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Nutanix, Inc. (NTNX) Q3 2019 Earnings Call Transcript

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Nutanix, Inc. (NASDAQ: NTNX)
Q3 2019 Earnings Call
May 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Julianne, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Nutanix Q3 Fiscal Year 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

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

Tonya Chin -- Vice President of Corporate Communications & Investor Relations

Thank you. Good afternoon and welcome to today's conference call to discuss the results of our third quarter 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's CEO; and Duston Williams, Nutanix's CFO. After the market close today, Nutanix issued a press release announcing the financial results for its third quarter of fiscal 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 provision of Federal Securities Laws regarding the company's anticipated future revenue, billings, gross margin, operating expenses, net loss and net loss per share, free cash flow, our business plans and objectives, demand for and customer adoption of our products and customers -- our products and services, plans and timing for and the impact of our transition to a subscription-based and recurring revenue business model; the impact of recent leadership changes, plan for and timing of the release of new products, technologies and services, our continued investment in technology, talent and sales and marketing efforts and any expected impacts from these investments; the benefits capabilities of our platform; competitive and industry dynamic; market size and 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 Form 10-Q for the second quarter of fiscal 2019 filed with the SEC on March 12, 2019, 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 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 our Investor Relations section of our website and in our earnings press release.

Lastly, Nutanix will be at the Bank of America Merrill Lynch Global Technology Conference on June 5th in San Francisco, the William Blair Conference in Chicago also on June 5th and the Stifel Cross Sector Conference on June 11th in Boston. We hope to see many of you there.

And with that, let's turn the call over to Dheeraj. Dheeraj?

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Thank you, Tonya. In my remarks today, I'll focus on three key themes; one, our transition to subscription is ahead of schedule; two, our field execution is improving in terms of pipeline and sales hiring; and three, our customers love us because of our products and customer service.

Looking back, Q3 was a mixed quarter for us as we delivered better-than-expected gross margins and EPS and strong growth in our subscription-based revenues, indicating an acceleration of our business model transition, while also delivering billings and revenue below our guidance range. As you may recall, our guidance last quarter was less than expected as we needed to rebuild our pipeline by doubling down on lead generation and increasing our focus on sales hiring and execution, especially in the Americas. At the Investor Day in March, we also talked about a 5% to 10% compression in top line due to our transition to a subscription model.

We believe that our outperformance in our transition to an increasingly subscription-based model this quarter highlighted for us a key difference in contracted revenue amounts in our life of device versus subscription licenses, which we're now factoring into our strategy and outlook. This transition to increase subscription based revenue is a core aspect of our strategy that we expect will deliver increased predictability and leverage for business over time, and we're making significant efforts to predict the impact that these changes will have to our revenue and other financial metrics moving forward. Duston will provide more details on this later in the call.

During Q3, we executed well on the strong plan to ramp lead generation and thus improved sales execution. As we noted in both our Q2 earnings call and at our Investor Day in March, we continue to believe our actions to address this will drive improved business into FY '20 as these changes take a couple of quarters to show results. We will be watchful and conservative in the near-term as we give New Americas sales leadership time to effect change as we understand the top line impact of even higher subscription. We saw a number of enterprise successes in Q3, which highlights the fact that the fundamentals of the business and competitive positioning in the large and growing HCI and hybrid cloud markets remain strong. During the quarter, we continued to see momentum in large deals closing 50 worth more than $1 million, including eight worth more than $3 million, we now have 18 customers with a lifetime spend of more than $15 million and nearly 850 customers with a lifetime spend of more than $1 million, and our customers remain enthusiastic about AHV or hypervisor, increasing adoption hypervisor to 42% this quarter ruling 4-quarter basis.

\We were also encouraged to see continued growth for our new solutions outside our core HCI platform with 23% for deals in the quarter, including essentials and enterprise offerings. As I mentioned, we are further along in our transition to a subscription business than anticipated. Our continued shift to a recurring revenue model resulted in 65% of our billings coming from subscriptions, up from 41% in the year ago period, and our subscription revenue is now 59% of total, up from 28% a year ago.

Our transition to a subscription revenue model is driven by the needs of our customers while increasingly moving toward a hybrid cloud environment and therefore won the same licensing flexibility within their private cloud deployments that begets in the public cloud. Based on feedback from our customer base and the lessons learned from the software industry, where large vendors that ignored subscription business now suffer.

We are confident that this transition will allow us to drive higher quality more predictable revenue over time, while also making it more flexible for our customers to purchase in consumer software. Our customers are already responding well to the new flexibility this model provides as evident in our deal this quarter with the Global 2000 French multinational hospitality company that has a lifetime spend to more than $7 million with us. This customer, which has previously purchased life of device licenses spent nearly $4 million on new term-based subscription licenses in Q3. As part of this deal, this hospitality company will expand it's use of our core platform to run new VDI and database workloads and adopt additional services outside of our core platform, including Prism Pro, our multi-cloud orchestration software comp, our new object storage services buckets and our database service area. New customers are also taking advantage of the subscription-based licensing model as evidenced by a win with one of the global big four accounting firms. This initial deal, which was worth nearly $6 million, is the largest term subscription deal we've ever received from a new customer. This customer will replace its existing traditional infrastructure with our enterprise cloud platform for VDI, test and dev, business intelligence and ROBO workloads running AHV.

As we undergo this transition, we also continue to provide our customers with new options for how to run our software within their data center infrastructure. In Q3, we announced an exciting new partnership with HPE that enables our channel partners to directly sell HPE servers combined with Nutanix's enterprise cloud OS software so that customers can purchase a fully integrated appliance and also provide a new -- as a service delivery model for customers through HPE's Green Lake offering.

This offering is an example of how large partners can transform company like ours into monthly ratable business models that take us further down the path of subscription. Earlier this month, we held to target a largest .NEXT user conference to-date hosting nearly 6,000 attendees in Anaheim, California over three days. This flagship conference is one of many .NEXT events we host worldwide throughout the year reaching more than 26,000 attendees. For our existing customer base, .NEXT serves as an opportunity to deepen their understanding of our platform and contribute their feedback, helping to drive continued growth within accounts.

One example of this growth was a deal worth more than $3 million this quarter with an entity within the US Department of Defense that has a lifetime spend of nearly $20 million. With this deal, this customer continued transition that began three years ago replacing traditional infrastructure architectures with our platform across its remote sites. And for our prospects, .NEXT provides an opportunity to learn more from our existing customer base about how we help them overcome the legacy infrastructure challenges that have kept their IT teams from creating value for the organization. And one deal was more than $1 million this quarter, a new customer, one of the largest publishers in the world, Meredith Corp initiated a complete rearchitecture strategy for its data center beginning the process of replacing its traditional infrastructure with our enterprise cloud platform.

Our .NEXT events also serve as a platform to checkpoint our ongoing product innovation. In prior years, we've added to our core platform with new services that address every aspect of our customers' IT needs like object storage with buckets, database services with error, file services with files and disaster recovery services with (inaudible). This year, we focused on the work we have done to strengthen our platform and existing essentials in enterprise products so that they integrate better. Nutanix Mine is a new offering that in partnership with leading secondary storage vendors like VM and HYCU, Commvault and Veritas integrates backup operations into our platform so customers can manage their primary and secondary storage operations from -- within our Prism management frame. We also announced a powerful new capability in Nutanix Frame, our SaaS VDI offering, to support desktops on-prem. If enterprise apps are on-prem, so should the desktop. Hybrid desktop as a service, or DAAS, will be a killer application for hybrid cloud computing over the next few years.

We also previewed Xi Clusters, a hybrid cloud offering that delivers the Nutanix stack directly on AWS EC2 bare metal instances, a killer use case for multi-cloud as lift and shift of legacy applications and Xi Clusters offer a simple one-click way to move on-prem applications to a public cloud data center. By delivering our software as a complete stack on AWS, customers will enjoy the same simplicity of running Nutanix but with all the benefits of public cloud deployment, including subscription licensing flexibility. These recent product innovations allow us to further differentiate ourselves in the large and strongly growing HCI and hybrid cloud markets.

Before handing the call over to Dustin, I want to touch briefly on two additional announcements that we made today. First, we announced that Snail Potti, our Chief Product Officer, has decided to leave the company to pursue another opportunity. Sunil joined Nutanix at a critical moment over four years ago, and has shepherded our product organization through a period of significant growth. The last four years have been memorable, and I will miss a leader in him who was fun, collaborative and deeply empathetic. We are grateful to have benefited from his leadership as we've grown over the years and we wish him the very best in his future endeavors.

In the past 18 months as engineering grew, we split the entering ranks between Sunil and David Sangster, our COO. David and Rajiv Mirani, our CTO, and two of our SVPs of engineering who helped bring billions of dollars of core revenue as well as our founder GMs have graciously agreed to step up to lead. As we go deeper into large enterprise accounts, we will need their rigor and curiosity to take the company into new era of product and engineering. I'm also pleased to announce that we continue to add industry expertise and visionary leadership to our Board of Directors. Brian Stevens will join our Board on June 1st, coinciding with his last day as VP and CTO of Google Cloud, will bolster our already talented team with his perspective built to nearly five years of experience at Google and nearly 13 years of experience at Red Hat, including as their EVP and CTO.

As we approach our 10th anniversary as a company, we are very excited about the opportunities ahead while remaining focused, nimble and creative as we solve for the challenges and encompass scaling a business to drive our next 10 years of growth. Great businesses are built over time on the foundation of exceptional products, outstanding customer support and an entrepreneurial employee base that is constantly learning. These have been the foundation of our success at Nutanix.

We've made mistakes along the way, but we have also acted swiftly to address them. From being a hardware company not too long ago and being compared to converged infrastructure, we've come a long way to being identified as an emerging operating system software company that is ploughing through a much needed transformation toward subscription and hybrid cloud. Much needs to be done in the coming quarters as we flush through our pipeline and sales execution issues and leverage the new subscription model to improve profitability and sales leverage.

With that, I'll turn it over to Duston to provide more details on the quarter and guidance. Duston?

Duston Williams -- Chief Financial Officer

Thank you, Dheeraj. During Q3, we made significant progress with two of our major focus areas, specifically our shift to our recurring subscription business accelerated and our pipeline generation for the quarter met our expectations. In Q3, subscription billings accounted for 65% of total billings, up from 57% in Q2. Subscription revenue now accounts for 59% of total revenue, up substantially from 47% in Q2.

In Q3, our new term-based subscription bookings were $90 million, up from $57 million in Q2. Approximately 55% of the $90 million came from existing customers who had previously purchased non-portable licenses. In the quarter, we saw over 600 customers purchase new term-based licenses. We remain very excited about the transition to a subscription-based business as there are many long-term benefits to the business associated with this shift. Some of these benefits include ultimately a more predictable recurring billings and revenue stream, allowing customers to choose their software license term rather than paying for the entire license fee upfront as occurs in a life-of-device type purchase, providing license portability for our customers both on-prem and off-prem, and the lower go-to-market cost that is inherent with subscription business models.

Now, while there are substantial benefits to the business associated with this transition to a subscription-based model, there are also clearly some friction points to our top line as a result of this transition. As we approach the first cumulative $200 million in new term-based subscription billings, we are now at a level of scale where we have a better understanding of the impact of the shift on our business.

During our Investor Day back in March, I mentioned that with the additional scale and subscription billings, we were getting into a better position to analyze the full impact from the two very different pricing mechanisms between the old life-of-device node-based licenses versus the new term-based subscription licenses based on cores and flash capacity. At the meeting in March, I also mentioned that there may be some top-line differential between these two offerings, and at that time we stated this differential could be 5% to 10%. Some of the top-line impacting subscription-related friction points include life of device software licenses have perceived duration of five-plus years versus a new term-based capacity license, which averages less than four years in duration.

Although we expect to collect the fifth year and beyond upon renewal, this duration impact and other factors result in some upfront top-line billings and revenue compression. The new term-based software licenses also have a higher revenue deferral rate versus a life of device license based on the inherent support term differential that exist among the two offerings. This deferral impact reduces the upfront in-quarter revenue recognition. This transition has also invoked some friction in the field selling process. The selling impact has the potential to slow down and extend sales cycles as the Nutanix sales rep, the channel rep, the (ph) disti, and the Nutanix customer all must become educated on the benefits of this new licensing methodology versus the prior life of device licensing structure. We expect that this friction from -- will naturally dissipate overtime as our new term-based subscription offerings become the norm.

And lastly, although not significantly top-line impacting today, we will over time experience some additional top-line impact as we gradually shift to a more ratable recurring revenue stream. This ratable impact will occur when our SaaS products such as frame, error, (ph) zye and others, including the HPE GreenLake offering become a greater percentage of our total billings -- bookings.

Regarding the duration impact and other factors affecting Q3 billings and revenue, while it is very difficult to predict the exact impact as every transaction is different with variations in price, mix and volume. Our best estimates would suggest that we are receiving approximately 10% less upfront value from the new term-based licenses versus the traditional life of device licenses. And the deferral impact driven by a higher revenue deferral rate from the new subscriptions can yield up to 20% less in-quarter of revenue recognized versus what would have been recognized based on the traditional life of device licenses.

In summary, our transition to subscription has impacted our top line. We are currently experiencing the trade-offs of some top-line strength, all for the long-term benefits of building a more predictable recurring subscription business. And quite candidly, some of these top-line impacts are different than our previous expectations. As many of you know, subscription transitions are often unpredictable and Nutanix's subscription transition is no different. For this reason, we continue to push toward a subscription-based business as soon as possible. In the meantime, the quarterly results will be a bit more volatile than normal.

Ultimately, as our subscription base grows, reporting results based on more traditional subscription metrics such as ACV and ARR will naturally equalize some of the volatility associated with our subscription transition. The other area of great focus during the quarter was leveraging our incremental lead generation spending into increased pipeline build. Our pipeline that we generated in Q3 met our internal targets and grew almost 40% sequentially from Q2. This was the highest sequential growth in pipeline generation that we have experienced since our very early days well over five years ago. While we're pleased with the performance of our pipeline generation in Q3, we also acknowledge that we have a significant amount of work in front of us to ensure that this type of pipeline generation performance can be repeated each and every quarter.

I'll now move on to a few specific Q3 financial highlights. Revenue for the third quarter was $288 million, down slightly from a year ago and down 14% from the previous quarter, and slightly off the low end of our guidance of $290 million. The revenue performance in the quarter was impacted by the following items. We shipped approximately $8 million less hardware than planned. Hardware as a percentage of total revenue was at a historic low of less than 8%. As previously mentioned, we believe we're receiving less upfront value from the new term-based licenses versus the traditional life of device licenses, which likely impacted Q3 term-based revenue by up to 10%. Higher deferral rates associated with the new term-based licenses versus the life of device licenses reduced the new term base Q3 license revenue by 20%. And the sales leadership changes that have occurred at a worldwide and Americas level have also clearly impacted the results for the quarter.

Software and support revenue was $266 million in Q3, up 17% from the year ago quarter and down 11% from the prior quarter. Total billings were $346 million in the quarter, representing a 1% decrease from the year ago quarter and down 16% from Q2. The billings were also impacted by the lower-than-expected hardware shipments and the lower upfront value received from the new term-based licenses. Software and support billings were $324 million, up 11% from the year ago quarter and down 14% from the prior quarter.

Bill to revenue ratio in Q3 was 1.2, slightly lower than 1.23 last quarter. New customer bookings represented 25% of total bookings in the quarter, down from 29% in Q3 of '18. In Q3, our software and support bookings from international regions were 45% of total software and support bookings, the same as Q3 '18. Our non-GAAP gross margin in Q3 was 77.1% versus our guidance of 75% to 76%, reflecting a lower-than-expected hardware mix. Operating expenses were $327 million, slightly lower than our guidance range of $330 million to $340 million. Our non-GAAP net loss was $103 million for the quarter or a loss of $0.56 per share.

A few balance sheet highlights. We closed the quarter with cash and short-term investments of $941 million, down $25 million from Q2. DSOs based on a straight average were 76 days versus 68 days from last quarter. The weighted average DSO was 23 days in Q3. We used $36 million of cash flow from operations in Q3, which was negatively impacted by $17 million of ESPP outflow and free cash flow during the quarter was negative $59 million. This performance was also negatively impacted by the $17 million of ESPP outflow.

Now turning to the details of our Q4 guidance on a non-GAAP basis, we expect the following for Q4,. Billings between $350 million and $380 million, revenue between $280 million and $310 million, gross margins of approximately 77%, operating expenses between $340 million and $350 million, and a per share loss of approximately $0.65 using weighted average shares outstanding of 187 million.

The guidance for the quarter assumes the following, a continued aggressive push to a greater percentage of subscription-based business, lower hardware revenue as a percent of total revenue of sub-7%. From a subscription transition perspective, we expect a continued in-balance between the upfront value where we see for new term-based license versus the prior life of device licenses, a higher revenue deferral rate on new term-based licenses versus the prior life of device licenses, in some residual friction in the field that's associated with selling the new term based subscription offerings, and the backdrop of substantial sales leadership changes that were made during the quarter at both a worldwide and Americas level.

Although we're excited about the progress that our leadership is making within the Americas region, some of these foundational changes will take a few more quarters to see material improvement, even though pipeline build in the enterprise is hardening.

In closing, as Dheeraj mentioned upfront, I want to summarize our key messages; one, our transition to subscription is ahead of schedule; two, our field execution is improving with lead generation and pipeline build and sales -- improved sales hiring; and three, we are a leader in a large and quickly evolving market.

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

Questions and Answers:

Operator

Certainly. (Operator Instructions) Your first question comes from Rod Hall from Goldman Sachs. Your line is open.

Rod Hall -- Goldman Sachs -- Analyst

Yeah. Hi, guys. Thanks for the question. I guess I have two. I wanted to just make sure we understood, Duston and Dheeraj, I guess both of you, this change in the upfront value versus your expectations. You said at least 10% impact on total revenue, deferred revenue is impacted by more than that. Could you give us any more color on what's changing there or what's different from what you expected? And then, I also -- just bigger picture, I wanted to see Dheeraj if you could comment on, it's always been a balance between large enterprise and medium size enterprise for you guys. And my perception was, you kind of tilted toward larger enterprise. And I'm just wondering strategically given where the business stands right now today, are you thinking of (ph) floating back a little bit more toward mid-sized businesses or are you pretty much unchanged in terms of your strategy on the size of the business that you want to go after? Thanks.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

In fact I'll take the second one first and then we can talk about the first one. Thanks, Rod, for the question. I think, if you look at what we have built for the product portfolio, it is definitely a big demand for core in the commercial mid-market as well, and mostly in the commercial select. I would say. Because that's where they actually buy more than just a box. I mean, there are competitors out there who are actually doing it at a server cost plus gross margins. And that's not the business that we can sustain our product portfolio, and R&D investments cannot sustain that, but definitely in the commercial select we have a big focus. And with some of the partnerships that we've made, including with partners like HPE, that's the exact game plan that we go with HPE's partners to really go and focus on some of the commercial segment itself.

Obviously international is, as you can see, 45% of the business is international. There it's much bigger mix of commercial. And in Americas, I think we have a pretty good foothold and a very, good opportunity with the large enterprises, because that's where most of the good enough doesn't work in terms of products and customer support and such. But we definitely feel like partnerships like HPE will help us with the mid-market. And we've continued to do really well with some of our channel partners, CDW, EBT, SHI (ph) series and all these partners have done pretty well for us, we want to double down on that as well.

Duston Williams -- Chief Financial Officer

And Rod, on your first question there, the two quantifiable pieces which we mentioned obviously is that we're getting less upfront on the initial transaction. And as I mentioned, it appears now that the perceived duration of those appliances and folks view of those appliances of probably five-plus years, and the average new term-based deals are a little less than four years. So you've got that impact, and it's hard to understand exactly how that was going to play out quite honestly from that perspective. And on the deferral piece there -- and then the other impact is obviously magnified by the outperformance in the subscription transition during the quarter. So, there's more of this revenue than expected that was impacted. But on the -- again, on the deferral piece, when you cut back through and finally you get to scale and you can go back and get into the details because really pretty much every product offering has some type of different deferral rate is that now when you are a five-plus on a life of device, you've got maybe an average support contract when you do that deal of three years. So you've got support effectively, 60% of that five years, but on a new term base, the support is effectively, we've ripped out and we spread it over the entire --in this case, a little less than four years. So you've got a bigger piece of that product being deferred.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

And as you also mentioned, the pricing model is different.

Rod Hall -- Goldman Sachs -- Analyst

Very different.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

We used to have T-shirt sizes of 20 different models and we used to basically charge for software value that included not just CPU, but storage of both kinds flash and spindles, and we used to charge for higher RAM versus lower RAM. And all that now is much simpler, so we are only charging for CPU and flash actually. And I think at some level, there is a simplification for our customers. And if you were to take a bottom-up view of all our deals that we've done, while it's become simpler and it's going to be great in the mid to long-term, I think there is some apples and oranges comparison with respect to pricing as well.

Rod Hall -- Goldman Sachs -- Analyst

Okay, great. Well, thank you for that. Appreciate it.

Operator

Your next question comes from Aaron Rakers from Wells Fargo. Your line is open.

Aaron Rakers -- Wells Fargo -- Analyst

Yeah, thank you for taking the questions. I want to go back to the issues that you guys had highlighted last quarter around the lead generation as well as the sales hiring. So, I guess, the first question in that context, can you just given an update on what you've done this quarter, how that's improved and in the context in the pipeline build up 40% quarter-over, that sounds great, but I'm just curious how do I think about that in the context of how much the pipeline was down last quarter and what assumptions are you making in terms of closure rates?

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

So, as Rod asked this question as well about our sales force, I think we definitely have an enterprise-heavy pipeline, and this is what we said last time as well, that it will take a couple of quarters to flush just because build the pipeline doesn't mean we can actually go and, quote-unquote, spend it quarter itself. But I think we've done a pretty good job of the enterprise build itself. And I think you asked about how worse it was last quarter. I think we were flat.

Duston Williams -- Chief Financial Officer

Yeah, it's basically flat. So we're coming from a flat, it wasn't a big decrease that we're building back from, so it's basically flat.

Aaron Rakers -- Wells Fargo -- Analyst

And then, just as a -- go ahead.

Duston Williams -- Chief Financial Officer

Just answering your question on sales hiring, obviously a lot of focus going on there, and this quarter we got over net adds of over 50 sales reps, which is a big improvement from the prior quarter. So there continues to be a lot of focus on that and we would expect that to continue to improve going forward here.

Aaron Rakers -- Wells Fargo -- Analyst

Okay. And then, just as a (inaudible) follow-up, could you discuss what you're seeing currently in the competitive landscape, it looks like one of your key competitors tonight reported continuing solid bookings growth year-over-year. So I'm just -- has there been any change, have you seen an acceleration in terms of competitive meet rates and pricing pressure in the market? Thank you.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Yeah. I think, we are going through a subscription model change that probably competitors are deferring or kicking the can head on because it's hard, it's very difficult, but it's the right thing to do for the long term. I mean, imagine two years ago, we were a hardware company, and I think in just two years, we've said, look, if you want to be relevant cloud operating system software company that runs on-prem and off-prem, we've got to go through this change. There is no other way to do this. And I think that is just something that is built for the long-term with respect to Nutanix versus anybody else. I think competitively, obviously there is a lot going on in the overall landscape with the public cloud providers coming and trying to do things on-prem, and again we're finding optionality to relate our software on anywhere. We just talked about AWS, we have some very good discussions going on with GCP, they already have a virtual bare-metal and we'll actually do physical bare metal as well as they open up that offering. HP has been a very good optionality for us as well. There's some really good large customer discussions and openings of conversations that we never saw before is going on. So, I think we are opening up our optionality Fujitsu, Lenovo, all these other solo vendors as well actually want second vendor to really go and keep it honest for the hybrid cloud business.

So all in all, I think we are focused on things that we can control and the things that we control today are the fact that we have to go through the subscription transformation sooner, faster than our ourselves, and better than anybody else and, secondly, some of the fixes that we talked about in the last quarter.

Aaron Rakers -- Wells Fargo -- Analyst

Thank you.

Operator

Your next question comes from Wamsi Mohan from Bank of America Merrill Lynch. Your line is open.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Yes, thank you. One for Duston, and one for Dheeraj. So Dustin, as you look at the sort of deceleration in growth rates, but looking at sort of where OpEx spend levels are, I'm wondering if this is a couple of quarter phenomena but it also sounds like structurally because the subscription there's going to be maybe some deceleration and sort of out-year growth rate as well? So when do you -- what's your best guess in terms of when we should start to see some operating leverage in the model?

And second, for Dheeraj, could you be more specifically talk about how you think about the TAM post the VMware announcement with Azure, do you think that shrinks the TAM or Nutanix or how are you thinking about it? Thank you.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Yeah. So I'll take the second one. I think all the cloud providers will do these deals with everybody, and there is only two in everybody, there's VMware and there's Nutanix. So, in that sense, being the first is not the only way to do this. At the end of the day, customers want to either use agile credits and they'll say, I want to use it with Nutanix or want to use it with VMware. So in that way we also want to differentiate in the way we bring it to market, so it won't be a siloed bare metal offering but really going and using the right automation and APIs to do this within the customers bubble, and that's what we did with Amazon as well. It's truly hyper-converged with the VPC that Amazon is actually built as opposed to a managed service like the way VMware is doing it. And we don't have to peer it to a customer like VPC and only be able to use a few services not others. So, I think what happened with vBloc and FlexPod five, six, seven years ago, the exact same thing is going to happen with hyper convergence of public and private as well. So, in that sense, you can expect us to actually go and do this with all the cloud providers, as well as doing with service providers on our own.

And I think, on the second one, the first question that you had, it is definitely a plan for us to even look at loss of distribution as we think about subscription transition because there will be way to segment the sales force even further with hunters and gatherers and people who actually get paid for first-year terms and maybe liberated second-year terms and then renewal people come into actually do second, third, fourth and so on. And then we pay our hunters again on refreshing it either on-prem or bringing it to off-prem itself. And I think the subscription transition itself will have immense leverage as we go through the next phase of this transition.

Operator

Your next question comes from Katy Huberty from Morgan Stanley. Your line is open.

Kathryn Lynn Huberty -- Morgan Stanley -- Analyst

Thank you. Good afternoon. Wondering if you can give us some color around the HPE partnership, Dell at peak, I think, was a little over 10% of the business. HPE's server business is about 80% the size of Dell. So, is it fair to think that that partnership could account for 8% of billings or revenue at some point in the future or is there another way to think about it?

And then, just on that same topic, what was the thought process behind committing to certain volumes that could require you to make a cash payment to HPE, if you don't hit them, which I don't think is an element of other OEM partnership that you've announced in the past. Thanks.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Yeah. Yeah, so on the first question, obviously it's early, but there is enthusiasm because HPE channel partners are actually looking for a solution. They compete more with Dell as well. So in that sense, even in very large accounts where we sometimes have to go direct, we'd rather go through HPE as well and we seeing some of that activity as we speak this quarter as well. I think it's going to be very good partnership but did a lot of execution to get this from an inertia of rest because right now, it's actually addressed and we've made some great announcements, there's some great early activity. The channel is actually really looking forward as quite a few of them that showed up at our .NEXT user conference with channel partners that we never had signed up in the past. So there's a lot of goodness, but I think we've just got to go and put our heads down and execute on that.

On the second question which you asked about the liability, it's basically a way to say how do we really leverage and balance both our current OEM -- ODM provider and HP as well, because there is value in using the HP at least recommending the HP hardware to our channel partners as then the HP sellers at least make $0.25 to $1 in that case and given the fact that they actually have feet on the ground, it makes for a better lead generation and partnership in the field as well.

So, in the big scheme of things, it's not substantial percentage of our overall nodes. We have been relatively cautious in that. And at the same time, over a three-year period, it's actually a relatively small number given how much we have to do cumulatively in pure software over the next three years.

Kathryn Lynn Huberty -- Morgan Stanley -- Analyst

That's great. Thank you for the color.

Operator

Your next question comes from John DiFucci with Jefferies. Your line is open.

Julia Karl -- Jefferies -- Analyst

Hi, this is Julia Karl on for John. We just plan to know about when we're thinking about the transition to term or subscription license, are you incentivizing the sales force using commissions or the end customer using discounts to kind of motivate or like speed up the transition? Thank you.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Yeah, this is definitely a way of converting some of the folks who are close to end of life of device and providing them -- we used to see how this portable license is better for them. And we have been incentivizing folks who are within that boundary for a year to life of device exploration to really use this new licensing mechanism itself. And overall, the story is actually sticking well, although there's still a need for enablement and understanding that some customers don't like it because they still believe in CapEx and that many would like it because they like the OpEx model itself. So there's still going to be two kinds of customers. And we don't want to force this down to the throat of those that what was rather depreciate capital and use the old method itself.

Operator

Your next question comes from Alex Kurtz from KeyBanc Capital. Your line is open.

Alexander Kurtz -- KeyBanc Capital -- Analyst

Yeah, thanks guys for taking a clarification and the question. Just looking back at the quarter, Duston, do you feel like you gave a bunch of reasons about what impacted the top line from billings from the subscription change. Just want to be really clear, were you guys on plan for the quarter as far as what you expected to hit just from a transaction perspective, outside of all these changes that we're doing to the subscription?

Duston Williams -- Chief Financial Officer

Well, clearly the quarter should have been better overall. Some of this again was impacted. We -- on the software of the subscription transition, we outperformed what we originally thought by well over 25%. So that clearly had some impacts there. But I mean, clearly we've got some issues, we're working through, and the pipeline, we said we're going to go work on that and that's up 40% quarter-over-quarter. We said we were going to go work on sales hiring, that's improved substantially quarter-over-quarter. We've got some leadership changes we're working through. And that's clearly impacted Q3 as well as I said impact also Q4.

Alexander Kurtz -- KeyBanc Capital -- Analyst

And do you feel for the -- you feel like for the next -- the upcoming quarters guidance you just provided today, you feel like the new leadership in Americas had the ability to dig into what they see as the pipeline and have a good view into that or is it still a little bit of on the fly as they transition into the roles?

Duston Williams -- Chief Financial Officer

No, they are deeply involved in the business. Trust me.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

He's an architect of the business, not just a manager of the business.

Alexander Kurtz -- KeyBanc Capital -- Analyst

Okay. Okay. All right, thank you.

Operator

Your next question comes from Steve Milunovich from Wolfe Research. Your line is open.

Steve Milunovich -- Wolfe Research -- Analyst

Great, thank you very much. Two questions. Number one, you admit that you're not the cheapest solution on the block. And I'm just wondering in this macro environment and with EMC VxRail probably bundling and discounting quite a bit, if you're getting any push back in terms of pricing and then if you therefore having to maybe discount more than you expected?

And second, the storage vendors claimed hyper converged is great for small companies but doesn't scale beyond that but I'm assuming you disagree with that, but what proof points can you give us that you're seeing an architectural shift from 3 Tier to HCI including that large enterprises?

Duston Williams -- Chief Financial Officer

Yeah. On the second one, we've basically been going through this for the last six, seven years now. And every year the market actually grows and there are more and more vendors who want to provide offerings in the space as well. There is the reason why NetApp has an offering of this kind, and everybody wants to actually get into a space where you can sell it to the application folks. This infrastructure is supposed to be invisible enough that app folks can actually administer it. S there's definitely a lot of value in this and you look at all the stories that we actually talk about, our wins and everything else. These are not like 200K deal is something to be really going doing very large deals with our customers.

And if you think about it, 200 of our customers pay a pretty substantial portion of our overall bills every year, and then 850 of these, which I talked about also pay out like a very, very large percentage of our overall bills every year. And that can only happen if there's an architectural shift happening. But then folks have talked about this about public cloud as well in the last three, four, five years. And over time, as we get into more workloads, as we get into more geographies, as we get into different surface areas like a wider surface area of not just our own appliances but software running on every server vendor out there, that's the way you actually grow the TAM, the TAM only grows in these three ways, more workloads, larger surface area and more geographies.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

And then, you had a question on pricing, yeah. I think, we've been pretty flexible on that and our sales people have taken advantage of that flexibility. Now, in the lower end of the mid-market, we probably don't appear to be that cheap. And I think the story is still -- a relatively evangelical, it's not a rip and replace. It's really hard to say that it could be done with zero touch. But I think in the higher end of the mid-market and in the enterprise, I think we definitely have a ton of flexibility for our sellers to -- and our channel partners to make money with the kind of discounting regime we actually have today.

Steve Milunovich -- Wolfe Research -- Analyst

Thanks.

Operator

Your next question comes from Matt Hedberg from RBC Capital Markets. Your line is open.

Matt Swanson -- RBC Capital Markets -- Analyst

Thanks. This is actually Matt Swanson on for Matt. Dheeraj, when we think about the strong quarter for pipeline generation, can you give us a sense of how much of that pipeline is now subscription versus term and just kind of what that could do to sales cycles if you're introducing some optionality maybe later on in the sales process?

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Yeah, most of that discussion actually happens in the later stages of our sales campaign. And I think many of our sales people are embracing it, and some of them when they realize that customers is CapEx friendly they don't bring it up. I think looking at the pipe, it's very hard to say which is what. As Duston said that we'd rather flush through this whole thing, rather than being this limbo for a long time. I think, the goal of the company is to be on the other side of this rather than be in the middle for a long, long time unless the customer doesn't want it.

So I would say that there is also an incentive for the customer, because now they can't really do one-year terms and three-year terms and they can make it affordable, and the fact that with this kind of optionality, they can actually even use the public cloud for Nutanix those are the kind of things that our sellers are using to go and entice to customers.

Matt Swanson -- RBC Capital Markets -- Analyst

That's really helpful. And then, Dustin, you mentioned some friction in the sales force with net adds around -- over 50. Could you give us some sense if the gross number was a lot different than that. I know just with some management changes and changes in sales model, if there was any planned or unplanned turnover. And then just a quick reminder on how long you usually think of it takes a rep to ramp to productivity?

Unidentified Speaker

Sure. There's always obviously churn and anybody's sales so that number was obviously bigger than 50. So, but if you look at the attrition rates over the last four quarters, they moved around here and there, but they have been basically on a direct quota-carrying rep pretty flat when you annualize those over trended four quarter period there. And then, on a rep again, depending on the rep but in average rep of four quarters roughly, after four quarters during the fourth quarter there. And then, if your global account manager or something like that, clearly a little bit longer as those sales cycles are longer.

Matt Swanson -- RBC Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from Simon Leopold from Raymond James. Your line is open.

Simon Leopold -- Raymond James -- Anja

Thank you for taking the question. I wanted to ask about the revenue forecast for the July quarter. Specifically I'm noticing a broader range -- the $30 million range that you've offered. In the past, it's been typically around $10 million, sometimes this is a small size, sometimes $15 million but a bigger range. Just could you help us understand what you're thinking and what are the levers that could make it toward the high end versus the low end and why this is a broader range and we've heard from you in the past?

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Sure. I mean, we just went through a lot of that with subscription and some of the unknowns that have come with that volatility that has been associated with that. So we clearly thought that a bigger range was much more prudent based on what we're seeing there. So, your question of what can swing that big deals, obviously we solve a lot of issues. And there is no -- there is no shortage of big deals, it looks interesting for Q4, looks interesting for Q1, but we have to close those deals and things like that. But it is around big deals and then continuing to get a healthy pipeline. Obviously that has to happen in quarter-over-quarter and we've got one quarter out of the chute and we've got some pretty good results that we were very happy with for Q3.

Simon Leopold -- Raymond James -- Anja

That makes sense. Could you maybe help us understand perhaps the duration or how long it takes -- typically takes to close the big deals versus the smaller deals to maybe give a little bit of perspective around the delta of the close time.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

You mean the pipelines color itself?

Simon Leopold -- Raymond James -- Anja

Yeah. So I would tend to think that it would take longer to close a large deal with the sales cycles, but just simply a longer process on large deals given the complexity, maybe the buying patterns of those bigger customers, I assume are different. So, I'm imagining that that's part of it, but I'm trying to understand if that's -- if I'm really reaping too big a conclusion there.

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Well, compared to 3 Tier, it's very different. We've gotten to customers with $15 million of spend in 18 months, but not in the single chunk. But we do it like maybe the first deal will come in three to five months with a $0.5 million deal and then we grow it to $2 million and $4 million. In fact even one of the large deals last quarter came over like six or eight deals, and that's the way I think the value of the scale-out architecture is such that we don't have to really be all about selling a big refrigerator, big mainframe like hardware or something. So, that's very helpful, and that's, we've actually gone and build trust with our large customers. But as it gets to these same customers going and doing very, very large EPAs or ELAs, that's when we start to bring in financial selling concepts and total cost of ownership and many of these things that are really about understanding the commercial aspects of the company and the transaction rather than the technical aspects of the company and the transaction.

Simon Leopold -- Raymond James -- Anja

That's helpful. And just as a follow-up, on the partnership with HP Enterprise, my understanding is that the company is still leading with its own Simplivity-based solution and then essentially partnering with you when the opportunities arise to present themselves. Do you see that you are getting in a better position as the lead sale for HPE or simply a partnership when customers are seeking Nutanix with the HP servers?

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

So, obviously our stack in the product portfolio is very different. This is really compete with VMware more than anything else. The core essentials, enterprise are not what Simplivity is. And so, if the HP sellers need to go and really talking about modernizing infrastructure including the hypervisor software and building a private cloud with orchestration and automation and software defined filers, and micro-segmentation and operations management, that's essentials, and then obviously there is the enterprise services we have. So I think at the end of the day it's really apples to oranges. I think the use cases are different and the workloads are different and the size of the enterprise or mid-market is actually also very different from the two companies.

Simon Leopold -- Raymond James -- Anja

Thank you very much.

Operator

Your next question comes from Erik Suppiger from JMP. Your line is open.

Erik Suppiger -- JMP Securities -- Analyst

Yes. You had noted that 23% of your deals have more than HCI, give us some context on what that has been historically?

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

So, maybe about -- till about a year ago, a lot of it was Prism Pro, which is our operations management software, and we seeded this. This is the oldest of the new guard in some sense because we ceded Prism Pro almost four years ago. And now, increasingly I think in the last 12 months, I would say, and more so in the last six months than they were before, there's new products like files, and files a system of record as opposed to system of engagement or intelligence. So we believe that files is a large opportunity for us. And then, with automation, which is a system of engagement for automation and orchestration com is actually becoming you know pretty successful as well and -- natural attached to AHV so micro-segmentation is -- you're saying, if we can make this very, very simple, then it doesn't have to be expensive 12 months professional services and roll-out of a big kind when it can be done with a few clicks actually. So I think most of the essentials portfolio actually is a relatively natural attached to the core, where with the core we talk about modernizing infrastructure and then with essentials we go and talk about building a private cloud itself. I think the enterprise is still, I would say, more aspirational. We've done some good work with desktop as a service and IoT and some of the other products. But I think right now most of the focus is on essentials beyond the core.

Erik Suppiger -- JMP Securities -- Analyst

Can you give us a sense in those deals how much contribution is coming from outside of HCI?

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

We haven't broken it down, but in many accounts, like for example, a system integrator in India where there was no way we could have gotten him without Comm. Comm was the reason why they actually opened up the whole discussion because they had to deliver it to developers. Similarly there are others, we talked about a deal last quarter that were not (inaudible) quarter or the quarter before this. We're one of the largest cafeteria companies in the world that did $2.5 million and it was actually led with IoT. But I think by and large, I would say that 95-plus-percent of the things is still around core.

Let's go and modernize infrastructure and then make it sticky and make it competitive, because if you're only going and talking about a core alone, then many of these folks are saying, what about the public cloud like experience. And in that, it has to be beyond web scale engineering and consumer grid design, which is what core is good at, web scale engineering and consumer grid design. But on top of it, what if I have to really compare this to a public cloud experience, what if I needed to store application data, what if I really needed multi-site operations management, which is what Prism Pro does, among other things, and same thing with micro-segmentation. So, I think the discussions become more richer with the large enterprises once we go and talk about the private cloud story.

Erik Suppiger -- JMP Securities -- Analyst

Very good. Thank you.

Operator

And there are no further questions at this time. I will turn the call back over to the presenters.

Tonya Chin -- Vice President of Corporate Communications & Investor Relations

Thank you so much for joining us today.-Guys, we hope to see you at the three conferences that we're at in June and look forward to speaking to you next quarter.

Operator

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

Duration: 61 minutes

Call participants:

Tonya Chin -- Vice President of Corporate Communications & Investor Relations

Dheeraj Pandey -- Founder, Chief Executive Officer & Chairman

Duston Williams -- Chief Financial Officer

Unidentified Speaker

Rod Hall -- Goldman Sachs -- Analyst

Aaron Rakers -- Wells Fargo -- Analyst

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Kathryn Lynn Huberty -- Morgan Stanley -- Analyst

Julia Karl -- Jefferies -- Analyst

Alexander Kurtz -- KeyBanc Capital -- Analyst

Steve Milunovich -- Wolfe Research -- Analyst

Matt Swanson -- RBC Capital Markets -- Analyst

Simon Leopold -- Raymond James -- Anja

Erik Suppiger -- JMP Securities -- Analyst

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