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Edited Transcript of NTNX earnings conference call or presentation 28-Aug-19 8:30pm GMT

Q4 2019 Nutanix Inc Earnings Call

SAN JOSE Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Nutanix Inc earnings conference call or presentation Wednesday, August 28, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dheeraj Pandey

Nutanix, Inc. - Co-Founder, Chairman & CEO

* Duston M. Williams

Nutanix, Inc. - CFO

* Tonya Chin

Nutanix, Inc. - VP of Corporate Communications & IR

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Conference Call Participants

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* Aaron Christopher Rakers

Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst

* Alexander Kurtz

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Jason Noah Ader

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications

* Jon Philip Andrews

Needham & Company, LLC, Research Division - Senior Analyst

* Karl Emil Keirstead

Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst

* Kathryn Lynn Huberty

Morgan Stanley, Research Division - MD and Research Analyst

* Pinjalim Bora

JP Morgan Chase & Co, Research Division - Analyst

* Roderick B. Hall

Goldman Sachs Group Inc., Research Division - MD

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Nutanix Q4 and Fiscal Year 2019 Earnings Conference Call. (Operator Instructions)

Tonya Chin, Vice President of Corporate Communications and Investor Relations, you may begin your conference.

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Tonya Chin, Nutanix, Inc. - VP of Corporate Communications & IR [2]

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Good afternoon, and welcome to today's conference call to discuss the results of our fourth quarter and full year of fiscal 2019. This call is also being broadcast over the Web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix' CEO; and Duston Williams, Nutanix' CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its fourth quarter and fiscal year of 2019. If you'd like a copy of the release, you can find it in the press releases section of the company's website.

We'd like to remind you that during today's call, management will make forward-looking statements within the meaning of the safe harbor provisions of federal securities laws regarding the company's anticipated future financial performance in various periods including anticipated revenue, software and support revenue, hardware revenue, billings, software and support billings, hardware billings, gross margin, operating expenses, net loss, net loss per share and free cash flow.

The exemptions underlying our anticipated future financial performance, our plans to provide future projections and financial guidance, our business plans, initiatives and objectives, including our transfer pipeline and demand generation expansion, our focus on growing our commercial business, potential go-to-market transition, our continued investment in technology including our subscription-based product, talent and sales and marketing effort, the expected impact of these investments and our plans to manage operating expenses if our future financial performance does not meet our expectations. Our ability to achieve such plans, initiatives and objectives successfully in a timely manner, and the impact of such business plans and initiatives and objectives on our business, competitive position and financial performance. Demand for and customer adoption of our products and services, and our ability to retain and expand upon existing customer relationships, our plans and timing for and the impact of our transition to a subscription-based and recurring revenue business model. And our ability to complete the transition successfully and in a timely manner. The impact of recent leadership changes, our plans for and the timing of the release of new products, technology and services, the benefits and capabilities of our platform, competitive and industry dynamics, market size and potential market opportunity 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 and explicitly disclaim any obligation to update, alter or otherwise revise these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our Form 10-Q for the third quarter of fiscal 2019 filed with the SEC on June 5, 2019 as well as our earnings release submitted 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 the website and in our earnings press release. Lastly, Nutanix management will be at the Deutsche Bank 2019 Technology Conference on Tuesday, September 10 in Las Vegas, and we hope to see many of you there.

With that, I'll turn the call over to Dheeraj. Dheeraj?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [3]

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Thank you, Tonya. Good afternoon, everyone. Q4 was a good quarter for us as we reached the expectations on total billings and revenue and by $15 million each for software and support billings and revenue. Going forward, we'll be guiding on software and support billings and revenue or total contract value, TCV, as we call it.

For Q1 billings and revenue, even as our business top line has been impacted by the subscription transition. More on this later from Duston.

For the past 2 quarters, we've highlighted how we needed to rebuild our pipeline as we continue to transform our business to subscription. I'm pleased to report that our Q4 results demonstrated measurable progress in our subscription transformation. Our pipeline funnel, our sales reenablement, our simpler messaging on platform versus new apps and our hybrid cloud journey, all this enabled us to close our fiscal 2019 on a high note. While we still have much work left in our business transition towards a hybrid cloud model of licensing, we're encouraged by our progress to date and believe that our solid quarter-on-quarter billings and revenue growth as well as our progress in sales hiring are clear indicators that our execution is improving and our market remains strong. We're particularly pleased to see such strong growth in our deferred revenue balances in Q4 with 44% year-on-year growth.

Our remaining performance obligations, or RPOs, will remain a strong proxy of the underlying health of our business, especially as our life of device licenses transition to term-based licenses. Our subscription transition continues to move along at a rapid pace. And just like our hardware to software transition in fiscal 2018, we are shedding significant top line for our future-proof business architecture that has positioned us well in the era of cloud. Our sellers and customers have responded well to the model change, and we believe that subscription and infrastructure software business, both on-prem and off-prem, will quickly become a core competitive advantage for the company.

Our customers will be able to buy portable software licenses that can run both in a private cloud and on bare metal offerings in the public cloud. We'll make a strong push for why hyperconvergence matters even more in the public cloud virtual networks and why data and applications need to be close together, preferably on the same machines and physically within the same racks.

Just like this last decade, the sheer amount of data will make the network an even bigger enemy of applications. It's these laws of physics that make HCI such a powerful architecture even for hyperscaler data centers. The flexibility of portable licensing will enable our customers to treat their private infrastructure as availability zones, or AZs, that are peers of the availability zones, or AZs, from the public cloud. More importantly, they'll be able to move applications freely and redeploy Nutanix licenses back and forth, thus creating a true hybrid cloud. With our virtual private cloud, or VPCs, as public cloud developers call them, experience on both sides. Renting software won't be the domain of public cloud alone as proven by the business model transitions of many large software companies in this last decade.

Customer success will be king, as we have to hustle like SaaS companies to work in customer retention and churn, annual contract values, or ACV, net expansion rates and lifetime value. These metrics will be the new vocabulary of Nutanix once we have moved the majority of our life of device entitlements. This is the why of our subscription transition. This is the why of our own digital transformation from appliances to OEMs to software subscription, and eventually to ratable as you will hear from Duston. This is the why of digital journeys within our customers as they grapple with the trade-offs in technology of ownership versus access.

Our virtual transformation continues to be ahead of our expectations with subscription revenue up 16% from Q3, now representing 71% of total billings, strong progress towards our previously stated goal of 75% by the end of calendar 2021.

Reflecting on Q4 and more broadly on FY '19, as our platform continues to make in-roads into a hardware-centric world of on-prem infrastructure, we've made meaningful progress with our new apps, i.e. Essentials and Enterprise that draw on top of our core platform. We now see these new apps in 26% of our deals in a rolling 4-quarter basis, up nicely from 23% last quarter and 17% in Q4 of FY '18. This quarter also saw the addition of approximately 990 new customers, our highest new customer infusion in the past 6 quarters. These new customers included 31 new Global 2000 logos bringing our new total number to 810.

In Q4, we continue to see strong, large deal momentum with 58 deals worth more than $1 million, 11 of which spent more than $1 million with us in Q3. Of those 58 deals, 26 were with customers in the Global 2000 and 3 were worth more than $5 million. We now have 16 customers that spent over $20 million with us in lifetime bookings, up from 9 customers at the end of FY '18. Of those 16, 6 were over $30 million in lifetime bookings. We have 46 customers with over $10 million lifetime bookings, up from 26 at the end of fiscal 2018. More importantly, these metrics continue to show robust growth even though it's apples to oranges between the older TCV deal values and the newer, term-based deal values. Our broader product portfolio drove large opportunities with new and existing customers. A great example of this was a deal with more than $10 million in Q4 alone with a Global 500 holding company for insurance, reinsurance and investment operations.

This customer was looking to adopt a hybrid cloud strategy and gain a pricing performance advantage towards its existing legacy infrastructure. After seeing both the simplicity of our enterprise cloud platform and the value we bring to our total hybrid cloud solution, to database and automation offering such as Era and Calm, this customer decided to reset its entire data center strategy using our technology. Additionally, across our customer base, Files, Flow and Prism Pro are becoming strong additions to our portfolio. On the theme of deepening our penetration within G2K, the question of why Nutanix would come up to the casual observer. If you look closer at the JPMorgan Chase 2019 CIO survey, you would know why we are gradually becoming a trusted invisible infrastructure brand within the largest enterprises going through their own digital journey. The words "frictionless, reliable and invisible" are synonymous with Nutanix. We don't sell vaporware. Speaking of which, I specifically want to emphasize a Q4 deal with a total contract value or TCV of over $15 million this quarter and how a Fortune 25 customer selected our platform as the backbone powering its infrastructure across the U.S.

This customer, with a lifetime spend of nearly $30 million since their first purchase 18 months ago, selected our core platform with AHV virtualization over an incumbent that had overpromised and underdelivered on true enterprise reliability with software-defined infrastructure.

Last quarter, we told you about a win with a new customer, one of the Global 4 accounting firms that was worth $6 million. In Q4, our team worked closely with this customer to understand the unique challenges, replatform the infrastructure of the hybrid cloud. In a trend we are seeing throughout our business, one of our Essential offerings, Calm, is allowing us to learn with our customers in the real meaning of hybrid cloud. This customer shared with us that with their legacy approach, it will take them years to realize their multi-cloud vision. Calm, together with their core, was the critical combination that made this win possible.

We are particularly pleased with our strong uptick in gross margins, which grew to 80% this quarter, even as we carve out more bookings in the deferred revenue that goes through our balance sheet.

Most importantly, our support and customer success organizations continue to differentiate our solution from the competition by being authentic in their approach to problem-solving. Speaking of apps versus the platform, our database in the service offering, Era, helped us win new opportunities with a major American airline in the Global 2000. In a deal worth more than $3 million, this existing customer that has a lifetime spend of more than $10 million, decided to replace its proprietary, heavily engineered database system for e-commerce with Era, backed by our Web scale core running on commodity servers. In another win this quarter worth more than $1 million with a Global 2000 multinational health care company, we're able to expand our existing presence because of our rich product portfolio and data services are commissioned and secured.

Speaking of security, our federal government business is top of mind for us as we build our hybrid cloud offering. Earlier this month, the Nutanix Xi government cloud was listed in the FedRAMP marketplace as FedRAMP in process. FedRAMP is a government-wide program that enables federal agencies to rapidly adopt cloud-based IT solutions that meet stringent, standardized security criteria. Federal agencies that are already taking advantage of some of the services in the Xi government cloud as part of the civil amenities. This is a significant step towards a full FedRAMP model authorization, which will enable federal agencies to take advantage of our Xi government cloud solutions. At our Investor Day in March, we spoke about our need to invest and focus on pipeline as we hire hundreds of sellers every year.

We are particularly pleased to see strong pipeline creation in our enterprise segment, yielding a surge in deal opportunity for workload expansion in existing accounts and new Global 2000 prospects. For the first 5 years, that is our first $1 billion, we're mostly selling to the commercial mid-market and large federal agencies.

In the last 3 years with an intense go-to-market focus, segmentation of the sales force and expansion of the product portfolio, we built a world-class enterprise-focused company. Now in the next 3 years, we have to prove that we can balance the 2 ends of the barbell equally well, selling both within the enterprise and through the commercial mid-market at scale.

With that in mind, we have segmented commercial completely out of our enterprise sales leaders, and building a focused U.S. commercial sales leadership and an organization on demand. We're also emphasizing a higher digital touch at the top of the funnel, so prospects can go without any human touch from digital adds to our clusters in the cloud with a few clicks.

Before I conclude, I'd like to take a minute to reflect on the highlights of our past fiscal year. Fiscal '19 represented a new phase of development for this company as we lead into our hybrid cloud vision and expand it beyond our core infrastructure platform. I'm pleased that Xi cloud service is generally available to the public and they have helped create significant opportunity for us in both new and existing accounts. This year also saw our multicloud multiattack approach validated by the market with new partnerships with HPE and others, delivering customers more freedom to choose the hybrid platforms that best fit their environment.

We also grew our customer base 34% year-over-year with new logo additions. Finally, this year, we've made tremendous progress in our subscription transition as we made a painful yet fundamental change in pricing for our new software and services model to market scale. We grew our subscription billings 57% in fiscal '19 from fiscal '18 while our growth margins increased from 68% in fiscal '18 to 78% in fiscal '19.

This last year, as we were adding new employees at a brisk pace, we also qualified our invisible culture of principles and how we maintain high standards of ownership, curiosity and listening. We also feature in the Forbes Just 100 list of the 100 companies that are doing right by America.

We're pleased to end the fiscal year in a resilient note as we plow through one of the toughest transitions in the history of IT, going from hardware to software subscription. I'm proud of the hard work and commitment demonstrated by our team members around the world. As we move into the new fiscal year, we'll continue to work through the business model transition. Foremost among them is educating our hardware-centric ecosystem about the new subscription economy, annual contract values and bite-size selling.

Case in point is the way the channel is reporting our numbers to Wall Street analysts, not realizing that we're not selling hardware anymore nor the impact of our subscription transition. This burden of proof in education lies in us, as we are one of the first infrastructure companies to disrupt the hardware neighborhood with pure software, portable licenses and consumption economics.

Subscription's biggest value will be in complete segmentation of feed activities. That is, sales, hunting for new ACV versus customer success, farming for the residual TCV and the 2 teams maximizing customer lifetime value, or LTV, in tandem.

That focus on clarity of purpose in the coming year and 24 months is how we'll unlock the biggest efficiency gains in our go-to-market. I look forward to continuing to build momentum in the new fiscal year. As we completed our hardware and software transition this last quarter, it is a seminal moment for the company to start guiding to software and support billings and revenue. We hope our investors find this to be a simpler way to model our business going forward.

Speaking of simplicity, there's one more thing. We will start giving out annual guidance. While the subscription transition makes it harder to project the full year, Duston will introduce the tradition of annual guidance because we believe it can tell a simpler, more compelling story of our 2 aspirational areas of investment: our commercial business and our new apps, and how they unfold over the coming year and in the future, talk more about this quarter in the fiscal year.

And now turn it over to Duston. Duston?

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Duston M. Williams, Nutanix, Inc. - CFO [4]

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Thank you, Dheeraj. I was pleased to see our fiscal year close out with a stronger Q4 performance versus the performance of the prior few quarters. The business is starting to show some results of improved execution with good momentum in bookings, new customer growth, large deals in Global 2000 traction. Additionally, as Dheeraj just noted, the shift to a recurring subscription business exceeded our expectations during the quarter and we continue to expand our pipeline.

In Q4, subscription billings accounted for 71% of total billings, up from 65% in Q3. And subscription revenue now accounts for 65% of total revenue, up from 59% in Q3. The faster-than-expected transition in Q4 was buoyed by some larger deals in the quarter. In Q4, our new term-based subscription bookings increased 67% to $150 million, up from $90 million in the prior quarter. And we expect these subscription percentages to fluctuate a bit, plus or minus, for the next couple quarters.

We are very pleased with the speed that we're working through our subscription transition and as more of our business moves to subscription, it gives us more data to review upper trends. This allows us to gain incremental insight relative to the top line impact relating to the transition.

During our Q4, we saw additional total contract value and balances between our 5-year term deals and life of device license deals, which resulted in less total contract value received on these 5-year term deals versus what would have been realized on an equivalent life of device transaction. To adjust for this, we're altering our pricing structure this quarter on 5-year deals to try to correct this imbalance. However, for the -- we've assumed that this value differential will continue for the foreseeable future.

We also saw the average duration of our new subscription contracts fall to 3.7 years in Q4 versus a duration of approximately 3.9 years last quarter. This was the result of seeing more 5-year deals move to 3-year terms rather than an acceleration in 1-year deals. This contract duration shift results in less upfront billings for the initial deal with the difference being captured when the term renews. As a result of these trends, we're now planning for a negative top line impact relating to the subscription transition to be approximately 20% versus the prior assumption of 10%.

And as we stated in the past, we do not believe that any of the prior transitions to subscription in our industry have been quite as complicated as the one that we are now working through, which includes 2 very different pricing mechanisms between the prior life of device licenses and the new term-based licenses.

Despite this negative subscription impact to the top line, in, Q4 bookings performance rebounded quite well as we exited Q4 with over 2.5x more backlog than the prior quarter.

I'll move on to some specific Q4 highlights, but before I go into the specific details for the quarter, when analyzing the absolute numbers in growth rates, please keep in mind that we believe the total billings and total revenue as well as the software and support billings and software and support revenue performance for the quarter, were all compressed by between $20 million to $25 million due to our subscription transition.

Total billings and revenue performance was also impacted by $8 million as we shipped less hardware than planned. Revenue for the fourth quarter was within our guidance range of $280 million to $310 million, coming in at $300 million, down 1% from the year ago and up 4% from the prior quarter. Hardware accounted for 4% of total revenue, down from 8% in the prior quarter. Software and support revenue was $287 million in Q4, up 7% from the year ago quarter and up 8% from the prior quarter.

Total billings were $372 million in the quarter, within our guided range of $350 million to $380 million, representing a 6% decrease from the year ago quarter and a 7% increase from Q3. Software and support billings were $359 million, flat from the year ago quarter and up 11% from the prior quarter. Our bill-to-revenue ratio in Q4 was 1.24, up from 1.2 last quarter. New customer bookings represented 26% of total bookings in the quarter, down from 31% in Q4 '18 and up from 25% in Q3. In Q4, our software and support bookings from our international regions represented 45% of total bookings versus 40% in Q4 '18.

Our non-GAAP gross margin in Q4 rose nicely to 80%, 3 percentage points better than our guidance of 77%. Operating expenses were $344 million and our non-GAAP net loss was $106 million for the quarter or a loss of $0.57 per share. A few balance sheet highlights. We closed the quarter with cash and short-term investments of $909 million. That's down $32 million from Q3. We used $10 million of cash flow from operations in Q4, which was positively impacted by $12 million of ESPP inflow. And free cash flow for the quarter was negative $33 million. This performance was also positively impacted by the $12 million of ESPP in 12 -- in the quarter. Now turning to the details of our Q1 guidance.

Hardware has become an insignificant percentage of our total billings and revenue and therefore, going forward, rather than providing guidance for total billings and total revenue, we will only specifically guide to software and support billings and software and support revenue. We will also provide an estimate of hardware as a percentage of total billings.

So on a non-GAAP basis, for Q1, we expect software and support billings to be between $360 million and $370 million, software and support revenue to be between $290 million and $300 million, hardware billings and hardware revenue to be 3% or less of total billings, gross margin of approximately 80%, operating expenses between $385 million and $390 million and a per share loss of approximately $0.75 using a weighted average shares outstanding of approximately $190 million.

The guidance for Q1 assumes the following: An estimated 20% or $25 million to $30 million top line compression related to our subscription transition; approximately $10 million less in hardware billings and revenue versus current Street estimates; and a bill to revenue ratio of 1.23 versus current Street estimates of 1.20, impacting total revenue and software and support revenue by approximately $10 million. The 20% top line compression related to the subscription transition impacts the Q1 year-over-year growth rates by approximately 7 percentage points. The software and support billings guidance of $360 million to $370 million compares to the current Street estimates of $355 million. The software and support revenue guidance of $290 million to $300 million compares to the current street estimates of $290 million.

Our planned increase of $40 million to $45 million operating expenses in Q1 is primarily coming from the following expense categories: Planned increases in headcount, particularly in sales and engineering, and regular course merit increases that are effective Q1; cost associated with our annual global sales training and enablement meeting, and continued growth in our demand generation spending to fuel our plan to growth for FY 2020 including our annual EMEA.NEXT Conference in Copenhagen, which was moved up from Q2 last year to Q1 in fiscal 2020.

Now turning to the details of our fiscal 2020 guidance. This was the first time that we have provided annual guidance. Our subscription transition has clearly added complexity to the business, which has made it tougher for the investment community to model. We hope that this top level view of FY '20 will help provide some clarity on our expectations for the year.

For fiscal 2020, we expect software and support billings between $1.65 billion and $1.75 billion. Software and support revenue between $1.3 billion and $1.4 billion, hardware billings and hardware revenue to be 2% or less of billings; gross margin of approximately 80%; and operating expenses between $1.65 billion and $1.7 billion. This guidance for fiscal 2020 assumes no major economic downturn during the fiscal year and no material change to the current average subscription term of 3.7 years.

This guidance also assumes an estimated 20% or approximately $170 million to $200 million top line compression related to our subscription transition as well as approximately $45 million less in hardware billings and hardware revenue versus the current Street estimates.

The estimated 20% top line compression related to the subscription transition impacts the fiscal 2020 year-over-year growth rates by about 8 percentage points. The software and support billings guidance of $1.65 billion to $1.75 billion compares to the current Street estimates of $1.6 billion and reflects a year-over-year growth rate of 17% to 24%.

The software and support revenue guidance of $1.3 billion to $1.4 billion compares to the current Street estimates of $1.3 billion and reflects the year-over-year growth rate of between 15% and 24%.

We will continue to push through our transition to subscription as quickly as practical. We have targeted our subscription-based billings to be greater than 75% by the end of FY '20. We are also aware that as our business increasingly transitions to subscription, our go-to-market cost structure must also transition to a more efficient model that resembles the efficiencies of other subscription or SaaS models. Although this will take some time to accomplish, some of the early thinking and work has already begun.

We remain bullish on several of our newer products as they are starting to become a bigger deciding factor in winning large enterprise-type deals. And therefore, we will continue to significantly fund these newest subscription-based products throughout FY '20. We believe these newer product offerings will ultimately enhance our top line growth and protect our value proposition in the years to come. FY '20 will also be a year that have renewed focus on investing and growing our commercial business. Our enterprise business is showing good signs of strength from the investments in FY '19, and we expect an improved commercial performance in FY '20.

Our expectations for FY '20 clearly reflects the impacts of -- impact of the subscription transition as well as the continued funding of newer products in our solution set. These 2 factors alone account for well over 50% of the projected negative operating margin in FY '20.

In this transitory year, we would expect cash usage in the low- to mid-$200 million range versus the current Street estimate of $190 million with the subscription transition accounting for a vast majority of this cash usage. And lastly, if the estimated growth rates for FY '20 do not materialize as planned, we will prudently manage operating expenses accordingly.

In summary, we continue the tough work of transforming the business model with a view on the long-term despite the short-term impact to the business. It's been nearly 2 years since we started the transition from an all-hardware model to an all-software model. It was this transformation that laid the foundation for our current transition from an all-software model to an all-subscription model, and it will be the all-subscription model that will ultimately lay the foundation to our third and final phase of transforming the company, with the final phase being the all-ratable model.

Once again, despite the significant short-term optical impacts to the business, we are already planning how we might make this next and final phase, the all-ratable phase, a reality at some point in the future.

And with that, operator, if you could now open the call up for questions, that would be great. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jason Ader from William Blair.

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Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [2]

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Duston, I think you mentioned 2.5x on the backlog versus the prior quarter. Can you just talk about, I guess, what drove that specifically?

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Duston M. Williams, Nutanix, Inc. - CFO [3]

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I think it was good execution. Obviously, in the field, we knew that was going to rebound eventually after 2 quarters that we weren't very proud of. And we ended up with some good backlog build in the quarter. And we'll see how this quarter goes. But we would hope to do the same thing, but we'll see how it goes.

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Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [4]

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Okay. And then Dheeraj, just for you. When we think about the kind of hybrid cloud pitch from Nutanix, let's just say I'm a company that's got an on-prem infrastructure that's been transitioning to HCI. And I've also got a public cloud strategy and I'm working with, let's just say, Azure, to move apps over time from my private cloud, which is based on HCI to public cloud, which is obviously a different architecture today. Is the pitch that, stay with Azure but just move to the bare metal Nutanix offering on whichever public cloud and just kind of keep everything consistent? Is that ultimately what you're trying to convince customers to do?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [5]

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Yes. I think there's -- thanks for the question, Jason. There's 2 parts to this. One is the data plane, the control plane and then the management plane. There's 3 layers of the stack here. And customers really like our data plane because it's reliable, highly available. And when I say data plane, I'm not -- I just don't mean software times storage. I mean filers and object storage and even our segmentation, micro-segmentation, kind of like network products.

At the end of the day, when they want to take this to Azure, in fact, we're already talking to some of our largest customers to -- we will take Nutanix to Azure. They want to use Azure's billing plane and identity and data centers and things like that. So there will be a certain blurring of the lines between what they want to use from Azure, which could be Azure credits, and how they can bundle the credits by using a Nutanix-like technology. I think that's where the world is really headed for us.

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Operator [6]

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Your next question comes from Wamsi Mohan from Bank of America.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [7]

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I was curious about your confidence in putting this out there, given just that there is so much macro uncertainty, you've seen some very material misses in storage and server land, and just curious if you are baking in a tough macro backdrop in your guide versus sort of the last couple of quarters when you thought most of this was execution-related? And I have a follow-up.

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [8]

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Yes. Thanks, Wamsi, good question. I'm going to take a stab at it, and Duston, you should, too. I mean there's basically 2 macros. One is the macro-macro and one is our own subscription macro. And right now we are very much focused on that one macro that we can at least get a little better handle on. And we think that, if we can keep that in control, I mean as Duston mentioned, about 3.7 year term, I mean [modeling] that, I think we believe that we have the things in our control and we are obviously investing towards growth as well. But at the same time, if the macro really changes, then overall, our investments in sales and marketing will also reduce and we'll adjust accordingly.

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Duston M. Williams, Nutanix, Inc. - CFO [9]

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Yes. I mean we haven't, since we last updated you on our thoughts there, there's really been no additional signs or signals that we've seen. Now who knows what the future brings. But over the last 3 months this, in our view, anyway now. Again, at $1.5 billion, we don't have this massive view of the world here. But from our perspective, there's really no change from our view 3 quarters ago, or 3 months ago.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [10]

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And Dheeraj, you say you need to balance the large enterprise focus versus U.S. commercial sales segmentation. Why is this the right time to resegment the sales force? And where do you think the incremental investments that you will enable in the next year, where will those be most geared toward?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [11]

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Yes. I think the question of right timing, we have a much better, sort of grasp of the segmented enterprise sales force. We have been doing it for the last 2.5 years now. If you recall, our February 2017 call, we talked about segmentation, segmentation, segmentation. We did that for almost 2 years. I think we have a pretty good grasp on it. And now our sales leadership actually believes that we can now focus on commercial. There is a better marketing engine for commercial. We think we have a better brand as well that can seep from the enterprise down to commercial.

And the digital delivery model is now coming together where, as I mentioned in our banner ads, with a couple of clicks, you can actually get to doing a POC and kick the tires on Nutanix without having to [reship] a box and also do sorts of things that appliance companies used to do. I think we'd love to do more and more digital touch with our prospects before they even pick up the phone and call a human being in the salesforce.

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Operator [12]

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You next question comes from Jack Andrews from Needham.

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Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [13]

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I was wondering if you could drill down a little bit more on the commentary around 26% of deals including a product outside your core offering. You talked about some of these newer products becoming a deciding factor in winning larger deals. Could you provide a little bit more color on any one of them in particular that's really helping you move the needle on this front?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [14]

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Yes. Obviously, we understand data really well, so Files has taken off in a big way. So we're going after application data now, and Files to me, the system record. So with capacity, we'll actually see that 1 product actually make a lot of progress in terms of dollars that we make on Files. Flow is a little bit more of a control plane. So we won't see the exact same kind of dollars. But the fact that Flow is pulling AHV, and think about when people really like microsegmentation, extremely lightweight, easy-to-use. They start pulling our high provider as well, even though our high provider is license-free. And on the systems of engagement and intelligence, I think about Era and Calm, they've done a pretty good job of really having a more of a solution sale approach.

So Era is more for database workloads and we're going and talking a language to the data base folks, and including the DevOps outside of the West Coast, about how they should manage databases. And that pulls the core as well along with it. So I just start thinking about the workflows. You're not thinking about infrastructure workflows or modulation workflows, you're thinking about database workloads. And similarly, Calm is now the system of engagement that we think we can integrate with Beam and Epoch to make it a system of intelligence as well, which is basically multicloud work for us, how do you really think about the private cloud, both a Nutanix stack as well as a VMWare stack and how do you think about Amazon and Azure? And then, how do you start to drag and drop these applications between different clouds? I think the future of multicloud will depend on how easy do we make mobility, the idea of motion of applications across different clouds.

So I think between Calm, Era, Files and Flow, we're making tremendous progress. And there's another system of intelligence called Prism Pro, which we are going and up-selling to our customers about, around operations management. And that's about monitoring, alerting, doing a lot of machine learning around our machines and making sure that our support actually doesn't have -- has been [full] experience when it comes to debugging customer's problems.

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Jon Philip Andrews, Needham & Company, LLC, Research Division - Senior Analyst [15]

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Really appreciate the commentary around that. As follow-up question, Dheeraj. You talked about how you've been disrupting the channel market, which is historically a hardware-centric market. I was wondering if you could expand a little bit more on your thoughts there? And as you think about trying to gain a broader presence with channel partners, do you think it's better to go -- maybe go deep with a smaller number of relationships who really understand your products? Or do you think you can gain enough significance and market presence with a larger number of vendors who may be selling dollar volumes of competing products, essentially?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [16]

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I think less is more with any relationship, and we've done a good job with a few and we believe that at least in the U.S., have a good handle on this. Obviously, internationally there is a lot of fulfillment of that channel actually does beyond just lead generation. And at the end of the day, we are lucky if you actually get a few of them to really go deep and that's where the focus has really been. Sometimes the customers bring their preference, like I would like to do business with their channel partner, and we basically work with the customer's interest there. But mostly, we work with few partners and try to get the more business as the quid pro quo from that, from them translates to us, too.

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Operator [17]

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Your next question comes from Rod Hall from Goldman Sachs.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Division - MD [18]

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I wanted to start off, I guess, and ask about the margin trajectory here. If you look at the -- if you back out the hardware pass-through and you just look at the software margins in the quarter and the support margins, the software margins seem to dip quite a bit and then the support margins are up a lot. And I'm assuming maybe that is related to the success you've had with the contract sales. But I just wanted to check that, Duston, see if you can bridge that for us at all, so we understand those dynamics in those underlying margins. And then I've got a follow-up.

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Duston M. Williams, Nutanix, Inc. - CFO [19]

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Yes. It's a little more confusing than that. And I was -- internally, we kind of look at it in its entirety just because the way some things work here. But in Q4, we actually had a year-to-date adjustment. There's no impact to total margins but a year-to-date adjustment that flowed through in Q4. COGS coming out of support and going into product. And I think if you do the calc there, it's probably a 4.5% or so pick-up to the support margins and probably about a 2.5% decline in product margin from that [make up.] Now it's kind of a change for the entire year there, so due to some of our cloud-based offerings, it's probably -- the COGS are more appropriate into the product category there. So again, we kind of look at that in its entirety anyway, from a margin perspective. So hopefully, that gives you some clarity there.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Division - MD [20]

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Are you saying that, that's just a one-off? That doesn't carry forward as we look into next year? Really, it just affects that Q4?

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Duston M. Williams, Nutanix, Inc. - CFO [21]

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Yes. Now those COGS on a quarterly basis now will go up into -- in the product and out of support. So there'll be a little ongoing shift there. But again, there's no impact to the total.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Division - MD [22]

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So that -- that shift is what you loaded in there is the whole year loaded into one quarter? So the impact going forward won't be quite as big as what we see there in the...

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Duston M. Williams, Nutanix, Inc. - CFO [23]

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Yes. Correct. Right.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Division - MD [24]

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Okay. And then the other question that I had for you guys is on the -- is just looking at the full year guide and the rule of 40. Obviously, we calculate a pretty low number there. I just wondered how you're thinking about the rule of 40 now in the context of all this?

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Duston M. Williams, Nutanix, Inc. - CFO [25]

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Yes. And this is the transition. And you see the growth rates from the guidance perspective and the impact that we see on the subscription piece, and...

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [26]

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Once we actually get to ACV, right? I mean right now we can't do that because it's pro forma.

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Duston M. Williams, Nutanix, Inc. - CFO [27]

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Yes. So there's a lot of complexities in here, but we've got work to do on that and it's going to be a while obviously before we get back to that and let's say this transition, you've got some apples and oranges going on from a comparative perspective, too.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Division - MD [28]

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But it's still a governing kind of principle, the way that you guys are running the business? Or is it sort of something that you're tabling for now and maybe revisit in '21? Or how are you thinking about that?

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Duston M. Williams, Nutanix, Inc. - CFO [29]

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Yes. I mean it's hard in a transition year like this, that's so impactful. It's kind of hard to govern that. Obviously, we'd like to get the cash back into a neutral position year as soon as we can and the growth rates accelerate. And I think ultimately, the rest takes care of itself here. But we'll need to flush through a few things.

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Operator [30]

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You next question comes from Aaron Rakers from Wells Fargo.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [31]

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I have 2 as well, if I can. So on the first question, I just want to understand kind of just a clarification, if you will. The 2.5, that's increase in what you're calling backlog. Is that, is backlog remaining performance obligations or contracted obligations that you sit on top of the deferred dollars or are you referring to [type line]? I just -- I want to be clear. Because that seems like just a massive number, considering that I think your contracted value is like $845 million exiting last quarter. Can you just give us exactly the context behind that 2.5X increase?

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Duston M. Williams, Nutanix, Inc. - CFO [32]

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It's simply an order that we have not billed.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [33]

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Okay. So is that what's going to be disclosed as contracted not yet revenue-recognized balance?

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Duston M. Williams, Nutanix, Inc. - CFO [34]

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No -- yes.

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [35]

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I think you're probably looking at 2 numbers, deferred revenue, which obviously is the breakdown. And then there's the very, very short term stuff, which is for next quarter. It's just different billings, actually.

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Duston M. Williams, Nutanix, Inc. - CFO [36]

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Yes. I mean this is simply bookings that just haven't been -- we've got the order in from a customer but it simply hasn't been billed.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [37]

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Okay. So maybe a different way of asking. I think you raised at the beginning, you said the remaining performance obligations would be an important metric to consider as far as your business trajectory going forward. That is something that's actually disclosed in the 10-Qs, I believe. So that number is actually something well north of deferred revenue, correct?

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Duston M. Williams, Nutanix, Inc. - CFO [38]

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Yes. I'm getting confused on your question here. But again, this backlog that we're referring to, again is orders that have come in, might have been at the end of the quarter, whenever, that we simply haven't billed the customer or done anything with that order.

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [39]

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But the deferred revenue is $910 million.

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Duston M. Williams, Nutanix, Inc. - CFO [40]

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Yes. $910 million for the quarter, yes. We'll disclose the same stuff we've always done, in this case, the Q. But in this case, now the K here.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [41]

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Okay. Okay. And then, I guess, thinking about the model and the operating expense trajectory, the guidance was quite a bit higher than I think The Street was looking for. Can you just help us understand how you think about kind of the path of profitability? Or what kind of level of breakeven do you think about from a model perspective?

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Duston M. Williams, Nutanix, Inc. - CFO [42]

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Yes. I mean we've got some work to do on that. Again, through this transition time here, we've got some investments and I think ultimately, you have to believe that these investments will pay off in the future for higher growth rates. And I think we've started to see that. I think if you look at the new products, I wouldn't expect us to disclose this every quarter, but I think if you just look at new products that we define as essentials in enterprise and you look at it, you have to really cut it down to ACV, the annual contract value. In FY '19, those new products represented about 10% of our total annual contract value in FY '19.

So I mean that should give you some feel that these products are getting traction. That's no bundling, by the way. This is -- these are kind of being sold by themselves. At some point, we'll actually even start doing some thoughtful bundling on these products and it doesn't say, obviously, everything else they're dragging along with them. But you've got to have a belief that what we're investing not only in the product side of the house but the go-to-market side of the house, is going to pay off in the future.

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [43]

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Also at Investor Day, we'll probably come back and talk about the 3 deals as well.

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Duston M. Williams, Nutanix, Inc. - CFO [44]

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Yes. Yes, it's hard to do, obviously, on a call like this, but -- it's fair questions, but we'll give a -- clearly a renewed view.

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Operator [45]

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You next question comes from Alex Kurtz from KeyBanc.

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Alexander Kurtz, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [46]

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Duston, when we look at the North America sales organization and what's been going on there the last couple of quarters, how would you characterize productivity across different cohorts? Any kind of metrics around how -- I know you just gave up this backlog number as a signal of that. But is there anything else we can kind of dig into? And then, Dheeraj, your largest competitor's obviously having a big event this week and there's a lot of discussion around Kubernetes being integrated into their core compute product. Just some high-level thoughts about where Nutanix stands today on that topic.

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [47]

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Sure. In fact, while Duston looks up that stuff for adjusted numbers of TCV, I'll take the question around Kubernetes and the rest. So you think about our strength, we are foundationally based on Linux. And the core container engine is really Linux-based. And that's our core competitive advantage. We're actually getting a lot of benefits because our hypervisor, and our entire stack, including our controllers, they're all Linux-based, actually. And now the real magic will come around this. How do you make it enterprise grade, reliable, available, high-performance? And then encircle the compute engine, which is the docker engine of Linux, with storage and networking and security and management planes and being dragged and dropped across clouds? That's where the real monetization opportunity of Kubernetes really is.

So we are coming from our strength because we are Linux-based, and VMware is coming from its strength, which is installed base. But they still have vSphere that is not Linux-based. So I think we are more aligned with the cloud hypervisors. You think about Amazon and we look at what even Azure is doing now, what Google has, they're all based on Linux. And we think we can get a lot of advantage of really taking Linux to everybody rather than having to build a proprietary core biz around that.

And I think also competitively speaking, we have been a company that's really about data and design. That's how we lead with. There's a lot of products that we built in the last 4, 5 years that really bolster our data position around not just data for washing machines, but data for containers, filer data, object storage just came out recently and then finally, database as a service. There's a lot of things that we're doing around data, making it really simple, which is around design, which is there to differentiate.

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Duston M. Williams, Nutanix, Inc. - CFO [48]

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On your question, Alex, on North America, it's still early. But I think Chris and team have made some really good progress in a very short period of time. I think we always look again on productivity at a ramped rep basis on a rolling 2 quarters. And clearly, that productivity in North America, we always take that out because it's so lumpy. But from a -- Chris' territory with all the Fed, improved on a rolling 2 quarters. So lots of good things happening there and Chris has taken a disciplined approach, obviously to run the business. So lots of good stuff happening there, but it's early. And we're particularly proud what's happening in APAC. I think the team there has done a really good job. Their productivity, again on a rolling 2 quarters basis on the ramp rep had gone up 3 or 4 quarters in a row here now. So they're on a pretty good run, what they're doing there, and we're happy to have Sammy take over the leadership in EMEA. So I think we've got 3 great leaders here now that will kind of perform in harmony here. And I think the execution will continue to improve. Q1's always a tougher quarter in general, but we're excited to have some good focus on all 3 of these regions.

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Operator [49]

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You next question comes from Katy Huberty from Morgan Stanley.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [50]

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Just looking at Slide 15, you showed lifetime bookings multiples, which have moved up and to the right over the past 3 years. In 4Q, that metric leveled off. Does that tie to the subscription transition? Or is there another explanation for that, the expansion of that multiple flowing?

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Duston M. Williams, Nutanix, Inc. - CFO [51]

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Well, top line compression, obviously 20% doesn't help that multiple. But we have to get back to you on exact specifics. If you're talking about the globe -- are you talking about Global 2000 repeat multiple?

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [52]

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Yes. On Slide 15, the lifetime bookings multiples that you provide. Maybe look, past 3 years, every quarter that's increased and then there was a leveling out. And even last quarter, there was a big jump in the multiples, even with the weaker revenue trend. But we can talk about it off-line.

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Duston M. Williams, Nutanix, Inc. - CFO [53]

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Yes. Clearly, taking $20 million or $25 million out of the top line, but we'll get you some sort of answer.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [54]

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Okay. And then Dheeraj, earlier in response to a question, you talked about some of the apps that are driving engagement and revenue. It sounds like Files and Prism Pro are contributing the most revenue now. Is that correct? And then when you think that to fiscal '20, are there new apps that you think can hit the inflection point in terms of revenue contribution?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [55]

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Yes. You're right, I think Files and Prism Pro are 2 and we are thinking about a top-down pricing model change for both Era and Frame around core desktop per user, per year kind of a license, which we're basically pulled through the core other than us pricing core differently from Frame itself. And similarly for Era, it could be based on sockets as well. So there's some pricing simplification that will actually help us have that solution-based approach, which will help these 2 products not have 2 separate discussions. One is, well, I sold you the core, now I'm going to sell you for control planes or management planes. I think those are the kind of the discussions we're having. But I think Era and Calm and Frame are the 3 that we believe could really take off from here.

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Operator [56]

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Your next question comes from Mark Murphy from JPMorgan.

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Pinjalim Bora, JP Morgan Chase & Co, Research Division - Analyst [57]

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This is Pinjalim for Mark. Duston, on the next year guidance, as you go into the 75% subscription revenue mix, do you perceive any risk in duration for the term-based license contract a little bit that you managed specific incentives that's been given to sales reps to drive a 3-, 4-year deal? Or could it, in terms of flexibility, I mean could it works at 1-year level [or volume] next year? I mean you're probably not going to want to, but is there more risk in that number?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [58]

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Well, one of the things that we are trying still trying to learn from the market is how infrastructure is still considered CapEx for a lot of our customers, especially in the large enterprise. And until commercial becomes like really, really large for us, I would assume that infrastructure will still be consumed in a 3- to 4-year kind of horizon simply because a lot of CFOs still look at it as CapEx, actually. So there's some sort of understanding of how the market perceives infrastructure to be, because our competitors are still selling hardware. And that's going to be one of the balancing acts that last year had to play with.

Now if the market wants to do 1-year term, we should -- will not come in the way, we should not give anything unnatural to sell or don't sell one year. I mean definitely, we want to do 3-year contracts. The question is, how do we collect and how do we actually compensate for?

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Pinjalim Bora, JP Morgan Chase & Co, Research Division - Analyst [59]

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I see, understood. Okay. And then secondly, on the sales new group that you talked about on the enterprise side. Do you perceive any kind of disruption around that? And it seems like it's in U.S. and if that is baked into the numbers that you gave us?

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [60]

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Yes. I think the last 12 to 18 months, we have done a lot of segmentation for the enterprise, anyway. So a lot of the territories we're talking about in the commercial space is white space. And Chris really believes that we can get the flywheel going if we were methodical with commercial and investments in commercial as well.

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Operator [61]

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Our last question comes from Karl Keirstead with Deutsche Bank.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [62]

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Two for Duston. Duston, on the operating cash flow, I just want to make sure I heard you correctly. I think you guided for fiscal '20, negative $200 million to $250 million. So I just want to confirm that, that's correct. And I wanted to ask you, as we look out into the following year, fiscal '21, do you think you're on a trajectory to realistically get to operating cash flow neutral that year? Or given the ratable transition and the weight on cash flows, that could be a stretch?

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Duston M. Williams, Nutanix, Inc. - CFO [63]

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Well, let me clarify the first thing. That kind of cash range we gave for FY '20 is free cash flow, not operating cash flow, okay? So it includes all the CapEx in that number. So obviously the operating cash flow will be a lot better than the number that we had mentioned.

And we'll work through this. I think as we get a majority of the business transition to subscription, that obviously the cash usage have to come down and it will come down over time, whether it gets neutral in fiscal '21, again, it's kind of our yearly look that we'll give investors again at Investor Day and some other thoughts, I'm sure.

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [64]

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And again, about the collections, whether we should collect 3-year upfront or not, these are all the questions that we're going through right now.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [65]

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Okay. That make sense. And then just my second and last question. Duston, back to the question around the OpEx guide for fiscal '20 and how you might start to moderate that. You mentioned that you are beginning efforts to make your sales structure more efficient. It sounded like those are actions different than the split between commercial and enterprise that you just mentioned. So without getting into too much detail, I'm sure it will come later, but just broad strokes, what is the vision to get your sales efficiency a little bit more in line and hence, that OpEx number under a little bit more control? Just maybe high-level thoughts would be great.

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Duston M. Williams, Nutanix, Inc. - CFO [66]

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Yes, I think it's similar to other types of subscription businesses. How do you take advantage of renewals and how do those play into the equation? And how do you get some efficiencies? How do you get the productivity and ferry these renewals, take on a little different feel and look from a simplicity perspective? And does that enhance productivity? There's a lot of things that we need to go look at. We realize we need to look at it. And we understand that there's some efficiencies that needed there. We're in the early stages, quite honestly, and we'll -- it will take some time. But we understand we need to do that and we're thinking through it.

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Dheeraj Pandey, Nutanix, Inc. - Co-Founder, Chairman & CEO [67]

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Yes. I mean the Investor Day would be a good place to talk about some of these things.

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Operator [68]

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There's no further time for questions. I will now turn the call back over to the presenters.

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Tonya Chin, Nutanix, Inc. - VP of Corporate Communications & IR [69]

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Thanks very much for joining us today. And as we said earlier, we'd love to see you some of you at the Deutsche Bank Conference. We'll talk to you all soon. Thanks.

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Operator [70]

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This concludes today's conference call. You may now disconnect.