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 Q3 FY 20 18 earnings conference call. I will now turn the call over to Tanya Chin, VP of Investor Relations And Corporate Communications. You may begin your conference.
Thanks. Good afternoon, and welcome to today's conference call to discuss the results of our third 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 Deerich Pandey, Nutanix's CEO and Dustin Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its third quarter of fiscal 2018.
If you'd like a copy of the release, you can find it in the press releases section of the company's website. We would like to remind you that during today's call, management will make forward looking statements within the meaning of the Safe Harbor provision of federal securities laws regarding the company's anticipated future revenue billings, gross margins, operating expenses, net loss, loss per share, free cash flow, business plans and objectives, product sales, plans and timing for and the impact of our transition to focus more on software only sales, expectations regarding products, services, product features and technology that are under development, competitive and industry dynamics, New strategic partnerships and acquisitions, our intent to acquire new technology, changes in sales productivity, ex cations regarding increasing software sales, 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 representing our views in the future. We undertake no obligation to update these statements after this call For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10 Q for the second quarter of fiscal 2018, filed with the SEC on March 15, 2018, 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've 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 Stifel Conference in Boston on June 12th and also at the NASDAQ European Conference in London also on June 12th, and we hope to see many of you there. Now, I'll turn the call over to Dheeraj.
Thank you, Tania. Good afternoon, everyone. Q3 was a quarter in which we accelerated growth, while operating at above a $1,000,000,000 run rate. It was strong across the board with billings, revenue, and gross margins all ahead of consensus. This is the 3rd quarter in a transition towards a software defined business model, and I can say that we have managed change immensely well.
Our results were bolstered by strong HV adoption as well as continued penetration of the Global 2000. We just back from our 4th.next user conference in New Orleans, and I couldn't be more excited about the way this event has evolved. Just three short years since our first dot next conference. Attendance has grown from approximately 900 to nearly 5000 attendees, raising the total to more than 20,000 who have joined us at our global.next events over the past year. What I'm proud of is that dotnext continues to be hyper focused on our customers.
From a first hackathon where customers like the County of San Mateo, Cardinal Innovations, Healthcare And Tucson, Medical Center developed exciting new projects for our ecosystem to the dot next awards where we recognized Home Depot, JetBlue, multi commodity exchange of India and CSRA for their contributions. Our customers are at the center for success and we are delighted to be able to celebrate them each year. We're also pleased by the positive reaction to the 3 announcements we made at dotnext. These 3 new additions to our product portfolio, Nutanix Beam, era and flow are important not only for their strategic value to our business, but also for the new opportunities they open for customers in our platform. These offerings will help our customers better manage their hybrid cloud environments while helping to solidify our unique thesis of building an enterprise operating system to tell you about each of these offerings so you can better understand the opportunity to present.
When we introduced FCI in 2011, We disrupted the status quo by collapsing storage and compute into an easy to use platform. Customers will complain about the cost and complexity of their legacy 3 tier architectures. The same was true when we collapsed a hypervisor into our stack for the introduction of AHV in 2015. Security in the network were the next logical areas to focus our attention. These are legacy strongholds of Complexity in the on prem data center, and that's what we are tackling with Flow.
Flow will combine our native homegrown micro segmentation technology with application centric network visibility technology from our recent NetSIL acquisition, which we announced and closed in Q3. The innovators and the NetSol team, the Gil brothers and the Collegemates from the University of Pennsylvania, who developed the state of the art observability technology for multi cloud environments are now a key part of Nutanix R&D. With Flow, our customers can secure network traffic and soon ensure their applications run optimally with deep insight and visibility into how these applications are performing on the network. As many of you know, our mission is to make infrastructure invisible with Nutanix era, We are redefining infrastructure to include databases. Enterprise platform as a service for PaaS, needs to straddle private and public clouds, edge and core computing, and managed open source and bring your own licenses.
Error dramatically streamlines the provisioning of new databases and automates the lifecycle management of those business critical databases. Similar to the functionality AWS offers in the public cloud with its relational database service or RDS, will initially support Oracle and PostgreSQL databases with future support for MySQL and Microsoft SQL Server. We expect error to be available in the second half of calendar twenty eighteen. Beyond databases, enterprise PaaS also includes message Buses for event driven queue based applications. At dotnext, we showcase project share lock, a multi cloud message bus with which IoT applications can take advantage of machine learning and AI algorithm at the edge where machines are producing data.
Rather than bring immense amounts of data to the cloud, Project Sherlock brings the cloud paths to the edge. It was the most well received keynote at the conference. Beyond databases and message busses, enterprise PaaS also includes object storage for next generation applications. At the conference, we showcased how our high performance highly secure S3 compatible object store service will become an integral part of our enterprise cloud offering. Moving further of the stack, we also introduced our 1st ever SaaS offering, Nutanix Beam, a multi cloud cost governance and security compliance application that is based on technology from our acquisition of Mingjar.
Based on machine learning of metering, billing, and network data, he makes continuous recommendations and provides one click remediation to cloud deployments that have suboptimal economics and violate compliance checks. Over time, we expect Beam to become the policy engine that will drive mobility of applications between on prem and off prem. At the conference, we also showcase the progress we have made with Nutanix Zai, spelled X I, Nutanix Com and Google. As we talked about at our Investor Day in March, we are providing early access to Zai this summer. Delivering a true hybrid cloud with a seamless experience that harmonizes the architectures of owned and rented clouds hasn't been done before.
Like hyper convergence of hardware on prem, the attention to detail in engineering and design to hyperconverge private and public clouds will create a very large opportunity for us in the enterprise. Our bet is that mobility will be the killer app in multi cloud. Our engineers, designers and product managers have been burning the midnight oil to make sure that replication, multi tenant networks, and runbook automation are indeed one click in this hybrid experience, simple yet secure. And most importantly, that our own engineering processes are one click in cloud deployment and change management. Our relationship with Google continues to make very good progress Google Cloud CTO, Brian Stevens, joined us on stage at.next to provide an update and live demonstrations of native Kubernetes support for containers.
And Calm support for Google GCP. And this entire demo was working with no hardware on prem. The entire Nutanix stack was running in GCP on Google's hypervisor. That is the power of our software centric architecture. Like Dell, Lenovo, and IBM ports, we showcased how our cloud operating system will be ubiquitous, running inside hyperscale environments like Google's.
In addition to support for GCP, Calm now includes support for VMware environments. This continued expansion across public and private cloud environments brings Calm closer to reaching its full potential as an application orchestration and lifecycle management offering for the multi cloud world. Interest in Calm is accelerating with some of our most innovative customers. And in this past quarter, it was adopted by a diverse set of customers in industries, including health care, insurance and banking. Now let's move on to a few of our noteworthy highlights from Q3.
During the quarter, 44 percent of our bookings came from large deals. We now have 67 customers with over $5,000,000 in lifetime bookings, 22 of which have lifetime bookings of more than $10,000,000. The majority of those customers are in the Global 2000. In this quarter, our top 4 deals were in all in excess of $5,000,000 each and 3 of those deals were softer only. Of those deals, 3 were noteworthy for the customer's decision to go all in with our hypervisor AHV.
In a 3rd largest deal of the quarter with a global 2000 retail customer with whom we have more than $35,000,000 in lifetime bookings, The customer will leverage our platform to run call center operations on AHV. This deployment will also enable the company to roll out a new tech support offering and is our largest deal with the customer to date. In addition to its success within the Global 2000 HV is also a major decision fact for government entities worldwide. HV was a significant factor in both our largest deal of the quarter, a new customer win with a large UK Central Government Department and our 4th largest with an entity of the U. S.
Department of Defense DOD which has lifetime bookings of more than $5,000,000. Public sector entities continue to adopt AHP for both the cost savings set provides and the increased functionality of our fully integrated stack. With these large deals and continued adoption across our customer base, HP adoption rose to 33% on a rolling 4 quarter basis, up from 30% in Q2. We expect this adoption will continue to rise over time. In addition to AHV, our robust security continues to be a major decision factor for our public sector customers.
In 2 of our top deals this quarter, with the previously mentioned DOD entity and another DOD entity with lifetime bookings of more than $16,000,000 that is composed of military, federal civilians and contractors. Our security first approach scalability and ease of use were noted as major factors in our selection. In the second DOD deal, I mentioned the military, Pedro's civilian and contractor compose entity plans to use Prism Pro for planning and analytics. We continue to see adoption of Prism Pro And AFS throughout our customer base. In Q3, a new customer, an American investment management firm with a focus on asset management, serving customers worldwide, signed a deal for more than a $1,000,000 that included AHP and AFS across thirteen locations, all managed by Prism Pro.
Another new customer from our APAC region, a data processing unit within our agriculture co op in a large prefecture, we'll leverage HV and AFS to integrate all the infrastructure within the prefecture onto our software platform. As mentioned, Q3 saw continued adoption from our G2K customers, which accounted for 43 of our top 110 deals in the quarter. One of our 9 deals worth more than $3,000,000 in Q3 was a software deal with the U. S. Brokerage firm that has lifetime bookings of more than $10,000,000.
This G2K customer continues to expand its production media environment on our platform and has made purchases in every quarter since it's initial by in Q3 of 2017. Another software deal with the G2K customer in Q3 was with a French multinational banking and financial services company. This customer has lifetime bookings of nearly $10,000,000 in a Nutanix environment running a diverse set of enterprise application workloads across more than 22,000 virtual machines. This deal was one of our 47 deals worth more than $1,000,000 in the quarter. Now, coming to talent, we hired Sankal Saksena as Managing Director of Leader Operations in India.
Sankal will oversee our India technology center and further the great contributions that the team has made to our product and business. Built by our India sales leader Sunil Mahale, the Indian customer base also continues to pleasantly surprise us. I call India, the AHV country, their extremely high adoption of AHV convinces us that virtualization is still an underpenetrated market. And by making hypervisors invisible, we're growing the surface area of enterprise cloud. We have very high hopes for India as it grows to invest in software, automation, a Silicon Valley like startup culture and cloud.
From 5 years ago, when we had nothing in India to where we are today, we've come a long way improving that a high quality business corporate development strategy can be built by being geographically dispersed without compromising on culture. No wonder we've been recognized in 2018 by Glassdoor And Battery Ventures as one of the top public companies to work for in cloud computing. In summary, Q3 was a great milestone in our journey towards our goal for $3,000,000,000 in software billings in fiscal 2021. There's much work to be done in the coming 12 to 18 months, both in products and in our go to market motion. We hope you'll keep us honest.
With that, I'll hand things over to Dustin who will provide a more detailed breakdown of Q3. Dustin?
Thank you, Dheeraj. Q3 mirrored the underlying trends of prior Q3s and we were pleased with our results that reflected continued strong growth. Revenue for the third quarter was $289,000,000, growing 41% from a year ago, and up slightly from the previous quarter and significantly ahead of our guidance of $275,000,000 In Q3, we targeted to eliminate $45,000,000 of pass through hardware revenue. And I'm pleased to report that we exceeded our plan and eliminated $52,000,000 of pass through hardware revenue during the quarter. Software and support revenue was 227,000,000 up 55% from the year ago quarter and up 9% from the prior quarter.
On a revenue basis, the product mix was 78% software, and support and 22% pass through hardware. We built 351,000,000 in the quarter, representing a 50% increase from the year ago quarter and a 1% decrease from Q2. Once again, and consistent with last quarter, this billings performance far exceeded the current street estimates of 332,000,000. Software and support billings were $292,000,000, growing 67% from the year ago quarter and up 6% from the prior quarter. On a billings basis, and 17% pass through hardware revenue.
Notably on a bookings basis, cash through hardware decreased to less than 16% of total bookings. The build to revenue ratio in the quarter was 1.21 in line with our previous estimate of approximately 1.2. We have, we continue to have slightly higher revenue deferrals with our software only deals, which has the impact of lowering our current quarter revenue, along with increasing our deferred revenue balance. As we executed more software only deals, we expect the build to revenue ratios to continue to elevate into Q4. New customer bookings represented 27 percent of total bookings.
On a regional basis, EMEA continued its resurgence and turned in another very nice performance in from our international regions were 45 percent of total software and support bookings versus 37% in Q3 2017. Our Q3 deferred revenue increased by $62,000,000, up 62% from a year ago and up 13% from the previous quarter. Non GAAP gross profit for the quarter was $198,000,000 growing 57% from the year ago quarter and up 9% from Q2. Our non GAAP gross margin for the quarter was 68.4% compared to 61.2% in the year ago quarter, 63.5% in the prior quarter and to our guidance of 67% to 68%. This continued gross margin expansion is being driven by a transition to a Last quarter, I mentioned we had fallen behind in our hiring and that we would, fiscal year to try to make up for this headcount shortfall.
Well, we executed this full court press flawlessly and ended up hiring During the quarter, we added over 60 new sales teams, which is critical We were very pleased with the hiring performance in the quarter and although not yet at our planned headcount, we did significantly exceed what we thought was possible when guiding Q3, including the addition of almost 85 employees from our 2 recent acquisitions Net cell and Minjar. This strong hiring performance drove expenses to $232,000,000 in Q3, exceeding the high end of our guidance by $12,000,000.
Expenses
but had a significantly lower rate of growth in total billing than in total billings of 50%, software and support billings growth of 67% and gross profit growth of 57 percent. Our outperformance in hiring combined with higher than anticipated payroll taxes from RSU vesting, contributed to almost all the operating expense overage as compared to our guidance. The higher payroll taxes are directly correlated the Nutanix stock price appreciation that has occurred over the last several months. On a non GAAP net loss, our non GAAP net loss was $35,000,000 or a loss of $0.21 per basic share. Few balance sheet highlights.
We closed the quarter with cash and cash equivalents of $923,000,000. That's up from $918,000,000 in Q2. DSO is on a straight average for 60 days compared to 58 last quarter. The weighted average DSO was 26 days in Q3. We generated $13,000,000 of cash flow from operations in Q3, which was negatively impacted by $10,000,000 of E SPP outflow.
And we generated negative $1,000,000 of free cash flow during the quarter and this was also negatively impacted by the same $10,000,000 of ESPP outflow. Now, for the guidance for the 4th quarter, again, on a non GAAP basis, we've revenue between $295,000,000 $300,000,000, assuming the elimination of approximately $95,000,000 in pass through hardware revenue. Gross margin between 73 percent 74 percent, operating expenses between $250,000,000 260,000,000 and a per share loss of approximately $0.20 to $0.22 using weighted average shares outstanding of 171,000,000. Although somewhat fluid from quarter to quarter, in Q4, we are assuming a build to revenue ratio of up to 1.25 versus the current street estimates of approximately 1.2. Based on our revenue guidance and our expected build to revenue ratio, We expect billings of at least $25,000,000 to $30,000,000 higher than current street models.
This would also indicate based on assumed software and support billings only, a 50% growth rate in billings from the year ago period. It is also very important to note that in Q4, the change in the estimated bill to revenue ratio of 1.25 from the current street of 1.2 ends up resulting in approximately $12,000,000 more of incremental deferred revenue. That would have otherwise been reflected equally in revenue and gross profit to continue to fuel strong growth in Q4, we expect operating expenses to increase between $250,000,000 $260,000,000. Finally getting to a level assumed in our operating plan that we put in place at the beginning of the fiscal year. And even with this growth on a year over year basis, expenses will grow significantly less than the growth rate of our software and support billings.
This growth in expenses has been thoughtfully crafted and is closely correlated to the superior growth rates we are experiencing within our software and support billings. We will continue to accelerate our spending around existing products, new products and on new technology derived from M And A activity, if we believe it will lead to notably improving our already current market leadership position. If not, for the projected increase in the build to revenue ratio for the quarter, which results in additional deferred revenue, this expense growth would have sets any expense growth. And lastly, as you may recall, during our Investor Day in March, we talked a lot about the rule of 40. With the rule of 40 score basically summing up the annual revenue growth rate percentage and free cash flow as a percent of revenue.
We also show that very few software companies can consistently maintain a Rule of 40 score of more than 40%. And that companies that execute to this are rewarded with superior evaluations. We also stated that we would continuously trade off higher or lower revenue growth with corresponding lower or higher free cash flow and profitability, while always targeting a rule of 40 score of 40% or greater. Based on a rolling 4th quarter basis and using our software and support revenue as a proxy for total revenue, Our Q4 guidance would suggest a rule of 40 score approaching 50%, which we believe puts us in the top 10% to 15% of all public software companies. So in summary in the third quarter, it was a strong one.
We had good growth in both billings and revenue, saw rapid gross margin expansion. We ramped hiring to support our growth plans and we delivered on our stated milestones shift to a software defined business model. With this execution, we are well positioned to reach for fiscal 2021. And with that operator, if you could open the call up for questions, that'd be great. Thank you.
Your first question comes from Matt Hedberg with RBC Capital Markets.
Hey guys, thanks for taking my questions and congrats on the strong results. Maybe starting, Dheeraj, with the pending launch of Xi Cloud and the related which I think still sound to be absolutely on track from Analyst Day. How do customers think about operating in a true multi cloud world? Where I and how quickly might we be able to realize true application and data mobility?
Great question, Matt. We at.next did some really good touched on with customers and how they feel about this, some great sessions, more than 900 attendees and people are flowing out of the conference room. We we're almost violating the fire code of the building with so many attendees. There was immense interest in Zai because we really built a cloud for the IT operator. Up until now, most of the cloud is being catered to developers and builders of new applications.
But there's a ton of legacy to really migrate, from an owned on prem world to a rented off prem world. And we're really putting a lot of attention to detail to those mundane things in storage and compute, networking and high availability business continuity disaster recovery. A lot of those things are the things that we actually are doing to make sure that people get a one cloud, one click experience. And, we are fairly close. I mean, as I told you, earlier, the thing that we're really building is a bullet train between on prem and off prem.
And, that is a lot of work in terms of compute and storage and networking and security and identity that all have to become hybrid. But, you will start to see, those results show off in the coming couple of quarters. I mean, we talked about summer is when we actually launch this for our customers. And, from there, you'll start to see us report about how many migrations because this is really adjacent to our existing customers. They really like the fact that they can get this in a one click experience.
That's great. And then maybe just one operational question. With the record hiring this quarter, and I think 60 new sales teams, what process are in place to ensure these teams scale appropriately? I'm curious, are you splitting territories in certain regions or are more of these in net new pads that did not have prior coverage?
Well, you know, segmentation is a journey not a destination. So we'll continue to segment We are continuing to look at how some of our reps actually graduate from enterprise accounts to global accounts within global accounts, we'll continue to segment because some of them might have 10 accounts and over time, I think it's a great right of passage to have our reps only focus on 2 accounts. But there's a lot of farming and hunting that has to go in peril. So we continue to look at this as a pyramid and a lot of experienced reps will actually go from commercial reps to being enterprise reps and a lot of really good enterprise reps will become a global account reps actually.
But there's a
there's also a focus on channel as well and that's the other area that we're focused on as we segment a lot of our own sales force. How did the channel actually go and deal with the SMB and the lower end of the mid market?
Got it. Thanks a lot. Well done guys.
Your next question comes from Alex Kurtz with KeyBanc Capital Markets.
Hey guys,
thanks for taking a couple
of questions here. Josh, just on the on the OEM portfolio and your hardware partners, you know, how's the ramp in, year to date and taking maybe a sneak peek into fiscal 2019, you know, which one of the the big OEMs you think could offer the most leverage and maybe getting international growth or maybe into new verticals that you guys really aren't today?
Thanks, Alex. So, you know, one thing that has really gone on well for us is during the transition, we have not, pissed off our OEM partners. And it's very important to, you know, when you talk about change, especially of this kind, the last three quarters have been immense change in the business model. We've done a really good job of saying it's a win win. It's not a 0 sum game.
And many of our large customers are actually working with our OEM partners to provide them the hardware that they actually prefer which, you know, the freedoms that they actually need between Dell or Lenovo or HP or Cisco, all in all, I think we're seeing a really good partnership across the board, we just announced the X E Core Partnership at Dell as well, where people can now buy software licenses on top of Dell hardware. Linnova has done a tremendous job. It's probably the best quarter to date that, Dustin can also attest to but Akra, I think we're seeing a few things in Japan and the rest of Asia, including Germany. Fujitsu has actually been one of our recent partners and IBM, in the power architecture, you know, this is not X86. We just announced our AIX solution.
So the fact that people can virtualize AIX environments has been seen really positively by IBM customers.
And thanks. And then, Dustin, just a quick question about steady state OpEx growth as maybe we start to look to fiscal 'nineteen, maybe an early look on how we should be thinking about that?
Yes, I think Q1, again, we only guide to 1 quarter at a time, but we've got, some other chunky things in Q1. So we'll have some reasonable, expense growth there, but it's, again, it's going to be highly correlated to our billings performance. Specifically around software and support. And that's, I think we've done a good job at balancing that and the more comfortable we get with that growth rate and what's going on there, we'll continue to put up some reasonable expense growth to fund that growth. Q1 maybe a little bit more than the other quarters, but we'll have to see how that plays out.
Just from some planning things that we have going on in Q1 and our sales meetings and things like that.
Your next question comes from Aaron Rakers with Wells Fargo.
Yeah, thank you. And also congratulations on the quarter. A couple questions if I can. So first of all, I wanted to understand exactly what you're saying about the billings relative to revenue trend. If I look at just the software plus services billings and you're saying about 50% year over year growth, it would unless my math is wrong, it would seem that you're actually assuming that the the billings relative to revenue for software and services alone, that actual ratio comes down a bit.
So I'm just curious of why would that be or is my math off?
Yes, I would probably have to take it offline. I think your math is probably off a little bit there. Maybe just, picking up some numbers. I haven't dissected it into the, individual pieces there. Clearly, it was 1.21 in Q3 and we see it on a total billings is going up to roughly the 1.25 maybe upwards of 1.25 there.
So I'll have to go through the detail with you.
Okay. Fair enough. And then when we look at your guidance on around the gross margin line, You look at the delta between what you're guiding 9% it looks like hardware pass through hardware as a percentage of billings. There's been about a 4 percentage point delta between that relative to the percentage of revenue that you've driven from pass through hardware. So if I do the math and assume about a 98% gross margin on software alone and you assume a 60% gross margin, on a services business, then it would appear that you're being rather conservative in the gross margin guidance for this quarter.
So I guess I'm trying to understand what exactly you're assuming Is it the services gross margin kind of goes back into that mid-fifty percent range and why would that be?
Yes. No, we've always had that a pool of other expenses there that doesn't, that doesn't easily get allocated to, to the software piece or the other? You have professional services as well? Yeah, the professional service, which is in the support piece there. So That's we've talked about in the past.
It's roughly $2,500,000 a quarter plus, that's kind of a fixed amount there. To your point on the margins, we've been really happy with the progression on the margins coming up this quarter. Obviously, we beat guidance a little bit and we're excited about what we're doing and we'll see how Q4 plays out here.
So to be clear, you're assuming a a mid-fifty percent services gross margin?
If you bundle those other fixed costs into there, that's what you'll probably come up with, yes. Because right now, it probably has a home and the other bucket there. And ultimately, if there's nothing left, it has to get allocated somewhere.
Your next question comes from Katy Huberty with Morgan Stanley.
Congratulations on the quarter. The acceleration in software and support growth to 67% in the quarter Is that entirely driven by faster node growth? Or is there also a dynamic of higher attach software that's playing into that trend?
Yes, I think, thanks Katie for the question. Guess it's a combination of quite a few things, large deals being won. A year ago, we were in this business with we talked a lot about DRAM pricing and things of that nature where hardware and movements in hardware pricing were actually affecting our overall ability to extract value of the software itself. So a big chunk of this is just the fact that we can now sell software at scale. And obviously, you know, people are looking at ultimate, which is one of the additions that we sell, which has quite a few features, we are selling Prism Pro now at scale.
We are selling Prism Pro. In fact, it's, the other thing that we have seen is AFS, which is our fastest growth product in the history of the company. So there's a few other things coming along, but the biggest factor I would say is the fact that we can decouple software from hardware and not worry so much about hardware pricing.
Okay, we've done, I think, as George mentioned, a good job of maintaining value We typically look at it on a software in support of what we call implied software value software and support. ASP per node, and that held pretty strong in the quarter. So it's pretty good determination there of us holding some pretty good value. The other thing that we also did, Katie, in the last year, has been use of consumer grade flash. That has actually really helped
us in all flash environments. We're doing a lot of all flash environments now. And that's happening because of a lot of the work that we did with consumer grade hardware.
And can you remind us when some of the new products like Xyee column being flow that will ship this year. When that can contribute meaningful revenue? Are we still a few years out from that?
To flow is a is a GA product, and there's a lot of education. In fact, we're going down a path of saying you don't need Bx lands. That's actually a complete different thesis just like we talked about, no sand and and, no VTechs. We talk about no VXLAN. And there's some education here, but we can definitely see some customers, many customers, large customers who have been, you know, extremely affected by the complexity of VXLANs and the network virtualization stack of the last 3, 4, 5 years we are seeing some really good traction in POCs.
So I would say that meaningful revenue, we probably expect some time in calendar 2019. Now exactly what that looks like will be a function of execution, not just for product because product is pretty much there in flow. But a lot of work that we are doing go to market itself and saying, there's a different way of doing network virtualization. Era, think, again, is going to be G8 by the end of this year. So, you know, it's early days.
It's like 2011 for Nutanix is what Era is right now. And Beam, the good thing is that it's a SaaS product, and it's already GA ed. So we'll learn a lessons about how do you really pay the channel? How do you pay the sales force on a subscription product itself? And I think there'll be some good lessons to come and talk about in the coming quarters.
And then just finally, where are you in integrating AI capabilities into the software? And do you think that those are features that you can charge for, or are they if necessary to compete in the software market going forward?
Yes, it's a great question about AI. There's a lot of, AI talk, just like, you know, you think about the Gartner hype cycle. There's a lot of AI software, there's a lot of AI and open source, there's a lot of AI coming from, especially models and algorithms coming from public cloud vendors, our goal would be to make AI and ML accessible to customers because there's this design principle called the Maya Design Principle and the acronym stands for most advanced yet acceptable And, a lot of AI in the 90s failed the Maya principle, just like RFIDs in 2000s and Docker a couple of years ago. So beyond the hype cycle, there's a very good opportunity for us to really go deeper into, making this consumer great one of the things that we talked about dot next was Project Sharelock. And Sharelock's goal is to actually make AI more useful and accessible through one click consumption and how quickly can you build applications, not just the fact that you can use, GPU hardware or flash hardware but really the fact that you can build applications.
And that's one of the big things that we're focusing on with project share lock.
Thanks so much.
Your next question comes from Rod Hall with Goldman Sachs.
Yeah, hi guys. Thanks for taking the question. I wanted to start off, I go back to this comment, you made Dheeraj about All Flash and sort of understand who you think you might be taking business from there. So could you just comment on who you think you're competing with there? Who may be losing business as a result of your progress there?
And then I've got a follow-up.
So on one side, there's definitely a lot of disruption going on with mid range arrays, because a lot of them are up for refresh. Most of them were actually using spindles in the past. And on the other side, you know, hyperconverged infrastructure itself, we know we've done a really good job of mixing and matching hybrid nodes with all flash nodes. And that is a really hard problem to for because you have to really understand data locality and gearing and metadata. And a lot of the things that Otherwise, goes awry when you think about spindles and flash in the same cluster.
So on one hand, we are becoming super competitive, in heterogeneous clusters on hyperconverged infrastructure. On the other, we think that we're doing a pretty good job of selling flash to the application administrators. Rather than going and selling to the storage guys, but it's actually a sense per gigabytes or dollars per gigabyte kind of a conversation. But what does it mean to really make this application fast and be able to deploy this at scale?
Yes, it's just strange because we've seen some flash vendors pivoting to like a DAS type of messaging and we wondered if maybe your you're putting some pressure on them from a competitive point of view?
I mean, definitely if you look at developers and containers, I mean, at the end of the day, a lot of the next generation DevOps and developers will want commodity servers and be able to really do things like the way they did with Hadoop and Spark and Apache, Kafka, and all those different kinds of DAS architectures really need to come together. I need to provide all the bells and whistles that you had in a 3 tier architecture in this collapsed commodity hardware architecture?
And then, Dustin, I just wanted to check pass through hardware expectations in fiscal Q4. Could you just maybe update us on what you're expecting now that you've seen the got the quarter under your belt and a
little bit of the fiscal Q4 as well?
Yes. So,
Nothing to do with where we are in Q4, but, you know, roughly what we've said will eliminate 95% we had a target to get to roughly, I think, 9% for billings. That's always 3% to 4% higher for revenue. And, you know, as we see it now, you know, we should be pretty close to that estimate that we put out 3 over 3, I guess, quarters ago. North America, as we mentioned, the team did a great job. So that's done.
Europe is well underway, with a with a lot of progress being made there and now focus has turned to APAC. So, a lot of good stuff going on and, as we see it now, we should be pretty close to that number.
That's great. Thank you. Looks like good execution. So, nice job.
Yes, team's done a really nice job.
Your next question comes from Jason Nolan with Baird.
Okay. Super. My congrats too. Deraj, I wanted to ask on this shared accelerated storage term, kind of an umbrella phrase for NVMe. You're agnostic to the hardware underlay, but is this an opportunity for Nutanix and does it change anything within the industry overall?
Oh, absolutely. We talk about how close can storage get to the application because now with NVMe or fabric, we actually need to bring it even closer to the application because, at the end of the day, NVMe is going to be that much faster And while we're talking about 40 gigabit networks and 100 gigabit networks, still the commodity is 10 gigabit. And only in the last 2 years have people moved away from one gigabit, onboard network cards to 10 gigabit now. So I think it's a great opportunity. In fact, we can also virtualize the NVMO fabric protocol to be hyper converged, which is again a very unique opportunity.
The fact that you can have apps not going through NFS, which was the tax that we had pay for hypervisors. In the HV land, I think when you look at our hypervisor, there's some immense opportunities to go and optimize the NVMe or fabric kind of protocols without really thinking about legacy hypervisors.
Okay. Thanks for that. And then a follow-up on h AHV, you said it's a significant part of some of your larger deals. Is that driven primarily by cost savings or is there more to it?
Well, I think we don't lead with cheap. Nutanix is not that cheaper product. If anything, we get a lot of slack for being a premium product, but we lead with ease of use and the stuff works. And the fact that, application folks can now use virtualization. And that's the thing.
I talked about, for example, India is a country that was under virtualized now they can just use it without having to really become virtualization experts, look at Splunk Administrators and Oracle administrators and Citrix administrators. A lot of these folks, including mode 2 applications. I mean, a lot of mode 2 apps need this software underneath to be able to make things high available and replicable and backup and disaster recovery proof and so on. So we're seeing a lot of adoption because of the fact that we're making things invisible rather than just making it cheap. Now budget is definitely a reason.
I mean, people are like, wow, I don't have to pay for it anymore. But the real education on the fact that it's we should not have to pay for it comes from public cloud. People are like, well, I use the public cloud and I don't really pay for a hypervisor. I don't have a team of people managing virtualization software is the education that people are getting on prem as well.
Your next question comes from Ramsey Mohan with Bank of America Merrill Lynch.
Yes, thank you. One for Dustin, one for Dheeraj. Dustin, the new customer acquisition pace has slowed down to about 4 percent year on year and that's been decelerating. But you also noted like increasing traction over the last several quarters on on larger deals and even including software only. So has there been a change in focus towards larger deals versus new customer footprint And your ramp in sales teams that you alluded to in this quarter, how should we expect that to trend going into next quarter as well?
And I have a follow-up for Dheeraj.
Sure. Now, if anything, you know, we're focusing on a lot of things and, we've actually had a renewed focus with the channel on on new customer logos, actually. We've got a rebate program in place now. And year of the company and we're really excited actually now this has to obviously get into actual bookings, but really excited about what's happening in the channel with the pipeline for new logos and things like that. So, there's been, if anything, an acceleration of focus there from a new customer.
The Q3 new logos usually come down. We had a really good Q2 in a lot of different ways. And, unlike 26, 2017 when Q2 was Yes, we had an opposite issue in, in, a year ago, but we had a really good quarter in Q2, which brings up a good point guys. We've internally now and maybe you want to start doing this also. Is that we're starting to analyze the business really on a rolling two quarters basis because it's it's a lot more insightful because I think potentially in this phase, maybe we have Q2s and Q4s are January July quarter, which also happens to be the end of a commission 6 month commission period for us, maybe be a little stronger So you can't really look at a strong Q2 and a strong Q4 without looking at a potentially slower Q1 or a slower Q3 or conversely, you can't do the opposite.
So, we've started actually analyzing a lot of things on a rolling 6 month or 2 quarter basis, which, as I say, is pretty insightful for the business.
Also, be comfortable with our long term average that we want every quarter if the rule, I mean, the Investor Day presentation, we talked about the average customer that we want every quarter.
Okay. That's helpful. And then, Dheeraj, how are you thinking about the evolution of the product portfolio? You've been adding assets like NetSol, Minjar, to make your offerings even more comprehensive. And you alluded to sort of very, I guess, quite extreme focus on internally on areas like your application and one cloud deployment, a lot of things you brought up.
How far are you from what you view as sort of a comprehensive enough complete portfolio towards your cloud OS destination? Like, how far are we from, you know, the asset base that would get you to your end state?
It's a great question, Wamsi. And definitely a lot of wondering that I need to do for this answer itself. I was talking to somebody yesterday to join Microsoft in 1991. And, I was trying to hire him and he said, you know what, Microsoft is as big in 91 as you guys are today. And this is a timeless journey.
What we're really doing is like the Microsoft Oracle of 1991 to build an operating system is never going to end. I mean, even today, Windows is hustling with, Windows Azure, and it's a new consumption model of a hypervisor and operating system. And this window was seated back in 1991. So I think we are in a timeless path here. We'll go into many, many things, in layers above us.
Like PaaS. I mean, I talked about enterprise PaaS. We'll double down on enterprise PaaS. We had great open source leverages. We leverage a lot of open source to build things that are commercial grade, that are enterprise grade.
So expect us to do many things where open source becomes a big part of our leverage.
Your next question comes from Jason Ader with William Blair.
Yes, thank you. 2 quick ones. Maybe first for, Diroj, as you've shifted to an all software model, what has surprised you the most, I guess, both positively and negatively?
Great question, Jason. Thanks for the question. I think the biggest positive thing that I see is that our front office actually likes it. And our customers like it as well, because, you know, when any time you do a transition, of a business model. And you have to do it really methodically.
It's like at 35,000 feet, how do you change the wings of a plane? It's kind of the thing that we went through. In the last 9 months, but it was done without a blip. And that's what I feel really good about that the front office embraces it There's not a whole lot of like what did we just do? And we're seeing some large deals in, I mean, in terms of, what we see on the horizon and that probably would not have been possible had we continue to sell appliances.
And the big reason is because people would not want to buy all the hardware upfront. Now that's not to say that, we don't see a lot of customers saying, please do not discontinue Nx because they love the single throat to choke in a single hardware plus software kind of integration. So I think what pleases me is that we're able to actually have our cake and eat it too. Your question about what is the corn? Like, what do we not like about it?
I think it's the it's the design piece of it. We have to really go and I mean, and it's not about the last 9 months, but the next 12 to 18 months, we really have to think about a hybrid license model. And it's not that easy because for the first time, we'll have to expose what it means to deal with on prem and off prem that nobody in the world has ever done before. What are the accounting standards and rev rec issues look like? There's a lot of pains and it'll probably be a great company if you come out of it in a way that is not reminding people of the DRAM licensing that we embedded.
Every time we do something in licensing, a lot of our ex VMware employees, like remember what we embedded with DRAMs and don't ever do that. So I think that's the thing that we have to watchful for.
And do you think the software flexibility has actually helped the business just from the standpoint as now customers don't necessarily need to rip and replace, they could use existing hardware?
There's a lot of requests coming for what does it mean to do this on NEC and Bujitsu and this and that. So definitely there's more requests coming and we are seeing the TAM grow because now, kind of the meeting in the middle with the customer. They're like, we love your software, but can you do this with my favorite hardware vendor and so on. So I think it's definitely helped from that point of view.
Okay. And then just one quick one for Dustin. Dustin, are you willing to give us sort of a ballpark breakeven level from a revenue standpoint?
No. No. I mean, again, that's kind of the whole purpose of when we talked about the rule 40 in growth and trading off growth with with free cash flow and profits and the likes there. So we're fueling a lot of growth and And we see a lot of growth ahead, but we've, as I say, we've done a pretty good job balancing in the past and still growing pretty rapidly. And I think you can assume we'll continue to do that balance going forward, but I'm not prepared to give you a revenue breakeven number.
All right. I tried. Thanks.
Yes. All right. Good try.
Your next question comes from Simon Leopold with Raymond James.
Great. Thank you. First, I wanted to ask a, a, more of a modeling type question and then more of a, competitive environment question. On the modeling, you you you offered us the, the metric of the the ratio of 1.25 And I'm also looking at trends in DSO. And and really my objective here is to try to think more precisely about the the cash generation So over time, how do you think that ratio 1.25 plays out over the next 1 to 2 years And how should we think about, DSOs in general for the company?
Okay. 1 to 2 years, long time. You know, we're we're learning a few things along the way here. I would, quite honestly, we'll have to see how it plays out. I would be surprised If we saw something higher than 1.3, because sooner or later, you have enough other stuff coming the other way off the balance sheet too that offset deferrals.
And we've got a couple of other things we're working on there. So, I think it's too early to tell, but I think anything above 1.3 would be a little surprising, but again, 1 to 2 years is quite a, quite a ways out there. And then DSOs, I don't think you should see much you know, movement in the DSOs. We always look at it on the weighted average and you can't, you know, get do much better. From that perspective, I don't see really anything getting materially worse there.
We've done a pretty good job, maybe a little customer mix, maybe a little geography mix, but, I don't think you should see a material change in DSOs. It was 2 days from last quarter, it was 58 last quarter and 60 in Q3. On a rock calculation perspective. So, I think that stays relatively consistent quarter to quarter. Also, I mean,
that's the coming model. My other question was, if we could get updates on the competitive environment particularly with the shift to the the the the software model and and more partnerships, And we've got companies like NetApp talking about developing their position in hyper convergence, although we haven't seen much evidence of that in our our checks. I'd love to hear your perspectives on where the biggest competitors and new entrants are are playing against you. Thank you.
Thanks for the question. I also want to say the sequel to the last answer that Dustin gave that we're in transition. So until the software thing is completely flushed out and becomes the 9% thing until you see that stability, it's hard to also predict on
these things. Yes, very hard. Just on that point too, just to make sure, you know, the build to revenue ratio has nothing to do with cash flow. So, wherever that goes, if you bill, you bill. So, nothing there on cash.
And I think once it's stabilized, if Zai has done a good job, we'll start talking about subscription Right.
Yeah. So we'll talk about something different in the future here. Especially if you've done a good job with
the product. On NetApp, obviously, there they've built a very good business. We respect them for their channel, loyalty, for example, learning a lot from a company like that. They are fully focused on storage. And in fact, they talk about their cloud positioning and so on.
And it's basically about storage. We are a compute storage, networking, security, and application mobility companies, an entire operating system. And some of the things that some of our hardware competitors are assuming they're assuming like NetApp is assuming that the legacy enterprise apps are already there in the public cloud hyperscale setup. That to us is the 2nd order problem to go and solve for filer for a legacy app that has already moved. We're working on the 1st order problem.
How do you get the app there in the first place? And by apps, we mean in their entirety it's a much bigger problem with way bigger rewards down the road at Sheena. In terms of real competition, I think there's a lot of legacy to go and displace The growing brand helps. We expect a lot from the channel in the coming months and years And we also know that the higher up we go in the global 2000, the more that brand will trickle down to the mid market as well. So There's, across the board, there's a lot of, hustle that we're actually doing and that's just one part of the go to market.
As you talked about, different hardware platforms, different geographies. I think there's a lot of that work that we continue to do and we don't underestimate the competition, but same time, we don't overly worry about them. That's one thing that's been really good about the company is that we do not lose focus in the by focusing on the competition actually. The thing that we always see in every dot next user conference, it's just the customer love And it's one of those things that you would not see reflected in the P and L. If you haven't visited a user conference, it would love for you to actually come and see from directly from the customers what they see about us.
Our last question at this time comes from Andrew Nowinski with Piper Jaffray.
Great. Thanks for taking the question. So I just have maybe a a follow-up on your new customer, growth. So I understand the quarterly seasonality with on in Q3 being the weakest. But if we go back to your Analyst Day, I think $1,800,000,000 of that $3,000,000,000 target was expected to come from your non global 2000 customers.
You know, implying you had to add about a 1000 per quarter. So I guess while the transition to software only, you know, certainly has led to larger deal sizes, you can concerned that the shift may have negatively impacted your smaller, customer growth. And are you still comfortable with that $3,000,000,000 target?
Yes. I mean, Dustin can answer this, but so can I hear you?
Yes. I mean, that's a 3.5, you know, let's give it some time here, Andy, right? This is 1 quarter or a couple a month or so after the Analyst Day. And it's an average. And it's an average over a three and a half year period.
We're doing some really, as I said, cool stuff in the channel with new logos. I don't think anything suffered because of, success in larger deals and things like that. No. So we're comfortable. That's going to bounce around.
Let's see what happens in Q4 and then we'll have a discussion.
Well, I guess that was more focused on, you know, the software transition element. Have that had any impact on large customer versus small customer growth?
No, I don't think it's impacted. Again, the customer can have anything they want. If they want an appliance, they're going to get an appliance. So Yes, there's no reason why that should impact smaller, smaller customers or smaller deals.
All right. And then the percentage of nodes that are managed by acropolis, continues to increase. I was just, which is great. But that could be a factor of, you know, just existing customer footprint continuing to So I was wondering if you're seeing any sort of change in the adoption of acropolis by your new customers?
That's the data that I don't have the back of my, you know, pocket, but we can actually
We can follow-up with you, Andy. Yeah, we don't track it quite like that, but we can see if we can dig in and find it for you.
All right. Thanks.
That was our last question. Thank you for joining today's conference call. This concludes today's call. You may now disconnect.