Ladies and gentlemen, thank you for standing by, and welcome to Nutanix Q2 fiscal 2020 Earnings Conference Call. There'll be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tania Chin, Vice President of Investor Relations And Corporate Communications. Please go ahead, madam.
Thank you. Good afternoon and welcome to today's conference call to discuss the results of our second quarter of fiscal 2020. 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 Dirich Pandey, Nutanix's CEO and Dustin Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for second quarter of fiscal 2020.
If you'd like to read the release, please visit the Press Releases section of the Nutanix website. During today's call, management will make forward looking statements, including statements regarding our business plans and financial targets in future periods. The timing and These forward looking statements involve 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. For a detailed description of these factors, please refer to our SEC filings including our quarterly report on Form Ten Q as well as our earnings press release. These forward looking statements apply as of today, and we undertake no obligation to update these statements after this call.
As a result you should not rely on them as representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today's call are expressed on a non GAAP basis, and have been adjusted to exclude certain charges. We have provided to the extent available reconciliations to these non GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release. Turning to our upcoming conferences, Nutanix Management will be at the Morgan Stanley TMT Conference on March 2nd, and the KeyBank Emerging Technology Summit on March 3rd. Both conferences are in San Francisco.
We hope to see many of you there. Lastly, we'll be hosting our Investor Day 2020 in New York City on Thursday, March 26th. The event will be webcast on our Investor Relations website. Institutional investors and sell side analysts interested in attending in person should contact IR at investor day at nutanix.com for registration information. And with that, I'll turn it over to Dheeraj.
Thanks, Tania. Q2 was another strong quarter and I'm pleased to see continued execution from across our organization. Our TCV billings came in on the high end of guidance range and our TCV revenue, gross margin and EPS all exceeded our guidance despite a softer U. S. Federal business.
Further, our deferred revenues surpassed $1,000,000,000 for the first time this quarter, growing 35% year over year. Business is robust and our transition is well ahead of our internal plans, but we are also in an environment that is murky due to the impact of the coronavirus dealing with the unknown for the first time in the company's decade long history. Hence, we are cautious about our second half guidance, which Dustin will delve into soon. Since we began our transition to a subscription business model in Q1 of FY19, we have regularly highlighted the areas of a business that are evolving along the way. After another strong quarter of progress, I would like to emphasize a few areas of the business that stood out in the quarter First was a faster than expected transformation to subscription.
2nd, our growing number of large deals in the continued adoption of new product and solutions beyond our core 3rd, the momentum we are seeing in our commercial business and finally, our promising partnership with HPE which continues to bring us new A key driver of our improved sales execution over the past year has been the strong leadership of Chris Caddares in the Americas and EMEA in the years before that. Chris joined us as an EMEA sales leader more than 3 years ago. Right around when we went public, we were a tiny company back then, almost 1 third the revenue, 1 fourth, the number of customers, an appliance business model and a single product in our portfolio. We've come a long way since then. The sales force in this time has endured a dramatic transition in the business model, learned to sell software, and really strive to master the portfolio selling approach that most companies could only dream of.
Chris has also in the last 2 years, both in EMEA and in Americas. If you recall, we set out to segment our business almost 3 years ago as the muscle to go beyond 1,000,000,000 of annual sales required large customers, a profound customer success culture, and a strong portfolio of products that are secure and reliable. Large customers do not buy point products. They buy a platform an operating system that can be used for multiple use cases. I'm happy to report that our large enterprise business has flourished in the last 18 months ever since we started down the path of the subscription transition.
We now have 18 customers that lifetime spend greater than $20,000,000, up from 12 a year ago, their aggregate lifetime spend is almost $600,000,000, up 56% year over year. The largest three cohorts of lifetime spend $10,000,000 to $15,000,000 $20,000,000 $20,000,000 plus have now collectively grown more than 60% year over year. Both in number of total accounts and in aggregate dollars spent. There are 60 customers that fall into those cohorts and those 60 customers now account for more than $1,000,000,000 of lifetime spend with us. We now have 220 accounts have each spent more than 4,000,000 lifetime spend accounting for more than $2,000,000,000 lifetime.
And this cohort has grown nearly 50% year over year. Subscription compression notwithstanding. And finally, the cohort of $1,000,000 plus customers has grown in lifetime spend by more than 40% year over year subscription compression notwithstanding. Specifically in Q2, we closed 52 deals worth over $1,000,000 in the quarter, including 11 deals worth over $3,000,000, which includes 3 deals over $5,000,000. The 11 of these customers also spend at least $1,000,000 with us last quarter and more than half substantially increased their note count with us during the quarter.
Notably, TCV bookings our top 10 customers in Q2 increased approximately 30% from the previous quarter. We now have 1060 customers with at least $1,000,000 in lifetime spend, up 36% year over year. We have 880 of the global 2000 net customers, including 3 of the Forbes Global 5, 8 of the Forbes Global 10 and 70 of the Forbes Global 100. All in all, we've done a pretty good job of selling and competing in the large account segment profoundly disrupting the hardware and perpetual software incumbents. This is why I'm so happy to announce the thoughtful architect of this enduring transition Chris Caderis is now going to be a global leader of the company as the Executive Vice President of Worldwide Sales.
He's equally passionate about the commercial mid market has been busy working on the other end of the go to market barbell U. S. Commercial more on this later. Speaking of our ongoing subscription transition, which Chris is also a big champion of, we outperformed our own internal plans seeing our percentage of billings attributed to subscription increased to 79%, up from 73% in Q1. That well surpassed the guidance of 75% by Q4 of FY 2020 we laid out earlier this year.
Our large deals and our existing large customers are moving to subscription at a rapid pace. Case in point is the largest lifetime customer was spent $78,000,000 lifetime with us. This full stack customer sparked the idea of building our own hypervisor AHV with us more than 6 years ago. They spent more than $5,000,000 this quarter to convert some of their renewals to subscription. Similarly, a large Fortune 500 insurance company that is an existing customer purchased an additional $1,500,000 worth of our software subscription, bringing their lifetime purchase to more than 6,000,000.
Disrepeat purchase is due in part to Nutanix delivering on its commitment to mission critical availability and disaster recovery SLAs. The simplicity of our solution is the reason why government agencies are such large repeat customers of Nutanix as they're constantly challenged on talent and skillsets. These agencies are now embracing subscription without friction. One such example is our existing customer, an agency in EMEA that supports asylum seekers, which spent $1,500,000 this quarter, bringing their lifetime spent more than $4,000,000. New customers are also looking at subscription terms by default.
Case in Point, a large multinational banking firm, a top 10 global 2000 company, did a subscription deal that was worth $1,000,000 this quarter as a first time customer. Our biggest deal of the quarter exemplifies our partnerships subscription model and new products all together in the same opportunity. This repeat Fortune 10 company invested more than $17,000,000 in subscription licenses this quarter continue modernizing their IT infrastructure. This valued customer, which now has nearly $58,000,000 of lifetime bookings with us just in the last 18 months, we view us as a critical partner in their journey to hybrid cloud, which requires secure, reliable and easy to manage cloud services. The purchase also included Nutanix files, our software defined scale out filer, and Xyee frame our desktop as a service offering.
Speaking of portfolio selling, we saw continued momentum in the adoption of new products in the quarter. 31% of deals on a rolling 4 quarter basis included at least one product outside of the company's core HCI offering, up from 21% in Q2 of last In addition, TCV billings from new products reached a record high in the quarter, growing 99% year over year. We believe one of the reasons for the increased attach rate of new products to our core software is an increased focus on packaged solutions. Solutions to us is about offering our customers a choice between good, better and best and more often than not speaking their language, which many a time is Vertical specific For example, in an end user computing solution, we now offer our customers a progressively tiered experience, modernizing away from 3 tier hardware, to selling 1 click filers and data protection, to selling 1 click disaster recovery, to selling data and network security. With this approach, we're working the whole body of IT transformation with 2 simple yet to profound themes, simplicity and reliability.
Keith in point in how our simple and reliable message is resonating is a net new Fortune 50 telecom customer, which spent more than $3,000,000 with us all A. H. V. And files to modernize their call center infrastructure. A similar customer win that highlights attraction for solution selling was with a financial services provider in EMEA.
This subscribed to more than $3,000,000 of our Xi Leap cloud services this quarter for the end user computing and disaster recovery needs. This solution based workload driven approach also drove traction with an existing customer in leading bank in Mexico, who spent more than $1,500,000 in subscription licenses. The purchase of product for operations management, multi cloud orchestration, and multi cloud cost covenants but a large part of the purchase decision was to use Nutanix era to offer true databases of service experience for the internal cloud. Era was also a big reason why we won a large $1,500,000 with the government ministry in Saudi where Oracle database is extremely popular and private cloud is in high demand. In a world that is rethinking globalization and doubling down on data sovereignty, private clouds and customers' premises are becoming a pervasive discussion.
An example of that in the deal in Europe were $1,000,000 with one of the busiest airports in the world, who selected us to be the standard for their private cloud as they transition from legacy hardware and perpetual license software to a true webscale software defined infrastructure driven by subscription licensing. Our multi cloud control plans for automation, security compliance and cost covenants com and Beam respectively were instrumental in our sales campaign here. Our automation and multi cloud orchestration product, Calm is all about DevOps. We're going deeper into DevOps with application lifecycle management, containers, databases and object storage and existing global 2000 in the aerospace and defense industry brought their lifetime spend with Nutanix to more than $2,500,000 by purchasing Nutanix says new products support the organization's DevOps. They're big uses of Calm and also Flow for consumer grade networking and security.
Flow and subscription licensing were also the two big reasons why we did a large $2,000,000 deal with a mission critical communications customer in EMEA. Not only did they select our core HCI software and native hypervisor AHV, they selected a number of our new products, including Flow, as the simplicity of micro segmentation was key to their cybersecurity modernization. Security has become a core value proposition for our overall portfolio, both on prem and off prem, as the 0 Trust cybersecurity culture becomes pervasive in the enterprise. 0 Trust is a security concept centered on paranoia. A belief that organization should not automatically trust anything outside or inside its parameters and that machines and applications are already compromised.
Recently hired a Chief Product Security Officer in Duqari for the vast experience in cyber security from his past life. Hindu is bringing in encrypt everything, micro segment everything and audit and analyze everything. In an integrated approach to our 0 trust security posture. Our DNA simplicity and reliability is now key to making security invisible just like Apple did with its devices. On top of our software, customers are not just running Splunk security and virtual firewalls, but also building fraud detection applications as was illustrated by more than a $5,000,000 deal with a large credit card financial services firm this quarter.
This Fortune 500 company has nearly $13,000,000 of lifetime TCV spend with us and values are ease of use simple upgrade process and most importantly, platform security, which was core to their decision making. On the subject of innovation in reliable and secure products, we continue to make steady progress across our multi cloud, multi product portfolio. In Q2, we made our hyperconverged backup product Nutanix Mine with Veeam and Haiku generally available. This integrated data protection solution combines the power of leading backup software offerings with all the benefits of our platform, including FCI for compute and block storage, files and objects for deep storage. Back up and Splunk are killer use cases for our semi and unstructured data offerings, files and objects.
Our optics products has come out resoundingly well in its first full quarter since general availability. In a deal worth nearly $1,000,000, a managed service provider in the U. S. Chose our full stack to create their own cloud offering backup and archival services that provide a simple consumption model for devops, disaster recovery and analytics workloads. Nutanix objects was a critical factor in their decision to go all in with us and replace multiple competitors.
We also launched Carbon 2.0 Carbon with a K, which dramatically simplifies the configuration, deployment and lifecycle management of Kubernetes containers clusters. Carbon brings the simplicity of containers in the public cloud to a multi cloud environment built on top of our core HCI, it delivers a full cloud native environment in all computing locations public, private, or edge. Response from customers, including a major U. S. Airline and a leading consumer packaged goods company has been very positive.
Carbon has enabled them to fast track their production Kubernetes deployments and has enabled the public cloud like user experience. Beyond the DevOps ecosystem, during the quarter, we also announced that our software is optimized around an epics operational database the most prevalent database system for healthcare companies in the U. S. We're going deep in the Epic Healthcare EMR community at a time when Epic is very carefully choosing its cloud partners. On partnerships, while we've done a good job with Dell, Lenovo, Fujitsu and others, our synergies with HPE are looking strong in our 1st full quarter of joint selling.
ENDRA Chief Commercial Officer, Tarkan Manay's leadership both party that bringing deals and customers to each other to learn co selling and co marketing. As an example, in a win worth more than $4,000,000, a global 2000 healthcare company, which has a lifetime spend of $14,000,000 took advantage of our subscription licensing to run our cloud services on HPE servers. This is one of the 3 deals greater than $3,000,000 in the pharmaceutical industry, a vertical that is increasingly turned into Nutanix to build secure private clouds In financial services, we took a similar approach with HPE at 1 of the big 4 accounting firms in a deal worth a $1,000,000 in an account that has spent almost 12,000,000 with us lifetime on the strength of our core software and our multi cloud automation offering. And we also saw another $4,000,000 of subscription deal this quarter with HPE at a Fortune 100 Financial Services customer that has spent more than 23,000,000 dollars lifetime with us. Similar to Q1, well over half of the HP customer, the new logos to Nutanix, customers clearly see the value of working with 2 world class technology partners.
And together, we are winning competitive deals. Nearly 1 quarter of our new customers in the commercial segment purchased Nutanix software and HPE servers. As we mentioned before, the other end of the barbell I. E. The commercial mid market is extremely important for a company that has done so well in large enterprises and aspires to go to its 3rd 1,000,000,000 in annual subscription sales.
We saw a solid quarter in terms of new customers what we could do better. Our approximately 9 20 new customers raises our total customer count to 15,880. I'm happy to report that our focus in the commercial segment has produced positive returns on our investment. The hard work we've done to ramp partners is paying off We saw a strong uptick in partner initiated deals in this segment. Our commercial business focus is also leading to more predictable revenue streams than complement a larger chunkier enterprise deals.
Mid market accounts can be very large as well, especially in U. S. Commercial and both Chris and our U. S. Commercial leader, John, know this well.
A leading provider of business, legal, tax and digital brand services to companies around the globe, that has spent more than $30,000,000 with us over the course of our relationship, converted some of their renewals to subscription in a deal worth an incremental $3,000,000 this They're using our multi cloud orchestration services, Calm, our database as a service offering error, and our Kubernetes platform, Carbon. The commercial segment is proving to be fertile ground for a new product adoption, particularly, and files. One of the reasons why partnerships such as HPE and Citrix are flourishing is because we've built a reliable platform that has an extremely good repeat business profile. A large multinational pharmaceutical company, an existing customer of ours, spent $3,500,000 with us this quarter bringing their lifetime spend to $10,000,000. We've become a strategic partner to them as our platform runs most of their primary applications that help them discover, develop and launch breakthrough medicines.
Reliability for our products is also the reason why another of a large existing customers a Fortune 500 healthcare company, which has spent nearly $35,000,000 with us lifetime, bought $4,000,000 worth of additional software to build their dispersed private cloud across more than 100 hospitals. Exact same story with a large electric utility company in the U. S. Which doubled down with our software with a $3,000,000 deal this quarter to bring their lifetime spend to $14,000,000. They're using Nutanix to build applications and services to help their customers reduce power consumption.
Reliability of webscale applications and commodity service is the reason why We had yet another of our large fintech customers in the U. S. Spent $2,500,000 this quarter, bringing their overall spend to $16,000,000 lifetime. Reliability of customer service, as reflected in the average Net Promoter Score or NPS of 90, was a big reason for one of our other large existing 4 fibrin customers, a large professional services firm dealing with risk and strategy, spent an additional 1,500,000 in our software for the end user computing needs, bringing their lifetime spend to $15,000,000. Reliability and simplicity of our disaster recovery and business continuity solutions with the primary reason why we won another $2,000,000 deal at a large EMEA government agency dealing with public pensions, bringing their lifetime spend to $11,000,000.
Me as a leader for the 3rd year in a row in the Gartner Magic Quadrant for hyperconverged infrastructure, scoring the highest of all evaluator and the ability to execute access. Our obsession with simplicity, design and customer delight is what sets us apart. This is also why we were awarded champion status in the 2019 Canalis EMEA channel leadership matrix. This honor was the result of partners who ranked Nutanix the highest amongst all hyperconverged infrastructure companies in channel management through EMEA based on our continued investments in channel incentives, enablement resources and customer support. Our cultural principles have been our internal compass to help us through the highs and lows of company building and have helped us navigate the complexities of growth and global presence.
Despite 2019 being the toughest year in our 10 year history and business model transitions in public markets do make you tough, We were thrilled to be on the Fortune 100 Best Companies to Work For List. Nutanix was one of only 8 new companies to be added to the list. In 2020 and 1 of only 2 information technology companies. The best part about achieving this certification is that it's predominantly driven by employee feedback and our employees resoundingly voted that they cared for the mission. Speaking of the mission, the cloud is a new server for us.
As we evolve from making on prem infrastructure visible to making cloud locations invisible, our true malls remain steadfast, deliver simplicity, choice and delight to our customers. With that, I'll turn it over to Duston. Duston?
Thank you, Deric. In Q2, we made outstanding progress for 79% of total billings, up from 73% in Q1 and subscription revenue now accounts for 77% of total revenue, and that's up from 69% in Q1. We repeatedly stated that it's our desire to move forward through the subscription transition as fast as possible and we made great progress on this goal in the quarter. Our execution in this area far exceeded our expectations in Q2, significantly surpassing our FY 2020 Q4 goal of 75% and almost equaling our stated CY 21 goal of 80% mentioned at last year's investor day. It should come as no surprise that the short term downside to this faster than expected push to subscription is the impact to the top line.
Based both on term compression when compared to life of device deals and some pricing differential between our life of device licenses, in our term based offerings. We expect to recover this top line impact as renewals come in over time. This impact of the faster than expected push to subscription is reflected in our Q3 and fiscal year 2020 top line guidance. Exclusive of professional services billings, our goal is to ultimately drive our subscription billings to 100% of total billings. The average dollar weighted term length in Q220 including renewals was 3.9 years flat with the 3.9 years we reported in Q1 twenty twenty.
As with last quarter, this calculation assumes life of device licenses or 5 year terms. Some specific Q2 financial highlights, TCV revenue or software and support revenue for the second quarter exceeded our guidance range. Of $330,000,000 to $335,000,000 coming in at $338,000,000, up from 14% a year ago and up 11% from the previous quarter. TCV billings or software and support billings were $420,000,000 versus our guidance of 410 $420,000,000, up 12% from the year ago quarter and up 13% from the prior quarter. The TCV billings were negatively impacted by approximately $5,000,000 due to the faster than expected shift to subscription.
ACV booked in the quarter in Q1, we define ACV as the annual contract value of new business plus the annual contract value of renewals and we calculate ACV by taking the value of each transaction booked in the quarter including renewals, but excluding professional services, divided by its term length and then summing the total of those values. While we saw a number of positives to our expectations, our federal business underperformed our expectations in the quarter. This business has always been somewhat lumpy in terms of timing and a significant portion of the federal miss was related to large deals that we believe were not lost, but rather pushed out to future quarters. Whoever the time to close these deals is uncertain. New customer bookings represented 24 percent of total bookings in the quarter versus 23 26% in Q2 2019, and up from 23% in Q120.
Our HPE DX related business continued its strong performance and accounted for 117 new customers. For the 2nd quarter in a row, the Americas was our best performing region in Q2. TCV bookings or software and support bookings from our international regions represent 49% of total bookings versus the same 49% in Q2 twenty nineteen. Our non GAAP gross margin in Q2 was 81.4%, exceeding our guidance of 80%. We expect gross margins to hover in the 80% range plus or minus a little bit over the next several quarters.
Operating expenses were $396,000,000 below our guidance range of $400,000,000 to $410,000,000 and our non GAAP net loss was $116,000,000 for the quarter or a loss of $0.60 per share. I'm looking at a few quick things on the balance sheet. We closed the quarter with cash and short term investments of 819,000,000 We used $52,000,000 of free cash flow from operations in Q2, which was positively impacted by $19,000,000 of ESPP inflow, And free cash flow during the quarter was negative $74,000,000 and this performance was also positively impacted by the $19,000,000 of ESPP inflow. Now turning to the details of our fiscal 2020 guidance. On a non GAAP basis for fiscal 2020, TCV, we expect TCV billings to be between 1.61.67 $1,000,000,000 versus our previous guidance of between $1,650,000,000 TCV revenue to be between $1,290,000,000 $1,360,000,000 versus our previous guidance of $1,300,000,000 to $1,400,000,000 Gross margin of approximately 80.5 percent, operating expenses between $1,630,000,000 $1,650,000,000 versus previous guidance of $1,650,000,000 to 1.7000000000 This guidance is impacted by our much faster than expected transition to subscription in a more cautious view on our business activities in the Greater APJ region due to the anticipated impact of the Corona virus.
Further, this FY 2020 guidance yields an operating loss and free cash flow usage that is roughly in line with current consensus estimates of $550,000,000 $250,000,000 respectively. The implied ACV based on the FY20 guide is approximately 505,000,000 The guidance for FY 2020 assumes no change to the current dollar weighted average deal terms currently at 3.9 years. And our guidance also does not assume any meaningful disruption to the global server related supply chain linked to the temporary factory closers. In China. For additional clarity of the $50,000,000 to $80,000,000 decrease in TCV billings guidance range, Approximately $25,000,000 to $30,000,000 is related to the faster than expected transition to subscription, with the remaining amount attributed to the reduction in our APJ region sales plan.
Our APJ region is more dependent on new business in any given quarter And with the shutdown in China and the slowness and uncertainty being exhibited in other APJ countries, we believe it's prudent to take a cautious view of our APJ performance for the next few quarters. Our cautious APJ view also includes Japan, which generally operates under a March fiscal year end period. We have a few large deals pending in Japan in which we assume a reduced portion will close in Q3. Based on our current outlook, both the Americas and EMEA regions seem to be in a good position to deliver their expected results the second half of fiscal twenty twenty. This of course assumes that the business interruptions in the APJ region from the coronavirus does not spread to these regions too.
As our updated operating excluding sales teams and a few other select roles, we have recently taken a pause on a significant portion of our planned headcount in second half of our fiscal year contributing to $20,000,000 to $50,000,000 expense reduction from our previous guidance range. Regarding our hiring, we have slowed headcount for the following 2 reasons. First, we would like to have more clarity to see if there might be any further potential disruption related to the impact of And secondly, quite honestly, it puts us in a better position to more efficiently integrate the 1400 of SO employees we have added over the last year. Regardless of this headcount pause, we still plan to hire We view this selected headcount pause as simply the right thing to do and is in no way related to any change to our overall positive view of our business going forward. Now turning to our Q3 TCV billings to be between $365,000,000 $385,000,000, reflecting a year over year growth of 13% to 19%.
TCV revenue to be between $300,000,000 $320,000,000, reflecting year over year growth of 13% to 20% gross margin of approximately 80% operating expenses between $420,000,000 $430,000,000 and a per share loss of approximately $0.89 using weighted average shares outstanding of approximately 196,000,000. Subscription and a more cautious view on our business activities in the greater APJ region due to the coronavirus, consistent with my comments on our fiscal year twenty 20 guidance. Additionally, the sequential decline in our FY 2020 Q3 implied booking guidance which at the midpoint of the guide assumes a 7% sequential decline is actually better than what we experienced for our actual FY18 in FY 2019, Q2 to Q3 sequential historical bookings performance, which was approximately a 10% sequential decline. Furthermore, the sequential increase in our FY 2020 Q4 implied booking guidance which at the midpoint of the guide assumes a 25% sequential increase is also in line with our FY18 in our FY19 actual Q3 to Q4 sequential historical bookings performance, which was a sequential increase of 33% and 25% respectively. The current consensus numbers for TCV sequential growth from Q2 to Q3 and from Q3 to Q4 are quite misaligned to the historical averages.
Our Q3 guidance and the applied Q4 guidance brings these sequential growth rates back in line with historical averages. As you're aware, FY 2020 was our 1st year of providing annual guidance. With this approach, the yearly guidance gets updated each quarter and we also give quarterly guidance for as well as our guidance for which put the shaping and the sizing of these quarters in the hands of the analyst community. Start of any fiscal year, we will add some additional clarity on how we see the fiscal year shaping up, specifically around quarterly seasonality. If we had provided this insight at the beginning of the fiscal year, the sequential growth rate for the Q3 and Q4 top line consensus might have been more in clearly the company has been through a tough couple tough transitions over the last few years with significant top line impact related to the hardware elimination and the current subscription transition.
Although, when you cut through all the messiness and go back and focus on one simple metric, that being total revenue. It is nice to see like so many other companies that have been through subscription transitions. That finally the year over year growth rate has now started to reaccelerate once again. Our total revenue year over year growth rate appears to have bottomed out in Q3 and Q4 FY2019 growing at a negative 1%. That growth accelerated to 1% in Q1 FY20, three percent in Q2 FY20.
And based on the midpoint of the Q3 guidance, and implied Q4 guidance, we anticipate that the year over year growth rate will further accelerate. To approximately 10% With that operator, if you could now please open the call up for questions, that'd be great. Thank you.
Your first question comes from the line of Rod Hall from Goldman Sachs.
Thank you. This is RK on behalf of Rod. I wanted to ask about ACV. You reported 18% growth versus your guidance for 24%. Is the delta all driven by the federal business or are there any other factors to think about?
And could you give us more color there? And I have a follow-up.
Sure. So a vast majority was, was driven by the federal under performance in the quarter and also just the subscription impact. And we mentioned $5,000,000 of TCV. So there's some ACV in there. And if you look at this ACV metric, it is a real time metric of the business and we just decided to provide that last quarter because I thought it was important to, to give that kind of metric, that, you know, you can't hide from anything.
It is what it is. And I it's an important metric during a subscription transition that things are messy and you can't really get a good feel for the business going forward. But I think we'll continue that through this fiscal year and then probably end up transitioning to a more conventional ACV, which is more of a waterfall kind of 4 quarter waterfall type ACV metric that most companies show there. But yes, it was mostly clearly mostly federal a little bit of the subscription top line impact.
Thank you. And I wanted to take a step back and talk about your subscription transition. You had some problems with setting the pricing right and the sales motion and the discounting. So could you talk about where you are with each of these challenges and how do you see that going forward?
Sure. David, do you want to?
Yes, I mean, you know, both of us should probably chime in I think pricing was a big change, almost a year and a half ago, I would say, and we are mostly past it. Sales and customers have been surprisingly very, receptive. I think customers, we thought that the large customer probably not moved to subscription this quickly. But we've been pleasantly surprised at how much they've actually been forthcoming and willing to actually move from the old license model to the new license model. Even the channel for that matter, including the global system integrators have actually moved in that direction quite well.
I think we had a conservative view on when we'd get to 80%. That was in December, January of 2020, 2021. Is when we said we'll get to 80%. But one of the things we learned along the way that we have to plow through this as fast as possible and as we realized that the large customers are willing to take this, we went ahead and said, let's get to 80 80% even if it means it's a year and a half ahead of time actually. And on
the discounting that you asked about there, we continue focus that obviously a lot in the back office work there and change some processes and things. So that's ongoing. It will continue to be ongoing. I think we've made some pretty good progress there, but clearly we have some more progress to go. And then we've realigned some of the pricing, list pricing and things like that, but it takes a while for that to to flush through, but we continue to focus on both of those.
Your next question comes from the line of Aaron Rakers from Wells Fargo. Your line is open. Aaron, your line is open.
Hey guys, thanks for taking the question. I want to go back to the sales kind of motion. Can you talk a little bit about with your plans to kind of pause the spending or the investments in the sales organization? How we should think about the guidance relative to the productivity ramp you're seeing in some of the new sales hires? And I think if I calculate productivity, right, it looks like you're down 20% or 25% versus what you were call it a year ago on a billings basis.
Do you think that we can see productivity back at the levels that we've seen back a year plus ago? And I have a follow-up.
Let me start and dealers can chime in here. Well, two things. First of all, we mentioned that we're not pausing sales teams. So that's very important that that comes across clearly. We'll continue to hire sales teams because any downturn period.
The worst thing in my mind you can do is halt sales teams because so you have a little pause. In this case, it's completely out of our hands. I think we're being prudent But if you start pausing on sales teams and it takes you twice as long to get back to an accelerated growth because then you got to go higher folks and and ramp them and things like that. So we'll continue with the vast majority of our sales teams hiring there. Then the productivity you mentioned, I'm not sure how you're calculating that, but it's not close to what we've seen from a productivity degrogation.
It came down a little bit in 2019, came pretty close to what we expected here in Q2. And Q1 was up from Q4. So And ACV? Yes. And we really look at it on an ACV basis because it takes term change out of the equation and it puts it on a equal playing.
If anything, that has only stayed better.
Okay. Fair enough. And then as a quick follow-up, you talked again this quarter about the engagement with HPN price. I think it was 117 new customers. I think last quarter you did 25.
So as you kind of continue to deepen the engagement there, how are you seeing that relationship evolve? Is there more to potentially come or deepen with regard to the HP go to market? When might that happen if there is? Thank you.
It's an ongoing partnership discussion. Every quarter, we get into know more about, their aspirations as well. And obviously, primarily, they have a pretty large server centric business. And while we as I said, we've done a pretty good job with Dell and Lenovo and Fujitsu and others, I think HP is becoming a pretty substantial portion of our both enterprise and commercial go to market. So I don't want to speculate anything about the future, but all I can say is that, it's looking like it's a win win for both sides and there might be more things to come with subscription of our software in their hands with GreenLake.
And especially some things around how we can go to market together and sell together including their existing products.
Thank you.
Your next question comes from the line of Jason Ader from William Blair.
Thanks. Dustin, just on the APJ impact from the virus, Is it right to think that's all demand and not supply at this point?
Correct. Yes. We'll have to look at the supply thing. I think Q3 is from what I see and what I'm told here is that Q3 looks to be okay and maybe a little tight. And then depending on what happens, with the factories and folks coming back to work here.
It's a little bit you'll have to see there. But yeah, that's that's not a supply issue. And what's happening in the region quite honestly is, is if you look at this, nothing happening in China, There's really no meetings happening in several other countries and we've got if you look at the impact to to the coronavirus in general and the verticals that it hits, it hits retail transportation and manufacturing and hospitality. Travel and all that stuff. So it's kind of a ripple effect of this.
We got our initial roll up from our APJ folks and as I mentioned, we've got a couple very intriguing interesting deals in Japan that we feel really good about, but the timing of those we just can't take an aggressive stance on that at this point.
Okay. All right. Because Microsoft just pre announced since it seemed, I don't know if you saw that, but they talked about the supply.
Jason, I think the important thing to understand here is, is we feel good about the business There's 2 things happening. One that's 100% completely in our control and there's another thing that's 100% out of our control. And we're really happy about the subscription transition because again, the quicker we get through here, the better it sets up the model when there is renewals come, start to flow in here. So we're really pleased on that and we'll take the hit on the top line any day to go faster there. And then hopefully we're taking a reasonably prudent view on some unknown factors related to the virus.
So we'll see how that plays out. But the business itself, which we talked about in the script and everything else, we feel good. Large customers repeat purchases, big global 2000 new products. Everything is tilted in the right direction, except we've got one big unknown here that we can't control. Yes, so quality, that's
why we keep asserting that business is robust and, qualitatively, we just have to be a little bit more cautious.
And on the subscription transition, do you have a forecast by originally you were at $75,000,000 obviously you're going to bar surpass that. What would you say would be a good a guesstimate for Q4 right now in terms of a percentage of billings from a subscription?
Yes, I know it's probably going
to bounce around a little bit. We had pretty good acceleration this quarter. So, probably not too much different, but we'll again update a couple of these thoughts at investor day here coming up on, on March 26. So Yeah. For the first time we put this,
you know, new sales comp. Discount?
Yes. And we're starting to tweak our sales comp. We put a roadmap in over the next several years for sales comp and how we end up morphing the sales comp ultimately to take advantage of the leverage effectively of of a subscription business and the renewals and things like that. And this is the 1st period that we've actually put a negative multiplier on some LOD business. And in the next 6 months, we'll put a negative multiplier on any LOWD business.
So I think that naturally there will start shifting some of our bigger legacy customers over to a subscription over the next 6 months here too.
Your next question comes from the line of Ramsey Mohan from Bank of America. Your line is open.
Yes, thank you. Just a follow-up a little more on the coronavirus situation. Can you give us some color on how you're up with that estimate. I mean, when you say that it's based purely on APJ demand, it seems like demand in other regions is also getting impacted as the situation remains quite fluid. And secondarily, supply for the server supply chain seems like that might be impacted very near term.
So is there more can you give us some clarity on why you think supply might not really be an issue, in the near term? And I have a follow-up.
No, what I mentioned is Q3 from what we're being told that doesn't it looks tight, but it doesn't look at this point to be a serious issue from our perspective. Q4, I don't know. It depends on how this progresses here. I think the reason why we have a little bit more point of view on APJ is, is that there's been a longer issue there. And we've had chance to kind of digest that and get some forecast and things like that.
We mentioned that EMEA looks good and we've got good pipeline there and the second half looks really good, but this assumes that there is not significant impact that migrates into there. And we just can't at this point guess what might happen or guess what might happen with with this service supply chain.
And then I think HPE hasn't told us anything to the contrary. And some of our legacy supply chain is Taiwan, not China. So I think, it's not in the list of countries that people at least have talked about in the past. So, I mean, we're making an educated guess in some of this stuff as well, but we do feel like this is a pretty good guess for the next half.
Okay. Thanks for that. And then, Dheeraj, there have been some high profile changes in management at IBM and Google Cloud. How do you think changes the competitive landscape? Do you think it does or not and also the M and A landscape around this?
Thank you.
Well, I think we definitely feel like we will be becoming more and more of a software company running, I mean, as I mentioned this in the last paragraph of the script, that the cloud becomes the new server for us. The big issue with the public cloud right now is enterprise workloads have a tough time to lift and shift. And all of a sudden, if our software can bring that level of virtualization where it doesn't matter where it's running on commodity servers on prem, or commodity server's off prem. I think it really opens up a new surface area for our software. And I think we are looking at the next 3 to 4 years to be such a transition.
No different than when we transitioned from pure appliances to OEM into Dell back in 2014. I mean, over the course of the next 3, 4 years, a quarter of our business, was running on Del Nodes. And I think a lot of that stuff, we expect to see from hyperscalers too actually. So, IBM with the Red Hat thing will definitely be a partnership opportunity for us. Especially around containers and hybrid cloud and IBM cloud as well.
And also some of the work that we're doing with them on their power and AIX software. They have an operating system in AIX that we believe can we can modernize I think in Amazon and Azure, really good, I would say engineering work going on. You will see this year to be the year when the hyperscalers get really close to us and we do the same with them. And we think that we'll actually prepare them for a true lift and shift that is not at the more see of, just, global system integrators coming and trying to re architect the app because re architecting the app to go move it to the public cloud is really really hard and risk prone. Thanks.
Your next question comes from the line of Kathy Huberty from Morgan Stanley. Your line is open.
Thanks for the question. Going back, Dustin, to your reference to Salesforce compensation changes, what do you doing around shifting compensation from TCV to ACV? And then related you mentioned that you're confident that you can close the gap between term and life of device pricing on renewal. Is it the sales force compensation changes that can help you around pricing? Have you seen renewals yet such that you have confidence that you can you could raise prices as customers come up on their renewal?
Well, we haven't seen many renewals, quite honestly, on intrusive subscription. Most of these haven't timed out yet on it from that perspective. We do know though mean, if we just and we'll show a graph here at Investor Day, if you simply take an average 3 year CBL deal and assume that renews for another 3 years. So 2, 3 year CBL deals compared to a 5 year life of device. And if you and if that renewed for 1 year of support, so you had comparable 6 year periods that the 2, 3 to 2, 3 year CBL deals clearly exceed the value of that life of device 5 year plus 1 year renewal.
So there's no doubt when you look at the averages of what we're pricing things. It's just that we take a hit upfront, but through that 6 year period, we're much better off. So we just have to have to wait a little bit there. And on the sales comp, we I think the good news about the sales comp is that we can again, we do commissions in 6 month periods, which is really great in a period like this that we can kind of morph things every 6 months instead of a year. So we will highly likely morph to ACV way before we need to.
And because it will kind of be seamless from that perspective, we believe. And then we'll kind of run with that and quota setting and things like that. So when the renewals flow in, I think we'll be in pretty good shape to actually get some some leverage from those renewals because just like any subscription business, those renewals have to come in at a much higher efficiency factor. And, you know, hopefully we can, show this in a reasonably thoughtful interesting way how this more so over time over the next several years at investor day. And how we see leverage playing in once the subscription renewals comment various efficiency factors and how the percentage of the business becomes pretty large portion in the outer years as subscription renewals and things like that.
So, I mean, we're really happy about the faster pace to subscription, but a lot of the benefits are going to come in a couple of years.
So the shift to ACV, that'll be 6 months out or more that's not in the current sales compensation changes?
Correct. Yeah, what we've done in the current sales comp, we started to put some negative multipliers on LOD business.
Okay. And then just lastly for me,
sorry. The next phase will probably have some type of ACV transition.
Okay. And just lastly, you surpassed margin guidance and took it up for the full year. Can you just talk about drivers of of upside on gross margin?
Yes. And it's pretty simple when you look at it because right now, the cost bucket that we operate within obviously software is 100% margin, but the cost bucket now is with the support model and the support teams historically done a pretty good job of gaining leverage there. And so in this case, we had a pop up in top line and we can leverage that support structure. So it's just more top line on a small increase in the support cost another cost internally here. So, we guided at 80% next quarter, but that's just because it's a smaller top line base on a similar cost structure.
But as I think we can continue to leverage that slightly as the top line continues to increase.
Great. Thank you.
Your next question comes from the line of Meta Hosseini from Subquehanna. Your line is open.
Hi guys. This is Nick filling in for Mehdi. So turning to the, the full stack of your next solutions, how much is that impacting your billings? And specifically, is that what percentage of the billings are actually for the entire stack?
I think we mentioned, last quarter was 11. This quarter is 13% of our bookings.
Yes, that's that's right. New products.
On top of the core product itself, I think they're fairly accretive in many ways. There's a lot that we talked about in my earnings script as well. Where many of these customers actually are buying our entire stack because they are really comparing it to cloud. You know, the private cloud has to look like the public cloud in many, which ways. If anything, you know, we are really pleasantly surprised to see that this attach and the overall contribution in Global 2000 is higher than the overall company average, that number 13% is higher in Global 2000 which basically tells us that this is not one of those conventional mid market first, sort of portfolios that we're actually selling compared to, let's say, our hypervisor, which really started more in the mid market for the 1st 3, 4 years before it went up market.
I think many of our new products, especially the ones around automation and databases and security, they're really starting, equally if not better actually in the Global 2000.
And do you break down that 13% based off of new customers versus maybe existing customers who are upgrading or do you not have those numbers?
We don't. I mean, the only interesting statistic there on the on the 13%. When you look at the global 2000, that 13% is actually a little bit bigger. So you might have some perception that this might type customers trying things out. It's actually playing very well in our these new products are playing well within our big customers.
Okay. Perfect. And then just one follow-up on cash burn. Is that something that's concerning you guys in the near term? I know that balance sheet looks a little bit better, but maybe talking about that a little bit?
Yes. No, even with the little bit change in the top line today $250,000,000 or so. So we'll try to continue to kind of manage that bucket.
Okay, perfect. Thank you.
Your last question comes from the line of Jack Andrews from Needham.
Was wondering if you could shed some additional light on just where things stand with your solutions based approach on the go to market side. Nice to hear that you're seeing some success, but could you provide some broader context in terms of just how much of your sales force is fully enabled with this approach And similarly, where do you stand with your partners in terms of getting them to embrace this solutions based approach?
Great question. I mean, you know, there's 2 parts to this. One is the way we talk to our customers, which are new customers or new campaigns, I call it more north south. And there we are really leading with, things like, databases and end user computing and private cloud and, remoteedge, and things like that. And all our sellers, especially in the, I would say, Global 10,000, where you really go sell solutions because when you start to get lower in the mid market, it's hard to sell a solution to a first time commercial customer.
Obviously, there's a lot of HCI plus files, maybe a little bit of operations management that's going on in the mid market. So The answer is a little bit more nuanced because of the segments, but I would say that all our enterprise sellers have really been doing this. And that's the way they actually can go create a pipeline. The pipe is not created, but just doing a bottom up selling of infrastructure. It's more workload driven and solution driven actually.
The channel is getting there. I think we have not yet started to track pipeline for solutions. That's where the next sort of evolution of this solution driven approach is when we start to really track entire funnels that are driven by pipeline itself, but that's the next phase in the journey.
Got it. Thank you very much.
This concludes today's earnings call. We thank you for your participation. Have a great day.