Red Hat, Inc. (RHT) Q4 2018 Earnings Conference Call Transcript

Red Hat, Inc. (RHT)
Q4 2018 Earnings Conference Call
March 26, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to today's Red Hat, Inc. Q4 FY 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during a Q&A session. You may register to ask a question at any time by pressing *1 on your touchtone phone. You may withdraw yourself from the question queue by pressing the # key. Please note today's call may be recorded, and I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Tom McCallum, Vice President of Investor Relations. Please go ahead, sir.

Tom McCallum -- Vice President, Investor Relations

Thank you, Elise. Hello everyone, and welcome to Red Hat's earnings call for the fourth quarter of Fiscal '18. Speakers for today's call will be Jim Whitehurst, President and CEO, and Eric Shander, Executive Vice President and CFO.

Our earnings press release was issued today after the market closed and may be downloaded from redhat.com on the Investor Relations page. Also on this page, you'll be able to find a copy of today's prepared remarks, a schedule of currency rates and a slide deck with financial highlights and supplemental metrics that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results.

During this call, we will make forward-looking statements about our future financial performance and other future events or trends, including guidance for our first quarter and full fiscal year FY19. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks, uncertainties, assumptions and other factors that could affect our financial results and the performance of our business and which we discuss in detail in our filings with the SEC, including today's earnings press release and the risk factors and other information contained in our most recently filed Form 10-K and Form 10-Q. Red Hat assumes no obligation to update any forward-looking statements we may make on today's call.

And with that, let me turn the call over to Jim.

Jim Whitehurst -- President and Chief Executive Officer

Thank you Tom, and let me add my welcome to all of you joining us on today's call. Our fourth quarter capped off an excellent year for Red Hat. Our global team executed well and we continued to experience strong demand for our technologies that enable digital transformation and hybrid cloud environments. We also continued to extend our strategic position as a trusted vendor for our customers as they look to modernize their data centers and adopt Red Hat technologies to build, deploy and manage cloud-native applications.

Our results for the quarter were strong and contributed to several new records and milestones for the fiscal year. Here are just a few of the highlights:

First, the fourth quarter marked our 64th consecutive quarter of total revenue growth. Second, our annual billings proxy exceeded the $3 billion milestone, while the fourth quarter marked the first time our billings proxy exceeded $1 billion in a quarter. Third, strong sales execution led to our third straight quarter of 20% or better revenue growth with 21% total revenue growth for the year. We exited Q4 with an annualized revenue run-rate that exceeded the $3 billion mark. Fourth, sales execution also contributed to a record total backlog of approximately $3.4 billion, up approximately 24% year-over-year.

Fifth, we continued to win larger, multi-year commitments from our customers. We had a record number of deals over $1 million for the fourth quarter and the fiscal year. On a year-over-year basis, we had a 50% increase in deals over $1 million for Q4 and a greater than 30% increase in deals over $1 million for the year.

Let me discuss some more highlights regarding Q4 deals:

Overall our large deal growth in the quarter was strong due to cross-selling and solid demand. For the quarter, we closed a total of 169 deals over $1 million and as I discussed a moment ago, this was up approximately 50% year-over-year. Within these deals, 26 were greater than $5 million which is a record for any quarter. Included in the 26 deals were 14 greater than $10 million with two of those over $20 million.

Cross-selling was strong, with 81% of the top deals greater than $1 million including one or more components from our group of Application Development-related and emerging technologies offerings. One-third of the deals contained 5 or more technologies across our portfolio of offerings -- providing evidence of the value Red Hat is delivering to our customers based on the expansion of our product portfolio in recent years.

Our top industry verticals within the deals greater than $1 million were financial services, tech & media and our other category which includes mainstream sectors such as retail, healthcare, and manufacturing.

On the technology front, our biggest announcement during the quarter was our acquisition of CoreOS, an innovator and leader in Kubernetes and container-native solutions. The acquisition of CoreOS further enhances our ability to help customers build applications and deploy them across hybrid environments. By combining CoreOS's complementary capabilities with Red Hat's already broad Kubernetes and container-based portfolio, including OpenShift, we aim to further accelerate adoption and development of the industry's leading hybrid cloud platform for modern application workloads.

CoreOS is the creator of CoreOS Tectonic, an enterprise-ready Kubernetes platform that provides automated operations, enables portability across private and public cloud providers, and is based on open source software. It also offers CoreOS Quay, an enterprise-ready container registry. In addition, CoreOS's talented technical team is well-known for helping to drive many of the open source innovations that are at the heart of containerized applications, including Kubernetes, where it is a leading contributor. These innovations include a lightweight Linux distribution created and maintained by CoreOS, called Container Linux, which automates software updates and is streamlined for running containers.

We continue to believe that the next era of technology will be driven by container-based applications that span multi- and hybrid cloud environments and that Kubernetes, containers, and Linux will be the foundation of this transformation. Both Red Hat and CoreOS have been leaders in open source communities and in bringing Kubernetes to enterprise customers. This acquisition further advances Red Hat as a leader of hybrid cloud and modern application deployments and will help us to expand our strategic position with customers.

In closing, we celebrated 25 years of Open Source software this past quarter, and Red Hat has been a major catalyst. As we welcome the team from CoreOS as part of the nearly 12,000 team of global Red Hat associates; we are excited to have them join our efforts to drive innovation and growth in the future. Let me also extend my thanks to all of our Red Hat associates who are keenly focused on helping out our customers to succeed. And as a company, we are confident in our ability to capitalize on the market opportunity in front of us.

On a final note, I hope many of you will be able to join us for the May 8 Analyst Day at Red Hat Summit in San Francisco. It will be a great opportunity to learn more about our strategic direction and innovative technologies. You will hear directly from our customers and partners, including technology visionaries, leading industry players and cloud providers.

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

Eric Shander -- Executive Vice President and Chief Financial Officer

Thank you, Jim. Let me also add my appreciation for the strong execution and efforts that our global associates delivered during the quarter and the fiscal year which resulted in strong financial performance that was above our guidance. Our execution this year resulted in higher growth than FY2017 across total revenue, non-GAAP operating income and operating cash flow and continues to be attributable to the demand for our hybrid cloud technologies.

Highlighting the fourth quarter, we delivered a powerful combination of year-over-year growth of 23% for total revenue, 24% for non-GAAP operating income and 14% for operating cash flow. With that introduction, I will begin my remarks with a review of our Q4 performance, followed by a summary of the fiscal year results and then our outlook for FY19.

As I discuss our results, please note that many of the major foreign currencies that we transact business in have strengthened against the dollar since we provided guidance in December and as compared to prior year. So for this quarter, I will keep my prepared remarks focused on reported USD results with occasional references to constant currency details. You will find a more detailed table of constant currency results as well as a more detailed view of our results and reconciliations for our non-GAAP measures to GAAP in our earnings press release.

We delivered $772 million of total revenue for the fourth quarter, which was above the high-end of our guidance and represented growth of 23% in USD or 18% in constant currency. We exceeded the high-end of our guidance by $9 million, which included a foreign exchange tailwind of approximately $6 million. The remaining upside was driven mainly by stronger performance in our subscriptions business, coupled with continued healthy demand for services supporting our emerging technologies.

Subscription revenue, which is mainly renewable, constituted 88% of total revenue in Q4 and grew 22% year-over-year in USD or 18% in constant currency. Higher growth across our subscription portfolio drove this result. Subscription revenue for our infrastructure-related offerings was $510 million, an increase of 17% year-over-year in USD or 13% in constant currency. Subscription revenue for our application development-related and other emerging technology offerings was $173 million, an increase of 39% year-over-year in USD or 34% in constant currency.

The primary driver of the performance in this area of our business was the growth we continued to experience with our Ansible, OpenShift, and OpenStack technologies. The higher growth rates in these emerging technologies were partially offset by a slight moderation in the growth in our middleware offerings as some customers begin to shift their workloads from traditional physical deployments to container environments, where they would run "middleware as a service" within the OpenShift environment. We believe these initial efforts to use "middleware as a service" will increase over time as customers shift more applications to container environments, benefiting our middleware results over the long run.

We view OpenShift and our middleware products as highly complementary to our overall cloud-native application development strategy. Application development-related and emerging technologies revenue represented approximately 22% of total revenue, up 260 basis points from the year-ago quarter. Lastly, our services revenue of $89 million grew 29% year-over-year in USD or 23% in constant currency. The impressive growth of our services business has been fueled by the demand for consulting projects around our Ansible and OpenShift offerings.

On a non-GAAP basis, operating income of $190 million grew 24% year-over-year and non-GAAP operating margin came in at 24.6%. This quarterly result was 30 basis points higher than Q4 last year and in-line with the operating margin guidance that I provided on our last call. This also includes the partial impact from the CoreOS acquisition of approximately $3 million.

As a reminder, non-GAAP operating income adjusts for non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations. Other income was $11 million which included a one-time gain from the sale of a strategic investment which we noted in our December guidance.

Shifting to taxes and EPS, our non-GAAP effective tax rate was 18.6% for the quarter, which is inclusive of discrete tax benefits. This resulted in non-GAAP EPS of $0.91, up 46% year-over-year and $0.10 higher than our December guidance. The lower tax rate is a result of the US tax reform and is the main reason for our higher non-GAAP EPS result vs our original guidance. Also related to the reform, we repatriated $486 million of foreign earnings and recorded a one-time tax expense of $123 million. The one-time tax expense was due to the transition tax on the repatriation and the remeasurement of our deferred tax assets. The one-time tax expense, along with our debt discount expense of approximately $5 million are excluded from non-GAAP net income.

Turning to the balance sheet, we ended the quarter with cash and investments of approximately $2.5 billion. After factoring in the additional cash from the repatriation and the cash used for the acquisition of CoreOS, our US versus non-US cash based balances represents a 58%/42% split. Our total deferred revenue at quarter end was $2.6 billion, an increase of $525 million or 25% over the same quarter a year ago.

Moving to operating cash flow, we delivered $362 million for the quarter, up 14% year-over-year. Our FX adjusted DSO was 58 days, in-line with Q4 last year. Our cash flow performance was the result of higher profitability and strong billings, which was slightly moderated by our business linearity, as it was weighted to the back-end of the quarter. As Jim noted, we experienced significant growth in deals over $1 million which was up 50% year-over-year, however many of these deals closed late in the quarter. As a result, the cash will be collected in the following quarter. This monthly linearity is something that we have discussed on prior calls and continue to actively manage.

The rolling four quarters average billings proxy was $838 million, up 21% year-over-year. As a reminder, the rolling four quarters billings proxy is calculated by adding revenue plus the change in deferred revenue on the cash flow statement for the last four quarters.

Next, let me discuss our annual backlog, which we disclose at the end of each fiscal year. Total backlog was up 24% year-over-year for a record balance in excess of $3.4 billion in USD. We define total backlog as the value of non-cancellable subscriptions and service agreements, which have billed, plus the value to be billed in the future but not yet reflected in our financial statements. The billed portion of the backlog is total deferred revenue, which was $2.6 billion. The other portion of total backlog, which has not yet billed, was in excess of $775 million up 19% from the prior year.

Of the $775 million, the portion to be billed over the next twelve months was in excess of $450 million, up approximately 36% year over year.

I will now review some highlights related to our bookings. We continued to drive balanced bookings growth across our major geographies. This quarter, 58% of bookings came from the Americas, 27% from EMEA and 15% from Asia-Pacific. The percent of business in the Americas was affected by a tough comparison due to the $100 million deal we closed in Q4 last year. After adjusting for this deal, the Americas would have had double-digit growth. The fourth quarter route-to-market mix was 71% from the channel and 29% from our direct sales force, compared to the fourth quarter prior year's split of 69% and 31%.

Looking at our top deals, 24 out of 25 of our largest deals that were up for renewal, renewed and did so in aggregate at greater than 120% of their previous value. The one deal that did not renew is with a customer that is experiencing many challenges within their industry. We continue to partner with this customer to help understand the business transformation they need to implement and where our products may help accelerate this process. On an annual basis for this metric, we renewed 99 out of 100 of the top deals at greater than 120% in aggregate.

Our proxy for bookings duration was nearly 23 months, two months shorter than the 25 months duration reported in Q4 last year. This was, however, longer than we anticipated due to the strong growth of multi-year deals that Prepared Remarks 03/26/18 were closed in the quarter. Looking at FY19, we expect our bookings duration metric will be one month lower than this past year's average of 22 months.

Now to briefly recap and summarize some of the highlights for our full fiscal year:

Total revenue grew to $2.9 billion, up 21% in US dollars or up 20% in constant currency.

Subscription revenue grew to $2.6 billion, an increase of 21% in US dollars or 19% in constant currency. Subscription revenue for Infrastructure related offerings was nearly $2 billion, up 15% in US dollars or 14% in constant currency. Subscription revenue for Application Development-related and other emerging technologies was $624 million, up 42% in US dollars or 40% in constant currency.

For FY18, Application Development-related and other emerging technologies subscriptions constituted 21% of total revenue, up from 18% last fiscal year.

Non-GAAP operating income grew by 26% year-over-year. Full year operating cash flow was $923 million, up 18% for a cash flow margin of approximately 32%. We repurchased $237 million or 2.3 million shares of Red Hat stock in the fiscal year, leaving a balance of $399 million in our repurchase program.

Now I'd like to turn to guidance. Our outlook assumes current business conditions and foreign exchange rates, which have generally, strengthened against the dollar year-over-year.

For the full-year, we are estimating total revenue guidance of $3.425 billion to $3.460 billion, up approximately 19% in USD and 17% in constant currency at the high-end of the range. Given the upfront financial impact related to the recent acquisition of CoreOS, coupled with our desire to target the strong demand for container technology, we plan on maintaining a non-GAAP operating margin of 23.9% in FY19. This plan includes more than 100 basis points of expense related to the acquisition of CoreOS. In FY20, we anticipate increasing operating margins by 25 to 50 basis points per year while continuing to invest in the strategic growth areas.

We're estimating our full-year non-GAAP earnings per share to be approximately $3.38 to $3.41 per share, assuming approximately $4 million per quarter for net other income, an annual effective tax rate of 25% and approximately 185 million diluted shares.

On a GAAP basis, we expect GAAP EPS to be approximately $2.25 to $2.28 with estimated annual stock compensation expense of approximately $215 million and annual amortization expense of approximately $38 million. GAAP fully diluted EPS guidance includes non-cash interest expense related to the convertible debt discount of approximately $20 million. We estimate capital expenditures to be in a range of $55 million to $65 million. Finally, we expect our full-year operating cash flow to be in a range of $1.035 billion to $1.045 billion.

We do not provide guidance on billings, but as we have experienced in past years, we expect Q1 to typically be our lowest quarter and we continue to see a modest shift to the second half of the year. Also, as I mentioned previously, we are expecting 1 less month of bookings duration in FY19.

Typically, Q1 has the lowest duration of the year but in Q1 FY18 we closed a deal for $30 million for 3 years that both booked and billed upfront. For Q1, we offer the following outlook. We expect revenue to be in the range of $800 million to $810 million, which is up approximately 20% in USD at the high-end of the range and 16% in constant currency. We expect non-GAAP operating margin of approximately 20.5% which includes expenses for Red Hat Summit and our regional sales kick-off events. We expect non-GAAP earnings per share of $0.68 with 185 million diluted shares. GAAP EPS is expected to be $0.42 with 187 million diluted shares.

We will continue our practice of not providing quarterly cash flow guidance, but please note that it can be variable depending upon individual payments or collections.

Recapping FY18, we delivered strong results that reflect the continued adoption of the technologies that address the opportunities around digital transformation and hybrid cloud computing. Finally, I would like to thank all of our customers who have trusted us as their business partner, and our associates around the world whose dedication and hard work helped to deliver these strong results both financially and operationally for our customers. We're optimistic that the execution this year will position us well for continued future growth.

At this point, I'd like to turn the call back to Elise for our first question.

Questions and Answers:

Operator

Certainly. As a reminder, it is * then 1 if you'd like to ask a question and the # key to withdraw yourself from the question queue. To allow everyone an opportunity to ask questions today, we do ask that you limit yourself to one question and then reenter the queue for any additional questions. Our first question comes from Kash Rangan with Bank of America Merrill Lynch. Please go ahead.

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

Hi, thank you very much, guys. Congratulations on a really good quarter. My question has to do more with balance sheet mechanics. When I look at the free cash flow generation of the company, which is pretty impressive, I always want to clarify if you look at the growth in free cash flow from last year to this year, you've added about $120, $130 million in free cash flow, but a lot of that growth, almost all of that growth, in fact, more than that growth, comes from long-term deferred revenue increase, which we've not seen grow to this magnitude. I'm just curious to get your take on how sustainable is the dependence of the company on free cash flow from contract duration or, more specifically, long-term deferred revenue increase. That's it for me. Thank you. Congratulations.

Eric Shander -- Executive Vice President and Chief Financial Officer

Kash, as we said, obviously we are expecting duration to go down. I mean, certainly, similar to what we saw last year, we did see an uptick in the longer-term deals that we're seeing. But we feel pretty bullish about some of the short-term deals that we've got in play looking at the pipeline, as well as some of the longer-term. So, we expect duration to come down to probably about 21 months as we look at this upcoming year from where it's at now around 22 months. But we're pleased with both the short-term and long-term growth on the balance sheet.

Jim Whitehurst -- President and Chief Executive Officer

Yeah, Kash, I hadn't look at that over a multi-year time, but obviously we guided cash flow for next year even assuming some duration pull-down, so given the growth rate there, I think it's safe to assume that the growth rate really isn't driven by changes in relative mix of short and long-term.

Eric Shander -- Executive Vice President and Chief Financial Officer

And I should say, our previous guidance that we have given in terms of our free cash flow operating margin of between 30% and 32% is still with what we're targeting and obviously we're at the higher end of that as we look at next year.

Tom McCallum -- Vice President, Investor Relations

Great. Next question please, Operator.

Operator

Our next question comes from Karl Keirstead with Deutsche Bank. Please go ahead.

Karl Keirstead -- Deutsche Bank -- Analyst

Hi, thanks. Question for Jim. Jim, I was intrigued by Pivotal's IPO falling on Friday. Just in the context of Red Hat placing a big bet clearly on containers, their subscription revenues it feels like are quite a bit larger than OpenShift in their growth rate of 70%+. I'm just wondering if you could, just given the importance of this part of the business to the Red Hat story, maybe briefly contrast Red Hat OpenShift with Pivotal Cloud Foundry and maybe the answer is simply that the application pass basis is so strong in early stage that there's plenty of room for two, but curious for your comments. Thank you.

Jim Whitehurst -- President and Chief Executive Officer

Yeah, obviously I've read it this weekend as well. We'll talk about it more at analyst day. We're trying to work out what we can give you instead of numbers. But just give you a couple things. I was actually surprised at their relative number of customers. We are 650+ customers on OpenShift. We added several hundred customers this year. I think that if you look in their filing, they added 44 net customers year-over-year. We added several hundred. We are growing faster than they are. Obviously, off of the smaller base, but I think we're performing quite well. After reading that, I feel even better about how we're performing on OpenShift.

We'll figure what else we can give you on that at analyst day, but what I'd say is we're growing faster. We have many, many, many more customers. I will say they obviously do a top-down, traditional sale. Their average customer size, if you just take their revenue and number of customers, is $1.5 million. For an emerging technology, you normally have more of a bubble up. So, I don't quite understand that. But overall, I would say I think OpenShift compares very favorably and gave you a couple numbers there and we'll follow-up more at analyst day with more.

Karl Keirstead -- Deutsche Bank -- Analyst

Thanks, Jim. That's helpful.

Tom McCallum -- Vice President, Investor Relations

Operator, next question.

Operator

Thank you. We'll go next to Keith Weiss with Morgan Stanley. Please go ahead.

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. Thank you guys, very nice quarter. Maybe a couple for Eric on the impacts of CoreOS. Can you help us understand from a sort of top line and bottom line perspective, how should we think about what CoreOS did in terms of billings in Q4? Maybe you could help us in parsing out the operating margin impacts heading into FY19 versus what the underlying core -- excuse the pun -- but underlying what Red Hat would have done excluding CoreOS?

Eric Shander -- Executive Vice President and Chief Financial Officer

Keith, as you can imagine, obviously as part of the acquisition, any of the deferred revenue gets written off, so you're essentially building up that book of business from scratch as we go into the new year. So, what I would say is the add of top-line revenue growth from CoreOS is not going to be significantly material. From an expense standpoint, as we mentioned in my prepared remarks, we've got over 100 basis points of expense and you all can calculate that pretty quickly in terms of what we're going to be absorbing and what's that really done for us though has helped us accelerate some of the technical hirings that we were going to be pursuing this year that we essentially brought in at the end of last year.

So we're extremely thrilled to have the CoreOS team with us. I think it does really help, as we've said before, it helps us reaffirm our No. 2 position within the Kubernetes project, but then also a lot of the automation that Jim was talking about in terms of containers, it has helped us accelerate a lot of that work. We're bullish about it but from an expense standpoint, it's over 100 basis points that we're going to be absorbing, which is why we're not taking the margin up for this year.

Jim Whitehurst -- President and Chief Executive Officer

Yeah, and again, just in Q4, because we write off deferred revenue, it rounds to 0.

Eric Shander -- Executive Vice President and Chief Financial Officer

I was several hundred thousand dollars. Again, we didn't really have a whole lot of lead time.

Tom McCallum -- Vice President, Investor Relations

Next question, please, Operator.

Operator

Our next question comes from Mark Murphy with JP Morgan. Please go ahead.

Mark Murphy -- JP Morgan -- Analyst

Yes, thank you. My congrats. Jim, the first time you used the word "Kubernetes," it was so many years ago, I had never even heard the word. And at the time, I said, Kuber- what? I didn't even know what it was. So, just considering how early you were in identifying Kubernetes and positioning for it and just now layering on top the acquisition of CoreOS, do you think that it solidifies Red Hat's positioning as a leader in Kubernetes' capabilities? And just also, as a Part B, could you just update us on how Kubernetes is tracking relative to Docker and maybe where you think that balance is heading?

Jim Whitehurst -- President and Chief Executive Officer

Yeah, sure. A couple things. Just real quick contextually, there have only been two successful models for monetizing open source. One is the public cloud model, so Amazon or other public cloud offering open source as a service, and then Red Hat's model, which is to be a significant contributor and offer on-premise and drive roadmaps for customers, etc. So as we look at Kubernetes, we can talk about leadership or not, but if you look at the key people involved, it would be Google, which has the as-a-service way to monetize it, and Red Hat, which has our Enterprise model. I do think public clouds will offer Kubernetes as a service-type offering out there.

There is such a far gap between our contribution and No. 3, that I think it would take someone a very long time to build a credible position to offer an on-premise or a hybrid Kubernetes offering. So, I never want to say the war is won; we have competitors. But I think we have a very substantial lead in being able to help Enterprise customers implement Kubernetes. Beyond Google and Red Hat, it is a far, far distant No. 3 in terms of contribution and influence on that community. So, I do feel like we're in really, really good shape there.

Relative to Docker, Docker's a different animal, right? So, Docker is doing different things. It's now adopted Kubernetes as its approach to orchestrating Docker containers. We certainly also orchestrate Docker formatted containers but I think we're more open to other types of container format. So, it's hard to compare them directly. But I will so, I don't see Docker in many of the deals that we are involved in. I think they're a little more developer-focused at this point. I feel really good about our position across a container platform. Obviously, our position in Kubernetes has put us, I think, in a far lead over anyone else.

Mark Murphy -- JP Morgan -- Analyst

Thank you.

Tom McCallum -- Vice President, Investor Relations

Next question, please.

Operator

Our next question comes from Ittai Kidron with Oppenheimer. Please go ahead.

Ittai Kidron -- Oppenheimer & Co. -- Analyst

Hi, guys, again. Great quarter. Just trying to focus on the core infrastructure business. It's been a while since we've seen such a year-over-year growth in that category. Can you talk about patterns over there and how much did cloud also contribute to that number?

Eric Shander -- Executive Vice President and Chief Financial Officer

Just high-level overall, contextually, as people look at hybrid cloud environments and/or modernizing applications to run on a more scale-out type infrastructure, those are primarily Linux-based workloads. So, I do think part of what you're seeing there is Linux willing share from Windows and also just continuing to take out Unix. I think just this general move toward hybrid cloud is good for the core Linux business.

As we've said before, the public cloud business which is to revenue the CCSP program, it continues to be very fast growth. It would be the fastest growing part of our portfolio. I think we said it was Q2 or Q3 when it hit $200 million? In Q2 we said it, it's a $200 million run rate. We haven't really given a time when we'll update that again, but you can kind of do the math around that. It's the fastest growing part of our business, so you should see it continuing to do.

Jim Whitehurst -- President and Chief Executive Officer

It's growing about twice as fast as the company. So when we hit the next milestone, we'll certainly announce that or when we're getting close to it, but it continues to grow nicely.

Eric Shander -- Executive Vice President and Chief Financial Officer

That's all RHEL, it's all RHEL revenue just the way it's recognized.

Ittai Kidron -- Oppenheimer & Co. -- Analyst

Great.

Tom McCallum -- Vice President, Investor Relations

Next question, please, Operator.

Operator

Our next question comes from Siti Panigrahi with Wells Fargo. Please go ahead.

Siti Panigrahi -- Wells Fargo -- Analyst

[Inaudible] [00:34:59] quarter mainly. Looking at this 2016 over $5 million and then you're adding emerging technology, that's good, 39%. I'm wondering, how many deals out of the 26 was driven by this emerging technology? Those large deals. Then when you look at this [inaudible] as well, so you talked about earlier 5% is emerging technology and [inaudible] 100% last year, I'm wondering if you have color on that.

Jim Whitehurst -- President and Chief Executive Officer

Let me start with a couple of those. If you look at the big deals, we didn't really break it out for just the top 26. But virtually all of those have a lot of emerging tech in them. The largest deal was virtually entirely OpenShift. Actually, 2 of the top 4 were primarily OpenShift. Two of the others in that -- I'm looking at the top 10 here, I'm just scanning -- 2 of the others were virtually entirely in OpenStack. The others have kind of quite a mix of things in them. None of them I would say were heavy, heavy, heavy, big RHEL. I mean, they all had some RHEL in them, but they were primarily the emerging tech in that kind of largest, just skimming 10 deals.

Eric Shander -- Executive Vice President and Chief Financial Officer

He has a second question.

Jim Whitehurst -- President and Chief Executive Officer

You had a second part of the question beyond what --

Siti Panigrahi -- Wells Fargo -- Analyst

I was talking about the 5% emerging technology you said last year, it was growing 100%. I'm wondering if you have any color on that for this year.

Eric Shander -- Executive Vice President and Chief Financial Officer

Yeah, Siti, it's Eric. When we get to analyst day, all of the metrics that I provided around the cloud-enabling technologies, you'll recall last year we said it was over $100 million in revenue growing over 100%, we will update all of that in May. Look forward to that in another month or so.

Tom McCallum -- Vice President, Investor Relations

Next question please, Operator.

Operator

We'll go next to Michael Turits with Raymond James. Please go ahead.

Michael Turits -- Raymond James & Associates -- Analyst

Hey, question. Thank you. A question for Eric. It looks like EBIT growth is around 18% at the midpoint of the next year and cash flow from ops around 13%. Can you parse the headwinds to that in terms of linearity, duration, and whether there's still a cash tax impact and whether or not by the time we get to Fiscal '20, maybe those headwinds are behind us so we can grow at the same rate at EBIT?

Eric Shander -- Executive Vice President and Chief Financial Officer

Yeah, so Michael. One of the things I had in my prepared remarks, we did see this year some back-end loading of the deals in the fourth quarter closing the last couple weeks. In fact, even some the last week of the quarter. So, as we modeled out this upcoming year, we assume similar assumptions as we went into both the second half of this year, as well as into Q4 specifically. Again, as we've been saying, our deals are getting larger, getting more complex. You can appreciate the fact that with our customers, a lot more procurement organizations are getting involved and it will naturally skew some of this to the back part of the quarter.

Where linearity is most important in Q4 obviously is what gets closed in month 1 and month 2, we can certainly collect a month free, but what's happening is we are seeing more activity closing in month 3 when the cash flow is collected in the following year. So what I would say is we're assuming very similar trends for this upcoming Q4 as we had this past year, but certainly, we are working with the sales teams to see if we can get some of that activity pulled out of month 3 into even month 1 or month 2 within the fourth quarter.

What I would say is we were really seeing good progress in linearity Q1 through Q3, and then not too terribly unexpected, we saw a little bit of a bigger shift, again, some of it's because it's our year-end. We would not do any kind of unusual discounting at the end of the year otherwise. So, that kind of naturally forced some of this stuff to happen in the last month of the quarter.

What I would say, Michael, is that we are continuing to work on getting those a little bit more in parity. I do think you'll see improvement in FY20. We are continuing to see a trail-off of some of the cash taxes that we're going to have in this year as well. Then I expect that to taper off a little bit more as we get into FY20. So, I don't think they're going to get exactly in parity in FY20, but they're going to start closing that gap a little bit more than what you're seeing now.

Michael Turits -- Raymond James & Associates -- Analyst

Thanks.

Tom McCallum -- Vice President, Investor Relations

Next question, please, Operator.

Operator

Our next question comes from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow -- Barclays -- Analyst

Thanks for taking my question and congrats. Can you talk a little bit more toward the middleware as a service? How much of a trend is it, Jim? How much of ahead and will it be to the application portfolio? I guess we're getting some more numbers about the emerging areas, but just to make sure that we don't read too much into it.

Jim Whitehurst -- President and Chief Executive Officer

I think we continue to take share in middleware. I just want to be clear; we continue to do that. We've had a big focus though on our core platforms of OpenShift and OpenStack. Then we're driving attached to those platforms, so as we do that, then middleware is consumed as a service on OpenShift.

I think in the very short-term, it's led to some slightly lower growth rates on the middleware side, which is pulled that [inaudible] [00:40:52] and emerging down a bit, but I think what we're trying to say is that overall, OpenShift drives greater affinity to our middleware and we see long-term that growing quite nicely as we see a large percentage of our customers who buy OpenShift ultimately buy a fair amount of middleware from us. So, there's a nice synergy across that. That's really what we're trying to say there.

Raimo Lenschow -- Barclays -- Analyst

Okay, thanks.

Tom McCallum -- Vice President, Investor Relations

Next question please, Operator.

Operator

Our next question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Matt Hedberg -- RBC Capital Markets -- Analyst

Thanks for taking my question. Jim, a lot of focus is paid for OpenShift and rightly so, but I'm curious about OpenStack. I know you're at Mobile World Congress this year and the telco vertical gets a lot of focus there. I'm curious though, are you seeing adoption for OpenStack and some other verticals as well? Maybe just an update there, thanks.

Jim Whitehurst -- President and Chief Executive Officer

Yeah. Just looking through the math of it, I think 9 of our top 10 OpenStack deals in Q4 were not in the telco space. So we're actually seeing some nice traction. A good bit in financial services, which is good to see, and then, again, a mix across other industries. So, we're actually seeing good, solid traction beyond telco. Now, obviously, telco's big. We added 50 material NFV wins with telcos through the course of the year. Those aren't pilots; these are people putting it into production for real workloads.

Obviously, a lot of those are in anticipation of 5G. So, yeah, we're seeing really nice in telco but I don't want that to overshadow the fact that we're seeing some solid traction in OpenStack. We had one big cloud provider, a big 8-figure deal, that's using it both for Enterprise and for cloud. But just kind of across the board we're seeing some good, solid OpenStack traction.

Matt Hedberg -- RBC Capital -- Analyst

Great, thank you.

Tom McCallum -- Vice President, Investor Relations

Operator, next call, please.

Operator

Our next question comes from Greg Moskowitz with Cowen & Co. Please go ahead.

Gregg Moskowitz -- Cowen & Co. -- Analyst

Thanks very much. I'll add my congratulations. Jim, just a follow-up on that last question from Matt. It's helpful to hear some of the progress for OpenStack, both telco and non-telco. As you look forward to Fiscal '19, are you building in meaningful expectations for 5G and NFV-driven deployments as part of the guide? How are you thinking about that as an opportunity over the next year as well as beyond?

Jim Whitehurst -- President and Chief Executive Officer

No, frankly nothing in the guide on 5G. But I think people are making decisions now. And again, whether it is some POCs, or as I've talked about these 50 wins when people are putting it in production for specific [inaudible] [00:43:46] for workloads. 5G is really still, I would say, at least 18 months to 2 years away before we'll see that take off. The reason we talk about it is obviously winning those now, those will scale up big. But we're a ways away from seeing those in a big way. So, we have kind of a frankly 0 win for 5G in the plan for this year in the guide we gave you.

Gregg Moskowitz -- Cowen and Company -- Analyst

Perfect. Thank you.

Tom McCallum -- Vice President, Investor Relations

Great. Next question please, operator.

Operator

Our next question comes from Jason Ader with William Blair. Please go ahead.

Jason Ader -- William Blair -- Analyst

Thanks. A quick one for Eric and then one for Jim. Eric, on the services and consulting line, how should we think about the revenue growth rate in FY19 versus FY18? Then for Jim, OpenShift obviously growing really fast. What are your priorities for OpenShift in 2018 to maintain the kind of growth that you've been seeing and really expand more into the mainstream?

Eric Shander -- Executive Vice President and Chief Financial Officer

Jason, it's Eric. For services, clearly, we had a really strong year this year. As we've been saying, services are both a leading and lagging indicator in terms of the emerging technologies and the adoption of those. As we go into FY19, we see continued strength into the first half. So I would say we're going to see low 20% range in the first half, maybe a little bit lower than that, high teens. Then as we get into the second half of the year, as we continue to bring up the partner ecosystem, we expect it to moderate a bit down, a little bit more closer to the historic levels.

It'll be a little bit higher than our historic levels because it will take some time to get these partners up and running, but we have been working with a lot of our partner ecosystem to really get them up and scaling that out. It's really going to be first half continued strength, second half we'll moderate a little bit closer toward more of our historical levels. So that's the way I would model it for services.

Jim Whitehurst -- President and Chief Executive Officer

Then does well with OpenShift and what we're doing. I think we've done a really good job of building bottom-up groundswell momentum around OpenShift. What that's starting to reflect now is SIs coming to us wanting to build practices because they're seeing demand from their customers. So you'll see us working a lot with partners to work to build out services capability around OpenShift.

The other thing that -- well, we'll be able to talk about it if you're at summit is that some of the other large industry players are seeing interest in OpenShift and so we should have some announcements at summit that'll be interesting around that. So, I'll whet your appetite to come see that as well. Really building out the ecosystem now that we've built the core kind of groundswell, bottom-up demand. Now that the ecosystem is interested, we'll make sure that we light that up and enable it to further accelerate the business.

Jason Ader -- William Blair -- Analyst

Thank you.

Tom McCallum -- Vice President, Investor Relations

Great. Next question please, Operator.

Operator

We'll go next to Adam Holt with MoffettNathanson. Please go ahead.

Adam Holt -- MoffettNathanson -- Analyst

Hi, thanks for the question. If I could just follow up on the OpenShift business, which obviously continues to be strong. I wanted to make sure I understand because I asked about this, I think, last quarter or two quarters ago, this idea of a transition in middleware. Are you seeing customers buy OpenShift and not buy middleware because they're able to build applications and deploy independently of the Enterprise product? Or is it just a delivery model shift that ultimately ends up pulling along more of the middleware? When would you expect, I guess, if you will, that shift to normalize so that it's not a headwind for the OpenShift business?

Jim Whitehurst -- President and Chief Executive Officer

It's a bit of both. The OpenShift platform, one of our real strengths is we can run both traditional staple applications and cloud-native applications on the portfolio. So, the traditional staple applications can pull Java, EAP, etc. out of the middleware portfolio right in. So, as people migrate applications, that migration often is off of WebSphere, WebLogic, onto JBoss as the containerized application server on OpenShift. And so we get a lot of attach as people are doing brownfield.

For the more greenfield cloud-native stuff, that's when stuff like BRMS, our rules engine, BPM, Fuse, our services that you need whether that's messaging or integration or rules that you do need or API management on a new, more modern application, those get dragged through on the newer stuff, so it's a little bit on both. It depends on the use case and a lot of companies will start with one like I'm going to do my cloud data stuff, and they justify it or pay for it by moving the traditional brownfield. But again, it depends a little bit on the customer.

But across the board, once you're building on OpenShift, it does make it easier, and we make it easy to consume any of the middleware services. So, that's why I think we're seeing a good tailwind there.

Adam Holt -- MoffettNathanson -- Analyst

Great, thank you.

Tom McCallum -- Vice President, Investor Relations

Great, thank you. Next question, please, Operator.

Operator

Our next question comes from Abhey Lamba with Mizuho Securities. Please go ahead.

Abhey Lamba -- Mizuho Securities -- Analyst

Thank you. Great quarter, guys. Jim, I wanted to revisit the OpenStack question. It's great to see traction outside of the telco [inaudible] [00:49:39] and its use case in telco is well understood. IT would be helpful if you could tell us what are the enterprises using OpenStack for and what type of loads do you expect there?

Jim Whitehurst -- President and Chief Executive Officer

If you look across the workloads, it is really for a whole set of different types of new workloads. A lot of it is OpenShift running on OpenStack. You have to have infrastructure underneath it and if you want that to be on-premise, we're seeing a lot of OpenShift on OpenStack as people are building things out. We have some large, especially in financial services, just customers with kind of RHEL-based type workloads and as they're putting in new infrastructure, putting those on OpenStack as it's continued to mature.

It's a whole mix there. I'm trying to see if I can pull up some more specifics on the deals. But it really is kind of a whole mix of what I'll call general purpose types of workloads. It's across government, technology, a lot of financial services in there as well. Actually, a chunk of those has RHEL as well in there. But a chunk of them are also OpenShift. So it really is kind of a whole mix of general purpose workloads.

Abhey Lamba -- Mizuho Securities -- Analyst

Thank you.

Tom McCallum -- Vice President, Investor Relations

Next question, please.

Operator

We'll go next to Kirk Materne with Evercore ISI. Please go ahead.

Kirk Materne -- Evercore ISI -- Analyst

Thanks very much. I'll add my congrats as well. Jim, I was wondering if you could just talk a little bit about Ansible? When we talk to folks, obviously a lot of momentum and interest around OpenShift. But we've heard a lot about Ansible over the last say 3 to 6 months. I was wondering if you could just add a little bit more color there, how it's performing against your expectations, and how that plays into sort of the broader strategy on the cloud side? Thanks.

Jim Whitehurst -- President and Chief Executive Officer

First off, thank you for asking. It really has been a real standout performer for us. It continues to grow even faster than our very high expectations. We now have over 1 million nodes managed. It's big and growing fast. We released a networking product or module really in the fall. We've already had 14 material Ansible wins. Of the large deals of $1 million, 53 had Ansible components in it. It continues to grow really nicely. The nice part about it is it fits in broadly as you start thinking about automating containers. It fits in that space.

It fits in the CICD pipeline, so it holds dev ops world. It fits again as you start thinking about managing network devices. We're seeing the same thing in security, where security is moving for people wanting to just have issues identified to having them remediate and Ansible is a particularly good technology to do that.

It's just a general purpose technology that's easy to use. We're seeing that really across the board. It fits well into our core cloud strategy, but it fits in nicely in a number of scenarios. Especially as we start to see IoT and those types of use cases. It really is a great solution for a whole set of pain points there. It's growing really well and we see nothing to say that's going to slow down.

Tom McCallum -- Vice President, Investor Relations

Great, thank you. Operator, we have time for one more question, please.

Operator

Certainly. We'll take our final question from Keith Bachman with Bank of Montreal. Please go ahead.

Keith Bachman -- Bank of Montreal -- Analyst

Hi, thank you very much for fitting me in. I also wanted to ask about Ansible. Consistent with Kirk, we've heard good things about it. But what are you, when you're out there bidding on work, what is it typically that you're bidding against in terms of Ansible? In other words, what's the use case that customers are alternatively looking at that they're going to use different technologies than Ansible?

Then just to sneak in one, sorry, since I'm the last caller. Michael asked about cash flow. Looking at the difference between the revenue guide and the cash flow guide, the cash flow's lower growth rate, but you didn't mention the duration as one of the impacts. Perhaps I missed it, but I just assumed that duration was also impacting the cash flow. If you could just clarify. Thanks very much and congratulations for a good quarter.

Eric Shander -- Executive Vice President and Chief Financial Officer

The second one's a little bit easier, duration. It is actually in my prepared remarks. We do expect duration to shorten by a month.

Jim Whitehurst -- President and Chief Executive Officer

On the first one, that's a great question and I ask that question a lot. There isn't a really good, simple answer to a competitor because I would say 80% of the time, that may be a little high, but not too far off of that, it's Ansible versus do-it-yourself. People writing scripts. It is manually people doing stuff. So there is another technology, in very rare cases, for more traditional-type automation. A little bit of chef for people like that. But the vast majority of the use cases are people saying well, I can automate this and take human labor cost out, or have better security compliance and auditing because I now have a tool to do this versus humans running around.

So really, the vast majority of cases, it's replacing DIY people running scripts and running around with fobs and that kind of stuff. So it's a great story because it really does help with workflows, automation, security, it can take real cost out, or, importantly, help organizations scale without adding incremental resources. So, it's rarely this technology versus that technology. It really is kind of this versus DIY.

Keith Bachman -- Bank of Montreal -- Analyst

Understood, thanks very much.

Tom McCallum -- Vice President, Investor Relations

Thank you, Operator. Thank you, everyone, for joining the call today. We appreciate it and we hope that you will be able to join us at our analyst day at Red Hat Summit. We have VIP passes for everyone. Please come if you can. Thank you.

Operator

This does conclude today's conference. We appreciate your participation. You may disconnect at any time. Have a wonderful day.

Duration: 57 minutes

Call participants:

Tom McCallum -- Vice President, Investor Relations

James Whitehurst -- President and Chief Executive Officer

Eric Shander -- Executive Vice President and Chief Financial Officer

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

Karl Keirstead -- Deutsche Bank -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Mark Murphy -- JP Morgan -- Analyst

Ittai Kidron -- Oppenheimer & Co. -- Analyst

Siti Panigrahi -- Wells Fargo -- Analyst

Michael Turits -- Raymond James & Associates -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Matt Hedberg -- RBC Capital -- Analyst

Gregg Moskowitz -- Cowen and Company -- Analyst

Jason Ader -- William Blair -- Analyst

Adam Holt -- MoffettNathanson -- Analyst

Abhey Lamba -- Mizuho Securities -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Keith Bachman -- Bank of Montreal -- Analyst

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