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Cloudera, Inc. (NYSE:CLDR)
Q2 2019 Earnings Conference Call
Sept. 5, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Sheryl and I will be your conference operator today. Welcome to the Cloudera Second Quarter Fiscal 2019 Quarterly Results Conference Call. All participants' lines have been placed in a listen-only mode to prevent any background noise. After the speakers' remarks, there will be an opportunity to ask questions. If you would like to ask a question during this time, simply press "*1" on your telephone keypad. If you would like to withdraw your question, press "#". Please note this conference is being recorded.

Your host is Kevin Cook, VP, Corporate Development and Investor Relations. Kevin, you may begin your conference.

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

Thank you, Sheryl. Good afternoon and welcome to Cloudera's Second Quarter Fiscal 2019 Conference Call. We will be discussing the results announced in our press release issued after market close today. From Cloudera with me today are: Tom Reilly, Chief Executive Officer; Mike Olson, Co-Founder, Chairman, and Chief Strategy Officer; and Jim Frankola, Chief Financial Officer.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by the use of words such as expect, believe, anticipate, intend, and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and more fully detailed under the caption "Risk Factors" in our annual report on Form 10-K, our quarterly report on Form 10-Q, and our other filings with the SEC.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude stock-based compensation expense and amortization of acquired intangible assets. In addition, we provide a non-GAAP weighted average share count for fiscal 2018. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage you to consider all measures when analyzing Cloudera's performance. Additionally, our commentary today and the guidance we provide are under existing accounting standard ASC 605. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures, and a quantitative reconciliation of those figures, please refer to today's press release regarding our second quarter fiscal 2019 results. The press release has also been furnished to the SEC as part of a Form 8-K.

In addition, please note that the date of this conference call is September 5, 2018, and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

Now I'll turn the call over to Tom.

Tom Reilly -- Chief Executive Officer

Hello, everyone. Thank you for joining us to discuss our second quarter fiscal 2019 results. As I will detail shortly, in Q2 we made substantial progress in our product and our go-to-market initiatives, delivering strong financial results in the quarter and accomplishing many of our goals for sustained success in our market. I am pleased with our execution in the quarter and look forward to continued improvement and performance as all of our initiatives are fully implemented. It is encouraging to see the changes we are making being validated by customers and partners. In addition, the secular tailwinds in our market remain intact and demand is strong across our solution set.

Total revenue for the second quarter was $110 million, representing year-over-year growth of 23%. Subscription software revenue grew 26% year-over-year. Operating cash flow was negative $24 million, bringing year-to-date operating cash flow to positive $1 million.

One of the measures of our transition that I'm happiest with is the sum of new customers beginning with annual recurring revenue above $100,000.00 and existing customers graduating to greater than $100,000.00 of ARR. These customers best reflect our target market and support our business model. We increased this number by 30 in the quarter, exceeding our expectations, for a total of 568 customers with more than $100,000.00 of ARR at the conclusion of Q2.

Recapping our transition plans very briefly, we have made transformative investments in two areas. First, we have refined our go-to-market model to reduce customer acquisition costs and to sustain high net expansion rates. And, second, we're investing in innovative and differentiated technology and machine learning, analytics, and cloud to expand our competitive moats. I'll spend a moment to provide an update on advances in each area.

Let me begin with our go-to-market strategy. We made very good progress this quarter. At the highest level, we are exhibiting more discipline in focusing on our target market. Recall that we refined our target market to approximately 5,000 named prospects and existing accounts that display the type of consumption and expansion characteristics representative of our best customers. Next, we have reorganized our field around two new selling roles: account managers who exclusively land new customers in our target market and those who exclusively focus on expansions in our largest customers, driving their success.

The early indicators are encouraging. On the new customer acquisition front, we acquired more than 60 new customers. In banking and financial services, we won 16 customers, including Bank of Baroda, Abu Dhabi Islamic Bank, and Zions Bank. In manufacturing, we added seven customers, including Top Cut Steel, Wiki Power, and Leonardo. In the energy space, an up-and-coming vertical, we added five important customers, including Husky Oil, SaiPem, and Gulf Energia. In the public sector, we continued to have success both domestically and internationally across intelligence, law enforcement, defense, and civilian agencies, adding eight customers this past quarter, including Statistics New Zealand and France's Ministre de la Justice.

Impressively, the focus on new customer acquisition in our target market resulted in a more than 30% increase in our initial deal size for the quarter. It is too soon to call a trend here, but the Q2 results suggest a positive impact from better customer targeting and our salesforce reorganization.

With respect to existing customers, greater focus and execution discipline in Q2 translated into renewal rates that were above recent averages and a strong expansion bookings quarter. We now have 69 customers exceeding $1 million of annual recurring revenue, representing half of all our software revenue. Also, our in-quarter net expansion was higher than expected for a reported net expansion rate of 128%.

Many of our Q2 expansion transactions reflected typical customer journey, illustrating our land-and-expand strategy. It is notable that most of these customers are moving toward higher value use cases, employing machine learning, artificial intelligence, advanced analytics, and often on public cloud infrastructure.

For example, Lufthansa Technik is one of the world's leading providers of civilian aircraft maintenance and modification services. Lufthansa began using Cloudera to integrate and analyze data from across their business to improve operational efficiencies. They have since expanded use of the software to run their Internet of Things analytics platform with Cloudera on Microsoft Azure and they're using machine learnings to help airlines predict and prevent maintenance issues, improve flight safety, and reduce costly unplanned repairs. With this new use case, Lufthansa Technik is spending over 200% more than they were previously.

ANZ Bank, one of the largest banks in Australia and New Zealand, has run analytic workloads on Cloudera for several years. Today the bank is using Cloudera's machine learning capabilities for cyber security, supporting identification of anomalous behavior and assessing its likelihood for being malicious. In addition, they've recently adopted Cloudera Data Science Workbench to accelerate the delivery of new machine learning applications. This quarter's expansion represents a 60% increase in ANZ's annual payments to Cloudera.

Samsung Electronics America, one of the world's largest IT and consumer electronics companies, built a 360 degree view of their customer base using Cloudera. They have expanded their initial use case in a number of ways in order to develop personalized customer interactions and more effective marketing campaigns. With their most recent expansion, this organization has more than tripled their annual payments to Cloudera.

Our strategy is to focus on the needs of organizations that are striving to get insights out of data versus solely managing data. We accomplish this by: 1) leading our customers in machine learning and artificial intelligence adoption, 2) we are disrupting the data warehouse market; and 3) we're helping our customers capitalize on cloud adoption. The customer journeys highlighted in the case studies that I shared were all driven by our capabilities in machine learning, analytics, and cloud, reinforcing the importance of our investments in these key industry trends.

I am very pleased with our refined target market, our new selling roles, and our success in driving the customer journey. I am also pleased to announce that we have concluded our search for a new sales leader. We will be making an announcement shortly, as the start date is being finalized. This executive has a strategic and operational experience to further execute our go-to-market transition and scale our business to match the market opportunity.

Now Mike Olson, our Co-Founder, Chairman, and Chief Strategy Officer, will discuss some exciting new product announcements. Mike?

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

Thanks, Tom. Hello, everyone. As you may know, we made three major product announcements in August: the introductions of Cloudera Data Warehouse, Altus Data Warehouse, and Cloudera Workload Experience Manager, or Workload XM. These announcements are significant for Cloudera and the industry, as they represent several years of development work and a big leap forward with our analytics business.

We've had great success in helping customers perform self-service business intelligence and SQL analytics workloads with the high-performance Apache Impala SQL engine. It's a big deal for customers to be able to run traditional SQL analytics as well as cutting-edge machine learning from the same platform and on the same data without making copies.

Data warehouse offloading has been one of the most popular use cases on our platform. This was mostly an organic process. When we delivered the broad platform but didn't focus expressly on data warehouse workloads. Nevertheless, our customers in the Gartner Peer Insights Customer Choice Survey selected us as one of the Top 5 data warehouse vendors.

With our recent Cloudera 6.0 release, we've made substantial progress on scale and performance and have concentrated on improvements to enable data warehouse workloads in particular. We have more than five years' experience supporting SQL analytics with Impala and that investment, coupled with our hybrid and multi-cloud strategy, makes a deliberate move into the $16 billion data warehouse market, an obvious choice for us.

Here's what we're introducing. Cloudera Data Warehouse is a modern data warehouse for self-service analytics. Let me define modern data warehouse and why it's important in this world of exploding data and the Internet of Things. It's a cloud-native architecture that can manage 50 petabyte workloads, deliver sub-second core performance on hundreds of thousands of daily reports, and scale to hundreds of compute notes. On each of these metrics, it beats legacy systems by at least an order of magnitude.

Our modern data warehouse is also hybrid. Hybrid is the new normal in data warehousing. Hybrid enables enterprises to optimize how their business works: public cloud for elasticity and scale, multi-cloud for redundancy and choice, and on-premises for performance and privacy. Traditional data warehouses and first-generation cloud data warehouses have typically enabled only one cloud choice -- theirs. Cloudera Data Warehouse helps people work with secure data, whether it's in a public cloud or on-premises. We deliver a hybrid cloud data warehouse that works where enterprises work, with the agility, security, and governance needed by enterprise IT and the self-service analytics demanded by business people and enterprise data professionals.

Cloudera is further expanding its hybrid cloud data warehouse offerings with the availability of Cloudera Altus Data Warehouse. This is our modern data warehouse delivered as a service and it's available on either Microsoft Azure or Amazon Web Services. The all-new Cloudera Altus Data Warehouse provides on-demand agility with hybrid cloud flexibility and performance that first-generation cloud data warehouses simply weren't designed to deliver. It maintains lineage and history for transient workloads, critical for governance and compliance, and it eliminates the need to copy data into proprietary object stores, simplifying governance and making it easier and more secure for people to collaborate and experiment on shared data sets and real-time analytics workloads.

So, as I stated, we've been doing SQL for years. The very best data warehouse offerings on the market, though, must do more. Traditional data warehouse providers offer real-time workload management for performance and tuning technology. This capability represents a big portion of the value and revenue for these vendors. Last week we announced our own workload analysis and performance management solution, Cloudera Workload XM, to accompany our modern data warehouse. This is a new SKU and an upsell opportunity for our salesforce.

Workload XM is an intelligent cloud service that provides guided self-service workload analytics for visibility and control over analytic workloads through their entire lifecycle. It affords customers the visibility they need to efficiently migrate, analyze, optimize, and scale workloads running on a modern platform, reducing migration risk, speeding up troubleshooting, and improving up time and resource utilization. Together with Cloudera Data Warehouse and Altus Data Warehouse, Workload XM delivers the full-featured solution our customers require.

Tom said earlier our intent is to disrupt the data warehouse industry. All of this development is designed to ensure that we gain more share as customers begin to upgrade their legacy data warehouse and data mark technology. This migration is happening now, as IoT, exploding data, and the demand for machine learning and artificial intelligence solutions means that enterprises are rapidly outgrowing their legacy data warehouses. Our modern offerings are well-timed and tailored to compete directly in this major market shift.

I look forward to your questions on our solutions and on this opportunity. First, though, Jim will review the financial results. Jim?

Jim Frankola -- Chief Financial Officer

Thanks, Mike. Hello, everyone. We had a strong quarter across the board, especially concerning the key initiatives of our transition plan. Subscription software revenue was $93 million, an increase of 26% year-over-year. This represented 84% of revenue, up from 82% in Q2 of fiscal '18. In total, revenue was $110 million for the second quarter, representing 23% growth over the year ago period.

Given the go-to-market transition, we want to share more detail than we typically do and provide additional early indicators of progress. The transition is not complete but Q2 suggests that we've taken some positive steps. We have steadily grown annual renewing revenue per customer. In the first half of the year, 67 customers have either started in or have grown to be more than $100,000.00 of ARR, bringing the total to 568 customers in this class, representing 93% of our software revenue. Million dollar-plus customers represent another significant milestone. As of Q2, we had 69 customers with more than $1 million of annual recurring revenue, representing 51% of software revenue.

We are also seeing growth in new customer ARR. In Q2 new customers started at approximately $87,000.00 versus a historical average of $65,500.00, an increase of 33%, showing the benefits of heightened focus on our refined target market. Finally, as Tom mentioned, the 128% net expansion rate in Q2 was better than expected due to improved renewal rates and increased focus on customer success.

Collectively, these measures best reflect our ability to both acquire target customers and advance customers along a journey toward increasingly attractive unit economics.

As I review the remainder of the income statement, note that, unless otherwise stated, all references to expenses and operating results are on a non-GAAP basis. Historical non-GAAP results are reconciled to GAAP results in the press release issued earlier today.

I would like to highlight the steady progress we are making in terms of operational efficiencies. We are seeing the benefits of our technology being applied to our support organization, our go-to-market processes, and to other functions. Together with appropriate expense controls, these results increase confidence in our path to positive operating cash flow. Specifically, margins in expenses improved in nearly every dimension.

Total gross margin for Q2 was 76% compared to 73% last year. This was driven by subscription gross margin of 87%, up from 85% a year ago. As to operating expenses, sales and marketing expense was $52 million for the second quarter, or 48% of total revenue. This compares to 55% of total revenue in the year ago period. Research and development was $31 million for the second quarter, or 29% of total revenue, improved from 33% a year ago. SG&A was $13 million for the second quarter, or 12% of total revenue, improved from 13% of revenue last year.

Overall, operating loss was $13 million in Q2, representing a negative operating margin of 12%. This was a substantial improvement of more than 16 percentage points compared to the year ago period. Loss per share was $0.08 in the second quarter based on 150 million weighted average shares outstanding compared to a loss per share of $0.17 in the second quarter of fiscal 2018.

Please review the financial statement tables in today's press release for additional information regarding historical and forward-looking stock-based compensation expense and shares outstanding.

Now, turning to the balance sheet and cash flow, we exited Q2 with $458 million in cash, cash equivalents, marketable securities, and restricted cash. Operating cash flow for the second quarter was negative $24 million. Through the first half of this fiscal year, operating cash flow was a positive $1 million, as compared to negative $18 million in the first half of fiscal '18. As a reminder, Cloudera's cash flows are seasonal, with collections highest in fiscal Q1 and Q4.

Capital expenditures were $3 million in the quarter. Total deferred revenue was $284 million at the end of the second quarter, up 23% year-over-year. Short-term deferred revenue was $254 million, up 31% year-over-year.

I will conclude by providing initial guidance for fiscal Q3 and updated guidance for fiscal 2019. We expect Q3 total revenue to be between $113 million and $114 million, representing approximately 20% growth compared to Q3 of last year, with subscription software revenue in the range of $96 million to $97 million, up approximately 24% year-over-year. Net loss per share is projected to be $0.12 to $0.10 based on 152 million weighted average shares outstanding.

For fiscal year 2019, we expect total revenue to be between $440 million and $450 million, representing approximately 21% growth, with subscription software in the range of $372 million to $377 million, up approximately 24% year-over-year. Net loss per share is projected to be $0.53 to $0.50 based on 151 million weighted average shares outstanding. We expect operating cash flow for the year to be approximately negative $35 million. Consistent with the objectives we established at the time of our IPO, we expect operating cash flow to be positive in fiscal Q1 2020 and for the full year fiscal 2020 as well.

I will now return the call to Tom for some concluding remarks.

Tom Reilly -- Chief Executive Officer

Thank you, Jim. It was a very good quarter and we achieved or exceeded many of our goals. I am increasingly confident that we are on the right path with the initiatives we are executing in our go-to-market and our product strategy. The team remains focused on positioning Cloudera to capture more of the long-term market opportunity, as reflected in machine learning, artificial intelligence, and analytic workloads moving increasingly to the cloud. As Q2's performance indicates, with proper focus and continued product innovation, we are doing just that.

The potential of our three new data warehouse offerings is particularly exciting. With a modern architecture for on-premises deployments and being cloud-native for public cloud infrastructure and platforms with service implementations, we believe we have the right set of solutions for the next phase of the data warehouse industry. What's more, with Workload XM, we are further differentiating our offering by ensuring optimal performance, reducing downtime, and improving utilization across the complete lifecycle of analytic workloads. I look forward to updating everyone as we seek to disrupt this very large market.

The team and I remain grateful to our customers, our employers, our developer community, our partners, and, of course, to our investors. Thank you all.

Operator, we're prepared to begin the Q&A portion of the call. Thank you.

Questions and Answers:

Operator

At this time, I would like to remind everyone, in order to ask a question, press "*1" on your telephone keypad. Our first question comes from the line of Michael Turits of Raymond James. Please go ahead. Your line is open.

Michael Turits -- Raymond James -- Analyst

Hey, guys. It looks like a very strong quarter all around. Two questions. One, can you talk a little bit -- Jim, you referred to the ways in which you were getting operational efficiencies for adding customers and expanding customers and we did see OpEx below our model. If you can drill down a little bit on how you're accomplishing that, that would be great. And then I've got a follow-up.

Jim Frankola -- Chief Financial Officer

Yeah. The operational efficiencies come pretty much across the board. In our support area, we are using our technology to do predictive and proactive maintenance. We have identified the customers that need the greatest amount of help from us that are having a lot of support calls and have programs in place to make them more successful, thereby also driving our support margins up. When we go to the sales line, where we see a big increase, we're starting to see the effects of the go-to-market changes. When we described these changes, we looked at the data that we were collecting over what drove successful expansion of customers and what sort of behaviors inside of the company were in line with that, both in terms of the sales approach, focusing on new customers versus focusing on expanding customers, as well as the technical support that we provide to those customers. We are seeing the benefits of those organizational changes, both in terms of our cost structure and in terms of our ability to renew and expand customers.

Michael Turits -- Raymond James -- Analyst

And then, Tom, last quarter you discussed how you were competing in cloud and the fact, again, you're relatively new there. I don't know if you can quantify for us what the progress is there, whether it's in terms of total number of customers, win rates, or just qualitatively in terms of how you're competing against the native cloud offerings, like Elastic.

Tom Reilly -- Chief Executive Officer

Thank you, Michael. So, with every passing quarter, we are competing more often in the cloud and we're seeing our competitive win rates improve as our sales force here builds its skills. Today we have roughly 26% of our customers that have moved workloads to the cloud. Invariably, most of these customers are working in a hybrid fashion, so they're using our capabilities on-premises, they're using it in the public cloud, and often in a multi-cloud fashion. Our competitive differentiators are just that. We deliver enterprise features that large enterprises require in the cloud, we do that in a hybrid fashion, in a multi-cloud fashion, and importantly leveraging STX, we give multifunction. Now with Altus Data Warehouse, we can bring to our customers data warehouse capabilities and machine learning capabilities against shared data, whether they're doing that on Amazon or Azure, and they can move workloads back on-prem.

Michael Turits -- Raymond James -- Analyst

Great. Thanks, Tom.

Tom Reilly -- Chief Executive Officer

Thank you, Michael.

Operator

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

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. Thanks. I'll echo nice job on the quarter. Maybe one quick clarification for Tom and then a follow-up. Tom, I think you said in your prepared remarks, with respect to net expansion in the quarter was higher than maybe the net expansion trailing four quarters, I guess. Did I catch that right?

Tom Reilly -- Chief Executive Officer

I'll let Jim answer that more accurately.

Jim Frankola -- Chief Financial Officer

Yes. So, net expansion rate for the quarter was 128%, which is an average of the last four quarters. It's a trailing 12-month measurement. It is lower than it was last year, but quite frankly higher than we expected due to good execution in the quarter.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Okay. And then maybe a follow-up, again for Tom. Tom, can you maybe talk about -- or Jim, for that matter -- on I think you believe -- obviously you've raised guidance -- you believe you're through the most difficult part of the go-to-market changes and transition. Can you give us a sense for how confident you are that we're past that, I guess? And then maybe talk about -- you've introduced a lot of new products and the data warehouse new offerings are really exciting, I think. Kind of how much of those new products are -- what's kind of a penetration rate into the base or how much are really being reflected in kind of the current run rate? Thanks.

Tom Reilly -- Chief Executive Officer

Alright, Chad. So, as far as our transition, when we announced the transition, these transitions take time to see the full results. I set the expectation it would take roughly four quarters or through the end of our year. The good news is the bulk of the disruptive activity is behind us and I've seen our changes take root even sooner than I thought. We have work to do in our second half but I'm confident with the changes we have in place and completing all the change we want to drive by our Q4.

With respect to our data warehouse offerings, as Mike shared, we have been working with our customers in analytics for well over five years. We have roughly 800 large enterprises that we have gained tremendous expertise. Our recent work was in performance and scale with our C6 release, integration with cloud data stores -- that's 3 and ADLS -- building out our PaaS as service offerings, and introducing our Workload XM capabilities, all of which has us very well-positioned to compete in this market. And so we have great expertise with many customers and we think this will be one of the higher growing parts of our business portfolio.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. Nice job, guys.

Operator

Your next question comes from the line of Greg McDowell of JMP Securities. Please go ahead. Your line is open.

Greg McDowell -- JMP Securities -- Analyst

Great. Thank you very much and it's great to see the progress being made. I wanted to first specifically ask about the new customer initial ASP. I think you said it was up 33%. And I was just hoping you could expand a little bit on some of the drivers for the new customer ASPs and why they were up so much. Are customers adopting more Cloudera upfront, in terms of workloads or users or more SKUs, or is it just more confidence that they're gonna be using you guys as their standard platform and expanding quickly? If you could just touch on that a little bit and then I have one follow-up.

Tom Reilly -- Chief Executive Officer

Thank you, Greg. This is Tom. So, I'm very excited about us seeing the increase in the new customer ACV. I think there's three reasons driving that. So, first is we are really refining our target market and making sure that our field is pursuing opportunities that we believe will fit into our longer term, not only land but expand model. Second, we've introduced named -- I'm sorry, we've introduced specific new account logo hunters who focus on landing. So, they're building better skills at articulating our value to new customers. And we've elevated our selling beyond IT to line of business around machine learning and analytic use cases. And when you get to the line of business, we're seeing higher ACVs and starting points. So, historically, I think we had too many IT evaluations on the platform and now we're very focused on business outcomes.

Greg McDowell -- JMP Securities -- Analyst

Great. And then one quick follow-up for Mike. Just expanding a little bit on the three major product announcements, which I agree, it's gonna be very interesting to follow the progress. But I was hoping you could expand. Some Cloudera customers, as you talked about at the Analyst Day, already use Cloudera for ETL offloader or data warehousing offload. So how should we think about maybe the existing Cloudera customer base using these new products? Do they migrate their existing agreements to some of these data warehouse offerings or do they just expand their existing agreements? I was hoping you could help me think through the mechanics of Cloudera customers that already use you for a data warehouse type solution.

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

Yeah, Greg. Let me dive in. So, first of all, this isn't a wholesale replacement of the existing platform. This is an evolution of what they've already got. We've improved scale, we've added additional capabilities, we're just delivering more and more complete data warehouse services. We think we should be able to capture a much larger share of the data warehouse workloads in these large accounts. Think of IoT. Think of long-term collections of transactional and other data. Data that was just too big to fit into legacy platforms, those are a big forward opportunity for us and we'll see, we believe, traditional data warehousing tools and analytics running on data at much larger scale on this modern platform.

I'll point out as well, most of our big customers are running hybrid deployments. They want to be able to adopt not only in their data centers, where their data warehouses have run for a long time, but they want to apply those skills in the cloud and they want to be able to move them from the data center to the cloud and among the clouds. So, delivering hybrid and multi-cloud capabilities allows us to compete for new and emerging workloads and to capture those workloads as they move off premises. Legacy systems weren't designed to handle either the scale or the hybrid nature of those deployments and we think we're well-positioned to capture a good share of that market.

Greg McDowell -- JMP Securities -- Analyst

Got it. Thanks.

Operator

Your next question comes from the line of Tyler Radke of Citigroup. Please go ahead. Your line is open.

Tyler Radke -- Citigroup -- Analyst

Hi, there. And I apologize if my question has been asked already. I'm jumping around calls here. I was just hoping you could talk about just where we're at in terms of the return to strong net expansion rates. Are we past the peak point of disruption? And what's your expectation on timing in terms of when you think strong bookings will rebound?

Tom Reilly -- Chief Executive Officer

Tyler, thanks for the question. This is Tom. So, first off, our transition is to achieve two things: to improve our customer acquisition costs and to drive sustained high net expansion rates. Historically, they've been in the 120% to 150%. So that's the transition we're executing on to achieve that. The disruptive part of our transition is behind us. And I'm pleased, in our second quarter of that transition, we had strong results and early indicators that these changes are having effect and that's very rewarding for not only me to see but the whole company to see.

We do have more work to do. So, one of our results is we're introducing more outcome-based services to help our customers through their journey, which will drive those expansion rates. We're doing that via our own services but also through our partners. We're implementing those capabilities in the second half. But I expect most of our transition work to be done by our Q4 and hopefully that gives you a sense of where we're at.

Tyler Radke -- Citigroup -- Analyst

Yeah, that's great. And then just as a follow-up, can you just update us where you're at just in terms of the maturity of the new go-to-market approaches that you outlined around analytics, cloud, and machine learning? Just where we are in terms of maturity or even a revenue contribution.

Tom Reilly -- Chief Executive Officer

I don't think I'm prepared to break out the revenue contribution, but for the broader audience, we're shifting a bunch of our R&D and innovation work into three areas. Machine learning. It's our intent to lead large enterprises to machine learning and artificial intelligence. We're investing in the data warehouse market and we intend to disrupt, aggressively disrupt, the data warehouse market. And, third, we are capitalizing on cloud adoption by our large enterprise customers. In each of those areas, we're making significant progress.

This call we dedicated to three major releases in data warehousing: Cloudera Data Warehouse, Cloudera Altus Data Warehouse, which is our managed service offering for data warehousing, and Workload XM. That's a reflection of how quickly we're shifting to help our customers get insights. We're making great progress in machine learning and data science. We will be giving some more updates, probably in our next call. And then with cloud adoption, we're very excited that the use of cloud by our customers is the fastest growing part of our business. We have 26% of our customers moving workloads into the cloud and running workloads in the cloud. Given that our customers are large enterprises, the majority of them are working in hybrid environments. And increasingly we're seeing a multi-cloud deployments by our customers who want to avoid cloud lock-in and they value the portability.

So, these three areas, we're doing extremely, extremely well. They're all underpinned by our core platform and we also released Cloudera 6.0, which dramatically improves our performance and scalability.

Operator

Your next question comes from the line of Kash Rangan of Bank of America Merrill Lynch. Please go ahead. Your line is open.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for the update and congrats on the stability that you're seeing in the business. Tom, I had a question for you. A couple of quarters back, you talked about how the company, the salesforce had been particularly successful in getting a deep degree of success across a narrower section of the funnel and that that necessitated a change in the sales approach to have a dedicated farmer organization versus a hunter organization, and therefore we went through the GM structure for the different products.

I'm curious, where do we stand today with respect to broadening out the funnel and making this a broader market opportunity? And maybe there were certain things that needed to have been worked and they have already been worked through in order to make this more of a mainstream message. Because, if you are to build share, this is the case. And the long-term, enduring, billion dollar-plus, $2 billion-plus revenue company, one would assume this faction is more broad-based and not deeper across a narrow set of customers that seem to get the value proposition. So, what is happening at a more fundamental funnel entry point that will cause this market to be more mainstream for the likes of Cloudera and maybe even others? Thank you so much.

Tom Reilly -- Chief Executive Officer

Thank you, Kash. You covered quite a bit of different topics there, but let me see if I can address it this way. Right now, we want to have greater discipline in how we go to market and who are the customers that we target and how we accelerate their maturity in their journey. We have six stages of maturity that we measure and we're looking at outcome-based services and relationships and technology capabilities that advance them through that.

Now, we also believe that we can introduce more capabilities to expand the size of our relationship with any existing customer. So, we've done that with our new data warehouse offerings. And as our customers want to move data warehouse workloads to the cloud, we now have an offering to capture that. Our general cloud offerings allow us to grow that relationship. One of the other things in building out a -- bringing discipline to our target market also requires us to invest in our channel. And I didn't cover it in the earlier comments, but we are also putting in place our channel to allow us to address a broader market at a lower acquisition cost and support cost. And so we put in place our global distributors. We're making investments in our channel to be able to provide better support and services to a broader market.

And then ultimately our cloud capabilities. While, our cloud capabilities today are geared toward capturing our large enterprises' desire to move workloads into the cloud, we are designing that also at the right time for us to be able to move down market and address the market in a larger way. So, Kash, I hope that gives you a sense of how we're looking at broadening our market through the channel, through cloud, but our near-term focus is to stay disciplined and targeted into large enterprises.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Completely, yeah. I understand the near-term imperative, balancing that versus what needs to be longer term. I completely appreciate that. Thank you so much, guys.

Operator

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

Karl Keirstead -- Deutsche Bank -- Analyst

Thank you. Maybe this question is suited for Mike. I'm just interested in your, what I think is, bigger focus on disrupting the legacy data warehouse industry and I've got two questions on that. One is that market is fairly dominated by the likes of Oracle, Teradata, and IBM, with Natezza and other offerings, and I'm just wondering whether you think any one of those vendors might be more vulnerable for displacement than others. And then secondly, I know Snowflake is also looking to disrupt the legacy data warehouse industry and I'm just curious, maybe that's a long topic to address on a call like this, but are there a couple of obvious differences in your approach? Or perhaps the answer is the opportunity is so big that there's certainly room for a couple of vendors to go after it. Thank you.

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

Thanks, Karl. So, I'll answer those in the order you asked. So, first of all, clearly this is a $16 billion market. There are some monster players in it. Oracle, IBM, and Microsoft, decades in the market. We bring to market a modern platform and I'll highlight some of our strengths there. You asked whether any of those guys is ready for disruption. It certainly hasn't escaped our notice that Natezza is end-of-life. Right? There is a great opportunity to go capture those workloads, modernize that infrastructure, help enterprises that have been using Natezza move those workloads into the cloud, if they want to do that, and give them much larger scale and powerful analytic program. We're running a program that we call "Step Up" aimed precisely at those Natezza migrations.

You call out also interesting new market entrants. And Snowflake, great company and great products. Really four sharp differences that I would hit for you. So, No. 1, Cloudera is hybrid. Our customers want to run on-prem and in the public cloud. We let them do that. Cloud-only vendors like Snowflake don't.

We're zero copy. And that sounds like nerd speak but, look, if you've got data in the public cloud, you're storing it in Amazon S3 buckets or in ADLS. You don't want to copy it into a proprietary store where it's locked up and only available to Snowflake. We operate natively on those stores, so you don't need to make multiple copies of your data.

Closely related, most of our customers want to do more than one thing with their data. Yeah, they want to run petabyte-scale queries over structured data, but they also want to train machine learning models. They want to analyze that data using a whole bunch of statistical tools. We've got a multifunction platform that lets them do that.

And, fourth, remember, we're aimed at large enterprises. Our customers need secure, compliant, governed, managed systems. They've got to be able to set and enforce security policies and track usage, not only over their SQL queries but also over their machine learning and their statistical analytic applications. And we're able to deliver that shared data experience across that spectrum of workloads.

So, I think we've got a strong offering in the market. We're gonna see a lot of customers who need to step off of their legacy platforms. IoT data is arriving way too fast and at a much larger scale than those vendors can handle. We think we're gonna win our share.

Karl Keirstead -- Deutsche Bank -- Analyst

Got it. Very comprehensive answer. Thank you, Mike.

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

Thank you.

Operator

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

Matthew Coss -- JP Morgan -- Analyst

Good afternoon. This is Matt Coss on behalf of Mark Murphy. Thanks for taking our questions. Can you talk about the level of sales rep attrition or retention you've seen given some of the changes you've been making? And how amenable have those reps been to changes in any comp plans? And then separately, with artificial intelligence and machine learning in their very early stages, have you noticed any meaningful mistakes in the market with respect to how some companies have approached the deployments of artificial intelligence and machine learning? And how are you making sure that your customers hit the nail on the head when they deploy AI and machine learning?

Tom Reilly -- Chief Executive Officer

Okay, Matt. Hey, you'll get two of us to answer it. So, you'll have Tom. I'll take the first part about the salesforce and Mike will cover the second part. So, with any transition, you're going -- it's difficult to take a company through transition. But I'm very pleased. One of the strengths in our culture is we have great transparency and lots of communication. And so we have been regularly communicating with the company on where we're at in the transition, what to expect, and I'm quite pleased actually with our success at retaining our best talent. Our attrition rates are higher than they were a year ago, but that was the year of our IPO. But if you look over the past three years, our attrition rates are better than what we've had on average. So, that is very positive.

And when it comes to the field, Q1 was very disruptive for the field because roughly 40% of accounts change hands and territories change. But what we're able to do is, using our own data, direct our salesforce where they would get the best returns and where they should be spending their time, and it's resulting in their success. So, I think the salesforce is very supportive of the transitions we're making because their success is our success. And then we've been investing in their skills to sell into line of business around machine learning and data warehousing. And so we've got strong enablement there to help them as well.

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

And, hey, Matt, this is Mike Olson. I'm gonna dive on the second part of your question. This call we talked a lot about the data warehouse announcements that we made because we're really pleased and proud and we think that's a big deal. I expect probably next time we'll talk more about what's going on in machine learning. But just to hit the specific issue you addressed, yeah, machine learning is new and it's moving fast and it's confusing to people. We offer an open platform. We were the first vendor in the market to adopt Apache Spark. We can take advantage of all the open source algorithms that are coming out of places like Facebook and academic research community, unlike, for example, IBM Watson or Palentir: black box systems that are opaque to customers that they can't understand. So, simply that openness is helpful.

We also, you may recall, introduced more than a year ago now our Data Science Workbench offering and that's aimed at making data scientists and analysts much more productive. So, software tools to help them develop those applications. Finally, just under a year ago, we brought in new capability at Cloudera, Fast Forward Labs is our research and strategic consulting team that is able to deliver advice on state-of-the-art and where the market is going and how these techniques can be applied to business problems, how organizations need to reorganize themselves in order to turn these AI tools into real, actionable business insights.

So, again, we'll probably spend more time on that later, but I think we're well-positioned there. We've certainly been engaged in the market and thinking very hard about how we lead.

Matthew Coss -- JP Morgan -- Analyst

Thank you.

Operator

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

Josh Baer -- Morgan Stanley -- Analyst

Hi, this is Josh Baer on for Sanjit. I have a few questions on gross margins, which outperformed this quarter. If you could review some of the dynamics that led to subscription gross margins improving two points year-over-year and anything to keep in mind on the services margin line looking forward as you work on efficiency.

Jim Frankola -- Chief Financial Officer

Yes, this is Jim. The subscription gross margin was driven by the factors I touched upon earlier. So, we use our own technology very comprehensively across Cloudera. Within our support organization, we will proactively look at customers' usage of the technology and, in essence, predict when failures may occur, contacting the customer ahead of time, and preventing that failure. That leads to great customer satisfaction. It also leads to a much lower cost. In addition, as we are implementing these new go-to-market changes, we are better identifying customers that it makes sense to invest in that are early in their journey and quite frankly struggling -- have low margins. And we've seen a significant increase in profitability of our lowest margin customers over the past few quarters. So, those two areas have really driven the subscription improvement.

In terms of services gross margins, they're about 16%. That's roughly where they were last year. Movement you see in any given quarter on services gross margin is entirely due to we are still under the 605 accounting standard. We don't have the SOE and therefore you will have ebbs and flows in revenue recognition. So, there's no real news on the services gross margin piece.

Josh Baer -- Morgan Stanley -- Analyst

Thanks. And as the new data warehouse products and Workload XM increase in adoption and mix, will that have any impact on gross margins?

Jim Frankola -- Chief Financial Officer

Good question. I expect the data warehouse to be similar to our existing gross margin trend, which is increasing over time. To the extent customers are adopting that in the cloud, we expect our gross margins in the cloud to be slightly higher than those on-premises. We price essentially the same whether they are in cloud or on-premises, but the cloud deployments are much more consistent. Fewer failures, easier to diagnose. So, the cloud story will be more of a trend on gross margin improvement. Individual products, I don't expect to see much change in that one.

Operator

There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

Tom Reilly -- Chief Executive Officer

Well, thank you for all of you that had questions for us and spending the past hour with us. This is a very exciting time for Cloudera. We are making the right investments, both on product and go-to-market, to have sustained competitive advantage to build out our moats, to lower our customer acquisition costs, to sustain our high net expansion rates. I appreciate you all understanding our journey and thank you for the time today. We look forward to reporting back to you in a quarter from now with even better news. Thank you.

Operator

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

Duration: 54 minutes

Call participants:

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

Tom Reilly -- Chief Executive Officer

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

Jim Frankola -- Chief Financial Officer

Michael Turits -- Raymond James -- Analyst

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Greg McDowell -- JMP Securities -- Analyst

Tyler Radke -- Citigroup -- Analyst

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Matthew Coss -- JP Morgan -- Analyst

Josh Baer -- Morgan Stanley -- Analyst

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