Nutanix, Inc. (NTNX) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Nutanix Q4 and Fiscal 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] 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 of 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 closed today, Nutanix issued a press release announcing the financial results for its fourth quarter and fiscal year of 2017. If you'd like a copy of the release, you can find in the Press Releases' section of the Company's website. We would like to remind you that during today's call management may make forward-looking statements within the meaning of the Safe Harbor provisions of federal securities laws, regarding the company's anticipated future revenue, gross margin, operating expenses, net loss, loss per share, free cash flow, business plans and objective, 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 two years of financial data and the impact to Q1 guidance given on this call for Tuesday September 5, at 4PM Eastern, 1PM 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 revenues standard ASC 605. With that, I'll turn it over to Dheeraj Pandey, CEO of Nutanix. Dheeraj?

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 route to market have evolved. We grew our software only bookings by 96% and also saw our hypervisor 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 leader in the Magic Quadrant for integrated systems. Our industry leading customer support continue to significantly build our brand in fiscal 2017 and for the fourth year running we had 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 datacenter, 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 two 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 in both sides of the hybrid divide effectively converging all the elements of infrastructure so that the devices customers own seamlessly blur with a cloud service event 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 within containers a more lightweight unit of compute with virtual machines. This is another place where we are 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 layers of infrastructure app to an abstraction that is application centric. Effectively detaching applications from data centers and making them movable in a multi cloud world. Calm, Xi and Kubernetes containers form a trisector for product strategy for the next several years. We continue to evolve just like when we decided to work on our own hypervisor AHV. AHV, Acropolis and Prism are the architectural debts of the past eight years that will form a robust foundation for Calm and Xi in the coming eight years. Another highlight in the quarter was our third annual .NEXT conference in Washington DC 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 roadmap 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. Now 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 7000 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 continue 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, mint and other great tasting snacks. In this past quarter, Hershey significantly extended its existing relationship with Nutanix by purchasing Nutanix clusters for 10 of the manufacturing sites as well as for their new US-based hybrid cloud. The new installation employed 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 the 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 two large deals with this customer during the quarter including one 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 will be 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 are also very pleased to see customers increasingly taking advantage of the full range of capabilities offered by our hypervisor AHV. One of our largest partner is CDW helped us grow our presence in a very large Global 2000 healthcare provider with over 160 hospitals and 100 surgery centers. This customer extended their Nutanix solutions to include Prism Pro together with AHV for the enterprise applications including Microsoft SQL server. Our partnership at CDW continues to flourish and we're very pleased to recognize them as a 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 insight capabilities. Also in Q4 we signed our largest ever Prism Pro deal with a Fortune 500 insurance company with over 5000 employees. And finally, we signed a sizeable software only deal running on Cisco UCS servers or the global system integrator for large scale VDI as our services at a FTSE 100 organization in UK. 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 form factors, containers and launching Xi. Our ambition and attention to detail have to hand in hand to fully realize our potential as a viable cloud opening 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. The 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 FY17. 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 and up 18% from the previous quarter. We billed $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 region's 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 FY17. In addition, our APAC region was clearly the best performing geography in FY17 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, six were with Global 2000 companies. Two 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 two others were approximately $7 million each. It was also not surprising to see that the 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. And 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 operating system running on Cisco UCS and HPE hardware with the potential for additional hardware platforms over time. ELA's 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 four quarter average increased to 17% and that's up from 16% in Q3. Our international bookings mix with consistent in Q3 2017 with Q3 2017 and Q4 2016 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've 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 two years. Because we plan to continue to invest in this critical segment, we should see operating expenses increased more than $10 million per quarter in fiscal 2018. And for modeling purposes, our current assumption is that any incremental gross profit dollars generated throughout FY 2018 that is over and above the - and with 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 2018 and FY 2019 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 straight average 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 turning to our guidance for the first quarter. Now the guidance is based on the 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 weighted average shares outstanding of approximately $156 million. We expect the whole Q1 2018 gross margins relatively flat to the Q4 2017 levels despite a projected 10% increase in DRAM cost by influencing a mix of software only sales. One final note regarding the new revenues 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've tried to take the most transparent and investor friendly approach as possible. Our specific communication plan with the analysts and investment communities surrounding the new standard will be as follows. As stated above, we have currently provider Q. 118 guidance under the historical revenue standard again ASC 605. This provides investors with an apples-to-apples comparison to the current street consensus estimates currently in place for Q1 2018. 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 PM to specifically address the changes related to ASC 606. With this disclosure, we'll provide a brief overview of exactly how the new revenue standard impacts Nutanix and publish the recast of two years of historical quarterly financial statements. Additionally, we have provided separate 606 investor package that will show the summary historical financial information both pre, and post ASC 606. And finally, we will provide Q1 2018 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 2018 guidance which will ultimately be provided both pre, and post ASC 606. And now 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 would be great now if you could open the call up for questions. Thanks.

Your first question is from Matt Hedberg from RBC Capital Markets.

Hi, guys. Thanks for taking my questions. 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 are starting to see a real inflexion 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 are few reasons for it. Obviously, the first is focus. We talked about focus about two-three quarters ago with segmentation. That's helping us quite a bit, as our global accounts and enterprise account managers are focused in 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 the hypervisor, the software defined storage pieces, operations and systems management, automation with Calm and security and networking capabilities also. 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 is a lot the nay sayers are becoming fence hitters and a lot of the fence hitters are becoming believers. I think this process will only continue over the next two to three years as the Nutanix brand and the customer service in the products continue to actually work the whole body.

That's great. 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 we get a lot of questions of investors to kind of pick up 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 learned 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.

Got it. Thanks. Congrats again.

Thank you.

The next question is from Mark Murphy from JP Morgan.

Yes, thank you very much and I'll 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 three to five years 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 maybe Dheeraj can chime in on the first question. Yes, relative -- I'm sorry I forgot that -- the levers. I'm sorry, so sorry. The biggest lever there just because it comes with the bigger sizes would be ELAs and previously those ELAs were tucked on to the balance sheet and not recognize immediately and put over a three-year period. Now under 606, the license piece now with a 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 various sizes throughout the quarter and we have ability to redirect appliances how we choose to do that in a given quarter also. So, there's just with 606, there is more capabilities for us to play with the software mix in a given quarter.

Yes, and I think on the strategy piece. If you think about what you have successfully done Mark is to really have the same software on a multiple hardware platform 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 are some basic things that we had to go and fix to make sure that we look at software as fairly as we look appliance itself and some of the core pieces are very mundane things but they're very important reality of life around sales comp and such. So, we are doing that going forward and at the same time there's 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 are points to review on how many of these are ready for our AHV hypervisor, our ELAs, our Prism Pro product, AFS product which is a 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 at roughly 1.25 times into Q1 or is there a little different seasonality there?

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

Okay. Thank you very much for taking my questions.

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

Yes, thanks. Great quarter guys. Just Dheeraj on the Cisco acquisition of SpringPath, you're obviously continuing 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 is not “OEM” yet and what's your take on the acquisition means to Nutanix?

Yes. Thank you, Alex. We've always had this fundamental view that hyper convergence is not a 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, automation, operations, and systems management and also migration. Migration is an actually 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 are too focused on the form factor that we used to talk about five years ago. I think they and HP and NetApp are still playing a hardware game off HCI when I think the real game that's being played in Pure software is about the entire opening 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% percent 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 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 you have to win a deal, you will have to partner with a good operating system vendor right now there's only 2 out there VMware and Nutanix.

Thank you.

The next question is from Ittai Kidron from Oppenheimer.

Hi, guys. 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 how VDI is now at its lowest level as a percent of booking, if I remember correctly. Can you talk about what has been rising like what are the kind of maybe the number 2 number 3 used cases that you're seeing is 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 genetic silver 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 no SQL databases as well. And in the big data aside we're seeing pivotal in 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 a look at the retail customers that we have a lot of them actually have robot offerings that are powered by Nutanix as well.

Ittai, Duston just want to 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 want 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 is any different approach that you're thinking about this now that it seems like this is going to take a while to resolve. Are you changing the patterns or the amount of capacity or buying upfront for this or you're still very much focused on spot market here how do I think about this?

Now 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've 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 the 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. FFD's 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 2017 of margin impact based on DRAM. We offset some of it last quarter in Q3 to kind of put a stake in the ground and said enough is enough we're going to stay at minimum 58% and we'll go from there and we've done the same thing this quarter and now we have more leverage to play with software to help offset that.

Got it. Very good. Alright. Good luck guys.

The next question is from Jason Ader from William Blair.

Yes, thanks. First question 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 quarter basis. I'll tell you Jason, over the last three quarters, it's been in the high single digits as a percent of total bookings and where we 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.

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 murky for us to really predict how it's going to be this September.

Okay. And then Dheeraj for you should we expect software to find networking to become a bigger part of the roadmap? I know you've done some things with kind of partnering automation et cetera but ultimately should we expect just more development here more innovation from Nutanix?

Yes, I think it's a great question. Micro segmentation was the killer app for software to fined 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 our engineers is to build features that are not just one, for one world and not the other that's the biggest challenge of a hybrid cloud. For that overlay network piece will need to be shipped to on frame customers as well and that is the journey that we are upon to in the coming 12 to 18 months, you will actually see us become a full-fledged networking and software defined security vendor just like what you are seeing VMware as well.

Okay. One quick last month for Duston. Are you going to provide an updated target model based on 606, because I know gross margins are going to be higher correct?

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

Thank you.

Next question is from James Kisner from Jeffries.

Hi. Thanks guys and nice quarter and outlook. I just wanted to go back to the comments that Duston made about just reinvesting upside for margin in the Global 2000 efforts. Is this kind of a -- is this a new realization that you are the - you discover that you just have more need to invest than you previously thought you would. I guess I was just kind of wondering how you figure out when it makes sense to pull back and allow yourself to get more leverage. Obviously, your guidance for higher revenue is not resulting in higher EPS for the coming quarter over the street [ph] 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 thoughtfully invest and go chase those opportunities and we've seen some really good evidence here the last couple quarters on the Global 2000 piece. And now we've had accelerated revenues and we'll go invest some of that back in and that's been the really the philosophy of the company all along. At the same time, being thoughtful about the gross margins and and operating margins and cash flow and trying to balance all those and at the same time.

Yes. I mean 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 and sort of sell on but also on upsell of newer products. We've seen that formula work. We know that in the Global 2000, we will get many many more very large customers and I think this is the journey. I think this is five and half 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 three to five years.

Okay. That really helps. Just a clarification, any updated thoughts on any CapEx requirements for your data centers in support of your internal support of Xi? Thanks.

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

Thank you.

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

Yes, thank you. Congrats on your quarter as well. 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 highly correlated with your largest customers because that would be quite bullish with your targets of increased penetration at larger customers? And I will follow up with Dustin.

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, you know, it's an HPE only customer from day one. They are the ones who helped seed AHV for Nutanix, they were the design partner for Nutanix very early on. And there is 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 our strategy tax to say that they must adopt AHV along the way; it's -- I mean at some level we are still disrupting so much of the traditional storage, traditional sand, traditional blade servers that are just the act one [ph] itself can help very large customers for us. But at the same time I talked about installed base 400 -- 400 customers, when we go back to them we are sitting and understanding their virtualization software needs, their overall spending in systems management and operations management software; and I think it's opening new doors for us in these large accounts.

Thanks, Dheeraj. And Duston, your comment on Dell booking, just north of 10% but not necessarily counting on similar future levels. I'm wondering if you're actually seeing the 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 it's not prudent to think that it would stay at that elevated level. I mean the relationship has been good, business has been good but we did see a pop here in Q4 and we're just taking up I think what's a prudent view for Q1.

Alright, thanks Duston.

The next question is from Jayson Noland from Robert W. Baird.

Okay, great, thank you. 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?

I would say that all these $10 million plus customers definitely have a large number of nodes which means that they are 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 overtime. 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 the Hail Mary [ph] 18 months long sales 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 six months we're going in selling some more and winning the trust of these accounts but all these $10 million plus customers definitely have taken the majority of the workloads or a pretty significant chunk of the workloads and running at Nutanix.

Okay. And then as a follow-up Dheeraj, any change to the competitive environment; Cisco finalized Spring [ph] and that's out with a solution; now that anything you would mention as a delta quarter-on-quarter?

Yes, I think this whole architecture of computer storage coming together is going to get commoditized and it's a good thing because we need education for the customers to understand that 3TR [ph] is legacy and probably is an 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; you know, this as-your-stack [ph] strategy that they have in the last few months.

Okay, congrats on the quarter. Thank you.

The next question is from Katy Huberty from Morgan Stanley.

Yes, thank you. 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 those years you grew 19% sequentially; and so is there anything in particular that makes you think that you will 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. But 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 creative environment worth too early to call for a timeline on EPS and free cash flow sustained profitability or do you have an updated view on that?

Yes, I think on the same profitability again which we've said all along, it's highly dependent on growth and we do a lot of work around this and growing it -- 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 base from adding reps and things like that and now having said that we're looking all sorts of ways to get a bit more leverage even in a high growth mode which will 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. And the cash part, that's probably a little bit easier to answer but I think it's going to even flow [ph] 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 cash balance, we ended at 349; under the current assumptions that would be -- there is 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 account 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 or just given that you're still awaiting that?

Yes, we have -- we obviously got it in the background somewhere here but it's less of importance for us right now.

Okay, all right. Thank you.

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 saw some change in 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?

Well, Dheeraj has talked about where we are in the transition there, we're just on the North American productivity first. Yes, you're right, it rebounded nicely in Q3 and it rebounded nicely in Q4, again, 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 looked 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 last two plus quarters, we've been working on this, we took a bunch of our enterprise account managers who are essentially managing a territory as well and we gave them global accounts because they were that productive and then we hired a bunch of enterprise account managers along the way. But there is a clear distinction between global account managers, enterprise account managers and commercial account managers; there is a distinct salary and OTE structure for all these three. So we have a pretty clear view on all that and we are implementing 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 games and our enterprise account guys and our camps with a deliberate view on who brings how much and where do they really focus on.

Got it, thanks for that. 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%.

Okay, thanks.

The next question is a from Simon Leopold from Raymond James.

Great, thank you. I wanted to follow-up in terms of where 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 of VMware and that's typically what we hear and it sounds like you're pretty constructive in terms of VM whereas 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?

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 three years, not I mean -- ever since the announcement was made and the good thing is that like best and for tolerant companies we are building many routes to market and Dell remains to be a strong one but there is equivalent products that people can consume from Nutanix appliances, Lenovo appliances, Cisco and HP -- you know, it's our software running on those servers and finally even IBM. So as a company we've been 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 [indiscernible] about the relationship. I think there will be good business, I mean there is even cases of ELA's where one of our largest retail customers is; on ELA on both Dell and HP server harder. 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 -- I mean timing our -- cell is our channel; very large partners go and generate demand. And those places recently, especially if you look at Salesforce, there is many Dell sales people who go and generate demand that make a ton of 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 Phase 3, the integration efforts and the time past that Dell having acquired EMC or is it more or less stable?

Yes, I mean I would say that it's a highly competitive world; I mean you think about VMware, joining forces with AWS which has zero overall of interest with Dell hardware or EMC hardware and so on. If anything when we embarrass selling on AWS's data centers and so on. It's sort of competitive to Dell and the MCA and I think the large company is -- and especially in this day and age of computing market, there is a lot of co-petition [ph] and there is 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 at, that's the way VMware looks at it.

The next question is from [indiscernible].

Hi, thanks very much. This is Nick [ph]. Congrats on the great quarter. Can you just talk briefly about how you view composable infrastructure which as an HP synergy product? And whether or not you perceive it as a competitive threat or if it could ultimately become something that falls into -- and eventually integrates as part of your roadmap?

Thank you for the question. You know, to us it's a niche because it's about a hardware routing mechanism that let's you address disk drives using some hardware switching because the switches to compute servers dynamically and so on. I think our approach is software defined, we would rather use commodity servers just like the way Webscale folks use it and all the hyper-scale folks they do not use anything that's proprietary or niche proprietary hardware solution and that's where the real value of Nutanix's software really is. So I think composable is acute 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.

All right, excellent. Thank you very much. I appreciate it.

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. I will turn the call back over to the speakers for closing remarks.

Thanks everyone for joining us today. We hope you tune-in next week for our call and presentation on the impact of ASC606. With that operator, we can conclude the call.

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