Earnings Call Transcript - NTNX Q3 2020

Operator, Operator

Thank you for standing by and welcome to the Nutanix Q3 Fiscal 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Tonya Chin, VP of Investor Relations and Corporate Communications. Thank you. Please go ahead.

Tonya Chin, Vice President, Investor Relations and Corporate Communications

Good afternoon, and welcome to today’s conference call to discuss the results of our third quarter of fiscal 2020. 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 closed today, Nutanix issued a press release announcing financial results for the third quarter of fiscal 2020. If you’d like to read the release, please visit the Press Releases section of the Nutanix website. During today’s call, management will make forward-looking statements, including statements regarding our business plans and financial targets in future periods, the timing and impact of our transition to a subscription business model, the factors driving our growth, the benefits and capabilities of our new and existing products, and the current and anticipated impact of the COVID-19 pandemic. These forward-looking statements involve 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. For a detailed description of these factors, please refer to our SEC filings, including our most recent quarterly report on Form 10-Q, as well as the earnings press release. These forward-looking statements apply as of today and we undertake no obligation to update these statements after this call. As a result, you should not rely on them as representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today’s call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided to the extent available reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release. And with that, I’ll turn the call over to Dheeraj. Dheeraj?

Dheeraj Pandey, Chief Executive Officer

Thank you, Tonya, and good afternoon everyone. I appreciate you joining us today and hope you are healthy during this time. Since we last spoke during our second quarter earnings call in late February, the way we live has undoubtedly changed. At that time, we were just beginning to see the impact of the coronavirus, which was largely isolated to just Asia. As we tried to estimate the potential impact of the virus, we provided Q3 guidance that reflected the worsening business conditions in Asia, noting that we couldn't then predict what would happen in the rest of the world. Today, just 90 days later, we find ourselves nearly two months into a global pandemic. Today, I'll start by covering our response to COVID-19, including the trends we are seeing across our customers and end markets. I’ll also talk about where we are finding opportunities to better serve our customers as the pandemic meaningfully alters the future of work, which I believe will make us a stronger company as we emerge on the other side of this. I’ll then touch on the quarter and how the steps we have taken recently enabled us to deliver a strong Q3 performance. Finally, I'll provide an update on the progress we have made in our subscription business model transformation before turning the call over to Duston to discuss our results in more detail. Starting with COVID-19, in February it was business as usual, and by the end of the month, we anticipated there could be a demand issue in APJ, as noted on our Q2 earnings call. Beginning in March and continuing through April, we saw an increase in demand for our end-user computing offerings, which include both VDI and Desktop as a Service Solutions. While in the rest of our business, we saw some modernization project spillover into future quarters as customers faced rapidly changing financial circumstances. While this is a time of broader uncertainty, it is also a time of greater opportunity. Most long-lasting companies that survive their first decade undergo a strengthening process during a recession, emerging stronger. We have been able to quickly assess the situation and make informed real-time changes to how we operate our business. To that end, Nutanix has focused on the wellness of our employees, customers, and core products, while revisiting productivity and cash efficiency. Starting with employees, as COVID began impacting EMEA and the U.S., our global employee base began working from home. While we had never envisioned such an abrupt change to our working environment, this transition was extremely smooth because we were ready to enable our workforce to work remotely, thanks to our own technology. Within a two-week period, we moved from having employees working remotely and 70% working in our offices to nearly 100% working remotely, with no service interruptions. With our work-from-home systems firmly in place, our employee productivity has held steady and even improved in some cases. Employee engagement has also seen a slight positive uptick. Some of our productivity advantages are due in part to "drinking our own champagne," as our CIO likes to say. Nutanix VDI and Autonomous AOS and AHV powered infrastructure with zero-touch operations, Xi Leap disaster recovery as a service. Nutanix Files for application data and Frame, Desktop as a Service are the necessary pillars of our company’s IT strategy that have been in the works for several years before this pandemic. In many ways, this digital infrastructure is now the biggest reason why we found this discontinuity to be so much less painful than many other businesses. Turning to our customers, during this time we also put to the test our ability to provide the exemplary service that our customers and partners have come to expect from Nutanix, even as our entire team works from home. In early March, we communicated our intent to continue to provide 24/7 support remotely. Thanks to the hard work and dedication of our employees, we've been able to achieve numerous unsolicited positive responses from our customers. Appreciating our attention to their needs, our industry-leading customer support NPS Score has actually increased, with our third quarter scores reaching the highest levels they have been in the past four years. As we focus on the health of our employees and customers, we are also concentrating on the health of our business. While financial strength and flexibility are important, we are taking proactive steps to manage operating expenses and cash usage to better position the business as we navigate through the pandemic and beyond. Duston will provide more detail, but in summary, we have implemented two non-consecutive weeks of unpaid time off for many of our employees around the world, one week in each of Q4 FY’20 and Q1 FY’21. We have carefully coordinated these actions to minimize the impact on our customers and our employees while prioritizing temporary measures such as furloughs instead of permanent changes like layoffs. We also believe in sharing the burden across all levels of the organization, and as such, our executive team took a 10% reduction in salary starting in April. Our efforts are not stopping there as we continue to look for areas to save on operating expenses more broadly. Other areas where we are driving smart savings are within our marketing organization by pivoting to innovative and engaging virtual solutions. We have been encouraged by the early returns on our shift to virtual events from traditional in-person events, to regional .NEXT tours and technology boot camps. We have gone completely virtual and are seeing comparable yields in terms of qualified leads and virtual meetings for our sales organization at less than half the cost. Another key digital initiative to further improve our ease of use in conducting business is our test drive product and offer. We’ve truly doubled down on this particular demand generation initiative, which is designed to enable our prospects to experience Nutanix products via a zero-touch, self-service, Google Cloud-powered platform. With that, let me turn to the quarter. We were pleased with our Q3 performance, and in fact, despite challenging market conditions, our final results came in modestly ahead of the preliminary ranges we pre-announced several weeks ago. TCV billings were $380 million, up 17% year-over-year, and TCV revenue was $314 million, up 18% year-over-year. Both metrics also came in about the midpoint of the guidance we provided on our last earnings call. Total revenue of $318 million has returned to double-digit year-over-year growth of 11%. Despite revenue compression resulting from our continued subscription model transaction and hardware elimination, we also delivered a strong performance on EPS. Customers who have lifetime spend with us of more than $10 million have once again grown more than 60% year-over-year, both in total accounts and in aggregate dollars spent. There are 64 customers in this category, and they now account for more than $1.2 billion of lifetime spend with us. Our customer cohorts with a minimum lifetime spend of $3 million grew 37% year-over-year to 329 accounts and they have collectively spent more than $2.5 billion in lifetime spend, growing 43% year-over-year. The number of customers who have spent more than $1 million with us in lifetime spend has increased to 1,122, up 32% year-over-year. Moreover, once again, these customers grew nearly 40% year-over-year in total lifetime spend. In Q3, we closed 59 deals worth over $1 million, growing 31% year-over-year in TCV bookings. 11 of these 59 accounts also spent at least $1 million with us last quarter, and the aggregate purchase amounts increased over 40% from last quarter. We now count nearly 910 of the Global 2000 as customers, and these customers have collectively spent 37% more in Q3 than in the same quarter a year ago. Global 2000 customers continue to account for approximately 30% of our business. We are now privileged to serve a total of 16,580 customers in over 140 countries. While we were ensuring our employees could effectively and productively work from home, we also launched programs aimed at helping our customers quickly set up remote work environments for their employees. I'm proud to report that many of the major pharmaceutical companies, both in the U.S. and Europe, are using Nutanix infrastructure to make progress on medical research to fight this virus. We also launched FastTrack for End User Computing or EUC, a special program to help companies quickly expand capacity or set up a new VDI or Desktop as a Service environment to support remote work. Over the past decade, we've delivered millions of desktops reliably to enterprises, large and small. We believe that the future of work has been meaningfully altered due to this pandemic, as has the future of healthcare and education. Our work in healthcare and education will largely depend on computing environments delivered via the Cloud without the burden of rewriting legacy applications. Hyperconverged infrastructure, now serving as a multi-cloud Infrastructure as a Service or IaaS, plays a critical role in the lift and shift to the Cloud, both private and public, as virtualization did more than a decade ago by providing a new operating model without any change to legacy applications or operating systems. In fact, while many of our deals in the quarter were a continuation of longstanding data center modernization projects, we did see demand for our end-user computing solutions increase significantly during the quarter. EUC-related sales increased to 27% of TCV bookings, up from 20% last quarter and up from 18% a year ago. EUC deals also brought in 20% of our new customers during the quarter. Xi Frame, our Desktop as a Service offering or DaaS, demonstrated solid momentum and had a record quarter. In some cases, thanks to extraordinary efforts from our customer service and sales teams, we were able to get some customers set up with remote work solutions in record time. Our customers’ expectations include having remote work as a necessary component of their own digital transformation. This focus on end-user computing is bringing us back to our roots when a much larger portion of our business supported virtual desktop workloads, primarily for U.S.-based government organizations. Ten years ago, we took a contrarian approach to bet on VDI as the killer app for our scale of architecture within the data center. It was contrarian because pundits thought Windows was dead in the era of mobile computing, while we maintained a strong belief in Windows for the enterprise. VDI was also mission-critical, as the entire front office would not have even had a browser if we suffered downtime. Over time, as we grew our portfolio, VDI remained important, though a smaller percentage of our business. When we acquired Frame in 2018, we broadened our end-user coverage to include as a service, combining our VDI and DaaS groups under one organization in the prior year. Looking back, this pandemic has made us realize how critical that reconciliation has been between our digital HCI platform, supporting Citrix and VMware VDI, and our SaaS-based desktop service. In our largest deal this quarter, totaling over $7 million, one of the largest financial services holding companies in the U.S. came to us for a highly agile digital infrastructure to build a private cloud. Due to a recent merger, this Global 2000 Company needed to share desktops seamlessly between their two large entities. The ease of deployment of our software significantly reduced the bottleneck of storage and compute in time-sensitive workload deployments. Because our software is so easy to use, the EUC team has been able to take ownership of the entire stack. We have similar stories from a large American financial services company that purchased nearly $5 million of our software this quarter, bringing their lifetime spend with us to over $18 million. Now they are using the Nutanix core software and our AHV hypervisor for all employees working from home, as well as using us for three large business-critical applications. Both of these large financial institutions have immense respect for customer service and have mentioned that our support organization was a key factor in their decision to commit entirely to Nutanix. We are grateful to our SRE team for obsessing over the customer experience. On the topic of going all-in, we saw robustness in our overall product portfolio this quarter. But before I talk about our portfolio, let me attempt to describe it to you one more time. You should think of Core HCI with our AHV, AOS, and Prism products as the digital infrastructure that assumes the role of portable IaaS in a multi-cloud world. As I mentioned before, we’ll make a strong case in the next two to five years for how HCI becomes a killer app for all things lift and shift, without any change to applications or operating systems, similar to virtualization 15 years ago. What sits on top of this horizontal foundation are DDDs; Data Center Services, which includes unified storage, disaster recovery, operations management, networking, and security services; DevOps Services, which includes multi-cloud automation, database services, containers, and the like; and desktop services, which include cloud-based SaaS and overall end user computing solutions for the future digital workspace. In summary, our portfolio is simply DDDD’s. Our core digital HCI platform on top of which sit data center, DevOps, and desktops, which are akin to apps running on top of the platform. Together, the platform and the apps fuel each other’s adoption as Windows and Office did in their symbiosis. Speaking of momentum with our DDDs, in a rolling four-quarter basis, the attach rate of these products in Q3 was 32%, up from 23% in the year-ago quarter. On a rolling full quarter basis, the transaction volume of these 3D products in Q3 increased 16% year-over-year and 35% quarter-over-quarter. At the end of Q3, 28% of our customers had purchased at least one of these non-core products, up from 20% in the year-ago quarter. Q3 lifetime bookings of non-core products grew 116% year-over-year and now make up 13% of new ACV and 15% of overall ACV. We also saw solid momentum with our DevOps offering, Nutanix Era, which is our database-as-a-service solution. One of the largest automobile insurers in the U.S. spent nearly $1.5 million with us during this quarter, primarily for Era. They had been experiencing performance and scalability problems with Oracle, their most critical workload. During a proof-of-concept, we were able to show them significant performance increases and the ability to make database operations invisible with Era. Nutanix Era is to databases what Nutanix Calm is to VMs, containers, and all modern Mode 2 apps, i.e., one-click sales service orchestration, multi-cloud automation, and autonomous operations. One of the largest professional services firms in the world spent $5 million with us to continue their build-out of a private cloud infrastructure based on our software and native AHV hypervisor. This purchase brought their lifetime spend up to nearly $17 million as part of the digital infrastructure initiative. We believe that this trend of zero-touch IT, self-service delivery, and streaming cloud-based infrastructure will accelerate in the post-COVID world. Our customer base continues to be highly diversified, with the biggest vertical in Q3 being financial services, which represented less than 25% of our business, consistent with historical levels. This sector is quite global for us as well. One of the largest financial institutions in Europe made the decision two years ago to use Nutanix for their strategic data center platform for all new and existing workloads and applications. This Global 2000 company is an existing customer with $18 million of lifetime spend with us, with $3.5 million of that in Q3 alone. Because our digital HCI foundation provides them true agility and because they had capacity ready for a disaster scenario, they were able to scale up to get all of their 7,000 employees working from home in about a week and even provide database services like a public cloud provider. The Board of Directors was extremely appreciative of this preparedness. Regarding capital allocation in other industries, our exposure to energy and hospitality verticals remains small, even though we are ready for them as they rebuild their operations post COVID. While the retail industry as a whole has been impacted by COVID-19, we have some retail customers who have seen such a significant increase in online purchases that they've had to fortify their IT infrastructure to support the load. An existing customer and large retailer in the U.S. came to us because of a major shift to online sales and curbside pickup, which put added pressure on their IT infrastructure. They said that the pandemic made every day feel like Black Friday. They purchased an additional $1.5 million of our software, and we were able to quickly get them set up with a solution to support this additional load. This customer has a lifetime spend of more than $24 million with us. In healthcare, we have supported customers who had to quickly transition to telehealth or enable their non-frontline workers to work remotely. An existing customer, a large healthcare provider and hospital system on the east coast, tripled their deployment with us so they could set up a solution for their non-essential employees working from home. Additionally, a non-profit healthcare system on the East Coast purchased our core software and Prism Pro Management Console in a subscription deal worth $1.3 million. They're running VDI workloads as well as the healthcare industry's Epic operational database, for which we announced certification in Q2 of this year. This crisis will shape not just the future work and the future of healthcare with telemedicine but also the future of education with remote learning. A statewide school district in the East Coast needed to quickly set up a solution for their students to learn remotely due to COVID-19. This new customer required an IT infrastructure solution that could be set up quickly, unsure of the capacity they needed, and it all needed to be configured remotely due to shelter-in-place orders. Their challenge was to scale the remote learners from 200,000 to 2.8 million. They purchased $1 million of our cloud software as well as our DevOps and data center services, such as Calm, Files, Flow, and Prism Pro, and had it deployed in weeks, enabling millions of students to embrace digital learning. Speaking of digital, let me now spend some time on our ongoing transformation to a subscription-based business model, along with our customers. During this time of uncertainty, we are even more resolved in our move to this model. Not only will it give us more recurring revenue over time, but it also provides our customers with the flexibility they may require to purchase software on an OpEx versus CapEx basis. We are seeing large deals and large customers move to subscription. A U.S.-based financial services company continued their digital journey with us by purchasing nearly $4 million of additional software from last year’s subscription, bringing their lifetime spend up to over $11 million. Similarly, a large utility company on the U.S. West Coast, one of our top-25 lifetime customers with a total spend of $18 million, purchased nearly $4 million from us in Q3 as part of their ongoing digital transformation. Some of our largest and most tenured customers are also embracing subscription earlier than we had imagined. One of the largest automobile manufacturers in the U.S., who has spent more than $37 million with us over the years, purchased another $3.5 million in software from us in Q3 and switched from life of device to subscription. This new entitlement of our software has made this organization nearly 100% Nutanix, with only a small amount of the infrastructure residing in mainframe. Subscription is also being embraced by U.S. federal agencies in earnest. A federal entity in the U.S. has been working with us to modernize their datacenter and added more product to their order for this quarter totaling nearly $2 million worth of software on a subscription basis over a lifetime spend of nearly $40 million. Nutanix is their on-prem private cloud solution for mission-critical workloads using HPE servers. Another significant subscription deal in the quarter was with one of the leading operators of general acute care hospitals in the U.S., who has been a customer since 2016 and has a lifetime spend with us of over $15 million. In Q3, we sold them an additional $2 million of our software to assist them in their lift and shift to private cloud. They are working toward a zero-touch provisioning model, and both our core HCI software and Nutanix Calm for orchestration and automation are critical to that strategy. As customers look to the future, we expect that corporate initiatives around remote work, hands-free IT automation, disaster recovery, and lift and shift to private and public cloud infrastructure will be some of the pillars of digital transformation, and we believe we will be at the center of these conversations. As we contemplate the future of work, our developers are deeply grasping the meaning of subscription economics, cloud engineering, and container-based microservices. Our newer products like Life Cycle Manager, Objects, and Prism Pro are completely based on Kubernetes containers as an agile delivery model. Most importantly, our Xi cloud services are designed to be available 24/7/365. That is a significant shift towards a DevOps mindset as we try to bring our signature NPS of 90 to cloud SLAs of security, availability, and performance. As we’ve discussed in the past, our core engineering is working closely with AWS and Azure on Nutanix Clusters, so our entire portfolio can be delivered in our customers’ virtual private cloud in the public cloud datacenters, integrated seamlessly with their commitments and strategies. In conclusion, we’ve focused on the collective health of our employees, customers, partners, and our overall business. We’ve quickly and efficiently shifted our business to match the changing times. Our business has proven resilient, and we have seen bright spots in EUC as well as our core business. We do not see this shift as temporary; in fact, we see the future of work changing permanently. In a report this month from industry analysts from Gartner, we predict that by 2024 in-person enterprise meetings will drop from 60% to 25%, driven by remote work and changing workforce demographics. Separately, Forrester stated that even after a vaccine becomes available, firms will never return to the pre-pandemic normal as knowledge workers demand these newfound highly flexible, commute-free, productivity improvements to become permanent. We believe our product portfolio and our customer-centric culture keep us well-positioned to navigate this crisis and evolve with the dislocation for our stakeholders' advantage: customers, employees, and investors. Speaking of the crisis and our imminent opportunities around efficiencies and prudence, over to Duston.

Duston Williams, Chief Financial Officer

Thank you, Dheeraj. With all the disruption and uncertainty that COVID-19 has caused, we were pleased to deliver solid Q3 results in line with or in the case of EPS, better than our expectations heading into the quarter. As you may recall, when we issued our Q3 guidance in late February, we saw early indications that COVID-19 would create a demand issue for our APJ operations, and we adjusted our guidance accordingly. We did not adjust our outlook for our Americas or EMEA operations as the virus’s impact on these regions was uncertain at that time. The virus clearly ended up affecting all three regions, and despite this, our teams did an excellent job executing in a very turbulent environment. We also mentioned that we began to prudently manage our operating expenses during our Q2 earnings call. This proactive and timely approach was based on our view that it was possible for the current demand environment to deteriorate due to the impact of COVID-19. Once our initial premise of a weakening demand environment began to materialize, we took further actions to reduce expenses, which I will detail shortly. Our subscription journey continues to move forward as selling term-based subscriptions have clearly become the norm. Subscription billings now account for 84% of total billings, up from 79% in Q2, and subscription revenue now accounts for 82% of total revenue, up from 77% in Q2. The average dollar-weighted term length in Q3 ’20, including renewals, was 3.9 years, flat with the 3.9 years we reported in Q2 ’20. As with last quarter, this calculation assumes life of device licenses with five-year terms. Now I’ll move on to some specific Q3 financial highlights. TCV revenue, or our software and support revenue for the third quarter, came within our initial guidance range of $300 million to $320 million and above our May 5 estimated preliminary results range of $307 million to $312 million, coming in at $314 million, up 18% from the year-ago quarter. TCV billings, or software and support billings, also came within our initial guidance range of $365 million to $385 million and above our May 5 estimated preliminary results range of $371 million to $376 million, coming in at $380 million, up 17% from the year-ago quarter. ACV booked in the quarter exceeded our expectations at $130 million and was up 22% from the year-ago quarter. Additionally, total revenue also exceeded our May 5 estimated preliminary results range of $312 million to $317 million, coming in at $318 million, up 11% from the year-ago quarter. We utilized a modest amount of backlog during the quarter. This marks the third consecutive quarter we've experienced year-over-year growth in total revenue. The revenue growth rates are starting to reflect more meaningful comparisons as the revenue impacts of hardware elimination have been effectively complete for the last six months. The ACV of our HPE DX related business increased 16% in the quarter versus Q2. We exceeded our pipeline generation goal for Q3 set before the quarter started. As expected, new customer bookings lagged a bit in the quarter, representing 19% of total TCV, compared to 24% in Q3 ’19 and down from 24% in Q2 ‘20. The Americas and EMEA regions performed well. As expected, the APJ regional performance reflected a more pronounced impact from COVID-19-related issues. TCV bookings from our international regions represented 44% of total bookings compared to 45% in Q3 ’19. Our non-GAAP gross margin in Q3 was 80.7%, above our guidance of 80%. Operating expenses were $390 million, significantly below our guidance range of $420 million to $430 million. The lower-than-expected expense number for the quarter was primarily due to the hiring pause implemented early in the quarter, reduced travel, and overall expense management. Our non-GAAP net loss was $135 million for the quarter, or a loss of $0.69 per share, versus our guidance of a loss of $0.89 per share. Now a few balance sheet highlights. We closed the quarter with cash and short-term investments of $732 million. DSOs in Q3 were 67 days, compared to 76 days in Q3 ’19, and 65 days in Q2 ‘20. Free cash flow during the quarter was negative $117 million. This performance was negatively impacted by $23 million of ESPP outflow in the quarter, higher than we expected due to the lower Nutanix stock price. Free cash flow was also negatively impacted by a somewhat higher-than-expected accounts receivable balance and higher capital expenditures. Our Q4 capital expenditures should be substantially less than the Q3 total of $33 million. Now, a few comments regarding the future. Despite the economic uncertainty that most companies are dealing with in today's environment, we were generally pleased with our Q3 results. As we look forward to Q4 and beyond, we remain very excited about what the future holds for Nutanix. We are a much stronger and better company today than we were just 12 months ago. We continue to aggressively move forward with our subscription journey, our non-core products are starting to gain serious traction in some of our largest accounts, and our sales leadership continues to improve, all with a significantly larger pipeline than one year ago. Although the future clearly looks encouraging, the short term comes with a high degree of uncertainty. We are still in an unprecedented, volatile time, and importantly, we are still in the early innings of transforming our business to a subscription model fueled by low-cost renewals. While we're making great progress on this transformation, we have not yet reached the point where the predictable renewal business makes up a substantial portion of our quarterly results. We are getting there, but for now, new business and upsell business—areas with greater inherent uncertainty—still account for a vast majority of our quarterly billings. Accordingly, we do not believe it is prudent to provide guidance for Q4. However, we are encouraged by the progress we're making. We spent the last year and a half building a subscription business that will ultimately lead to a much more predictable business. With 84% of our billings in the quarter now coming from subscriptions, combined with a customer retention metric of 97%, we believe it's largely a matter of time until the business matures to a new level of predictability. As such, we plan to issue annual guidance for FY ‘21 during our Q4 conference call, with any top-line guidance most likely focusing on ACV and with growth rates appropriately correlated to the current macro environment. What we do know about FY ‘21 is that our teams will be ready, our products will be ready, and our subscription model will be ready to take full advantage of any economic recovery that might occur. In the meantime, in lieu of specific guidance for Q4, I'll provide a few thoughts around specific areas that we are focusing on and in which investors frequently show interest. Expense management: As Dheeraj noted, we have aggressively managed our expense structure since mid-Q2 and will continue to do so moving forward. Hiring has been very limited; merit increases and bonuses have been paused; executive salaries have been reduced; and we've implemented two non-consecutive weeks of unpaid time off for most of our employees worldwide, one week in Q4 and one week in Q1. Major events such as .NEXT and our worldwide sales meetings will go virtual, along with many other cost-saving initiatives. This early and aggressive action to control expenses in the near term, while maintaining a relentless focus on the customer, has clearly paid off based on the Q3 operating expenses coming in $40 million lower than the high end of our previous guidance. Going forward, we will continue to actively manage the expense structure as the macro environment dictates. For the immediate future, we expect operating expenses to hover around $375 million to $400 million per quarter. Cash management and free cash flow: Again, our proactive and aggressive expense management has positioned us well to control cash burn over the next several quarters. Our hiring has been very limited, and any future hiring will involve highly critical roles, as well as some hiring for customer-facing positions such as sales teams, professional services, and support. We expect cash usage to decrease significantly from Q3, and we will continue to do what is necessary to minimize cash usage in the future. A few comments on sales compensation: We continue to move aggressively to align our sales compensation plans to support a subscription-based model, and starting in the first half of FY ‘21, we will transition to either a partial or full ACV sales compensation model. This is the first step in establishing a compensation structure that takes advantage of the natural leverage a subscription model affords. Renewals: Renewals have become a major focus area for the company and will be the foundation for building a profitable business moving forward. We are in the process of establishing roles and responsibilities within various organizations to ensure renewals are efficiently transacted. The available pool of subscription renewals is just starting to come into play. In Q3, we transacted about $5 million in non-support related subscription renewals, and that pool available for renewal will grow to approximately $10 million in Q4. A few thoughts on operating leverage: The subscription business model and operating leverage go hand-in-hand. Many investors routinely ask us why our sales and marketing cost structure does not line up closely with other subscription businesses. Before we answer this question, some context is needed. As you recall, we started our subscription journey in the first half of FY ‘19 when the company was approaching a billings run rate of $1.5 billion. Since then, we have transitioned a substantial portion of our business to a term-based subscription model with average term lengths of less than four years. Subscription-based businesses derive considerable operating leverage from their renewal base and most mature subscription companies probably have a renewal base that accounts for close to 50% of their total billings. Today, all of our subscription renewals account for less than 10% of Nutanix’s total billings, which means over 90% of our business is still composed of new and upsell transactions, which are costly to execute compared to renewals. As our subscription business matures and renewals represent a substantial percentage of our overall business, we believe it is realistic to expect Nutanix will begin to exhibit operating leverage characteristics similar to those of other mature subscription companies over time. To date, only the negative aspects of our subscription transition, mostly around top-line compression related to terms and pricing, have been well documented and have received headlines. We refer to these negative aspects as the investments into our subscription transition. Much of the financial content for our previously postponed Investor Day was aimed at focusing on the future positive aspects of our subscription transition, primarily around why renewal inflows will naturally provide significant operating leverage over time. We call these positive aspects of the transition the returns on our subscription investments, and the move to an ACV-based compensation model for our sales force will ultimately position us to leverage this return from renewal inflows. After all, every substantial investment requires a substantial return. We look forward to sharing a more detailed view of our go-forward operational plan and corresponding financial targets at an appropriate time in the future. With that operator, you can now open the call to questions. Thank you.

Operator, Operator

Thank you. Your first question comes from Katy Huberty with Morgan Stanley. Your line is open.

Katy Huberty, Analyst

Thank you. Good afternoon. Dheeraj, as you mentioned, what we're seeing in the current environment is the accelerating adoption of public cloud. So I was wondering if you can just walk through what you have in the pipeline and on the product roadmap in terms of any solutions that will be distributed on the Amazon and Microsoft platform, and whether you see that as incremental revenue opportunities or is that just new features layered on top of the current product portfolio.

Dheeraj Pandey, Chief Executive Officer

Thank you, Katy, for the question. Yeah, in fact just to take a step back, you know our idea of really blurring the lines between on-prem and off-prem is to take all our products and run them in the public cloud as is, and we believe this will be the biggest differentiation when it comes to lift and shift—just like what virtualization did 15 years ago. However, public cloud also offers some elasticity capabilities, which we are now incorporating into our products. For example, features like auto scale-in, auto scale-out, and more autonomous infrastructure that is policy-based—what we refer to as intent-based in product terms. Additionally, commerce is evolving as we enable customers to purchase products for three months or one year versus having a salesperson on board. There are many opportunities we can take advantage of there. Finally, the concept of hybrid is very powerful for our customers because they will need to make decisions about public versus private based on data sovereignty, data gravity, and economic reasons, which are dictated by the laws of physics, the land, and economics. Therefore, we are looking forward to major announcements in the next three to six months.

Katy Huberty, Analyst

Thank you for that. And Duston, just as a follow-up, the new customer count accelerated in the quarter to 970. How would you characterize the deal pipeline heading into July versus, for instance, a year ago?

Dheeraj Pandey, Chief Executive Officer

Yeah, Katy, to ensure I understood you, you were referencing the new customers?

Katy Huberty, Analyst

Yes, I mean the April quarter of new customers of 970 was an acceleration from the prior quarter, so clearly good performance. Just curious what the old pipeline for new business looks like going into July versus this time last year?

Dheeraj Pandey, Chief Executive Officer

Yeah, just on that, new customer count is around 700 in the quarter. So we'll have to sync up on those two numbers. But yeah, the pipeline—and I guess maybe your question is more kind of Q4 in general—and while we haven't provided any specific guidance, it is probably a question that will come up at some point. So, you know, why aren’t I addressing your question? In my comments, I mentioned pipeline; our Q3 generation exceeded our target and was the largest pipeline generated in our history. So, that's clearly encouraging. As for Q4, now that we are only roughly three weeks into the quarter, you know, take that for what it's worth. But, on the surface, there are not many things that look out of line. Now the results won’t be as good as we thought they would be pre-COVID, but if you look down at conversion rates—where we stand from the pipeline compared to our expectations—everything looks okay. Loss rates are actually a bit lower; the sales cost or one-to-one linearity is within terms of what we expect historically. We closed several million-dollar deals, I think at least three this week, with a couple being spillovers that we expected to close in Q3 but actually closed this week—two federal deals that were pushed from Q3. If you look at EMEA, there’s promising activity with new customers and partners starting to engage in the public sector, which looks encouraging. AHV is gaining renewed attention for its cost-saving aspects. APAC was initially impacted, but is starting to open up, with some reasonable news from countries there. India and China continue to struggle but not too badly. Overall, the pipeline is there; there’s no doubt about that. Sales capacity is also present, but deals remain volatile. We are within our decision not to provide Q4 guidance, as we mentioned previously, and that shouldn't surprise anyone. The situation remains volatile, and less than 10% of our business is truly predictable at this point. However, when you consider the metrics, there are positive things happening; our product is performing well, and sales teams are executing effectively.

Katy Huberty, Analyst

That's great color, thank you.

Operator, Operator

Your next question comes from Rod Hall with Goldman Sachs. Your line is open.

Raghunathan Kamesh, Analyst

Hi! This is RK on behalf of Rod, thanks for taking my question. Your OpEx came in nicely lower than expectations and you’ve talked about cost cuts and furloughs and slower hiring. So I wanted to ask if you could just give us some confidence that these OpEx savings don’t affect the revenue growth looking out in the future.

Duston Williams, Chief Financial Officer

Yeah, why not? I can start on that one. You can’t do this work without worrying about not just FY ‘21, but also FY ‘22, because the easiest thing for us to do would be to completely stop everything and not worry about future growth, but we can't do that. We’ve done a lot of scenario planning with downside, base case, and best case scenarios, and in that environment, we have to have a view on FY ‘22; otherwise, those scenarios don’t work well. Don’t ignore the fact that we have excess sales capacity entering this downturn, so it’s not like we were operating with razor-thin capacity. We’ve clearly got more capacity, so it’s a fine line we walk. That’s why I believe we’ve taken prudent actions that consider everyone, rather than singling anyone out because we all need to participate in the growth going forward.

Dheeraj Pandey, Chief Executive Officer

Yes, well said, Duston. I just wanted to add that, as I mentioned in my script, this is our first recession as a company, and I used the term very deliberately: annealing. It’s a process of re-crystallization that yields increased strength. When we went public, we had 1,800 employees, around 3.5 to 4 years ago, and now we have more than 6,000 employees. About 70% of our workforce has never experienced a private Nutanix, and I think it’s worth our time to reflect on every dollar we spent four or five years ago. How can we revert to basics and cultivate a startup mentality again? We’re leveraging this opportunity to do just that.

Raghunathan Kamesh, Analyst

Thank you. I also wanted to ask about your cash flow and liquidity position. Is there a minimum amount of cash that you have in mind to run the business, and what are you considering in terms of potentially accessing the capital markets again?

Duston Williams, Chief Financial Officer

Yeah, again, this is something we analyze regularly with scenarios based on our downside, base case, and best case views. We feel good about our cash balance throughout FY ’21 based on these scenarios. The markets are reasonably open, and the terms are favorable, but we believe we’re in a good position going forward. If we were to raise cash in the future, it would likely be to provide us optionality around our continued subscription transition. It would be more about that rather than day-to-day needs. This would likely be related to whether we want to shrink our average terms further from the current 3.9 years. We know this would significantly enhance the business's profitability with less discounting because, generally, shorter terms yield lower discounting. This shift is highly leverageable from a business model perspective. Additionally, shorter terms lead to quicker renewals, and with a 97% retention rate, that expedites efficient deals entering the business at a much lower cost. So if we were to pursue something, it would be focused on that optionality to enhance profitability.

Raghunathan Kamesh, Analyst

Great, thank you.

Operator, Operator

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

Alex Kurtz, Analyst

Thanks and hope everyone is safe and healthy over there. Duston, just to revisit your earlier comment about the pipeline. I think you said it’s like the largest in Q3 pipeline growth in company history, something along those lines. I guess the question for both of you is what are the workloads driving that growth? Is it just a continuation of the EUC and VDI trends that you saw in the last quarter, or are you kind of seeing a heavier mix of bigger digital transformation projects? So I guess what’s driving that and is it sort of a continuation of last quarter?

Dheeraj Pandey, Chief Executive Officer

You want to take that, Duston? Yeah, let me at least make an attempt at it. I think a lot of the pipeline in Q3 that got converted to EUC deals—which we reported as 27% of our TCV bookings—was created and closed within the same quarter. The numbers that Duston talked about reflect overall creation in the quarter, which is beneficial for Q4 and Q1. I think the mix is very similar. As I mentioned in my call script, EUC used to be a much larger percentage of our business five years ago. It has come down to 18% a year ago, 20% a quarter ago, and it has now spiked to 27% this quarter. So, I believe our pipeline is matching our bookings in Q3.

Alex Kurtz, Analyst

Alright. Thanks, guys.

Operator, Operator

Your next question comes from Jason Ader with William Blair. Your line is open.

Jason Ader, Analyst

Yeah, good afternoon, guys. My first question is on guidance. I’m sure this has been hotly debated internally, but why not just give a range? You know that’s what most companies are doing. To completely pull your guidance after some of the comments you made in May regarding the metrics being reasonable and the pipeline growth that you saw in Q3 seems odd. Can you walk us through that thought process?

Duston Williams, Chief Financial Officer

Yeah, again, things are volatile, and we’re early into Q4, about 3.5 weeks. Many companies with a subscription-based business are giving guidance based on a substantial portion of their business coming from renewals, which we don’t have. Our business is significantly less than 10% in that category at this moment. It is more about comparing ourselves against conventional businesses. For instance, if you take a look at VMware, which enjoys a 60% renewal rate, we are dealing with much lower figures. As such, it’s not just about subscription companies—I think it highlights how much our renewal business differs from conventional metrics. We are in the process of ramping up; we acknowledge that renewals will elevate over time. Given our history of only starting this journey a year and a half ago, renewals haven't aligned yet. Shorter terms could be beneficial here, as they allow quicker renewals, and we can leverage that with our high retention rate. That’s why we’re taking a pause on guidance for this quarter.

Jason Ader, Analyst

Okay, yeah, but I mean companies like Cisco, that don’t have a lot of subscription, provided a range. I mean, I guess you’re comparing yourself against some of the pure ratable-type models and renewal models, so I guess…

Duston Williams, Chief Financial Officer

Jason, even for traditional businesses, if you look at, let’s say VMware, their renewal rate is at 60%. For us, it’s much less than 10%. So, it’s not just a comparison with subscription companies; it’s a difference in almost every conventional business that has a strong renewal model.

Jason Ader, Analyst

Right, but don’t you have around 30% that’s recurring support?

Duston Williams, Chief Financial Officer

No, not of the quarterly bookings, no. Not in its entirety. In fact, in total, our recurring—whether you want to classify that as quarterly or now subscription renewals—this is less than 10% of Nutanix’s overall billings, which creates a substantial difference. What we’re working towards is ensuring renewals become an increasing part of our revenue stream over time, and that’s the whole story. We’ve successfully transacted about $5 million last quarter in that area, and our pool for renewal is around $10 million right now. We expect that to accelerate as we continue to get more customers on-board with aspirations for our transition.

Dheeraj Pandey, Chief Executive Officer

Furthermore, we have extensive international exposure, which contributes to unpredictability regarding when governments and economies will fully open up. Comparatively, several younger companies lack a robust international business, which can create complications. At the same time, I believe that through Katy’s question, Duston has provided ample insight on what we anticipate for Q4. It's all about balance, and there’s no definitive right or wrong approach. It could be reasonable to provide a wide range but given our prior announcement on May 5, we prefer to take it one quarter at a time—a more measured approach.

Jason Ader, Analyst

Okay, and then one quick follow-up on the billings coming from renewals. That was helpful to get that magnitude for Q3 and Q4. Could you provide a ballpark idea of what the percentage of billings that will derive from renewals might look like in fiscal ’21 and ’22?

Duston Williams, Chief Financial Officer

Yeah, we have mapped that out for Investor Day. We’ll release that detail when we furnish guidance for FY ‘21. It’s straightforward for people to model because you know our average deal length, and you are aware of our subscription transitions. It’s reasonable to predict how our business will evolve as those renewals grow, assuming an efficiency factor just like other subscription-based enterprises. We look forward to sharing a more detailed view of our operational plan and corresponding financial targets at the appropriate time in the future. With that, operator, you can now open the call to questions. Thank you.

Operator, Operator

Thank you. Your next question comes from Jack Andrews with Needham. Your line is open.

Jack Andrews, Analyst

Good afternoon, and thanks for taking my question. I just had a two-part question. I was wondering first of all if you could just talk about the significance of your partnership with Wipro to launch digital database services, and then how big could that be over time. The related question is just broadening it out more generally—should we expect other practice areas to be built with global SI's around some of your other emerging subscription products?

Dheeraj Pandey, Chief Executive Officer

Thank you for the question. In fact, we announced two products with Wipro in the last six months: one around end-user computing and another around databases, with both powered by our infrastructure with Citrix or our controlled platform on the database side, which is Era. These are two massive workloads—databases and desktops—and we’ve managed well in both areas. They probably represent equal-sized business opportunities. Excluding things like Splunk and other emerging apps that we work with, I see this as a significant area for us. Many challenges exist in lifting and shifting these to the public cloud, and that’s where we see our value come in. Data and compute should remain close for performance. Virtual desktops must be universally accessible. Both the Wipro efforts surrounding these products will play a crucial role in our GSI strategy. We are also establishing relationships with Capgemini, HCL, Infosys, and others. We see these partnerships as pivotal as they expand their service provider offerings for Global 2000 clients and use Nutanix as their underlying infrastructure. We are very optimistic about our prospects with GSIs and feel like we've only begun to scratch the surface.

Jack Andrews, Analyst

Great! Thanks for your insights.

Operator, Operator

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

Victor Chiu, Analyst

Hi! This is Victor Chiu in for Simon. You mentioned that all three regions were impacted incrementally relative to your expectations. Can you help us understand what’s the couple of offsets that provided some upside relative to your previous guidance expectations?

Dheeraj Pandey, Chief Executive Officer

Yeah, globally, I think it was a combination of factors. The takes from our side were end user computing, where we were able to provide services globally—not just in the U.S. and federal, but also in EMEA and APJ, which acted as a tailwind for us. Conversely, on the purchasing side of large deals, we saw postponements or revisits, negatively impacting some forecasted revenues. EUC was a significant contributor to our growth.

Victor Chiu, Analyst

That’s helpful. Thank you.

Operator, Operator

Your next question comes from Mehdi Hosseini with SFG. Your line is open.

Nick Ghattas, Analyst

Hey guys, this is Nick on behalf of Mehdi, and thanks for squeezing me in at the end here. I just wanted to key in on VDI for a second. Looking ahead, is there still incremental upside with your VDI solution? Are you still hearing from customers that they need assistance getting online with their work-from-home setups, or is that opportunity pretty much closed at this point? I have a follow-up.

Dheeraj Pandey, Chief Executive Officer

I think we're still early in this. Thank you for the question. The Global 2000, perhaps the Global 5000, had been tested, but even there, the penetration remains around 30%. Reviewing Citrix’s data, the enterprise seats don’t correspond to the number of large enterprise employees. Large accounts are likely only one-third penetrated right now, but mid-market presents a vast and untapped opportunity. I believe the digital workspace for end-user computing will be redefined and is probably in its early innings—not much down the line. Moreover, the future of healthcare and education is also tied into this transformation.

Nick Ghattas, Analyst

Okay, that’s really helpful. If I could just squeeze in one more here, the 97% retention rate clearly reflects performance from the prior era. Can you provide a bit more context about what you’re expecting regarding churn or retention rates moving forward, particularly as renewals start coming online?

Dheeraj Pandey, Chief Executive Officer

Duston, do you want to take that?

Duston Williams, Chief Financial Officer

Sure. I don’t expect to see much of a difference, quite honestly. The product holds significant value, and the enhancements we've seen are compelling. I mentioned how AHV is becoming increasingly attractive in a cost-conscious environment, which we're observing now. We ran those numbers through Q3, and were still looking around 97% retention. Therefore, I wouldn’t anticipate significant changes over the next several quarters.

Nick Ghattas, Analyst

Okay, I appreciate it. Thank you.

Operator, Operator

And our last question comes from Pinjalim Bora with J.P. Morgan. Your line is open.

Pinjalim Bora, Analyst

Hey guys, thanks for squeezing me in. Dheeraj, we have heard plenty of positive comments surrounding your HPE partnership in Q3. Can you tell us how you performed compared to expectations, and did the pay-as-you-consume structure for GreenLake help during this time? Additionally, do you see value in providing a pay-as-you-consume model yourself?

Dheeraj Pandey, Chief Executive Officer

Thanks for the question. Our partnership with HPE has forged ahead quite well. It’s only been about 2.5 quarters since it began. They certainly possess a global presence, and our account management teams are collaborating closely. We believe the push has been somewhat early, given we haven't fully incorporated our products. However, after COVID, we began to see a rise in inquiries—many regarding whether we could leverage the entire Nutanix portfolio through GreenLake. It’s a rather innovative idea, and there are exciting partnership opportunities with HPE, particularly surrounding Xi. They’re exploring prospects involving Telcos and service providers who have a tendency to buy hardware using CapEx. GreenLake could serve as a significant value proposition for Nutanix and our partner ecosystem as we aim for an OpEx-driven model.

Operator, Operator

This concludes today’s conference call. You may now disconnect. Thank you for participating.