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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press the pound key. Thank you. Tonya Chin, you may begin the conference.
Thank you. Good afternoon, and welcome to today's conference call to discuss 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.com website. Joining me today are Dheeraj Pandey, Nutanix's CEO, and Duston Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its 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 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 of our solutions, our plans regarding how we will report the software content of our business, potential market opportunities, and other financial and business-related information.
These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after 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 13, 2017, as well as our earnings release posted a few minutes ago on our website. Copies of these documents may be obtained from the SEC or by visiting the investor relations section of our website.
Also, please note that unless otherwise specifically referenced, all financial measures we use on this call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the investor relations section of our website and in our earnings press release. As a reminder, all results today included 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 12th. Interested sell-side analysts and institutional investors should contact Tonya Chin 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 Dheeraj. Dheeraj?
Thank you, Tonya. 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 software-defined nature of our business and to dramatically grow 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% year-over-year, even with the elimination of $14 million in pass-through hardware revenues. Our software and support business is also growing at a significant pace.
That business has now reached over $1 billion in annualized run rate for billings in its own right. Very few public software companies have achieved this milestone, and we are pleased to be one among them. This move towards a software-defined business model has helped us to accelerate our large deal momentum. In Q2 alone, we secured 57 deals worth more than $1 million, up 104% year-over-year. Also in Q2, we had 19 software and support deals worth more than $1 million. In fact, five were worth more than $3 million, and three were worth more than $5 million. All three of these were deals with Global 2000 customers. We now have 57 customers with over $5 million in lifetime bookings, 18 customers with over $10 million in lifetime bookings, and 10 customers with more than $15 million 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 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 companies in the leaders quadrant. Our position, which is furthest to the right on the completeness of vision axis and highest in the ability to execute axis, 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 in the journey of hyperconvergence 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 hyperconverging disparate 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 Minjar. Minjar is the maker of Botmetric, 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 applications and data.
In addition to Botmetric, Minjar also offers SmartAssist Assurance for customers to adopt public cloud services in a hassle-free manner, and Minjar Managed Cloud Service, which significantly offloads customers from public cloud management and operational minutiae. We leverage the technology and people expertise Minjar brings from the public cloud space to build and operate our own cloud services, Xi, spelled X-I. Minjar 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, shouldering the burden of a seamless software transformation of the business.
Noteworthy features include single-node clusters, software-based encryption, graphics and NUMA virtualization for our native AHV hypervisor, real-time replication, self-service portal in Calm for DevOps, antivirus support in software-defined file services, AFS, and cross-hypervisor migration. We mentioned before, Calm brings an application-centric approach to multi-cloud orchestration, migration, and lifecycle management. Calm is also melding the worlds of virtualization and 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 our customers since the product became generally available in our 5.5 release. In Q2, we saw seven customer deals involving Calm, including one of the top deals of the quarter with a Global 2000 customer, which operates one 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. As we increase our penetration into our G2K customer base, we're seeing a consistent pattern of account expansion over time. In Q2, we had 32 G2K customers spending more than $1 million, and five spending more than $5 million 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 2000 remains a critical part of our growth strategy going forward. Speaking about land and expand, across our deals with customers that spent more than $1 million in the quarter, nearly 50% were with customers that have also purchased from us in Q1 2018.
One of our largest deals this quarter was with the previously mentioned Global 2000 customer that operates one of the largest clinical laboratory networks in the world. This customer has spent more than $10 million in lifetime bookings and has transitioned in this quarter towards purchasing our software as it continues to expand the unified solution load within its private cloud. Our largest deal of the quarter, which was over $10 million, was also with a G2K customer that is a major integrated beverages company. This $10 million-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 Magic Quadrant will be instrumental in further establishing that trust with enterprise prospects. In Q2, we also had a $3 million-plus deal with our 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 six-figure purchase in Q3 of 2017. These deals have increased in value each quarter, reaching seven figures in the last two. Our team in India signed a great deal with the Multi Commodity Exchange of India Limited, or MCX, India's first listed exchange.
MCX is a state-of-the-art commodity derivatives exchange that facilitates online trading and clearing and settlement of commodity futures and options transactions, thereby providing a platform for risk management. The exchange has 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 a cluster of commodity servers, invented by the engineering trio of Karan Gupta, Taman Konka, and Alex Kaufman. We also bolstered our leadership team with the addition of Ben Gibson as Chief Marketing Officer and Aaron Bean as Chief Human Resources Officer. Ricardo Jenez also joined the management team of our engineering organization as Senior Vice President of Development.
Chris Kozub joined as Senior Vice President of Global Marketing, and Rodney Foreman has joined as our new Vice President of Global Channel Sales. In conclusion, I'd say that our software is increasingly becoming ubiquitous in 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 six years, and that will require tremendous focus on 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 has 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 on a strong footing with our new business model. To talk more about some of the business insights, I'll turn it over to Duston. Duston?
Thank you, Dheeraj. 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 fourth quarter was $287 million, growing 44% from a year ago, and up 4% from the previous quarter, despite eliminating $14 million in pass-through hardware revenue during the quarter. We billed $356 million 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 and higher support renewals, as well as receiving a prepayment in Q2 in excess of $10 million 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 million, growing 57% from a year ago and up 17% from the previous quarter. Gross profit for the quarter was $182 million, growing 45% from a year ago and up 7% from the previous quarter.
Our gross margin for the quarter was 63.5%, 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 million of our pass-through hardware revenue. I'm pleased to say that we exceeded our plan with strong execution and eliminated $14 million of pass-through hardware revenue during the quarter. On a billings 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% of total bookings. Our operating expenses were $202 million, below our guidance by $8 million, primarily due to the timing of new hires.
We have a full-court press on in hiring in the second half of the fiscal year to try to make up this headcount shortfall. Our non-GAAP net loss was $23 million, 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%, while 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 '18 versus 48% in Q2 '17. Both Dell and Lenovo contributed nicely in Q2. Dell matched 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 $3.5 million in two deals at $2.6 million each. Lenovo included four deals greater than $1 million. 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. Lastly, our Cisco UCS related bookings increased over 40% sequentially and included deals of $2.5 million and $1.5 million. 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 servers, and the remaining 25 nodes on Cisco servers, without our immediate knowledge regarding the exact deployment details.
A matter of fact, we have one Global 2000 that has completed over $6 million in ELA bookings directly with Dell, with the licenses to be deployed on some mix of Dell and HP servers. In Q2, this exact same customer also did $2 million 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 deployed via our OEM transactions and on other various servers as well as our own edition software into a single grouping called software-only sales. A few minutes on the balance sheet.
We closed the quarter with cash and cash equivalents of $918 million. This is up from $366 million in Q1. The Q2 cash balance includes approximately $509 million in net proceeds raised during the quarter through our 5-year convertible senior notes. As a reminder, this transaction was done at zero interest rate with an effective conversion premium of 100% and at an effective pre-tax interest rate on the proceeds, including the cost of the call spread, of approximately 2%. DSO is based on a straight average of 58 days compared to 57 last quarter. Weighted average DSO was 30 days in Q2. We generated $46 million in cash flow from operations in Q2, which was positively impacted by $12 million of ESPP funding. We generated $32 million in free cash flow during the quarter. This was also positively impacted by the $12 million of ESPP funding.
AHV nodes as a percent of total Nutanix nodes, based on a rolling four-quarter average, was 30%. Looking at our guidance for the third quarter, the guidance again on a non-GAAP basis is as follows: revenue between $275 million and $280 million, gross margin between 67% and 68%, operating expenses of approximately $218 million-$220 million, and a per-share loss of $0.19-$0.21 using weighted average shares outstanding of approximately 167 million. 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. Even more importantly, the assumed gross profit guidance yields a 50% growth rate from the year-ago period.
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 and 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 crafts a 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 we will eliminate approximately $45 million of our pass-through hardware revenue during the quarter. With that, operator, if you could open the call up for questions, that would be great. Thank you.
At this time, I would like to remind everyone, in order to ask a question, press star, then 1 on your telephone keypad. Your first question comes from Jason Roland with Baird. Your line is open.
Okay. Great. Congrats on the quarter. Just to clarify, Duston, what's Q3 expectation for hardware pass-through elimination as a percent of revenue?
Yeah, it's going to be somewhere in that range that we had provided before, plus or minus 1% maybe. We've got a bunch of moving parts and variable inputs and outputs here, but I don't think it's going to be too different. We had said 22% this quarter, and it came in around 23%. The only reason really it came in at 23% is we shipped some more, having a good quarter. We previously said 16%, I believe, for this quarter, and we'll be within that range, I think. I say plus or minus, but on that front, we're making good progress. North America is pretty much all now being transacted without the hardware attached. 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.
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 it happened to be just on the big deal theme, about a $9 million all-in order that we've already closed in the quarter that was transacted without the hardware. We're doing some pretty good stuff. We've got a lot of work to do, but so far, so good.
Okay. Thanks for that color. Then a follow-up on sales force. I think you guys went software-only on quota February 1st. Maybe if you could give an 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 we are curious to hear your thoughts.
Yeah. This is Dheeraj. Thanks for the question. I would say that there is clarity for the sales force 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. Now we have single currency, and this normalizes everything into one. 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.
Okay. Great, Dheeraj. Thanks a lot.
Your next question comes from Simon Leopold with Raymond James. Your line is open.
Hi, guys. This is Victor Chiu with Simon Leopold. 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.
Yeah, absolutely. 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, Minjar actually sits right next to it and complements the multi-cloud layer with its costing, budgeting, governance, and compliance feature sets. Now we believe that in the next three to five years, as we talk about this in my earnings script as well, that as the world goes more and more towards multi-cloud, we talk about hyperconvergence of all these clouds. Hyperconvergence of these clouds would require a control plane that includes Calm, Minjar, and many future different pieces that need to fit together in the puzzle itself. That's what Minjar really is.
They have a couple of other things, one of which is a managed service that they've actually done to improve a migration of an on-prem customer to an off-prem customer, and we'll be using that for Xi Cloud as well.
Okay. Excellent. I'm sorry, did you guys disclose the terms of that transaction, or did you?
We did not. It's not material to the balance sheet. We won't be disclosing that.
Okay. All right. Thank you.
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, Dheeraj, you talked about Xi Cloud, I think it's still supposed to launch mid-year. To us, this model is clearly moving to software. I'm curious, should we think about a second inflection coming? 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, as you think about us as a software company, we have been collecting three-year support because of our appliance heritage. We used to collect three-year support for that. There's a lot of billings that is ratable today, and Duston threw some more color on that as well. As we communicate with people going forward in the future quarters, we'll talk about subscription as an important pillar of our overall business as well. Duston, you 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 Xi under our belt first, then I think we can have a better opinion on that.
Okay, great. Duston, a follow-up for you. I know you're guiding into Q3 today. I assume we'll get maybe more of a long-term look at your Analyst Day. I'm wondering if you can help us, 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 for fiscal 2019 at all as well. Maybe exiting this year would certainly be helpful.
Yeah. We don't go out more than a quarter. I'm not going to specifically talk about our July quarter in this call. I think, looking longer term, you should expect 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. It would be similar to other software companies, 75%, 80%. At that point in time, you'd be at 60+% software at 100% margin. Probably 30-something or 30%ish of support at a pretty decent margin. You can do that math. The remaining hardware, whatever's left over, would be at zero. You can come up just with that calculation and with a pretty good, healthy margin profile once we get down to some minimal appliance pass-through hardware stuff.
Great. Very helpful. Thanks, guys.
Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Yeah, thank you. This is Mac Ball on behalf of Rod Hall. Dheeraj, just on the software transition, I know it's 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 a result of the change?
Yeah, 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. Obviously as a company, we've never really tried to do big right away because the whole idea of hyperconvergence is more like cloud consumption, where you start small and you pay as you grow, and you grow over time. If they're the 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 over time and hardware depreciates over time. Why would we buy a lot of hardware upfront? Because based on Moore's Law, you know that over the next 12 to 18 months, things will actually become faster and cheaper.
I think we are seeing this resonate with our customer base today. Including our partners, 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 margins with them as well. I think all in all, Main Street is quite happy. I think, again, it's early days, and as a company, we are paranoid about things, and every quarter we come and talk about some of these things as well, but I think we've got to a pretty good start.
Got it. Then for Duston, just on the convert, 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 just how you're thinking about using the proceeds over time.
Yeah, the motivation was simply the markets were in an outstanding period of time to raise some good quality capital at a remarkably effective rate in cost. We clearly took the opportunity to do that. I gave some of the statistics around that. There's no dilution to any shareholder until the stock appreciates 100% from when we did the deal. Even after that, we look forward to the day that happens, then even after that, it's minimal dilution from there. It was a great time to go do the transaction. Then, the usage of the cash, it's really put us in a place from an optionality perspective to do what we need to do to grow the company and make our company the most successful possible. With this cash, from an M&A perspective, you should not expect any big, large deals.
That wouldn't work for us necessarily anyway. You should expect more smaller deals, just like the one we announced today from that perspective. It just gives us, again, the optionality in good times and bad times, in good economies and bad economies to take advantage of situations and having that cash on hand.
Yeah. I think I just want to reiterate what he just said, that the DNA of this company will not absorb a very large acquisition. I think just not what we built for, we'll look at smart teams, smart technologies, smaller teams that can really come and bolt for this company's overall business in the next three to five years. There's no instant gratification of an M&A for us. Calm was an acquisition that was done in July, August of 2016. 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. A lot of these things that we're doing is looking at three to five years out, as opposed to saying we need something for the next 12 to 18 months to bolster our revenue.
Thank you.
Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Yeah. Thank you very much for taking the questions. Congratulations on the great results. 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. If you look at the breakdown of your revenue stream, you've got about $10 million of product deferred that kind of flows into this April quarter. I guess what I'm getting at is based on the hardware burn off, are you assuming that you can grow software-only revenue as much as the 50+% range? If that's true, how sustainable are you guys thinking about growth for software only being in that 40+% year-over-year range over the next couple of quarters? I have a follow-up.
Yeah. I'm not going to necessarily get into the pieces of the growth, Aaron, but maybe we'll just talk about some generalities, I guess. As far as how we feel comfortable going forward with the growth rates, I think we'll give a little bit of insight at our investor day on March 12th here coming up shortly. We'll clearly give some insights there. Just in growth rates in general, we talked about 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 million that we're eliminating, that year-over-year growth rate would be close to, I believe, 60% year-over-year. All healthy from a growth rate perspective and things like that. It's a big market.
We're a leader in that market, we should have some pretty good healthy growth rates going forward for a while.
I can't overemphasize the fact that we are still scratching the surface of this market. While this might have started as a box, like, oh, it's an NX, but this NX is going to be all-consuming, and if we haven't done that, then we're not a successful company, honestly. I think this is about computing. It's not about hyperconvergence. Over time, as I said, we'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. Then as a follow-up real quickly on the model as well. I think last quarter you talked about the support gross margin being in that mid-50% range. It looks like you did well above that 63.5% this quarter. What's the right gross margin there? Then you also talked about operating expenses growing $10 million per quarter. Obviously, you underspent this quarter, but is that $10 million a quarter the right level to be thinking about going forward?
Yeah, I think plus or minus, it's generally directionally correct. We've got a bunch of make up we're trying to do, obviously, this quarter coming up from the $202 to the $218 to the $220. I think going forward somewhere in that range, which we've stated before, I think clearly we've got a lot of projects to go spend on. I'm sorry, the first part was?
The services gross margin, support gross margin.
Oh, yeah. I mean, it gets to be a bit of an involved answer there. The target margin includes some residual internal cogs, if you will, that stays once all the hardware's gone. It has to flow somewhere. That's in a steady state model, is probably once we get to the 5% or 8% billings in revenue on the pass-through hardware piece, probably ultimately the right number to attach to that over time.
Just to be clear, you're sticking with the mid-50% that you gave us last quarter?
Yeah. I think when you look at it in 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 from Katy Huberty with Morgan Stanley. Your line is open.
Yes, thank you. Good afternoon. In the U.S. market where you're pushing hardest in terms of the software transition, what's the mix now of new node shipments on the non-Supermicro hardware? 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 two as you come out of this transition? Just connected to that, given all the success stories that you walked through and use cases around customers deploying your software across a diverse number of servers, are you seeing that sort of awake the management teams of those other OEMs and realize that there's potentially an opportunity to work in a more aligned manner to participate in these deployments?
Yeah. You get great questions, Katy. On the first one, lifetime, if you think about lifetime deployments, about one-third was non-Supermicro. I would say about 35% was in the last five, six years of selling. I would imagine, this is again, waging a guess, this would probably get to 50/50 in the next 18 months or so. Obviously, every 6 months we'll be observing some of this as well. I think that'd be a good one. Now, what are the market forces? Because the market forces also are strong. We can't just do it on our own accord, because people love the NX support, which is direct to us. I think many of them, they just want to come to one-stop shop for support for both hardware and software.
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 we don't want to throw the baby out with the bathwater as we actually go through this transition. I think I would wager something like 50/50 in the next 18, 24 months. On the second question, I think it's happening. The grassroots is where the rebellion happens. The grassroots is the customers, the partners.
They're the ones who've been basically saying, "Look, I love Nutanix, and I would like for you to really run it on your servers." I think that's what we've been really trying to do for the last 12 to 18 months, which is how one of the examples I gave about Cisco, another one that Duston gave about HP, is 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.
Thank you.
Your next question comes from Alex Kurtz with KeyBanc Capital Markets. 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 Europe right now. It seems like it's going well, and you guys are executing well there. I was wondering if these are the changes you guys have made over the past year or so, or what's really driving this development?
Yeah, I think, part of it was some restructuring of people and our VP of EMEA has done a pretty good job of 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. Lastly, there's something going on with Brexit as well. I think, when customers and a lot of the market is thinking about where to go from Britain and where do they land in Germany and other such places, I think it's causing a lot of data center transformation projects to come alive because when they're moving operations, they're also moving their infrastructure as well.
Just on the EMEA large deal comment, I believe EMEA quarter-over-quarter large deals by our definition, was about 3X the Q1 performance. Some really good large deals happening in EMEA. The exciting thing about that, again, as Dheeraj says, is the repeat purchase capability of most of these customers so.
The other thing that's also popping up is the system integrators in Europe are taking note now, and I think because there's a tipping point at which the SIs start to take note, and we're starting to see some movement in that direction, especially.
Okay, great. Thanks, guys.
Your next question comes from Wamsi Mohan with Bank of America Merrill Lynch. Your line is open.
Yes, thank you. The pace of your incremental new customer add was very strong. I was wondering if you could comment on what drove that strength. 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? I have a follow-up.
Yeah, I think on the first one, which is about Sorry, I skipped the question.
The customer adds.
Customer adds. I think, the channel is definitely kicking in, especially in the mid-market. We're seeing the channel. 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. 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 five, six years, we were carrying the burden of really creating a market, and I think, we're seeing that change actually come together.
Over the coming 18, 24 months, we'll see many more of these senior people now taking stock of the situation, especially as they see the big bills coming from the public clouds. I think they've got to figure out a way to really contain that and figure out these better cloud architectures on-prem as well, to really go and box the budget and the spend.
Thanks, Dheeraj, if I could just follow up. There is a lot of noise around what can happen at Dell VMware, 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. If there were any deal on that side happen, how would you handicap the probability of somewhat of a sharp de-emphasis of Nutanix at Dell?
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, if he gets closer to VMware on one hand, he also has massive roots in the server business. One of his goals, and Jeff Clarke, who's the President of the company for the last 30 years, they have actually built this business on the strength of the server, they would not want to lose that by not being close to us as well. There's only two operating systems that are really merging in this market. One is VMware, one is Nutanix.
Given what I know of this leadership there, which is one of the things that we've continued to see over the last three, four years, this cloud or EMC and Dell are coming together, what will happen to XC, what's going to happen to the Nutanix relationship? We have been fielding this question for the last 24 months, 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 a marketplace, an 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. They probably might be one company, but I think for them to get close to another operating system would be a smart strategy.
Thanks, Dheeraj.
Your next question comes from Jack Andrews with Needham & Company. Your line is open.
Good afternoon, thanks for taking my question. I was wondering if you could drill down a little bit more on the five $3 million deals you signed. Are there any just common themes, whether it's specific catalysts or use cases that were involved there? Are there any applicable lessons learned from signing those types of deals that you can take with you moving forwards?
I think a big focus for us has been around customer success, which means that we start with this phrase called data center modernization. We talk about upselling with the same workload. We go and talk about, well, we've gained this trust over the last I would say 12 months with a customer and they like the operational efficiency, they like the pay-as-you-grow model. There's the simplicity and the elegance of the product. The application folks start to really say, "I want to do more with this stuff as well." That's when you talk about re-platforming everything, or at least a large chunk of their stuff. As their existing capital actually comes to refresh, they're really looking at Nutanix as a platform play. That's the big shift that we've seen over the last, I would say, 12 months.
I would imagine that the Gartner MQ is only going to help us with that because the trust actually comes with all the reporting that Gartner has actually done. All in all, I would say that most of them are existing customers. We've played a pretty keen role in looking at the utilization and net promoter score. As the trust is built, they have gone and tried to re-platform 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?
I think, you probably could even take a look at our website. It's pretty evident that we are big on hiring. There's a massive market ahead of us. Because of the repeat business that we've seen, that we have even reported in our investor deck, you can imagine that once we actually get a dollar from the customer, we get an average of four and a half more dollars from the entire population, close to $9, nine and a half dollars from our Global 2000, and close to $20 or more than $20 from our top 25. Given all that, there's a formula that actually says we need to just go for coverage.
Our Chief Revenue Officer, Lou Attanasio, he says that, "The places where I lose is where I don't have a seat at the table." 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. Obviously, we're doing a lot of R&D work as well, but it's going to be within the guardrails. Even though we actually go and acquire some of these smart, smaller teams, I think the focus is to keep it within the guardrails of the last three, four quarters, which is close to 18%, 19% of revenue.
Great. Thanks for taking the 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 ago. 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 six months, we can come and report some more on how it's coming together. The thesis is that it should reduce because now they can be the matchmakers of the hardware vendors and our software, which can only be good because now it's not an either/or. You can take Nutanix software and put it on their other partner as hardware, and then go and sell it as a solution. Plus, they get to see some professional services on top of it, and as we sell more software ELAs, we expect and hope that the way we actually go and pay the channel more is based on utilization consumption. We'll have a bunch of shelfware lying on the customers' shelves, and we want the partners to go and make money after the fact based on consumption itself.
There is good business for them, and they can actually play the matchmakers that they have always played in the past 20, 30 years of IT history.
Got it. Thanks for that. Just to 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?
Yeah. I think there's a bell curve here. You think about the international expansion. One of the things that we did well four years ago, five 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. We've done a pretty good job of not being laggards in that. Then there are markets like Japan and Germany and ASEAN and places like that where we've seen good success, even U.K. I think we look at some of those. We look at federal, where honestly, we could do a whole lot more. Federal was one of the pillars of this company's success two, three years ago in a much bigger way. I think we can go and double down on some of these success stories.
Healthcare has been a massive vertical for us. There's a lot of referential selling that happens in the healthcare space itself. 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 three, four years. Duston, you want to add to that?
Got it. Thanks for the questions.
Your next question comes from Nehal Chokshi with Maxim Group. Your line is open.
Thank you. Great quarter. Gross profit in the billings will be higher than reported gross profit. Is that correct?
I'm not sure I understand you. Could you 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. My question then is, the gross profit billings growth, is that even higher than your reported gross profit growth? Would you be able to tease that out for us, actually?
I don't have that exactly at hand here, Nehal, and we can get a little bit for you, but Yeah. Likely the case, but I don't have the exact numbers.
Okay. All right. You did have a nice uptick in your Acropolis Hypervisor adoption. Was there any new factor at play that drove that slight acceleration there?
Well, last time, as we talked about, was this whole journey of the customer starting from talking about data center modernization, going away from three-tier to, oh, we can upsell in the same workload. Finally, the one around re-platforming, because then they're trying to look at the whole stack, not just hyperconvergence and computing storage coming together. What about the rest of the stack itself? Which is where AHV has come into play, especially for our existing customers. Citrix has been a good partner in that vein as well, so I think that workload has helped AHV too. Finally, there are a few features that we were behind on that we've caught up with. One of the big ones that's coming and that's been cooking for the last two years was micro-segmentation on network virtualization.
Hope to see that whole stack comes together with network and security. The partners that have actually written their stack. We've opened up our network and security APIs to a lot of our partners. You see a lot of virtual firewalls, virtual load balancers, network companies that are actually integrating with our APIs, is really making AHV into a true new platform.
Great. Thank you very much.
Your next question comes from Mark Murphy with JPMorgan. Your line is open.
Hi, this is Pinjal. I'm sitting in for Mark. Thank you for taking my question. Piyush, congratulations on being featured as a leader in Gartner Magic Quadrant. I think the report also states that by 2020, 20% of business-critical workloads currently deployed on 3-tier architectures will transition to HCI. What is your opinion? Do you think that's an aggressive or conservative view? Could an acceleration in workload migration to the public cloud derail that thesis?
I think, we've been talking about this for the last three years now, the pendulum had swung too far in the other direction about everything is going to be rented. I think as you know, that owning and renting will come to balance itself. We personally, I look at this as a journey of hyperconverging public and private, owned and rented, blurring the lines between on-prem and off-prem. That's where the real money will be. Over the next three to five years, the cloud will be a thing, it won't be an experience. 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 three to five years is going to make that thing into an experience.
Similar to what we did with on-prem. There was a lot of hardware boxes that we said, look, we just need to make them into pure software. That goalpost of converging on-prem and off-prem is an even harder problem with respect to networking and security and identity and bursting into renting in seasonal quarters of a business and so on. There's a lot of good problems in computer science and in design to go and solve for that. I don't look at this as a zero-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 on the 20%, again, four years ago it was zero, now it's 20.
I think if we were to succeed as a company and if this Magic Quadrant were to become something bigger than what it is today, it's just a computing TAM. Virtualization in 2005 was probably okay, fine, we gave it 20%. Every year, VMware was working on new workloads, better capability, even features, reducing the virtualization tax and new regions, new geographies, new certifications and all that stuff. That's the rite of passage of any new architecture. We are in the very early days of this, and every year we'll 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 the hands of the customer.
Got it. When you're thinking about that, blurring the line between on-premise and off-premise, seems like networking is a big deal in there, and VMware, obviously NSX and the VeloCloud acquisition was a big deal for them, and that's filling a lot of the holes that they had. For you, I think you're developing in-house. How much of do you think there is a gap between NSX and your networking technology at this point in time, or would you say you are on par at this point?
I think we focus on 80% of the 60%, and that's the formula that most good product companies actually focus on. If you think of 60% is the real stuff and the other 40% is just stuff that's bundled. I would say that today we are already 80% of the 60%. For us, it's not a $5, $10 million deal because network virtualization is not a thing that you need to buy for $5, $10 million and expect 12 months of rollout and professional services. Look at the public cloud. They don't even talk about network virtualization because any developer can go and actually consume security groups and virtual private clouds in one click.
I think our goal is to really make it one click and one node at a time and not have to really talk about it being a $10 million ELA because it's a thing, because network virtualization is not a thing, really. It's really a part of an entire operating system experience.
Understood. If I can sneak in one more. In terms of all the changes that you're currently going through, especially with the sales comp changes coming in February 1st, could you update us on, from a sales perspective, where are we with the changes? Are we already done with all the changes in territories, quote-to-cash process, everything else?
Yeah. This is something that Duston and Mark have been talking about as well, about how we need to actually have Mark come to our Investor Day conference. There's a lot to really exchange notes on with JPMorgan, we'd love to actually have you folks come in. 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's innovating upon it every quarter. I think it's early days, but every quarter's 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.
At this time, this concludes the Q&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 all on the same day. For all of you who actually showed 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.