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. 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 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 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, strategy, initiatives, vision, objectives and outlook, including our financial guidance as well as our ability to execute thereon successfully and in a timely manner and the benefits and impact thereof on our business operations and financial results. Our financial performance and targets and use of new or different performance metrics in future periods, 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 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 more detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K in the fiscal year ended July 31, 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 Communacopia 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.

Thank you, Rich, and good afternoon, everyone. Against a volatile macro backdrop, we delivered a good fourth quarter relative to the updated outlook we 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 continued 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 FY ‘22 in its entirety provides a better picture of the progress we made on our subscription business model transition. Specifically, we saw ACV billing growth accelerate to 27% year-over-year, up from 18% in FY ‘21. We also saw non-GAAP operating margin improve 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’m pleased with our progress and financial performance in FY ‘22. 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 EMEA-based financial services provider that we’re looking to modernize their 3-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 win 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 has standardized our Nutanix Cloud Platform for all of its business-critical applications and SQL travel 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. 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 3-tier solution to Nutanix Cloud Platform, including our AHV Hypervisor due to the resiliency, scalability, and reduced total cost of ownership offered by our solutions. 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 Brinded as our new Chief Revenue Officer. Andrew has been with us as a sales leader for over five years, most recently as our 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 renewals, 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 a difficult decision to reduce our headcount by approximately 4%. This is 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’re 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-GAAP 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.

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 billings for Q4 were $193 million, above our guidance range of $175 million to $185 million. The outperformance was due to both renewals and the 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 million 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 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 gross 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 $356 million, better than our guidance range of $360 million to $365 million. Non-GAAP net loss for Q4 was $38 million or $0.17 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, 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 billings was better than expected and in line with historical linearity; and three, diligent expense management. We closed the quarter with cash and cash equivalents of $1.324 billion, up slightly from $1.3 billion in Q3 ‘22. Moving to the 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 billings grew year-over-year but came in below our expectations, largely due to the challenges identified in Q4, while renewals ACV billings outperformed our expectations. As we transition more fully to a subscription model with total ACV billings and revenue guidance, along with disclosure around metrics such as ARR, we no longer plan to share the breakdown between new ACV billings and renewals ACV billings. Our gross 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 margin 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 million to $215 million, a year-over-year growth of 16% at the midpoint; revenue of $410 million to $415 million, year-over-year growth of 9% at the midpoint; non-GAAP gross margin of approximately 82%; non-GAAP operating margin of approximately negative 6% with non-GAAP operating expenses of $360 million 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 Q1 ‘23 compared to Q4 ‘22, given that Q1 is a seasonally strong U.S. federal quarter, which typically has lower contract duration. 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 headcount 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 million to $60 million. Finally, we expect free cash flow to be around breakeven for Q1 ‘23 after factoring in approximately $20 million of onetime severance payments related to the headcount reductions in Q1. Excluding those onetime payments, free cash flow expectations for Q1 ‘23 would have been around $20 million. Moving to full year expectations. The guidance for fiscal year ‘23 is as follows: ACV billings of $895 million to $900 million, year-over-year growth of 19% at the midpoint; revenue of $1.77 billion 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 billion 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 billings is expected to be greater than growth in revenue because orders with future start dates that are billed are reflected in ACV billings, 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 million 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 onetime severance payments. Moving on to add some color to fiscal year 2025 expectations. We expect free cash flow margin 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, operator, please open up the line for questions.

Our first question comes from James Fish with Piper Sandler.

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 good to hear that. Rukmini, 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 a lower buy 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 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 easing supply chain dynamics in the second half of the fiscal year.

Thank you, Jim, for your question. I would like to provide additional context regarding our expectations for fiscal year '23. There are several factors we considered. First, in terms of our billings and revenue, we are looking at both renewals and our new and expansion business. Starting with renewals, as we have mentioned previously, this area continues to perform exceptionally well. Given the increasing base of renewals, we anticipate strong growth in renewals for fiscal year '23, which will account for a significant portion of the growth expected from '22 to '23. We also foresee growth in new and expansion business; however, in light of the macroeconomic environment, we have adopted a more cautious approach regarding this segment. Additionally, we finished Q4 and fiscal year '22 with record levels of backlog, which we are also considering in our fiscal year '23 guidance. All these elements, particularly the renewal growth and our solid backlog position, help mitigate the risks associated with our forecast. Regarding supply chain issues, we expect conditions to remain stable in the first half, with a slight improvement possible in the second half. We will keep everyone informed on our supply chain outlook as we progress each quarter.

Makes sense. I appreciate that 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 share a few insights. There is definitely a notable increase in engagement from VMware customers due to current circumstances, and they are more willing to engage in discussions with us. Additionally, we are observing more VMware employees seeking new job opportunities. Regarding our portfolio, we are very confident in its current state. We offer a comprehensive cloud platform that differentiates itself through simplicity. We simplify complex problems significantly. We have not combined multiple products to create a solution; we have built our resources from the ground up. First, we prioritize simplicity. Second, we offer our customers the freedom of choice without any lock-in. Third, our commitment to customer satisfaction is becoming increasingly vital as we support our customers for the long term. Lastly, we excel in managing various types of data within our architecture. Overall, we have a highly competitive portfolio, and our win rates against both major competitors and our traditional 3-tier rivals continue to improve. We feel very positive about our product offerings.

Our next question comes from Rod Hall with Goldman Sachs.

I guess, Rukmini, 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 impact we have in the guided quarter. I mean, is it some proportion of the total savings that you talked about of $55 million to $60 million a year, or is it the total amount for the whole quarter? So, that’s my first question and then I have a follow-up to that. Thank you.

Thanks for the question. So, the $55 million to $60 million is the expected annualized savings coming from those reductions. And we are through most of the notifications; several of the headcount reductions are complete. However, as we all know, we’re a global company, and 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 then, we have a few that are outstanding for Q2, but that $55 million to $60 million is sort of an annualized number, Rod, but like I said, most of them are expected to be complete in Q1.

Most complete in Q1. Okay. Thanks, Rukmini. So, then…

And yes, please continue with 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 million to $60 million, of course, as you can imagine. So that factors in the actual impact and $55 million to $60 million is the annualized number.

Okay, great. And the other thing that I was going to ask about this, Rukmini, is if I take the annualized number and divide by 4, even at the high end of the savings or 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.

Yes. The $20 million figure I mentioned is a comprehensive total. It encompasses salaries, bonuses, benefits, and payroll taxes. The 55 to 60 million is the complete figure for the year. As I indicated, this decision reflects a global strategy. We assessed our priorities and chose where to invest and where to optimize. While I can't provide a geographic breakdown, it's reasonable to conclude that this was a global decision.

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.

Our next question comes from Pinjalim Bora with JP Morgan.

Congrats on a great quarter, much better than expected here. I wanted to ask you about, again, the ACV billings guidance. It seems like you took some conservatism into that for the new business, but seems like you might not have factored much into the renewals 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.

Thank you for the question, Pinjalim. Regarding renewals, we are not making any assumptions beyond what we have delivered. I want to clarify that we expect continued performance in the renewals business. As for the new and expansion business, we anticipate it may be affected by supply chain issues. However, we are currently seeing solid demand. There hasn’t been any indication of elongation in deep cycles. We expect that potential macro conditions could impact growth in the new and expansion segments, which we have taken into account. Additionally, when considering our ACV billings guidance for the full year, we have a healthy backlog, which provides us with some assurance as we approach 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 to see any meaningful change in customer conversations, turning more strategic to adopting Nutanix in a broader sense, especially with the acquisition of one of your largest customers as a backdrop?

Yes, that's a great question, Pinjalim. We've definitely noticed a significant increase in customer engagement, as they are more open and understandably concerned about potential future developments. This heightened engagement has been beneficial for us. Regarding our fiscal '23 outlook, we are not assuming any substantial advantages from this situation in the short term. However, we do anticipate some long-term benefits as customers seek alternatives. Concerning our portfolio, we are seeing strong momentum with our new offerings, which are helping to increase the size of our deals. For instance, Nutanix Cloud Management is increasingly being paired with Nutanix Cloud Infrastructure. As a result, larger deals with customers are now being contracted through our new portfolio, allowing us to expand our offerings and potentially accelerate the growth of these deals.

Our next question comes from Dave Nwokonko with Morgan Stanley.

This is Dave Nwokonko on for Meta. Congrats on the quarter. Just with the CRO transition, I was wondering if you’re seeing any major changes to the sales organization as a part of that transition. And then, I have a follow-up question.

Yes, with Dom moving on, we have appointed Andrew Brinded as our new Chief Revenue Officer. Andrew has been with the company for over five years in various sales roles, including managing the EMEA region for a while. Most importantly, he has been closely involved in our subscription journey and served as our Chief Operating Officer in sales for the past year, leading the transformation of our sales organization. He is well-prepared for this role and has a deep understanding of our business, product portfolio, and customer base, making the transition seamless. Additionally, we recently held our first in-person annual sales kickoff in three years, which left the team feeling energized and excited about our vision. We've also invested significantly in training and supporting them for sales, and we are reinstating our annual excellence program for our top performers. Overall, I believe we are in a strong position from a sales perspective as we head into FY23.

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

No, I wouldn’t say there are no changes below that. We’ve got some changes below that. We’ve brought on the new person to run Americas for us. He came over from VMware as it turns out. He was from their enterprise business and now leads 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. We feel very good about the sales leadership team that’s in place right now, not just at Andrew’s level, but also at the levels 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 spend 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 roughly flat quarter-over-quarter. In FY23, 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 talk about our new portfolio. We’ve talked about solution selling. We’ve refined our segmentation going in. We’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.

Our next question comes from Mike Cikos with Needham.

Hi, team. Thanks for including me in this discussion. For my first question, I noticed in your remarks that you mentioned strong performance and attributed part of the top-line growth to an increase in large expansion deals this quarter, as well as solid performance in the renewals base. Could you help clarify the contributions of these components to the growth this quarter? How much did the large expansion deals contribute compared to the renewals? I'm asking this because I’d like to understand the progress of your renewals initiative that you’ve been emphasizing. Additionally, this information would be useful for us as we consider our forecast and any potential upside that might have resulted from a higher-than-expected number of expansion deals this quarter. Does that make sense?

Thank you for the question, Mike. In Q4, as we've discussed in our scripted remarks, several factors contributed to our strong performance. Renewals represent a fundamental aspect of our business model. Over the past few years, we've undertaken significant changes in how we operate, and we're starting to see positive results from that effort, including in Q4. Renewals exceeded our expectations, and we anticipate that trend to continue. The large deals we mentioned primarily relate to expansion rather than renewals, and they significantly contributed to our performance in new Annual Contract Value (ACV). Therefore, when considering Q4, all these elements played a role in the outperformance. Looking forward to fiscal year '23, we enter with a strong backlog. It's important to note that our renewals forecast is based on previous sales to customers, tracking when those contracts are up for renewal. Our Gross Renewal Rate (GRR) remains in the 90% range or higher, making our renewals forecast quite predictable for ‘23. We are also continuing to invest in new ACV growth. Rajiv mentioned sales rep productivity, and we expect new ACV to increase in fiscal ‘23 as well, although we've adjusted our assumptions slightly due to the uncertain macroeconomic environment. We aren’t quantifying this for you, Mike, but I hope this provides helpful context.

It definitely does. Thank you for providing some more detail there, especially with the predictability of that renewals business, 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 the leadership team at Nutanix? Do we have the pieces in place at this point, when we’re looking at the guidance parameters set for this year? Is this a team that’s going to get us to those free cash flow targets that you guys have been articulating now as we think about that fiscal ‘25 target?

Let me address that question. Companies go through various phases in their life cycle as public entities, and it's natural for management changes to occur during these transitions. We see this as an opportunity to tap into the strong talent market for executives. We're excited about the high caliber of talent we've hired externally and those we've promoted internally. Currently, we have an executive team with significant experience and knowledge that will support us in our next phase focused on profitable growth. This transition is a normal part of the company's evolution.

Our next question comes from Jeff Koch with Raymond James.

So specifically regarding the cost cuts, what areas are you targeting for those reductions? Is it primarily focused on General and Administrative expenses? Sorry if I missed that. Is there an opportunity for reinvestment, particularly in sales, given your competitors? I also have a follow-up question.

Yes. I’ll just give you a high-level view. We, of course, look at every function and then we look at benchmarks across every function, but the majority of the impact was in sales and marketing. And within sales, it was mostly non-quota-carrying salespeople. And then, of course, the rest was across all the other functional areas.

Okay. And then secondly, like, 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 cover a wide range, so I can't highlight a specific vertical. However, we have a solid renewal base, which is crucial for our foundation. Our renewals business is established and benefits from high renewal rates due to customer satisfaction and our NPS score. In the last quarter, we observed significant strength in the financial sector, addressing your question about verticals. Some regions also performed well, with the Middle East consistently being a strong performer, but there's nothing particularly noteworthy to stand out.

And 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? Like, what are you most optimistic about? That’s it.

No, I think we’re already doing relatively well in gaining market share even before recent news and with our portfolio execution. With this new information, there are now more customers concerned about potential outcomes. This concern spans a broad range of customers globally who are aware of the current situation and public statements, leading to increased uncertainty. Uncertainty translates to risk, which forces our customers to explore additional alternatives. While it may be too early for us to gauge any significant benefits from this in FY23 as per our guidance and plans, I believe it could provide some long-term advantages for us.

Our next question comes from Matt Hedberg with RBC Capital Markets.

It’s Dan Bergstrom for Matt Hedberg. Thanks for taking our question. Regarding the supply chain challenges, it seems to have performed better than anticipated, which is great to hear. Last quarter, you mentioned that improvements started quite late in the period, so I’m curious about the timing of any improvements this quarter. Was the supply chain consistently better than expected, or did it improve gradually throughout the quarter?

Thank you for the question.

Go ahead, Rukmini. Go ahead. Go ahead.

I’ll begin, Rajiv, and you can chime in. I want to clarify that there was no improvement in Q4 compared to Q3; it actually declined further, as we anticipated. However, it wasn't as severe as we initially projected. It's worth noting that the supply chain issues resulted in a higher percentage of orders with future start dates in Q4 compared to Q3. In response to your question about linearity and how that developed throughout the quarter, generally, we see a larger portion of our bookings come in during the last month and particularly the last couple of weeks of the quarter. This creates a natural linearity. While Q4 was not as heavily front-loaded as Q3, the trends do reflect a more gradual buildup. I want to emphasize that in Q4, we experienced a greater percentage of orders with start dates than in Q3, but the spike in the last weeks wasn’t as pronounced as it was in Q3.

Great. Thanks for the clarification.

Yes. And the one more point maybe I’ll add to that is 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.

Our next question comes from George Wang with Barclays.

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 base, which is based on usage versus sort of more fee-based. So just curious if you guys have existing contracts just based on consumption.

Currently, we have not seen much consumption in our model. We operate primarily on a subscription basis. Some of our partners may offer a consumption-based service, and we do have a small, emerging managed service provider business that could potentially operate in that manner. However, at this stage, our focus remains solely on subscription services.

Okay, great. So, the follow-up is kind of curious about the cadence of the term compression. You guys talked about kind of for FY '23, it’s going to be slightly down. Just curious how that’s tracking versus your target of 2.8 to 3.2 years.

Thank you for the question, George. Referring back to what Duston presented at our Investor Day in fiscal year 2021, he mentioned that we anticipated settling around 2.8 to 3 years. For fiscal year 2022, we exceeded our internal expectations due to some larger, longer-term deals. For fiscal year 2023, we do expect a slight decrease in term lengths, but not by much. We will monitor this closely. Our expectation is that it will be around the three-year mark, but we will see how it unfolds. Essentially, we allow customers to choose their preferred term, whether it’s one, three, or five years, while ensuring it aligns with our economic goals. We expect this to remain consistent with our previous outlook, and we will keep everyone updated as things progress.

Our next question comes from Aaron Rakers with Wells Fargo.

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 address that. We're not anticipating a severe recession or anything extreme like that, Jake. However, we believe it's wise to take the current macroeconomic landscape into account given the uncertainty we're all aware of. That's why we've approached our new ACV, including new and expansion ACV, with some caution to ensure we're factoring in these elements. That's how I would describe our assumptions concerning the macro environment.

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?

Sure, I can do that. To conclude my answer to your earlier question, I want to emphasize the significant growth in 2023, primarily driven by our increasing base of renewals. We generally expect this segment to remain resilient even in a challenging macro environment. Additionally, we will consider the uncertainty in the macro landscape regarding IT spending as it relates to our new ACV billings growth. As for our backlog, we finished the fourth quarter with a record level, and we usually utilize that backlog in the first quarter, which we anticipate will happen again this quarter. Overall, the combination of our growing renewals and the backlog provides a solid foundation for our growth in 2023 and helps mitigate the risks associated with our forecasts.

Our next question comes from Erik Suppiger with JMP.

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?

Yes. Maybe I will answer that, Erik. Without giving a specific headcount growth assumptions because there’s obviously a lot of variables go into 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, right, by both focusing on growth and on free cash flow and operating margin, right? So, that’s how we thought about investment. Clearly, we have already taken some actions here as it relates to our overall expense profile. As Rajiv said, the majority of the reductions that we did earlier this quarter were in sales and marketing. And so, we’re going to invest prudently where we need to going forward, keeping in mind that overall sort of pieces are sustainable, profitable growth.

We will continue to invest in innovation and research and development. Our focus will remain on improving productivity in sales and marketing. As renewal costs decrease, we anticipate that sales and marketing expenses as a percentage of revenue will decline, as we mentioned in our last Investor Day. We will invest wisely for the future and manage our costs closely. We will prioritize innovation and ensure that our investments in sales and marketing are appropriate while also enhancing productivity and reducing our spending as a percentage of revenue.

Our next question comes from Ben Bollin with Cleveland Research.

Rajiv, I was hoping we could focus a little bit on the share gain opportunity within hypervisor and hyperconverged infrastructure. How do you view the longer-term potential from the perspective of acquiring new customers as well as expanding existing customer spending? Do you have any insights on how this might affect future bundled sales opportunities? I also have a follow-up.

Yes. There are many factors at play here; it's not just one single element. First, if we consider the core hyper-converged infrastructure (HCI), the software can operate on any hypervisor, whether it's VMware or our own AHV. We see a growing market opportunity as we continue to transition away from traditional three-tier systems and improve our win rates against competitors like VMware. There is still significant potential within the three-tier market that can be converted to HCI, allowing for more efficient operations and better total cost of ownership. Additionally, we’re seeing more of our HCS users migrating to AHV. This trend is likely to continue, especially as more customers adopt our hypervisor, which is part of our cloud platform. We don’t sell it separately. As customers switch to our hypervisor, we can also expand our offerings by introducing our other solutions, such as Nutanix Cloud Management and Unified Storage, extending into the public cloud. When evaluating the overall opportunity, it appears quite substantial. We already have a solid presence in HCI, but this extends beyond HCI to a complete cloud platform, where we have room for growth in other areas as well. Moreover, whenever there's industry disruption, it typically presents favorable conditions for us in the long term, and that will likely accelerate our progress in this space.

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 you think about that? How long that engineering effort, how big that lift might be, just so we have an idea of how long that tail could last? Thanks.

Yes. We have been conducting many migrations over time from EFX to AHV. We have become quite proficient at migration and developed numerous tools to automate the process. One such tool is called Move, which facilitates this transition. This allows customers to begin with initial planning, identifying the workloads they wish to run on our platform and ensuring that the necessary ecosystem support is in place. Once this initial qualification is complete, the actual migration process is generally smooth and can typically be completed within a couple of months. This part is manageable. However, another factor to consider is the automation and scripts that customers may have implemented in their existing environments to integrate with their systems. Some customers implement minimal changes, while others may have done extensive custom work. In cases where significant customizations exist, we will need to provide additional services to assist in migrating that automation to our platform. However, this is also achievable, and we have successfully managed similar situations before. There are not many obstacles that hinder this migration process. Complexity can vary; if it involves a straightforward hypervisor migration, it is usually quite simple. However, if there is considerable automation involved, it may take more time and additional services to facilitate that migration.

Our next question comes from Wamsi Mohan with Bank of America.

It’s actually Ruplu 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?

Thank you for the question. As we discussed last quarter, revenue is recognized only in the quarter when the license start date occurs, while ACV billings can be invoiced and collected soon after the bookings. This means that revenue is impacted more than ACV billings, even when considering projections for Q1 and fiscal ‘23. Regarding Q4, we are not providing a specific breakdown, but I can mention that the percentage of future start dates we assumed for Q4 ended up being lower than anticipated, falling between what we observed in Q3 and our assumptions for Q4. That discrepancy is reflected in both the revenue figures and the ACV billings, with a more moderate effect on the latter.

Looking at the guidance for the fiscal '23 full year, you're forecasting a gross margin of 82%, down from 83% in fiscal '22. Given the increase in revenues year-over-year, this indicates a decline of 100 basis points in gross margins. Can you explain the reasoning behind this and what factors are affecting gross margins this year?

Yes. 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, right? 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 Rajiv just described, or for example, where there’s a 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.

Our next question comes from a representative at Raymond James.

Thank you.