Nutanix, Inc.

Good afternoon, and thank you for attending today's Nutanix fourth quarter for fiscal year 2022 conference call. My name is Amber, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad at any time. I now have the pleasure of handing the conference over to our host, Rich Valera, Vice President of Investor Relations. Rich, please proceed.

Good afternoon, and welcome to today's conference call to discuss the results of our fiscal fourth quarter and full year 2022. Joining me today are Rajiv Ramaswamy, Nutanix's President and CEO, and Rukmini Sivaraman, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for its fiscal fourth quarter and full year 2022. 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, strategies, initiatives, vision, objectives, and outlook, including our financial guidance, as well as our ability to execute their run successfully and in a timely manner, and the benefits and impact thereof on our business operation and financial results, our financial performance, and targets in use of new or different performance metrics in future periods, expectations regarding profitability, our competitive position, and market opportunity, the timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical, and industry trends, including global supply chain challenges, and the current and anticipated impact of the COVID-19 pandemic and its effects. These forward-looking statements about risks and uncertainties some of which are beyond our control, which could cause actual results different materially and adversely from those anticipated by these statements. For a more detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K, the fiscal year ended July 31st, 2021, and our subsequent quarterly reports on Form 10-Q, 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 Goldman Sachs Communicopia and Technology Conference on September 12th and the Piper Sandler Growth Frontiers Conference on September 14th. And we hope to see many of you at these events. And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Rich, and good afternoon, everyone. Against a volatile macro backdrop, we delivered a good fourth quarter relative to the updated outlook we had provided on our third quarter call. We exceeded all our guided metrics and saw continued strong performance in our renewals business. Supply chain constraints with our server partners, while remaining a significant challenge in the quarter, were better than we had expected. While we are aware that the macro backdrop has grown incrementally more challenging for many businesses, in our fourth quarter, we continue to see solid demand for our Nutanix cloud platform, with businesses continuing to spend on digital transformation, modernizing their data centers, and adopting hybrid multi-cloud operating models. During the fourth quarter, I spent a lot of time on the road meeting with customers in person. I was energized by the face-to-face engagement and struck by their enthusiasm for their overall experience on Nutanix products and the strong customer support they have received. These conversations reinforced my view that our unwavering focus on reducing the complexity and cost of IT environments as well as our obsession with customer delight is resonating with our customers. Taking a closer look at the fourth quarter, we delivered bookings well above our expectations, aided by a number of large expansion deals and the continued strong performance of our renewals business. This drove billings and revenue outperformance relative to our guidance. Top line outperformance, diligent expense management, and better than expected linearity helped us achieve positive free cash flow in the quarter, which was substantially better than our expectations. Given the largely supply chain driven headwinds that affected our fourth quarter, I believe looking at F522 in its entirety provides a better picture of the progress we made on our subscription business model transition. Specifically, we saw ACV billings growth accelerate to 27% year-over-year, up from 18% in FY21. We also saw non-GAAP operating margin improved by 15 percentage points year-over-year to minus 5%. Finally, for the first time since 2018, we achieved positive free cash flow for the entire fiscal year. Beyond these financial accomplishments, we had other important achievements, including launching our simplified product portfolio, enhancing our leadership team, making progress with our partners, and continuing to delight our customers as reflected in our high NPS scores and strong renewal performance. Overall, I am pleased with our progress and financial performance in FY22. As I noted, our fourth quarter was bolstered by a number of large expansion deals, including customers both increasing their use of our Nutanix Cloud Platform and broadening their adoption of adjacent solutions in areas such as storage, database as a service, and cloud management. A good example was an expansion deal with an existing customer who is a global Fortune 100 financial services firm that placed a double-digit million-dollar order to broaden their usage of our core Nutanix cloud platform while standardizing on Nutanix database service for managing and deploying their databases throughout their organization. This customer also plans to utilize NC2 on AWS to enable bursting into the public cloud with their Nutanix-based workloads. We see this customer as a great example of how we are able to land and expand with some of the largest enterprises in the world. Our largest new customer win in the quarter was with an NER-based financial services provider that was looking to modernize their three-tier infrastructure with the aim of improving scalability, performance, and management resources required to support future growth objectives, while also providing a path for seamless access to the public cloud. They chose our Nutanix Cloud Platform full-stack offering as well as Nutanix Cloud Management due to its simplicity and built-in automation for infrastructure as a service. They also added Nutanix Unified Storage and Nutanix Database Service for their storage and database automation needs, respectively. This WIM is a great example of customers seeing the benefits of adopting our full stack. On the product front, we were excited to announce that NC2 on Azure progressed to public preview during the quarter, which will significantly broaden the pool of customers for our cloud offerings. One of our first customers onboarded to NC2 on Azure is a leading global brewer, based in EMEA that is standardized on Nutanix Cloud Platform for all of its business critical applications and SQL Server workloads. This customer chose Nutanix due to its simplicity, performance, ease of management, and ability to seamlessly burst into the public cloud of their choice. Another exciting product development was the recent release of AOS 6.5, a comprehensive and feature-packed release which reflects our continued investment and innovation in our platform. Release 6.5 has features focused on improving performance, security, and integrated data services required for demanding database workloads and business-critical applications. Go-to-market leverage with partners is one of my top priorities, and we continue to see progress on this front during the fourth quarter. Our partnership with Red Hat, with whom we have a growing number of joint wins for both OpenShift and Red Hat Enterprise Linux workloads running on Nutanix Cloud Platform, continues to show good momentum. One example of a joint win in Q4 is a central bank of a country in the EMEA region. that shifted their business-critical applications running on Red Hat OpenShift from a competing three-tier solution to Nutanix Cloud Platform, including our AHP hypervisor, due to the resiliency, scalability, and reduced total cost of ownership offered by our solution. We are excited about the growing opportunity pipeline we see with Red Hat. Also on the partner front, we were pleased to be named 2022 HPE GreenLake Ecosystem Partner of the Year. We view this award as a testament to our growing partnership with HPE. Now I'd like to comment on our recent sales leadership transition. Following Dom Delfino's decision to pursue an opportunity with another technology company, on August 1st, we appointed Andrew Brendan, as our new chief revenue officer. Andrew has been with us as a sales leader for over five years, most recently as a senior vice president and worldwide sales chief operating officer, and has developed a deep understanding of our business model, go-to-market strategies, and sales operations. Our sales organization is in excellent hands under Andrew's leadership. and I look forward to working closely with him in his new role. More broadly, I feel confident that we've got the team in place to take Nutanix to its next stage of profitable growth. In closing, I'd like to provide some thoughts on our priorities and outlook. First, our overarching priority remains driving towards sustainable, profitable, growth. To enable this, we will continue to judiciously invest in the growth of the business, execute on our growing base of renewables, and diligently manage expense levels. Towards this end, as part of our comprehensive review of our business and operating model, and along with a number of other expense reduction actions, we made the difficult decision to reduce our headcount by approximately 4%. This was not a decision we made lightly, but it was important to ensuring that we could continue to drive towards profitable growth in a variety of macroeconomic scenarios. However, we are also seeing businesses continuing to prioritize digital transformation and believe the challenging macro backdrop is providing further incentive for them to optimize their IT and cloud spend. We see these dynamics as playing to the strength of our hybrid multi-cloud platform, which enables companies to reduce the complexity and cost of their IT environments. Finally, we see the business achieving positive non-gap operating income and continuing to be free cash flow positive in FY23. We plan to do this through a combination of strong, continued top-line growth and diligent expense management. We remain confident about the opportunity ahead of us and enter FY23 with a sense of excitement and cautious optimism. And with that, I'll hand it over to Rukmini Sivaram. Rukmini?

Thank you, Rajiv. The fourth quarter of fiscal 22 came in better than the expectations that we had set forth in our last earnings call as indicated earlier this month. ACV billing for Q4 were $193 million above our guidance range of $175 to $185 million. The outperformance was due to both renewals and new ACV bookings coming in better than expected. Q4 also benefited from a few large deals which are harder to forecast. New logo additions in Q4 were around 620. ARR at the end of Q4 was $1.202 billion and grew 37% year-over-year. Average contract duration was 3.2 years in Q4 flat from 3.2 years in Q3. Revenue for Q4 was $386 million above our guidance range of $340 to $360 million. As described during our last earnings call, the percentage of orders with future start dates was a key assumption in our Q4 guidance. This percentage came in higher than it was in Q3 22 as expected, but not as high as our forecast. This also positively impacted ACV billings and revenue performance relative to guidance with a larger impact on revenue. While our largest server partner had almost no impact from supply chain challenges during our Q4, we did see a significant percentage of orders with future start dates from other server partners. Sales rep productivity increased year over year in Q4. Non-GAAP growth margin in Q4 was 82.6%, higher than our guidance range of 79 to 80% because of higher than expected revenue. Non-GAAP operating expenses for Q4 came in at $366 million, better than our guidance range of $360 to $365 million. Non-GAAP net loss for Q4 was $38 million or 17 cents per share. Billings linearity was good in Q4 and better than our forecast. DSOs were 30 days in Q4, down from 40 days in Q3. Free cash flow in Q4 was significantly better than expected at positive $23 million and while we had previously expected a significant use of cash. This was driven by three factors. One, our bookings and billings coming in higher than expected. Two, linearity of billing was better than expected and in line with historical linearity. And three, diligence expense management. We closed the quarter with cash and cash equivalents of 1.324 billion dollars. up slightly from 1.3 billion in Q3 22. Moving to full year fiscal year 22 results, ACV billings in fiscal year 22 was $756 million representing strong growth of 27% year over year compared to year over year growth of 18% in fiscal year 21. New ACV billing grew year over year but came in below our expectations, largely due to the challenges identified in Q4, while renewal's ACV billings outperformed our expectations. As we transition more fully to a subscription model with total ACV billing and revenue guidance, along with disclosure around metrics such as ARR, we no longer plan to share the breakdown between new ACV billings and renewal's ACV billings. Our growth retention rate, or GRR, for fiscal year 22 continued to be within our 90% or greater target range. Net retention rate for fiscal year 22 was around 125%. Revenue for fiscal year 22 was $1.581 billion and grew at 13% year over year, returning to double-digit growth for the first time since the start of our subscription journey, despite the impact of increased future start dates in Q4 22. Non-GAAP gross margin for fiscal year 22 was 83%, greater than our guidance of approximately 82%, largely due to revenue coming in higher than expected. We delivered meaningful operating leverage as non-GAAP operating margins went from negative 20% in fiscal year 21 to negative 5% in fiscal year 22. We generated free cash flow of approximately $18 million in fiscal year 22, the first year of positive free cash flow since fiscal year 18 and since the beginning of our subscription journey. Fiscal year 22 was a significant year as we saw the thesis around our subscription business model and diligent expense management start to bear fruit, with renewals performing better than expected and positive free cash flow for the year. As we have demonstrated over the last couple of years, we expect to continue to make steady progress each year towards continued top-line growth and profitability. Now turning to Q1 guidance. The guidance for Q1-23 is as follows. ACV Billings of 210 to $215 million, a year-over-year growth of 16% at the midpoint, revenue of 410 to $415 million, year-over-year growth of 9% at the midpoint, non-GAAP growth margin of approximately 82%, non-GAAP operating margin of approximately negative 6% with non-GAAP operating expenses of 360 to 365 million, weighted average shares outstanding of approximately 229 million. I'll now provide some context around our Q1 guidance. First, the top line guidance for Q1 assumes that supply chain dynamics would remain more or less the same compared to Q4 22. It also assumes that contract durations stay approximately flat to slightly down in Q123 compared to Q422, given that Q1 is a seasonally strong U.S. federal quarter, which typically has lower contract durations. Second, in line with our stated priority of driving towards sustainable, profitable growth, we conducted detailed expense reviews as part of our annual planning process. Earlier this month, we made the difficult decision to reduce our hit count by letting go of approximately 270 employees, about 4% of our total headcount, which we expect to result in estimated annualized expense reduction of approximately $55 to $60 million. Finally, we expect free cash flow to be around break-even for Q123 after factoring in approximately $20 million of one-time severance payments related to the headcount reductions in Q1. Excluding those one-time payments, free cash flow expectations for Q123 would have been around $20 million. Moving to full-year expectations, the guidance for fiscal year 23 is as follows. ACV billings of $895 to $900 million, year-over-year growth of 19% at the midpoint, revenue of $1.77 to $1.78 billion year-over-year growth of 12% at the midpoint, non-GAAP gross margin of approximately 82%, non-GAAP operating margin of approximately 2% with non-GAAP operating expenses of $1.41 to $1.42 billion. I'll now provide some color on our full year guidance. First, the guidance assumes that contract durations would decrease slightly compared to fiscal year 22. The fiscal year 23 revenue guidance also assumes that supply chain dynamics would remain more or less the same through the first half of fiscal year 23 and would start to ease modestly in the second half of the fiscal year. Growth in ACV billing is expected to be greater than growth in revenue because orders with future start dates that are bills are reflected in ACV billing, but revenue can only begin to be recognized in the quarter of the actual license start date. Second, while the demand for our solutions has remained solid, we have considered the uncertain macroeconomic environment in our guidance. Finally, we expect to deliver about $75 to $100 million of free cash flow for fiscal year 23. We are also happy to reiterate the previously stated target of being sustainably free cash flow positive as of the first half of fiscal year 23, excluding the one-time severance payment. Moving on to add some color to fiscal year 2025 expectations, we expect free cash flow margins in fiscal year 25 to be around 10 to 15% of revenue, representing at least $300 million in free cash flow. We also expect to continue to make steady progress each year towards becoming a Rule of 40 company by driving growth and margins. With that, operators, please open up the line for questions.

Yes, of course. Thank you. We will now begin the Q&A session. If you would like to submit for a question, please press star one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, that's star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from James Fish with Piper Sandler. James, your line is now open.

Hey guys, thanks for the questions and congrats on a really good quarter and bounce back here as well as the reiteration of that $300 million of cash flow in the out year. Really, really good to hear that. Rupini, on the upside in the quarter and on the guide for fiscal 23, though, how much of that prior $90 million reduction for fiscal Q4 that you had to lower by came back into fiscal Q4 versus how much of that really flows into that fiscal 23 number? And what's really driving your confidence around guiding that fiscal 23 revenue to that level, especially, you know, in the macro, the change in kind of leadership at the sales level and the headcount reduction that would, in theory, lower your capacity a little bit. And I know you're talking about, you know, easing supply chain dynamics in the second half of the fiscal year.

Thank you. Thank you, Jim, for the question. So let me maybe share a little more context around how we thought about fiscal year 23. So there are a few drivers here that we considered. First, when we think about our billings and revenue, we talk about both renewals and our new and expansion business. So first, talking about renewals, as we talked about before, the renewals business continues to perform really well. And given the growing base of renewals, we expect renewals to grow strongly in fiscal year 23 as well. And renewals contribute a significant majority of the growth expected from 22 to 23. We're also expecting growth in new and expansion business. But when I alluded to the comments around the macroeconomic environment, that's where it's in the new and expansion business that we have factored in some conservatism as it relates to the macro environment. And then we did exit Q4 and fiscal year 22 with record levels of backlog. And so we're factoring that in as well into the fiscal year 23 guide. And all of that combined, especially the renewals and the strong and healthy backlog position helps us to reduce the risk around the forecast. And I think supply chain, as we talked about, Jim, what we expect will stay more or less the same for first half and then maybe start to ease modestly in the second half. But that, again, could evolve and we'll keep everybody sort of updated what we see related to supply chain as we go here from quarter to quarter.

Makes sense and appreciate the color. And then Rajiv, obviously your major competitors having their user conference this week and release an updated version. And I know it's only been 24 hours in terms of the announcement, but from that new functionality that was announced, how does Nutanix actually stack up and what continues to differentiate Nutanix versus your primary competitor? Are you seeing a change in that competitive landscape already given concerns around VMware?

Yes. I'll give you a couple of points there. First, yes, there is definitely a higher level of engagement from VMware customers as a result of what's going on out there. And they're more open to discussions with us. They're also seeing more talent out there from VMware looking for new career opportunities. Now, with respect to the portfolio itself, we feel very good about where our portfolio is at this point. We have a complete cloud platform that's And if you look at our fundamental differentiation, the platform provides a lot of simplicity. We make these problems really, really simple. And from the beginning, we haven't put together two or three different products to build a solution, actually. We've engineered it as such from the very beginning. That's number one, simplicity. The second is the freedom of choice that we provide to our customers, no lock-ins. The third is our focus on customer delight, which is becoming even more critical now these days in terms of how we support our customers for the long term. And the last bit is about our architecture and how we manage all forms of data. So from a portfolio perspective, we have a very competitive portfolio. Our win rates continue to increase related to our competition against both our large competitors as well as our legacy three-tier competition. So we feel pretty good about the product side of this.

Thank you. Our next question comes from Rod Hall with Goldman Sachs. Rod, your line is now open.

Yeah, hi. Thank you for taking the question. I guess for me, I wanted to come back to the impact of the cost reductions and just kind of make sure I understand what the timing on that impact is, how full an impact we have in the guided quarter. I mean, is it some proportion of the total savings that you talked about of $55 to $60 million a year, or is it the total amount for the whole quarter? So that's my first question, then I have a follow-up to that. Thank you.

Hi, Donald. Thanks for the question. So on the $55 to $60 million is the expected annualized savings coming from those reductions. And we are – through most of the notifications, several of the head conditions are complete. However, as we all know, we are a global company, so there are some notifications and exits that are still due to happen. We expect them to be largely complete by the end of Q1. And there may be a few that are standing for Q2, but that 55 to 60 is sort of an annualized number, Rod, with, like I said, most of them expected to be complete in Q1.

Most complete in Q1. Okay, thanks for meaning.

So then... Sorry, go ahead, finish your question.

Oh, no, please.

I was just going to add, Rod, that the annualized operating expense and operating margin guide factors in that 55 to 60, of course, as you can imagine. So that factors in the actual impact, and 55 to 60 is the annualized number.

Okay, great. The other thing I was going to ask about this, Rukmini, is if I take the annualized number and divide by four, even at the high end of the savings, it's $15 million a quarter, but your severance number is $20 million, which suggests you're doing more of this maybe overseas, not as much in the U.S.? I'm just kind of curious what the balance of that is and why that severance number is so high in the one quarter given the quarterly savings you're kind of indicating here.

Yeah, so the approximately $20 million that I mentioned is a fully loaded number, right? So it includes on-time earnings, the salaries, any kind of bonuses. The 55 to 60 includes the benefits. It includes all of that, Rod, right? So the 55 to 60 is a fully loaded number for the year, payroll taxes. It's a full number. And like I alluded to, it is a global action that we've taken depending on what we've seen as our priorities and where we want to invest versus we don't want to, or we've sort of decided to optimize in certain areas. So I'm not providing sort of a breakdown by geography, Rod, but I think it is fair to assume that it was a global action.

Great. Okay. That's very helpful. It's really good to see the cost reduction and the cash flow here. Much better than what we expected as well. Thank you.

Thank you.

Thank you.

Our next question comes from Pinchalambora with JP Morgan. Pinchalambora, your line is now open.

Hey, everyone. Thanks for taking the question and congrats on a great quarter. Much better than expected here. I wanted to ask you about, again, the ACV Billings Guidance. Seems like you took some conservatism into that for the new business, but seems like you might not have factored much into the renewal of business. I'm just trying to understand what exactly are you assuming? Are you assuming close rates to deteriorate? Are you assuming elongation of sales cycles? Maybe any context there would be helpful.

Yes. Hi, Pendulum. Thank you for the question. So on renewals, like I said, we're not assuming anything beyond what we've actually delivered. So I want to be clear on the renewal space. We're assuming continued performance in the renewal business. And to your question on the new and expansion business, what we're assuming is that this business will be impacted in some way by supply chain. Again, we're seeing solid demand so far, Pendulum. It's not so much elongation. We haven't seen that many elongation in deep cycles or anything like that so far. So we're assuming that effectively the growth in new and expansion business will be maybe impacted by macro conditions should they happen. So that's sort of what we factored in at this point. And the last piece that I talked about in thinking about the ACV billing guidance for the full year is the backlog piece, which is a healthy backlog number, so it gives us an additional benefit of reduced stress thinking about fiscal 23.

Understood. One question for Rajiv. You introduced the pricing and packaging earlier in the year. You have noted some kind of full end-to-end customers adopting Nutanix. Are you starting, especially with the acquisition of one of your largest customers as a backdrop I guess, are you seeing any meaningful change in customer conversations?

learning more strategic to to adopting Nutanix in a broader sense yes I think this is a good question pendulum what I'll say is we've definitely seen a much higher level of engagement with you know customers being much more open and of course they're concerned in terms of you know what might potentially happen and so the level of engagement has definitely gone up for us Now, in terms of what we've assumed on how quickly this transfer is, we're not assuming any meaningful benefit from this in our fiscal 23 outlook. We do expect to see some long-term benefits from this transaction as customers will look for alternatives. So that's what I would say for the VMware Broadcom situation. Now, in terms of the portfolio, to your question on the portfolio, we're certainly seeing good traction with our new portfolio. It's helping definitely upsize deals in the sense that you're seeing more of the portfolio being consumed. For example, especially Nutanix cloud management, we're seeing a much higher level of attach of Nutanix cloud management to Nutanix cloud infrastructure. And so some of the larger deals with customers are actually being contracted using the new portfolio now. And we're seeing more of the portfolio which has upsized our deals and potentially also makes these deals go faster.

Got it. Thank you and congrats again.

Thank you, Lizanne.

Thank you. Our next question comes from Mehta Marshall with Morgan Stanley. Mehta, your line is now open.

Hi, team. This is Dave Ocongo on for me to congrats on the quarter. Just with the CRO transition, I was wondering if you were seeing any major changes to the sales organization as a part of that transition. And then I have a follow-up question.

Yeah. No, I think, look, Andrew, so as John moved on, we made Andrew who had rented our new CRO. And Andrew's been with us for four or five years. He's had a variety of sales roles. He used to run the EMEA region. for some period of time. And also most importantly, he's actually been in the throes of our subscription journey. He's for the last year or so, he's been our chief operating officer inside of sales. And so he's been driving the entire transformation of the sales organization. So he's very well set. We've got a very good deposit continuity here and he understands the business. He understands the product portfolio. He understands the customer base. So it's been a very smooth transition The other thing you'll say is we just had our first annual sales kickoff in three years since 2019 in person last week. And the team left super energetic and excited about the vision. We also invested a lot in training and enabling them to go sell. And we're also reinstating our annual what we call circle of excellence for our highest performing sales people. So all in all, I think we're in a good place from a sales perspective going into FI23.

Okay, so it sounds like other than Andrew, not really any changes below that.

No, I wouldn't say that. No, there are changes below that. We've got some changes below that. We've brought on a new person to run Americas for us. He came over from VMware, as it turns out. He was running the enterprise business, and he now leads for the Americas team. So there have been changes underneath, for sure, but there is a lot of continuity and knowledge of the base as well. So we feel very good about the sales leadership team that's in place right now, not just at Andrew's level, but also the level below and a couple of levels deeper inside the organization.

Okay, great. And then just the new reps that you're bringing on, has that been able to stem some of the turnover that you mentioned seeing last quarter? And do you happen to have, I guess, an estimate of their productivity timeline?

Yes, I think in the fourth quarter, we did see our rep retention improve. Our rep headcount was actually flat quarter over quarter. In FI23, we do expect to grow our headcount modestly from current levels on the sales side, while also continuing to drive rep productivity. So there is a significant focus on rep productivity. We talked about our new portfolio. We talked about solution selling. We refined our segmentation going in. They're investing in training and enabling our sellers, and they're getting more leverage through the partners. So that combination, all of which continues to improve our productivity, and it's been going up consistently.

Great. Thank you. And congrats on the quarter again. Thank you.

Thank you. Our next question comes from Mike Sikos with Needham. Mike, your line is now open.

Hi, team. Thanks for getting me on here. I guess for my first question, I know in your prepared remarks, you guys talked about the strong performance here and attributed that top line growth partially to the large, I guess a greater number of large expansion deals in the quarter, as well as strength in that renewal space. And I just wanted to see, can you help us parse through those different components as far as what they did contribute to the growth this quarter. How much was the large expansion deals versus the renewals? And the reason for the question first, just want to see this, the development of that renewals initiative that you guys keep pressing on. And then secondly, I think it would just help us think through our forecasts when we think about potential upsides that might've come in this quarter from a greater than expected number of those expansion deals. Does that make sense?

Let me try and take a shot at that, Mike. Thank you for the question. So in Q4, as you alluded to and that we talked about in the scripted remarks, there were a few factors that led to the outperformance. And renewals for us is a business model, right? So it's much more than an initiative. It's something that we've sort of undertaken in the last few years fundamentally change how we operate, and we're starting to see all of that bear fruit over the last several quarters, including in Q4. So renewals did come in better than we expected, and we expect that performance to continue. The large deals we were referring to are really on the expansion side. They were not so much on the renewal side, but really on the new expansion side. And those contributed to the outperformance on the new ACV side. And so when I think about Q4, all of that kind of factored into Q4 outperformance. And as I alluded to, we're also entering fiscal year 23 with a healthy level of backlog. The only thing I'll add is more generally for 23, our renewals business continues to perform. Renewals, I will remind you, is sort of the forecast for our renewals business is really built on what we've already sold. So we looked at We look back at what we've already sold to our customers. We know when those contracts are up for renewal. And that's what the renewals forecast is based on. And as we talked about, our GRR is in the 90% or greater target range. And so that renewals forecast is very predictable as we look out to 2023. And we have continued to invest in new ACV growth. Rajiv just talked about sales rep productivity and so on. And so we do expect new ACV to grow in fiscal 23 as well, but that's where we've moderated our assumptions somewhat in light of the uncertain macro environment. So I realize we're not quantifying it for you here, Mike, but I hope that color helps.

It definitely does. Thank you for providing some more detail there, especially with the predictability of that renal spread. It's very important when we're going through our thesis on our side. If I could just ask another question, and I guess it's maybe more philosophical in perspective, but if I just think about this past year, there has been some turnover, obviously, when I think about the management team. We now have the new CFO with you sitting in the seat. We also have the announcements around the new chief marketing officer, the new head of engineering, the new chief revenue officer most recently, which we were talking about on this call. Can you just help us think through that? uh, the leadership team at Nutanix. Do we have the pieces in place at this point? Um, when, when we're looking at the, the guidance parameters set for this year, is this a team that's going to get us to those pre-casual targets that you guys have been articulating now as we think about that fiscal 25 target? Thank you.

Yes. Yeah. Let me, uh, let me, uh, take that question here. Uh, the company's transitioned through different phases in their life cycle, uh, as a public company. And as we do that, we think that it's natural for there to be some transitions in management. And we've looked to capitalize on these, and the talent market is also quite strong in terms of being in execs. And so we've been quite excited about the caliber of exec talent that some that we have hired from the outside and others that we have promoted from within. We believe we have an exec team at this point that brings significant experience and domain knowledge that will serve as well for our next stage where we're focused on profitable growth. And so that's, I think, yes, some of this, like I said, is a very natural transition as a company evolves.

Very helpful. Thank you again, guys. I'll turn it over to my other colleagues. Appreciate it.

Thank you.

Our next question comes from Jeff Koch with Raymond James. Jeff, your line is now open.

Yeah, thanks. This is Jeff Koch, Ian, for Simon Leopold. So specifically on the cost cuts, where are you guys targeting those cuts? Is it all coming out of GNA? Sorry if I missed that. And how do you – is there some reinvestment that you think you can – an opportunity there, you know, specifically with some of your competitors?

um on the sales side and then i have a follow-up yeah i'll just give you a high level view uh we uh we of course look at every function and then we looked at benchmark across every function but the majority of the impact was in sales and marketing uh and and within sales it is mostly non-quota carrying sales people uh and uh so and then of course the rest of us across all the other functional areas

And then secondly, where are you seeing the strength? Just given the macro weakness, is there specific verticals that you can point to that are holding up better?

Our products are fairly broad-based. So, you know, I can't point to any single vertical here. But keep in mind, we have a very strong base of renewals. And the renewals business, of course, provides a good foundation. And renewals is already business that we've already sold. and needs to be renewed, and we renew that with high renewal rates, given the customer satisfaction and the NPS scores that we have. So that provides a very good foundation. We, of course, you know, this particular last quarter, we saw good strength in financials as a vertical, to your question on verticals. We saw a great strength in some regions, of course. I think our Middle East has been a high-performing region consistently for a while. So, but nothing that stands out.

I guess maybe I'll put one more in here. So with this higher engagement that you're seeing, maybe you can talk about specifically where you think the biggest opportunity is for you guys, given VMware getting acquired. What are you most optimistic about?

That's it. No, again, I think we're already in a market where we're doing relatively well in terms of gaining share, and even before this news came on. and with the portfolio, and they're executing, and they're very focused on this. Now, with this news coming on board, there's just more customers who are concerned about what could potentially happen. It's a very broad base of customers across the world, and they've all seen what's happening. They've all heard what's being said in public, and there's just more uncertainty, which means uncertainty equals to risk, and risk means that customers have to consider more alternatives. And so that's what we see. And like I said earlier, it's a little premature for us to comment on this in the sense that we're not factoring in any major upside from this in FI23 in what we guided and what we're planning. But in the long term, I think this should have been for us.

Great. Thanks.

Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. Matt, your line is now open.

Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for taking our question. On the supply chain challenges, it sounded like it tracked better than expected. That's great to hear that. Last quarter, you noted they started very late in the quarter. Just wondering about the timing of improvement this quarter. Was the supply chain consistently better this than you thought or was there more of a gradual improvement through the course? Yeah. Thank you. Thank you for the question.

I'll go ahead with me. Go ahead.

Go ahead. Yeah, I'll start Rajiv and you can add in. I was going to say that I want to be clear that it did not improve in Q4 relative to Q3. It actually did get worse in Q4 as we expected. it just didn't get to be quite as bad as we thought. I think it's an important point that supply chain challenges that we saw, the percentage of orders that came in with future start dates did increase in Q4 relative to Q3. To your question, I think your question was on linearity and how did we see that play out throughout the quarter I would say we do have, just as a general practice, more of our bookings coming in in the last month and in the last couple of weeks of the quarter, so that's a natural linearity. So it does tend to – all of the trends tend to reflect that as well. So I wouldn't say it was as back-end sort of loaded as we saw in Q3, so it was more gradual than that. But it is – I do want to point out that Q4 we did see a higher percentage feature start dates come in in Q4 than we did in Q3, but it wasn't quite as drastic in terms of the last couple of weeks like we saw in Q3.

Great. Thanks for the clarification.

Yeah, and one more point I maybe I'll add to that is that the linearity overall was better as well for Q4, as I alluded to in my remarks, which helps with things like free cash flow, which linearity impacts.

Thank you.

Our next question comes from George Wang with Barclays. George, your line is now open.

Hey guys, congrats on the quarter. I have two questions. The first question is, any thoughts on the consumption-based model versus subscription? If you look at other software companies, more and more companies are adopting consumption-based, which is based on usage versus more seed-based. So just curious if you guys have little existing contracts just based on consumption.

Yeah, we don't have much by way of consumption at all here yet. I would say that we do a subscription model. Some of our partners, of course, take that and deliver that consumption-based service. For example, we have a very small but hopefully growing managed service provider business. It's still really, I would call it incubation, small, but that business, the MSPs could be selling that as a consumption business. Some of the business partners effectively might go that way, but our business is all just subscription at this point.

Okay, great. So the follow-up is kind of, you know, curious about the cadence of the contract, the term compression. You know, you guys talk about kind of FY23, it's going to be flat or down. Just curious, how is that tracking versus your target of 2.8 to 3.2 years?

Yeah, George, I can take that. Thank you for the... Thank you for the question. So I would say, I think if I go back to what Dustin had outlined at our Investor Day in fiscal year 21, last year actually in June of 2021, he had said that we expect to settle at about 2.8 to 3. For fiscal year 22, we came in slightly higher than our internal expectations. We had some large deals that were of longer duration. So it's even slightly higher than we expected in fiscal year 2022. And so 2023, we do expect term length to go down slightly, not by much, but slightly. And we'll watch this closely. I don't think there's any – we'll be around that three-year mark is our expectation at this point, and we'll see how it plays out. Because what we largely do is we let customers kind of choose what ultimately they would like to do. whether it's sort of a one-year or a three-year or five-year term, obviously making sure that economics work for us from our standpoint. But we want to make sure that that is being met while managing for making sure the economics are good, right? So about three, I think, is what we'd expect, not too different from what we said last year. And we'll keep everybody updated as that progresses.

Okay, that's helpful. Thank you.

Thank you.

Our next question comes from Aaron Rakers with Wells Fargo. Aaron, your line is now open.

Hi, this is Jake on for Aaron. Congrats on the great quarter. Just starting out, I was wondering if you could maybe give a little bit more color on the degree of macro slowdown you have embedded in the 2023 guide.

Yes, I can take that. So we are, you know, we're not assuming sort of a full-blown recession or a deep recession or anything like that, Jake, but we are, I think we believe it's prudent to consider the macroeconomic environment as we think about just how uncertain things are right now as we all read in the newspaper. And so I would say I think that's why we've thought about our new ACV, new expansion ACV, and tempered that growth somewhat, right, to make sure that we are factoring that in. So that's how I characterize kind of what we assumed in terms of macro.

Okay, great. And then just as a follow-up, maybe could you give a little additional color around the backlog and when you see that drawing down?

Can you repeat that question, Jake? I heard backlog.

Yeah, I was just asking if you could get some additional color around the backlog and how you see that going into 2023.

Sure, sure. Yes, I can. And I think just to maybe finish out actually the answer to your previous question, I do want to reiterate this point about the significant growth in 23, the majority of that growth is coming from actually our growing base of renewals, which we generally expect to be relatively resilient in a challenging macro environment. So that's part of the thought process here. as well. And then, like I said, we've taken into account some uncertainty in the macro as it relates to IT spending into our new ACV billings growth. And then on the backlog point, we did exit Q4 with record backlog, as I said. And we typically use backlog in Q1, and so we'd expect that to be the case this quarter as well. But overall, between the growing base of renewals and the backlog, it just provides a good foundation for our growth in 23 and helps reduce the risk of our forecast.

Great. Thank you so much.

Thank you. Our next question comes from Eric Spiger with JMP. Eric, your line is now open.

Yeah, thanks for taking the question and congrats on a good quarter. Most of my questions have been asked, but I'm curious. I assume you're still targeting kind of mid-40s percent of revenue for sales and marketing as you get into fiscal 25. What growth assumptions are you making for headcount as you start looking out?

Yeah, maybe I will... answer that, Eric, without giving our specific headcount growth assumptions, because there's obviously a lot of variables going to that as we think about a global company and so on. But I will say that, look, we are committed to really improving our overall Rule of 40 score each year by both focusing on growth and on free cash flow and operating margin. So that's how we've thought about investments. Clearly, we have already taken some actions here as it relates to our overall expense profile. As Rajeev said, the majority of the reductions that we did earlier this quarter were in sales and marketing. We're going to invest prudently where we need to going forward, keeping in mind that overall pieces of sustainable profitable growth.

What I would say, just to add to that, we will continue to invest in innovation and R&D for innovation. We will continue to focus on continuing improvement and productivity on sales and marketing. With the renewal cost base coming, renewal showing up at a lower cost base, we do expect that sales and marketing as a function of revenue will continue to drop, as we've indicated in our last investor day. But we will continue to invest prudently for the future. We will manage our cost carefully. continue to invest in innovation, and we will make sure that we are investing the appropriate amount in sales and marketing, but combine that with productivity and make sure that our percentage spend is going down as a function of revenue.

Very good. Thank you.

Thank you. Our next question comes from Ben Bolin with Cleveland Research. Ben, your line is now open.

Good afternoon. Thanks for taking the question. Rajeev, I was hoping we could focus a little bit about into the share gain opportunity within hypervisor and hyperconverged infrastructure. How do you think about the longer term potential from a net new customer perspective, as well as wallet share expansion? And any thoughts on how this could influence future bundled sales opportunities? And then I had a follow-up.

Yeah, I think first of all, that there's many levers here. It's not one instant lever, right? I think, so first, if you look at the core HCI itself, the core stack, because really software-dependent storage, regardless of whether it's running on any hypervisor, right, whether it's a VMware hypervisor or our own hypervisor AHV, we see a market opportunity for that continuing to grow as we continue to displace largely 3-tier and continue to improve our win rates versus, say, VMware or other players. So that market opportunity, I mean, there's still a lot of 3-tier out there that can be converted to HCI and run more efficiently with better TCO. So that's one piece of it. The second, of course, is we do see more. I mean, at this point, you know, for the folks that use our HCI stack, more than half of them are converted over to AHV. And we will see that, I think, especially with the impetus now in terms of what's happening potentially, that will probably continue to go up. And once we get to that part in terms of customers coming to our own hypervisor, and by the way, our hypervisor is included in our offering in our cloud platform. We're not selling it separately. And when we do that, Then we also get to attach the rest of the portfolio, take them to the public cloud, and so there's huge expansion opportunity. We get to attach on Nutanix Cloud Management. We'll attach Nutanix Unified Storage, our database service, and then extend all of this into the public cloud. So when you look at that sum total of the opportunity here, I think it's quite significant. And today we have a well-established position in HCI, but this is beyond HCI. This is for a full cloud platform, including all the other pieces there, we don't have as much share. And I see a lot more opportunity for share gains in those areas as well, right, as we see this conversion happening. And again, I think now there's more, given the, you know, whenever there's a disruption in the industry, and in this case it happens to, I think, be somewhat favorable to us at least long-term, it's only going to help us accelerate this piece of it.

Okay. And that takes the second part. When you have a customer that makes the decision to transition from another party to yourselves. Could you share any commonalities you've seen from those experiences? Any thoughts on average duration, how long they think about that, how long that engineering effort, how big that lift might be? Just so we have an idea of, you know, how long that tail could last. Thanks.

Yeah. We have been doing a lot of migrations over time, you know, from, say, ESX to AHV. to be very specific there. And we've gotten very good at that migration. We've gotten a lot of tools to automate that. We have a tool called Move, which actually handles that piece of it. And so that piece of it, customers, once they do the initial planning, they qualify the workloads that they want to run on this platform, and they make sure that we have the appropriate ecosystem support needed. Once that initial bit of qualification work is done, the actual move itself is quite smooth. We can get that done within a couple of months, usually, and That part of it is not difficult. Now, the other part that comes into play here is the automation and the scripts that they have potentially invested on top of their existing environment to integrate with the rest of their environment. So some customers don't do much of that. Other customers do a fair amount of custom work. And if they've done a lot of customization, then we will have to invest in some services to help migrate all of that automation that they've done over to our platform. But that's also doable, and we've done that as well. So there's no, a lot of critics here that prevent this migration from happening. The degree of complexity can vary depending on, you know, if it's just a simple hypervisor to hypervisor migration, that's actually quite straightforward. If it's a, you know, a lot of automation that they've invested in, it takes a little bit more time and some services to make that migration happen. Great. Thanks, Rajiv.

Thank you. Our next question comes from Wamsi Mohan with Bank of America. Wamsi, your line is now open.

Hi, thanks for taking the questions. It's actually Rukmini filling in for Wamsi today. I have a couple of questions. First, Rukmini, you talked about how the percent of orders with future start dates positively impacted the ACV billings and had a larger impact on revenues. Is there a way to quantify what the benefit was versus the guidance ranges that you had given for ACV billings and revenue?

Yeah, hi. Thank you for the question. So I would say that as we talked about last quarter, in general revenue can only be recognized in the quarter in which the license start date happens. Whereas ACB Billings, we do invoice it and collect soon after the bookings is received. That was my comment on sort of revenue being impacted more than ACB Billings, even looking forward when you think about what we presume for Q1 and fiscal 23. For Q4 specifically, we're not breaking that out, Rupal, but I will say that what we assumed as a percentage of future start dates for Q4, the actual percentage was lower, but it was sort of between what we saw in Q3 and what we'd assumed for Q4. So it came in somewhere in between those two. And that's what you see reflected in kind of the revenue numbers and in the ACB Billings number, but to a lesser degree.

Okay, thanks for that. And then can I ask you, looking at the fiscal 23 full-year guidance, you're guiding gross margin to 82%, but you did 83% in fiscal 22. So on higher revenues year-on-year, you're guiding 100 basis points lower on the gross margins. So Amy, how should we think about that? What are some of the drivers for gross margins this year?

Yeah, so I'd say on gross margins, our product gross margins have remained fairly steady and we don't expect any changes to that. One of the things we are focused on, and it's interesting because Rajiv just mentioned services, one of the things that we are looking at is making sure that we are attaching services where it makes sense to do so. in situations like the one that you just described, or for example, where there's significant portfolio solutions that are deployed, and we want to make sure that our customers are adopting them and using them as they intend to. So we might see a slight uptick in services as we go through fiscal 23 here. So that's factored into that 82% guidance that we provided.

Okay, got it. And if I can just sneak one more in. for Rajiv. Rajiv, this quarter you added 620 new customers. I think last year in the fourth quarter you added 700, and I think 700 was the average that you've done traditionally. But then you've also talked about focusing on quality of customers versus quantity. I mean, how do you think about new customer ads, and is this even a metric to focus on going forward? Thank you.

Yeah, it's a good question there. The Q4 for us is reasonably stronger with respect to new customer acts or new logos than Q3. And we saw NEC roughly in line with that historical seasonality this last quarter as well. Now, to your point, we have been focused on higher quality, higher ASP new logos, more so than just raw new logo count. And that continues. So this quarter, again, we continue to see year over year new logo ASP growth in Q4 as well. So now as we go forward in terms of these new logos, we do want to drive more of this by enabling more partner-based selling. We have this program internally that we call Autonomy, which is really enabling partners to go drive this by themselves and also continuing to get some leverage towards strategic partners and making sure that we have the appropriate sales incentives in place. So we are focused on, yes, continuing to add new logos for sure, but also making sure those are the right new logos coming in with higher ASPs and also with ones that we can continue to build on. So that's probably the way to think about it. And so our business always is going to have some portion with new logos. If you look at our entire slate, so there's new business, new and expansion, and then there's renewal. The renewal business continues to grow. When you look at new and expansion, expansion is a big chunk of what we do because in many cases our land First deal with customers is small, and then it continues to grow a lot with many of these customers. And then the land provides the new fuel to the fire over the long term, right? We continue to provide. So all are important. All these three legs of the stool, new logos, expansion, existing customers, and renewables are all equally important to the business model.

Got it. Thanks for all the details, and congrats on the quarter.

Thank you. Thank you.

That ends today's question and answer session. And that concludes today's conference call. Thank you for your participation. You may now disconnect your line.