Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Nutanix q11 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
Thank you. I'll now turn the call over to Tania Chen, Investor Relations.
Thank you. Good afternoon, and welcome to today's conference call to discuss the results of our first quarter of fiscal 2018. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Deerej Pandey, Utanix's CEO and Dustin Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its first quarter of fiscal 2018.
If you'd like a copy of the release, you can find it in the press releases section of the company's website. We would like to remind you that during today's call, management will make forward looking statements within the meaning of safe harbor provision of federal securities laws regarding the company's anticipated future revenue, gross margin, operating expenses, net loss, loss per share, free cash flow, business plans and 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, 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 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 third quarter of fiscal 2017, filed with the SEC on June 2, 2017, Our annual report on Form Ten K filed with the SEC on September 18 2017, as well as our earnings release posted a few minutes ago on our website. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that unless otherwise specifically referenced, all financial measures we use on this call today are expressed on a non GAAP basis, and have been adjusted to exclude certain charges. We have provided reconciliations of these non GAAP financial measures to GAAP financial measures in the investor relations section of our website and in our earnings press release.
As a reminder, all results included in today's call and press release are using the newly adopted revenue standard ASC 606. Finally, Nutanix plans to attend to Raymond James 2017 investors conference in New York City on December 4th, and the Wells Fargo Tech Summit in Deer Valley, Utah on December 6th, We hope to see you there. Now I'll
turn the call over to Dheeraj. Dheeraj? Thank you, Tania. Hi, everyone. Thank you for joining.
Q1 mark another strong quarter for Nutanix with billings, revenue, gross margin and EPS performance better than our guidance and consensus. Before getting into our Q1 results, I'd like to start the call by discussing the business transformation within Nutanix. You might have heard from us that we are increasingly taking a software centric approach to go to market and financial reporting. I want to take this opportunity to zoom out and talk about the why behind our packaging and distribution strategy over the last 6 years. And the somewhat obvious why of the future software strategy.
I borrow from my annual shareholder letter to the, set the context. Digitalization or virtualization as we call it has been an unstoppable phenomenon in computing. Saw this with music, photography, shopping carts, and maps as they all converged into pure software and as digital constructs in our consumer lives. We brought that ForeSite to enterprise storage and compute. And by doing so, we improved machine productivity by bringing data closer to applications and also human productivity by breaking down artificial walls and IT departments.
By standardizing on commodity hardware, a common operating system, we delivered economies of scale that were unprecedented in enterprise data centers. But none of this would have been possible if we hadn't obsessively focused on product design. The elegance of Nutanix products is in their simplicity and in our ability to bring a consumer rate experience to enterprise grade systems. We're now on a path to digitizing networking, security, and effectively the entire data center. This architecture of an undifferentiated hardware running software services that then bring all the differentiation is the only way to operate a cloud if the enterprise wants to stay in the business of computing.
In 201112, softer defined anything was too abstract for our customers to put their arms around. So vendors were conflicted because they sold 1,000,000,000 of dollars worth of hardware equipment that we as disruptors were digitizing into pure software. Our only route to market was to take control of our own destiny. The Nutanix appliance was born. We now had an Iphone like design pattern that people could touch and feel and the channel could sell.
Customers loved us for bringing the webscale culture to them in which the white box with a robust software Aided by a world class customer service was meaningfully more delightful than the current experience of stitching together vendors and inside teams that constantly finger pointed at each other. Over time, as our architecture gained popularity, we relaxed our opinion on our own hardware and signed OEM relationships. We build the muscle memory on a 2 hub customer service. Also in the last 18 months, we signed large ELAs and pure software, some of which are hyperscale customers run on OCP like server equipment. In the last 12 months, we ported our software to every major X86 server vendor, IBM Power Microprocessor, ruggedized warfare servers and even 4x4 inch Intel mini servers for the IoT Edge.
We now have a meaningful competitive advantage being the most portable form in the last 3 years. A software only form factor gives us ubiquity. It also enables friction free access to of our technology to tinkerers prospects were at the top of the sales funnel, but the change is beyond just the product. It includes thoughtful changes to the quote to cash process sales compensation, software downloads, license management, and new tools at the top of the sales funnel. These changes also prepare us well as we embrace the subscription model next year with our Xi spelled Xi cloud services.
The company that is obsessed with an iPhone like motif is ready to institutionalize the pure software version of its operating system. And all that without compromising customer experience and without being negligent about the boundary at which hardware and software meet. Shifting gears to product. Over the past 2 years, we've built a multi product portfolio. We have built our own hypervisor AHV, which is consistently grown in market share quarter over quarter.
We introduced AFS, a software only scale out filer to remove yet another hardware silo from enterprise data centers. We added PrismPro and Calm for operations management and model driven automation, respectively. At our recent.nextEurope customer conference in Meas, France, we continued this innovation with the announcement of the acropolis object storage service, acropolis compute cloud, and Nutanix app marketplace. These services, which will be included with our software, help our customers run a growing set of cloud native applications. Appropolis object storage service supports the growing number of applications with large unstructured data and enables application development teams to consult storage of the high performance on demand service, similar to public cloud offerings.
Complementing Object Storage Services is our new AHV based compute service, the Acropolis Compute Cloud. This new capability will help enable enterprise customers to economically scale compute resources to better support applications like distributed analytics, workloads, large scale front end web services, Citrix xenapp Deployments and other CPU intensive workloads.
Finally, on Nutanix Com,
spelled as CALM, we announced the addition of the app marketplace. This new marketplace service empowers IT teams to rapidly deploy fully validated applications via self-service portal so new workloads can be deployed quickly and easily. Zai continues to be on track for a mid-twenty 18 release. We are making meaningful progress with Google and the go to market and deployment strategies around the world. On a related note, the bare metal as a service offering for the public cloud providers is a very promising breakthrough for our cloud OS.
As we explore even more ubiquity for our software. Through API, automation and digital delivery, bare metal in the cloud even further commoditizes a commodity server. Alliance partnerships move from business relationships to developer relationships aided by SDKs and APIs. The next few years will be exciting in our cloud OS journey as we forge deeper alliances with new hardware partners in the cloud. At DocNEXT, one of our most intriguing announcements was removed to the IoT Edge.
We laid the foundation of the IoT Edge with our 4 by 4 mini server form factor port and principal software. Beyond providing an invisible IoT infrastructure, we are building an event based message bus application that manages data between the Edge and the cloud core. Both object storage in this IoT data service are early forays into building platform services for developers beyond traditional infrastructure for IT operators. Consumer cloud operators like Amazon and Facebook have leveraged a lot of open source to their competitive advantage. Similarly, in the last 8 years, we embraced Linux to build an elegantly simple yet enterprise grade hypervisor and network virtualization.
And also no sequel databases to build the core metadata service of our operating system. 2018, 2019, will be years when we embrace open source Apache Software Foundation Services even further to deliver consumer grade developer building blocks in Rye. Making these building blocks into hybrid services is our big bet around the future of cloud. The true note for us is to provide a common IT experience in a hybrid cloud world as we try to blur the lines between owning and renting computing. Shifting to some Q1 KPIs now.
Last quarter, I shared the progress we had made in signing large deals. We continued our large deal momentum with 478 customers that have purchased in excess of $1,000,000 lifetime to date. Up 74 in the first quarter and they have collectively spent nearly $1,400,000,000 with us in lifetime bookings. Additionally, we have 206 customers that have purchased over $2,000,000, up 40 from last quarter, 47 customers that have purchased over $5,000,000 and 16 customers that have purchased over $10,000,000 with us lifetime to date. As we've shared in the past, customers are increasingly trusting us with the most critical workloads.
Our top 3 deals in Q1 were all in the federal vertical and together comprise more than $50,000,000 in billings. In 2 of those engagements, the customer went all in with AHV or hypervisor choosing to standardize on our built in hypervisor or other virtualization offerings. The first customer, which is the largest revenue generating civilian agency in the federal government, selected Nutanix because of the inherent security and rapid time to value our platform provides. This customer will take advantage of our Prism Pro software benefiting from reduced complexity and costs for operations and management. The other customer a unit within the United States Armed Forces which handles day to day operations around the globe will use the Nutanix platform to support facilities that provide recreational and educational opportunities to the children and youth soldiers and US armed forces civilians stationed basis in both the U.
S. And abroad. This quarter also saw great momentum in the healthcare vertical with 7 deals greater than $1,000,000. One such deal was with Baylor Scott and White Health, another existing customer that is using our platform to host Epic. It's electronic health record system.
And power its DNA sequencing environment. In fact, using the Nutanix solution, painterscot And White Health has been able to process DNS sequencing results 5 times faster and at greater volume than with its previous solution. Another great use case in the health services spaces with an S and P 500 company that operates 1 of the largest clinical laboratory networks in the world. The company is replacing its legacy 3 tier infrastructure with Nutanix, using our platform to run a host of different workloads including powering the lab tests for a popular privately held personal genomics and biotechnology company. Outside of the healthcare and federal verticals, a leading entertainment provider with 17 facilities including casinos, hotels and show theatres, uses our platform to support its value gaming management software.
To give some context on that workload, When the gaming management system goes down, the casino stops running and customers leave. It's the company's moneymaker and they trust this mission critical application to Nutanix. Another customer and international group active in the design manufacturing sale of watches, jewelry, and watch components which had previously committed to a VMware centric strategy, selected our platform because of its easy to use and simplified management console. In this quarter, we continue to see customers refocusing their infrastructure strategies away from public cloud only ambitions. 1 such customer, a leading provider of device insurance, warranty and support services for cell phones, consumer electronics and home appliances began adding a variety of mission critical workloads to our platform after a year long focused on evaluating and testing AWS.
Cost service level agreements and security concerns were among the contributing factors for the shift. We saw robust demand for our software upsells including Prism Pro and our ultimate software license. In Q1, Prism Pro adoption increased by 40 percent quarter over quarter. We also had 16 Prism Pro deals in excess of $100,000 including the previously mentioned largest revenue generating civilian agency in the federal government, which was one of our largest deals this quarter. Another customer, a Fortune 100 multinational company that produces a variety of commercial engineering, aerospace, and consumer products, continues to standardize the Nutanix software including adding Prism Pro to their 300 plus Nutanix nodes.
So that they can execute proactive capacity planning to lower operation costs and reduce risk. This customer continues to invest in rely on the Nutanix Enterprise Cloud Platform across their enterprise inclusive of mission critical applications such as ERP and PLM. One win of particular interest with the Department of Defense Agency. The software only deal coupled with our software with hardware from a partner class Telecom, KLAS Telecom.
They ought
to deliver a ruggedized hyperconverged solution that is roughly same size as airline carry on luggage. This agency plans to deploy these ruggedized Nutanix appliances across its field teams who'll operate the units on battery power to maintain communications and other critical applications in war zones. In closing, I'm very pleased with how the company is evolving towards its next act. Lou Econacio our new Chief Revenue Officer will play a pivotal role in our transformation to software as he leads our growing sales force in the journey that blurs the lines between owning and renting computing. This now allows Suresh Naya, our president, to focus on strategic partnerships, importantly Zai and its developer oriented services and our largest of the large customers.
I sincerely believe that we now
to discuss our strong Q1 financial performance. Dustin? Thank you, Dheeraj. I'm pleased that our Q1 results came in a bit better than expected, primarily driven by a solid quarter in our federal vertical. And as a reminder, we adopted ASC 606 beginning this quarter, and our results are reported under this new method of revenue recognition.
Revenue for the quarter was $276,000,000 growing 46% from a year ago and up 9% from the previous quarter. We billed $315,000,000 in the quarter, representing a 32% increase from a year ago and a 9% increase from Q4. Our performance in our geographic regions were essentially in line with what we would expect for the first quarter of our fiscal year. As expected, our OEM business, although at approximately 10% of bookings, waned a bit from the very high level we experienced in Q4. On the upside, we saw good performance in our federal business as well as continued strength in APAC, region.
The strength was somewhat offset by seasonal declines in our North America commercial in EMEA Businesses. Once again, we were pleased to see the number of large deals in Q1 keep pace with the strong levels we experienced in Q4. We booked 15 greater than $2,000,000 deals dollar deals in the quarter, and that was consistent with our strong Q4 performance. Bookings from our international regions were 37% in Q1 2018, up from 34% in Q1 2017. Our gross margin for the quarter was 61.9% which was higher than our guidance and compares to 65.4% in the year ago quarter and 62.6% in the prior quarter.
The Q1 'eighteen gross margins benefited by approximately 1.5 percentage points as we purposely eliminated more than 9% of revenue attributable to our pass through hardware revenue. Our operating expenses were 193,000,000 below our guidance by 7,000,000, primarily due to timing of new hires and other personnel related expenses. Our non GAAP net loss was $25,000,000 or a loss of $0.16 per basic share. Before I review for a high level discussion on how we see our business model evolving over the next several years. Today, we are a software company more specifically, an enterprise cloud operating systems company.
That up until now has delivered a majority of its software via its own branded appliance, and recognized the associated hardware revenue. This approach allowed us to stand tall amongst our competitors in an emerging market, while at the same time allowing us to build out a direct sales force and brand for what was early on an unknown company. It was this very same approach that yielded 60% gross margins despite our significant software content in which inadvertently disguise the true nature of the company. This left many investors wondering if we were really a software company or just another storage for our appliance company. And despite our best efforts to establish Nutanix as a software company, in the minds of many investors, You simply are which your margins say you are.
Going forward, over time Nutanix will emerge exactly what it is. And enterprise cloud operating system company. In conjunction with this, investors should expect the following to occur over the next few years. First, we will begin the migration away from pass through hardware related revenue. Beginning last quarter, we started the gradual migration away from recognizing pass through revenue attributed to the hardware portion of our business.
Today, the hardware portion of our business is approximately 26% of our total billings. This transition will come in two parts. 1st, with straightforward changes that will allow us to step aside for most hardware only invoicing. By enabling our legacy appliance manufacturers to begin selling the NX hardware directly to our distributors. And secondly, by simply focusing on more software only transactions, allowing our customers It is important to note that stepping aside from this pass through hardware does not in any way infer that customers are not ordering NX appliances.
To be very clear, and the result of elimination of at least 80% of all pass through hardware related revenue. All things being equal. The direct impact of this specific change would result in significantly higher software content and significantly higher gross margins with no change to our growth in gross profit dollars. Probably the most important point to make here is that this change will have absolutely no impact to our future growth rates of our software and support billings. That being the portion of our business today that represents 74% of our billings.
Over time, we would also hope to gain additional selling leverage that naturally comes from focusing on software only will be a gradual shift to ratable software as a service revenue. Once our Zai cloud service offering takes hold, starting with services such as disaster recovery, we expect to see the emergence of some ratably recognized software as a service revenue. And lastly, over time, we will start to position the company for increasing ratable software as a subscription revenue. Although not immediate and not yet quantifiable with the introduction of both our Xi cloud services and Nutanix comp We believe we have the opt we'll have the option to convert some of our perpetual in turn based software streams into ratably recognized subscription software. To help incentivize and expedite this transformation, starting February 1, 2018, our fiscal Q3 2018 we will start the process of compensating our sales teams
on
sales representatives will no longer be compensated for pass through hardware sales. To summarize, this transformation of our business will take placed methodically over an extended period of time. The 1st phase will result in more perpetual and term based software as we begin to significantly reduce our pass through hardware revenue. We then expect to see As we start to shift away from pass through hardware revenue, we will also take this opportunity to change how we report the software content of our business. The previous methodology had us reporting software as a percent of total bookings with the software content comprised of OEM licenses upsell of our addition software and other miscellaneous software sales.
What this methodology excluded was the significant software content attributable to the base operating system software content attributable to our base operating system into the total software metric. The base operating system is simply calculated by taking the total billings attributable the appliance sale less billings of the actual cost of the hardware. As we increasingly separate ourselves from the wear sale, the related revenue and cost of goods sold would be eliminated in equal amounts. This amount representing the actual cost of the hardware. Under this new software centric reporting based on billings for Q1 2018, the splits of the business would be as follows.
Software and support 74% of total billings and hardware 26%. It is this 26% attributable to the investor deck located in the Investor Relations section of the corporate website, for further details surrounding this new software centric reporting and the associated, historical breakouts. So in summary, what would Nutanix have looked like Over the last 12 months, if we chose not to build any pass through hardware related transactions, the resulting business would have been very interesting. Basically yielding an $800,000,000 pure software and support infrastructure company with gross margins above 80% while at the same time being a market leader within a $100,000,000,000 TAM. That's what Nutanix would have looked like over the past 12 months void of any pass through hardware billings.
This level of size, growth, and gross margins compares very favorably to other software service companies such as Splunk, Atlassian, Tableau and others. Now let's turn to the balance sheet for a few highlights. We closed the quarter with cash and cash equivalents of $366,000,000, up from $349,000,000 in Q4 DSOs on a straight average with 7 days. It was 8 days lower than the 65 days reported in the prior quarter. The weighted average DSO was 27 days in Q1.
We generated $10,000,000 of cash from operations in Q1, which was negatively impacted by $8,000,000 of ESPP funding. We used $8,000,000 in free cash flow during the quarter, and this was also negatively impacted by the $8,000,000 of ESPP. Funding. Now on to the guidance for the second quarter. The guidance on a non GAAP basis is as follows: revenue to be between 2 $80,000,000 $285,000,000 gross margins between 62.5% 63.5% This revenue and gross margin guidance is expected to yield approximately 170 $73,000,000.
Operating expenses of approximately $210,000,000 and a per share loss of $0.20 to $0.22 using a weighted average shares outstanding of approximately 161,000,000 shares. This guidance assumes that we will eliminate approximately 12000000 dollars or 15% of our pass through hardware revenue and an equal amount of hardware cost of sales during the quarter. Without this change, we would have guided, revenue to the range of $292,000,000 to $297,000,000 with gross margins of 60% to 61%. Lastly, for modeling purposes, we anticipate eliminating up to twothree of all pass through $1,000,000 reduction in pass through hardware revenue, gross margin should increase by about 80 to 100 basis points. At this point, operator, if you would call, open a call up for questions, that would be great.
Your first question comes from the line of Jason Nolan from Baird.
Congrats on the quarter and, exciting stuff on the transition in the business. I guess Dustin, I wanted to ask on the elimination of 80% of your pass through hardware in about a year. What has to happen over the next 12 months? I assume there's lots of negotiation with distributors to take that hardware revenue.
Yeah. That, has already happened in the U S. So that's the good news. The team has done an excellent job getting those getting that process in place. So North America is, is done.
We need to now go acute on it, but those agreements are now complete. And we're now off working on some international regions.
Okay. And we spent some time on our team trying to figure out what your long term operating model would look like. And I don't know if you're ready to point us point in any directions here, but is, is would the profitability be pushed out a bit with, more leverage in the model longer term?
Yes, we'll give a full, I think at the beginning of the year, We'll have a full deep dive on the operating model and how that changes. Obviously, gross margins go up substantially the operating margin goes up and some other things there. And I don't think, from a cash flow perspective, there shouldn't be any major changes there. We've been hovering plus or minus, and that's kind of how we've been running the business from that perspective. But Yeah, we've been doing an awful lot of work on the long term model and things like that.
So at some time, I think probably at first quarter of the calendar year, we're anticipating of scheduling some type of probably analyst event that that will give a pretty deep dive into all that.
Your next question comes from the line of Matt Heidenberg from RBC Capital Markets. Your line is open.
Hey, thanks guys. I'll offer my congrats again. I, I'm curious now. This is the 2nd quarter in a row you guys have had really strong, large deal momentum. I know you highlighted the federal vertical in particular this quarter.
Can you talk about sort of the momentum that you're seeing there? How do you see that large deal funnel progressing here in a software only model? I'm sort of kind of curious about the pipeline of these larger deals.
Yes, thanks, Matt. This is you, definitely, we've seen an uptick in the last three quarters. That's also because of the way we segmented our sales force. Focus is on, global accounts and enterprise accounts, strategic accounts, I should say. And a lot of the replatforming is now happening.
So of the 1st 3, 4, 5 years of selling, we are going and selling, workloads and project based spend, trying to go and exhaust the project based spend. But many of our existing customers, we talked about $474,000,000 of those $1,000,000 customers. They are massively strong return customers for us and we really focus hard on them. And you can see that from our Net Promoter Score as well, which is one of the big determinants of large deals in the large deal pipeline, for the last 3 quarters in the coming quarters as well.
And then I was curious.
I don't think you guys mentioned in
your prepared remarks anything about the GCP relationship. I know it's probably still early, but but Deeridge, is there any updates on, on the progress of that?
Yes, I talked briefly about this, in my, in my call script as well. Making good progress. I think we are talking engaged with Google on the locations, like where does Nutanix, where do Nutanix products go? And we've identified a couple of regions both here in the U. S.
And outside the U. S. As well. To make Nutanix in the service where customers can rent us rather than own us. So sometime in the middle of next year, you'll actually see big update around the Zai, which is the cloud service.
And it's not completely dependent on Google, but that's a big of overall pushes to go together as partners.
Your next question comes from the line of Andrew Nowim from Piper Jaffray. Your line is open.
All right. Thank you very much and congrats on a great quarter. In the transition to your software model, are you assuming that most customers can do the integration work themselves between hardware and software, or are you going to become more reliant on channel partners CDW to do the integration work for you?
Yes, it's like a pyramid, Andrew, if you think about the top of the pyramid will be driven by global SIs, and especially as we've sold the software, some of which could actually go direct as well. We'd expect the channel and the SIs to come back and help, utilize that, deploy them on servers, on commodity servers, X86 servers. In the middle of the pyramid, we expect more of the resellers to do that. We made it extremely simple to actually go and deploy Nutanix. That's one of the biggest values of being an appliance company, the roots, because we really understood the value of the hardware software boundary itself.
So we've made a lot of those deployments one click. And the base of the pyramid could still be going through as Nx. And as Dustin mentioned, it could be an Annex that's basically going through the disti model where we just take the order, but then the saw comes to us and the hardware goes to the hardware vendor.
Okay, got it. And then
That's right. And I
just want to say one more thing about customer success that we just seeded a team around customer success where our technology relationship managers called in TRMs who will be very active at the top of the pyramid. It's our largest customers and we expect to get professional services, our own professional services as well as the PS of the of our resellers and the SI partners themselves for the middle of the pyramid.
Great. That makes sense. And then I just had a follow-up. You had a fairly big jump in percentage of nodes sold with AhV this quarter up to 28%. Are you seeing customers just getting more comfortable with the crop less or, you know, or have there been changes on the competitive front that are prompting more customers to look at new options such as AHD?
Thanks. Yes, this is Dustin. Just on that metric there, we did continues to do great, as you can see from the investor presentation there. The only thing we did make a little tweak there, as you can see in that chart there is that We've now, I think, more appropriately, shown this just as N X nodes, and, not including the OEM business in there. As you might expect, it's heavily tilted away from A HB.
So that tweaked a little bit, but not substantially.
And I think one of the correlations is with respect to our partnership with Citrix, the VDI business went up a little this quarter and we've been doing some really good work with Citrix using the AHV hypervisor. And the Citrix workload. Yeah. And if we
if we had used the exact same metric last quarter, I think it would have gone from 24 to 25. So not a substantial change there, but up no matter what.
Great. Keep up the good work.
Your next question comes from the line of Aaron Rakers from Wells Fargo.
Yeah, thanks, for taking the questions as well and congratulations. You know, just looking at your slide deck and looking at slide number 7. And I can appreciate the fact that you're looking at the mix of business based on billings. But just simple math, I guess looking at an 80% plus gross margin on your software support revenue would leave us to think about a progression of gross margin into at least the 70, if not mid-seventy percent range. So I guess the first question is, is that how we should be thinking about the overall progression of the gross margin?
And then to follow-up on that, I think last quarter, you talked about adding $10,000,000 of OpEx per quarter. It looks like your guidance is a little bit less than that. I'm curious of how we should think about the OpEx trajectory through the course of this year relative to your prior commentary? Sure.
Yeah, on the first one, and I actually gave you the metric, because I wanted you guys to get this correct. You can do your own assumptions there. We gave you a couple of data points, 2 thirds elimination by the end of the year. By at the end of Q4. And then for every $5,000,000 to $6,000,000 that you're going to take out of your models of hardware pass through hardware revenue, gross margins should go up 80 to 100 basis points.
So it's a pretty simple way for you to go, you know, get to that endpoint and it's and it's from your models obviously, but you should be able to easily do that from that perspective. On the expenses, yes, I mean, we came in a little. We were a little under hiring. It wasn't intentional. We didn't try to drive it down.
We're still got obviously a lot of, priorities and, and things like that. So we'll continue to. You'll see expenses. I don't think we'll continue to be massively under There's a lot of a lot of things going on, a lot of hiring and things like that. So
Yeah.
Especially as we as we focus on the unrecovered global accounts in unrecovered enterprise accounts because we've done 1 phase of segmentation, but now we need to go back and figure out if we need to resegment it in the coming quarters as well. Okay. And then a quick follow-up.
If you could, I'd be interested in in comment, your your comments on the IBM relationship, and I'll feed the floor.
Yeah. So we did the JLR product a couple of months ago with IBM and we have some really good momentum on the Linux applications. We have some proof of concepts going on in very large customers, both in the U. S. And Canada and beyond as well.
And we are working on the AIX product, which is one of the biggest sort of product sort of coverages that IBM has and virtualizing that itself would grow the time of this whole relationship. So expect to see some news in the coming quarter or 2. The product is off to a good start with proof of concepts going on right now.
Thank you very much.
Your next question comes from the line of Jason Ader from William Blair. Your line is open.
Yeah, thank you. Hey, guys. I have a question on the let's see what slide it was. Oh, it's slide, number 7. It assumes some support and other margin of 55 cent for future periods.
And when I look at the model, it looks like the support gross margins are quite a bit higher than that. So wondering what is happening
court. It includes, the small piece of professional services that we have. And then some residual other COGS that we have, on a quarterly basis. So nothing massively trending there. It's just kind of all in residual of what would be remaining there.
And again, professional services is included in that support piece.
Okay. So that doesn't include the residual pass through hardware. That's still
Correct, correct.
Right. Okay. So what it so right now your support gross margin is in low 60s. So what Yeah.
It's it's it's covered 60, 62, or something like that. So, yeah. There's just some other some other cogs that we capture in that total that, you know, it really is truly residual left there. There's just some other stuff that gets bundled into there. Okay.
Yeah. So today, it's in the product side.
Yeah. You could argue either either way, but it's it's residual, so it has to go someplace.
Okay. I gotcha. Alright. And then, and then Biraj, I see the guidance. If you include the pass through borrower, obviously, very strong.
So I'm assuming that with the strong federal, federal performance, is it fair to say that you had, some good backlog on the enterprise side, on side?
Yeah, let Dustin answer this one.
Yeah, the backlog didn't really surprise us, you know, for Q1 from that perspective. So it bounces up and down and we've maintained reasonably healthy backlog over the last several quarters. So we'll see how it progresses here with the with Q2 and obviously we have the end of calendar year. So we'll see how things play out with those efforts.
Okay. And then last quick one for me is on the billings differential from revenue. Is that just because you had a very strong billings quarter a year ago and how should we think about the differential going forward between Bone's growth and revenue growth?
Yes, I don't think you'll see that that much difference going forward. We, about a year ago or so, we had a little tweak to support pricing and how the the mix to bill and revenue kind of tweaked a little bit there, but I think you're seeing some residual of that, but I wouldn't expect that you'll see that level of delta going forward on a year over year basis.
Your next question comes from the line of Simon Leopold from Raymond James.
Just first wanted to see if we could clarify the federal. You highlighted it was strong this quarter. If we could just get some quantification around contribution percent of revenue from federal and where it is typically and how much of this is seasonal?
Yeah. So we expected federal to be reasonably healthy and it was pretty good. If you look at our federal business in total on average, it averages 10% to 12% of bookings or so. And then Q1, it pops up So we had a pretty good pop up in Q1. It wasn't quite exactly to the same percentage as last year.
But the team did a great job. We had lots of large deals as, as Deerich mentioned there. So, a little bit better, but not massively better.
Great. And then
sorry, go ahead.
I was going to say that obviously the CR, the continued resolution for most of the year, a lot of that budget was flushed, at the end of their fiscal, which was September.
Great. And I wanted to see you gave us, I think, a number of helpful insights in terms of the software pivot of how it affects our modeling and how the analysts might look at the financial metrics. But I guess what I'm a little bit hazy on is your customer experience, how your customers will view Nutanix? How they're going to interact with you? I think my worry is, are they becoming more at arm's length, in terms of their interaction with Nutanix?
Could you help us get a better understanding of really the interaction level and how that either does or does not change? Thank you.
Yeah, it's a great question. And we think about it all the time, simply because we are paranoid about customer experience, by the way. So the first step as, as Dustin mentioned is about having the same, quote to cash experience where they can order NX appliances and it will get split in the channel via the disti to Nutanix and, and super micro. So we hope to continue to keep that experience. Even if we end up selling more software than hardware as we do over time, but then the customers can come back and fulfill the hardware by going through a very similar sales process.
Even today, we have more than 30% of our nodes are actually OEM nodes and we have tested been tested in customer service, customer support. And we've kept our OEM partners honest as well. So we've actually gone through building that muscle memory of customer support at a non trivial number of nodes that don't belong to an X node.
I think it's really important also to really understand that there's absolutely zero change from what the customer sees. So that process from the customer is left intact and exactly the same as it has been
in the past. And that being said, obviously, we want, folks to buy our software and run it on, like I mentioned, some of our customers run it on OCP like servers. In fact, others run it on Cisco. Cisco was a pretty good quarter for us this quarter, a substantial jump from last quarter. HP is also going down a pretty robust path.
So we have really done a good job of building the right tools, all the way from install tools. We call it foundation. We have Sizer, which is capacity planning tool. We have X-ray, which is our POC automation tool, so it does a lot of the testing of the hardware upfront. We're in the process of actually pushing out our certification tool to all the partners so that they can actually go and certify this in the field itself.
So a ton of automation that we've actually done to make sure that transition from hardware to software is without a lot of these negligent things that one could end up doing and so suffer with experience and not just experience, but product reliability and integrity of data and things like that.
Great. Thank you for taking my questions.
Your next question comes from the line of Mark Murphy from JP Morgan. Your line is open.
Hi. Thank you. This is Pinjalim sitting in for Mark. Great quarter. Seems like a lot of moving pieces.
So as you my question was about the sales motion and how it changes. So as you move to a softer centric company, I'm guessing it seems like there'll be a lot of changes. I don't know if they're changing the organization structure, but definitely comp, will change for the sales guys. How does the sales motions for sales guys change? Is there a learning curve to selling software versus selling the appliances, etcetera.
And how confident are you that you'll be able, that we will not see a period of oscillations with respect to, bookings in the next next 12 months.
So one thing that we've learned in the last couple of years is to segment segment segment, our world and our lives. So If you look at the pyramid, the middle of the pyramid, which is the mid market and the base of the pyramid, which is commercial business, we shouldn't see of a difference. We've been selling OEM nodes with our software for the last couple of years. Our sellers have done a pretty good job of really managing relatively conflicted relationships, in a way that hasn't hurt our relationship with the customer, including both sales in terms of professional service and customer support itself. The top of the pyramid is where we expect to, especially our global account managers, who have been used to selling software in their past lives as well to go into ELAs.
And these could be very large ELAs that basically help re platform our customers overall infrastructure. So I think we're going to look at it in that segmented way and And I think that's the way to actually mitigate any kind of risks along the way, but definitely it's a cultural shift to think about how do you decouple the budget between the software budget and the hardware budget. And many of our folks have actually been thinking on these lines for a while because it's not just the fact that we flip to switch overnight and we've been talking about this for almost a year now as we were putting our software to Cisco or putting our software to HP and IBM and ported our software to white boxes like OCP like servers and so on. So we've done a fairly thorough job in the last 18, 24 months, which is exactly what I told him. I crypt.
This is not something that happened overnight. On the other question was Destiny about
on the software centric disclosure. I think you mentioned $800,000,000 of software and support. If you had gotten rid of the pass through, in the last 12 months, what portion of that is recurring today and how how do you think that recurring portion looks maybe 12 months from now?
Yes, that's something, again, far as how that changes and the recurring piece of that, that we need to give some more thought to. And I think maybe at the beginning of the year, we'll, we'll, we'll give some more thought there. We've obviously got a big piece of the support part of the transactions that are Obviously, all recurring and 95 percent renewal plus rate there. And, we continue to get more and more of the product portfolio set up that way to reoccur. But, yeah, we'll give some insights.
The good thing is also that our software additions starter pro and ultimate. They're all term licenses actually. So most customers look at 1 year, 3 year terms and they buy it with the support lifetime itself.
Okay. Got it. I'll see the floor. Thank you.
Your next question comes from the line of Alex Kirk from KeyBanc Capital Markets. Your line is open.
Yes. Thanks, guys. A couple of quick questions here. Droraj, at the beginning of the call, you talked about a hyper scale customer win running on OCP. I don't know if that was new or not, but maybe you could refresh us on, selling your software, maybe not into the top 4 hyperscalers, but sort of maybe 5 through 20, if there's been sort of a development in the pipeline with that customer base Yes,
I think one of the things we'll do, Alex, in the coming couple of quarters, start talking about SaaS customers. You know, we've done some good things with those folks in the past. We'll break that vertical part, but the most exciting thing there is more than the 15 to 20 is to take our software and put it in the bare metal as a service in the top 4 themselves and they're all willing to open up including the announcement that Amazon made about 3, 4 days ago about their metal as a service. That opens up some really good goals for us to go and use them as a platform where we make our software even more invisible than actually shipping systems to their on prem environment. So look out for some more SaaS based insights in the coming quarters.
And just a follow-up with the move to software, you seen any customers in the top 25 or maybe within the top, the global 2000 where they've approached you about just purchasing the software directly from you and then just kind of going on their own as far as, burning it
onto the hardware. Yes. So,
we talked about a couple of the ELAs in the last quarter. In fact, one of the ELAs is a very giant re tail chain. It's a global 1000 company that has taken our software and an ELA version of it and is running it on both Dell and HP servers actually. So a lot of what we did in terms of getting that support from HP was because the customer wanted it. So we've done some other delays with Global Thousand customers in a very similar fashion.
Your next question comes from the line of Wamsi Mohan from Bank of America Merrill Lynch. Your line is open.
Hi, thank you. So this is Parram Singh on behalf of Wamsi. So firstly, you know, I was wondering what was your average billing per customer in the quarter. How's that trended. It also looks like, the number of new customers that came into your installed base was lower than the past few quarters.
So maybe you could comment on that as well. Thank you. Yes.
On the, we've never really given a number on the average of that question average deal size or customer size there because there's too many segments there. You've got the OEM piece, which is obviously lower. You got global 2000 that's higher. You've got all this other stuff there. So we really haven't, we haven't come in, but I think you'd take away that with the big deals that has a tendency to migrate up and the deep we get into Global 2000, obviously, that deal size ends up taking care of itself.
But even on ours, the product is built for repurchase also. So it's a little deceiving there that you don't have to buy these massive amounts of upfront purchases. That's not how the product's designed obviously. So you always have a bunch of continuing repeat purchasing there. On the customer count, yeah, I wouldn't look too much into that.
Q1 is always a little softer from a customer perspective. But we added, you know, a decent amount of customers there in Q2 will pop up naturally, which it usually does quite a bit from the Q1 level. Okay, got it. And as a
follow-up, I appreciate the clarity you guys, give on the transition here, but maybe you could talk a little bit about, what have you already done in the U S? What sales groups are you focused on on? Is it by vertical that have now been moved to, kind of passing through the hardware? Or, it's just that you go adopted across the US right now, and it's just take time to show up on your, P and L. And then how do you expect to kind of incrementally, launch that with your sales teams in the international markets.
Appreciate any clarity there.
Yes. Again, it's fairly transparent, for most things there. And again, it's not it has nothing to really do with verticals or customers or whatever. It's a generic process that we can start executing and eliminating the pass through hardware on our books there. So there's no limitations, if you will, from that perspective.
And then international is just another process there. We just haven't focused on it yet, but it's a similar process. It's a little bit more dispersed. So you lose a little of the concentration. So maybe it takes a little longer to do some things there, but it's very similar.
Process that the folks are working on now.
And in terms of any kind of segmentation to roll this out slowly and gradually, we just picked up some large deals and built some muscle memory and they're just going down that path of, you know, deeper down the pyramid.
Okay. And then, you know, with Super Micro, is there anything that they would be doing differently than they are right now with the appliances?
In the new model? Just who the invoice. That's all. Okay. Got it.
Really appreciate the color there guys. Thank you.
Our last question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.
Thank you. Congrats on the quarter. Dheeraj, does deemphasizing hardware increase your chances of new partnerships or even the chance the partners like Dell will increase their their commitment to selling your solution versus their their own? And then I have a follow-up.
Yeah. I think, definitely reduces friction in the sales motion, both for our sellers and the OEM sellers themselves. That being said, we also expect fully that in the market will make its decision on whether they want to get end to end support from us. Or whether they're comfortable actually going through 2 hub support. So I think we have to hustle to prove that either our OEM partners are very good at support even at scale or customers who just pick us over going through 2 ops of support itself.
But absolutely, we expect the friction to go down don't expect any kind of, I don't know, algorithms that people have to apply to take it through this route to market versus that route to market because there'll be a normalized currency for how salespeople will make quota.
Okay. And then at the user conference, in June, I I think you talked about, Xi launching early 2018. Today, you talked about middle the year, is that just a function of early release versus GA or is the timing different? And then maybe you can comment on when you think the memory market loosens, because I know that's been a factor on gross margins. Thank you.
Yes, thank you. I think one of the things Katie that we talked about our overall engineering culture is how, this release that we're actually doing in 5.5 took us a little bit longer to come out with in terms of general availability. And that pushes a few of the things out as well. So, there's a, I would say, 3 months worth of victim in Xi, because we have to keep the lights on with on prem customers as well. And we do expect to actually change the way we do engineering in these 2 pizza teams, like really thinking about cloud engineering, what does it mean to have a platoon of developers who are independently releasing code and becoming a company that's more DevOps like.
So that's a transition that the company is going through to actually improve our overall fidelity of releases as
And Dustin, do you have any comments on your thoughts around the memory market?
Oh, yeah. As we've said, it's gotten obviously better. I don't think there's any insights right now to seeing it actually going the other way, as far as pricing goes, it's gotten to a manageable level that we've been doing a good job managing around it and doing a fine job with margins and we expect it to be a little bit better this quarter and then we'll see from there.
Thank you ladies and gentlemen for joining today's conference call. This concludes today's conference call. You may now disconnect.