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Cloudera, Inc. (CLDR) Q3 2019 Earnings Conference Call Transcript


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Cloudera, Inc. (NYSE: CLDR)
Q3 2019 Earnings Conference Call
Dec. 5, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Christine and I'll be your conference operator today. Welcome to the Cloudera third quarter fiscal 2019 quarterly results conference call. All participants' lines have been placed in a listen-only mode to prevent background noise. After the speakers' remarks, there will be an opportunity to ask questions. If you would like to ask a question during this time, simply press * and the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. Please note, this conference is being recorded. Your host is Kevin Cook, V.P. Corporate Development and Investor Relations. Kevin, you may begin your conference.

Kevin Cook -- Vice President, Corporate Development and Investor Relations

Thank you, Christine. Good afternoon and welcome to Cloudera's third quarter fiscal 2019 conference call. We will be discussing the results announced in our press release issued after the market closed today. From Cloudera with me is Tom Reilly, Chief Executive Officer. Mike Olson, Co-Founder, Chairman, and Chief Strategy Officer. And Jim Frankola, Chief Financial Officer. During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company including those as merged with Hortonworks.

Generally, these statements are identified by the use of words such as expect, believe, anticipate, intend, and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call.

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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 10K, our quarterly report on Form 10Q, and our other filings with the SEC, including a registration statement on form S4 containing a joint proxy statement and prospectus of Cloudera and Hortonworks. During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude stock-based compensation expense and amortization of acquired intangible assets.

In addition, we provide a non-GAAP weighted average share count for fiscal 2018. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing Cloudera's performance. Additionally, our commentary today in the guidance we provide is under existing accounting standard, AFC605. Note that guidance is provided for Cloudera on a stand-alone basis.

For complete information regarding our non-GAAP financial information the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release regarding our third quarter fiscal 2019 results. The press release will also be furnished to the SEC as part of a form 8K. In addition, please note that the date of this conference call is December 5, 2018, and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. Now, I'll turn the call over to Tom Reilly.

Tom Reilly -- Chief Executive Officer

Hello, everyone. Thank you for joining us to discuss our third quarter fiscal 2019 financial performance. I recognize today is very special. The national day of mourning for President Bush. Our thoughts and prayers are with the Bush family and the nation. Considering the markets are closed today in honor of this special memory, I appreciate all of you joining us for this call. I will quickly review Q3 results for Cloudera stand-alone and then update you on a proposed merger with Hortonworks, our combined company strategy, and the progress we're making in integration planning. Remember that the transaction was announced on October 3rd in the midst of our third quarter.

Despite this major development in all the groundwork we had to leave for the merger, we remain focused and execute well to deliver strong results in the quarter. Total revenue for the third quarter was $118 million representing year-over-year growth of 25%. Subscription software revenue grew 28% year-over-year. Recall that we are very focused on driving expansions at our existing customers and acquiring new customers in our target market. The sum of existing customers graduating to greater than $100,000 of annual recurring revenue and new customers beginning with annual recurring revenue above $100,000 is our measure of this business activity. We increase this number by 33 in the quarter for a total of 601 customers with more than $100,000 of ARR at the conclusion of Q3.

Reflecting the significance of this measure, these 601 customers represented more than 90% of software revenue in the quarter. While much of our focus is on long-term strategy and merger planning, it is reassuring to see continued favorable results from the go-to-market changes we initiated a few quarters ago. We added 63 new customers in Q3, predominantly in our target market. Increasingly, our new customer wins are being driven by our hybrid cloud offerings. We've noted from customer engagements the past few quarters that there is little interest in a public cloud versus on-premises deployment debate. Instead, the hybrid cloud in avoidance of cloud lock-in themes is amplified.

Customers are demanding hybrid and multi-cloud capability and our competitive advantages here are evident in their decision-making. Reinforcing our hybrid cloud strategy, even our partner AWS announced an on-premises appliance last week to address the hybrid cloud expectations of large enterprises. Given our years' investment in both hybrid and multi-cloud capabilities, we have a strong competitive advantage in this rapidly evolving market. Furthermore, the customer wins in our target market reinforce our field and go-to-market transformation efforts initiated earlier this year to drive strong net expansion rates. Existing customers continue to renew and expand, contributing to a net expansion rate for Q3 of 127%. Workloads in the cloud are measured by instance hours are outpacing this growth. In all, we are pleased with our execution in the quarter.

Of course, the big news in Q3 was our announced plan to merge with Hortonworks. Each day we get more excited to bring these complementary businesses together. Having received early termination of the antitrust waiting period and having filed our joint proxy statement with Hortonworks, we and Hortonworks plan to hold our respective shareholder means to vote on the proposed merger later this month with a completion of the merger to follow soon thereafter. If the closing occurs as planned, we'll have completed the transaction ahead of schedule in less than 90 days. I will now spend a few moments to review the strategic rationale for the combination and update you on our progress with respect to integration planning.

As you can see in our S4 registration statement, this is a transaction that Rob Bearden, the CEO of Hortonworks, and I have been considering discussing for several years now. It is a natural alignment and has always made great business sense. The deal is highly strategic and will position the combined company for enhanced innovation, market expansion, and sustained long-term growth. It is about achieving the scale needed to compete with a new class of competitors and to service the ever-changing needs of some of the world's most demanding organizations. As a combined company, powered by open source innovation, we will have the scale and the skills required from market leadership and to capture market growth.

To keep things simple, you can think about the merger rationale in two broad buckets. The first is innovation and growth. And the second is market leadership in financial synergies. Let's talk about innovation and growth. The combination of Cloudera and Hortonworks will fuel innovation at a greater rate and pace than we could've achieved as stand-alone companies. The new Cloudera will have the scale, resources, and talent to do more and do it faster. Our significant investments in engineers and committers working with the open source community will enable us to innovate on key technologies ranging from real-time streaming at the edge to an enterprise-grade cloud-native data warehouse, and a new platform to industrialize AI.

All delivering the industry's first enterprise data cloud. The enterprise data cloud is the embodiment of our shared cloud everywhere vision. Together we plan to accelerate our cloud competitiveness and innovation delivering the only data and analytics offering that is both hybrid and multi-cloud supporting all five major public cloud vendors, AWS, Azure, Google, IBM, and Oracle. We aim to bring the right data analytics to data anywhere the enterprise needs to work. The emergence of new open source standards, including Kubernetes and container technology, will play a significant role in this strategy, enabling the separation of computer and storage and cloud-like architectures that customers can run anywhere. In fact, earlier today at the AI summit we announced a preview of our next generation cloud-native machine-learning platform powered by Kubernetes. Cloudera machine learning will deliver faster provisioning and auto-scaling as well as containerized distributor processing across multiple cloud environments.

As one company, we will also spark new growth by investing in the unified platform that spans the edge to AI broadening the breadth of use cases we support in expanding the markets we serve. We'll blend the strongest elements of each company's technology in this new platform and cross-sell the products that are represented a competitive advantage for our respective companies. In recent years, we have each invested in differentiated yet complementary areas. Hortonworks is invested in real-time streaming and data ingest to support IOT use cases at the edge. Likewise, Cloudera's invested heavily in machine learning and AI to empower data scientists with a state of our tooling to automate machine learning workflows. The new Cloudera will become the only player to offer a complete solution for the edge to AI.

Increasing the use cases we enable, expanding our addressable market, and unlocking great cross-sell opportunities. Specifically, soon after our merge, we plan to sell Hortonworks edge offering, HDF, or Hortonworks and data flow, to existing Cloudera customers. We plan to sell Cloudera data science workbench to existing Hortonworks customers. These are the first of many cross-sell opportunities we have identified. Okay. Now I'll discuss bucket number two: market leadership and financial synergies. The combination of Cloudera and Hortonworks creates a clear market leader in the industry standard for a modern data platform, producing significant advantages for customers and partners. Establishing the industry standard minimizes risk and improves clarity for customers. It simplifies customers' evaluation processes and speeds decision-making. The standard also focuses on the open source community's innovative efforts.

In terms of the partner ecosystem, a standard streamlines or go-to-market, and development efforts. Partners have had to split resources and focus between our two platforms. Now our partners will be able to commit more resources to the relationship and concentrate their investments in a unified platform. For example, we expect to enhance and expand our partnerships with our public cloud providers as we bring more enterprise customers with production workloads to their platforms. Last, but certainly not least, significant financial synergies produced by merging the two companies. We expect to generate substantially more cash in a shorter timeframe and if we have remained independent companies. We will also accelerate the achievement of our long-term target model.

Although the merger will generate large cost savings, it is important to note that we intend to invest some of those savings into enhanced go-to-market capabilities and the technological innovations mentioned previously. So in summary, the merger will deliver accelerated innovation and growth and establish clear market leadership. The strategic merit and financial benefits are apparent. But merging two companies is hard work. So it has been really encouraging to have our plans validated by countless customers and partners since announcing the merger. This outpouring of support from our respective customers and partners reinforces the industrial logic of the merger. It also makes Rob and I wish we had found a way to join forces sooner.

Perhaps the greatest air of enthusiasm has been around our new product roadmap. Customers love the idea of an enterprise data cloud that supports both hybrid and multi-cloud implementations with use cases that span from the edge to AI. They also appreciate that much of our software from the two companies is common open source and also complimentary code. Thereby making our job of integrating the two platforms easier and less risky. Our customers also appreciate the glide path that we have created for them and to date we have seen no change in purchasing habits. As most of you are aware, Cloudera and Hortonworks are prohibited from operating as one company until the merger has closed.

However, during this pre-closing period, we have made tremendous progress in planning post-merger integration and many of our critical integration decisions have been made. We have consultants from top professional services firms helping us get the planning and execution right. We also have a joint steering committee, integration management office, and function integration teams dedicated to merger integration. My sincere thanks to all the individuals from both Hortonworks and Cloudera for their cooperation and commitment to achieving our shared vision for the new company. Our merger integration teams are working extremely well together and are ahead of schedule. Here's a quick update on some of the concrete steps we've taken in a pre-closer merger integration planning.

Every business function has created their integration plans. This will enable a fast start to capturing the expected merger benefits. The engineering and product teams have already agreed on our joint product vision and roadmap. We have independently completed the engineering work to ensure that soon after the merger closes Cloudera's data science workbench and Hortonworks data flow offerings will function with each other's platforms and can be cross-sold. We have validated our specific cost synergy assumptions by functional area and believe that we have identified the potential for even greater synergies than assumed, which we intend to reinvest in high growth areas including hybrid cloud, machine learning, IOT, and edge.

I cannot be more pleased by the substantial work that has been done to date and the reception that our plans receive in the market from our partner network. After working on integration planning for more than 60 days, the overriding find is that our companies are more similar than we had appreciated. Culturally, we share the same commitment to open source software, innovation, and customer success. As we've highlighted in the past, our product roadmaps and technology vision for the future are nearly identical. Our go-to-market strategies, sales, channel, and partnerships are the same. We've been impressed at a how well aligned we are already. We target similar customers with similar technologies in a similar way. The things that differentiate us are mostly relative strengths that we want to preserve in the combined company for competitive advantage and customer benefit.

And on the practical front, integration is aided by both companies being headquartered in Silicon Valley. And each of us having development and support centers in both Hungary and India. This makes integration easier and increases our ability to capture more synergies earlier. As to customers, we have very little overlap among our combined customer base with fewer than 5% of all customers in common. This enlarges our opportunity, reduces the potential for disruption in sales motion, and simplifies the assignments of account executives. On the whole, we are happy with the status of integration planning and particularly the feedback on our plans from our ecosystem customers, partners, and developers. To be sure there's plenty of work to do but the challenges with integration that technology companies typically face are less apparent here. I'd like to ask Jim to provide more detail financial updates. Please, Jim.

Jim Frankola -- Chief Financial Officer

Hello, everyone. Across the board, we had another good quarter in Q3. Description software revenue was $100 million for the third quarter, an increase of 28% year-over-year. In total, revenue was $118 million for the third quarter representing 25% growth over the year-ago period. Given that our merger announcement occurred mid-quarter, we are very satisfied with our execution in the face of this news. Some highlights this past quarter, we increased by 33 the number of customers who started at or have grown to more than $100,000 of annual recurring revenue bringing the total to 601 customers in this class. As of Q3, we had 74 customers with more than $1 million ARR representing 52% of software revenue.

Finally, our net expansion rate in Q3 held relatively steady at 127%. Collectively, these measures reflect our ability to both acquire target customers and advance customers along a journey toward increasingly attractive unit economics. As I review the remainder of the income statement, note that, unless otherwise stated, all references to expenses and operating results are on a non-GAAP basis. Historical non-GAAP results are reconciled to GAAP results in the press release issued earlier today. Cloudera's continued focus on operational efficiency was reflected in Q3 results as margins and expenses improved in nearly every respect. In particular, expenses were much better than expected. In anticipation of the leverage that the merger provides, we slowed hiring in areas that will be impacted by the merger and have gotten a fast start on achieving our cloud savings targets.

Total gross margin for Q3 was 79% compared to 73% in Q3 of last year. This is driven by subscription gross margin of 89% up from 86% a year ago. As to operating expenses, sales and marketing expense was 49 million for the third quarter or 42% of total revenue. This compares to 57% of total revenue in a year ago period. Research and development were $30 million for the third quarter or 25% of total revenue improved from 31% a year ago. G&A was 18 million for the third quarter or 15% of total revenue versus 12% of total revenue in Q3 of last year. This increase was driven by $6 million of merger-related costs. Excluding these costs, G&A would've been 10% of revenue better than a year ago. Overall, operating loss was $4 million in Q3 representing a negative operating margin of 3%.

This was a substantial improvement of more than 22 percentage points compared to the year-ago period. Loss per share was $0.03 in the third quarter based on 152 million weighted average shares outstanding compared to a loss per share of $0.17 in the third quarter of fiscal 2018. Please review the financial statement tables in today's press release for additional information regarding historical and forward-looking stock-based compensation expense and shares outstanding. Now, turning to the balance sheet and cash flow. We exited Q3 with $453 million in cash, cash equivalents, marketable securities, and restricted cash. Operating cash flow for the third quarter was -$7 million, which includes $6 million of merger-related spending. Cash flow performance was better than expected due to strong collections and early achievement of some merger-related savings.

Year-to-date operating cash flow was -$6 million compared to -$20 million in the first three quarters of fiscal 2018. These results have us on track to meet our stand-alone company goals of being operating cash flow positive in Q1 of 2020 and for the full fiscal year of 2020. Capital expenditures were $2 million in the quarter. Total deferred revenue was $277 million at the end of the third quarter up 19% year-over-year. Short-term deferred revenue was $243 million up 23% year-over-year. I will conclude by providing initial guidance for fiscal Q4 and updated guidance for fiscal 2019. Note that the guidance is provided for Cloudera on a stand-alone basis.

We intend to provide guidance for the combined company after closing in the merger and completion of Cloudera's fiscal fourth quarter. We expect Q4 total revenue to be between $119 million to $122 million representing approximately 17% growth compared to Q4 of last year. With subscription software revenue in the range of $101 million and $103 million up approximately 21% year-over-year. Net loss per share is projected to be $0.12 to $0.10 based on 155 million weighted average shares outstanding. For the fiscal year 2019, we expect total revenue to be between $450 million and $453 million representing approximately 23% growth compared to the fiscal year 2018.

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

To summarize, not only did we execute well on our stand-alone business, but also we made a surprising amount of progress on the merger. By limiting hiring to areas that directly support growth, we have achieved more than 20% of merger synergies before the deal has closed. This combination of solid execution and focused hiring is driving our financial results for the year. With that, I'll return the call to Tom for some concluding remarks.

Tom Reilly -- Chief Executive Officer

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

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

As soon as our merger closes, we will be the only next-generation data management company to run across all major public cloud infrastructure: Amazon Web Services, Azure, Google, IBM, and Oracle. We believe that operating across all clouds while also offering a public cloud experience everywhere, what we call the enterprise data cloud, is a powerful competitive advantage because it is what enterprises expect. The team and I are grateful to our customers, our employees, our developer community, our partners, and of course to our investors. Thank you all for joining us on this special day. Operator, this is a great time for us to begin the Q&A portion of the call. Thank you.

Questions and Answers:

Operator

At this time, I would like to remind everyone in order to ask a question please press * then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Tyler Radke from Citi. Your line is open.

Tyler Radke -- Citi -- Analyst

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

Jim Frankola -- Chief Financial Officer

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

Tyler Radke -- Citi -- Analyst

Okay. Where would you expect those to truss out? I think you originally said in the low 120s. is that still your expectation?

Jim Frankola -- Chief Financial Officer

That's still the expectation. Once again, when you look at net expansion rate, it's helpful to look in an annual context. Our guide for revenue for the year is 27% growth in software revenue, which is actually I think about three percentage points higher than our initial guidance for the year. so the year has turned out to be better than we initially expected. Of those 27 percentage points of growth, let's call it roughly 5-6% points will come from new customers added over the course of the year.

So, therefore, call it, some number in the low 20s, 20-22 will come from our existing customers. And it's not a perfect correlation between that number and net expansion rate but it's pretty good. That's the guidance that we gave earlier in the year. That's where we are today. I think early in the year I was expecting net expansion rate to top out in the high one-teens, like 118-119. Obviously, it looks like it'll be a little bit better than that.

Tyler Radke -- Citi -- Analyst

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

Tom Reilly -- Chief Executive Officer

One, I'm very pleased with our new head of sales who are joining Cloudera. I'm excited that we are early in identifying revenue synergies from the merger. Those will come from immediately on almost day one our cross-sell capabilities. We mentioned a couple during the call. We've already identified some that can follow in the subsequent quarters.

And then, the innovation that we're gonna drive. Especially around our enterprise data cloud strategy, is going to be a strong differentiator. We think the market is moving toward us from it just being a public cloud versus on-premise to enterprises realizing that they want a hybrid multi-cloud strategy. So all of this gives me great confidence that we see continued strong growth.

Operator

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

Daniel Ives -- Wedbush -- Analyst

Great color in the call. Just to confirm, so you're maintaining your targets on the combined company that you gave when you announced deal? Because I'm getting a few questions.

Jim Frankola -- Chief Financial Officer

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

Daniel Ives -- Wedbush -- Analyst

Okay. And just a last question. So you maintain the targets that you gave on the combined company when you announced the deal? I just want to confirm that.

Jim Frankola -- Chief Financial Officer

Let me start with that and then I'll let Tom take over. When we announced the deal, what I'll say is we didn't issue guidance or targets. We wanted to describe what the profile of the company would look like. As a combined entity in fiscal year '21, or calendar year '20, we said that we would be more than $1 billion of revenue growing faster than 20% a year with more than a 15% operating cash flow margin.

There are literally only a handful of enterprise companies that fit that profile and the companies that fit that profile are attacking large markets with disruptive technology and are well managed. That does not mean we're guiding $2 billion. We're guiding to more than $1 billion of revenue. Exactly what that's going to be, we'll have much better insight once we close Q4. I need to understand how much of a deferred revenue haircut we'll be taking on the Hortonworks revenue. So don't take that as guidance. Take that as a profile of the type of company we will be.

Daniel Ives -- Wedbush -- Analyst

Thanks for the clarity.

Operator

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

Michael Turits -- Raymond James -- Analyst

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

Jim Frankola -- Chief Financial Officer

We're gonna break that question up in two pieces. What I'll say is, I'm not gonna get on my soapbox on billings other than to say it's not a great measure on the quarterly basis. If you were to look at our trail in 12 months total billings, they're up I think about 18% year-over-year. We are seeing shorter contract durations and more importantly, shorter billings durations. In fiscal year '17 and '18 our average billing duration were a little bit over 14 months. In Q3 it was 13 months. We're getting closer and closer to upfront annual payment terms so that will be a drag on billings growth relative to bookings of revenue growth.

But then, with that said, if you compare that 18% growth in Billings on a trailing 12 months basis compared to our revenue guidance in Q4, compared to our growth in deferred revenue short-term -- all those numbers converge in roughly around 20. What you're seeing here is a business that is positioned to grow roughly 20% -- a little bit faster than that on software come Q4. And clearly, post-Q4 is where we're looking to see the benefits on a stand-alone basis of the go-to-market transition. And then, obviously, we're gonna accelerate that with the merger with Hortonworks. I'll turn it over to Tom to talk about the second part of your question.

Tom Reilly -- Chief Executive Officer

Michael, good to hear your voice. Thank you for the question. And I know that another Michael, the CEO of one of our peer companies made some comments about on-premises Hadoop slowing down. I don't want to disagree with him. There's validity to what he says. But here are a couple of things I'd like to share with you. First off, we don't view ourselves as an on-premise Hadoop provider. Our capabilities have gone way beyond what was traditionally called Hadoop.

Our value proposition is managing data across multiple data stores including cloud storage buckets and on-premise environments, and we do see traditional bare metal deployments slowing down because customers want to move workloads to the private cloud and public cloud, what we call the enterprise data cloud. And we are capturing those workloads. So as I said, the discussion the longer is it bare metal on-premise, our customers want cloud capabilities.

And they want that cloud capability to multiple areas. They want it in the private cloud and they want it across multiple public cloud players. No longer are they just -- they want to avoid cloud lock-in. They're not betting on just one public cloud provider. And Cloudera's in a very unique competitive position to capture the market growth where the market is headed. So hopefully that provides some clarity on the other Michael's comments in his earnings call.

Michael Turits -- Raymond James -- Analyst

I guess my follow-up is in the same line of questions still. Jim, you said basically 20% of the real economic growth in the fourth quarter. You've said over 20% growth for complying companies of fiscal '20. You haven't talked about the intervening years yet but let's just say since a guide of over 20% that you gave on the merger call and given some of those inputs from that other management company in the quarter's trends. Any diminution at all in your confidence in those kinds of growth profiles?

Jim Frankola -- Chief Financial Officer

From my standpoint, everything that I see gives us confidence. I'll back it up to our long-term. Way back we went through that queue, we noted that our net expansion rates in our customer set ranged between 120 and 150. And where with are today, we're still above 120. More importantly, when we look at our target customer set, the G2K and companies like that, their net expansion rates continue to be well above that 120. So as we are executing this go-to-market transformation of which part of it is a refined target market, I see that as something that's gonna help our net expansion rates over time.

Clearly, everything that we see happening with the merger with Hortonworks, the ability to cross-sell product. I don't need to go through the whole pitch of innovation and cloud and so forth. All of that will be a tailwind for positive growth in net expansion rates. We don't know exactly how much it will be. We also understand as we execute the merger, for the first few months we've got to bring two companies together. That's why we want to get half the merger closed, get Q4 results under our belt before we give more guidance on both fiscal year '20 as well as the longer term business model, which I think would include fiscal year '21.

Operator

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

Jack Andrews -- Needham -- Analyst

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

Tom Reilly -- Chief Executive Officer

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

The next one is the ISVs. So we at Cloudera have over ISVs in our program. These ISVs all have to integrate their software into two platforms today. Quickly, next year, and as we deliver our first combined platform, they only have to integrate to one platform. That's gonna make those integrations tighter. Now customers benefit from both those things. SVIs with better skills and deeper domain, one platform. And ISVs that have done a better job of integrating. Finally, we have been both Hortonworks and Cloudera have had a focus of bringing large enterprise customers and their workloads to the cloud platform.

So public cloud platforms. In particular today, Amazon, Microsoft, and to a degree, Google. These partners have all expressed excitement about our merger because they too don't have to spread their time between two firms, two different sales forces that are competing. They want to put their energy behind us and help accelerate those migrations to their platforms as well. And then finally, I've always been envious of the work that Hortonworks had done with IBM. I'm pleased that IBM is very excited about this partnership and we are going to embrace that partnership and take it to the next level.

And finally, I certainly believe that my colleagues at Hortonworks are excited about the relationship with Intel and the strategic work that we've been doing there. But I can attest that Intel is also very excited about this merger because it helps them get more optimization upstream toward the further platform. So, Jack, I can't identify any partners to date that have expressed concerns. Nor have I come across any customers that have expressed concerns. In fact, we're almost receiving lots of great momentum and support to bring the two companies together.

Jack Andrews -- Needham -- Analyst

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

Tom Reilly -- Chief Executive Officer

That strategy and initiative are alive, well, and growing extremely well. Basically, sequel capabilities on our platform are maturing very rapidly. And customers are moving increasingly more workloads from traditional data warehouses to this platform. Our oldest data warehouse is particularly designed to capture these migrations that want to move to the cloud where you see a company like a Snowflake or Amazon's redshift, traditionally serving those cloud markets. But we have strong competitive advantages in data warehousing.

So first and foremost, we offer the only data warehouse that combines both sequel and machine learning against the shared data experience. None of the other players are doing that today. Secondly, we offered in a hybrid fashion. They can do it both on-premise or in the public cloud and increasingly want to do both if you're managing a migration. So that's very powerful. And then we can get technical but we have years and years of experience of doing this at great scale. And so we're bringing those years of experience to bear. We believe data warehouse workloads are naturally going to land on our platform and we're well positioned to capture those.

Operator

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

Chad Bennett -- Craig-Hallum -- Analyst

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

Jim Frankola -- Chief Financial Officer

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

Chad Bennett -- Craig-Hallum -- Analyst

Okay. And then, for Tom. Going back to the merger targets for 2020. If I'm hearing you correctly on your kind of pre-close integration execution here. Revenue synergies, you believe you're already seeing in terms of potential and you've made headway in terms of HDF being capable to the Cloudera base and data science workbench -- did the Hortonworks space. I don't believe revenue synergies were factored in that billion plus or any meaningful revenue synergies in that billion plus target.

And then secondly, you talked about financial cost synergies, so to speak, being ahead of plan; albeit, you likely will reinvest that. So I just want to make sure, in light of what you said on October 3rd to what you're saying today, it seems to me that not only is that 2020 framework solid but you potentially are ahead of the game there. Am I characterizing it correct?

Tom Reilly -- Chief Executive Officer

I think there's a lot of validity to what you're saying. It is true that our business case had no revenue synergies assumed. In fact, there was some dissynergy expected. But I would tell you I am encouraged at how our teams are coming together. I'm encouraged of the little bit of small overlap between our customer bases. I'm encouraged by the fact that because we both have our platforms as an open source, each of our teams independently were able to test our cross-sell opportunities now and get them ready for as soon as we announce this merger and close it, we're gonna show up at each of our respective customers and give them capability that didn't exist pre-close.

So I'm very encouraged. I'm not in a position to say what we think those revenue synergies are but I'm very encouraged with our opportunities to drive growth. And we do expect to have many more resources and opportunities to invest in growth. Our roadmap that we are laying out. At the time, we had that same -- we talked about our strategy -- we talked about the hybrid cloud roadmap that we were gonna deliver independently. Hortonworks had a separate Cloud they're delivering.

Together with the synergy, we found in engineering and overlap, we're accelerating the delivery of that to the point now where we're actually talking to customers about the capabilities that they'll be receiving quite quickly. I'm encouraged is how I would frame it, Chad. And I think by the time Jim's prepared after our Q4 and looking at the plans to give guidance. I think he'll be able to deliver more accurate predictions there.

Chad Bennett -- Craig-Hallum -- Analyst

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

Tom Reilly -- Chief Executive Officer

Let me get specific to help you here. So, what I said in my prepared remarks is that the market is moving in our direction. If you look two years ago, enterprises were trying to figure out what this public cloud thing was. And they were spending time with the AWS of the world, understanding those platforms and going right to the public cloud. Large enterprises that moved to the public cloud just two years ago are wanting to move off the public cloud. They do not like the cost. They do not like the lock-in that it poses. They suddenly are stuck with one public cloud provider and all that they have to offer. And so they're moving workloads back into a private cloud or across multiple clouds to avoid that lock-in and have leverage over those infrastructure costs.

What we hear from customers; the public cloud is just the new hardware for them. If a complete stack was gonna win the market, then Oracle plus Sun would've won a long time ago in the data center. It's not what customers want. They want the flexibility and they want this hybrid enterprise cloud capability. I'll talk in the quarter, we won 63 new customers. Customers are coming to our platform, all of them are evaluating cloud. And it's our hybrid cloud capabilities that are winning. I'll give you the caliber of some names I'm allowed to share.

Indonesia's largest motorcycle manufacturer, Astros, Honda Motor selected us for our cloud capabilities. Tufts Health Plan selected us in a competitive battle for our cloud capabilities. Mizuho Securities here in the USA, a very conservative company selected us for our cloud capabilities. In Michigan, one of the largest utilities, DT Energy selected us for our cloud capabilities. These are new wins. I've got an equally long list of existing large enterprise customers that move workloads to the cloud with Cloudera. And so, we're uniquely positioned to run where our customers want to run and give them a lot of flexibility.

Operator

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

Karl Keirstead -- Deutsche Bank -- Analyst

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

Jim Frankola -- Chief Financial Officer

Since I didn't give any guidance on the quarterization of that, I'm not gonna update my lack of guidance. What I will do is say that directionally, what you're hearing from us is that as we've gotten into the merger planning, I'll echo some of Tom's comments. We're more alike than dissimilar. As one of the executives who is actively engaged in this progress on a daily basis, the teams are working extremely well together. They are planning with the idea of the combined entity and optimizing for it.

And because of that, decisions are overall being made faster than what I've seen in the past. I've done big acquisitions at IBM. I've done mergers of equals before in software companies. By far this is going faster and better than anything I've ever been associated with. So yes, whatever savings that you probably were assuming we would get, we're probably gonna get a little bit faster. Because so far the merger planning process is going extremely well. We're not done. There's always a chance for surprise. But we really like what we see so far.

Operator

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

Rishi Jaluria -- D.A. Davidson -- Analyst

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

Tom Reilly -- Chief Executive Officer

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

Rishi Jaluria -- D.A. Davidson -- Analyst

Second question. I know you recently hired a head of sales and I was wondering in the near term what the top priorities for him will be?

Tom Reilly -- Chief Executive Officer

Our new head of sales -- wonderful individual and he's having a great impact. I always chuckle because he joined us two days before our merger was announced so he had a nice welcome party. His top priority is following through on the transition that we began three quarters ago, which was intended to continue our strong net expansion rate growth and focusing in on driving customer expansions. And also building out our channel.

And so he's hit the ground running. What I find exciting is that a lot of the learnings that Cloudera has invested in over the last few quarters in understanding how to drive expansions, what's our target market and how to leverage the channel, is going to be directly applicable to the expanded customer base we have with our colleagues at Hortonworks. And so they've been briefed on the work. They are as excited about it. We look forward to driving it.

Operator

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

Mark Murphy -- JP Morgan -- Analyst

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

Jim Frankola -- Chief Financial Officer

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

Mark Murphy -- JP Morgan -- Analyst

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

Jim Frankola -- Chief Financial Officer

Once again the Q3 billings to the extent that they are off our long-term trends, are noise. So once again, we did fewer multi-year deals with pre-paids in Q3 than we did in previous years. So that impacts the short-term billings. We also just had the normal ebbs and flows of when transactions are closed versus when they are invoiced. I'm not overly focused on the 10% or so growth year-over-year. I'm more focused on what's going to trail in 12 months number, which is somewhat higher.

And then from my standpoint, the sequential change in deferred revenue. That's fairly typical for us. I don't have the exact amount for last year but we typically see sequential declines in deferred revenue in the middle part of the year given our high Q4 bookings, which then get billed and collected in Q1. And then we have a trough and it increases again in Q4.

Mark Murphy -- JP Morgan -- Analyst

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

Tom Reilly -- Chief Executive Officer

So there are a lot of exciting things in the Cloudera platform and also in the Hortonworks. So you mentioned Kafka as one area. Kafka has been a strong grower for us and it's getting great traction in the enterprise. With Hortonworks HDF -- or their Hortonworks data flow offering -- it combines Kafka, Nifi, and Spark Streaming into a very elegant platform. And we expect that to be a big grower for us. The next one I like to highlight is what we're doing in data science workbench.

We're seeing enterprises after many years of talking about ML and AI, suddenly maturing and saying, 'hey, now's the time to start investing in machine learning and AI.' In the quarter, we added nearly 30 new customers in that area. Today we just announced our machine learning capabilities powered by Kubernetes. So that's another great area. If you combine HDF and Kudu, that is gonna be a strong driver in IOT workloads. And then finally, our cloud data warehouse is gaining traction. So we have a play, which we call the Netezza step-up program. If customers want to migrate from their traditional Netezza platform and they're looking to go to a modern architecture, what we're finding is, you might as well move from an appliance to a cloud environment and to modern software.

So our cloud data warehouse is growing well along with just data warehousing in general. So those are all big growth drivers, Mark. And you had mentioned Spark. The patchy Spark is like -- we've captured nearly every one of our customers on a patchy spark. So earlier to the question about Hadoop; Hadoop was defined by map-reduce in HDFS. Spark is subsumed map produce in that traditional sense. HDFS is just one of many data stores we support. We like object stores as we find in the cloud and in other environments. So, and Kudu being yet another store. Spark is the center of our platform.

Operator

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

Brad Reback -- Stifel -- Analyst

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

Tom Reilly -- Chief Executive Officer

I'll tell you where we won't reinvest and I'll let Jim give you the balance. From a product standpoint, number one priority is to accelerate our cloud roadmaps. Our two companies had the exact same roadmap and plans. So we planned to accelerate that. Secondly, when we talk from the edge to AI, we are going to invest in more in the edge capabilities and the AI capabilities. Those from a product standpoint are really going to give you kind of a clear roadmap where we intend to differentiate and advance ourselves. Jim will have the tough task of finding the right balance of how much goes to the bottom line versus how much we put forward to growth.

Jim Frankola -- Chief Financial Officer

Just a little color. First of all, too soon. What we're signaling is that the gross synergies are looking good. The level of reinvestment will be a function of what we think the return on the incremental dollars is. So step one is to build up -- call it a base case synergy plan. Step two is to look in the various areas for investment -- cloud, IOT, technical resources to accelerate customer adoption, assess what we think the returns are, both in short and long run, and dowel that investment level appropriately. So once again you'll hear more about that after we close Q4.

Operator

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

Sanjit Singh -- Morgan Stanley -- Analyst

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

Jim Frankola -- Chief Financial Officer

Mike Olson is wrestling me to take this question. Ok so, 606. We've completed our historical work for 606. It doesn't have a big impact on our software revenue, at least for the past year or two. It does accelerate services revenue into the earlier periods. Let's call for software revenue it will be plus or minus, 1-3 percentage points, we think impact. For services, it might be between 5% or 10% of either drag or tailwind, depending on what period you're looking at. And once again, we'll provide all the details and the bridges once we close Q4. I don't think 606 is gonna have a big impact.

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

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

The only thing I'll add to Jim's pretty good comment is that I was sitting across the desk from him and read the paper upside down. I thought we were implementing 909. Good thing he's on it.

Sanjit Singh -- Morgan Stanley -- Analyst

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

Tom Reilly -- Chief Executive Officer

My experience is mergers are always challenging and disruptive. I think this is unlike most common mergers because our companies are roughly the same age. We have much of the code we ship is nearly identical code. Much of the code that is not identical is complementary so we continue to ship it. There are very few products where we have to rationalize and pick one or the other. Our product teams have come together very, very quickly. As a matter of fact, they're equally impressed. What Hortonworks has done with data plane services is very creative. Opened our eyes to some great possibilities. Likewise with what we've done with shared data experience. I'm very pleased with how the product teams are coming together.

In fact, many of our engineers already know each other because they collaborate in the open source community. So that is very unique. Take the sales; we're all worried about sales disruption. With fewer than 5% of our customers overlapped and the majority of our growth coming from existing customers, there'll be very little disruption to customers and the accounting execs that they know. Our goal is to drive that down. And our customers are telling us they can't wait to get access to the to cross-sell offerings. I do know that Cloudera customers are very interested in Hortonworks data flow. And we'll be able to bring that to them day one. So every merger is hard. This one has its unique challenges. But the integration teams are ahead of schedule.

Everyone is working extremely well together. I think we can minimize field disruption and bring value to our customers nearly immediately. Our partners are all happy. The code seems that we can deliver our new integrated offering in short time order. So I am quite pleased. We're gonna wrap up here. Thank you all for joining us. I know the markets were closed. This is a very special day for the nation and we're recognizing the President's passing. I do appreciate that you guys joined us for your thoughtful questions and for following us on this journey. It is very exciting. Our future earnings call will be as a new company. And we will be joined by our colleagues at Hortonworks. I thank all of them for the great work they've been doing with us in the pre-merger. I look forward to doing this call as a new company that combines the best of Cloudera and Hortonworks. Thank you all and we look forward to talking to you in the quarter.

Operator

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

Duration: 70 minutes

Call participants:

Kevin Cook -- Vice President, Corporate Development and Investor Relations

Tom Reilly -- Chief Executive Officer

Jim Frankola -- Chief Financial Officer

Tyler Radke -- Citi -- Analyst

Daniel Ives -- Wedbush -- Analyst

Michael Turits -- Raymond James -- Analyst

Jack Andrews -- Needham -- Analyst

Chad Bennett -- Craig-Hallum -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Rishi Jaluria -- D.A. Davidson -- Analyst

Mark Murphy -- JP Morgan -- Analyst

Brad Reback -- Stifel -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

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

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