Nutanix, Inc. Q1 FY2024 Earnings Call

Good afternoon and welcome to today's conference call to discuss first quarter fiscal year 2024 financial results. 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 first quarter fiscal year 2024 financial results. 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 financial guidance. 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 for fiscal year ended July 31, 2023, 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 future views. 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. Nutanix will be participating in the Raymond James TMT and Consumer Conference in New York City on December 5th and the Barclays Global Technology Conference in San Francisco on December 6th. We hope to see you at one of these events. Finally, our second quarter fiscal 2024 quiet period will begin on Wednesday, January 17th. And with that, I’ll turn the call over to Rajiv. Rajiv?

Thank you, Rich, and good afternoon, everyone. We delivered a solid first quarter with results that came in ahead of our guidance. The uncertain macro backdrop that we saw in our first quarter was largely unchanged compared with the prior quarter. However, we saw a steady demand for our solutions driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives and looking to optimize their total cost of ownership. Taking a closer look at the first quarter, we were happy to have exceeded all our guided metrics. We delivered record quarterly revenue of $511 million, exceeding a $2 billion annualized run rate for the first time, and grew our ARR 30% year-over-year to $1.7 billion. We also had another quarter of strong free cash flow generation aided by good linearity. Overall, our first quarter financial performance was a strong start to our fiscal year. Our federal business is typically strong in our first quarter, and this one was no exception. We saw wins with several different agencies across all three of our expansion vectors, including additional capacity for existing workloads, capacity for net new workloads, and adoption of additional portfolio products. The wins also included expansion into the public cloud with NC2 on AWS, and our first win with a large existing customer for GPT-in-a-Box, our recently introduced turnkey solution for deploying generative AI. We view the breadth and diversity of our wins with this important customer as a testament to our ability to expand within our largest customers. Another notable win in the quarter was with a Global 2000 bank in the Asia Pacific region. This customer, who signed a significant expansion agreement, selected Nutanix as their sole platform for their future modernization initiatives and planned build out of multiple new data centers. This was a departure from their historical dual vendor strategy. They chose our Nutanix Cloud Platform, including Nutanix Cloud Management to run their containerized, business-critical applications, leveraging its simplicity and built-in automation for infrastructure-as-a-service. They also adopted Nutanix database service for managing and deploying their databases throughout their organizations. We see this win as a great example of our ability to partner with the largest and most demanding companies in the world as they look to modernize and grow their businesses. Generating leverage from our partners remains a key focus. And towards this end, I am excited with the early progress we've seen with our recently launched Cisco partnership. This past quarter, our joint solution was made generally available to be sold by both sales forces. We also saw good customer interest and secured a few wins for this new offering, which were conversions of customers who had previously been planning to purchase Cisco's HyperFlex. While it is still early days in this partnership, I am encouraged by what we’ve seen so far. Another positive development on the partner front in the first quarter was a significant expansion deal we signed with a North American managed service provider, or MSP. This partner was increasing its capacity to handle the expected growth of its Nutanix related business. We see this win as reflecting the growing traction we are seeing with our MSP partners. On the product front, this quarter we announced important enhancements to the Nutanix Cloud Platform to strengthen its capabilities against ransomware attacks on unstructured data. These new features enable organizations to detect the threat, defend from further damage, and begin a one-click recovery process, all within 20 minutes of exposure. They build on the strength of the Nutanix Cloud Platform to protect and secure customers' most sensitive data across clouds. These enhancements reflect our ongoing commitment to investing in our platform. In the past quarter, we continued to receive industry recognition for our Nutanix Cloud Platform, being recognized as a leader in the latest report from Forrester Research in this area. We view our position as one of only two companies named as a leader in this report as a reflection of our strong competitive position in the market. Finally, it was a pleasure seeing many of you in-person at our recent Investor Day. We were happy to be able to provide an update on a large and growing market opportunity to discuss our long-term vision of enabling portable applications and to provide targets calling for an ARR compound annual growth rate of approximately 20% through fiscal year '27 and generation of $700 million to $900 million of free cash flow in fiscal year '27. We have received great feedback so far from our Investor Day, and look forward to continuing to drive towards the vision and targets we share. And with that, I’ll hand it over to Rukmini Sivaraman. Rukmini?

Thank you, Rajiv. I will first provide commentary on our Q1 '24 results, followed by the guidance for Q2 '24 and fiscal year '24. Q1 '24 was a good quarter in which we exceeded the high end of the range on all guided metrics. ACV billings in Q1 was $287 million, above the guided range of $260 million to $270 million and a year-over-year growth rate of 24%. Revenue in Q1 was $511 million, higher than the guided range of $495 million to $505 million and a year-over-year growth rate of 18%. The outperformance was driven partly by stronger-than-expected performance from our U.S. federal government business, which grew significantly year-over-year in new ACV bookings. Our renewals performance also continued to be good. ARR at the end of Q1 was $1.664 billion, representing a year-over-year growth rate of 30%. Similar to last quarter, we saw a modest elongation of average sales cycles, relative to the year-ago quarter. Average contract duration in Q1 was 2.9 years, slightly lower quarter-over-quarter and largely in line with our expectations, due to the higher mix of U.S. federal government business, which typically has lower contract duration. Non-GAAP gross margin in Q1 was 85.9%, higher than our expectations, due to higher revenue and a mix of factors leading to lower-than-expected cost of goods sold. Non-GAAP operating expenses were $360 million in Q1. Non-GAAP operating margin in Q1 was 15.6%, higher than our guided range of 9% to 11%, partly due to higher-than-expected revenue. Non-GAAP net income in Q1 was $85 million or EPS of $0.29 per share, based on fully diluted weighted average shares outstanding of approximately 293 million shares. Linearity was good, and DSOs, based on revenue and ending AR were 24 days in Q1. Free cash flow in Q1 was $132 million, implying free cash flow margin of 26%, higher than our expectations, largely due to better-than-expected bookings familiarity. We saw a larger-than-expected proportion of Q1 bookings in the first two months of the quarter. And since our payment terms are typically 30 to 45 days, more of the bookings were billed and collected in Q1 than expected. We ended Q1 with cash, cash equivalents, and short-term investments of $1.571 billion, up from $1.437 billion in '23. Under the share repurchase program, authorized by our Board of Directors at the end of August, we began repurchasing shares in Q1, through a 10b5-1 plan. Given the timing of the authorization, we were in the market repurchasing shares for only a portion of Q1. Moving on to Q2. Our guidance for Q2 '24 is as follows: ACV billings of $295 million to $305 million; revenue of $545 million to $555 million; non-GAAP gross margin of 85% to 86%; non-GAAP operating margin of 14% to 16%; fully diluted shares outstanding of approximately 297 million shares. The updated guidance for full year fiscal year 2024 is as follows: ACV billings of $1.08 billion to $1.1 billion, representing year-over-year growth of 14% at the midpoint of the range; revenue of $2.095 billion to $2.125 billion, representing year-over-year growth of 13% at the midpoint; non-GAAP gross margin of approximately 85%; non-GAAP operating margin of 11.5% to 12.5%; free cash flow of $340 million to $360 million, representing free cash flow margin of 16.6% at the midpoint of the range. This updated fiscal year '24 guidance is higher than our previously provided fiscal year '24 guidance across all metrics. I will now provide some additional commentary regarding our fiscal year '24 guidance. First, we are seeing continued new and expansion opportunities for our solutions, despite the uncertain macro environment. However, as we mentioned previously, we have continued to see a modest elongation of average sales cycles. Our fiscal year '24 new and expansion ACV performance outlook assumes some impact from these macro dynamics. Second, the guidance assumes that our renewals business will continue to perform well. And a reminder that while our available to renew, or ATR pool, continues to grow year-over-year, it is growing at a slower pace in fiscal year '24, but is expected to reaccelerate in fiscal year '25, based on our current view. Third, the full year guidance assumes that average contract duration would be flat to slightly lower, compared to fiscal year '23, as renewals continue to grow as a percentage of our billings. A reminder that the full year ACV billing is not the sum of the ACV billings of the four quarters due to contracts with durations less than one year. We expect full year ACV billings to be about 5% to 6% lower than the sum of the four quarters ACV billings. Finally, a few thoughts on seasonality for the remainder of the fiscal year. Based on our current view, we expect the trend in top-line metrics in Q3 relative to Q2 to be more or less similar to what we saw in fiscal year '23. A reminder that operating expenses tend to be slightly higher in Q3 versus Q2, all else being equal, as Q3 includes the full impact of calendar year resets to payroll taxes. In closing, we are pleased with our Q1 results exceeding guidance and to raise our top line and bottom line guidance for the full fiscal year. With that, operator, please open the line for questions.

And our first question for today will be coming from Pinjalim Bora of JPMorgan.

Hey. Thank you. This is Pinjalim. Thank you for taking the questions, and congrats on the quarter, guys. Rajiv, I was surprised to hear about your first customer for GPT-in-a-Box. I'm curious to know more about what this company is doing with GPT-in-a-Box. Is this more of a test development environment, or are they looking to use GPT-in-a-Box in production? Are you seeing similar deals in the pipeline? How should we think about potential increases in ACV? I have a number of questions, and it's just surprising to see a new customer signing up so quickly.

Thank you for your question. It's still early for GPT-in-a-Box, but we have received strong interest from customers and potential ecosystem partners. We have secured our first win with a federal agency, and their use cases align with our expectations, focusing on document search and retrieval as well as identifying patterns related to potential criminal activity. At this stage, it is too early to determine when it will significantly impact our numbers. Looking at the broader market, I see three key aspects of AI for us. First, there is the introduction of new applications, with many companies looking to implement solutions like our customer. AI applications will often be situated where data exists, some of which will be in public clouds while others will be in secure private clouds. We can assist with our GPT-in-a-Box platform by offering a complete solution for fine-tuning and training models while also providing inferencing capabilities. The second aspect involves enhancing our products through telemetry collected from customers, which can be analyzed using back-end AI for insights. For instance, we have an operations management product called AI Operations, which optimizes various operational environments, including capacity planning. Lastly, we focus on utilizing AI internally to increase efficiency and automate processes within the company, starting with customer service. While it's early days for generative AI, we are witnessing considerable interest and will continue our engagement.

Understood. One follow-up. In the channel, we have been hearing that Red Hat is pursuing the VMware opportunity with OpenShift’s virtualization technology. You obviously have a strong partnership with Red Hat. How do you see that competition evolving as both of you pursue the VMware opportunity?

Yes, I believe that the original concept behind the Red Hat partnership was based on how well we complement each other. Red Hat offers a complete platform for modern app development through OpenShift, while we provide the underlying infrastructure. This partnership is beneficial as we both compete against VMware—Red Hat on the application side and we on the infrastructure side. We've noticed several customers adopting OpenShift on our Nutanix platform, and we’ve seen success with G2K wins, including banks using OpenShift on Nutanix. This illustrates a strong synergistic relationship, and we are eager to explore further collaboration. A recent example is a G2K bank in Asia Pacific that is successfully running OpenShift on our cloud platform.

And today, our next question will be coming from Jim Fish of Piper Sandler.

Just wanted to build off the last one and ask it a little bit more directly. You guys have talked about like a little bit of VMware contribution here this quarter. But, maybe you could walk us just through the pipeline. What does the pipeline look now that the competitor's acquisition has officially closed over to Broadcom and you've actually already seen them from what we've heard in our channel shacks at least, about them kind of raising maintenance prices pretty significantly. So can you just walk us through a little bit more detail on what you're seeing on the VMware pipeline itself going forward outside of just the Red Hat opportunity?

Certainly, Jim, that’s a great question and very relevant considering the recent transaction closure. In the last quarter, we secured additional deals that were likely influenced by the Broadcom VMware transaction. For example, the win with the G2K bank was definitely impacted by this event. Initially, it involved a dual vendor strategy, but moving forward, it will be a single vendor strategy with us. However, the timing and significance of these deals can be unpredictable, and determining the primary motivations behind them is often complex, especially since we compete regularly, even before the acquisition announcements. Nevertheless, this transaction is having an effect. Although it closed recently, we don’t anticipate an immediate impact in terms of potential risks. Many customers had already signed multiyear enterprise licensing agreements with VMware before the deal closed, giving them time to explore options moving forward. There are still many concerns we’ve discussed in the past regarding pricing, potential price increases, and reduced support levels. We have a robust pipeline of opportunities that is expanding, with strong engagement from prospects driven by these concerns. However, predicting the timing and significance of these wins remains challenging. We continue to expect some benefits from deals influenced by this transaction, which we have factored into our guidance for this fiscal year.

Very helpful. And I’m surprised to hear a little bit about the Cisco partnership already picking up. I mean, we're two months in. Understanding it's easier with the installed base of HyperFlex to kind of sell or sell into that base. But, any way to think about if there are larger periods of renewals at certain times within that base, or if those renewals are accelerating, understanding you mentioned that the larger the wins there were more on the kind of customers evaluating HyperFlex and you guys get substituted in.

Yes. First of all, we're pleased that our joint solution with Cisco was launched last quarter and is now being sold by both teams. The initial deals are primarily from situations where Cisco was either close to winning or had already secured deals with HyperFlex, and they are now transitioning those to Nutanix. Regarding our new pipeline, we know it typically takes 6 to 9 months to close deals, so we don't anticipate significant contributions from Cisco this year. However, we have included some expectations in our guidance and foresee growth continuing into next fiscal year and beyond.

Our next question will be coming from Matt Hedberg of RBC Capital.

Great. Thanks for taking my question, guys. And I'll offer my congrats as well. Really solid quarter and guide, especially given the uncertainty of the macro environment. Rukmini, I had a question for you. You noted strong renewals in the quarter and obviously, it's becoming a bigger part of the mix. On the call, you talked about some new wins as well. But I'm curious, can you just step back and maybe double-click a little bit more on the new business side of it? I know that, obviously, it's been more of a renewals business of late. But just where are we in the new business sort of aspect of the story?

Hi Matt, thank you for your question. In regard to Q1, I will discuss our Q1 performance and touch on the full year to address your point about trends. In Q1, our overall top-line performance was largely driven by effective execution in our new and expansion business. Notably, our U.S. federal business saw significant year-over-year growth in new and expansion ACV bookings, which contributed to our Q1 results. Looking at the full year, we anticipate improvements in our new and expansion ACV performance compared to fiscal year '23. We have considered some factors that may influence our outlook, including potential advantages from the current competitive environment and benefits from our new partnership with Cisco. While we feel optimistic about these developments, there is macroeconomic uncertainty that makes it difficult to predict exactly how the rest of the year will unfold. These considerations have influenced our outlook for new and expansion performance for the year. As you mentioned, renewals are a more predictable aspect of our business, especially since our gross revenue retention is over 90 percent, and we know the timing of those renewals. This part continues to perform well and remains predictable. I hope this provides clarity on our revenue and expansion strategies.

Super helpful. If I could ask one more. The gross margin performance has been great. And obviously, you guided to a really strong Q2 gross margin. Maybe could you double-click there also, like what are some of the biggest factors driving that significant gross margin improvement?

Yes. So, I think a couple of points that I would make. Again, I'll start with sort of the Q1 and maybe the Q2 guide, Matt, and then talk more broadly on gross margin. So for Q1, we attributed our gross margin outperformance, revenue coming in slightly higher, of course, because we beat on revenue. But we also had a mix of factors that led to COGS coming in lower. Now, there were a few things in there, Matt. I think that I would call out as one singular factor but a mix of things, some of which we believe will sustain and which is why we were happy to take up our full year gross margin number, last quarter when we gave you the first guide, we said approximately 84%, and we're happy to take it up to approximately 85%. So I would say it's just a mix of good execution on a few different funds, and a reminder that our COGS has a good portion of it is our support teams like for our customer support folks are in there, we have services costs in there. And so across a few different dimensions, we were happy to see gross margin do better and take some of that across to the full year guide as well.

Our next question will be coming from George Wang of Barclays.

Congrats on the quarter. Yes, so, two quick ones. Firstly, just given better-than-expected free cash flow generation, just given kind of you guys started purchasing stocks. Just curious kind of any high-level plan going forward, how to model in terms of the share buyback, just given better free cash profile?

Hi George, thank you for your question. As I mentioned earlier, we started repurchasing shares in the first quarter under the authorization approved by our Board in August. We executed this through a 10b5-1 program we established. Due to the timing of the authorization, we were only in the market for part of the first quarter. You'll see in the financial tables we released that we spent approximately $17.5 million on share repurchases during that time. For that segment of the first quarter, we utilized $17.5 million. The timing and amount of future repurchases will depend on various factors, including stock prices and market conditions. I won’t provide specific outlook details, but I wanted to give you some insight into our activities in the first quarter, considering it was just for part of the period.

Okay, great. Just a quick follow-up, if I can. Just can you kind of comment on backlog? Last quarter, you talked about backlog slightly improved in absolute dollars year-over-year, as you kind of factored into the FY24 guide. Just curious if you have any latest update in terms of the backlog level and any sort of plus and minus, how would that factor into the latest guide?

Yes, happy to give you some color on that. So we used some backlog in Q1, as is seasonally typical for Q1 and expect some backlog to be consumed over the course of this fiscal year, as we talked about before. But as is to be expected in an environment like this, where things remain fairly uncertain from a macro perspective, the range of possible outcomes is wider than usual. And as we continue to grow, the absolute dollar number of backlog would also increase over time. So, a few different factors there. But yes, I think in Q1, we used some backlog as is typical for Q1, and we expect to use some backlog over the course of the year as well.

Our next question will be coming from Michael Cikos of Needham.

Congratulations on a strong quarter. I wanted to return to some of the points we made regarding the revenue and the ACV billings outperformance, specifically mentioning U.S. federal. Could you provide more insight into the size or contribution of U.S. federal to revenue or ACV billings? I understand there may be seasonality with their year-end, but it would be helpful to know how significant this component is to the overall business. Additionally, you mentioned an improvement in linearity during the quarter. Is this improvement connected to the stronger U.S. federal business, or do you see these as separate factors?

So I can take a first crack at the federal piece, Rukmini you can go for the rest. So what I’d say is, look, largely, we don't have verticals, but we have two exceptions. And that's in the U.S., we have federal as a vertical, and we have health care as another vertical. So from that perspective, federal is a significant portion of our business. We haven't broken it out exactly in terms of the percentages. But given the fact that it is 1 of 2 verticals and we have a focused team on it, it is important for us. And of course, there's also seasonality there, as Rukmini was alluding to here. I mean this quarter typically is strong for federal. So that's kind of what we have to say about Federal. Rukmini, you can comment on the linearity.

Yes. Regarding the linearity, what we mean is that we have certain expectations for how bookings are spread across the first three months. This is important for free cash flow because we invoice shortly after bookings occur, and we have 30- to 45-day payment terms. In Q1, we observed that a larger portion of those bookings occurred in the first two months compared to our expectations. Additionally, there was strong performance in the federal sector, likely influenced by the U.S. federal government's fiscal year ending in September. As a result, since we invoiced right after receiving the bookings, we collected more cash in Q1 than we had anticipated, which significantly contributed to our free cash flow performance for that quarter.

Understood. Thank you for clearing that up. I guess, the other question that I had, this is more specific to the 2Q guidance that we have here today, Rukmini. But if I could just take a look, I'm happy to see that the revenue is coming in above where the sell side models were, happy to see the strong gross margins, and then the operating margin is also coming in ahead of where we had been. But one of the things that I'm looking at is the OpEx. The implied OpEx from Q1 to Q2 has a pretty material pickup after being relatively flat the last couple of quarters. And I just wanted to see what is it that you guys are embedding in that? Is it more maybe targeted go-to-market initiatives? Are you focused on hiring or potentially backfilling open positions? Like, how should we think about that OpEx ramp that you guys are putting now in the 2Q guide?

Certainly. A few points regarding Q2 operating expenses in relation to Q1. Firstly, as we mentioned during our last call when we provided our initial full-year guidance, we plan to keep investing to stimulate growth while enhancing our margin profile. This has been our strategy for the year, and we referenced this during the previous call and at Investor Day. We have begun these investments, which naturally involves ongoing hiring. This hiring process is contributing to an increase in operating expenses in Q2 as new employees come on board. Additionally, it’s important to note that we’re only accounting for one month of Q2. The calendar year reset affects items like payroll taxes, which is something I mentioned in my remarks; this reset impacts the operating expenses for Q2 as we have one month of it in January. Despite this, we are pleased to have raised both our revenue and profit guidance for the full year.

And the next question will be coming from Erik Suppiger from JMP.

Two questions. One, you said the sales cycles continue to elongate. Are they still getting longer, or have they kind of reached a level of extended cycles? Is it consistent with last quarter? Is it actually getting longer? And then secondly, you've had some time now to talk with customers about their GPT-in-a-Box. What are the specific use cases that customers are using either what department are they using that for, or how are they using that in particular?

Thank you, Erik. I'll address the first question. Yes, Rajiv can take the question about GPT-in-a-Box. Regarding sales cycles, I mentioned that we are experiencing some modest elongation in average sales cycles compared to the previous year. Specifically, when I compare Q1 this year to Q1 last year, the sales cycles have become longer. However, if we look at the average sales cycle in Q1, it has been relatively consistent with the last few quarters. So, it hasn't continued to lengthen from quarter to quarter, but year-over-year, it remains high. Once again, it's difficult to predict exactly what will happen given the uncertainties we've discussed, but that's the situation we observed in Q1.

So Erik, on the GPT-in-a-Box. By the way, it’s GPT not ChatGPT. So on the GPT-in-a-Box section, there are four use cases that we typically see. And again, I want to caution all this by saying it's pretty early. A lot of people are just trying to figure out how to use gen AI. But the four use cases right now. First, of course, is a classic customer service use case. That includes chat, that's one. The second is a whole bunch of operations having to do with documents, document search, document analysis, document retrieval of key information from unstructured data, for example. So that's the second big, I would say, a use case. The third use case is co-piloting, generally providing assistive services, for example, to software developers or researchers in pharma for example. That's the third use case. And the fourth use case I would broadly classify as fraud detection or fraud prevention. And these are things across multiple verticals. I think these tend to cut across verticals, whether it be financial services or retail or our federal or other.

Last question is you talked about the class of customer service. Is that the majority of the use cases at this point, or is it spread across those different four options?

I would say it's spread across. The customer service use case, for instance, is one that we are currently trialing internally at Nutanix. However, I believe it's fairly widespread among all four areas. It's still very early for us to determine the exact percentage of one use case compared to another. We're just in the formative stages at this point.

Our next question will be coming from Meta Marshall of Morgan Stanley.

This is Karan on for Meta. So just first question, I understand it's sort of a challenging environment today. But I guess just in terms of customer conversations or what you're hearing from customers in terms of 2024 budgets, I guess what are you hearing from customers on those budgets? And are you seeing a pickup in any RFP activity?

I wouldn't say there's anything specific we are observing in our discussions with customers. Certainly, they are continuing to invest in their digital and modernization efforts. In every customer call I participate in, there are discussions about how they can implement AI within their organizations. From a budget perspective, I believe that IT spending will likely grow faster than GDP growth. Moreover, software modernization spending is expected to grow even faster. However, we haven't identified any specific trends beyond the fact that customers remain engaged and are willing to spend money. They are focused on ensuring there's a solid business case, with good total cost of ownership and return on investment for their initiatives. There is certainly more scrutiny involved, which is contributing to a longer decision-making cycle. They are seeking additional approvals before committing to projects, but they are still moving forward with them.

Okay. That's helpful. And then a quick follow-up. At the Analyst Day, you mentioned that some of the VMware share gains would likely occur gradually with each customer over time. As you start to see these opportunities unfold, are the share gains exceeding expectations, or are they simply due to more opportunities or more chances? Any insights on the share gain opportunities you're encountering would be appreciated.

Yes. I believe we discussed the overall situation regarding VMware and Broadcom. We are currently at a stage where we have a substantial and growing pipeline of opportunities with potential clients. However, it's challenging to determine what portion of these will convert into wins. Some may consider us as a secondary vendor, others as the primary vendor, or even use us as leverage in negotiations to secure better deals from VMware. This creates significant uncertainty and makes long-term predictions difficult. Therefore, we have incorporated a level of anticipated share gains into our forecasts for this year and included it in our guidance. Nonetheless, I want to stress that this will be a long-term process for us. The timing and the exact share gains remain unpredictable.

Our next question will be coming from Ben Bollin of Cleveland Research.

Rajiv, I wanted to ask about the Global 2000 Financials Awards. Could you share a little bit about what that process looks like? How long was the evaluation, the pilot? And how does the ACV ramp for that deal? Does it build over time, as they get more data centers? Does it commence at a full run rate? Just any color on that? And then, I have a follow-up.

Yes, this bank in the Asia Pacific region has been our customer for some time. They have been transitioning from traditional legacy three-tier infrastructure to hyper-converged infrastructure. For many years, they operated using both our services and VMware's. As they approached their renewal period, they were also looking to significantly expand their offerings and modernize multiple data centers. This created an opportunity for us to make a substantial expansion alongside the renewal. Typically, once we establish a relationship with companies like this, they tend to be satisfied with our services and expand over time. We have shared data indicating that such expansions can be around 25 to 26 times over the relationship's duration. This bank was similar; they appreciated our services, felt comfortable working with us, and ultimately chose us as their sole vendor during the expansion. That's how the situation unfolded.

If I can add to that, Ben. I think you had a question on ACV ramp. And just to clarify, our contracts, typically, they're sort of evenly spread up. There isn't a ramp within the year. So like this transaction and typically most of our transactions, it would be a total TCV amount divided by the contract duration. That's how we calculate the ACV of any given transaction.

Okay. That's great. The other item, Rajiv, I'm curious, you talked about the MSP awards. Can you share any thoughts about your strategy around go-to-market efforts? Do you have some programs specifically geared to pursue more of these partners that are potentially alienated by this deal? That's it for me.

Yes, I believe that this is both specific to MSPs and part of a broader context in your questions, Ben. For us, independent of this transaction, this has been a focus area for us because we traditionally haven’t had a strong route to market through MSPs. Over the last few years, we have been building our MSP presence and bringing more of these partners on board. That effort continues, and this recent deal was a good illustration of an expansion opportunity where they initially engaged with us on a smaller scale and have now significantly expanded that relationship. I believe that with this transaction, it’s not just VMware's customers who will be impacted, but also their partners, including the MSPs. We are engaging with MSP partners in the same way we are with other customers and working to recruit more onto the Nutanix platform. I would say we are still relatively new to the MSP route to market, and there is considerable potential for us to recruit more MSPs over time and bring them on as partners. We have a dedicated team at Nutanix focused on this partner recruitment and enablement.

The next question is coming from Ruplu Bhattacharya from Bank of America.

It's actually Wamsi here at Bank of America. I guess, Rukmini, if you could address seasonality. Your Q2 revenue guidance at the midpoint is calling for 8% growth. That is the lowest that we've seen over the last four or five years, but you're calling for Q3 seasonality to be down similar to fiscal '23, which is down the highest in the last several years. And I'm just wondering, are you seeing something around the macro that's causing you to view the seasonality this way, which is actually a little bit biased lower towards Q3 than historically, a little bit lower also in Q2 to the upside. Just wondering if you could share any color there.

Hi Wamsi, thanks for your question. I want to mention a few things. First, regarding the dynamic between Q1 and Q2, Q1 exceeded our expectations, particularly in terms of revenue and ACV billings. As for Q2, based on our guidance, it should be higher than Q1, which is typical for this time of year. Therefore, I wouldn't put too much emphasis on that dynamic. The insight we provided about Q3 reflects what we're currently observing in our pipeline and various factors affecting revenue. Additionally, as we mentioned earlier, the full year ACV billings reflect a discount of about 5% or 6% due to the annualization for contracts shorter than one year. Overall, I wouldn't stress too much about the seasonality; we simply wanted to update on our pipeline situation. We are pleased to raise our '24 ACV billings guidance following a solid first quarter, but we remain cautious about how the rest of the year will unfold given some macro uncertainties.

Thank you for the information. Regarding free cash flow, can you clarify the difference in normal booking linearity for the quarter? What would you identify as the overachievement in the first fiscal quarter? Is this overachievement the main factor behind the increase in full year free cash flow, or do you expect free cash flow to exceed just the first quarter overachievement? Thank you.

Yes, great question, Wamsi. So two thoughts. So one on Q1, we, of course, don't guide to quarterly free cash flow. So I'm not able to sort of give you specifically how much we overachieved our own expectations for Q1 free cash flow, but we did overachieve it. And I will say that, in addition to the billings number coming higher, right, given we had a beat on ACV billings as well for Q1. So that helped, but the linearity was a significant factor in Q1, okay? So that did have a significant impact on the outperformance for free cash flow in Q1. And I think the second part of your question is around the full year free cash flow guidance. And what I'd say there is that in addition to benefiting from the raised top line guide, and of course, as you know, billings has a very high correlation with free cash flow, right? So the fact that we were able to raise our full year billings number. So that's one factor. But we're also expecting to see some benefit from somewhat better working capital management within the year than previously expected, including from improved linearity. So that is helping us to raise the full year free cash flow guide as well.

And the next question is coming from Simon Leopold of Raymond James.

This is Victor Chiu in for Simon Leopold. Can you tell me if there are situations where customers utilize both VMware and Nutanix?

Many customers utilize both VMware and Nutanix. To clarify their usage, some adopt a dual vendor strategy, using VMware for some functions and Nutanix for others. Additionally, Nutanix collaborates with VMware’s hypervisor, ESX. A significant number of customers have implemented Nutanix on top of the ESX hypervisor. Over the years, many have transitioned from ESX to our proprietary hypervisor, which was developed in 2015. Currently, around 65% of our workloads across all customers have migrated to the Nutanix hypervisor, with most of them previously using VMware ESX. We remain committed to seamless interoperability with VMware, ensuring customers have the flexibility and choice they need. Ultimately, it's the customer's decision whether to fully replace VMware or not.

Are you having discussions with customers? Is your visibility into their future plans incorporated into your assumptions, including the potential share shifts that may occur as a result? Is that factored into your considerations, or is there some flexibility that could arise with these changes?

Yes. Like we said, it's hard to predict the timing and how big these things are going to be, right? And so, we have factored in some of this into our guide for the full year, and we'll have to see how things materialize. There's a lot of engagement, but what happens to these engagements from do we win them fully, do we win partially or do we win nothing and just become a leverage point for them to get a better deal on the other side? It's hard to predict ahead of time. So we have to see how it plays out. And it's hard to predict both timing and the degree to which they'll play out for each customer.

Thank you. This concludes the Q&A session. I would like to turn the call back over to management for closing remarks. Please go ahead.

I don't think we have any closing remarks. Do we?

No, I think we conclude the call now. Thank you.

Thank you all.

Thanks everyone.

Thank you all for joining the conference call tonight. You may all disconnect.