Nutanix, Inc.

Good afternoon and welcome to today's conference call to discuss the results of our second quarter fiscal 2022. Joining me today are Rajiv Ramaswamy, 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 second quarter fiscal 2022. If you'd like to read the release, please visit the press release section of our IR website. During today's call, Management will make forward-looking statements, including statements regarding our business plans, strategies, initiatives, vision, objectives, and outlook, including our financial guidance, as well as our ability to execute thereon successfully and in a timely manner, and the benefits and impact thereof on our business operations and financial results, our financial performance and targets, and use of new or different performance metrics in future periods, our competitive position and market opportunity, timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical 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 risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K if the fiscal year ended July 31st, 2021, and our quarterly report filed on Form 10-Q if the fiscal quarter ended October 31st, 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, except for revenue, 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 Susquehanna Technology Conference on March 4th, the KeyBank Emerging Tech Summit on March 8th, and the Morgan Stanley TMT Conference on March 10th. And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Rich, and good afternoon, everyone. Before we begin, I want to spend a moment acknowledging the current situation in Ukraine. Our thoughts are with all of those who are personally impacted by the situation in the region. Now, turning to our second fiscal quarter. Against the backdrop of an evolving COVID-19 pandemic, we delivered another solid quarter, exceeding all of our guided metrics and saw building momentum in our renewals business. We continue to see healthy demand for the Nutanix Cloud Platform, driven by businesses looking to accelerate their digital transformation, modernize their data centers, and adopt hybrid multi-cloud operating models. Taking a closer look, our second quarter reflected continued execution on our subscription model and was marked by strong top and bottom line performance. We delivered record ACV billings, which grew 37%. year over year, our highest growth rate in three years. Our revenue also grew 19% year over year, despite seeing expected term compression. Once again, we saw good linearity, which, combined with diligent expense management, enabled us to generate positive free cash flow for the first time since we started our transition to subscription, approximately three years ago, putting us well on track to achieving our target of sustainable positive free cash flow by the second half of calendar year 2022. Overall, we are pleased with our second quarter financial results. During the second fiscal quarter, Nutanix published its fourth Global Enterprise Cloud Index report based on a survey of 1,700 IT decision makers around the world. Respondents noted that they're strategically choosing where to run workloads based on security, cost, and performance parameters. We see this cloud smart approach as a driver of hybrid multi-cloud adoption. As such, we're not surprised that 83% of respondents agreed that hybrid multi-cloud was the ideal operating model. The results of the survey reinforce our view that the simplicity and performance enabled by the Nutanix Cloud Platform for deploying and managing workloads across a variety of on-prem and public cloud environments is what the market is looking for. Recently, we took another important step forward on our strategic priority of making our products easier to sell and consume with the global launch of our hybrid multi-cloud solution portfolio. With this launch, we simplified our packaging, metering, and pricing, and aligned our portfolio with the hybrid multi-cloud solutions our customers are consuming, supported by validated designs and deployment best practices. While still early, the initial response to the rollout from customers, partners, sales reps, and industry analysts has been encouraging. We saw numerous wins in the quarter in which new and existing customers adopted Nutanix Cloud Clusters, or as we've recently renamed it, NC2. to extend our platform into the public cloud with an emphasis on disaster recovery and flexible capacity use cases. RBL Bank in India, an existing customer who was already using the Nutanix cloud platform, including Nutanix unified storage and database service solutions, added NC2 on AWS to its existing deployment as a disaster recovery solution for their mission-critical applications, going from proof of concept to live deployment in just three weeks. They found the simplicity, ease of deployment, and seamless failover from on-prem to public cloud set it apart from alternative solutions. Another win saw a government ministry in the MIR region, consolidate workloads from its regional branches onto the Nutanix cloud platform to improve performance, cost, and security while using NC2 on AWS to seamlessly support seasonal spikes in demand. In the second quarter, we continue to receive industry recognition for our unified storage solutions. Nutanix Files was named a leader and outperformer in Giga Ohms Scale-Out File Systems Radar Report. Building on recognition received last quarter in which Nutanix was named a visionary in Gartner's Magic Quadrant for distributed files and object storage for the first time. A win with a US-based sporting goods distributor in the quarter demonstrated the increasing traction we're seeing with Nutanix Unified Storage and our broader platform. This customer was unhappy with the performance of a competing HCI product and replaced it with the Nutanix Cloud Platform, including Nutanix Cloud Infrastructure and Unified Storage Solutions. They also adopted Nutanix Database Service to automate the administration of existing and new databases and facilitate migration to more modern databases. Another win with a European-based energy services provider demonstrated the growing momentum we're seeing with Red Hat, an important strategic partner. This joint customer shifted their container-based big data workloads that were running on OpenShift on a competing HCI solution to the Nutanix Cloud Platform, including our AHV hypervisor. We also saw a North American-based retailer deploy their business-critical workloads on Red Hat Enterprise Linux, or RHEL, running on the Nutanix Cloud Platform. In both of these wins, our joint customers were able to see improved performance and meaningful cost savings by running on our AHV hypervisor, assured by the recent certification of both OpenShift and RHEL on AHV. We are excited about the large and building opportunity pipeline that we see with Red Hat. As we continue to strive for progress across all aspects of ESG, we had two important announcements on the governance front during this quarter. First, we eliminated our dual-class stock structure, simplifying the company's capital structure and ensuring that all shares have equal voting rights. We think this shareholder-friendly move could improve our chances of being included in additional index funds and broaden our shareholder base of both active and passive investors. Second, we also announced that we strengthen our board of directors with the appointment of Gail Shepherd, who currently serves as corporate vice president and head of global expansion and digital transformation for Microsoft Cloud and AI. Gail works closely with Microsoft's largest customers that are implementing multi-year digital innovation and modernization strategies, and with governments and countries around the world driving Azure's regional expansion. We believe Gail's combination of public cloud experience and running businesses at scale is a great fit for our business, and I look forward to benefiting from her insights. In closing, I am pleased with the results of our second quarter. We delivered another quarter of strong growth, exceeded all of our guided metrics, and generated positive free cash flow for the first time since the beginning of our transition to a subscription model. We made important progress on transitioning our hybrid multi-cloud platform towards solutions, which we think will make it easier for us to sell and for our customers to adopt. And we're starting to see the benefit of our building base of subscription renewals, which we expect will help us deliver consistent growth and substantial sales and marketing leverage. This progress makes me optimistic about our ability to deliver against the vast opportunity ahead of us. And with that, I'll hand it over to Dustin Williams. Dustin?

Thank you, Rajiv. I will get right into some of the specific Q2 highlights. ACV billings for Q2 were 218 million, reflecting 37% growth year-over-year, significantly above our guidance range of 195 to 200 million, and ahead of the street consensus number of 198 million. Our renewals team is starting to hit their stride and the renewals business performed much better than expected, accounting for the ACV billings upside in the quarter. Both LOD support renewals and term-based license renewals exceeded our plan, which resulted in a higher mix of renewal business. In any given quarter, our renewals performance is comprised of a certain percentage of late renewals that are executed after the renewal date, on-time renewals, and early renewals that are executed before the renewal date. We forecast renewals based on the ATR, or available to renew, and apply an estimated retention rate. We also estimate the percentage of renewals that will be transacted as late, on time, and early. In Q2, we processed more early renewals than expected, which led us to exceed our renewals projections. Revenue for Q2 was $413 million, reflecting 19% growth year-over-year, above our guidance range of $400 to $410 million, and ahead of the Street Consensus number of $407 million. The revenue outperformance for the quarter was a bit more muted than the ACV Billings outperformance, as early renewals did not impact current quarter revenue. Revenue for LOD support renewals is recognized ratably over the term length, and the outperformance on LOD support renewals was not immediately reflected in the current quarter revenue. Our average contract term lengths overall stayed steady at 3.1, the same as in Q1-22. We previously thought we'd see a slight uptick in term lengths during the quarter since our federal business, which has a seasonal high in Q1, has lower term length, but the higher renewal mix impacted the average contract term length in the quarter. ARR, as of the end of Q2, was $1.04 billion, growing 55% year-over-year. We've now fully rolled out our new solutions offerings globally, and as we've previously stated, overall emerging product comparisons to prior periods are becoming less meaningful. However, era and files, two of our historically largest emerging products, which have relatively clean comparisons to prior periods, both saw healthy year over year growth and record levels of total bookings in the quarter. Q2 sales rep productivity was in line with our forecast and net sales reps were flat in Q2. We were pleased with the addition of approximately 700 new logos in Q2 22, versus the Q1-22 new logo count of 560 and the Q2-21 new logo count of 730. Our non-GAAP gross margin in Q2 was 83.8% versus our guidance of 82 to 82.5%. Non-GAAP operating expenses were 347 million, lower than our guidance of 360 to 365 million. This is a result of continued diligence on expense management, hiring that has been a bit slower than planned, and a slower return to post-COVID normalcy. Our non-GAAP net loss was $6 million for the quarter for a loss of $0.03 per share. This was our lowest non-GAAP net loss since the company began shipping products. Due to linearity remained good. DSOs in Q2 were 36 days, up from 28 days in Q1, 22. Our free cash flow was once again aided by good linearity in collections, coming in at a positive 17 million, over 40 million better than the street consensus. Although we might not quite be at the point that we will consistently generate positive free cash flow on a quarterly basis, we generated positive free cash flow for the first time in over three years. and we're very pleased with the progress we have made. We closed the quarter with cash and short-term investments of $1.29 billion, up from $1.28 billion in Q1-22. Now turning to our guidance. The guidance for Q3 is as follows. ACV billings to be between $195 and $200 million, representing year-over-year growth of 22% to 25%. revenue of 395 to 400 million, gross margin of approximately 82%, operating expenses between 365 and 370 million, and weighted average shares outstanding of approximately 222 million. The Q3 ACV Billings Guidance, which calls for year-over-year growth of 22 to 25%, compares to the actual growth of 18% in Q3 21, and the street consensus growth of 21% for Q3-22. Our average contract term lengths will most likely be flattish in Q3. LOD support renewals should stay somewhat elevated in Q3. The elevated LOD support renewals, which have ratable revenue recognition, combined with a somewhat higher overall renewal mix, will have a small impact on revenue growth in Q3. From a Q3 free cash flow perspective, we would expect a small usage of cash, which is better than the current consensus estimates of negative 25 million. The guidance for FY22 is as follows. ACV billings to be between 760 and 765 million, representing year-over-year growth of 28 to 29%. Revenue of 1.625 to 1.63 billion, non-GAAP gross margin of approximately 82.5% and non-GAAP operating expenses between 1.465 and 1.47 billion. The ACV Billings Guidance of 760 to 765 million compares to the previous guidance range of 740 to 750 million and versus the current consensus estimates of 750 million. The revenue guidance of 1.625 to 1.63 billion compares to the previous guidance range of 1.615 to 1.63 billion and versus the previous consensus estimate of 1.626 billion. With that, operator, would you please open the call up for questions? Thank you.

Thank you very much. If you would like to ask a question, please do so now by pressing star and then 1 on your telephone keypad. If you change your mind and wish to withdraw your question from the queue, please press star followed by 2. When preparing to ask your question, please ensure that your device and your microphone is unmuted locally. Today's first question comes from the line of Jason Ada from William Blair. Jason, your line is open.

Thank you, guys. A couple of quick ones for me. First, Dustin, are you going to disclose the percentage of ACD that came from renewals in the quarter? And if you're not going to disclose it specifically, could you give us a sense of, you know, I don't know, was it a few percentage points better than you expected when you talked about being better than expected?

Yeah, so Jason, maybe the easiest way to talk about being better than expected, what we said is that basically the entire upside for the quarter, so we guided 195 to 200 on ACV billings. We printed 218. So effectively, that 18 million was the renewal upside in the quarter, which implies that new ACV was basically at the guide That was assumed in that 195 to 200.

Okay, perfect. But you're not going to disclose quarterly, right, the percentage? Correct, correct. Okay, all right. And then, Rajiv, just want to understand the new solutions offering and the motivation there. Was it something that – where you had spent time with the sales reps and channels and the feedback was that there still was work to do in terms of the simplification because I know that's something that the company has been striving towards over the last couple of years to really kind of create bundles and simplification. But is the right way to think about this? Is it the culmination of that? multi-year effort and you feel really confident about this being the sort of go forward picture just because, you know, it can get confusing for reps and channels and customers when you're constantly changing, you know, how the product portfolio looks.

Oh, indeed, Jason, that's a very good question here. Yes, we talked about this at our last investor day in terms of changing our go-to-market from know 15 20 individual products with different pricing uh metering etc to moving towards the more solution oriented portfolio and if you recall we said we we would trial this in about 10 regions we did that earlier in the year and and now most recently we went ga with it across the world and uh so with this what we've done is we've simplified our packaging our metering and pricing we've aligned the portfolio to the solutions that our customers want and they're consuming and we provided validated designs and deployment best practices to help them. Now it's still early, but the initial response from this rollout is actually quite encouraging from customers, from partners, from our own sellers and the industry analysts. We've seen a more rapid closure for some deals utilizing the new simplified pricing and packaging. We've seen customers already taking advantage of this new packaging to quickly purchase more complete solutions to meet their needs. And in general, we expect to see more high velocity transactions like these with both our own sales reps as well as with our partners.

And the renewals, just to be clear, the renewals that you are doing for something which doesn't line up with how the customer previously bought it in your new solutions, how does that work?

Yes. So we will keep both the old and the new available for a period of time. And we will gradually over time migrate to the new. And that goes for both new bookings as well as any renewals that we do.

Great. Thank you.

Next we have a question from James Fish from Piper Sandler. James, please go ahead. Your line is open.

Thanks, guys. I know a lot of us say congrats on results all the time, but truly congrats on these great results. It's very nice to see. I do want to build off of Jason's question there. When you talk about, Dustin, that $18 million of renewal upside in the quarter, you broke it down to that we had good renewal activity overall, but we also had a pull-in of early renewals. Can you break down how much of that $18 million was just outright early renewal activity instead of, you know, just better cross out upsell, um, that resulted in probably a better net retention rate against your analyst state targets.

Yeah. So far as a retention rate, we're in obviously within that range that we laid out there. So, um, you know, that's clearly one, one point there. And, uh, you know, as far as the upside goes, uh, most of that, um, were early renewals um now a little bit more uh lod maybe but uh effectively uh almost all of that was was early renewals and and i i wouldn't label it uh a pull-in you know this is more of our renewals team uh kind of refining their processes and and and back office things and we provide quotes out in advance obviously the renewal dates and some customers opt to uh just to transact those renewals early. So that's what you're seeing there. In this case, not only did we process the renewal early, but they actually paid for those renewals early also.

Understood. And just to follow up on the operational side, I know you guys are not likely to change your analyst day goalposts, given it's only been a few quarters, but As we think about that out your guide of three to 500 million in free cash flow, and you're showing much stronger cash flow than anticipated with all the efficiencies being implemented and just really strong execution. I guess what would prevent even the lower end of that range from potentially being pulled forward into fiscal 24, for example, when linearity has been really good for the last few quarters and it seems to be holding. And operationally, it does seem like you're going to get more and more renewals here in fiscal 23 and fiscal 24.

Yeah, no, we're really, really happy with the execution all around, actually. Linearity, as you mentioned, continues to be good. The operating expense discipline continues to be good. Renewals are kind of playing out as planned. There's been a lot of work done there, a lot of heavy lifting with the renewal team. They've done an outstanding job, still more work to do there. So we've got, you know, with the backdrop, obviously, of a great product, and now with these solution offerings, that should accelerate things into the future. Dom Delfino has just come on board as a new CRO, so we've got a lot of things pointed in the right direction. But the reality is we're only, you know, few quarters away from, from that investor day. And, uh, you know, we'll, we'll see how things play out, but we're really, really pleased with how things are going so far.

Outstanding. Thanks guys.

Our next question comes from Matt Hedberg from RBC Capital Markets. Matt, please go ahead.

Hey, Stan Bergstrom from Matt Hedberg. Thanks for taking our questions. say new customer growth in the quarter was up nicely versus the first quarter. I know we've been kind of focusing more on the quality of new customers. Any change to the new customer profile here in the quarter? Or did you just simply acquire more of those quality new customers?

Yeah, I'll go ahead.

Yeah. Yeah, we've been focused for the last several quarters on on better quality and what that translates into somewhat new or higher ASPs for new logos. And typically between Q2 and Q3, we do get more new logos compared to Q1 and Q2, sorry. And we did that this time as well. We're quite happy with the fact that, you know, we're now again back at around 700 or so new logos and they are of good quality. Dustin, do you want to add anything?

No, perfect. Yep, wouldn't add anything.

Great from both of you. Thank you. And then on the new product portfolio, just to be clear, are there other emerging products that are still out there to be rolled into new solution offerings we should be thinking about over the second half of the year, or have we largely simplified that packaging and pricing at this point?

Yeah, we are done. So this is it. This includes all the portfolio products. They're all part of the solution. We have Nutanix Cloud Infrastructure, Cloud Management, Unified Storage, Database Service, and User Computing. And that represents the entirety of our portfolio.

That's great to hear. Thank you.

Our next question is from Pindalim Borah from JP Morgan. Please go ahead. Your line is open.

Oh, great. I'll echo my congrats on the quarter as well. Good to see. Dustin, just a follow-up on the renewals uplift that you're seeing there. The early renewals part, does that change the seasonality for Q4 in any way, or would you say you continue to see a big jump from Q3 to Q4?

uh not meaningful no i mean we're always going to uh you know have uh have quarters with early renewals um so you know from that perspective be you know the atr from q3 to q4 does go up and that's not materially changed got it uh

Rajiv, could you maybe talk about the general demand environment from a new business standpoint, you know, heading into 2022 compared to last year? Do you feel like IT modernization projects are kind of coming back on the table and might accelerate in the new year?

Yes, I think the demand environment continues to be still healthy. We are seeing customers continue to focus on using IT as an enabler. They're focused on continuing to modernize their infrastructure, go to the public cloud, and of course, continuing to drive their remote workforce. So we haven't seen that. The fundamental dynamics are still pretty much intact. In that context, what I would say is that We are a pure-play provider focused on that HCI market and transitioning legacy three-tier storage architectures to HCI, and then extending that to the public cloud. So we haven't seen anything significant from a demand change at all, and customers continue to be investing at this point.

Lastly, if I can, the pricing and packaging obviously has the word pricing and metering, I think you said. Is there an underlying uplifting unit price for like for like if somebody is renewing?

Yeah, that's a very good question. And that was not our intent, right? So our intent here with this new launch is really around, it wasn't intended to be either a price increase or a price decrease, but it was really to make it easier for our customers to consume our portfolio and for our reps to quote our products. way that matches their needs now i'll give you some specific examples we did simplify the metering and we moved entirely to core based pricing for our core offerings now one impact of the change is that it makes our core offering much more competitive on all flash configurations that customers are increasingly favoring compared to hybrid with flash and disk We've also introduced, for example, a new middle tier in our cloud management offering. And that's catering very specifically for customers looking at a hybrid cloud operating model that includes operations, self-service, and cost governance. And buying this thing a la carte in the past would have required you to actually buy more products than before, right? So we have a very custom solution now that's geared towards this particular use case. So overall, I'd say that we made it easier for customers to buy these multi-product solutions to address their specific needs. And this will help them consume more of our portfolio and for our sales reps to be more productive. And the feedback so far from both customers and partners bears results.

Got it. Thank you.

Next, we have a question from Wamsi Mohan from Bank of America. Wamsi, your line is open.

Yes, thank you. Dustin, on OPEX, you guys have been showing very strong results relative to your guide for several quarters now, at least for the past four quarters. And those efficiencies seem to be increasing in magnitude, or maybe said another way, you're coming in much lower than your guide on OPEX. Can you talk about what of that is structural versus what is more a function of maybe difficulties in the labor market and adding headcount to the pace you had anticipated? And I will follow up.

Yeah, well, we continue to have very good discipline on the OPEX, and that will continue. There's no doubt about that. On the hiring front, we wish we had a few more heads. It's tough for everybody. Nutanix is no exception on the hiring front. So there's clearly some underspend going on headcount. that we wish would get plugged here going forward. A little bit of just getting back to normal. Travel is still down quite a bit, and that hasn't returned. We assume that would return a little bit there. But the efficiencies that we continue to look, Dom obviously is taking a hard look, continuing at sales, even though he's done a pretty good job there. He's got some thoughts of how we can get even more efficient from a sales perspective. You know, I think if you look at the assumed guide, you know, for the guide for Q3 and then the assumed inherent guide for Q4, because that's the only quarter we haven't officially guided for, we have a step up there. So we're, again, assuming, you know, some return to normalcy here in Q4. And I think, you know, some increased hiring.

Okay. That's helpful. Thank you. And then if I could, Back to renewals, you noted these early renewals. How early are the early renewals and why are customers choosing to do this? And I wasn't very clear why that doesn't have somewhat of a pull-in or pull-forward impact. Is it just that? Maybe you can shed some color on that. Thank you.

Sure. The impact that it has when we do an early, as long as we collect cash, is it does accelerate ACV billings and it does accelerate billings, total billings. But the revenue is always going to be recognized in the quarter that the renewal terms, right? Or it starts again. So you're never going to recognize revenue early on an early renewal. But as long as we collect cash, that will Going to ACB bill ACB billings and total billings from that perspective now your question on I think how much was from q3 Which kind of gets into interest about q3 guidance and things, you know roughly probably 10 million or so came from q3 and And so then you think about the difference. What's the difference related to and a lot of that is mostly relate to co-terming because the beauty of our business, we're always upselling. But that leaves a customer with a bunch of different renewal dates. And so if a customer has a fair amount of renewals, in this case in Q2, and they've got renewal in Q3 and a bunch of renewals in Q4, what they may opt to do is co-term all those and just bring them into Q2, have a common term date, makes it easier for them and makes it easier for us. So that's mostly related to some of the other renewals there that are outside of Q3. Okay.

That's very helpful. Thank you.

Next we have a question from Meta Marshall from Morgan Stanley. Your line is open.

Great. Thanks. I just wanted to get a sense of, you know, whether underlying supply chain challenges with some OEM kind of partners and whether that you saw any impact to kind of demand or ability to close new customers during the quarter. And then maybe second, just kind of building on one question and your kind of answer to it, Dustin, just getting a sense of what percentage of customers or kind of an overall size of the revenue base that has co-termed contracts at this point. Thanks.

Okay. I'll take the first question. And on the supply chain, Dustin can do the second. On the supply chain, we've noted in the past that our software runs on a variety of hardware platforms, and it's not necessarily tied one-on-one to new hardware sales. So supply chain impact so far in our business to date has been relatively modest, including in this quarter. We've seen a few customers pulling forward orders in some cases to get early access hardware. We've also seen some other customers that have delayed placing orders to confirm expected late deliveries of hardware. We certainly expect hardware procurement to remain challenging over the near term. What I would say, though, is to this, given the choice and flexibility that we provide with our software, the net effect on our business so far has been minimal. We'll, of course, continue to watch this very, very carefully as we go forward.

And then just on the percentage of co-terms, just by definition, where we're so early into the term-based renewals, as far as starting to get into volume, it's not a I suspect we'll see more and more of this as these renewals start to come up and a customer has all these different renewal dates. They're going to want simplicity. We're going to want simplicity. I would suspect we'll see more and more of these as the ATR in general continues to elevate over the next several quarters.

Great, thanks.

Next, we have a question from Rod Hall from Goldman Sachs. Rod, please go ahead.

Yeah, thanks, guys. Appreciate the question. I want to come back to renewals and the renewal rate and just see What you're observing, it sounds like you're a little bit deeper into renewals now. You've done some of these co-term deals. What do you think the renewal rate is sort of running up to this point? I know you're early stage in it, but I'm just curious what that rate's running, and I have a follow-up. Yeah, sure, Dustin.

At Investor Day, we had put a target out there from a GRR perspective of 90% or or greater, and we're within that range currently. So, you know, there's no real difference, really, than what we've seen over the last couple cores. We have a bigger sample size, of course, now. And, you know, we're happy where the core is. You know, we're focusing on adoption of the total product portfolio. But, you know, so far there's been really no meaningful change there.

Okay, great. And then the other thing I wanted to ask is how many, so of the renewals that were available, I guess, what proportion of them did this co-terming? And is that representative of what you expect to see going forward? Or, you know, I think we're all trying to get a handle on how much of this co-terming might come through in the renewals and how much the renewals kind of just will happen I don't know, without the co-terms. So I don't know if you can give us any help on that or observations.

Yeah, probably a little early to talk about this. At this point, I think, you know, if you look at, you know, somewhat of a majority was just, you know, playing early. And then, you know, anything out of Q3 would have more tilt or some of it would have more tilt to the co-terming just because of the you know, extension of outside of Q3. So I think it's just, it's too early to tell. And this is all customer preference too. I mean, we don't want to force a customer to do anything. We wouldn't force a customer to do something with bad economics on our side. So I think this is just something, you know, we're going to have to monitor going forward. But I think just by the elevation of the ATR, we'll probably see some more of this. Certainly with, I suspect, the bigger customers.

Great. Okay. Thank you.

Our next question comes from the line of Mike Seacoast from Needham. Please go ahead.

Hey, guys. Thanks for taking the questions here. Just wanted to go through the billings, and I know it seems like it's the topic of the day here. But if I'm looking at the $18 million of revenue upside, sorry, billings upside you recorded this quarter, We're seeing that is almost entirely coming from the early renewals. And about 10 million of that was from this co-terming, maybe pull-in from Q3. If I normalize for that in Q2 results and then normalize for that in the Q3 guide, it implies that your billings would be flat sequentially instead of, I guess, you've typically seen 3% to 4% sequential declines. And I'm just curious, is there anything that you can point us to which is helping, I guess, reduce that typical seasonality we would see in the ACV billings going from Q2 to Q3?

Sure. Let me take a shot at that. You know, one of the pieces that we laid out at Investor Day was predictability of renewals, you know, because The company was always built on new and upsell and we weren't afforded the luxury to have renewals and the two traits of renewals that we laid out first that they were very cost effective and they added leverage to the business model. And secondly, they added predictability, right? And so now we're starting to have a revenue stream that has a much higher level of predictability. Now I wouldn't, layer that too much into your comment about Q2, Q3, but clearly as the ATR goes up, you know, we're going to have, you know, a different profile of the business that's not, you know, dominated by new and upsell. And finally, this is what we've been talking about for the last two or three years, you know, finally the business starts to change and morph into a, you know, somewhat more predictable, better leveraged business.

very helpful and i think this probably leads into my second question but um you guys materially outperformed on the gross margin uh well ahead of that 82 to 82 and a half percent that you had guided to versus the 83.8 percent that you delivered was a solid chunk of that derived from this um from the renewals here or or is there anything else at bay that that helped that gross margin outperform where where we were previously modeling

Well, I mean, any time you've got increasing top line, obviously revenue in this case, you know, it's going to help the margin. But we also, quite honestly, got a little favorableness for some underspend on headcount and support. That wasn't necessarily by design, so that accounted for a little bit of it, but You know, clearly we're, you know, we've, I think, if you look at the gross margin trend over the last many, many quarters, it's, you know, it's been in that, you know, 82, 83% range. And we continue, I think, to do a pretty good job managing within that range. So, you know, popped up probably a little higher than what we expected. And primarily the reason we're bringing it down in Q3 is the revenue-based

naturally shrinks a little bit as we go from q2 to q3 understood thank you very much for the uh the timing the several answers there i really do appreciate it next we have a question from aaron rakesh from wells fargo aaron please go ahead yeah thanks uh for taking the questions um too if i can as well so

Maybe first of all, I just wanted to ask about the competitive landscape and how that's evolved now that your biggest competitor has completely spun off from Dell. And I think in that same context, how has the company evolved from a partner ecosystem perspective? Can you comment on HP, any incremental engagements with Dell post that splint, etc.? ?

Sure. So let me take a crack at that. So first on the competitive environment and then on the partners. So we haven't seen a major change in market dynamics from a competitive perspective. I will say fundamentally from the market view, HCI continues to grow and displace these traditional architectures while it becomes a foundation for hybrid multi-cloud. And like I said earlier, it's capable of handling all these, you know, all virtualized enterprise workloads. including things like databases that are very performance sensitive. Now, from a competitive angle, if you look at some of the other players without naming names here, so many of the other players in the market have offerings in both traditional storage and HCI. And so they tend to be not, you know, they may be less aggressive in pushing HCI as they seek to protect margins in their traditional business. And then if you look at other classes of competitors, they have a broader portfolio that includes things like developer and security offerings without a focused go-to-market effort in just HCI. So from that perspective, we are a pure play. We are continuing to win in our fair share and more of the market because of the platform, the robustness, the scale, the simplicity, the flexibility and freedom of choice that we offer. And of course, our focus on customer delight. So that's the competitive angle. Now, when it comes to the partners, Again, I think we've talked about OEM partners and then the traditional server vendors, and then we've talked about our ecosystem and the cloud. So on the OEM side, we continue to grow the partnership with HPE. As you can see from their own earnings, they had a big focus on GreenLake. We are part of their GreenLake solutions, both our core platform as well as our database as a service platform era as well. are part of their GreenLake offerings. GreenLake is small but growing rapidly. The teams are working together in the field and continue to win deals together. So that partnership continues to develop. Lenovo is steady state with us. We've been working together with Lenovo for a long time. And then when you come to the ecosystem side of it, the two that we are very focused on right now are Red Hat and Citrix. And with Red Hat, we've had now, we are now two plus quarters into, since we announced the partnership, we continue to do very well under the head front. There is a number of engagements. We continue to get new wins every quarter here. For example, this quarter, there were a couple of wins that I can talk about that continue to build on the momentum we had. One was around OpenShift running on top of a Nutanix platform. There was this European energy services provider took all their container-based big data workloads that were already running on OpenShift, but on a competing HCI solution and moved it to the Nutanix Cloud Platform, including our own hypervisor. We had another retailer customer who deployed their business critical workloads on Red Hat Linux, moving to the Nutanix Cloud Platform. So that Red Hat relationship continues to grow. With Citrix, we've had a long standing relationship that just got formalized recently So there's just a number of joint customer engagements and wins together around end-user computing and virtual desktops that happen every quarter, this quarter that continues. And that momentum is very much there. The last piece was a cloud piece. There again, I think we've had our solution with AWS up for a while. We talked about some more examples of wins there this quarter in terms of customer usage. We are continuing to work jointly with Microsoft Azure to get our our cluster solution out to market. We are in private preview on that. So these partnerships are all continuing to build, and we expect to get more and more from them as we progress.

That's great. And then as a quick follow-up, Dustin, I'm curious, back to Wamsi's question, you've clearly not only executed well in OpEx, but you've underperformed, or you've had OpEx below the guided range for the past several quarters. Given that that's reflective of some not yet back to office fully and some slower hiring, should we expect over the next couple of quarters that there could be a quarter where that catches back up, given how much you've relative to guide underspent over these last couple of quarters?

Well, we guide to a range that we expect to come close to. In this case, we guided 365 to to three, uh, three 70, you know, you have some just one-off things like, uh, uh, you know, FICA taxes reset. Uh, so that's, you know, millions of dollars in the, you know, the first part of the calendar year. And, uh, you know, we have a bigger step up in, uh, uh, in Q4 and there's the inherent, you can do the Calc, uh, for the guide for one 60, one 65, one four six, the one four six five for the year. So, you know, eventually we'd like to hire more folks. We'd like to hire, you know, we're not massively off the target of sales reps, but we'd like to hire a few more sales reps. We'd like to hire some more R&D folks. We'd like to hire some more support folks. And, you know, I think we'll do that over time. It's just a question of, you know, when will that happen? Now, again, we've laid out an expense structure not only for this year with this guide, but we've laid it out, you know, 23 and 25. So regardless of what we end up hiring, we're still in the total company still marching to those parameters. That's helpful. Thank you, Dustin.

Our next question comes from Simon Leppold from Raymond James. Your line is open.

Thank you. Appreciate getting a question here. I wanted to ask you about the full year forecast for ACV billings. If I'm thinking about this correctly, You've put up about $200 million average per quarter between the two quarters you reported and the April quarter you forecast, which seems to imply you're expecting a decline in ACV billings in your fourth quarter in July. I just want a little bit of help understanding what the thought process might be there.

Well, that's not correct, Simon, so let me – you know, kind of state the facts. So as you recall, uh, you know, we have, uh, we've talked about this in earnings calls, I think for the last three times we didn't this time, cause we've talked about so much is that, um, you know, the, the four quarters of our ACB billing guidance, uh, don't equal the year. And the reason why that doesn't, uh, doesn't equate is because less than one year deals, if we do a six month, a million dollar deal, in the quarter, we would count that as, as ACV of 2 million. And so you can't simply add, it's been historically, it's been about a six, 7% discount. Again, we've laid this out in earnings call. So I think if you do all that math, it would certainly not suggest a decrease in ACV billings in Q4.

Yes. No, I recall you talking about it before, but I think it certainly bears repeating. It's a, a point you should continue to be making.

Yep, yep, yeah. So there's, again, it's simple math to do. I don't want to talk specifically about Q4 because we don't guide to Q4 at this point. But if you do that math, it would certainly suggest an uptick in ACV billings in Q4.

Thanks. And then just as a follow-up, in terms of the operating expenses, have you seen a change in wage inflation in the last – quarter. Obviously, you've guided to a slightly lower expense for the year. Just want an update on what you're thinking about wage inflation in that equation. Thank you.

Yeah, I think everything's gone up and salaries are certainly one of those things that have gone up. So we've built that into the forecast. You know, we're monitoring it effectively daily, weekly, and you know, the assumptions there is that those wages are increasing. And we have tweaked up the assumption, or we will end up tweaking the assumption up for FY23 also. And this isn't just us, obviously, this is everybody. But again, regardless of what that is, we will still operate within the expense structure we've laid out.

Yeah, but that's the only thing I would add to that. Yeah, I might just add that what that practically means is instead of hiring 100 people, we might hire 90 people instead or something like that, right? If the wages are going up and still stay within our OPEX months.

Thank you very much.

Next, we have a question from Nahal Chokshi from Northland Capital Markets. Your line is open.

Yeah, thanks, and congratulations on awesome ACV results. It sounds like you are adjusting up the expected percent renewals or available renews, say, one or two quarters out on a go-forward basis, but not as much as what you experienced in the January quarter. Is that what's going on in between the differential between the year of your growth that you just put up on ACV buildings and what you're guiding to for the April quarter?

I'm not sure I quite understood the question at all. Sorry. All right. Let me try again.

So what went into the beat for the January quarter was a greater percent of renewals that renewed earlier than expected. While you expect a certain percent to renew, it was a higher percent than typically expected.

Yes.

Yes. Typically this would represent a pull forward, but that's not what your guidance represents because you're actually raising your April quarter ACB buildings guidance relative to where consensus is. And so I guess, but it's not as much as a January quarter B. So I get what I'm trying to say is that the percent that was more than usual of renewal, they're raising that, but not as much as what you had experienced in the January quarter. Is that essentially what's happening here?

Yeah. That's fair. Yeah. We would not expect at this point the amount of early renewals on a percentage basis, or you can do it on a dollar basis, that we experienced in Q2. All right. Great. Now, we've also got LOD renewals playing in here, too, that have been a little bit stronger than what we had previously assumed.

Right, right.

On the support piece, yeah.

Great. And then there's also been a lot of questions around off backs and whether or not this underspend is going to negatively impact future ACV billings growth. So maybe another way to address this is that where are you in terms of your new ACV per sales team targets today? Do you see still plenty of runway for improving that?

uh we do uh we were on target uh this quarter and there's a lot of different things going on and dom and team are you know working away and uh you know whether that's you know channel and uh channel work there channel autonomy which we've talked about a lot leveraging partners a lot more training for the sales force and then you have the solution selling and again the whole and rajiv has talked about this a lot but One of the big concepts on the solutions offerings are it makes it easier for the customer to consume and understand, and it makes it easier for our sales reps to understand and sell. And so clearly we think there's clearly more upside on the productivity piece.

Okay. Can you give me a sentence of what kind of magnitude that we're talking about? Are we talking about 2X or maybe 50%, 20%?

uh investor day we laid out the thoughts uh investor day is a slide there on not only sales reps but uh what we uh what we thought on productivity great okay we'll review that then thank you yep yep those are all the questions we have time for today so this ends our call thank you for joining us today you may now disconnect your lines