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Red Hat, Inc. (NYSE:RHT)
Q1 2019 Earnings Conference Call
June 21, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please standby. Your conference is about to begin. Should you need assistance during your call today, please press * then 0.

Good day everyone and welcome to Red Hat's Q1 earnings call. At this time, all participants are in listen-only mode. Later you will have the opportunity to ask questions during a Q&A session. You may register to ask a question at any time by pressing * then 1 on your touchtone phone. You may withdraw yourself from the question queue by pressing the # key. Please note, today's call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Tom McCallum, Vice President of Investor Relations for Red Hat. Please go ahead.

Tom McCallum -- Vice President of Investor Relations

Thank you, Elise. Hello everyone and welcome to Red Hat's earnings call for the first quarter of fiscal '19. Speakers for today's call will be Jim Whitehurst, President and CEO, and Eric Shander, Executive Vice President and CFO. Our earnings press release was issued today after the market closed and may be downloaded from redhat.com on the investor relations page. Also on this page, you'll be able to find a copy of today's prepared remarks, a schedule of currency rates, and a slide deck with financial highlights and supplemental metrics along with our earnings release. Included in that is a reconciliation of GAAP to non-GAAP financial results.

Please note, this quarter we adopted AFC606 using the full retrospective method. The impacts of adoption are reflected in the financial information provided in the supplemental information section of the press release. The adoption of 606 did not, as previously reported, material impact our total revenues and had no impact on net cash. The primary impact of adopting AFC606 related to the deferral of incremental commissions and other costs of obtaining contracts with customers. Previously, we deferred only direct and incremental commission costs and amortized those costs over the contract term. Under the new standard, we are also amortizing related fringe benefit costs over the contract term. These changes are reflected in the current and prior year's results for both GAAP and non-GAAP.

During this call, we may make forward-looking statements about our future financial performance and other future events or trends, including guidance for our second quarter and full fiscal year FY19. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to the risks and uncertainties and assumptions and other factors that could affect our financial results in the performance of our business which we discuss in detail in our filings with the FCC, including today's earnings press release and the risk factors and other information contained in our most recently filed form 10K and form 10Q. Red Hat assumes no obligation to update any forward-looking statements we may make on today's call. And with that, let me turn it over to Jim.

Jim Whitehurst -- President and Chief Executive Officer

Thank you, Tom, and let me add my welcome to all of you joining us on today's call. As customers continue to view the move to hybrid cloud architectures at the top strategic priority, red hat is positioned as one of the foundational components of this strategy. We demonstrated this at the Red Hat Summit this year, where more than 100 customers from around the globe spoke about how they deployed our broad portfolio of technologies to successfully achieve their initiatives and transform their businesses.

Before I expand on some of the key events from the Red Hat summit, let me provide you with some highlights in the quarter. We delivered total revenue growth of approximately 20% for the fourth straight quarter in USD. We delivered double-digit core infrastructure growth while also driving growth in application development in other emerging technologies above 30%. This resulted in annualized revenue run rate approaching 800 million and was particularly strong when considering the ongoing transition of middleware from stand-alone deployments to containerized cloud-based services.

Our overall growth is being driven by our ability to deliver next-generation platforms to help customers address some of their most pressing challenges that they face when creating, deploying, and managing applications that run their businesses. Let me give you a few examples. First, we delivered a 48% year-over-year increase in deals over $1 million due in part to the fact that 70% of these deals including one or more components of our group of application development related and emerging technologies offerings.

Second, we drove strong growth in our Linux container platform, OpenShift, where we added over 100 new customers in the quarter and continued to grow median revenue per customer. Third, we continue to experience high demand for our services business, which grew 27%. This result was mainly driven by additional consulting demand for Ansible and OpenShift. A fourth example: We eclipsed 1,000 customers for our Ansible subscribers in Q1, up approximately 70% year-over-year. We believe this type of moment around our in-to-in suite of next-generation technologies and related services will enable us to deliver choice and innovation for our customers as they develop, deploy, and manage their applications.

Now let's turn to discuss some of the recent business and technology highlights. Our marquee user event, the Red Hat Summit, was held in San Francisco in May. We had record attendance, with approximately 7,500 attendees including developers, IT decision makers, and partners. This was a 20% increase from last year's event. In addition to the high level of customer participation and several technology announcements, we also had some key partner announcements with OpenShift, our container platform. As published in their October 2017 Smarter with Gartner blog, "Six Best Practices for Creating a Container Platform Strategy," Gartner predicts that by 2020 more than 50% of global organizations will be running containerized applications in production, up from less than 20% today. Clearly, containers are becoming a major driver for application development. This is further evident in our announcements, which I'll describe between Red Hat and two of the major public cloud providers.

These are in addition to last year's announcement at the summit in Boston where we extended our strategic alliance with Amazon web services to further integrate OpenShift, enabling AWS services within OpenShift container platform for hybrid users. This year, first we expanded our alliance with Microsoft to empower enterprise developers to run container-based applications across both Microsoft Azure and on-premise environments. With this collaboration, we will introduce the first jointly managed OpenShift offering in the public cloud, combining the power of Red Hat OpenShift, the industry's most comprehensive enterprise Kubernetes platform and Azure, Microsoft's public cloud. OpenShift on Azure will be configured and designed to reduce the complexity of container management for customers.

As the company's preferred offering for hybrid container workflows for our joint customers, Red Hat, and Microsoft will manage the solution for customers with support from both companies. In addition to being a fully managed service, Red Hat OpenShift on Azure is expected to bring enterprise developers the flexibility to freely move applications between both on-premise environments and Azure using OpenShift, which offers a consistent container platform across the hybrid cloud. It will also bring increased productivity by providing a development platform that integrates natively with Azure infrastructure. We're excited about this new offering, which will be available in preview in the coming months.

The second key partner announcement from summit for OpenShift was with IBM, where we extended our long-standing collaboration to bring together OpenShift and IBM cloud private with a number of IBM software and cloud solutions. This agreement builds on the recent move by IBM to modernize its software portfolio with containers, including WebSphere, MQ series, and DB2. Container technologies are increasingly being used as a reliable way to move applications across multiple IT footprints from existing data centers or private clouds to public cloud and vice versa. This collaboration between IBM and Red Hat provides an additional pathway for enterprises to adopt hybrid cloud computing.

Through this new agreement, IBM and Red Hat customers can now maximize their existing technology investments and move them more easily to the hybrid cloud with IBM cloud private and Red Hat OpenShift serving as the common foundation. It can build and deploy Red Hat certified container applications on one single integrated container platform, IBM cloud private, which provides a single view of all enterprise data and enable developers to design, modernize, and deploy new applications more quickly while taking advantage of IBM's cloud-based services such as artificial intelligence, internetive things, and blockchain, with IBM cloud private on the Red Hat OpenShift container platform. As part of this agreement, IBM will extend its private cloud platforms and middleware offerings to OpenShift as Red Hat certified containers. This exemplifies the broader transition we are seeing in middleware to deployments as a service on top of containers. Our dual strength in containers and middleware positions us well to compete in the middleware -- a dressful market that is estimated to reach $18 billion by 2021.

We have recently announced a series of product updates and enhancements to integrate our offerings more closely with OpenShift. This allows us to offer our middleware as containerized cloud-based services. We have created a new team focused on this area and we will update you on our progress to drive additional growth in middleware over the next few quarters. In summary, as was on display at Red Hat summit; customers are deploying hybrid cloud technologies to enable to them to compete in this world of digital transformation.

We believe Red Hat has the most comprehensive portfolio solutions and partners to be one of the leaders in digital innovation. We've worked hard to build a reputation as a trusted brand in modern IT technology and believe we are well positioned to drive growth as we look ahead. Before turning the call over, I want to thank all of our global associates from the team that runs great events like the Red Hat summit to everyone at Red Hat's 12,000 associates that are focused on our customers every day. With that, let me turn the call over to Eric.

Eric Shander -- Executive Vice President and Chief Financial Officer

Thank you, Jim. Let me also thank our global associates for their continued commitment to our customers, partners, and the open source communities. As Jim discussed, our financial performance continues to be driven by the strong demand for our hybrid cloud technologies. Highlighting the Q1 financial results, we delivered a combination of the following. Year-over-year revenue growth of 20% in USD, or 17% in constant currency. Non-GAAP operating income growth of 19%. And operating cash flow growth of 34%.

Before I discuss our results in further detail, please note that many of the foreign currencies that we conduct business in have weakened against the dollar since we provided guidance back in March. For instance, total revenue for the quarter would have been $3 million higher using the FX rates for March. As for the impact to our full-year revenue outlook, we are reaffirming the growth on a constant currency basis of 16%, 17%, while we adjust the dollar range down by $50 million for the changes in fx rates as of today, which I will discuss in more detail at the end of the call.

Given this fx volatility in the quarter, I will provide results in both USD and constant currency growth and you will fin da more detailed table of our constant currency results and reconciliations for our non-GAAP measures to GAAP in our earnings press release. Now, I will begin with a review of our Q1 performance and business metrics and then I will move to our outlook for Q2 and FY19.

We delivered 814 million of total revenue for the first quarter, which was above the high end of our guidance and represented growth of 20% in USD or 17% in constant currency. Adjusting for the $3 million fx headwind I noted earlier, we exceeded the high end of our guidance by $7 million. The upside was driven primarily by a higher demand for services supporting our emerging technologies. Subscription revenue, which is mainly renewable, constituted 87% of total revenue in Q1 and grew 19% in USD or 16% in constant currency. Double-digit growth across our subscription portfolio drove this result.

Subscription revenue for our infrastructure related offerings was $522 million, an increase of 14% in USD year-over-year or 11% in constant currency. Subscription revenue for our application development related and emerging technology offerings was $189 million, a year-over-year increase of 37% in USD or 32% in constant currency. Within this portfolio of solutions, our emerging technologies, which include Ansible, OpenStack, OpenShift storage, and cloud management offerings, continue to make strong traction. As we discussed last quarter, the emerging technology performance is somewhat offset by a moderated growth rate for our middleware offerings. As some customers begin to consider shifting their workloads from traditional physical deployments to container environments. We believe this transition will impact the revenue growth of the middleware business this year and as such, had previously factored this into our full year guidance provided back in March. We believe that in the long run, as customers shift more applications to container environments, it will benefit our middleware results and Red Hat overall.

Overall, application development related and emerging technologies revenue represented approximately 23% of total revenue, up 270 basis points from the year-ago quarter. Lastly, our services revenue of $102 million grew 27% year-over-year in USD or 24% in constant currency. This impressive growth of our services business has been fueled by the demand for consulting projects around Ansible and OpenShift offerings.

Before I move to the income statement, as a reminder, non-GAAP operating income adjust for non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations. On a non-GAAP basis, operating income of $168 million grew 19% in USD year-over-year and the non-GAAP operating margin was 20.7%. This quarterly result was 20 basis points higher than our guidance. As for net other income; it was $4 million for the quarter in line with guidance. Shifting the taxes and EPS, our non-GAAP effective tax rate inclusive of discrete tax benefits was 22.8% for the quarter and lower than our original guidance of 25% due to the US tax reform. Our non-GAAP EPS for the quarter was $0.72 up 24% year-over-year in USD and above our guidance of $0.68 with a lower tax rate contributing $0.02 to the $0.04 beat.

Turning to the balance sheet. We ended the quarter with cash and investments of approximately $2.5 billion after factoring in the additional cash from incremental repatriation in Q1, our US versus non-US cash balance is a 55%, 45% split. Our total deferred revenue at quarter end was $2.4 billion, an increase of 390 million up 19% in USD or 18% in constant currency for the same quarter a year ago.

Moving to operating cash flow. We delivered $346 million for the quarter, up 34% year-over-year. Our Q1 cash flow performance was the result of strong collections on our Q4 billings, which as we discussed last quarter was more heavily weighted to February shifting the collections to this quarter. Our fx adjusted DSO was 66 days up from 62 in the prior-year quarter. The rolling four quarters billings proxy was 858 million up 20% in USD or 17% in constant currency. As a reminder, the rolling four quarters billings proxy is calculated by adding revenue plus the change in deferred revenue on the cash flow statement for the last four quarters.

Next, let me discuss our total backlog, which we will now be disclosing on a quarterly basis in our form 10Q filing pursuant to the changes of adopting ASC606. Estimated total backlog was up 21% year-over-year in USD from the prior year quarter for a balance of $3.3 billion in USD. I will now review some highlights related to our bookings performance. Looking at our top deals, 25 out of 25 of our largest deals that were up for renewal were nude and did so in aggregate at greater than 120% of their previous value. This continues to demonstrate the strong partnership our customers have with Red Hat as they modernize their IT environments.

In addition to our top deals, cross-selling was strong with over 70% of the top deals greater than $1 million including one or more components from our group of application development related and emerging technologies offerings. Our top industry vertical within the deals greater than $1 million was our other mainstream vertical, which includes sectors such as healthcare, hospitality, and transportation. Our second largest industry vertical was the government. As Jim noted, the growth of deals over $1 million was strong in the quarter with a total of 65 deals up approximately 48% year-over-year. Within these deals, six were greater than $5 million and one deal was greater than $10 million, which was three less than Q1 last year.

As we discussed at analyst day, we are focused on building our strategic partnerships within our mid-market customers. In Q1, our mid-market deals greater than $250,000 increased 138% year-over-year from 21 deals to 50 deals with notable growth in Ansible and OpenShift. Our partnership with Global Systems Integrators is helping to drive growth in the mid-market with these emerging technologies.

As for the route to market, 75% was from the channel and 25% from our direct sales force compared to the prior Q1 split of 72% and 28%. Our proxy for bookings duration was just over 21 months, half a month shorter than Q1 last year. Consistent with our discussion at analyst day, we continue to believe duration will be approximately 1 month shorter for the full fiscal year. The shorter duration is driven in part by an increased focus on our mid-market customers, which typically start out with a shorter subscription duration.

As we also highlighted in analyst day, there is a smaller base of large customer renewals this year as we increased our strategic partnerships with many of our largest customers back in FY17. The longer deal duration in FY17 has enabled us to increase our focus on driving adoption of emerging technologies, which as I noted earlier, continues to grow at a rapid rate. The shorter the deal duration will have an impact on both bookings and billings growth rates in FY19. Lastly, our geographical bookings mix was 50% from the Americas, 28% from [inaudible] and 22% from Asia-Pacific. The percent in the Americas was impacted by the smaller base of larger customer renewals we just mentioned.

Now I'd like to turn to guidance. Our outlook assumes current business conditions and foreign exchange rates. As I discussed at the beginning of my prepared remarks, many of the foreign exchange rates we conduct business in have weakened against the dollar since we gave guidance in March. As a result, for the full year, we are adjusting our total revenue guidance in USD to 3.375 billion to 3.410 billion to reflect the $50 million impact from foreign exchange rates as of today.

In constant currency growth, we are reaffirming the year-over-year growth range of approximately 16% to 17% at the high end. As a result of the foreign currencies weakening since March, the resulting year-over-year growth in USD would be approximately 16% to 17%. As for other changes to our full year guidance, as I mentioned earlier, our annual effective tax rate was lower than expected and are now planning for a 22.5% tax rate. Our full year non-GAAP EPS will increase to approximately $3.44 to $3.48 per share. This also assumes approximately $4 million per quarter for net other income and approximately 185 million diluted shares, which does not include any impact from the new $1 billion share repurchase program announced today.

While we are reducing our effective tax rate to 22.5% for FY19, we believe it will be prudent to continue to use a 25% tax rate in FY20 and beyond as we continue to evaluate the impact from the US tax reform. All other previous non-GAAP guidance remains unchanged including our full year non-GAAP operating margin of 23.9% and operating cash flow outlook of approximately 1.035 billion to 1.045 billion. For Q2, we offer the following outlook. After adjusting for the foreign exchange rate impact of approximately $15 million, we expect revenue to be in the range of 822 to $830 million, which is up approximately 14% to 15% in both USD and constant currency. We expect non-GAAP operating margin of approximately 23%. We expect non-GAAP earnings per share of $0.81 with 185 million diluted shares. We will continue our practice of not providing quarterly cash flow guidance but please note that it can be variable depending upon individual payments or collections.

Recapping the quarter: We delivered financial results that were in line with our expectations. We remain confident and focused on partnering with our customers on their journey to adopting our technologies that address the opportunities around digital transformation and hybrid cloud computing. Elise, at this point, please open the call up for questions.

Questions and Answers:

Operator

At this time, if you would like to ask a question please press * then 1 on your touchtone phone. You may withdraw yourself from the question queue at any time by pressing the # key. Again, * then 1 if you would like to ask a question. We do ask that you limit yourself to one question to allow everyone an equal opportunity. Our first question comes from Siti Panigrahi with Wells Fargo. Please go ahead.

Siti Panigrahi -- Wells Fargo -- Analyst

Thanks for taking my question. Just digging into Q1 results in your guidance. Billings and also Q2 guidance were a little lighter than expected but your FY19 in your guidance you only lowered by 50 million BTSX. So just wondering if you are expecting any shift in business more toward in the second half or are you seeing any other factors influencing your fossil? Any kind of color would be great.

Eric Shander -- Executive Vice President and Chief Financial Officer

Siti, it's Eric. I mean, certainly, as we've seen in the past, we do continue to see revenue skewed a little bit more toward the back second half of the year. As we had said before from a services perspective, services has continued to be pretty strong, very strong against our expectations. We see that happening, we see that continuing the second quarter and maybe a little bit more into Q3 as well. So we see strength across our services business but we do continue to see the pick up of our revenue especially as we get to the second half of the year.

Operator

Our next question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey guys, thanks for taking my question. Eric, I know you don't guide to deferred revenue. It was a little weaker than we were expecting. I know you've talked about duration in the past. I'm wondering if you can help reconcile the impact of duration on deferred revenue and then just maybe just highlight any other potential headwinds to deferred this quarter.

Eric Shander -- Executive Vice President and Chief Financial Officer

Matt, as we've talked about -- we discussed this a little bit on the Q4 call. What I would offer up is when you start to look at duration, what I would do is I would take our annual billings number and divide it by the outstanding months and you can calculate what the impact from a financial standpoint would be. The other thing I would also say too when you look at the deferred is we do see a continued strength across our services business, which certainly is not gonna carry a significant amount of deferred with it.

Jim Whitehurst -- President and Chief Executive Officer

I think the only other thing I would say there too in terms of the business is, and as Eric talked a little bit about, the core middleware business has slowed a bit. We feel really good and tried to talk a little bit about that. We have really good middleware penetration where we sold OpenShift, but obviously, we're just landing that platform. So there's a little bit of an impact associated with middleware in there as well, which as OpenShift grows, we think that turns back around.

Eric Shander -- Executive Vice President and Chief Financial Officer

And I guess Matt, the only other commentary to add -- clearly our on-demand business continues to grow at healthy rates, which is continuing to become a nice piece of the business. I would also -- when you're looking at the deferreds, I would also in tandem with that look at the growth that we've seen in our backlog as well because we've been pretty pleased with the growth there.

Operator

Our next question comes from Mark Murphy with JP Morgan. Please go ahead.

Mark Murphy -- JP Morgan -- Analyst

Yes, thank you. I was curious if you could comment on the growth for the infrastructure subscription revenue. I believe it came in at 11% growth in constant currency and I believe you expected that to trend a little closer to 13% or 14%, at least in the medium term. Any thoughts on what might have held that back a couple of points in Q1 whether it was a function of a tough comp or anything else you might have seen?

Eric Shander -- Executive Vice President and Chief Financial Officer

As you look at that Mark, what we've been saying is we're pretty comfortable that our REL is gonna be growing in double digits -- we've been saying low teens and certainly 11% is a number we're happy with. But as you mentioned, last year we did have some reasonably sizable deals that had a lot of REL content so it was a bit of a tougher comp this quarter but there wasn't anything systemic that we saw in any of the deals that would tell us that we're seeing a slow down in the REL business.

Jim Whitehurst -- President and Chief Executive Officer

Matt, I would drill into the details on that, but we talked a lot when we saw an OpenShift deal, they start small and grow. Frankly, a lot of the multi-EREL deals are more constant in size over the three years and so we did a lot of multi-year deals over the past couple of years as we strategically said we wanted to, and so I do think that step change that you get when we talked about the big renewals where we typically get a step up, that happens at a renewal not necessarily each year on a three year deal. And so, haven't modeled it out but my hypothesis would be there's some of that happening as well since we just have few of those big renewals that happened in this quarter.

Operator

Our next question comes from Karl Keirstead with Deutsche Bank. Please go ahead.

Karl Keirstead -- Deutsche Bank -- Analyst

Thanks. Just to drill into the Q2 guide is I guess 14% to 15% constant currency growth. That's a little bit of a decel from prior quarters. So Eric, maybe you could sort of unpack the components to get there? What might be slowing a little bit? Should we be modeling perhaps the application development bucket a little bit more conservatively given that you've called out the middleware softness a couple times on the call? Is that where we might see a little bit of a slowdown in Q2? Super quick, Eric, could you just clarify the impact of 606 on EPS? You've mentioned that revenues no impact, cash flow no impact, but what about on the EPS side relative to your prior guidance? Thank you.

Eric Shander -- Executive Vice President and Chief Financial Officer

Karl, thanks. On the first one as we think about the revenue components, it really is in terms of the slowdown, if I were doing your modeling I would put it into the middleware bucket. I mean, that's certainly where we've seen the slowdown. And again, I just want to reemphasize that it's not a loss of revenue, it's really a pause as customers are really starting to look at whether they're gonna containerize their environments or are they gonna move to a more contemporary middleware solution? We're working with customers in terms of what is that technical roadmap look like? We had mentioned this in analyst day that we expect this to be several quarters because these are pretty big technical decisions that customers have to make. They're certainly looking at that and we expect that to happen over time.

And then, as we look at 606 there is no impact to EPS and we provided some supplemental information in our press release, which gives some detail schedules and really the biggest change there certainly from a restatement standpoint as Tom had mentioned, we updated the fact that we're now able to amortize the fringe benefits associated with commissions. So that's the big change there -- but no impact to EPS.

Operator

We'll go next to Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow -- Barclays -- Analyst

Hey, thanks. With all the excitement on OpenShift, Jim, can you talk a little bit about OpenStack? What are we seeing there? Like, a couple of quarters ago there was a lot of talk around [inaudible] adopting properly. What are you seeing there? Thank you.

Jim Whitehurst -- President and Chief Executive Officer

Yeah so, I think we're seeing really good progress with those large Telco relationships. There weren't really many this quarter. We actually have solid relationships with a lot of them. They seem to be Q3 and Q4 deals. So interactive with a number of them at the summit and afterward on their continued expansion with these NFC roll-outs and their beginnings of 5G but they frankly didn't show up in a materially way in billings this quarter because those deals are kind of done and we're working through this day expand. So as we get to Q3 and Q4 and those deals, many of which were up for renewal again. We'll have a lot more to talk about as those are renewing and hopefully continuing to expand the way we expect them to. But this quarter honestly just weren't many.

Operator

Our next question comes from Keith Weiss with Morgan Stanley. Please go ahead.

Sanjit Singh -- Morgan Stanley -- Analyst

Hi, this is Sanjit Singh for Keith Weiss. Thank you for taking the question and thank you for the color on the middleware part of the portfolio. I guess my follow-up to that topic is as we think about OpenShift, where there does seem to be a lot of customer traction as well as OpenStack and Ansible. Is there a timeframe that you guys could sort of outline where that segment of the portfolio sort of overcomes the pause or the slowdown in the middleware part of the portfolio such that we get back to accelerating growth in the immersion products? Is there a timeline where that could happen in your view? Thank you.

Eric Shander -- Executive Vice President and Chief Financial Officer

I wish we could give you an exact timeline on that. I will say again, our OpenShift customer account is up 75% year-over-year and we added 100 customers in the last quarter. We see -- and I want to be clear, I'm not saying all of this is running on OpenShift because we don't necessarily exactly know where people are running some of this -- but 70% of OpenShift customers are also Red Hat middleware customers. So we see very strong affinity between OpenShift and middleware. So as that customer account continues to grow, which it continues to grow quite nicely, that certainly pulls through middleware and so a pardon we've talked a lot about it could be modeled exactly when that happens. I don't have a number for you but all the trends are moving in the right direction.

Sanjit Singh -- Morgan Stanley -- Analyst

I appreciate the color, thank you very much.

Operator

Our next question comes from Heather Bellini with Goldman Sachs. Please go ahead.

Heather Bellini -- Goldman Sachs -- Analyst

Great, thank you so much for taking the question. I guess I wanted to ask if you've noticed -- you talked about the pause in the middleware business. And I'm just wondering, is there anything going on from a competitive standpoint impacting the app development market? Have you seen any new entrance or any changes in the competitive landscape that might be causing some of these causes? And how long do you think it takes to have that work through the system?

Eric Shander -- Executive Vice President and Chief Financial Officer

I haven't seen any new competitor that's having an impact but what I do think that we have seen is as this is kind of -- especially EAP where a big chunk of EAP was people changing it out based on price versus web stream web logic. Both IBM and Oracle has started giving 98% discounts or whatever it takes to hold onto that tail of the business. And so I haven't seen a new competitor in new technology impacting but I think there's a greater sense of, hey, I may as well kind of retain that little bit of revenue and so price down. And again, I think that happens as these technologies get old. That has probably impacted the growth rate a bit in that some of the prior kind of lift and shifts are happening less as people are just sticking to what they have until they're looking to move to more container-based technology. But I haven't seen any new competitors out there that are making a material difference.

Jim Whitehurst -- President and Chief Executive Officer

I mean think it's really just to the conversations with customers, the more around the technology roadmap that they're doing. It's not about whether or not they're gonna stay with Red Hat, it's really what does that look like? So we haven't heard a whole lot about the competitive landscape changing.

Operator

Our next question comes from Jason Ader with William Blair. Please go ahead.

Jason Ader -- William Blair -- Analyst

Hi, I know you said that you baked in the middleware slowdown in your FY19 guidance but we're looking at the Q1 billings, which I think I calculated roughly flat year-over-year. Is it fair to say that Q1 in middleware was slower than you even expected it the time that you gave the original guidance?

Eric Shander -- Executive Vice President and Chief Financial Officer

It's not slower. What we calculated was 9% growth.

Jim Whitehurst -- President and Chief Executive Officer

In constant currency.

Eric Shander -- Executive Vice President and Chief Financial Officer

Exactly. So not flat. We did have 9% constant currency growth. But no, it's pretty much been inline and which is certainly why we had messaged this in Q4 as well as during analyst day. And again, it's more of a technology shift than anything.

Operator

Our next question comes from Kirk Materne with Evercore ISI. Please go ahead.

Kirk Materne -- Evercore ISI -- Analyst

Thanks very much. Obviously a good quarter for you all in services. I was wondering if you could just talk about how we should think about services as maybe a precursor for bigger deals in growing adoption around Ansible and OpenShift and how we should think about that? Obviously, services a couple years ago is starting to get a little bit more de-emphasized, it's obviously taking up. So I guess is this a positive -- should we be feeling good about services strength in terms of -- especially Ansible and OpenShift? Thanks.

Jim Whitehurst -- President and Chief Executive Officer

What we've been saying Kirk -- and I think the good news here is it's both a leading and lagging indicator of the emerging technologies. It's a leading indicator because a lot of customers who end up doing proof of concepts with us and then those obviously will result in bigger deals from a subscription standpoint. It's a lagging indicator from the standpoint of customers will buy some of the technology then start to work with it and then certainly need some assistance and then that's when we'll pull the services team in. so the strength is really, as you see that strength, it really is fueled around Ansible and OpenShift. So we're pleased with it.

As you think about modeling it out, what I've been saying is certainly the first half is gonna continue to be strong. We may see some of that strength continue into the third quarter. But then what our plan has been and as we're continuing to get the partner ecosystem really up and running around a lot of these emerging technologies, we're really starting to kind of scale a lot of that out to them so then in the second half probably some time between our late Q3 and into Q4, you'll start to see a lot more of that activity getting performed by our partners, which is certainly what we want to do, enables us to scale the business.

Operator

Our next question comes from Brad Zelnick with Credit Suisse. Please go ahead.

Brad Zelnick -- Credit Suisse -- Analyst

Thanks very much for taking my question. DSOs ticked up meaningfully. What can you tell us about linearity in the quarter and how receivable should trend throughout the year?

Eric Shander -- Executive Vice President and Chief Financial Officer

Sure, Brad. So DSOs, what I would say is, it did pick up a bit few days, four days versus last year year-over-year. What that's really a reflection of is we've seen a little bit more business in some of our international countries that have a little bit elongated longer payment terms, which has propped that up a few days. So that's really what's driving that. In terms of linearity, we continue to -- and this is something that as we talked about last year all throughout the year we saw improvements as we went through last year and then when we got into Q4 we certainly saw a lot more of our business happen in the last month of the quarter, which as you can appreciate, when it happens in last month of the quarter in the last quarter of the year, that's gonna certainly flow over from a cash flow perspective into this year which is what we certainly saw.

But as we look at our in-quarter linearity, it's fairly consistent with where it was -- actually, we're seeing a little bit more slide toward the back end of our quarter, our month three in this quarter. So we continue to focus in on it. There's been a lot of things that we've done in terms of managing linearity, but it's one of these things, too, where we're not gonna do anything unnatural to close a deal within a particular month in the quarter. But certainly as the renewals and the renewal rates -- we're seeing high renewals happening on time so depending upon when they're due up we're pretty confident that we'll see some of those patterns repeat. Nonetheless, linearity is gonna be a continued focus for us. But what I would just as everyone is starting to really model it out, what's the most important linearity from our perspective obviously is what happens in Q4 and how much business happens in the last month of the quarter because that's really gonna determine what gets collected in the next fiscal year. And that's really what we're focused in on.

Operator

We'll go next to Michael Turits with Raymond James. Please go ahead.

Michael Turits -- Raymond James -- Analyst

Hey guys, good evening. I heard you talk about the competition around middleware, sounded like mostly around more traditional middleware. But can you talk about what kind of competition you are or not seeing around OpenShift in particular? Whether it's with other open source vendors or with the native offerings from the cloud vendors themselves?

Eric Shander -- Executive Vice President and Chief Financial Officer

That's a great question and one that we continue to ask ourselves. We don't often compete directly head-to-head with the cloud providers. Obviously, they just are GAing their services now. So in terms of the use to date wouldn't be like workloads that are in production. So I am sure there are people going on and using those services that we don't know about but we have yet to be in competition with any of those services in a meaningful way. So I'm sure they're out there. They're clearly getting some traction and it's one, we need to try to get visibility into all of those. But typically when we have an opportunity to compete we win and haven't seen a lot of loss to those. But again, they're just GAing their services now. And so we obviously have a different value proposition in terms of where we're drawing roadmaps by being large contributors in the communities and hybrid model et cetera. But we'll see how that plays out going forward.

I would say at this point, the more the merrier, the more people are talking about containers and the more alternatives there are out there that overall drives adoption and as the leader right now that's great for us regardless.

Operator

Our next question comes from Alex Kurtz with KeyBanc Capital Markets. Please go ahead.

Alex Kurtz -- KeyBank Capital Markets -- Analyst

Yeah, thanks for taking the question. Can you comment on the size of the renewal base this year and how it compares to last year and just how does this relate to the middleware comments you've been making tonight?

Jim Whitehurst -- President and Chief Executive Officer

Well, I mean, it's down. I don't know if we have specifics. What basically happened is we said over the last couple of years, we've worked to sign multi-year deals on our core offerings with our large customers. That frees up time to sell net new into those accounts or to a new set of mid-market accounts. You do that for two years and our typical long-term deal is three years. That obviously kind of drains a set of renewals out of this year. And so it's down some, right? That does have a bit of an impact on linearity because net new happens later as well as typically on pipeline, we have a high renewal rate on, we need a higher pipeline repeatedly net new because obviously, some things don't happen. There's a bit of a headwind there but I feel confident we're working through it because we have good traction with the new offerings.

Eric Shander -- Executive Vice President and Chief Financial Officer

And Alex, I would just offer up -- and I know you were at analyst day -- one of the pieces of information that we provided was of the top, the largest 50 renewals that we had this year, over half of them have already rerenewed and rerenewed in aggregate at a higher amount. A lot of these renewals, they do happen at the customer's request, right? Because as we're working with customers and as they're starting to look at different options around their technology and updating their infrastructure, a lot of our customers are coming to us increasing the number of different components of our technology within there.

So a lot of times we'll end up rerenewing and we're certainly going to do that where it makes sense for the customer. Just of our 50 largest renewals that would've happened this year, they've already happened in a prior year in an aggregate amount. So from a company standpoint and from a customer standpoint, this is absolutely what we want to do. But certainly, as Jim had mentioned, it certainly means that we need to go more net new business this year, which is what we're focused on and working on.

Operator

We'll go next to Keith Bachman with Bank of Montreal. Please go ahead.

Keith Bachman -- Bank of Montreal -- Analyst

Hi, I wanted to revisit on the infrastructure side. In calendar year '17 and early part of '18, it was a common theme that many of what we'd call on-premise spending for a lot of vendors VMware, Red Hat, Microsoft, the spending was very resilient and I think an upside surprise. If I focus on the results that you had tonight in the guidance, it seems like the infrastructure piece or rail is a little bit less than what we've been thinking about. And I know you said there might be some timing issues. But is there any sense that you're getting -- that there might be reversals so to speak of the very strong on-premise spending that's been demonstrated for Red Hat and others over the last five quarters. Is it your sense that there's any less spending on rail or the infrastructure piece as it relates to perhaps a broader trend on-premise spending?

Jim Whitehurst -- President and Chief Executive Officer

First off, to emphasize REL, a lot of REL runs in the public cloud. So looking at REL overall I don't think helps you try to sus out public cloud versus on-premise, right? Because our CCSP, our cloud access, all of that is in the REL number. And so I don't know if that kind of provides any clarity around public cloud versus on-premise.

We continue to see really good traction and a lot of growth in CCSP business and in the cloud access business so we feel very, very comfortable that public cloud is actually a tailwind overall to REL. Bunch of moving parts around the REL number. Recognize OpenShift includes REL, it's a different way to do it so when someone moves to OpenShift that comes out of REL. OpenStack is typically sold as a bundle with REL and so that's in the OpenStack number. There are a lot of moving pieces around REL so look one quarter; I wouldn't draw too much from it. But no matter what, you can't really look at that as somehow indicative of on-premise just given the strength we're seeing with REL in the public cloud.

Operator

Our final question comes from Brad Reback with Stifel. Please go ahead.

Brad Reback -- Stifel -- Analyst

Great. Thanks very much. Eric, I'm not sure if I missed this but I believe last quarter you talked about a fiscal 2020 out margin expanding 25 to 50 basis points. Is that something you're still looking to occur in 2020?

Eric Shander -- Executive Vice President and Chief Financial Officer

So Brad, thanks for the question. As we reaffirmed our 23.9% for this year and there's nothing that has changed that says we would not return back to expansion as we move into FY20 and beyond.

Tom McCallum -- Vice President of Investor Relations

Thank you, operator. We're going to conclude the call today and thank you, everyone, for joining us and we look forward to catching up with you over the next quarter. Thanks.

Operator

Thank you. This does conclude today's conference. We appreciate your participation. You may disconnect at any time and have a great day.

Duration: 51 minutes

Call participants:

Tom McCallum -- Vice President of Investor Relations

Jim Whitehurst -- President and Chief Executive Officer

Eric Shander -- Executive Vice President and Chief Financial Officer

Siti Panigrahi -- Wells Fargo -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Mark Murphy -- JP Morgan -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Heather Bellini -- Goldman Sachs -- Analyst

Jason Ader -- William Blair -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Michael Turits -- Raymond James -- Analyst

Alex Kurtz -- KeyBank Capital Markets -- Analyst

Keith Bachman -- Bank of Montreal -- Analyst

Brad Reback -- Stifel -- Analyst

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