Tonya Chin - IR Dheeraj Pandey - CEO Duston Williams - CFO

Jayson Noland - Baird Victor Chiu - Raymond James Matt Hedberg - RBC Capital Markets Aaron Rakers - Wells Fargo Katy Huberty - Morgan Stanley Steve Enders - KeyBanc Capital Wamsi Mohan - Bank of America Merrill Lynch Jack Andrews - Needham and Company James Fish - Piper Jaffray Nehal Chokshi - Maxim Group

Good afternoon. My name is Chris and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Nutanix Q2 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tonya Chin, you may begin the conference.

Thank you. Good afternoon and welcome to today’s conference call to discuss the results of our second quarter of fiscal 2018. This call is also being broadcast live 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 the financial results for its second quarter of fiscal 2018. If you’d like a copy of the release, you can find it in the Press Releases’ section of the Company’s website. We would like to remind you that during today’s call, management will be making forward-looking statements within the meaning of the Safe Harbor provisions of federal securities laws, regarding the Company’s anticipated future revenue, billings, gross margins, operating expenses, net loss, loss per share, free cash flow, business plans and objective, product sales, plans and timing for, and the impact of our transition to focus more on software-only sales, expectations regarding product features, technology that is underdevelopment, competitive and industry dynamics, new strategic partnership and acquisitions, changes in sales productivity, expectations regarding increasing software sales, future pricing of certain components of our solution, our plans regarding how we will report the software content of our business, potential market opportunities 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 to update these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10-Q for the first quarter of fiscal 2018 filed with the SEC on December 13, 2017, as well as our 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. Also please note that 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 have provided 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. As a reminder, all results today included in the call and the press release, are using the newly adopted revenue standard ASC 606. Finally, Nutanix is hosting its inaugural Investor Day in New York City on the afternoon of March 12th. Interest certified analysts and institutional investors should contact Tonya Chin if they’re interested in attending. We hope to see as many of you as possible as we have a great day planned. Now, I’ll turn the call over to Dheeraj. Dheeraj?

Thank you, Tonya. Hi, everyone. Thank you for joining. Q2 was yet another strong quarter for Nutanix with billings, revenue, gross margin and EPS all better than our guidance and consensus. Q2 also saw us add a record number of new customers, bringing our total number to 8,870. Last quarter, you heard a lot from us about our software emphasis including eliminating the sale of pass-through hardware over time, to align our go-to-market with the software-defined nature of our business and dramatically grow the surface area for operating system. I’m proud of how our sales leadership has stepped up to help us execute so well on this model shift. In Q2, our revenues were up 44% year-over-year, even with the elimination of $14 million in pass-through hardware revenues. Our software and support business is also growing at a significant pace. That business is now reached over $1 billion in annualized run rate for billings in its own rate. Very few public software companies have achieved this milestone and we are pleased to be one among them. This move towards the software-defined business model has helped us to accelerate our large deal momentum. In Q2 alone, we secured 57 deals worth more than $1 million, up 104% year-over-year. Also in Q2, we had 19 software and support deals worth more than $1 million. In fact, fie were worth more than $3 million and three were worth more than $5 million, and all three of these were deals Global 2000 customers. We now have 57 customers with over $5 million in lifetime bookings, 18 customers with over $10 million in lifetime bookings, and 10 customers with more than $15 million in lifetime bookings, up significantly from the previous quarter. Before we talk about Q2 numbers, I’d like to share a significant milestone that we believe is a watershed moment in the Company’s history. In early February, Gartner published its Magic Quadrant for Hyperconverged Infrastructure, representing the first time analyst firms emphasize their presence of operating systems software companies in the Leaders quadrant. Our position which was furthest to the right on the completeness of vision access and highest on the ability to execute access is a testament to our product quality, customer service and end-user delight. Software-defined infrastructure is gaining immense ground in the enterprise and this state of the heart report from Gartner, marks the inflection point of the journey of hyperconvergence of disparate [ph] data center tiers on a common operating system in the private cloud. In the next few years, we intend to make a similar case for hyper-converging disparate cloud data centers using common software platform that we call the Enterprise Cloud OS. In the world of multi-cloud silos, enterprises have already started thinking hard about choice and application mobility. In addition to our solid results in Gartner’s reporting of our customer success, I’m also excited to share that we’ve signed a definitive agreement to acquire a company called Minjar. Minjar is the maker of Botmetric, an elegant service built for the AWS marketplace, providing customers with unified cost control and enhanced operational insights into their workloads running in public clouds. We expect Botmetric will enable our customers to embrace multi-cloud architectures, giving cloud operators the freedom to choose the best environment for their business applications in data. In addition to Botmetric, Minjar also offers SmartAssist Assurance for customers to adopt public cloud services in a hassle-free manner and Minjar managed cloud service, which significantly offloads customers from public cloud management and operational minutia. We leverage the technology and people expertise Minjar brings from the public cloud space to build and operate our own cloud services Xi, spelled, X I. Minjar bolster our automation and lifecycle management offering Calm and Xi Cloud. In the coming months, we’ll provide more details on how we’ll specifically integrate the Company and its technology into our fabric. Last quarter, we also released our product version 5.5. This update was the biggest software release in the Company’s history, shouldering the burden of a seamless software transformation of the business. Noteworthy features include single node clusters, software based encryption, graphics and NUMA virtualization for our native AHV hypervisor, real-time replication, self-service portal in Calm for DevOps, antivirus support in software-defined file services, AFS and cross-hypervisor migration. As we’ve mentioned before, Calm brings an application-centric approach to multi-cloud orchestration, migration and lifecycle management. Calm is also melding the worlds of virtualization and Kubernetes-based, Linux, Docker, Containers. In the coming years, this product offering will play a very crucial role in our DevOps go-to-market within the enterprise. We are delighted by the interest from our customers, since the product became generally available in our 5.5 release. In Q2, we saw seven customer deals involving Calm, including one of the top deals of the quarter with a Global 2000 customer, which operates one of the largest clinical laboratory networks in the world. Q2 2018 was a fantastic quarter for our business overall, increasing our number of Global 2000 or G2K customers by 34 in the quarter ending with 642. And as we increase our penetration into our G2K customer base, we’re seeing a consistent patent of account expansion over time. In Q2, we had 32 G2K customers spending more than $1 million and five spending more than $5 million with us. Moreover, 12 of our top 15 deals in Q2 were with our G2K customer base. It goes without same that coverage and penetration of the Global 2000 remains a critical part of our growth strategy going forward. Speaking about land and expand, across our deals with customers that spend more than $1 million in the quarter, nearly 50% were with customers that had also purchased from us in Q1 2018. One of our largest deals this quarter was with the previously mentioned Global 2000 customers that operates one of the largest clinical laboratory networks in the world. This customer has spent more than $10 million in lifetime bookings and has transitioned in this quarter towards purchasing our software as it continues to expand the use of our solution within its private cloud. Our largest deal in the quarter which was over $10 million was also with the G2K customer that is a major integrated beverages company. This 10 million plus deal was one of the first for Nutanix as a brand new customer and also marked a largest AFS deal in the quarter. A critical success factor for this deal was a richness of our software-defined storage services. As the brand is growing, so is the confidence of first time customers to do large deals with us. The Garner MQ will be instrumental in further establishing that trust with enterprise prospects. In Q2, we also had a $3 million plus deal with a G2K customer that is an American natural gas utilities holding company. The company’s engagement with us includes our operations management software Prism Pro, making it one of the largest Prism Pro deals in our history. Yet another notable win was with an American telecommunications company that provides wireless services and is an internet service provider that runs its Nutanix deployment on Cisco UCS servers. This customer has made repeat purchases in every quarter since its initial low-six-figure purchase in Q3 of 2017. These deals have increased in value each quarter, reaching seven figures in the last two. Our team in India signed a great deal with a Multi Commodity Exchange of India Ltd. or MCX, India’s first listed exchange. MCX is a state-of-the-art commodity directives exchange that facilitates online trading and clearing and settlement of commodity features and options transactions, thereby providing a platform for risk management. The Exchange has selected our platform to runs its Cloudera, DevOps and production workloads, disaster recovery on our own hypervisor AHV. Finally, I want to take a moment to talk about one of the most important factors in building our business, our people. We were granted our 50th U.S. patent on building a distributed metadata system running on a cluster of commodity servers invented by the engineering trio of Karan Gupta, Pavan Konka [ph] and Alex Kaufman. We also bolstered our leadership team with the addition of Ben Gibson as Chief Marketing Officer and Aaron Bean, as Chief Human Resources Officer, Ricardo Jenez also joined the management team of our engineering organization as Senior Vice President of Development, Chris Kozup joined as Senior Vice President of Global Marketing and Rodney Foreman has joined as our new Vice President of Global Channel Sales. In conclusion, I’d say that our software is increasingly becoming ubiquitous in terms of the number of hardware platforms it now runs on. Customers have come to appreciate the flexibility and portability of licensing. Our goal is to keep the customer experience as good as it has been in the last six years, and that will require tremendous focus on retaining our net promoter score through this transition. Like some of the best consumer brands we have paranoid about NPS and we promise that we’ll keep our experience just as delightful as we give more choice to Main Street. With automation, machine learning and one click design, we believe we can deliver software-defined infrastructure as true software running on commodity servers. That has been the DNA of this company and will continue to remain the biggest competitive advantage as we grow to become a larger company. We’ve started on the strong footing with our new business model and to talk more about some of the business insights, I’ll turn it over to Duston. Duston?

Thank you, Dheeraj. I’m very pleased that our Q2 results came in much better than expected for virtually every significant metric. We had record performances in bookings, OEM bookings, billings, revenue, backlog, free cash flow, new customer adds, number of large deals, software-only bookings and Global 2000 bookings. Revenue for the fourth quarter was $287 million, growing 44% from a year-ago and up 4% from the previous quarter. Despite eliminating $14 million in pass-through hardware revenue during the quarter. We billed $356 million in the quarter, representing a 57% increase from a year-ago and a 13% increase from Q1. Although, we don’t specifically guide to billings, this billings performance far exceeded the street consensus estimates. This outperformance was due in part to a general overachievement and higher support renewals as well as receiving a great payment in Q2 in excess of $10 million for a transaction that will ship in Q3. The bill to revenue ratio moved up to 1.24 versus our previous estimate of about 1.15. In addition to the items stated above, we are also experiencing slightly higher revenue deferrals within our software-only deals, which has the impact of lowering our current quarter revenue along with increasing our deferred revenue balance and ultimately adding additional predictability going forward via the recognition of more ratably recognize, high-margin revenue in future periods. Our deferred revenue in Q2 increased by $69 million, growing 57% from a year ago and up 17% from the previous quarter. Gross profit for the quarter was $182 million, growing 45% from a year ago and up 7% from the previous quarter. Our gross margin for the quarter was 63.5%, which is at the high-end of our guidance and compares to 63.2% in the year ago quarter and 61.9% in the prior quarter. As you may recall, last quarter, we targeted to eliminate up to $12 million of our pass-through hardware revenue. I’m pleased to say that we exceeded our plan with strong execution and eliminated $14 million of pass-through hardware revenue during the quarter. On a billings basis, our product mix for Q2 was 77% software and support and 23% pass-through hardware. On a product mix, on a revenue basis was 73% software and support and 27% pass-through hardware. New customer bookings represented 34% of total bookings. Our operating expenses were $202 million, below our guidance by $8 million, primarily due to the timing of new hires. We have a full-court press on hiring in the second half for the fiscal year to try to make up this headcount shortfall. Our non-GAAP net loss was $23 million or a loss of $0.14 per basic share. Performance across all of our geographic regions were outstanding with all three regions recording record performances. EMEA and APAC were especially strong. EMEA’s results exceeded its previous best quarter by well over 50%, while APAC exceeded its previous best quarter by over 35%. Both of these regions also experienced record sales productivity in the quarter. Bookings from international regions were 49% of total bookings in Q2 2018 versus 48% in Q2 2017. Both Dell and Lenovo contributed nicely in Q2. Dell matched its best historical performance and Lenovo recorded its best performance, increasing almost 80% sequentially. Dell bookings came in slightly less than 10% of total bookings, and included deal sizes net to Nutanix of $3.5 million and two deals at $2.6 million each. Lenovo included four deals greater than $1 million. IBM is still in its early stages of relationship and progressing within our expectations. We booked our first two initial IBM related deals within the quarter. And lastly, our Cisco UCS related bookings increased over 40% sequentially, included deals of $2.5 million and $1.5 million. Looking forward, our software business will continue to grow significantly. Our software is completely portable among many different server platforms. For instance, a customer could secure a 75 nodes of software licenses from Nutanix and deploy 25 of these nodes on Dell servers, another 25 nodes on HP servers and the remaining 25 nodes on Cisco servers. Without our immediate knowledge regarding the exact deployment details. As a matter of fact, we have one Global 2000 that has completed over 6 million in ELA bookings directly with Dell, with licenses to be deployed on some mix of Dell and HP servers. In Q2, this exact same customer also did $2 million ELA bookings directly with Nutanix with licenses to be deployed on Dell, HP and potentially other servers. Going forward due to the ubiquitous nature of the software, we will no longer be reporting or commenting on specific details surrounding the Dell, Lenovo and IBM OEM business or any other specific vendors such as Cisco or HP. Instead, we will combine and comment on all software sales deployed via our OEM transactions and on other various services as well as our own edition software into a single grouping called, software-only sales. Few minutes on the balance sheet. We closed the quarter with cash and cash equivalents of $918 million. This is up from $366 million in Q1. The Q2 cash balance includes approximately $509 million in net proceeds raised during the quarter through our five-year convertible senior notes. As a reminder, this transaction was done at zero interest rate, with an effective conversion premium of 100% and add an effective pretax interest rate on the proceeds, including the cost of the call spread [ph] of approximately 2%. DSOs based on straight average were 58 days compared to 57 last quarter. Weighted average DSO was 30 days versus 30 days in Q2. We generated $46 million in cash flow from operations in Q2 which was positively impacted by $12 million of ESPP funding and we generated $32 million in free cash flow during the quarter. This was also positively impacted by the $12 million of ESPP funding. In AHV nodes, as a percent of total Nutanix nodes based on a rolling four quarter average was 30%. Now, looking at our guidance for the third quarter. The guidance again on a non-GAAP is as follows. Revenue between $275 million and $280 million, gross margin between 67% and 68%, operating expenses of approximately $218 million to $220 million, and a per share loss of $0.19 to $0.21 using weighted average shares outstanding of approximately $167 million. In Q3, we’re assuming a bill-to-revenue ratio of approximately 1.2. The revenue guidance above assumes a 35% growth rate from the year-ago period. And even more importantly the assumed the gross profit guidance yields a 50% growth rate from the year ago period. And as a reminder, we believe the best metric to measure our progress during this transition period to a software centric model is gross profit dollars and growth in gross profit dollars and not revenue or revenue growth as revenue and even gross margins could be somewhat fluid during this transition. Furthermore, we also believe that anyone who casts a negative opinion on the company founded on slowing revenue growth during this period of transition is simply being disingenuous based on our strong gross profit growth. Lastly, this guidance assumes that we will eliminate approximately $45 million of our pass-through hardware revenue during the quarter. And with that operator, if you could open the call up for questions, that would be great. Thanks you.

[Operator Instructions] Your first question comes from Jayson Noland with Baird. Your line is open.

Okay, great. Congrats on the quarter. And just to clarify, Duston, what’s the Q3 expectation for hardware pass-through elimination as a percent of revenue?

Yes. It’s going to be somewhere in that range that we have provided before, plus or minus a percent maybe. It’s a complicated. We’ve got a bunch of moving parts and variable inputs and outputs here. But, I don’t think it’s going to be too different. We had said 22% this quarter and came in around 23%. And the only reason really it came at 23% is we shipped some more having a good quarter. And we previously said set 16% I believe for this quarter and will be within that range I think, say plus or minus. But on that front, we’re making good progress. North America is pretty much all now being transacted without the hardware attached. So, those processes seem to be up and running and going pretty nicely. We said all along the real heavy lifting is in the international regions. So, we still have obviously significant work to do there, which we’re undertaking as we speak. And we’ll start to transact some of those orders without the hardware here shortly. We’ve done actually one transaction already kind of a one-off in EMEA. It happened to be just on the big deal theme, about $9 million all-in order that we’ve already closed in the quarter that was transacted without the hardware. So, we’re doing some pretty good stuff, go a lot of work to do. But, so far so good.

And then, a follow-up on sales force. I think, you guys went software-only on quota February 1st. Maybe if you could give an early perspective on how that’s taken with the sales force in the field. We’ve heard of the elimination of channel conflict on the hardware side, but curious to hear your thoughts.

Yes. This is Dheeraj. Thanks for the question. I would say that there is clarity for the sales force, because in the past as we are thinking about how to fulfill and how that actually would relate to their quote expiration and commissions and things of that nature. So, now we have single currency and this normalizes everything into one. So, by and large, what we’ve heard that this clarity is a good thing. We have a very good leadership that’s actually adapted changed management. And we’re going to the process, but there is nothing to see that this thing actually needs more work. I think we’re in pretty good shape as of this quarter.

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

This is Victor to in for Simon Leopold. Could you just speak about the acquisition that you guys made, maybe just a little color around what your logic was behind that and with the strategy, is there for particular deal?

Yes, absolutely. So if you think about the orchestration layer that we have built with Calm and that’s about orchestration across multiple clouds, it’s closer to developers and DevOps as the end user. Now, sitting next to it, Minjar actually sits right next to it and complements the multi-cloud layer with its costing, budgeting, governance and compliance feature sets. And now, we believe that in the next three to five years, as we talk about, this was my earning script as well, that as the world goes more and more towards multi-cloud, we’ll talk about hyperconvergence of all these clouds and hyperconvergence of these clouds will require a control plane that includes Calm, Minjar and many future different pieces that need to fit together in the puzzle itself. That’s what Minjar really is. They have couple of other things, one of which is managed service that they’ve actually done to improve a migration of an on-prem customer to an off-prem customer and we’d be using that for Xi Cloud as well.

I’m sorry. Did you guys disclose the terms of that transaction or did you…

We did not. It’s not material to the balance sheet. So, we won’t be disclosing that.

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

In your prepared remarks, Dheeraj you talked about Xi Cloud and I think it’s still supposed to launch mid-year to tell us this model is clearly moving to software. But I’m curious, have you think about a second inflection coming? And I guess what I’m referring to is an even more aggressive move towards ratable subscription revenue in the future?

Yes. I think there is definitely and as you think about us as a software company, we have been collecting three-year support, because of our appliance heritage. We used to collect three-year support for that. So, there is a lot of billings that is ratable today, and Duston too some more color on that as well. But, as we communicate with you going forward and future quarters, we’ll talk subscription as an important pillar of our overall business as well. Duston, if you want to add some more to that?

No. I think that’s right. I think, we’ve got to get a little bit more of Xi under our belt first and I think we can have a better opinion on that.

Okay, great. And then, Duston a follow-up for you. I know, you’re guiding to Q3 today, and I assume we’ll get maybe more of a long-term outlook at your Analyst Day. But, I’m wondering if you can help us what a good gross margin exit rate might look like this year. I don’t know if you’re going to comment on an exit rate for fiscal 2019 at all as well, but maybe exiting this year would certainly be helpful?

Yes. I mean, we don’t go out more than a quarter. So, I’m not going to specifically talk about our July quarter in this call. I think looking longer term, you should expect pretty healthy software like margins, once we’re down to the 5%, which we’ve talked about as a billings target that’s probably 8%, maybe 9% on revenue basis. But, it would be similar to other software companies, 75%, 80%. At that point in time, you’d be at 60 plus percent software, or 100% margin. And then probably 30 something or 30 percentish of support at a pretty decent margin. You can do that math and then the remaining hardware whatever’s left over would be at zero. So, you can come up just with that calculation with a pretty good healthy margin profile, once we get down to some minimal appliance pass-through hardware stuff.

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

Yes. Thank you. This is [indiscernible] for Rod. Dheeraj, just on the software transition. So, I know it’s still early days but just wondering if you could talk a little bit about what the customer response has been so far and just have you seen any impact on sales cycle as a result of the change?

Yes. Thanks for the question. I think, the big thing that we’re seeing is that as people decouple software and hardware consumption, we’re also seeing deals becoming bigger. And obviously as a company, we have never really tried to do big right away because the whole idea of hyperconvergence is more like cloud consumption, where you start small and you pay as you grow and you grow over time. But, if you have a consumer that’s been around for about a year or more, now they’re talking about consumption that’s actually bigger, they are looking at larger deals because for them software appreciates over time and hardware depreciates over time. So, why would they buy a lot of hardware upfront, because based on Moore’s law you know that over the next 12 to 18 months, things will actually become faster and cheaper. I think, we’re seeing this resonate with our customer base today. And including our partners, we’re talking to a lot of our channel partners and they see value where they can go make money by selling software and we can share some of the margins with them as well. So, I think all-in-all, Main Street is quite happy. I think again, it’s early days. As a company, we’re paranoid about things and every quarter we’ll come and talk about some of these things as well. But I think we’ve got to a pretty good start.

And then for Duston, just on the convert. So, Q2 was a pretty strong cash generation quarter. I think, you already had a pretty solid cash balance on hand, even excluding the proceeds. Just wondering if you can help us understand a little bit more the motivation behind the issuance and just how you’re thinking about using the proceeds over time?

Yes. The motivation was simply the markets were in an outstanding period of time to raise some good quality capital at a remarkably effective rate in cost. And we clearly took the opportunity to do that. And I gave some statistics around that. There’s no dilution to any shareholder until the stock appreciates 100% from when we did the deal. And even after that, we look forward to the data that happens. And then, even after that it’s minimal dilution from there. So, it was a great time to go do the transaction and then uses of the trends -- of the cash, it’s really to put us on a -- place from an optionality perspective to do what we need to do to grow the Company and make our Company most successful possible. And with this cash, from an M&A perspective, you should not expect any big large deals. That’s not -- wouldn’t work for us necessary. Anyway, you should expect more smaller deals just like the one we announced today from that perspective, but it just gives us again the optionality and good times and bad times and good economies and bad economies to take advantage of situations and having that cash on hand...

Yes, I think I just want to reiterate what we just said that the DNA of this company will not absorb of any large acquisition, I think just not what we’ve built for. And we’ll look at smart teams, smart technologies, smaller teams that can really come and bolster this company’s overall business in the next three to five years. There is no instant gratification of an M&A for us. Calm was an acquisition that was done in July, August of 2016. And we said, we got to the right thing for the product and the end customers. So, the GA [ph] only cannot in January. So a lot of these things that we’re doing is looking at three to five years out as opposed to saying we need something for the next 12 to 18 months to bolster our revenue.

Your next question comes Aaron Rakers with Wells Fargo. Your line is open.

Yes, thank you very much for taking the questions and congratulations on the great results. I wanted to ask a little bit about the current quarter guidance and just to make sure that I’m thinking about the math correctly. So, if you look at the breakdown of your revenue stream, you’ve got about $10 million of product deferred that kind of flows into this April quarter. I guess what I’m getting is based on the hardware burn off, are you assuming that you can kind of grow software only revenue as much as the 50 plus percent range? And if that’s true, how sustainable are you guys thinking about growth for software only being in that 40 plus percent year-over-year range over the next couple of quarters? And I have a follow-up.

Yes. I’m not getting to the pieces of the growth Aaron, but maybe we’ll just talk about some generalities I guess. As far as how we feel comfortable going forward with the growth rates, I think we’ll give a little bit of insight at our Investor Day on March 12 here coming up shortly. So, we’ll clearly give some insights there. And then, just growth rates in general, we talked about on a gross profit basis, we’re growing based on the guidance year-over-year Q3 to Q3 at 50% year-over-year. If you just took the topline and you add it back the $45 million that we’re eliminating that year-over-year growth rate would be close to I believe 60% year-over-year. So, all healthy from a growth rate perspective and things like that. It’s a big market, we’re leader in that market so we should have some pretty good healthy growth rates going forward for a while.

Yes. I can’t over-emphasize the fact that we’re still scratching surface of this market. I mean, while this might have started as a box like, oh, it’s an MQ but this MQ is going to be all consuming and if we haven’t done that, then we are not a successful company honestly. I think this is about computing, it’s not about hyperconvergence. And over time as I said, we’ve got to make this about converging clouds and there is a massive opportunity to build an operating system for that.

And then, as a follow-up real quickly on the model as well. I think last quarter, you talked about the support gross margin being kind of in that mid-50% range, it looks like you did well above that, 63.5% this quarter. So what’s the right gross margin there? And then, you also talk about operating expenses kind of growing $10 million per quarter. Obviously, you under spent this quarter, but is that $10 million a quarter, the right level to be thinking about going forward?

I think plus or minus, it’s generally directionally correct. We’ve got a bunch of make-up, we’re trying to do obviously this quarter coming from the 202 to 218 to 220. But I think going forward somewhere in that range, which we’ve stated before. So, I think clearly, we’ve got a lot of projects to go spend on. And the first part was…

The services gross margin, support gross margin.

Yes. I mean, it gets to be a bit of involved answer there. That target margin includes some residual internal COGS, if you will that stays once all the hardware is gone. So it has to flow somewhere. So, that’s kind of in the steady state model is probably once we get to the 5% or 8% billings and revenue in the pass-through hardware piece probably ultimately the right number to attach to that over time.

So, just to be clear, you’re sticking with the mid-50% that you gave last quarter?

Yes. I think when you look at its entirety at a steady state with very little hardware, all encompassing, it has to go somewhere and we’ve bumped it into that support piece.

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

In the U.S. market, where you’re pushing hardest in terms of the software transition, what’s the mix now of new node shipments on the non-SuperMicro hardware? So, software shipments on top of Dell, HP, Cisco Lenovo, when you additional that up, how is that mix changed over the last six months? And where do you think, you might be in a year or two as you come out of this transition? And then just connected to that, given all the success stories that you walked through and used cases around customers, deploying your software across the diverse number of servers, are you seeing that sort of awake the management teams of those other OEMs and realize that there is potentially an opportunity to work in a more aligned manner to participate in these deployments?

On the first one, lifetime, if you think about lifetime deployments, about one-third was non-SuperMicro, I would say about 35% was in the last five, six years of selling. I would imagine and this is again waging a guess, this would probably get to 50-50 in the next 18 months or so. And obviously every six months will be observing some of this as well. But I think that’d be a good one. Now, what are the market forces, because the market forces also are strong. We can’t just do it on our own accord. The people love the NX support, which is direct to us. And I think many of them to just want to come to one-stop shop for support for both hardware and software. So, while we might eliminate the hardware top-line, the fact that they actually trust our support will be one of the forces that we have to continue to look at, because we don’t want to throw the baby out with the bathwater as we actually go through this transition. So, I think I would wage it something like 50-50 in the next 18, 24 months. And on the second question, I think, it’s happening, the grassroots is where the rebellion happens. The grassroots is the customers, the partners, they’re the ones who’ve been basically saying, look, I love Nutanix and I would like for you to really run it in your servers. And I think that’s what we’ve been really trying to do for the last 12 to 18 months, which is how -- one of the examples I gave about Cisco, and another one that Duston gave about HP, is all about the power of the customer. They’re extremely powerful, especially the Global 2000 is very powerful in the way it actually dictates what server vendors actually go and work on it or not?

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

Hi, guys, this Steve Enders on for Alex. I was wondering if you could talk a little bit about what you’re seeing in Europe right now. It seems like it’s going really -- going well, and you guys are executing well. I was wondering, these are the changes you guys have made for the past year or so, or what’s really driving this development?

Yes. I think part of it was some restructuring of people and our VP of EMEA has done a pretty good job of looking at the kind of people who needed for different roles. Part of it is also large deals. We’ve done some really good business last quarter based on large deals from -- and many of them from existing customers, which is being one of our pillars of these businesses, large deals from existing customers. And then, lastly, there’s something going on with Brexit as well. I think, when customers and a lot of the market is thinking about where to go from Britain and where to land in Germany and other such places, I think it’s causing a lot of data center transformation projects to come alive, because when they’re moving operations, they’re also moving their infrastructure as well.

And just on the EMEA large deal comment, I believe EMEA quarter-over-quarter large deals by our definition, was about 3x the Q2’s -- or the Q1 performance. So some really good large deals happening in EMEA. And the exciting thing about that again is -- as Dheeraj said is the repeat purchase capability of most of these customers, so.

And the other thing that’s also popping up is the system integrators in Europe are taking note now. And I think because there’s a tipping point at which [indiscernible] start to take note and you’re starting to see some movement in that direction especially.

Your next question comes from Wamsi Mohan with Bank of America Merrill Lynch. Your line is open.

Hi, yes. Thank you. So, the pace of your incremental new customer add was very strong. I was wondering if you could comment on what drove that strength. And can you talk about the profile of the new buyer? It seems like the billings per new customer also increased materially, are you seeing any shift in the profile of the buyers? And then I have a follow-up.

Yes. I think on the first one, which is about -- sorry, I skipped the question.

The customer adds.

Customer adds. Yes, I think the channel is definitely kicking in, especially in the mid-market we’re seeing the channel -- I mean, it took us a while to actually get to where we are you. We have intense focus on how we really blend lead with the channel, look at them as a customer not just as a partner. And I think that has been a huge contribution to overall mid market customer acquisition. And I think on the second question, it is getting elevated with Gartner MQ, the buyers profile is changing because the C-level people, the CIOs, the VPs of infrastructure, they were waiting for this to come together as a mainstream thing. For the last five, six years, we’re carrying the burden of really creating a market. And I think we’re seeing that change actually come together. So, over the coming 18, 24 months, we’ll see many more of these senior people now taking stock of the situation, especially as I see the big bills coming from the public clouds, I think they’ve got to figure out where do we contain that and figure out better cloud architectures on prem as well to really go and boss the budget and the spend.

Thank you. And if I could just follow-up, there is a lot of noise around what can happen at Dell VMware including mergers and reverse mergers. And sounds from your commentary, you’ve really not seen any change in behavior as it pertains to your relationship. But, if there were any deal on that side happen, how would you handicap the probability of somewhat emphasis of Nutanix at Dell?

Yes. I mean, we’re waiting and watching. Obviously, it’s difficult to speculate, but what I’ll say is that I respect Michael Dell as a leader. And if he gets closer to VMware on one hand, I mean he also has massive routes in server business. And one of his goals and Jeff Clarke who is the President of the company for the last 30 years, they have actually built this business on the strength of the server and they would not want to lose that by not being close to us as well. I mean, there is only two operating systems that are really merging in this market, one is VMware and one is Nutanix. And given, what I know of this leadership there, which is one of the things that we continued to see over the last three, four years, I mean this cloud or EMC and Dell are coming together, what will happen to XC, what’s going to happen to the Nutanix relationship. We have been feeling this question for the last 24 months. And I think they are just smart as business people just like consumer companies who actually know that they can compete with partners and still have marketplace and app store and all that stuff. I think that’s what Dell is all about. I think they are getting closer to the VMware, they’ve gotten closer to VMware, they probably might be one company. But, I think for them to get close to another operating system would be a smart strategy.

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

Good afternoon. Thanks for taking my questions. I was wondering if you could drill down little bit more on the five $3 million deals you signed. Are there any just common themes whether it’s specific catalysts or used cases they were involved there and if there are any applicable lessons learned from signing those types of deals that you could take with you moving forward?

Yes. I think a big focus for us has been around customer success, which means that we start with this phrase called data center modernization. And then, we talk about upselling with the same workload and then we go and talk about well we’ve gained this trust over the last I would say 12 months with the customers and they like operational efficiency, they like model. This is simplicity and the elegance of the product and the application folks start to really say I want to do more with this stuff as well. And that’s when you talk about replatforming everything or at least the large chunk of this stuff. So, as their existing capital actually comes to refresh, they are really looking at Nutanix as a platform play. And that’s the big shift that we’ve seen over the last, I would say 12 months. And I would imagine that the Gartner MQ is only going to help us with that, because the trust actually comes with all the reporting that Gartner has actually done. So all-in-all, I would say that most of them are existing customers. We’ve played a pretty keen role in looking at the utilization and Net Promoter Score and have the trust is built, they have gone and tried to re-platform the entire data center with Nutanix.

As a quick follow-up, could you touch on what are your hiring priorities, I guess over the next couple of quarters?

Yes. I think, you probably could even take a look at our website, it’s pretty evident that we are big on hiring, there is massive market ahead of us. And because of the repeat business that we’ve seen that we have even reported in our investor deck, you can imagine that once we actually get a dollar from the customer, we’ll get an average $4.5 more from the entire population close to $9, $9.5 from our Global 2000 and close to $20 or more than $20 from top 25. So, given all that, there is a formula that actually says, we need to just to go for coverage. Our Chief Revenue Officer, Lou Attanasio, he says that the places where I lose is where I don’t have the seat on the table -- seat at the table. So I think there is a big push to increase the awareness for the company and actually get more account coverage, which is basically the focus for the business. And obviously, we’re doing a lot of R&D work as well. But it’s going to be within the guardrails. I mean, even though we’re actually going to acquire some of these smart smaller teams, I think the focus is to keep within the guardrails for the last three, four quarters, which is close to 18%, 19% of revenue.

Your next question comes from James Fish with Piper Jaffray. Your line is open.

I’m on for Andy. Thanks for the questions here. Maybe just a follow-up to a prior question a bit ago. Are you seeing a reduction in channel friction following the change to the software only mode?

I think, it is early, but probably in the next six months, we can come and report some more on how it’s coming together. The thesis is that it should reduce, because now, they can be the matchmakers of the hardware vendors and our software, which can only be good, because now it’s not an either or, it’s -- you can take Nutanix software and put it on their other partner as hardware and then go and sell it as a solution. And plus they get to see some professional services on top of it. And as we sell more software ELAs, we expect and hope that the way we actually go and pay the channel more is based on utilization consumption, because we’ll have a bunch of shelf wear lying on the customers’ shelves. And we want partners to go and make money after the fact based on consumption. So, there is good business for them and they can actually play the matchmaker that they’ve always played in the past 20, 30 years of IT history.

And just a follow-up quickly. You talked a bit about being behind on hiring this quarter in yet put a very solid billings growth. Do you actually need to hire as much as you expected before really? And in other words, how sustainable do you think that the productivity you saw this quarter is over the next year or so?

Yes. I think, there’s a bell curve. You think about the international expansion, one of the things that we did well 4 years ago, 5 years ago, we said, we’ve got to see a lot of the international territory, because over time half the business will come from outside the U.S. So, we’ve done a pretty good job of not being laggards in that. And then, there are markets like Japan and Germany ASEAN and places like that where we’re seeing good success, even UK. So, I think, we’ll look at some of those, we’ll look at federal where honestly we could a whole lot more. I mean, federal was one of the pillars of this company’s success two, three years ago in a much bigger way. So, I think we can go and double down in some of these success stories. Healthcare has been a massive vertical for us, but they’re also referential -- there’s a lot of referential selling that happens in the healthcare space itself. So there’s a few verticals where we can actually put these specialists sales force that will come to help us with the Global 2000 in the coming three, four years. And Duston, do you want to add…

Got it. Thanks. Thanks for the questions.

Your next question comes from the Nehal Chokshi with Maxim Group. Your line is open.

Thank you. Great quarter. Gross profit in the billings will be higher than reported gross profit. Is that correct?

I’m not sure I understand your question. Say that again, Nehal?

The gross profit that’s held in the billings number will be higher than the reported gross profit. Correct?

Yes.

Yes. Okay. So, my question is then is the gross profit billings growth, is that even higher than your reported gross profit growth and we should be able to tee that out…

I don’t have that exactly at hand here, Nehal. We can get a little bit for you, but I don’t -- yes, likely the case, but I don’t have the exact numbers.

Okay. All right. And you did have a nice uptick in your Acropolis hypervisor adoption. Was there any new factor at play that drove that slight acceleration there?

Well, last time, we talked about was this whole journey of the customer starting from, talking about datacenter modernization, going away from three tier to oh, you know, we can upsell in the same workload, but then finally the one around replatforming because then they’re trying to look at the whole stack, not just hyperconvergence and computing storage coming together, but what about the rest of the stack itself, which is where AHV is come into play especially for existing customers. Citrix has been a good partner in that vein as well. So I think that workload has helped AHV too. And I think there are few features that we were behind on that we caught up with. And one of the big ones that’s coming in and that’s been cooking for a last two years was micro-segmentation and network virtualization. So, hope to see that that whole stack comes together with network and security. And the partners that have actually written their stack, so we’ve opened up our network and security APIs to a lot of our partners, so you see a lot of virtual firewalls, virtual load balancers, network companies that are actually integrating with our APIs is really making AHV into a true blue platform.

Your next question comes from Mark Murphy with JP Morgan. Your line is open.

Hi. This is [indiscernible] filling in for Mark. Thank you for taking my question. Dheeraj, congratulations on being featured as leader in Gartner’s Magic Quadrant. I think the report also states that by 2020, 20% of business critical workloads, currently that more than three [indiscernible] will transition to HCI. [Ph] What is your opinion? Do you think that’s an aggressive or conservative view? And could an acceleration in workload migration in the public - to the public cloud derail that thesis?

Yes. I think we’ve been talking about this for the last three years now and the pendulum has swung too far in the other direction about everything is going to be rented. And I think as you know that owning and renting will come to balance itself. So, we personally -- I mean I look at this is a journey of hyperconverging public in private owned and rented, blurring the lines between on-prem and off-prem that’s where the real money will be. Because over the next three to five years the cloud will be a thing, won’t be an experience. And when something becomes a thing, there is money to be made on top of it, which is what we are actually banking on and doing a lot of our innovation over the next three to five years is going to make that thing into an experience. Similar to what we did with on-prem, there was a lot of hardware boxes that we said look, we just need to make in pure software. And that job only gets -- I mean that goalpost conversion on-prem and off-prem is an even harder problem with respect to networking and security and identity and bursting into renting in seasonal quarters of the business and so on. So there are lot of good problems in computer science and in design to go and solve for that. I don’t look at this as a zero sum game. It’s actually -- if you’ll had a growth mindset, you’ll say there is a lot of money to be made when you look at cloud as a silo and how you can bring the silos together. On the Gartner thing, the 20%, again four years ago, it was zero; so now, it’s 20. And I think if we were to succeed as a company and this Magic Quadrant were to become something bigger than what is it today, then it’s just a computing tab. I mean virtualization in 2005 was probably okay, fine, we’ll give you 20%. And then every year VMware was working on new workloads, better capabilities and features, reducing the virtualization tax, new regions, new geographies, new certifications and all that stuff that’s the right of passage of any new architecture. So, we are in the very early days of this. And every year we’ll come and talk about it and Gartner is going to revise its number based on how the market makers will really behave with respect to product and customer service and looking at legacy and holding hands of the customer.

Got it. Now, when thinking about that blurring line between on-premise and off-premise, seems like networking is a big deal in there and VMware obviously NSX, the Nicira acquisition was a big deal for them and that’s seemingly a lot of the holds that they had. For you, I think you’re developing an in-house. How much do you think there is a gap between NSX and your networking technology at this point in time or would you say you are on par at this point?

Yes. I mean look, I think we focus on 80% of the 60%. That’s the formula that most good product companies actually focus on it. So, if you think 60% is the real stuff and the other 40% is just stuff that’s bundled, but I would say that today we are already 80% of the 60%. And for us it’s not a $5 million, $10 million deal because network virtualization is not a thing that you need to buy for $5 million, $10 million and expect 12 months of rollout and professional services. Look at the public cloud, they don’t even talk about network virtualization because any developer can go and actually consume security groups and virtual private clouds in one click. So, I think our goal is to really make it one click and one node at a time and not have to really talk about it being a $10 million ELA because it’s a thing because network virtualization is not a thing really, it’s really a part of an entire operating system experience.

Understood. And if I can speak one more in terms of all the changes that you are currently going through especially with the sales comp changes coming in February 1st and could you update us on from a sales perspective where are we with the changes, are we already done with all the changes in territories with the cash process, everything else?

Yes. I mean this is something that Duston and Mark have been talking about as well about how we need to -- actually we have Mark come to our Investor Day conference, because there is a lot to really exchange notes on with JP Morgan and we’d love to actually have you folks come in. But look, I think, we have just like our software operating system, is actually making a lot of improvements and innovation, I think there is a go-to-market operating system that’s innovating upon every quarter. So I think it’s early days, but the quarter -- every quarter results will tell you more about how these change is coming together. But love to have you come together to the Investor Day conference, including Mark as well.

And at this time, this concludes the Q&A session for today’s conference. I will now turn it back to the presenters.

Thank you so much everybody for joining us. I know it was tough day, because of VMware and Splunk and us moving all in the same day. For all of you actually showed presence here means a lot to us. Your time is precious and look forward to seeing you at the Investor Day conference. Thank you.

This concludes today’s conference call. You may now disconnect.