Nimble Storage's (NMBL) CEO Suresh Vasudevan on F1Q 2015 Results - Earnings Call Transcript

May.30.14 | About: Nimble Storage, (NMBL)

Nimble Storage, Inc. (NYSE:NMBL)

F1Q 2015 Earnings Conference Call

May 29, 2014 17:00 ET

Executives

Edelita Tichepco - Investor Relations

Suresh Vasudevan - Chief Executive Officer

Anup Singh - Chief Financial Officer

Analysts

Brent Bracelin - Pacific Crest Securities

Bill Shope - Goldman Sachs

Steve Milunovich - UBS

Ittai Kidron - Oppenheimer

Katy Huberty - Morgan Stanley

Jason Ader - William Blair

Andrew Nowinsky - Piper Jaffray

Richard Kugele - Needham & Company

Alex Kurtz - Sterne Agee

Brian Alexander - Raymond James

Joe Wittine - Longbow Research

Aaron Rakers - Stifel, Nicolaus

Srini Nandury - Summit Research

Rajesh Ghai - Macquarie

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Nimble Storage First Quarter 2015 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, May 29, 2014.

And I would now like to turn the conference over to Edelita Tichepco, Investor Relations for Nimble. Please go ahead.

Edelita Tichepco - Investor Relations

Great. Good afternoon and thank you for joining today’s conference call to discuss first quarter fiscal year 2015 results for Nimble Storage. This is Edelita Tichepco, Nimble Storage Investor Relations. Joining me are Suresh Vasudevan, Chief Executive Officer and Anup Singh, Chief Financial Officer.

After the market close today, Nimble Storage announced financial results for its first quarter fiscal year 2015. The shareholder letter, earnings press release and a live webcast of this session are available on the Investor Relations page of our website at nimblestorage.com. A replay of this webcast will be available for 45 days. During the course of today’s call, our executives will make forward-looking statements within the meaning of the federal securities laws.

Forward-looking statements are subject to known and unknown risk factors and assumptions. It is not possible for us to predict all risks, nor can we assess the impact of all factors that may affect our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statements we may make. Factors that could affect our financial results are detailed in our filings with the Securities and Exchange Commission and may cause our actual results and performance to differ materially and adversely from those anticipated or implied by our forward-looking statements.

Please note that any forward-looking statements made today are based on assumptions that we believe to be reasonable as of today and we undertake no obligation to update these statements after today’s presentation to confirm these statements to actual results or to changes in our expectations, except as required by law.

During this call, we present both GAAP and non-GAAP financial measures. These non-GAAP measures have limitations and you should not consider them in isolation from or as a substitute for our GAAP financial information. For quantitative reconciliation of GAAP to non-GAAP measures, please refer to today’s shareholder letter and press release regarding our first quarter results, which are available on our Investor Relations website.

Let me now turn the call over to Suresh Vasudevan, Nimble Storage CEO.

Suresh Vasudevan - Chief Executive Officer

Thank you, Edelita. Good afternoon and thank you for joining us on today’s call. We were founded on the belief that we could transform the storage industry by leveraging two key external disruptions: flash and cloud connectivity. We translated our belief into a platform built on two fundamental innovations. The first is CASL, our flash optimized file system. The second is InfoSight, our cloud-based management software. Our execution during Q1 continues to validate our founding beliefs and the magnitude of the growth opportunity ahead of us as we leverage our technology leadership in flash storage solutions.

From a technology perspective, Q1 was a very strong quarter in that we further extended our product differentiation against competitors. First, we rolled out scale-out functionality broadly during Q1 with over 1,200 customer systems deployed on our now GA scale-out release. Our scale-out implementation is one of the most comprehensive implementations of scale-out and our customers are thrilled at the ability to start with small footprints and scale to extremely massive environments non-disruptively. At the end of Q1, we also launched the beta of a new high-end platform that’s incredibly powerful. At one end of the spectrum, this platform allows us to match the performance of all flash arrays, while still being much more cost effective.

As an example, one of the largest telecom companies globally is planning to deploy this platform for an extremely demanding and large scale data analytics workload. Now, at the other end of the spectrum, it further expands our massive advantage against the hybrid arrays of large incumbents in our industry in petabyte scale deployments. Given that the formal launch of this platform is in June, I will not say much more of this juncture. Besides scale-out and our high-end platform, the third major initiative for this fiscal year is fiber channel and we remain on track to deliver fiber channel by the end of this fiscal year.

From a go-to-market perspective, Q1 marked a very strong start to the fiscal year. We delivered revenue in Q1 of $46.5 million, 110% higher than in Q1 of last year. And in keeping with our philosophy, even as we drove rapid growth, we simultaneously demonstrated strong year-on-year improvement in our operating leverage as our operating losses came down to negative 22% versus negative 36% a year ago. This growth was driven by strong performance across all of our group dimensions new customer acquisition, diversifying our customer base to serve large enterprises and cloud service providers, international expansion and our land and expand model.

We continue to add new customers at a rapid pace with 450 new customers in Q1. Our channel partners continue to drive strong leverage for us in terms of bringing out new customer opportunities. What’s perhaps even more important is that we are seeing the fruits of our investment that we made in channel enablement. For example, in about 40% of the sales engagement that led to new customer acquisitions, our channel partners independently drove most of the sales cycle with minimal assist from us. As another example, the number of channel partner sales representatives selling our product has more than doubled from a year ago. This along with numerous other metrics we track points to the fact that our channel is driving strong leverage for us.

The key factor that’s helping us acquire new customers and enable channel partners is the momentum that we are seeing with our alliance partners including Cisco, VMware, Microsoft, Oracle, Citrix, CommVault, REEM and others. We are seeing strong interest in our SmartStack solutions which are pre-validated converged infrastructure solutions. As an illustration the number of SmartStack deployments in Q1 of this year more than quadrupled compared to Q1 of last year.

We are also making very good progress on serving large enterprises. We now have over 200 Global 5000 customers more than double the number we had a year ago including three of the Fortune 10 companies and several Fortune 500 companies. Similarly our focus on serving cloud service providers has also paid rich dividend with over 280 cloud service providers as customers. Even as we have grown the install base of cloud service providers we serve, the propensity for repeat purchases is driving aggressive growth for us. In Q1 for example repeat bookings accounted for about 60% of the total bookings by cloud service providers, significantly higher than the average repeat bookings across our customer base.

Another dimension of growth for us is international expansion. International revenues accounted for 19% of our total revenues, up from 12% a year ago as we now have presence in 14 countries and distribution agreements in 21 additional countries. During Q1, we signed distribution agreements with Ingram Micro and the Westcon Group which further strengthens our ability to accrue channel partners in EMEA and Asia. As well as we are doing on acquiring new customers what we are ever more proud of is that our customers quickly come back to deploy additional workloads on our platform once they experience the benefits that we bring to bear. Our land and expand model that contributes very strongly to our growth as we saw repeat bookings account for about 40% of our total bookings in Q1.

At this juncture let me turn this over Anup to provide a brief overview of our financial performance.

Anup Singh

Thank you, Suresh and good afternoon everyone. I will do a brief summary of our financial results. Since we have already supplied a more extensive discussion in our shareholder update which is now available on our Investor Relations homepage. Q1 was a very strong financial quarter for Nimble. We achieved a record number of revenue of $46.5 million, above our guidance of $42 million to $44 million and more than doubled the approximately $22 million we reported in Q1 a year ago. Even though Q1 is typically our seasonally slowest quarter, we added over 450 new customers to end with an install base of nearly 3100 accounts, more than two-fold increase from a year ago.

We continued to see success in our land and expand strategy. Across our entire base of customers the average customer would more than have doubled their initial investment with Nimble in two years after their initial deployment. This repeat trend of purchasing is even greater for our largest accounts. We also saw the number of orders received above $100,000 as continuing to trend upwards. We had almost 400 orders above $100,000 during the last period, 12 months compared to less than 200 orders in the prior year ago period. Our non-GAAP gross margins of over 66% were strong and up by over 4 percentage points from prior year. Our gross margins are a continuing reflection of the competitive differentiation of CASL and InfoSight as well as our ongoing focus on operational excellence.

Our non-GAAP operating income and margins was negative 22% compared to negative 36% a year ago. This was due to improvements in both our gross margin and operating expense leverage even as we continue to invest in the business. We ended Q1 with 668 employees on board, an increase of 76 during the quarter. Our Q1 non-GAAP loss was approximately $0.14 a share compared to our guidance for a loss of $0.16 to $0.17 a share. We ended Q1 with cash and cash equivalents of approximately $204 million. We continued our strong focus on managing working capital and achieved a cash-to-cash cycle of 4 days.

Our Q1 cash flow from operations was approximately $0.5 million. This is the second quarter in a row that we generated the cash flow from operations. Free cash flow was negative $3.3 million in line with our last fiscal quarter and better than the negative $6.8 million a year ago.

So, moving on to guidance for Q2, we expect our revenue in the range of $49 million to $51 million and operating losses between $11 million and $12 million. This translates into a non-GAAP loss of $0.16 to $0.17 a share, which is based on approximately 70,800,000 shares outstanding. Our guidance for the range of Q2 operating losses is similar to what we have guided for in Q1 and is in the range of what we would expect for the next few quarters.

As we have previously discussed while operating margins may fluctuate on a quarterly basis, we currently expect to continue to drive sequential improvement in operating margin every fiscal year. And based on the current estimates, we estimate that by the end of our next fiscal year FY ‘16 we will achieve our breakeven on a non-GAAP operating income to a basis with breakeven on a free cash flow basis achieved ahead of that timeline.

With that, I will hand it back to Suresh.

Suresh Vasudevan - Chief Executive Officer

Thank you, Anup. Over the next several years, we believe that flash optimized storage systems will displace traditional storage systems. We have built the broadest flash platform in the industry. We have pulled ahead of all other flash-based startups in our industry and we have very strong competitive differentiation against the large incumbents in our industry.

We believe therefore that we have the opportunity to emerge as a leader of the next evolution in storage architectures and our strong execution during Q1 brings us one more step closer to that objective. We want to thank our customers and partners once again for embracing us, our investors for their confidence in us and our employees for their dedication in flawless execution.

With that, Anup and I are happy to now take any of your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from the line of Brent Bracelin with Pacific Crest Securities. Please go ahead.

Brent Bracelin - Pacific Crest Securities

Thank you. Suresh, obviously if you look at kind of the fiscal Q1 kind of results across the space here, HP is struggling, EMC is struggling, you guys are – it’s clearly a bright spot within the storage industry. Have you seen any sort of change in the competitive landscape at all are customers getting – are competitors getting more aggressive on pricing, clearly the gross margins here look very healthy, so but just trying to understand what are you seeing from a competitive response standpoint just given the momentum you are seeing in the business and the fact that some of your competitors are struggling here?

Suresh Vasudevan

Sure. I would say Brent there are a couple of changes in the competitive environment. Let me start off by calling out what has not changed much, because the bulk of it is very much unchanged. I would start by saying the mix of who we see if I look at the top four competitors that we encounter EMC, NetApp, Dell and HP now continue to account for four out of five deals that we compete in. And our advantage against them remains very, very strong if anything things like scale out have only sort of strengthened our differentiation. What is somewhat sort of perhaps more intense than even before I would say is price competition has certainly intensified on our industry, what is also now true is that there are more and more deals that we find is that there are more senior executives coming into the deal to sort of protect the deal and so on.

So, I think it’s certainly more intensity being applied in every engagement. It’s not I think price as weapon, while it can be used in individual situations as a systematic method it’s much harder for them to use. So I would say that’s probably the one change versus the large incumbents. The only other change I would call out I think is that as we are competing in more and more higher performance environments, we are seeing flash array competition a bit more, which is good news for us. We are being considered in more and more larger environments, some of the large customers that I have talked about are often setting us against flash only arrays. And we are doing very well there because as much as we deliver very high performance all of the other things that we do well things like much better cost of capacity, things like much better data management, InfoSight all of that comes into play for us. So those are sort of slight nuances and what we think differently now than perhaps in the past.

Brent Bracelin - Pacific Crest Securities

Perfect, very helpful color. And then one for Anup here if you look at kind of the deals over $100,000, you had talked about that being I think 400 over the last 12 months, is that solely tied to scale out driving larger deals or is there another driver behind why you are seeing larger deal sizes uptick here?

Anup Singh

Yes, so Brent as a reminder with regards to the scale out software explicitly it was only in the recent sort of past we did on scale out. The trends that we have been seeing in terms of growth of larger deals has actually been going on for quite a while and actually over about a year and a half ago we brought to bear a bunch of scaling initiatives in which we did to scale up and scale deep. If you recall that actually allowed customers to upgrade the controllers, increase the amount of flash in their systems and to add expansion shelves and so on. So it’s been a combination of increases in sales to larger enterprises and you have seen the growth in our base of large enterprise accounts also increasing in the average sort of deployment size in our midsize enterprises as well.

Brent Bracelin - Pacific Crest Securities

It’s helpful. Thank you.

Operator

Thank you. Our next question is from the line of Bill Shope with Goldman Sachs.

Bill Shope - Goldman Sachs

Okay, great. Thanks. My first question is just an extension of that last one. For those deals over $100,000 can you give us some color on which verticals you are seeing most of that activity and where you are seeing the most improvement there and I guess how you are thinking about this – the trends for these large deals particularly going to next year once you have fiber channel support out there?

Suresh Vasudevan

Yes, Bill I think I will start by saying frankly not just in the large deals across our customer base, we don’t see a particular vertical standout in any significant fashion, it’s a very much of a horizontal deployment model for us. Some of our larger verticals we do really well in state and local government and education. We have done really well in technology companies and manufacturing service providers is a large segment for us. I don’t think there is any propensity for large deals to be concentrated in anyone of those verticals. I would say it’s sort of more broad based. As I look ahead I anticipate that – so this is a tough one to answer only in that the number of greater than $100,000 deals will continue to do really well for us. We will continue to grow that quite significantly.

But the other aspect of our business that’s doing extremely well is the engagement within our channel community right. And so we are starting to track all kinds of metrics that points to the channel being more self sufficient and being able to sort of bring on more business and often that’s in the mid-size enterprise category where sort of smaller deals are growing quickly as well. So, I think I expect that both segment large deals and mid-size deals should grow one driven by channel, the other driven by product capabilities and by our enterprise focus sales teams.

Bill Shope - Goldman Sachs

Okay, great. And then, looking at your target operating model, I know we’ve gone over this in the past, but we’re getting a lot more questions on target operating models from many of the higher growth companies. Can you give us some clarity at least on how we should think about the timeline for achieving that, I know you don’t have an explicit target day but just improving operating margins sequentially each year, that’s helpful, but I mean how should – can you help us provide some sort of framework around that given that, that is an important topic.

Anup Singh

Sure. I appreciate the question, Bill. So, a couple of things that we said right, I mean, so, number one as we explicitly said in this call, our target for breakeven is by the end of FY ‘16, so by the end of next fiscal year. As we have also seen in the past each year we drive sequential improvement in operating sort of margins. We’ve also said in the past that, the market opportunity is huge and our number one strategy if you will, is investing for growth because we truly think that we were able to continue to drive significant increases in revenue, increase our share of a market which is frankly, it’s a $20 billion sort of opportunity.

And so, in our view is as long as we’re able to continue to drive essentially substantial growth in revenue, we’re not looking to really to optimize on operating income and get to our target sort of model in a rush. Now, having said that, in addition to driving the growth in revenue, we’re actually looking at maintaining the integrity of gross margins which is best-in-breed in the storage industry and also, to show that sequential improvement. And I think the broader thing we also look at it is, as we look at the investments that we’re making as a company, we really, we try to take a balanced view of investing for growth. And at the same time, we’ve got an eye on improving our margin, driving some leverage in the model as well. So, it’s not as if its growth at all expense, it’s a tradeoff between the two and actually we’ve done a good job in both of those areas so far.

Suresh Vasudevan

I think that, if the other way to interpret your question as well just to add on a new very much captive to the essence of how we think. The contrast in growth companies that I think growth at all costs versus I think our approach is very much, very high growth, balanced with sequential improvements in operating leverage right. Putting a timeframe out of revenue target to get the target operating margin is perhaps not as relevant as measuring our growth rate both of, if we started to get in to more normal growth ranges. So, sort of year over year growth in the 20%ish, then I would want to be in the target operating model at that point already. But, if we can see ourselves driving very aggressive growth, then while improving operating margins on a year over year basis, we will continue to make investment to drive that growth as well. I think what’s crystal clear to us is that the transformation in our industry is big enough that even multibillion dollar product lines will make way for the next architectural evolution, and that’s the opportunity that we don’t want to lose slight off even as we balance more and more operating leverage over time.

Bill Shope - Goldman Sachs

That makes sense. Thank you.

Operator

Our next question is from the line of Steve Milunovich with UBS. Please go ahead.

Steve Milunovich - UBS

Great. Thank you very much. Could you comment a bit on how much of a – what the mix is between HDD and Flash typically in your systems, I’m sure it varies by applications but just kind of curious roughly where it is and are you anticipating particularly with this new high-end coming that didn’t go head to head with an XtremIO and Flash, where even that comes from NetApp and so forth in a pure flash sense?

Suresh Vasudevan

Yes. So, let me answer the first part. The first part is somewhat harder to quantify, I’ll give you an answer, but Steve the reason it’s somewhat harder to quantify, it doesn’t just vary by application because we are unique in that you can on the slide change the ratio of flash to disk as you’re even within a given application has your workload changes and the number of users change, a customer has the option of changing the flash to disk ratio. And if, anything we’re making it easier and easier to go to extremely high ratios or extremely low ratios. I would say we are in these sort of at this point by and large for most workloads, you probably seeing sort of in the 10% would be a good ratio of flash that make sure that you have very high performance and still are optimizing cost really well. That would probably be the norm high single-digits to even 10%, is for most workloads more than adequate. We of course have some sort of higher end workloads that want the higher flash ratio.

On the second part of your question, I will say without sort of going into a lot of detail that’s exactly what we are doing is our platform will extend to a point where we are very comfortable competing with flash-only arrays like the one you mentioned while still having the other attributes that we have already done well on.

Steve Milunovich - UBS

Okay. And I was just curious I think last quarter you said something about not having fully passed on lower commodity costs yet to customers, is that occurring today? Is that part of the sequential gross margin decline? And what are you seeing in commodity costs?

Anup Singh

Yes, Steve this is Anup. So, we did say that in Q4 and actually in Q1 we did succeed in passing that on. If you look at our margins for product, we were essentially flattish from Q4 to Q1 whereby 69 or so for product. Even though we passed on the increases in cost in Q1, we did see some significant improvements from an operational standpoint, which drove sort of a bit of an offsetting improvement in margin. In terms of the go-forward trend that we are seeing in terms of cost of components, I mean, we have got a roadmap, which we are driving for some cost savings. And we are basically seeing an improvement in a couple of percentage points each quarter.

Suresh Vasudevan

But I think from a product gross margin or from a gross margin perspective, we are still sort of very much in the – our target ranges are not different. We would expect to be at the high end of our target range perhaps, but it’s not that somehow we are sort of – we shouldn’t extrapolate from this quarter and the past quarter into assuming that therefore that’s now our gross margin.

Anup Singh

That’s right. And Steve, we said our target range is 66 to 67 for margins of product and gross margin 63 to 65.

Steve Milunovich - UBS

Great, thank you.

Operator

Thank you. Our next question is from the line of Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer

Yes, thanks and congrats guys on great numbers and execution. I wanted to follow up on the Suresh on the comments you mentioned at the beginning regarding competition and the fact that one of the changes you are seeing is a little bit more price competition. So, I guess I am wondering where is the level of confidence in your ability to keep gross margin at the higher end of the range as you mentioned near term. Well, where is that coming from?

Suresh Vasudevan

Yes, Ittai, first of all, thank you. So, it’s all quarter I think and frankly it’s been intense for quite sometime this quarter more so than other quarters as well. And despite that if anything some of the attributes were introducing into our product, only just continue to say that for EMC or NetApp to compete against us, the difference in economics are so great that they are often having to price at our cost in – sorry at their cost in order to get sort of competitive with us. And so it’s only possible in some instances where you are protecting your account, but it’s very, very hard to do systematically. And then our companies attempt to do this for a while and then sort of it doesn’t stay current, because imagine going to an entire region and saying to every channel partner if you see Nimble here is the new price, that basically destroys your pricing model. And so, I think we are seeing strong ability on our part to continue to maintain the margins. Part of the reason we are saying sort of assume a drop into the high end of our target range rather than sustained 59% is in anticipation of continued pressure competitively also to some degree international margins tend to be somewhat lower and international is climbing as a percentage of our revenue. And so those are some of the factors that we have considered when we thought about our guidance.

Ittai Kidron - Oppenheimer

Very good. That makes sense. And then regarding the channel, clearly you are marking very good strong traction over there, but from this point going forward, how much of the traction you anticipate would be increasing number of channels versus going deep within existing channels?

Suresh Vasudevan

Yes, I think I would reiterate something that’s been true for us for now at least the last six months, which is its sort of different channel motions in different parts of the world. Internationally, the fact that we have signed on Ingram Micro in Europe is explicitly to go after recruiting additional channel partners. It still happens that Ingram is great, because they are also partnered with Cisco and we can go to market with SmartStack solutions and not just Nimble Storage products. And that’s helpful. Similarly in Southeast Asia we brought on the Westcon Group very, very similar motivations. Increased the number of channel partners, make sure that they are not just equipped to sell storage but they can partner in selling SmartStack converged infrastructure solutions which are doing really well for us. In the U.S. the emphasis and part of the point in some of the metrics I gave out was really to talk about almost our entire focus is on a few things. One, how many trained technical people do we have within our channel partners, how many individual reps within our partners are engaged in selling our product, how often our channel partner is able to take a deal from cradle to grave without assistance from us. So it’s all about enablement. We will continue to recruit, but that’s not the focus in the U.S. it’s all about sort of enablement if you will.

Ittai Kidron - Oppenheimer

Very good, excellent. Congratulations and good luck guys.

Suresh Vasudevan

Thank you very much.

Operator

Our next question is from the line of Katy Huberty with Morgan Stanley. Please go ahead.

Katy Huberty - Morgan Stanley

Hi. Thanks. Congrats on the quarter Anup just back to the question around gross margin, when would you expect the combination of pricing and international mix to get you back to the high end of the 63% to 65% target range, is that in the back half of this year or is that more next fiscal year.

Anup Singh

So as you know we don’t explicitly offer up any guidance for gross margins and where it’s going. A couple of things I would say, some of the pressure as you mentioned which is international its also increased investments we are making in the channel, it’s pricing. Basically all of those it could have a little bit of a drag on gross margins. We also are benefiting from economies of scale as we grow our business. We are getting a lot of improvement in leverage from an operational and supply chain standpoint as well which is to some extent is offsetting sort of the compression that we are seeing. So it’s hard to tell exactly in a given sort of quarter the effects which are in play. So basically I will leave it at that. I think the guidance we have said in the letter was we actually expect our margins to be at the high end of our range for the next few quarters.

Katy Huberty - Morgan Stanley

Okay. And do you feel like if pricing or mix were to surprise you, there is any flexibility on the OpEx line or is there such a laser focus on driving the land and expand and the revenue growth that you would not look to pull back OpEx if you had to?

Anup Singh

Yes. So I will comment on that and then I will let Suresh add his thoughts. I mean we always have some degree of flexibility in operating expenses. I mean the three quarters of the costs of the company sort of employee related expansion we have been adding employee headcount at a nice sort of (cliff). I mentioned Q1 we added a total of 76 sort of heads. We expect to add about the same in Q2 on a go forward. So if needed we do have some levers and so on to pull to come back though to the – I think the question I answered for Bill already around – regarding the strategy of the company overall is to invest for growth, to increase our market share, drive sales to maintain our margins and to drive improvement and leverage each fiscal year.

Suresh Vasudevan

Yes, I think the two comments I would just add I think Anup pretty much nailed it is as you know even the gross margins visibility without going into too much details we do a fantastic job of knowing the gross margin could be within very, very narrow bound at any point in the quarter. So this is not one way we are sort of trying to get a summary perspective once a month or thereabout. So we have the ability to dial in as we move along and that’s something that we have invested quite a lot of energy in. So rarely do we get completely surprised, often that’s one comment I would make. The second comment I would make is certainly within a quarter boundary we have absolute sort of ability to prioritize the dials because so much of it is hiring related, right. Should the surprise hit in the last week of a quarter, it might be harder but a window for a reaction is pretty small. It’s typically sort of two or three months of just slowing or accelerating the pace of hiring will it give us a great degree of control on the results. Does that make sense?

Katy Huberty - Morgan Stanley

Yes, got it. Thank you. And just as a follow-up the large customer and service provider growth those are up 118% in terms of customer accounts which is great but your total customer growth was actually faster?

Suresh Vasudevan

Indeed.

Katy Huberty - Morgan Stanley

Would you expect that large enterprise and service provider customer account accelerates as these new products come to market or is the more important metric looking at total order sizes and repeat bookings?

Suresh Vasudevan

Yes, I think this is when I go back into it, in truth we don’t have a relative objective. Candidly, I would like both to grow as fast as they possibly can. By nature, I think I actually do believe our midsize enterprise customer growth rate will be higher simply because of the much larger population to draw upon and our channel enablement sort of traction is very strong. Repeat bookings in the large enterprise and service provider segments are a bigger driver of growth than simply landing new ones. And so that metric I think will always be healthier for large enterprises than service providers, Katy. I actually do not have an objective on either overall ASP or number – growth rate, relative growth rate. We just want to grow new customer count aggressively in all categories. And then focus on making sure we have very strong repeat bookings. I do think that the natural tendency for the next three or four quarters for the midsize enterprise customer base to grow faster.

Katy Huberty - Morgan Stanley

Okay, thank you.

Operator

Next question is from the line of Jason Ader with William Blair. Please go ahead.

Jason Ader - William Blair

Yes, thank you. Suresh, I was wondering do you think it’s necessary for Nimble to deliver in All Flash Array at some point and then does your architecture actually lend itself if you decide at some point strategically that you would like to have AFA platform, does you architecture lend itself to developing that?

Suresh Vasudevan

Yes, I will start off by answering the second question first. Very concretely, the file system design that we have, I would say, we are one of the few file systems that underneath a single umbrella has designed a layout that’s optimized for flash and the layout that’s optimized for disc. As you peel the onion and say what are the attributes that a flash-only array needs to have you will find that with many of those attributes are part of our file system, whether it’s lock structuring, whether it’s scale-out, whether it’s data reduction, all of those are things we can accommodate. So, I will start by saying the architecture itself is broad enough to enable us to go towards the flash-only array while sort of doing what we are currently doing as well.

The more sort of difficult question to answer is when or whether do we think it will become necessary and without going into too much detail, that question entirely revolves around will the endurance of flash coupled with the price of flash, so will the price of flash go down without compromising endurance to a point where the economic start to favor An all flash array. At this junction, not even the semiconductor industry will give you a clear answer that says endurance will stay roughly where we need it to be for enterprise flash arrays and price will go down. So that’s the big unknown what I am sure of is it is not happening in the next three to five years, the cross over point is certainly not there at least for that time frame beyond that it maybe. So that’s sort of the way we think about it. We watch this carefully, we make sure all of the ingredients are in place should we need to react, but I will leave it at that.

Jason Ader - William Blair

Okay. And then just to your question on competing more with some of the all flash array guys in certain deals. I guess I am a little confused by that it would just seem like if when you guys are competing in the deal, one of you guys maybe in the wrong deal and because obviously the performance of a flash array is quite a bit different and the performance characteristics are quite a bit different I would think in terms of IOPS and such so, what is interesting there?

Suresh Vasudevan

Yes, I will give you two comments. Jason, I am going to add, one I would say we had one very large investment management firm that was looking for performance in the 200,000 IOPS range. And with scale-out one on the fundamental changes that’s taken place is the single application can get that kind of IOPS performance. We have been in many instances where we have beaten the IOPS performance with our existing product of a couple of the leading flash array vendors in the market, right. And so that’s the first comment, because suddenly the ability to aggregate performance is the changes the dynamic of where we can compete meaningfully. The second component of that is just – on June 11, I think when we are doing our launch and you will hear a lot more about sort of what it is that allows us to sort of even go much further on performance and how we are attacking that problem as well.

Jason Ader - William Blair

Alright, look forward to it.

Operator

Our next question is from the line of Andrew Nowinsky with Piper Jaffray. Please go ahead.

Andrew Nowinsky - Piper Jaffray

Okay, good afternoon. Congrats on a nice quarter again. I just want to do another follow-up on your high-end platform. I know you said you have 20 customers beta testing it now, some of which I think you said were cloud service providers. And so I guess while some large enterprises may require fiber channel connectivity, do you think the cloud service provider market is more focused on Ethernet. I guess, I am just trying to get an understanding as to how quickly the platform to get adopted or if it’s actually dependent on fiber channel connectivity?

Suresh Vasudevan

It’s a great question. The first comment I want to make is I didn’t say it was cloud service providers that just still happens that one of the beta customers is a very, very large telecom company, but they are not using this in their cloud services arena. They are using this as an internal consumer for a large data analytics workload. So maybe that was the confusion, Andrew. Many of our beta customers are enterprises that are a couple of service providers in that beta group as well. So, that’s the first comment.

Now, in terms of its impact, I do think maximizing the potential of our high end platform will be sort of best done in conjunction with fiber channel. And as I mentioned earlier by end of the year, we will in fact see the two complement each other very nicely for large enterprises that warrant sort of a high end platform with all of these performance and functionality, having fiber channel will only increase the opportunity. It’s also true that service providers tend to be less protocol sensitive and are much more comfortable to applying Ethernet based infrastructure. Now, I will also say many large enterprises, all of the large enterprises we have acquired are all deploying us using Ethernet. So, while it’s true that fiber channel will expand the opportunity, there are quite a large number of enterprises deploying with Ethernet today as well. Did I answer your question, Andrew?

Andrew Nowinsky - Piper Jaffray

Yes, it did. Thank you very much. And then just one more question I guess on the scale-out side. Historically, your revenue from repeat purchases, I think you said it was more than double revenue from the initial purchase. Do you think adding scale-out functionality could actually accelerate that rate as customers can all start small and then basically pay as they grow?

Suresh Vasudevan

Yes. My first reaction is yes, that will happen. And so we do anticipate that happening. I will go back to what Anup said earlier as well, we have had a couple of other interesting scaling options that are not typical in our industry, the ability to non-disruptively upgrade controllers, the ability to non-disruptively change the ratio of flash to disc, those have already been helpful in sort of causing customers to come back and deploy more workloads. This provides yet another way in which they can do that. And so we have seen proof points of our scalability allowing us to see more repeat deployments than is the norm for the industry I think.

Andrew Nowinsky - Piper Jaffray

Okay, keep up the good work.

Suresh Vasudevan

Thank you.

Operator

Thank you. Our next question is from the line of Richard Kugele with Needham & Company. Please go ahead.

Richard Kugele - Needham & Company

Thank you. Good afternoon. I will just add my congratulations to the long list, but two questions, in particular. I just want to dive a little deeper on the service provider side as well, obviously strong growth there. But can you just talk about how their needs are different than the other customers and the typical systems scale that they are looking for? And as that grows, is there a margin, another headwind or tailwind that we should be aware of?

Suresh Vasudevan

Yes. First of all, thank you Rich. On the kind of – so there are many attributes that are common to large enterprises and service providers, but let me call out the ones where I think there is heightened sensitivity within the service provider community. The very first thing I would say is if efficiency is important to enterprises, efficiency is paramount for service providers, because for them lowering the cost is not so much about sort of a cost center being more efficient, it directly flows to their bottom line. So, our ability to optimize both capacity and performance at the lowest possible capital cost is a big, big benefit. So, that’s the first thing I would say.

The second thing I would say that’s sort of typical of service providers where we do really well is their revenue stream often to be variable. They are billing their customers in a monthly usage based model. And traditionally, storage has come in the form of big chunky investments. You buy an expensive controller, you add discs, and when you are done you buy another expensive controller. Our scale-to-fit model is very, very similar to assembling storage with a Lego building block approach. And so the cost structure tends to be more aligned to the way their revenues flow and we have heard a lot of service providers say that allows them to manage their P&L a lot better. So, that’s the second thing.

The third one that’s actually being sort of very, very impactful is for them SLAs, missed SLAs can destroy their entire profitability they are all living on stringent SLAs. InfoSight and our ability to monitor their infrastructure predict 90% of the performance issues before they have missed SLAs predict 90% of the support issues that has become a really big enabler as well. And so enabling them to have not just high availability through product architecture but being able to predict when things could go wrong. That’s another thing that we are seeing as sort of it’s important for all our customers, but service providers are particularly sensitive to that. So those are some of the things I would call out as unique to our service provider customer base. Not – we don’t see a different margin profile from the service provider community than we do from our broader customer base. And I would not anticipate that to change just because we are serving large service providers.

Anup Singh

If I can add to that I think as Suresh said earlier on actually the land and expand sort of effect that we are seeing from the base of cloud SPs is even greater than across our customers as a whole and so it obviously is sort of – it helps us from a leverage standpoint as well.

Richard Kugele - Needham & Company

Very helpful. And then just one follow-up one of the other comments that had come from the rest of the storage industry was that there was a pause to evaluate alternative solutions, you did not mention that and so presumably you are part of what they are being evaluating, can you just comment on that aspect and how do you incentivize the channel given many of the startup companies also engaging with the similar type model of using the channel as their primary go to market force, how do you continue to make sure that they get the right sales commissions and such and just can you talk about how that might evolve over time?

Suresh Vasudevan

Sure. So, on the first question of this is a pause the only metric I can look at is sort of what was the linearity of and what was the sales cycle and candidly given that it was Q1 we had a normal Q1 linearity. So I am not sure that we saw that I would call out anything unique in what we see in our linearity pattern in Q1, it’s Q1 and that’s what we saw. I am not sure that I would say our sales cycle got any longer either. So we certainly did not see this pause effect as much. And it will be hard for us to separate the pause effect from our Q1 sort of normal linearity in any event is all I would say Rich.

On the channel side I think it’s a – our view is fairly simplistic. In the end when a channel partner bets on Nimble what they are betting on is really that the revenue stream that they had with the NetApp or an EMC or a Dell is somewhat in jeopardy because to some degree one of those larger companies is going to say why are you selling your competitors product. And so what we have to be able to demonstrate we can put incentives in play, but fundamentally what a channel partner has to believe is that win rates when they go with Nimble are high enough that they are really saying do I want no margin or some margin was just sort of and so that’s the first thing. They have to believe that there is strong win rates.

The second thing I think they have to believe is that there is a strong velocity, which means that we are not just focused on one particular niche application or one particular area but with us they can drive sufficient volume growth over time. And so and the third one is just the consistent pattern of not trying to go direct and sort of making sure that there is very strong channel integrity in place. I think there are lot of fundamentals that I think we have got right and we just have to make sure we are continuing to execute on those fundamentals, maintain our differentiation and therefore win rates and drive growth to our channels and not violate that moral and that I think is really what we are doing pretty well.

Richard Kugele - Needham & Company

Thank you so much.

Suresh Vasudevan

Thank you.

Operator

Thank you. Our next question is from the line of Alex Kurtz with Sterne Agee. Please go ahead.

Alex Kurtz - Sterne Agee

Yes, thanks guys for taking the questions. Just on the competitive mix during the quarter can you just tell us what it looks like regarding Dell and maybe some of low end EMC and NetApp, was it still a lot of ecologic and Compellent and mid-range VNX and FAS or did you see some real change sequentially?

Suresh Vasudevan

No I think not enough that I would call – so I would call out sort of some these are all minor changes by and large the pattern other than the one I call that which is seeing more flash arrays. I would say even that just to put this in perspective we would see less than sort of a handful a couple of quarters ago. This time, we probably saw a little over 2000 deals in which we started to see flash arrays. And so that’s the nature of the change. This is against a pool of well over 1000 engagements. Within the large vendors VNX is the most frequent platform that we compete against within the Dell mix Compellent is larger than the – is getting larger every quarter than – between Compellent and EqualLogic, Compellent is getting bigger and EqualLogic is getting smaller in terms of who we compete against. (Indiscernible) has continued to increase in terms of frequency and consequently HP has increased in frequency. And NetApp FAS is always the second platform that we compete against. So I am not sure if that’s substantially different Alex from what we have always had.

Alex Kurtz - Sterne Agee

Okay, that’s helpful and I appreciate that. What’s the fully diluted share count for the quarter?

Anup Singh

Let’s have a look, so for Q1 our fully diluted shares was just short of 89 million. For Q2 we are expecting that to go up about a million, so it will be about 90 million for Q2.

Alex Kurtz - Sterne Agee

Alright. Thanks guys.

Suresh Vasudevan

Thank you.

Operator

Our next question is from the line of Brian Alexander with Raymond James. Please go ahead.

Brian Alexander - Raymond James

Okay, thanks and good evening. This scale-out adoption looks like it’s off to a really good start with over 1,200 systems deployed. I am just curious to what extent you think that played a role in the customer count increase this quarter of about 450. Is scale-out primarily being driven by existing customers or new customers and just any more color on what types of customers are adopting scale-out and for what workloads? Thanks.

Suresh Vasudevan

Yes, I would say, scale-out has done really well not just in terms of the customer count measure part of the reason we took such a measured approach to releasing it to our installed base is we have very stringent sort of availability metrics that we hold to before we say it’s ready for our installed base to move on to. And so that’s done really well on the availability front as well, very, very stable. Having said that, much of the adoption of scale-out is within our installed base at this juncture that there is much of what drove our new customer count, it was very strong, particularly for Q1, much of that I think was driven simply by not necessarily the volume of channel partners, but by very healthy trends in terms of how active the channel partners have become with our platform. I would attribute much more to that at this juncture. Scale-out is particularly important because now that’s our default release. So going forward, not only is it now being rapidly taken up by our customers. For new customer deployments, we are at a point in its maturity and its availability characteristics that, that will become our default release. So, it will drive a lot more new customer acquisition as well as sort of large scale deployments, but as I look back on Q1, I would say it was more installed base adoption.

Brian Alexander - Raymond James

Great. And then just a quick follow-up on service providers to clarify you are seeing a higher percentage of service providers repeat purchasing than your broader customer base, I think you said 60% earlier, but you have also seen much higher dollar volume from the service provider community when they come back and purchase incremental capacity than your broader customer base. I am just trying to get a sense for dollars versus percentage?

Suresh Vasudevan

I am not sure of the exact data whether the individual transaction sizes on repeat purchases are different. My gut reaction is to say there is no reason why it should be different, if anything they tend to want to purchase in increments as their requirements grow, so I would say each tranche is not likely to be larger and cumulatively they are going to buy more during a year, but I don’t see why each tranche will be any larger than for everybody else, but that’s my instinctive response.

Brian Alexander - Raymond James

Okay, alright. Thanks and nice job.

Suresh Vasudevan

Thank you.

Operator

Next question is from the line of Joe Wittine with Longbow Research. Please go ahead.

Joe Wittine - Longbow Research

Thanks. A follow on to the scale-out question, the 1,200 customers was a surprisingly big number to me at least. How many of those customers that have scale-out in production are actually using the benefits meaning actually scaling out immense datasets versus just having adopted the functionality, just seems like a big number given a lot of your workload mix is focused on things like exchange of BDI, which often don’t need massive scale?

Suresh Vasudevan

That’s right. So, first just to clarify, 1,200 systems in customer count is going to be smaller than the 1,200 systems. And as you rightly said, a majority of those in the first instance will be single node scale-out software or two node not necessarily fully scaled out to four nodes as you called out, but there is one important distinction I want to draw on scale-out, which is scale-out has at least three major benefits. One of which is that you can aggregate the performance of multiple nodes. And so you would want to think about that as a solution to really high performance environments. In an earlier question, I mentioned that we can go already to 200,000 IOPS by scaling out. That’s an example of where you are using scale-out to grow up to flash array like performance levels.

The second used case is capacity aggregation. So, we have a – for example we have a very large financial services customer that’s adding capacity at such a pace that scaling out multiple nodes to grow the capacity is what’s driving them not necessarily taking the workload and splitting it across the entire cluster to get more performance. The third one which is still perhaps the biggest thing that more mid-size environments will see is ease of management. When I can manage multiple arrays as of they are one entity then it just radically simplifies administration. And so I want to make sure it’s not always seen scale-out of not just about really large environments or really large performance in particular.

Joe Wittine - Longbow Research

Okay, that’s really helpful. And then I know you wanted to talk to us much about the high performance platform or just what’s in the strategy behind it, how many deals today are you losing let’s say for not having a higher performance array in the tool…?

Suresh Vasudevan

I would say it’s not a large proportion of deals that we lose because we don’t have high performance, but there are many environments where the way we would configure that for example would be to aggregate multiple nodes to solve the customer’s problem but scale-out is an example. This makes it more elegant. I will tell what’s – actually I don’t want I was going to discuss sort of certain of the attributes. There are other attributes than just simply high performance. At this juncture if I may I am not going to walk down the details of what’s in the platform there are a couple of dimensions of scaling with the high end platform that allow us to target a larger base than simply delivering much higher performance levels. I apologize but I want just leave it at that.

Joe Wittine - Longbow Research

Fair enough. Thank you, Suresh.

Suresh Vasudevan

Thank you.

Operator

Thank you. Our next question is from the line of Aaron Rakers with Stifel, Nicolaus. Please go ahead.

Aaron Rakers - Stifel, Nicolaus

Yes. Thanks. I was going to actually ask that last question a little bit different way. When you look at your $18 billion TAM opportunity that’s out there, obviously we have talked in the past about fiber channel and that being I think the math was around $3 billion of incremental TAM being addressed by that opportunity. And I know you are not going to talk a much about it, but in your opinion with the high end platform coming out how would you characterize the opportunity if TAM expansion as you look to ramp that over the coming quarters and maybe specifically is there any workload environments that are particularly addressed by that opportunity?

Suresh Vasudevan

Yes. So let me just clarify the TAM question again apologies that I am not going to talk about the workloads either. But on the TAM question there is two ways I mean we have always talked about $18 billion TAM and I had two responses to that. One is to say and when we say that we talk about the fact that 50% or more of our deployments are against fiber channel arrays where we win and therefore we should count that in our TAM. So that’s one line of reasoning that leads to a large TAM.

Following that reasoning I would argue that the platform we are introducing is not about TAM expansion but it’s about win rates within that TAM. The other argument I have heard back is frankly if you win with high scalability against fiber channel that’s what creates the high scalability market and so you shouldn’t count that in your TAM. You really are today in a $5 million TAM. When you view it in that context then fiber channel expands our TAM from $5 million to $20 and the high end platform in a similar range expands our TAM. So hopefully am I making sense? So depending on whether you see it as a very large TAM that allows us to expand our win rate within that TAM or if you think about TAM is small then it absolutely adds a fairly substantial chunk to our TAM. I will just leave it at the kind of workloads are performance – higher performance workloads but also environments where you have large numbers of workloads that cause a big variability on how much performance you might need over a period of time. Right, so we are able to address that kind of environment where you have hundreds of workloads being consolidated and you don’t know what you might need.

Aaron Rakers - Stifel, Nicolaus

Okay, fair enough. And then just as a quick follow-up I know that you had talked earlier about the headcount expansion that you have done it looks like you had about 356 employees in your sales and marketing organization. So as that looks to actually it accelerated a little bit this last quarter should we assume that a similar contribution to your sales an marketing organization and how – remind us again how you see that ramping as far as when you bring on a new sales person in terms of productivity over a couple of quarters or so?

Suresh Vasudevan

Yes. So, let me start by addressing the productivity question, the sales and marketing headcount if you just look at the last two or three quarters we tend to aim for similar numbers on a quarterly basis. And so anyone quarter we are more successful or less successful but roughly speaking if you look at the last couple of quarters or so that’s really what we are trying to do on a quarterly basis in terms of incremental adds. From a productivity standpoint, Aaron, if I look at sort of our mature teams, mature regions, then in many ways we are already at the target model that we need to be at to support our overall business model. Right, so we are already at the target productivity that supports the target business model that Anup talked about. And that’s in fact aided by factors like frankly more channel enablement is allowing us to more successfully close more deals without time. Repeat bookings are continuing to aid that productivity. And so the mature teams and mature regions are already proving to us what our end game will be on productivity.

At the same time though, we sort of if we placed all our investment bets in that – in the mature team, in the mature regions, then we are short changing long-term growth. Some of our investments are in enterprise teams, some of our investments are in international regions, where we don’t have as much presence and that then dilutes the productivity until they ramp up as well. So, that’s – and really we tried to blend every quarter our investment stocks that were yielding a sequential improvement in our sales productivity, while at the same time sort of getting closer and closer to our target model. Then hopefully that made sense in how we think about it.

Aaron Rakers - Stifel, Nicolaus

Go ahead.

Anup Singh

And so, I was just going to add, Aaron, just briefly I mean in addition to what Suresh said about the balancing investments for growth with improvements in sales and productivity. The one thing I will say if you look at the trends in terms of sales productivity from a year-over-year sort of basis, it’s been increasing for us as well. So it gives us the confidence in making the incremental investments on a go forward basis.

Aaron Rakers - Stifel, Nicolaus

Okay. And then the final real quick question, can you just help us the assumption on gross margin, I know you said at the high end and product margin, it seems to – there has been a little bit of volatility that we have seen the last two quarters now in terms of service gross margin. Can you just help us understand again how we should think about the trajectory of that service gross margin in particular?

Anup Singh

Yes, sure. So our gross margins for support and service is continuing to increase. If you look at Q1 last year, we are at 23%, Q1 this year we basically almost had doubled from that. I would say on a given sort of quarterly sort of basis, the numbers are still small, so that if we make some extra investments in a quarter in Q1, we added some new headcount. We expanded the number of service depots and so on. We have been growing internationally. We have been growing our base of customers. So, we accelerated some investments in Q1. So, you saw bit of a dip from Q4 to Q1, but basically for support and service, we expect to see the margin expansion throughout sort of this year as compared to periods from last year.

Aaron Rakers - Stifel, Nicolaus

Okay, great. Thank you.

Operator

Our next question is from the line of Srini Nandury with Summit Research. Please go ahead.

Srini Nandury - Summit Research

Thank you for taking my call. Obviously, you still have a pretty large untapped market here in the U.S., but at the same time, you cannot afford not to invest in the international markets. Can you take me through some of the thought process involving how you planned your investments going forward in the U.S. versus international markets?

Suresh Vasudevan

Yes, this is – Srini, this is Suresh. This is essentially the comment I was making earlier as well, which is candidly when we went on almost any given quarter when we pull our investment opportunities in the sales capacity front, we typically have more countries we can go into or to add more teams in existing countries than the number of teams that we would go hire in any given quarter. And what we try to do is a blend of adding capacity in regions where we can just split territories and drive more productivity. So, we want to do some of that. At the same time, we also – there is a natural pace of international expansion, because when you go into a new market, let’s say, you are going to Korea, then it takes some amount of time to build channel partners, to put marketing plans in place. So, that’s a natural limiter as well on how quickly you can expand internationally. So, there is no formula. We literally at any point in time have a six-month horizon on all of the opportunities and then we sort of blend and pick a sort of pad that optimizes to multiple variables.

Srini Nandury - Summit Research

Okay.

Suresh Vasudevan

Those being productivity along with long-term growth.

Srini Nandury - Summit Research

Okay.

Operator

I think your final question is from the line of Rajesh Ghai with Macquarie. Please go ahead.

Rajesh Ghai - Macquarie

Yes, thanks. Suresh, appreciate the remarks on the competitive landscape. When you talk to the large incumbents, they tell you that one of the ultimate solutions that they are – that are causing a pause in the market is the public cloud.

Suresh Vasudevan

Right.

Rajesh Ghai - Macquarie

And just wondering how much of that is a factor for you, especially as you compete in the SME segment, which is increasingly looking at the public cloud? And related with that, how much of your revenue comes from the public cloud (indiscernible) at this point in time? I appreciate the customer count I am just kind of looking at how much isn’t really impacting your top line?

Suresh Vasudevan

Yes. So, let me answer both. But let me start with the first component, Rajesh. Are we seeing sort of customers evaluating public cloud? We certainly in many of the customers we sell into we absolutely see customers evaluating public cloud. One clarification that might help sort of draw the distinction is when I think about public cloud, Amazon actually being a canonical case of sort of a public cloud, then really the kind of data that people are contemplating placing on that kind of a public cloud is what I think of as eventually consistent data.

And the consumer side of things like photographs that you might upload on Facebook in large organizations it’s things like archives, image repositories, content depots and so on. In the past, these would live on large scale NAS systems or really dense large scale RAID arrays like the ones from sort of NetApp, EMC and so on. And those are increasingly starting to make their way to object storage systems like whether it’s public cloud, object stores like X3 or other things. We don’t focus on that segment at all. That’s not a segment that we think of as part of our target market. In some ways, that’s more commodity infrastructure. We focus very much on sort of immediately consistent data rather than eventually consistent data for more transactional applications. Where I think the real alternatives are more SaaS or cloud service providers like infrastructure as a service provider and so on. But I want to make sure that distinction is understood, Rajesh. So, I think we see less of a threat of our applications migrating away. In terms of our breakup of revenue from service providers, I believe there is a slide in our investor deck that calls out on our website, that calls out I think it’s about 11%, yes 11% of our revenues from service providers today.

Rajesh Ghai - Macquarie

Okay, that’s very helpful. And my last question on gross margin, Anup, you talked about international margins being lower than the corporate average and potentially being the reason why you cannot have your long-term model below where you are right now. In terms of what you have seen so far, has that borne out? Is the international margin actually lower than your corporate average? And it doesn’t seem to be impacting your margin I am just kind of curious how that’s playing out? Thank you.

Anup Singh

Yes, sure. Yes, I mean, I would say from the experience we have had so far, the international margins are probably slightly lower than where we are in North America. I mean, it’s not a meaningful or material sort of difference. The comments around so gross margins overall, we are just about 66, our target range is 63 to 65. And so, if we look ahead at some of the trends that we are seeing we talked about already the competitive environment from a pricing standpoint. We have talked also about some investments that we are making in the channel as we look to increase our engagement there. And then I would say international is probably the third leg of this tool, but it’s probably in that order.

Rajesh Ghai - Macquarie

Alright, thank you. Good luck.

Suresh Vasudevan

Appreciate it. Thank you, Rajesh.

Operator

Thank you. At this time, there are no further questions in queue. I would like to turn the call back over to Mr. Vasudevan for closing remarks.

Suresh Vasudevan - Chief Executive Officer

Well, let me just conclude by thanking you all for joining us today. And I want to also thank our employees for making the quarter successful. We look forward to talking to you all in about 90 days. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for today. We would like to thank you for your participation and you may now disconnect.

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