Earnings Call Transcript - NTNX Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Nutanix Q1 Fiscal 2020 Earnings Conference Call. I would now like to hand the conference over to your speaker today Tonya Chin, Vice President of Investor Relations and Corporate Communications. Thank you. Please go ahead, madam.

Tonya Chin, Vice President of Investor Relations and Corporate Communications

Good afternoon and welcome to today’s conference call to discuss the results of our first 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 first quarter of fiscal 2020. If you’d like a copy of the release, please visit the Press Releases section of the Nutanix website. During today’s call, management will make forward-looking statements within the meaning of the Safe Harbor provisions of federal securities laws regarding among other things the company’s anticipated future financial performance in various periods, including anticipated revenue; software and support revenue; TCV revenue; billings; software and support billings or TCV billings; gross margin; operating expenses; net loss; net loss per share; weighted average shares outstanding and annual contract value or ACV. The assumptions underlying our anticipated future financial performance in various periods, our plans to provide future projections and financial guidance, our plans and timing for and the benefits and impact of our transition to a subscription-based and recurring revenue business model including anticipated impacts thereof on our business and financial results, and our ability to complete the transition successfully and in a timely manner, our business plans, initiatives and objectives, and our ability to achieve such business plans, initiatives and objectives successfully and in a timely manner and the anticipated benefits and impact thereof on our business, competitive position and financial performance, demand for and customer adoption of our products and services, and our ability to retain and expand upon existing customer relationships, our continued investment in talent, technology including our subscription-based product and marketing, and the success and impact of such investments, the benefits and capabilities of our platform, products, services and technology; our customers plans regarding their adoption or deployment of our products, our plans for and expectations regarding new products, services product features and technology that are under development or in process; the interoperability and the availability of our solutions with and on third-party platforms, competitive and industry dynamics, market size and potential market opportunity, and other financial and business-related information. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation and explicitly disclaim any obligation to update, alter or otherwise revise these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our annual report on Form 10-K for the fiscal 2019 filed with the SEC on September 24, 2019, as well as the 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. Please note, unless otherwise specifically referenced, all financial measures we use on this call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We 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. Turning to our upcoming conferences, Nutanix management will be at the Wells Fargo TMT Summit in Las Vegas on December 3, the Credit Suisse Technology Conference in Scottsdale on December 4, Raymond James Technology Investor Conference in New York City on December 10, the Barclays Global TMT conference in San Francisco on December 12, and the Needham Growth Conference in New York City on January 14. We hope to see many of you there. Lastly please mark your calendar for our third Investor Day in New York City on Thursday, March 26. With that, I'll turn it over to Dheeraj.

Dheeraj Pandey, CEO

Thank you, Tonya. Good afternoon, everyone. Thank you for joining us and a very happy Thanksgiving in advance. In September, we celebrated our 10th anniversary. We reached $1 billion in annual revenue, faster than most software companies in the past 20 years with deferred revenue at almost $1 billion as well. In the last two years, we have transformed our business model from appliance to software and are now solely doing subscription. As we look to our next 10 years, we see even bigger opportunities to continue to work hard with our customers to ensure that words frictionless, reliable, and invisible remain synonymous with Nutanix. Q1 was a strong quarter for us based on better-than-expected financial results, progress in subscription, recorded large deals, as well as continued new product traction. To build on last quarter’s strong momentum with $370 million in software and support billings or TCV billings and $305 million in software and support revenue or TCV revenue, both metrics beating consensus. We signed the second-highest number ever of large deals in a quarter which we define as deals greater than $500,000. Subscription grew to 73% of total billings, up from 71% last quarter as we move steadily towards the goal of more than 75%, which is our stated goal by the end of fiscal 2020. Later, I'll talk more about why our move to the subscription model gives us a competitive edge in a world that is increasingly going hybrid. We also had strong 39% year-over-year deferred revenue growth in Q1, reaching nearly $1 billion in the quarter, a notable milestone. In this call, I want to focus on the three pillars of our execution that are driving this improved financial performance; our go-to-market engine, our move to subscription model as we establish a new baseline, and the organic adoption of our new products. The headline of the quarter was our continued momentum in execution across both sales and marketing. In addition to increasing our focus on lead generation, our global sales leaders continue to infuse rigorous operational discipline into our sales process around the world. The Americas region delivered record-high software and support or TCV bookings this quarter. We also made excellent progress in sales hiring in the quarter with a record number of net new sales reps. We made another key sales hire during the quarter with the addition of a new VP of Americas channel. The new leadership is focused on helping our partners virtualize, simplify and integrate the multi-cloud experience of our customers. As we noted on last quarter's call, we spent the last three years building a robust enterprise business. Our goal is now to balance that with an equally strong mid-market business, as commercial customers are just as aspirational as enterprises on the hybrid cloud transformation. Not surprisingly, we discovered many of our million-dollar accounts in this segment. One real example of a new customer win in this segment was with a U.S.-based Internet service provider. This deal, which was $750 million, comprised our core AOS operating system, Prism Pro, Bios and native AHV hypervisor to build a scalable private cloud, leveraging Nutanix to run several of the enterprise apps including their Oracle databases. We also recently added a seasoned technology veteran to our executive team with the hire of Tarkan Maner as Chief Commercial Officer. In his multifaceted role, Tarkan will lead business development, M&A, global system integrators, service providers, and so on for cloud and platform products. I've watched Tarkan build two very meaningful companies in the last 15 years, Wyse Technology and Nexenta. He brings an entrepreneurial mindset and an acute awareness of the computing landscape. His authentic leadership style, a clear bias for action, and a broad industry network have helped him create high-energy companies in the space of end-user computing and storage. I’m thrilled to have an extremely hardworking leader who’s passionate about cloud, telcos, people, and clarity in communication. Speaking of clarity, let me share some of our progress in the simplification of our go-to-market messaging that emphasizes customer solutions rather than individual products. We focused on three solutions around private cloud, end-user computing, and databases. One of the most common themes we hear from customers is that they want their computing silos to work seamlessly from performance, security, APIs, and ease of use points to a few. This frictionless delivery is the focus of our new global ad campaign launched this quarter that shows how Nutanix software brings it all together now to virtualize, simplify and integrate data, applications and infrastructure. This outstanding approach was very well received at our European .NEXT Conference this October, where we brought together 4,500 attendees in Copenhagen at our biggest EMEA event to date. Customers, prospects, employees, and more than 1,200 Nutanix channel partners participated in over 100 technical breakout sessions to hear about the why, the how, and the what of our future and how it relates to their multi-cloud journey over the next three to five years. Our customers now want to take our software to hyperscaler substrates in the public cloud as they realize that compute and storage need to set side by side in these highly virtualized network environments. At our conference, we showcased how we are approaching this problem by making the private and public cloud symmetric for our customers. They can build secondary sites, force computing to accommodate seasonal peaks, and globally load balance or distribute applications across these data centers with a single affordable software license orchestrated by a single pane of glass that manages both sides of the aisle. Events like .NEXT help us drive strong momentum in large deals with new and existing customers. Shortly after .NEXT in Copenhagen, we signed a multimillion-dollar deal with a leading financial services firm in Germany that attended the event. They are now using Nutanix to run their mission-critical financial services applications. This really is a great example of how to leverage our premier marketing events to build trust with our prospects. That customer was just one of the 66 customers we signed in the quarter that are worth over $1 million, a record for us. Thirteen of those customers also spent at least $1 million with us in Q4, with 50% of them increasing their engagement with us to support new workloads in Q1. In addition, this quarter we closed nine deals worth more than $3 million. Finally, we are close to reaching a milestone of having nearly 1,000 customers with a lifetime spend of more than $1 million, up 39% year-over-year notwithstanding the compression in our topline due to subscription. Our biggest deal this quarter was with a repeat marquee client that invested nearly $9 million in subscription licenses to modernize the infrastructure. This global Fortune 10 company has lifetime bookings with us of over $38 million. The use case fuels a new edge computing solution that will manage their climbing use of IoT sensors and provide additional security to their digital transactions. This relationship accentuates what we are known for in the market: reliability, reliability, and reliability of our products, processes, and our people in customer support and success. And finally, this relationship also underscores how we're helping our Fortune Global 100 customers transform from ownership of technology to access to technology with a subscription consumption model. To own music with iTunes or to stream music with Spotify is a simple way to think about tradeoffs of ownership versus access. Given how rapidly technology is changing, companies are introducing new products, and enterprise customers are waking up to this idea of subscription to a product portfolio being streamed to them in a very similar way. Just a short amount of time, we have shown strong progress in transforming our business to cater to this new cloud consumption mentality. This transition will enable us to offer what we believe is one of the infrastructure segments only to license mobility models to protect our customers’ investments in multicloud computing. It will help our customers move investments fluidly between private and public clouds, as their business needs dictate. Our flexible licensing is a competitive differentiator and a clear customer benefit. Equally important is how the subscription model paves the way for our long-term profitability as we set go-to-market incentives, respectively for hunting versus farming of annual contract value or ACV driven by sales versus total contract value or TCV driven by customer success. Speaking of customer success, one of our top subscription deals in the quarter came from a large civilian department of the U.S. government and is worth nearly $5 million. The deal represents this customer's first private cloud solution with our AHV hypervisor to manage and scale mission-critical workloads. The customer who uses Nutanix to run Oracle in addition to selecting Era for their database management and Frame to deliver virtual desktops to its growing user base. They chose us for product quality and breadth, simplicity, and strong customer references. Speaking of simplicity, recently a Nutanix customer posted on an online forum about how easy it is to update Nutanix Clusters. The customer said, 'I just wanted to give a shoutout to Nutanix on here so everyone knows how great and easy it is to set up an entire cluster from scratch.' This customer had previous experience with multimillion-dollar projects for incumbents, which took weeks. However, with Nutanix, it would have taken two hours. They went on to say, 'I know Nutanix talks about this, but we need to be shouting this from the rooftops.' We intend to bring the same level of invisible laps when customers are instantiating workloads in a hyperscale data center of the public cloud. Another example of a $1 million-plus subscription deal in Q1 was with a new customer that is a high-profile US-based apparel manufacturer. We're helping this customer modernize their infrastructure to move off of a legacy three-tier solution into a cloud-first architecture for their data centers, their primary workloads into databases and VDI. We partnered with a global SI who's helping us integrate Xi Beam, Calm, Files, Flow, and Prism Pro with our native virtualization technology, AHV. The customer chose us for a simple ease of use, single pane of glass, and the flexibility for the IT team to scale an elastic infrastructure. On the topic of flexibility, one of the key benefits of a subscription is that it allows customers complete freedom to choose to spend operating or capital budget dollars. The hybrid consumption model in this case unlocks mobility of the entire stack including data, applications, networks, and licenses. The 2019 Enterprise Cloud Index or ECI issued just two weeks ago supports these pieces of app mobility. The independent third-party survey asked over 2,600 global IT decision-makers about the state of global enterprise cloud deployments and adoption plans for hybrid cloud. 85% of ECI respondents said hybrid cloud is the ideal IT operating model. 95% reported that it’s essential and desirable to be able to easily move applications across cloud environments. Moreover, 73% said they’re moving applications back on-premises, indicating a clear need for mobility. Switching gears to our third pillar of execution in the quarter, there was traction of our new product portfolio. Customers know and love us for our reliable HCI core and our customer success ethos. Architecturally, we brought together storage, compute, and networking into a platform combining the benefits of web-scale architecture with the consumer-grade simplicity of a smartphone delivered with a genius-bar-like customer support experience. Over time, this trust and loyalty made our customers realize they wanted and needed more from us higher up the stack, given how poor their other IT relationships are. Our newer products continue to gain traction in the market. In fact, this holistic approach to a hybrid cloud stack is often a critical reason why we win deals. In Q1, the number of deals that included at least one product beyond our core HCI offerings increased once again to 28% on a rolling four-quarter basis showing nice progression from 26% in the previous quarter. Our software and services portfolio now covers the trifecta of data plane, control plane, and management plane. With the data plane comprised of the runtime for the machines which are themselves pure software in the software-defined world. The control plane is where the machines orchestrate other machines and the management plane is where humans interact with machines increasingly with the help of AI in an era of AI ops. One example of the power of our product portfolio is that one of the world's leading organ transplant nonprofit organizations. This customer purchased over $2 million of our software including our core AOS operating system, Calm, Flow, Files, and AHV Hypervisor to run their SQL databases. The use of Nutanix software is a critical part of the full-scale modernization of their computing platform. When trialing our software earlier this year, we saw a 1.5 times performance improvement over the legacy infrastructure. This customer is now evaluating Xi Leap, our cloud-based data recovery solution. We also scored a competitor win with the largest organic farming cooperative in North America in the quarter. The farming industry has been going through significant changes which drove this customer to look at new and innovative IT solutions to address their database performance issues and support future growth needs. They returned to us to reduce operating costs by significantly shrinking the database licensing fees. A great example for our TCO is that the cost savings on these licenses alone funded the purchase of our software. On the topic of hyperscaler platforms, we announced Nutanix Clusters earlier this year to enable our software to run in public cloud data centers. Our approach to multi-cloud is architecturally different. Just like HCI was so different from converged infrastructure or CI. CI was nothing more than a band-aid, strapping large technology providers under one roof. We founded this company on the premise that CI was a hack, a temporary coalition of big brands that would not withstand the test of time because it was packaging expensive hardware and software under an umbrella term of convergence with no change in the operating and consumption models. HCI, on the other hand, was a fundamental rethink on an empty canvas of commodity servers, commodity networks, and enterprise-grade software coming together with an elegant consumer-grade design. How we look at the new multi-cloud world of the new HCI challenge with their commodity servers, commodity networks, and our software and design is the journey of this decade. I’ll share more about clusters in the coming months. We hope to convince Gartner one more time about the real convergence of cloud’s Magic Quadrant. Virtualizing, simplifying, and integrating them all together into one delightful experience is in our DNA. Speaking of delight, providing our customers with the freedom to choose which hardware or platform to run our software was a masterstroke for us in 2014. When we decided to open our appliance router market to competition from other server vendors who started to OEM our software, we are pleased to see our new relationship with HPE start to blossom—this being the first quarter since the integrated products G8. HPE’s huge customer base can now easily adopt Nutanix. As we announced the general availability of our software in HPE ProLiant DX servers, fully integrated with our enabled support, HPE’s hybrid cloud in the server’s GreenLake solution is also generally available now. As a result, we saw a number of new customer wins in these solutions during the quarter. In Q1, more than half of our HPE DX customers were also new logos to Nutanix, validating this new partnership and our software has increased exposure to HPE's installed base. One example of how our new relationship with HPE is ramping faster than any of our past OEM partnerships is a nearly $2 million deal in Q1 with a new customer, which is a large EMEA-based insurance company. Early success is compelling customers who already explored database and service use cases with Nutanix Era. One very critical initiative within the company is Xi test drive service running on Google GCP. To me, this is one of our most important projects to get right for a true digital transformation of the company. How our prospective customers go from a digital banner ad to trying out our entire product portfolio hosted in the public cloud in a one-click, self-guided experience is a testament to how far we've come from being an appliance company a couple of years ago. If we get this right, it’ll immensely improve profitability in the commercial mid-market as most of the prospects would then be enabled with a digital touch, and only the self-selected ones would require a human touch. I'm proud to say that in this last year, we have also done a thousand-odd credit card transactions to sell our cloud services with zero human touch. Digital transactions are core to our future including for subscription renewal and eventually to our profitability. Finally, we are humbled to be recognized that Comparably is a great company for millennials to work for in the San Francisco Bay area and also Bloomberg Intelligence is one of the 50 companies to watch for in 2020. Before I turn it over to Duston, I want to bring it all together now. Strong quarter, continued progress in the rollout of a subscription model, record number of large deals, growing demand for new products, and an increasingly digital go-to-market strategy—all beneath it all, the care and attention we give customers remains one of our most substantial competitive differentiators. Our proven track record and passion for simplifying complexity makes us a trusted partner for enterprises building the computing platform. Our long-term differentiation continues to be at the intersection of public and private clouds in how we virtualize, simplify, and integrate the silos to make computing invisible anyway. Now I’d like to turn it over to Duston.

Duston Williams, CFO

Thank you, Dheeraj. Q1 was a quarter during which we met or exceeded our guidance for software and support billings, software and support revenue, gross margin, operating expenses, and earnings per share. We were pleased with the amount of pipeline we generated in the quarter in that our backlog position showed very little change from Q4 FY 2019 to Q1 FY 2020. This was in sharp contrast to the fact that over the last three years we have experienced on average about a 25% decline in backlog from Q4 to Q1. During the quarter, we also made good progress on our shift to our recurring subscription business. In Q1, subscription billings accounted for 73% of total billings, up from 71% in Q4, and subscription revenue now accounts for 69% of total revenue, up from 65% in Q4. This subscription shift for the quarter was in line with our guidance last quarter at which time, we mentioned that the subscription percentages would fluctuate a bit either plus or minus for the next couple of quarters with a goal of 75% of billing from subscriptions by Q4 of fiscal 2020. Q1 marked our fifth quarter into the subscription transition. We have strived during this transitionary period to find an ideal financial metric to portray an apples-to-apples comparison of our top-line growth—one that mixes the attributes of the old life of device model with the new subscription model. Historically, we've had one metric, TCV or total contract value for software and support that we apply to show the growth rates for the entire company, which combines the old life of device model business model and the new subscription-based business model. Using TCV as a growth metric works well for the old life of device model but not for the new subscription-based model as TCV ignores changes in term lengths and therefore significantly understates the true growth of the business in a period of decreasing term loans. As such, we believe the single best metric to measure the true growth profile of the company during our transition to our new subscription-based model is new annual contract value plus renewals or ACV for short booked in the quarter, which includes sales of life of device licenses based on an assumed five-year term. By calculating in this way, we take into account the changing term lengths while still showing the impact of our continued sales of life of device licenses. Having aggregate ACV in any given period will allow us for a cleaner apples-to-apples comparison of period-over-period growth rates. In its most simplistic form, we define ACV booked in the quarter as the annual contract value of new business plus the annual contract value of renewals. We calculate ACV booked in the quarter by taking the value of each transaction booked in the quarter including renewals but excluding professional services divided by its term length and then summing the total of those values. We have updated our investor deck to include this new ACV metric. The average dollar-weighted term length in Q1 2020 including renewals was 3.9 years versus 3.9 years in Q4 2019. This calculation assumes life of device licenses for five-year terms. Moving on to some specific Q1 financial highlights. For simplicity purposes and as we said last quarter, we used the term TCV or total contract value to describe our software and support revenue in billings. TCV revenue or software and support revenue for the first quarter exceeded our guidance range of $290 million to $300 million, coming in at $305 million, up 9% from a year ago and up 6% from the previous quarter, reflecting the revenue compression from the company's ongoing transition to subscription and the significant reduction in hardware revenue. TCV billings or software and support billings were $370 million versus our guidance of $360 million to $370 million, up 5% from the year-ago quarter and up 3% from the prior quarter; also reflecting the billings compression from the company’s ongoing transition to subscription and the significant reduction in hardware billings. ACV booked in the quarter was $123 million, which is up 18% from the year-ago quarter. New customer bookings represented 24% of total bookings in the quarter, the same as Q1 2019 and up from 23% in Q4 2019. Although we only had a partial shipment and a quarter of shipments, our HPE DX-related bookings got off to a good start with about $8 million in sales including 25 new customers to Nutanix. We will not normally disclose this level of detail, but we felt that it was important to provide an initial indication of the early progress in the relationship. The Americas was our best performing region in Q1 on a year-over-year basis; the enterprise-related business outperformed the commercial business. Our federal business performed slightly better than expected. In Q1, TCV bookings or software and support bookings from our international regions represented 40% of total bookings versus 40% in Q1 2019. Our non-GAAP gross margin in Q1 was 80%, in line with our guidance. Operating expenses were $386 million and at the lower end of our guidance range of $385 million to $390 million. Our non-GAAP net loss was $135 million for the quarter or a loss of $0.71 per share. A few balance sheet highlights: we closed the quarter with cash and short-term investments of $889 million, down $20 million from Q4. We used $26 million of cash flow from operations in Q3, which was negatively impacted by $10 million of ESPP outflow. Free cash flow during the quarter was negative $44 million, and this performance was also negatively impacted by the $10 million of the ESPP outflow in the quarter. Turning to our details of our Q2 guidance on a non-GAAP basis for Q2, we expect TCV billings or software and support billings to be between $410 million and $420 million versus current consensus estimates of $410 million. TCV revenue or software and support revenue is expected to be between $330 million and $335 million versus current consensus estimates of $328 million, gross margins of approximately 80%, and operating expenses between $400 million and $410 million versus current consensus estimates of $407 million, in a per-share loss of approximately $0.70 using weighted average shares outstanding of approximately $193 million. The TCV billings or software and support billings guidance assumes the dollar-weighted average deal terms remain constant quarter-over-quarter at 3.9 years. Based on the TCV billings or software and support billings at the guidance midpoint of $415 million, ACV for Q2 would approximate a $135 million reflecting an approximate year-over-year growth rate of 24%. Now turning to the fiscal 2020 guidance. Our guidance for fiscal 2020 remains unchanged, which we believe to be prudent based on the uncertain macro environment referenced by many infrastructure-related companies over the last several months. Specifically for fiscal 2020, we expect TCV billings or software and support billings between $1.6 billion and $1.75 billion. TCV revenue or software and support revenue between $1.3 billion and $1.4 billion. Gross margins of approximately 80% and operating expenses between $1.65 billion and $1.7 billion. For representative purposes, based on the TCV billings, our software and support billings at the guidance midpoint of $1.7 billion, ACV for fiscal 2020 would approximate $535 million, reflecting approximate year-over-year growth rate of 25%. The guidance for fiscal 2020 assumes no major economic downturn during the fiscal year and no change to the current dollar-weighted average deal terms currently at 3.9 years. And with that, operator, you could now open the call up for questions. Thank you.

Operator, Operator

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

Matt Hedberg, Analyst

Thanks for taking my questions. And first of all, happy 10th anniversary and congrats on the strong results, guys. I wanted to touch on maybe just first the macro spending question. Then I had a question on partnerships. Obviously, good results here. It sounds like you had good progress in the Americas’ strong large deal performance. I'm curious if you could talk about the rest of the world and maybe some of the things you've learned in the Americas that can be applied to the rest of the world. And maybe just your overall comments on IT buying patterns, spending patterns.

Dheeraj Pandey, CEO

Well, I think—thanks for the question, Matt. I think at the high level when we look at our overall quarterly performance, 40% from international has been in line with what we did a year ago. So we don't see anything unusual in APAC and EMEA. Obviously, Chris' leadership has been telling in America, they would love to actually go and apply a lot of that rigor to both APAC and EMEA as well.

Matt Hedberg, Analyst

Then, I guess in terms of your partnerships, you've specifically called HP which was great to hear some of the success there. And you commented briefly, Dheeraj, on GCP with Xi. I’m wondering if you can give us a little bit more of an update on GCP in particular. If there's anything that you have in terms of joint customer or momentum that you could share, that would certainly be helpful.

Dheeraj Pandey, CEO

Yes. Again on GCP, you know I talked about Google test drive, one of our most important projects to get right for us to increasingly have a digital go-to-market motion, and it's a very, very important project for us to really, really improve the efficiency of our commercial segment. We are working very closely on Kubernetes, Calm, and Anthos coming together well. Our approach is to integrate Anthos to the control team of Calm, rather than raw hypervisor like AHV or something. So, there's some really good progress we have made over the last three to six months in Anthos with GCP, and we’re hopeful that with the recent acquisition of CloudSimple it will open up new doors for bare metal as a service. It could potentially bring GCP on par with what we are doing with AWS and Azure.

Operator, Operator

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

Rod Hall, Analyst

I wanted to ask for starters just to double-check that our math is right on the top-line impact this quarter. So the ACV grew 18% year-over-year and then software support up 9%. So the difference in the two is, I guess, what you would say is the top-line impact from the transition. Just double-checking that, Duston.

Duston Williams, CFO

Yes, it's not as simple as that necessarily because the ACV calc—obviously different term lengths are weighted differently within the ACV. But you can get some feel there for the difference, but I wouldn't take that literally.

Rod Hall, Analyst

Right, just going to put this in a ballpark anyway. Okay, thanks for that. And then the main thing I wanted to ask is ACV is accelerating to 25% growth in the forward quarter, at least that's kind of where we are on the midpoint. I wonder if you guys could maybe comment on what's driving that? Is that GreenLake or is there some other thing that is driving that acceleration in ACV?

Dheeraj Pandey, CEO

Well part of it is just creating a new baseline because we just flushed through a big chunk of the transformation. We think we have a stable term length now. Our salespeople are getting used to selling subscription. Our customers are getting used to hearing about subscription, and our channel partners have gotten enabled. We know how to defend value, protect value through software. It's getting better as well in that sense. So, all in all, this was a tough 12 months for us. But I think it was well worth it. So, to summarize, it's really a new baseline, and of course we put some real meat behind the bones when it comes to pipeline and marketing and demand generation and things like that.

Rod Hall, Analyst

And do you guys—just one last question, and I'll give up the floor. But do you guys, Dheeraj, have hopes for expansion beyond GreenLake to other on-prem cloud services like AWS, Outposts, or other things like that? I mean, is it a good possibility maybe we’ll see you in some of those in the future, or can you just comment on what the strategy is there?

Dheeraj Pandey, CEO

Yes. I think you know AWS definitely wants their hardware outpost to really run our software as well, but also we hope to do a lot of that stuff in a way that is reliable and stable, and because we take longer—one of the things that people don't know about is how we tested the heck out of the flash drives coming out of the platform vendors, and now our test suite is the industry standard. We've kept failing many of the very large SSD providers because of our rigor. So, we want to apply very similar rigor when it comes to these platforms coming from hyperscalers as well.

Operator, Operator

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

Aaron Rakers, Analyst

Congratulations on the quarter. As you guys move through the subscription transition, one thing that you’ve talked about in the past was the next kind of transitional phase for the company would move to more of a ratable type model. Can you just give us any kind of updated thoughts you have around that? What maybe the timing might be and what exactly that would entail as the next phase?

Dheeraj Pandey, CEO

Sure. Yes, obviously our new products are effectively mostly all ratable in nature. Now they’re still a relatively small piece of the equation there. It’s something that’s on our minds, but quite honestly, I think we have a few more quarters to get through first to, I think, maybe earn that right to do another movement in the model. Right now, the focus is on consistent execution, continuing to get the business back to a level of expectations that we have for the business certainly. That’s the focus. Ultimately, you know, we’ll need to do that, I think, to complete the transition and get to a very predictable revenue model.

Duston Williams, CFO

And even before the ratably change there, just a sales comps of that, you know, involves change management and the enablement. Obviously, we are more agile in our quota setting which is twice a year. We do six-month quotas unlike most of the enterprise-heavy companies. So we are really trying to understand when we move to an ACV-based sales comp.

Aaron Rakers, Analyst

That's perfect. And then the follow-up question, you know, the number of deals now involving more than one product or one product above core at 28%, that's a notable trend that the company started to see over the last few quarters. You know, I think last quarter you also noted that you've yet to drive a more bundled sales approach across your organization. Can you talk a little bit about what's driving the success of that continued increase? And when looking forward we can expect maybe a sales motion that bundles a bit more effectively the additional or add-on products?

Duston Williams, CFO

Yes, we know we are approaching this more from a top-down like customer in more solutions-driven than product-driven. Each solution will drive a mini portfolio of products, and that's how we are educating our sales force and our prospects. In many ways, we're asking them to segment their campaigns based on solutions, so they don't have to go and really talk about six or seven different products, maybe just three different products. Now we have not gone ahead and created a queue out of this bundle, where at the very least, we’re helping them think about a mini portfolio based on a solution they're approaching.

Operator, Operator

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

Elizabeth Elliott, Analyst

This is Elizabeth on for Katy. I have two questions. One, what would your view have been on ACV growth if you had a full quarter of HPE each compared to the 2018 growth that we supported? And where do you expect ACV growth for the full year? And then, I have a follow-up.

Dheeraj Pandey, CEO

Yes. It's hard to answer on the HPE thing—it clearly depends on the length of the contracts and how much extra we could have done. So that's a tough one to theorize on. We did mention, I think in the script here that ACV growth for the year would roughly be 25% based on the TCV billings that we presented. And also this GreenLake thing, which is fully ratable consumption, is very early for us to comment on. I think over the course of the next four quarters, as we understand the opportunities and the challenges in this hardware subscription model that HP has, we will be able to come and talk more about it.

Elizabeth Elliott, Analyst

Thank you. And then a follow-up related to the deals outside of the core offerings. What are some of the software products that are most outperforming your expectations and could you give us an idea of what percent of customers have purchased something outside of the core HCI?

Dheeraj Pandey, CEO

Yes. On the former, I think we talked about, I talked about it in my narrative as well, obviously AHV, we don't charge for and that's been 47% of our business on a rolling four-quarter basis. Prism Pro has been doing very well in terms of attached files which is our software-defined filer, our micro-segmentation product called Flow, which is now integrating with our SaaS product called Beam. So that together they'll become the unified security posture for the company in a multi-cloud world. And then there’s Era and Frame. So these products, we definitely see a lot of conversations going on, and a lot of attaching as well.

Elizabeth Elliott, Analyst

And did you have an idea of what percent of customers have purchased something outside of the core offerings?

Dheeraj Pandey, CEO

Not in our hands right now. I think is to 28% of our deals this quarter on a rolling four-quarter basis.

Operator, Operator

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

Jason Ader, Analyst

On the macro - on the guidance for the year, you talked about macro being a little bit weaker at some of your competitors. Just to be clear, is that something that you have seen in your business up to this point?

Dheeraj Pandey, CEO

It's early actually and it's so mixed because we're small, Jason, that it's hard to really say whether we're seeing something right now. As I’ve said, international business continues to be the way it was from quarters ago. I don’t know, Duston, if you want to comment on this?

Duston Williams, CFO

Yes. It’s something obviously that we keep our eye on, Jason, just because of the frequency I think that you hear about it now. When we look at spending, we try to take a prudent approach to the spending equation looking forward. But there's nothing significant that we can point to—there's always a story here or there, but there's no trend that we've uncovered from that perspective.

Dheeraj Pandey, CEO

Not large enterprise in America; we actually do see doing well. There is a lot of noise in Brexit and China, and we continue to monitor that and be cautious about it.

Jason Ader, Analyst

And then just a follow-up, Dheeraj, clearly things have gotten better for you guys. But maybe you could talk about some areas of the business where you know you still feel like you could be doing a lot better?

Dheeraj Pandey, CEO

Well, I think the big investments that we’re making in commercial and how we really need to make it extremely digital and a lot more efficient is a big part of this. How we can go and get even more developer productivity is something that we don't talk about externally, but it’s on my mind and the minds of a lot of our people as well. I think about our customers outside, but sometimes the cobbler's children have no shoes. So, I think that's one thing we really focused on for the last six months. I believe it's going to bring a lot of efficiency to our R&D as well. We believe there's a lot that we can unlock there too, so between commercial and doing things you know, with test drive and developer productivity.

Operator, Operator

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

Simon Leopold, Analyst

I wanted to touch on the competitive environment given that some of the others within sort of the IT supply chain have talked about some players becoming more competitive and cutting prices. Whether or not you've seen any change in behavior from the folks you're going up against, and then I've got a follow-up.

Dheeraj Pandey, CEO

Yes, I think the win rates have not changed much. In fact, it's pretty much consistent with the last four quarters. I would say three, four years ago the competitive pressure was from converged infrastructure and big incumbents in the space of storage, virtualization, and networking. Now, it just happens to be two of us—VMware and us—and we are talking about how we navigate this multi-cloud environment over the next five years. We think we have different approaches. I think hyperconvergence as a Magic Quadrant is really driven by software now as opposed to hardware. This was a battle that we had to win over the last three, four years, and I think the dust has finally settled. It's really an operating system play. I would say that a multiproduct portfolio is probably the next big battleground for both companies, how to really do this well. We are doing this organically with no small teams and we believe that over the long haul, this is a much better approach than going in and acquiring revenue. There is obviously going to be competition. It's a large market, and large markets are red oceans. Red oceans are whales, and red oceans are bloody. We got to be the faster shark that knows how to navigate change. Just in the last 18 months, this notion of running our software and hyperscaler public cloud involvement was something we probably didn't conceive of three years ago. As we go and expand the surface area for software, we get into other battlegrounds that we haven't talked about before.

Simon Leopold, Analyst

And just as a follow-up, I wanted to see how you're thinking about getting back to generating cash. Early in fiscal 2019, you had very strong cash from operations, and then you sort of pivoted to making more investments. I just want to think about what's sort of the trajectory to being a cash-generating company? Thanks.

Dheeraj Pandey, CEO

Yes. Thank you. This goes back to transforming our sales force and being more disciplined about extracting more value for software. A big change for a company that used to sell appliances until about 18 months ago. I would say that a lot of it is around operational rigor and setting enablement goals for our sellers who are now selling pure software and subscription, educating the market on this transition itself.

Duston Williams, CFO

Yes. I think clearly over time, and this is obviously through the next several years here—it's how do we take advantage of the efficiencies that come from a subscription model. We have to have a flow of renewals coming in first, but what we're doing in the interim is starting to structure the business, thinking from a productivity perspective, a channel productivity, how do we position some of the things that we need to in advance of the subscription renewal and flow if you will, and how do we take advantage of those efficiencies. That's over time what's clearly going to help drive that. Now, when we exactly going to get back, we’ve given you guidance for FY 2020 and you know what that looks like, and we will clearly give some updates at Investor Day back in - upcoming in March.

Operator, Operator

Your next question comes from line of Mehdi Hosseini from Susquehanna Financial. Your line is open.

Mehdi Hosseini, Analyst

Thanks for taking my question. It’s Mehdi Hosseini from Susquehanna International. Dheeraj, I want to go to Slide 14 and wanted to reference your view that the industry is becoming more like a duopoly where Nutanix is coexisting with VMware, and I think the bar chart to the left of the Slide 14 captures that and you’re coexisting with your main competitor. In that context, when I look like - when I look at two, three years from now, what percentage of your billing should capture the entire stack of products that you're marketing? In other words, the second bar chart on the Slide 14—when would this represent more than 50%, 60% of the entire stack of products? And I have a follow-up.

Dheeraj Pandey, CEO

One thing it’s easy to show that the balloon can be made to look bigger by pressing it on the core side. You can always financially engineer things that come out of the core and go into the new products. Do it as accretive revenue is where the real goodness belongs to any multi-product portfolio company, and we are very much focused on that. It improves seller productivity and channel productivity, which leads to the accretive dollars. I would say that in the next three years, if you can actually get 25% of our business accretively to come from there, that’ll be huge actually, you know. Do it right methodically without having to take money out of the left pocket and put in the right pocket will be key to this transformation.

Mehdi Hosseini, Analyst

So, in the longer term, two or three years, we should see basically at least a quarter of your billing driven by the entire stack of products. Is that what you're saying?

Dheeraj Pandey, CEO

New products, new products. Yes, I mean at least based on ACV right now, we are tracking to like 10%, 11% or something.

Mehdi Hosseini, Analyst

And then one other question—outside of the U.S., yes, there was a migration towards a multi-cloud, but I still don’t see a more organized way of doing this. There's a lot of standardization in North America or Europe, but not much in the Asian market. How do you see your capitalizing on this? In the past, you've had relationships with the likes of Lenovo. Is there anything there that you can capitalize on? Is there any views or thoughts that you can share with us?

Dheeraj Pandey, CEO

Yes. I think China definitely between Inspur and Lenovo as the server platform partners. But there's something there with Alibaba. We have not had bandwidth to go much deeper there, but it's actually coming up more and more. Alibaba is also pretty prevalent with SoftBank in Japan. There are some regional players coming up in that part of the world, and we have to get really good with over the course of the next 12 to 18 months. Tarkan is passionate about international, and he talks a lot about—I'm learning a lot from him as well in some of these things. But I think there will be a lot of local partners that we will need to go and share some of the profits with, and that's the value of software that the cost of an additional unit is $0. So we can actually expand the market by sharing some of the margins with other partners. That’s our intent really—doing this with the hyperscalers, Alibaba in particular in APAC, but also the server platform vendors who are regional players like Lenovo, Inspur, NEC, Fujitsu, and Hitachi.

Mehdi Hosseini, Analyst

Should I be concerned with OpEx commitment? Does this require more investment to be able to drive incremental billing?

Dheeraj Pandey, CEO

I wouldn't think it's going to be anything substantial, or I mean, mostly a lot of this is supporting software to these platforms. Another one that we believe service providers in Asia Pacific will also be a very important part of our overall go-to-market transition as well. We talk about Xi and Xi right now is our data centers, but then in the next 12, 18, 24 months, we really want to do this with our software running on partners’ capital so their data centers and their hardware investments. If they’re willing to actually use our billing, our payments, and our identity, then all of a sudden we actually get the best of both worlds, between an asset-light model of Nutanix with assets really coming from the partners.

Operator, Operator

Your last question comes from the line of Jack Andrews from Needham. Your line is open.

Jack Andrews, Analyst

Duston, I wanted to see if you could drill down a little bit more on your comments regarding the backlog. I think you mentioned it was largely unchanged versus typically a sequential decline from 4Q to 1Q. Could you go into a little more detail about what is comprised in the backlog now? Do you have a series of much larger deals at this point than you typically see?

Duston Williams, CFO

I don't think the composition is that much different. Again for us, it's just the backlog is defined as a PO that we've received that we have not billed, and there's a different mix of customers and transactions and things like that. But there’s nothing in there unusual that one customer’s dominating, and there’s nothing along those lines. It’s pretty much a similar composition, and just the fact that at this point in Q1, we were able to hold that flat. Usually Q1 we rely on that a little bit more quite honestly with the weaker both EMEA and APAC are typically weaker for us. In Q1, Americas had a good Q1 for us, and federal had a pretty good Q1 and things like that. So, nothing unusual there.

Jack Andrews, Analyst

Okay, thanks for the color. And then just a quick follow-up. As you had gone through the educational and enablement process with your sales force in the channel around all your new subscription products, I mean what are people most excited about? Which product or a couple of subscription products do you think represent the most significant upside from here?

Dheeraj Pandey, CEO

So, Frame for sure, desktop-as-a-service product. A lot of good proof of concept going on; Files for those who are actually selling hardware before—we are really looking at how do you connect with channel partners who are related to hardware, but these days will relate to similar services except being pure software as I think Files is another one. Then, database is a work in progress; many of the bars don't relate to it but the SIs do. The global SIs are definitely working on DevOps as they relate to Era a lot, I would say. Many of the mid-market resellers also relating to micro-segmentation. So Flow has become a very big part of the AHV drag. We don't go and sell AHV by itself because if you can just sell free like, oh, it's cheap, it's free, you really don't have a good way to sell that. But if you go and talk about Flow and micro-segmentation and the fact that you’re democratizing something that’s very expensive otherwise, people are actually embracing both Flow and AHV.

Operator, Operator

This concludes today’s earnings call. Thank you for your participation. You may now disconnect. Have a great day.