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Nutanix, Inc. (NASDAQ:NTNX)
Q2 2019 Earnings Conference Call
Feb. 28, 2019 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nutanix second-quarter fiscal year 2019 earnings conference call. [Operator instructions] Tonya Chin, VP of investor relations and corporate communications, you may begin your conference.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Thank you, Tonya. Good afternoon, everyone. Q2 was a good quarter for us as we continue to transform to a subscription business with a meaningful extended product portfolio. Our continued shift to a recurring revenue model resulted in 57% of our billings coming from subscription, up from 38% in the year ago period.

And our subscription revenue is up 112% year over year to $157 million. Continued execution in product, customer support and enterprise selling resulted in a number of new large deals, strong continued penetration into our existing customers and record AHV penetration. Our differentiated product offering helps us drive continued standardization within customer accounts. In Q2, we again saw strength in large deals, closing 57 deals worth more than a million dollars and six deals worth more than $5 million in the quarter, three of which were from customers who also spent more than $5 million just a quarter ago.

We now have 17 customers with a lifetime spend of more than 15 million and nearly 800 customers with a life time spend of more than $1 million. Global 2000 customers continue to recognize the value of our platform, the simplicity it brings to their infrastructure. We now count more than 760 as customers, including two of the Forbes Global 5, six of the Global 10, and 40 of the Global 50. And even as we add to our diverse customer base, we remain committed to providing an outstanding customer experience, which continues to be a strong differentiating factor between us and our competitors.

The market we address remains very strong and our win rates and pipeline conversion have remained consistent. We feel there is a very large opportunity to continue to sell our industry-recognized Nutanix core offering to customers, who are looking to modernize their IT environments with the greatest choice. And increasingly, we see demand from both new and existing customers for solutions outside our core offering. As we look forward to and plan for the continued growth of our business, we're constantly examining every aspect of our business execution.

In that way, I'd like to take you through three key areas of our business where we're making adjustments to maximize our strong market opportunity. First, we recently identified some imbalances in our lead generation spending that were beginning to impact our sales pipeline. We recognize these imbalances in Q2 and have adjusted our lead generation spend accordingly. Despite these, these actions will take some time to take effect and therefore, our Q3 guidance reflects the short-term impact of these imbalances.

The changes we implemented are already showing early positive signs at the top of the funnel, and we expect to see increasing traction in our sales pipeline on the coming quarters. Duston will provide more details on these imbalances and our actions taken later in the call. Second, over the past few quarters, we have not kept pace with our bullish sales hiring goals. This plays a role in our sales pipeline development.

Hiring at this scale is an art and there's an ebb and flow to the process. We've been putting more focus on this aspect of our execution as we don't foresee any macro weakness in the horizon. Finally, we're in the process of addressing a few opportunities to improve our sales execution in the Americas region. To address this, we have promoted Chris Kaddaras, our current head of EMEA sales to lead both the Americas and EMEA Sales organizations.

Chris has led our EMEA Sales engine to tremendous growth over the past two and a half years, turning around a business that was initially challenged. And we expect that he'll bring the same execution excellence to North America. He's in the process of moving back to the U.S., and he'll lead both the Americas and EMEA regions, which are effectively 80 to 85% of our business. He has the wisdom and a healthy paranoia for operations that are key to success for a high-growth company such as ours.

We're in excellent hands with him leading these two important geographies as we try to build an iconic company at such high velocity. As we make these operational adjustments to our business, our sales force continues to have the benefit of selling our best-in-class software. Just this quarter, our database-as-a-service offering, Era, was named 2018 Product of the Year by CRN. And for the second year in a row, Gartner has recognized our platform as the leader in the market in its Magic Quadrant for HCI systems.

In fact, our software has been ranked as the top HCI solution by Gartner for the past six years across two different Magic Quadrant reports. These achievements are based not just on the excellence of our engineering organization, but also our commitment to providing our customers with unparalleled choice of platform, hypervisor and deployment model and our industry-leading customer support organization. Our commitment to excellence in both our product and our customer success organization has clearly paid off, and we are proud of the continued recognition in the industry. Additionally, we have seen several large new customers coming to us in the past couple of quarters after trying good enough competitive solutions.

I'd like to highlight a few key wins from the quarter. We saw a continued adoption of our products globally and across many verticals in the quarter, including a deal worth more than $5 million with an office within the U.S. Department of Defense. This customer has a lifetime spend of more than 15 million and continues to expand its investment in our software.

This customer has gone all-in on AHV, our hypervisor, contributing to the record 40% adoption of our hypervisor this quarter. Another deal this quarter worth more than 5 million was with a Global 50 American multinational retailer. Three large teams within this customer's organization have now standardized on our platform. This customer already has a lifetime spend of more than 10 million in just two quarters, with many more projects in scope.

Our largest deal, worth more than 5 million was with an American for-profit operator for healthcare facilities. This competitive win against traditional three-tier expands on an existing customer deployment to bring a new workload, Splunk, on to the Nutanix platform. This particular deal is a great example of our ability to win trust in large accounts one workload at a time. They first purchased our software through a free facility more than two years ago.

The field operation was looking to streamline its IT infrastructure for production workloads and chose our software with an extremely competitive process. Over time, our software now runs across its facilities and this customer has a lifetime spend of more than 20 million. We have seen this type of life cycle progression with another of our large deal this quarter, more than -- worth more than 5 million. With this customer, a Global 500 French multinational investment bank and financial services company, we converted a small private cloud deployment four years ago into a lifetime spend of more than 15 million, more than 30,000 virtual machines running on our software globally, an expansion into new workloads like VDI.

As this customer expands its workload mix, it has also begun evaluating solutions beyond our core offering and into the essentials and enterprise segments, which include Era, Calm, Beam and Xi IoT. We're increasingly seeing customers looking not only to modernize their infrastructure with our core HCI offering, but also to take advantage of our new solutions that deliver a true hybrid cloud experience. Within our own customer base, IT leaders are thoroughly evaluating and often purchasing our solutions that expand the reach of Nutanix core, delivering new solutions including our database-as-a-service offering, our cloud cost control and governance platform, our DevOps platform and our Edge computing IoT service. A great example of this is a deal worth more than one million with one of the largest insurance companies in the world based in Italy.

This Global 500 company is continuing to expand its adoption for core HCI platform. But perhaps most notably, this customer is also taking advantage of one of our essentials offerings, files, to collapse the traditional file server silo into a pure software offering running as an app on the commodity server grid. Another example is -- it's one of our Global 500 customers, an American multinational financial services corporation that has a lifetime spend of more than 5 million. This customer is relying on our software as it modernizes its data center infrastructure, using it to run server virtualization, desktops and database workloads.

It is also exploring services in addition to our Nutanix core. And as part of its $1 million purchase in Q2, made a significant investment in files, which was the largest files purchase since the solution became generally available. This shift beyond core HCI is notable in the public sector as well. One of our largest deals of the quarter, and the first with this customer worth more than 5 million, was with the service component command within the U.S.

Army. Using Flow, our micro segmentation product with the Nutanix essentials, the customer is able to run a large-scale farm on AHV and maintain strict isolation for workloads and networks, ensuring that strict data classification requirements are followed and users can access information even at an untrusted network. This is our largest Flow deal since we introduced the service in Q4 of fiscal 2018. And we also had a great win with a British multinational contract food service company in the Global 1000 that purchased our Xi IoT solution to power an innovative machine learning-driven computer vision project within its facilities.

In this deal worth $2 million, the customer will use Xi IoT, a product within our enterprise segment to build a solution that will allow our customer in a restaurant to proceed through checkout without any human interaction. Xi IoT is just one of our Xi Cloud Services offering that shows a promising start. Xi Leap, our DR service, which became generally available just three months ago, has already been adopted by several customers. In conclusion, this September we'll be 10 years old.

In these last nine-plus years, we have sold more than 4 billion worth of product and services; built a proven product portfolio; assembled a hungry and humble employee base; captured the imagination of a trusting customer base and yet, we're only a good company. Well, from good to great is a decade-long journey and that decade is about to begin. With that, I'll turn it over to Duston to provide more details in the quarter and guidance. Duston?

Duston Williams -- Chief Financial Officer

Thanks, Dheeraj. Before we get into the other specific deals around our Q2 performance, let me first provide an overview on two items that we were particularly pleased with in Q2, our recurring subscription business and large deals. We made great progress in Q2 with our recurring subscription business. Subscription billings accounted for 57% of total billings, up from 51% in Q1.

And additionally, subscription revenues now account for 47% of total revenue. In Q2, 57 million in bookings were based on our new term base subscription licensing methodology, up from $20 million in Q1. And almost 50% of the $57 million came from existing customers, who had previously purchased nonportable licenses. In the quarter, we saw over 500 customers purchase term-based licenses and approximately 40% came from large enterprises.

We remain on track to have our recurring subscription business represent 70 to 75% of total billings in three to five quarters. We also executed well in closing large deals in Q2. Specifically, we had a record number of deals greater than 500,000 and a record number of deals greater than 5 million. Large deals greater than 500,000 averaged 1.2 million, up from one million in Q2 '18.

About one third of our total Q2 bookings came from customers booking deals greater than 1 million, and almost 20% of our total large deals came from new customers. We had a record number of G2K customers transacting deals greater than $500,000. And almost 50% of our total G2K customer base transacted business with us in Q2, showing continued standardization in our enterprise OS platform. Excluding our federal business, G2K customers accounted for over 40% of total bookings, with large G2K deals averaging approximately 1.6 million in the quarter.Now move on to some other Q2 financial highlights.

Revenue for the second quarter was 335 million, up 17% from a year ago and up 7% from the previous quarter, and at the top end of our guidance of 325 to $335 million. Software and support revenue was 297 million in Q2, up 42% from the year ago quarter, and up 6% from the prior quarter. Total billings were $414 million in the quarter, representing a 16% increase from the year ago quarter, and up 8% from Q1. Software and support billings were $375 million, up 37% from the year ago quarter and up 7% from the prior quarter.

And the bill to revenue ratio in Q2 was 1.23, slightly higher than the 1.22 last quarter. We continue to defer a large percentage of our revenue. And our Q2 deferred revenue increased by 78 million from Q1, an increase of 63% from a year ago, and up 11% from the previous quarter, ending the quarter at 780 million. New customer bookings represented 25% of total bookings in the quarter, down from 35% in Q2 '18, which included one $12 million deal.

In Q2, our software and support bookings from our international regions were 49% of total software and support bookings, up from 46% in Q2 '18. Our strong international performance was driven by EMEA. In fact, the strong EMEA performance drove that region to a record 28% of total bookings. Our EMEA region also had a record number of large deals greater than 1 million, and we are pleased that the EMEA ramp rep productivity has increased 70% over the past six quarters from a low point in Q1 '18.

Our non-GAAP gross margin was -- on Q2 was 76.8% versus 63.5% in the year ago quarter and 78.6% in the prior quarter, reflecting a slightly higher-than-expected hardware mix in Q2. And while the hardware billings were within the five to 10% we guided, it was at the higher end of this range and above what we had planned for in Q2. Other cost of goods sold were also slightly higher than planned. Operating expenses were 297 million, slightly lower than our guidance range of 300 to 305 million and fewer headcount additions accounted for most of the shortfall.

Our non-GAAP net loss was 40 million for the quarter, a loss of $0.23 per share. Now a few balance sheet highlights. We closed the quarter with cash and short-term investments of 966 million, it was up 1 million from Q1. DSOs, based on a straight average, were 68 days, an improvement of one day from the last quarter.

The weighted average DSO was 26 days in Q2 and we generated 38 million cash from operations in Q2, which was positively impacted by 17 million of ESPP inflow. Free cash flow in the quarter was negative 4 million, the performance was also slightly -- positively impacted by the 17 million of ESPP inflow in the quarter. And important to note that both operating and free cash flow were negatively impacted by an 18 million tax payment related to moving our non-U.S. intellectual property back to the U.S.

Nearly all of this $18 million will be refunded within a four-year period. Now turning to the guidance for the third quarter. And before getting into the line item detail, let me step back a bit and provide some additional context for our Q2 performance and our third-quarter guidance. In Q2, while we were pleased with our progress with moving to a recurring subscription business, as well as with our large deals and EMEA performance, we were disappointed to miss our pipeline targets.

Generally speaking, our Q2 quarter, that should afford us to build backlog and that did not happen this year. As Dheeraj discussed at the beginning of the call, we recently identified some imbalances in our lead generation spending that were beginning to impact our sales pipeline. Lead generation spending is a key component to building pipeline, which ultimately, significantly impacts bookings, billings and revenue. In fiscal '18 -- I'm sorry in fiscal '17, we had increased lead generation spend by 75% over the prior year.

This increase drove strong pipeline generation in fiscal '17 and fiscal '18, as well as improved efficiencies within the lead generation spend during fiscal '18. Encouraged by our overall company performance, in fiscal '18, we reallocated some of our lead generation spending to other priorities. As a result, there was a four-quarter period from Q4 '17 to Q3 '18 that we basically kept lead generation spend flat, all while the company continued to perform quite well. Based on lead generation spend efficiencies we experienced in FY '18, we assumed further efficiencies would take place in FY '19 and we again reallocated capital away from lead generation spend during our planning process.

In Q2, we noticed a pattern that some of our lead generation efficiencies that we had planned for were not being realized. We began taking actions to reallocate capital back to lead generation spending, while at the same time dialing back on non-sales hiring. We have continued these actions into Q3. Our quota-carrying sales reps also contribute to pipeline build, and our pipeline targets were further impacted by a shortage of sales reps in the first half of the fiscal year, resulting in an underspend by several million dollars.

It's important to note that all this shifting of spend back to lead generation is not an insignificant amount, the magnitude of the shift is in a few tens of millions. Although we started making this adjustment in Q2, we expect it to take a couple of quarters to show meaningful results. In the meantime, we will double down on driving further business from within our large existing enterprise customer base, while the augmented lead generation spending works its way into the pipeline. This brings us to our guidance for Q3, where we expect significant impact from an imbalance in lead generation spending earlier in the year and slower-than-expected sales hiring.

However, we believe that our actions to address these factors, combined with better sales execution, will drive improved pipeline build into Q4, which we expect to leave us in a solid position as we enter FY '20. Now turning to specific details of the guidance. On a non-GAAP basis, we expect -- for Q3, we expect the following: billings between 360 and 370 million; revenue between 290 and 300 million; gross margins between 75 and 76%; operating expenses between 330 and 340 million; and a per share loss of approximately $0.60, using weighted average shares outstanding of 183 million. I'll finish up with a quick comment on our 3 billion FY '21 software and support billings target, as well as the Rule of 40.

And we have further analysis to perform, however, based on the planned increase and lead generation spending, combined with the incremental growth that we expect from license refreshes and new essentials and enterprise products, we remain encouraged by our growth potential into FY '20 and '21. And we'll provide additional detail and thoughts around our $3 billion billings target at our upcoming investor day on March 20. And regarding the Rule of 40, we will dip below our target score of 40 over the next couple of quarters. With the objective of -- to return to 40 as soon as practical.

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

Questions and Answers:

Operator

[Operator instructions] Your first question comes from the line of Rod Hall with Goldman Sachs. Rod, your line is open.

Rod Hall -- Goldman Sachs -- Analyst

Hi, guys, thanks for the question. I guess I wanted to go back to this lead generation issue as I'm sure you expected to get a few questions on it. I'd just ask, if you could give us a little bit more color on why the efficiencies deteriorated so much in this past quarter and maybe a little bit of an example of where these leads are coming from, and have you changed the source of leads, anything like that? Then I have a follow-up to that.

Duston Williams -- Chief Financial Officer

Yes, why don't I start, Rod. And I'm sure Dheeraj would want to pitch in here also. Now let me just again kind of reiterate a few things that I had said in the script and maybe a few more things. But if you back up again, back to FY '17, where we increased spending 75% year over year, effectively allowed us to build some pretty good backlog, pretty good pipeline in FY '17 and into FY '18.

And then in '18, we started to see some pretty good efficiencies within that spend and we talk about efficiencies as how much pipeline we built and ultimately how much bookings we get out of a demand dollar spend. And we saw some pretty good efficiencies there in '18. Now looking back at it, we probably over-rotated a bit to the existing customer base and large customers there, where those efficiency dollars are easier to get, and probably underspent a little bit on new customers, which -- those efficiencies are a little tougher to get on new customers. But the cost at the company was doing fine in FY '18 and then we go into FY '19 and we have a lot of spending demands and a lot of pressure on spending and a lot of people looking for leverage.

And we made a decision at that point that we figured those efficiencies would not only continue but to increase in FY '19. And we reallocated spending away from demand gen to a certain degree into headcount.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes. I think one other thing I'll also add to this is that it's like building this business is like building a software. This go-to market is like an operating system. And things emerge, like, in the last three months, we saw the aspect of the business around how we needed to have actually spent in demand gen in '18 to make these new customers as existing customers of '19.

And as you know from the last two years of -- a lot of our go-to market has been around making our existing customers even more successful. And it camouflaged some of the things that we needed to do in terms of adding to the cohort of existing every year so that next year you can go reap that customer base itself.

Duston Williams -- Chief Financial Officer

So we took some action in December and we reallocated dollars in December, we did the same thing in January. And we're doing the same thing in now in Q3 and then we'll repeat that in Q4, reallocating more dollars to demand gen and some away from non-sales hiring.

Rod Hall -- Goldman Sachs -- Analyst

OK. OK. And then my follow-up to that, and I wanted to, I guess, follow-up and see -- NetApp called out this weakness in January and I'm wondering if you -- if there's any possibility in your mind that this lead generation efficiency, as you perceive it, might be due to external factors like competition or maybe demand disruption as a result of the trade and the other issues, the government shutdown, etc., if you can just think that there's any external forces that might be affecting what you're seeing.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes, I mean, obviously there are things there we don't know -- that we don't know, but based on everything that we analyze in this business, we first look internally, and it's about inputs and outputs and we ended up focusing too much in outputs in '18 based on what we were getting from our existing customers. So we went back and did some first principles thinking to say, "Hey, why was '17 like that?" Because '16 we had slowed down quite a bit in demand spending, too, because of those three quarters of macro issues with China and oil crisis and Brexit and everything. So '16 was a slow year for us and then we woke up in '17 and said we've got to do this thing around demand as well and that really helped us in '17 and '18. So right now, we are really thinking about this as an internal issue.

I mean, we've looked at our win rates closely, and if anything, they've actually had a steady, a little bit of an uptick. Our pipeline conversion rates have actually stayed pretty steady. We look at our Global 2000 customer base and they continue to buy. This was a record quarter for us in terms of number of 1 million deals, number of $5 million deals, number of more than half a million-dollar deals.

So many of those things actually point in the direction of internal stuff as opposed to external. And you know competition, I mean, I've talked about this forever on this call and to pretty much anybody who's willing to hear, there are few things in competitive stuff that have -- that change every year, I mean. And so there's a give-and-take that goes on, competitively speaking, like, if you think about our competitive landscape, obviously there is the public cloud. There's a need to think about the hybrid cloud.

There's OPEX versus CAPEX stuff that everybody's thinking about. And those are new things in the last two years, but then there are things that we also got along the way like our product is 10x better than three years ago. We used to run on one or two workloads four years ago, now we run pretty much every workload. We used to run on one server four years ago, now we run on a multitude of servers and we have all these different software-only form factors and subscription form factors.

We have a much bigger customer base than three, four years ago. Our repeat business is way better than three, four years ago. The brand is bigger, the Gartner Magic Quadrant is being new in the last couple of years. We used to have Vblock and FlexPod 2, three years and that's been totally dismantled.

Our portfolio of the product is much bigger. And so when you look at all these things, you're like, well, you get some and you give some. And competitively so, I think the waxing and waning of a few things, one way or the other, goes on all the time, actually.

Duston Williams -- Chief Financial Officer

I think ultimately, Rod, we squeezed too hard. We squeezed too hard on lead generation spend, and we shouldn't have done that. And we've corrected it.

Rod Hall -- Goldman Sachs -- Analyst

Right. OK, guys, thank you.

Operator

Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Matt, your line is open.

Matt Hedberg -- RBC Capital Markets -- Analyst

Great, thanks. I want to dig in a little bit more on the sort of the questions that were just asked. I'm curious, what areas did you reallocate capital to versus lead gen? And is the plan, sort of beyond this Q3, to increase the overall level of spending or is it just reallocating back? And then maybe secondarily, is this primarily a U.S. issue, given your comments on EMEA and the sales commentary as well, the sales head commentary?

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

So I'll actually take the latter question and, Duston, you can take the first one. So EMEA is obviously probably 12 months behind the U.S., and it reaped the existing customer base really well and continued to do so in these next six to nine months. But they will start to see the effects as well probably in the next 12 months. America is 12 months ahead, they reap the benefits of existing customers over the course of the last year as well.

But obviously, there was execution stuff that EMEA did well as well under Chris's leadership and that's why we're giving him both Americas and EMEA as well. But all in all, I think, I would say that the spend issue was a global issue for us across the board between EMEA, APAC and U.S. itself.

Duston Williams -- Chief Financial Officer

And on the expenses, where we reallocate, clearly, to headcount, a lot went to engineering, some new products and things like that. And if you look at the -- this quarter-over-quarter now it did $297 million in Q2. We've guided to 330, 340 in Q3 here. Almost 75% of the expense increased quarter-over-quarter projected is in the run rate effectively, and there's not a whole lot that we can do about that.

We expect the top line to be bigger, it would have absorbed that spending easily. And that then only real -- we've added a little headcount in the current quarter here, and we got lead generation spend in the quarter. So I think if you fast-forward to Q4, obviously we're just guiding a quarter at a time at this point, but you won't see a similar increase in expenses from three to four as you did from two to -- or we're projecting from two to 3.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's helpful. And then I assume we might get into this more at Analyst Day. But I'm curious, looking I guess, a little longer term here, when you think about this move from nonportable to subscription revenue, I'm curious, it seems like you're having some success there. Can you help us with sort of the puts and takes for a customer, as well as yourself, sort of, the unit economics of that decision because it seems like that's critical to this subscription mix that you sort of reiterated, 70, 75%?

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes, I think on the customer front, it's all about flexibility and choice, because imagine in the next 12, 18 months that there's a recession and there's macro issues to deal with, we can at least go and start with a one-year subscription, a one year term with these folks that we could not have done without having the one-year entitlement itself. So getting a foot in the door when the purse strings are tight, I think it's a great way to get there. In some point Xi Leap, for example, can do monthly subscription and quarterly subscription, and all those things are now up for grabs, which is basically the, sort of, what cloud is all about. It's like traction consumption down to the last month, if possible.

I think in the spectrum on premise, still, people are buying 100k at a time, so it looks like one-year terms are good enough. But over time, I think as things actually get tougher because of a bad macro, I think it'll open us up for getting foot in the door with many customers. Many of the people are actually always looking at OPEX versus CAPEX. It gives us flexibility on OPEX versus CAPEX, like, federal in the last couple of years, especially because of these continuing resolutions, the CRs, many of the budgets are only flowing because of key -- I mean, sorry the O&M spend, which is operation maintenance stuff, so subscription helps there as well.

So it just gives us a lot of flexibility in many which ways. And then customers can -- we can go back to the customers when it's time to refresh and actually have a better discussion. It gives us better predictability in forecasting as well.

Operator

Your next question comes from the line of Alex Kurtz with KeyBanc Capital Markets. Alex, your line is open.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Thanks, guys. A quick comment then a question. I would say, given Chris's strong reputation in the industry, his time at EMC, I think investors could really benefit from hearing from him at the Analyst event. And if not, maybe on the next earnings call.

I hear a lot of perspective in the industry, and I think it would be helpful to kind of have him weigh in on sort of these changes that we're seeing in the marketplace and internally within the sales organization. My question, Duston is, I think, historically you've talked about rep productivity and so the historical hires and sort of the upside opportunity from reps getting to fuller productivity. I didn't really hear you talk about that today. That's always been a kind of repetitive view and narrative from the team.

So could you comment on what that looks like and how that's sort of played into this change in bookings growth?

Duston Williams -- Chief Financial Officer

Yes, so again, we, because we've got stronger and weaker quarters one and three and two and four, we'll always look at rep productivity on a rolling six month basis. So on a rolling six-month basis ending Q2 here, productivity -- and we always look at it on ramp rep basis, obviously, EMEA ramp rep productivity went up in the quarter. APAC ramp rep productivity went up a little bit in the quarter and North America ex fed came down in the quarter.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes. By the way one thing I would also like to add is that productivity is still a derived variable, Alex, it's not real input. The inputs are salespeople and pipeline spend, the demand gen spend that we've talked about earlier.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

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

Jason Ader -- William Blair -- Analyst

Yeah, thank you, guys. I wanted to -- I know that Allegiant is going to dominate the conversation here, but I wanted to understand a little bit more about whether you think, No. 1, you may have over-rotated a little bit much to the -- too much to the large enterprise, and also whether you think you took too much on in terms of new products in 2018, which may have affected the demand gen just from the standpoint of maybe the sales force and the channel being a little bit confused with all of these new products.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes, I think on the -- thanks, Jason, for the questions. On the first one, it does camouflage stuff, and the fact that we had large deals and large customers, it does come in the way of thinking. So now looking back, running at high velocity, I wish we didn't have to think about this as an afterthought, but it does come up. And I think how we go and really segment commercial select and look at the top 12,000 customers of America, not just the top 3,000, 5,000, I think those things have been things that we have looked at in the last three to six months.

But before I get to the product, there's -- people also probably will realize that in the last 18 months, this company has gone through two big transformations. And our sales force has gone through the transformation, has been the people that have really gone through this, which is software-only and in subscription now. So in the last 18 months, we've had a big payload of transformation and it probably does count toward simple things like hiring and stuff like that, they're like, man, it's a big change. So I think how we do a better job of absorbing all the stuff while we become a software company, while we become a subscription company, while we become a cloud company, I think does come up.

On the product portfolio, yes, I mean, obviously I'm a big fan of Andy Grove and the way he wrote the two chapters in the book, Let Chaos Reign, and in Reign in Chaos. So we let chaos reign in the first half of '18 with the product portfolio in terms of lack of Chris messaging and then obviously when we realize that we had to do a better job of messaging and classification and things of that nature, I think, the core essentials enterprise has been a great sort of storytelling methodology for everybody. And people need to realize that we can't just sell things because Beam is a thing and IoT is a thing and Calm is a thing, but they have to really think about the customer journey and really empathize on behalf of the customer, say, "Look, start with core, then essentials, then enterprise." So I think it's helped a lot in the last four, five months. But yes, it comes up, we are a high-velocity company and sometimes we let chaos reign, and then we go and rein in the chaos.

But I think the most important sort of, at least in my head, is how our sales force has actually gone through two big transformations in the last 18, 24 months.

Jason Ader -- William Blair -- Analyst

OK, then one quick follow-up. Do you get a sense at all, Dheeraj, whether the Amazon Outposts announcement and just the hybrid cloud story, overall has impacted demand generation, just as customers sort of maybe pause and think about what they're going to do and look at their options, etc., whereas that didn't really exist a year ago?

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes, I mean, it's too far-fetched for us to look at our data in terms of our -- opportunities created. Right now, we are doing first principle thinking, which is input, output. What was the input to the system and what are the intermediate outputs and what's the final output. And in that sense, I think we are still blaming ourselves more than looking at things that could be three, four orders out.

Honestly, again, maybe we've got our cognitive bias toward this stuff, I feel like it's great for Amazon to say cloud is everywhere. Outposts needs to come on-prem because then we don't have to have people saying, but cloud is all about renting and it only is off-prem, and things like that. I think the market is going to become bigger ones Outposts is there. And then it's is going to be about multicloud and flexibility and choice and running on multiple servers and all sorts of things.

And Amazon will also have to realize that miniaturizing and optimizing a cloud is actually harder than anything else. And Intel realized this with ARM and low-power processors and things of that nature. So I think this market is not given on a platter to them. I think we'll actually -- we would love for cloud to be dispersed and distributed in many, many, many more regions of the world than just 100 data centers actually.

Operator

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

Katy Huberty -- Morgan Stanley -- Analyst

Thank you. Duston, can you give us some clarity as to how much backlog was down year-on-year exiting the second quarter, and which quarter do you think you can get backlog back to growth? And then I have a follow-up.

Duston Williams -- Chief Financial Officer

Yes, I don't want to give the specific details, again, usually we build backlog in Q2. We took a little down in the quarter, and it's a reflection of not having enough pipeline generated in the quarter. I would hope, obviously, that the Q3 guidance affords us the ability to start that path in Q3.

Katy Huberty -- Morgan Stanley -- Analyst

OK. And Dheeraj, 21% of customers are buying software beyond the core. How long do you think it takes to get that to 50% or something more significant that would message that Nutanix isn't an HCI company anymore, it's a true cloud software company?

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes, thanks for the question, Katy. I mean, if you look at AHV, which we introduced almost four years ago, so it took four years to get to 40%, and one good thing, we have a good track record for introducing products and then doubling down on them and doing a good job. And I think that what we did with AHV, what we're doing with files, what we're doing with all these different products, they've probably gone through their first year in the next two to three years. And especially talking about 2021, we definitely feel like getting to 40%, 50% would not be unachievable.

Now the important thing is how we don't just share-shift from core to Essential to enterprise because it's relatively easy to just share-shift and say, look, we can account this as essentials and account that as enterprise, but how do we go create new earth is a hard problem. And most companies, who are still growing, need to find them to be growth engines, rather than shifting it from the left pocket to the right pocket, actually. So that's the challenge that we have upon us, and we have to really do a good job of creating new earth.

Katy Huberty -- Morgan Stanley -- Analyst

Thank you, that's helpful..

Operator

Your next question come from the line of Aaron Rakers with Wells Fargo. Aaron, your line is open.

Aaron Rakers -- Wells Fargo -- Analyst

Obviously on the lead generation side, I want to go back to if you were to look at your breakdown between existing and new customers, how would you characterize the challenges that you've had in lead generation over this period of kind of a reset? Is it more gaining the new customer momentum or is it -- have you seen it show up also in your kind of repeat business at existing customers? And really what I'm trying to get at is how, Duston, has your kind of assumptions around the 3 billion billings number changed relative to what you provided at the Analyst Day back in last March?

Duston Williams -- Chief Financial Officer

Yes, I mean, just the run -- we'll show you, actually, Aaron, the assumptions that we made relative to the 3 billion back -- a year ago now, as far as repeat purchases, average ASP for new customers, the cohorts and stuff like that. So I mean, we'll go back in a few weeks here, show you what we had suggested that might look like, and a year later, after another year of history, go compare what we told you. And there's nothing there that's off. We've got puts and takes but there's nothing real different from that perspective.

And relative to the 3 billion, I made some comments there, but effectively we probably pushed things a quarter or 2. And I think the good news is we've got a big refresh piece. I really haven't talked too much about that there's a lot of that entitlement, if you will, in FY '21, so we'll show you what that looks like. We haven't talked much about the potential of essentials and enterprise growth there.

We'll show you some potentials there, but yes, I mean, we'll be pretty open as far as what we think there. And ultimately, we're probably off a quarter or two maybe.

Aaron Rakers -- Wells Fargo -- Analyst

OK. And then as a quick follow-up, just kind of curious on the headcount investment side. As -- first of all, how short do you think you've been in terms of headcount hiring? And just remind us again how long it takes to see those investments, once they come in, turn to -- or what your views on getting to the right productivity levels on those new hires.

Duston Williams -- Chief Financial Officer

Yes, on the new hires, again, depending on what type of hire it is, it varies anywhere from four quarters or in enterprise or GAM from six to potentially eight quarters, depending on the scale of customer that are going after there. So that's kind of the range. That hasn't changed much from that perspective.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

The volume of the hires are still commercial select and...

Duston Williams -- Chief Financial Officer

Correct.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Territory guys. And enterprise and GAMs are obviously not that many. And I think in terms of -- as we're was mentioning before as well that our sales force has gone through a lot in the last two years, and there's a little bit of a sales prioritization issue, but also to do it in the way that is empathetic to them about subscription software only, segmentation, all these things. There's some indirect consequences with a lower marketing spend on how they actually perceive new hires versus existing heads.

And also there was some calendar year and a hiring seasonality as well that we have not taken into consideration. Many salespeople actually wait till January, so I think we probably will have a back-end loaded hiring schedule.

Duston Williams -- Chief Financial Officer

OK. Thank you.

Operator

Your next question comes from the line of Wamsi Mohan with Bank of America Merrill Lynch.

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

Duston, your commentary suggest you might have about six quarters of underspending in this lead generation element. Can you talk about the cumulative amount of underspend? It sounded like tens of millions, but can you be a little more specific? And how fast can you normalize that spend, and does revenue reacceleration just take as long as the time when you redeployed into this? And I have a follow-up.

Duston Williams -- Chief Financial Officer

Oh, certainly not in four quarters, no. I mean, we made a decision back then based on, again, efficiencies and how the company was doing in general that ultimately we kept it flat there. But I mean the spending going forward, we said a couple -- a few tens of millions, so we've allocated, call it, 20-ish, plus or minus there, million dollars back to lead gen. And we'll continue to monitor that to make sure that's enough.

But that we'll -- I mean, there's massive focus, as you might expect, throughout the company on this, that Dheeraj mentioned we're seeing some early signs there. It takes a while to flush through the funnel, but we would expect to see some pretty good progress going into Q4 and then, hopefully, setting us up into FY '20 to have a pretty good year. The cumulative amount, I don't know exactly what you mean there. We underspent but we don't need to, obviously, increase the spend by history of what we've underspent.

It's not that kind of spend profile.

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

OK. And correct me if I'm misstating this, but when you say that some shift went from lead gen to headcount, does this mean that your longer-term OPEX structure is just structurally higher? And can you also just comment perhaps about the customer acquisition cost, should that be higher than what we have calibrated to over the past couple of years?

Duston Williams -- Chief Financial Officer

The lead generation spend that we're talking about in the scheme of things for our company that just spend $300 million a quarter isn't a massive amount. That's another thing that we hope to show you at investor day, is effectively lifetime value of customer to cost of acquisition of customer. And I think we look pretty good from that perspective. So maybe in the short term we get a little blip here, but again, depending on the growth profile, and the faster you grow, the more you're going to spend, but I don't think anything has been meaningfully shifted one way or another.

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

Thank you.

Operator

Your next question come from the line of Jack Andrews with Needham. Jack, your line is open.

Jack Andrews -- Needham and Company -- Analyst

I was wondering if you could drill down a little bit more on the specific tactical marketing spending that you're talking about, examples of what exactly do you mean by spending on lead generation? Because you mentioned that the product is 10x better than it was a few years ago, you obviously have a much higher customer base. So I'm just wondering are you essentially going to be rolling out a similar playbook that was working a few years ago? Or do you need to change what is actually happening from a tactical perspective around this initiative?

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes, I think it starts with -- I just had two simple inputs, it's time and money. And time is what sales force actually puts in and money is what we give them to go and do all sorts of events and how do you set up meetings. So, we start looking at these different tiers of the funnel, starting from marketing qualified leads to meeting set up to opportunities created to things below that in the funnel itself. And in that sense, I don't think the methodology has changed.

It's just that the input, which is the most basic input is dollars and that has a certain formula to that how those dollars convert to leads and to meetings and to opportunity and things of that nature. So, I think we are dispersing a lot of this stuff across the world in, like, 17 different regions of the world. And it's very similar to what we did almost 18 months ago.

Jack Andrews -- Needham and Company -- Analyst

Go it. Thanks for your perspective.

Operator

Your next question comes from the line of John DiFucci with Jefferies. John, your line is open.

Unknown speaker

This is Julia calling for John DiFucci. I was just wondering, you had been touching on retention rate previously but you didn't touch on it here today. Has anything significant happened with retention rate?

Duston Williams -- Chief Financial Officer

It's a great question. We probably should've mentioned that. After we put that in the investor deck last quarter, I think we did ourselves a disservice. We showed our retention rate of roughly 90%.

But we did that on a cumulative basis and we should have been doing it on an annual basis like everybody else was doing it. So again, we'll roll that out at investor day, it's much better than the 90%, so -- but we'll just -- we'll show you that in a few weeks.

Unknown speaker

Thank you.

Operator

Your next question comes from the line of Mark Murphy with JP Morgan. Mark, your line is open.

Adam Bergere -- J.P. Morgan -- Analyst

This is Adam Bergere on behalf of Mark Murphy. Aside from the huge deal with the Department of Defense, did you guys see any material impact due to the long government shutdown this past quarter? Thank you.

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Yes, I think DoD was still funded and Intel is funded, was funded. It was civilian and, obviously, civilian, a lot of the stuff was up for grabs. And I think the thing, actually, the government shutdown, was kind of completed a couple of days or a few days before the quarter closed, but -- and apart from one $5 million deal, I don't we actually saw an effect from civilian.

Duston Williams -- Chief Financial Officer

No, if it was -- if the civilian was funded we probably could've done a little better but not meaningful.

Adam Bergere -- J.P. Morgan -- Analyst

Awesome. Cool. Thank you.

Operator

Our final question for today comes from the line of Simon Leopold with Raymond James. Your line is open.

Victor Chiu -- Raymond James -- Analyst

This is Victor Chiu in for Simon. Can we isolate the impact to results exclusively to lead generation, meaning if you hadn't reduced the lead generation allocation, how confident are you that you could've driven results near the consensus expectation on like the 20%-ish year-over-year growth?

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

I think with sales hiring and lead generation, were the two inputs that we were shy of. And most of it, in an 80-20 kind of argument, I think 80% of it can be contributed to these 2, actually. 20% obviously relates to better sales execution. With the same inputs, could we have derived better outputs? I think Americas could have done better there as well.

Victor Chiu -- Raymond James -- Analyst

Have you seen any changes in the competitive landscape or secular demand? I know Dell reported results and I haven't had a chance to weigh in on there yet but I know HCI is an area that they continue to focus on. So is there any changes in the competitive landscape that's interesting?

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Not really. I mean, obviously in the last 18 months, our relationship with them has also evolved. Now we meet in the channel and our products look really, really good. I mean, I can tell you that the few things that we feel proud about is being competitive.

Now obviously, they're also going and cannibalizing their existing storage business, which comes in the way of things like gross margin and such for them, but the more they actually go ship VxRail, the better it is for us. Because we need, like, a lot more marketing dollars to be spent on market enablement and education than we can do just on our own.

Victor Chiu -- Raymond James -- Analyst

Thank you.

Operator

[Operator signoff]

Duration: 61 minutes

Call Participants:

Dheeraj Pandey -- VP of Investor Relations and Corporate Communications

Duston Williams -- Chief Financial Officer

Rod Hall -- Goldman Sachs -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Jason Ader -- William Blair -- Analyst

Katy Huberty -- Morgan Stanley -- Analyst

Aaron Rakers -- Wells Fargo -- Analyst

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

Jack Andrews -- Needham and Company -- Analyst

Adam Bergere -- J.P. Morgan -- Analyst

Victor Chiu -- Raymond James -- Analyst

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