Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Nutanix Fourth Quarter and Fiscal 2018 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Tonya Chin, Vice President, Investor Relations and Corporate Communications. You may begin your conference.

Thanks. Good afternoon and welcome to today's conference call to discuss the results of our fourth quarter and fiscal 2018. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix's CEO; and Duston Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its fourth quarter and fiscal 2018. If you'd like a copy of the release, you can find it in the press releases section of the company's website. We would like to remind you that during today's call, management will make forward-looking statements within the meaning of the Safe Harbor provisions of federal securities laws regarding the company's anticipated future revenue, billings, gross margin, operating expenses, net loss, loss per share, free cash flow, business plans and objectives, product sales, plans and timing for and the impact of our transition to focus more on software-only sales and our transition to a subscription-based business model, expectations regarding products, services, product features and technology that are under development or were recently acquired, competitive and industry dynamics, new strategic partnerships and acquisition, our intention to acquire new technology, changes in sales productivity, expectations regarding increasing software sales, changes in the segmentation of our sales organization and the impact of such changes, our plans regarding how we will report software content of our business, potential market opportunities, and other financial and business-related information. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them, as representing our views…

Thank you, Tonya. Good afternoon everyone. Q4 was another fantastic quarter and a great bookend to our fiscal 2018. We grew our software and subscription business steadily throughout the year with Q4 year-over-year billings growth of over 66% and Q4 year-over-year revenue growth of 49%. We delivered record performance in several areas, including delivering non-GAAP gross margins of nearly 78% and growing our deferred revenue balance by 71% for the -- from the prior year. Duston will dive deeper into these results shortly, but before he and I delve into Q4, let me spend a few more moments focusing on our fiscal 2018 and highlight how we have acted like a big company, i.e. celebrating leverage at scale, and also like a small startup, i.e. building things that people like at the same time. In fiscal 2018, we delivered close to $1.2 billion in software and support billings, growing 54% year-over-year and added over 3,600 new customers. In fact, our year-over-year growth accelerated from the previous year despite a much larger base and having generated a higher free cash flow than the year before. Last year, we achieved tremendous leverage in our go-to-market. Customer productivity or market pulls for the first dollar after 18 months, is at an all-time high across all segments of the market. Our existing customers provide us massive leverage because of the quality of our product and our obsession with customer success as well as the size of the total addressable market of computing in the Global 10000. This leverage from existing customers is also a result of our sales segmentation and our continued re-platforming of the large enterprise with a broad operating system software value proposition. Over the next 18 months, we'll work even harder on commercial segmentation as we build a world-class feeder program…

Thank you, Dheeraj. Before we get into the review of our strong Q4 and fiscal 2018 results, I thought it would be helpful for me to summarize where we are in our overall software transition and more importantly, where we're headed in FY 2019. In fiscal 2018, we embarked on a business and consumption model transition, the likes of which few, if any companies, have accomplished, focusing on the elimination of the pass-through hardware revenue associated with the sales of our turnkey NX appliances. During our Q1 earnings call, just nine -- Q1 2018 earnings call, just nine months ago, we committed to a bold plan to eliminate a majority of our pass-through hardware revenue. Today, I'm extremely pleased to say that we have eliminated our hardware pass-through revenue exactly according to this plan. It's important to note that all of our non-portable software transactions associated with the past appliance sales were not perpetual licenses but rather, licenses valid for the life of the device. Therefore, we expect a large portion of these historical non-portable software licenses to renew over time. Beginning in Q2 2019 and ramping through the second half of the fiscal year, we will make changes to how our software solutions will be packaged for our non-portable software sales, directly associated with the Nutanix appliance or NX. For instance, we will begin a phased-in approach for software licensing connection with the new Nutanix NX sale that will transition the business to a term-based subscription licensing model. This will replace today's licensing structure, which is based on life of the hardware, giving customers greater choice and flexibility around their software procurement strategies and provide portability of the software. Over the last few quarters, we've also been focused on selling more term-based subscription software associated with our current offerings.…

[Operator Instructions] Your first question comes from Andrew Nowinski from Piper Jaffray.

Great. Thank you. Maybe just a question on the new subscription-based licenses you're talking about. Can you just give us an idea on what the breakeven point might be as to when a customer purchasing a perpetual license or the revenue from the subscription-based license would surpass what will have spent from a customer purchasing a perpetual license? And then whether you think they'll spend more over a three-year period with the new subscription licenses you're offering?

Yes. Thanks for the question. So, obviously, our current licenses are not perpetual. They were the life of device because that's the most important thing that when they would have gone for new hardware -- remember this is server-side hardware; it's not any kind of proprietary hardware. It's commodity, off-the-shelf servers but people are probably refreshing the memory four years. And with the new model, we're going for one, three, and five-year term licenses. And we expect that most often, people buy three-year licenses, which is what our average support term has also been. And I think the big goal here is that when we look at the mid-market transactions, the conversations that our mid-market sellers are having in the mid-market, they expect to really go and have another leverage point in terms of discounting behavior and whether they can actually go and sell them one year licenses. In many cases, this is the cloud-like consumption model of saying why don't you just try with one-year term, and in that, we don't have to discount it much. And over time, that one year could look like six months and one quarter, so we really have a continuum in which we can go and negotiate with the market at scale, especially in the mid-market transactions.

Okay. And then you -- when you started the transition model or the transition to software-only, I think you talked about how the deal sizes were actually going up. Can you just give us any color in terms of how that's played out since you started the transition? And maybe just a brief explanation as to why the deal sizes are going higher? Is that just from customers doing bigger ELAs?

I think its multiple factors. One of them is, obviously, our salesforce has been segmented so it's looking after larger enterprise customers and definitely not ELAs. We're not doing any ELAs at all. All our deals in software -- I mean, except for one or two of them, have all been term licenses, including for support as well. So, yes, it would be -- as a company, we really stayed away from scorching the earth and going after large deals and pulling from the future.

Great. Thanks.

Your next question comes from Matt Hedberg from RBC Capital Markets.

Hey thanks for taking my question guys. Strong results this quarter. Your end markets are clearly growing rapidly. You guys are benefiting from a shift in spend away from legacy solutions. I guess, Dheeraj, from a competitive perspective, fundamentally, how do you differentiate yourself from VMware, which I think is the -- your biggest competitor there? And just how is your fundamental approach different?

Yes, yes. Thanks for the question, Matt. I think -- so we definitely sell similar products. We are relatively close in the Rule of 40, they're at 47, we are at 51 last fiscal. But they're also managing a growth of 12%, and we have to manage a much higher growth. So, in some sense, the similarities end there. And now you start to see how the companies are so different. And they have an installed base of, I don't know, maybe $40-plus billion. We have an installed base of almost $4 billion. They were really created in the Microsoft era of right click while we were really born in the era of Apple and machine learning, which is one or zero clicks, so there's a huge emphasis on design as well. A lot of VMware's technology is inside the kernel, which is the hypervisor, where we do a lot of work in user space. And therefore, we end up leveraging a lot more open source, which VMware is trying to do via the Amazon partnership actually. They have a lot of perpetual licenses. We are progressively going to move toward subscription in the immediate future. And they're very -- they are very competitor-obsessed, we are very customer-obsessed. And I think, for us, the focus has always been about the customer. We had to focus so much on design. We didn't get it easy. They sold themselves to EMC to build an operating systems company. We had to do it one customer at a time, inching our gross margins from low 40s to high 70s, one NPS point at a time. And it's been hard and it's been worth every penny. They tried vCloud Air but that didn't last long. And if you think of us, we were born with…

Super helpful. And maybe just maybe just a quick one for Duston. Appreciate your commentary on expense growth this year. I think for your guide, I think you're looking for about $30 million of sequential OpEx growth from Q4 to Q1. Can you kind of help us how we should think about OpEx growth through the year? I mean, is it $10 million, $15 million sequentially? Just any sort of help there, I think, would be helpful from a modeling perspective.

Yes, I think the -- it's probably -- obviously, more than that now with the new product focus here that -- and obviously, a lot going to the core as Dheeraj mentioned earlier products. But clearly, we'll up our spend on new products, which we should. And I think the easiest thing, from a model perspective, is kind of go back to my comments of the Rule of 40 and staying within that 40% commitment, but highly likely all of that comes from -- on the revenue side. So, I think when you look at your model and adjust some of that, it will give you a feel for probably what you should do on the expense side.

Got it. Thanks guys.

The next question comes from Rod Hall from Goldman Sachs.

Yes, hi guys. Thanks for the question. I guess I wanted to start off by, I guess, the one, three, and five-year term licenses. I wonder are there any other variations within these licenses? I know in the past you guys have talked about maybe varying the price by number of quarters or size of the machine that the license is running on. So, just wanted to see if there are other nuances within that model and then I've got a follow-up as well.

Yes, definitely. Thanks, Rod, for the call -- for the question. So, we are looking at two different axes; one is term, the other one is capacity, which is the kind of T-shirt sizes people want to buy is -- could be higher on CPU and higher on flash or higher on CPU and low on flash. And these are the two sort of vectors we're looking at. One is term; the other one is capacity, which includes both compute and flash storage.

Okay. Thanks Dheeraj. That's really helpful. And then I also wanted to get a feel -- I know you said you're going to phase it in and you're going to start reporting this in the first quarter. Can you give us any idea how fast it's going to phase-in? Are you going to just -- are you out of the shoots now starting to sell it across the Board? Or how does this progress through the business I guess?

Yes. I mean we've been doing enough of the third-party hardware selling for the last 18 months now. So, many of those are already there in our business. It's not like a new muscle that we have to build. The new one is going to be around -- really going in, homogenizing and harmonizing the way we've been doing it for the SuperMicro hardware and the rest of the hardware that others have been buying directly. But I think -- all-in-all, I think you will see a projection come out a quarter from now. We'll talk about what subscription looks like. Right, Duston?

Yes, yes.

So, it's still -- it's not fully available, Dheeraj? Just to be clear, it will become available sometime this year depending on what type of license you might want to buy, is that right?

No. I think the third-party stuff -- as I said, already we've done almost 15% of that just this last quarter. So, there's enough that we've been doing for the last 18 months on other party hardware and that was always subscription. It was never a perpetual license. And now we'll add -- all our customers we're saying, you know what, I would rather buy a white box, which is SuperMicro, and then the software on top of it. That software will now be portable. That's the big change you're making in terms of entitlement saying, you can take this software and put on any other hardware over time.

Okay. All right. Thank you very much.

And then, Rod, that's what we mentioned that we'd give you some further insight into Q1, how we think that progresses through the fiscal year.

Great. Okay, thanks Duston.

Your next question comes from Mark Murphy from J.P. Morgan.

Thank you, Dheeraj. I'm interested in how you view the hybrid cloud strategy of the major public cloud providers. For instance, Amazon with VMware and they're extending on-premise with RDS on VMware now. Microsoft's with Azure Stack. Google is now offering GKE On-Premise. So, they're -- it just seems like there's so many vectors of change there in -- literally in the last month. And I'm just curious what you think is the net effect? Is it helping to validate the overall Nutanix vision? Or does it kind of up the ante on your Google partnership? Or is there any possibility it would cause customers to pause and sort of evaluate the path forward at some point?

Yes. Thanks for the question, Mark and thank you for the upgrade today as well. So, we -- if you go back seven years, when we really started the company, there was a lot of froth about converged infrastructure, large companies coming together and saying -- with Cisco and EMC and VMware and NetApp, there's all sorts of consortiums that are coming together and saying, this is the next cloud, in some sense, in a box. And it did have revenue. It had a buzz for a while. And then the question is what eventually survived? I mean, nobody talks about Vblock and FlexPod anymore. But the real question is, who's going to build the best operating system for the multi-cloud? And it's very, very early in that marathon. I think we are trying to stay like the way VMware stayed out of the server wars, saying, look, we just need to the Switzerland of servers. Design will win and as will customer love, I think. For example, think of Xi Leap, which is our idea-as-a-service. I will spend two-plus years building something that really will hyperconverge on-prem with off-prem. Now, think of Calm, how it's painfully building migration within clouds and melding Kubernetes with VMs. Same thing that RDS equivalent, Era as we call it, will use so much for our compute and storage functionality. And the battle will be back to data services and performance. So, it's really early in the hybrid wars. The one thing that we've at least come to appreciate from these announcements, that the public cloud folks are now at least being pragmatic in saying that, look, not everything can be rented. There's enough laws of the land and laws of physics, and laws of economics around owning and renting that will dictate this idea of a hybrid cloud. And we have been saying this for the last two, three years now. And I think innovation eventually will win and that's what happened to converged infrastructure. Today, nobody talks about the word converged infrastructure.

Thank you for that Dheeraj. And Duston, if I may, I had a follow-up. The billings result in the billings guidance are obviously quite robust. And I was just wondering if you -- could you just clarify whether all of that large U.S. DoD deal win is reflected in the result this quarter? And then when you look at the pipeline composition, does it seem fairly diversified and predictable? Or would you say that there are more of these large discrete deals along the lines of the DoD win that might be a little harder to predict than timing?

Yes. So, on the big deal that we referenced greater than $20 million, it was all billed in Q4. Although that's one of the reasons our bill-to-revenue ratio went up a little bit is that -- just the nature of the support piece on that. Only about 40% of that deal was actually recognized in revenue in the quarter and the rest will be over the support period. So, that's the first piece there. And on the second piece, I think just the business in general, as Dheeraj talked about extensively earlier, is that we're seeing bigger deals and we will continue to get larger and larger deals. Now, Q1 has the additional variable of federal, of course, with the year end. We've always had a pretty good Q1 for federal; we're assuming it's going to be okay. This quarter also, a decent performance there. And any time you're talking federal, you have some lumpiness in there. So, we'll have some bigger deals that will appear in the quarter. We've assumed some will, some won't, so we've taken -- hope a pretty good balanced approach from a federal perspective.

Understood. Thank you.

Your next question comes from Jason Ader from William Blair.

Yes, thanks guys. Duston, could you comment on backlog and visibility at quarter end? I know that's sort of -- you just talked a little bit about that on the fed side. But how are you feeling about this -- the Q1 seasonality and having that confidence in that billings guide that you gave?

Yes. I mean, we wouldn't have guided if we didn't feel reasonably confident in the numbers. So, that's the first point there. I'm sorry, the first -- your first?

Backlog?

Backlog. Yes, yes. On backlog, it always bounces around. It bounced around little this quarter but not substantially up or down from prior quarter. The composition has changed. We used to have more hardware not -- zero margin hardware embedded in that. Now, it's pretty much -- the vast majority of our backlog is software and support, as you might expect. So, it's a better profile of backlog also.

Okay, great. And then for Dheeraj, it's hard to keep up with all the new products, honestly. You have a laundry list right now. But what -- which products -- I mean, can you kind of hone us in on a couple of products that you feel very strongly about, let's say, over the next 12 to 18 months that will start to become more meaningful?

Thanks Jason for the question. Yes, I mean, if you go back to like the introduction of the iPhone, there had to be some native apps that Apple itself had to build. But if you don't build though, you don't get the experience of what it means to build a platform. So, it was upon us to really go and test every little facet of the underlying operating system, the platform, the cloud services, the APIs, many things that all these six to eight apps are really doing. And without building your own, there's no viable platform per se. And that's what we're really doing in six to eight of these. A couple of these are really good in terms of the promise of what they really drag in terms of compute and storage. They will go and -- like, for example, Frame and Era, Era being the database virtualization product, which is an equivalent of RDS, and Frame, which is our digital desktop product. Both of these will really go and drag a lot of our core services that we've been selling for the last seven, eight years. And I feel like these two could be very, very large in some sense. Obviously, Calm makes a lot of things sticky. We've even told the Calm developers to go and cannibalize Nutanix, if that's what it means actually, because if they build with such a mission, then they'll actually go and make money for their customers. It's not supposed to pay the strategy tax of Nutanix. It's supposed to pay the death of multi-cloud actually. So, they're doing a lot of work and orchestration and automation in the multi-cloud world that lets us look like a Switzerland in this multi-cloud world, going forward itself. So, I think net-net, I would say these two products, Frame and Era will go drive a lot of our core services. And then these others, including Beam and Calm and Sherlock and Epoch, many of these will really take us to developers. That's the big goal of the company right now is let's only go to the developers, builders, as opposed to just IT operators. That's the quest for this company in the coming three years is can we go and relate to them? Can we bring a lot of open source stuff to them? Because at the end of the day, that's what Amazon PaaS is all about. Amazon didn't build anything new; they just took a lot of open source Apache and CNCF stuff and made them into commercial services. So, there's a huge effort in really saying let's bring all of that with the kind of experience of hybrid that people have not yet seen.

Does that put you against Citrix, a historical partner, a little bit on the Frame side?

No, it's -- I'd say yes and no because they definitely have a very loyal customer base, especially in the Global 2000. And Frame is going with a very different mindset of let's deliver to a browser. And there's a lot of very large enterprises which will take a long time to really even think of digitally delivering a Windows experience to a browser itself. And I think in the midmarket, we'll definitely go and really work with Citrix to figure out what does it mean to simplify our experience and their experience of Citrix cloud. There's a lot of work ahead between them and us. And I'm meeting their CEO soon, a couple of times next month. And the whole goal is to not think of it as a zero-sum game. I mean, one thing, Jason, that we really thought hard about is, if you have a growth mindset, it's never a zero-sum game actually. And there's a way to really grow this market. I mean 65 million PCs a quarter, a billion PCs around the world. I mean, it's crying out loud for digitization, and nobody has done a good job operating it. So, I think there's a massive opportunity both for Citrix and for Nutanix to go and grow this market.

Thank you.

Your next question comes from Aaron Rakers from Wells Fargo.

Yes, thanks for taking the question. I do have a follow-up as well. Just building on the last kind of thoughts there, when I think about your $3 billion of billings target looking out to fiscal 2021 or I even think about your outline of investment or capital allocation around 70/20/10, and you think about that 10% of new products and services that should be accretive to the platform. What is the goalpost for you guys in terms of the contribution from them? If I think about that $3 billion, how much of that business do you think could be driven by that new set of product or services?

Yes. So, maybe I'll take a stab and Duston, you should say the same actually. There's a part of me as an entrepreneur that says, prepare for the worst, be paranoid, these products will help you get to $3 billion at least. And the side of me that's optimistic that says, then if things are going well, then these new products will go and be accretive on top of the $3 billion. And so I think it's very early right now. I would rather play the conservative game and say that we have to assume that in a more noisy landscape, the market, these things are actually going to help us get to at least $3 billion with a good amount of effort.

Yes, I think -- just to follow-on there a little bit, and it's a completely fair question, it might just be a little bit early -- an early fair question that -- and I think we mentioned in the script there that our next Investor Day, sometime in calendar 2019, we'll start to give you a feel for how we view our billings path for some of these products going forward.

Also, I think one thing that we're doing -- at least thinking hard about is organizational design. But at the end of the day, all the strategy and writing code and delivering product is one thing. But organizationally, planning-wise, GM structures and having these GMs think like CEOs, there's a lot of work that we've actually done in the last nine months. And we'll continue to have to do it in the next nine months to make sure that we really think of these individual products. But it's very easy to go and speak to salesforce, I was mentioning in my script. Just speak to sales force and say, why don't you just go and sell these new products. But what happens is they end up basically cannibalizing the core product and money just shifts from one pocket to the other. It's really, really easy to do that. But to really go and create new earth will take some real organizational design. And I mean we are learning a lot of good lessons on what not to do as well.

Great. And then as a follow-up and more maybe architecturally, it seems like the storage market in general has got a healthy demand backdrop too. We've seen some healthy growth rates in the all-flash side, Pure Storage, NetApp, et cetera. I'm just curious to how you see the architectural landscape playing out, where maybe you sit today versus where maybe an all-flash offering might sit in the equation of a data center deployment model? And whether or not you see that -- actually that you're starting to compete against one another architecturally more.

Yes, it's a great question by the way. And in fact, when Jason was asking about one other product, I think I've missed talking about Nutanix Files. And Files is our fastest growing product in the history of this company basically. Without any kind of specialist salesforce and we barely have started the GM structure at Files itself, it's going to be a software-defined architecture, which means that in the Xi VPC, people can spin up their own filers without having to do anything with hardware. And that is at the core of our architecture, that we have made everything -- like you think of NetApp cloud volumes, its hardware sitting next to a data center of Google or Amazon or Azure. But what does it mean to fuse it within the data center of these cloud providers? The only way you could do that is if it's pure software. To build these scale out architectures where people can spin them up with a click of a button with no human involvement, and that's what's really going to differentiate some of our offerings actually, where people are not dependent on proprietary hardware and NVRAM and all sorts of hardware assists to really get the best performance out. From day one, we have said commodity servers, rackmount and SSDs will serve the purpose of everything that required proprietary hardware up onto now.

Thank you.

Your next question comes from Katy Huberty from Morgan Stanley.

Thank you. You hit your target around hardware runoff in the fourth quarter and yet you beat gross margin by 400 basis points. So, can you just talk about the contributors to that upside? And then I have a follow-up.

Yes. I think if you look at the support margins, there's a little bit of increase there around a couple of points, probably quarter-over-quarter. The team did a nice job from a support perspective and the infrastructure and cost there. And then even some of our internal operations costs were a little bit lower, which clearly helped too and then there are some other things around the fringe there. But pretty much, those are the driving factors anyway, Katy.

And you now have 710 Global 2000 customers. Can you continue to add 30 to 40 a quarter? Or is there a point where you have so much scale and penetration that the incremental adds on a quarterly basis will slow down?

In our fiscal 2021 map, we have kept it at 30, 35. We'll obviously be adding more global account managers over time. There's a lot more segmentation to be had in this business. But many of our commercial account people will really be pulled up to become enterprise account managers. And many of the account managers -- enterprise account managers will become global account managers. So, the more focus we bring to global accounts because maybe some -- for global account managers that have 10 accounts and probably they should only have four accounts. And so I think every year as a function of growth and scale, we'll start to segment and we'll start to really focus on product of DoD's account and so.

Thank you.

Our last question comes from Alex Kurtz from KeyBanc.

Thanks. Thanks for the question. I won't have a follow-up, so I just have the last question here. So, as you implement the new software licensing model, I was just wondering, given what could be a big refresh in the installed base, I was wondering what the margin orders were going to be to the salesforce as far as approaching existing customers that might be primed to sort of expand their use cases and buy more software. Are you going to maybe transition them into the new licensing model or leave some of those customers sort of in what they have today and just focus on new workloads? I'm just sort of wondering how you're going to navigate the installed base as you move to this new model.

Yes, I think the goal is to have them think hard about portability. And especially as we go and come up with this idea of hybrid consumption, which is still early days. So, in the next 12 months, as Xi picks up, you'll see us really go and think hard about what is the hybrid contract going to look like and what would favor them the most in terms of the drag-and-drop experience between on-prem and off-prem. So, I think it's probably a little early to say what kind of a model will follow. I mean, obviously, the big push is to go and tell them that, look, portability is a good thing. You want portable licenses. But I think in the next 12 months, as Xi picks up, we'll probably have a lot more clarity as well.

All right. Thanks guys.

And that was our last question. At this time, I'd like to thank everyone for joining us today. This marks the end of the call. You may now disconnect.