Tintri's (TNTR) CEO Ken Klein on Q2 2018 Results - Earnings Call Transcript

| About: Tintri, Inc. (TNTR)

Tintri, Inc. (NASDAQ:TNTR)

Q2 2018 Earnings Conference Call

September 7, 2017 5:00 PM ET

Executives

David Jew – Senior Director of Investor Relations

Ken Klein – Chairman and Chief Executive Officer

Ian Halifax – Chief Financial Officer

Analysts

Jason Ader – William Blair

Katy Huberty – Morgan Stanley

Wamsi Mohan – Bank of America

Victor Chu – Raymond James

Alex Kurtz – KeyBanc Capital Markets

Andrew Nowinski – Piper Jaffray

Jack Andrews – Needham

Operator

Good afternoon. My name is Chelsy and I will be your conference operator today. Welcome to the Tintri’s Second Quarter Fiscal Year 2018 Earnings Call. At this time all participants are in a listen-only mode. At the conclusion of the prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder this call is being recorded.

I would now like to introduce your host for today’s conference call David Jew, Senior Director of Investor Relations for Tintri. David, you may begin your conference.

David Jew

Thank you and good afternoon. And welcome to Tintri’s second quarter fiscal year 2018 earnings call. With me today are Ken Klein, Tintri’s Chairman and Chief Executive Officer; and Ian Halifax, Chief Financial Officer. This call is being broadcast live over the web and can be accessed via the Investor Relations section of the Tintri website.

As a reminder during today’s call we may make forward-looking statements including but not limited to statements regarding the markets in which we operate and our market opportunity, trends and expectations for our products and technology, the structure of our sales organization and the anticipated impact of recent changes to our sales organization on our business performance, the impact of our recent customer acquisitions on our long-term growth, our competitive position, our financial performance, profitability, expenses, gross margins, DSO levels, operating leverage in the future periods and our revenue and non-GAAP loss per share guidance for Q3 fiscal 2018.

While these forward-looking statements reflect Tintri’s best current judgment, they are subject to risks and uncertainties that could cause actual results to materially differ from those implied by these forward-looking projections. For a more detail prescription of these risks and uncertainties please refer to our earnings release, which was issued earlier today. And our perspectives filed with the SEC on June 30, 2017. We undertake no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Also during this call, we will discuss non-GAAP measures in talking about the Company’s performance, reconciliation to the most directly comparable GAAP measures is provided in our earnings press release. Ken Klein will begin today’s call with a review of the Company’s financial and operational highlights, Ian Halifax will then provide additional details about the Company’s financial results and outlook, which will be followed by a question-and-answer session.

With that, it is now my pleasure to turn the call over to Tintri’s Chairman and CEO, Ken Klein.

Ken Klein

Thank you, David. And thanks to all of you for joining this call. Before we discuss our second quarter results, I want to take a few minutes to provide a brief overview of the Tintri value proposition, the large and growing market opportunity we have in our business model. Tintri’s mission is to deliver the agility of a public cloud with a control only possible in an enterprise data center bringing the best our both worlds together.

Many organizations have look to the cloud for needed flexibility especially for cloud-native applications. But moving enterprise applications to the public cloud can be costly and complex. Before they can be migrated they must be recoded, re-factored, reintegrated and retested and they must provide resiliency in the case of downtime. Additionally, performance maybe unpredictable, that’s why a large number of organizations have moved some computing storage services out of the public cloud and back on-premises.

These organizations have realized that the cloud is about how you deliver IT services not where you do it. Tintri provides the agility of the public cloud with the control of on-premises data center infrastructure providing performance, availability and security serving needs of both cloud-native and enterprise applications. Tintri’s enterprise cloud platform includes all-flash storage systems plus highly differentiated software and web services. Our enterprise cloud platforms allow us to tackle several large attractive markets, which can be split into virtualized storage systems and enterprise cloud solutions.

The market for virtualized x86 storage systems and software is expected to grow to a $37 billion opportunity in 2018 driven by an increasing adoption of virtualization centric storage systems, a move to flash-based storage and a growing use of primary storage for data protection and recovery. The market for enterprise cloud solutions is expected to grow to a $27 billion opportunity in 2018 and comprises storage hardware, storage software and cloud systems management software, which are all deployed on-premises. The intersection, now these two markets [Audio Dip] IP based protocol storage systems is our immediate TAM and it is estimated to be $7.4 billion in 2018. Within these markets to increase focused on large enterprises, public sector entities and cloud service providers.

Now onto our second quarter results. And this is our first quarter as a public company. Q2 revenue grew 27% over the same quarter a year ago, at the low end of our expectations. This is primarily due to distraction, disruption and some sales attrition occurred during and after our IPO. Following Mike McGuire’s departure as Chief Sales Officer, we have flattened our sales organization by moving to two sales regions North America and international. I understand leadership about global sales force and believe this change will help us improve go to market alignment, velocity and execution.

I’m also increasing our focus on sales retention, training and enablement as we launch our new product offerings. We’ve made progress improving our operating leverage, our EPS of negative $0.91 and free cash flow of negative $23.9 million came in better than our expectations. Remained focus on attaining cash generation and profitability. Ian will provide more detail on our Q2 performance and forward guidance later in the call.

For now, I’d like to provide some additional color on the quarter. First, we grew our total customer account over 400. I’m also pleased to report that receive the largest order in a company’s history from a major U.S. financial institution, which did not underwriter IPO. We had significant new wins including the following; a large international charitable organization chose Tintri to replace network appliance because of our simplicity and our performance. A large construction and civil engineering company chose Tintri over HPE 3PAR and Nimble because of our simplicity, performance and functionality.

Finally, a large global media company chose Tintri over NetApp and Nutanix after extensive proof of concept. These wins reflect the continuing shift to the enterprise cloud and the recognition of Tintri’s competitive advantage. I’m also please to report that we saw a continued momentum with our land and expand strategy, which positions us well for the future. And looking at our top 25 customers comparing the value of their total purchases with us to date orders that placed with us in their first quarter as a customer, we see on average a 21x multiplier. We refer this metric as our land and expand multiplier.

In other words, an initial spend of $100,000 is turned into $2.1 million over the customers life time with us. This compares to 15x in the same quarter a year ago. In addition, for all customers who have been with us for 12 months or more the multiplier increased to 3.3x from 2.6x in the same quarter a year ago.

Let me discuss briefly one of these customers that really illustrate this point. Mentor Graphics is a Siemens Business is a leading company in electronic, design, automation. . Mentor Graphics is an example of a long time Tintri customer that made additional repeat purchases in the quarter because of our performance and ease of management for virtual machines, Mentor Graphics deploys Tintri to spin up and spin down tens of thousands of virtual machines each week supporting production servers and systems. Mentor’s land and expand multiplier is 22x.

Now let’s turn to our recent product announcements. Earlier this quarter we announced integration with Cisco’s UCS Director. This Tintri plug-in allows customers to more fully realize Tintri’s capabilities including simpler management, separate scalability of compute, network and storage and a greater efficiency of workloads. As we enter the second half of our fiscal year, Tintri is delivering on our most significant ever series of product launches.

In August we announced integration between on-premises Tintri solutions and Amazon Web Services as well as IBM Cloud Object Store via the Tintri Cloud Connector. We also extended the machine learning power capabilities of Tintri analytics to help customers predict their need for storage and compute resources up to 18 months into the future. And just yesterday, we announced our completely new Tintri Enterprise Cloud 6000 all-flash storage systems line up. The EC6000 series with Tintri global center allow the customer to start with just 10, excuse me, 19 terabytes and 500 virtual machines and scale up to 40 petabytes and 480,000 virtual machines. Supported by the same OS platform they manage from one common central console.

This allows customers to manage more virtual machines in less space or reducing management by more than 90% sitting both capital and operating expenses. Organizations building enterprise cloud demand this degree of agility, scale and control. We’re encouraged by the initial response the launch by our customers, partners and prospects. Although our Q2 revenue performance was at the low end of our expectations the company’s fundamentals and value proposition remain very much intact. We’re excited about the marketing opportunity ahead of us and the significant benefits our enhanced product portfolio will bring to our customers.

I’ll now turn the call over to Ian to provide detail on our Q2 financial performance and to discuss our outlook for Q3. Ian?

Ian Halifax

Thank you, Ken. Good afternoon everyone. Thank you for your interest in Tintri. Now we look for keep you updated on the company’s financial performance. Because, this is our first earnings call and some of you on the call may be new to Tintri.

Let me quickly go over some important aspects of our business model. We focus on large organizations and CSP through maximize the lifetime value for the customer through a land-and-expand strategy. After the first purchase, customers generally buy additional systems and software products.

As a result, our financial model demonstrates revenue growth driven by new customer additions and the expansion in our install base customers. We seek to drive growth margins through incremental software sales and we are focused on increasing operating leverage. Before I get into the specifics of the financial results, and as a reminder, please note that during my remarks, unless I specify otherwise, all results and projections discussed on today’s call other than revenue will be non-GAAP. A reconciliation of these measures to the GAAP comparables is available in our earnings press release.

As Ken said earlier, total revenue for Q2 FY2018 grew 27% year-over-year to $34.9 million. Product revenue which consists of system sales and software license revenue grew 27% year-over-year to $26.3 million. Services revenues which stand from maintenance and support agreements grew 26% year-over-year to $8.5 million. Services revenue accounted for 24.5% of total revenue of approximately same as the 24.6% in Q2, a year ago. In Q2, 74% of revenues came from the U.S. and 26% from our international operations. This compares to 68% and 32% respectively in the same quarter year ago.

Gross margin in Q2 was 60.1%, compared with 65.3% in the same quarter year ago. Product gross margin in Q2 was 59.1%, compared with 65.8% in Q2 last year. This change is largely due to one, a nearing end to a key product cycle and two industry-wide increases in flash and DRAM pricing.

As Ken mentioned earlier, we have refreshed the entire product portfolio, as we enter Q3, adding superior performance and higher capacity systems along with significant enhancements to our software portfolio. We expect gross margins to improve over the medium term, as customer adoption for the new product line accelerates.

Services gross margin was 63.2% in Q2, down slightly from 63.6% in the same quarter year ago, as we added incremental resources to support our customers worldwide. This is an investment in our long-term growth and we are confident that this investment will yield positive returns in the quarter ahead and we expect services margins to trend through the mid-60s.

Operating expenses for the quarter were $45.8 million in Q2, up from $38.9 million in the same quarter, year ago, an increase of 18%. Operating expenses as a percentage of revenue decreased to 131% from 141% in the same quarter year ago. We maintained tight cost control and this is consistent with our intent to grow revenue at the higher rate than operating expenses in order to drive operating leverage.

R&D expenses were $14.7 million in Q2, an increase of 26% over $11.6 million in the same quarter year ago. R&D expenses were 42% of revenues, the same as Q2 last year. This dollar increase reflects investment and extending our platforms and making significant additions to our software portfolio. We believe that we have strengthened our competitive position, as a result in these investments.

Sales and marketing expenses were $27 million in Q2, compared to $23.4 million in the same quarter year ago, an increase of 16%. Sales and marketing expenses as a percentage of revenue decreased to 77% from 85% in the same quarter a year ago, which demonstrates our commitment to balance investment in the go-to-market engine with a focus on driving sales productivity from existing resources.

We’re expect to continue to drive operating leverage with sales and marketing expenses, probably more slowly than revenue in the quarter ahead, as we further ramp our sales productivity. G&A expenses were $4.2 million in Q2, up from $3.8 million in the same quarter year ago, an increase of 8%. G&A expenses as a percentage of revenue decreased to 12% from 14% in the same quarter year ago. This dollar increase reflects the addition of incremental resources and third-party spending associated with our preparing for our IPO.

Total headcounts for end of the quarter was 584, up 23 sequentially as we added to all functions though primarily in R&D and in support. Non-GAAP operating loss was $24.9 million in Q2, compared with $20.9 million in the same quarter year ago. Non-GAAP operating margin includes negative 71% compared to negative 76% in the same quarter year ago.

Interest and other expense was $2.4 million for Q2, this is primarily interest on our debt facilities. Non-GAAP net loss was $27.4 million for Q2, compared with $22 million in the same quarter year ago. Non-GAAP loss per share was $0.91 in Q2, compared with $1.03 in the same quarter year ago.

The weighted average shares used in per share calculations were $30.2 million and $21.4 million respectively. Note that the share count numbers used to calculate the net loss per share on a non-GAAP basis assume the IPO shares and conversion of all preferred shares, as of the beginning Q2 FY2018, under conversion of all preferred shares, as of the beginning Q2 of FY2017.

Moving to the balance sheet and cash flow, we finish across with $80.6 million in cash, cash equivalents on investments. Free cash flow with negative $23.9 million for the quarter, where negative 68% of revenues, compared with negative $21.8 million or nearly – negative 79% of revenues in the same quarter year ago.

DSOs were 51 days at the end of quarter, approximately the same level as Q2 year ago at 50 days. We expect DSO to be in a similar range over the near term. That stands at $68.5 million consistent with last quarter. We continue to review various options to both modify and to add to our debt facilities.

I would now like to turn to guidance for Q3. Given Q2 revenue at low end of our expectations following the IPO, we are taking a cautious view of revenue for the next quarter and are focused on delivering bottom line results by carefully managing our cost structure. We expect revenues for the quarter to be in the range of $36 million to $37 million and we expect non-GAAP loss per share to be in the range of $0.77 to $0.81.

We remain confident in our ability to drive the company to positive cash generation and profitability. We have a large and growing market opportunity to address, we have refreshed our product line and we continue land-and-expand in enterprise accounts. While we are impacted by some short premises, we look forward to increasing momentum over the second half of the year.

And with that, I will hand the call back to David, he will open the call for the question-and-answer session. David?

David Jew

We will now open the call for a question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Jason Ader with William Blair.

Jason Ader

Yes, thanks. I know you haven’t given guidance for Q4, just talked about some improving momentum toward the end of the year here. But if I roll through Q3 to Q4 and I assume some type of reasonable growth from Q3 to Q4 it’s still going – it’s like almost no growth year-over-year. How should we be thinking about the growth profile of the business at this point, I mean, you had talked about pre-IPO, like a 30% type growth. Obviously that is not going to be the case to the second half of the year and probably not in the first half of next year given the comps. So maybe just first, how do we think about growth at this point and then what has really changed to cause growth to stall out here.

Ian Halifax

Let me take the first part of that question if I may Jason, its Ian speaking. So obviously the Q2 revenue was slightly lower than we hoped and Ken commented in his prepared remarks. As a result we’re just been very focused on closing our guidance for Q3 and I wouldn’t expect to see a strong return to growth in Q4. But for now we’re simply guiding through the end of Q3, I’ll break guidance for Q4 onto next quarter and then provide full year guidance for next year – at the end of the fiscal year.

Jason Ader

Okay. That didn’t really answer my question. I guess I’m trying to understand what – I know you’re trying to be cautious because you had a weaker than expected Q2. But unless you’re going to see like a dramatic pickup in the business I guess. What would cause a dramatic pickup in the business? And then maybe why – why are things – I know you talked about the IPO but is there something else that’s changed – the product cycle have a bigger impact, kind of ending of this product cycle before the new product cycle have a bigger impact than you expected what are other things going on here that have caused this sort of reset.

Ken Klein

Yes, Jason. It’s Ken. How are you? So the IPO actually had a profound impact on our business as I mentioned in my prepared remarks it definitely caused distraction, disruption and some unwanted attrition particularly in the sales force. And so, as mentioned I’ve taken over, taking really the necessary steps to get it back on the right sort of growth trajectory platen the organization. I’m focusing on sales processes, improving productivity and I have a really strong team reporting, Mr. Tom Ellery, running North America as X- EMC, Brocade and Tom Cashman running rest of world and Alliance of X-IBM.

So the guidance is really just fundamentally due to taking a cautious posture given what we experienced in Q2. Now obviously the things that we’re pretty excited about the fact that we’re still accumulating nice net-net new large customer logos, we’re at the beginning of a product life cycle here with a brand new E6000 product and obviously a very robust software payload, so those remain very strong compiling reasons were optimism. But right now as Ian mentioned we’re not guiding to Q4.

Jason Ader

Okay.

David Jew

Thank you, Jason. Next question.

Operator

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

Katy Huberty

Yes. Thank you for taking the questions. You released in a K when the Chief Sales Officer left, but I wonder if you could provide some color as to how many quota carrying sales reps you have? I think last quarter it was 70, did you also see some turnover in that base. Because I guess we’re trying to reconcile a strong customer add number, I think you added 127 customers versus 90 the prior few quarters. You’re talking about strong land and expand. And so the metrics in the business look okay, but you’re guiding revenue down 15% in October. I was just trying to understand what might be going on in the sales force beyond the head of that business leaving? Thanks.

Ian Halifax

Let me take the first part, okay. So we’re not going to disclose the absolute number of sales teams or ramp sales team. What I can tell you that we did loss a small number of ramp sales team but having said that, the yield – the average yield per ramp team actually increased 33% year-over-year, so that we think is pretty healthy.

Ken Klein

Yes. And then in terms of customer adds Katy, we added approximately 88 net new logos in the quarter. So it was pretty consistent with – sort of the customer add totals that we’ve experienced in previous quarters. And we have some nice new logos including we added Fox as a new customer, Bechtel, Volkswagen and Salvation Army are pleased with those adds.

Katy Huberty

And then just as a follow-up, does that 33% increase in average yield per ramp team does that include the contribution from some of the people that left during the quarter? And then just as a connected question to that why are you so confident that you can drive increased sales productivity to deliver growth whereas a lot of your other competitors in the emerging storage space are having to hire aggressively in order to deliver their growth. Why do you think Tintri is different? Thank you.

Ian Halifax

Thanks Katy. This is Ian. The first part of the question there were some sales people, probably who were included in that 33%, yield number I gave you. So the answer now is yes. Second part is we’re very focused on our land and expand model. As you can see the land and expand multiplier went to 21x last quarter from 19x. So we believe that fundamentally we align the right enterprise account and expand there, we don’t need to darken the skies with new sales people.

Ken Klein

And I’d also mentioned back to Q2 80% of our business came from existing accounts again that was really driven by the expansion of these large logos. And again 20% of the Fortune 100 customers that’s a very strong source of revenue for us. It’s independent to a certain degree from the number of teams that we’re adding.

Katy Huberty

Okay. Thank you.

David Jew

Thank you, Katy. Next question.

Operator

The next question is from Wamsi Mohan with Bank of America.

Wamsi Mohan

Yes. Thank you. What’s your plan to add new sales teams and are you changing that I mean given the fact that your revenue trajectory looks materially different at least for the next quarter. What are you putting in place in terms of ramping because it also sounded as though you are going to cautiously manage your expenses? So are you putting expansion of sales teams on hold at the moment?

Ken Klein

It’s Ken. It’s really a balancing act obviously where we see a TAM that we can access will add new teams. I’d say, that we’re biased more toward productivity again as I mentioned I really flattened the organization, really three strong leaders here including a sales ops function as well. And we’re very much focused on driving productivity because productivity is really going to be the key they gets us toward our cash and profitability goals in the longer-term. So we’re focusing on – primarily on things like sales process and really optimizing organization, kind of how we’re doing things, how we’re working with the channel and those sorts of things as opposed to just blindly adding teams.

Wamsi Mohan

Okay. Thanks. As a follow-up, in your guidance can you help us parse through what your assumptions are so we can try to disaggregate what might be more transitory disruption around IPO and leaving your sales head versus anything much more structural? Can you help us think through within the guidance what sort of repeat purchases are you accounting for is there a significant change in the deal size existing or new customers that you’re embedding and acquisition of new customers. If you can help us think through these different pieces what your assumptions are embedded within your guidance I think it will be helpful to sort of characterize what is transitory versus not?

Ken Klein

I’ll try to take a swag and I’ll let Ian follow-up. So it is really difficult to quantify last quarter, I mean – clearly retention bid us to certain degree but there was a fair amount of disruption and distraction, which is in fact transitory, so we believe we really stabilized the organization. And we’ve kind of move beyond a very difficult IPO. Again, as I mentioned, we installed very, very strong leaders in North America and in rest of world to really manage the business. And I’ll turn the rest of the question over to Ian.

Ian Halifax

Yes. I think [indiscernible] the situation is transitory rather than structural cumulative data points, while I think [indiscernible] case. The first is I believe [indiscernible] land and expand multiple of 29 times, so that metric continues to grow forward consistently 0.1. Second is the sales yield data, I talked about it earlier, we are still growing sales unit and are ramping 33%. And then third our average order value average transaction size again grew in Q2, the average order value was approximately $150,000 [indiscernible] a year ago. So those parts of the business land and expand, sales yields, average selling prices are going in the right direction.

Wamsi Mohan

Okay. So without giving formal guidance, I mean if we characterize these things as transitory should we expect that you can get to sort of 20% plus growth rate back in 2018 without holding you specifically to that is guidance, directionally would you say that – if you exited out these transitory factors I mean would you have been sort of at least at 20% plus growth rate.

Ian Halifax

Going through the IPO process, the results we believe over the long-term we could see top line growth in the high 20%. Nothing structural or competitively has changed to affect that assumption. What we have in place are some internal factors that have caused us to guide [indiscernible] near-term. So longer-term with our market opportunity, our product portfolio, our high level differentiation, inaugurate customer base there is no reason why in time we can’t return to those [indiscernible]

Wamsi Mohan

Thank you.

David Jew

Thank you, Wamsi. Next question.

Operator

The next question is from Simon Leopold with Raymond James.

Victor Chu

Hi. This is Victor Chu in for Simon Leopold. You’ve given the earnings guidance that you provided for next quarter this seems to imply that your OpEx is growing a bit slower than we were previously expecting. So I guess when investors think about the expense profile, high growth tech companies this would seem to be kind of an outlier that trenches or something driving your reason for running the operation a bit near.

Ian Halifax

I think it’s very simple, we’re looking at every dollar we spend in the company and making sure that we get return from them. And so we’re keeping all options on what we spend and where we spend open.

Victor Chu

Okay. So just to be clear then we shouldn’t read into that as any kind of implication for what you are looking for growth going forward – structurally different growth profile then you were thinking before I guess.

Ian Halifax

I’m not sure I follow the question.

Victor Chu

I’m just trying to make sure that – we’re clear that the lower OpEx isn’t something that we should read into about a structurally different top line growth profile for you guys.

Ian Halifax

No. I would say it’s more about prudent managements and folks in operating leverage.

Victor Chu

Okay. I guess – just one other quick question, can you provide us with some color on the product gross margin dynamics this quarter, memory constraints materially worse than what you were really give us previously, because it was – product gross margins was bit lower than where we were at – also there – I guess how do we think about the trend for that next quarter and to end the year.

Ian Halifax

I think I’ve said in prepared remarks, there are really two factors that drove the year-over-year for in product gross margin along with the size we were coming to the end of a product cycle and who we talked about was completely from top to bottom refreshed portfolio. So we did see some price pressure as a result of the outline being at the end of it cycle, and then two like everybody else in the space. We’ve been affected at least a couple hundred basis points by the flash and DRAM process. Going forward – we expect to see gross margins improve both new product launch selling more software and in time but it’s flash processing.

Victor Chu

The product cycle was in – that was anticipated all right, so I guess, when I’m trying to out what the Delta primarily the memory constraints it’s clearly you had already visibility into the products cycle was doing.

Ian Halifax

That was factored but we also saw slight lower revenue and forecast which meant less absorption over head. Those probably are the two details about it.

Victor Chu

Okay. Thank you.

David Jew

Thank you, Victor. Next question.

Operator

The next question is from Alex Kurtz with KeyBanc Capital Markets.

Alex Kurtz

Yes. Just a couple questions for me, guys. It just looks like I mean based on what the guidance, you given here it looks like OpEx would be potentially down in October sequentially. Is that in the right direction?

Ian Halifax

Yes.

Alex Kurtz

Okay. Just wanted to state that as you guys sort of review all of your cost. Back on the earlier question about sales yields and who’s left in the organization and have you going to kind of pro forma analysis on the reps that are left and their yield rates and if you were to look at those teams, in kind of look into fiscal 2019, it just kind of extrapolate land-and-expand within, there was an install basis. Is there enough there with those sales and those yields rates among people that are left not the 33% – the core number where you could grow mid-teens based on current roster.

Ken Klein

Yes. I mean, I’d say if you look at our best performance team as I said in prior calls, all the best performing team consistently yield more than $1 million per quarter, which is where we need to be get to our target model. And so the good challenge, we face and we’ll miss, we’re very clear about it. We need to get more and more of all things through that breakeven yield of around $900K or $875 because we’re talking about, and then $2 million and beyond. So our focus is A, hire the right people be getting trained and then see driving into those $875 million yields, and our success is based on guessing more and more teams to that best-in-class best performing level.

Alex Kurtz

Just a question for Camellia jump here at another potential disruption would be down the road kind of if you guys decided to bring in as head of global sales to replace Mike and that could lead to another attrition like event. Can you say right now that you really believe that, that’s not the path forward here in the next 24 to 36 months that the current shot here is what it is and that you’re moving forward with.

Ken Klein

I can tell you that unless I like that and I have no plans at this time to change the structure from the one that I just created. Again, just to reiterate, I thought I’d have a very strong team Ian, both Tom Ellery and Tom Cashman and Ben Taft around sales operations really supporting me and that’s just as a reminder, I’ve run companies from the past add billion dollars from scale from sales perspective. So it’s not something that’s far into me and actually it’s provided a unique opportunity to really align ourselves the field with headquarters and headquarters of field are more – closely, more tightly and again that alignment, I’m already seeing the signs of driving sort of faster velocity in terms of decision making and I expect to see improved execution. So I’m comfortable with the organization the model we have in place.

Alex Kurtz

All right. Thank you.

David Jew

Thank you, Alex. Next question.

Operator

The next question is from Andrew Nowinski with Piper Jaffray.

Andrew Nowinski

All right. Thanks. May I have start with the clarification first. So is the EC6000 replacement to other models, and what is the end of life state for those are older models.

Ken Klein

I think so replacement of – probably two strong at term is it’s really an extension to what we’re offering. So the EC6000 really increases us into actually in two directions and the very low end actually and will be – as I mentioned getting down to 19 terabytes on even below that was sub 1000 IOPS, and then all the way up in the high end to over 300,000 IOPS and 650 more or less terabytes. So it’s really a broadening of the product line, which again allows us to cover more of the IDC bands, it also offers much more – much easier incremental upgradeability. So you can actually offers to drive by drive extendibility which is something, I think is very differentiating something in a number of our customers are really pretty excited about, because they didn’t buy exactly what they need and then they can add very easily to add additional capacity and this coupled with the VM Scale-out now which again is view as our ability to manage a whole array of these – 64 country appliances, which allows us to really address some extremely robust workloads. And as I mentioned, no one can get anywhere close to this half million – and to the half million virtual machine sort of barrier and we’re able to do that and we’re seeing customers really is as I mentioned customers like Mentor I alluded to that in script and other starting to really deploy a large enterprise which means lots of the – which means they need much higher performance and density. And so we’re really – I think there’s new product line and we’re really oriented in the sweet spot in the market.

Andrew Nowinski

Okay, great. And then I think you should expect the gross margin to improve in part from some of the launch in new products, but typically companies have a lower gross margin profile, when they launch new products, I guess why you’re expecting a benefit to gross margin by near term going forward from the new products.

Ken Klein

Well, I’m not getting adding into a lot of detail but this EC6000 carries a lower cost of goods sold, and so that’s going to generate higher margins as we transition to that product moreover as we’ve mentioned we have had a very large payload in terms of the software launch – we’ve added the next version of the VM Scale-out with array offload, we’ve added a new capability with the machine learning around Tintri analytics to support compute and now we have the Cloud Connector which it gives us a connection again with Amazon Web Services, these are not – that is not a free product we’re selling our products. So again more software as good as when it comes to gross margins.

Andrew Nowinski

It makes sense. All right, thanks. Just one last question for me regarding competition, I know what – I’ve assume that the competitive landscape hasn’t changed much a lot of five years. But if you were seen any of the legacy vendors getting any more aggressive on pricing than usual this quarter.

Ken Klein

No I think the – well the environment – competitive environment has been robust, area is robust, and I expect it to be robust, but I would say that we’re seeing sort of incremental changes with competition, I would say as track win rates, I didn’t seeing our win rates, improving to answer some legacy folks that’s specifically HP, Nimble and 3PAR and EMC on the other hand, I think that after showing higher strength as an example, so I think it’s a mix that bad overall it certainly is a competitive space. But obviously incrementally, I’m seeing sort of some variance between the various competitors.

Andrew Nowinski

Thanks, Ken.

David Jew

Thank you, Andy. Next question.

Operator

[Operator Instructions] The next question is from Jack Andrews with Needham.

Jack Andrews

Hi, good afternoon. Thanks for taking my question. So Ken I was wondering at a high level, when you speak two prospective customers these days. Do they really understand the value proposition of your technology right away? Or do you need to spend some time evangelizing I guess about Tintri as a company and kind of cutting through the noise in this market.

Ken Klein

That’s a good question. Yes, there’s a fair amount of evangelizing we’ve need to do to get them to basically to give us consideration above once we enter the proof-of-concept base and they try it in their environment then we’re saying this it’s great sort of 21x multiplier take-hole and again that $100,000 or $150,000 purchase which as the units mention is actually going up into the right, we’re saying that as they grow very large in our – large accounts over time. And so once we’re in – we’re seeing it grow. Obviously getting those first wins is – it’s challenging that’s what we’re spending a lot of focus to make sure that we’re working ourselves to go after the right set of customers either the right size enterprises and cloud service providers and then leveraging this land-and-expand business model from there.

Jack Andrews

Sure and then just as a follow up on that point. If you talk a bit more broadly about your partner strategy now that you’re a public company, is there an opportunity to really drive more leverage from this avenue moving forward.

Ken Klein

Absolutely, we enjoy our partnership longstanding partnership with Jujutsu, OEM product in Japan. Obviously, we’re pretty excited about the integration with Cisco and as a UCS Director – this probably about 40% of our installed base is running, leveraging Cisco, our UCS host. So I think we think that’s actually going to be very helpful to us. But there is a option key for signing up other partners that’s something that our team is working on a daily basis.

Jack Andrews

All right. Thank you.

Ken Klein

You’re welcome.

David Jew

Thank you, Jack.

Operator

At this time there are no further questions.

David Jew

This concludes our question-and-answer session. And I will now turn the call back to Ken for some concluding remarks.

Ken Klein

Thanks David. Let me conclude by reiterating the fundamental investment [indiscernible] for Tintri. First, we have a near term $7.4 billion market opportunity which includes virtualized and IP based protocol storage systems as the access point to address the ships to the enterprise cloud. Second we have a highly differentiated software and web services technology, it’s fundamentally distinguishes us from conventional storage. Third, we have refreshed and expanded our entire all-flash product line and a substantial enhance our software portfolio. Four, the customer land-and-expand strategy says continued momentum with our top 25 customers having purchased on average 21 times our initial order. And fifth, we believe our improving operating leverage means to have clear path attributing cash flow generation and profitability over time.

We’re pleased with our progress and our focus on adding to our momentum with our new product offerings in the second half of the year. We thank you for your interest in Tintri, and looks forward to talking with you again in the near future.

Operator

This concludes today’s conference call. You may now disconnect.

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