Pivotal Software, Inc. (PVTL) Q1 2019 Earnings Conference Call Transcript

Pivotal Software, Inc. (PVTL)
Q1 2019 Earnings Conference Call
June 12, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Jesse and I'll be your conference operator today. At this time, I would like to welcome everyone to the Pivotal First Quarter 2019 Earnings Call. All lines are placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press "*1" on your telephone keypad. If you would like to withdraw your question, you may press "#". Thank you.

As a reminder, this conference is being recorded today, June 12, 2018. I'd now like to turn the conference over to Ms. Helyn Corcos, Vice President of Investor Relations. Please go ahead.

Helyn Corcos -- Vice President of Investor Relations

Thank you. Good afternoon and welcome to Pivotal First Quarter Fiscal 2019 Earnings Call. We will be discussing the results reported in our press release issued after close of market, which is posted on the Investor Relations website, where this call is being simultaneously webcast and a replay of the call will be available. Also posted on the website are our prepared remarks and supplemental table.

With me today are Rob Mee, our CEO, and Cynthia Gaylord, our CFO. During the call, we will make forward-looking statements related to our business. These statements may include: our financial results, trends, and guidance for the second quarter and fiscal year 2019; the benefits of our platform and products; industry and market trends; our market opportunity and ability to expand our leadership position; expanded margins and profitability; our go-to-market, customer, and partner growth strategy; our ability to maintain and expand existing customers; and our ability to acquire new customers.

Pivotal has based these forward-looking statements largely on our current expectations and assumptions and information available as of today and we assume no obligation to update any forward-looking statements as a result of new information or future events, except as required by law. These forward-looking statements are subject to a variety of risks, uncertainties, and assumptions that may cause actual results to differ materially from the statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements. Please refer to the press release, the final IPO offering prospectus, and other periodic filings with the SEC for a complete discussion of these risk factors that may affect our future results.

In addition, during today's call, unless otherwise stated, references to our expenses and operating results are provided as non-GAAP financial measure and are reconciled to our GAAP results in the earnings release that was posted on our Investor Relations website before the call.

With that, let me hand it over to Rob.

Rob Mee -- Chief Executive Officer

Thanks, Helyn, and thank you to everyone for joining us for Pivotal's first earnings call as a public company. It's been a great start to our fiscal year. Completing our IPO in April was a major company milestone and I'm pleased to share that we delivered strong results for the first quarter of fiscal 2019.

We generated total revenue of $155.7 million, up 28% compared to Q1 last year, driven by strong subscription revenue growth of 69 percent year-over-year to $91 million. In addition, we saw continued customer momentum in Q1, ending the quarter with 339 subscription customers, up 20% year-over-year. The strength of Q1 is the result of our compelling product strategy, focus on customer success, accelerating go-to-market initiatives, and a large and growing partner ecosystem.

I'd like to provide some brief background on Pivotal's business since some of you are new to our story and so you can more fully understand what is driving our financial results. Fundamentally, we are a cloud-native platform company. Our unique advantage is our software platform, Pivotal Cloud Foundry, or PCF, a cloud-native application platform that enables developers to create and deploy software rapidly and helps IT operations personnel efficiently manage their infrastructure. PCF is multi-cloud. It runs on Azure, Google Cloud, AWS, Openstack, and vSphere. Enterprises use PCF as one platform to run many different workloads in what is increasingly becoming a multi-cloud world. That means on-premises as well as public and private cloud environments.

We offer a set of differentiated services, together with our cloud-native platform, that enable the world's largest companies to transform the way they build software and securely run their most strategic applications. As software development becomes a strategic imperative, we enable Global 2000 companies across industry sectors to make software development and IT operations a strategic advantage and thus help them deliver more value to their customers.

With that, I'd like to spend a few minutes discussing our product portfolio. Pivotal Cloud Foundry is a powerful platform that enables customers to run applications on any cloud while empowering development teams to focus on delivering software that impacts business outcomes. PCF includes these offerings. Pivotal Application Service, or PAS, which takes a developer's latest changes and, within seconds, has them running securely in a production environment. Pivotal Container Service, or PKS. This is a joint collaboration between Pivotal VMware, and Google Cloud to deliver enterprise-grade Kubernetes. PKS enables operators to reliably deploy and run containerized workloads across private and public clouds. The Pivotal Marketplace. This features products built by Pivotal and more than 75 ISV partners. These products are made to work seamlessly with PCF, enhancing the value of the platform. For example, Pivotal Cloud Cache, or PCC, is a high-performance data caching solution designed to support cloud-native applications.

Moving on to our product strategy, we believe in shipping frequent updates of our products to customers. We have engineered the platform so that upgrades are easy and customers can confidently move to new versions of our software quickly. I'd like to highlight three important product releases that occurred in Q1.

PAS 2.1 includes a number of enhancements, but most importantly we delivered a world class experience for .NET developers and added support for Windows Server 2016. We see a large and underserved market opportunity to help enterprises bring their portfolio of .NET applications to the cloud-native world.

PKS 1.0 was released in February. Demand for PKS is growing quickly, particularly among VMware customers looking to add container management to their private cloud. We're very excited with the early momentum we're seeing with this new product.

Spring Boot 2.0 is a major update to the framework that's become synonymous with Microservice applications. We've added support for reactive programming models, which will enable companies to develop their next-generation of event-driven cloud-native applications.

We believe compelling product capabilities will continue to create meaningful outcomes for customers and support our business strategy, which includes the addition of new customers and expansions from existing customers.

During Q1, we saw strong customer momentum, adding new customers such as StubHub, Dick's Sporting Goods, and others in the technology, retail, telecom, supermarket, medical equipment, and mobile gaming sectors. We also saw strong demand from our existing customers, such as West Corp and Garmin, who both expanded their usage of PCF.

We'd like to highlight two customers to better articulate how our platform is being used and the benefits our customers are seeing. The first is a new customer for us: StubHub. As you may know, StubHub is the world's largest ticket marketplace, operating in 48 countries and selling a ticket every 1.3 seconds. StubHub is working with Pivotal and Google Cloud to pioneer their next generation of digital products and inspiring event experiences. StubHub is leveraging Pivotal Cloud Foundry to build applications faster and reduce operating costs, while leveraging the benefits of Google's cloud services to innovate faster than ever before and to meet the demands of its growth around the world. StubHub is also using Pivotal's strategic services to accelerate their application modernization efforts.

The second is West Corp, an Omaha-based provider of telecommunications that operates the backbone for over half of the country's 911 services. In Q1, West Corp expanded their subscription of PCF as they continue to modernize their software portfolio and migrate to two public clouds. West Corp expanded their subscription footprint with us to include PKS and PCC. They have also engaged Pivotal's strategic services to enable a globally distributed team of West Corp developers to move key business applications to PCF. As a result, West Corp is realizing significant operational cost savings and faster delivery of new features. West Corp is now deploying applications to PCF environments running on multiple public clouds as well as their own private cloud.

Our go-to-market strategy is focused on working with enterprise customers as they modernize their businesses and seek to use software for competitive advantage. We are investing in our direct sales force to acquire new customers and support existing customers' successful adoption of our products. We've expanded our account coverage in North America, adding new direct sales teams to see international growth in our EMEA and APJ regions, and increased focus on the U.S. Federal government.

We also believe the developer community is an important and strategic part of our go-to-market. We are the primary contributors to some of the most popular open-source projects. For example, Spring Boot is now downloaded over 35 million times per month. This approach means that many prospective customers are already using elements of Pivotal technology with their organizations before we ever make a sales call. Related to this, many of our enterprise customers are now active participants in the open-source communities that have formed around our products. The Cloud Foundry Foundation Summit in April showcased many of Pivotal's customers, such as T-Mobile, Allstate, HCSC, Comcast, CSAA Insurance, and Garmin. These companies shared the success they have achieved using Pivotal Cloud Foundry.

Complementary to our direct sales and grassroots activities, we also partner with Dell and VMware to market and sell our products and services as partners. In Q1, their field sales teams began receiving compensation for Pivotal products and are actively generating new opportunities for us. We think this is a compelling opportunity to accelerate our penetration in the Global 2000. Specifically, with PKS, we have started to see the VMware sales force extend our account coverage and accelerate our sales cycles. We expect PKS will seed cross-selling opportunities for other products across our portfolio over time.

In addition to our direct sales force, we have a large and growing partner ecosystem. We work with many of the large SIs, as well as boutique, regional, and vertical specialists.

Among the highlights of our first quarter was the opening of the first innovation hub by Accenture's Pivotal Business Group in Columbus, Ohio, adding 200 jobs to the city's tech community. This collaboration will help leading organizations accelerate digital transformation programs, modernize legacy applications, leverage disruptive technologies, and take advantage of the latest IT delivery techniques.

We also launched an expanded relationship with Perficient, a leading digital transformation consulting firm. Perficient is making significant investments in its Pivotal Cloud Foundry practice and, in 2018, intends to enable over 300 cloud-native developers and architects through Pivotal's Platform Acceleration Lab.

We also saw continued expansion of our ISV partner ecosystem during the quarter. Our Pivotal Marketplace, as I mentioned earlier, has over 75 ISVs offering services integrated with our platform, enabling enterprises to quickly realize additional benefits. We added 18 partners to the program and released five new product integrations. We are also honored to have received Apigee's Partner of the Year Award in 2018. Pivotal and Apigee have been working together for a number of years and now have a significant number of joint customers.

In summary, I'd like to thank our customers, partners, and employees for helping us deliver a strong performance in our first quarter as a public company. As we look ahead, we are excited about Pivotal's ability to penetrate the Global 2000. We believe we are well-positioned to disrupt some of the largest areas in IT investment as we help enterprises across industries transform.

With that, let me turn it over to Cynthia to review our financials in more detail.

Cynthia Gaylor -- Chief Financial Officer

Thanks, Rob. Hello, everyone. We're excited to have you join us for our first earnings call as a public company. We enjoyed meeting with many of you during the roadshow and appreciate your support through the IPO process. For those of you who are new to the Pivotal story, welcome.

We are very pleased with the company's financial performance in the first quarter, highlighted by the continued strong growth at scale. The primary indicator of the growing market adoption of our platform is our subscription revenue, which grew 69% to $90.1 million year-over-year. Subscription performance was driven by strong expansion of existing customers, demonstrated by our dollar-based net expansion rate of 156%, coupled with 20% growth in our customer base relative to Q1 of last year, finishing the quarter with 339 subscription customers.

Before discussing the details of our results, I want to provide context on our financial model. We are fundamentally a platform software company. We have a subscription-based business model for our software, with PCF at the core of our offering. This provides us with a high level of visibility into future revenue. Our subscription revenue is recognized ratably over the term of our contracts, which are typically between one and three years. We price our software primarily on the number of application workloads or instances a customer expects to deploy on the platform. This means that our revenue grows as existing customers expand the use of our platform and as we add new customers. We generally bill our customers annually in advance, although for our multi-year contracts, some customers pay the full contract amount upfront.

Our strategic services have been a critical driver of our rapid subscription growth, as we use Labs to acquire new customers who have PCF affinity, while helping existing customers get more out of the platform, leading to the expansion of their overall software spend. We typically price our strategic services on a time and materials basis.

With that, let me transition to the specifics of our first quarter results. We had a strong first quarter and great start to our fiscal year. As Rob mentioned, total revenue for the first quarter was $155.7 million, growing 28% year-over-year, driven by strong expansion of existing customers along with continued growth in our customer base.

Subscription revenue increased 69% and represented 58% of total revenue, up 44% in Q1 of last year. Growth in subscriptions is the driving force behind our revenue mix shift and subsequent margin improvement. As we execute on our strategy of landing new customers and expanding the footprint of existing customers on our platform, we expect to continue to drive growth and operating leverage over time.

RPO, or Remaining Performance Obligation, represents the estimated value of our billed and unbilled subscriptions and services and demonstrates the visibility associated with our revenue model. RPO was $800 million at the end of Q1, with approximately 50% expected to be realized in the next 12 months. We expect quarterly seasonality in RPO, with variability from a peak in Q4, relative to the subsequent quarters.

Services represented 42% of total revenue, generating $65.6 million, down 3% over last year. This decrease was primarily driven by the continued decline of maintenance revenue associated with our legacy products, which was less than 2% of total revenue in Q1. Our services revenue is now at scale and we are leveraging partners and system integrators to build virtual services capacity to ensure customer success on PCF and subscription growth over time. As such, service revenue is not a growth driver on its own.

Our subscription gross margin was 92%, up 3 points from Q1 of last year. We expect subscription gross margin to generally remain in this range. Services gross margin was 26%, consistent with Q1 of last year, and we expect it to vary quarter to quarter with the seasonality of projects and timing of engagements. Total gross margin for Q1 was 64%, up 10 points compared to 54% in the year ago period, driven by a higher subscription revenue mix combined with slightly higher subscription margins. We are encouraged by the operating leverage we are seeing across our business as we invest to drive future growth.

Sales and marketing expenses were $64.7 million for the first quarter, or 42% of total revenue. We continue to invest in our field sales and our land and expand priorities while improving the sales productivity and efficiency. We will continue to focus on increasing our customer talent, renewing existing customers, and expanding customers' footprint on the platform.

Research and development expenses were $41.6 million, or 27% of total revenue, in the first quarter. Innovation remains a top priority for us. We will continue to invest in R&D to expand our market leadership and platform capabilities to drive greater adoption of our PCF platform. G&A expenses were $14.2 million, or 9% of total revenue, in the first quarter.

Operating loss for the quarter was $21 million, resulting in an operating loss margin of 14%, improving 19 points from Q1 of last year. Strong subscription revenue growth drove operating leverage while we continue to invest strategically in sales and marketing and R&D.

Net loss per share was $0.10 based on 224.2 million weight average shares outstanding, compared to a loss of $0.20 per share and 215.8 million share year-over-year. These non-GAAP share count numbers assume conversion of our preferred stock to common for the full quarter in both periods.

Now turning to the balance sheet and cash flow. We exited Q1 with $645.5 million in cash and cash equivalents. Cash flow from operations was $4.5 million, primarily driven by Q4 collections. Free cash flow was a positive $2.6 million. This is our first quarter of positive free cash flow. We expect continued progress toward sustainable positive free cash flow. However, it may not be linear given seasonality trends. In addition, we received a tax sharing payment from Dell for $32 million which added to our total cash inflows. We expect these payments to be significantly lower going forward.

Overall, we are very pleased with our first quarter performance. I will conclude by providing our non-GAAP guidance for Q2 and for the fiscal year 2019. Please note that growth rates are based on the midpoint of the guidance range compared to Q2 or to fiscal year 2018. Based on the visibility of our subscription model and customer traction, our guidance is as follows.

For the second quarter, we expect subscription revenue to be between $92 million and $93 million, representing growth of 43%. We expect total revenue to be between $157 million and $159 million, representing growth of 25%. We expect operating loss to be between $23 million and $22 million, representing improvement of 25%. We expect net loss per share of $0.10 to $0.09 based on weighted average shares outstanding of approximately 249 million.

For the fiscal year, we expect subscription revenue to be between $380 million and $384 million, representing growth of approximately 47%. We currently expect total revenue to be in the range of $642 million and $649 million, representing growth of 27%. We expect operating loss to be between $96 million and $91 million, representing improvement of 27%. We expect net loss per share of $0.39 to $0.37 based on weight shares outstanding of approximately 244 million.

In closing, we are pleased with our strong first quarter results as we establish our track record as a public company. Pivotal is addressing a very large market and we have a differentiated multi-cloud platform. We generate strong growth at scale and will continue to focus on adding new customers and expanding existing customers across sectors.

Thank you again for joining the call. We will now turn it back to the operator to take your questions.

Questions and Answers:

Operator

Thank you. At this time, if you would like to ask a question, please press "*1" on your telephone keypad. If you'd like to withdraw your question, you may press "#". Please limit yourself to one question and one follow-up to allow time for other participants to join the queue. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Sanjit Singh with Morgan Stanley. Your line is open.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the question and congrats and welcome to the public market. Very nice quarter, very nice start to the year. I guess my question is around the product portfolio, specifically around Pivotal Cloud Foundry and positioning of Pivotal Cloud Foundry versus Pivotal Container Service, which, Rob, I think you mentioned in your comments that you're seeing some early traction. Can you give us a better sense of the right type of customer for Pivotal Cloud Foundry versus a customer that would be more interested in Pivotal Container Service?

Rob Mee -- Chief Executive Officer

Sure. Thanks for joining us and thanks for the congrats. So I think really we don't see them as sort of separate customers. Really PAS and PKS, or Pivotal Application Service and Pivotal Container Service, are really part of the overall PCF platform and essentially both inherit the same underpinnings and the same underlying security, Day 2 operations, and other advantages that they have. What we believe is that different workloads can run on each. And PKS really expands the number and kind of workloads that we can run on the platform. In other words, workloads that are directly containerized by our customers, as opposed to PAS, which takes source code from developers and containerizes it and then runs it on the platform.

Sanjit Singh -- Morgan Stanley -- Analyst

Very helpful. And then maybe, Cynthia, for you, in terms of thinking about how the rest of the year might progress, I know last year was a very strong expansion year and Q1 looks to be following some of the trends that we saw last year. As you think about the balance between new customer acquisition and new customer revenue versus expansion, how do you see that progressing for the balance of the year?

Cynthia Gaylor -- Chief Financial Officer

So, Sanjit, I think we need to do both. Clearly we had a very strong Q1 and that was driven by both a net expansion rate of 156% as well as adding 20 new customers in the quarter over Q4. And so we're really pleased with that. But at the end of the day, we really need to execute the land and expand strategy for both in-quarter revenue and then, as we grow customer footprints over time, those new customers become the expansion customers. And so we're really focused on doing both.

Sanjit Singh -- Morgan Stanley -- Analyst

Got it. And then the last one for me maybe, Rob. In terms of expansion deals, can you give us a better sense of how a customer, when they sort of initially start with Pivotal, what are the types of workloads that you see after that initial deal? Is it customers refactoring or replatforming existing applications or is it more on the net new application front?

Rob Mee -- Chief Executive Officer

You know, when we first brought the platform to market four or five years ago, we definitely saw net new applications as the first things that customers would bring onto the platform. Increasingly, though, they've been taking their -- sometimes their entire estate of applications to the platform. So a lot of application migration and modernization. And sometimes now that's where we start. And we find that customers getting workloads onto the platform quickly and seeing the benefits is one of the prime drivers of success. So whether it comes from net new or whether it comes from existing applications that are being modernized, it's both good and we see a lot of both.

Sanjit Singh -- Morgan Stanley -- Analyst

Great. Congrats again.

Rob Mee -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Heather Bellini with Goldman Sachs. Your line is open.

Heather Bellini -- Goldman Sachs -- Analyst

Great. Thank you. I wanted to follow up on Sanjit's question and then I had another. But just in regards to the fantastic net expansion rate that you guys saw, can you help us think about the split potentially of that net expansion rate and how do we think about it in terms of people adding additional workloads, given they might start small and then get bigger and bigger? And how much of it is also related to adding on of additional parts of the platform? And then I had a question on PKS, which I could follow up with.

Cynthia Gaylor -- Chief Financial Officer

Thanks for the question, Heather. So our net expansion rate was strong this quarter. I would say we don't necessarily break out and look at is as existing workloads versus new workloads. I mean, we're seeing both coming from customers. There is kind of the new application development and then there's the migrating legacy apps onto the platform, but when we look at the expansion rate itself, we don't necessarily break it out between those two. I mean, we're looking for customers to do both and we're seeing both in the marketplace.

Helyn Corcos -- Vice President of Investor Relations

Heather, do you have your follow-up question?

Heather Bellini -- Goldman Sachs -- Analyst

Yeah. Sorry. Sorry, I thought you could hear me. Yeah. So, for PKS, I know it's early days, but can you help us with what's driving the early adoption that you mentioned? Is there anything that you could hone in on about the competitive differentiators that you're hearing from customers? And I also was wondering how helpful is the VMware tie-in with its adoption. Thank you.

Rob Mee -- Chief Executive Officer

Sure. Thanks, Heather. We're seeing a lot of adoption from existing customers. A lot of our existing customers are investing in PKS. They have workloads that they want to run that aren't necessarily a great fit for our PAS offering and so they're really glad that Pivotal is bringing a Kubernetes offering to market and it runs on the same platform as PAS. And so we have a lot of customers that are jumping in and getting their feet wet with that right now. What we think is a real advantage of it is that it enables a very small team of operators to deploy and update dozens or hundreds of Kubernetes clusters with relative ease and that's something that's differentiated.

The VMware connection there is very helpful because we're activating their large sales force to help us go to market there. We're also integrating with their networking capability and that's something that solves one of the biggest challenges of using Kubernetes in a private cloud setting.

Heather Bellini -- Goldman Sachs -- Analyst

Thank you.

Rob Mee -- Chief Executive Officer

Thanks.

Operator

Your next question comes from Walter Pritchard with Citi. Your line is open.

Walter Pritchard -- Citi -- Analyst

Hi, thanks. First, a product question. As it relates to the continuous service, can you talk about how much of the demand there is incremental, maybe even new customers that are interested in that, versus your install base? And would be interested in well for the function service that I don't think is out yet but is probably -- you're probably talking to customers about it at this point.

Rob Mee -- Chief Executive Officer

Yeah. We definitely see PKS expanding, both the addressable workloads for our existing platforms and also driving a lot of new customers to us. And some of the customers are customers that haven't considered PCF in the past so that's good for us. And if you can remind me about the second part of the question, I've driven it out of my mind already. I'm sorry.

Walter Pritchard -- Citi -- Analyst

Just on the function service, a kind of similar question. Are you seeing, in terms of that building in your -- I don't know if it's building in your pipeline at this point, but are you seeing largely existing customers interested there or is that sparking conversations with new customers? Potential new customers?

Rob Mee -- Chief Executive Officer

I think probably a bit of both. Because it's not available yet, we're generally talking to existing customers. We're not really out pushing it to new customers or trying to acquire new customers with something that we don't support yet. But we definitely see a lot of interest in functions as a service from existing customers.

Walter Pritchard -- Citi -- Analyst

And then for Cynthia, just on the cash flow side and specifically long-term deferred, you had a pretty strong quarter with that as a driver. Can you help us understand what drove that? And as we think about that long-term deferred as a driver of cash flow potentially for the rest of the year, should we expect to continue to see strength there or is that more of an anomaly in the quarter?

Cynthia Gaylor -- Chief Financial Officer

Yeah. So I would say a couple things have contributed. I mean, coming off of a strong Q4 on the cash flow side, that definitely leads to cash inflow in Q1. From a deferred perspective, our long-term deferred includes prepayments from some of the subscription customers so that can tend to be lumpy. If you're looking at short-term deferred though, that's definitely a closer proxy for subscription growth. And just remember that both short-term and long-term deferred include services and services is still a material portion of our revenue. So that can also impact the trend.

I would say short-term though, the net expansion rate certainly helped. We're at kind of an industry-leading net expansion rate of 156% now that we're at scale. We wouldn't expect to maintain that rate so you should expect that rate to come down over time. But we also saw strong demand from new customers in the quarter. I would also say that RPO, which is the new 606 metric, shows very strong revenue coverage relative to Q1. So I think those are a few things to think about.

You mentioned on billings as well, which is not a metric that we track, but the last thing I would add there is, given when you're looking at the comparisons, depending on when customers are billed, that can impact the comparisons from a seasonality and from a lumpiness perspective in that metric as well.

Walter Pritchard -- Citi -- Analyst

Great. Thank you.

Operator

Your next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Brad Zelnick -- Credit Suisse -- Analyst

Thanks very much and congratulations as well to a great start to the year. For Rob. Rob, we noticed you recently signed a major new one-year agreement with the U.S. Air Force. Can you talk about the nature of the deal and how do you view the opportunity in the federal space more generally.

Rob Mee -- Chief Executive Officer

Thanks, Brad. Yeah. The federal sector is really a large and growing opportunity for us, as modernization and innovation have become a strategic imperative across agencies. It's been an area of investment for us over the last few years so it's encouraging to us to see these wins. We've had several deals with the Air Force. The Air Operations Center adopted Pivotal Cloud Foundry and is implementing the Pivotal Labs agile methodology to advance their software development capabilities.

Brad Zelnick -- Credit Suisse -- Analyst

Yeah, so federal seems to be a huge opportunity. And just one for Cynthia. Cynthia, giving the way you report subscription customers, you have more visibility than the net 20 customer adds that you reported. How should we think about customer count through the rest of the year as well as customer churn progressing?

Cynthia Gaylor -- Chief Financial Officer

Sure. So in terms of -- we're not providing guidance on customer count specifically. But we are investing heavily, as we mentioned, in sales and marketing to drive new customer growth but also to drive expansion. And our net expansion rate does include churn. And so I think as you look at that number, again, we're at scale, we're expecting it to come down, but it is pretty compelling. That shows kind of our strategy of landing and expanding is working and we think we're kind of at the leading edge of really the technology to expand with customers.

Brad Zelnick -- Credit Suisse -- Analyst

Okay. Great. Thank you.

Operator

Your next question comes from Alex Kurtz with KeyBanc Capital Markets. Your line is open.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Thanks, guys. Thanks for taking a couple of questions here. Just on the federal, follow-up question. That was a very large award and I just want to make sure. Is that already part of the July quarter guidance? Is that how we should think about it?

Cynthia Gaylor -- Chief Financial Officer

Yeah. So I think we're gonna get into the specifics of specific contracts or specific customers and the terms and how that flows through the financials. But we are, as Rob said, from the federal perspective, we do think that's a big opportunity for the company. You should also just be aware that the numbers that the government disclosed, the way that we recognize that revenue is over time and it also includes both subscription and services. But that's probably the level of specificity we can get into at this point.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Totally understand. And on the Labs opportunity with PKS, how is VMware supporting Lab engagements today and sort of moving customers through that model so they're successful with a PKS launch?

Rob Mee -- Chief Executive Officer

Yeah, I think we'll bring to bear all of our strategic services for PKS customers and that includes innovation and net new application development in collaboration with Pivotal Labs. It includes platforms dojos which help customers operate the platform application migration services to help them successfully move legacy workloads to the platform. And we'll bring those to bear with VMware customers who buy PKS as well.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Alright. Thanks. Congrats on the quarter.

Rob Mee -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Jennifer Lowe with UBS. Your line is open.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you. I guess, first, looking at the upside in the quarter, obviously expansion rate came in nicely, new adds came in nicely, but I think the upside looks even greater than we would have expected given that. So I was curious what trends you saw were in ASPs for new customers and whether there were any outsized deals in the quarter that might have caused that to be a bit higher than typical.

Cynthia Gaylor -- Chief Financial Officer

Thanks, Jennifer. That's a great question. So in the quarter, we did execute really well against kind of the land and expand. But we also made some investments going into the second half of last year, mainly focused around sales and marketing efforts, between attracting new customers and expanding existing. I would say as well, in Q1 we did see some favorable in-quarter linearity that was associated with the timing of deals and we would not necessarily expect that to recur at the same level moving forward. And so there were not necessarily larger deals or larger ASPs or APB type of contract, but I would say that there were timing of deals in-quarter that benefited in-quarter revenue on the subscription side.

Jennifer Lowe -- UBS -- Analyst

Okay. Great. And then maybe just a broader question. We've seen digital transformation as a pretty robust theme across the group and obviously one that you benefit from as well. As you go in and talk with your customers about their aspirations and how they want to modernize, are you seeing any increased urgency around these kind of projects? Increased budget around these kind of projects? I know that it's been a trend for more than just the most recent quarter but curious if there's anything incremental, given that it seems pretty strong across the spending environment broadly, in addition to your own results.

Rob Mee -- Chief Executive Officer

I think you're location is completely valid that the urgency is increasing and the activity is increasing in digital transformation generally. More specifically, we really find that customers are trying to increase productivity and building more applications and getting them to production more quickly. But they're also expecting operational efficiencies. And I think that's something that we're uniquely positioned to bring them with an approach and methodology that we bring of how to develop software in a very modern way, as well as enabling technology to get the operational efficiencies and enable people to develop very, very quickly and incrementally. So, yeah, that's a fortunate trend for us.

Jennifer Lowe -- UBS -- Analyst

Great. Thank you.

Operator

Your next question comes from Nikolay Beliov with Bank of America Merrill Lynch. Your line is now open.

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

Hi, thank you for taking my questions. And I wanted to add my congratulations on the strong result. The 20 new customers that you added in the quarter, the strongest number in five or six quarter, I believe. If you can just give us more color on the types of customers you added. Fortune 100, Fortune 500, verticals, etc.? That would be helpful.

Cynthia Gaylor -- Chief Financial Officer

Sure. That's a great question and you're right. We haven't had that many net adds since Q4 of fiscal '17 so we were really pleased with the results. And as I mentioned earlier, we did make some pretty significant investments in the back half of last year to really help drive the field on new customer acquisition and making sure that we were both renewing our existing customers and expanding their footprints but also adding new customers. And so I think what you saw in Q1 is kind of the -- starting to realize the benefits of some of those earlier investments.

And then in terms of, I guess, verticals, we really saw -- I mean, we don't have customer concentration with one or two customers, in terms of our quarterly performance. I mean, that's really the benefit of a subscription model. But we really saw, across industries, we don't have any industry concentration as well. And so we were really pleased with just kind of the breadth of, I guess, the performance in Q1.

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

Thank you. One question we keep on getting from investors is the competitive differentiation versus Open Shift and they seem to be doing a push there. Maybe can you just talk about, contrast and compare, your solution versus theirs and the change in win rate over time you could see. Thank you.

Rob Mee -- Chief Executive Officer

Yeah. So I think having competition for platform operating -- excuse me. Having competition for platform is a real validation of our market opportunity and how large it is. So we think it's good to have multiple players in the market and we think there's plenty of room for competition and that's good for innovation. We're not particularly looking at one competitor or another or looking over our shoulders to figure out who's competing on exact features. That said, we now offer PKS, which is comparable to Open Shift and it's offered within the PCF platform. And the platform allows customers to run those workloads anywhere and on prem or off prem. So we think that, in terms of customer acquisition, our average relationship with customers is quite large, relative to the competition. And that represents more of a strategic relationship and mission critical workloads getting onto the platform.

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

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

Raimo Lenschow -- Barclays -- Analyst

Thanks for taking my question and congrats from me as well. Rob, more a bigger picture question. If your customers are modernizing their infrastructure with you, what are you seeing in terms of where they're running it, in terms of on premise versus public cloud? And how does that dynamic, in terms of maybe more public cloud going forward, change your positioning with the customers?

Rob Mee -- Chief Executive Officer

Yeah. We're still seeing the vast majority of workloads running on premises. We do see increasing use of our platform in the public cloud and I think one of the things that PCF does really well is it helps smooth the migration for our customers into the public cloud. It helps them put workloads there in a consistent manner. It provides a very common architecture across -- a consistent common architecture across cloud infrastructures. And it helps them not only with the complexity of managing multiple cloud infrastructures on premises and off premises, but it helps them avoid a single-source future, with all applications locked into a single environment. So we think a multi-cloud platform like PCF is really necessary to effectively and efficiently navigate that complexity of a multi-cloud future and that's working really well for us.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Thank you. And one quick follow-up for Cynthia. Just we talked a lot about the second half last year investments into increasing you signing more customers. I would assume what we saw this quarter, since they were kind of longer term investments, should be just the beginning of something rather than just a one-off quarter thing, correct?

Cynthia Gaylor -- Chief Financial Officer

Yeah. I would say it's just the beginning. And I would say we don't forecast or give guidance on customer count per quarter so I would expect different quarters to exhibit different trends there. But it is a focus area for us and so we would expect those investments to pay off over time. But I wouldn't say we're forecasting that to be every quarter for the remainder of the year.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Thank you. Congratulations.

Rob Mee -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Matthew Hedberg -- RBC Capital Markets -- Analyst

Hey. Thanks for taking my question, guys. I'll offer my congrats as well on a strong start to the year. Following up on Raimo's question, given that a majority of the workloads today run on premise, I'm wondering, there was a lot of positive feedback from the channel and in your prepared remarks on PKS. Rob, does advancements there, could that be one of the big catalysts then for increased public cloud usage of the platform?

Rob Mee -- Chief Executive Officer

Matt, thanks for joining us and thanks for the congrats. Yeah, I'm not sure if I could say that PKS is necessarily any different than PAS in terms of being a catalyst for migration to the public cloud. I think it really just expands the addressable workloads, whether they're running on prem or off. And I would guess that it's much like PAS in that regard. So probably not too much differentiation between those two abstractions that run on the platform.

Matthew Hedberg -- RBC Capital Markets -- Analyst

That's helpful. And then, in taking to customers, the feedback on Labs was obviously very positive and led to additional Pivotal Cloud Foundry usage. And it's not necessarily a focus for growth in the future but in your prepared remarks you talked about successfully enabling partners to deliver additional service. I'm wondering if you can give us a little bit more color on that particular aspect, Labs-specific.

Rob Mee -- Chief Executive Officer

Yeah, sure. I mean, we think there's a large and growing opportunity for systems integrators to help enterprises modernize and replatform their existing applications portfolio. So we're working with global systems integrators, like Accenture and Cognizant, along with other firms, like Perficient that I mentioned. They're building focused practices around the Pivotal technology implementation, including application migration but also including cloud-native development. So they are very much looking to do modern co-development and enablement kind of mode, just like Pivotal Labs. And from our perspective, we really feel, along with the mission of transforming how the world builds software, that the more people are enabled to build that way and help others build software that way, the better for the world in general.

Matthew Hedberg -- RBC Capital Markets -- Analyst

Thanks, guys.

Rob Mee -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Siti Panigrahi with Wells Fargo. Your line is open.

Siti Panigrahi -- Wells Fargo -- Analyst

Thanks and my congratulations as well. Just to follow up on your question on Labs services, you talked Labs, how strategic it is for customer adoption. As you transition to Labs to partners, how do you maintain the standard and quality of the service that you operate in your Pivotal Labs?

Rob Mee -- Chief Executive Officer

I want to make clear that we're not transitioning our Labs offering to partners. We're definitely going to continue a modest growth with Pivotal Labs because it is so strategic to us. But we also are really pleased to see other organizations adopting our methods and using those. And when we work with customers to help them adopt methods, the same methods that we use, we do it in a co-development model. And so we pair with them and we build real software with them in a highly collaborative model, so that, over time, they can internalize those methods and hopefully do it just as well as we do. And when we're working with partners, we actually follow the same model. So we work with them hand-in-hand, co-located. We build software with them, for our customers and theirs. And, in the model, we help them internalize all of these methods and be able to execute oftentimes as well as we do. And we can't really guarantee that ongoing, everyone is going to stay up to our standard but part of our model is ensuring that they have the opportunity to do exactly that.

Siti Panigrahi -- Wells Fargo -- Analyst

Thanks for the color. And could you also talk about how strategic is the Marketplace for your business? How do you plan to expand that Marketplace?

Rob Mee -- Chief Executive Officer

Yeah, Marketplace is definitely strategic for our business. We have a lot of great partnerships. We mentioned one or two of them. What we're also seeing with PKS is that the interest in building services that integrate with that, there's a lot of demand for that as well. So we think we'll see our Marketplace expand with PKS as well and we're gonna continue to press on that. We have a lot of great joint go-to-market opportunities with a lot of the ISV providers.

Siti Panigrahi -- Wells Fargo -- Analyst

Thanks, guys.

Rob Mee -- Chief Executive Officer

Thank you.

Helyn Corcos -- Vice President of Investor Relations

Jesse, we have time for one more question, please.

Operator

Your last question comes from Bhavan Suri with William Blair. Your line is open.

Sarah Shivas -- William Blair -- Analyst

This is Sarah Shivas on for Bhavan. Can you just talk a little bit about general traction with your products outside of PCF, like GemFire and Greenplum?

Rob Mee -- Chief Executive Officer

Sure. We continue to see customer demand for our data products, particularly as customers want to migrate to open source-based products and away from proprietary solutions. And the other thing that we're seeing is that customers increasingly want to have, as a service or a self-service delivery of their data stores. And so we're oriented our product roadmap to deliver on this, leveraging the technology that we've been building in PCF. So we've seen early success with this strategy with Pivotal Cloud Cache, or PCC. And PCC is based on the GemFire code base but reimagined as a self-service, multi-cloud caching solution.

Sarah Shivas -- William Blair -- Analyst

Great. Thank you.

Rob Mee -- Chief Executive Officer

Thank you.

Operator

With that, I'll turn the call back to the presenters.

Cynthia Gaylor -- Chief Financial Officer

Thank you, Jesse. We just want to thank everyone for joining us today and that's the end of our call.

Operator

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

Duration: 52 minutes

Call participants:

Helyn Corcos -- Vice President of Investor Relations

Rob Mee -- Chief Executive Officer

Cynthia Gaylor -- Chief Financial Officer

Sanjit Singh -- Morgan Stanley -- Analyst

Heather Bellini -- Goldman Sachs -- Analyst

Walter Pritchard -- Citi -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Jennifer Lowe -- UBS -- Analyst

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Matthew Hedberg -- RBC Capital Markets -- Analyst

Siti Panigrahi -- Wells Fargo -- Analyst

Sarah Shivas -- William Blair -- Analyst

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