Nutanix Inc (NTNX) 2017 Q1 法說會逐字稿

Good afternoon. My name is Mariama and I'll be your conference operator today. At this time, I would like to welcome everyone to the Nutanix Q1 FY17 earnings call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Tonya Chin, Investor Relations. You may begin your conference.

Good afternoon and welcome to today's conference call to discuss the Nutanix first quarter of FY17 results. 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 Chairman and CEO; Dustin Williams, CFO; and Howard Ting, Chief Marketing Officer.

After the market closed today, Nutanix issued a press release announcing the financial results for its first quarter of FY17. If you would like a copy of the release, you can access it in the press releases section of the Company's website.

We would like to remind you that during today's call, management may make forward-looking statements within the meaning of the Safe Harbor provisions of federal securities laws regarding the Company's anticipated future revenue, gross margin, net loss, loss per share, free cash flow, and other financial and business related information, including our business plans and objectives, product features and technology that are under development, competitive and industry dynamics and potential market opportunities.

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 and 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 perspectives filed with the SEC on September 30, 2016 as well as our earnings release posted a few minutes ago on our website. Also, please note that unless otherwise specifically referenced, all financial measures we use on this call will be 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. Before I turn the call over to Dheeraj, I would like to highlight a few upcoming investor conferences.

Tomorrow, Dheeraj and Dustin will be speaking at the Credit Suisse Technology, Media, and Telecom Conference in Scottsdale, Arizona and on December 5, Sunil Potti, Nutanix's Chief Product and Development Officer, and Dustin will be presenting at the Raymond James Technology Investors Conference in New York City.

Live webcasts of both presentations will be available on our IR website and we will also make archived versions available for at least 90 days. We hope to see many of you there.

Now, I would like to turn it over to Dheeraj.

Thank you, Tonya, and good afternoon, everyone. We're pleased to have you join us for our very first earnings cause a public company. Today will cover a lot of ground on the way we think and dream about the future of enterprise computing, invoke some history on our audacious decisions in the last five years, discuss why we succeed on an everyday basis and demonstrate how all this continues to reflect on our quarterly earnings.

Many of you joining us may be new to Nutanix so I would like to begin my remarks by spending a few minutes summarizing our view of the industry and our position within it. How has the industry evolved? As many of you are well aware, enterprise adoption of cloud architectures continues to accelerate, exerting immense pressure on legacy box vendors and piecemeal infrastructure operating system software companies that fail to match the one click delight and fractional economics of public clouds.

Contrary to some perceptions, we believe adoption of Amazon web services is ultimately a tailwind for us. Owning and renting will find a balance and the operating system that straddles the two will emerge as the new virtualization layer for enterprise infrastructure. I will repeat that again. The operating system that straddles the two will emerge as the new virtualization layer infrastructure.

The more developers spin up their test environment to the public cloud in minutes and the more that IT managers deploy their elastic workload such as big data analytics in the public cloud for better scaling, the more demand we see from organizations looking to move off of legacy three-tier environments. As some of you heard during our IP roadshow, we firmly believe in the idea of the enterprise cloud which combines the frictionless delivery and consumption model of public cloud with the controlled security and long-term economics of on-prem infrastructure. We believe Nutanix is uniquely positioned to deliver this enterprise cloud experience.

We are often asked how our enterprise customers could possibly match the scaling efficiency of AWS. While achieving scale is an important metric for cloud customers, we believe equally important are considerations such as customized SLAs for diverse enterprise applications, data governance to meet compliance and regulatory requirements across nation states and the long-term economics of owning versus renting.

We strongly believe that the Global 2000 clouds will be dispersed and not be consolidated into a handful of mega data centers, as it is with consumer or SaaS clouds. Just like other utilities such as water and electricity that reside closer to end-users, cloud computing will evolve to span thousands of data centers across 100 odd countries, powering millions of customer applications that quantify the business processes and local laws of individual companies and government agencies that view computing as a competitive advantage in an increasingly digitized world.

To be clear, we view these custom applications to be different from horizontal SaaS applications that quantify relatively generic business workflows for meaningfully large markets. Companies and governments do not view these commercialized SaaS apps as their competitive advantage. Another question we are often asked is how the hybrid cloud will evolve, or said another way, how public and private cloud computing will converge and effectively homogenize owning and renting.

Convergence is a powerful phenomenon we have seen repeated on many occasions in our lifetimes. The fax, the phone, the printer, the copier, the iPhone, the Intel microprocessor and the X86 chip set, the new software defined data center, the list goes on and on. As a company, we think we have made a bet on convergence that naturally resonates well in technology.

The true delight of convergence though comes from the software stack that powers it. Five years ago, large infrastructure incumbents came together to define bolt-on converges heavily driven by joint marketing and professional services.

Industry pundits fell for the convergent infrastructure trap and today the market is ashamed with talking about convergent infrastructure because it was a hack that flattered to deceive. The hybrid cloud juggernaut will rule indeed, with mega announcements replete with media fodder filling a two- to three-year window of bolt-on hybrid before true convergence on a clean canvas triumphs. As a company, we have had to go through that rite of passage before when we had a nonexistent brand and no distribution muscle.

The next five years will be yet another journey of dreaming and delivering cloud convergence that has end-user delight at its true north. To set the context, who are we and what do we do? Nutanix identified this enterprise cloud opportunity early on and has methodically built an operating system that includes all layers of the IT stack over time.

Starting with our roots in simplifying storage with our pioneering work in hypo-converged infrastructure, we rapidly expanded our acropolis fabric into virtualization, native file and block services, and containers. In a pivotal early product decision, we elected to build our own pane of glass for user interface called Prism rather than rely on our junk tabs or extensions on someone else's pane of glass, which would've limited our strategic value to our customers.

We have spent considerable energy designing Prism to bring consumer great delight with a search-first interface, customizable dashboards and a rich machine intelligence platform to bring extensive one-click automation for many of the common IT tasks. At our inaugural.NEXT Europe conference held in Vienna earlier this month with over 1,200 attendees, we announced a planned expansion of our platform to include networking and security with the aim of bringing the same one-click delight our customers have grown accustomed to across all layers of infrastructure.

The imminent capabilities and focus on visualizing the network showing through Prism how applications are connected to the physical and virtual network for simplified monitoring, trouble shooting and remediation of applications issues. These imminent networking capabilities will also include expanded APIs to integrate with third-party switches, load balances and firewalls from the likes of Arista, 5F, and Palo Alto networks to automate provisioning and changes to the network environment and to dramatically reduce the time and manual effort required to deploy our skill applications.

In a subsequent release, we'll deliver network security by offering native microsegmentation to protect against modern threats that often rely on penetrating lower valued and less secured environments and then propagating the attack horizontally across the data center.

So how did the competitive environment look like? We believe the competitive landscape continues to evolve rapidly. The transition from legacy three-tier environments to modernized cloud architectures continues to accelerate, and we believe the primary reason customers elect to continue with or expand their traditional three-tier environments is the inertia of the people managing those products, as well as the procurement processes themselves, which are aligned with large periodic CapEx cycles.

The growing market clamor for hyper-converged infrastructure has attracted many competitors, with each of them now increasingly leading with these projects over there legacy three-tier offerings. As we articulated during the IP roadshow, we believe hyper-converged infrastructure is a mere pit stop in the journey of an enterprise cloud operating system.

Because we don't have the luxury of bundling shelf ware, we have to earn our keep in every deployment. While we remain a force to reckon with in the hyper-converged infrastructure space, we are increasingly winning in the enterprise due to our full stack solution that includes native virtualization systems, management, cloud orchestration, and, going forward, networking security.

Our customer add option continues to grow nicely and validates our thinking on product and business design. In the first quarter, we added a record number of new customers, over 700, which was up 109% year-over-year, bringing our total customers to over 4,400. We also continued to attract large customers, with cumulative customers who spent over $1 million with us growing 137% year-over-year to 256.

Our footprint in the Global 2000 grew to 376 accounts and our real opportunity is to expand deeply in these accounts as they bet on future computing architectures. Today on average, our Global 2000 account of lifetime purchase multiples of 7.3 times that of their initial purchase with us, demonstrating the power of account penetration.

We also demonstrated continued strong execution with our newer products in the first quarter. Customers electing to run our full stack continued to increase as proven by our AHV Hypervisor option growing to 17% using a trailing four-quarter average up from 13% out of the prior quarter. For customers deploying our solution in ROBO environments, remote office branch office environments, in Q1, nearly 50% elected to use AHV, demonstrating the powerful of a full stack story.

Enterprise computing in the Global 2000 will be extremely dispersed, as I said before, as these highly complex organizations that are present in 50 to 100 countries operate with decentralized teams and navigate local laws around data safe harbor and computing sovereignty. Our webscale commodity hardware-based approach to both the control plane, which is Prism, and the data plane, which is Acropolis and AHV Hypervisor, allows for this elegant yin yang between computing locality and centralized cloud scale management.

Our relationship with Dell continues to be strong, with billings in the quarter better than expected. In fact, Dell was responsible for signing a number of our new Global 2000 customers during the quarter. We are working closely with them to get both Dell and EMC sales teams trained to sell our products.

The teams are is also engaged in deeper collaboration to bring automation and one-click delight to erstwhile EMC products via Nutanix Prism. From the sidelines, it might appear that because of the VMware ownership, Dell EMC and Nutanix are in a zero-sum game. As hustlers in the front line, we see a very different picture in which customer interest dictates alliances.

A healthy cooperatation with partners is how consumer computing has thrived over the past decade and exactly how enterprise computing is shaping up to be. We are proud of our appliance heritage and the strength of both the Nutanix brand and our sales force. What keeps Dell and Nutanix in an honest partnership with mutual respect is the fact that we can compete and cooperate on a deal by deal basis.

Let me give some specific color on notable first-quarter wins. We extended our relationship with a Global 2000 software ISV after being selected as their primary platform for their SaaS offered, bringing their total lifetime spending with us to over $6 million. We expand our footprint at Toyota Motors North America as we continued to help them with a major data center consolidation project.

Toyota made several purchases in Q1 and remains one of our largest enterprise accounts. We won several expansion projects at Scotia Bank, another Global 2000 customer, for Splunk and their enterprise cloud after extensive testing and performance evaluation against competitive solutions. We closed several expansion deals at GIC, exceeding $1 million in total Q1 purchases to power their enterprise cloud.

We won a sizable expansion deal with one of the most recognizable technology brands in the world to replace Oracle XE data for its manufacturing operation systems after signing a very large ELA in Q4 for the initial business, and a little softer ALA. We closed an expansion deal with over $3 million with a large diversified manufacturer of consumer products. We initially landed this account in May of this year as part of a project to refresh the manufacturing plants and disaster recovery sites.

This deal represents a hard-fought win against bolt-on converged infrastructure for the customer's core data centers. We see many customers that look at the public cloud for predictable workloads and conclude that they can have a superior solution with Nutanix's enterprise cloud platform, which offers them greater control and for less cost over time.

One great example is ICICI Bank Limited, India's largest private sector bank with over $100 billion in assets. ICICI expanded their engagement with us after evaluating public cloud in legacy three-tier for their branches. Additionally, they will be using AHV as their hypervisor for this workload.

We continue to expand our footprint at one of the largest beverage companies and one most valuable brands in the world. This enterprise is ranked in the top 100 of the Global 2000 and has an evolved enterprise cloud strategy around own versus rent and globally dispersed computing.

We also had a very strong quarter in the US federal market, which remains one of our strong verticals. These are a few of the notable wins in the segment during the quarter, which marked the end of the fed procurement year. We closed a deal worth over $1 million with the US Army Human Resources Command for 54 sites, running our enterprise cloud stack, including our own hypervisor AHV, replacing traditional three-tier architecture at all existing US army recruiting brigades and battalions.

We sold our software to run on Cisco UCS at the US Navy, a new customer to run Splunk, McAfee server and SQL server. And finally, we won a new customer, a large functional combatant command in the Department of Defense in a deal worth over $6 million to power Microsoft exchange SharePoint and SQL Server for the first phase of a project that is expected to eventually include hundreds of thousands of users.

Notably, we won this deal with Dell and beat the incumbent three-tier vendors. As illustrated by some of these customer examples, we have conceived, designed and delivered superior products and customer experience and continue to hustle better than the competition on the front lines. As I mentioned before with no luxury of selling shelfware entitlements or shifting revenue dollars with new products, we've had to earn our keep in each of these wins.

Large enterprises have had us walk on fire to prove that we could support their mission critical applications and we have responded in kind with an incredibly strong net promoter score, NPS, that underscores brand loyalty and repeat purchase. While hardware vendors and smaller insurgent startups continue to enter a frothy market of hyper convergence, they all depend on a full software stack delivered either by VMware, or Nutanix, or a combination of the two.

Simply delivering a software-defined storage capability on top of a hypervisor is hardly going to meet the bar in the Global 2000 where OpEx rules and continues to bleed IT. As we expand to meet demand, we continued to add talented and experienced employees with the right insurgent mentality to help sustain our growth and improve our efficiency as we scale. Our employee base grew by nearly 400 in the first quarter to just over 2,350, including over 110 employees that joined us from PernixData and Calm.io acquisitions.

One notable addition to our team is Chris Kaddaras, our new head of EMEA, filling an important role that had been vacant for the past year. Chris joins us from EMC where he spent the last 15 years and brings a wealth of industry knowledge in deep network relationships to lead our second largest region where enterprise cloud computing will be truly dispersed across 50-plus countries. Those who continue to receive strong industry recognition in Q1, Gotner named us as a leader in the magic coordinate for integrated systems for the second year in a row.

While we believe our enterprise cloud operating system extends well beyond the definitions of hyper-converged infrastructure and integrated systems, the strong third-party endorsement aids in our sales efforts, particularly as it relates to the Global 2000 and larger enterprises. Now I couldn't close without noting our robust Q1 financial performance, which Dustin will review in detail in a moment. As a young public company, we'll strive to balance our short-term goals with the long-term bets we must make for sustainable differentiation.

Through these quarterly calls, we hope you get to know us better as our public persona emerges. The laggard observer focuses on our core data management capabilities to box us into a hyper-converged category.

Data to us is what music is to Apple. Data has gravity, data has viscosity. Data makes us sticky. Data is what makes our control plane machine intelligence hum. Having said all that, we have built a holistic cloud scale operating system, learning immensely from VMware as they have learned from us the craft of [decibel] computing, agile execution and consumer grade design.

The biggest disruption of our infrastructure is the new consumption model. We disrupted storage in our virtualization with the new consumption model that makes components invisible. In the next five years, there is an immense opportunity to build a pure play independent cloud company that is acutely aware of the needs of the Enterprise 5000. As a nerdy operating systems company that is passionate about usability, we stand an non-trivial chance.

With that, I will now turn it over to Dustin for a detailed review of our first-quarter financial results. Dustin?

Thank you, Dherraj. Our Q1 performance, led by a much stronger-than-expected federal business, due in part to the federal year end, coupled with an outperformance in our OEM business, exceeded expectations by almost all measures. In fact, our federal team simply performed at record levels. In absolute dollar terms this quarter, the federal bookings were approximately 75% greater than any other quarter in our history.

We had well over 100 federal deals, with 12 of them in excess of $1 million. The Nutanix Acropolis Hypervisor, or AHV, will be used in over one-third of the total federal nodes shipped during the quarter. From a year-over-year growth perspective, federal bookings grew 78% in Q1 versus 37% in FY16 and 37% in FY15.

We're also particularly pleased to see our OEM business outperform our expectations in what is typically a seasonally slow quarter. During the quarter, we also continued to execute on our stated gross margin strategy, which, as we have consistently communicated in the past, is to target a gross margin for the foreseeable future of around 60%.

Any potential upside due to higher OEM in software sales is expected to be invested back into our business through competitive appliance pricing to accelerate new customer acquisitions, as well as to expand into certain targeted geographies. We continued to invest aggressively in the business, although always measured against the backdrop of our sales productivity model.

We are mindful of the delicate balance that exists between growth and cash flow. As an example, during the quarter, we took on approximately 110 additional hits related to the PernixData and Calm.io acquisitions. To fit within our existing spending plans, we simply cancelled the equivalent amount of already approved Nutanix headcount requisitions.

If we step back for a minute to see how our business focus has morphed over the last few years, we would find that early on, like most early stage companies, we're almost always solely focused on growth and products. After a few years, we added an additional goalpost of operating within a 60% gross margin parameter.

Once the margin goal was accomplished, we added the additional goal of operating at a level of positive cash flow from operations. Today, I'm pleased to note that Q1 represented our fourth straight quarter of positive cash flow from operations.

Having successfully balanced growth, gross margins and positive cash flow from operations over many quarters, we recently added the next operating goalpost, that of being positive free cash flow, which we expect to occur at the end of calendar year 2017. Once we do become self-funding, we clearly have the option of making even further investments to expand the reach of our product platform and to broaden our sales footprint with a goal of securing superior growth over an extended period of time.

I will go through a few details for the quarter now. Revenue for the first quarter was $167 million, growing 19% from the previous quarter and 90% from a year ago. We billed $240 million for the quarter, representing a 16% increase over the prior quarter and an 86% increase from a year ago. This billing total excludes a $6 million addition to deferred revenue related to the PernixData acquisition.

Over the last few quarters, our billings to revenue ratio was elevated to a range of around 1.45 to 1.5, resulting in unprecedented increases in our deferred revenues. Going forward, we would expect this ratio to decrease to a more normalized range as the last few quarters included some larger one-off ELA deals, outperformance within our OEM business, and higher than normal support renewals, all which augmented billings with little associated revenue recognized.

Our non-GAAP gross margin for the quarter was 61% versus 61% in the prior quarter and 60% in the year-ago quarter. The non-GAAP net loss was $47.8 million, or $0.37 per share.

This quarter we had a few more than usual reconciling items between GAAP and non-GAAP results due to our IPO, the PernixData and Calm.io acquisitions and the repayment of our outstanding debt, all occurring within the quarter. We've provided a thorough reconciliation of the impact of these items on our non-GAAP results in our press release.

I'll finish it up with a few balance sheet stats and a few other miscellaneous items. Cash, cash equivalents and short-term investments ended at $347.1 million. That was aided by approximately $250 million raised in the IPO. We paid off the entire debt balance of $75 million. Our DSO as based on a straight average calculation was 81 days versus 73 in the prior quarter.

However, the weighted average DSO, which reflects the period an average receivable was actually outstanding, improved to 24 days versus 31 days in the prior quarter. Software as a percent of total bookings based on a rolling four-quarter average was 15%, up from 9% in the year-ago quarter. And the AHV nodes as a percent of total nodes based on a rolling four-quarter average was 17%, up from 6% in the first quarter of FY16.

Now looking at the guidance for Q2, on a non-GAAP basis, we expect revenue to be in the range of $175 million to $180 million, gross margin of approximately 60% and a loss per share between $0.35 and $0.36, assuming shares outstanding of approximately $142 million. In conclusion, we were very happy with our strong Q1 performance, which included a couple of large ELA deals, as well as outperformance in our federal business.

With the continued revenue growth, steady gross margins and thoughtful investments implied in our Q2 guidance, we are confident that our business continues to move toward our long-term financial targets. Thank you. Tonya?

What that, we will turn it over to the operator for the question-and-answer session. We would like to request that you please limit your question to one question and one follow-up to allow time for others. Operator?

Thank you.

(Operator Instructions)

Your first question comes from the line of Mike Hedberg. Your line is open.

Hello, guys. Thanks for taking my question and congrats on the strong Q1 results. Dheeraj, I wanted to ask you, years ago, hyper-converged was mostly used for VDI deployments, but today, that is clearly significantly different. Can you talk about some of the new use cases or applications that you are seeing and maybe some of the fastest growth from customer adoption?

Yes. I mean, as I mentioned, in my call script as well, Matt. Every rearchitecture of the data center has actually had to go through one killer app, one killer workload. And if you look at VMware 10 years ago, it was test and dev. For AWS, it was exactly the same some, test and dev. So VDI became that killer app for us because Windows 10 refresh was coming, there was a lot of iOS and android on the edge so Windows moved to the cloud, which people call a virtual desktop infrastructure.

And we foresee that market by itself to grow quite a bit, but at this current stage, it's less than 30% of our business. I think last quarter was 25%, if I'm not mistaken. Pretty much the rest of the 75% is server virtualization workloads, they are about 8% to 9% is remote office branch office. There is a lot of Microsoft applications, as I mentioned, in some of the customer wins. There's Splunk as a use case, there is Oracle, and basically, a ton of healthcare apps that people don't know.

These are dark apps that nobody apart from healthcare actually knows about, so healthcare is becoming a pretty strong vertical for us and we are going pretty deep, certifying a lot of these applications on our quarter-by-quarter basis. And a huge focus for the Company is really looking at things top-down rather than selling infrastructure bottom-up and that will mean going deeper into. For example, in federal, we have just certified Crystal as a new piece of hardware because it is ruggedized and so we speak the language of the industry as opposed to going and speaking a hyper-converged infrastructure language.

That's great. And then maybe as a follow-up, I think in the prepared remarks, you mentioned your Dell OEM business was better than expected. I'm curious though, given your relationship with Lenovo is only a few quarters in right now, can you talk about the run rate of that business for Lenovo? How does that feel versus the Dell business maybe when that was only a few quarters in?

I think they're pretty similar. Obviously, there are two different companies. Dell is highly centralized decision making. Lenovo is quite the opposite.

They are more regional, which makes for quite a bittersweet experience, I would say. Bitter because there is there is no one place where you can actually go and forge product decisions or go-to-market motions and such.

But at the same time, it gives leeway to individual regions like China, like Europe, like Africa. So we're doing a lot of these things on a regional basis, but we foresee that Lenovo is going to be yet another hard work for us just like Dell was and it continues to be one of those things where we as a Company need to go and sell ourselves and expect that the OEMs will actually follow.

Great. Thanks a lot guys.

Your next question comes from Kulbinder Garcha with Credit Suisse. Your line is open.

Hello. Can you hear me?

Yes.

This is [Efford Schwan] for Kulbinder. I just have a couple of quick questions. The first one is that this quarter your revenue grew 90% and if we use the middle point of next quarter's revenue guidance, it is about a 74%, 75% or 73% year-over-year, which is kind of a deceleration. But when you look at other metrics, you have the healthy billings and you have constant growth accelerating.

Can you just help us understand this kind of dynamics? You have a healthy billing and better metrics of other things, but your revenue guidance is kind of decelerating and I have a follow-up.

Sure. We mentioned a couple things on the revenue for Q1 that, and mostly around federal. And federal outperformed our expectations quite significantly in the quarter and I think the consensus number was roughly $152 million or something along those lines and into $167 million.

So we are coming from a slightly elevated number in Q1 and it's not quite apples to apples to look at that on an elevated Q1 number. I think if you look at the current consensus out there for Q2, it's roughly I think $168 million so this guidance of $175 million to $180 million is about a 4% to 7%, I believe, increase or raise over that prior consensus also. But you're right, (multiple speakers) the business on the customer growth was great this quarter, but we had a little extra unexpected in Q1.

Okay, and also can you kind of give us some kind of color about your billings? Like how much is from the new customer billings? How much is from existing customer billings? Because I think that would help us understand that kind of ASP for each set of customers and also is your software revenue close to 10% of total revenue now or how close is it?

Yes, so on the repeat, it was roughly 65%/35% existing and new customers. So existing customers roughly 65% of the total. When we state those figures, it is always a percentage of bookings. And that, it is plus or minus 5% maybe every quarter or something along those lines, but it has been fairly steady in that 60%, 65% range for several quarters.

And then the second part, what was the second part of the question? Oh, the software as a percent of revenue. We have not given that.

It is creeping up, obviously. We gave the rolling four-quarter software total at 15% of total bookings and as the amortization of Dell and other software continues to roll in there, that's getting up there, but we have not specifically set it on a revenue basis.

Your next question comes from Simona Jankowski with Goldman Sachs. Your line is open.

Thank you. This is Matt Cabral on behalf of Simona. I guess could you just dig a little bit deeper into the strength that you saw in federal in the quarter and help us understand what actually drove the acceleration? I mean I guess was this just pent-up demand that finally closed in the quarter was or there something more structural that changed that maybe had legs beyond just the first quarter?

Well, obviously to the fed procurement year end, their procurement ends, their fiscal ends in September. So Q1 is typically one of those quarters where we see more federal, but there are some large deals that we saw as well and these are more difficult to predict deals. I talked about some of them here as well.

The OEM relationship is finally kicking in as well. One of the things that federal was late to embrace was the OEM relationships itself. So they are finally doing well with Dell and other than that I think it's just there was nothing special about it.

We also probably under investing in the quarters before in our federal sales investment in terms of putting more feet in the ground and we did some of that in the last two quarters as well. So some of those numbers also showed the federal procurement year end.

Got it. Thank you. And then, Duston, on the gross margin guidance, I guess, could you just walk us through the puts and takes to get you to that modest step-down that you're guiding for into the second quarter?

Yes, I mean, it is plus or minus, again, and we've just always had that 60% kind of mentality if you will so there's nothing scientific, if you will, why it would decrease in several [10s] of basis points there quarter-over-quarter. It's just that's how we've tried to manage the business and you can't get it perfect all the time.

In an ideal world, we would love 60% every quarter for the immediate future anyway and then grow the footprint and add more sales teams and things like that. It's just the parameter. You can say it is plus or minus 100 basis points maybe on each side of that which we said in the past there, but it is basically just the philosophy of how we running the Company.

Thank you.

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

Yes. Thank you very much and congrats on a strong result. Dheeraj, I'm curious how often these days are you competing head-to-head against Amazon AWS? If the prospect is considering the economics of predictable workloads? And also, just how frequently are your customers using Nutanix coupled with AWS in kind of a true hybrid capacity?

This is a very good questions that actually we think about on an everyday basis and if you think about our thesis, Mark. Our thesis is that in the Global 2000 and generally speaking in the Enterprise 5000, it is going to be about hybrid, not pure play public cloud. And it's kind of came to the market for electric car versus hybrid versus gasoline.

And own versus rent will kind of shake itself out in the coming years. As I mentioned earlier, predictable versus elastic will be a pure economic argument once on-prems OpEx looks similar to a public cloud.

Today, it is all messed up because of the complexity of dealing with multiple boxes and vendors and tons of opinions on whose hypervisor to choose, whose server to use, whose switch and load balance and firewall to use and et cetera. So we are on a path to simplify a lot of these. I mean, as you can appreciate, IT in Global 2000 is about builders who have too many opinions on technology.

And their balance of trade issues with vendors and ownership of risk and CapEx friendly mindsets and things like that, so the highly opinionated public cloud black box is not a panacea for these organizations and at the same time this is an illusion over time. We believe that there is no technology provider out there who has the attention to detail to affect this change.

That is where we see our opportunity. What do we mean by attention to detail? I mean, on the hybrid front, there are tons of things that are broken in the hybrid world.

Networking is broken, security is broken, data center wide scheduling, online migration that is cross cloud and cross hypervisor. There's a ton of technology that we need to pay before we partake in this hybrid buzzword of today.

Convergence of public and private cloud will require heavy lifting of design and backend infrastructure and what I can tell you is that we have been busy. We'll come back to you when we think we are ready with paying off the technology data itself. And hybrid is, as I said, in a classic convergence, just harder than the last one we did over the last seven years of our company journey.

And just overall in order to share this with the rest of the shareholders who are also on the line, I can appreciate the angst that they have with the shareholder, what's going to happen with this CapEx versus OpEx war. As a very large shareholder myself, let me reassure you that we have disrupted and reinvented ourselves every three or four years because we are a bunch of highly dissatisfied paranoid builders who wake up everyday and think about this intermediation.

That is how HP was born, that's how the OEM decision was deliberately taken to compete with our sales and grow the [by]. That is how Prism decision was taken six years-plus ago even though it was considered a rash idea born out of being in control of our destiny.

I think net-net, we have all plans to make hybrid elegant. We will come back to you every quarter and talk about how far down the road we are with some of the tech debt before we measure success of go-to-market which I promise we will hustle equally hard for.

Okay, great. Well said. And Duston, I just had a quick follow-up for you. I guess I'm a little surprised by the federal bookings comments. I think you said it grew 78% year-over-year. It's actually a little slower than the revenue growth and it's a little slower than the billings growth.

So I just want to make sure I'm digesting that correctly that the federal business performed above plan but grew a little slower than the broader business. Is that a fair way to look at that?

Yes, I mean if you look at it, what I was comparing is what it grew Q1 of last year, it grew 37% year-over-year. The prior Q1, it grew 37%. So there was just some good, healthy growth comparatively and clearly it exceeded what we had expected.

Thank you.

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

Thanks for the questions and congrats on the quarter. First of all, now that the Dell EMC deal has closed, what have you learned around how that channel will position the Nutanix product versus the EMC and VMware solutions? And a follow-on to that: How realistic is it for investors to expect you to broaden your OEM partnerships or do you feel like you are happy with the Dell and Lenovo relationships that are in place today?

I think on the Dell EMC front, I've covered a lot of ground in my talk, but I would say we are in good shape. There is a healthy cooperation on a deal by deal basis. We have extended our partnership framework to 2021. We have won joint customers in Global 2000 by helping each other and yet we are paranoid to lose them as they are to lose us. That is a healthy relationship, I would say.

Our EMC sellers are being enabled as we speak. There's much work ahead in terms of enablement of Global 2000 heavy sales force, their aspirations of account control, friction reduction, and are preparing them to disrupt themselves as Nutanix disrupt itself and so on. It is hard stuff, as hard as product development, if not harder, but we are focused and we are aware of the pitfalls. We are willing to be the most agile shark in the red ocean, I think.

I think it is pretty positive move for Dell EMC to embrace Nutanix and VMware and Microsoft as a trifecta and it is going to come down to being humble and honest and hungry and we will see where this whole thing goes. It was very similar, I think it's early days. We don't know what we don't know.

We went and localized our product for China, in particular, because we look at that as a very different market than the rest of the world and we're seeing some good reception in terms of having empathy for the end-user, so it is going pretty well. I think it is going to tier two towns in China and things like that which broadens our customer base as well.

And how realistic is it that you would look to additional OEM partners or are you happy with what you have in place in terms of channels now?

I think one thing that is pretty clear to us is that we should not be suffering from any kind of attention deficit disorder on simply signing contract for the sake of signing contracts. Enabling EMC by itself is a lot of work and fraught with friction and requires our utmost attention to detail and then there is working on Lenovo and getting it right. And then there is enabling our own sales force to know which route to market is best for that opportunity that they are chasing.

There's a ton of people enablement and friction reduction, business process automation for one-click delight and things like that, so at this point, we just have to get a lot of what we have in our hands right, including Cisco UCS. If we get these right, then we will probably look at adding more OEMs in the future.

Okay, and then just a bigger picture question, one that I get often on the competitive landscape, why do you think customers will turn to Nutanix to bridge public and private workloads instead of turning to another large infrastructure provider like VMware or application provider like Microsoft that already has a lot of existing relationships and are embedded in the applications today?

I think to me it is very simple and it is not technology. It's ambition and attention to detail. Everybody has tried. We're the only ones that have successfully written a control plane that hides the details of individual hypervisor stacks and sold it at scale through the channel in OEMs. Now going from here to the next level, trying to go through AWS as a full stack beyond [VIS fear], hyper [vnh three]. We could still fail.

We are redefining [EPIs] in hybrid operating system capabilities and it could get complicated as we abstract out individual cloud providers. So I'd say it is early days and we'll report more in another year. Interestingly, the Calm.io acquisition is very important in this context.

They automate entire application blueprints and abstract cloud underneath. So we are burning a lot of midnight oil trying to assimilate and integrate that goodness into our Prism and self service portal.

Again, we could fail if it we didn't have the attention to detail in our organizational assimilation and [UX] and UI design and things like that. And then finally containers throws another curveball here and no one knows how best to integrate VMs and containers so it creates a level playing field in which there is no guarantee that the biggest brand will win. If anything, I think being an underdog has helped with innovation so looking forward to that.

Thank you for your thoughts.

Your next question comes from Aaron Rakers with Stifel. Your line is open.

Yes. Thanks for taking the questions and congratulations on the quarter as well. I believe in the IPO roadshow, you guys had made a comment about your sales capacity and I believe I think the number was around 54% were deemed to kind of be productive.

Is that a metric you can provide an update on? And how do we think about your plans on sales capacity expansion going forward? And I do have a follow-up.

Yes, I mean we'd ultimately like to probably get away from disclosing that, but this quarter, there was very little change in that metric. It's pretty much the same. If you are looking at again, how do we plan to -- I think your question was how we plan to grow the sales force going forward?

Correct.

Yes, and again, it is all hinged back to the sales productivity model like we do on all the other investments in the business and we look at that and we continue to analyze it and study it and to see how that is progressing and as long as that continues to perform as, or better than, expected, we will continue to add resources.

As a matter fact, this quarter, I believe the sales adds for this quarter, total sales, so this is quoted, non-quoted, overhead folks and the like there, I think it was 25% greater than any other quarter so far in our history here as far as the amount of adds in the sales organization this quarter. So we continued to hit it pretty hard. And it won't always probably be at these levels, but again, if the productivity model continues to work, and it has continued to work, it gives us comfort to go do that.

And there is a focus on Global 2000 in Germany and Japan from the regions they are looking at.

Yes.

Okay. And then as a quick follow-up, you know, talked a lot about the OEM relationships. I'm curious of what you've seen in the field with regard to your ability to sell into Cisco environments of supporting Nutanix on top of the UCS platform.

I think at .NEXT we announced plans to support both blades and rack launch server form factors from Cisco. At a high level, we have much work to do here, Aaron, just like Uber had to work hard and fight for its rights in every major city around the world. It won't be easy, but we are hoping diehard Cisco UCS customers will see value and then push hard for the two companies to cooperate and behave. Probably very similar to what happened with Oracle and VMware in this last decade.

The only way to counter platform hubris of companies, including our own hubris sometimes, is to listen to the joint customer and do it right by them. The rest takes care of itself and Cisco does realize that they don't have the full stack, they're mainly replacing a sliver of the VMware stack with their arm's length OEM product and the goals of shipping that OEM product are also different.

That software in a bundle with every UCS server today is being delivered literally for free to create the optics of software shipment. But we all know that the enterprise don't buy cheap stuff. They buy stuff that works and meaningfully displaces existing CapEx and OpEx. That requires more than bundling software with every motherboard.

Thank you very much.

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

Great. Thanks for taking my question. Duston, you mentioned the billing to revenue ratio in the quarter -- or has recently been around 1.45 to 1.5 and you suggested it would trend lower. Could you give us some idea of what you consider normal in this regard?

Yes, I would go probably back, Simon, to maybe four quarters or so ago and maybe a little bit more than that and see what it was trending at that point in time. We started to get some pops that put it up.

The OEM business kicked in heavy there. As I said, the ELAs came on this quarter quite heavily. There's some support renewals in there that hit it that just is not right for us to assume that's going to continue like that from the perspective. So, yes, I would go back probably four or six quarters and do that calc there and it is probably more somewhere in that range.

Great. Appreciate that, and in terms of the business with Cisco, in your prepared remarks, you, I think, mentioned that some of the federal projects came about through work with Cisco. Could you help us get a better understanding because it sounds like a number of the questions were dancing around the relationship with Cisco and in the past, it sounds like you've had a lot of strength in the Dell relationship.

You spent a lot of time in prepared remarks on the Dell relationship, but it seems as if you have got some brewing strength with Cisco. I'm just wondering if that creates any kind of tension given the relationship or tension between EMC Dell and Cisco. Just wanted to be can help us understand some of the dynamics and what could develop out of that. Thank you.

You know, I wouldn't read too much. There are a few wins here and there. We're still very early.

It is like seeding a new start up product within a larger company and it's not just love from their site, it is also our own attention to detail on how we go and focus on Cisco as if it is a mini start-up within the big start-up. We have challenges and there's risks and we don't know what we don't know about the next 12 months, but we'll hustle hard and hope to get more joint customers and from then on, it could be a different relationship.

Right now, I think Dell is probably the most self aware and the most situationally aware OEM with Lenovo that understands where the market is headed, what the public cloud is doing to consumption models and what it means to actually keep the on-prem environment elegant. Everybody else is still scratching the surface of what it means to compete with AWS and then so on. So I think it's early days to see what Cisco and Nutanix will do together.

Your next question comes from Alex Kurtz with Pacific Crest. Your line is open.

Yes. Thanks, guys, for taking the question. Maybe some color around ASPs and these larger strategic Global 2000 accounts and how that trended during the quarter. As you get into these bigger $1 million-plus transactions, what does that mean for sales cycles and any potential lumpiness in future quarters?

Yes, I think the ASPs on the appliance side have pretty much held up. I can't see a reason to say that from a year ago, it is actually been any different. Now, there are some Global 2000 customers that have bought ELAs from Nutanix via the Dell OEM agreement, so we realize only software dollars. And then there is some other ELAs that went on white boxes that, again, have a very -- it's an apples and oranges comparison in terms of the ASP there as well.

But overall, I think the sales cycles, early sales cycles, if you look at the first dollar that a Global 2000 is spending on us, it's probably from six to nine months. And then in the next 18 months, as we reported in the past, they are repeat purchasing another $7.50 on average. And our top 25 is doing about [14 X]?

No, [15.5].

[15.5X] from the first dollar, in the next 18 months after the first dollar.

Okay, and just a follow-up on one of the other competitive questions, maybe you could just frame the argument right now against you guys versus the VxRail and how VSAN to VMware were the only environment type of product and how that has been looking in your pipeline. Has it been growing your pipeline or is it more sort of legacy sort of converged systems that you're seeing?

Yes, I think 70% are still a three tier. I think we are thankful to VMware and pretty much everybody in the space to go and broaden that market because everybody is going and spending marketing dollars, educating thousands of customers talking about new architecture. And I think it's very helpful and I think the good thing is that [HCI] is not about hardware speeds and feeds.

I mean, the true repeat business, the end-user delight is about a complete experience and operating system and its capabilities around automation and orchestration, machine learning, OpEx reduction and then you don't just do this for compute and storage, but for containers and networking and security and sales service for developers and think about migration, I mean the APIs for partners. It is a very high-level problem than the speeds and feeds of selling boxes whether it is ATI or AFA or what have you.

And I would say also, intrinsically, our disabled systems problems that our large incumbent vendors are inherently not good at. Only software companies that have successfully solved algorithm problems around multiple machines that made it look like one have done it right.

I think VMware is close. No one is even close, actually, except for VMware. So and then on top of that, HCI is about usability in the control plane. It is about designing and elegant simplicity, it is about celebrating less is more that many incumbents have never come to understand or appreciate that, that is the barrier to entry.

Having said that, we are aware that good enough is the biggest enemy of the great, so we are constantly thinking about pricing, packaging for the value-friendly buyer who is cost conscious and that is where the multiple routes to market become important and the fact that we have segment impairment.

Thanks.

Your final question comes from Jayson Noland with Baird. Your line is open.

Okay, great. Thank you and my congrats also. I wanted to start with Global 2000. If my math is right, you added 65 to this category in the quarter. Last year, you averaged about 25 or 30 per quarter. I think, Dheeraj, Dell was mentioned but a little more color there. That's a big deal.

Yes, so what's the question, again, Jayson?

Why was the Global 2000 add so strong in the quarter?

Jason, Duston. Every year, the Global 2000 resets and so what we do is we recalc based on the current Global 2000 at any given time. We finished the fiscal year on the old method, on the old Global 2000, and we just updated to the new Global 2000.

So it was more, I think it was like 23 new adds based on the new Global 2000 recent publication there. That is what we do. Now, in our investor presentation that is either posted or will be posted on our website, you will have all the history there based on the current Global 2000 mix.

Okay. Thanks for that clarification. And then a bigger picture question to finish, Dheeraj, you mentioned that on-prem is a cost-effective alternative to the public cloud for predictable workloads. Is that a common opinion for your target customer base given the public cloud pricing isn't exactly transparent?

Yes, I think, if you look at the common sense around renting a hotel for 30 days or renting a hotel because you are paying for the optionality of pulling the plug any day you want. So renting a hotel for a year or two years or three years, it just doesn't make sense. Or, I mean, if you go out and try to rent a car for a year, it is going to come out to be darn expensive.

So these service providers who rent cars or rent hotels, they know that that's the kind of pricing they need to subsume to be able to pay for the rest of the optionality actually. And I think computing is just going to be like the rest of the stuff. Computing is not going to be any different in housing or autos or what have you.

Is that well understood across your customer base or still some confusion?

It's very early. I mean, look, I was talking to a healthcare provider today at an [EBC] and they were like, look, we are completely CapEx oriented and we can not even think of moving to OpEx because of blah, blah, blah reason. So it's really a CapEx versus OpEx argument and it depends on the culture of the organization and how their finance teams look at tax depreciation and things like that and who has the power in terms of the CIO, the CFO and things like that. So a lot of things that actually are not about technology or things like that more particular in cultural.

I will leave it there. Thank you.

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