has fundamentally changed. And then that translates into sort of ease of use, right? So now when customers come in and use the product, that experience is a lot more magical, if you will, right. They don’t get into interference with other tenants, they can get their work done. Obviously, it’s a — it’s a more appealing UI, and user experience. But fundamentally, it’s a completely brand new experience. And we provide them whether it’s on-prem, the private cloud, or the public cloud, we saw them delivered the SaaS experiences, which you know, they kind of need and demand — it helps.

Rob Bearden

And I would just, I would just wrap up with this still on that on that part. What it’s really delivered is the ease of use capability, but it’s been the foundational enablement for really getting to the hybrid multi cloud data architecture that they’re trying to get to. And that’s been the — that’s been the really big adoption point that our enterprise customers have been asking us to deliver. And this is really the enabler to that. And that’s a very, very strategic and important differentiator that we’re delivering here. We’re quite frankly, I think the only enterprise software company in the world doing it today.

Phil Winslow

Got it? Thanks, guys. And then just one quick follow up obviously. I love me some data flows. So hopefully just tell you why don’t you give us an update on a data flow?

Rob Bearden

Yes, again, [Indiscernible] out but take this on, but it’s one of the fastest growing pieces or segments of our product suite. Especially as we move into a hybrid data architecture, being able to bring data under management from the point of origination, be able to bring that under management, apply machine learning models to it, take as events change in half and be able to take prescriptive action in real time and then pull the analytical fad and then just bring the macro analytics to rest. And all the prescriptive action happens in real time.

And that’s really what our customers have been asking for. And our streaming team continues to deliver customers are seeing great benefit value from it. And the adoptions are very strong. So, and sort of from a market acceptance, customer acceptance and adoption, Arun, you want to touch base from a technical standpoint?

Arun Murthy

Yes, absolutely. And again, we talked about the sort of edge-to-AI, right. We are uniquely positioned to start with data at the point of origination, and data flow is the fundamental piece that helps us there. And frankly, going further Phil as your you’ve been aware, it was something that when we brought the two companies together, we had a huge opportunity for sort of cross sells across, the legacy basis, right ML and, and Dataflow, we’ve been able to really make progress on both sides of it for both legacy sets of customers.

Rob Bearden

Yes. And so I would just wrap up that around streaming at this point, what our customers want in an enterprise data architecture, leveraging and Enterprise Data Cloud, they want to be able to manage the entire lifecycle of data. They don’t want to have to put together point solutions, they want to be able to manage that entire data lifecycle in streamings, the underlying enablement for that. And so that’s why we’re seeing such embracement across our customer base in a large enterprises, because as they move towards managing an end-to-end data lifecycle, framings underpinning to that.

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Phil Winslow

Got it. Awesome, thanks guys.

Operator

Your next question comes from the line of Pree Gadey from Barclays. Your line is open.

Pree Gadey

Hey guys, congrats on the strong numbers again. So, I want to ask two quarters of good execution. You guys increased guidance. I was hoping you could kind of walk through the drivers of what’s happening at the fundamental level? Whether its better-than-expected churn, expansion from CDP, public cloud. I guess, kind of walk through the drivers of the better optimism?

Rob Bearden

Sure. Jim and I are going to take this together. I’ll start, Jim, if that’s okay.

Jim Frankola

Yes.

Rob Bearden

So, thanks for joining the call. Appreciate your time today. Its really about execution. And I think, it really speaks to how well the management team did, building the plan moving into the year. How well the business has been operationalized across every line of business. We were very fortunate that we were able to get our sales kickoff in, our global sales kickoff in just before the shutdown happened. And in the sales kickoff, the team did a great job of really defining what our coverage model is. What our sales motion is across each of the product offerings. The methodology had been sorted through very, very granularly. Had a very, very good grasp on our customer base, our coverage model. Jim and team had done a phenomenal job on having a very, very good granular financial model and plan, that we knew we could execute against.

Obviously the pandemic forced us into a high level of discipline in a remote working environment that our team really erodes the occasion across every line of business from sales execution, through marketing driving pipeline, and digital engagement, really accelerating the digital transformation that Mick Hollison been leading. Engineering continue to execute extraordinary well as evidenced by the of the great releases, CDP Private coming out just recently. And then the support organizations been able to deliver on a world-class since that numbers.

And then, our pre-sell team and professional service team have been able to do a great job remotely focusing with our customer base and showing them the journey to CDP. As I mentioned, we done over 500 workshop. And so, we just got strong momentum that certainly tearing through into the customer base showing up in the numbers, but also showing up in the quality release and innovation around the tech. So I think its number of things that all fall underneath granular operating and financial plans, very strong management discipline and how they operationalized a lot of business and fall up through an execution down to every individual contributor. They’ve been not only impressed, but very proud of the team. So Jim on the financial mode, do you want talk about some of the levers that we had especially on expense side.

Jim Frankola

Yes. And I’ll focus on the top line. First, its important to note that our success to date this year has been on the back of predominantly our existing product line including CDP 7.x, the new release that came out earlier. And there isn’t yet much contribution from CDP Public Cloud or CDP Private Cloud, obviously the new announcement. So, all of those are upside. And very specifically, what we’re seeing is, yes, we’re seeing reduced churn. We’re seeing greater expansion. Its important to note we’re seeing that in our key customer groups. So we’ve talked to you about — in fact we do very well with large enterprises. You’ve seen that in our growth in million dollar plus accounts. We’ve grown more year-to-date this year than we did all of last year.

Drilling downward, we’re still doing very well in financial services, telecom, public-sector segments that are more resilient to the pandemic than those. So, we think we’re very well-positioned. As Rob said, we’re not immune to the economic effects, but we’re were very resilient. And then all that top line improvement coupled with expense actions that we’ve taken earlier this year has translated to obviously an acceleration of our bottom-line margin improvement and cash flow.

Pree Gadey

Great. Thank you. And I guess, just a quick question on the guidance. The Q3 subscription revenue guide assumes a deceleration quarter-over-quarter, which is pretty atypical for a subscription company. Beside conservatism is there anything else to point out on the Q3 guide?

Jim Frankola

Yes. So, we don’t guide ARR. But we certainly expect ARR to be up sequentially quarter-over-quarter. So what’s going on is a decline in our non-recurring revenue streams. So what you have there is strategically post merger, we have been ramping down our non recurring engineering, the amount of work we do there. The second thing is we’re moving our product line to 100% open source. As part of that the amount of upfront revenue that we recognize in any given quarter decreases. And both those factors will be slight drags on a quarter-over-quarter basis. Once again, that’s why we focus on ARR because it normalizes it out and I do expect ARR to grow sequentially.

Pree Gadey

Thank you.

Operator

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

Chad Bennett

Great. Nice job again on the quarter in a tough environment. Maybe for Rob, just — I mean, the excitement around private cloud seems to be all around, whether it’s within Cloudera or within your partner, IBM, Red Hat. I guess, just from your perspective, and I understand it’s very early here. But how do you think about the incremental opportunity in your base in terms of private cloud? When I think about it, are — is your current customer base primarily shifting workloads from bare metal to private cloud? Or are these incremental workloads on top of bare metal that are just moving to private cloud for the flexibility and public cloud like experience? And secondarily to that would be, I assume that IBM opportunity, potential opportunity would be all incremental for private cloud. Any commentary you can provide there?

Rob Bearden

Sure, absolutely. So, there’s been great excitement around private cloud generally. And the reason, there’s a lot of drivers to that. Arun hit a rehash interest of time. and all the sort of architectural efficiencies that it brings by separating storage and compute. But what the real issue is, is that it enables that hybrid data architecture, and the efficiencies that brings the flexibility that brings. And private is fundamental — and the private has the fundamental basis to that efficiencies that it drives. And our particular implementation of private cloud that delivered hybrid with a cloud with one common security and governance framework and a single pane of glass to manage it — to manage it bidirectional workloads across private and multi-cloud. We’re the only environment in the world that can deliver on that as an enterprise software company today.

And so, that opens up not only many more workload opportunities in our legacy customer base, but also then goes to the IBM and Red Hat customer base, because as you know, we adopted OpenShift is the primary — is our kubernetes platform. And so that fits extraordinarily well with their OpenShift customer base and the data layer that we can become and the value that we can create beyond the app layer for their OpenShift community. And so, what we’re seeing now is our customer base largely wants to move, probably 80% of our customer base that is legacy Cloudera Hortonworks to the private cloud, and then add net new workloads to the public cloud.

And then some select workloads that are on-prem today will also move to the public cloud. But then, it gives them the ability to bring the expansion of data sets on to the environment, which obviously represents more incremental TAM opportunity for us. And that remains very consistent from an IBM and Red Hat customer base as well. So we’re seeing a great perception, expanding our TAM and the more important thing is, we’re creating a lot more value for our customers and the IBM, Red Hat customers with private and hybrid than the old traditional legacy platforms. And so that’s why they want to adopt it. They want to get there as quickly as possible.

Chad Bennett

Great. Fair point. And then maybe secondly, just real quick for Jim. Jim, I think in your commentary, you talked about the ARR beat in the quarter, both ARR and RPO year-over-year growth accelerated again this quarter, which is great to see. But you indicated in your commentary that what drove the beat was both new and expansion bookings. I know going into this year you weren’t expecting a ton from net new, but just — are we seeing net new public cloud customers. Can any color on that?

Jim Frankola

Yes. We are seeing net new public cloud customers and we’re very pleased with that. Those are relatively small dollars at this point since we’re landing and expanding them. The – what drove the new this quarter was actually pretty interesting. So we made changes to licensing and paywall several quarters ago. And the first benefits that we saw from that was in terms of reduced churn. So existing customers that had thought about self supporting, understanding what the cost would be and deciding to stay with us. What we saw this quarter, and I don’t want to over emphasize it. We saw some very significant wins where customers, large customers who were using the software as non-pay — I shouldn’t call them customers, non-paying users were using the software.

And as they saw our roadmap and the value that we’re creating decided to become customer. So at this point, as we add up the saves versus the wins for new customers. As of Q2, we now have more new customers coming on board due to the changes in licensing paywall than we’ve had saves. So that was the surprising piece of the new story this quarter. Not sure how long it will repeat. But we’re confident that it will be a net add for a long period of time.

Chad Bennett

That’s really good to hear. Congrats and kudos on the quarter.

Jim Frankola

Thank you, Chad.

Rob Bearden

Thanks for joining the call. Appreciate it.

Operator

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

Unidentified Analyst

Hi. It’s Conan [ph] for Jack. Thank you for taking my question. I was wondering if you could talk a bit more about the migration model of customers to CDP that you touched on in your prepared remarks, Rob. It’s been a mixed bag of results from other companies that have migrated. So how should we be thinking about migration ramp? And what percentage of your sales base will be dedicated to migration versus net new?

Rob Bearden

Sure. So Arun, you want to start on that, and then I can talk about — I’ll follow it up. How about that?

Arun Murthy

Yes. For sure. Thanks. Hey, thanks for the question. Obviously, this is something that we’ve been very cognizant of. When the two companies came together, we had CDH and SAP and we had to make sure we thoughtfully and carefully designed a path for both sets of customers to get the CDP. And today, with CDP Private in the market, we see this — we are sort of in the early stages of this, but the early signs have been very encouraging.

In terms of designed an approach where we can take both sets of legacy customer bases, CDH and SAP and give them a fairly scripted, and of course, our professional services on — more on this. We can get them over to what we call as a CDP Private base, right? And that has similar form factor and fields [ph] before, but obviously has all of the newer capabilities starting with SDX they get to take advantage of. And that’s why customers are really excited about getting to CDP with SDX. Furthermore, then we stand up, Kubernetes space, private cloud instances right next to them, so they can actually get all the value we talked about, separation of compute and storage, the net new SaaS experiences for multi-tenancy in isolation, but they can get that value back really, really fast and very, very aggressively.

So we’ve actually — the way we’d also did this was we started a design department [ph] program, which was incredibly well run, and we chose five to 10 customers who went through this. One of the early feedback regards was, I think, it was like the second customer. We did this. They were able to stand up CDP Private cloud in under 30 minutes and get value, right? We’re just kind of unheard of. And especially on the on-prem side of the house, its something that we expect in the public cloud. But doing that in private and on-prem, private cloud, on-prem was a great validation. Back to you, Rob.

Rob Bearden

Yes. And Jack, just to round that out. So, as I mentioned, we run a number of workshops over 500 at this point year to-date with our customer base. And the vast majority went to take the existing on-prem workloads, move those over to CDP and then enable private cloud, excuse me, hybrid data architecture leveraging the next year across multiple public cloud. And then some of those may actually put — it’s a much, much smaller percentage will actually go directly to the public cloud and then round back out to the private. So, we’re seeing adoption of hybrid generally, that the biggest migration going directly to — the on-premise legacy directly to the private cloud.

Unidentified Analyst

Thank you. That makes a lot of sense. And for you, Jim, can you talk a little bit more about the impact of public and private on gross margins as these products scale over time. Are there any fundamental differences that lead to differences in gross margins between public and private versus the on-prem license?

Rob Bearden

At this point, we believe that the public and private offerings as they mature will lead to higher gross margins. It’s a more homogeneous environment. The products, especially the experiences are easier to use, have a simpler UI. So we believe that there will be a net add to gross margin as they develop.

Unidentified Analyst

Thank you.

Operator

Your next question comes from the line of Rishi Jaluria from DA Davidson. Your line is open.

Unidentified Analyst

Hi. This is Phil Brigbe [ph] for Rishi Jaluria. Thanks for taking the question. So it looks like stock-based comp increased in the quarter. Can you talk about what the driver was there? And then just to expand on that, can you give us an update on how you’re looking at hiring in this environment?

Rob Bearden

Jim, do you want to take that?

Jim Frankola

Okay. I’ll take this stock-based comp, you can take the hiring. I actually thought stock-based comp declined in the quarter, some. And the macro story there is in the merger we did a number of things in terms of making sure employees were retained. Between the two companies. We’ve had some executive changes. I think Q1 is actually a peak in terms of stock-based comp for the foreseeable future. Q2 was less than Q1. And I think Q3 and Q4 will be less than Q2, so I expect you’ll see a decline in trend on both dilution and stock-based comp.

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Unidentified Analyst

Yes, perfectly. And then — go ahead, I’m sorry.

Rob Bearden

In regards to the hiring, it’s really been interesting environment, right. Like the rest of the world have been sort of getting a hang of it. But its actually been helpful given our open source groups. Like if you go back to the groups of both the companies, we’ve always had community spread across the world. And frankly, this environment has really reiterated and reinforced some of the lessons we’ve learned for the last decade or so. So overall, like hiring, I would say, and attrition has been much — attrition will be lesser. Hiring has been easier than for most other companies.

Unidentified Analyst

It’s great. Thank you so much, guys.

Operator

Your next question comes from the line of Nehal Chokshi from Northland. Your line is open.

Nehal Chokshi

Thank you. You guys talked about how — it’s still a difficult environment out there. I was wondering, could you give us a sense as to how much of the impact it has on the Q-o-Q ARR growth, which was about 2.5% Q-o-Q?

Rob Bearden

Jim?

Jim Frankola

Yes. What I’d say is, it’s modest, less than a percent. When we look at the details, we do have some customers especially in the hospitality industries, travel and entertainment, that are under severe budget pressure and are either deferring expansion or in some cases, moving to self-support at least for a very short period of time just to manage through this crisis. Now fortunately for us, that’s a very, very small percentage of our business. So I’d call it, again, less than a percentage point drag due to the impacts in the quarter.

Nehal Chokshi

Great. Thank you. And the follow up question is that, with the changes to licensing and paywall. And now that you’ve saw a record number of non paying customers become subscribers. Do you expect the greater than 100 pay customers to start to progress from what has been flash over the past three quarters?

Rob Bearden

Yes. I’ll go ahead. So, in the short run, so for this fiscal year, the answer is no. From a business model standpoint, our focus this year has been predominantly on our existing customers, bringing CDP to them, early adopters, early majority and getting more successful in the product line. As we think about fiscal year 2022 and beyond, for sure, we have a product line that’s emerging especially CDP public cloud that will be much better place for newcomer to start. So I do see an increase in the total customer count and the over $100,000 customer count, but not so much this year. That’s really going to be something that’s going to impact next year.

Nehal Chokshi

Thank you.

Operator

Your next question comes from a line of Matt Coss from JPMorgan. Your line is open.

Matt Coss

Hi. Good afternoon. Thank you for taking my questions. Last quarter, you cited the possibility of growing at market rates, which you mentioned was about 20% pre COVID once fully transitioned to CDP. Is there any change in that thinking based on what you’ve seen during the last quarter?

Rob Bearden

No. From what we’ve seen — exactly. We talked about embracing the rule of 40.

And that, as we see our TAM and where we’re positioned in our product suite against the TAM and where the public clouds growing versus that the on-prem environment. We stated that we felt like we could get back to sort of a market growth rate in that low to mid 20s. And what we’re seeing — and that we would leg into that growth rate. And so, what we’re seeing from a reception on CDP, we’re very comfortable that we’re going to continue to leg in and up to that growth rate over the next few quarters, and/or seeing that as a natural motion, very comfortable with that.

Matt Coss

Great. Thank you. And then perhaps you can share a refresher on ultimately where you think operating margins can go over time. I know you’ve sort of said, we don’t expect dramatic changes for the rest of this year. But as you look maybe in an intermediate term, kind of what’s that operating margin threshold?

Rob Bearden

Yes, Jim. Yes. So, our business model, the first level of proximation says, once we get through CDP transition top line growth around 20%, operating profit around 20% as well. To the extent that we have an offering that allows us to grow at faster than 20%, then our operating margin may hover slightly below 20%. If for whatever reason, 20% growth is not in our cards, we see the ability to have significant leverage on the bottom line and take operating profits to 25% or more. So, there’s a lot of flexibility in the business model. We’re positioning ourselves for transition to growth, and we think it’ll be a very balanced approach on growth and profitability.

Matt Coss

Thank you.

Operator

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

Mark Rende

Hi. Mark Rende on for Sanjit Singh. Thanks for taking my question. So I just want to ask you to maybe one on product and one on the guidance. So in terms of — what’s the adoption today of CDP cloud looking like from an actual workload perspective? I guess said differently, are customers just kind of transitioning workloads from legacy cloud era platform onto CDP? Or are they currently actually using it for like net new workloads? And if workloads just transferred, is there any associated ASP uplift with that from the legacy to the new platform?

Rob Bearden

Sanjit, thank you for the question. So a few things wrapped up in there. So what we see is the notion for our customer base is that they want to move the existing legacy workloads or the vast majority to private cloud, and then take net new workloads and put on public cloud. And that’s been very consistent with what we’re seeing with public cloud uses that — its customers that do plan to move their legacy environments, predominantly in wholesale, plus expansion to private and now they’re taking and starting with net new workloads on CDP public.

And so, from a expansion standpoint, what we see is from workloads that go to public, it tends to be more cost effective than the cloud native services, but an uptick to an on-premise price point. So it sort of represents an uplift to our existing on-premise environments, but still more cost effective than the native cloud environment. Did that hit your question?

Mark Rende

Yes. Very helpful. And then maybe one other I could sneak in here on the guidance. So I know the assumptions that COVID continues to kind of impact through Q4 versus kind of last quarter, it was expected to maybe moderate in Q4 if I look back at the release from last quarter. But if I look at kind of net new ARR, in this quarter, it was like $16 million, versus about $13 billion last quarter. So maybe to put a little bit of context around kind of guidance in over the next two quarter like are you guys thinking about the worst is behind us? Or its kind of still a bumpy road. And Q3 is a little bit — Q3, Q4 might vary a little bit with COVID. And just the kind of the new product portfolio as well. Kind of what are your thoughts internally, I guess in terms of that ARR trajectory?

Rob Bearden

Jim?

Jim Frankola

Yes. So, clearly, the pandemic impact on us so far has been less than we had originally modeled. Speaks once again to the resiliency of the business. But this is a very uncertain environment. And we all talk about is it a V? Is it a W? Is it some other letter that will describe the economic recovery? We want to be prudent in this very uncertain environment? And so, to paraphrase your words, yes, we expect there will continue to be some bumps in the road economically. And we have factored that into our guidance.

Mark Rende

Got it. Thank you.

Operator

Your next question comes from the line of Kash Rangan from Bank of America. Your line is open.

Kash Rangan

Hey, gentlemen. Thank you so much, Rob, Kevin, and the rest of the team, Jim, as well. My question for you is, when you look at your existing customer base, the offering that you have is presumably be very attractive. You’ve got the opportunity to migrate to the new platform, whether it’s private cloud, public cloud. When you look at the next evolution, the market generally in software at least from an application centric standpoint, the pitch for the incumbents has been that we’ve got this hybrid optionality. So you can deploy on-prem, or in the cloud — pure cloud native guys generally don’t have that option, but they tend to participate in the market growth in a certain way, right? As you look at this next evolution the market as — if the next tranche of customers start to make decisions with native cloud first mentality, what is the Cloudera differentiation in that granted that you have a great compelling pitch for existing customers. But as you enter the new customer or new phase of market adoption, how should we think about the differentiation versus some of the cloud native guys like a Snowflake?

Rob Bearden

Sure. So, we’ll start with our core customer base. What they want to do is — our core customer base, obviously, is the Fortune 2000 enterprise data architecture enablement. And what they want to do and that’s what we in our current phase are very focused on, giving them the ability to truly enable that hybrid multi cloud data architecture, be able to manage the data across each tier from the edge, on-prem private cloud and across multi public clouds with the common security and governance framework managed from a single pane of glass.

That’s what the Fortune 2000 enterprise is looking to accomplish from an enterprise architecture standpoint. That’s what CDP addresses very, very cleanly, very squarely with high value. That gives our existing customers and their existing on-prem workloads, the ability to very flexibly migrate to that environment, enable their data architecture, and then leverage our experiences to manage that entire lifecycle of data for streaming with ML, with ML templates applied to their — take it through data engineering, ultimately to a data warehousing and do that across CDP private cloud and public cloud.

So that really truly gives IT the ability to have that enterprise architecture enablement. And then that gives us then the ability to come back now in the next phase and to be able to bring those experience that end-to-end data lifecycle experience in a cloud native environment. And I think it’s very — that then becomes a win-win, where IT can now go to the line of business user and provide that native service capability and an enterprise grade, hybrid data architecture, with all of the disciplines of the single security governance framework managed from a single pane of glass. And that’s very different than trying to focus on very specific SaaS point solutions that you didn’t have to stitch together multiple point solutions to enable that in that overall enterprise data lifecycle.

Kash Rangan

Yes.

Rob Bearden

Kash?

Operator

My apologies. I thought it was done and if you would please read-queue for your follow up. Once again, please re-queue as I removed your line from the queue. This line is once again open. We can hear you now. Okay, great.

Jim Frankola

Yes, Kash. Let me apologize for that.

Kash Rangan

Oh, no, no, no worries no worries at all. Totally worth it. Thanks for an answer by the way that gives good clarity. But if a customer were to make a pure cloud native valuation, in that case there’s no consideration for legacy, private and public, hybrid, etcetera. How should we think about the competitive advantage that the platform has in a pure public cloud? Only architecture, vis-à-vis the likes of snowflake.

Rob Bearden

Yes, again, when we hit it at the macro then, we’ll jump in. Keep in mind, if it is a head-to-head against a point SaaS provider, that typically tends to be at a line of business, in a line of business departmental environment, where we had focused on with our product strategy has been to enable an overall data architecture for hybrid and multi-cloud and then to be able to bring the entire lifecycle data under management. That’s been that’s been for this current phase, our strategy in its model.

Next phase will be then to look at how we then enable IT to bring very specific data workflows to the line of business. So with that, Arun you want to augment on that a bit?

Arun Murthy

Absolutely. Hey, guys. So first what we see customers, when we talking to people that take a sort of a pure cloud play, right? What we’ve fundamentally come to understand working with the customer base we have is that when they try to solve a business use case today, take something precise, like hey, they just want to show a current, a real time bill or something they’re charging the customer for, to do that use case you need interestingly, a set of technologies you need to be able to get data under time, you need to be able to sort of transform it, report on it and even predict on that data, right. So it just is one use case simply because it talked about needs like four or five things they need. So what we do with CDP in a pure, pure sort of cloud scenario is that we sell a position — we and multiple experiences we have, we have a sort of world class ware house solution, we have a great machine learning solution. We have data engineering, we have streaming technologies, the fact that they can put together that end-to-end use case and still have great security and governance within that, rather than have to put together all these points solutions themselves is a big differentiator. And that is what we are starting to see, as Jim talked about. That is why we’re starting to see some of the net new customers start directly, purely on the public cloud, but start with CDP either on Amazon or on Azure. And they’re sort of obviously in the early stages of this. But we’re really excited about the possibilities and what they can do there.

Rob Bearden

And Kash, I’ll just wrap up with this. Now that we delivered CDP private, that completes the enterprise data cloud strategy and vision that we’ve had and now we’ve now we’ve delivered the enterprise hybrid data architecture. It’s going to be much easier for us to go down market to address those workflows for the line of business against that enterprise data architecture then, as opposed to trying to start with a point SaaS solution and enable and enterprise data architecture. So we’re very, very happy with our positioning and where we are within the solutions that we’re bringing to the enterprise.

Kash Rangan

Wonderful. Thanks. Again, very clear.

Rob Bearden

Yes. Good catching up.

Operator

There are no further questions at this time. I’ll turn the call back to management for closing remarks.

Rob Bearden

Well, great, thank you very much. We appreciate all you attending and look forward to talking with you again next quarter. Have a great day. Thank you.

Operator

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



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