Nutanix Inc (NTNX) 2017 Q4 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Nutanix Q4 and Fiscal 2017 Earnings Call. (Operator Instructions) I will now turn the call over to Tonya Chin. You may begin your conference.

Good afternoon, and welcome to today's conference call to discuss the results of our fourth quarter and fiscal year 2017. 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 Chief Financial Officer. After the market close today, Nutanix issued a press release announcing the financial results for its fourth quarter and fiscal year 2017. 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 may make forward-looking statements within the meaning of the safe harbor provision of federal securities laws regarding the company's anticipated future revenue, gross margin, operating expenses, net loss, loss per share, free cash flow, business plans and objectives, product features, technology that is under development, competitive and industry dynamics, new strategic partnerships, changes in sales productivity, expectations regarding increasing software sales, future pricing of certain components of our solutions, our plans regarding the adoption of new revenue recognition standards, 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 the call. For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10-Q for the third quarter of fiscal 2017 filed with the SEC on June 2, 2017, as well as our earnings release posted a few minutes ago on our website. Additional information will also be set forth in our Form 10-K that will be filed for the year ended July 31, 2017, which should be read in conjunction with the financial results reported today. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Please note that unless otherwise specifically referenced, all financial measures we use on this call 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 release. Lastly, the company has adopted the new revenue recognition standard commonly known as ASC 606 effective August 1, 2017. Management has scheduled a call to discuss the impact of this new standard, including a recast of 2 years of financial data and the impact to Q1 guidance given on this call for Tuesday, September 5 at 4:00 p.m. Eastern, 1:00 p.m. Pacific. The company will also file an 8-K with this information after the market closes on September 5. Dial-in information for the call is included in today's earnings release.

A webcast of the call and corresponding presentation will also be available for the live event and archived after the event for 90 days in the Investor Relations section of the company's website. All financial results reported today as well as on our Q1 -- as well as our Q1 fiscal '18 guidance will be based on our historical revenue standard ASC 605. With that, I'll turn it over to Dheeraj Pandey, CEO of Nutanix.

Thank you, Tonya. Hi, everyone. Thank you for joining. I'm very pleased to report that we closed our fiscal 2017 with an outstanding quarter, with billings, revenue, gross margin and EPS performance better than our guidance and consensus. The strong performance reflects our customers' deep commitment to Nutanix, our authentic products, customer service and vision for the Enterprise Cloud. Our customers are moving past the initial hype of a public-cloud-only world to a definition of cloud that is more nuanced around automation, commodity hardware, web-scale engineering, consumer-grade design and hybrid consumption.

We closed our first year as a public company with revenue of $767 million, up 72% from fiscal 2016. As promised, we carefully balanced our industry-leading growth with prudent expense management. Along the way, our routes to market have evolved. We grew our software-only bookings by 96% and also saw our high provider AHV adoption increase by 214% based on number of nodes. Beyond our financial results, fiscal 2017 was a great year with a successful IPO contributing to our strong ending cash position of nearly $350 million.

For the second year in a row, we were pleased that Gartner named us a Leader in the Magic Quadrant for Integrated Systems. Our industry-leading customer support continued to significantly build our brand in fiscal 2017. And for the fourth year running, we have an unprecedented NPS score of 90.

Continuing our history of balancing velocity with quality, we launched or announced major product capabilities around networking and security, a port of our software to IBM hardware as part of our OEM agreement with them and a port each to HPE and Cisco hardware on which we'll monetize pure software revenue.

Blurring the physical boundaries between different components in the data center, that's compute and storage, networking, systems and operations management, automation and security, and then converging them into one single OS, or operating system, that's extensible, ubiquitous and elegantly simple to use has been a journey of a lifetime for engineers, designers and product managers.

This "One OS, One Click" journey will continue as we blur the lines between owning and renting computing. Our strategy for the next several years is to continue building a hybrid cloud operating system that will converge the 2 consumption models with our current offerings, that is, containers with virtual machines and public cloud with private.

In partnership with Google, we've announced our own public cloud service, Xi, spelled X-I, connoting X to the power of invisible, reinforcing our mission statement of invisible infrastructure. The idea of Xi is to run the same OS on both sides of the hybrid divide, effectively converging all the elements of infrastructure so that the devices customers own seamlessly blur with the cloud service they rent, akin to how Apple iOS fuses an iCloud service with an iPhone. There are profound computer science, user experience and design challenges to overcome along the way.

A similar challenge and an opportunity exists in blurring the lines between containers, a more lightweight unit of compute with virtual machines. This is another place where we're collaborating with Google and the evolving Kubernetes container management system. Both Xi and containers will come together into a single hybrid umbrella with the help of our multi-cloud management software, Nutanix Calm.

Calm elevates automation from the lower levels of infrastructure app to an abstraction that is application-centric, effectively detaching applications from data centers and making the mobile in a multi-cloud world. Calm, Xi and Kubernetes containers form the trifecta of our product strategy for the next several years. We've continued to evolve, just like when we decided to work on our own hypervisor, AHV. AHV, Acropolis and Prism are the architectural depths of the past 8 years that will form a robust foundation for Calm and Xi in the coming 8 years.

Another highlight in the quarter was our Third Annual .NEXT conference in Washington, D.C. this summer, where more than 3,500 attendees joined us to learn about the why, the how and the what of our continuous innovation, learn from each other and hear more about our product road map for the multi-cloud world. What was noteworthy was the excitement of our steadily growing technology partner ecosystem, which doubled in size in the past year as more than half of our partners joined us at the show.

This EPI-driven partner ecosystem is the strongest proxy for an extensible platform, a true operating system that is enabling other software companies to build and monetize meaningful solutions on top of our innovation. I'd like to share a few customer highlights and illustrative wins.

Driving continued penetration into our larger customers is critical to our growth, for example, 404 of our more than 7,000 customers have purchased in excess of $1 million each, lifetime to date, and have collectively spent over $1.1 billion with us in lifetime bookings. Additionally, we have 166 customers that have purchased over $2 million, 39 customers that have purchased over $5 million and 11 customers that have purchased over $10 million with us, lifetime to date. And in Q4 alone, our top 25 customers made up $74 million in bookings. This installed base of large customers provides a significant opportunity for continued repeat purchases and expansions as they standardize on our operating system.

We continued to see strong traction in the Global 2000 during Q4. One of our largest wins was the Hershey company, a global confectionery leader known for bringing goodness to the world through its chocolate, sweets, mints and other great-tasting snacks. In this past quarter, Hershey significantly extended its existing relationship with Nutanix by purchasing Nutanix clusters for 10 of their manufacturing sites as well as for their new U.S.-based hybrid cloud. The new installation employs an all-flash solution that will leverage Nutanix's built-in native replication for all on-prem virtual workloads.

We also signed a major extension in excess of $10 million with one of the world's leading providers of business, legal, financial and digital brand services in Q4. This customer truly views Nutanix as a strategic partner for their IT infrastructure. After many follow-on orders, they now run a majority of their workloads on the Nutanix Enterprise Cloud, including Oracle, Windows, Azure Pack, Cloudera and Splunk. Our partnership continues to evolve and we are grateful to be such a critical part of their IT strategy.

One of our strongest vertical industries is retail, where we have many of the world's most recognizable brands as customers. In Q4, we had a great win with a Global 2000 customer that is also ranked as one of the 25 largest retail companies in the world. We closed 2 large deals with this customer during the quarter, including 1 that updated their in-store infrastructure, transforming their customers' purchasing experience.

On the OEM front, one notable and sizable deal with Q4 software billings in excess of $2 million was with a Global 2000 insurance company. This company has been deploying nodes for VDI, private cloud with VMware vRealize Automation, enterprise apps including Microsoft SQL Server, and enterprise content management software with a second site for disaster recovery.

We're also very pleased to see customers increasingly taking advantage of the full range of capabilities offered by our hypervisor, AHV. One of our largest partners, CDW, helped us grow our presence in a very large Global 2000 health care provider with over 160 hospitals and 100 surgery centers. This customer extended their Nutanix solution to include Prism Pro together with AHV for their enterprise applications, including Microsoft SQL Server. Our partnership with CDW continues to flourish and we are very pleased to recognize them as our commercial partner of the year for the fourth year running at our .NEXT user conference in June.

We've also seen increasing traction with our higher end software additions, including Prism Pro, which adds one-click planning and operational insights capabilities. Also, in Q4, we signed our largest-ever Prism Pro deal with a Fortune 500 insurance company with over 5,000 employees.

And finally, we signed a sizable software-only deal running on Cisco UCS servers with a global system integrator for large-scale VDI as a services at a FTSE 100 organization in U.K.

In conclusion, we feel very good about our large customers becoming even larger, and many of them are now interested in software agreements with us in fiscal 2018. Our new initiatives are being well received by our customers and are finding a good product market fit, which is a great sign for a company aspiring to be a full-stack platform player in this coming decade. 2018 will have an intense focus on software-only form factors, containers and launching Xi.

Our ambition and attention to detail have to go hand-in-hand to truly realize our potential as a viable cloud operating systems company in the enterprise.

With that, I'll turn it over to Duston to review our financial performance in detail. Duston?

Thanks, Dheeraj. We ended our fiscal year on a high note with Q4 revenue, gross margin and EPS all exceeding our expectations.

Before we get into the details for Q4, I'd like just to very briefly recap FY '17. Again, billings were $990 million and revenue was $767 million, reflecting a 55% and a 72% year-over-year increase, respectively. We added approximately 3,300 new customers during the year, which increased our total customer base by almost 90%, and we generated $14 million in cash flow from operations during the year.

Now looking at Q4. Revenue for the fourth quarter was $226 million, growing 62% from a year ago and up 18% from the previous quarter. We billed 290 -- $289 million in the quarter, representing a 40% increase from a year ago and a 24% increase from Q3. And we also continued to build a backlog during the quarter.

Our Q4 performance was well balanced, with each of our regions delivering record performances. North America put up another nice quarter, extending their strong performance in Q3. In Q4, our EMEA region nearly doubled their performance from the first quarter of FY '17. In addition, our APAC region was clearly the best-performing geography in FY '17, with a 90% increase in year-over-year bookings compared to fiscal '16.

We are pleased to see our Q4 large-deal performance keep pace with the strong levels we experienced in Q3. I'll review some of the highlights of our large deal activity, which reflects customers' booking more than $500,000 during the quarter. And as a reminder, as we've previously noted, as we move into fiscal 2018, we'll continue somewhat to reduce the level of detail that we provide around our big-deal activity.

In Q4, we experienced a record number of large deals and a record number of large Global 2000 deals. We closed 15 deals greater than $2 million, with bookings for this group totaling $57 million, compared to 13 deals greater than $2 million and bookings of $45 million in the third quarter. Of the 15 deals greater than $2 million in Q4, 6 were with Global 2000 companies, 2 were with investment funds that together, have a combined $1.5 trillion of assets under management; and one was a large government agency. Three of these deals exceeded $5 million, with our largest deal coming in at $11 million, and 2 others were approximately $7 million each. It was also not surprising to see that VDI, as a percent of total bookings, shrunk to its lowest level in our history.

And lastly, our Q4 Global 2000 bookings kept pace with the record Global 2000 bookings we experienced in Q3. Now building on our commentary from last quarter, we continued our company-wide focus on increasing our software bookings as a percent of total bookings. Over the next several quarters, our Enterprise Cloud operating system will be able to be delivered via software-only transactions in the following ways: through our existing OEM relationships, including our newest OEM partner, IBM; via term-license deals for our operating system running on Cisco UCS and HPE hardware, with the potential for additional hardware platforms over time; ELAs that will be used on the customer's choice of any qualified hardware platform by selling Nutanix's upgraded software additions, including Pro Ultimate and Prism Pro; through our new offering, Calm, a hybrid cloud application automation management system; and, finally, through our new Xi Cloud Service.

In Q4, we booked about 45% more software than in any previous quarter. Fourth quarter software bookings were aided by Dell. I will note, though, that our Dell bookings, as a percent of total bookings, were only slightly above 10% of total bookings. Looking forward, we haven't built in the expectation that the Q4 Dell performance will continue into Q1.

We also doubled our Cisco UCS bookings in Q4 versus Q3. Software, as a percent of total bookings based on a rolling 4-quarter average, increased to 17%, and that's up from 16% in Q3. Our international bookings mix was consistent in Q3 '17 -- with Q3 '17 and Q4 '16 at 38%.

Our gross margin for the quarter was 58.3%, which was slightly higher than our guidance and compares to 61.3% in the year-ago quarter, and 58.4% in the prior quarter. As expected, we saw the cost of DRAM increase during the quarter, which was mostly offset with a greater mix of higher margin support revenue.

Our operating expenses were $180 million, slightly below our guidance. Looking forward, we have been very pleased with the Global 2000 traction over the last few quarters, and we will continue to make strategic investments in this area as our segmentation efforts continue to deliver results.

Our history clearly shows that these investments pay off. Lifetime to date, we have generated almost $600 million in Global 2000 bookings, with about 80% coming in the last 2 years. Because we plan to continue to invest in this critical segment, we should see operating expenses increase more than $10 million per quarter in fiscal '18.

And for modeling purposes, our current assumption is that any incremental gross profit dollars generated throughout FY '18, that is over and above the analysts' current consensus models, will be reinvested in operating expenses to further enhance our Global 2000 penetration. We expect these planned investments to yield continued Global 2000 penetration throughout FY '18 and FY '19 and contribute to driving a richer mix of software. On a non-GAAP basis, net loss was $51 million or a loss of $0.33 per share.

Now a few items on the balance sheet. We closed the quarter with cash and cash equivalents of $349 million that was essentially flat with Q3. DSOs on a straight average was 73 days, 6 days lower than the 79 days reported in the prior quarter. And the weighted average DSO was 27 days in Q4. We generated $6 million of cash flow from operations in Q4, which was positively impacted by about $11 million of ESPP funding and we used $6 million in free cash flow during the quarter, and this was also positively impacted by the same $11 million.

Now turn to our guidance for the first quarter. Now the guidance is based on a historical revenue standard, specifically ASC 605. The guidance on a non-GAAP basis is as follows: Revenue to be between $240 million and $250 million, gross margins of approximately 58%, operating expenses of $195 million to $200 million and a per share loss of $0.37, using a weighted average shares outstanding of approximately 156 million.

We expect to hold Q1 '18 gross margins relatively flat to the Q4 '17 levels despite a projected 10% increase in DRAM costs by influencing a mix of software-only sales. One final note regarding the new revenue standard known as ASC 606. We formally adopted the new revenue standard effective August 1, 2017, the start of our fiscal year 2018.

We are one of the very few technology companies that have adopted the new revenue standard. Therefore, there is no best practice approach to communicating the changes to investors. We have tried to take the most transparent and investor-friendly approach as possible.

Our specific communication plan with the analysts and investment community surrounding the new standard will be as follows: As stated above, we have currently provided our Q1 '18 guidance under the historical revenue standard, again, ASC 605. This provide investors with an apples-to-apples comparison to the current Street consensus estimates currently in place for Q1 '18. In conjunction with the adoption of ASC 606, we plan to recast the historical numbers using the full retrospective approach. We will issue an 8-K and hold a separate analyst call on September 5 at 1:00 p.m. to specifically address the changes related to ASC 606.

With this disclosure, we will provide a brief overview of exactly how the new revenue standard impacts Nutanix and publish the recast of 2 years of historical quarterly financial statements. Additionally, we have provided a separate 606 investor package that will show the summary historical financial information, both pre- and post-ASC 606. And finally, we will provide Q1 '18 guidance based on ASC 606.

We believe this approach allows us to discuss today's earnings call and information and guidance, all in the context of the historical revenue standard, including full transparency with our Q1 '18 guidance, which will ultimately be provided both pre- and post-ASC 606.

And now, one just last mention on ASC 606. As I noted above, we are one of the very few technology companies to early adopt the new revenue standard. I'm very proud of our accounting and business application teams that made this happen. The adoption of the new revenue standard was also completed with very little outside financial resources.

Operator, it'd be great now if you could open the call up for questions. Thanks.

(Operator Instructions) Your first question is from Matt Hedberg from RBC Capital Markets.

Congrats, guys, on the very strong close of the quarter and the guide. I guess, my first question, Dheeraj, I think what stood out to us and there was obviously a lot of positives to look through here. But the large deal momentum was impressive. And this has sort of been a building trend. I guess, I'm wondering, could you provide a little bit more granularity on why you're starting to see a real inflection here in big deals? And I guess, we're trying to figure out how to think about that in the context of next year?

Yes. Thank you, Matt. Yes, I think there's a few reasons for it. Obviously, the first one is focus. We talked about focus about 2 to 3 quarters ago with segmentation. That's helping us quite a bit as our global accounts and our enterprise account managers are focused on fewer accounts than an entire territory. The other one is the fact that we have a full stack now. It's a full-stack operating system, which includes a hypervisor, the software-defined storage pieces, operations and systems management, automation with Calm and security and networking capabilities. So we're providing a real platform for the cloud that most of these large enterprises are looking for.

And finally, the brand is building. I mean, this is a virtuous cycle. As you look at what happens with the channel uptake and basically there's a lot of the naysayers are becoming fence sitters and a lot of the fence sitters are becoming believers. So I think this process will only continue over the next 2 to 3 years as the Nutanix brand and the customer service and the products continue to actually work the whole body.

That's great. And then, maybe just a quick follow-up. Obviously, the Google partnership looks interesting to us. And you provided some good context. Could you talk to us about how we should think about the monetization of that? And I think we get a lot of questions with investors to kind of think of the cadence and adoption of that particular product but I guess anything additional on the monetization would be helpful.

Yes. I think in the next quarterly call, we probably will go a little bit deeper into how we are thinking about pricing it. We just talked about this internally to our sales force. And there'll be some details around that, that we can discuss in the next quarterly call. But the end goal here is just like many of these on-prem software companies, like Microsoft and Adobe and Oracle, that we learn some great lessons about what it means to pull off a hybrid consumption model, which includes both on-prem software as well as off-prem software.

The next question is from Mark Murphy from JPMorgan.

I will add my congratulations on a great quarter. So Duston, you mentioned a handful of emerging vehicles for driving software bookings higher into the future. I'm curious, where do you see the business mix of recurring revenue streams, let's say, if we look out 3 to 5 years of from now. And also, I believe you used the word influencing. You said that you'll be influencing a higher mix of software-only deals in Q1, if I heard that correctly. Could you just walk us through some of the specific levers that you'll be pulling to drive that mix so rapidly in Q1?

Yes, let me take that question and then maybe Dheeraj can chime in on the first question. Yes, relative -- I'm sorry, I forgot the...

Levers.

Yes, the levers, I'm sorry. So sorry. The biggest lever there, just because it comes with the biggest sizes would be ELAs. And previously, those ELAs were tucked onto the balance sheet and not recognized immediately and put over a 3-year period. Now under 606, the license piece now at 100% margin hits in the current quarter. So that, clearly, is our biggest leverage from a dollar perspective. And then, we have all those others that come in, in various sizes throughout the quarter. And we have ability to redirect appliances how we choose to do that in any given quarter also. So there's just, with 606, there's more capabilities for us to play with the software mix in any given quarter.

Yes. And I think on the strategy piece, if you think about what we've successfully done, Mark, is to really have the same software run on multiple hardware platforms. And that was basically the necessary condition for any of the software pieces to actually have worked. And as a company, we have also revisited our sales comp model because, obviously, up until now, it was appliance heavy. So there's some basic things that we had to go and fix to make sure that we look at software as fairly as we look at appliance itself. And some of the core pieces are very mundane things, but they're a very important reality of life around sales comp and such. So we're doing that going forward.

And at the same time, there's an immense focus on our 404 customers, which is growing every quarter. The million-dollar customers and how we go and sell our new products to them because there's a case to be made. There's points of view on how many of these are ready for our AHV Hypervisor, our ELAs, our Prism Pro product, our AFS product, which is software-based filer and also our automation engine, like Calm. So we're going to really do this account-based marketing sort of initiative that will help drive behavior in the sales force itself.

Okay. Then, Duston -- thank you for those answers. Duston, as a quick follow-up, is there any comment on the billings-to-revenue ratio coming into fiscal Q1? Would we expect it to trend to roughly 1.25x into Q1? Or is there a little different seasonality there?

Yes. So you saw it -- well, 2 points there. You saw it pop up in Q4 at 1.28. We had been talking around 1.25. And that quite, honestly, is a little bit of the OEM billings popping in there, but not making it into revenue. Now that gets turned as we have the discussion next Tuesday, that will obviously go down, and we'll give you a new feel for what that bill-to-revenue ratio will be under ASC 606.

The next question is from Alex Kurtz from KeyBanc Capital Markets.

Great quarter, guys, just, Dheeraj, on this Cisco acquisition of Springpath. You obviously continue to execute here, meeting in the market with your software at UCS. So maybe just your perspective on how big that partnership could become even though it's not "OEM" yet and what your take on the acquisition means to Nutanix.

Yes. Thank you, Alex. We've always had this fundamental view that hyperconvergence is not our destination. It's a milestone in the journey for a true cloud experience. It's not about software-defined storage alone. It's also about hypervisor, software-defined networking, security and automation, operations and systems management, and also migration. Migration's actually a pretty big piece of our overall offering now. It's about the entire operating system and increasingly, it's about the same OS running on both public and private cloud side, as you see from Microsoft talking about Azure and Azure Stack.

And I think Cisco's current offering is very far from this. They're too focused on the form factor that we used to talk about 5 years ago. I think they and HP and NetApp are still playing a hardware game of HCI when I think the real game that's being played in pure software is in -- about the entire operating system itself.

So given the success you've had so far with customers demanding or looking for Nutanix software on UCS, could you see an outcome where UCS becomes 5%, 7% of software? Or some factor like that?

Yes. I think it's perilous to predict this early. I mean, I would say that the business, especially from the grassroots, is good from both sides. The grassroots are working really well, and I think Cisco's sellers also need to compete against Dell sellers and HP sellers. And if they all carry very similar offerings, it doesn't differentiate them. So many a time, we're seeing all sorts of very interesting regional alliances on an opportunity-by-opportunity basis, where they're saying, well, if we have to win a deal, we'll have to partner with a good operating system vendor. Right now, there's only 2 out there, VMware and Nutanix.

Our next question is from Ittai Kidron from Oppenheimer.

Congrats, great quarter and guide. Nice to see the evolution also. Dheeraj, I think one of the interesting points again that you guys highlighted on the call was the -- how VDI is now at its lowest level as a percent of bookings, if I remember correctly. Can you talk about what has been rising? Like what are the kind of maybe the #2 and #3 now use cases that you're seeing as most common and where you are seeing most of the opportunity going forward?

Yes. Thanks, Ittai. I think beyond VDI, a big chunk of it is generic server virtualization. And within that, we're seeing a whole bunch of databases, whether it's Microsoft SQL Server or Oracle or even some of the newer NoSQL databases as well. And in the Big Data side, we're seeing Pivotal and Splunk. And then, if you look at that as one of the biggest chunks, the next one, which is growing for us, still less than 10% of our business is remote office, branch office, especially if you look at the retail customers that we have, a lot of them actually have ROBO offerings that are powered by Nutanix as well.

And Ittai, I just wanted to make -- clarify one thing. You seem to allude that VDI was probably the biggest portion of our business, just by the way you had phrased the question. I just wanted to make sure that is not the case. I mean, that has shrunk significantly and continues to shrink.

Got it. And then, Duston, on the DRAM prices. I mean, clearly, that's still a challenge. I'm just trying to understand if there's any different approach that you're thinking about as now the -- it seems like this is going to take a while to resolve. Are you changing the patterns or the amount of capacity you're buying upfront for this? Or you're still very much focused on spot market here? How do I think about this?

We've taken a little different approach here, our operations team, over the last quarter or so. And we're actually -- not on our balance sheet, but we've put aside a little less than a quarter or so maybe of DRAM. So we locked in prices from that perspective. So we got a little aggressive there. And I think the other encouraging thing is that the quarterly increases are happening at smaller increments now. So that's certainly encouraging. It came down. Q3 was probably in the 15% to 20%. We're thinking roughly 10% this quarter. So that's encouraging, and we'll have to see where those trends go. SSDs have kind of come in line, so we're happy with that.

And once we get back to some reasonable DRAM pricing, we'll get back to our normal quarterly cadence of decreasing cost on a quarterly basis. And don't forget, we've absorbed 600 basis points in fiscal '17 of margin impact based on DRAM. We offset some of it last quarter in Q3, we kind of put a stake in the ground and said enough's enough. We're going to stay at minimum, 58%, and we'll go from there and we're doing the same thing this quarter and now we have more levers to play with software to help offset that.

The next question is from Jason Ader from William Blair.

First question -- or maybe a clarification for Duston. Could you give us federal as a percentage of your sales? And then what type of growth that you're seeing in federal?

Yes, we typically don't give the exact percentages on a quarterly basis. I'll tell you, Jason, over the last 3 quarters, it's been in the high single digits as a percent of total bookings. And where we've got the September month in our Q1, that will go up to double digits. But we're not expecting a real robust federal quarter as you might expect. But that will get back up into the maybe low double digit, maybe mid-double digit, something around there.

Yes, and by the way, we don't include SLED, Jason, in our federal. SLED is still separate. And the continued resolution continues to make it more key for us to really predict how it's going to be this September.

Okay. And then, Dheeraj, for you. Should we expect software-defined networking to become a bigger part of the road map? I know you've done some things with kind of partnering automation, et cetera. But ultimately, should we expect just more development, hear more innovation from Nutanix?

Yes, I think it's a great question. Micro-segmentation was the killer app for softer-defined networking, but that's not the end destination for us. We have been working on overlay networks for Xi, and I think the big engineering challenge, which is an opportunity for all of our engineers, is to build features that are not just one -- for one world and not the other, which that's the biggest challenge of a hybrid cloud. So that overlay network piece will need to be shipped to on-prem customers as well, and that is the journey that we're upon. So in the coming 12-18 months, you'll actually see us become a full-fledged networking and software-defined security vendor, just like what you're seeing from VMware as well.

Okay. And then one quick last one for Duston. Are you going to provide an updated target model based on 606 because I know gross margin's going to be higher, correct?

Yes, and we'll talk -- you'll see the differences. We'll talk about what we should assume for the gross margin differences and things like that. And then, we'll talk about the long-term model. I wouldn't expect too many updates there, but we'll certainly touch on that.

The next question is from James Kisner from Jefferies.

Nice quarter and outlook. Based on -- if you go back to the comments that Duston made about just reinvesting upside from margin in the Global 2000 efforts. Is this kind of the -- is this a new realization? Did you or are they -- you discover that you just have more need to invest here than you'd previously thought you would? I guess, I'm just kind of wondering how you figure out when it makes sense to pull back, otherwise, you're thinking more leverage. Obviously, your guidance for higher revenue is not resulting in higher EPS for the coming quarter relative to The Street, but just do you have any additional thoughts there on those comments?

Yes, I mean, we've always taken the view that, as we see great growth opportunities, we'd thoughtfully invest and go chase those opportunities. And we've seen some really good evidence here over the last couple of quarters on the Global 2000 piece. And we've had accelerated revenues, and we'll go invest some of that back in. And that's been really the philosophy of the company all along. At the same time, being thoughtful about gross margins and operating margins and cash flow and trying to balance all those at the same time.

Yes, I mean -- and just to add to that what Duston said. We know the formula of land-and-expand works at Nutanix beautifully. Not just in terms of more number of nodes or servers that we go in for a sale on, but also on upsell of newer products. We've seen that formula work. We know that in the Global 2000, we'll get many, many more very large customers. And I think this is the journey. I think this is 5, 5.5 years of selling. We have sold upwards of $2.1 billion, $2.2 billion. And I think it's unprecedented in the history of IT infrastructure to have done something of this sort as an independent company starting from scratch, building a sales force on its own, and then saying, look, there's so much more ahead of us in the coming 2 to 5 years.

Okay, that perspective helps. Just for a clarification. Any updated thoughts on any CapEx requirements for your data centers in support of your internal support of Xi?

Thank you. Yes, I think it's very early. We are exploring different kinds of options with Google Cloud colo as well. And as we see how much they are willing to invest, including their own hardware, we'll see exactly where this goes.

The next question is from Wamsi Mohan from Bank of America Merrill Lynch.

Dheeraj, wondering how much overlap there is between your largest lifetime customers and AHV adoption? And is the adoption of higher software attach, paid software attach how you correlate it with your largest customers because that would be quite bullish with your targets of increased penetration at larger customers? And I have a follow-up for Duston.

Yes. Thank you, Wamsi. So definitely, as a point of fact, our largest customer is an AHV-only customer. And that is, as we last reported last quarter, is upwards of $55 million, $60 million. It's an AHV-only customer from day 1. They're the ones who help feed AHV for Nutanix, and they were the design partner for Nutanix very early on. And there's definitely a correlation between our large customers and AHV as well. I would say that it's relatively early. I mean, right now, we are not trying to pay a strategy tax to say that they must adopt AHV along the way.

And so at some level, we are still disrupting so much of the traditional storage, traditional SAN, traditional Blade servers, that just the ACT 1 itself can help very, very large customers for us. But at the same time, I talked about installed base 400, these 404 customers. When we go back to them, we are sitting and understanding their virtualization software needs, their overall spend and systems management and operation managements software. And I think it's opening new doors for us in these large accounts.

And Duston, you -- your comment on Dell bookings just north of 10%, but not necessarily counting on similar future levels. Wondering if you're actually seeing a difference or any change in the trajectory of that business? Or was that not supposed to be the implication of that comment?

No, just, Wamsi, it just popped up quite a bit in Q4 over previous quarters. And my only comment there would be is it's not prudent to think that it would stay at that elevated level. The relationship's been good, the business has been good. But we did see a pop here in Q4, and we're just taking, I think, what's a prudent view for Q1.

The next question is from Jayson Noland from Robert Baird.

I wanted to ask back on large deals. I think you said 11 customers north of $10 million lifetime. Would you consider these platform wins? Or any theme to point out across these larger customers?

Yes. Thank you. I would say that all these 10-plus million dollar customers definitely have large number of nodes, which means that they're running all sorts of application workloads on our platform. And they started with something very small, maybe less than $0.5 million and have gone on to become very large customers over time. One of the things that we have done well as a company, because of the architecture of the product, that we don't have to depend and sort of have these Hail Mary 18-month long sale cycles, and then get the $10 million. We can grow into the $10 million over 18 months with these kind of sprinting approach where we say, every 6 months, we're going in selling some more and winning the trust of these accounts. But all these 10-plus million dollar customers definitely have taken a majority of the workloads or a pretty significant chunk of the workloads and running within Nutanix.

Okay. And then as a follow-up, Dheeraj. Any change to the competitive environment? Cisco finalized Springpath and NetApp is out to -- out with a solution now but anything you would mention as a delta quarter-on-quarter?

Yes, I think this whole architecture of compute and storage coming together is going to get commoditized. And it's a good thing because we need education for the customers to understand that a 3 tier is legacy and probably is an archaic architecture. So all these big incumbents getting into the market is actually a good thing for us. At the same time, and the real competition is really from operating systems companies that includes VMware and maybe a little bit of Microsoft that we don't know much about because it's still fresh off the oven, this Azure Stack strategy that they have in the last few months.

The next question is from Katy Huberty from Morgan Stanley.

My congrats as well on the quarter. When you look out to October, the guidance implies high single-digit sequential growth. And when you look back over the last couple of years, in fact, both years you grew 19% sequentially. And so is there anything in particular that makes you think that you'll see weaker seasonality as you go into the first quarter?

Yes, I think we've taken a less robust probably view on the federal business, quite honestly, where we're doing fine there. But again, I think from a prudent perspective, we've modified that view a little bit.

Okay, got it. And then, Duston, as you think about the strategy of reinvesting gross profit upside in OpEx, does that create an environment where it's too early to call for a time line on EPS and free cash flow sustained profitability? Or do you have an updated view on that?

Yes, I think on the -- it's the same probability, again, which we've said all along. It's highly dependent on growth. And we do a lot of work around this and growing at -- pick whatever you want to pick, 50% or whatever, with the sales force. We know the model works at market growth rates. We just get such a penalty in the high-growth phase from adding reps and things like that. Now having said that, we're looking all sorts of ways to get even more leverage even in a high-growth mode, which we'll continue to work through over the next several quarters. So again, the profitability part of the equation, highly correlated to growth, but it's on us to go find, obviously, more leverage even in high growth.

On the cash part, that's probably a little bit easier to answer, but I think it's going to ebb and flow, I think over the next year. ESPP kind of muddles things up a little bit. But I think unless we find something really intriguing, I think if we fast-forward to this time next year, we'll probably have a similar-ish, if you will, cash balance. We ended at 349. Under the current assumptions, I'd be -- there's a lot of puts and takes there, but I'd be surprised if it was much different in a year from now.

Okay, that's helpful. And then, just, lastly, what was diluted share count in the quarter?

Fully diluted all in, 192 million roughly.

Okay. And have you done the work around treasury method? Or are you not there, just given that you're still a ways from that possibility?

Yes, we have obviously got it in the background somewhere here, but it's less of an important source right now.

The next question is from Andrew Nowinski from Piper Jaffray.

This is Jim Fish on for Andy. Congrats on the quarter. First, back in Q2, you talked about improving the North American productivity over the next couple of quarters, and then we heard a bit of it in Q3 and then sort of some changing sales compensation as well. Are we completely through that sort of transition? And if not, what inning are we in? And if any further changes could be coming as well?

Yes, I'll let Dheeraj talk about where we are in the transition there. But just on the North American productivity first. Yes, you're right. It rebounded nicely in Q3, and it rebounded nicely in Q4. Again, a function of big deals and big deals help a lot of things. And it came back to one of the better quarters from a productivity on a ramp-to-wrap -- we look at it on a ramp-to-wrap basis. It was pretty strong in North America.

Yes. And I think on the segmentation piece, we have a pretty clear view in the last 2-plus quarters we've been working on this. We took a bunch of our enterprise account managers who were essentially managing a territory as well and we gave them global accounts because they were that productive. And then, we've hired a bunch of enterprise account managers along the way, as well. But there's a clear distinction between global account managers, enterprise account managers and commercial account managers. There's a distinct salary and OTE structure for all these 3. And so we have a pretty clear view on all that, and we are implementing it as we speak. It's very much like building software. I think we're building a go-to-market machine that has a really robust architecture now and we just have to end up growing our GAMs and our enterprise account guys and our CAMs with a deliberate view on who brings how much and where do they really focus on.

Got it. And then just one follow-up for me, and I'm not sure if I just missed it. But Duston, if -- what percentage of sort of the business today was coming from existing customers?

70%.

The next question is from Simon Leopold from Raymond James.

I wanted to follow up in terms of the way you're viewing the competitive environment, particularly the Dell relationship in that, I guess, it's sort of a mixed blessing in my mind that Dell was a lower percentage. But then maybe that means the business is going somewhere else, perhaps to VMware. And that's typically what we hear. It sounds like you're pretty constructive in terms of VMware as a competitor. So could you maybe give us a sense of how that competition has evolved over the last quarter? And how you see it over the next several quarters?

Yes. Hi, Simon. If you look at just the facts, we had a strong quarter with Dell in Q4. People have been talking about this relationship for the last 3 years, not -- I mean, ever since the announcement was made. And the good thing is that, like best -- and for tolerant companies, they're building many routes to market and Dell remains to be a strong one. But there's equivalent products that people can consume from Nutanix appliances, Lenovo appliances, Cisco and HP -- our software running on those servers and, finally, even IBM, so as a company, we're very deliberate about building multiple routes to market.

And at the same time, for as long as both the companies look at this as a win-win, which we have continued to look at for the last 18, 24 months, while there was all this naysaying about the relationship, I think they'll be good business. I mean, there's even cases of ELAs, where one of our largest retail customers has done an ELA on both Dell and HP server hardware itself.

And I think the key question is who creates the demand? I mean, we have not delegated or even expecting Dell to go and create demand for us at this time, our sellers, our channel. We have very large channel, channel partners who go and generate demand. And those places recently, especially if you look at sales force, there's many Dell salespeople who go and generate demand, they make a ton of money in Nutanix and yet there are others where we go and create demand and they fulfill it. It's a combination.

And do you see it changing or evolving, particularly in light of basically the integration efforts in the time past of Dell having acquired EMC? Or is it more or less stable?

Yes. I mean, I would say that's a highly cooperative world. I mean, you think about VMware joining forces with AWS, which has 0 overlap of interest with Dell hardware or EMC hardware and so on, if anything, when VMware is selling on AWS's data centers and so on. It's sort of competitive to Dell and EMC. And I think the large companies, and especially in this day and age of computing market, there's a lot of coopetition. And there's no one right answer. It's not a zero-sum game. And that's the way we look at it. That's the way Dell looks that. That's the way VMware looks at it.

The next question is from Mehdi Hosseini from Susquehanna.

This is Nick Ghattas for Mehdi Hosseini. Congrats on a great quarter. Can you just talk briefly about how you view composable infrastructure which -- as a HPE synergy product and whether or not you perceive it as a competitive threat? Or if it can ultimately become something that folds into and eventually integrates as part of your road map?

Yes. Thank you for the question. To us, it's a niche, because it's about a hardware-routing mechanism that lets you address disk drives using some hardware switching, SCSI switches, to compute servers dynamically and so on. I think our approach is software-defined. We'd rather use commodity servers, just like the way web-scale folks use it and all the hyperscale folks, do not use anything that's proprietary or -- a niche proprietary hardware solution. And that's where the real value of Nutanix's software really is. So I think composable is a cute terminology, but at the end of the day, the world is moving towards commodity, towards rack-mount servers that are off-the-shelf as opposed to using some hardware tricks to really go and build solutions.

That was our last question. At this time, I'd like to thank everyone for joining the call. This concludes today's conference call. You may now disconnect -- and I will turn the call back over to the speakers for closing remarks.

Thanks, everyone, for joining us today. We hope you'll tune in next week for our call and presentation on the impact of ASC 606. With that, operator, we can conclude the call.

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