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Red Hat, Inc. (NYSE:RHT)
Q2 2019 Earnings Conference Call
Sept. 19, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Red Hat second quarter of fiscal year '19 earnings call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the * and 1 on your telephone keypad. I will be standing by if you should need any assistance and it is my pleasure to turn today's conference over to the Vice President of Investor Relations, Mr. Tom McCallum. Please go ahead, sir.

Tom McCallum -- Vice President, Investor Relations

Thank you, David. Hello everyone, and welcome to Red Hat's earnings call for the second quarter of fiscal 2019. 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 that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial metrics.

During this call, we will make forward-looking statements about our future financial performance and other future events or trends, including guidance for the third quarter and full fiscal year '19. 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, uncertainties, assumptions and other factors that could affect our financial results and performance of our business, which we discuss in detail in our filings with the SEC, including today's earnings press release and the risk factors and other information contained in our most recent filings of Form 10-K and Form 10-Q. Red Hat assumes no obligation to update forward-looking statements that we make on today's call. And with that, let me turn the call 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. In the second quarter, we continued to see demand from our customers around the globe as they focus on their digital transformation and hybrid cloud initiatives. We enable our customers to succeed on these initiatives with our innovative solutions, award-winning support, and global services. Our focus on customers helped us drive strong results in the second quarter, where we delivered double-digit growth in a number of our key financial metrics. Let me highlight a few of those for the quarter.

Our total backlog, driven by strong bookings, grew 20% year-over-year. Our major geographic regions each grew bookings at double-digit rates year-over-year. Our application development related and other emerging technologies subscription revenues grew more than 30% year-over-year. Our services revenue, led by demand for OpenShift and Ancible consulting and training grew 19% year-over-year in constant currency.

Now let me give you some business metrics and highlights that demonstrate our continued traction with our customers and partners. Looking at our deals over $1 million this quarter, we closed a total of 73 deals over $1 million, up approximately 11% year-over-year. Within these deals, 11 were greater than $5 million, which is a record in a Q2 for us, and one deal was greater than $10 million.

Cross-selling was strong in this cohort. Over 76% of the top deals greater than $1 million, including one or more components of our application develop related and emerging technologies offerings. One of the deals over $5 million was the largest services deal we have ever closed in a quarter. This deal is with a global bank that is digitally transforming their payments business based on our integration middleware.

Other top industry verticals within the deals greater than $1 million were financial services and the government sector. Looking at our top deals, 24 out of our top 25 deals that were up for renewal did so at an aggregate value of more than 100% of their previous value. The one deal that did not renew is a rare competitive loss to a legacy on-premise provider based on pricing. We are actively pursuing future business with this customer as they evaluate additional technologies such as adopting OpenShift as a multi-cloud platform for the digital transformation of their business.

Removing the one-loss deal and using the next largest deal that did renew, the adjusted top 25 deals for the quarter have renewed at an aggregate value of approximately 115% of their previous value. Looking more broadly across our customer base at two of our fastest growing technologies, OpenShift and Ancible, let me provide you with some recent achievements that demonstrate the momentum we're seeing with our customers and partners.

Last week, we announced a multi-partner relationship with Hortonworks and IBM Cloud Private to bring their big data and analytics products on to OpenShift. This is designed to enable customers to develop and run data intensive applications on OpenShift, bringing them the power of hybrid cloud.

Our Ancible technology reached approximately 2 million managed nodes at the end of Q2, essentially doubling the number of managed nodes since Q4 of last year. Overall, both of these technologies added nearly 100 new customers each since Q1, and we continue to grow the median revenue per customer.

In summary, we continue to drive significant adoption of our hybrid cloud technologies, even as we work through the headwinds and middleware in our renewal base that we view and have previously discussed. We remain confident in our long-term competitive position and our proven ability to become increasingly strategic with our customers, as evidenced by our growth over the past several quarters with large customer engagements and momentum with our partners.

I want to thank Red Hat associates for their tireless efforts in serving our customers. From building innovative solutions to delivering and supporting these technologies, we continue to stay focused on the success of our customers and delivering value 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 recognize and thank our global associates for their continued commitment to helping our customers succeed. Red Hat's ability to deliver business value has been a key driver to building a multi-billion-dollar business and the strength of our strategic customer relationships is one of the reasons we believe we are well positioned for the long term.

Our performance this quarter was driven by the demand for our hybrid cloud technologies, which enabled us to deliver results that were in line with our guidance. As a result of our performance to date and the outlook for the remainder of the year, we are reaffirming our full-year revenue growth in constant currency at 16% to 17%, along with our full-year non-GAAP operating margin and cash flow.

However, in U.S. dollars, we are lowering the full-year revenue range by approximately $15 million to account solely for the change in FX rates, as the trend of weaker rates against the dollar for many of the major foreign currencies has continued to decline in recent months. For instance, Q2 total revenue would have been nearly $3 million higher using the FX rates from my June guidance. As such, for this call, I will discuss our results in both USD and constant currency to provide a full view of the impacts of foreign currency on our results. A more detailed view of our results and reconciliations for our non-GAAP measures to GAAP is included in our earnings press release.

I will now review our Q2 performance and business metrics before finishing with our outlook for Q3 and the rest of FY19. In the second quarter, we delivered $823 million of total revenue, which was in line with guidance and represented growth of 14% in both USD and constant currency. As I mentioned earlier, this result of USD included a foreign exchange headwind of approximately $3 million from the rates used for guidance in June.

Subscription revenue, which is mainly renewable, made up 88% of total revenue in Q2 and grew 13% in USD, or 14% in constant currency. Subscription revenue for our infrastructure-related offerings was $527 million, an increase of 8% year-over-year in both USD and constant currency. This result was impacted by the lower available renewal base, which is largely RHEL in the lower renewal value that Jim discussed in our Top 25 renewals metric.

Year-to-date, our infrastructure-related offerings are up 11% in USD and 10% in constant currency. Subscription revenue for our application development related and other emerging technology offerings was $196 million, an increase of 31% year-over-year in both USD and constant currency. Within this portfolio, we continue to drive rapid growth in our emerging technologies, particularly in Ancible and OpenShift.

As we discussed in the past, this growth has been somewhat offset by the moderation we are experiencing in our middleware offerings. We continue to believe that as customers shift their workloads to container environments, our middleware results and subscription revenue will benefit in the long run.

Overall, application development related and emerging technologies revenue represented approximately 24% of total revenue, up 300 basis points from the year-ago quarter. Lastly, our services revenue of $100 million grew 17% year-over-year in USD or 19% in constant currency. The strong growth of our services business was driven by demand for training and consulting projects for our Ancible and OpenShift offerings.

As I have mentioned before, our services business is both a leading and lagging indicator for the demand around our emerging products. We have seen that customers who buy both services and subscriptions tend to have higher retention, which can lead to future opportunities and additional technology sales.

Before we move to our non-GAAP operating income results, as a remainder, our non-GAAP operating income adjusts for non-cash share-based compensation expenses, amortization of intangible assets, and transaction costs related to business combinations. Non-GAAP EPS adjusts for all these items, as well as non-cash interest expense related to the debt discount.

On a non-GAAP basis, our Q2 operating income of $197 million grew 3% year-over-year, with a non-GAAP operating margin of 23.9%. This quarterly result was 90 basis points higher than my June guidance and reflects some repositioning of hiring and marketing programs to the second half of the fiscal year. Net other income was $4 million and in line with guidance.

Shifting to taxes and EPS. Our non-GAAP effective tax rate was 22.3% for the quarter, which includes discrete tax benefits and the impact from certain nondeductible share-based compensation expense. This resulted in non-GAAP EPS of $0.85, up 10% year-over-year and above my guidance as a result of the higher non-GAAP operating margin.

Turning to the balance sheet. Our total deferred revenue at quarter end was $2.4 billion, an increase of $341 million, representing growth of 17% in USD or 19% in constant currency over the same quarter a year ago. Our cash and investments at the end of the quarter was approximately $2.2 billion, after repurchasing approximately $250 million or 1.7 million shares under our new share repurchase authorization, which has a remaining balance of approximately $750 million. In addition, we had approximately $245 million of total cash outflows related to repayment of convertible notes.

Moving to operating cash flow. With the adoption of Accounting Standard ASU 2016-15, Statement of Cash Flows, which requires us to classify the portion of the repayment of convertible notes attributable to debt discount as an operating cash flow, as opposed to a financing cash outflow.

In an effort to appropriately reflect the cash generated from the operations of the business and for comparability of prior periods, we will provide both a GAAP and non-GAAP operating cash flow metric. Our GAAP operating cash flow inclusive of the $32 million of repayments for the convertible notes attributable to the debt discount was $133 million, down 7% year-over-year. The non-GAAP operating cash flow was $165 million, an increase of 16% year-over-year. Our FX adjusted DSO was 61 days, up 5 days from Q2 of last year, driven by business linearity.

The rolling 4 quarters billings proxy was $884 million, up 19% year-over-year. As a reminder, the rolling 4 quarters billings proxy is calculated by adding revenue plus the change in deferred revenue on the cash flow statement for the last 4 quarters.

Now, I will discuss our total backlog for Q2, which includes billed contracts from the balance sheet, the new ASC 606 performance obligation disclosures, and our backlog for time and material service bookings. Total backlog was up 20% year-over-year in Q2 for an estimated balance of $3.3 billion in USD. Our backlog in the quarter was the result of our bookings performance with all of our regions at double-digit growth year-over-year. As for the regional mix in the second quarter, 54% of our bookings came from the Americas, 26% from EMEA, and 20% from Asia-Pacific.

The second quarter route-to-market mix was 77% from the channel and 23% from our direct salesforce, compared to second quarter prior year split of 79% and 21%. Our proxy for bookings duration was approximately 22 months, up nearly 1 month from Q2 last year. We attribute this to some customers choosing to extend their commitment to Red Hat with a longer-term strategic partnership.

Now, I'd like to turn to guidance. Our outlook assumes current business conditions and foreign exchange rates, which have generally continued to weaken against the dollar year-over-year. I will begin with our full-year guidance, which assumes an incremental FX headwind to revenue of $15 million, as compared to our prior guidance. As a result, we are adjusting our total revenue guidance in USD to $3.360 billion to $3.395 billion, or a year-over-year growth range of 15% to 16% in U.S. dollars. In constant currency, we are reaffirming the year-over-year growth range of 16% to 17%.

From a profitability perspective, we are reconfirming our full-year non-GAAP operating margin of 23.9%, which includes the necessary investments to drive future growth. We are planning an annual non-GAAP effective tax rate of 22.5% for FY19, prior to discrete items and our full-year non-GAAP earnings per share to be approximately $3.45 to $3.49 per share. This assumes approximately $4 million per quarter for net other income and approximately 184 million diluted shares, which is lower due to share repurchases.

Due to the difficulty of predicting the timing and amount of any future convertible note settlements, our guidance will now be on the non-GAAP operating cash flow for FY19. Excluding the repayments of convertible notes that are attributable to the debt discount, our outlook remains unchanged for the full year. Non-GAAP operating cash flow is expected to be in a range of approximately $1.035 billion to $1.045 billion, which includes an incremental $10 million in tax payments.

For Q3, we offer the following outlook. We expect revenue to be in a range of $848 million to $856 million, which is up approximately 13% to 14% in USD and 15% to 16% in constant currency. We expect non-GAAP operating margin of approximately 24%. We expect non-GAAP earnings per share of $0.87, with a 22.5% tax rate prior to discrete items. This assumes approximately $4 million in Q3 for net other income and 184 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.

Looking forward, we remain excited that Red Hat is increasingly viewed as a top strategic IT partner to the world's leading companies as they execute on their digital transformation and hybrid cloud initiatives. We remain committed to our customers' success. David, at this point, please open up the call for questions.

Questions and Answers:

Operator

At this time, if you'd like to ask a question, please press the * and 1 keys on your telephone keypad. Kind in mind that you may remove yourself from the question queue at any time by pressing the # key. Also, please limit yourself to one question and requeue if you do have any follow-ups. We will take our first question from Walter Pritchard with Citi. Please go ahead, your line is open.

Walter Pritchard -- Citigroup -- Analyst

Hi, thanks. A question for Eric, maybe a two-parter. But just on the RHEL growth or the infrastructure growth at 8%, you talked about renewals driving that softness in revenue. I guess we haven't seen in the past the renewal business drive such deceleration in RHEL. Could you help us understand what's going on this year versus when you've had that dynamic in the past. Then, should we expect that business? It sounds like if it's a renewal thing, as you get through the renewals, that would reaccelerate. Can you help us understand the timing of that reacceleration?

Eric Shander -- Executive Vice President and Chief Financial Officer

Sure, Walter. There's actually a couple components that are impacting the RHEL revenue growth. So, certainly the lower renewal base has impacted that because the majority of our renewals are RHEL, have a significant amount of RHEL content. The other thing, as Jim had mentioned, we did have this larger competitive loss within the quarter, which did have an impact, as well as we also had a project de-scope from the Army that impacted the growth in RHEL as well. So, we had a couple components other than just the lower renewal base.

In terms of right now, the way that we're looking at the bookings and the momentum we've seen in the field and the pipeline, we do believe that we've bottomed out in terms of the RHEL growth slowing down. Our expectation from here and through the second half of the year and into next year that we will see a reacceleration of the growth rate.

Walter Pritchard -- Citigroup -- Analyst

Great.

Tom McCallum -- Vice President, Investor Relations

Next question please, operator.

Operator

We'll take our next question from Karl Keirstead with Deutsche Bank. Please go ahead, your line is open.

Karl Keirstead -- Deutsche Bank -- Analyst

Hi. Maybe this question is for Eric. Eric, even though you don't disclose your middleware business, you've spoken in the past about this piece of the Red Hat revenue mix growing in the 9% to 10% zip code in fiscal '19. Given the quarter you just put up, is that still your expectation for the middleware growth rate this year? Thank you.

Eric Shander -- Executive Vice President and Chief Financial Officer

Sure, Karl. Yeah, we did. What we've been saying is we expect the middleware growth to moderate close to where the industry is, anywhere from the 8% to 10% range. We did see that this quarter and we certainly expect that as we go into the second half of the year. So, nothing has changed in terms of the growth rate from a middleware perspective.

Karl Keirstead -- Deutsche Bank -- Analyst

Okay, thank you.

Eric Shander -- Executive Vice President and Chief Financial Officer

You're welcome.

Tom McCallum -- Vice President, Investor Relations

Next question, please.

Operator

We'll take our next question from Zane Chrane with First Bernstein Research. Please go ahead, your line is open.

Zane Chrane -- Bernstein & Co. -- Analyst

Hi, thanks for fitting me in. This is a question for Eric or Jim, either one. When we look at the growth in RHEL, how much of the growth is driven by new customer adoption versus expansion inside your existing base? And then when it is new customers, where all right they choosing to deploy that in terms of on-premise versus public cloud deployment? Thanks a lot.

Eric Shander -- Executive Vice President and Chief Financial Officer

Zane, I'll start that and certainly have Jim add a little bit more color to it. Certainly, for new customers, we are seeing both on-premise and in the cloud. Most of those typically start on-premise. For existing customers, we're still seeing expansion as our customers' IT footprints are continuing to expand. I've shown several of these examples during our previous analysts days of not only do we see customers embracing and adopting the emerging technologies, but a lot of that also has a pull-through effect in terms of the RHEL requirements as well.

James Whitehurst -- President and Chief Executive Officer

Just to add to that. We haven't actually looked at it quite like a number that way. The only reason I say that is because the cloud revenue is immediate revenue and obviously our normal subscription business is lumpier when we do either one or three-year deals. I think a lot of our new, smaller customers are coming in via cloud. We have some really nice growth there. It's still growing at well more than twice the growth rate of the company. A lot of that we believe is new business. The core business, customers are continuing to renew. We give you those numbers.

The odd part, again, just to remind everyone, we started about 2.5 years ago focusing on trying to do multi-year deals to try to basically get our customers into multi-year engagements so our salesforce could focus on net new. Well, obviously, 2.5 years into that, we've done our best to get people in 3-year deals, so our renewal base is quite small relative to where it's been in the past. It's at renewal when we typically take up the size of those relationships.

So, fewer renewals means less take-up in these last couple of quarters. But again, we're seeing it from both. We still see a lot of growth with our existing customers. As we've talked about in the past, customers who are adopting cloud tend to grow their RHEL footprints faster than those who aren't.

Operator

I do apologize. We will take our next question from Kirk Materne with Evercore ISI. Please go ahead, your line is open.

Kirk Materne -- Evercore ISI -- Analyst

Yes, thanks very much. Jim, could you just talk about this year obviously you knew coming into the year that you were going to have a smaller renewal portfolio to build off of. Could you just talk about the net new business growth that you've seen? Because the billings this quarter obviously look pretty good. Specifically, within the emerging product segment, given the drag on JBoss, one could infer that with OpenShift, Ancible, might actually be going better than you might have expected at the beginning of the year? I'm just curious on the impact on net new business momentum and then some of the smaller products like OpenShift, Ancible relative to your expectations? Thanks.

James Whitehurst -- President and Chief Executive Officer

You hit on a good point there. If you look overall, given the overall backlog growth and the fact that we didn't have as a great a renewal, that we're seeing some really good traction with new products to deliver what we delivered. A lot of that is the new products. I think we're really pleased with OpenShift and with Ancible. We talked about adding -- we don't break those numbers out -- but adding over 100 customers in each in the quarter is pretty significant and shows the size of that momentum.

We didn't give a lot of stats on OpenStack, but it continues to grow nicely as well. So, across all three of those, we're seeing really nice growth and really good traction. I had a plan where we were expecting to be, yes.

Eric Shander -- Executive Vice President and Chief Financial Officer

Kirk, it's Eric. Just some additional color around the size of the deals and the traction. In Q1, we articulated just the deals between 250,000 and a million that was growing over 130%. This quarter, the number of deals, between 250,000 and a million, grew at over 120%. So, as you can see, we're still seeing a lot of momentum in the mid-section of the deals and the size of those deals. We do expect, as we've been saying, a lot of these deals will start smaller and it will certainly take a couple years to cultivate them into larger strategic enterprise customers, but that absolutely is the strategy that we're on.

Tom McCallum -- Vice President, Investor Relations

Great. Next question please, operator.

Operator

The next question is from Michael Turits with Raymond James. Please go ahead.

Robert Majek -- Raymond James & Associates -- Analyst

Jim, can you just talk about any changes you're seeing in the competitive environment when it comes to RHEL cloud deployments? Especially against competitors like Amazon Linux? Thanks.

James Whitehurst -- President and Chief Executive Officer

I don't think we've seen anything new there. I think the cloud business is growing very nicely and if you look cloud-by-cloud, our growth rate is pretty consistent with the growth rates of the clouds. So, that to me says that we're maintaining share or on some of them we're growing faster. We're either maintaining or growing share across the major clouds. To me, that's a good sign. That's on the CCSP piece.

One of the other pieces that we've seen as well is we've had some very large CCSP customers who have rolled out of CCSP and done subscription agreements with Red Hat because they want to have a direct relationship. That's the direction we like to see things move. We feel really good overall. We watch that carefully. Again, I don't see, again, if I look at our growth rates cloud-by-cloud versus the clouds' growth rate, we feel pretty good that we're certainly maintaining or growing share.

Operator

Our next question is from Raimo Lenschow with Barclays. Please go ahead, your line is open.

Raimo Lenschow -- Barclays -- Analyst

Thanks. Eric, quick question for me. If you look at the slightly better leverage this quarter, you talked about hiring some initiatives getting pushed out in the second half. Can you double-click on that a little bit? Was that kind of you managing the business as you knew what your revenue was doing this quarter or what the drivers were? Thank you.

Eric Shander -- Executive Vice President and Chief Financial Officer

Thanks very much. There was a bit of, as you go through the quarter and as we've talked about, this one competitive loss. It was not lost until the very end of the quarter, so we were certainly fighting to keep this until the end of the quarter. However, having said that, as you can imagine as we look at some of the other trends in the business, we did a slight pull-back in certain areas. Certainly not in our sales area because that's a key area of investment and continuing investment. So, there was a little bit of cost management as we went through the quarter.

Essentially, as you think about the guide for the rest of the year, I expect the margin essentially to be flat as we go into Q3. Then it will pop up into Q4 because some of the marketing spend that we have will be actually done in Q3 versus Q4. So, we're going to continue to actively manage the cost side, but at the same time, too, just want to emphasize that we are continuing to be very, very mindful about making the appropriate investments into our most strategic areas. A lot of those investments come as we get efficiencies and productivities in other spaces within the company.

We absolutely will continue to invest in the strategic areas as we go through this year and certainly into next year, but we are taking a very active position. IM, certainly, in terms of how we're managing the cost.

Tom McCallum -- Vice President, Investor Relations

Next question, please, operator.

Operator

Our next question is from Kash Rangan with Bank of America. Your line is open.

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

Hi, I'm just curious to get a little bit more perspective on the renewal base you talked about with respect to the deceleration of the RHEL business. I know you're certainly pointing to that business reaccelerating. Typically when we look at Q1 to Q2, there's been a nice, sequential growth in the RHEL business. This time it seemed the magnitude of that seemed to be a little surprising. If you could just drill into that a little bit and also help us understand what is happening on the really emerging technologies side of the middleware component, the PaaS side. A little bit more color there, that would be useful. Thank you so much.

Eric Shander -- Executive Vice President and Chief Financial Officer

Thanks, Kash. I'll start and Jim can give a little bit more color on the business side of it. But just as a reminder, Q1, our billings we were at 9%. So what you're really seeing from a revenue perspective, that really flowed through. That did have an impact to RHEL. Then, obviously, this quarter as we looked at the bookings and the billings, the renewal base continued to be a bit of a headwind, as well as just reemphasizing both this project descope that was out of our control that was specific to the Army, as well as this one competitive loss.

They did also have both a fair amount of content of RHEL. All of these impacted us in the current quarter, which again gives us confidence that we look at the pipeline, as we look as we go into the second half, we do see a reacceleration of the growth.

James Whitehurst -- President and Chief Executive Officer

Kash, just a little bit on PaaS. What also I would say is that's obviously the vast majority of our revenue is baked when we come into a quarter. So, coming out of Q1 where we were light of where we wanted to be on billings and backlog you kind of roll through. Obviously, we had a lot stronger quarter this quarter in growth there. We have some better visibility looking forward into RHEL. We do think this is the bottom there.

Related to PaaS, we're seeing great traction. Over 100 customers for OpenShift. Not only is it customers, it's also partners. Unlike some other software companies that will pay tens of millions of dollars to enable SIs, we focus on bottom-up demand generation. We've gotten really good bottom-up support for OpenShift. Now, the large global system integrators are all building practices around OpenShift. I think that also leads to incremental traction. I think the Microsoft deal, the relationship we announced back at Summit, has raised awareness and has helped as well.

I was in Europe last week and I think out of the maybe 30 or so customer meetings I had, 20-something of them were about OpenShift, in particular. It really is a topic that people want to understand and figure out how to do in containers. I will say just as an editorial comment, I also think one of the things that has slowed RHEL growth a bit is customers want to talk about containers, and we need to continue to talk about RHEL as part of that portfolio. I do think shiny object syndrome gets us all, me included, where we're talking about OpenShift and Ancible because there is so much traction around them.

But overall, it's hard to find a customer that's not looking at or starting to use OpenShift in some way, which is great to see.

Tom McCallum -- Vice President, Investor Relations

Next question, please, operator.

Operator

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

Matt Hedberg -- RBC Capital -- Analyst

Thanks for taking my question. It's Dan Bergstrom for Matt Hedberg. Jim, maybe could you update us on the overall spending environment? Any changes in customer buying behavior into the back half?

James Whitehurst -- President and Chief Executive Officer

No, customers seem to still feel good about the economy and where it's going. I think the concern about a trade war with China is spooking some people. But at this point, I wouldn't say I've seen that ripple all the way through into spending. So, it still feels pretty good. Our Q2, because it ends in August and there are a lot of vacations, etc., I would say I typically have less senior-level discussions in Q2 than I would have in Q1 or Q3. I don't want to overstate my confidence in saying that in the sense that, again, I haven't talked to as many CEOs about their overall thoughts there. Again, it still feels robust. But again, I don't want to overstate given that it's a Q2 ending in August and less time directly out there with customers than I would typically have.

Tom McCallum -- Vice President, Investor Relations

Great. Next question, operator, please.

Operator

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

Heather Bellini -- Goldman Sachs -- Analyst

Great, thank you. I had a question about your comments about RHEL growth. It went from 11% constant currency last quarter to 8% this quarter. You're talking about a reacceleration, but I think the big question is, is that reacceleration you're expecting back to 10% as we normalize the renewal base that you're talking about or is this going to go back to what you used to say, which was kind of the low-teens growth rate. Because I'm just trying to get a sense from when you're talking about reacceleration off of what is a very low base.

James Whitehurst -- President and Chief Executive Officer

Heather, I'll start on that. I think we'll see as we get into next year, bluntly, I do think we'll see it reaccelerate through this year. Exactly where that ends up, it's hard to exactly say. As we get into next year, we have a much larger renewal base. Sans OpenShift continuing its momentum, which I hope it does, I would say it can easily accelerate quite a bit. But we are running into a little bit of a sales capacity issue. The better OpenShift does and the more time we're spending on that, the less time we're selling RHEL.

The demand is clearly there. The market is clearly there. Given the size of the renewal base, I think it'll expand more than that, but I want to be a little bit guarded, just as people are -- there's just so much momentum around OpenShift right now, that it does kind of eat into selling time on RHEL. So clearly, if you look at the overall trends of the move of workloads from Windows to Linux and the overall growth of workloads, it certainly feels like it should accelerate well above 10% and back into the teens.

But, again, our other products can at times start to push that out a little bit, which I think is part of the dynamic that we've seen with the strength in OpenShift affecting RHEL a bit. I know that's a long answer, but we feel really good about the macro trends around Linux and the ability of us to have the bandwidth to pick it all up.

Eric Shander -- Executive Vice President and Chief Financial Officer

Just as a reminder, and we continue to always say this, but Linux is containers. So, even as Jim was articulating the fact that customers are starting to purchase OpenShift, Linux RHEL is embedded into that. We certainly don't break it out. We don't necessarily view it as a bad thing, as OpenShift is continuing to gain momentum and gain traction because by default, they are using RHEL in that product. So, we will just reiterate what we've been saying and that is a good thing.

James Whitehurst -- President and Chief Executive Officer

It is a different way to deliver the operating system. It's not like OpenShift runs on top of RHEL. OpenShift is RHEL. So, that growth is also a good thing. So, how that mix works depends on the relative adoption rate of containers.

Tom McCallum -- Vice President, Investor Relations

Great. Next question, please, operator?

Operator

Our next question comes from Keith Weiss with Morgan Stanley. Please go ahead, your line is open.

Sanjit Singh -- Morgan Stanley -- Analyst

Hi, this is Sanjit Singh for Keith. Thank you for taking the questions. I had two small ones, if I might. First on the 5G cycle. Can you give us an update on how you feel the OpenStack portfolio is positioned for the upcoming 5G cycle? And any comments on timing on where you might start to see large deals come through? That would be helpful. And then secondly, on JBoss and the middleware portfolio. There's a lot of elements within the middleware portfolio. Is the weakness that you're seeing particularly on the application server side? And would you expect the integration of pieces like Fuse to actually see potentially more demand as customers move to things like OpenShift and next-generation application architectures? Thank you.

James Whitehurst -- President and Chief Executive Officer

A couple things there. In terms of the 5G cycle, I'm not an expert in telco, so I don't want to overstate that. We have a lot of work going on with the major telcos around it, so I think OpenStack is very well positioned there. I've also been amazed is probably the wrong word, but really surprised at the amount of traction we're having around containers with those telcos as well. It's not just a matter of the infrastructure, it is the application platform at the edge. If you have a 5G network, you need applications at the edge. That's the differentiator that telcos have.

We have a significant amount of engineering effort working with the telcos on OpenShift as well. The timing of that, again, those deals continue to grow. We had 14 deals with OpenStack over a million dollars, which is up nicely from last year. Not all of those are in telco, though we did have some sizable telco wins and we have I think four significant NFD wins with telcos in the quarter. Again, how fast those things scale, I'll leave that up to the experts to talk about, but we feel really good about where that is.

JBoss, absolutely. This is primarily an EAP-related thing. The other products sit nicely on top of OpenShift's. So, as OpenShift grows, that increases the market for those. We mentioned the over $5 million services deal that is for a bank around our integration products. That includes very little of the integration products until that's up and running, but that's a good example of a bank that's also a big OpenShift user now looking to do significant work with us on the integration side. This is primarily around EAP that we're seeing the moderation that's affecting the overall app-dev and emerging growth.

Tom McCallum -- Vice President, Investor Relations

Great. Next question, please, operator.

Operator

Our next question is from Mark Murphy with J.P. Morgan. Your line is open.

Mark Murphy -- JP Morgan -- Analyst

Thank you. I'm curious at what point do you think the tide would begin to turn on the renewal cycle? I know you mentioned next year it's in better shape. But if we were to try to circle a quarter in our models where the renewal cycle would begin to switch from a headwind to a tailwind, I guess I'm wondering next May, next August? If you can help us with that. Then also, I think you said the competitive loss did not happen until quarter end. But I believe you said it impacted the RHEL growth of 8%. I guess I don't understand if there was daily ratable rev rec and it continued there until quarter end, I guess I'm not understanding then how that impacted the revenue growth. If you could just clarify that. Thank you.

James Whitehurst -- President and Chief Executive Officer

I'll start with the second one. Typically in these large deals, there's been some degree of over-deployment, so there's always some true-up revenue that's in there. Those can actually be more material than you realize. Because we lost it, I didn't get into the details of the flows around that, but there was across the portfolio a couple million dollar, several million dollar impact across that. It was fairly significant in terms of overall revenue. How much of that was around true-up versus the last day wasn't at the end of the quarter, Eric, you may have those details.

Eric Shander -- Executive Vice President and Chief Financial Officer

Yeah, Mark, a lot of it really had to do with the revenue true-up. During this period, the customer was in the process of phasing out their activities and they were in the process of making some decisions. So, had they made the decision to stay with us, there would have certainly been a retroactive adjustment in terms of the revenue and us truing that up, but that was not the case in this situation. So, unfortunately, it what's this competitive loss to a legacy on-prem provider. It certainly was unfortunate. But as Jim said, we're already working some new leads with this customer. But it really had to do with just the way the revenue would've been trued up.

Tom McCallum -- Vice President, Investor Relations

The second part was on when the tide would turn on the number of renewals next year. What quarter.

Eric Shander -- Executive Vice President and Chief Financial Officer

Yeah, so Mark, as we're looking at it, I would tell you the latter part of the first quarter, certainly as we get into the second quarter, you'll start to see the renewals pick up. Now, I say that and as I mentioned previously, one of the things that makes the renewals analysis challenging for all of us is that assumes that customers don't come to us and decide that they want to co-term something early. So certainly if we have a customer that comes in the second half of this year where they have something that's going to renew next year, but if they come to us and say we'd like to do a bigger engagement and we'd like to infuse some OpenShift or OpenStack, etc., we absolutely will do that deal.

That will throw some of this off. There is a fair amount of that as it happens. Certainly the one thing we're not going to do is pull in deals ourselves, but if a customer has a business need and they want to expand their scope with us, we absolutely will entertain those. So, barring any big co-terms happening in the second half of this year, I would say in your models I would assume the latter part of Q1 and then really as you get into Q2 onwards is when you'll see it pick back up.

Tom McCallum -- Vice President, Investor Relations

Thanks, Eric. Thanks, everyone. Can we have the next question, please, operator?

Operator

Yes. The next question is from Alex Zukin with Piper Jaffray. Please go ahead, your line is open.

Taylor Reiners -- Piper Jaffray -- Analyst

Hi, this is Taylor Reiners on for Alex. I was wondering when we think about the renewal base in the back half, I was wondering on what are your thoughts around the cross-selling opportunities that are being impacted? And as your renewal base starts to normalize, how are you handicapping the opportunity for maybe a reacceleration around your emerging offerings, just given a larger renewal base to sell into?

James Whitehurst -- President and Chief Executive Officer

It's a mixed bad. We really like the renewals because that's the time to cross-sell and up-sell, which is really, really nice. But some of the time on that deal that's spent on the renewal, the components around it, where the reason we originally started 2.5 years ago, trying to get people in these 3-year deals is it frees up more time to go sell net new. Now, the net new may not be as efficient to sell, and it may be shorter 1-year deals, but it creates more clarity and focus in our go-to-market organization.

So, hard to say which of those actually weighs out in terms of the emerging. I would say, on balance, if I ask the team they're going to say attach and growing cross-sell, up-sell around the renewal is the more efficient way to see that grow. But, again, it is more sales time spent on that renewal as well than on the new business. There might be a little bit of an impact there in terms of accelerating the other associated with it. But the big impact is those renewals typically grow. We've given you the data on that. So, bigger renewal base does a lot especially to help RHEL growth.

Eric Shander -- Executive Vice President and Chief Financial Officer

We did have, and it was in our prepared remarks, Q2 was over 76% cross-selling, which certainly demonstrates that. But just as a reminder, as we've said, as we're going into this next tranche of smaller customers, and they're not necessarily small customers, but customers that are spending smaller amounts with us, those will typically start out as a RHEL customer and then as we continue to work with them, start expanding beyond that. So, beyond the existing renewal base that we have, part of what we're doing very intentionally is going to that next tier of customers to be able to get certainly and grow an additional set of enterprise customers as we go forward. So, some of this is going to be layering it on, but I think as Jim said, I think there are nice cross-selling opportunities across the board with the existing renewal base that we have.

Tom McCallum -- Vice President, Investor Relations

Great. Next question, operator, please.

Operator

We'll take our next question from Keith Bachman with BMO. Please go ahead.

Keith Bachman -- BMO Capital Markets -- Analyst

Hi, thanks very much. I wanted to dig down a little bit more on JBoss. You've mentioned that you see improved renewal cycle for RHEL. I'm just wondering your thoughts on JBoss as we look out into '19. Part of the context of the question is you mentioned last quarter that some of your competitors were very aggressive on pricing. Do you think JBoss flattens out next year? Improves? Or could there be more competitive pressure? Then the follow-up question on RHEL, you mentioned you had a loss. Implicit in your discussion tonight is that you feel really good about RHEL's opportunities, but the loss was based on, I think on-premise deal of pricing. What makes you convinced that there won't be some more very aggressive pricing by some of your competitors to try to maintain their legacy base? That's it for me. Thank you.

James Whitehurst -- President and Chief Executive Officer

Yeah, I'll start with the second and then I'll go to the first. The last three years, we've talked about the Top 25 renewals of each quarter. That's 300 deals. We've only now lost 2. The one that we lost, we did an even bigger middleware deal with after. When we've lost people in the past, we have typically won them back. It sounds logical to say I can go get a cheaper price for my Linux, but what production customers find is they don't get the quality of software and certainly not support that they get from us.

So, honestly, I don't mind losing one every now and then. If we win them all, then we're probably underpricing. We have a really good track record of winning them back after they've had a chance to experience the other. So, given that and how rare the losses are and how often the losses have come back, and even become reference customers for us. We always want to take competitors seriously, but in terms of over-looking at this one deal, I wouldn't overly focus on that relative to our long-term history of competing with others.

In terms of middleware, you hit on a good point. In the same way that we bid multi-year deals on RHEL, a lot of those deals and stand-alone JBoss deals were multi-year deals three years ago as well. And so there's a lot of renewal on JBoss coming up next year as well. So, again, that'll be a good opportunity for us to continue to expand.

Tom McCallum -- Vice President, Investor Relations

Great. Thank you. Next question, operator, please.

Operator

Our next question is from John DiFucci with Jefferies. Your line is open.

John DiFucci -- Jefferies -- Analyst

Hi, my question is for Jim. Jim, Red Hat's done a really impressive job over the years and I've questioned you a lot, but you've really done it. You dominate the paid Linus market. More recently, you've moved aggressively into new growth markets and you've apparently become very relative in those markets and reading them. And this is asked in a respectful manner, it's really usually not a good sign when a growth business starts to talk about the effect of renewal cycles for reasons of moderating growth. I think a lot of us are just wondering, is there something else happening here in the Linux business? I don't know. I don't know what it could be. People have feared at times that people are going to start in the public cloud, start to use the quote "free versions" or unpaid Linux. Or is there a saturation on-premise? Is there anything else happening here or is it just this sort of renewal cycle?

James Whitehurst -- President and Chief Executive Officer

John, first off, thanks for the compliments. I was beginning to think that somebody was impersonating you. So, I appreciate that. But no, seriously, on the renewal cycle, the reason you're hearing us talk about it is we've always talked about how we get into a customer and our business grows with them. That almost always, that growth happens when we step up at renewal time. For a long time, we were more focused on doing 1-year deals than doing multi-year deals.

And so every year, each of those deals would ratchet up. Well, and I feel like it's the right decision 2.5 years ago, we decided to focus more on doing multi-year deals so we could get the customers locked into a set of technologies on which we could then go work to upsell, which we do. But the problem of that is that after you've been doing that for 2.5 years, you've drained a lot of the swamp of potential renewal, which means a deal we did -- I'm making it up -- last year that had 20% growth, well that growth rolling through revenue this year is zero and the deal we did two years ago that had 20-something-percent growth in it, is rolling through revenue flat this year, and we just don't have as many renewals because these are the people we couldn't get in 3-year deals in the last two years that are up now.

So, yeah, we see good growth and we've talked about since that one competitive loss, we still see solid up-sell and cross-sell in our renewals when they come up. But the renewal is typically the precipitating event to do the up-sell and cross-sell. And while certainly that's not always the case, we have people in multi-year deals and we have multiple other deals with them, but the renewal is that precipitating event and it's a lot lower.

Which if you actually asked our sales team, the amount of net new growth that they have to get this year, they're seeing growth numbers 40% to 50% depending on the region, which given, I don't want to say renewals are automatic. Obviously, we have a very high renewal rate. That amount of new business that they're seeing is like dramatically higher in terms of the new business that they have to go get and they are going and getting, than you're seeing in our revenue or even in our bookings numbers because of just the relatively lower renewal rate.

So, that's why you hear us talking about it. It's not that we're quote/unquote "milking the renewal," it's just we don't have the precipitating events as often as we typically do. Again, that starts to come back next year because we get into the steady state of from three years ago, those renewals coming back around. I don't think it's a change in focus to what we're doing, it's just the sheer math of how much business we have that we can cross-sell and up-sell on.

Eric Shander -- Executive Vice President and Chief Financial Officer

John, it's Eric. I think in addition to what Jim said, if you think about it, when we're out with customers, it's a natural progression if they're already using RHEL to then start to talk about using OpenShift, using OpenStack, etc., because that technology shift makes it a whole lot easier. As Jim said, we don't want to give the impression that we have a certain set of customers that we're just relying on those renewals. We've got thousands of customers and if you think about most of the customer engagements that we have, even looking at the CCSP program, our online program, we're harvesting those opportunities for future growth opportunities.

So, it starts with when a customer is already using RHEL, from a technology perspective, it's a whole lot easier of a conversation since they're already using our OS to then start using OpenShift, especially if they're going to start containerizing their applications. So, it really is more of a technology discussion and why it makes sense. It's not just the fact that we're going back to the same customers, but it really is, as Jim said, a business event that makes it much easier for them to leverage the new technology.

James Whitehurst -- President and Chief Executive Officer

It's also when they want to buy. The idea of saying I'm going to go and buy $500,000 of OpenShift, what kind of discount am I going to get versus us doing an $8 million renewal and I'm throwing this in, what kind of discount do I get? It's a natural way the customers buy as well.

Tom McCallum -- Vice President, Investor Relations

All right. We have time for one more question, please, operator.

Operator

We'll take our last from Brian White with Moness Crespi. Please go ahead, your line is open.

Brian White -- Moness Crespi Hardt & Co. -- Analyst

Jim, it sounds like RHEL has definitely been slowing. Would you say that you've lost market share in the server operating system markets? That's one of my questions. And also, maybe give us an update on core OS? Ancible has been a phenomenal acquisition. Maybe give us an acquisition on Core OS? Thank you.

James Whitehurst -- President and Chief Executive Officer

Sure. No, I certainly don't think that we're losing share. If anything, we continue to gain share from our on-premise competitors. Again, just looking cloud-for-cloud and our relative RHEL growth rates in those clouds versus their overall growth rates, I don't think we're losing share to whether it's Amazon Linux or any of the other Linuxes out there. I don't see a place where we are losing share.

Again, a lot of this you're getting the math of the fact that many of our customers are in three-year engagements that aren't growing. So, you're getting this weighted average thing and we're in the year before the renewals restart. So, no, I don't see us losing share at all. If anything, I see us gaining share. Again, maintaining share on public cloud as public cloud grows is also taking share because that's vast majority Linux versus on-premise, where nearly half the workloads are Windows.

Overall, I feel very, very good about where we stand with Linux and how we're growing. Is there a second part of that? Oh, core OS. Core OS we're really excited about. To be clear, core OS is different than Ancible. Ancible was an additional product that has done extremely well for us. Core OS is a set of features in a container platform that we are integrating into OpenShift.

The core OS team focused on ease of use from the users' perspective. We bring incredible content associated with RHEL and the RHEL ecosystem and how we life cycle those together. It's a phenomenal marriage. We've started to bring some of those technologies into OpenShift in the various dot releases and certainly as we get into OpenShift 4, you'll see I'll say basically the entirety of their core feature set integrated in. We're really excited about it. I think that's one of the reason that we're seeing so much traction with OpenShift today.

Tom McCallum -- Vice President, Investor Relations

Great. Thanks, Jim. Thank you everybody for joining us on the call today. We look forward to speaking to you during the quarter. Thank you. Thanks, operator.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Duration: 58 minutes

Call participants:

Tom McCallum -- Vice President, Investor Relations

James Whitehurst -- President and Chief Executive Officer

Eric Shander -- Executive Vice President and Chief Financial Officer

Walter Pritchard -- Citigroup -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Zane Chrane -- Bernstein & Co. -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Robert Majek -- Raymond James & Associates -- Analyst

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

Dan Bergstrom -- RBC Capital -- Analyst

Heather Bellini -- Goldman Sachs -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Mark Murphy -- JP Morgan -- Analyst

Taylor Reiners -- Piper Jaffray -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

John DiFucci -- Jefferies -- Analyst

Brian White -- Moness Crespi Hardt & Co. -- Analyst

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