RHT
#Thank you for the introduction, Jim
I would also like to take this opportunity to thank our Red <UNK>at associates around the world for their contributions to delivering a strong quarter both operationally and financially
On last quarter's call we indicated that we expected to close the year on a strong note
I'm pleased to share that we did just that
Our fourth quarter revenue results were well above our guidance, the accelerated growth of our billings in Q4 drove our FX adjusted rolling four quarter average billings proxy metric to the highest level in five quarters and we ended the year with a record backlog
We are seeing our customers increasingly building out hybrid cloud environments and implementing digital transformation initiatives, which we believe help drive these results
Red <UNK>at is benefitting due to our broad portfolio of solutions and proven history of delivering business value and innovation
Let me begin with the financial highlights of our Q4 performance, followed by a summary of our full fiscal year results and our outlook for FY18. For a more detailed view of our results and reconciliations of our non-GAAP measures to GAAP, please refer to our earnings press release
I am pleased to announce total revenue of $629 million, approximately $7 million above the high-end of our guidance and representing growth of 16% in USD and constant currency
Although currency rate volatility continued in Q4, the exchange rates stabilized to a point where many of our USD and constant currency growth rates are essentially equivalent
So, for this quarter I will keep my prepared remarks focused on our reported USD results where appropriate and you will find a table of constant currency results in our press release
Subscription revenue continued to be the largest driver of our total revenue at $560 million for the quarter, an increase of 17% year-over-year
This renewable revenue stream was 89% of the total revenue for the quarter
We continued to drive growth across our technology portfolio
Subscription revenue for our Infrastructure-related offerings was $435 million, an increase of 11% year-over-year
Our Application Development-related and other emerging technologies subscription revenue was $125 million, an increase of 40% year-over-year
Application Development-related and other emerging technologies revenue was approximately 20% of total revenue, up 340 basis points from the year ago quarter
On a non-GAAP basis, operating income of $153 million grew 23% year-over-year and non-GAAP operating margin of 24.3%, which was 30 basis points higher than guidance
As a reminder, non-GAAP operating income adjusts for non-cash share-based compensation expense, amortization of intangible assets and transaction costs related to business combinations
Our non-GAAP effective tax rate of 29.2% was higher than expected due to a higher than expected level of income being generated in higher tax jurisdictions
As such, our non-GAAP diluted earnings per share came to $0.61, in line with our guidance and up 17% year-over-year
We ended the quarter with cash and investments of approximately $2.1 billion
We returned $139 million to shareholders in the quarter through the repurchase of approximately 1.9 million shares of stock
Our repurchase program has reduced our fully diluted, weighted average shares by more than 3 million shares year-over-year
Operating cash flow was $318 million for the quarter and increased 27% from the year-ago-quarter
Strong billings growth, a modest improvement in monthly linearity and strong collections contributed to this result
The FX-adjusted days sales outstanding was at 58 days, improving from 61 days a year-ago quarter
Total deferred revenue at quarter end was $2.1 billion, an increase of $347 million or 20% over the same quarter a year ago
The total change in deferred revenue from our cash flow statement which neutralizes most of the impact of currency fluctuations increased by $357 million compared to the end of Q3. The rolling four quarter average billings proxy which is calculated by adding FX adjusted revenue plus the change in deferred revenue on the cash flow statement for the last four quarters was $690 million, up 19% year-over-year
Next, let me discuss our backlog which as a reminder, we disclose at the end of each fiscal year
Total backlog was up 28% year-over-year for a record balance in excess of $2.7 billion in USD
We define total backlog as the value of non-cancellable subscriptions and service agreements, including total deferred revenue, which is billed, plus the value of non-cancellable subscriptions and service agreements to be billed in the future not reflected in our financial statements
<UNK>ere are the components; as I mentioned a moment ago, the billed portion of the backlog is total deferred revenue which was $2.1 billion at the end of fiscal 2017. The other portion of total backlog, which is yet to be billed and as such is not included in our balance sheet, was in excess of $650 million at the end of fiscal 2017, up nearly 60% compared to in excess of $410 million last fiscal year
This is the highest growth rate we have reported on this metric since we first disclosed it in FY08. It is worth noting that the portion of off-balance sheet backlog to be billed in the next twelve months was in excess of $330 million, up approximately 20% on a year-over-year basis, which is consistent with the growth in this metric for the prior two years
The backlog contributes to a significant portion of next year's revenue as well as giving us forward visibility of revenue beyond FY18. I will now review the metrics for business momentum and large deals in the quarter
We had strong bookings growth across our major geographies even with many of our largest deals being attributed to the Americas
This quarter 67% of bookings came from the Americas, 21% from EMEA and 12% from Asia-Pacific versus a 64%, 23%, 13% split in Q4 last year
The Q4 route-to-market mix was 69% from the channel and 31% from our direct sales force, compared to a 71%, 29% split in Q4 last year
The increase in the direct channel contribution was driven by the increase in large deals that closed in the quarter
Our proxy for bookings duration was approximately 25 months
This is higher than our historic duration of 21 months
Going forward, we would expect duration to move closer to the historic 21 months level
While the short term component will not be impacted by the shorter deal duration, we believe the growth rate of long term component could be impacted by the smaller pool of out-year deals
Now to briefly recap and summarize highlights for the full fiscal year; total revenue grew to $2.4 billion, up 18% in US dollars or up 17% year-over-year in constant currency and near the high-end of guidance from last March
Subscription revenue grew to $2.1 billion, an increase of 18% in both US dollars and constant currency
Subscription revenue for Infrastructure related offerings was $1.7 billion, up 15% in US dollars and 14% in constant currency
Subscription revenue for Application Development-related and other emerging technologies was $439 million, up 36% in both US dollars and constant currency
For FY17, Application Development-related and related emerging technologies subscriptions constituted 18% of total revenue, up from 16% last fiscal year
Non-GAAP operating income grew by 15% year-over-year
Non-GAAP diluted EPS for the full year was $2.27, up 19% over the prior year
Now I would like to turn to guidance
Our outlook assumes current business conditions and current foreign exchange rates
Our outlook is in US dollars but on a constant currency basis, we would expect a 1% headwind to Q1 revenue growth and a 2% headwind to full year FY18 revenue growth
We are forecasting our full year revenue guidance to be $2.72 billion to $2.76 billion in US dollars, up approximately 14% at the high end of the range
In FY18, we will be balancing investment in our growth initiatives and operating leverage
Our plan includes adding approximately 1,000 net new associates or approximately 10% headcount growth compared to 19% in the previous fiscal year
Given this level of investment, we expect operating margin to expand by 50 basis points to approximately 23.6% in FY18 compared to 23.1% in FY17. We expect full year non-GAAP earnings per share to be approximately $2.60 to $2.64 per share, assuming approximately $2 million per quarter forecast for net other income, and annual effective tax rate of 28% and approximately 180 million diluted shares
On a GAAP basis, we estimate annual stock compensation expenses of approximately $200 million and annual amortization expense of approximately $30 million
GAAP fully diluted EPS guidance includes non-cash interest expense related to the convertible debt discount of approximately $19 million
We estimate the capital expenditures to be in a range of $75 million to $85 million
Operating cash flow is expected to grow in a range from $850 million to $870 million and includes an incremental $25 million of cash paper taxes
For those of you who try to model billings metrics and quarterly cash flows, we would expect the same business flow in our model as in the past
Along with our assumption of deal duration moving to the historic 21 months level, we also expect bookings and billings to repeat their historical pattern of being lowest in Q1 and growing going forward to end at the highest level in Q4. In addition, we have also seen a continuation of sales towards the fourth quarter
For modeling purposes, we would factor in an approximate 2% increase in the percentage of full year sales that occurs in Q4 when estimating billings
Our operating cash flow guidance for FY18 has factored in this continued shift and the timing lag on collections
For Q1 specifically, we offer the following outlook; we expect revenue to be in the range of $643 million to $650 million, which is up 15% in US dollars at the high end of the range
We expect a non-GAAP operating margin of approximately 20% and a non-GAAP earnings per share of $0.52 to $0.53. Our assumption on Q1 expenses including further investing in our emerging technologies as well as expenses for a number of important events in Q1 including our annual Sales and Partner Kick-off events, the opening of our Executive Briefing Center and Innovation Lab in Boston, the OpenStack Summit and our premier user event, Red <UNK>at Summit which is moved into Q1 which was in Q2 last year
Consistent with prior practices here at Red <UNK>at, I will not be providing a forecast for quarterly cash flow but please note that it can be variable depending upon individual payments or collections
Overall, we are very pleased with our financial performance in the fourth quarter
We are excited about the company's long-term growth opportunity in the hybrid cloud digital transformation and modernizing data centers with open source solutions
At Analyst Day in May, we will have the opportunity to have deeper discussions on our plans to realize this large, growing opportunity
I personally look forward to meeting many of you at Analyst Day
<UNK>, I would now like to turn it back over to you for our first question
Question-and-Answer Session
Sure
So <UNK> just in terms of the actual number of deals that we had ---+ so we had 11 deals with ---+ they had open stack in them and then we had another nine with OpenShift
And back to your point in terms of the overall growth of the billings; I mean clearly, that we did what we said we were going to do
A lot of focus was put on longer term deals so that our teams can continue to focus in on newer clients and opportunities
So we ---+ I think are very proud of what the team executed in terms of the quarter and we set out to do that at the beginning of the fourth quarter and that's exactly what we did
So I mean as you can imagine ---+ I mean linearity continues to be something that we focus in on
The team did a great job this past quarter in terms of addressing linearity but you know, as we've mentioned in the past, trying to address linearity or completely eliminate linearity wouldn't be necessarily something that financial makes sense because a lot of times clients certainly know in terms of negotiating, you know, getting deals to the very end
So what we've essentially done in our guidance as well as the cash flow modeling is we've assumed this was the 2% that I'd had mentioned in my prepared remarks
We've assumed the 2% shift of business into Q4 and we've rippled that through the cash flow statement
So we continue to be very focused in terms of collecting our cash timely, there is no change to any of our payment terms, it's not our desire to change the payment terms but certainly we're going to stay very focused in our linearity as we go into next year
So we approximate it to be about $120 million headwind, a theoretical headwind to billings for the year
As Jim mentioned, I mean it's an area that continues to grow
It's a nice business for us
And yes, but we would say it's about $120 million headwind to billings
That's the crazy cloud access component
The CCSP program, our cloud access to our customers just take their subscriptions to Amazon or other clouds that bills the normal
So it only to CCSP piece that they are [indiscernible]
Yes, and just in terms of the operating cash flow, as we mentioned that the big focus that we have is certainly linearity and as I mentioned the 2% shift that was essentially down from the quarters one, two, three and quarter four
I mean obviously you are going to see that in the accounts receivable and clearly something that we're continuing to focus in on that to the extent that we can obviously make sure that that is minimized as we go forward and we well but, it's certainly, it's a business reality that we see and also at some of the larger deals as you would expect, they are only billing one year in advance
So that's pretty common and pretty expected and that's not all of our transactions but certainly as deals get bigger, we'll become a larger portion of the IT wallet share spend, that's going to be something that we're going to continue to deal with
I'll start and let me actually look through the numbers to tell
But Ansible is often sold as part of a broader solutions
One of the reasons we acquired the company is it's a great standalone automation solution, but in a scale out world automation becomes increasingly important
So our customers who want to buy cloud forms often also acquire Ansible
Most of it, I would bet that most of our OpenStack and OpenShift customers buy at least a degree of Ansible as well
It really does just ---+ it becomes a core component of the way you're going to manage an automating modern infrastructure
So Ansible especially is in many of those same deal
OpenStack and OpenShift is kind of a mix often OpenShift will run on top of OpenStack, but some of the largest deals that I mentioned are over telco deals that were just OpenStack
One of those big top four was OpenShift running on OpenStack just kind of looking down
So they are often sold together because you got to have a deployment target for OpenShift
The sale point we use over-and-over again is you can run it on Amazon, you can run it on Azure, you can run it on VMware, you can run it on OpenStack and it really is a mix
In this quarter, actually a fair number of the OpenShift deals also weighed in on OpenStack
So there's a reasonable amount of cross sell there
