Good afternoon. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Nutanix Q1 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Tonya Chin, Investor Relations.

Thank you. Good afternoon and welcome to today's conference call to discuss the results of our first quarter of fiscal 2018. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix's CEO; and Duston Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its first quarter and fiscal year of 2018. 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 sales, plans and timing for, and the impact of our transition to focus more on software only sales, expectations regarding product features, technology that is under development, competitive and industry dynamics, new strategic partnership, changes in sales productivity, expectations regarding increasing software sales, future pricing of certain components of our solution, our plans regarding how we will report the software content of our business, potential market opportunities and other financial and business related information. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after 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, our Annual Report on Form 10-K filed with the SEC on September 18, 2017 as well as our earnings release posted a few minutes ago on our website. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also please note that unless otherwise specifically referenced, all financial measures we use on this call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release. As a reminder, all results included in today's call and press release, are using the newly adopted revenue standard ASC 606. Finally, Nutanix plans to attend the Raymond James 2017 Technology Investors Conference in New York City on December 4th, and the Wells Fargo Tech Summit in Deer Valley, Utah on December 6th. We hope to see you there. Now, I'll turn the call over to Dheeraj. Dheeraj?

Thank you, Tonya. Hi, everyone. Thank you for joining. Q1 marked another strong quarter for Nutanix with billings, revenue, gross margin and EPS performance better than our guidance and consensus. Before getting into our Q1 results, I would like to start the call by discussing the business transformation within Nutanix. You might have heard from us that we are increasingly taking a software-centric approach to go-to-market and financial reporting. I want to take this opportunity to zoom out and talk about the why behind our packaging and distribution strategy of the last six years, and the somewhat obvious why of the future of software strategy. I borrow from my Annual Shareholder Letter to set the context. Digitization or virtualization as we call it has been an unstoppable phenomenon in computing. We saw this with music, photography, shopping carts, and maps, as they all converged into pure software and as digital construct in our consumer lives. We brought that foresight to enterprise storages in computer, and by doing so, we improved machine productivity by bringing data closer to applications and also human productivity by breaking down artificial walls in the IT departments. By standardizing on commodity hardware and a common operating system, we delivered economies of scale that were unprecedented in enterprise data centers. But none of this would have been possible, if we hadn’t obsessively focused on product design. The elegance of Nutanix's products is in their simplicity and in our ability to bring a consumer great experience to enterprise grade systems. We are now on a path to digitizing networking, security and effectively the entire data center. This architecture of an undifferentiated hardware, running software services, that then bring all the differentiation, is the only way to operate a cloud if the enterprise wants to stay in the business…

Thank you, Dheeraj. I'm pleased that our Q1 results came in a bit better than expected primarily driven by a solid quarter in our federal vertical, and as a reminder, we adopted our ASC 606 beginning this quarter and our results are reported under this new method of revenue recognition. Revenue for the fourth quarter was $276 million growing 46% from a year ago and up 9% from the previous quarter. We built $315 million in the quarter representing a 32% increase from a year ago and a 9% increase from Q4. Our performance in our geographic regions were essentially in line with what we would expect for the first quarter of our fiscal year. As expected, our OEM business although had approximately 10% of bookings, waned a bit from the very high level we experienced in Q4. On the upside, we saw a good performance in our federal business as well as continued strength in APAC region. The strength was somewhat offset by seasonal declines in our North America commercial and EMEA businesses. Once again, we are pleased to see the number of large deals in Q1 keep pace with the strong levels we experienced in Q4. We booked 15 greater than $2 million deals in the quarter and that was consistent with our strong Q4 performance. Bookings from our international regions were 37% in Q1 '18, up from 34% in Q1 '17. Our gross margin for the quarter was 61.9% which was higher than our guidance and compares to 65.4% in the year ago quarter and 62.6% in the prior quarter. The Q1 '18 gross margins benefited by approximately 1.5% points as we purposely eliminated more than 9% of revenue attributable to our pass-through hardware revenue. Our operating expenses were 193 million below our guidance by 7 million,…

Thank you [Operator Instructions]. Your first question comes from the line of Jayson Noland from Baird. Your line is open.

I guess, Duston, I wanted to ask on the elimination of 80% in your pass through hardware in about a year. What has to happen over the next 12 months? I assume there is lots of negotiation with distributors to take that hardware revenue?

Yes, that has already happened in the U.S., so that's the good news. The team has done an excellent job getting those -- getting that process in place. So North America is done. We need to now go execute on it, but those agreements are now complete. And we're now off working on some international regions.

And we've spent some time on our team trying to figure out what your long-term operating model would look like, and I don’t know if you are ready to point us in any directions here. But would the profitability be pushed out a bit with more leverage in the model longer term?

Yes, we will give a full I think at the beginning of the year, we’ll have a full deep dive on the operating model and how that changes. Obviously, gross margins go up substantially. The operating margin goes up and some other things there. And I don’t think, from a cash flow perspective, there shouldn’t be any major changes there. We've been hovering plus or minus, and that's how we've been running the business from that perspective. But yes, we've been doing awful lot of work on the long-term model and things like that. So at some time, I think, probably at first quarter of the calendar year, we're anticipating of scheduling some type of probably analyst event that will give a pretty deep dive into all that.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

I'm curious now, this is the second quarter in a row you guys have had really strong large deal momentum. I know you highlighted that federal vertical and particularly this quarter. Can you talk about the momentum that you’re seeing there. How do you see that large deal funnel progressing here in a software-only model? I'm sort of kind of curious about the pipeline of these larger deals.

Thanks Matt. This is Dhiraj. Definitely, we’ve seen an uptick in the last three quarters, that’s also because of the way we segmented our sales force. The focus is on global accounts and enterprise accounts strategic accounts, I should say. And a lot of the replatforming is now happening so first three, four, five years of selling, we’re going in selling in a workloads and project based spend, trying to go and exhaust the project based spend. But many of our existing customers, we talked about $474 million of those million dollar customers. They are massively strong return customers for us and we really focus hard on them and you can see that from our net promoter score as well, which is one of the big determinants of large deals and the large deal pipeline for the last three quarters and the coming quarters as well.

And then I was curious, I don’t think you guys mentioned in your prepared remarks anything about the GCP relationship. I know it's probably still early but is there any updates on the progress of that?

I talked briefly about that in my call script as well. Making good progress I think you know we are talking -- engaged with Google on the locations, like where do Nutanix's products go and you’ve identified a couple of regions, both here in the U.S. and outside the U.S. as well to make Nutanix's as a service where customers can rent as well as own us. So sometime in the middle of next year you will actually see a big update around Xi, which is a cloud service, and it's not completely dependent on Google, but that’s a big part of our overall pushes to go together as partners?

Your next question comes from the line of Andrew Nowinski from Piper Jaffray. Your line is open.

In the transition to your software model, are you assuming that most customers can do the integration work themselves between hardware and software? Or you're going to become more reliant on channel partners like CW to do the integration work for you?

It's like a pyramid, Andrew, if you think about the top of the pyramid, will be driven by global SIs, and especially as we’ve sold the software, some of which could actually go direct as well. So we’d expect the channel and the SI to come back and help utilize that, deploy them on servers on commodity servers, specific servers. In the middle of the pyramid, we expect more of the resellers to do that. We made it extremely simple to actually go and deploy Nutanix's, that’s one of the biggest values of being an appliance company, the routes because it really understood the value of the hardware, software boundary itself. So we've made a lot of those deployments one click. And the base of the pyramid could still be going through as NX. And as Dustin mentioned, it could be an NX that’s basically going through [avidity] model where we just take the order, but then the software comes to us and the hardware goes to the hardware vendor.

And I just want to say one more thing about customer success that may be just seeded a team around customer success where our technology relationship managers, we call them TRMs, who will be very active at the top of the pyramid with our largest customers and we expect to get professional services, our own professional services, as well as the EPS of our resellers and SI partners themselves for the middle of the pyramid.

And then I just have a follow up. You had a fairly big jump in percentage of notes sold with AHB this quarter, up to 28%. Are you seeing customers just getting more comfortable at the acropolis, or have there been changes on the competitive front that are prompting more customers to look at new options, such as AHB?

Yes, just on that metric there. We did continuously break, as you can see from the investor presentation there. The only thing we did make a little tweak there as you can see in that chart there is that we've now, I think, more appropriately shown this just as Annex nodes and not including the OEM business in there as you might expect. It’s heavily tilted away from AHB. So that tweaked a little bit but not substantially. And I think one of the correlations is with respect to our partnership with Citrix the VDI business went up a little this quarter, and we’ve been doing some really good with Citrix using the AHB hypervisor, and the Citrix workload.

Yes, and if we had used the exact same metric last quarter, I think it would have gone from 24 to 25; so not a substantial change there, but up no matter what.

Your next question comes from the line of Aaron Rakers from Wells Fargo. Your line is open.

Thanks for taking the questions, as well congratulations. Just looking at your slide deck and looking at slide number seven, and I can appreciate the fact that you're looking at the mix of business based on billings. But simple math, I guess, looking at an 80% plus gross margin on your software support revenue, would leave us to think about progression of gross margin into at least the 70, if not mid 70% range. So I guess the first question is, is that how we should be thinking about the overall progression of the gross margin? And then the follow up on that, I think last quarter you talked about adding $10 million of OpEx per quarter it looks like your guidance is a little bit less than that. So I'm curious of how we should think about the OpEx trajectory through the course of this year relative to your prior commentary?

On the first one and I actually gave you the metric because I wanted you guys to get this correct. You can do your own assumptions there. We gave you a couple data point, two thirds elimination by the end of the year, at the end of Q4 and then for every $5 million to $6 million that you’re going to take out of your models of hardware pass through hardware revenue. Gross margins should go up 80 to 100 basis points. So it's a pretty simple way for you to go get to that endpoint, and it's from your models obviously. But you should be able to easily do that from that perspective. On the expenses, yes, I mean we came in a little under hiring’ it wasn't intentional; we didn’t try to drive it down. We’ve still got, obviously, a lot of priorities and things like that. So we will continue to -- you’ll see expenses, so I don't think we’ll continue to be massively under. There is lot of things going on, lot of hiring and things like that.

Actually, as we focused on the under covered global accounts and the under covered enterprise accounts, because we’ve done one phase of segmentation but now we need to go back and figure out if we need to re-segment it in the coming quarters as well.

And then a quick follow up, if you could, I would be interested in comment -- your comments on the IBM relationship. And I’ll just leave the floor.

Yes. So we did GAR product couple of months ago with IBM, and you have some really good momentum on the Linux applications. You have some proof of concepts going on in very large customers, both in the U.S. and Canada and beyond as well. And we are working on the AIX product, which is one of the biggest product coverages that IBM has. And virtualizing that itself would grow the time on this whole relationship so I expect to see some news in the coming quarter or two; the product is off to a good start with the proof of concepts going on right now.

Your next question comes from the line of Jason Ader from William Blair. Your line is open.

I have a question on the -- let me see those slides -- it's number seven. You assume support and other margin of 55% for future periods. And when I look at the model, looks like the support gross margins at quite a bit higher than that. So wondering what is happening with 55%?

This includes support, it includes the small piece of professional services that we have and then some residual other COGS that we have on a quarterly basis, so nothing massively trending there. It's just all-in residual of what would be remaining there. And again, professional services is included in that support piece.

So that doesn’t include the residual pass through hardware, that's still…

Correct…

So right now, your support gross margin is in low 60s.

Yes, it covered 60 to 62 or something like that. There is some other COGS that we capture in that total, but it really is truly residuals left there. There was just some other stuff that gets bundled into there.

So today that’s in the product side…

Yes, you can argue either way. But it's residual we’ll have to go some place.

And then Dheeraj, I see the guidance if you conclude the capacity pass through of all revenues, it's very strong. So I'm assuming that with the strong federal performance, is it fair to say that you had some good backlog on the enterprise side and the commercial side?

Yes, I'll let Duston answer this one.

Yes. The backlog didn’t really surprised us for our Q1 from that perspective, so it bounces up and down and we've maintained a reasonably healthy backlog over last several quarters. So, we’ll see how it progresses here with the Q2 and obviously we have the end of the calendar year. So we will see how things play out with those efforts.

And then last one quick one from me is on the billings differential from revenue. Is that just because you had a very strong billings quarter a year-ago? How should we think about the differential going forward between billings growth and revenue growth?

Yes, I don’t think you’ll see that much difference going forward. We, about a year-ago or so, we had a little tweak to support pricing and how the mix to bill and revenue tweaked a little bit there. But I think you're seeing some residual of that, but I wouldn’t expect that you’ll see that level of delta going forward on a year-over-year basis.

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

Just first wanted to see if we could clarify the federal -- you highlighted it was strong this quarter. If we could just get some quantification around contribution, percent of revenue from federal and where it is typically and how much of this is seasonal?

So we expected federal to be reasonably healthy, and it was pretty good. If you look at our federal business, in total on average, it averages 10% to 12% of bookings or so. And then Q1, it pops up. So we had pretty good pop up in Q1, it wasn’t quite exactly to the same percentage as last year. But the team did a great job. We had lots of large deals, as Dhiraj mentioned there; so, little bit better but not massively better.

Great and then -- go ahead.

As you can see that, obviously, the CR the continued resolution for most of the year, a lot of that budget will flush to -- at the end of their fiscal, which was September?

And I wanted to see -- you gave us, I think a number of helpful insights in terms of the software pivot of how it affects our modeling and how the analyst might. Look at the financial metrics. But I guess what I'm a little bit hazy on is your customer experience, how your customers will view Nutanix's, how they are going to interact with you? I think my worry is, are they becoming more at arms length in terms of their interaction with Nutanix's. Could you help us get a better understanding of really the interaction level and how that either does or does not change? Thank you.

It's a great question, and we think about it all the time, simply because we are paranoid about customer experience, by the way. So the first step, as Duston mentioned, is about having the same -- cash experience where they can order NX appliances and it will get split in the channel of avidity to Nutanix's and SuperMicro. So we hope to continue to keep that experience. Even if we end up selling more software than hardware as we’ll do overtime, but then the customers can come back and fulfill the hardware by going through a very similar sales process. Even today, we have more than 30% of our nodes are actually OEM nodes and we have tested, been tested in customer service, customer support and we've kept our OEM partners honest as well. So we’ve actually gone through building that muscle memory of customer support at a non-tribule number of nodes that don’t belong to an X nodes.

And I think it's really important also to really understand that absolutely zero change from what the customer sees. So that process from a customer is left and packed and exactly the same as it has been in the past.

And that being said, and obviously we want folks to buy our software and run it on like I mentioned some of our customers run into an OCP like servers; in fact, others run it on Cisco. Cisco was pretty good quarter for us. This quarter substantially jumped from last quarter. HP is also going down pretty robust path. So we have really done a good job of building the right tools all the way from installed tools, we call it foundation, we have Sizer, which is capacity planning tool. We have x-ray, which is our POC automation tools, which does a lot of the testing of the hardware upfront. We are in the process of actually pushing out our certification tool to all the partners, so that they can actually go and certified this industry in itself. So a ton of automation that we’ve actually done to make sure that the transition from hardware to software is without a lot of these negligent things that one could end up doing, and suffer with experience and not these experience but product reliability and integrity of data and things like that.

Your next question comes from the line of Mark Mercy from JP Morgan. Your line is open.

This is [indiscernible] sitting in for Mark. Great quarter, seems like a lot of moving pieces. So as you -- one question was the sales motion, and how it changes. So as you move to a software centric company, and it seems there will be a lot of changes, I don’t know if that’s changing the organization structure but definitely comp will change for the sales guys. How does the sales motion where sales guys change? Is there a learning curve to selling software versus selling the appliance, et cetera? And how confident are you that you will be able -- that we will not see a period of automation to address back to bookings in the next 12 months.

One thing that we’ve learned in the last couple of years is the segment, segment, segment, our world and our live. So if you look at the pyramid, the middle of the pyramid, which is the mid market and the base of the pyramid, which is come business, which we didn’t see much of a difference. We have been selling OEM nodes with our software for the last couple of years. Our sellers have done a pretty good job of really managing -- relatively conflicted relationships in a way that hasn’t hurt our relationship with the customer, including both sales in terms of professionals services and customer support itself. The top of the pyramid is where we expect -- especially our global account managers, who have been used selling software in their past lives as well to go and do ELAs and it could be very large ELAs that basically help re-platform our customer’s overall infrastructure. So I think we’re going to look at into that segmented way and I think that’s the way to actually mitigate any risks along the way. But definitely it’s a cultural shift to think about how do you decouple the budget between the software budget and hardware budget. And many of our folks have actually been thinking on these lines for a while, because it's hard just the fact that we flip to switch overnight. We’re talking about this for almost a year now as we’re reporting our software to Cisco, are reporting our software to HP and IBM and reported our software to white boxes like OCP like servers and so on. So we’ve done a fairly thorough job in the last 18 to 24 months, which is exactly what I told in that script that this is not something that happened overnight.

The other question was, Duston, about on the software centric disclosure. I think you mentioned 800 million of software and support, if you adds on rate of the pass-through in the last 12 months. What portion of that is recurring today? And how do you think that recurring portion looks maybe 12 months from now?

Yes, that’s something again -- as far as how that changes and the recurring piece of that that we need to give some more thoughts of and I think maybe at the beginning of year, we’ll give some more thought there. We've obviously got big piece of the support part of the transactions that are obviously all recurring in 95% renewal plus rate there. And we continue to get more and more of the product portfolio set-up that way to [reoccur] but, yes, we’ll give some insights out of it…

The good thing is also that our software addition STARTER, PRO and ULTIMATE, they are all term licenses actually. And so most customers look at one-year, three-year terms and they buy it with the support lifetime itself.

Your next question comes from the line of Alex Kurtz from KeyBanc Capital Markets. Your line is open.

Dheeraj at the beginning of the call, you talked about a hyperscale customer win or running on OCP, I don’t know if that was new or not, but maybe you could refresh us on selling your software, maybe on to the top four hyperscalers but maybe 5 through 20, if there has been a development in the pipeline with that customers base?

Yes, I think one of the things we’ll do Alex in the coming couple of quarters, start talking about SaaS customers. We’ve done some good things with those folks in the past with a great vertical part. But the most exciting thing there is more than the 15 to 20 is to take our software and put it in the bare metal of the service in the top four themselves, and they’re all willing to open up, including the announcement that Amazon made about three to four days ago about bare metal as a service, that opens up some really good doors for us to go and use them as a platform where we make our software even more invisible than actually shipping systems to their on-prem environment. So look out for some more SaaS based insights in the coming quarters.

And just a follow-up with the moves to software. Have you seen any customers in the top 25 or maybe within the top global 2000 where they have approach to you about just purchasing the software directly from you and then just kind of going on their own as far as burning it on to the hardware?

Yes. We talked about a couple of these ELAs in the last quarter. In fact, one of the ELAs is very giant retail chain, it's a global 1000 company that has taken our software, an ELA version of it and is running it on both Dell and HP servers actually. So a lot of what we did in terms of getting that support from HP was because the customer wanted it. So we've done some other ELAs with global 1000 customers in a very similar fashion.

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

So firstly, I was wondering, what was your average billing per customer in the quarter how has that trended. It also looks like the number of new customers that came into your installed base was lower than the past few quarters, so maybe you could comment on that as well. Thank you.

We've never really given a number on the average, if that was the question, average deal size or customer size there. It's just too many segments there. You got the OEM piece, which is obviously lower, you have Global 2000, that’s higher, you've got all this other stuff there. So we really haven't we haven't commented on, but I think you can take away that with the big deals that has a tendency to migrate up, the deep we get in the global 2000, obviously, that deal size ends up taking care of itself. But even on ours, the product is built for repurchase also. So it's a little deceiving there as you don’t have to buy these massive amounts of upfront purchases and that’s not how the products designed obviously. So you always have a bunch of continuing repeat purchasing there. On the customer account, I wouldn’t look too much into that. Q1 is always little softer from a customer perspective, but we added a decent amount of customers they are and Q2 will pop up naturally, which it usually does quite a bit from the Q1 level.

And as a follow up, I appreciate the clarity you guys given on the transition here. But maybe you could talk a little bit about what have you already done in the U.S.? What sales groups are you focused on, is it by vertical that have now been moved to passing through the hardware, or it's just that you’ve opened up across the U.S. right now and it's just taking time to show up on your P&L? And then how do you expect to incrementally launch that with your sales teams in the international markets? I appreciate any clarity there.

Again, it's fairly transparent for most things there. And again, it's not -- it has nothing really to do with verticals or customers or whatever, it’s a generic process that we can start executing and eliminating the path through hardware on our books there. So there is no limitations if you will from that perspective. And then international is just another process there. We just haven't focused on it yet, but it’s a similar process. It's a little bit more dispersed so you lose a little of the concentration so maybe take a little longer to do some things there, but it's very similar process that the folks are working on now.

And in terms of any segmentation to roll this out slowly and gradually, I think we just picked up some large deals and built some muscle memory and they’re just going down that path of deeper down the pyramid.

And then with SuperMicro, is there anything that they would be doing differently than they are right now with the appliances in the new model?

Just through the invoice, that’s all.

Our last question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.

Dhiraj, does deemphasizing the hardware increase your chances of new partnerships or even the chance that partners like Dow will increase their commitment to selling your solutions versus their own and then I have a follow up.

I think, definitely it reduces friction in the sales motion, both for our sellers and the OEM sellers themselves. That being said, we also expect fully that the market we will make its decision and whether they want to get end-to-end support from us or whether they are comfortable actually going through to op-support. So I think we have to hassle to prove that either our OEM partners are very good at support, even at scale or customers who just pick us over going through to op support it-self. But absolutely, we expect the friction to go down. We don’t expect any algorithms that people have to apply to take it through this route to market versus that route to market, because there’ll be normalized currency for how sales people will make quota.

And then at the user conference in June, I think, you talked about Xi launching early 2018 today you talked about middle of the year. Is that just a function of early release versus GA, or is the timing different? And then maybe you can comment on when you think the memory market loosens, how that’s been a factor on the gross margins. Thank you.

I think one of the things, Katy, that we talked about in our overall engineering culture is how this release that we’re actually doing in 5.5 took us a little bit longer to come out with, in terms of general availability. And that pushes a few of the things out as well. So there is, I would say, three months worth of victim in Xi, because we have to keep the lights on with on-prem customers as well. And we do expect to actually change the way we do engineering. In these two pizza teams, like really thinking about cloud engineering, what does it mean to have a platoon of developers who are independently releasing code and becoming a company that’s more DevOps like, so that’s the transition that the company is going through to actually improve our overall fidelity of releases as well.

And Duston, do you have any comments on your thoughts around the memory market?

Yes. As we’ve said, it's gotten obviously better. I don’t think there’s any insights right now to seeing it actually going the other way as far as pricing goes. It's gotten to a manageable level that we’ve been doing a good job managing around it, and doing a fine job with margins. And we expect it to be a little bit better this quarter and then we’ll see from there.

Thank you, ladies and gentlemen, for joining today's conference call. This concludes today's conference call. You may now disconnect.