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Nutanix, Inc. (NTNX -1.94%)
Q3Â 2020 Earnings Call
May 27, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for standing by and welcome to the Nutanix Q3 Fiscal 2020 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to your speaker today, Tonya Chin, VP of Investor Relations and Corporate Communications. Thank you. Please go ahead.
Tonya Chin -- Vice President of Investor Relations and Corporate Communications
Good afternoon and welcome to today's conference call to discuss the results of our third quarter of fiscal 2020. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix's CEO and Duston Williams Nutanix's CFO.
After the market closed today, Nutanix issued a press release announcing financial results for the third quarter of fiscal 2020. If you'd like to read the release, please visit the Press Release section of the Nutanix website. During today's call, management will make forward-looking statements, including statements regarding our business plans and financial targets in future periods, the timing and impact of our transition to a subscription business model, the factors driving our growth, the benefits and capabilities of our new and existing products and the current and anticipated impact of the COVID-19 pandemic. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a detailed description of these factors, please refer to our SEC filings, including our most recent quarterly report on Form 10-Q, as well as our earnings press release. These forward-looking statements apply as of today and we undertake no obligation to update these statements after this call. As a result, you should not rely on them as representing our views in the future.
Please note, unless otherwise specifically referenced, all financial measures we use on today's call are expressed on a non-GAAP basis, and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investor Relations section of our website and in our earnings press release. And with that, I'll turn the call over to Dheeraj. Dheeraj?
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Thank you, Tonya, and good afternoon everyone. I appreciate you joining us today and hope that you and your loved ones are safe and healthy during this time. Since we last spoke during our second quarter earnings call in late February, the way we live has undoubtedly changed. At that time, we were just beginning to see the impact of the coronavirus, which was largely isolated to just Asia. As we tried to estimate the potential impact of the virus, we provided Q3 guidance that reflects the worsening business conditions in Asia, noting we couldn't then predict what would happen in the rest of the world. Today just 90 days later, we find ourselves nearly two months into a global pandemic.
Today, I will start by covering our response to COVID-19, including the trends we are seeing across our customers and end markets. I'll also talk about where we are finding opportunities to better serve our customers as the pandemic meaningfully alters the future of work and I hope makes us a stronger company as we come out on the other side of this. I'll then turn to talk about the quarter and discuss how the steps we have taken recently enabled us to deliver a strong Q3 performance. And finally, I'll provide an update on the progress we've made in our subscription business model transformation before turning the call over to Duston to discuss our results in more detail.
Starting with COVID-19, in February, it was business as usual. And by the end of the month, we anticipated there could be a demand issue in APJ as we noted on our Q2 earnings call. Beginning in March and continuing through April, we saw an increase in demand for end user computing offerings, which include both VDI and desktop as a service solutions, while in the rest of our business, we saw some modernization projects spillover into future quarters as customers faced rapidly changing financial circumstances. While this is a time of broad uncertainty, it is also a time of great opportunity. Most long lasting companies that went past their first decade went through an annealing process during a recession and came out stronger. We have been able to quickly assess the situation and make informed real-time changes to how we operate our business. To that end, Nutanix has been focused on the wellness of our employees, customers and core products, while revisiting productivity and cash efficiency.
Let me touch on each of these in more detail starting with employees. By mid-March, as the pandemic began impacting EMEA and the U.S., our global employee base began working from home. While we had never envisioned such an abrupt change to our working environment, this was an extremely smooth transition because we were ready to enable our workforce to work remotely, thanks to our own technology. Within a two-week period, we moved from having roughly 30% of our global team members working remotely and 70% working in our offices to nearly 100% working remotely with no service interruptions. With our work-from-home systems firmly in place, our employee productivity has held steady and even improved, in some cases. Employee engagement has also seen a slight positive uptick.
Some of our productivity advantages are due in part to "drinking our own champagne" as our CIO likes to say. Citrix VDI, an autonomous AOS and AHV-powered infrastructure with zero touch operations, Xi Leap disaster recovery as a service, Nutanix Files for application data and Frame desktop as a service are the necessary pillars of our company's IT strategy that has been in the works for several years before this pandemic. In many ways, this digital infrastructure is now the biggest reason why we found this discontinuity to be so much less painful than many of the businesses.
Turning to our customers, during this time, we also put to the test our ability to provide the exemplary service that our customers and partners have come to expect from Nutanix, even as our entire team works from home. In early March, we communicated our intent to continue to provide 24/7 support remotely. Thanks to the hard work and dedication of our employees, we've been able to achieve just that. We have received numerous unsolicited positive responses from our customers thankful for our attention to their needs at this time. In fact, our industry-leading customer support NPS score has actually increased with our third quarter scores reaching the highest level that they have been in the past four years.
As we are focusing on the health of our employees and customers, we are also focusing on the health of our business. While financial strength and flexibility are always a priority, we are taking proactive steps to manage operating expenses and cash use to better position the business as we navigate through the pandemic and beyond. Duston will provide more detail but in summary we've implemented two non-consecutive single week of unpaid time off for many of our employees around the world, one week in each of Q4 FY '20 and Q1 FY '21. If carefully coordinated, these actions do minimize the impact on our customers and our employees, while prioritizing temporary measures such as furloughs instead of permanent changes such as layoffs. We also believe in sharing the burden across all levels of the organization and as such, our executive team took a 10% reduction in salary starting in April. Our efforts are not stopping there as we continue to look for areas to save on operating expenses more broadly.
Other areas where we are driving smart savings are within our marketing organization by pivoting to innovative and engaging virtual solutions. We have been encouraged by the early returns on our shift to virtual events from traditional in-person events back to the regional.NEXT and tours and technology boot camps. We have gone completely virtual and are seeing comparable yields in terms of qualified leads and virtual meetings for our sales organization at less than half the cost. Another key digital initiative to further improve our ease of use in doing business is our test drive product and offer. We've truly doubled down on this critical demand generation initiative, which is designed to enable our prospects to experience Nutanix products via a zero touch self service Google Cloud-powered platform. With that, let me turn to the quarter.
We were pleased with our Q3 performance and, in fact, despite challenging market conditions, our final results came in modestly ahead of the preliminary ranges we pre-announced several weeks ago. TCV billings were $380 million, up 17% year-over-year and TCV revenue was $314 million, up 18% year-over-year. Both metrics also came in above the midpoint of our guidance we provided in our last earnings call. Total revenue was up $318 million and has returned to double-digit year-over-year growth of 11%, despite revenue compression resulting from our continued subscription model transition and hardware elimination.
We also delivered a strong performance on EPS. Customers who have a lifetime spend with us of more than $10 million have once again grown more than 60% year-over-year, both in number of total accounts and in aggregate dollars spent. There are 64 customers in this category and they now account for more than $1.2 billion of lifetime spend with us. Our customer cohorts with a minimum lifetime spend of $3 million grew 37% year-over-year with 329 accounts and they have collectively spent more than $2.5 billion in lifetime spend, growing 43% year-over-year. And the number of customers who have spent more than $1 million with us in lifetime spend has increased to 1,122, up 32% year-over-year. Moreover, once again, these customers grew nearly 40% year-over-year in total lifetime spend.
In Q3, we closed 59 deals worth over $1 million, growing 31% year-over-year in TCV bookings. 11 of these 59 accounts also spend at least $1 million with us last quarter and their aggregate purchase of notes increased over 40% from last quarter. We now count nearly 910 of the Global 2000 as customers and these customers have collectively spent 37% more in Q3 than in the same quarter a year ago. Global 2000 customers continue to be approximately 30% of our business. We're now privileged to serve a total of 16,580 customers in over 140 countries.
While we were ensuring our employees could effectively and productively work from home, we also launched programs aimed at helping our customers to quickly set up remote work environments for their employees. I'm proud to report that many of the big pharma companies, both in the U.S. and Europe are using Nutanix infrastructure to make progress on medical research to fight this virus. We also launched FastTrack for end user computing or EUC, a special program to help companies quickly expand capacity or set up a new VDI or desktop as a service environment to support remote work.
Over the past decade, we have delivered millions of desktops reliably to enterprises, large and small. We believe that the future of work has been meaningfully altered due to this pandemic, as has the future of healthcare and education. How work, healthcare and education get delivered in the coming years will depend largely on computing environments that get delivered via a cloud but without the burden of rewriting older applications. Hyperconverged infrastructure, now serving as a multi-cloud infrastructure as a service or IaaS plays a critical role in the lift and shift to the cloud, both private and public, as virtualization did more than a decade ago, by providing a new operating model without any change to legacy apps or operating systems. In fact, while many of our deals in the quarter were a continuation of long-standing datacenter modernization projects, we did see demand for our end user computing solutions increase significantly during the quarter. EUC-related sales increased to 27% of TCV bookings, up from 20% last quarter and up from 18% a year ago. EUC deals also brought in 20% of our new customers during the quarter.
Xi Frame, our desktop as a service offering or DaaS demonstrated solid momentum and had a record quarter. In some cases, thanks to extraordinary efforts put forth by our customer service and sales teams, we were able to get some customers set up with remote work solutions in record time. Our customers' expectations include having remote work as a necessary component of their own digital transformation. This focus on end user computing is bringing us back to our roots. We're in a much larger piece of our business for supporting virtual desktop workloads primarily to U.S. based government organizations. 10 years ago, we took a contrarian approach to bet in VDI as the killer app for our scale-out architecture within the datacenter. It was contrarian because pundits thought Windows was dead in the area of mobile computing, while we had a long-lived Windows mantra for the enterprise. VDI was also mission critical as the entire front office would not even have a browser if we suffered a downtime. Over time, as we grew our portfolio, VDI remain important though a smaller percentage of our business. When we acquired Frame in 2018, we broadened our end user coverage to as a service, and last year we combined our VDI and DaaS groups under one organization.
Looking back, this pandemic has made us realize how critical that reconciliation has been between our digital HCI platform, supporting Citrix and VMware VDI and our SaaS-based desktop service. In our largest deal of this quarter totaling over $7 million, one of the largest financial services holding companies in the U.S. came to us for a highly agile digital infrastructure to build their private cloud. Due to a recent merger, this Global 2000 company needed to share desktops seamlessly between their two large entities. The ease of deployment of our software significantly reduced the bottleneck of storage and compute in time sensitive workload deployments. Because our software is so easy to use, the EUC team has been able to take ownership of the entire stack. We have a similar story to share about a large American financial services company that purchased nearly $5 million of our software this quarter, bringing their lifetime spend with us to over $18 million. Now they're using Nutanix core software and our AHV hypervisor for all employees working from home, as well as using us for three large business critical applications. Both of these large financial institutions have immense respect for our customer service and has mentioned that our support organization was a key factor in their decision to go all-in with Nutanix. We are grateful to our SRE team for obsessing over the customer and front line.
On the topic of going all-in, we saw robustness in our overall product portfolio this quarter. But before I talk about our portfolio, let me attempt to describe our portfolio to you one more time. You should think of core HCI with our AHV, AOS and Prism products as the digital infrastructure that assumes the role of portable IaaS in a multi-cloud world. As I mentioned before, we'll make a strong case in the next three to five years for how HCI becomes a killer app for all things lift and shift with no change to applications or operating systems, similar to virtualization 15 years ago. What sits on top of this horizontal foundation is three D's: Datacenter services, which includes unified storage, disaster recovery, operations management, networking and security services; DevOps services, which includes multi-cloud automation, database services, containers and the like; and Desktop services, which includes cloud-based SaaS and overall end user computing solutions for the future digital workspace.
In summary, our portfolio is simply four D's, a core Digital HCI platform on top of which sits Datacenter, DevOps and Desktops, which are akin to apps running on top of the platform. Together, the platform and the apps fuel each of these adoption as Windows and Office did in their symbiosis. To give you a momentum with our three D's on a rolling four-quarter basis, the attach rate of these products in Q3 was 32%, up from 23% in the year ago quarter. On a rolling four-quarter basis, the transaction volume of these three D products in Q3 increased 16% year-over-year and 35% quarter-over-quarter. At the end of Q3, 28% of our customers have bought at least one of these non-core products, up from 20% in the year ago quarter. Q3 lifetime bookings of non-core products grew 116% [Phonetic] year-over-year and now make up 13% of new ACV and 15% of overall ACV.
We also saw good momentum with our DevOps offering, Nutanix Era, which is our database as a service solution. One of the largest automobile insurers in the United States spent nearly $1.5 million with us during this quarter, primarily for Era. They had been having performance and scalability problems with Oracle, which is their most critical workload. During a proof of concept, we were able to show them a significant performance increase in the ability to make database operations invisible with Era. Nutanix Era is to databases what Nutanix Calm is to VM's, containers and all modern [Indecipherable] apps, i.e., one-click self service orchestration, multi-cloud automation and autonomous operations. One of the largest professional services firms in the world spent $5 million with us to continue their build out of a private cloud infrastructure based on our software and native AHV hypervisor. This purchase brought their lifetime spend up to nearly $17 million as part of their digital infrastructure initiative. We believe that this trend of zero touch IT self-service delivery and streaming cloud-based infrastructure will hasten in the post-COVID world.
Our customer base continues to be highly diversified. The biggest vertical in Q3 was financial services, which represented less than 25% of our business, consistent with historical levels. This sector is pretty global for us as well. One of the largest financial institutions in Europe made the decision two years ago to use Nutanix for their strategic datacenter platform for all new and existing workloads and applications. This Global 2000 company is an existing customer with $18 million of lifetime spend with us, with $3.5 million of that in Q3 alone. Because our digital HCI foundation provides them true agility and because they had capacity ready for a disaster scenario, they were able to scale up to get all of their 7,000 employees working from home in about a week and even provide database services like a public cloud provider. The Board of Directors was extremely appreciative of this preparedness.
Regarding capital allocation and other industries, our exposure to energy and hospitality verticals remains small even though we were ready for them as they rebooted their operations post-COVID. While the retail industry as a whole has been impacted by COVID-19, we have some retail customers who have seen such a significant increase in online purchases that they've had to fortify their IT infrastructure to support the load. An existing customer and large retailer in the U.S. came to us because of a major shift to online sales and curbside pickup, which put added pressure on their IT infrastructure. They said that the pandemic was making "every day like Black Friday". They purchased an additional $1.5 million of our software and we were able to quickly get them set up with a solution to support this additional load. This customer has a lifetime spend of more than $24 million with us.
In healthcare, we've supported customers who have had to quickly make the transition to telehealth or to enable their non-frontline workers to work remotely. An existing customer who is a large healthcare provider and hospital system on the East Coast tripled their deployment with us so that they could set up a solution for their non-essential employees who work from home. In addition, a non-profit healthcare system in the East Coast purchased our core software and Prism Pro management console in a subscription deal worth $1.3 million. They're running VDI workloads as well as the healthcare industries Epic operational database, which we announced certification for in Q2 of this year.
This crisis will shape, not just the future of work and future of healthcare with telemedicine, but also the future of education with remote learning. A statewide school district in the East Coast needed to quickly set up a solution for their students to be set up to learn remotely due to COVID-19. This new customer needed an IT infrastructure solution that could be set up quickly and were unsure of the capacity they needed and it all needed to be set up remotely due to shelter-in-place orders. Their challenge was to scale the remote learners from 200,000 to 2.8 million. They purchased $1 million of our cloud software as well as our DevOps and datacenter services such as Calm, Files, Flow and Prism Pro and had it deployed in weeks, enabling millions of students to embrace digital learning.
Speaking of digital, let me now spend some time on our ongoing transformation to a subscription-based business model along with our customers. During this time of uncertainty, we are even more resolved in our move to this model. Not only will it give us more recurring revenue or time, it also provides our customers with the flexibility they may require to purchase a software on an opex versus capex basis. We are seeing large deals and large customers move to subscription. A U.S. based financial services company continued their digital journey with us by purchasing nearly $4 million of additional software from us via subscription bringing their lifetime spend up to over $11 million. Similar story with a large utility company on the U.S. West Coast who was one of our top-25 lifetime customers with total spend with us at $18 million, purchased nearly $4 million with us in Q3 as part of their ongoing digital transformation. Some of our largest and most tenured customers are also embracing subscription earlier than we had imagined. One of the largest automobile manufacturers in the U.S. who has spent more than $37 million with us over the years, purchased another $3.5 million in software from us in Q3 and switched from life of device to subscription. This new entitlement of our software has made this organization nearly 100% Nutanix, with only a small amount of their infrastructure residing in mainframe.
Subscription is also being embraced by U.S. federal agencies in the earnest. A federal entity in the U.S. has been working with us to modernize their datacenter and added more product in their order this quarter to total nearly $2 million worth of software on a subscription basis for a lifetime spend of nearly $40 million. Nutanix is their on-prem private cloud solution for mission-critical workloads using HPE servers. Another one of our large subscription deals in the quarter was with one of the leading operators of general acute care hospitals in the U.S. who has been a customer since 2016 and has a lifetime spend with us of over $15 million. In Q3, we sold them an additional $2 million of our software to help them in their lift and shift to private cloud. They are working toward a zero touch provisioning model and both our core HCI software and Nutanix Calm for orchestration and automation are critical to that strategy.
As customers look to the future, we expect that corporate initiatives around remote work, hands free IT automation, disaster recovery, and lift and shift to private and public cloud infrastructure will be some of the pillars of digital transformation. And we believe we will be at the center of these conversations. As we contemplate the future of work, our developers are deeply grasping the meaning of subscription economics, cloud engineering and container-based micro services. Our newer products like Life Cycle Manager, Objects and Prism Pro are completely based on Kubernetes containers as an agile delivery model. Most importantly, our Xi cloud services are designed to be 24/7/365. That is a huge shift toward a DevOps mindset as we try to bring our signature NPS of 90 to cloud SLA's of security, availability and performance.
As we've discussed in the past, our core engineering is working closely with AWS and Azure on Nutanix Clusters so that our entire portfolio can be delivered in our customers' virtual private cloud in the public cloud datacenters, integrated seamlessly with their cloud commits and credits.
In conclusion, we've been focused in the collective health of our employees, customers and partners and overall business. We have quickly and efficiently shifted our business to match the changing times. Our business has proven resilient and we have seen bright spots in EUC as well as our core business. We do not see this shift as temporary and in fact, we see the future of work changing permanently. In a report this month from industry analysts from Gartner, they predict that by 2024, in-person enterprise meetings will drop from 60% to 25% driven by remote work and changing workforce demographics. In a separate report, [Indecipherable] have stated that even after a vaccine is available, firms will never return to the pre-pandemic normal as knowledge workers demand these new found highly flexible commute-free productivity improvements to the component. We believe our product portfolio and our customer-centric culture keeps us well-positioned to navigate this crisis and evolve with this dislocation to our stakeholders' advantage, i.e., customers, employees and investors. Speaking of the crisis and our imminent opportunities around efficiencies and prudence, over to Duston. Duston?
Duston Williams -- Chief Financial Officer
Thank you, Dheeraj. With all the disruption and uncertainty that COVID-19 has caused, we were pleased to be able to deliver solid Q3 results in line with, or in the case of EPS, better than our expectations heading into the quarter. As you may recall, when we issued our Q3 guidance in late February, we saw early indications that COVID-19 would cause a demand issue for our APJ operations and we adjusted our guidance accordingly. We did not adjust our outlook for our Americas or EMEA corporations as the virus's impact on these regions was uncertain at that time. The virus clearly ended up affecting all three regions and despite this, our teams did an excellent job executing in a very turbulent environment.
We also mentioned that we were starting to prudently manage our operating expenses during our Q2 earnings call. This proactive and timely approach was based on our view that it was possible that the current demand environment could deteriorate due to the impact of COVID-19. Once our initial premise of a weakening demand environment began to play out, we immediately took even further actions to reduce expenses, which I will return to a bit later. Our subscription journey continues to move forward as selling term-based subscriptions have clearly become the norm. Subscriptions billings now account for 84% of total billings, up from 79% in Q2 and subscription revenue now accounts for 82% of total revenue, up from 77% in Q2. The average dollar weighted term length in Q3 '20, including renewals, was 3.9 years, flat with the 3.9 years we reported in Q2 '20. As with last quarter, this calculation assumes life of device licenses of five-year terms.
Now, I'll move on to some specific Q3 financial highlights. TCV revenue or software and support revenue for the third quarter came within our initial guidance range of $300 million to $320 million and above our May 5 estimated preliminary results range of $307 million to $312 million, coming in at $314 million, up 18% from a year ago quarter. TCV billings or software and support billings also came within our initial guidance range of $365 million to $385 million and above our May 5 estimated preliminary results range of $371 million to $376 million, coming in at $380 million, up 17% from the year ago quarter. ACV booked in the quarter, exceeding our expectations, was $130 million and was up 22% from the year ago quarter.
Additionally, total revenue also exceeded our May 5 estimated preliminary results range of $312 million to $317 million coming in at $318 million, up 11% from the year ago quarter. We used a modest amount of backlog during the quarter. This marks the third consecutive quarter that we have experienced year-over-year growth in total revenue. The revenue growth rate is starting to reflect a more meaningful comparisons as the revenue impacting hardware elimination has been effectively complete for the last six months. The ACV of our HPE DX related business increased 16% in the quarter versus Q2. We exceeded our pipeline generation goal for Q3 that was set before the quarter started. As expected, new customer bookings lagged a bit in the quarter representing 19% of total TCV versus 24% in Q3 '19 and down from 24% in Q2 '20.
The Americas and EMEA regions performed well. As expected, the APJ regional performance reflected more pronounced impact from COVID-19 related issues. TCV bookings or software and support bookings from our international regions represented 44% of total bookings versus 45% in Q3 '19. Our non-GAAP gross margin in Q3 was 80.7%, above our guidance of 80%.
Operating expenses were $390 million, significantly below our guidance range of $420 million to $430 million. The lower than expected expense number for the quarter was mostly due to the hiring pause implemented early in the quarter, reduced travel as well as overall expense management. And our non-GAAP net loss was $135 million for the quarter or a loss of $0.69 per share versus our guidance of a loss of $0.89 per share.
Now a few balance sheet highlights. We closed the quarter with cash and short-term investments of $732 million, DSOs in Q3 were 67 days versus 76 days in Q3 '19 and 65 days in Q2 '20. Free cash flow during the quarter was negative $117 million. This performance was negatively impacted by $23 million of ESPP outflow in the quarter, higher than we expected due to the lower Nutanix stock price. Free cash flow was also negatively impacted based on a somewhat higher than expected accounts receivable balance and higher capital expenditures. Our Q4 capital expenditures should be substantially less than the Q3 total of $33 million.
Now a few comments turning to the future. As we have mentioned a few times, despite all the economic uncertainty that most companies are dealing within today's environment, we were generally pleased with our Q3 results. As we look forward to Q4 and beyond, we remain very excited of what the future holds for Nutanix. We are a much stronger and better company today than we were just 12 months ago. We continue to aggressively move forward with our subscription journey, our non-core our products are starting to get serious traction in some of our largest accounts. And our sales leadership continues to improve, all with the backdrop of a pipeline that is significantly larger than just one year ago.
Although the future clearly looks encouraging, the short term comes with a high degree of uncertainty. We are still in an unprecedented and volatile time period. And importantly, we are still in the early innings of transforming our business to a subscription model fueled by low cost renewals. While we're making great progress on the transformation, we have not yet reached a point where the predictable renewal business makes up a substantial portion of our quarterly results.
We are getting there but for now, new business and upsell business, areas with greater inherent uncertainty, still account for a vast majority of our quarterly billings. Accordingly, we do not believe it's prudent to provide guidance for Q4, but as I said we're encouraged with the progress we're making. We've spent the last year and half building a subscription business that will ultimately lead to a much more predictable business. With 84% of our billings in the quarter now coming from subscriptions, combined with the customer retention metric of 97%, at this point we believe it's largely a matter time until the business matures to a new level of predictability. As such, at this time, we plan to issue annual guidance for FY '21 during our Q4 conference call for any top-line guidance most likely focused on ACV and with growth rates appropriately correlated to the current macro environment.
What we do know about FY '21 is that our teams will be ready. Our product will be ready and our subscription model will be ready to take advantage of any economic recovery that might take place. In the meantime, in lieu of specific guidance for Q4, I'll provide a few thoughts around specific areas that we are focusing on and in which investors frequently show interest.
Expense management, as Dheeraj noted, we have been aggressively managing expense structure since mid-Q2 and we'll continue to do so moving forward. Hiring has been extremely limited, merit increases and bonuses have been paused, executive salaries have been reduced and we have implemented two non-consecutive single weeks of unpaid time off from most of our employees worldwide, one week in Q4 and one week in Q1. Major events such as.NEXT and our worldwide sales meetings will go virtual along with many other cost saving initiatives. This early and aggressive action to control expenses in the near term, all while keeping relentless focus on the customer have clearly paid off based on the Q3 operating expenses coming in $40 million lower than the high end of our range of previous guidance.
Going forward, we will continue to actively manage the expense structure as the macro environment dictates. For the immediate future, we would expect operating expenses to hover at somewhere around $375 million to $400 million per quarter. Cash management and free cash flow, again, our early and aggressive expense management has put us in a pretty good position to control the cash flow over the next several quarters. Our hiring has been very limited and whatever hiring that will take pace will involve around highly critical roles, as well as some hiring around customer facing roles such as sales teams, professional services and support. Going forward, we would expect the cash usage to decrease significantly from Q3 and we will continue to do what is required to minimize cash usage in the future.
A few comments on sales compensation. We continue to move aggressively to align our sales compensation plans to support a subscription-based model. And starting in the first half of FY '21, we will move to either a partial or full ACV sales comp model. This is the first step in setting up a comp structure to take advantage of the natural leverage a subscription model affords. Renewals, renewals have become a major focus area for the company and will be the foundation to build a profitable business going forward. We are in the process of setting up roles and responsibilities within the various organizations to make sure renewals are efficiently transacted. The available to renew pool of subscription transactions is just starting to come into play. In Q3, we transacted about $5 million in non-support related subscription renewals and the pool available to renew will grow to approximately $10 million in Q4.
A few thoughts on operating leverage. The subscription business model and operating leverage can go hand in hand. Many investors routinely ask us why our sales and marketing cost structure does not line up closely with other subscription businesses. Before we answer this question, some context is needed. As you recall, we started our subscription journey back in the first half of FY '19 when the company was approaching a billings run rate of $1.5 billion. Since then, we have transitioned a substantial portion of our business to a term-based subscription model with average term duration of less than four years. Subscription-based businesses derive considerable operating leverage from their renewal base and most mature subscription companies probably have a renewal base that comes close to 50% of their total billings.
Today, all of our subscription renewals account for less than 10% of Nutanix's total billings or to put it another way, more than 90% of our business today is still composed of new and upsell business, business that is costly to transact. Compare this to renewals, which are transacted at a low cost, much lower than new business or upsell business. As such, it is reasonable to expect a wide gap in operating leverage profiles from two different subscription companies, one with less than 10% of their total business derived from renewals and the other with 50% of their total business coming from renewals. As our subscription business matures and our renewals also become a substantial percentage of our total business, we believe it is realistic to assume that Nutanix, over time, will begin to display somewhat similar operating leverage characteristics as other mature subscription companies.
To date, only the negative aspects of our subscription transition, mostly around top-line compression related to terms and pricing have been well documented and have carried the headlines. We refer to these negative aspects as the investments into our subscription transition. Much of the financial content for our previously postponed Investor Day was aimed to focus on the future positive aspects of our subscription transition, mostly around why the renewal inflow will naturally provide significant operating leverage over time just like every other subscription company. We refer to these positive aspects of the transition as the return on our subscription investments and the aforementioned move to ACV-based compensation for our sales force will ultimately position us to garner this leverage from the renewal inflow. After all, every substantial investment requires a substantial return on that investment.
We look forward to sharing a more detailed view of our go-forward operational plan and corresponding financial targets at an appropriate time in the future. With that, operator, you can now open the call back to questions. Thank you.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question comes from Katy Huberty with Morgan Stanley, your line is open.
Katy Huberty -- Morgan Stanley -- Analyst
Thank you. Good afternoon. Dheeraj, as you mentioned, what we're seeing in the current environment is accelerating adoption of public clouds. I was wondering if you can just walk through what you have in the pipeline and on the product roadmap in terms of any solutions that will be distributed on the Amazon and Microsoft platform and whether you see that as incremental revenue opportunities or is that just new features layered on top of the current product portfolio.
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Thank you, Katy, for the question. Yeah, in fact just to take a step back, our idea of really blurring the lines between on-prem and off-prem is to take all our products and run them in the public cloud as is and that we believe is going to be the biggest differentiation when it comes to lift and shift just like what virtualization did 15 years ago. But public cloud also has some elasticity capabilities that we're putting as part of our product. So things like autoscale and autoscale out, more autonomous infrastructure that is policy based and somewhat intentful, as we call it, in product terms. Also commerce, I think doing it in the marketplace and having people go buy something for three months or one year as opposed to really needing a sales person to do things. There's a lot of good things that we can actually go and avail there as well.
And finally, this idea of hybrid where you want part of your infrastructure to run off-prem in a public cloud, but parts that would actually run on-prem, I think is very powerful for our customers, because they're going to make some decisions about public versus private based on data sovereignty and data gravity and economic reasons which is laws of physics and laws of the land and laws of economics. So we really are looking forward to the next three to six months. There is some big sort of announcements coming, but we want to make sure we do it in a differentiated way as opposed to just being the first to market, being the best to market is very important to us.
Katy Huberty -- Morgan Stanley -- Analyst
Thank you for that. And, Duston, just as a follow-up, the new customer count accelerated in the quarter to 970. How would you characterize the deal pipeline heading into July versus, for instance, a year ago?
Duston Williams -- Chief Financial Officer
Yeah. Katy, to make sure I understood you, new customers, you were referencing?
Katy Huberty -- Morgan Stanley -- Analyst
Yeah, I mean the April quarter new customers of 970 was an acceleration from the prior quarter. So clearly, good performance. Just curious what your pipeline for new business looks like going into July versus this time last year.
Duston Williams -- Chief Financial Officer
Yeah, just on that, new customers is around 700 in the quarter. So we'll have to sync up with you on those two numbers.
Katy Huberty -- Morgan Stanley -- Analyst
Okay.
Duston Williams -- Chief Financial Officer
But, yeah, the pipeline and I guess maybe your question is more kind of Q4 in general and where we haven't given any specific guidance, it's probably a question that will come up sooner or later, so why don't I kind of answer your question and maybe a little bit bigger question. Q4, again, in my comments, I mentioned pipeline for Q3 generation exceeded our target, and it was the biggest in quarter pipe that we generated in our history, so that's clearly encouraging. And if you look at Q4 in our only roughly three weeks into the quarter, so take that for what it's worth, but on the surface, there is not many things that look terribly out of line. Now the results won't be as good as we thought they would be pre-COVID, but if you go down and look at conversion rate, where we should be three-plus weeks into the quarter, where we are, from what's converted from pipeline, that looks OK. The loss rates are actually a little bit lower. The sales curve for month one linearity is within the bounds of what we would expect historically months two in cumulative, same thing. We've closed several million-dollar deal, I think, at least three this week and a couple of those were spillovers that we thought was going to close in Q3, actually closed this week, two Fed deals that pushed from Q3.
If you look at EMEA, there is some good stuff going on there with new customers and partners starting to get engaged there with some public sector activity that looks really encouraging. And AHV, not surprisingly, is getting, I think, some renewed attention from a cost [Indecipherable]. We've clearly got something there for them with AHV. And APAC was first impacted and that's starting to open up and there is some reasonable news within some countries there, I think, India and China is still obviously struggling but not too bad. And to get to your question about pipe, the pipeline is there. There's no doubt about it. The sales capacity is there, no doubt about that but deals are volatile. And they're still volatile. So you know, us not giving Q4 guidance, we mentioned that we wouldn't be doing this, May 5, so there's really no surprise there. And then, the comment was that again, it's just a little tougher in a volatile period for us to give specific guidance just because, again, less than 10% of our business is through renewal business at this point. But when you go all through the metrics and stuff, there is some really good stuff happening, the products are performing really well. Our sales teams are executing all that. It's just very, very volatile period.
Katy Huberty -- Morgan Stanley -- Analyst
That's great color. Thank you.
Operator
Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Rajagopal Kamesh -- Goldman Sachs -- Analyst
Hi, this is RK on behalf of Rod. Thanks for taking my question. Opex cam in nicely lower than expectations and you've talked about cost cuts and furloughs and slower hiring. So I wanted to ask if you could just give us some confidence that these opex cuts you're making don't affect revenue growth looking out in the future?
Duston Williams -- Chief Financial Officer
Yeah, I can start on that one. You can do this work without worrying about not FY '21 but FY '22 also, to your point, because the easiest thing for us to do again would be to completely stop everything and not worry about the future growth but we can't do that. So we've done a lot of scenario planning, downside base case, best case and within that environment, you have to have a view on FY '22 or those scenario don't work well so I think the other comment there is don't ignore the fact that we have excess sales capacity coming into this downturn also. So it's not like we were razor thin on capacity. So we've clearly got more capacity. So it's a fine line we walk and that's why I think we've done some pretty prudent things that, again, kind of affect everybody and not singling folks out because everybody is going to take part in the growth going forward. So I think we've done this thoughtfully and we'll adjust it every week, every month, every quarter and as we need to, based on what's happening.
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Yeah.
Rajagopal Kamesh -- Goldman Sachs -- Analyst
Thank you.
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Well said, Duston, and I just wanted to add just the fact that I mentioned this in my script as well, about 10 years later, we have a recession. This is our first recession at the company and I use the word very deliberately annealing. It's a process of recrystallization in getting more strength. When we went public, we had 1800 employees which was 3.5 years ago, maybe close to 4 years and now we have more than 6,000 employees, about 70% of our workforce has never seen a Private Nutanix and I think it behooves us to actually look back and think about every dollar that we used to spend 4, 5 years ago, how do we go back to the basics and become a start-up again. So we're using this opportunity to really go to that as well.
Rajagopal Kamesh -- Goldman Sachs -- Analyst
Thank you. Also wanted to ask about your cash flow and liquidity position. Is there a minimum amount of cash that you have in mind to run the business? And what's your thinking about potentially accessing the capital markets again?
Duston Williams -- Chief Financial Officer
Yeah. Again, this is something that we look at all the time with scenarios, and they say this downside base case, best case and based on our view of those scenarios top-line potential and what we have done with expenses and the levers that we can pull with expenses, we feel really good about our cash balance throughout FY '21 based on what we've scenario out in those three cases there. The markets are reasonably open. The terms in some of these -- the terms are reasonably good but again, what we've looked at, we feel pretty good going forward. I think if we were, at some point, to raise cash in the future, it would be more around tilted to giving us some optionality with our continued subscription transition. It would be more tilted to that rather than day to day stuff and this would be more potentially around, do we want to have average terms shrink down a little bit further from where they are today, about 3.9 because we know two things happen, that makes the business much more profitable with some a little bit lower terms and that's lower discounting because the lower the term, the lower the discounting. That's highly leverageable from a business model perspective.
And the shorter the term, the quicker that deal comes up for renewal and with a 97% retention rate, the quicker that deal comes up for renewal, the quicker we get an efficient deal levered into the business coming at a much, much lower cost. So if we were going to do something, it would be more around, again, that optionality to make the business much more profitable. And now we've got the current debenture out there, that's January '23 timeframe. So there's lots of optionality around that, too.
Rajagopal Kamesh -- Goldman Sachs -- Analyst
Great, thank you.
Operator
Your next question comes from Alex Kurtz with KeyBanc Capital Markets. Your line is open.
Alex Kurtz -- KeyBanc Capital Markets -- Analyst
Thanks and I hope everyone is safe and healthy over there. Duston, just to revisit your earlier comment about the pipeline, I think you said it's like the largest in third quarter pipeline growth in company history, something along those lines. I guess, to both of you, what are the workloads that are driving that? Is it just a continuation of the EUC VDI trends that you saw in the last quarter or are you kind of going back to a heavier mix of big digital transformation projects? So I guess what's driving that and is it sort of a continuation of last quarter?
Duston Williams -- Chief Financial Officer
You want to take that, Dheeraj?
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
So yeah, let me at least make an attempt to this. I think a lot of the pipeline in Q3 that got converted to EUC deals, which we reported as 27% of our TCV bookings, a lot of that got created and closed in the same quarter and the numbers that Duston talked about was overall creation in the quarter, which is helpful for Q4 and Q1. I think the mix is very similar. I mean, as I said in my call script as well, that EUC used to be a much larger percentage of our business five years ago. It has come down to 18% a year ago and was 20% a quarter ago and has become 27% this quarter. So I think our pipeline is in the same range as our bookings in Q3.
Alex Kurtz -- KeyBanc Capital Markets -- Analyst
All right. Thanks, guys.
Operator
Your next question comes from Jason Ader with William Blair. Your line is open.
Jason Ader -- William Blair -- Analyst
Yeah, good afternoon, guys. My first question is just on the guidance. I'm sure this has been hotly debated internally, but why not just give a range. That's what most companies are doing. To completely pull your guidance after some of the comments that you made on the month of May and the metrics being reasonable and the pipeline growth that you saw in Q3, it's just -- it's a bit odd to me that you did not give any Q4 guidance. So just walk us through the thought process there.
Duston Williams -- Chief Financial Officer
Yeah. Again some things there are volatile and we're early into Q4, 3.5 weeks or so into our Q4 and again a lot of companies with a subscription-based business are giving that guidance with a substantial portion of their business coming up for renewals that they know is going to renew. I mean we're dealing with a chunk less than 10% of our business in that category. So it's kind of apples and oranges comparison there. And I gave you some pretty good thoughts about Q4, but for us to go put a range in there now with only less than 10% of the business coming in naturally, we just thought we'd pause for a quarter, and then let things play out macro-wise a little bit and then come back with a fresh view of FY '21.
Jason Ader -- William Blair -- Analyst
Okay. Yeah. But I mean like companies like Cisco, that don't have a lot of subscription, provided a range. I mean, I guess, you're you're comparing yourself against some of the pure ratable-type models and renewal models, so I guess...
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Jason, even for conventional businesses, if you look at, let's say, VMware, 60% of the business is renewals. For us it's less than -- much less than 10%. So it's not just about subscription companies. It's about most companies that actually have a renewal business.
Jason Ader -- William Blair -- Analyst
Right. But don't you have around 30% that's recurring support?
Duston Williams -- Chief Financial Officer
No, not of the quarterly bookings, no. No, it's in its entirety, Jason, that percentage of recurring, whether you want to call it support or now a subscription renewals is less than 10%, so substantially different. I mean that's we're building off. That's the whole story here which we're talking about is that we know those renewals as a percentage of the total business, those renewals are going to increase and they're going to increase over time, we've done close to $5 million last quarter. We've got a pool of $10 million for this quarter, that's going continue to accelerate. But today, because we started this only a year and a half ago, we just -- these renewals just haven't timed out. That's why a little lower term is probably a good thing ultimately because those renewals flow in quicker than they normally would have.
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Also, we have big international exposure making things a bit more unpredictable as to when governments and economies and businesses are going to open compared to many of the companies actually who are younger, maybe 10 years old but don't have as much international business. And at the same time, I think, to Katy's question, Duston provided a lot of color about what we think Q4 is looking like right now. So I mean it's a fine balance, Jason. And there is no right or wrong answer. We could have provided a pretty wide range or we said look at some macro for quarter and given the fact that we announced this already on May 5, there should be a way to really go and reconcile this with all of you.
Jason Ader -- William Blair -- Analyst
Okay. And then one one quick follow-up on the billings coming from renewals. That was helpful to get that magnitude that we have Q3 and Q4. Could you give us some sense of what the percentage of billings will come -- that will come from renewals in fiscal '21 and '22 -- sorry, fiscal '21 and '22 might look like? Just kind of ballpark numbers there?
Duston Williams -- Chief Financial Officer
Yeah, I mean, we have that all laid out for Investor Day. We'll do that probably when we give '21 guidance. You can -- actually, it's very simple for folks to go model because you know our average deal length and you know what we've done from a subscription perspective. So it's pretty easy, that's kind exciting, I think it's pretty easy to go and see this and touch it and feel it because it does, by definition, become a pretty substantial piece of the business going forward and again those renewals, just like every other subscription-based company, come in with a very high efficiency factor. So that's kind of the exciting stuff going forward. Just getting back to the Q4 guide, I wouldn't read anything specific into us not providing this. We just think that there is some volatility that we prudently, probably, shouldn't guide but things look reasonably OK right now. But it's early in a period that's never happened before. I've certainly never seen it. So, that's the view, but I wouldn't read anything specifically into that.
Jason Ader -- William Blair -- Analyst
Okay, thank you guys.
Operator
Your next question comes from Jack Andrews with Needham. Your line is open.
Jack Andrews -- Needham -- Analyst
Good afternoon and thanks for taking my question. I just had a two-part question. I was wondering, first of all, if you could just talk about the significance of your partnership with Wipro to launch digital database services and then how big could that be over time. And then the related question is just broadening it out, more generally speaking, should we expect other practice areas to be built with global SI's around some of your other emerging subscription products?
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Thanks for the question. Yeah, in fact, we did announce two products with Wipro in the last six months, one around end user computing and one around databases, both of which are powered by either our infrastructure with Citrix or with our controlled center on database side which is ERA. These are two massively large workloads databases and desktops and we've done a pretty good job of both of these. They probably are equal-sized businesses. If you exclude things like Splunk and other such things that we actually do and more to apps like no sequel databases and Hadoop and so on, excluding all of that, I think it's a pretty big business for us.
We foresee that many of these will actually have a trouble in the lift and shift to the public cloud, and that's where a lot of our value comes in, because data and compute sit next to -- needs to sit next to each other for databases and virtual desktops need to be delivered anywhere and everywhere where people are. So I think both these workloads, including what Wipro is doing with their products, driving our products will be very important part of our GSI strategy. We are working very closely with Capgemini, Arthos, HCL and Infosys as well. In fact, currently they're a very large customer of Nutanix, so as they think through the opex model for themselves, because many of these are also acting as service providers to their Global 2000 customers and we become the infrastructure below that as well. So we're very excited about our GSI opportunities and we feel like we've barely begun to scratch the surface of this.
Jack Andrews -- Needham -- Analyst
Great, thanks for your perspective.
Operator
Your next question comes from Simon Leopold with Raymond James, your line is open.
Victor Chiu -- Raymond James -- Analyst
Hi. This is Victor Chiu on for Simon. You mentioned that all three regions were impacted incrementally relative to your expectations. So can you just help us understand what was the offset that kind of have provided some upside relative to your previous guidance expectations?
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Yeah, normally as we report [Speech Overlap] all right, go ahead, Duston.
Duston Williams -- Chief Financial Officer
No, I'm sorry, Dheeraj. Go ahead, sorry.
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Globally, the yin and yang, we call it, the puts and the takes, the takes from our side were end user computing. The fact that we were able to do this globally not just in the U.S. and federal, but also in EMEA and APJ was actually a good tailwind for us. And I think obviously the puts from our side were more on the large deals that we were obviously tracking for the last six months that people have come to postpone as revisit for now. But we do believe that EUC alone have provided a big tailwind.
Victor Chiu -- Raymond James -- Analyst
Okay, that's helpful. Thank you.
Operator
Your next question comes from Mehdi Hosseini with SFG. Your line is open.
Nicholas Ghattas -- Susquehanna Financial Group -- Analyst
Hey guys, this is Nick on for Mehdi, and thanks for squeezing me in at the end here. I just wanted to kind of key in on VDI for a second. Just when we look forward, is there a more incremental upside with your VDI solution as in, has anyone who is -- are there still resurgence from customers like that they need to be -- they need assistance getting online and going through this work-from-home set up or is that opportunity pretty much closed at this point? And I have a follow-up.
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
I think we are early in this -- thanks for the question. We are relatively early in this. Obviously the Global 2000, maybe the Global 5000 has tasted this. But even there, the penetration is still 30%, even if you look at Citrix's data, the enterprise seeds not the same as number of employees in these large enterprises. And I think large accounts are probably one-third penetrated right now, but the mid-market is yet another very large market and outside the U.S., I think there is a lot more that will get digital. So I believe that this end user computing, digital workspace will actually get redefined and it's probably in its early innings, maybe in it's second innings, more so than the fifth or sixth actually. And it's not just the future of work, it's also future of healthcare and future of education.
Today, there was a really good piece on CNN about universities. They have basically grown their fee structure like 1400%, 14,000% or 1400%, I can't remember the exact number, but over the last 40 years and nothing has changed in terms of their courseware and the way they impart education. So there's a lot of things that are up here for grabs in higher education, state and local, as well as middle school and high school education plus in healthcare and work as well.
Nicholas Ghattas -- Susquehanna Financial Group -- Analyst
Okay. That's really helpful. If I could just squeeze in one more here. The 97 historical retention rate, obviously that was not in the era of -- declining era that we live in now, so can you just provide a little bit more color about what you're thinking about churn or the retention rates going forward, especially as renewals start coming online?
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Duston, you want to take that?
Duston Williams -- Chief Financial Officer
Sure. Yeah, I wouldn't expect all that much difference, quite honestly. The product is very compelling. The value add is compelling. I mentioned about how AHV becomes even more compelling in a cost conscious environment, which we're starting to see there. We've run those numbers through Q3, the quarter just ended. And there was probably still rounds to around 47 -- 97, I'm sorry. So I wouldn't expect to see too much change there over the next several quarters. But we'll see.
Nicholas Ghattas -- Susquehanna Financial Group -- Analyst
Okay, I appreciate it. Thank you.
Operator
And our last question comes from Pinjalim Bora with J.P. Morgan. Your line is open.
Pinjalim Bora -- J.P. Morgan -- Analyst
Hey, guys. Thanks for squeezing me in. Dheeraj, we have heard a lot of comments -- positive comments about your HPE partnership, this F23 [Phonetic]. How -- could you tell us how did you perform maybe versus your expectation? And then did the pay-as-you-consume construct for GreenLake helped in this current environment? And then lastly, do you see any value in providing a pay-as-you-consume kind of a model yourself? That's all I had.
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Yeah, thanks for the question. HPE, very good partnership, it's been about two and a half quarters, I would say, since it began. They definitely have a global presence and our sellers are working together hand in hand in many of these accounts. The pay-as-you-go is a little early, I would say, simply because we haven't put all our products in there. But some of the large customer, especially after COVID, we've started to see questions emerge, a lot more questions emerge about can we take entire Nutanix portfolio and have it run through GreenLake. I think it's a pretty novel concept and there is some interesting partnership opportunities between HPE and us, especially in the world design. We're talking about Telcos and many of these service providers who currently buy hardware with capex. I think GreenLake needs a killer app and Nutanix can be that killer app on top of GreenLake and especially as we take this to GSI's and Telcos and service providers, all of whom actually would be very willing to look at hardware in opex model rather than capex.
Operator
[Operator Closing Remarks]
Duration: 73 minutes
Call participants:
Tonya Chin -- Vice President of Investor Relations and Corporate Communications
Dheeraj Pandey -- Founder, Chief Executive Officer and Chairman
Duston Williams -- Chief Financial Officer
Katy Huberty -- Morgan Stanley -- Analyst
Rajagopal Kamesh -- Goldman Sachs -- Analyst
Alex Kurtz -- KeyBanc Capital Markets -- Analyst
Jason Ader -- William Blair -- Analyst
Jack Andrews -- Needham -- Analyst
Victor Chiu -- Raymond James -- Analyst
Nicholas Ghattas -- Susquehanna Financial Group -- Analyst
Pinjalim Bora -- J.P. Morgan -- Analyst
