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Carbon Black, Inc. (NASDAQ:CBLK)
Q2 2019 Earnings Call
Aug 1, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Carbon Black Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Steve Webber, Chief Financial Officer. Please go ahead.

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Thank you, Kristine. Good afternoon, and thank you for joining us today to review Carbon Black's second quarter 2019 financial results, which we announced in our press release issued after the close of market today. Joining me on the call today is Patrick Morley, Carbon Black's CEO. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 including statements related to our financial results, statements regarding management's expectations of future financial and operational performance, operational expenditures, expected growth and business outlook including guidance for the third fiscal quarter and full year 2019; industry and market trends and projections; our go-to-market and growth strategies; our market opportunity and ability to expand our leadership position and extend into adjacent security markets with our platform; the competition that we face in our market; our ability to maintain and upsell existing customers; our ability to acquire new customers and the anticipated benefits of our platform.

These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For discussion of the material risks and other important factors that could affect our actual results, please refer to those listed in our Form 10-Q for the second quarter of 2019, which we filed with the SEC this afternoon. These documents are available in the Investor Relations section of our website at www.carbonblack.com. A replay of this call will also be available there for a limited time. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

With that, I'd like to turn the call over to Patrick.

Patrick Morley -- Chief Executive Officer, President & Director

Thanks, Steve, and thanks to all of you for joining us today to review our second quarter performance. Let's quickly review our financial results, which exceeded our guidance ranges on both the top and bottom line. This reflects Carbon Black's successful transition into a cloud-first company, which we believe positions us to accelerate future growth. Cloud revenue was up $22.9 million, representing 68% year-over-year growth. Total revenue was $60.9 million, representing 19% year-over-year growth. Cloud ARR was $101.4 million, up 66% year-over-year and total ARR was $237.6 million, up 22% year-over-year. And finally, we ended the quarter with 5,680 total customers and 3,496 cloud customers, which represented 32% and 62% year-over-year growth, respectively. So passing $100 million in cloud ARR was a major milestone for Carbon Black.

This growth has been driven by our cloud-native endpoint protection platform, the Predictive Security Cloud or PSC. Reaching this scale in less than 4 years is exciting validation of our cloud vision as well as the unique value we offer in the marketplace. As a reminder, our cloud ARR, which consists primarily of the PSC, also includes our Cb Response cloud offering. The following metrics for the PSC, many of which represent record performances for the company, reflect our cloud momentum in Q2. 91% year-over-year ARR growth from our cloud-native endpoint protection platform, the PSC. Nine of our top 10 deals in the quarter were on our cloud EPP, demonstrating our success in the enterprise. 74% of our bookings in the quarter were on our cloud EPP compared to 46% in the first quarter. We closed 140 multiproduct cloud EPP deals in the quarter. Incremental ARR per cloud customer was over $38,000, a 64% sequential increase. And finally, two of our largest wins in the quarter were driven by MSSP partners, which reflects greater channel awareness of the value of our cloud EPP.

The most exciting evidence of the success of our cloud EPP were several significant multiproduct enterprise wins during the quarter. We signed a substantial seven-figure 50,000 endpoint deal with one of the largest airlines in the U.S. for Cb Defense, Cb ThreatHunter and Cb LiveOps. This was a displacement of an existing McAfee deployment and benefited from the active involvement of a partner who helped the customer understand Carbon Black's ability to stop advanced attacks and provide consolidated security capabilities on one platform. Another seven-figure win was with one of the world's largest technology companies to deploy Cb Defense and Cb ThreatHunter to 90,000 endpoints. Carbon Black's unique ability to continuously record all endpoint activity is what enabled us to stand out during the POC process. The decision became clear when the prospect simulated an advanced attack, which Carbon Black detected, but our competitors did not. We won a 20,000 endpoint deal with one of the largest brands in Australia, an existing McAfee customer. They had previously deployed CrowdStrike in a portion of their estate prior to making an enterprisewide decision.

The combination of our security efficacy and our ability to work with the customer's specific use cases were the keys to winning this strategic account. And finally, we signed a 20,000 endpoint deal with one of the largest universities in the Southeastern U.S. for Cb Defense and Cb ThreatHunter. This win was driven by one of our MSSP partners whose position as a trusted advisor with this customer provided Carbon Black with instant credibility. The ability of this partner to powerfully articulate the differentiation of Carbon Black is indicative of our opportunity with channel partners, as they get more experienced with our cloud EPP strategy. Another exciting aspect of the quarter was the performance of Cb ThreatHunter and Cb LiveOps, the 2 newest products on our cloud EPP. Cb ThreatHunter, the next generation of Cb Response, has highly differentiated threat hunting and incident response capabilities that provide an unparalleled level of visibility and detection through continuous and centralized analysis of endpoint activity.

The power and sophistication of Cb ThreatHunter is unique in the market and its strong product market fit drove both sizable wins in the second quarter and growing interest from prospective customers. Cb LiveOps, our real-time endpoint query and remediation product, is also experiencing success. In Q2, we delivered 6 solution packs for Cb LiveOps, which are a set of predefined queries for specific use cases. Customers now have the ability to get immediate answers about the health and security of their endpoints on use cases ranging from forensics, to compliance, to vulnerability assessment. This level of insight has traditionally come from labor-intensive manual queries, which often required multiple agents. With Cb LiveOps latest solution packs, it's now a simple point-and-click process inside of a single product on your cloud EPP. More than 70% of our Cb LiveOps customers are using these new solution packs to save significant time and resources for their businesses.

The success of Cb ThreatHunter and Cb LiveOps are the latest examples of Carbon Black's product differentiation and value proposition. I'd now like to take a minute to review what we've done to position Carbon Black as a leading cloud EPP solution. Over the past three years, we have developed a cloud-native endpoint protection platform with a single lightweight agent and console that currently consists of 5 products. Carbon Black provides unmatched endpoint security efficacy by analyzing the deepest endpoint activity from approximately 15 million global endpoints and combining it with real-time and community-augmented intelligence. Our cloud EPP benefits from a powerful network effect that makes it smarter with the addition of every new customer and every new endpoint, which enhances its value for all users.

The result is a cloud-native endpoint protection platform that is able to recognize even the subtlest evolutions in attackers' behaviors, giving customers the ability to prevent, detect and respond to emerging attacks, predicting them before they've had a chance to materialize. A great example of this came from Carbon Black's threat analysis unit, which uncovered new components of a prominent and polymorphic cryptocurrency mining campaign. Our teams research demonstrated that attacks starting as commodity malware were frequently transformed and evolved into more complex campaigns. This insight gleaned from endpoint data across our customer ecosystem allowed us to gain visibility into a new class of attacks and provide stronger protection across our global customer footprint. Our team will be presenting the results of its research at the Annual Black Hat U.S.A. conference in Las Vegas next week.

Another aspect of our cloud EPP's value is the breadth and depth of our robust partner ecosystem and our open APIs. Here are some stats from the first half of 2019 that show our growing partner momentum with our cloud EPP. We had 256 partners book a cloud EPP transaction in the first half, up 57% year-over-year. 60% of our MSSP bookings are on our cloud EPP, more than double a year ago. And incident response partners used our cloud EPP in 134 incident response engagements, a more than 400% increase year-over-year. We also made several important product announcements during the quarter. At our user conference, Cb Connect, we announced new innovations that significantly enhance data security in the cloud. We introduced our third-generation cloud EPP architecture, which addresses important data security and data sovereignty issues that exist and clouded delivered solutions don't. At Carbon Black, we believe per customer segmentation should be available to all customers, which is why we are building, bring your own key encryption into our core platform.

We added cloud workload and container protection that gives security and IT teams access to cloud workloads and containers running in their environment. We believe this will make it significantly easier to resolve configuration drift, remediate vulnerabilities in realtime and confidently respond to incidents. In the past, introducing new components to an environment required the deployment of new monitoring and management tools. Now with our cloud EPP, customers can manage their entire environment from a single agent. With this release, we have also expanded our support to nearly every Linux distribution released since 2011. This extends our cloud EPP to all major operating systems. And finally, we introduced new detection techniques, leveraging our unfiltered data analysis to further prevent living off the land attacks, which is when an attacker uses known good software from trusted developers to evade detection as they compromise endpoints and move laterally. This is a growing threat for many companies and one that traditional EPP solutions are unable to detect or prevent.

As we head into the second half of the year, it's important to recognize how much progress we have made through the first 2 quarters of 2019. We continue to innovate and extend our cloud EPP to provide enhanced customer value by building what we believe is the most powerful platform in the market. We also made significant progress training and enabling our direct sales team and our channel partners on the value of our cloud EPP. This was validated by the enterprise wins and associated growth numbers we saw in Q2. Our focus in the second half is to build upon this progress. We know our cloud EPP strategy is resonating with customers. Now we need to focus on driving faster adoption and increasing sales velocity. We are taking the lessons learned from some of the large enterprise cloud EPP wins that I discussed earlier and operationalizing these learnings across our sales team. Additionally, we are continuing to conduct trainings and seminars with channel partners to increase their knowledge and confidence in the differentiation of our cloud EPP. We are firmly on track to meet our objective of fully enabling our go-to-market team on our cloud strategy in the second half of the year.

I want to thank all of our employees at Carbon Black for the amazing work they're doing every day to keep our customers safe. To summarize, our second quarter's performance was clear validation of our cloud strategy. We believe this can drive significant value for customers and for shareholders. The market remains in the early stages of the shift to cloud EPP. And we are confident in Carbon Black's position to be a primary beneficiary.

With that, let me turn the call over to Steve.

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Thanks, Patrick. Let's begin by reviewing our second quarter results. As Patrick mentioned, we are pleased with our performance in the second quarter. One of the key measurements for our business is our annual recurring revenue or ARR. As of June 30, cloud ARR was $101.4 million, up 66% year-over-year and now represents 43% of total ARR. The $12.6 million of incremental cloud ARR was the highest quarterly dollar increase we've recorded and is indicative of the substantial growth opportunity in this market. Total ARR at the end of the second quarter was $237.6 million, up 22% year-over-year. Our on-premise ARR was $136.2 million, up 1% year-over-year. Total revenue in the quarter was $60.9 million, up 19% year-over-year. Subscription, license and support revenue was $58.6 million, up 22% year-over-year. And services revenue was $2.2 million, up 28% year-over-year. The decline in services revenue is expected and directly attributable to the growing mix of our cloud products in the business. Cloud base subscription revenue was $22.9 million, which was up 68% year-over-year.

Revenue from our on-premise products was $35.7 million, up 4% year-over-year. We expect the mix shift toward cloud to continue with our cloud EPP being the primary focus of our sales efforts. During the second quarter, we added 327 cloud customers. The number of customers who have at least 1 cloud product was 3,496 at the end of the second quarter, which was a 62% increase from the year ago period. We added 341 total customers, bringing our total customer count to 5,680, a 32% increase year-over-year. Short-term billings on a trailing 12-month basis were $249.1 million, up 16% year-over-year. Short-term billings were $63.2 million in Q2, up 11% year-over-year. We believe the trailing 12-month short-term billings is helpful for investors as it factors out the impact of invoice timing and seasonality in a given quarter. In the second quarter, our gross retention rate was 87%. Our gross retention rate was in line with our expectations and flat to our first quarter. We anticipate gross retention to remain at a similar level for the balance of 2019. Please note that the gross retention rate calculation does not take into the account the impact of any upsell activity.

Moving down to P&L. Please note that I'll be discussing our quarterly results on a non-GAAP basis unless, otherwise, noted. Gross profit in the second quarter was $48.1 million, representing a gross margin of 79%. We were pleased with the gross margin performance in the quarter, particularly in light of our rapidly growing mix of cloud revenue. Cloud revenue represented 38% of total revenue in the second quarter, up from 27% in the second quarter of 2018. The unit and scale economics of our cloud platform are a primary area of our focus. We continue to expect a modest decrease in gross margin over time as our percentage of cloud business continues to grow due to the associated hosting and infrastructure costs of delivering cloud products. Total operating expenses during the second quarter were $58.4 million, a 5% increase year-over-year.

Operating expenses declined $3.4 million from the first quarter, which reflects the steps taken earlier this year to rationalize some non-quota-carrying sales and marketing expense. We continue to make incremental investments in our product development teams as we expand the capabilities of our cloud EPP. For the balance of 2019, we expect operating expenses will remain at similar levels to the second quarter. Our operating loss was $10.3 million or a negative 17% operating margin compared to negative 30% in the year ago period. Net loss in the second quarter was $9.6 million or $0.13 per share based on 72.4 million weighted shares outstanding. On a GAAP basis, gross profit was $47.7 million, operating loss was at $15.2 million and net loss was $14.6 million.

Turning to the balance sheet and cash flow. We ended the quarter with $148.1 million in cash and short-term investments and no debt. Operating cash flow in the second quarter was negative $13.8 million. After taking into consideration $1.4 million in capital expenditures and capitalized software development costs, free cash flow was negative $15.2 million in the quarter and in line with our internal expectations. I will now discuss our outlook for the third quarter and full year 2019. For the full year 2019, we are raising our revenue expectation to be in the range of $243 million to $245 million, which equates to 16% growth at the midpoint. We expect professional services revenue to be approximately $8.5 million. Non-GAAP loss from operations is expected to be in the range of $45 million to $43 million, and non-GAAP net loss per share to be in the range of $0.61 to $0.58 per share based on 72.3 million weighted average shares outstanding.

Now turning to the third quarter. We expect revenue to be in the range of $61.3 million to $62.3 million including $2 million in professional services revenue. Non-GAAP loss from operations is expected to be in the range of $9.3 million to $8.3 million, and non-GAAP net loss per share will be in the range of $0.12 to $0.10 based on 72.9 million weighted average shares outstanding. Overall, we made solid progress against our strategic priorities in the second quarter. We are generating substantial growth from our cloud EPP, which remains in the very early stages of a generational replatforming process. We are confident our differentiated cloud EPP positions us well to be one of the primary winners in this market.

Operator, we are now ready to take questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jonathan Ho from William Blair.

Jonathan Ho -- William Blair -- Analyst

Good afternoon and congratulations on the results. I just wanted to see if you could give us a little bit of additional color in terms of what you're seeing from, I guess, traction for ThreatHunter and LiveOps. And just given like what you said about, I guess, improving the strategy and moving forward, what are some of the steps that you can take and learnings that you've picked up regarding the cloud EPP strategy?

Patrick Morley -- Chief Executive Officer, President & Director

Jonathan, thank you. And we were very pleased with the traction that we saw with ThreatHunter and LiveOps in the quarter. Of course, ThreatHunter is an understood product because it's the next generation of response. LiveOps provides a set of capabilities, as I described in the call, and we've been talking about. That really extends the definition of cloud EPP. And so I think when we take a step back and we think about what we said at the beginning of the year, which we laid out specific objectives around what we had to do in 2019, one of them was building capabilities on the go-to-market side to be able to position the breadth of our cloud EPP.

I think what we saw in Q2 gave us confidence that we're learning how to do that and our channel partners are as well. One of the stats that I gave in here was the number of multiproduct, 140 multiproduct deals in the quarter, which was a record. We've never done that before. And in addition, if you -- some of the deals that I discussed, some of the larger deals, they were all multiproduct deals as well. So that gives us confidence that we are learning quickly on how to sell those -- the broader cloud EPP offering.

Jonathan Ho -- William Blair -- Analyst

Got it. And then just with regards to, I guess, the some of the recent challenges, that maybe some of your competitors have faced around their AI engines, is that creating any new opportunities for you? Or are you starting to see any sort of dislocation in the competitive set?

Patrick Morley -- Chief Executive Officer, President & Director

Well, the primary -- obviously, the primary opportunity for Carbon Black when we look at the market is that less than 15% of the overall market today has cloud EPP. If you got a large TAM that's going to replatform over the coming years, and so you have got a huge TAM available. And so the primary opportunity its got the legacy providers. I do think some of the recent news in the press in regards to some of the challenges around static AI engines, it does create an opportunity to have discussions with customers, but the primary opportunity is to go after the larger legacy EPP market.

Jonathan Ho -- William Blair -- Analyst

Great. Thank you.

Patrick Morley -- Chief Executive Officer, President & Director

Thanks, Jonathan.

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Thanks, Jonathan.

Operator

Our next question comes from the line of Rob Owens from KeyBanc Capital.

Rob Owens -- KeyBanc Capital -- Analyst

Great, and thank you guys for taking my questions. Patrick, you've gone through a little bit of this reorganization and found more optimization at sales and marketing line, but still affecting this cloud change. I guess, a couple of things. Number one, what's still left to do? We've had a couple of quarters here of good consistent performance, but I'm sure you like to see momentum. So what's left to add? And number two, as I look at the overall sales and marketing and just what's been going on in the industry with customer acquisition cost, are you starting to see behavior rationalize out there from a competitive standpoint? And how are you guys competing in those situations?

Patrick Morley -- Chief Executive Officer, President & Director

Yes. So we'll take those 2. So first off, we reached a really important milestone for the company this quarter, $101.4 million in cloud ARR. And we've done that over the last four years essentially from 0. So we're really proud of that what we've been able to accomplish in that time frame. And in particular, one of the things we did on this call was we talked specifically about what was going on with the cloud EPP kind of underneath the covers and 91% ARR growth for our cloud EPP, which again, I think, reinforces the opportunity in front of us and it also reinforces that, as you described it, optimizing the sales and marketing engine. We are doing a good job and are confident that the work that we did in the second half is paying off -- excuse me, in the first half is going to pay off and continue to deliver in the second half. And I think what really shows the transformation, if you look at revenue, 37% of our revenue is cloud, 43% of our ARR is cloud.

And then if you look at the most leading indicator, which we gave on the call, which is bookings, it was 74% of our new and add-on bookings was on cloud EPP. So the work we're doing is having an impact. And then as far as competitive dynamics in the marketplace, we haven't seen a significant change in Q2. Obviously, as I just said to Jonathan, right, we're all focused on the large opportunity in front of us, this TAM dislocation.

Rob Owens -- KeyBanc Capital -- Analyst

Great. And then Steve, how much revenues were recurring at this point? I think still at 90-plus-percent. Did you give some specifics on the call or could you give it to me?

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Yes. We didn't Rob, but it's 94%.

Rob Owens -- KeyBanc Capital -- Analyst

94%. Great. Thank you, guys.

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Correct. You bet. Thank you.

Operator

Our next question comes from the line of Michael Turits from Raymond James.

Michael Turits -- Raymond James -- Analyst

Hi, guys. Congrats on the quarter where you beat again. You raised slightly for the year, but you still got into very little sequential increase obviously and the year-over-year actually decelerates. Given that on-prem is pretty much flat and cloud is accelerating and growing well, why shouldn't we be seeing more of a pick up at this point in the second half?

Patrick Morley -- Chief Executive Officer, President & Director

Yes, so good question, Michael. We've past through our upside from Q1 through the higher end of our guidance range. We've kept our guidance methodology as we've always done it, and it's based on our best view of revenue as we see it right now.

Michael Turits -- Raymond James -- Analyst

Okay. And then billings, as you pointed out was kind of trailing 12-month basis, but weaker 8%, total at 11% current on just this quarter. So -- and cash flow was at least below The Street. So were there timing issues or were there duration issues? What was impacting billings that it's growing at least in this quarter below the level of revenue growth? And how should we think about that into the back half?

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Yes. We continue to reiterate that ARR is our leading indicator and the best way to view our business. Our cloud EPP ARR grew 91%, overall ARR grew 66% on the cloud side. So those are the big best focal points from the business model to look at. From a billings perspective, it's still the trailing 12 months due to seasonality and the timing of when some certain renewal orders can come in any particular quarter.

Overall, one other thing you can look at from a total billings perspective is our backlog went up $7 million. That's part of our 10-Q. Went up to $47 million. So the ARR is still the key leading indicator we're focused on to look at the growth of the business and our transition to the cloud EPP.

Michael Turits -- Raymond James -- Analyst

Okay. Thanks, Steve.

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

You bet.

Operator

[Operator Instructions] Our next question comes from the line of Jonathan Ruykhaver from Baird.

Jonathan Ruykhaver -- Baird -- Analyst

Yeah. Good afternoon, guys and good ARR performance. Pat, you've talked about with the PSC and now 5 offerings, a focus this year on selling larger additional deal lands, expansion opportunities, and then the opportunity around migrating on-premise to cloud. And I am just wondering when you think of your execution around each of those initiatives this year, how should we view the relative impact to cloud ARR growth?

Patrick Morley -- Chief Executive Officer, President & Director

Yes. Well, what we're seeing right now and what we saw in Q2 was we saw significant lands for cloud EPP and you've got the ordering right, right? Land, expand, and we also are going to -- certainly are talking to some of our on-prem customers about their readiness to come onto the cloud platform. But for 2019 the primary leading motion is going to be lands.

We said last quarter on the call we wanted to see the enterprise flywheel start to work with our cloud EPP offering and we saw that in Q2. We delivered on that which we are excited about. And so we want to continue to land large cloud EPP deals, and we're also going to start to see the expand contribute. We did not see from a contribution basis anything on the migration side. It was not material.

Jonathan Ruykhaver -- Baird -- Analyst

Okay. That makes sense, when you look at revenue or ARR per cloud customer, it's growing, but it's not really picking up yet, so obviously...

Patrick Morley -- Chief Executive Officer, President & Director

In the cloud ARR, I mean, cloud ARR per customer base is in the quarter, right? We're pretty excited about that. If you look at last quarter, it was in the low 20s, 38,000 this quarter. So it just reinforces that enterprise deals are happening because the per customer ARR jumped so heavily.

Jonathan Ruykhaver -- Baird -- Analyst

Okay. And the other thing I wanted to ask about is historically for Response, one of the things we've heard is price being -- can be high in the market, the product is very technical, lot of functionality, but can be challenging to manage. Can you just talk about price and usability with the cloud deployed ThreatHunter version and how you might be addressing some of that friction?

Patrick Morley -- Chief Executive Officer, President & Director

Yes. Certainly, Cb ThreatHunter on the cloud EPP because it's delivered via the cloud reduces some of the requirements from a technical standpoint. And I think what you're referring to is that part of standing up Cb Response is implementing infrastructure to support a big data and analytics platform on-premise. And when you do that in the data center, it does add -- it can potentially add additional complexity. And by putting it onto the PSC, our cloud EPP offering, it certainly reduces the complexity of having the standup, any of that infrastructure. And what we're seeing initially with the deployments on ThreatHunter we really like. That's one of the reasons you continue to see services come down on a quarterly basis because we require less PS because the products are much easier to deploy.

Jonathan Ruykhaver -- Baird -- Analyst

Yes. That makes sense. And just my final question, Steve, you highlighted ARR as the more important metric with the shift to cloud. Can you just remind us with the shift what ARR is capturing or not capturing relative to billings?

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

ARR will capture everything except our services and our perpetual billings from our recurring revenues. So to the earlier question, 94% of our revenue would be captured in our ARR calculation. And our overall guidance for services is down to $8.5 million for the full year, $8.5 million.

Jonathan Ruykhaver -- Baird -- Analyst

Perfect. Thank you.

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Yeah.

Operator

Our next question comes from the line of Nick Yako from Cowen and Company.

Patrick Morley -- Chief Executive Officer, President & Director

Thanks, guys. Just wondering if you could talk about the initial reception to the Gen 3 architecture and sort of how that rollout is progressing? And then as a follow-on to that, if that architecture is driving some of the strength you're seeing on the cloud side?

Yes. The strength that we saw in Q2 on the cloud side was essentially us delivering against what we said we had to do in '19, which was, get that cloud EPP flywheel going from a go-to-market standpoint, deliver enterprise wins and be able to showcase the fact that our cloud EPP offering is actually differentiated in a really material way in the marketplace. So I would think about what we saw in Q2 as us delivering on what we said we were going to do.

And again, the growth on the cloud EPP side, that 91% ARR growth is a great proof point of that. The Gen 3 architecture discussion really is about where we see the market going over the next few years. And if you just look at, especially outside the United States, but also in the U.S. with certain market segments, data privacy, data sovereignty is a really, really important issue. And with this architecture, we're are able to address that in a very differentiated way. We rolled that out at our user conference. I think the reception was very strong because it certainly reinforces that we are looking ahead to where the market is going to be over the next couple of years. And again, we're trying to leave it.

Jonathan Ruykhaver -- Baird -- Analyst

Great. And Steve, maybe one for you. As you sort of realized some of the cost efficiencies and pull those costs out this year, can you maybe talk about some of the levers you have to sort of achieve that end of year 2020 breakeven free cash flow target?

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Yes, I think we're just going to commit to the guidance for 2019 at this point. And as the future view, we will get more specific about full guidance for 2020, but we still have a line of sight in the path to the break even for Q4 cash flow break even as we indicated earlier. So there's nothing different. It's on the horizon there and our long-term operating model that we had laid out is still on track.

Nick YakoCowen and Company -- Cowen and Company -- Analyst

All right. Great. Thank you.

Operator

We have a follow-up question on the line of Jonathan Ho from William Blair.

Jonathan Ho -- William Blair -- Analyst

Hey, guys. Just wanted to sneak one more in. As you start to sell more of the cloud product, can you give us a sense of how you are engaging the channel? And maybe what's been most compelling in terms of how you convince them to lead with your product?

Patrick Morley -- Chief Executive Officer, President & Director

Yes. Thanks, Jonathan. And as I described in my remarks, what we saw in the first half, we like what we've seen in getting the channel enabled on the new platform. And we've seen a dramatic tick up, both with the overall channel for actually doing transactions with the new offering, but also with some of the sectors of the channel that we have really invested in, MSSP partners and incident response partners who are building services on top of our platform.

We think that's a real critical element to our channel strategy because we're partnering with them in a deeper way. And the primary reason that we are seeing that traction is twofold, one is the element -- of the fact that it is a cloud delivery EPP and it's all built cloud native. And the second piece is the technology that's in it. And as I said, again when you look at offerings like Cb LiveOps and Cb ThreatHunter, they truly are differentiated in the marketplace for a cloud EPP offering. I think there's both elements. One element is just the cloud piece. The other piece is the platform we're delivering is very differentiated.

Jonathan Ho -- William Blair -- Analyst

Thank you.

Operator

We have no further questions at this time. I will now turn the call over back to Mr. Patrick Morley.

Patrick Morley -- Chief Executive Officer, President & Director

Thank you, operator. I want to thank everyone for joining us on today's second quarter call. The second quarter performance was certainly validation of our cloud strategy. And as we move forward into the second half, we believe we can continue to drive significant value for our customers and for our shareholders. The market is still early and the opportunity that Carbon Black has to position ourselves as a leader and be a primary beneficiary of the move to cloud EPP. So thank you very much.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Stephen J. Webber -- Chief Financial Officer, Principal Accounting Officer, Executive Vise President, Treasurer and Assis

Patrick Morley -- Chief Executive Officer, President & Director

Jonathan Ho -- William Blair -- Analyst

Rob Owens -- KeyBanc Capital -- Analyst

Michael Turits -- Raymond James -- Analyst

Jonathan Ruykhaver -- Baird -- Analyst

Nick YakoCowen and Company -- Cowen and Company -- Analyst

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