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Edited Transcript of APTI earnings conference call or presentation 2-Aug-17 9:00pm GMT

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Q2 2017 Apptio Inc Earnings Call BELLEVUE Jun 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Apptio Inc earnings conference call or presentation Wednesday, August 2, 2017 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kurt Shintaffer Apptio, Inc. - Co-Founder & CFO * Sachin Gupta Apptio, Inc. - Co-Founder, CEO, President & Director * Susanna Morgan;Senior Vice President of Finance & Investor Relations ================================================================================ Conference Call Participants ================================================================================ * Benjamin J. McFadden KeyBanc Capital Markets Inc., Research Division - Former Research Analyst * Bradley Hartwell Sills BofA Merrill Lynch, Research Division - VP * Brian Jeffrey Schwartz Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst * Kevin Kumar Goldman Sachs Group Inc., Research Division - Associate * Pinjalim Bora JP Morgan Chase & Co, Research Division - Analyst * Ross Stuart MacMillan RBC Capital Markets, Research Division - Former Co-Head of Software Sector * Zachary Paul Lountzis Jefferies LLC, Research Division - Former Equity Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. And welcome to the Q2 2017 Apptio Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Susanna Morgan, SVP of Finance and Investor Relations. You may begin. -------------------------------------------------------------------------------- Susanna Morgan;Senior Vice President of Finance & Investor Relations, [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, everyone. And welcome to Apptio's Second Quarter 2017 Earnings Call. Joining me on the call today are Sunny Gupta, our CEO; and Kurt Shintaffer, our CFO. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. The webcast replay of this call will be available on our company website under the Investor Relations link at investors.apptio.com. We will make forward-looking statements on this conference call such as those using the words will, believe, expect, anticipate and similar phrases to convey that information is not historical fact. These statements include our future expectations regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. During today's call, we will review our second quarter financial results and discuss our financial guidance for Q3 and full year 2017. All financial figures we will discuss today are non-GAAP except for revenues and balance sheet data. These non-GAAP financial measures, which we believe are useful in measuring Apptio's performance and liquidity, should be considered in addition to, not as a substitute for or in isolation from, GAAP results. Our non-GAAP measures exclude the effect of share-based compensation. To see the reconciliation between these non-GAAP and GAAP results, please refer to our earnings press releases, which are posted on the Investor Relations page of our website. With that, I'll hand it over to Sunny. -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Susanna, and welcome, everyone. I'm pleased with our performance in the second quarter with strong execution across all of our key business metrics, including product innovation. For the quarter, total revenue grew 17% to $45 million, and subscription revenue grew even faster at 19% to $37 million. The leverage of our business model was evident as we expanded gross margins while also significantly improving operating margins. In Q2, we saw balanced performance across our geographies and customer segments. I would like to highlight 3 significant Q2 wins to demonstrate our momentum across customers of many sizes and industries. The first is a sale to a major SaaS application provider, who had unsuccessfully tried using spreadsheets and data aggregation for over a year to deliver data-driven insights and total cost of ownership of their hosting operations. They bought Apptio to understand this TCO since hosting operations represent a major component of the cost of goods sold and is complex due to the number of products and geographies. ATUM, the Apptio TBM unified model, was an important starting point as they wanted best practices to categorize their spending, standardize reporting and benchmarking across their on-premise and public data centers. In some areas, they're looking to increase their migration to public cloud providers, and in some cases, they want to bring workloads back into their private cloud. This company is growing rapidly, and their goal is to use Apptio to improve efficiency and decrease the cost per compute hour. This represents a strategic use case for Apptio to deliver transparency and planning into cost of goods sold since every major business process is powered by technology. I'm also really excited about another key win, this one with a large U.S. federal agency. The CIO of this agency bought Apptio, so he could show the cost of services to federal agency leadership on a more granular level in order to facilitate discussions around how they should optimize technology spending. This includes making data-driven decisions around data center modernization and leveraging cloud services. There is a continuous discussion around how IT initiatives impact the mission of this agency without a good understanding of how these initiatives impact cost. Additionally, the agency CIO wants to use Apptio to identify high-dollar, low-use applications for retirement and rationalization. Finally, this agency is planning to use Apptio to collapse the time it takes to generate regulatory reporting. This win showed Apptio's continued momentum in the federal sector. I attended a White House summit on technology business management just a few weeks ago. The Office of Management and Budget, who sets standards for agency cost accounting, invited several of our largest CIO and CFO customers from the private sector to present TBM best practices and learnings that could be applied to the U.S. federal government. In fact, U.S. federal leadership is mandating reporting against the TBM taxonomy. U.S. federal agencies spend roughly $90 billion on IT annually. The public sector continues to be a massive opportunity for Apptio. But as I've mentioned before, it may take some time to build consistent momentum. We are currently focusing on creating simpler packages for federal customers to get started with Apptio more quickly and continue winning agencies like the one I mentioned earlier. At the other end of the spectrum, we are seeing some deals in the commercial sector, particularly in our enterprise customer segment, close at a faster pace. For example, this quarter, we closed a new logo transaction with a manufacturing company. This company historically produced their IT financial reporting in a labor-intensive way using spreadsheets. While this produced budget variance analysis, it didn't provide much more than that. This company is adopting cloud services at a rapid pace and needs to manage cloud migration and increasing cloud usage. They will use Apptio to automate IT spending variance analysis, gain additional insight into vendor support and project costs and better plan for on-premise and cloud workloads. Moving on to existing customers. I'm pleased with the progress we made on renewals and upsells in Q2. Let me give you a few quick upsell examples. One customer, who we won about 1.5 years ago, significantly increased their annual contract value with Apptio by expanding from using cost transparency to also buying Bill of IT and IT Benchmarking. The CIO of this customer wanted to drive efficiencies and improve decision-making by showing accurate cost detail to the business. With Apptio, the CIO can show things like cost per port in the network along with relevant benchmarks or answer how much spend should go into a data center. The customer is planning to leverage our Bill of IT application to share the true cost of running the business, exposing levers for optimization. A second upsell example involves a customer who bought and implemented one of our newer modules, SaaS Insights. They use SaaS Insights to quickly identify almost $1 million in underutilized licenses. This is just one proof point of customers driving value from Apptio as they gain transparency into how consumption is driving IT costs and where inefficiencies exist. We're also seeing momentum around vendor insights and growing adoption of Interactive Benchmarking, which we released just last quarter. Turning to product. We had another strong quarter for innovation. We released real-time public cloud analytics for Amazon Web Services, which allows customers to view their cloud spend on an hourly, daily and weekly basis and to allocate cloud costs and consumption directly to the infrastructure, applications and services each business unit consumes. Since the volume of the data can be very high, we were quickly able to create a new highly elastic data store architecture to provide this capability. The growth in cloud, the variable nature of cloud spending and the need for agility makes frequent visibility critical. With Apptio, IT leaders can manage the true cost of ownership of their hybrid IT environment, including public cloud alongside private cloud and on-premise investments. This helps companies optimize their IT footprints and increase its alignment with business priorities. As we look through our aggregated data, we found that approximately 29% of customers using our cloud data connectors are managing multiple cloud environments together, partly due to a concern about vendor lock-in. 76% are using Amazon Web Services, while a lower but growing portion are using Azure. We believe these mixed environments make Apptio even more valuable as the decision system for managing hybrid IT. The continued adoption of Apptio will allow us to further enrich our aggregated data on how enterprise IT is adopting the cloud. Continuing on the theme of innovation. You may have seen that, last week, we announced a new offering, IT Financial Management Foundation. This new offering is designed to help IT finance leaders produce an accurate, credible budget in partnership with technology leaders while proactively managing spend variance and forecasting for the future. I'll talk more about this on the call next quarter, but I'm really excited by our recent and planned innovations and the impact that we believe they will have. In addition to releasing new product, we continue to innovate to make our cost transparency and IT planning applications easier to use and faster to deploy. In fact, we are seeing a decrease in enterprise segment customer deployment times of about 40% for customers who have gone live this year as compared to deployments from 2016. As an example, a global insurance company recently went live with our Cost Transparency application in 3 months for their North America subsidiary. On the heels of that deployment, they then deployed our IT Planning solution in less than 30 days. Continuing to decrease deployment times and leveraging our partner ecosystem will allow us to scale quickly into a greater set of customers. Moving on to marketing and events. I attended the European Technology Business Management Summit in June, along with over 350 senior IT leaders from both current customers and prospects. We are seeing increased momentum in EMEA and are now selling into a number of Western European countries. IT spending across Europe is expected to reach EUR 1.17 trillion this year, and we believe Apptio has the potential to uncover more than EUR 58 billion in savings for IT leaders. Globally, the membership of the non-profit TBM Council grew to over 3,800 people, approximately 20% growth so far in 2017. We see this as a proof point of TBM category traction, which we are driving to convert into Apptio customers. Finally, we continue to strengthen our Board of Directors in Q2 with the addition of Kathleen Philips, Zillow Group's CFO. I'm excited about the contribution that I know Kathleen will make since she's played a broad role in a high-growth company that also pioneered a new category. In summary, I'm pleased with our performance in the second quarter. We had a number of exciting customer wins across a variety of sizes, industries and geographies. We retained and grew our revenue within existing customers and continue to innovate at a very rapid pace even as we improve operating margins. Our competitive leadership position in the market remains strong across all segments and verticals. I have deep conviction that every company in the Global 10,000 needs some part of the Apptio product portfolio. We have the leading position in a $6 billion market, which leaves us plenty of room to grow. With that, I'd like to turn things over to Kurt to give you some color on our financial results for Q2. -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [4] -------------------------------------------------------------------------------- Thanks, Sunny, and welcome. In Q2, we were pleased with strong subscription revenue growth, continued progress in expanding gross margins, and we significantly improved our operating margins. As Sunny mentioned, Q2 2017 subscription revenue grew by 19% on a year-over-year basis to $37.2 million. Our Q2 2017 subscription revenue accounted for 82% of total revenue, which is up slightly from Q2 2016. Services revenue grew by 8% on a year-over-year basis to $8 million. The lower services growth is due primarily to shorter deployments, which is beneficial for customers and for our business model long term. In total, Q2 revenue increased 17% on a year-over-year basis to $45.2 million. Turning to retention. Our trailing 12-month net subscription dollar retention rate remained approximately 98%. We had a good quarter in terms of retention and upsell, but we're still seeing the impact of the Q4 2016 nonrenewal we've discussed previously. For the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results, which exclude the impact of stock-based compensation. We were pleased with our Q2 2017 total gross margin of 68.9%, which was a substantial improvement over the total gross margin of 67.1% from Q2 2016. As a reminder, we look at gross margin trends year-over-year since there is some seasonality to our business. Our Q2 subscription gross margin was 81.2%, an improvement from 79.7% in Q2 of last year. Our Q2 professional services gross margin was 11.8%, roughly in line with the prior year. Moving down the P&L. We continue to show the operating leverage inherent in our business model. Q2 2017 R&D expense was 20% of revenue, in line with last year's Q2, as we continued to invest in product innovation. Sales and marketing expense declined to 44% of revenue from 49% in last year's Q2, and G&A expense of 12% of revenue was similar to last year. In total, Q2 2017 operating loss was $3.6 million or 8% of revenue. This compares to an operating loss of $5.7 million or 15% of revenue in the second quarter of 2016. We're very pleased with this operating margin improvement. Net loss per share was $0.08 in the second quarter of 2017 based on 39.2 million weighted average shares outstanding, a significant improvement from the net loss per share of $0.50 based on 13 million weighted average common shares outstanding in the second quarter of 2016. Turning to cash flows. Our free cash flow improved to negative $10.9 million in Q2 2017 as compared to negative $13.5 million in Q2 2016. Year-to-date, we were close to breakeven. As you know, our free cash flow varies from quarter-to-quarter due to the timing of billings in when collections are made. This quarter was impacted by the delayed collection of a receivable from one of our larger customers, which we subsequently collected in July. We remain confident in our ability to reach cash flow breakeven for the year. On that note, we typically don't discuss quarterly billings since it's not always the best indicator of the strength of our business. However, we wanted to make everyone aware that we had a large 3-year contract that was sold in Q2 of 2016, which billed in equal installments in the first and second years. The second billing of that contract went out this quarter, adding to our long-term deferred revenue. It is important to remember that there will not be a billing associated with this specific contract in Q2 2018, although we will still be recognizing the revenue through the end of the 3-year term. Going forward, we expect there may be increased variability in billing terms as we continue to scale the business into the Global 10,000. Finally, we ended Q2 2017 with a strong balance sheet, including $124 million in cash, cash equivalents and marketable securities. Turning ahead, let me offer you some thoughts about the third quarter and full year of 2017. For the third quarter of 2017, we expect total revenue of approximately $44.5 million to $45 million. We expect subscription revenue growth to continue to outpace services revenue growth, increasing sequentially in Q3. We'd like to remind you that Q3 is typically a lighter services revenue quarter due to the seasonality in the business, and Q4 is typically higher for services revenue due to the TBM conference. Finally, we expect a non-GAAP operating loss of approximately $3.5 million to $4 million in Q3 2017 to reach operating margins similar to Q2 as we invest in product development in other areas. For the 2017 fiscal year, we expect total revenue of approximately $180 million to $183 million. We expect a non-GAAP operating loss of approximately $14 million to $16 million for the fiscal year, as there is typically some seasonality in our sales and marketing expense. As I mentioned earlier, we expect to reach free cash flow breakeven for the full year, an important business milestone for us. And with that, let me turn it back over to the operator for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Ben McFadden from KeyBanc Capital Markets. -------------------------------------------------------------------------------- Benjamin J. McFadden, KeyBanc Capital Markets Inc., Research Division - Former Research Analyst [2] -------------------------------------------------------------------------------- I wanted to start, Sunny, with maybe just a question on kind of you launched the IT financial management foundation in the quarter. I'm just -- or just here recently. I'm curious how we should be thinking about your strategy as far as targeting different users or personas, where that potentially sits today as far as what the makeup of different users on the platform are and kind of the opportunity for that to shift moving forward. Or any broader color on kind of how it's been trending would be great. -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [3] -------------------------------------------------------------------------------- Yes. So really, look, as we've created this category of Technology Business Management, we've been selling to the combination of a CIO, IT finance as well as head of infrastructure or a project in the typical IT organization. And as we've engaged with our customers, we found that the IT finance persona is a very key persona for Apptio, and their needs are slightly smaller, if you will, than what a typical CIO may buy the Apptio Cost Transparency application for. And so really, we know this persona deeply. There's deep usage of our product with this persona. So we decided to create a very purpose-built offering for this persona, and it's a combination of some capabilities from the IT Planning as well as Cost Transparency product. And really, this offering is fundamentally drastically faster to deploy. It also is oriented around a single persona, so it does not really have the consensus sell, which Cost Transparency could have. And the entry price point may be slightly lower. The other thing which we've done is we've bundled in software and services into a single price point, which is for the first time we've done that, which allows us to get to a broader set of customers faster, also will create a bigger upsell opportunity for Apptio. And I'll talk a little bit more specifically about this next quarter as we go along. But the broader question you're asking, I would say, generally, the strategy -- we are very pleased with the offerings we have in the market, but we are continuing to look at very targeted personas within the CIO organization. And we'll continue to think about packaging, product innovation in new unique ways to bring unique offerings for specific personas. -------------------------------------------------------------------------------- Benjamin J. McFadden, KeyBanc Capital Markets Inc., Research Division - Former Research Analyst [4] -------------------------------------------------------------------------------- Great. And then, Sunny, I just wanted to follow up kind of on the idea around these implementation times decreasing. Just curious kind of if there's anything we can sort of take away from a perspective of are you seeing signs that potentially new customer adoption could accelerate under these decreased implementation times. Is at least -- I mean, you called out the upsells on the call that it's making that easier. Is that -- are you seeing more of an impact on the upsells currently related to those decreased implementation times? How should we think about how that's actually converting into deals? -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [5] -------------------------------------------------------------------------------- Yes. So first of all, I would say, really, really excited about lowering the deployment times by additional 40% this year in the enterprise segment. And as you may remember, we had lowered 35% of our deployment times in the full year of 2016. Now it's only the first half, so we got to run through the rest of the year. But really, the way it manifests itself is certainly shorter deployment times, smaller upfront, product what the customer is buying. That should lead to a better opportunity for Apptio to kind of create upsell opportunities. So the answer is, on both fronts, shorter deployment, faster adoption and upsell. But on the upsell, the comment I wanted to make is now remember, this is the very early days of this business model for Apptio. So we are very excited about where this could go, but it is the early days, and we are really monitoring this closely. But bringing down deployment times and increasing adoption is a very, very core initiative, which we are making meaningful progress on. -------------------------------------------------------------------------------- Benjamin J. McFadden, KeyBanc Capital Markets Inc., Research Division - Former Research Analyst [6] -------------------------------------------------------------------------------- Great. And then if I could just get a real quick follow-up for Kurt. I wanted to ask around the services line. Just we've seen it decelerate some. Just curious, kind of given the fact of the faster implementation times as we head to the back of the -- back half of the year and into 2018, is there a point where services should flat line or potentially decline? Or are we still in a state where we should expect some steady increases in services revenue? Any color there would be great. -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [7] -------------------------------------------------------------------------------- Yes. So our objective is not to push for growth on the services line. We really work to deliver as much customer value as we can through both our internal resources and our partners who are delivering a portion of the revenue. So I think, you've seen over the last couple of years, services revenue growth pretty considerably lag subscription revenue growth, and I think that's the trend that will continue. I won't call it flat lining just yet, but it certainly will lag in its growth. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And our next question comes from the line of Jesse Hulsing from Goldman Sachs. -------------------------------------------------------------------------------- Kevin Kumar, Goldman Sachs Group Inc., Research Division - Associate [9] -------------------------------------------------------------------------------- This is Kevin Kumar on for Jesse. Can you provide some color on your hiring plans for the second half of the year? I know, previously, you indicated that a sales rep growth would be in line with revenue growth. Is that still the right way to think about that? -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [10] -------------------------------------------------------------------------------- Yes. So this is Kurt. I'll take that one. So we're hiring in all parts of the business, and I'd say overall, our hiring pace is going to be a bit shy of our revenue growth because we're looking to drive bottom line. On the sales rep specifically, right, we previously commented that, roughly speaking, our sales rep adds will be in line with our total revenue growth. And I think, going forward, that's not necessarily going to be the best way to look at it. We feel really good about the capacity we have on hand right now. We're hiring to meet our growth targets, and we're bringing on some really quality folks. But we focus on both rep productivity as well as in number of reps. And it also matters a lot what type of reps we're hiring because reps within the different segments have different quotas. And so our real focus is productivity, and we're seeing some nice results there. Specifically in the first half, we've seen an uptick in enterprise rep segment productivity. So that's a qualitative answer I would give. We're continuing to grow there, and we're continuing to put people in the right spots to meet our targets. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- And our next question comes from the line of John DiFucci from Jefferies. -------------------------------------------------------------------------------- Zachary Paul Lountzis, Jefferies LLC, Research Division - Former Equity Associate [12] -------------------------------------------------------------------------------- You got Zach Lountzis on for John. Your billings were strong in the quarter, but AR was a bit more of a use of cash than we had modeled. And I think, Kurt, you spoke to that. If you could maybe touch on that again just because the impact it had on cash flow from operations. And then kind of in that same vein, did we see more deals back-end loaded this quarter than maybe you typically see? -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [13] -------------------------------------------------------------------------------- Yes. So maybe going in reverse order, it was a pretty typical quarter in terms of its back-end loading. We do a majority of our deals in the last months of the quarter. But that really wasn't what was driving the variance that we talked about. So really, the variance to our internal forecast was really a single transaction. It was one of our -- it was a billing related to one of our largest customers. It was a renewal billing from Q1 that was teed up to be collected in Q2, but due to a process issue on their side, that spilled over into July. So it's since been collected. And had we been able to put that collection back into Q2, we would have been very much in line with our internal plans. -------------------------------------------------------------------------------- Zachary Paul Lountzis, Jefferies LLC, Research Division - Former Equity Associate [14] -------------------------------------------------------------------------------- And then if I could ask one more. Do you guys have any update on that 4Q nonrenewal? I know you were talking to or contracting with some of the other divisions given their new structure, their decentralized structure. Just any update there if you have one? -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [15] -------------------------------------------------------------------------------- Yes. I'll take that one. This is Sunny. So as we reported out for the Q1 earnings call, we were very pleased with our ability to win back one of the smaller divisions of that Q4 nonrenewal. And -- but I really think of the rest of the divisions as truly independent sales cycles, which are underway. But frankly, there's a lot of change in this specific organization, and so we treat that as almost like an independent sales cycle and no different than we have so many other companies really to go after in the broader Global 10,000 style customer. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And our next question comes from the line of Mark Murphy from JPMorgan. -------------------------------------------------------------------------------- Pinjalim Bora, JP Morgan Chase & Co, Research Division - Analyst [17] -------------------------------------------------------------------------------- This is Pinjalim sitting in for Mark. The real-time IT analytics for cloud cost seems like an exciting area where people, I would assume would be interested in. How has been your initial conversations? I know it's pretty early, but -- and who else in the market provides such a service and on a competitive side? I mean, is Cloudyn -- would be something that actually provides something like this? Can you help us on that? -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [18] -------------------------------------------------------------------------------- Yes. So first of all, I am super excited about this new cloud analytics real-time capability, and we were able to kind of introduce that very fast into the market because we are finding that the cloud spend of Amazon, Azure can vary hour to hour. And we've talked to many, many customers and prospects now where they're getting surprises of their cloud spending. When all the spend used to be on the on-premise data center, at least your cost structure was fixed, even though you may not have transparency into that. With the cloud world, we are finding that this can actually hit the bottom line of expense and margin expansion. So the forecasting spend management is very, very important. We've been working with our customers for over the last 1.5 years, 2 years around how to deepen our cloud capability, and we've continuously added a lot of features into our Cost Transparency application for the last, I would say, couple of years. This was probably one of the major new innovations which our customers were asking for. So the early feedback from our customers has been very positive. We had quite a few customers involved in the design process with us, so I'm excited about that. Look, in terms of the competition, again, really what I would say for specifically this capability, our customers are really in a hybrid IT environment for a very long time. They have a lot of their investments trapped in on-premise data centers, applications, and they're putting a lot of their new workloads onto the public cloud services. So really managing this new world of hybrid IT is even more complex than ever. And they need best-of-class solutions on both sides, and they, more importantly, need decision-making around that. So really, Apptio is very uniquely positioned, and we are certainly the market leader kind of providing this capability. And the new capabilities will further add to our innovation there. -------------------------------------------------------------------------------- Pinjalim Bora, JP Morgan Chase & Co, Research Division - Analyst [19] -------------------------------------------------------------------------------- And what are on -- on the hiring side, somebody asked about the second half. But if I have to put a final point on it, if you think about 2018, is there any way you can help us think about how hiring might trend, especially sales hiring in 2018? How are you thinking about that? -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [20] -------------------------------------------------------------------------------- Yes. So I'd start by saying we'll be hiring as a growth mode company next year. We?ve talked about the importance of getting to free cash flow breakeven on the full year this year. We think that will give us a great opportunity to assess all of our opportunities in front of us and invest for the growth opportunity we see. And what that means, means people and sales reps. So I see 2018 being a both a growth and investment year, and we'll have a chance to talk more about that as we near start of 2018. -------------------------------------------------------------------------------- Pinjalim Bora, JP Morgan Chase & Co, Research Division - Analyst [21] -------------------------------------------------------------------------------- Okay, understood. And lastly on the billing side, 2 questions on that. For Q3 and Q4 for the second half, would you expect billings linearity to basically follow something like last year? Or is there any -- you expect any change on that? And for this quarter, was there anything to call out on the services billings side? -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [22] -------------------------------------------------------------------------------- Yes. So taking those questions in reverse order as well. On the services side, unlike last quarter, there really wasn't anything much to call out. Services billings roughly were equal to services revenue. And so for billings in the back half of the year, we're not guiding to billings. Part of the reason we don't do that is for reasons just like we saw in Q2 where there was this anomalous billing that will turn around and have 0 related billing in Q2 of 2018. But we like where we sit. We ended the first half -- or the second quarter with 20% subscription billings approximately, and it sets us up to achieve what we want to in the back half. Q4, we expect to be seasonally our largest quarter, and so that will drive a billing dynamics worth noting there. But really, we feel like we're on track to hit the objectives we set out for the business. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- And our next question comes from the line of Brian Schwartz from Oppenheimer. -------------------------------------------------------------------------------- Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [24] -------------------------------------------------------------------------------- I had 2 questions, kind of follow-up from your commentary so far. The first one was just on sales productivity trends. You gave good color on positive trend that you're seeing in the enterprise sales force in the first half. The questions I wanted to ask you is, one, the other sales force segments, the newer ones, I'm wondering if you're seeing maybe not the gains yet today but if they're following kind of the similar trajectory as you scale the enterprise sales force. And then the follow-up question is, even with the gains, productivity gains you're seeing so far with the enterprise sales force, if there's still a lot of room left in that segment for more productivity improvements. -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [25] -------------------------------------------------------------------------------- Yes. Brian, this is Kurt. I'll take that one. So on the enterprise sales productivity headroom, we'll call it, there's absolutely room to grow. We think that's a big focus of the business, and it's really one of the reasons that we were excited about this IT FM offering because we think that's going to be a great product for the enterprise sales group to sell in and sell in quickly. The other segments, 2 key segments we talk about would be -- from a rep type perspective would be account management and strategic sales reps. On the strategic reps, we're seeing just consistent strong performance out of that rep group. That's been one of our bread-and-butter components from the early days, and it continues to be a strong part of our business. And on the account management side, you can call out the productivity gains there specifically. But if you look back over the last couple of years, we've seen real nice gains in account management productivity as we've really gone from not much of an upsell model to something that's now a material part of the business. And geographically, we're seeing growth where we're investing the most in growth, that being EMEA and Asia Pacific. And we've expanded into some of the Southern European countries, and we've gone outside of Australia into Singapore and some of the close by countries there. And we've had some nice wins in those areas. So we expect those geos to outpace the growth because that's where our investments come in. -------------------------------------------------------------------------------- Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [26] -------------------------------------------------------------------------------- That's a good lead into my follow-up question, Kurt. It's for you, and it's on the cash flow. And certainly, very clear just on the timing and what's going on in the cash flow. But the question I wanted to ask you is you've reiterated the cash flow guidance for this year. But if I look at the business, the margin performance of the business, you're ahead of the plan from where you started at the beginning of the year. So I'm just wondering if maybe your growth investments are ramping right now based on the business strength that you saw versus the plan in the first half. -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [27] -------------------------------------------------------------------------------- Yes. So I definitely think that's the case. So one of our growth investment areas isn't just sales and marketing. It's R&D. And that -- our R&D expense as a percent of revenue has been consistent year-over-year because that's not where we want to find margin expansion. And then on the sales and marketing side, what we've been able to do there is, I guess, grow into our investment so that sales and marketing expense as a percent of revenue is coming down, while we're adding overall rep count because we're able to have more of the investment in the sales and marketing area is quota-bearing reps. So yes, I think you're right. We're continuing to invest. -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [28] -------------------------------------------------------------------------------- And let me add to what just Kurt said. I mean, just at a meta level, Kurt and myself along with our Board of Directors, we are maniacally focused on balancing the vectors of growth and reaching cash flow breakeven. And those 2 levers are very important to our business. And once we obviously get to the cash flow breakeven, we will continue to look for opportunities to kind of balance -- further balance the vector, whether we drive incremental growth or whether we drive more leverage in the business. But getting to that point of kind of breakeven and balancing that with growth is very important to us. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- And our next question comes from the line of Ross MacMillan from Royal Bank of Canada. -------------------------------------------------------------------------------- Ross Stuart MacMillan, RBC Capital Markets, Research Division - Former Co-Head of Software Sector [30] -------------------------------------------------------------------------------- I guess, I had a question. Just I missed the early part of the call in the prepared remarks. But could you just comment on the balance between new logos and sellback to base this quarter and whether it was biased one -- the new subscription billings were biased one way or the other? -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [31] -------------------------------------------------------------------------------- Yes. Ross, this is Kurt. So from an aggregate dollar perspective, more of our new ACV came from new logos than it did upsells. But on the upsell side, we're increasing -- we're continuing the trend of greater dollars coming from upsells. But it's still a ways from overtaking new logo ACVs as the biggest additive ACV component to the business. -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [32] -------------------------------------------------------------------------------- And Ross, what I'd add on top of what Kurt said, so Q2 was our best-ever quarter from a new logo acquisition outside Q4, right, from a new logo perspective. And I think what we mentioned in the earlier part of the call was the new logos were very well balanced from a vertical, from geography as well as from the customer segment. The second point I wanted to make was the -- I was actually very pleased. If we looked at some of the sales cycles in the enterprise segment, these are very, very early trends, and there's a lot of execution ahead of us. But a few of the deals kind of closed at really, really fast sales cycle, so that was a good early trend. And a lot of this is really tied to simplification, faster deployment, cloud relevance and some of the tailwinds of hybrid IT and kind of what's happening with digitization in the enterprise. -------------------------------------------------------------------------------- Ross Stuart MacMillan, RBC Capital Markets, Research Division - Former Co-Head of Software Sector [33] -------------------------------------------------------------------------------- Great to hear. Maybe just a quick follow-up on -- maybe 2 actually. Just on the insights product, SaaS Insights, et cetera, are those finding particularly strong traction in cross-sell? We certainly picked that up, so I was just curious as to kind of which modules you're seeing the strongest cross-sell on right now. -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [34] -------------------------------------------------------------------------------- Yes. So Ross, this is Sunny again. The biggest upsell product, which Apptio has, as you know, our flagship entry-level motion to the customer is -- still remains Cost Transparency application, and customers typically buy 1 to 2 apps. So they may buy another app along with it. But from an upsell perspective, IT Planning Foundation kind of remains very strong, and that is the biggest selling. In fact, that's in -- greater than 1/3 of our customers now. And then outside those products, we are starting to see very good traction on the new insight module, especially Vendor Insights, SaaS Insights. We're getting very good traction on this Project Financial Planning, which sits on top of the IT Planning Foundation. So I would say that's kind of where we are seeing success. Now remember, we have 5 application families and obviously have 12 discrete licensable modules, so it definitely gives us plenty of room to upsell a customer. -------------------------------------------------------------------------------- Ross Stuart MacMillan, RBC Capital Markets, Research Division - Former Co-Head of Software Sector [35] -------------------------------------------------------------------------------- That's great. And then just a quick follow-up finally for Kurt on the impressive subscription billings growth this quarter. Just assuming that we don't get any significant surprises on attrition, is it fair to say that, over time, we should see subscription revenue growth and subscription billings growth converge? So I know there's obviously time to run here. But if you were to put up 20% type growth in subscription billings, are there any dynamics that would inhibit your subscription revenue to grow at that rate? -------------------------------------------------------------------------------- Kurt Shintaffer, Apptio, Inc. - Co-Founder & CFO [36] -------------------------------------------------------------------------------- No. If we can put up consistent, and when I say consistent, I mean more than just a couple of quarters of 20-ish percent subscription billings growth, logic would suggest that revenue would begin to grow at that rate as well. And I think you can sort of see those trends over time. But you can also see the trend that we have of lumpiness in those billings numbers based on various timings of things and how transactions hit in a -- in 1 quarter to the next. So -- but yes, the dynamic you described is something that is -- we would expect to see if we held this level of growth over time. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- (Operator Instructions) And our next question comes from the line of Brad Sills from Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [38] -------------------------------------------------------------------------------- I just -- I had one on the reduction and implementation cycles. I know that, that effort is kind of geared towards getting customers to value fairly quickly, both in the implementation side and then also in their ramp time once they're live. Can you comment a little bit on how, I guess, qualitatively you feel, whether it's through expansion opportunity over more spend under management? But just qualitatively, how are customers ramping? Do you feel like your renewal rates are kind of set up here to kind of expand back to historical levels and then potentially go north of that as you bring the time to value horizon more rapid to these customers? -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [39] -------------------------------------------------------------------------------- Yes. So I'll take that. This is Sunny. So look, I think meaningful progress on shrinking deployment times, that's been primarily possible through continued product innovation and secondly, I would say a lot of just tweaking around the packaging of what customers really want to consume and kind of deploy. So that's a very good sign. And generally, when we can deploy a customer fast, get them to usage and adoption faster, that leads to a very happy customer, and that leads to greater upsell opportunities. As I mentioned earlier, upsells is still very early days for Apptio in our business model. So we believe there are opportunities remain for us to kind of that becoming a bigger part of our motion. But generally, the business model -- we are very happy with how the business model is working, where we sell 1 to 2 apps, deploy faster and then gives us the opportunity to continuously sell additional capabilities. And then the other lever of upsell other than product titles also tends to be expanding the spend band under management. So more technology spend comes into the platform, and that also is turning out to be a upsell lever for us. -------------------------------------------------------------------------------- Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [40] -------------------------------------------------------------------------------- That's great. And then to that point, Sunny, on the spend under management, are you seeing the customers are starting with more as a percentage of total spend on the initial deployment? And then also, what does the expansion look like just directionally? -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [41] -------------------------------------------------------------------------------- Yes. I would say those trends have generally remained fairly constant for Apptio where customers do start with generally these managed, what I would call the central IT kind of spend. And they'll start with 1 or 2 applications. And then the spend expansion deals, which we've seen, have really come from, because of the strategic nature of IT, every major business process is powered by technology now. So we have seen increases in technology spending, and that technology spending may be coming from additional technology spend captured in the business units. We've seen dynamics where there's been additional M&A, so there's been more technology kind of spending come into the environment. And that has led to upsell -- some spend under management being a driver of the upsell. -------------------------------------------------------------------------------- Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [42] -------------------------------------------------------------------------------- Got you. Great. And then one more if I may please. On just the move down market into the next 10,000 below the Global 2000s. Can you comment please on how that initiative's going and your progress in that segment of the market please? -------------------------------------------------------------------------------- Sachin Gupta, Apptio, Inc. - Co-Founder, CEO, President & Director [43] -------------------------------------------------------------------------------- Yes. So we are making meaningful progress reaching the Global 10,000. Even if you look at 2016 in their number of reported logos, 75% kind of came from really the enterprise segment and which is really greater than $1 billion in revenue or $30 million plus in IT expense. Q2 again represented the best quarter in new logo acquisition outside the Q4. And the meaningful shortening of deployment times, we believe adding the public cloud analytics capability is a core driver. Launching the new IT Financial Management offering is a very core driver because that has even integrated services pricing, so there's one price to the customer. And really, our competitive position in the market remains very strong in all segments, so we continue to maintain strong kind of win rates. And so those are all things which give us optimism. Now with that said, it's a new category. It's an early market category. Primarily, a lot of what Apptio is doing is replacing home-grown spreadsheets and home-grown business intelligence solutions. And our journey, to be honest with you, is not that different than what the companies like Concur went through, and that's really what we are focused on and excited about from a long-term perspective. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Thank you. And I'm showing no further questions at this time. This concludes the question-and-answer session and today's program. You may now disconnect. Everyone, have a great day.