Good afternoon, and thank you for joining today's Nutanix Q3 Fiscal 2022 Earnings Conference Call. My name is Selena, and I will be your moderator. All lines will be muted during the presentation, but there will be a chance for questions and answers at the end. I would now like to turn the call over to our host, Rich Valera, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to today's conference call to discuss the results of our third quarter fiscal 2022. Joining me today are Rajiv Ramaswami, 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 third quarter 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 on them successfully and in a timely manner and the benefits and impacts 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, the timing and impacts of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical, and industry trends, including the ongoing global supply chain challenges 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 for the fiscal year ended July 31, 2021, and our quarterly reports on Form 10-Q for the fiscal quarter ended October 31, 2021, and January 31, 2022, 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 the 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 42nd Annual William Blair Growth Stock Conference on June 6th. 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 another solid quarter, exceeding all our guided metrics and seeing continued strong performance in our renewables business. We continue to see solid demand for our Nutanix cloud platform, driven by businesses looking to accelerate their digital transformation, modernize their data centers, and adopt hybrid multi-cloud operating models. That said, the quarter didn't finish as we had expected. Late in the third quarter, when we typically book a significant portion of our orders, we saw an unexpected impact from challenges that limited our upside in the quarter and affected our outlook for the fourth quarter. Increased hardware supply chain delays resulted in an increasing percentage of our orders having start dates in future quarters, or in some cases being delayed, pending availability of hardware. This affected both our billings and revenue upside in Q3, and we expect this trend to continue in Q4. In addition, after seeing our attrition rate among sales improve for each of the prior two quarters, we saw it worsen in Q3, driving a lower than expected rep headcount entering Q4. Rukmini will discuss these issues in more detail in her prepared remarks. Overall, our third quarter reflected continued execution on our subscription model and was marked by solid top-line and improving bottom-line performance. We delivered ACV billings growth of 28%, bolstered by strong execution on our building base of renewables. Our revenue, which continues to be affected by term compression, grew 17%. Topline growth, combined with diligent expense management and leverage from renewals drove a sharp year-over-year improvement in non-GAAP operating income. While timing of collections adversely impacted our free cash flow performance for the quarter. We continue to prioritize working towards sustainable free cash flow generation in FY '23. Overall, we are pleased with our third-quarter financial results. Our largest deal in the quarter reflected healthy adoption of our core Nutanix cloud infrastructure by customers looking to modernize their data centers and deploy hybrid cloud operating models, as well as good traction with adjacent solutions in storage, database-as-a-service, and cloud management. A good example is a seven-figure deal with a large North American-based energy exploration and operations company that was looking to modernize their traditional 3-tier infrastructure while adding the flexibility of extending their workloads into the public cloud. This new customer has decided to adopt Nutanix cloud infrastructure, including Nutanix Cloud Cluster or NC2 for public cloud access, as well as Nutanix Cloud Manager for full-stack self-service automation, application life cycle management, and hybrid multi-cloud management capabilities. The Nutanix solution is expected to enable them to simplify their operations, reduce their support requirements, and seamlessly extend their workloads into the public cloud. Another example is an EMEA-based online sports betting platform that is looking to quickly deploy their service in a new region. They used Nutanix Cloud Infrastructure with NC2 to extend their service to a regional AWS location in the Asia Pacific region, going from proof of concept to live deployment in just two weeks. Using NC2, they were able to expand operations into a new region virtually overnight while benefiting from the simplicity of a single unified control plane across private and public clouds. We recently launched our updated product portfolio that simplifies our packaging, metering, and pricing and aligns our offerings with the solutions we saw our customers looking for. Roughly one quarter in, we’re very pleased with what we’re seeing. It’s streamlining the quoting process, increasing our competitiveness in all-flash configurations, enabling more high-velocity transactions for our full-stack offerings comprising Nutanix Cloud Infrastructure and Nutanix Cloud Management, and making it easier for customers to quickly identify solutions for their specific needs. Our largest win in the quarter, a multimillion-dollar order with an EMEA-based company in the financial services sector, was a good example of a deal that benefited from the adoption of our updated portfolio pricing and packaging. This new customer, who was unhappy with the performance of their business-critical applications on their existing 3-tier infrastructure, chose our new Nutanix Cloud Platform full-stack offering comprising both Cloud Infrastructure and Cloud Management. Due to its simplicity, built-in automation for Infrastructure as a Service and total cost of ownership advantages versus competing alternatives. They also added Nutanix Unified Storage and Nutanix Database Service for their storage and database automation needs, respectively. Being impressed by their performance and seamless integration with the broader Nutanix platform. Go-to-market leverage with partners has been one of my top priorities, and we continue to see progress on this front during the third quarter. I'm especially pleased with the momentum with Red Hat as we've been seeing a building pipeline and a growing number of joint wins for both OpenShift and Red Hat Enterprise Linux running on Nutanix Cloud Infrastructure. One example is a North American-based financial services provider that was looking to reduce the time and resources required to manage OpenShift on their bare metal servers. They decided to move their OpenShift environment, running their business-critical workloads, to Nutanix Cloud Infrastructure, including its AHV Hypervisor, looking to benefit from the simplicity and compelling total cost of ownership advantages of our Nutanix Core platform versus their existing infrastructure. We are excited about the large and building opportunity pipeline that we see with Red Hat. In the third quarter, we continued to receive industry recognition for both our Core Platform and our unified storage solutions. Nutanix was recognized as a major player in the IDC MarketScape: Worldwide Distributed Scale-Out File System 2022 Vendor Assessment and was also named Customer's Choice in Gartner's Peer Insights program for both hyper-converged infrastructure and file systems object stores. We are especially pleased with our strong performance in the customer revenue-driven Peer Insights program, which we see as a reflection of our obsession with delighting our customers. Now I'd like to talk about our recent progress on another one of my priorities, developing and attracting talent. First, following Duston Williams's decision to join a pre-IPO startup after eight productive years with Nutanix, we promoted Rukmini Sivaraman, previously our Senior Vice President of Financial Planning and Analysis, to be our new CFO, effective May 1. In the five years with Nutanix, Rukmini has been instrumental in the company's growth and transformation while developing a unique understanding of our company and industry. I see Rukmini's appointment as a great example of the deep bench of talent we have cultivated at Nutanix and believe our financial, strategic, operational, and human capital expertise will be a valuable asset as we continue to execute towards our long-term growth and profitability goals. Please join me in welcoming Rukmini on her first earnings call in a new role. Second, I'd like to highlight the recent appointments of Mandy Dhaliwal, as our new Chief Marketing Officer; and Shyam Desirazu, as our new Head of Engineering. Both Mandy and Shyam are exceptional leaders with proven technological savvy and unique insight into what it takes to build and deliver industry-leading solutions. I see our ability to attract and develop such high-quality talent as reflecting belief in the opportunity that's in front of us and feel confident that we've got the team in place to take Nutanix to its next stage of profitable growth. In closing, in our third quarter, we delivered another quarter of solid growth, exceeding all of our guided metrics. We continue to see solid adoption of our Nutanix Cloud platform, from customers choosing Nutanix to modernize their infrastructure and enable their transition from on-prem to hybrid multi-cloud operating models. And we continue to execute well on a building base of subscription renewals, which we see as a reflection of both the strength of our team and our customers' high level of satisfaction with our products. While I'm disappointed with a weaker Q4 outlook due to the aforementioned supply chain and sales rep headcount issues, we don’t believe our reduced outlook is a reflection of any change in our market opportunity or demand for our solutions. That said, we are focused on mitigating the impact of these challenges and continuing to drive towards profitable growth. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?

Thank you, Rajiv. I am honored to join you all today for my first Nutanix earnings call. Getting directly to Q3 performance. Q3 was a solid quarter, and we beat all our guided metrics. ACV billings was $205 million, representing a year-over-year growth of 28%, exceeding our guidance range of $195 million to $200 million. Our renewals business continues to do well, and the ACV billings upside in Q3 was due to renewals performing better than expected. Gross retention rate, GRR, was in line with our expectations. Revenue for Q3 was $404 million, representing year-over-year growth of 17%, exceeding our guidance range of $395 million to $400 million. Growth in ACV billings was greater than growth in revenue because orders with future start dates that are booked and collected are reflected in ACV billings, but revenue can only begin to be recognized in the quarter of the actual license start date and also because of slight term compression from 3.3 years in Q3 2021 to 3.2 years in Q3 2022. ARR at the end of Q3 was $1.114 billion, growing at 46% year-over-year. Q3 sales productivity was in line with our expectations. However, we ended Q3 with fewer reps than planned as the talent market remained highly competitive. As Rajiv mentioned, we saw rep attrition worse than in Q3, resulting in lower-than-expected rep headcount entering Q4. Under the leadership of our new Chief Revenue Officer, Dom Delfino, our sales leaders remain focused on getting rep headcount to our target level via both better retention and increased hiring efforts. Our overall company headcount grew slightly in Q3. We added 586 new logos in Q3, which is largely in line with our historical seasonal trend in new logo additions from Q2 to Q3. As we've discussed in previous quarters, our sales teams continue to focus on higher-quality new logos, which was reflected in year-over-year growth in new logo ASP in Q3. Non-GAAP gross margin in Q3 was 83.3% ahead of our guidance of approximately 82%. Non-GAAP operating expenses for Q3 were $342 million, lower than our guidance range of $365 million to $370 million. This is a result of continued diligence on expense management and hiring that was a bit slower than planned. Non-GAAP operating margin for Q3 was negative 1%, which reflects our continued focus on operating leverage as we progress toward our goal of achieving sustained operating profit. DSOs were 40 days in Q3, up from 36 days in Q2. Free cash flow in Q3 came in at a negative $20 million and was impacted by worse-than-expected linearity of billings. We closed the quarter with $1.3 billion in cash and short-term investments, up slightly from $1.29 billion at the end of Q2. Before we move to Q4 guidance, I will make a few comments regarding the supply chain. Nutanix transformed that appliance model to a software model starting back in fiscal year 2018 and saw our non-GAAP gross margins grow from the low 60s to our current levels of around 83% in Q3. Our customers run our software on their choice of hardware, which they purchase from server providers, many of whom are our partners. Because we are an infrastructure software provider, customers often prefer to time their purchase of software from us with the purchase of the underlying server from hardware providers. This means that when there are delays in server availability from hardware providers, customers may choose to either: one, line-up the software subscription license stock base with the expected availability date for the servers, leading to us receiving orders with start dates in future quarters; or two, in some cases, delay their orders until the hardware becomes available. During the last several quarters and until late in Q3, we have experienced minimal impact from supply chain issues. While we have not seen a change in the demand for our solutions, we saw these supply chain challenges impact us late in Q3, which limited our upside in Q3, and we expect these trends to continue in Q4. With that, the guidance for Q4 is as follows: ACV billings to be between $175 million and $185 million; revenue to be between $340 million and $360 million; non-GAAP gross margin between 79% and 80%; non-GAAP operating expenses between $360 million and $365 million; and weighted average shares outstanding of approximately 225 million. The significant majority of the impact on our Q4 ACV billings guidance relative to our previously implied guidance for Q4 is due to the impact of increased supply chain challenges, which, as I described earlier, affects us in two ways: one, future start date, that is, orders that customers book with us but that are not yet collected; and two, customers choosing to delay placing orders with us, pending the availability of hardware. Our guidance is also impacted by sales rep headcount going into Q4 being lower than planned. Because of the increased uncertainty in the macro supply chain environment we saw towards the end of Q3 and continuing into Q4 and how rapidly it is changing, we are widening our ranges to reflect that increased uncertainty. The guidance assumes that the supply chain challenges continue to worsen in Q4. Absent the supply chain issues, we believe that we would have likely been at or close to our previously implied Q4 ACV billings guidance range. The Q4 revenue guidance is more impacted than ACV billings guidance relative to their respective previously implied Q4 numbers because orders with future start dates that are booked and collected are reflected in ACV billings, but are only reflected in revenue in the quarter of the actual license start date. Our average contract term length is expected to be flattish in Q4. The Q4 operating expenses guidance is well below the previously implied Q4 guidance of approximately $400 million even though it includes about $6 million for an in-person sales enablement event that was moved into Q4 from Q3. Because of the billing dynamics and because we expect linearity in Q4 to remain challenging due to supply chain delays, we expect working capital needs to increase in Q4. As a result, we expect cash usage to be significant in Q4 and higher than the current Q4 Street consensus. Moving on to full-year revenue, the guidance for fiscal year 2022 is as follows: ACV billings to be between $735 million and $745 million, representing year-over-year growth of 24% to 25%; revenue of $1.535 billion to $1.555 billion; non-GAAP gross margin of approximately 82%; non-GAAP operating expenses of between $1.402 billion and $1.407 billion. As a reminder, full-year ACV billings is not a straight summation of the four quarters ACV billings because of the adjustment required for transactions with less than one-year term length. The guidance above assumes that annual ACV billings guidance is 94% of the sum of the four quarters of ACV billings. While our Q4 outlook is lower than our prior implied guidance, we remain focused on profitable growth and continue to prioritize working towards sustainable free cash flow generation and non-GAAP operating margin breakeven in fiscal year 2023. We will look to provide more color on fiscal year 2023 expectations during our Q4 and fiscal year 2022 earnings call in August.

Absolutely. The first question comes from Wamsi Mohan with Bank of America. Please go ahead.

Hi. Thank you for taking my question. It's Rutu filling in for Wamsi today. Rukmini congrats on the new role. Look forward to working with you. My first question is for Rajiv. The two things that impacted you in the quarter, you said were the attrition more than expected of the sales reps and the supply chain issues that impacted hardware availability. Rajiv, do you think these are things that will resolve in the fiscal fourth quarter? Specifically, when we think about sales rep, I'm assuming you're going to try and replace them. But given the labor shortages, do you think that you can make up the required sales reps in the quarter? And the same question on the supply chain delays, how long do you think this will last? And so should we expect that going into fiscal 2023, these effects linger on into fiscal 1Q as well? So just your thoughts on the timing on when you can replace the reps, as well as on the hardware issues that you're seeing?

Let me start with the supply chain, as it has been the primary factor affecting our outlook. The majority of the downward revision is due to hardware constraints in the supply chain, which became significant late in Q3. Until recently, we managed these issues without major impacts, but we began to experience delays in orders towards the end of Q3. We are collaborating closely with our hardware partners to improve availability, but our influence is somewhat limited since we don’t supply the hardware directly. Based on feedback from server manufacturers and hardware partners, we anticipate that these supply chain challenges are likely to continue for several quarters. Regarding our sales rep headcount, this has been a smaller factor contributing to our current challenges. We are experiencing a broader industry trend of increased resignations, and we noted previously that our headcount was below target. In Q3, after two quarters of decreasing attrition, we experienced a rise in rep attrition, resulting in fewer reps than expected entering Q4. To address this, our new Chief Revenue Officer, Dom Delfino, is focusing on three main areas: retaining reps, improving their productivity, and hiring new ones. For rep retention, we are refining our segmentation and coverage model to enhance territory coverage and quota attainment, and we expect to have this ready as we move into the next fiscal year. In terms of productivity, we are intensifying our training and enablement efforts, using partner-based selling, and simplifying our product portfolio. On the hiring front, we have increased our recruiting efforts since Q3, and early signs are encouraging as we work to return to our desired sales rep headcount. We are addressing both issues, and while we expect the supply chain challenges to persist for a few quarters, we are making strides to resolve our rep headcount situation as quickly as possible.

Okay. Thanks for all the details, Rajiv. Maybe just another question for you. The new customer count this quarter was 580 new customers. I know in the past, you've talked about focusing more on quality versus quantity. I think the average, if I look from Q2 to 3Q over the last couple of years, I think it's been around 700. So, I mean, are you happy with this level of customer additions? And given the issues with the sales force, should we focus less on the number of customers that are being added in the next couple of quarters? Do you think that becomes less meaningful of a metric? And should we focus more on things like ACV billings or some other metric?

Yes. So Q3 is seasonally weaker than Q2. And we saw a decline roughly in line with historical seasonality in the third quarter when it came to new logos. Now, as you indicated, we have been focused on higher quality, higher ASP new logos more so than absolute new logo count. And on that front, we saw solid year-over-year new logo ASP growth in Q3, which is what we're driving for. So, if you look at – going forward, we expect a new logo growth to be driven through enabling more partner-based selling, continuing to drive our partner autonomy program, trying to get more leverage from our strategic partners, and by continuing to ensure that we have the right sales incentives in place. So, yes, we are focused more on the quality of these logos going forward and the ASPs that we can capture.

Got it. And let me just sneak one more in, if I could for Rukmini. I think you had guided average contract term to be flat. I think it went up a little bit from 3.1 to 3.2 years in 3Q. I think you're guiding flat again for fiscal 4Q. How do you feel that the growth in your renewables business would be impacting both the ACV billings seasonality, as well as this – the average contract terms? And should we expect that after 4Q, 1Q average contract term will decline given that the federal business is a more significant part of your revenues in that quarter? So, any thoughts you have on the growth in the renewables business and how should we think about the seasonality of ACV billings, as well as the trend in the average contract term? Thank you.

Yes. Thank you for the question. So, to first answer your question on the contract terms. So, I think this quarter in Q3, we had a couple of significant transactions that came in at higher terms, so that's probably sort of 3.2. But I think more generally, I'd say at this point, we are quite close to sort of what we think was where terms will eventually settle, which is around the 2.8 to 3 year mark, which we had laid out previously. So, we're quite close to that level, right? So it fluctuates a little bit as you're seeing, I think, here and what we are projecting for Q4 as well. And we expect that to again maybe trend down slightly, but not too dramatically at this point, given where we are and how close we are to the sort of where we think we'll settle. I think your second question was on the seasonality as it relates to renewals and what that does for ACV billings, and what I'll say in renewals as we talked about, I think, in the prepared remarks, right, renewals which continue to perform really well for us overall. And I think what it does is we do see the available-to-renew, or ATR, which I think we talked about before on these calls, does go up in general over time as the base of renewals continues to build. So I would say that, renewals in general is less seasonal than new ACV overall. But as you can imagine, right renewals is just at this point, outflow of when those orders came in going back, right? If the new business that we booked three years ago, two years ago, has that seasonality, the available to renew also has some of that seasonality, right? So it's not perfectly correlated, but I hope that answers your question that overall, I think our renewal business is doing really well. We're seeing slightly less seasonality in that business. But again, it follows the same pattern as what new business did a few years ago, which is somewhat seasonal between the quarters, right? So this is our first sort of full year of renewals, and so we'll continue to watch that closely.

Thank you for all the details. Appreciate it.

Thank you. The next question comes from James Fish with Piper Sandler. Please go ahead.

Hey, guys. Thanks. I want to continue on the supply chain challenges. Is there – appreciate the color you just gave, but is there a way to think of the backlog you now have that should come in when supply comes back, or put another way, is your backlog up by roughly the $90 million that you had to guide down for fiscal Q4, understanding there's multiple ways here of how orders get booked or delayed? Are you expecting that $80 million, $90 million then to come in during all of fiscal 2023? And do you think the persistence of these issues actually persist long enough that puts your $300 million to $500 million free cash flow guiding the out year at risk.

Thank you, Jim, for that question. I can take that, Rajiv. So a couple of thoughts, and maybe I'll add a little more color to what we said about supply chain. So as you'll recall, one of the things we said was a significant majority of the Q4 ACV billings guidance relative to what was implied at our previous quarter when we guided for Q3 and for the full year, the significant majority of that delta is coming from the supply chain challenges, and it shows up in two ways. One is orders that come in and have future start dates, they're booked, but have a start date, or they don't get booked because customers are waiting for the availability of the hardware. And the way we thought about trying to estimate Q4 is we looked at the percentage of our orders in Q3 that came in with future start dates. And as Rajiv talked about and I talked about, we saw late in Q3 that the percentage of those orders that came in with future start dates went up. And what we are modeling for Q4, we are modeling that percentage of our orders to come in future start dates to go up to increase or worsen compared to what it was in Q3. So that's how we've approached estimating Q4. And I do want to make the point, I think, to your question, Jim, on the revenue piece, right? So, if it's booked and we're able to collect it, it does show up in ACV billings, and we do that even with orders with future start dates. Whereas in revenue, even if we have booked and collected it, it doesn't show up in revenue until the actual date of the license starting. So, those are some of the nuances there. And to answer your question, Jim, on backlog and deferred and so on, right? So, because of this effect of these increased percentage of orders coming with delayed start dates, we do expect to build some deferred revenue and backlog. But until supply chain starts to improve and we see that percentage start to decrease, we would really not expect to sort of see that upside or that same margin would kind of show up in our topline just yet, right? So, that's how I would characterize thinking about backlog and deferred revenue.

Got it. And just on that $300 million to $500 million free cash flow, is that still on the table here? I know that's far out, but

Yes, thank you for bringing that up. We are currently planning for fiscal 2023, and we expect to end fiscal 2022 below our previous projections due to the heightened uncertainty surrounding the supply chain. While I can confirm the targets we shared with Jim, we intend to provide a broader update for 2023 during the Q4 earnings call. That said, I want to emphasize that we remain committed to profitable growth and will continue to focus on achieving sustainable free cash flow generation and reaching non-GAAP operating margin breakeven in fiscal 2023.

Okay, fair enough. My follow-up would be on actually the new packaging modules. How should we think about the rank order of these new packaging modules that are being adopted? And after the primary one, what package or two are coming in second or third? I know it's very early, but in what kind of timeframe are you expecting to get that second or third add-on, especially you guys were one quarter into kind of the new packaging? Thank you.

Yes, I’ll address that. While it’s still early, the initial rollout has been quite positive. The largest deal from last quarter came from a financial services company in EMEA, which utilized our new solution-based pricing and purchased the entire Nutanix Cloud Platform. More specifically, we've noticed two key trends: first, deals are closing more quickly with the new pricing and packaging; and second, there is a significant increase in the attachment of our Nutanix Cloud Management solution to our Cloud Infrastructure solution. The adoption of the new solution packaging is progressing at an accelerated pace, and we anticipate more rapid transactions and increased attachment of our portfolio products, which should enhance the productivity of our sales representatives and partners.

Thank you. The next comes from Meta Marshall with Morgan Stanley. Please proceed.

Great, thanks. I wanted to just kind of briefly touch on stock-based compensation as a part of attrition. And just you noted that you were seeing kind of larger-than-expected attrition, was stock-based compensation any part of that, just given the reset and valuations kind of across a lot of names, are there any efforts or adjustments that you guys are planning on making as part of increasing retention of sales reps? And then clearly, it sounds as if kind of the core underlying business is seeing some similar trends. But just whether in any region or any particular vertical, you've seen any kind of slowdown in activity just given macro would just be helpful? Thanks.

Yes. Regarding the first question, I believe it's important to consider the overall approach to compensation, which includes both equity and cash. We are experiencing some inflationary pressures in this area, and stock prices impact how our salespeople are focused on meeting their quotas. To support them in achieving or exceeding these quotas, we are working on better segmentation, improved coverage models, enhanced training, and leveraging partnerships. All these initiatives contribute to retention by giving our teams a better chance of success. We are also taking inflation into account when planning our wages, and we are adjusting our compensation plans accordingly. Additionally, some of our competitors, particularly start-ups, seem to be prioritizing cash conservation and slowing down their hiring, which may benefit us. For the second question about demand, overall demand remains robust, but we are facing challenges in execution due to supply chain issues, which are leading to delays in start dates and orders, as well as a shortage of sales representatives that we need to hire back. From a demand standpoint, there have not been any significant changes in customer spending, but we are monitoring the demand and macroeconomic conditions closely. Our core demand is driven by the accelerating digital transformation, with customers modernizing their legacy infrastructure and running various workloads, including performance databases and mission-critical applications on our platform and extending to the public cloud. We discussed several customer successes during our prepared remarks, which illustrate these trends.

Got it. Perfect. Thank you.

The next question comes from Nehal Chokshi with Northland Capital Markets. Please proceed.

Yep, thank you. When in the quarter did you start to notice higher-than-expected sales attrition?

Nehal, could you repeat the question, please? I couldn't catch it.

Yes. When in the quarter did you start to notice a higher-than-expected sales rep attrition rate?

Very, very late in the third quarter, literally the last couple of weeks in the quarter, Nehal.

Sales and marketing expenses decreased by 10% year-over-year, which is 9% lower than what most analysts anticipated. Would it be accurate to say that your sales representative headcount is significantly lower than the 10% target? How does your current sales rep headcount compare to your expectations? Is it 10%, 20%, or even 30% lower? Can you provide some insight into the extent of the shortfall?

Yeah. Nehal, we have not quantified exactly where we are at. Let's call it, we're slightly below where we would like to be. And we are doing everything we can to get it back up to where we want it to be going into next fiscal year.

The one thing that I would add –

Rukmini, go ahead.

Sorry, Nehal, I wanted to add one point there, if you were referring to just sort of the Q3 sales and marketing line item, I did mention this in my remarks, but in case, I just want to highlight that there was about $6 million in OpEx within that line item that was supposed to be in Q3, the sales enablement in-person event that got moved from Q3 to Q4. And so that's now in the Q4 number in the guidance we gave for Q4, but it was not in Q3. I just wanted to point that out as well.

Right. Yes, very good point. Okay. And then in terms of sales attrition often, it is correlated to a weakened demand outlook as salespeople tend to flock towards where there is demand and away from where there is a weak demand. So pushback on that natural correlation that tends to be out there.

I believe that part of the issue is focused on refining our coverage model and our segmentation to ensure that our sales representatives can meet their targets. They need to achieve their numbers, and we should provide them with every opportunity to do so. I don't think this is indicative of weak demand. The competition is significant as well, and many of our sales representatives often move to startups in hopes of quick IPO profits. However, that trend seems to be stabilizing now. Therefore, I don't believe this is related to demand or their ability to meet their targets.

Great. Great. Thank you for taking the questions.

And the thing – the other thing I'd add to that rep point is our rep productivity was in line with expectations in the quarter. And if you recall in the past, you said we expect rep like to go up over time. So that was in line with what we expected, which means that our reps are productive in terms of bringing in and closing deals. That said, we absolutely are keeping our ear to the ground on demand.

Awesome. Thank you for taking the questions.

Thank you. The next question comes from Rod Hall with Goldman Sachs. Please proceed.

Yeah. Thank you for the question. Welcome aboard, Rukmini. Good to have you aboard or I guess, aboard with the markets anyway. So first question I had for you is your comment on the renewals and the deviation on ACV billings kind of representing upside to your expectations on renewals? I wonder if you could say a little bit more about that. Are you talking about the high end of the ACV billings guidance range and then what you actually printed so $5 million? And then that, I'm just kind of trying to triangulate into the renewals number from that comment. I wonder if you could give us a little bit more color on that. And then I have a follow-up question.

Thank you, Rod. I appreciate that. Yeah, so on – as we said, I think just to emphasize what we said, we said the outperformance in Q3 on ACV billings was due to our renewals performance, right? And I think as we've said, we said this last quarter, our business continues to do really well. And they have largely not been impacted by the challenges that we've talked about on this call, on the supply chain side and on overall rep headcount. Those are predominantly affecting our new ACV outlook. So, that all said, we don't provide the split of new ACV, which is renewals on a quarterly basis, so I won't give that, Rod. But hopefully, that gives you some color on what I meant when I said outperformance for Q3 and renewals doing well.

Thank you, Rukmini. To follow up, I want to provide some additional insight since there's not a clear answer. For ATR, we anticipated lower seasonality for the quarter. We estimate that the seasonality for ATR is more than double what it was previously. If we assess the quarter-on-quarter development of ATR, it's more than double what we observed this quarter, in terms of quarter-on-quarter growth. Is that roughly accurate for ATR?

So, can you make sure I understand? So, what exactly is double in your estimate?

The quarter-on-quarter growth rate is being discussed, specifically looking at ATR this quarter compared to the previous quarter. In examining Q4 against fiscal Q3, we find that it's slightly more than double the figures from fiscal Q3. However, I want to confirm that we're in alignment on this estimate.

Yes, it's not that high. The difference is not double. The growth is not double, Rod, right? As I mentioned, Q4 does have a higher ATR than what we had previously, but there are also some dynamics we discussed last quarter, including some factors related to the early stages and so on. So, it's not nearly that large.

That's a challenge with breaking this down. Thank you for that, Rajiv. I wanted to ask you about the hardware attachment. Can you quantify how much of the new software licenses being sold are tied to hardware? Is it mostly all or is there a portion that doesn't require a piece of hardware to be shipped along with the software license?

Yes. By the way, I mean, to be clear, we are not shipping the hardware, right? So, we're getting just a software.

I know that. I'm saying for a customer to take delivery of the new piece of hardware along with the software license, just to be clear, we understand your model.

No, I understand your question, Rod. So, it's hard for us to actually have a precise view on that. First of all, renewals are all software, right? Renewals are largely independent of hardware, pretty much. So, people, once they have a software license from us, they're likely to go to renew that on the same hardware. So, that largely decoupled and our renewals business is not being impacted by all the supply chain or hardware issues. So, really, it comes down to the new orders, right? And out of those new orders, yes, some of those are tied to customers buying hardware; in fact, is a good chunk. And some of it is just them buying software and they may already have hardware available, right, and then just buying software to go run in the hardware. So, it's hard for us to tease apart and make a clear pattern on much of that. It tends to vary also. So, we don't have a specific proportion that I can tell you, right, what portion gets to be just software-only independent of the hardware, what portion gets to be tied to the hardware. But what we can say is the other side of the hardware, we saw a significant impact because of the delay in hardware availability.

Okay, all right. Thanks very much.

Thank you. The next question comes from Erik Suppiger with JMP Securities. Please proceed.

Yes, thanks for taking the question. I guess, I was just trying to understand, your customers have some pretty good flexibility in terms of the different platforms that they can choose from. Why weren't they able to migrate from one platform that had supply chain constraints to another?

Yes, that's a good question. Until last quarter, this was indeed what we were managing. Customers had some flexibility, but the issue we are facing is that we are seeing future starts across many, if not most, of the platforms we partner with. This is not an isolated problem, and our customers cannot simply switch to a different hardware supplier to get what they need. It affects a broad range of hardware providers that we work with, as well as how our customers operate our software.

Can you give us a sense? I mean, is it the majority of hardware solutions at this point that are seeing constraints?

Yes. And I would say, the constraints are different across different providers. It's not just one item that’s causing supply chain issue across all the providers; different providers seem to have different constraints in their supply chain. But it seems to be pretty much across all our major partners we are seeing this.

Okay. And is the largest partner at this point is still Supermicro?

The business at Supermicro remains very significant for us, but we also do a considerable amount of business with HP, Dell, and Lenovo. Additionally, we engage with smaller players like Fujitsu and others.

Thank you. The next question comes from Aaron Rakers with Wells Fargo. Please proceed.

Hi. This is Jake on for Aaron. Thanks for the question. Could you talk a little bit about the competitive landscape and maybe what's giving you the confidence that you're not seeing some increased competitive dynamics versus likes of say, VMware or others are maybe a shift in applications in the public cloud?

Yes. In Q3, we experienced a year-over-year improvement in our win rates, both against our largest competitor and against legacy three-tier solutions. This is encouraging, and we are focused on this aspect. Regarding the cloud, the dynamics remain stable; people continue to adopt the cloud for new applications while also considering hybrid and multi-cloud environments. Workloads are being distributed across various platforms. The trend towards cloud adoption has been consistent for some time, and we believe there have not been significant recent changes. We are actively involved in this cloud journey with our customers, showcasing our solutions in AWS and soon in Azure. On the on-premises side, we have also seen our win rates increase year-over-year.

Okay, great. And then, maybe just as a follow-up, you guys noted demand remains pretty strong. What about visibility, especially in the enterprise space? Are you having any major changes in visibility?

I think the main question regarding visibility is when the opportunities in the pipeline will translate into orders and how much will come in with future start dates. That's the part we are uncertain about. We have been assuming that this aspect has actually worsened this quarter compared to last quarter. The fundamental demand from our perspective has not changed, but the real question is at what point the demand can be realized given the hardware issues.

Okay. Great. Thank you.

Thank you. The next question comes from Simon Leopold with Raymond James. Please proceed.

Thanks for taking the question. I wanted to see if you had some thoughts as to whether or not the circumstances will cause your customers to accelerate public cloud adoption and potentially make opportunities for on-premise business for you essentially be reduced, given that if they're facing these kinds of challenges, just building out datacenters, regardless of who the supplier of the software is, does that accelerate public cloud adoption?

Yes, that's a good question. First of all, I will also say that public cloud providers also have to deal with hardware issues, right? They have to deal with their own. But second, I think cloud is a strategic initiative for our customers. So, customers are thoughtful about figuring out what they want to do with the cloud. And it's not largely, we haven't seen them do so in a reactive manner just because they can't get hardware temporarily on-prem, right? Clearly, people have been going to the cloud for new applications. And for customers who have the Nutanix platform, we provide a very quick and simple way for them to move to the cloud, right? And so, they have our platform, they can also move to the cloud using our platform, and run-on public cloud hardware that's available in the public cloud. And we haven't seen a lot of that happening yet, right? Because what customers decide – they decide what applications they are going to run on-prem and what applications they are going to run in the public cloud. And those applications that they are on-prem, they have good reasons to run on-prem, right? They might be systems of record or they might be mission-critical applications. So, they may have data privacy or locality issues. So, it's not easy for them to just take all of those and take it to the public cloud, right? So, they have been thoughtful. So, I think the answer to your question, Simon, is no, we haven't seen this as a reactive measure of people going more to the public cloud because they can't get hardware on-prem.

Great. And then as a follow-up, when you're thinking about your strategy for rebuilding the sales reps, do you think about trying to essentially hire experienced sales reps, which potentially cost more money or alternatively grooming and developing new sales reps, which may cost less, but take more time? How do you think about that trade-off in the rebuilding process?

Yes. I think it's a combination of both, right? I mean, it's not one or the other. So, clearly, there’s a combination of people we are having with the experience and with the skillsets. Last year, for example, we graduated many of our inside sales people to become accountants as part of their own career development. And so, that's another thing that we have done in the past and provide a career opportunity for our people to go from, whether they are inside sales, whether they're customer success, to potentially taking on a role as an account rep and training them and taking them forward to combine with hiring. So, it's both together; it's not one or the other. Great. Thank you for taking the questions.

Thank you. That concludes today's Q&A session as well as today's call. Thank you for joining. Please disconnect your lines.