Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Nutanix Q2 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.
Tonya Chin, you may begin the conference.
Thank you. Good afternoon, and welcome to today's conference call to this the results of our second 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 Pandes, 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 second 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 be making forward looking statements within the meaning of the Safe Harbor provision of federal securities laws regarding the company's anticipated future revenue, billings, gross margin, operating expenses, net loss, loss per share, free cash flow, business plans and objectives, product sales, plans and timing for, and the impact of our transition to focus more on software only sales, expectations regarding product features, technology that is under development, competitive and industry dynamics, new strategic partnerships and acquisitions, changes in sales productivity, expectations regarding increasing software sales, future pricing of certain components software content of our business, potential market opportunities and other financial and business related information. These forward looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call.
For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10 q for the first quarter of fiscal 2018 filed with the SEC on December 13th, 2017, as well as our earnings release posted a few minutes ago on our website. Copies of these documents may be obtained with from the SEC or by visiting the Investor Relations section of our website. Also, please note that unless otherwise specifically referenced, All financial measures we use on this call today are expressed on a non GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release. As a reminder, all results today included in in the call and the press release are using the newly adopted revenue standard ASC 606.
Finally, Nutanix is hosting its inaugural Investor Day in New York City on the afternoon of March 12. Interested sell side analysts and institutional investors should contact Tania Chien if they're interested in attending. We hope to see as many of you as possible as we have a great day planned. Now, I'll turn the call over to Biraj. Biraj?
Thank you, Tania. Hi, everyone. Thank you for joining. Q2 was yet another strong quarter for Nutanix with billings revenue, gross margin and EPS, all better than our guidance and consensus. Q2 also saw us add a record number of new customers, bringing our total number to 8,870.
Last quarter, you heard a lot from us about our software emphasis. Including eliminating the sale of pass through hardware over time to align our go to market with the softer defined nature of our business. And it dramatically drove the surface area of our operating system. I'm proud of how our sales leadership has stepped up to help us execute so well on this business model shift. In Q2, our revenues were up 44 percent year over year, even with the elimination of $14,000,000 in pass through hardware revenues.
Our software and support business is also growing at a significant pace. That business has now reached over $1,000,000,000 in annualized run rate, for billings in its own right. Very few public software companies have achieved this milestone, and they're pleased to be one among them. This moved towards a software defined business model and helped us to accelerate our large deal momentum. In Q2 alone, we secured 57 deals worth more than 4 deals worth more than $1,000,000.
In fact, 5 were worth more than $3,000,000 and 3 were worth more than $5,000,000. And all three of these were deals with global 2000 customers. We now have 57 customers with over $5,000,000 in lifetime bookings. 18 customers with over $10,000,000 in lifetime bookings and 10 customers with more than $15,000,000 in lifetime bookings, up significantly from the previous quarter. Before we talk about Q2 numbers, I'd like to share a significant milestone that we believe is a watershed moment in the company's history.
In early February, Gartner published its Magic Quadrant for hyperconverged infrastructure, representing the first time the analyst firm has emphasized the presence of operating system software company in the leaders quadrant. Our position, which is furthest to the right, on the completeness of Vision Access and highest in the ability to execute access is a testament to our product quality, customer service and end user delight. Software defined infrastructure is gaining immense ground in the enterprise, and this state of the art report from Gartner marks the inflection point of the journey of hyper convergence, of disparate data center tiers on a common operating system in the private cloud. In the next few years, we intend to make a similar case for hyper converging district cloud data centers using common software platform that we call the enterprise cloud OS. In the world of multi cloud silos, enterprises have already started thinking hard about choice and application mobility.
In addition to our solid results in Gartner's reporting of our customer success, I'm also excited to share that we have signed a definitive agreement to acquire a company called Mingjar. Minjar is the maker of VOC Metric, an elegant service built for the AWS marketplace. Providing customers with unified cost control and enhanced operational insights into their workloads running in public clouds. We expect Botmetric will enable our customers to embrace multi cloud architectures, giving cloud operators the freedom to choose the best environment for their business application in data. In addition to Botmetric, Ninja also offers SmartAssist assurance for customers to adopt public cloud services in a hassle free manner, and Minger managed cloud service, with significantly offloads customers from public cloud management and operational minutiae.
We leverage the technology and people expertise Mahindra brings from the public cloud space to build and operate our own cloud services. Zai, spelled X I. Mingjar will bolster our automation and lifecycle management offering Calm and Xi Cloud. In the coming months, we'll provide more details on how we'll specifically integrate the company and its technology into our fabric. Last quarter, we also released our product version 5.5.
This update was the biggest software release in the company's history. Showing the burden of a seamless software transformation of the business. Noteworthy features include single note clusters, software based encryption, graphics and normal virtualization for our native AHV hypervisor, real time re application, self-service portal in CALM for DevOps, antivirus support in software defined file services AFS and cross hypervisor migration. As we've mentioned before, Calm brings an application centric approach to multi cloud orchestration, migration and life cycle management. Kamam is also melding the worlds of virtualization in Kubernetes based Linux Docker Containers.
In the coming years, this product offering will play a very crucial role in our DevOps go to market within the enterprise. We are delighted by the interest from customers since the product became generally available in our 5.5 release. In Q2, we saw 7 customer deals involving Calm, including one of the top deals of the quarter with a Global 2000 customer, which operates 1 of the largest clinical laboratory networks in the world. Q2 2018 was a fantastic quarter for our business overall. We increased our number of Global 2000 or G2K customers by 34 in the quarter ending with 642.
And as we increase our penetration into our G2K customer base, you're seeing a consistent pattern of account expansion over time. In Q2, we had 32 G2K customers spending more than $1,000,000 and 5 spending more than $5,000,000 with us. Moreover, 12 of our top 15 deals in Q2 were with our G2K customer base. It goes without saying that coverage and penetration of the global 1000 remains a critical part of our growth strategy that spend more than $1,000,000 in the quarter, nearly 50% were with customers that had also purchased from us in Q1 2018. One of our largest deals this quarter was with the previously mentioned Global 2000 customer that operates 1 of the largest clinical laboratory networks in the world.
This customer has spent more than $10,000,000 in lifetime bookings and has transitioned in this quarter towards purchasing our software as it continues to expand the user for solution rates. Within its private cloud. Our largest deal in the quarter, which was over $10,000,000, was also with a G2K customer that is a major integrated beverages company. This 10,000,000 plus deal was one of the first for Nutanix with a brand new customer. And also marked our largest AFS deal in the quarter.
A critical success factor for this deal was the richness of our software defined storage services. As the brand is growing, so is the confidence of first time customers to do large deals with us. The Gartner NQ will be instrumental in further establishing the trust with enterprise prospects. In Q2, we also had a $3,000,000 deal plus deal with a G2K customer that is an American Natural Gas Utilities Holding company. The company's engagement with us includes our operations management software, Prism Pro, making it one of the largest Prism Pro deals in our history.
Yet another notable win was with an American telecommunications company that provides wireless services and is an internet service provider that runs its Nutanix deployment on Cisco UCS servers. This customer has made repeat purchases in every quarter since its initial low 6 figure purchase in Q3 of 2017. These deals have increased in value each quarter reaching 7 figures in the last 2. Our team in India signed a great deal with our multi commodity exchange of India Limited or MCX, India's first listed exchange. MCX is a state of the art commodity derivative exchange that facilitates online trading and clearing and settlement of commodity futures and options transactions, thereby providing a platform for risk management.
The exchanges selected our platform to run its Cloudera, DevOps and production workloads. Disaster Recovery on our own hypervisor AHV. Finally, I want to take a moment to talk about one of the most important factors in building our business, our people. We were granted our 50th U. S.
Patent on building a distributed metadata system running on our cluster of commodity servers, invented by the engineering trio of Karan Gupta, Carmen Konka and Alex Kaufman. We also bolstered our leadership team with the addition of Ben Gibbs as Chief Marketing Officer and Aaron Bean, as Chief Human Resources Officer. Ricardo Yanez also joined the management team of our Engineering Organization as Senior Vice President of Development. Chris Kozop joined as Senior Vice President of Global Marketing, and Rodney Foreman had joined as our new Vice President, Global Channel Sales. In conclusion, I'd say that our software is increasingly becoming ubiquitous terms of the number of hardware platforms it now runs on.
Customers have come to appreciate the flexibility and portability of licensing. Our goal is to keep the customer experience as good as it has been in the last 6 years, and that will require tremendous focus in retaining our net promoter score through this transition. Like some of the best consumer brands, we are paranoid about NPS, and we promise that we'll keep our experience just as delightful as we give more choice to Main Street. With automation, machine learning, and one click design, We believe we can deliver software defined infrastructure as true software running on commodity servers. That been the DNA of this company and will continue to remain the biggest competitive advantage as we grow to become a larger company.
We've started in a strong footing with our new business model and talk more about some of the business insights. I'll turn it over to Duston. Duston?
Thank you, Deric. I'm very pleased that our Q2 results came in much better than expected for virtually every significant metric. We had record performances in bookings, OEM bookings, billings, revenue, backlog, free cash flow, new customer adds, number of large deals, software only bookings, and Global 2000 bookings. Revenue for the 4th quarter was $287,000,000, growing 44% from a year ago through hardware revenue during the quarter. We built $356,000,000 in the quarter, representing a 57% increase from a year ago, and a 13% increase from Q1.
Although we don't specifically guide to billings, this billings performance far exceeded the Street consensus estimates. This outperformance was due in part to a general overachievement in a higher support renewals as well as receiving a prepayment in Q2 in excess of $10,000,000 for a transaction that will ship in Q3. The bill to revenue ratio moved up to 1.24 versus our previous estimate of about 1.15. In addition to the items stated above, we are also experiencing slightly higher revenue deferrals within our software only deals, which has the impact of lowering our current quarter revenue, along with increasing our deferred revenue balance and ultimately adding additional predictability going forward via the recognition of more ratably recognized high margin revenue in future periods. Our deferred revenue in Q2 increased by $69,000,000, growing 57 percent from a year ago and up 17% from the previous quarter.
Gross profit for the quarter was $182,000,000, growing 45% from a year ago and up 7% from the previous quarter. Our gross margin for the quarter was 63.5 percent, which was at the high end of our guidance and compares to 63.2% in the year ago quarter and 61.9% in the prior quarter. As you may recall, last quarter, we targeted to eliminate up to $12,000,000 of our pass through hardware revenue. I'm pleased to say that we exceeded our plan with strong execution and eliminated 14,000,000 of pass through hardware revenue during the quarter. On a billing basis, our product mix for Q2 was 77% software and support and 23% pass through hardware.
On a product mix on a revenue basis was 73% software and support and 27% pass through hardware. New customer bookings represented 34 percent of total bookings. Our operating expenses were 202,000,000, below our guidance by 8,000,000, primarily due to the timing of new hires. We have a full court press on and hiring in the second half of the fiscal year to try to make up this headcount shortfall. Our non GAAP net loss was $23,000,000 or a loss of $0.14 per basic share.
Performance across all of our geographic regions were outstanding, with all three regions recording record performances. EMEA and APAC were especially strong. EMEA's results exceeded its previous best quarter by well over 50%. By APAC exceeded its previous best quarter by over 35%. Both of these regions also experienced record sales productivity in the quarter.
Bookings from our international regions were 49% of total bookings in Q2 2018, versus 48% in Q2 2017. Both Dell and Lenovo contributed nicely in Q2. Dell Matt its best historical performance and Lenovo recorded its best performance increasing almost 80% sequentially. Dell bookings came in slightly less than 10% of total bookings and included deal sizes net to Nutanix of 3,500,000 and 2 deals at $2,600,000 each. Lenovo included 4 deals greater than 1,000,000.
IBM is still in its early stages of our relationship and progressing within our expectations. We booked our first two initial IBM related deals within the quarter. And lastly, our Cisco UCS related bookings increased over 40% sequentially, included deals of $2,500,000 $1,500,000. Looking forward, our software business will continue to grow significantly. Our software is completely portable among many different server platforms.
For instance, a customer could procure 75 nodes of software licenses from Nutanix and deploy 25 of these nodes on Dell servers. Another 25 nodes on HP service and the remaining 25 nodes on Cisco servers. Without our immediate knowledge regarding the exact deployment details. And a matter of fact, we have 1 Global 2000 that has completed over $6,000,000 in ELA bookings directly with Dell, with the licenses to be and also did 2,000,000 in ELA bookings directly with Nutanix, with the licenses to be deployed on Dell HP and potentially other servers. Going forward, due to the ubiquitous nature of the software, we will no longer be reporting or commenting on specific details surrounding the Dell, Lenovo and IBM OEM business, or any other specific vendor such as Cisco or HP.
Instead, we will combine and comment on all software sales deploys via our OEM transactions and on other various servers as well as our own addition software into a single grouping called software only sales. A few minutes on the balance sheet, we closed The quarter was cash and cash equivalents of $918,000,000. This is up from $366,000,000 in Q1. The Q2 cash balance includes approximately 509 to net proceeds raised during the quarter, Through our 5 year convertible senior notes, as a reminder, this transaction was done at 0 interest rate with an effective conversion premium of 100% and add an effective pretax interest rate on the proceeds, including the cost of a call spread of approximately 2,000,000 2%. DSO is based on a straight average of 58 days compared to 57 last quarter.
Weighted average DSO was 30 days versus 30 days in Q2. By $12,000,000 of ESPP funding and we generated $32,000,000 in free cash flow during the quarter. This was also positively impacted by the 12,000,000 of ESPP funding. And AHV notes as a percent of total on Nutanix notes based on a rolling 4th quarter average was 30%. Now looking at our guidance, for the third quarter, the guidance again on a non GAAP basis is as follows: Revenue between $275,000,000 $280,000,000, gross margin between 67% 68%, operating expenses of approximately $218,000,000 to $220,000,000 and a per share loss of $0.19 to $0.21.
Using weighted average shares outstanding of approximately 167,000,000 In Q3, we're assuming a bill to revenue ratio of approximately 1.2. The revenue guidance above assumes a 35% growth rate from the year ago period. And even more importantly, the assumed gross profit guidance yields a 50% growth rate from the year ago period. And as a reminder, we believe the best metric to measure our progress during this transition period to a software centric model is gross profit dollars in growth in gross profit dollars and not revenue or revenue growth as revenue and even gross margins could be somewhat fluid during this transition Furthermore, We also believe that anyone who crafted negative opinion on the company founded on slowing revenue growth during this period of transition, is simply being disingenuous based on our strong gross profit growth Lastly, this guidance assumes that will eliminate approximately $45,000,000 of our pass through hardware questions, that would be great.
Your first question comes from Jason Nolan with Baird. Your line is open.
Okay. Great. Congrats on the quarter. And just to clarify, Dustin, what's the FQ3 expectation for hardware pass through elimination as a percent of revenue?
Yes. It's going to be somewhere, in that range that we had provided before plus or minus or percent maybe. You know, it's a complicated, we got a bunch of moving parts and, and, and variable, inputs and outputs here, but I don't think it's gonna be, too different. We had said, 22% this quarter and it came in around 23%. And the only reason really came in at 23% is, is we shipped some more, having a good quarter.
And, we previously said 16%, I believe, for this quarter. And we'll be within that range, I think, let's say, plus or minus, but we're making on that front. We're making good progress. North America is pretty much all now being transacted without the hardware attached. So those processes seem to be up and running and going pretty nicely.
We've said all along that the real heavy lifting is in the international regions. So we still have obviously significant work to do there, which we're undertaking as we speak. And we'll start to, transact some of those, orders, without the hardware here shortly. We've done actually one transaction already, kind of a one off. And in EMEA, it happened to be just on the big deal theme, about a $9,000,000 all in order that we've already closed in the quarter that was transacted without without the hardware.
So we're doing some, some pretty good stuff. Got a lot of work to do, but so far so good.
Okay. Thanks for that color. And then a follow-up on Salesforce, I think you guys went software only on quota. February 1st, maybe a few could give and early perspective on how that's taken with the sales force in the field. We've heard of the elimination of, channel conflict on
the hardware side, but curious to hear your thoughts.
Yes, this is Viraj. Thanks for the question. I would say that, there is clarity for the Salesforce because in the past, as we were thinking about how to fulfill and how that actually would relate to their, quota expiration and commissions and things of that nature. So now we have single currency and this normalizes everything into 1. So by and large, I think what we've heard is that this clarity is a good thing.
We have a very good leadership that's actually adept at change management and we're going through that process, but there's nothing to, say that this thing actually needs more work. I think we're in pretty good shape as of this quarter.
Your next question comes from Simon Leopold with Raymond James. Victor Chui for Simon Leevold. Could you just speak about the acquisition that you guys made, maybe just a little color, around what your logic was behind that and what the strategy is there, for that particular deal?
Yes, absolutely. So if you think about, the orchestration layer that we have built with Calm, and that's about orchestration across multiple clouds, it's closer to developers and DevOps as the end user. Now sitting next to it, you know, Mindjar actually sits right next to it, complements the multi cloud, layer with its costing budgeting governance and compliance feature sets. And, now we believe that in the next 3 to 5 years, as we talk about, this is my earning script as well, that as the world goes more and more towards multi cloud, we talk about hyper convergence of all these clouds, and hyper convergence of these clouds would require a control plane that includes Calm, Ninja, and many future, different pieces that need to fit together in the puzzle itself. So that's what Ninja really.
They have a couple of the things, one of which is the managed service, that they've actually done to, improve, a migration of on prem customer to an off prem customer and we'd be using that for Zai cloud as well.
I'm sorry, did you guys disclose the terms of that transaction for you?
We did not. It's not material to the balance sheet, so, we won't be disclosing that.
Your next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.
Hey guys, thanks for taking my questions and congrats on the strong results. In your prepared remarks, you recently talked about Zai cloud And, I think it's still supposed to launch mid year. To us, this model is clearly moving to software, but I'm curious should we think about a second inflection coming? And I guess what I'm referring to is an even more aggressive move towards ratable subscription revenue in the future?
Yeah, I think there is definitely, you know, man, as you think about us as a software company, we have been collecting 3 year support, because of our appliance heritage, you know, we used to collect 3 year support for that. So there's a lot of, billings that is ratable today, and Dustin throw some more color on that as well. But as we, communicate with you going forward in future quarters, we'll talk about subscription as an important pillar of our overall business as well. I just want to add some more to it. No, I
think that's right. I think we've got to, get a little bit more of, you know, Zai under a belt first, and then I think we can have a have a better opinion on that.
Okay. Great. And then, and then Dustin, a follow-up for you. I know, you know, if you're guiding to Q3 today and I assume we'll get maybe more of a long term look at your Analyst Day, I'm wondering if you can help us with what a good gross margin exit rate might look like, this year. I don't know if you'd be willing to comment on an exit rate fiscal 'nineteen at all as well, but maybe exiting this year would certainly be helpful.
Yes. I mean, we don't go out more than a quarter, so I'm not going to specifically talk about, our July quarter, in this call. But I think, you know, looking longer term, you know, you should expect, you know, pretty healthy software like margins, once we're down to the, 5%, which we've talked about as a billings target, that's probably 8%, maybe 9% on a revenue basis. But it, you know, would be similar to other software companies, 75%, 80%. At that point in time, you'll, you'd be at, 60 plus percent software, 100% margin.
And then, you know, probably 30 something or 30 percent ish of support at a pretty decent margin. You can do that math and then the remaining hardware with whatever's left over would be at 0. So you can come up just with that calculation. It was a pretty good, healthy margin profile once we get down to some minimal appliance pass through with hardware stuff.
Great, very helpful. Thanks guys.
Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Yes, thank you. This is Michael Brown on for Rod.
Derek, just on the software transition, so I know still early days, but just wondering if you could talk a little bit about what the customer response has been so far. And just have you seen any impact on sales cycles as well as the change?
Yes, thanks for the question. I think the big thing that we are seeing is that as people decouple software and hardware consumption, we are also seeing, deals becoming bigger. And, obviously, as the company, we've never really tried to do big right away because the whole idea of hyper convergence is more like cloud consumption where you start small and you pay as you grow and you grow over time. But if there's a customer that's been around for about a year or more, now they're talking about, consumption that's actually bigger, they are looking at, larger deals because for them, software appreciates, you know, over time and hardware depreciates over time. So why would we have to buy a lot of hardware upfront because based on Moore's Law, you know, that over the next 12, 18 months, things will actually become faster and cheaper.
So I think we are seeing this resonate with our customer base today. And, including our partners, you know, we're talking to a lot of our channel partners and they see value where they can go make money by selling software and we can share some of the margin for them as well. So I think all in all, Main Street is, is quite happy. I think, again, it's early days, you know, as a company, we are paranoid about things and every quarter we'll come and talk about some of these things as well. But, I think we've got to a pretty good start.
Got it. And then, for Dustin, just on the convert, so Q2 was a pretty strong cash generation quarter. I think you already had a pretty solid cash balance on hand, even excluding the proceeds. Just wondering if you could help us understand a little bit more the motivation behind the issuance and how you're thinking about using the proceeds over time?
Yeah, the motivation was simply the markets, where we're in an outstanding period of time to raise, some good quality capital at a remarkably effective rate. And cost. And, you know, we clearly took the opportunity to do that. And, you know, I gave some of the statistics, you know, around that. You know, there's no dilution, to any shareholder.
Until the stock appreciates a 100% for when we did the deal. And even after that, we look forward to the day that happens. And then even after that, it's minimal dilution from there. So it was just a it was a great time to go to go do the transaction. And then, you know, usage of the trends of the of the cash, it's really, you know, to put us on a place, from an optionality perspective to do what we need to do, to grow the company and and make our company the most successful possible.
And, with this cash, from an M and A perspective, you should not expect any big large deals that's not, that wouldn't work for us necessarily anyway. You should expect more smaller deals just like the one we announced today, from that perspective, but it just gives us, again, the optionality in good times and bad times and good economies and bad economies. To take advantage of situations and having that cash, on hand.
I just want to reiterate what you just said that the DNA of this company will not absorb a very large acquisition. I think just not what we've built for and you know, we'll look at smart teams, smart technologies, smaller teams that can really common goals for this company's overall business in the next 3 to 5 years. There's no instant gratification of an M and A for us. Com was an acquisition that was done in, July, August of 2016. And we said, we've got to do the right thing for the product and the end customer.
So the GA only came out in January. So, a lot of these things that we're doing is looking at 3 to 5 years out as opposed to saying we need something for the next 12 to 18 months to bolster our revenue.
Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
I wanted to ask a little bit about the current quarter guidance. And just to make sure that I'm thinking about the math correctly, So if you look at the breakdown of your revenue stream, you've got about $10,000,000 of product deferred that kind of flows into this April quarter. Guess what I'm getting at is based on the hardware burn off, are you assuming that you can kind of grow software only revenue as much as the 50 plus percent range. And if that's true, how sustainable are you guys thinking about growth for software only being in that 40 plus percent year over year range over the next couple of quarters. And I have a follow-up.
Yeah. So I'm not getting, Garrett, unless they get into the pieces of, of the growth, Aaron, but maybe we'll just talk about some some generalities, I guess, as far as how we feel comfortable going forward with the growth rates. And I think we'll give a little bit of insight, at our, investor day. On, on March 12 here coming up shortly. So we'll, we'll clearly, give some insights there.
And then, you know, just in growth rates in general, we talked about, you know, on a gross profit basis, we're growing, based on the guidance year over year Q3 to Q3 at 50% year over year. If you just took the top line and you added back the $45,000,000 that we're eliminating, that year over year growth rate would be close to, I believe, 60% year over year. So, you know, all healthy from a growth rate perspective and things like that. It's a big market. We're a leader in that market, so we should have some pretty good healthy growth rates going forward for a while.
Yes, I can't overemphasize the fact that we're still scratching surface of this market. I mean, while this might have started as a box like, it's an NQ, but this NQ is going to be all consuming. And if you haven't done that, then you're not a successful company, honestly. I think this is about computing. It's not about hyper convergence.
And over time, as I said, you've got to make this about converging clouds, and there's a massive opportunity to build an operating system for that.
Great. That's helpful. And then as a follow-up real quickly on the model as well, you know, I think last quarter you talked about the support gross margin being kind of in that mid-fifty percent range. It looks like you did well above that 63.5% this quarter So what's the right gross margin there? And then you also talked about operating expenses kind of growing $10,000,000 per quarter Obviously, you underspent this quarter, but is that $10,000,000 a quarter the right level to be thinking about going forward?
Yes, I think plus or minus, it's it's a general, generally, you know, directionally correct. We've got a bunch of makeup we're trying to do, obviously, this quarter coming up from the from the 202 to the 218 to 220. But I think going forward somewhere in that range, which we've which we've stated before. So I think, you know, clearly, we've got a lot, a lot of projects to go spend on it. The first part was
the services gross margin support gross margin?
Yes. I mean, it gets to be a bit of a, involved answer there. You know, that, that target margin, includes some residual internal COGS, if you will, that stays once all the hardware is gone. So it has to it has to flow somewhere. So that's kind of in a steady state model, is probably once we get to, you know, the 5 or 8 percent billings and revenue on the pass through hardware piece, probably ultimately the right number to attach to that over time.
So just to be clear, you're sticking with the mid-fifty percent that you gave last quarter?
I think when you look at its entirety at a steady state with very little hardware, all encompassing, it has to go somewhere. And we bumped it into that support piece.
Fair enough. Thank you very much.
Your next question comes Katie Huberty with Morgan Stanley. Your line is open.
In the U. S. Market where you're pushing hardest in terms the software transition. What's the mix now of new node shipments on the non super micro hardware? So software shipments on top of Dell HP, Cisco, Lenovo, when you add that up, how has that mix changed over the last 6 months?
And where do you think you might be in a year or 2 as you come out of this this transition? And then just connected to that, given all the success stories that you walked through and you cases around customers, deploying your software across a diverse number of servers are you seeing that sort of awake the management teams of those of those other OEMs? And realize that there's potentially an opportunity to, work in a more aligned manner to, to participate in these deployments.
We get great questions, Katie. On the first one, lifetime, if you think about lifetime deployments, About 1 third was non super micro. I would say about 35% was, in the last, 5, 6 years of selling. I would imagine, and this is again, waging a guess, you know, this would probably get to 50, 50 in the next 18 months or so. And, obviously, every 6 months, be observing some of this as well.
But, I think that'd be a good one now. What are the market forces? Because the market forces also are strong. We can just do it in our own, cord as people love, the NX support, which is direct to us. And, I think many of them, they just want to come to one stop shop for support for both hardware and software.
So while you might eliminate the hardware top line, the fact that they actually trust our support will be one of the forces that we have to continue to look at because you don't want to throw the baby up in the bathwater as we actually go through this transition. So I think, I would wager something like fifty-fifty in
the next 18 to 4 months.
And on the second question, I think it's happening. The grassroots is where the rebellion happens. The grassroots is the customers, the partners, they are the ones who've been basically saying, look, I I love Nutanix, and I would like for you to really run it in your servers and And I think that's what we've been, really trying to do for the last 12 to 18 months, which is how, you know, one of the examples I gave out Cisco, another one that doesn't give out HP, all about the power of the customer. They're extremely powerful, especially the Global 2000 is very powerful. In the way it actually dictates what, server vendors actually go and work on it or not.
Your next question comes from Alex Kurtz with KeyBanc Capital. Your line is open.
Hi, guys. This is Steve Enders on for, Alex. I was wondering if you could, talk a little bit about what you're seeing in in Europe right now. It seems like it's going really, going well, and, you guys are executing well. I was wondering, these are the changes you guys have made over the past, year or so or with what's really driving this development?
Yes, I think, part of it was, some new structure with people and our VP of EMEA has done a pretty good job of, you know, looking at, the kind of people we needed for different roles. Part of it is also large deals. We've done some really good business last quarter based on large deals from and many of them from existing customers, which has been one of our pillars of this business is large deals from existing customers. And then lastly, there's something going on with the Brexit as well. I think when, customers and, and, a lot of the market is thinking about where to go from Britain and where did the land in Germany and other such places?
I think it's causing a lot of data center transformation projects to come alive because and they're moving operations, they're also moving their infrastructure as well.
And just on the EMEA large deal comment, I believe, me, of quarter over quarter, large deals by our definition, was about 3x the Q twos, or the Q1 performance. So, some really good, good large deals happening in EMEA. And the exciting thing about that again, as Dior said, is the repeat purchase capability of most of these customers. So
And the other thing that's also popping up is the system integrators in Europe are, taking note and I think because there's a tipping point at which the SIs start to take note, and you're starting to see some movement in that direction, especially.
Great. Thanks guys.
Your next question comes from Wamsi Mohan with Bank of America Merrill Lynch. Your line is open.
Yes. Thank you. So the the pace of your incremental new customer add was was very strong. I was wondering if you could comment on on what drove that strength. And can you talk about the profile of the new buyer?
Seems like the billings per new customer also increased. Materially are you seeing any shift in the profile of the buyers? And I have a follow-up.
Yes, I think on the on the first one, which is, about, sorry, skip the question.
The customer ads.
Customer ads. Yeah, I think, the channel is definitely kicking in especially in the mid market, we're seeing, the channel. I mean, it took us a while to actually get to where we are. We have intense focus on how we really go and, lead with the channel, look at them as a customer, not just as a partner. I think that has been a huge contribution to our overall mid market, customer acquisition.
And, I think on the second question, It is getting elevated with the Gartner MQ. The buyer's profile is changing because the C level people, the CIOs, the VPs of infrastructure they were waiting for this to come together as a mainstream thing. For the last 5, 6 years, we were carrying the burden of really creating a market. And I think, we're seeing that change actually come together. So over the coming, 18, 24 months, we'll see many more of these senior people now taking stock of the situation, especially as we see the big bills coming from the public clouds.
I think they've got to figure out a way to really contains that and figure out this, better cloud architectures on prem as well. It will go and box the budget and the spend.
Thanks, Biraj. And if I could just follow-up, there's a lot of noise around what can happen at at the LVM where including mergers and reverse mergers and sounds from your commentary, you've really not seen any change in behavior as it pertains to your relationship. But if there were you know, any deal on that side happen, how would you handicap the probability of of some overhead, you know, sharp the emphasis of of mechanics at Dow?
Yeah. I mean, we are waiting and watching. Obviously, it's difficult to speculate, but what I'll say is that, I respect Michael Dell as a leader and you know, if he gets closer to Vienna on one hand, I mean, he also has massive roots in the server business. And one of his goals and Jeff Clark, who is the president of the company for the last 30 years, you know, they, they have actually built this business on the strength of the server. And they would not want to lose that by, not being close to us as well.
I mean, there's only 2 operating systems that are really merging in this market. 1 is VMware. 1 is Nutanix. And I mean, given what I know of the leadership there, which is one of the things that we've continued to see over the last 3, 4 years, I mean, this cloud or or EMC and Delek coming together? What will happen to XC?
What's going to happen to the Nutanix relationship? You've been feeling this question for the last 24 months. And I think they're just smart as business people. Just like consumer companies who actually know that they can compete with partners and still have and marketplace and App Store and all that stuff. I think that's what Dell is all about.
I think they're getting closer to VMware. They've gotten closer to VMware probably might be one company, but I think for them to get close to another operating system would be a smart strategy.
Your next question comes from Jack Andrews with Needham And Company. Your line is open.
Good afternoon. Thanks for taking my question. Wondering if you could drill down a little bit more on the 5, $3,000,000 deals you signed. Are there any, just common themes, whether it's, you know, civic catalysts or or use cases that were involved there. And is there any, applicable lessons learned from from signing those types of deals that you can take with you moving forward?
Yes, I think a big focus, for us has been around customer success, which means that we start with this phrase called data center modernization. And then, we talk about upselling with the same workload And then we go and talk about, well, we've gained this trust over the last, I would say, say, 12 months with a customer and they liked operational efficiency, they liked, pay as we grow model, there's the simplicity and the elegance of the product, and the application folks start to really say I want to do more with stuff as well. And that's when we talk about replatforming everything, or at least a large chunk of this stuff. So as their existing, capital actually comes to refresh. They are really looking at Nutanix as a platform play.
And that's the big shift that we've seen over the last, I would say 12 months. And I would imagine that the Gartner MQ is only gonna help us with that because the trust actually comes with, with, all the reporting that Gartner actually done. So All in all, I would say that, most of them are existing customers. You know, we've played a, you know, pretty keen role in looking at the utilization in promoter Score. And as the trusted build, they have gone and tried to replatform their entire data center with Nutanix.
Thanks for the color around that. As a quick follow-up, could you touch on what are your hiring priorities, I guess, over the next couple of quarters?
Yeah, I think, you know, you probably could even take a look at our website. You know, it's pretty evident that we are, big on hiring. There's a massive market ahead of us. And because of the repeat business that we've seen that we have even reported in our investor deck, can imagine that once we actually get a dollar from the customer, we get, you know, an average 4.5 more dollars from the entire population close to $99.5 from our global 2000 and close to $20 or more than $20 from our top 25. So given all that, there's a formula that actually says we need to just go for coverage.
You know, our our Chief Revenue Officer, Louis Senacio, he said that, you know, the places where I lose is where I don't have a seat on the table. Seated the table. So I think there's a big push to increase the awareness of the company, and actually get more account coverage which is basically the focus for the business. And obviously, they're doing a lot of, R and D work as well, but it's going to be within the guardrails. I mean, even though We actually do want to acquire some of these smart, smaller teams.
I think the focus is to keep it within the card rails of the last three, four quarters, which is close to 18% of revenue itself.
Great. Thanks for taking my questions.
Your next question comes from James Fish with Piper Jaffray. Your line is open. Hey guys, I'm on for Andy. Thanks for the questions here. Maybe just a follow-up to a prior question, a bit go.
Are you seeing a reduction in channel friction following the change to the software only model?
I think it is early, but, probably in the next 6 months, you can come and report some more, on how it's coming together thesis is that it should reduce because now they can be the match makers of the hardware vendors and our software, which, can only be good because now it's not an either or, you know, it's, you can take Nutanix software and put it on their other partner as hardware and then go and sell it as a solution. And plus they get, to see some professional services and talk of it and you know, as we sell more software ELAs, you know, we expect and hope that, the way we actually go and pay the channel more is based on utilization consumption because we'll have a bunch of shelf relying on the customer's shelves, and we want the partners to go and make money after the fact based on consumption itself. So there is good business for them, and they can actually play the matchmaker that they have always played in the past, 2030 years of IT history.
Got it. Thanks for that. And just a follow-up quickly. You talked a bit about being behind on hiring this quarter and yet you put up very solid billings growth. Do you actually need to hire as much as you expected before?
Really, in other words, how sustainable do you think that the productivity you saw this quarter is, over the next year or so.
Yes. I think there's a bell curve here. You think about the international and one of the things that we did well, 4 years ago, 5 years ago, we said we got to seed a lot of the international territories because over time, half the business will come from, outside the U S. So, we've done a pretty good job of not being laggards in that. And then there are markets like Japan and Germany and ASEAN in places like that where we've seen good success, even UK, So I think we look at some of those.
We look at, a federal where, honestly, we could do a whole lot more. I mean, federal law is one of the pillars of this company's success, 2, 3 years ago in a much bigger way. So I think we can go and double down and sell these success stories. Healthcare has been a massive vertical for us, but they're also referential. There's a lot of referential selling that happens in the health care space itself.
So there's a few verticals where we can actually put these specialist sales force that will come to help us with, the global 2000 in
the coming 3, 4 years.
Your next question comes from Neil Chokshi with Maxim Group. Your line is open.
Thank you. Great quarter. Gross profit and the billings will be higher than reported gross profit. Is that correct?
I'm not sure I understand you, Chris. Say that again, Nehal?
The gross profit that's held in the billings number will be higher than the reported gross profit. Correct? Yeah. Yeah. Okay.
So my question is then is, the gross profit billings growth.
Is that even higher than your reported gross profit growth?
And we should be able to keep that out for us, actually.
I don't have that exactly at hand here in the hall. And we can, get a little bit for you, but, I don't, yeah, likely the case, but I don't have the exact number
Okay. Alright. And, you did have a nice uptick in your acropolis hypervisor adoption. Was there any new, factor at play that drove that flight acceleration there?
Well, last time we talked about was the, this whole journey of the customer starting from,
you
know, talking about data center modernization, going away from tree tier to you know, we can upsell in the same workload. But then finally, the one around replatforming, because then they're trying to look at the whole stack, not just you know, hyper convergence and computing storage coming together, but what about the rest of the stack itself, which is where HV is coming to play, especially for existing customers. You know, Citrix has been a good partner in that vein as well. So I think that workload has helped the HP too. And finally, there are a few features that we were behind on that we've caught with.
And, one of the big ones that's coming and that's been cooking for the last 2 years was, micro segmentation, our network was revision. So hope to see that that whole stack comes together with network and security. And the partners that have actually written their stack, so we've opened up our and security APIs to a lot of our partners. So you see a lot of virtual firewalls, virtual load balancers, network companies that are actually integrating with our is really making AHV into a true blue platform.
Great. Thank you very much.
Your next question comes from Mark Murphy with JP Morgan.
Your line is open. Hi, this is Pinjid. I'm filling in from Mark Thank you for taking taking my question. Due to, congratulations on being featured as reader and Kirkland's Magic Quadrant, I think the the report also states that, by 2020, 20 percent of business critical workloads currently deployed on 3 tier architectures or transition to HCI. What is your opinion?
Do you think that's an aggressive or conservative view and could an acceleration in workload migration of the public the public cloud, do you weigh that pieces?
Yeah. I think, you know, we've been talking about this for the last 3 years now, and the pendulum has swung too far in the other direction about everything is going to be rented. And I think as you know, that, owning and renting will come to balance itself. So we Personally, I mean, I look at, this is a journey of hyper converging public and private owned and rented during the lines between on prem and off prem. That's where the real money will be because over the next 3 to 5 years, the cloud will be a thing.
It won't be an experience. And when something becomes a thing, there's money to be made on top of it, which is what we are actually banking on and doing. A lot of our innovation over the next 3 to 5 years is going to make that thing into an experience. Similar to what we did with on prem,
you know, there was
a lot of hardware boxes that we said, look, and you just need to make them into pure software. And that job only gets, I mean, that goalpost of converging on prem and off prem is an even harder problem with to networking and security and identity and bursting into renting in seasonal quarters of a business and so on. So there's a lot of good problems in computer science and in you know, designed to go and solve for that, you know, I don't look at this as a 0 sum game. It's actually, if you had a growth mindset, you would say there's a lot of money to be made when you look at cloud as a silo and how you can bring the silos together. On this Gartner thing, over 20%, again, 4 years ago it was 0.
So now it's 20%. And I think if we were to succeed as a company, I mean, this magic quadrant would have become something bigger than what it is today, then, it's just a computing am. I mean, virtualization in 2005 was probably okay, fine. We gave it 20%. And then every year, VMware was working on new workloads, better capabilities and features, reducing the virtualization tax and new regions, new geographies, new, you know, certifications and, and all that stuff.
That's the right of passage of any new architecture. So we're in the very early days of this and every year will come and talk about it and Gartner is going to revise its numbers based on how the market makers will really behave with respect to product and customer service and looking at legacy and holding hands with the customer.
Got it. Now when you think about that blurring the line between on premise and off premise, seems like networking is a big deal in there and VMR, obviously NSX, and the CEO acquisition we're the big new for them, and that's, stealing a lot of a lot of the holes that they had. That's for you, you know, I think you're developing an in house How how much of do you think there is a gap between Netflix and your networking technology at this point in time? Or are you or would you say you are on par at this point?
Yeah. I mean, look, I think we focus on, 80% on the 60%. And that's the formula that most, good product company to actually focus on. It's So if you think of 60% is the real stuff and the other 40% is just, you know, stuff that's bundled, but, I would say that today we're already and the 60%. And for us, it's not a $5,000,000, $10,000,000 deal because network virtualization is not a thing that you need to buy for $5,000,000, $10,000,000 and expect 12,000,000 12 months of roll out and professional services.
When you look at the public cloud, they don't even talk about network virtual because any developer can glow go and actually consume security groups and virtual private clouds in one click. So I think our goal is to really make it one click and one mode at a time and not have to really talk about it being a $10,000,000 ELA because it's a thing. Network virtualization is not a thing. It's really a part of an entire operating system experience.
Understood. And if I can sneak in 1 more, in terms of all the changes that that you're currently going through, especially with the sales comp changes coming in February 1st. And, could you, update us on from a sales perspective what where are we with the changes that are already done with all the changes in territories, code to cash process, everything else?
Yeah. I mean, you know, this is something that Dustin and Mark have been talking about as well about how we need to actually have Mark come to our Investor Day conference. Because there's a lot to really exchange notes on with JP Morgan, and we'd love to actually have you folks come in. But look, I think we've, just like our software operating system, is actually, making a lot of, improvements in innovation. I think there is a go to market operating system that innovating on it every quarter and every.
So I think it's, early days, but, the quarter, every quarter results will tell you more about how this change is coming together. We'd love to have you come together to the Investor Day Conference itself, including Mark as well.
And at this time, this concludes the Q And A session for today's conference. I will now turn it back to the presenters.
Okay. Well, thank you so much everybody for joining us. I know it was a tough day because of VMware and Splunk and Pure and us. Going on in the same day. For all of you actually showed us here, showed, you know, presence here.
It means a lot to us. Your time is precious and look forward to seeing you at the Investor Day conference. Thank you.
This concludes today's conference call. You may now disconnect.