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Nutanix, Inc. (NASDAQ:NTNX)
Q4 2019 Earnings Call
Aug 28, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I'd like to welcome everyone to Nutanix Q4 and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions].

Thank you. Tonya Chin, Vice President of Corporate Communication and Investor Relations, you may begin your conference.

Tonya Chin -- Vice President of Corporate Communication and Investor Relations

Good afternoon and welcome to today's conference call to discuss the results of our fourth quarter and full year of fiscal 2019. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix's CEO; and Duston Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its fourth quarter and fiscal year of 2019. If you'd like a copy of the release, you can find it in the Press Releases section of the Company's website.

We'd like to remind you that during today's call, management will make forward-looking statements within the meaning of the safe harbor provision of federal securities laws, regarding the Company's anticipated future financial performance in various periods, including anticipated revenue, software and support revenue, hardware revenue, billings, software and support billings, hardware billings, gross margin, operating expenses, net loss, net loss per share and free cash flow; the assumptions underlying our anticipated future financial performance, our plans to provide future projections and financial guidance, our business plans, initiatives and objectives, including our plans for pipeline and demand generation expansion, our focus on growing our commercial business, potential go-to-market transitions, our continued investment in technology including our subscription based products, talent and sales and marketing efforts, the expected impact of these investments and our plans to manage operating expenses if our future financial performance does not meet our expectations, our ability to achieve such business plans, initiatives and objectives successfully in a timely manner, and the impact of such business plans and initiatives and objectives 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 plans and timing for and the impact of our transition to a subscription based and recurring revenue business model, and our ability to complete the transition successfully and in a timely manner, the impact of recent leadership changes, our plans for and the timing of the release of new products, technology and services, the benefits and capabilities of our platform, competitive and industry dynamics, market size and potential market opportunities and other financial and business-related information.

These financial -- 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 Form 10-Q for the third quarter of fiscal 2019 filed with the SEC on June 5th, 2019, as well as our earnings release posted a few minutes ago on our website. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also please note that unless specifically referenced, all financial measures we use on this call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of the website and in our earnings press release.

Lastly, Nutanix management will be at the Deutsche Bank 2019 Technology Conference on Tuesday, September 10th in Las Vegas, and we hope to see many of you there.

With that, I'll turn the call over to Dheeraj. Dheeraj?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Thank you, Tonya. Good afternoon, everyone. Q4 was a good quarter for us as we beat street expectations on total billings and revenue and by $15 million each for software and support buildings and revenue. Going forward, we'll be guiding on software and support billings and revenue or total contract value, TCV, as we call it. For Q1, billings and revenue, even as our business top line has been impacted by the subscription transition. More on this later from Duston.

Over the past two quarters, you've highlighted how we needed to rebuild our pipeline as we continue to transform our business to subscription. I'm pleased to report that our Q4 results demonstrated measurable progress in our subscription transformation, our pipeline funnel, our sales reenablement, our simpler messaging on the platform versus new apps and our hybrid cloud journey. All this has enabled us to close our fiscal 2019 on a high note. While we still have much work left in our business transition toward a hybrid cloud model of licensing, we're encouraged by our progress to date and believe that our solid quarter-over-quarter billings and revenue growth, as well as our progress in sales hiring are clear indicators that our execution is improving and our market remain strong. We're particularly pleased to see such strong growth in our deferred revenue balances in Q4 with 44% year-over-year growth.

Our remaining performance obligations or appeals will remain a strong proxy of the underlying health for business, especially the life of device licenses transitioned to term-based licenses. Our subscription transition continues to move along at a rapid pace, and just like our hardware to software transition in fiscal '18, we are shedding significant top line for a future proof business architecture that would position us well in the era of cloud. Our sellers and customers have responded well to the model change, and we believe that the subscription and infrastructure software business, both on-prem and off-prem, will quickly become a core competitive advantage for the Company.

Our customers will be able to buy portable software licenses that can run both in a private cloud and on bare metal offerings in the public cloud. We'll make a strong push for why hyperconvergence matters even more in the public cloud virtual networks and wide data and applications need to be close together, preferably on the same machines and physically within the same racks. Just like this last decade, the sheer amount of data will make the network an even bigger enemy of applications. If these laws of physics that make HCI such a powerful architecture, even for hyperscalar data centers.

The flexibility of portable licensing will enable our customers to treat their private infrastructure as availability zones or AZs that are peers of the availability zones or AZs in the public cloud. More importantly, they'll be able to move applications freely and redeploy Nutanix licenses back and forth, thus creating a true hybrid cloud. With a virtual private cloud or VPCs as public cloud developers call them, experience on both sides, renting software won't be the domain of public cloud alone as proven by the business model transitions of many large software company in this last decade.

Customer success will be king as we'll have hustle like SaaS companies to work on customer retention and churn, annual contract values or ACV, net expansion rates and lifetime value. These metrics will be the new vocabulary of Nutanix once you've moved the majority of our life of device entitlements. This is the wire for subscription transition. This is the wire for own digital transformation from appliances to OEMs, to software to subscription, and eventually to ratable as you'll hear from Duston. This is the why of digital journeys within our customers as they grapple with the trade-offs and technology of ownership versus access.

Our digital transmission continues to be ahead of our expectations as subscription revenue up 16% from Q3, and now representing 71% of total billings, strong progress toward a previously stated goal of 75% by the end of calendar 2021. Reflecting on Q4 and more broadly on FY '19, as our platform continues to make inroads into a hardware-centric world of on-prem infrastructure, we've made meaningful progress with our new apps, i.e., essentials in enterprise that run on top of our core platform. We now see these new apps in 26% for deals on a rolling four quarter basis, up nicely from 23% last quarter and 17% in Q4 of FY '18. This quarter also saw the addition of approximately 990 new customers, our highest new customer infusion in the past six quarters. These new customers included 31 new Global 2000 logos, bringing our new total number to 810.

In Q4, we continue to see strong, large deal momentum with 58 deals worth more than $1 million, 11 of which spent more than $1 million with us in Q3. Of those 58 deals, 26 were with customers in the Global 2000, and three were worth more than $5 million. We now have 16 customers who spent over $20 million with us in lifetime bookings, up from 9 customers at the end of FY '18. Of those 16, 6 were over $30 million in lifetime bookings. We have 46 customers with over $10 million lifetime bookings, up from 26 at the end of fiscal 2018. More importantly, these metrics continue to show robust growth, even though it's apples-to-oranges between the older TCV deal values and the newer term base deal values.

Our broader product portfolio drove large opportunity with new and existing customers. A great example of this was a deal worth more than $10 million in Q4 alone, with a Global 500 holding company for insurance, reinsurance and investment operations. This customer was looking to adopt a hybrid cloud strategy and gain a price and performance advantage over its existing legacy infrastructure. After seeing both the simplicity of our enterprise cloud platform and the value we bring to a total hybrid cloud solution to database and automation offering such as Era and Calm, this customer decided to reset its entire datacenter strategy using our technology.

Additionally, across our customer base, Files, Flow and Prism Pro are becoming strong additions to our portfolio. On the theme of deepening our penetration within G2K, the question of why Nutanix would come up to a casual observer. If you look closer at the JP Morgan Chase 2019 CIO survey, you would know why we're gradually becoming a trusted, invisible infrastructure brand within the largest enterprises going through their own digital journeys toward frictionless, reliable and invisible or synonymous with Nutanix. We don't sell vaporware speaking of which, I specifically want to emphasize the Q4 deal with a total contract value or TCV of over $15 million this quarter and how a Fortune 25 customer selected our platform as the backbone powering its infrastructure across the US. This customer, with a lifetime spend of nearly $30 million since their first purchase 18 months ago, selected our core platform with AHV virtualization or an incumbent that had over promised and under delivered on true enterprise reliability with software defined infrastructure.

Last quarter, we told you about a win with a new customer, one of the Global Four accounting firms, that was worth nearly $6 million. In Q4, our team worked closely with this customer to understand the unique challenges, we platform their infrastructure for the hybrid cloud. In a trend we're seeing throughout our business, one of our essential offerings, Calm, is allowing us to learn with our customers in the real meaning of hybrid cloud. This customer shared with us a bit of legacy approach. It would take them years to realize the multi-cloud vision. Calm together with Core was the critical combination that made this win possible.

We are particularly pleased with our strong uptick in gross margins, which grew to 80% this quarter, even as we carve out more bookings in the deferred revenue that goes to our balance sheet. Most importantly, our support in customers success organizations continue to differentiate our solution from the competition by being authentic in their approach to problem solving.

Speaking of apps versus the platform, our database is a service offering, Era, helped us win new opportunities with a major American airline in the Global 2000. In a deal worth more than $3 million, this existing customer that has a lifetime spend of more than $10 million decided to replace its proprietary, heavily engineered database system for e-commerce with Era, backed by a web scale, Core, running on commodity servers. In another win, this quarter worth more than $1 million with a Global 2000 multinational healthcare company, we're able to expand our existing presence because of our rich product portfolio in data services, automation and security.

Speaking of security, our federal government business is in top of mind for us as we build our hybrid cloud offerings. Earlier this month, the Nutanix's Xi Government cloud were listed in the FedRAMP Marketplace as FedRAMP In Process. FedRAMP is a government wide program that enables federal agencies to rapidly adopt cloud based IT solutions that meet stringent standardized security criteria. Federal agencies are already taking advantage of some of the services within the Xi Government cloud as part of the civilian entities. This is a significant step toward a full FedRAMP moderate authorization, which will enable federal agencies to take advantage of our Xi Government cloud solutions.

At our Investor Day in March, we spoke about our need to invest and focus on pipeline as we hire hundreds of sellers every year. We're particularly pleased to see a strong pipeline creation or enterprise segment yielding a surge in new opportunity for workload expansion in existing accounts and new Global 2000 prospects. For the first five years, that is our first billion, we're mostly selling to the commercial mid-market and to large federal agencies. In the last three years with an intense go-to-market focus, segmentation of the sales force and expansion of the product portfolio, we built a world class, enterprise focused company. Now in the next three years, we have to prove that we can balance the two ends of the barbell equally well, selling both within the enterprise and to the commercial mid-market at scale. With that in mind, we have segmented commercial completely out of our enterprise sales figures and building a focused US commercial sales leadership, and an organization under them. We're also emphasizing higher digital touch at the top of the funnel, though prospects can go without any human touch from digital ads or clusters in the cloud with a few clicks.

Before I conclude, I'd like to take a minute to reflect on the highlights of our past fiscal year. Fiscal '19 represented a new phase of development for this Company as they leaned into our hybrid cloud vision and expanded beyond our Core infrastructure platforms. I'm pleased that Xi cloud services are generally available to the public and they have helped to create significant opportunities for us in both new and existing accounts. This year also saw our multi-cloud multi-stack approach validated by the market with new partnerships with HPE and others, delivering customers more freedom to choose the hardware platforms that best fit the environment. We also grew our customer base 34% year-over-year with new logo additions.

Finally, this year, we made tremendous progress in our subscription transition having made a painful a fundamental change in pricing for our new software and services model to work at scale. We grew our subscription billings 57% in fiscal '19 and fiscal '18, while our gross margins increased from 68% in fiscal '18 to 78% in fiscal '19. This last year, we -- as we were adding new employees at a brisk pace. We also qualified our invisible cultural principles in how we maintain high standards of ownership, curiosity and listening. We also featured in the Forbes Just 100, list of the 100 company that are doing right by America.

We're pleased to end the fiscal year in a resilient note as you plough through one of the toughest transitions in the history of IT, going from hardware to software subscriptions. I'm proud of the hard work and commitment demonstrated by our team members around the world. As we move into the new fiscal year, we'll continue to work through the business model transition. Almost among them is educating our hardware-centric ecosystem about the new subscription economy, annual contract values and bite-sized selling.

Casing point is the way the channel is reporting our numbers to Wall Street analyst, not realizing that we're not selling hardware anymore nor the impact of our subscription transition. This burden of proof and education lies in us, as we are one of the first infrastructure companies to disrupt the hardware neighborhood with pure software, portable licenses and consumption economics. Subscriptions' biggest value will be in complete segmentation of field activities, that is, sales, hunting for new ACV versus customer success, farming for the residual TCV, and the two teams maximizing customer lifetime value or LTV in tandem. That focus and clarity of purpose in the coming 18 months to 24 months is how we'll unlock the biggest efficiency gains in our go-to-market.

I look forward to continue [Technical Issues] the new fiscal year as we completed our hardware to software transition this last quarter, it is a seminal moment for the Company to start guiding the software and support billings and revenue. We hope our investors find this to be a simpler way to model our business going forward.

Speaking of simplicity, there's one more thing. We're going to start giving out annual guidance, while the subscription transition makes it harder to project the full year, Duston will introduce the tradition of annual guidance because we believe we can tell a simpler, more compelling story of our two aspirational areas of investment, our commercial business and our new apps, how they unfold over the coming year and the future.

To talk more about this quarter and the fiscal year, I'll now turn it over to Duston. Duston?

Duston Williams -- Chief Financial Officer

Thank you, Dheeraj. I was pleased to see our fiscal year close out with a stronger Q4 performance versus the performance of the prior few quarters. The business is starting to show some results of improved execution with good momentum in bookings, new customer growth, large deals and Global 2000 traction. Additionally, as Dheeraj just noted the shift to a recurring subscription business exceeded our expectations during the quarter and we continue to expand our pipeline.

In Q4, subscription billings accounted for 71% of total billings, up from 65% in Q3, and subscription revenue now accounts for 65% of total revenue, up from 59% in Q3. The faster than expected transition in Q4 was buoyed by some larger deals in the quarter. In Q4, a new term based subscription bookings increased 67% to $150 million, up from $90 million in the prior quarter, and we expect these subscription percentages to fluctuate a bit plus or minus for the next couple of quarters.

We are very pleased with the speed that we're working through our subscription transition, and as more of our business moves to subscription, it gives us more data to review for trends. This allows us to gain incremental insight relative to the top line impact relating to the transition. During our Q4, we saw additional total contract value and balances between our five-year term deals and life of device license deals, which resulted in less total contract value received on these five-year term deals versus what would have been realized on an equivalent life of device transaction. To adjust for this, we're altering our pricing structure this quarter on five-year deals to try to correct this imbalance. However, for the -- we've assumed that this value differential will continue for the foreseeable future.

We also saw the average duration of our new subscription contracts for the 3.7 years in Q4 versus a duration of approximately 3.9 years last quarter. This was a result of seeing more five-year deals moved to three-year terms rather than an acceleration in one-year deals. This contract duration shift results in less upfront billings for the initial deal, with the difference being captured when the term renews. As a result of these trends, we're now planning for a negative top line impact relating to the subscription transition to be approximately 20% versus the prior assumption of 10%.

And as we stated in the past, we do not believe that any of the prior transitions to subscription in our industry have been quite as complicated as the one that we are now working through, which includes two very different pricing mechanisms between the prior life of device licenses and the new term-based licenses. Despite this negative subscription impact to the top line, in Q4, our bookings performance rebounded quite well, as we exited Q4 with over 2.5 times more backlog than the prior quarter.

I'll move on to some specific Q4 highlights. But before I go into the specific details for the quarter, when analyzing the absolute numbers in growth rates, please keep in mind that we believe the total billings and total revenue, as well as the software and support billings and software and support revenue performance for the quarter were all compressed by between $20 million to $25 million due to our subscription transition.

Total billings and revenue performance was also impacted by $8 million as we shift less hardware than planned. Revenue for the fourth quarter was within our guidance range of $280 million to $310 million coming in at $300 million, down 1% from the year ago and up 4% from the prior quarter. Hardware accounted for 4% of total revenue, down from 8% in the prior quarter. Software and support revenue was $287 million in Q4, up 7% from the year ago quarter and up 8% from the prior quarter. Total billings were $372 million in the quarter, within our guided range of $350 million to $380 million, representing a 6% decrease from the year ago quarter and a 7% increase from Q3. Software and support billings were $359 million flat from the year ago quarter and up 11% from the prior quarter. Our bill-to-revenue ratio in Q4 was 1.24 times, up from 1.2 times last quarter. New customer bookings represented 26% of total bookings in the quarter, down from 31% in Q4 '18 and up from 25% in Q3.

In Q4, our software and support bookings from our international regions represented 45% of total bookings versus 40% in Q4 '18. Our non-GAAP gross margin in Q4 rose nicely to 80%, 3 percentage points better than our guidance of 77%. Operating expenses were $344 million and our non-GAAP net loss was $106 million for the quarter or a loss of $0.57 per share.

A few balance sheet highlights. We closed the quarter with cash and short-term investments of $909 million, that's down $32 million from Q3. We use $10 million of cash flow from operations in Q4, which was positively impacted by $12 million of ESPP inflow. And free cash flow for the quarter was negative $33 million, this performance was also positively impacted by the $12 million of ESPP inflow in the quarter.

Now turning to the details of our Q1 guidance. Hardware has become an insignificant percentage of our total billings in revenue, and therefore going forward, rather than providing guidance for total billings and total revenue, we will only specifically guide to software and support billings, and software and support revenue. We will also provide an estimate of hardware as a percentage of total billings.

So on a non-GAAP basis for Q1, we expect software and support billings to be between $360 million and $370 million. Software and support revenue to be between $290 million and $300 million. Hardware billings and hardware revenue to be 3% or less of total billings. Gross margin of approximately 80%. Operating expenses between $385 million and $390 million, and a per share loss of approximately $0.75 using a weighted average shares outstanding of approximately $190 million.

The guidance for Q1 assumes the following: an estimated 20% or $25 million to $30 million top line compression related to our subscription transition, approximately $10 million less in hardware billings and revenue versus current Street estimates; and a bill-to-revenue ratio of 1.23 times versus current Street estimates of 1.20 times, impacting total revenue and software and support revenue by approximately $10 million. The 20% top line compression related to the subscription transition impacts the Q1 year-over-year growth rates by approximately 7 percentage points. The software and support billings guidance of $360 million to $370 million compares to the current Street estimates of $355 million. The software and support revenue guidance of $290 million to $300 million compares to the current Street estimates of $290 million.

Our planned increase of $40 million to $45 million operating expenses in Q1 is primarily coming from the following expense categories: planned increases in headcount, particularly in sales and engineering; and regular course and merit increases that are effective Q1; cost associated with our annual global sales training and enable meeting -- enablement meeting; and continued growth in our demand generation spending to fuel our planned growth for FY 2020, including our annual EMEA Dot NEXT in Copenhagen, which was moved up from Q2 of last year to Q1 in fiscal 2020.

Now turning to the details of our fiscal 2020 guidance. This is the first time that we've provided annual guidance. Our subscription transition has clearly added complexity to the business, which has made it tougher for the investment community to model. We hope that this top level view of FY '20 will help provide some clarity on our expectations for the year. For fiscal 2020, we expect software and support billings between $1.65 billion and $1.75 billion, software and support revenue between $1.3 billion and $1.4 billion, hardware billings and hardware revenue to be 2% or less of billings, gross margin of approximately 80% and operating expenses between $1.65 billion and $1.7 billion. This guidance for fiscal 2020 assumes no major economic downturn during the fiscal year and no material change to the current average subscription term of 3.7 years. This guidance also assumes an estimated 20% or approximately $170 million to $200 million top line compression related to our subscription transition, as well as approximately $45 million less than hardware billings and hardware revenue versus the current Street estimates.

The estimated 20% top line compression related to the subscription transition impacts the fiscal 2020 year over growth -- year-over-year growth rates by about 8 percentage points. Software and support buildings guidance of $1.65 billion to $1.75 billion compares to the current Street estimates of $1.6 billion, and reflects a year-over-year growth rate of 17% to 24%. The software and support revenue guidance of $1.3 billion to $1.4 billion compares to the current Street estimates of $1.3 billion and reflects a year-over-year growth rate of between 15% and 24%.

We will continue to push through our transition to subscription as quickly as practical. We have targeted our subscription based billings to be greater than 75% by the end of FY '20. We are also aware that as our business increasingly transitions to subscription, our go-to-market cost structure must also transition to a more efficient model that resembles the efficiencies of other subscription or SaaS models. Although this will take some time to accomplish, some of the early thinking and work has already begun.

We remain bullish on several of our newer products as they are starting to become a bigger deciding factor in winning large enterprise type deals, and therefore we will continue to significantly fund these newer subscription based products throughout FY '20. We believe these newer product offerings will ultimately enhance our top-line growth and protect our value proposition in the years to come.

FY '20 will also be a year that will have a renewed focus on investing and growing our commercial business. Our enterprise business is showing good signs of strength on the investments in FY '19 and we expect an improved commercial performance in FY '20. Our expectations for FY '20 clearly reflects the impacts of the -- impact of the subscription transition, as well as the continued funding of newer products in our solution set. These two factors alone account for well over 50% of the projected negative operating margin in FY '20. In this transitory year, we would expect cash usage in the low to mid $200 million range versus the current Street estimate of $190 million, with the subscription transition accounting for a vast majority of this cash usage. And lastly, if the estimated growth rates for FY '20 do not materialize as planned, we will prudently manage operating expenses accordingly.

In summary, we continue the tough work of transforming the business model with a view on the long-term, despite the short-term impact to the business. It's been nearly two years since we started the transition from an all hardware model to an all software model. It was this transformation that laid the foundation for our current transition from an all software model to an all subscription model, and it will be the all subscription model that will ultimately lay the foundation to our third and final phase of transforming the Company with the final phase being to all ratable model.

Once again, despite a significant short-term optical impacts to the business, we're already planning how we might making this next and final phase, the all ratable phase, a reality at some point in the future.

And with that, operator, if you could now open the call up to questions, that would be great. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Jason Ader from William Blair. Your line is open.

Jason Ader -- William Blair -- Analyst

Yeah, thanks. Duston, I think you mentioned 2.5x on the backlog versus the prior quarter. Can you just talk about what drove that specifically?

Duston Williams -- Chief Financial Officer

I think it was good execution, obviously, in the field. We knew that was going to rebound eventually after two quarters that we weren't very proud of, and we ended up with some good backlog build in the quarter and we'll see how this quarter goes, but we would hope to do the same thing, but we'll see how it goes.

Jason Ader -- William Blair -- Analyst

Okay. And then, Dheeraj, it's just for you. When we think about the kind of hybrid cloud pitch from Nutanix who wants to say, on a company that's got an on-prem infrastructure that's transitioning to HCI and I've also got a public cloud strategy and I'm working with, let's just say, Azure to move apps over time from my private cloud, which is based on HCI to public cloud, which is obviously a different architecture today. Is the pitch that stay with Azure but just move to the bare metal Nutanix offering on whichever public cloud and just kind of keep everything consistent, is that ultimately what you're trying to convince customers to do?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah, I think there is -- thanks for the question, Jason. There's two parts to this. One is, there is the data plane, the control plane and then the management plane, there's three layers of the stack here. And customers relike our data plane, because it's reliable, highly available. And when I say data plane, I'm not -- I don't just mean software defined storage, I mean filers and object storage and even our segmentation, micro segmentation, kind of like a network products. At the end of the day, when they want to take this to Azure, in fact, we already are talking with some of our largest customers to be able to take Nutanix to Azure, they want to use Azure's billing plane and identity and datacenters and things like that. So there will be a certain blurring of the lines between what they want to use from Azure, which could be Azure's credit and how they can burn those credits by using a Nutanix like technology, I think that's where the world is really headed for us.

Jason Ader -- William Blair -- Analyst

Yeah, thanks.

Operator

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

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

Hi, thank you. Thanks for sharing the fiscal year guide. I was curious about your confidence and putting this out there, given just that there is so much macro uncertainty, you've seen some very material misses in storage and server land. And just curious if you're baking in a tougher macro backdrop in your guide versus sort of the last couple of quarters, when you talk most of this was execution-related? And I've a follow-up.

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah. Thanks, Wamsi for that question. I'm going to take a stab at it and Duston you should too. I mean, there's basically two macros, one is the macro macro and one is our own subscription macro. And right now we're very, very much focused on that one macro that we can at least get a little better handle on. And we think that if we can keep that in control, I mean, as Duston mentioned about 3.7 year term, I mean, modulo that, I think we believe that we have things in our control and we are obviously investing toward growth as well. But at the same time, if the macro really changes, then overall our investments in sales and marketing will also reduce and will adjust accordingly.

Duston Williams -- Chief Financial Officer

Yeah, I mean, we haven't -- since we last updated you on our thoughts there, there's really been no additional signs or signals that we've seen now, who knows what the future brings. But over the last three months, in our view anyway now, again at $1.5 billion, we don't have this massive view of the world here. But from our perspective, there's really no change from our view three quarters ago -- three months ago.

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

Okay. Thanks for that. And Dheeraj, you say you need to balance the large enterprise focus versus US commercial sales segmentation? Why is this the right time to resegment the sales force and where do you think the incremental investments that you're going to make over the next year, where will those be most geared toward? Thank you.

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah, I think the question of right timing, we have a much better sort of grasp of the segmented enterprise sales force, we've been doing it for the last 2.5 years now. If you recall our February 2017 call, we talked about segmentation, segmentation, segmentation. We did that for almost two years. I think we have a pretty good grasp on it. And now our sales leadership actually believes that we can now focus on commercial that is a better marketing engine for commercial. We think that we have a better brand as well that can seek from the enterprise down to commercial. And the digital delivery model is now coming together, where as I mentioned, you know banner ads, with a couple of clicks you can actually get to doing a POC and kick the tires on Nutanix without having to really ship a box and do all sorts of things that appliance companies used to do. I think we'd love to do more and more digital touch with our prospects before they even pick up the phone and call a human being in the sales force.

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

Excellent guys.

Operator

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

Jack Andrews -- Needham & Company -- Analyst

Good afternoon. Thanks for taking my question. I was wondering if you could drill down a bit more on the commentary around 26% of deals, including a product outside your core offering. You talked about some of these newer products becoming a deciding factor in winning larger deals. Could you provide a little more color on any one of them, in particular that's really helping you move the needle on this front?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah, obviously, we understand data really well. So Files has taken off in a big way. So we're going after application data now, and Files to me, the system of records. So with capacity we will actually see that one product actually make a lot of progress in terms of dollars that we make on Files. Flow is a little bit more of a control plane. So we won't see the exact same kind of dollars, but the fact that Flow is pulling AHV. If you think about when people really like micro segmentation, extremely lightweight, easy to use, they start pulling our hypervisor as well, even though our hypervisor is license free.

And on the systems of engagement and intelligence, you think about Era and Calm. They've done a pretty good job of really having a more of a solution cell approach. So Era is more for database workloads. And we're going and talking a language to the database folks and including to the DevOps outside the West Coast, about how they should manage databases, that pulls the Core as well along with it. So as you start thinking about the workflows, you're not thinking what infrastructure workflows or virtualization workflows, you are thinking about database workflows.

And similarly, Calm is now the system of engagement that we think we can integrate with Beam and Epoch to make it a system of intelligence as well, which is basically multi-cloud workflows, you know how do you really think about the private cloud, both Nutanix stack as well as the VMware stack and how do you think about Amazon and Azure and then how do you start to drag and drop these applications between different clouds? I think the future of multi-cloud will depend on how easy do we meet mobility, the idea of motion of applications across different cloud. So I think between Calm, Era, Files and Flow, we're making tremendous progress.

And there's another system of intelligence called Prism Pro, which we are going and upsetting to our customers about -- around operations management, and that's about monitoring, alerting, doing a lot of machine learning around our machines and making sure that our support actually doesn't have as painful -- an experience when it comes to debugging customers problems.

Jack Andrews -- Needham & Company -- Analyst

Very well. Really appreciate the commentary around that. As a follow-up question, Dheeraj, you talked about how you've been disrupting the channel market which is historically a hardware-centric market. I just wonder if you could expand a little bit more on your thoughts there. As you think about trying to gain a broader process with channel partners, do you think it's better to maybe go deep with a smaller number of relationships who really understand your products or do you think you can gain enough significance and market presence with a larger number of vendors who may be selling dollar volumes of competing products essentially?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

No, I think less is more with any relationship, and we've done a good job with a few and we believe that at least in the US we have a good handle on this. Obviously, internationally, there is a lot of fulfillment that channel actually does beyond just lead generation. And at the end of the day, we are lucky if we actually get a few of them to really go deep and that's where the focus has really been. Sometimes the customers bring their preference, like I would like to do business with this channel partner, and we basically work with the customer's interest there. But mostly we work with fewer partners and try to give them more business as the quid pro quo from -- actually -- from them translates to us.

Jack Andrews -- Needham & Company -- Analyst

Great. Thanks for taking my questions.

Operator

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

Rod Hall -- Goldman Sachs -- Analyst

Yeah. Hi, guys. Thanks for the question. I wanted to start off, I guess, and ask about the the margin trajectory here. If you look at the -- if you back up the hardware pass through and you just look at the software margins in the quarter and the support margins, the software margin seem to dip quite a bit and then the support margins are up a lot, and I'm assuming maybe that is related to the success you've had with the contract sales. But I just wanted to check that, Duston, if you can bridge that for us at all, so we understand those dynamics and those underlying margins? And then I've got a follow-up.

Duston Williams -- Chief Financial Officer

Yeah, it's a little more confusing than that. Internally we kind of look at it in its entirety just because the way some things work here. But in Q4, we actually had a year-to-date adjustment. There was no impact at total margins, but a year-to-date adjustment that flowed through in Q4, COGS coming out of support and going into product. And I think if you do the calc there, it's probably 4.5% or so pick up to the support margins and probably about a 2.5% decline in the prognosis from that make up. Now it's kind of a change for the entire year there. So do some of our cloud based offerings and as probably the COGS are more appropriate into the product category there. So again, we kind of look at that in its entirety anyway from a margin perspective. So hopefully that gives you some clarity there.

Rod Hall -- Goldman Sachs -- Analyst

Are you saying that that's just a one-off, that doesn't carry forward as we look into next year really, it just affects that Q4?

Duston Williams -- Chief Financial Officer

Yeah, now those COGS on a quarterly basis now will go up into product and out of support. So there'll be a little ongoing shift there. But again, there's no impact to the total.

Rod Hall -- Goldman Sachs -- Analyst

But the shift is what you loaded in there as the whole year, loaded into one quarter, so the impact going forward won't be quite as big as what we see there in the...

Duston Williams -- Chief Financial Officer

Yeah. Correct.

Rod Hall -- Goldman Sachs -- Analyst

Okay. And then the other question that I had for you guys is on the -- just looking at the full year guide and the Rule of 40, obviously we calculate a pretty low number there. And I just wondered how you're thinking about the Rule of 40 now in the context of all this?

Duston Williams -- Chief Financial Officer

Yeah, this is a transition. And you see the growth rates from the guidance perspective and the impact that we see on the subscription piece.

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Once we actually get to ACV, right, I mean, right now we can't do that because it's pro forma.

Duston Williams -- Chief Financial Officer

Yeah. So there's a lot of complexities in here, but we've got work to do on that. And it's going to be a while, obviously, before we get back to that and in this -- say this transition, you've got some apples and oranges going on from a comparative perspective too.

Rod Hall -- Goldman Sachs -- Analyst

But it's still a governing kind of principle the way that you guys are running the business or it's sort of something that you're tabling for now and maybe revisit in '21 or how are you thinking about that?

Duston Williams -- Chief Financial Officer

Yeah, I mean, it's hard to -- in a transition year like this, that's so impactful. It's kind of hard to govern that. Obviously, we'd like to get the cash back into a neutral position here as soon as we can and the growth rate is accelerated. And I think ultimately the rest takes care of itself here, but we'll need to flush through a few things.

Rod Hall -- Goldman Sachs -- Analyst

Okay. All right. Thank you, guys.

Operator

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

Aaron Rakers -- Wells Fargo Securities -- Analyst

Yeah. Thanks for taking the questions. I have two as well if I can. So on the first question, I just want to understand kind of just a clarification if you will. The 2.5x increase in what you're calling backlog, is that -- is backlog remaining performance obligations or contracted obligations that you sit on top of the deferred balance? Are you referring to pipeline or just, I want to be clear, because that seems like just a massive number considering that I think your contracted value is like $845 million exiting last quarter. Can you just give us exactly the context behind that 2.5x increase?

Duston Williams -- Chief Financial Officer

It's simply in order that we have not build.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Okay. So is that what would be disclosed as contracted not yet revenue recognized balance?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

No. Yeah. I think you're probably looking at two numbers, deferred revenue, which obviously is lower income. And then there's a very, very short-term stuff, which is for the next quarter, it's just deferred billings actually.

Duston Williams -- Chief Financial Officer

Yeah, I mean this is simply bookings that just haven't been, we got the order in from the customer, but it simply hasn't been built.

Aaron Rakers -- Wells Fargo Securities -- Analyst

So maybe a different way of asking then. I think, Dheeraj at the beginning you said the remaining performance obligations would be an important metric to consider as far as your business trajectory going forward, that is something that's actually disclosed in the 10-Qs I believe. So that number is actually something well north of deferred revenue, correct?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah, I'm getting confused on your question here. But again, this backlog that we're referring to again as the [Indecipherable] that have come in might have been at the end of the quarter whenever that we simply haven't billed the customer or done anything with that order.

Duston Williams -- Chief Financial Officer

Okay. But the default revenue is $910 million.

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah, $910 for the quarter, yeah.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Okay. A quick follow up?

Duston Williams -- Chief Financial Officer

Yeah. We'll disclose the same stuff we've always done in this case, the Q, but in this case, now the K here.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Okay. And then, I guess, thinking about the model and the operating expense trajectory, the guidance was quite a bit higher than what I think the Street was looking for. Can you just help us understand how you think about kind of the path -- profitability or what kind of level of breakeven you think about from a model perspective?

Duston Williams -- Chief Financial Officer

Yeah, we've got some work to do on that again through this transition time here. We've got some investments and I think ultimately you have to believe that these investments will pay off in the future for higher growth rates and I think we've started to see that. I think, if you look at the new products, I wouldn't expect us to disclose this every quarter, but I think if you just look at new products that we define as essentials in enterprise, and you look at, you have to really cut it down to ACV, an annual contract value in FY '19, those new products represented about 10% of our total annual contract value in FY '19. So that should give you some feel that these products are getting traction. That's no bundling, by the way. This is -- these are kind of being sold by themselves. At some point, we'll actually start doing some thoughtful bundling on these products. And it doesn't say, obviously, everything else they're dragging along with them, but you've got to have a belief that what we're investing not only in the product side of the house, but the go-to-market side of the house is going to pay off in the future.

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Also at the Investor Day, we'll probably come back and talk about the three-year view as well.

Duston Williams -- Chief Financial Officer

Yeah, it's hard to do obviously on a call like this. But it's a fair questions, but we'll give clearly a renewed view.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Okay. Thank you.

Operator

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

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Thanks for taking. A couple of questions here. Duston, when you look at the North America sales organization and what's been going on there last couple of quarters, how would you characterize productivity across different cohorts? Any kind of metrics around how -- I know you just gave up this backlog numbers as a signal of that, but is there anything else we can kind of dig into? And then Dheeraj, your largest competitors are obviously having their big event this week, and there's a lot of discussion around Kubernetes being integrated into their core compute product and just some high level thoughts about where Nutanix stands today on that topic?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Sure, yeah. In fact, while Duston looks up that stuff for adjusted numbers of TCV, I'll take the question around Kubernetes and the rest. So if you think about our strength, we are foundationally based on Linux, and the core container engine is really Linux based, and that's our core competitive advantage. We're actually getting a lot of benefits, because our hypervisor and our entire stack including our controllers, they're all Linux-based actually.

And now the real magic will come around this, how do you make an enterprise grade reliable, available, high performance and then encircle the compute engine, which is the darker engine of Linux, which storage and networking and security and management planes being able to drag and drop them across clouds, that's where the real monetization opportunity of Kubernetes really is. So we are coming from our strength, because we are Linux-based and VMware is coming from its strength, which is its installed base, but they still have these figure that is not Linux-based. So I think we are more aligned with the cloud hypervisors.

If you think about Amazon and if you look at what even Azure is doing now, what Google has, they're all based on Linux, and we think we can get a lot of advantage of really taking Linux to everybody rather than having to built a proprietary core biz around that.

And I think you know also competitively speaking, we have been a Company that's really about data and design, that's how we lead with. There is a lot of products that we build in the last four, five years that really bolster our data position around not just data for virtual machines, but data for containers, filer data, object storage just came out recently. And then finally, databases and service, there is a lot of things that we're doing around data and making them really simple which is around design, which is where we differentiate.

Duston Williams -- Chief Financial Officer

And on your question, Alex, on North America, it's still early, but I think Chris and team have -- have made some really good progress in a very short period of time. I think we always look again on productivity at a wrap -- our ramped rep basis on a rolling two quarters. And clearly that productivity in North America, we always take that out, because it's so lumpy. But from Chris's territory without Fed, improved on a rolling two quarters. So lots of good things happening there. And Chris has taken a disciplined approach, obviously, to run the business. So lots of good stuff happening there but it's early.

And we're particularly proud of what's happening in APAC. I think the team there has done a really good job. Their productivity again on a rolling two quarters basis on a ramped rep have gone up three or four quarters in a row here now. So they're on a pretty good run what they're doing there and we're happy to have Sammy take over the leadership in EMEA. So I think we've got three great leaders here now that will kind of perform in harmony here. And I think the execution will continue to improve. Q1 is always a tougher quarter, in general, but we're excited to have some good focused on all three of these regions.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Thanks, guys.

Operator

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

Katy L. Huberty -- Morgan Stanley -- Analyst

Thank you. Good afternoon. Just looking at Slide 15, you show lifetime bookings multiples which have moved up into the right over the past three years. In 4Q, that metric leveled off. Does that tie to the subscription transition or is there another explanation for the expansion of that multiple flowing?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Well, top-line compression, obviously, 20% doesn't help that multiple, but we have to get back to you on the exact specifics. If you're talking about the Globe -- you're talking about Global 2000 repeat multiple.

Katy L. Huberty -- Morgan Stanley -- Analyst

Yeah, on Slide 15, the lifetime bookings multiples that you provide, maybe if you look past three years, every quarter they've increased and then there was a leveling out. I mean, even last quarter, there was a big jump in the multiple, even with the weaker revenue trend, but we can talk about this offline?

Duston Williams -- Chief Financial Officer

Yeah, clearly taking $20 million or $25 million out of the top line that will get you some specific answer.

Katy L. Huberty -- Morgan Stanley -- Analyst

Okay. And then Dheeraj earlier in response to a question, you talked about some of the apps that are driving engagement and revenue. It sounds like Files and Prism Pro are contributing the most revenue now. Is that correct? And then when you think to fiscal '20, are there new apps that you think can hit an inflection point in terms of revenue contribution?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah, you're right. I think Files and Prism Pro are two and we are thinking about a top down pricing model change for both Era and Frame around for desktop or user for your kind of license which were basically pulled through the Core rather than us pricing Core differently from Frame itself. And similarly for Era, it could be based on sockets as well. So there's some pricing simplification that will actually help us have that solution based approach which will help these two products not have two separate discussions. One is, I sold you the Core and I'm going to sell you from control planes or management planes. I think those are the kinds of discussions we're having, but I think Era and Calm and Frame were the three that we believe could really take off from here.

Katy L. Huberty -- Morgan Stanley -- Analyst

That's great. Thank you.

Operator

Your next question comes from Mark Murphy from JP Morgan. Your line is open.

Pinjalim Bora -- JP Morgan -- Analyst

Hey, thank you. This is Pinjalim from Mark. Thanks for taking my question. Duston, on the next year guidance as you go into the 75% subscription revenue mix, do you perceive any risk in duration for the term based licenses contract a little bit, but is there any specific incentives that's being given to sales reps to drive a three, four year deal or could it -- in terms of flexibility, I mean, could it go toward that one year level next year, I mean, you will be probably number one, but is there more risk in that number?

Duston Williams -- Chief Financial Officer

Well, one of the things that we are still trying to learn from market is how infrastructure still consider capex for a lot of our customers, especially in the large enterprise. And until commercial becomes like really, really large for us, I would assume that infrastructure will still be consumed in a three to four year kind of horizon, simply because a lot of CFO still look at it as capex actually, So there's some sort of understanding of how the market perceives infrastructure to be, because our competitors are still selling hardware and that's going to be one of the balancing acts that we'll actually have to play with. Now if the market wants to do one year terms, which will not come in the way, we should not anticipate anything unnatural to sell, don't sell one unit. I mean, definitely we want to do three-year contracts. The question is, how do we collect them? How do we actually concentrate [Phonetic] for.

Pinjalim Bora -- JP Morgan -- Analyst

I see. Understood. Okay. And secondly on the sales new group that you talked about on the enterprise side. Do you perceive any kind of disruption around that and it seems like it's in US and if that's baked into the kind of numbers so that you give us?

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah, I think in the last 12 months to 18 months, we have done a lot of segmentation for the enterprise anyway. So a lot of the territories we're talking about in the commercial space is white space. And Chris really believes that we can get the flywheel going if we were methodical with commercial and investments in commercial as well.

Pinjalim Bora -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Our last question comes from Karl Keirstead with Deutsche Bank. Your line is open.

Karl Keirstead -- Deutsche Bank -- Analyst

Okay, great. Thanks. Two for Duston. Duston on the operating cash flow, I just want to make sure I heard you correctly. I think you guided for fiscal '20 negative $200 million to $250 million. So I just want to confirm that that's correct. And I wanted to ask you, as we look out into the following year, fiscal '21, do you think you're on a trajectory to realistically get to operating cash flow neutral that year or given the ratable transition and the weight on cash flows, that could be a stretch?

Duston Williams -- Chief Financial Officer

Well, let me clarify, the first thing that kind of cash range we gave for FY '20 is free cash flow, not operating cash flow.

Karl Keirstead -- Deutsche Bank -- Analyst

Okay.

Duston Williams -- Chief Financial Officer

Okay. So it includes all capex in that number. So obviously the operating cash flow would be a lot better than the number that we had mentioned. And we'll work through this. I think, as we get a majority of the business transition to subscription, obviously the cash usage has to come down and it will come down overtime. Whether it gets neutral, in fiscal '21, again, it's kind of a yearly look that will give investors again at Investor Day and some other thoughts, I'm sure.

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

And again, about collections, whether we should collect through your upfront or not, these are all the questions that we go into right now.

Karl Keirstead -- Deutsche Bank -- Analyst

Okay. That makes sense. And then just my second and last question. Duston back to the question around the OpEx guide for fiscal '20 and how you might start to moderate that, you mentioned that you are beginning efforts to make your sales structure more efficient. It sounded like those are actions different than the split between commercial and enterprise that you just mentioned. So without getting into too much detail, I'm sure it'll come later, but just broad strokes. What is the vision to get your sales efficiency a little bit more aligned and hence that OpEx number under a little bit more control, just maybe high level thoughts would be great?

Duston Williams -- Chief Financial Officer

I think it's similar to other types of description businesses. How do you take advantage of renewals and how do those play into the equation and how do you get some efficiencies, how do you get the productivity? In theory, these renewals take on a little different feel and look from a simplicity perspective and does that enhance productivity? There's a lot of things that we need to go look at. We realize we need to look at it and we understand that. There's some efficiencies that needed there. We're in the early stages, quite honestly. And well, it will take some time, but we understand -- we need to do that and we're thinking through it.

Karl Keirstead -- Deutsche Bank -- Analyst

Yeah, OK.

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Yeah. I mean, the Investor Day would be a good place to talk about some of these things.

Karl Keirstead -- Deutsche Bank -- Analyst

Got it. Okay. Thank you very much.

Operator

There are no further time for questions. I'll now turn the call back over to the presenters.

Tonya Chin -- Vice President of Corporate Communication and Investor Relations

Thanks very much for joining us today. And as we said earlier, we'd love to see some of you at the Deutsche Bank Conference. We'll talk to you all soon. Thanks.

Operator

[Operator Closing Remarks].

Duration: 65 minutes

Call participants:

Tonya Chin -- Vice President of Corporate Communication and Investor Relations

Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman

Duston Williams -- Chief Financial Officer

Jason Ader -- William Blair -- Analyst

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

Jack Andrews -- Needham & Company -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Aaron Rakers -- Wells Fargo Securities -- Analyst

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Katy L. Huberty -- Morgan Stanley -- Analyst

Pinjalim Bora -- JP Morgan -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

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