Nutanix Inc (NTNX) 2019 Q1 法說會逐字稿

Good afternoon. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nutanix First Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) Tonya Chin, Vice President of Investor Relations and Corporate Communications, you may begin your conference.

Thank you. Welcome to today's conference call to discuss the results of our first quarter of fiscal 2019 live from London. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the Nutanix website.

Joining me today are Dheeraj Pandey, Nutanix's CEO; and Duston Williams, Nutanix's CFO. After the market close today, Nutanix issued a press release announcing the financial results for its first quarter of fiscal 2019. If you'd like a copy of the release, you can find it in the press release's section of the company's website. We'd like to remind you that during today's call, management will make forward-looking statements within the meaning of the safe harbor provision of federal securities laws regarding the company's anticipated future revenue, billing, gross margin, operating expenses, net loss, loss per share, free cash flow, business plans and objectives, product sales, plans and timing for and the impact of our transition to focus more on software-only sales and our transition to subscription-based business model; expectations regarding products, services, product features and technology that are under development or recently acquired; competitive and industry dynamics; expectations regarding increasing software sales; our plans regarding how we will report the software content and subscription portion of our business; potential market opportunities and other financial business related information.

These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our Form 10-K for the fiscal 2018 filed with the SEC on September 24, 2018, as well as our earnings release posted a few minutes ago to our website. Copies of these documents may be obtained from the SEC or by visiting the IR section of our website. Also please note that unless otherwise specifically referenced, all financial measures we use this -- in the call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We provide a reconciliation to these Non-GAAP measures to the GAAP measures in our Investor Relations section of our website and in our earnings press release.

Lastly, Nutanix will be at the Wells Fargo Tech Summit in Deer Valley on December 4, the Raymond James conference also on December 4 in New York City, the Barclays TMT conference in San Francisco on December 6, and the Needham Technology Conference in New York City on January 15, and we hope to see many of you there. Please mark your calendars for the Nutanix Investor Day in New York City on Wednesday, March 20. Now I'll turn the call over to Dheeraj. Dheeraj?

Thank you, Tanya. Good afternoon, everyone. I'm excited to be joining you today from London where we're hosting our third .NEXT Europe, Middle East and Africa user conference this week. We're excited to share our latest updates with more than 3,500 customers, entrepreneurs and prospects we expect at the show. Those attendees will get to see firsthand as we announce the general availability of Xi Leap at .NEXT. Leap is a Disaster Recovery Service offering I've mentioned to you in the past. This launch is a watershed moment for our company delivering our services across the entire customer journey from infrastructure modernization to the multi-cloud, which I'll provide more detail on shortly.

Now on to our Q1 results. We had a great start to fiscal 2019, delivering another strong quarter, growing software and support billings by 50% year-over-year to $351 million and software and support revenue by 44% to $281 million. Notably, subscription revenue increased 104% year-over-year, as we shift our business to an increasingly subscription-based consumption. The combination of higher-than-guided revenue, better gross margins and lower operating expenses drove our net loss per share to $0.13 per share, significantly better than our guidance of a loss between $0.26 and $0.28. Duston will share more on our financial metrics and outlook later in the call.

As we head into .NEXT, I found myself taking a step back to reflect how far we have come as a company since we were founded 9 years ago. In less than 10 years, we have done nearly $4 billion in lifetime sales, transformed from a hardware to a software business model while being publicly traded, surpassed $1 billion in annual software and support revenue run rate and surpassed the 10,000-customer mark while keeping our Net Promoter Score above 90. In this quarter alone, we closed 63 deals worth more than $1 million and 3 deals worth more than $5 million, and we now have 15 customers who have lifetime spend of more than $15 million, and more than 700 customers with a lifetime spend of more than $1 million. In fact, when you look at our customer base, we have seen 83% year-over-year growth in customer with a lifetime spend of $3 million to $5 million, and 111% year-over-year growth in customer with a lifetime spend of more than $5 million.

To put our achievements into context, we reached $1 billion in annual revenue faster than any other software company founded in the past 20 years, Salesforce, Palo Alto, Workday included. This success was built on the foundation of strong products and amazing customer service that has propelled us from creating hyperconverged industry towards sustained leadership position within it. Just this past quarter, we were recognized as the leader in the Forrester Wave for HCI and by Gartner for our 10-point lead in market share versus our nearest competitor in their most recently reported quarter. From everything I've mentioned above, you might think that we are a very optimistic company. On the contrary, we are an intrinsically paranoid company that happens to be optimistic.

In my favorite book, Only The Paranoid Survive, Andy Grove talks about this paradox in Chapter 7 and 8. Let chaos reign, reign with a g, and rein in chaos without a g. Building is inherently chaotic and you saw a bit of this in the last 12 months of our new product development and complementary acquisitions. These announcements created confusion in the minds of many who are in simultaneously balancing building and scaling in their day-to-day. Questions such as what are the core of your business? Will you need more than your core to get your stated goal of $3 billion in FY '21? Are the new applications even remotely related to the core? Will they leverage the existing core? Such questions emerged. In this earnings call, I'd like to rein in some of that messaging chaos with the customer journey that will traverse Nutanix's core, essentials and enterprise. The core of Nutanix's businesses is infrastructure. We call it the Nutanix Core with the capital C. It's comprised of our software-defined storage stack, AOS, an infrastructure control plane, Prism, and increasingly but optional for the initial leg of a customer's journey, our hypervisor AHV. People say infrastructure is a commodity as it becomes good enough and all the value will move higher up. They are so mistaken. They don't know how hard infrastructure is to execute and make a viable business out of. There's a reason why hardware incumbents struggle to monetize open stack in response to Amazon. Ask Oracle and they'll tell you about the pains of building an IaaS stack. Look at how Azure Stack has been a nonstarter for Microsoft, as Azure continues to bleed a multiple infrastructure stacks for their various workloads. Google itself has been trying to make their own homegrown core become useful for enterprises, and they've been trying since 2012. Observe how VMware is hedging its best bets between 3 infrastructure worlds, their traditional 3-tier comfort zone, their software-defined struggle zone and the new AWS cannibal zone. Only Amazon AWS has a true grasp of infrastructure and even they will have to think hard about how to make a truly enterprise workload ready and also miniaturize themselves, that is, ship core to tens of thousands of sites to disperse clouds. In fact our dominance in the core is why VMware avoids doing POCs and accounts when we are in a head-to-head fight, A case in point was a new customer in EMEA in Q1, a major international airport that is one of the busiest in the world. Remember how, in the last decade, Microsoft Hyper-V wasn't good enough despite being bundled with Windows for many erstwhile VMware customers who had profound enterprise-grade needs? With this customer, VMware is good enough wasn't good enough to create dynamic cloud-grade platform for the majority of their core airport applications.

Unlike humans, who can work around weaknesses and good enough business software, applications cannot work around good enough infrastructure software they run on. Good enough infrastructure is an oxymoron, period. This is why we have been so successful at adding Nutanix Core customers. These customers deployed AOS and Prism platform and AHV virtualization. They modernize and deliver a cloud-like experience within the walls of their own data center. Nutanix Core customers represent the foundation of our business in the near term and are what will enable us to deliver on our goal of at least $3 billion in software and support billings in 2021.

In Q1, AHV adoption increased to 38% on a rolling 4 quarter basis. AHV was a decision factor of one of America's leading operators of general acute care hospitals, our second largest deal of the quarter, which was more than $5 million. This healthcare provider will expand deployment of our platform to support its field facilities, all using AHV virtualization.

Once company have experienced a simplicity our platform brings to their core infrastructure, they often quickly and enthusiastically want to graduate and standardize Nutanix across their IT infrastructure, developing pure play software-defined cloud platforms for their business-critical workloads. These companies are Nutanix Essentials customers, essentials with a capital E, who build on our core offering to deliver on security, automation, data management and operational efficiencies. They do so with Calm for app-centric orchestration, flow for application security, files for storage consolidation and Prism Pro for large-scale operations management.

What might not be obvious is that essentials runs on top of core, that is, essentials pulls core with it in all deployments. Case in point, on this leverage and crawl before you walk philosophy is one of our U.S. federal customers, a department within the U.S. Navy. They have more than $2 million in lifetime bookings with Nutanix and made their first purchase with us in 2016 for VDI. Over the following few quarters, they expanded to server workloads in the data center and started replacement of legacy 3-tier in remote offices, all with AHV as the hypervisor.

Late in the journey, they purchased licenses for Calm, and in Q1, they expanded the Nutanix deployment even further, leveraging our platform across even more remote offices with the addition of both Flow and Prism Pro. Another example of this customer journey is our $1.5 million deal with a U.S. government agency that provides fact-based, non-partisan information to Congress. This customer, which has lifetime bookings of more than $4 million, first experienced Nutanix Core almost 4 years ago. Since then they've materially expanded the use of our platform, utilizing AHV, managing their unstructured data needs with files, running all their enterprise applications, virtualizing their exchange environment, and finally, in this quarter, expanding their VDI environment of 4000 users. Finally, Nutanix Enterprise, enterprise with a capital E, customers advance into hybrid and multi-cloud deployment with Karbon with a K, Era, Buckets, Volumes and Xi Cloud Services, our new suite of SaaS-based services. This new suite includes Xi Leap for disaster recovery as a service, Xi IoT for edge cloud computing, Frame for cloud-native desktop-as-a-service, Beam for multi-cloud governance and Epoch for multi-cloud application observability and monitoring.

Most Xi services use Nutanix Core and Essentials, yet others make them better by being multi-cloud, so thus making our stack compete better with other clouds. There is no Xi without Core and Essentials. I repeat, there is no Xi without Core and Essentials. Our all Core and Essential products currently running on-prem will become part of the Xi catalog and that is what every computing company in the face of this planet covets, a catalog that can run both on-prem and off-prem. This leverage in the customer journey of crawl-walk-run is evident by how our end users adopt our resolutions. In Q1, 19% of all our deals involve one or more for Essentials or Enterprise solutions in addition to our Core offering, calculated on a rolling 4 quarter basis. They're confident those customers who realize the simplicity and reliability of our Core will continue to recognize the value for extended platform and continue the journey with us seamlessly.

We've talked a lot about Xi over the past few quarters and, as I mentioned earlier, I'm pleased to say that Xi Leap is now generally available at future geographies rolling out over time.

Going beyond that, Xi IoT our edge computing solution is also generally available, and we made significant updates to our free and desktop service offering adding role-based access control in the cloud. Our customers have already validated this that there is demand for this set of services in the market. In the last couple of weeks, we closed a deal with a public school district serving more than 5,000 students to use Xi Leap. We made DR invisible for them. They do not need a backup and recovery box on-prem. DR is a huge adjacency for us, and will also become a highly automated way for us to migrate workloads off-prem with one click.

In this quarter, we worked with Google Cloud team to win a deal with an American worldwide consumer products company in the Global 50, our first with this customer, to deliver Frame virtual desktops to their workforce. The customers invested in Frame alongside Gsuite, a natural partnership for worker productivity in the cloud-first world.

I'd like to highlight another win worth more than $1 million with a life insurance company in India. They have decided to move forward, not only as a core customer with AHV virtualization, but to rapidly graduate to both essentials and enterprises with Prism Pro, Calm, Flow and Xi Epoch. Our message this week to .NEXT is clear. Xi Cloud Services from Nutanix are now open for business.

As many of you know, we made a very successful transition to software over the past year. Recently, we have evolved our business model toward an increasingly subscription model, designed to deliver more recurring and predictable revenue. This quarter, we saw 51% of billings from subscriptions, up 20 points from 31% just a year ago. We are in a very good trajectory with this transition. Duston will get into our expectations for how this will play out in just a minute.

To summarize, over the past year and even today, we have significantly added to the breadth of our platform, broadening our capabilities to address the challenges our customers tackle as they modernize their IT infrastructure and expand into multi-cloud operations. This product velocity stands as a critical advantage for Nutanix. Today we introduced a simple way to understand our product offerings based on how our end users adopt Nutanix. This is about a customer's journey, a buyer's journey, seller's journey, a learner's journey from infrastructure modernization of Nutanix Core to a customer cloud platform with Nutanix Essentials, all the way to the use of multiple cloud platforms with Nutanix Enterprise. In the journey to at least a $3 billion billings in FY '21, three large workloads of markets will lay on top of Nutanix Core: Unstructured data is files and objects; structured data, which is databases; and desktops, apart from virtualization and containers.

To conclude, in Q1, we had a strong quarter with notable progress and our revolution towards subscription software, strong product innovation with many new introductions including Xi Cloud Services and continued strong growth in our business. Now I'll turn it over to Duston to review the financial highlights of the quarter. Duston?

Thank you, Dheeraj. Before we get into the review of our Q1 fiscal '19 results, which for revenue, operating loss, earnings per share and earnings per share exceeded both our guidance and consensus estimates, I'd like to provide some historical background on how we started to monetize our software and how we built, and will continue to build, on this foundation to ultimately move to a fully recurring subscription business model.

The first monetization of our software and the initiation of recurring subscription business actually began when we first started shipping appliances in late 2011, early 2012. With customers engaging in subscription-based software and support, software and support entitlement contracts, basically recognizing the value of receiving continued software enhancements on an ongoing basis. In 2014 and 2015, we began selling standalone software, including software and support entitlements to our OEM partners, Dell and Lenovo, and have since added Fujitsu and IBM. In 2015 and 2016, we started to separately sell software upsells or additions on top of our base operating systems such as Pro, Ultimate, and later, Prism Pro. It was also in late 2016 and 2017 when we first offered our software through a subscription offering to run on HP and Cisco servers.

During 2017, we began software-only subscription sales of our operating system, which afforded customers the ability to run our software on the server platform of their choice. And it was in 2018 that we started another monetization vehicle for our software. Software-based sales of our software, a subscription-based sales of our software on Dell XC Core and Lenovo XC core products. Along the way we also began selling subscription-based sales of additional software offerings such as Calm, Flow, Files, and more recently, SaaS-based offering such as Beam, Frame, and now, Xi Leap.

So as you can see, our move to software has been planned and executed from day one and has progressed significantly over a several year period. And our move to a fully recurring subscription business model will take a similar path, thoughtfully planned and executed over an extended period of time.

As we discussed in our last earnings call, the move to a fully recurring business model will involve changes to how our software solutions will be packaged for our historically nonportable software sales. We stated that we would begin a phased-in approach that will transition our nonportable software sales to a recurring subscription licensing model. We further stated that this would replace today's licensing structure, which is based on the life of device giving customers greater choice and flexibility around their software procurement strategies and provide portability of the software. We also discussed that we would implement this change beginning in Q2 '19 and ramping through the second half of fiscal year. I'm pleased to announce that we had a bit of an early start with this transition, and in Q1 we transacted over 110 customers on this new licensing methodology. These transactions included enterprise, commercial and SMB customers, new and existing customers as well as a good mix of customers from all geographies. Although we're off to a promising start with a shift to a fully recurring software business model, like our shift away from hardware, we're not naive regarding the work that still needs to be done with both back-office systems and front-office education to make this a complete -- this transaction -- transition a complete success. As you might expect, we have bold plans with the shift to a fully recurring software model.

In FY '17, our subscription business accounted for 31% of our billings, in FY '18 our subscription business accounted for 41% of billings, and in Q1 '19 the subscription business accounted for 51% of billings. In Q1 alone, our new term based licensing accounted for over $20 million in bookings. We believe that in the next 4 to 6 quarters, our recurring subscription business will reach 70% to 75% of total billings, and by FY '21, we expect a large majority of the business should be recurring in nature, either on-prem or cloud based.

In our view this continued shift to recurring subscription business model, combined with retention rates averaging 90% and an average contract duration period of 3.6 years, demonstrates increased visibility and predictability into our model as the company moves away from life of device licenses.

We will provide further thoughts on how we envision the progression of our recurring subscription business model during our Investor Day, which will take place March 20 in New York.

Now moving on to a few Q1 highlights. Revenue for the first quarter was $313 million, growing 14% from a year ago and up 3% from the previous quarter, ahead of our guidance of $295 million to $310 million. This performance excludes approximately $104 million in pass-through hardware eliminated in the quarter. Software and support revenue was $281 million in Q1, up 44% from the year-ago quarter and up 5% from the prior quarter. Total billings were $384 million in the quarter, representing a 22% increase from the year-ago quarter and a 3% decrease from Q4. Software and support billings were $351 million, growing 50% from the year-ago quarter and decreasing 2% from the prior quarter.

On a billings basis, pass-through hardware represented 8% of total billings. This is slightly higher than what we expected and is mostly related to geographic mix and timing of orders. The bill-to-revenue ratio on Q1 was 1.22, slightly lower than the projected 1.26, reflecting a small change in product mix. Our Q1 deferred revenue increased by $71 million in -- $571 million from Q4, up 72% from a year ago and up 11% from the previous quarter, ending the quarter at $702 million.

New customer bookings represented 24% of total bookings in the quarter, down from 29% in Q1 '18. We had a record number of customers booking deals greater than $1 million in the quarter. Customers with bookings greater than $500,000 represented almost 50% of bookings in the quarter. We had a strong Global 2000 performance in Q1, with the G2K software and support bookings equaling 31% of the company's total software and support bookings in Q1, up from 28% in Q4 '18 and 26% in Q1 '18.

In Q1, our software and support bookings from our international regions were 40% of the company's total software and support bookings, up from 36% in Q1 '18. Our non-GAAP gross margins grew in Q1 to 78.6%, up from 61.9% in the year-ago quarter and 77.7% in the prior quarter. Operating expenses were $272 million versus our guidance range of $280 million to $290 million. Fewer headcount additions accounted for most of the shortfall. On a non-GAAP basis -- on a non-GAAP, our net loss was $24 million for the quarter or a loss of $0.13 per share.

Few balance sheet highlights. We closed the quarter with cash and short-term investments of $965 million, that's up from $934 million in Q4. DSOs on a straight average was 69 days, an improvement of 9 days from last quarter. The weighted average DSO was 24 days in Q1. We generated $50 million of cash flow from operations in Q1, which was negatively impacted by $13 million of ESPP outflow, and we generated positive $20 million in free cash flow during the quarter. This performance was also negatively impacted by the $13 million of ESPP outflow in the quarter.

Now turning to guidance, for the second quarter on a non-GAAP basis we expect the following for Q2: Billings between $410 million and $420 million, revenue between $325 million and $335 million, gross margin between 78% and 79%, operating expenses between $300 million and $310 million, and a per-share loss of approximately $0.25, using average shares outstanding of 180 million.

I'll just wrap up with a few final comments now. We are now at a point where the billings' hardware pass-through mix will bounce around in any given quarter at a somewhat immaterial rate between a low of 5% or less and a high of 10%, again, with most of this variability related to geographic mix and timing of orders. We expect this to continue for this foreseeable future. Regardless of the actual rate in any given quarter, we would still expect gross margins to remain in the high 70s, and we will of course, continue to provide the actual hardware percentage each quarter. Additionally, as I mentioned before, we have bought about at a steady-state range with a percentage of pass-through hardware that we experienced in any given quarter. Therefore, beginning in Q2, the quarterly decline in year-over-year growth in total billings and total revenues that we've experienced during our transition away from pass-through hardware is expected to moderate and growth will eventually reaccelerate as we go forward.

And with that, operator, if you could please open the call up for questions, that would be great. Thank you.

(Operator Instructions) The first question comes from the line of Matt Hedberg of RBC Capital Markets.

Dheeraj, I'm wondering, can you give us a bit more color on the crawl-walk-run message for core essentials and enterprise? And is the right way to think about this as a software bundle? Or is it still sort of like à la carte within these different tiers?

Yes, thank you, Matt, and thanks for the question. So we -- as I mentioned, we look at this as a journey for the customer, a journey for a seller, a journey for a channel seller and a journey for anybody who's getting enabled on selling and really furthering our products. So in that sense, we're not using this as a price bundle, we're not using this as a way to say, look, you will go and buy something based on a certain price book or SKUs assigned to Core's Essentials enterprise. What's really important is people do realize that Essentials uses Core, and Enterprise uses Essentials and Core. So there is a progressive utilization of the products, and these are not disparate products. They're not like completely misaligned with each other. Even Frame, for example, which is a SaaS-based service, very soon in the next couple of quarters, we'll go and use on-prem Nutanix, including off-prem Xi. So if you think about it, a lot of the service offerings will actually start to use both on-prem Core and Essentials and off-prem Core and Essentials running in Xi as well. So I think the idea here was to basically go and educate and enable our customers and our sellers to realize that there's a progressive way to get to what these new offerings in the SaaS world are.

That's helpful. And then maybe a follow-up for Duston. You've eliminated $104 million of pass-through hardware revenue. I think you said that was about 8%. I'm curious, going into the quarter, what were the expectations for Q1? Just -- I just wanted to get a sense for the delta in that mix?

Yes, I think it's -- I don't have the exact calculation, but it's probably somewhere around maybe 5% or a $5 million differential, somewhere around there. Maybe a little bit more but somewhere in that ballpark.

The next question comes from the line of Aaron Rakers of Wells Fargo.

Just as we kind of think about the transition that you guys are now executing through, I'm curious if there's a way for us to frame how much of your subscription revenue growth is at this point being driven by the transition of your existing customer base from the portable -- or I'm sorry, the nonportable software revenue relative to the monetization effects of some of the additional offerings, be it Flow, Beam, et cetera. I'm just kind of curious of how we think about the mix within that subscription revenue between those items?

I think the lion's share of this transition is going to come from the core and how people consume the core because we were all node-based licensing, if you remember, for the last 5, 6, 7 years. And now we're moving to a capacity-based method, which is basically tone-based and the fact that it's portable is what makes us -- use it for subscription as opposed to life of device. So I would say that it's early to say that anything but the enterprise SaaS or Xi Cloud Service is adding to the mix. Most of it's really coming from Core and Essentials.

Okay. And then as a real quick follow-up, I'm just curious as you guys make this kind of pivot in the strategy, how do you think about the competitive landscape? And I think about importantly the competitive landscape evolving, looking out over the next 12 to 24 months, has there been any change currently? And who do you view as actually your most formidable competitors going forward?

Yes. So in terms of the competitive landscape, nothing has changed in the last quarter or so. It's still a lot of on-prem, three-tier hardware vendors who used to sell blade chassis and fiber channel switches and storage arrays. So we go and collapse all that with the software and infrastructure. And we see enough of VMware but we don't see enough of VMware in about 70% of the transactions are POCs and not seeing VMware [VMware.] And we're going after very high-end workloads as well, and the other accounts where we see -- do see VMware, I think they're going with head-to-head fights. We're going with -- I mentioned this in my script as well, we really want to go after POCs, proof-of-concepts with VMware. We've built some highly automated testing tools, and we really believe that customers are looking for the same high-quality that they were expecting from these three-tier hardware deployments to come from a software-defined infrastructure. As I mentioned, I think nothing had changed in that respect in the last year or so. Now Dell EMC definitely is closer to VMware than it was, let's say, one year or two ago, but even there, we've navigated the competition waters really well. We have moved to Dell XC Core products, and XC Core is basically beating the channel where we actually use a certified Dell hardware. So in many which ways, we're driving our own brand and our own pool from the customers. And many of these things are coming directly from the customers that they want to transform themselves. They are looking at subscription-based pricing because OpEx is good for them as they look towards cloud consumption answers. So I think in that sense, the next 18, 24 months is going to be a lot of VMware, a lot of three-tier. Maybe if you'd see a little bit of Azure Stack, if at all, if we see any Azure Stack and over the course of the next 6 quarters, maybe some Azure as well.

Your next question comes from the line of Alex Kurtz of KeyBanc.

A question and then a clarification. So Dheeraj, on the transition to subscription, can you just remind us how the sales organization as well as the channel will be sort of -- the quote in the compensation models will change, if at all, as we go through this over the next 24 months? What should we expect and see from the outside when we hear about this transition and what it means to quarterly execution?

Sure. Yes, so I'm going to jump in and Duston you should also add to this. So right now, in terms of what we're collecting and what we are even seeing from the customers, they do want to see 3-year deals and 5-year deals and such. And I expect that some of this will be driven by the market forces. Right now, our comp has not changed because the 3-year subscription collection is pretty similar to what we're doing with life of device. Now as we go and really look at the lower and the midmarket where there might be some price pressure, they might start to do a few more one-year deals but it's very early to say anything regarding that. And maybe that market will be driven more by inside sales. They could be a new compensation strategy for inside sales and the territory managers and the commercial account managers who don't deal with enterprise or global accounts themselves. And did you have a second question, the second part of the question?

Well, guys, just -- that's helpful. Then just a clarification around one of your supply -- one of your hardware partners has been in the news in the last couple of months. And I was just wondering if you guys could take a chance to explain what you've seen from your side. Any potential disruption around that hardware partner and if it really matters at all, as you look into the rest of the quarter and the fiscal year?

Yes, it's Duston, and then I'll let Dheeraj chime in as needed here. We've been pretty upfront about this that we were notified back, I think, in March of this through the same reporter actually. And we, at that time, did a thorough investigation and found nothing, took it very seriously. And then this latest round, we did the same thing. Worked with Super Micro again, took it seriously, found nothing. And relative to the quarter, there were some questions and things like that, but there was no impact of the quarter really at all from this issue, and I think the important thing to remember here is that our software runs on 7 different server platforms. So if anybody did have an issue, they've got effectively 6 other choices, seamless choices, if you will, to go run this -- our software on. So no impact for the quarter, and we found no issues whatsoever with those allegations, yes.

Your next question comes from the line of Wamsi Mohan of Bank of America Merrill Lynch.

Dheeraj, I was wondering if you can just comment on how you view the potential opportunity for multicloud management in view of sort of IBM-Red Hat deal announcement? And I have a follow-up for Duston.

Sure. Thanks, Wamsi. So it's early days. The multicloud world is a buzzword, just like cloud was a buzzword maybe 3 years ago and continues to be a buzzword today. The way at least we look at it is that there will be need for a new -- and I'm going to use a metaphor, a hypervisor of virtualization stack on top of multiple clouds, just like there was a need for virtualization or a hypervisor across multiple servers and across multiple storage boxes on-prem. So we put a layer of software that virtualized servers and storage equipment, and we've got to do the same across multiple cloud stacks themselves. And in that, we have built a few mechanisms. In fact, we'll announce a few of them tomorrow around migration and drag-and-drop from one cloud to another, on-prem to off-prem, disaster recovery seamlessly with one click. So migration becomes a killer app for multicloud, just like it was a killer app for -- within the on-prem world, the killer app for VMware was vMotion and Storage vMotion and DRS and HA and all these were just about moving the app. When it failed, when it was hotly contended in a high-load environment and when it needed to move from an old box to a new box, VMware became a very large company because of building seamless mobility across different hardware boxes, and that's what's required across multiple clouds itself. And that's how you commoditize anything. You commoditize anything by virtualizing it. You virtualize something by bringing portability of applications in a one-click seamless fashion. So if you think of this portfolio of products that we have in the multicloud world, they are either a policy engine that tells you what is wrong, like maybe because of cost or because of governance or security or compliance reasons and then how do you correct and rectify it, which is where you need to invoke a mechanism for migrating it from one cloud to another. So both the mechanisms and the policies will form the new "hypervisor" in a multicloud world. So it's very early days to say exactly what will happen, but what I can tell you is that what is needed in that is a lot of migration mechanisms around storage and networking and security and identity because you'll have to move an entire app from one cloud stack to another. And it takes a lot of doing. So as a company, we've done a really good job of data, data migration, whether its replication or disaster recovery and run book automation and things of that nature. But now I think the bar will be raised with security and firewalls and networks and things like that. So how IBM Red Hat navigate that, it's early. I mean, at some level, I think as IBM puts its arms around the open stack's stack, I think clarity will actually be more.

Okay, Dheeraj. And Duston, just a quick one for you. Appreciate the incremental revenue breakout that you guys gave. I was just wondering if in just some qualitative terms you could talk about how much of that subscription mix is currently term-based versus SaaS versus SaaS support entitlement. Any directional color there will be helpful.

Well, of course, right now, there's very little SaaS in there. As you'd expect, that will build up over time. And I don't have the exact -- we can get it for you. I don't have the exact split there on the subscription pieces there. There's multiple pieces there with support, but we can get that. You've got it almost from the prior breakouts that we've done there, but we'll get that to you.

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

Question for the Dheeraj first. You mentioned that hybrid multicloud is becoming a buzzword, and we've certainly heard it from just about every infrastructure hardware, software company this quarter. So curious how you think it impacts your business. Are you seeing your pipeline growing customers, coming to you because competitors are affirming your strategy? Do your salespeople have to spend more time explaining the difference between your strategy and some of the others? Just how this evolves as more players follow your lead.

Yes, thanks, Katy. Yes, I think we definitely go and talk from the position of our strength as opposed to a position of someone else's strength. And many of the customers, we go and talk about their adjacency and our adjacency. Their adjacency is on-prem right now. And our adjacency is on-prem, which is software-defined infrastructure. And then we go talk about disaster recovery as a service, like, hey, about the first crawl piece of this multicloud journey where we can do one-click failover and testing and failback and fix that, then all of a sudden, the app is mobile because we did all the hard work with runbook automation and shipping data and things like that. So we basically start with our adjacencies and then, there's all these multicloud services that are very adjacent to Nutanix like desktops, it's very adjacent to what we have really understood and embraced in the last 7, 8 years. We probably are one of the strongest companies to understand end user computing experiences across Citrix and VMware and now with Frame itself. And now people are asking about Frame to be extremely multicloud, used by AWS credits, used by Azure credits. I talked about one of our experiences with co-selling with Google G Suite itself. So I think we are going and navigating this multicloud buzzword around our adjacencies so we don't talk fluff, I think, because most of the money is still coming from computed storage and networking and security and some of these workloads around that, like files, like databases, like desktops. So I think we asked our sellers and -- to actually go and focus on workloads because workloads and applications is where most journeys actually begin.

Understood. And Duston, software and support billings came down a bit this quarter. Is that just new seasonality as the business scales? Or was there some impact of the subscription transition in the quarter? If so, how much?

Yes -- no, there really wasn't any impact to say on the subscription piece. Actually, when you look at the length of these new licenses, the $20 million, it's slightly higher than the 3.6 average. So there really wasn't any tilt to one year or anything like that in that. But we had -- and just looking and addressing billings in total, we had the guided billings down actually in Q1. We came off a really strong Q3, a really strong Q4 into a seasonally soft Q1 so that we had guided $370 million to $390 million of total billings. And obviously, we came in at roughly $384 million, so close to the top end of that range. So it was kind of as expected there and the pieces kind of fell out as they did.

Our next question come from the line of Jack Andrews of Needham.

Dheeraj, it looks like to me you're achieving the highest growth rates with customers that are spending the most dollars with you. You talked about the 111% year-over-year growth in customer spending, more than $5 million. So I was wondering if you could drill down on what's happening with these larger dollar amounts, in particular. I mean, what's really driving that? And do you view kind of these large -- what these larger dollar amount activities as leading indicators for the rest of your customer base?

Thank you. Yes, I think what you're seeing is the first phase of what we talked about as segmentation almost 18 months ago in around February of 2018, 2017 we talked about segmentation. So in that first phase of segmentation of our sales force, we moved up market and that creates a lot of opportunity for cross-sells, upsells, more workloads, expanding workloads and that's -- and in fact, we have shown that through our repeat business numbers that have actually grown across our customer base itself. Now the next phase of segmentation is around inside sales and how do we really go about these midmarket customers, lower and midmarket customers themselves, and you will see that happen in the next 12 months itself. I think we've settled down on the upper half of the pyramid, and now we're going for the middle of the pyramid in some sense with channel investments and inside sales investments and such. So I think it's a barbell strategy for us. One end of the barbell is a large customer, the other end of the barbell is a frictionless transaction -- transactional business. And we expect to actually go and figure that out in the coming quarters and beyond.

And then just as a follow-up, could you maybe frame what your customer base looks like today in terms of mapping it to the Core Essentials and Enterprise layout that you introduced, what it looks like today and how you see that trending over time?

Yes, in fact, we started -- we introduced a new KPI in our infographic, and I spoke about it as well. In fact, it's going to be in the Investor Day too, 19% of all our deals that have one or more products beyond Nutanix Core. So obviously, everybody has Nutanix Core, except for maybe 1 or 2 customers that are not using Nutanix Core because they are Frame customers that are using desktop-as-a-service in AWS or Azure. But other than that, it's all Nutanix Core customers. And we will start to report on this on a quarterly -- rolling 4 quarter basis going forward. And maybe someday we'll actually even say how many of our customers have both Core and Essentials, how many of our customers have Core Essentials and Enterprises as well, as these number start to really come together.

Your next question comes from the line of Erik Suppiger of JMP.

A couple of things. One, on the Enterprise in the [Citrix] ratio, what kind of contribution -- it's -- if 19% of deals include products from those product categories, how are revenues going to track to that longer term? Do you envision that customers that are buying multiple products, with the Core product, with the Core -- with the Essentials and Enterprise products eventually eclipse the Core component of those customers? Or how can that revenue contribution look if you look out a few years?

Yes, one good thing about the nomenclature is that is timeless. Over time, more things will actually fall into Essentials and then some things will fall from Essentials to Core itself because as technology matures, some things become Essentials and then other things that were Essentials now become Core itself. So we expect that we will start to bolster more of the Core. I mean, some things might even fall off the Core because everybody knows that, that's really needed anyway. So might not even talk about, for example, let's say, Prism being part of the Core because Prism is assumed to be part of the Core. Similarly, AHV might become part of the Core and then over time, if we really start doing 80% of everything at AHV, you might say, look, why even talk about it actually? So I think the whole idea of this nomenclature is that over time, things will move from Enterprise to Essentials and from Essentials to Core, but the customers start to experience the journey from Core, especially the new customers who have never heard of Nutanix before, and there's quite a few out there. I mean, when we look at just America's global 12,000, we've barely scratched the surface. We only have 15% penetration in America's global 12,000. So 85% of the customers will need to go through the experience of Nutanix Core, then the Essentials, then the Enterprise.

On the AHV piece, it's been on a pretty good trajectory. I think it increased about 3% over the past quarter. When does that start to reach a maturing level? When are we going to see that contribution of AHV customers basically stabilize?

You just saw me talk about the global 12,000 Americans alone and we're only 15% penetrated there, so there's a lot of new customers. And I think there's basically a three-layered cake there, which is the Global 500 and the Global 2000, the Global 5000 and they all have different kinds of needs. I mean, many folks in the Global 5000, they're looking at VMware as the new Oracle, like there's a lot of predatorial practices around licensing and auditing and things of that nature happening. So people are saying, look, I really want to look at virtualization as a commodity actually, and it doesn't really belong in like multimillion dollar sort of -- in expense and things like that. And then there are other customers who love VMware and then yet other customers who are actually completely, I would say, neutral to what the virtualization stack itself looks like. So we are going to see a lot of progression in this over the coming 2, 3 years. I don't expect this to actually materially stabilize at least for the next 2 years. And obviously, all of Xi is AHV, so think about our cloud offering. What we're using in Xi is all AHV. And the best part is that, without being too self-righteous, we're saying, look, we'll actually support mix mode customers where the on-prem that they're running is VMware and the offering could be AHV, and that's what customers really like about us that we don't go and shove AHV down their throat. We're saying, look, if you're happy with VMware, stay with it because we can still go and sell a lot of data services and network services and computer services on top of it, actually.

Your next question comes from Jason Ader of William Blair.

This first question is just on macro environment, if you could provide some commentary on what you're seeing out there? Whether you've seen any changes, given some of the kind of political fluctuations? And then the second question is kind of on this multi-cloud hypervisor vision for you, Dheeraj. As you think about what you need, the pieces that you need to get there, I would think Kubernetes is pretty critical just because it's being seen as in a lot of ways beyond the key kind of common denominator of SaaS clouds. So any comment would be appreciated on what your plans are for Kubernetes development.

You want to start with this?

Yes, just on the macro, Jason, we always are looking at it and making sure that we're not missing anything, but clearly we haven't seen any slowdown in our business anyway. Now we're not a $20 billion company that would have insights into everything, but certainly within our realm anyway, we've seen really no signs of that. Obviously, we look at it all the time and a lot of companies are having issues one way or another with currency. We're fortunate to be selling obviously in U.S. dollars and things like that, so we've got that reasonably covered from that perspective, but we continue to look at it and continue to monitor it and be aware of it, but there's nothing right now that we see that's impacting the business.

Yes. And yes, we have levers to make adjustments as needed and people versus programs, things of that nature. And obviously, nobody's has crystal ball around this. This is going to be black swan event whether we like it or not. And I think the people versus programs levers piece is an important piece of our strategy going forward. As we see anything really dampening with the macro, I think we'll have ways and means to go adjust accordingly, actually. And talking about your Kubernetes comment, definitely, Kubernetes makes compute very mobile and portable, but then there's everything else around it that really needs to be made portable as well, which is storage and networks and identity and security. And there's a ton of pieces around the net stack and then storage that need to be portable as well. And I think it's -- one of the core advantages of Nutanix is that we really understand data, data migration, replication, backups, things of that nature. Plus we understand networks now. For the last couple of years, we've focused so much on networks, around networks and security. I mean, Xi would not have been possible without really digging deeper into multi-tenant networks, like what does it mean to really move an entire primary site from on-prem to off-prem without changing even a single IP address? These are very hard problems that we've had to go solve for. So a lot of the network virtualization pieces that have come together in Xi make us really competitive in the space of portability of applications. But Kubernetes alone doesn't make an application portable because there's a lot more to an application state than just sitting on the server itself, which is basically just software. That software needs storage. That software needs other services like object storage clusters and file storage clusters and active directory and VLAN settings and load balancers and firewall settings, all those things have to move around before you call Kubernetes to be the end-all and be-all of migration.

And just on -- and on that compute side, for you guys, is that something that you support today, Kubernetes?

Oh, absolutely, in fact, we have gotten really deep into Kubernetes over the last 12, 18 months. This is one of the biggest advantages of our architecture that all our code now runs as containers, all our code. And that has been a big issue with many of the companies that actually run inside the kernel, inside the hypervisor. You can't go and really infuse the value of containers inside the kernel of a hypervisor because it actually was written 15, 18 years ago, and they didn't think about services. They didn't think about patch upgrades, hot upgrades, rebootless upgrades. Many of the things that Kubernetes actually makes possible, we've been able to do in our own software. And now people can run Kubernetes containers on top of Nutanix, so one thing that we actually really went on in the path of saying, look, no change with open APIs and CLI of Kubernetes. Unlike Pivotal and Red Hat who actually added wrapper stuff around it, we're going and saying, whatever open source is, is what we'll actually go and support. So things like kubectl and all the APIs are exactly the same. And in fact, even on Calm, which is the orchestration layer that we have, we're saying the app specification of Kubernetes is a subset of Calm's app specification. So we can take a very well-formed Kubernetes spec and put it inside Calm, and now you have a hybrid app, which is both a combination of containers and virtual machines actually, which is probably going to be one of the hardest things that IT will struggle with is, now my entire app is not containerized. I have things that are running as containers within an app, and I have other things like database tiers that are running on virtual machines. So how do you really go and make a hybrid application possible? How do you make it auto-scalable? How do you upgrade it? How do you migrate it? And all these verbs of an app which is backup, replicate, scale out, upgrade, migrate, all these verbs in the app are now possible with Nutanix in a very hybrid setup, which is both a combination of containers and VMs. And that's where the money will be, IT ops. We have to go and talk to IT ops in a way that is mundane, but it is still pragmatic and realistic about the transition of containers because overnight we're not expecting every piece of the app to become containerized.

This concludes today's conference call, as we've completed the allotted time for questions. Thank you for your participation.