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Pivotal Software, Inc. Class A (NYSE:PVTL)
Q4 2019 Earnings Conference Call
March 14, 2019 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to Pivotal's fourth-quarter and full-fiscal 2019 earnings conference call. [Operator instructions] Thank you.

Helyn Corcos, vice president of investor relations, you may begin the conference.

Helyn Corcos -- Vice President of Investor Relations

Thank you, Chris. Good afternoon, and welcome to Pivotal's fourth-quarter and fiscal 2019 earnings call. We will be discussing the results and guidance reported in our press release, which is available on our investor relations website. This call is being webcast, and a replay will be available on our website.

Also available on the website are our prepared remarks, supplemental tables and an updated investor presentation. With me today are Rob Mee, our CEO; and Cynthia Gaylor, our CFO. During the call, we will make forward-looking statements such as our guidance for the first-quarter and full fiscal-year 2020 related to our business. These statements are based on our current expectations and information available as of today and are subject to a variety of risks, uncertainties and assumptions.

Actual results may differ materially as a result of various risk factors that have been described in our periodic filings with the SEC. As a result, we caution you against placing undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information or future events, except as required by law. In addition, during today's call, unless otherwise stated, references to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables.

With that, let me hand it over to Rob.

Rob Mee -- Chief Executive Officer

Thank you, Helyn, and thanks everyone for joining our call today. I'm pleased to report that Pivotal delivered a strong fourth quarter, wrapping up a successful initial year as a public company. To summarize our fiscal-year results, subscription revenue grew 55%, and total revenue grew 29% year over year. Our total revenue growth was higher in fiscal 2019 than the prior year, attributable to increasing workloads on our software platform, as you know, digital transformation is a high priority for companies across every industry and geography, topping virtually every CIO priority survey.

But digital transformation isn't merely about modernizing an organization's technology. Modernizing an organization's culture is equally important and challenging. The two combined create a huge opportunity for Pivotal. Our best-in-class software and services help organizations compete and grow by giving enterprises the technology they need to build and operate applications of scale securely on any cloud, whether it is public or private; and help them foster cultures that are optimized for speed, efficiency and productivity.

Our unique combination of products and services are driving more and more organizations to work with us and inspiring existing customers to invest more in our software. We're still in the early stages of this high-growth market. To capitalize on this opportunity, we will continue to fuel innovation by investing in R&D and, at the same time, continue our relentless focus on satisfying customers as they move more mission-critical applications to the platform. The workload expansion growth is exemplified through our industry-leading net expansion rate of 149%.

I'd like to share a few metrics that underscore the success we saw during fiscal '19 and highlight momentum we're building across numerous industries like financial services, retailers, government agencies, healthcare and transportation. We closed an impressive number of deals during the year, including more than 55 software deals above $1 million and another 15 deals over $10 million. We landed 58 net new logos, up 32% year over year, bringing our total customer count to 377. We added new Fortune 500 customers across a variety of industries and continue to penetrate the Global 2000.

Approximately 33% of the Fortune 100 use our platform, and we expect to see continued growth in these very large accounts as they seek to modernize the applications that run their businesses. And within the Fortune 500, we count 15 financial services companies as our customers, 14 insurers, 11 healthcare companies, nine transportation companies and 13 retailers. In Q4, customers included British Telecom, CUNA Mutual Group, CBS Health, HSBC, Manulife and Prime Therapeutics, among others in the financial services, insurance, retail and transportation sectors. I'd like to share two of our notable customer stories with you to underscore the business outcomes customers are experiencing on the platform.

First, CBS Health, a healthcare innovation company. The company's strategy is to transform the healthcare experience. CBS Health is leveraging Pivotal Cloud Foundry as an enabling capability in their technology and innovation agenda and partnering with Pivotal Labs as they focus on agility and new models of using technology to drive business outcomes. Second, one of the world's largest financial institutions is in the process of modernizing its culture, along with its applications, to provide better client and employee experiences and has gone all in on Pivotal because of our industry-leading platform and services.

We're excited to work closely with these companies to modernize their applications, migrate them to the cloud and teach their teams how to develop and deploy software faster. In fiscal 2019, we made significant progress against our vision of offering a single platform for all types of software application workloads on any cloud. There are two key themes from the year I would like to highlight. First, security.

2018 set a record for security vulnerabilities with over 16,000 cataloged, underscoring the severity of the patch management problem. Fortunately for our customers, PCF is an automated platform, secure by default. We've changed the way our customers think about patch management and vulnerability remediation. As we've seen in many of the recent high-profile incidents, breaches have started with an attack against a known vulnerability that has gone unpatched.

With PCF, our customers are able to quickly and easily deploy patches to reduce their exposure to known vulnerabilities. Second, Kubernetes. February marks the one-year anniversary of Pivotal Container Service, and we're very pleased with the current state of the product. Over the course of the year, we've delivered 27 releases and built the most comprehensive Kubernetes offering in the market.

It is now generally available for use on the three major public cloud providers and is fully integrated with VMware's private cloud. I'm excited to share that we now have over 100 customers using PKS and continue to be encouraged with the growing pipeline and traction we're seeing. While enterprises face a complex technology landscape, our unique combination of software and services remains the best solution for organizations to succeed at digital transformation. Our strategic services deliver value to our customers faster, which we know improves customer success and drives additional workloads to PCFs.

This year, we will continue to focus on improving sales execution. We are enhancing our enablement programs and growing technical sales teams to elevate our positioning among prospective customers. We are also expanding our sales coverage across North America and Europe, with particular focus on the government sector. In fiscal '20, we will continue to partner closely with VMware to expand PKS adoption among customers and prospects.

We're adding a dedicated team of sales and technical resources to work closely with the VMware organization that is selling where we don't have direct coverage. We're pleased with the early traction in PKS deals during the first year of availability and continue to be encouraged by the growing pipeline. While the majority of PKS sales are from existing customers, we're continuing to see new customer interest from both VMware and Pivotal salesforces. During the year, we made significant progress in expanding our partner ecosystem.

We ended the year with 190 systems integrators and 135 independent software vendors. A number of our SI partners, including NTT DATA, Wipro, DXC and Fujitsu, invested significantly in creating global Pivotal practices powered by our platform and enablement services. We also initiated an expert network of systems integrators to help enterprises adopt Kubernetes faster and drive application-oriented outcomes. Partners including ACL and Solstice are setting up demo labs and developing customer solutions with PKS.

In Q4, Proficient elevated Pivotal to enterprise partner status, a designation for their largest and strongest partnerships. And excitement is growing around our partnership with Confluent as Kafka is becoming a key component of the cloud-native application architecture. We're excited to keynote the 2019 Kafka Summit in April. IFC offerings are integrated with our platform, enabling enterprises to quickly realize additional benefits.

We are seeing accelerating interest and integration with PKS as more products are being built for containers and designed to run on Kubernetes. We're working with existing partners such as Confluent, MongoDB, New Relic and Redis Labs to add support for PKS. And we're aligning with VMware on further expansion of the ecosystem to include business applications and commercial off-the-shelf software products. In summary, we are enthusiastic about the market opportunity and positioning and are confident our best-in-class technology and services will continue to drive strong growth through fiscal '20.

Our ongoing investments in sales and marketing, research and development and partnerships are focused on what has become a key priority for nearly every enterprise: to modernize their software development. We will continue to drive customer expansions, as well as grow share by winning new customers. With that, let me turn the call over to Cynthia to discuss our financial results and guidance for next year in more detail.

Cynthia Gaylor -- Chief Financial Officer

Thanks, Rob, and good afternoon everyone. Our fourth quarter capped a strong year as we continue to attract new customer and as many of our existing customers grow their investments with us. Subscription revenue generated $112.5 million in Q4, more than $100 million for the second quarter in a row, with year-over-year subscription growth at 50%. Q4 total revenue of $169.2 million represented growth of 27% year over year.

And we finished our fiscal year with total revenue of $657.5 million, up 29% compared to fiscal 2018. Our subscription customer base grew 18% year over year to finish the quarter with a total of 377 subscription customers. We added nine net new customers in the quarter, bringing total new customer adds to 58 in fiscal-year '19, up 32%, compared to 44% in fiscal 2018. We also continue to see healthy expansion from existing customers.

Our dollar-based net expansion rate was 149%. This is the 10th consecutive quarter above 145%. As we've noted, although our net expansion rate remains at industry-leading levels, we expect the percentage to come down gradually over time. Our subscription performance in Q4 was driven primarily by customer expansions as customers increase the number of workloads they are running on PCS and expanded their consumption of our software.

Subscription revenue of $112.5 million represented 66% of total revenues, compared to 56% a year ago and continues to be the primary driver behind our top-line growth, shift in revenue mix and margin improvement. Subscription revenue for the year grew 55% to $400.9 million, representing 61% of total revenue, compared to 51% in fiscal 2018. In Q4, service revenue declined 3% year over year to $56.7 million and represented 34% of total revenue, compared to 44% a year ago. Services revenue came in slightly lighter than we were expecting as some services projects pushed out due to Q4 holidays.

For the year, services grew 2% to $256.6 million, representing 39% of total revenue, compared to 49% in fiscal 2018. Services are strategic for us in driving subscription growth. Customers who use Labs continue to grow their subscription footprint at a rate that is 1.5 times greater than customers who do not use Labs. Our focus is on delivering the right level of services to grow subscriptions and to make customers successful on our platform as we continue to build virtual capacity with our SI partners.

Total gross margin rose to 68% for Q4 and improved an impressive nine points year over year, primarily as a result of our top-line subscription revenue growth, which continued to drive mix shift toward subscription revenue subscription. Subscription gross margin was 93%, and services gross margin with 17%. We are very pleased with the level of margin expansion we achieved during the year. Turning to operating expenses.

Sales and marketing expenses were $69.3 million, or 41% of total revenue in Q4. We will continue to invest in enablement to deepen our relationships with existing customers and in technical sales, with a focus on delivering more value to new customers faster. These investments are critical to help customers succeed in this dynamic and changing market. R&D expense was $47.4 million in the quarter, or 28% of total revenue.

We expect ongoing investments in R&D to enhance our cloud-native products and platform differentiation. G&A was $19 million, or 11% of total revenue. Operating loss for the quarter was $20.8 million, with an operating margin loss of 12%, improving 13 points from Q4 of last year. Operating loss for the year improved 45% to $71.3 three million, with an operating margin loss of 11%, increasing 14 points from fiscal 2018.

We are encouraged by the overall operating leverage we are seeing in comparison to the prior year even as we invest strategically to drive customer usage and workload expansion. However, as we continue to invest in product innovation and field sales, we expect variability in margin before we reach sustainable breakeven. Net loss per share was $0.07, compared to a loss of $0.12 per share in Q4 of last year. For the fiscal year, net loss per share was $0.28, compared to a loss of $0.57 per share.

Now turning to the balance sheet and cash flow items. We exited Q4 with $702 million in cash and cash equivalents, up $629 million year over year, primarily due to proceeds from our IPO. Cash flow from operations was $8 million in Q4 and negative $5.4 million for our fiscal 2019. As a reminder, our operating cash flow has meaningful variability from quarter to quarter due to the seasonality of our business, timing associated with our billing cycle and working capital-related items.

Now turning to RPO. We finished the quarter with $990 million of RPO, up 21% year over year. We expect approximately 50% of these obligations to be delivered in the next 12 months. Our ending RPO of $820 million for fiscal '18 provided approximately 60% total revenue coverage for fiscal '19.

And based on our total revenue guidance for fiscal '20, we have a similar level of coverage this year. As we've noted, RPO will have some variability quarter to quarter based on contract duration and the timing of renewals with a significant uptick in Q4. In Q1 '20, we expect year-over-year RPO growth in the mid teens. Short-term deferred revenue was $377 million, up 40% year over year; and total deferred revenue was $466.6 million, up 47% year over year.

Looking ahead to Q1, we expect short-term and total deferred revenue to decline sequentially from Q4. We expect year-over-year growth in Q1 for short-term deferred in the mid to high 30% range, and for total deferred in the high 20% range. We expect year-over-year growth for the full year for short-term deferred in the mid 20% range, and for total deferred in the high teens range. As a reminder, Q1 of last year was strong for deferred revenue because we had favorability due to early renewals, timing of deals and prepayments, which make Q1 a more difficult compare.

These factors may impact deferred revenue in any given quarter. We encourage investors to look at trailing 12-month growth rates for these balance sheet metrics in order to smooth out the quarter-to-quarter variability. I will conclude by providing guidance for the first quarter of fiscal '20 and for the full fiscal year. Please note that we are providing year-over-year growth rates based on the midpoint of the guidance range compared to Q1, or to fiscal-year '19.

For the first quarter, we expect subscription revenue between $124.5 million and $125.5 million, representing growth of approximately 39%; Total revenue between $183 million and $185 million, representing growth of 18%; operating loss between $13.5 million and $12.5 million, representing improvement of 38%; and net loss per share of $0.06 to $0.05 based on weighted average shares outstanding of approximately 267 million. We estimate the fiscal year as follows: subscription revenue between $242 million and $247 million, representing growth of approximately 36%; total revenue to be in the range of $798 million and $806 million, representing growth of 22%; operating loss between $38 million and $36 million, representing improvement at 48%; and net loss per share of $0.15 to $0.13 based on weighted average shares outstanding of approximately $272 million. I would also like to share some assumptions that we have built into our guidance. I'm pleased to confirm that we will continue to be on track to reach breakeven profitability eight to 10 quarters from the time we went public, which would be during the first half of our fiscal '21.

With regards to revenue, we expect mix to continue shifting toward subscription. We expect services revenue for the year to be relatively flat to last year as we enable existing customers to be self-sufficient, leverage our SI partners and as maintenance revenue associated with legacy products continues to decline. And we expect services gross margin to be in the low 20% range for the year. As a reminder, our fiscal-year end is January 31st this year and with February 1st in fiscal '19.

The metrics on our balance sheet may be impacted by invoice timing and start dates within and between quarters. In closing, we will continue to drive top-line growth and operating leverage across the company. We are still in the early stages of executing against our long-term vision in this high-growth market, and I look forward to updating you on our progress throughout the year. With that, I'll turn it back to the operator to take your questions. 

Questions and Answers:

Operator

[Operator instructions] Your first question is from Brad Zelnick with Credit Suisse. Your line is open.

Kev Ma -- Credit Suisse -- Analyst

Hi, it's Kev Ma on for Brad, thanks for taking the question. Cynthia, it's good to see you transition more professional services work to partners, but you mentioned guidance implies flat growth next year and deceleration from this year. How should we think about the upside/downside risks to what you've baked into your 2020 outlook? And what are the major variables that might cause it to be higher or lower?

Cynthia Gaylor -- Chief Financial Officer

That's a great question. Thanks for the question. I would say in general, our guidance is pretty consistent, and each quarter reflects our expectations for this point in time in the year. So we think it's it's reasonable.

Clearly, there's some upside and downside in the guidance, but what we're putting out is what we think is reasonable for the year.

Kev Ma -- Credit Suisse -- Analyst

Got it, OK. And Rob, one for you. We hear more and more about the governance and security challenges associated with modern microservices architecture and containers. How should we think about the role of any of that Pivotal expects to play in security, which seems to be increasingly the responsibility of developers?

Rob Mee -- Chief Executive Officer

Yes. I mean, I think you know I mentioned that the platform is secure by default so it is probably worthwhile explaining what that means and what an important role that plays. We spent a lot of time and effort to make our product work in such a way that it meets the default, by default the setups that important industry-standard benchmarks require. So for example, we've collaborated with our partner, Canonical, to create the Security Technical Implementation Guideline, or STIG, for Ubuntu Linux.

And the embedded operating system that we deliver as part of PCF is preconfigured to those standards. And we've built PCF in such a way that we can update platform components or even parts of the application runtime without impacting application availability. And we did this because we observed that one of the biggest blockers to customers regularly patching was that it often required downtime in a maintenance window. As a result of that approach, our customers typically have much higher patch compliance rates for their applications running on PCF, as well as having considerably lower human effort to go along with that.

Kev Ma -- Credit Suisse -- Analyst

OK, appreciate the call. Thank you.

Operator

Your next question is from Sanjit Singh with Morgan Stanley.

Sanjit Singh -- Morgan Stanley -- Analyst

Hi, and thank you for taking the question. Congrats to the team on a very strong Q4. Maybe, Rob, we could start with you. I wanted to get your latest thoughts on how the salesforce and the Pivotal team is going out to their customers and sort of advising them between the sort of Pivotal Application Service decision versus Pivotal -- versus PKS.

How our customers sort of deciding between the two platforms? And what do you think is going to be -- which of the platforms you're seeing the most momentum from your perspective?

Rob Mee -- Chief Executive Officer

I think that they're both seeing a lot of momentum. As we mentioned, we tend to have a very strong expansion rate. And I think that applies both to PAS, as well as PKS. Now that we're partnering with VM, we're seeing a lot of momentum to getting new customers that are very interested in PKS and that pipeline growing in segments that we haven't traditionally gone into before.

With respect to how they decide what workloads go on what platform and how we advise them on that, for applications that are under fairly heavy development or modification, the productivity gains that you're going to get with PAS are just world-beating. That's, we think, the most efficient way to develop applications that we've seen. But not all workloads are under heavy development, and some are not appropriate for PAS. And we find a lot of those workloads run really well on PKS.

And so we try to do a holistic evaluation and assessment with our customers of their application portfolio and help them figure out where they're going to get the most advantage and the most savings and ROI from the different abstractions on the platform.

Sanjit Singh -- Morgan Stanley -- Analyst

Got it, that was very helpful. And then, Cynthia, maybe for you. If I look at fiscal-year '19 from a short-term billings perspective, looking at the full year, it looks like you've accelerated billings in fiscal-year '19. And then obviously on the RPO, that came down.

I was just wondering if you could walk us through the factors to consider in terms of the RPO growth in terms of contract duration or sizes of renewal base. I need you to put those two metrics in context. That would be very helpful. Thank you.

Cynthia Gaylor -- Chief Financial Officer

Sure. Thanks for the question. So I think we see a significant opportunity for both winning new customers, as well as expanding with our current base of customers. And I think PKS is a really good example of that as we introduce new abstractions on to the platform.

I think when you're looking at the balance sheet items, you need to remember we do have seasonality in our business. And so things like early renewals, timing of deals and prepayments impact; things like deferred revenue, both short term and long term, which fill in kind of some of the calculated billings that a variety of folks do, I think we've talked about RPO and how RPO helps smooth out that variability, and we look at RPO from a revenue-coverage perspective in terms of how much future revenue are recovering with that number. And we are comfortable with kind of the strength of the RPO that we've reported in Q4 and how that's growing relative to what we're seeing in the market and in our pipeline. The other thing is when you look at the balance sheet metrics, I also encourage you, continue to encourage you, to look at the trailing 12-month type of metrics because that will smooth out the variability in any one quarter.

Sanjit Singh -- Morgan Stanley -- Analyst

If I could just follow up really quickly on the RPO metric in the 21% year-over-year growth, to what extent was shorter duration and impact on RPO work for the full year?

Cynthia Gaylor -- Chief Financial Officer

Yes, so we're not seeing a big difference in the duration of our contracts. However, we have talked about, as federal becomes a bigger percent of the business, that could impact RPO over time. Our average duration has been pretty consistent in the two to three-year timeframe. The other thing I would just remind you is our IPO also includes services.

There is some services in the RPO number. And so I would encourage you to think about that number holistically, and that's why we look at it as kind of an all-encompassing number on revenue coverage versus just looking at it from a subscription perspective.

Sanjit Singh -- Morgan Stanley -- Analyst

Got it. Thank you very much, Cynthia.

Cynthia Gaylor -- Chief Financial Officer

Sure.

Operator

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

Caroline Lu -- Goldman Sachs -- Analyst

Hi, this is actually Caroline Lu on for Heather. Thanks again for the color on PKS. Just curious, can you give us any examples of the types of workloads you're seeing, being containerized on PKS? What kinds of customers are you seeing particular uptake from? Anything from verticals that you can point out?

Rob Mee -- Chief Executive Officer

Sure. We had one really good example in T-Mobile, which was a really significant PKS customer, one of our biggest customers today. And they were a very early user of PKS in production. They actually have multiple mission-critical applications in production.

And from the update that we did in December where they were doing a million transactions a day on PKS, they're now doing over 10 million transactions a day running through PKS. So those are customer-facing consumer applications that are running on PKS.

Caroline Lu -- Goldman Sachs -- Analyst

Got it. And any update on PFS when it will be generally available? And I guesscan you talk a little bit about the Knative project that you're working on with Google and how that leverages the increasing interest in Kubernetes?

Rob Mee -- Chief Executive Officer

Yes, PFS is built from a number of open source projects, including Knative and Istio, which are relatively early in the maturity cycle. So we expect PFS to be available GA by the end of the year. We're working, continue to work closely with Google on Knative, and we've contributed a lot, I think, in the thought leadership and the work that our team did early on with their serverless offering called riff and helping to coordinate that open source technology with Knative and contribute to Knative. So we've done a lot there.

There's a lot happening and a lot of interest here. As you know, Knative running on top of Kubernetes. But it is still early days for all of these, and these open source projects take time to mature.

Caroline Lu -- Goldman Sachs -- Analyst

Great, thank you.

Operator

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

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey guys, thanks for taking my questions. Cynthia, maybe for you. I wanted to ask a follow up on your services expectation. Given the customers that use Labs tend to expand a lot faster, in your prepared remarks you noted that you plan to enable existing customers to become more self-sufficient and also leverage SI partners.

I'm wondering though, if you were to include the impact of SI services revenue growth expectation, how fast might your overall services ecosystem grow versus sort of your expectations of the internal business being flat? And I guess secondarily, should you be investing even more in Labs kind of given the leading indicator for expansion?

Cynthia Gaylor -- Chief Financial Officer

Thanks for the question, Matt. Yes, I mean we are investing, and we'll continue to invest in services, and particularly, Labs. I think the key piece on services is to remember that we're delivering the level of services that our customers need to be successful on the platform. And then we are at kind of scale from a services perspective, and so we're really using partners to grow virtual capacity.

And we've seen quite a bit of our partners reporting significant growth of their Pivotal-focused businesses and publicly reporting that. So we're really encouraged by kind of, in some way, that virtual capacity that's building and the success our partners are seeing, which we think is really goodness for our subscriptions because it helps customers be more successful, consume more on the platform and then expand their footprint over time. So that is the strategy. But we will continue to invest in services.

It's just that we want to scale services through partners over time.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. And then I had a question on the federal business and kind of the pipeline. I know there was news that there may have been a large Air Force deal. And I appreciate you probably can't talk about too many specifics on that particular deal, but I'm wondering if you could help us with sort of the momentum in the federal space and how large deals potentially have a ripple impact with, be it the DoD or the broader U.S.

federal government for just more adoption.

Rob Mee -- Chief Executive Officer

Yes, we're super proud of the work that we've done with the Air Force Kessel Run project. And they're getting applications into production faster than they've ever done in history and saving all kinds of money in time from the work that we've done with them and building their own capability, which is great. What we're seeing with that is that it's opening the door to working with other large projects and other divisions in the Air Force already. And we have started several projects that are separate from from the initial Kessel Run projects.

And we're seeing both new work and introductions into other efforts, other agencies in the defense department and in the intelligence community as a result of the Air Force work. So it's definitely an area of excitement and potential very high growth for us.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. Thanks, Rob. And congrats on the subscription results here. Great, great quarter.

Rob Mee -- Chief Executive Officer

Thank you.

Operator

Your next question is from Jack Andrews with Needham. Your line is open.

Jack Andrews -- Needham and Company -- Analyst

Good afternoon. Thanks for taking my question. I want to focus in on your new customer adds and the activity around that. Could you update us in terms of who you're typically speaking to in potential new customers these days? I'm just wondering if you're engaging more with C-level executives or the chief digital officers who see more popular.

Or is this still, at its core, still an IT sale?

Rob Mee -- Chief Executive Officer

Really good question. I mean, I think you've hit at the core of the complexity of our sale, right, which is our most successful campaigns actually work with four buyers. There's the executive, usually the CIO; there's a head of application development or someone who owns a portfolio, a head of a line of business for example; we've got the CSO or the head of application security and compliance; then finally, we've got the head of infrastructure and operations. And if we get all four of those folks aligned, then we can make a really strategic sale.

And all of those different areas have input into it because the platform is focused on developer productivity. But it also provides huge ROI in terms of operations. So to get the really strategic deals we need, we need all of those folks kind of talking together and working with us.

Jack Andrews -- Needham and Company -- Analyst

Great, appreciate that. And then if I could just ask a follow-up question regarding your comments on your sales approach. It seems like there's an increased focus on the government specifically. I was wondering, does this portend to perhaps more of a vertical sales approach beyond that, focused on particular industries?

Rob Mee -- Chief Executive Officer

I don't think so. We're not really taking a vertical approach. Federal is somewhat different than other industries. Requires a different focus on compliance and a different focus on contracting and so forth.

So we have expertise that we're developing there. I don't think it portends a focus to vertical selling. We tend not to define that that's going to be working for us.

Jack Andrews -- Needham and Company -- Analyst

Understood. Thanks for taking my questions.

Operator

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

Steve Enders -- KeyBanc Capital Markets -- Analyst

Hi, this is Steve Enders on for Alex. Thank you for taking my question. I was wondering if you've seen any change in the marketplace since the Red Hat and IBM deal was announced about six months ago now?

Rob Mee -- Chief Executive Officer

I think, as with any change in the marketplace, I would just address that the Red Hat/IBM combination and what our customers are reacting, how our customers are reacting to that. And the reactions are confirming what we've said before, which is that it's a net positive for us. And I think also, the move underscores the importance of multicloud and definitely reinforces our position in the marketplace overall. But it kind of is a reinforcement of the noise and the complexity in the market.

You've got public clouds coming on prem, you've got these various combinations going on. Technology is moving very quickly, and I think for us, we want to stay best positioned to help organizations sift through the noise and manage all of that complexity. And with PCF, that is designed to take all of that complexity and allow developers to focus on writing great software on sort of a unified, consistent API. And PCF is built for the multicloud world so our customers can run their applications anywhere.

OK, that's helpful. And maybe four Cynthia, I was kind of wondering if there's any change in expectations for billings linearity for this next year or if any large deals were pulled into Q4 that might have otherwise would have been in Q1?

Cynthia Gaylor -- Chief Financial Officer

Yes. So I think in the prepared remarks, we gave some ranges for Q1 and for the year, so I think that will help kind of give you a sense of what type of growth we're looking to see year on year from a deferred perspective, as well as for an RPO perspective for Q1. And so I think we continue, as I said earlier, we are seasonal particularly on the balance sheet, and so would encourage you on the balance sheet items to look at kind of trailing 12 months to kind of draw the trend lines. The other thing I would say is when we think about the health of the business and the key indicators, we're really thinking about subscription revenue growth and the net expansion rate, as well as RPO.

And those are the metrics that we track most closely internally to really indicate the health of the business and and the growth profile.

Steve Enders -- KeyBanc Capital Markets -- Analyst

Great. Thanks for the questions.

Operator

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

Bhavan Suri -- William Blair -- Analyst

Thank you [Inaudible] I'm sorry, I'm just on the road.

Cynthia Gaylor -- Chief Financial Officer

We can hear you, ready when you are.

Bhavan Suri -- William Blair -- Analyst

Oh great, thanks. Thank you. Nice job there, guys, in the quarter. I guess I wanted to touch a little bit on the services part of the business.

I guess as you offload more to services and you think about that transition, which obviously there's pros and cons, but if we say optimally giving service revenue to partners is great, does that elongate sales cycle? Just to understand what that does to sort of the sales cycle and the process of actually getting a customer adopt a platform, vis-a-vis change management, the services guys taking their time sort of doing that, does that elongate sort of the time we get subscription revenue?

Rob Mee -- Chief Executive Officer

I think that's a really good question. There's kind of a subtlety to the answer, which is that when we engage with customers, we try to sell our services immediately so that we can make sure that customers successfully install and operate the platform and get initial workloads on very quickly. We find that if they get the platform operational and application in production on the platform very quickly, then they tend to expand rapidly. And as that expansion takes place, we can hand off to our SI partners, and that allows us to detach.

And that's when Cynthia said we try to provide the right level of services. It's kind of early and often with transition to other customers. And if you look at it that way, that tends to shorten the sales cycle and make make expansions happen more quickly. Does that makes sense?

Bhavan Suri -- William Blair -- Analyst

It does, I guess. But the real question is this, as you offload to partners, say Proficient, and they start selling whatever, PCF, PKS, whatever they're selling, I guess is the next step of expansion, is the next piece longer? I have a quick follow up, but I guess what I'm trying to get to is this: is the duration of the sales cycle getting longer for the expansion or for the, hey, here's the next project, or we put a website on Pivotal but the database and the underlying infrastructure is still on premise. We'll move it over, and that's the services feel that Proficient or Mphasis or [Inaudible] are going to do. And is that going to take longer? I'm trying to sort of understand, is there initial uptake then a slow down and there'll be a bigger uptake in subscription six, nine, 12 months down the road.

Cynthia Gaylor -- Chief Financial Officer

Sure, yes. And maybe let me take a shot at kind of clarifying. So Proficient is not selling the software. So they're not selling PCF or PAS or PKS.

Pivotal is selling that directly, right? And then where we would bring in a Proficient, as Rob was saying, usually if it's initial sale, a new customer, and we're doing kind of that initial implementation or what we call a dojo, Pivotal would provide that service. And then to the extent that customer over time is looking to migrate more workloads onto the platform and they've gotten spun up in our way of working, we would then pair with a Proficient. And it's usually a gradual process. So even in the first dojo, they may come in and pair with us and then become more of the primary provider of the service as time goes on, and then they help scale Pivotal and our subscriptions, like help them consume on the platform as Pivotal services we extract ourselves.

But they may continue and stay. Because again, our strategy is really to enable the customer. And to the extent they need more services over time, that's where kind of the virtual capacity really builds outside of Pivotal. But just to be clear, from a subscription sales cycle, the SI partners are really helping accelerate consumption of the software and expansions versus the sales cycle of selling, like the initial subscription upfront.

That's all being done by Pivotal. And then when the expansion happens, Pivotal is selling the subscription, not the SI partner.

Bhavan Suri -- William Blair -- Analyst

Got you, got you, that's great. Thanks for the clarity. And then just a follow up on sales quota. I guess when you think about attainment rates and you're adding a decent amount of headcount and you have the VMware guys and other partners helping in, just want to understand what are attainment rates? And then as you think about headcount additions for fiscal '20, love to think about what that means from a direct perspective, vis-a-vis I got a bunch of guys I'm going to help with partners, so from an indirect perspective, not guys we're selling indirectly but managing the partner channels.

Just trying to understand what that growth in spend or headcount might look like. Thank you.

Cynthia Gaylor -- Chief Financial Officer

Sure. So I mean, sales and marketing continues to be a big investment area for us. Most of our subscriptions, the vast majority, are done by the direct salesforce. So we are encouraged by the traction we're seeing in the broader family of companies, including Dell and VMware.

But we still have kind of, because of the strategic sale and the strategic touch points that Rob went through, it still is very much a direct focus. So we'll continue to invest there. We don't talk about kind of attainment or productivity metrics directly, but we are investing a lot in training, enablement, technical sales, ramping the teams and hiring new people. So those are all investment areas for us.

Bhavan Suri -- William Blair -- Analyst

Great, thank you for taking my questions, and really nice job in the quarter. Thank you.

Rob Mee -- Chief Executive Officer

Thank you.

Operator

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

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

Hi, thanks for taking my questions. Cynthia, I just wanted to clarify. Long-term deferred revenue picked up significantly quarter over quarter and year over year. Was there elongation of contract terms going on?

Cynthia Gaylor -- Chief Financial Officer

No, I think what you're seeing is Q4 is a big expansion period for us, right, because of the seasonal nature of our business. And so I think that's what you're seeing. There's no specific anomalies to point out there.

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

OK. And I know you did not guide to RPO growth rate for the year, but relative to the short-term DR and total DR guide and easier comps versus fiscal-year '19, how should we think about RPO for the year?

Cynthia Gaylor -- Chief Financial Officer

Yes, so at this point, I mean, we're not in a position to guide to RPO, but we are really pleased with the RPO. It's almost $1 billion of RPO that we reported in Q4 that provides significant revenue coverage for the year. And so I think demonstrates the visibility that we have into our business and the health of our business. And so I'm not in a position at this point to comment further on the year there.

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

Got it. Thank you for sharing the 55 customers more than $1 million and the 15 more than $10 million. Is it possible to get those metrics for fiscal-year '18 so we can see the trend here?

Cynthia Gaylor -- Chief Financial Officer

At this point, we did on this call provide some metrics because it's our first fiscal year as a public company and it's the year end kind of launching into the new year. So we did want to provide some additional color across all the metrics, and that's one of them. I think we also provided more color around some of the balance sheet items. I would say that I wouldn't anticipate doing that on a quarterly basis.

But again, we wanted to kind of kick off the year giving you some more insight and color into the health of our business. And so hopefully, you'll find that helpful.

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

Thank you, and quick question for Rob. Rob, fiscal-year '20, when you look at the sales organization, is the focus on new logos or expansions or both? And how do you balance that versus fiscal-year '19?

Rob Mee -- Chief Executive Officer

Yes, I mean, I think, again, it's a balance. Definitely, we'd like to see increases in the new logos. We have a great expansion rate, and we want to continue with that. So getting the incentives for the sales field just right on that is always a work in progress.

We are feeling pretty optimistic about the pipelines that we're seeing from VMware and also for the lift that we're getting from Dell Technologies in terms of getting us new customers. So that's good as well.

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

Thank you.

Operator

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

David Rainville -- Barclays -- Analyst

Hi, Rob; hi, Cynthia. This is actually David Rainville on for Raimo today. Thanks for taking our question and well done on the quarter again. So two questions.

Maybe just if we start, when we think about PKS and Kubernetes distributions going forward, how does your conversations with customers, and especially through the VMware channel, are going when VMware acquired Heptio? I'm just trying to understand what are the differentiating points that would get a VMware PKS customer to go PKS versus Heptio.

Rob Mee -- Chief Executive Officer

So a really interesting question, and obviously all these things coming together is complex. And definitely, customers have questions on that. But it's a really nice combination to have Heptio in VMware. They really bring a lot of credibility as the originators of Kubernetes, as well as a lot of open source contributors.

Another thing that they bring there is their curated open source distribution, which actually forms the underpinning for PKS now as well. So those are combined. We think that PKS has the best enterprise Kubernetes offering. Includes all the technology that we've developed over the years that led to the success of PAS.

And so that as an enterprise offering is probably the strongest in the market. The fact that it is now based on what we call Essential PKS, which is the Heptio offering, means we have consistency across those. Some customers want to have that ability to sort of use component building blocks that they get from the raw open source distribution. And that's important to them to do that.

And they might use Essential PKS.

David Rainville -- Barclays -- Analyst

OK, that makes sense. And maybe just a follow up on the competitive landscape. You mentioned that 33% of the Fortune 100 is using PCS. When we think of the remaining 67 companies out there in the Fortune 100, how much of that is a greenfield opportunity for you? Just companies that are not modernizing their landscape yet versus them just using a competitive offering of yours?

Rob Mee -- Chief Executive Officer

Yes, I think there are some industry segments and some customers that are not modernizing as fast as others. But the reality is that mostly, across verticals and across all major companies, they're realizing the need to lean into software development itself and to modernize their methods and their technologies. So I think pretty much all of those are opportunities for us. And a lot of them are using older technologies or they're using alternative technologies, competitive technologies.

But they're all potential customers for us. So while we're working with 33%, we think the other, as you say, the other 67 represents a big opportunity.

David Rainville -- Barclays -- Analyst

Makes sense. Congrats on the quarter and thanks again.

Rob Mee -- Chief Executive Officer

Thank you.

Helyn Corcos -- Vice President of Investor Relations

We have time for one last question.

Operator

Our last question comes from Rakesh Kumar with UBS. Your line is open.

Rakesh Kumar -- UBS -- Analyst

Hi, thanks for taking our question. You talked about 100 customers on PKS. How are the initial ASPs tracking? And any revenue expectations that are embedded in guidance for this year?

Rob Mee -- Chief Executive Officer

I'm sorry, that cut out a little bit. Could you repeat that please?

Rakesh Kumar -- UBS -- Analyst

On PKS, how are the initial ASPs tracking? And are there any expectations that are embedded in the guidance for this year?

Cynthia Gaylor -- Chief Financial Officer

So maybe just a little bit of color, I think you're asking how the --you're asking about PKS and the 100 customers, the over 100 customers that are on PKS and how are the ASPs tracking, I think; and then what our expectation is for the year. So as Rob talked about a little bit earlier, we're really encouraged by what we're seeing with PKS and the traction we're seeing with customers, both new and existing, as well as the pipeline. Our pipeline, as well as VMware's pipeline there, because it is a joint go-to-market and a joint R&D effort. I would say that ASP on PKS is less.

The initial ASP is less than PAS, which is something that we've talked about before. But we think that that gives us access to more customers, a different customer base than we would otherwise call on. And we expect our existing customers to continue to expand their footprint with PKS. And so that's a little bit of additional color.

We're not forecasting what that number will be through the year, but we are encouraged by the pipeline that we're seeing.

Rakesh Kumar -- UBS -- Analyst

Great, and then I have a follow up. On those 15 deals over $10 million dollars, I was wondering if you could talk about how penetrated are you with those customers in terms of workloads.

Rob Mee -- Chief Executive Officer

I think it's not a super deep penetration in those customers with respect to workload. There's a lot more workload potential in all of those customers. Some of them are using PAS, but they're not using PKS, and they may not be using a lot of the the other offerings that we have such as Pivotal Cloud Cache or our database services and so on. So we think there's still opportunity in most of those large accounts for us to grow.

Rakesh Kumar -- UBS -- Analyst

Thank you.

Operator

This concludes the Q&A portion of the call. I'll now turn things back over to Rob for any closing remarks.

Rob Mee -- Chief Executive Officer

Just want to say thank you to everybody for your attention and your questions today. We really appreciate it, and we enjoyed it.

Operator

[Operator signoff]

Duration: 55 minutes

Call Participants:

Helyn Corcos -- Vice President of Investor Relations

Rob Mee -- Chief Executive Officer

Cynthia Gaylor -- Chief Financial Officer

Kev Ma -- Credit Suisse -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Caroline Lu -- Goldman Sachs -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Jack Andrews -- Needham and Company -- Analyst

Steve Enders -- KeyBanc Capital Markets -- Analyst

Bhavan Suri -- William Blair -- Analyst

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

David Rainville -- Barclays -- Analyst

Rakesh Kumar -- UBS -- Analyst

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