Nutanix Inc

NASDAQ:NTNX

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Nutanix Q1 Fiscal 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today Tonya Chin, Vice President of Investor Relations and Corporate Communications. Thank you. Please go ahead, madam.

[Tonya Chin, VP of Corporate Communications and IR]

Good afternoon and welcome to today’s conference call to discuss the results of our first quarter of fiscal 2020. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix's CEO; and Duston Williams, Nutanix’s CFO.

After the market closed today, Nutanix issued a press release announcing financial results for the first quarter of fiscal 2020. If you’d like a copy of the result - the release, please visit the Press Releases section of the Nutanix website.

During today’s call, management will make forward-looking statements within the meaning of the Safe Harbor provisions of federal securities laws regarding among other things the company’s anticipated future financial performance in various periods, including anticipated revenue; software and support revenue; or TCV revenue; billings; software and support billings or TCV billings; gross margin; operating expenses; net loss; net loss per share; weighted average shares outstanding and annual contract value or ACV.

The assumptions underlying our anticipated future financial performance in various periods, our plans to provide future projections and financial guidance, our plans, and timing for and the benefits and impact of our transition to a subscription-based and recurring revenue business model including anticipated impacts thereof on our business and financial results, and our ability to complete the transition successfully and in a timely manner, our business plans, initiatives and objectives, and our ability to achieve such business plans, initiatives and objectives successfully and in a timely manner and the anticipated benefits and impact thereof on our business, competitive position and financial performance, demand for and customer adoption of our products and services, and our ability to retain and expand upon existing customer relationships, our continued investment in talent, technology including our subscription-based product and marketing, and the success and impact of such investments, the benefits and capabilities of our platform, products, services and technology; our customers plans regarding their adoption or deployment of our products, our plans for and expectations regarding new products, services products features and technology that are under development or in process; the interoperability and the availability of our solutions with and on third-party platform, competitive and industry dynamic, market size and potential market opportunity, and other financial and business-related information.

These forward looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future.

We undertake no obligation and explicitly disclaim any obligation to update, alter or otherwise revise these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our annual report on Form 10-K for the fiscal 2019 filed with the SEC on September 24, 2019, as well as the earnings release posted a few minutes ago on our website. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Please note, unless otherwise specifically referenced, all financial measures we use on this call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We provided to the extent available reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release.

Turning to our upcoming conferences, Nutanix management will be at the Wells Fargo TMT Summit in Las Vegas on December 3, the Credit Suisse Technology Conference in Scottsdale on December 4, Raymond James Technology Investor Conference in New York City on December 10, the Barclays Global TMT conference in San Francisco on December 12, and the Needham Growth Conference in New York City on January 14. We hope to see many of you there. Lastly please mark your calendar for our third Investor Day in New York City on Thursday, March 26.

With that, I'll turn it over to Dheeraj.

[Dheeraj Pandey, CEO]

Thank you, Tonya. Good afternoon, everyone. Thank you for joining us and a very happy Thanksgiving in advance.

In September, we celebrated our 10th anniversary. It reached $1 billion in annual revenue, faster than most software companies had in the past 20 years with deferred revenue at almost $1 billion as well.

In the last two years, we have transformed our business model from appliance to software and are now doing sole subscription. As we look to our next 10 years, we see even bigger opportunities to continue to work hard with our customers to ensure that words frictionless, reliable, and invisible remains synonymous with Nutanix.

Q1 was a strong quarter for us based on better than expected financial results, progress in subscription, recorded large deals, as well as continued new product traction. To build on last quarter’s strong momentum with $370 million in software and support billings or TCV billings and $305 million in software and support revenue or TCV revenue both metrics beating consensus.

We signed the second highest number ever of large deals in a quarter which we define as deals greater than $500,000. Subscription grew to 73% of total billings up from 71% last quarter as we move steadily towards the goal of more than 75% which is our stated goal by the end of fiscal 2020.

Later, I'll talk more about why our move to subscription model gives us a competitive edge in a world that is increasingly going hybrid. We also had strong 39% year-over-year deferred revenue growth in Q1 reaching nearly $1 billion in the quarter, a notable milestone.

In this call, I want to focus on the three pillars of our execution that are driving this improved financial performance; our go-to-market engine, our move to subscription model as we establish a new baseline and the organic adoption of our new products.

The headline of the quarter was our continued momentum in execution across both sales and marketing. In addition to increasing our focus on lead generation, our global sales leaders continue to infuse rigorous operational discipline to our sales process around the world. The Americas region delivered record high software and support or TCV bookings this quarter.

We also made excellent progress in sales hiring in the quarter with a record number of net new sales reps. We made another key sales hire during the quarter with the addition of a new VP of Americas channel. The new leadership is focused on helping our partners virtualize, simplify and integrate the multi-cloud experience of our customers.

As we noted on last quarter's call, we spend the last three years building a robust enterprise business. Our goal is now to balance that with an equally strong mid-market business, as commercial customers are just as aspirational as enterprises on the hybrid cloud transformation. Not surprisingly, we discovered many of our million dollar accounts in this segment.

One real example of a new customer win in this segment was with a U.S.-based Internet service provider. This deal which was $750 million comprised our core AOS operating system, Prism Pro, Bios and native AHV hypervisor to build a scalable private cloud, deleveraging Nutanix to run several of the enterprise apps including their Oracle databases.

We also recently added a seasoned technology veteran to our executive team with the hire of Tarkan Maner as Chief Commercial Officer. In his multi-faceted role, Tarkan will lead business development, M&A, global system integrators, service providers and so on for cloud and platform products.

I've watched Tarkan build two very meaningful companies in the last 15 years, Wyse Technology and Nexenta. It brings an entrepreneurial mindset and an acute awareness of the computing landscape. His authentic leadership style, a clear bias for action and a broad industry network have helped him create high energy companies in the space of end user computing and storage. I’m thrilled to have an extremely hardworking leader who’s passionate about cloud, telcos, people and clarity in communication.

Speaking of clarity, let me share some of our progress in the simplification of our go-to market messaging that emphasizes customer solutions rather than individual products. We focused on three solutions around private cloud, end-user computing and databases. One of the most common themes we hear from customers is that they want their computing silos to work seamlessly from performance, security, APIs and ease of use point a few.

This frictionless delivery is the focus of our new global ad campaign launched this quarter that shows how Nutanix software brings it all together now to virtualize, simplify and integrate data, applications and infrastructure. This outstanding approach was very well received at our European .NEXT Conference this October, where we brought together 4,500 attendees in Copenhagen at our biggest EMEA even to-date.

Customers, prospects, employees and more than 1,200 Nutanix channel partners participated in over 100 technical breakout sessions to hear about the why, the how and the what of our future and how it relates to their multi-cloud journey over the next three to five years. Our customers now want to take our software to hyperscaler substrates in the public cloud as they realize that compute and storage need to set side by side in these highly virtualize network environments.

At our conference, we showcased how we are approaching this problem by making the private and public cloud symmetric for our customers. They can build secondary sites, force computing to accommodate seasonal peaks, and globally load balance or distributed application across these data centers with a single fordable software license orchestrated by a single pane of glass that manages both sides of the aisle.

It's events like .NEXT that help us drive strong momentum in large deals with new and existing customers. Shortly after .NEXT in Copenhagen we signed a multimillion dollar deal with a leading financial services forum in Germany that attended the event. They are now using Nutanix to run their mission critical financial services applications.

This really is great example of how to leverage our premier marketing events to build trust with our prospects. That customer was just one of the 66 customers we signed in the quarter that worth over $1 million record for us. 13 of those customers also spend at least $1 million with us in Q4, with 50% of them increasing their engagement with us to support new workloads in Q1. In addition, this quarter, we closed nine deals worth more than $3 million.

Finally, we are close to reaching a milestone of having nearly 1,000 customers with a lifetime spend of more than $1 million, up 39% year-over-year notwithstanding the compression in our topline due to subscription.

Our biggest deal this quarter was with the repeat marquee client that invested nearly $9 million in subscription licenses to modernize the infrastructure. This global Fortune 10 company has lifetime bookings with us of over $38 million. The use case fuels a new edge computing solution that will manage their climbing use of IoT sensors and provide additional security to their digital transactions. This relationship accentuates what we are known for in the market reliability, reliability and reliability of our products, our processes and our people in customer support and customer success.

And finally, this relationship also underscores how we're helping our Fortune global 100 customers transform from ownership of technology to access to technology with a subscription consumption model.

To own music with iTunes or to stream music with Spotify is a simple way to think about tradeoffs of ownership versus access. Given how rapidly technology is changing, companies are introducing new products enterprise customers are waking up to this idea of subscription to a product portfolio being streamed to them in a very similar way. Just a short amount of time, we have shown strong progress in transforming our business to cater this new cloud consumption mentality.

This transition will enable us to offer what we believe is one of the infrastructure segments only to license mobility models to protect our customers’ investments in multicloud computing. It will help our customers to move investments fluidly between private and public clouds, as their business needs dictate. Our flexible licensing is a competitive differentiator and a clear customer benefit.

Equally important is how the subscription model paves the way for our long-term profitability as we set go-to-market incentives, respectively for hunting versus farming of annual contract value or ACV driven by sales versus total contract value or TCV driven by customer success.

Speaking of customer success, one of our top subscription deals in the quarter came from a large civilian department of the U.S. government and is worth nearly $5 million. The deal represents this customer's first private cloud solution with our AHV hypervisor to manage and scale mission-critical workloads.

The customer who use Nutanix to run Oracle in addition to selecting error for their database management and frame to deliver virtual desktops to its growing user base. They chose us for a product quality and breadth, simplicity and strong customer references.

Speaking of simplicity, recently a Nutanix customer posted on an online forum about how easy it is to update Nutanix Clusters. The customer said, "I just wanted to give a shoutout to Nutanix on here so everyone knows how great and easy it is to set up an entire cluster from scratch".

This customer had previous experience with multimillion-dollar projects for incumbents, which took weeks. That said, with Nutanix, it would have taken two hours. They went on to say, “I know Nutanix talks about this, but we need to be shouting this from the rooftops.” We intend to bring the same level of invisible laps when customers are instantiating workloads in a hyperscale data center of the public cloud.

Another example of a $1 million plus subscription deal in Q1 was with a new customer that is a high profile US-based apparel manufacturer. We're helping this customer modernize their infrastructure to move off of a legacy three tier solution into a cloud forest architecture for their data centers, their primary workloads into databases and VDI.

We partnered with a global XI who's helping us integrate Xi Beam, Calm, Files, Flow and Prism Pro with our native virtualization technology, AHV. The customer chose us for a simple ease of use, single pane of glass and the flexibility for the IT team to scale an elastic infrastructure.

On the topic of flexibility, one of the key benefits of subscription is that it allows customers complete freedom to choose to spend operating our capital budget dollars. The hybrid consumption model in this case unlocks mobility of the entire stack including data, applications, networks and licenses.

The 2019 Enterprise Cloud Index or ECI issued just two weeks ago supports these pieces of app mobility. The independent third-party survey asked over 2,600 global IT decision-makers about the state of global enterprise cloud deployments and adoption plans for hybrid cloud. 85% of ECI respondents said hybrid cloud is the ideal IT operating model. 95% reported that it’s essential, desirable to be able to easily move applications in the cloud environment. Moreover, 73% said they’re moving applications back on-premises, indicating a clear need for mobility.

Switching gears to our third pillar of execution in the quarter which was traction of our new product portfolio. Customers know and love us for our reliable HCI core and our customer success ethos.

Architecturally, we brought together storage, compute and networking into a platform combining the benefits of web scale architecture with the consumer grade simplicity of a smartphone delivered with a genius-bar like customer support experience. Over time, this trust and loyalty made our customers realized they wanted and needing more from us higher up the stack. Given how poor their other IT relationships are. Our newer products continue to gain traction in the market.

In fact, this holistic approach of a hybrid cloud stack is often a critical reason why we win deals. In Q1, our number of deals that included at least product beyond our core HCI offerings increased once again at 28% in a rolling four quarter basis showing nice progression from 26% in the previous quarter.

Our software and services portfolio now covers the trifecta of data plane, control plane and management plane. With the data plane comprised of the run time for the machines which themselves a pure software in the world software define. The control plane is where the machines orchestrate other machines and the management plane is where humans interact with machines increasingly with the help of AI in an era of AI ops.

One example of the power of our product portfolio is that one of the world's leading organ transplant nonprofit organizations. This customer purchased over $2 million of our software including our core AOS operating system, comm, flow, files and AHV Hypervisor to run their SQL databases. The use of Nutanix software is a critical part of the full scale modernization of the computing platform.

When trialing our software earlier this year, we saw 1.5 times performance improvement with the legacy infrastructure. This customer is now evaluating Xi Leap our cloud based data recovery solution. We also scored a competitor win with a largest organic farming cooperative in North America in the quarter.

The farming industry has been going through significant changes which drove this customer to look at new and innovative IT solutions to address their database performance issues and support future growth needs. Return to us to reduce operating costs by significantly shrinking the database licensing fees. And a great example for our TCO, the cost savings on these licenses alone funded the purchase of our software.

On the topic of hyperscaler platforms we announced Nutanix clusters earlier this year to enable our software to run in public cloud data centers. Our approach to multi-cloud is architecturally different. Just like HCI was so different than converged infrastructure or CI. CI was nothing more than a band aid stropping large technology providers under one roof.

We founded this company on the premise that CI was a hack, a temporary coalition of big brands that would not withstand the test of time because it was packaging expensive hardware and software under an umbrella term of convergence with no change to the operating and consumption models.

HCI on the other hand was a fundamental rethink on an empty canvas of commodity servers, commodity networks and enterprise great software coming together with an elegant consumer grade design. How we look at the new multi-cloud world of the new HCI challenge with their commodity servers, their commodity networks and our software and design is the journey of this decade.

I’ll share more about clusters in the coming months. We hope to convince Gartner one more time about the real convergence of cloud’s Magic Quadrant. Virtualizing, simplifying and integrating them all together into one delightful experience is in our DNA.

Speaking of delight, providing our customers with the freedom to choose which hardware report platform to run our software was a masterstroke for us in 2014. When we decided to open our appliance router market to competition from other server vendors who started to OEM our software, we're pleased to see our new relationship with HPE start to blossom this being the first quarter since the integrated products G8. HPE’s huge customer base can now easily adopt Nutanix.

As we announced the general availability of our software in HPE ProLiant DX servers, fully integrated with our enabled support, HPE’s hybrid cloud in the server’s GreenLake solution was built in Nutanix AHV Hypervisor is also generally available now.

As a result, we saw a number of new customer wins in these solutions during the quarter. In Q1, more than half of our HPE DX customers were also new logos to Nutanix, validating this new partnership and our software has increased exposure to HPE installed base.

One example of how our new relationship with HPE is ramping faster than any of our past OEM partnerships is a nearly $2 million deal in Q1 with a new customer which is a large EMEA-based insurance company. Early success is compelling customers who already explored databases and service used case with Nutanix Era.

One very critical initiative within the company is Xi test drive service running on Google GCP. To me this is one of our most important projects to get right for a true digital transformation of the company. How our prospective customers go from a digital banner ad to trying out our entire product portfolio hosted in the public cloud in a one click, self-guided experience is a testament to how far we've come from being an appliance company a couple of years ago.

If we get this right, it’ll immensely improve profitability in the commercial mid-market as most of the prospects would then be enable with a digital touch, and only the self-selected ones would require a human touch.

I'm proud to say that in this last year, we also done a thousand-odd credit card transactions to sell our cloud services with zero human touch. Digital transactions are core to our future including for subscription renewal and eventually to our profitability.

Finally, we are humbled we recognize that Comparably is a great company for millennials to work for in the San Francisco Bay area and also Bloomberg Intelligence is one of the 50 companies to watch for in 2020.

Before I turn it over to on to bring it all together now. I want to bring it all together now. Strong quarter, continued progress and the rollout of a subscription model, record number of large deals, growing demand for new products and an increasingly digital go-to-market strategy, beneath it all, the care and attention we give customers remains one of our most substantial competitive differentiators.

Our proven track record and passion for simplifying complexity makes us a trusted partner for enterprises building the computing platform. Our long-term differentiation continues to be at the intersection of public and private clouds in how we virtualize, simplify and integrate the silos to make computing invisible anyway.

Now I’d like to turn it over to Duston. Duston?

[Duston Williams, CFO]

Thank you, Dheeraj.

Q1 was a quarter during which we met or exceeded our guidance for software and support billings, software and support revenue, gross margin, operating expenses and earnings per share. We were pleased with the amount of pipeline we generated in the quarter in that our backlog position showed very little change from Q4 FY 2019 to Q1 FY 2020.

This was in sharp contrast to the fact that over the last three years we have experienced on average about a 25% decline in backlog from Q4 to Q1. During the quarter, we also made good progress on our shift to our recurring subscription business.

In Q1, subscription billings accounted for 73% of total billings up from 71% in Q4 and subscription revenue now accounts for 69% of total revenue, up from 65% in Q4. This subscription shift for the quarter was in line with our guidance last quarter at which time, we mentioned that the subscription percentages would fluctuate a bit plus or minus for the next couple of quarters with a goal of 75% of billing from subscriptions by Q4 of fiscal 2020.

Q1 marked our fifth quarter into the subscription transition, we have strived during this transitionary period to find an ideal financial metric to portray an apples-to-apples comparison of our top line growth one that mixes the attributes of the old life of device model with the new subscription model.

Historically, we've had one metric TCV or total contract value for software and support that we apply to show the growth rates for the entire company which combined the old life of device model business model and the new subscription based business model. Using TCV as a growth metric works well for the old life of device model but not for the new subscription based model as TCV ignores changes in term lengths and therefore significantly understates the true growth of the business in a period of decreasing term loans.

As such, we believe the single best metric to measure the true growth profile of the company during our transition to our new subscription based model is new annual contract value plus renewals or ACV for short booked in the quarter, which includes sales of life of device licenses based on an assumed five-year term. By calculating in this way, we take into account the changing term lengths while still showing the impact of our continued sales of life of device licenses.

Having aggregate ACV in any given period will allow us for a cleaner apples-to-apples comparison of period-over-period growth rates. In its most simplistic form, we define ACV booked in the quarter as the annual contract value of new business plus the annual contract value of renewals.

And we calculate ACV booked in the quarter by taking the value of each transaction booked in the quarter including renewals but excluding professional services divided by its term length and then summing the total of those values. We have updated our investor deck to include this new ACV metric. The average dollar weighted term length in Q1 2020 including renewals was 3.9 years versus 3.9 years in Q4 2019. This calculation assumes life of device licenses for five year terms.

Now moving on to some specific Q1 financial highlights. Again for simplicity purposes and as we said last quarter, we used the term TCV or total contract value to describe our software and support revenue in billings.

TCV revenue or software and support revenue for the first quarter exceeded our guidance range of $290 million to $300 million coming in at $305 million up 9% from a year ago and up 6% from the previous quarter, reflecting the revenue compression from the company's ongoing transition to subscription and the significant reduction of hardware revenue.

TCV billings or software and support billings were $370 million versus our guidance of $360 million to $370 million, up 5% from the year ago quarter and up 3% from the prior quarter also reflecting the billings compression from the company’s ongoing transition to subscription in the significant reduction of hardware billings.

ACV booked in the quarter was $123 million and up 18% from the year ago quarter. New customer bookings represented 24% of total bookings in the quarter the same as Q1 2019 and up from 23% in Q4 2019.

Although we only had a partial shipment and a quarter of shipments, our HPE DX-related bookings got off to a good start with about $8 million in sales including 25 new customers to Nutanix. We will not normally disclose this level of detail but we felt that was important to provide an initial indication of the progress early in the relationship.

Americas was our best performing region in Q1 on a year-over-year basis, the enterprise-related business outperformed the commercial business. Our federal business performed slightly better than expected. In Q1 TCV bookings are softer, and support bookings from our international regions represented 40% of total bookings versus 40% in Q1 2019.

Our non-GAAP gross margin in Q1 was 80% in line with our guidance. Operating expenses were $386 million and at the lower end of our guidance range of $385 million to $390 million. And our non-GAAP net loss was $135 million for the quarter or a loss of $0.71 per share.

A few balance sheet highlights, we closed the quarter with cash and short term investments of $889 million down $20 million from Q4, we used $26 million of cash flow from operations in Q3 which was negatively impacted by $10 million of ESPP outflow. Free cash flow during the quarter was negative $44 million and this performance was also negatively impacted by the $10 million of the ESPP outflow in the quarter.

Turning to our details of our Q2 guidance on a non-GAAP basis for Q2, we expect TCV billings or software and support billings to be between $410 million and $420 million versus current consensus estimates of $410 million. TCV revenue or software and support revenue to be between $330 million and $335 million versus current consensus estimates of $328 million, gross margins of approximately 80%, operating expenses between $400 million and $410 million versus current consensus estimates of $407 million in a per share loss of approximately $0.70 using weighted average shares outstanding of approximately $193 million.

The TCV billings or software and support billings guidance assumes the dollar weighted average deal terms remain constant quarter-over-quarter at 3.9 years. Based on the TCV billings or software and support billings at the guidance midpoint of $415 million, ACV for Q2 would approximate a $135 million reflecting an approximate year-over-year growth rate of 24%.

Now turning to the fiscal 2020 guidance. Our guidance for fiscal 2020 remains unchanged, which we believe to be prudent based on the uncertain macro environment referenced by many infrastructure related companies over the last several months.

So, specifically for fiscal 2020, we expect TCV billings or software and support billings between $1.6 billion and $1.75 billion. TCV revenue or software and support revenue between $1.3 billion and $1.4 billion. Gross margins of approximately 80% and operating expenses between $1.65 billion and $1.7 billion.

For representative purposes, based on the TCV billings, our software and support billings at the guidance midpoint of $1.7 billion, ACV for fiscal 2020 were approximate $535 million, reflecting approximate year-over-year growth rate of 25%. The guidance for fiscal 2020 assumes no major economic downturn during the fiscal year and no change to the current dollar-weighted average deal terms currently at 3.9 years.

And with that, operator, you could now open the call up for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

[Matt Hedberg, RBC Capital Markets]

Thanks for taking my questions. And first of all happy 10th anniversary and congrats on the strong results, guys. I wanted to touch on maybe just first the macro spending question. Then I had a question on partnerships. Obviously good results here. It sounds like you had good progress in the Americas’ strong large deal performance. I'm curious if you could talk about rest of world and maybe some of the things you've learned in the Americas that can be applied to the rest of the world. And maybe just your overall comments on IT buying patterns, spending patterns.

[Dheeraj Pandey, CEO]

Well, I think - thanks for the question, Matt. I think at the high level when we look at our overall quarterly performance, 40% from International hasn't been and in line with what we did a year ago. So we don't see anything unusual in APAC and EMEA. Obviously, Chris' leadership has been telling in America, they would love to actually go and apply a lot of that rigor to both APAC and EMEA as well.

[Matt Hedberg, RBC Capital Markets]

Then, I guess in terms of your partnerships, you've specifically called HP which was it was great to hear some of the success there. And you commented briefly Dheeraj on GCP with Xi. I’m wondering if you can give us a little bit more of an update on GCP in particular. If there's anything that you have in terms of joint customer or momentum that you could share, that would be - it would certainly be helpful.

[Dheeraj Pandey, CEO]

Yes. Again on GCP, you know I talked about Google test drive, one of our most important projects to get right for us to increasingly have a digital go-to market motion and it's a very, very important project for us to really, really improve the efficiency of our commercial segment.

We are working very closely on Kubernetes, Calm and Anthos are coming together well. And our approach is to integrate Anthos to the control team of Calm, rather than raw hypervisor like AHV or something. So, there's some really good progress we have made over the last three to six months in Anthos with GCP. And we’re hopeful that with the recent acquisition of CloudSimple, it will open up new doors for bare metal as a service. And bring GCP on par with what we are doing with AWS and Azure.

[Operator]

Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.

[Rod Hall, Goldman Sachs]

I wanted to ask for starters just to double check that our math is right on the top line impact this quarter. So the ACV grew 18% year-over-year and then software support up 9%. So the difference in the two is I guess what you would say is the top line impact from the transition. Just double checking that, Duston.

[Duston Williams, CFO]

Yes, it's not as simple as that necessarily because the ACV calc obviously different term lengths are weighted differently within the ACV but you can get some feel there for the difference but I wouldn't take that literally.

[Rod Hall, Goldman Sachs]

Right just going to put this in a ballpark anyway. Okay, thanks for that. And then the main thing I wanted to ask is ACV is accelerating to 25% growth in the forward quarter at least that's kind of where we are on the midpoint. I wonder if you guys could maybe comment on what's driving that? Is that GreenLake or is it - there's some other thing that is driving that acceleration in ACV?

[Dheeraj Pandey, CEO]

Well part of is just creating a new baseline because that - we just flushed through a big chunk of the transformation. We think we have a stable term length now. Our salespeople are getting used to selling subscription. Our customers are getting used to hearing about subscription, our channels partners have gotten enabled.

We know how to defend value, protect value through software. It's getting better as well in that sense. So, I think all in all this was a tough 12 months for us. But I think it was well worth it. So, I think - to summarize it's really a new baseline and of course we put some real meat behind the bones when it comes to pipeline and marketing and demand generation and things like that.

[Rod Hall, Goldman Sachs]

And do you guys - just one last question and I'll give up the floor. But do you guys Dheeraj have hopes for expansion beyond GreenLake to other on-prem cloud services like AWS, outposts or other things like that? I mean is it a good possibility maybe we’ll see you in some of those in the future or can you just comment on what the strategy there is?

[Dheeraj Pandey, CEO]

Yes. I think you know AWS definitely wants their hardware outpost to really run our software as well but also we hope to actually do a lot of that stuff in a way that is reliable and stable and because we take longer - one of the things that people don't know about is how we tested the heck out of the flash drives coming out of the platform vendors and now our test suite is the industry standard. And we've kept failing many of the very large SSD providers because of our rigor. So, we want to apply very similar rigor when it comes to these platforms coming out from hyperscalers as well.

[Operator]

Your next question comes from line of Aaron Rakers from Wells Fargo. Your line is open. Mr. Rakers, your line is open.

[Aaron Rakers, Wells Fargo]

Congratulations on the quarter. As you guys move through the subscription transition, one thing that you’ve talked about in the past was the next kind of transitional phase for the company would move to more of a ratable type model. Can you just give us any kind of updated thoughts you have around that? What maybe the timing might be and what exactly that would entail as the next phase?

[Dheeraj Pandey, CEO]

Sure. Yes, obviously our new products are effectively mostly all ratable in nature. Now they’re still a relatively piece of the equation there. It’s something that’s on our minds but quite honestly I think we have a few more quarters to get through first to I think maybe earn that right to do another movement in the model.

And I think right now the focus is on consistent execution, continuing to get the business back to a level of expectations that we have for the business certainly and you know that's the focus. But ultimately, you know we'll need to do that I think to ultimately complete the transition and get to a very predictable revenue model building model etcetera.

[Duston Williams, CFO]

And even before the ratably change there just a sales comps of that you know and this involves change management and the enablement and you know obviously we are more agile in our quota setting which is twice a year. You know, we do six month quotas unlike most of the enterprise heavy companies. So we are really trying to understand when we move to an ACV base sales comp.

[Aaron Rakers, Wells Fargo]

That's perfect. And then the follow up question, you know the number of deals now involving more than one product or one product above core at 28% that's a notable trend you know that the company started to see over the last few quarters. You know, I think last quarter you also noted that you've yet to kind of drive a more bundled sales approach across your organization. You know, can you talk a little bit about what's driving the success of that continued increase? And when looking-forward we can expect maybe a sales motion that bundles a bit more effectively the additional or add-on products?

[Duston Williams, CFO]

Yes, we know we are approaching this more top down like customer in more solutions-driven than product driven. Each solution will drive many portfolio of products, and that's how we are educating our sales force and our prospects.

So in many which ways we are asking him to segment their campaigns based on solutions and then they don't have to go and really talk about six or seven different products, maybe just three different products. Now we have not gone ahead and created a queue out of this bundle, where at the very least, we’re really helping them think about a mini portfolio based on a solution they're approaching.

[Operator]

Your next question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.

[Elizabeth Elliott, Morgan Stanley]

This is Elizabeth on for Katy. Now two questions. One, well, what would your view have been on ACV growth if you had a full quarter of HPE each compared to the 2018 growth that we supported. And where do you expect ACV growth for the full year? And then, I have a follow-up.

[Dheeraj Pandey, CEO]

Yes. It's hard to answer on the HP thing – HPE thing. It clearly depends on the length of the contracts and how much extra we could have done. So that's a tough one to theorize on that one. And then, we did mention I think in the script here that ACV growth for the year would roughly be 25% based on the TCV billings that we presented.

And also this GreenLake thing which is fully ratable consumption water is very early for us to comment on. I think over the course of the next four quarters, as we understand the opportunities and the challenges in this hardware subscription model that HP has will be able to come and talk more about it.

[Elizabeth Elliott, Morgan Stanley]

Thank you. And then a follow-up related to the deals outside of the core offerings. What are some of the software products that are most outperforming your expectations and could you give us an idea of what percent of customers have purchased something outside of the core HCI?

[Dheeraj Pandey, CEO]

Yes. On the former, I think we talked about, I talked about it in my narrative as well, obviously AHV, we don't charge for and that's been 47% of our business on a rolling four quarter basis. Prism Pro has been doing very well in terms of attached files which is our software-defined filer, our micro segmentation product called Flow which is now integrating with our SaaS product called Beam.

So that together they'll become the unified security posture for the company in a multi-cloud world. And then there’s Era and Frame. So these products, we definitely see a lot of conversations going on, and a lot of attach as well.

[Elizabeth Elliott, Morgan Stanley]

And did you have an idea of what percent of customers have purchased something outside of the core offerings?

[Dheeraj Pandey, CEO]

Not in our hands right now I think is to 28% of our deals this quarter on a rolling four quarter basis.

[Operator]

Your next question comes from the line of Jason Ader from William Blair. Your line is open.

[Jason Ader, William Blair]

On the macro - on the guidance for the year, you talked about macro being a little bit weaker at some of your competitors. Just to be clear, is that something that you have seen in your business up to this point?

[Dheeraj Pandey, CEO]

It's early actually and it's so mixed because we're small Jason, that it's hard to really say whether we're seeing something right now. As I’ve said, international business continues to be the way it was from quarters ago. I don’t know Duston if you want to comment on this?

[Duston Williams, CFO]

Yes. It’s something obviously that we keep our eye on Jason just because of the frequency I think that you hear about it now. And you know when we’ve look at spending we, you know trying to take a prudent approach to the spending equation looking forward. But there's nothing that you know is significant that we can point to. You always hear a story here or there but there's no trend that we've uncovered from that perspective.

[Dheeraj Pandey, CEO]

Not large enterprise in America is we actually do see doing well. There is a lot of noise in Brexit and China and we continue to monitor that and be cautious about it.

[Jason Ader, William Blair]

And then just a follow up, Dheeraj clearly things have gotten better for you guys. But maybe you could talk about some areas of the business where you know you still feel like you could be doing a lot better?

[Dheeraj Pandey, CEO]

Well, I think the big investments that we’re making in commercial and how we really need to make it extremely digital and a lot more efficient is a big part of this. How we can go and get even more developer productivity, I think that's one thing that we don't talk about externally.

But we - it's on my mind and the minds of a lot of our people as well as how do we really bring delight to our developers who are also customers actually. We think a lot about our customers outside but sometimes the cobbler's children have no shoes so I think that's one thing we really focused on for the last six months.

And I think it's going to bring a lot of you know sort of efficiency to our R&D as well. And we believe there's a lot that we can unlock there too. So between commercial and doing things you know with, with test drive and with test drive and Dev productivity.

[Jason Ader, William Blair]

What do you mean by Dev productivity Dheeraj? Is it like more DevOps practices? I'm not quite sure what you mean by that.

[Dheeraj Pandey, CEO]

Well, we have sort of disaggregated our products in the last year and the more we disaggregate the more independence we give them to read independent of each other because in a multi-product portfolio does come up with the challenges of how do you do release management and how do you do integration and testing of integrated products and at the same time provide autonomy to individual product owners to go and release code at even agile, more agile pace setting those are the kind of things that unlocks a lot of value for growing companies.

[Operator]

Your next question comes from the line of Simon Leopold from Raymond James. Your line is open.

[Simon Leopold, Raymond James]

I wanted to touch on the competitive environment given that some of the others within sort of the IT supply chain have talked about, some players becoming more competitive and cutting price whether or not you've seen any change in behavior from the folks you're going up against and then I've got a follow up.

[Dheeraj Pandey, CEO]

Yes, I think the win rates have not changed much. In fact, it's pretty much consistent with the last four quarters. I would say three, four years ago the competitive pressure was from converged infrastructure and big incumbents of the space of storage and virtualization and networking and now, it just happens to be two of us VMware and us and we are talking about how will you navigate this multi-cloud environment over the next five years and we think we have different approaches.

I think hyperconvergence as a magic quadrant is really driven by software now as opposed to hardware. And I think it was a battle that we had to win over the last three, four years and I think the dust has finally settled that it's really an operating system play.

And I would say that multiproduct portfolio is probably the next big battleground for both companies how to really do this well. I mean, we're doing this organically with no small teams that we come in together with and acquire and we believe that over the long haul I think this is a much better approach than going in and acquiring revenue.

So we believe that there is obviously going to be competition. It's a very large market and large markets are red oceans. Red oceans are whales and red oceans are bloody. So we got to be the faster shark that knows how to really navigate change.

And just in the last 18 months itself, this notion of running our software and hyperscaler public cloud involvement was something that we probably didn't conceive of three years ago. So, as we go and really expand the surface area for software, we get into other battlegrounds that we haven't talked about before.

[Simon Leopold, Raymond James]

And just as a follow-up, I wanted to see how you're thinking about getting back to generating cash. Early in fiscal 2019, you had very strong cash from operations and then you sort of pivoted to making more investments. And I just want to think about what's sort of the trajectory to being a cash-generating company? Thanks.

[Dheeraj Pandey, CEO]

Yes. Thank you. And I think this goes back to the transformation of our sales force, being more disciplined about extracting more value for software. I mean, it's a big change for a company that used to sell appliances till about 18 months ago. So I would say that a lot of it is around operational rigor and setting those enablement goals for our sellers who are now selling pure software and subscription, and going and educating the market on this transition itself.

[Duston Williams, CFO]

Yes. And I think clearly over time, and this is obviously through the next several years here, it's how do we take advantage of the efficiencies that come from a subscription model. And we have to have a flow of renewals coming in first, but what we're doing in the interim is starting to structure the business, thinking from a productivity perspective, a channel productivity, how do we kind of position some of the things that we need to in advance of the subscription renewal and flow if you will, and how do we take advantage of those efficiencies.

So, that's over time what's clearly going to help drive that. Now, when we exactly going to get back so we've given you guidance for FY 2020 and you know what that looks like and then now clearly give some updates at Investor Day back in - upcoming in March.

[Operator]

Your next question comes from line of Mehdi Hosseini from Susquehanna Financial. Your line is open.

[Mehdi Hosseini, Susquehanna Financial]

Thanks for taking my question. It’s Mehdi Hosseini from Susquehanna International. Dheeraj, I want to go to Slide 14 and wanted to reference your view that the industry is becoming more like a duopoly where Nutanix is coexisting with VMware and I think the bar chart to the left of the Slide 14 captures that and you’re coexisting with your main competitor. In that context, when I look like - when I look at two, three years from now, what percentage of your billing should capture the entire stack of products that you're marketing. In other words, the second bar chart on the Slide 14 when would this represent more than 50%, 60% of the entire stack of products? And I have a follow up.

[Dheeraj Pandey, CEO]

So, one thing it’s easy to show that the balloon can be made to look bigger by pressing it on the core side. You can always financially engineer things that come out of the core and go into the new products. Do it as accretive revenue is where the real sort of goodness belongs to any multiproduct portfolio company and we are very much focused on that.

So, it actually improves seller productivity and channel productivity and it actually the accretive dollars. I would say that in the next three years, if you can actually get 25% of our business accretively to come from there, that’ll be huge actually you know. And doing this right methodically without having to take money out of the left pocket and put in the right pocket will be key to this transformation.

[Mehdi Hosseini, Susquehanna Financial]

So, in the longer term two or three years, we should see basically at least a quarter of your billing driven by the entire stack of products. Is that what you're saying?

[Dheeraj Pandey, CEO]

New products, new products. Yes, I mean at least based on ACV right now we are tracking to like 10%, 11% or something.

[Mehdi Hosseini, Susquehanna Financial]

And then one other question outside of the U.S., yes there was a migration towards a multi-cloud but I still don’t see a more organized way of doing this. There's a lot of standardization in North America or Europe, but not much in the Asian market. How do you see your capitalizing on this? In the past, you've had relationship with the likes of Lenovo. Is there anything there that you can capitalize on? Is there any views or thoughts that you can share with us?

[Dheeraj Pandey, CEO]

Yes. I think China definitely between Insper and Lenovo as the server platform partners. But there's something there with Alibaba. We have not had bandwidth to go much deeper there, but it's actually coming up more and more. And Alibaba is also pretty prevalent with SoftBank in Japan.

So there's some regional players coming up in that part of the world that we have to get really good with over the course of the next 12 to 18 months. And Tarkan is passionate about international and he talks a lot about - I'm learning a lot from him as well in some of these things. But I think there is going to be the Japanese several platform partners, Fujitsu being an important one and ECE, Hitachi. We’re doing a lot of good work with Fujitsu in Germany as well.

So I think there’ll be a lot of local partners that we have to go and share some of the profits with, and that's the value of software that the cost of an additional unit is $0. So you can actually expand the market by sharing some of the margins with other partners. And that's our intent really.

Doing this with the hyperscalers, Alibaba, in particular in APAC, but also the server platform vendors who are regional players like Lenovo and Insper and NEC and Fujitsu and Hitachi.

[Mehdi Hosseini, Susquehanna Financial]

Should I be concerned with OpEx commitment? Does this require more investment to be able to drive incremental billing?

[Dheeraj Pandey, CEO]

I wouldn't think it's going to be anything substantial or I mean, mostly a lot of this is supporting of software to these platforms. There's another one where we believe service providers in Asia Pacific will also be a very important part of our overall go-to market transition as well. I mean, we talk about Xi and Xi right now is our data centers but then in the next 12, 18, 24 months, we really want to do this with our software running on partners’ capital so their data centers and their hardware investments and if they’re willing to actually use our billing, and our payments and our identity, then all of sudden we actually get the best of both world between an asset light model of Nutanix with assets really coming from the partners.

[Operator]

Your last question comes from the line of Jack Andrews from Needham. Your line is open.

[Jack Andrews, Needham]

Duston, I wanted to see if you could drill down a little bit more on your comments regarding the backlog. I think you mentioned it was largely unchanged versus typically a sequential decline from 4Q to 1Q. Could you go into a little more detail about what is comprised in the backlog now? Do you have a series of much larger deals this point than you typically see?

[Duston Williams, CFO]

I don't think the composition is that much different and again for us, it's just the backlog again is defined as a PO that we've received that we have not build and there's a different mix of customers and transactions and things like that, but there’s nothing in there unusual that one customers’ dominating and there’s something along those lines.

So, it’s pretty much a similar composition and just the fact that at this point in this Q1 we were able to hold that flat and usually Q1 we rely on that a little bit more quite honestly with the weaker both EMEA and APAC are typically weaker for us. And in Q1, Americas had a good Q1 for us. Federal had a pretty good Q1 and things like that. So, nothing unusual there.

[Jack Andrews, Needham]

Okay, thanks for the color. And then just a quick follow up. As you had gone through the educational and enablement process with your sales force in the channel around all your new subscription products, I mean what are people most excited about which product or a couple of subscription products do you think represents the most significant upside from here?

[Dheeraj Pandey, CEO]

So, frame for sure, desktop is a service product. Lot of good proof of concept going on files for those who are actually selling hardware before we are really looking at how do you really connect with channel partners who related to hardware but these days will relate to similar services except being pure software as I think files is another one.

And then database is a work in progress many of the bars don't relate to it but the SIs do. The global SIs definitely working on DevOps and as they relate to error a lot, I would say. And many of the mid-market resellers also relating to micro segmentation. So Flow has become a very big part of the AHV drag.

So, we don't go and sell AHV by itself because if you can just sell free like oh it's cheap, it's free, you really don't have a good way to sell that but if you go and talk about slow and microsegmentation and the fact that you’re democratizing something that’s very expensive otherwise people are actually embracing both Flow and AHV.

[Operator]

This concludes today’s earnings call. Thank you for your participation. You may now disconnect. Have a great day.