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spk02: Good day and thank you for standing by. Welcome to the Nutanix Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in their listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Valera, Vice President of Investor Relations. Please go ahead.
spk08: Good afternoon. and welcome to today's conference call to discuss the results of our third quarter of fiscal year 2021. This call is also being broadcast over the web and can be accessed on our investor relations website at ir.nutanix.com. Joining me today are Rajiv Ranaswamy, Nutanix's President and CEO, and Dustin Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for its third quarter of fiscal year 2021. If you'd like to read the release, please visit the press releases section of our IR website. During today's call, management will make forward-looking statements, including statements regarding our business plans, goals, strategies, and outlook, including our financial performance, financial targets and performance metrics, competitive position in future periods, the timing and impact of the current and future business model transitions, the factors driving our growth, macroeconomic and industry trends, and the current and anticipated impact of the COVID-19 pandemic. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a detailed description of these factors, please refer to our SEC filings, including our most recent annual report on Form 10-K for fiscal year 2020, filed with the SEC on September 23, 2020, and our quarterly report on Form 10-Q for the fiscal quarter ended January 31, 2021, filed with the SEC on March 4, 2021, as well as our earnings press release issued today. These forward-looking statements apply as of today and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today's call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Lastly, Nutanix Management will be participating in the William Blair Growth Stock Conference on June 1st and the Stiefel 2021 Cross-Sector Insight Conference on June 9th. Nutanix will also be hosting a Virtual Investor Day on June 22nd. A link to register for this can be found in our earnings release issued today. We hope to see many of you at these upcoming events. And with that, I'll turn the call over to Rajiv.
spk03: Rajiv. Thank you, Rich. And good afternoon, everyone. I hope you're all staying safe and healthy. We are closely monitoring the current COVID situation around the globe, particularly in India. where we've offered help and support to our local team, from healthcare assistance to fundraising for organizations supporting relief efforts in the country. I'm impressed by the resilience of both our employees and customers around the world, especially in India. Now I'll move on to our results. Q3 was a strong quarter across the board. We delivered another quarter of improved execution, continued momentum, and our performance on all our guided metrics. Today, I'd like to highlight some of our accomplishments in the quarter and also discuss progress on some of the key priorities I outlined on our last earnings call. We continue to execute on our transition to an ACV-based revenue model. And as expected, our renewal pipeline is continuing to build. Deal economics continue to improve due to shorter duration terms combined with uplift from our emerging products. In addition, we saw good linearity in the quarter as a result of our ongoing operational improvement to our go-to-market engine. And finally, While we typically see a seasonal decline in backlog in the third quarter, we were able to hold it steady, further demonstrating the strength of demand in the quarter. Overall, we are pleased with our execution and can see that the hard work of moving to a subscription model is paying off. Dustin will go into more details later on our financial performance. Last quarter, I shared my observations as a new CEO at Nutanix and outlined our priorities for driving long-term growth, including simplifying components of our product portfolio, deepening our ecosystem partnerships, continuing our shift to subscription, and nurturing our talent pool. I'd like to give updates on a couple of these priorities today, including our transformation to a subscription business model, and deepening our ecosystem partnerships to provide more impact on how we go to market. Starting with our transition to a subscription model, our average contract term continues to decline, coming down from last quarter to 3.3 years, helping drive higher unit economics. We also see our growing base of renewals as an increasingly important driver of top line growth and sales and marketing efficiency. With this transition well underway and with our increased focus on efficiency, we see a clear path to cash flow positivity and operating profit. And we'll go into more detail at our upcoming investor day. Focusing on deepening partnerships to scale how we go to market, as well as creating more opportunities with larger accounts, is critical to a long-term success. In April, Lenovo and Nutanix announced a complete as-a-service solution for hosted desktops to enable IT decision makers to thrive in the new remote hybrid workforce model. This new solution, all managed as a service with the convenience of a single monthly payment and single point of contact for support, includes Lenovo client devices, Citrix virtual desktops, and Lenovo servers powered by Nutanix software. This new aspect of our extended relationship with the number one seller of PCs in the world is a great example of how we can work with a strategic partner to leverage their capabilities from the data center to the desktop in order to best serve our customers. as well as give us meaningful incremental opportunities. Our partnership with Microsoft also continued to progress. During the quarter, we announced that our Kubernetes solution, Carbon, is now validated with Azure Arc Kubernetes Management. With the ease of deploying and managing their certified Kubernetes clusters on Nutanix HCI, with consistent policies and governance across clusters provided by Azure Arc, our mutual customers now have a smooth and fast path to modern containerized applications in a hybrid cloud environment. This month, we announced that the Nutanix Cloud Platform now extends to AWS GovCloud. providing a unified hybrid cloud environment across Nutanix on-premises and bare-metal Amazon EC2 instances running on AWS GovCloud. US public sector organizations looking for strength and security offered by AWS GovCloud can now accelerate their adoption and leverage a single platform and management interface across their private and public clouds. Next, I'll talk about the momentum in our core software as well as our emerging solutions during the quarter. In Q3, we continued to acquire new customers while our existing customers expanded their engagements with us. We saw continued strength in our core solution reflected by a healthy year-over-year increase in our win rates against both our largest competitor and three-tier infrastructure solutions. We also saw continued strength in emerging products, with our attach rate on a rolling four-quarter basis increasing to 39%, up from 37% last quarter. We are seeing more examples of customers choosing our complete cloud software platform, together with emerging solutions to meet all of their business needs. An example of this was for the government entity in the Asia-Pacific region that chose our cloud platform software, as well as our network security solution, to develop a secure private cloud supporting their mission-critical systems, including security, exchange, and SQL database workloads. Our database management solution, ERA, continues to be an important differentiator for us and had good momentum during the quarter. A financial services company headquartered in Europe selected ERA and other emerging solutions on top of our cloud platform to help expand their infrastructure at scale to support their banking customers' requirements for performance, growth, and financial service level agreements. This customer will use our database management solution to deploy, optimize, and manage SQL databases across multiple hybrid clouds, helping to drastically simplify and standardize their overall database operations. We also saw increased adoption of clusters during the quarter, with use cases including data center consolidation, virtual desktop disaster recovery, and the ability to burst to the cloud for additional capacity. In one case, a Fortune 500 North American financial services company selected Nutanix in a multi-million dollar deal to replace their three-tier architecture and run their VDI workloads, and is using clusters to burst into AWS on demand for disaster recovery in their multi-cloud environment. Next, I'd like to touch on efficiency, which is an important part of our path to profitability. We have increased our go-to-market productivity, including more efficient digital marketing spend, increased leverage of our channel partners, and optimized headcount in geographies based on market opportunity. In connection with these efforts, we recently decreased our global headcount by 2.5% from within the sales and marketing functions as we continue to refine our go-to-market model. We expect this action to yield approximately $15 million in annual savings. Finally, I'd like to highlight some industry awards that Nutanix received during the quarter, which demonstrate our customers' enthusiasm for our products and support. We were recognized by Gartner as a peer insights customer's choice vendor for our emerging solutions for distributed file systems and object storage. In addition, our core software was recognized by TrustRadius as a top rated product in the HCI, server virtualization, software defined storage, and virtual desktop infrastructure categories. We recently won the North Face Scoreboard Service Award for achieving excellence in customer service. All of these awards are based on customer feedback. In summary, I'm very pleased with our execution across the board in the third quarter. I look forward to sharing more information at our upcoming investor day on June 22nd. We plan to go into more detail about our mission to delight customers with a simple, open, hybrid, and multi-cloud software platform with rich data services to build, run, and manage any application. We will also provide insight on our strategy, solution portfolio, go-to-market, and mid-term financial outlook. In the meantime, I will hand it over to Dustin Williams. Dustin?
spk08: Thank you, Rajiv. Q3 was another quarter of consistent execution. In Q3, we exceeded all guidance metrics, and the expected benefits of our subscription transition and our ACV first focus continued to play out as planned. Our average contract term lengths compressed as expected, declining to 3.3 years versus 3.4 years in Q2-21. Term compression is highly correlated to better deal economics, and we were very pleased with the improvement in deal economics during the quarter. Other key components of our subscription transition in our ACV first focus include retention rates and increased attach rates for our emerging products, which typically have shorter average contract term lengths. Both of these metrics performed well in the quarter. And as average contract term lengths do begin to stabilize, we expect reported year-over-year revenue growth to move closer to ACV billings growth over time. Now I'll move on to some specific Q3 financial highlights. In Q3, we had record ACV billings. ACV billings were $160 million, reflecting 18% growth year-over-year, above our guidance range of $150 to $155 million. Run rate ACV as of the end of Q3 was $1.45 billion, growing 25% year-over-year, compared to our guidance for growth in the mid-20% range. Revenue was $325 million, growing 8% from Q3 2020. Our non-GAAP gross margin in Q3 was 81.7% versus our guidance of 81%. Operating expenses were $361 million versus our guidance of $365 to $370 million. We continue to benefit from overall spending reductions, including go-to-market efficiencies. Our non-GAAP net loss was $86 million for the quarter, or a loss of 41 cents. per share. We were pleased that our backlog position remained flat in Q3 versus Q2, despite Q3 typically being a seasonally slower quarter in which we usually experience some usage of backlog. In Q3, we experienced a solid year-over-year and quarter-over-quarter increase in our pipeline. This pipeline growth occurred with significantly less demand generation spending versus our spend in Q3 20. Q3 represented a third consecutive quarter of good linearity. DSOs in Q3 were 37 days, down from 44 days in Q2 21, and down significantly from 67 days in Q3 20. Our free cash flow for Q3 was once again aided by good linearity, coming in at a negative $71 million, $15 million better than consensus. We closed the quarter with cash and short-term investments of $1.25 billion, down slightly from $1.29 billion in Q2-21. Now, turning to our Q4-21 guidance, the guidance for Q4 is as follows. ACV billings to be between $170 and $175 million, representing year-over-year growth of 21% to 25%. gross margin of approximately 81.5 to 82%, operating expenses between 380 and 385 million, weighted average shares outstanding of approximately 212 million. Based on the Q421 ACV Billings Guidance, we expect run rate ACV to grow in the low to mid 20% range year over year. Additionally, Based on our Q421 ACV billings guidance, we expect ACV billings for FY21 to approximate $590 to $595 million, up from $505 million in FY20, reflecting year-over-year growth of 17% to 18%. As a reminder, for our reported quarterly ACV billings, we annualize any deal that is less than one year in term length. Therefore, the total fiscal year ACV billings are not derived from the simple addition of the four fiscal quarters. Our yearly ACV billings calculations eliminate any duplication that happens with the renewal of a deal that occurs within the period and is less than one year in duration. We do not believe we'll see the material change in average contract term length in Q4. Based on our ACV billings guidance, the implied revenue for Q4 should reflect double-digit year-over-year growth. Our operating expense guidance includes approximately $15 million in severance costs related to the previously mentioned limited workforce reductions that took place in Q4. We expect some improvement in our free cash flow performance in Q4 versus Q3. And finally, To help with your modeling, we continue to include in our earnings presentation, located on our IR website, our historical trends for ACV billings, run rate ACV, billings term length, and a bridge on how to model and convert our current and future ACV billing guidance to total billings. We will continue to include this level of detail through the end of FY21. With that, operator, could you please open the call up for questions?
spk02: As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please limit yourself to one question and one follow-up to allow time for everyone to ask questions. Please stand by while we compile the Q&A roster. Your first question comes from Matt Hedberg with RBC Capital Markets. The line is open.
spk08: Oh, hey, guys. Thanks for taking my questions. Congrats on the strong ACV results. I wanted to ask about clusters. You guys talked about it in your script. It sounds like it's doing better. I'm wondering if you could provide a bit more detail on some adoption trends there, and how is it helping, I guess, both with an upsell perspective, but also future-proofing existing customer spend? Is that kind of how they think about clusters in terms of extending the Nutanix stack to the cloud?
spk03: Yes, Matt. Happy to answer that. It's a good idea. It's still fairly early days, first of all, for clusters, since we did a GA for AWS. But we're quite encouraged by what we're seeing from a taxing perspective. We look at the use cases today. There are existing use cases that customers are using clusters. For example, disaster recovery for media departments. We talked about a large financial services customer doing that today. The advantage there, of course, is that it's somewhat elastic where you can actually run your VDI workloads or any other workloads on-prem, but use the cloud as you need for disaster recovery. And that's a very cost-effective, very effective use case for clusters. We're also seeing other use cases for driving data center consolidation. You want to get out of a data center and migrate to the cloud. This is the easiest way to lift and shift workloads for existing applications without needing to re-architect them. We are starting to also see organizations use this for dev tests and burst capacity for seasonal demands. Now to the latter part of your question there, Matt, I think there's an equally important factor of future-proofing. So our customers vary across the spectrum in terms of cloud adoption. Some of them are of course using cloud already today. Others are thinking about it as a path to the future. And for those customers who are actually looking at this as part of their future journey, having this capability today gives them a lot more confidence in choosing Nutanix as a platform. Now, the last bit is our multi-cloud roadmap. So, as you know, we've talked about working with Azure on clusters, and we do expect that to be available for early access later this year. And they're closely partnering with Microsoft on that project as well.
spk08: That's great. Thanks, Rajiv. And then maybe one for Dustin. Obviously, strong ACV results, ACV billings result this quarter, and you're calling for another acceleration in Q4. I assume a lot of it is based off your pipeline and also the fact that backlog didn't decrease. But what else gives you confidence in that kind of acceleration, which is certainly noticeable here? Yeah, no, we're pleased to give that guidance, which, as I said, is about a 21%, 25%. year-over-year growth on the ACV billings. Q4 typically is a stronger quarter for us, so you see some of that. Clearly, the pipeline and the work that has gone on with the pipeline management and the discipline in the pipeline is a big deal from that perspective. Conversion rates are doing okay, and and things like that, the products doing well in the marketplace, emerging products continuing to do their thing. We've seen some early indications with the channel starting to do a little bit more of the lift themselves with deals. So I think it's a combination of those things. But, again, Q4 is always a little bit better, but with the backdrop of a lot of good things going on behind the scenes. It certainly seems that way. Thanks a lot, everybody.
spk02: Our next question comes from James Fish with Piper Sandler. Your line is open.
spk05: Hey, guys. Congrats on the acceleration again. Kind of going off of Matt's question there. The demand environment does appear to be favorable now as the business is inflecting from our vantage point. How are you feeling about the sales capacity and productivity, and what are you looking to do to ensure that the first set of renewals really goes well over the next 12 to 18 months?
spk03: Yeah, so maybe I can start investing making time in there. So we continue to focus very much in terms of our sales productivity. We've talked about how Chris has driven a lot of discipline in terms of pipeline management and much more predictable pipeline conversion with the sales team. We are also building out, of course, leveraging the partner ecosystem more now. We are bringing out more solution-oriented selling. And then the emerging products on top of that also improve our productivity. And at the same time, you know, again, compressing these terms help our overall ASP uplift as well. Now, when it comes to the second part, renewals of your question, Jim, so we have been focused very much on building out the engine for being ready for all the renewals coming in. So we are building out the renewals team now to focus on a low cost renewal mechanism. They're putting in all the tooling necessary so that we get full visibility into where customers are in their adoption and consumption cycle. And we've also created the clarity around who's responsible across the sales organization and the customer success teams for driving this whole process from the time of sale to the time of renewal. So all in all, we feel pretty good about the upcoming stream of renewables here.
spk05: That's very helpful, Rajiv. And just keeping on the sales and marketing, obviously the announcement about the headcount reduction. Just any further details here? Was it more kind of middle management layer or any of the reps themselves? Or how do we think about, you know, that reduction element? Thanks, guys.
spk03: Yeah, I mean, I think there was, it wasn't, I mean, it was exclusively in sales and marketing, but it was, you know, based more around where we saw, for example, excess coverage that we didn't need that many people for in specific market regions, elimination of certain functions, creating, again, a room to go build out our renewal engine, right, separate from the team that's doing UACV. So it was fairly distributed across the spectrum. And of course, wherever possible, we tried to not impact quota-carrying reps, but look at the non-quota-carrying reps in terms of this process. So it is fairly distributed, not specific to one particular area.
spk05: That's it. Thanks.
spk02: Our next question comes from with JP Morgan. Your line is open.
spk10: Oh, great. Hey, guys, congrats on the quarter. Seems like a pretty good one. Rajiv, I want to double-click on the emerging products. We have been hearing a constant drumbeat about ERA being a differentiation in the market and kind of pulling the core platform in some cases. Maybe, I think you kind of alluded in the last quarter, where is this what's the maturity of the thinking at this point in time to sell error as a standalone, uh, solution to kind of act as a big beachhead. And the other part to that is at this point in time, what kind of an ECV uplift are you seeing from error and maybe files?
spk03: Yeah, good questions there. So on error, uh, Clearly, Error is a database management offering. It allows our customers to streamline how they install databases, provision databases, and then lifecycle of the databases, and manage all the day-to-day operations that they need to do on the databases. And we make use of the underlying Nutanix platform to do some of these functions very efficiently. So that is the connection and tie today to the underlying platform. So what we see is a twofold go-to-market around Error. Obviously, within our installed base of Nutanix customers, we can go in there and upsell them on ERA on top of our platform. But also, ERA has been a way for us to get into new accounts where they don't have any previous Nutanix footprint by focusing on the value proposition of ERA, which is differentiated and allowing us to pull in our core platform as well. So it works both ways. So I would say there's a very good product market fit at this point. It is an area that we are investing more in. And our vision, of course, over time is to grow ERA into a multi-platform, multi-cloud offering, not just tied only to a Nutanix platform, and increase the range of database engines that we will support in the offering. I'll let Dustin comment on the specific ACV uplift that we're seeing from ERA and flow and files, et cetera. Dustin?
spk08: Sure. Let me talk a little bit more in the broader bucket as far as just the emerging products, which flow and air and the likes are in there. As you heard, 80% year-over-year increase in ACV for those products, 39% attach rate. And, you know, from an uplift perspective, I think the best way to look at it, that we look at it also, is just plain deal economics. And there's two ways to get better deal economics. Term compression, obviously, shorter terms have higher deal economics. But then just better like-for-like pricing on a three-year to a three-year deal. And when we look at deal economics without error flow and the likes in that emerging bucket and with those products, uh we're seeing a significant uplift uh in the overall deal economic the era is front and center as far as uh you know the uplift that we're getting there and i think we'll shed a little bit of light because there's been questions a little bit you know uplift what are we getting from a you know a five year to a three year and a three year to a one year deal and you know how are emerging products helping deal economics so I think we'll try to shed a little bit of light on that at Investor Day and give you some insight, I think, for the first time there.
spk10: I see. Understood. Dustin, one for you. I was wondering on, I mean, at this point in time, you already have motions to go back to your life of device customers and get them to convert to term, maybe on renewals. But how has those conversations been? Are those customers weighing more towards like a three-year deal than a one-year deal? And what portion of the ACV growth is coming from that motion at this point?
spk08: Yeah, not a ton. You know, naturally, as you said, you know, when a support renewal is up for renewal, a life of device support renewal is up for renewal, it's a natural time to have that discussion. as far as merging over into a subscription-based transaction. So those go on naturally. Our guys are all over that, and so that's a natural occurrence from that perspective. And with the shift to ACV-based comp, it's got a higher likelihood that those deals, which we pegged as five years for the life of device, gets more tilted to a three or maybe even shorter deal because, you know, most likely have better deal economics, better hire ACB, and the rep's going to get more money, more commission dollars with that downtick in terms. So, again, it's a natural occurrence. You know, a lot of our support renewals that come up for renewals just merge. They don't renew. they'll merge into a new subscription transaction. So that's ongoing. And the great news there is that we've got a big pool of that, as you well know. And so that's an ongoing effort over the next several years that will continue to attack from that perspective.
spk10: Understood. I'm sure we'll hear more about that in the analyst day, but congrats on the quarter. Thanks.
spk02: Our next question comes from Jason Adder with William Blair. Your line is open.
spk04: Yeah, thank you. Hey, guys. My first question, I guess, for Rajiv, you know, there's this narrative that COVID has accelerated the shift to cloud, and I'm just wondering how you think that's impacted demand in the on-prem space generally, and then how has it impacted demand specifically for Nutanix?
spk03: Yeah, I mean, I think at the top level, if you look at the COVID impact, a lot more customers talked about, you know, how to get their employees working remotely pretty effectively. And that certainly had a stimulus effect in terms of virtual desktop deployments and scaling those deployments. And we, you know, that's a sweet spot use case for us. So we certainly benefited from that. they're also starting to see the use of cloud. Now, cloud migration, certainly I think as customers look at cloud, more and more customers are looking at making use of the public cloud. and we have certainly seen that uh being a driver for some of our deployments as well like we've talked about here with uh some of the examples we provided uh like this financial services customer who's actually doing you know meaning doing both right doing vdi to support the remote workforce but also uh using the cloud for disaster recovery in a very cost effective way So we're certainly seeing more and more of the use cases of hybrid cloud emerge as we go forward. So I think in general, when we look at COVID, I think it's accelerated customers' digital transformation. which means they're focused also on going more and more digital, driving application work, and that generally means they're also modernizing infrastructure where it makes sense, so that helps us. The drive to hybrid cloud is going to be a helping factor for us as well, and then the remote work is here to stay. it's going to be a hybrid workforce as we all come back into the offices. It will likely be people working part of the time in the office and part of the time remotely. So it will continue. So those drivers in general, I think, are helping us.
spk04: Gotcha. And you haven't seen any kind of significant shift from customers or opportunities where they've just said, you know what, we're done with on-prem data centers. We want to go cloud native. and we just don't need you guys anymore? You haven't really seen that type of a phenomenon?
spk03: We haven't quite seen that. As you can see, our business continues to grow healthily. We are seeing good demand, and we are seeing, in fact, an uptick in demand here. So, no, I think we're not seeing that yet. But we are seeing more and more customers talking about wanting to be in this multi-cloud world. They're going to decide what they want to go put in terms of their applications. Some applications will continue to run on-prem. Some will be in the public cloud. Some will be in the edge. And these are newer applications as well. So we are starting to see more of that hybrid trend emerge.
spk04: Very good. Thank you.
spk02: Our next question comes from Jack Andrews with Newtown. Your line is open.
spk03: Good afternoon. Thanks for taking my question.
spk08: Rajiv, given your focus on partnerships, I was wondering if you could just maybe discuss how maybe I guess the amount of awareness and maturity your channel ecosystem has for your line of emerging products relative to their awareness of your core HCI offerings. Is the channel fully up to speed in terms of just all the capabilities that you've introduced to the market, or is there still an education process happening there?
spk03: I think it's very much the latter. There is still an education process. Most of our channel partners are very much selling our core offering, our core HCI. That's what they're most familiar with. These newer products such as ERA and Files and Flow and so forth are relatively new to our partners. And only now are they building up their capabilities to be able to sell that. I think the initial product market fit for some of these products was driven very much by us. And now we are at the point where they're actually scaling these products that we have product market fit on. And this is where the partners come in and play a very significant role. So we are certainly investing in building up the capabilities and enabling them to transact and build up their competencies in these emerging products. And I think there is a future opportunity for leveraging the partners there as well.
spk08: Great, thanks. And then a quick one for Dustin. You've mentioned that you're not expecting any material changes to contract term lengths here in the fiscal 4Q. Any comments in terms of how you're thinking about it beyond this and moving into next fiscal year? yeah i think again uh you will see some you know potential gradual uh declines i think what we see in the pipeline you know there's not a whole lot of movement in those terms now you know when it converts to actual deals we'll see how that plays out but i you know i think again i've said for a while now and we'll have to see here over the next couple years uh but you know what i've said previously is you know probably 2.8 to 3 three Oh, uh, somewhere around there years. Uh, but that's over, you know, a period of time and it's pretty much now things can change, but it's pretty much played out so far as we have expected. We thought it would be a gradual decline because, you know, you've got plus or minus 80% of the existing customer base, you know, already has a set term. So you need to change that and whatever. So again, I think it's, you know, it's ultimately somewhere between that 2.8 and three. And I think that occurs, you know, over some period of time. And we're at 3.3 today. And, you know, we'll see how that goes over the next year or two. Great. Thanks, and congratulations on the results.
spk02: Our next question comes from Nancy Mohan with Bank of America. Your line is open.
spk09: Yes, thank you. And congrats on this solid ACV results and guide. Rajiv, there clearly has been a lot of change over at your largest competitor, both in terms of leadership, ownership, et cetera. Do you anticipate any significant competitive changes there as it pertains to Nutanix, especially with respect to either channel or pricing? Another follow-up.
spk03: Yeah. Look, I think obviously competition is good for the customer. I feel pretty good about our position in the market. independent of what's happening at any of our competitors, we're very focused. We're focused on executing on our HCI platform, building out the emerging products on top of that and extending that to multiple clouds. And we're very focused on our customers and delivering the best outcomes to our customers. And look, if we do that right, I think the rest will fall in place. Now, it is worth noting that we are still the one provider that provides the most choice in the market, allowing our customers to take the hardware, the hypervisor, the container and cloud platforms along with our software. And we remain very focused in terms of executing on that mission and also continuing to build and leverage partners where I see even more opportunity for us
spk09: Okay, thanks, Rajiv. And Dustin, the $50 million in annual savings, is that on a gross or net basis? And is there some that's getting reinvested somewhere else? Or is all of that to flow down the P&L? Thank you.
spk08: Yeah, most of it flows into the P&L. There may be some minor reinvesting, but most of it all flows. And And probably two thirds of that is in operating expense and the rest is in COGS with some of our services and things like that. But vast majority though will flow through.
spk09: Great, thank you so much.
spk02: Our next question comes from Katie with Morgan Stanley, your line is open.
spk01: Yes, thank you. My congrats on the quarter, too. I want to start with a question for Dustin. Can you just give some context around the better-than-seasonal third quarter backlog? Is that a function of an internal strategy to just run at higher backlog levels and improve visibility? Or was that a bit of a surprise and a signal of strengthening demand that you weren't able to ship at the end of the quarter?
spk08: Yeah, sure, Katie. I mean, you always hope for higher backlog to your point there. But, you know, pipeline's been strong. You saw the comments that you were pleased with a quarter of a quarter increase in pipe, the year-over-year increase in pipe. So I think you definitely see something going on from a demand perspective there. And then, again, you have to layer that on with the backdrop of some pretty good execution also within the pipeline management and deal management and deal closure and things like that. So, no, I think it's certainly a combination of both. And a good indicator also is linearity, which we talked about. Quite honestly, linearity surprised me a little bit in the quarter, being as good as it was. It's just typically, you know, not like that in Q3 coming off a big Q2. So I think it's a combination of, you know, mostly positive things at play there.
spk01: Great. Thank you. And then, just as a follow-up, maybe Rajiv can comment here. Today, what percentage of the business is driven by OEM partners, and how does that compare to a year ago? And then, which OEMs are you seeing the fastest growth with? And I just ask that in the context that, clearly, part of your strategic change is to build out that partner ecosystem. Thank you.
spk03: Yeah. I'll comment on the second one, and then Dustin, you can comment on the size of the business with these OEMs. So I would say HPE clearly is the one that's been growing the fastest for us overall in terms of the OEM relationships for us. Clearly Dell continues, and I would say Dell is more fulfillment. As we partner together and your customers want to land a solution on Dell hardware, Dell supports that. So I would say HPE, Lenovo, to the extent that they're in markets where they're strong, continues to be, from a server perspective, also continues to be a very good partner for us. So I would probably say those are the two big ones. Dustin, you want to comment on the sizing?
spk08: Yeah, I don't have a whole lot to add because we stopped giving that stat out a while ago because it just got complicated because most companies, if not all, the Dell business has rolled over to the XC Core, which is kind of meeting the channel with our software running on their service, which continues to do quite well, but it's outside of that OEM bucket there.
spk01: Great. Thank you.
spk02: Our next question comes from Ron Hall with Goldman Sachs. Your line is open.
spk07: Yeah, hi, guys. Thanks for the question. I wanted to start with kind of this question of supply. I know you're selling software, not servers, but then your customers have to install it on a server. So I'm just curious whether you think that there's, you know, any risk as you look out the next quarter or two, given all the supply shortages we keep hearing about, that people want to buy your software, but then they can't find servers to install it on. And then I have a follow-up.
spk03: Yeah, I mean, Rod, I can just tell you a global shortage of chips out there. And I think, you know, the one thing that I would say about software is not all our software necessarily goes on new servers all the time, right? I mean, people are doing more virtualization, and they might deploy it even on existing ones in some cases that are stuff that they've already procured. So we haven't quite seen supply shortages being a driver or impacting us at this point at all.
spk07: Okay, that's great. Thank you, Regina. And then my follow-up, I just want to come back to this point on contract term. I think some people look at it as stabilization and, you know, maybe they worry that, you know, we're stabilizing a little higher level. I'm just curious. I mean, Dustin, you said that's tracking the way you guys would have expected. I'm assuming this is just kind of puts and takes around mix on terms. And I think any other color you could dig into to help us understand why that 3.3 remains stable in Q4 in the guide and And, you know, how we ought to maybe see that trajectory after. Does it probably tick down after that or, you know, how is that kind of playing out? That would be great. Thanks.
spk08: Yeah, as you know, it's not an exact science to predict exactly what the term's going to be in any given quarter. It could go down a tenth here or there or whatever. I wouldn't be surprised about that. My comment is here, but I just don't see a material quarter-over-quarter change. Now, it's a little bit different in Q1 when Fed pops up and they have a lot of one-year deals, so take that out of the equation. But I just don't see any rapid decline in terms. And again, I We'll see how it plays out over the next couple of years, 2.8, 3.0, somewhere in that range. I think as we have more time and reps have more discussions with customers, they're naturally going to try to move them from five to three or shorter. So I think that occurs naturally over time. But it's not my assumption that we stay here at 3.3 and we don't move any further. I just don't think it's a rapid decline.
spk07: But we shouldn't think that maybe there's any slowing down of renewals or anything like that that would, you know, cause that to stabilize. It's nothing like that. No, no, no, no, no, no.
spk08: Okay. We'll give you a very good feel. We're loud and clear on the renewal front and needing more visibility and all that. So you're going to – you'll see a good dose of that on June 22nd. Great. Okay. Thanks a lot, guys. Appreciate it. Yep.
spk02: Our next question comes from Vernon Leopold. Vernon James, your line is open.
spk08: Hi, guys. This is Victor Chu in for Simon. I wanted to drill a little more into the cloud portfolio. Hybrid cloud is kind of a generic term that encompasses a number of different approaches and solutions. So can you maybe speak about Nutanix's competitive proposition compared to more integrated cloud platforms slash software-defined data center solutions like VMware Cloud and and Azure Stack, and maybe help us understand what are the most vital factors that enterprises consider when deciding which particular hybrid cloud approach to adopt?
spk03: Yes, I think the key question there, by the way, is, first of all, I mean, people operate, our customers are operating, of course, with an on-prem data center, but with one or more public clouds as well. Now, if you are looking at a particular public cloud provider, all the public cloud providers are also embracing hybrid strategies now. AWS has Outpost, Azure has Arc. And so if a customer is locked to one public cloud, then they can also look at that particular public cloud hybrid solution. But more often than not, and we'll show you some more data in the rest of the day, right, surveys show that customers are interested in more than one public cloud. So they're using multiple public clouds, and they're on-prem. And now when you start looking at this environment, the value that we provide with our cloud solutions is we provide one platform, one set of tooling, one set of management interfaces, one license that a customer can use to deploy and manage their workload on whichever cloud they want. Whether it's today, it's, of course, on-prem, Edge, or data center, and also moving to AWS. And tomorrow, once we get out of Azure, we'll have Azure. And over time, hopefully, we'll have more. And so that unique, think of this as a multi-cloud platform. that our customers can actually get. And so to some extent, VMware had something similar as well, right? The approach that we have is slightly different. Today we essentially say, customers, you have your own, whatever public cloud account you have, you can just deploy, buy the software from us, That same license, we don't care where you use it. You use it wherever you want. If you want to deploy that in the public cloud of your choice, we enable you to do that, and you can go up and deploy it. You can manage it all with one solution. And we also do a lot more work in terms of handling all the data services in terms of our heritage being in terms of how we manage and store data. So we do that particularly well as well. So our value proposition fundamentally is to be able to provide this platform that cuts across multiple clouds, essentially make these clouds invisible, right? Hide the underlying complexities of each of the cloud silos and provide this consistent platform for customers to go run their businesses on.
spk02: Excellent. That's very helpful. Thank you. Our next question comes from Eric with JNP Securities. Your line is open. Eric, your line is open.
spk06: Oh, I'm sorry. There we go. Thanks for taking the question. On the Lenovo partnership, can you talk about what the competitive dynamics are there? Are there any other... providers that are working with Lenovo and if they have as tight of an integration as you do and then secondly just curious with AHV it's kind of settled in at 52% it's been in the 50% range for a while is that something that's going to change at any point down the road or is this probably where it settles in for a while
spk03: Good questions. So Lenovo launched this offering just with us for now, right? I'm sure they may have other partners that they're bringing on board over time. But this particular announcement, which was fairly unique for Lenovo, it's called the two-scale offering. It is everything delivered as a subscription. So that means the hardware, the PCs, the servers, the Citrix media, and the Nutanix software, all put together and delivered as a subscription offering, as a service offering to their customers. And so this is an example where they work with us as a first partner to go deliver this complete end-to-end as a service subscription offering, combining hardware and software, to address this customer use case of their end-to-end solution, enabling their end users as well as to be able to consume remote desktops. So we are the first solution there. Now, a question on AHV. We expect continued growth and adoption of AHV over time. It's been a gradual continuing upshift. So customers look at the value of AHV. It's getting better and better every day to where AHV can today handle all the machine-critical workloads that customers want. And so customers look at this as an opportunity for them to save quite a bit of cost. and over time continue to migrate more and more of their workloads to AA3. For example, I mean, one of the last deals that we announced with this Asia Pacific mission critical deployment a lot on ahv right it uh it makes you made use of our native network security solution that's built in essentially now as part of ahv uh and uh so people are very comfortable with it as a as a mainstream hypervisor that can run all workloads so we do expect more and more it'll be a gradual update in in terms of the uh the deployment of ahv is there any catalyst that would drive that higher Potentially, you know, as cloud, for example, all our cloud, hybrid cloud solutions in AWS and also in Azure are based on AHV. And to the extent that the customers actually start using more and more of that, that will drive AHV. As, you know, customers look at renewals of their existing software from other vendors, and they look at this as potential cost savings that could accelerate it as well.
spk06: Very good. Thank you.
spk02: Our final question comes from Michal Coxey with Northland Capital Market. Your line is open.
spk08: Yeah, thank you for taking my question. Let's see. So has there been a change in the way you're building up the ACV guidance this quarter relative to prior three quarters? Because prior three quarters, you've been able to beat your own guidance by a healthy margin in the past. So I'm just wondering if there's been a change in the way that you're building up this ACV guidance. Same methodology. Okay, great.
spk10: And then when you talk about an uplift from emerging products, does this just mean the driver of the ACV burns acceleration?
spk08: Or are you also seeing year-over-year increase in ACV core? Is that what you mean by like-to-like pricing, actually? Yes, a lot of yes. It's actually a better deal economics. Gotcha. Okay, great.
spk10: And could you... I know this is somewhat difficult, but could you tell us what percent of AC billings was actually renewals in the quarter?
spk08: We have not given that on an ACV basis, but highly likely you'll see a fair amount of detail, again, at Investor Day on that. Okay. Great. Congrats on a strong quarter, and I think what I think is fantastic guidance. Congratulations. Thank you.
spk02: There are no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
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