Nutanix, Inc. Q2 FY2024 Earnings Call

Good afternoon and welcome to today's conference call to discuss second 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 second 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 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. Nutanix will be participating in the Morgan Stanley TMT Conference in San Francisco on March 6th. We hope to see some of you there. Finally, our third quarter fiscal 2024 quiet period will begin on Tuesday, April 16th. And with that, I’ll turn the call over to Rajiv. Rajiv?

Thank you, Rich. And good afternoon, everyone. We've delivered a solid second quarter, with results that came in ahead of our guidance. The macro backdrop in our second quarter remains uncertain, but stable relative to the prior quarter. We continue to see 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 or TCO. Taking a closer look at the second quarter, we were happy to have exceeded all of our guided metrics. We delivered record quarterly revenue of $565 million and grew our ARR 26% year-over-year to $1.74 billion. We also had another quarter of strong free cash flow generation. Finally, we achieved quarterly GAAP operating profitability for the first time in Q2, demonstrating the progress we continue to make on driving operating leverage in our subscription model. Overall, our second quarter financial performance reflected continued disciplined execution. Our largest wins in the quarter demonstrated the appeal of the Nutanix cloud platform to organizations that are looking to adopt hybrid multi-cloud operating models, optimize the performance of their workloads and improve their TCO all while managing through some of the disruption from recent industry M&A. A good example is a seven-figure win with a global EMEA-based provider of automotive technology solutions. This new customer had an existing three-tier footprint in need of a refresh but was frustrated by the recent price increases of their incumbent vendor and was also looking to have the flexibility to potentially move some of their footprint to the public cloud in the future. They chose our Nutanix Cloud Platform, including our AHP hypervisor, as well as Nutanix Cloud Management, based on its superior TCO, built-in automation for infrastructure as a service, and its ability to seamlessly transition workloads to public cloud via our NC2 solution. We see this win as a good example of the value customers see in our cloud platform for both modernization and providing a seamless pathway to the public cloud. A second good example is a win with a large North American-based hedge fund that was looking to mitigate the growing cost of its public cloud-hosted virtual desktop infrastructure or VDI. And for a more responsive solution to meet the performance demands of its traders. They chose to repatriate their VDI onto the Nutanix Cloud Platform on GPU-based servers, resulting in a meaningful improvement in performance and an estimated 60% plus TCO savings. We believe this win demonstrates the ability of the Nutanix Cloud Platform to seamlessly run and manage workloads wherever the optimal performance and TCO can be achieved, whether on-premise, at the edge, or in the public cloud. A final example is one of our largest new customer wins in the quarter, with a global airline based in the EMEA region that was looking to modernize their infrastructure while enabling a hybrid multi-cloud environment. This customer chosen Nutanix Cloud Platform, including Nutanix Cloud Management to run their 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 organization, and Nutanix unified storage to serve their unstructured data needs. We see this win as evidence of the value companies see in adopting our full-stack solution. Moving on, adopting and benefiting from generative AI is top of mind for many of our customers. As such, interest remains high in our GPT in-a-Box offering, which enables our customers to accelerate the use of generative AI across their enterprises while keeping their data secure. Last quarter, we saw our first win for GPT in-a-Box with a large federal agency. In this quarter, we saw multiple additional wins for a Gen AI-ready infrastructure offering. While it's still early days, and the numbers remain small, I'm excited about the longer-term potential for GPT in-a-Box. Finally, on the partner front, I'm happy with the early progress we're seeing with our Cisco partnership. We continue to see good customer interest in our joint offering and saw additional wins for it in the second quarter. While it's still early in this partnership, I'm encouraged by what we've seen so far. In closing, we are encouraged that the compelling value proposition of our cloud platform and the strength of our business model enable us to increase our top and bottom line outlook for fiscal 2024. We remain focused on delighting our customers while continuing to drive sustainable, profitable growth. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?

Thank you, Rajiv. I will first review our Q2 fiscal '24 results, followed by guidance for Q3 fiscal '24. And finally provide an updated view of our full-year fiscal year '24 guidance. Results in Q2 '24 came in higher than the high end of our range across all guided metrics. ACV billings in Q2 were $329 million, above the guided range of $295 million to $305 million, representing year-over-year growth of 23%. The outperformance was driven by better than expected renewal performance due to a combination of good discipline around renewals economics, improved on-time renewal performance, and early core term renewals. Revenue in Q2 was $565 million, higher than the guidance range of $545 million to $555 million and the year-over-year growth rate of 16%. ARR at the end of Q2 was $1.737 billion, representing year-over-year growth of 26%. In Q2, we continued to see modestly elongated average sales cycles compared to historical levels. The average contract duration in Q2 was 2.8 years, slightly lower than Q1, and more or less in line with our expectations. Non-GAAP gross margin in Q2 was 87.3%, higher than our guided range of 85% to 86%. Non-GAAP operating margin was 21.9%, higher than our guidance range of 14% to 16%, largely due to higher revenue and lower operating expenses as a result of timing of hiring. Non-GAAP net income was $136 million, or fully diluted EPS of $0.46 per share based on fully diluted weighted average shares outstanding of approximately 299 million shares. Q2 marked our first-ever quarter of positive GAAP operating income of $37 million and a positive GAAP net income of $33 million, with fully diluted GAAP EPS of $0.12 per share. Given expected variability in quarterly revenue and timing of expenses, we would not expect to be consistently profitable at the GAAP operating profit level over the near term. DSOs based on revenue and ending accounts receivable were 31 days in Q2. Free cash flow in Q2 was $163 million, representing a free cash flow margin of 29%, higher than our expectations due to higher billings and lower expenses in the quarter. We ended Q2 with cash, cash equivalents, and short-term investments of $1.644 billion, up from $1.571 billion at the end of Q1. We continued repurchasing shares in Q2 under the share repurchase program previously authorized by our Board of Directors. Our sustainable generation of free cash flow enabled us to transition the net share settlement to pay for employees' tax liability on RSU vesting in Q2, going forward from our previous method of selling to cover. This, along with our share repurchase program will help us continue to manage dilution. Moving to Q3 '24, our guidance for Q3 is as follows: ACV billings of $265 million to $275 million, revenue of $510 million to $520 million, non-GAAP gross margin of approximately 85%, non-GAAP operating margin of 7.5% to 8.5%, and fully diluted shares outstanding of approximately 301 million shares. The updated guidance for full-year fiscal year '24, which is higher than our previously provided fiscal year '24 guidance across all metrics is as follows: ACV billings of $1.09 billion to $1.11 billion, representing a year-over-year growth of 15% at the midpoint of the range. Revenue of $2.12 billion to $2.15 billion, representing a year-over-year growth of 15% at the midpoint. Non-GAAP gross margin of 85% to 86%. Non-GAAP operating margin of 12.5% to 13.5%. Free cash flow of $420 million to $440 million, representing a free cash flow margin of 20% at the midpoint. I will now provide some commentary regarding our updated 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 relative to historical levels. Our fiscal year '24 new and expansion ACV performance outlook assumes some impact from these macro dynamics. We are also seeing a higher mix of larger deals in our pipeline, which is driving greater variability in the timing of our new and expansion business. Second, the guidance assumes that our renewals business will continue to perform well. Third, the full-year guidance continues to assume 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 total billing. Fourth, a reminder that the full-year ACV billing is not the straight sum of the ACV billings of the four quarters due to contracts with durations of 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. In closing, we are pleased that our Q2 results exceeded guidance and to raise our top-line and bottom-line guidance for the full fiscal year. We remain focused on driving growth to capture the significant opportunity ahead of us and are investing prudently for that growth, consistent with our stated philosophy of sustainable, profitable growth.

Our first question comes from Jim Fish from Piper Sandler. Your line is open.

Hey, guys, thanks, thanks for the questions. Awesome quarter here. Look, I'm going to ask the obvious, that's on top of everybody's mind, and I'm sure you're totally prepared for. On the VMware opportunity and Rukmini, you even just mentioned, you know, you're seeing a higher mix of larger deals in the pipeline. So my question to you is, what sort of pipeline or bookings build have you seen relative to this stage last year, between either direct customers kind of coming to you or partners coming over to you as well in terms of signups?

Yes, why don't I start Jim, and Rukmini can give you color on the pipeline. So, first of all, I think, as you said, I mean, there are significant concerns from VMware customers regarding the Broadcom acquisition. And we think that this is a significant multi-year opportunity for us to win new customers and to gain share. Now, getting to your question a bit here, the timing and magnitude of these deals are a bit unpredictable. Our pipeline is quite substantial and growing. Now for a number of reasons, we expect contribution from the opportunity to build gradually, and here are the reasons. First one, Jim is that many customers signed multi-year enterprise license agreements with VMware prior to the deal closing three to five years. So it buys them some time to make decisions. The second, converting from VMware 3-tier accounts or legacy storage accounts, which is a good chunk of VMware footprint, in many cases requires a refresh of their storage and our servers, one of the two, which could also impact the timing of the potential software purchases that they would make with us. Okay. And the last piece is like with all these accounts, we typically have a land and expand motion. So the first deal could be followed, and then there's a lot of potential for expansion further than that. And then Rukmini, do you want to take this?

Sure. Yes, I'll add one thing, Jim, to your question is that I mentioned in my prepared remarks about this higher mix of larger deals that we're seeing in our pipeline and that is driving the greater variability, we believe, in the timing of our new and expansion business, as well as potentially contributing to the longer average sales cycles, because larger deals do tend to take longer to close. And we believe that this higher mix of larger deals in the pipeline is driven by one, our segmentation of the market, as we've talked about before, and the improved product readiness for those larger customers. And secondly, some of the dynamics that Rajiv talked about already regarding concerns from larger customers about the impacts from Broadcom’s acquisition of VMware. And so we have continued and continue to factor all of the impact of some of these dynamics into our updated fiscal year '24 outlook.

Make sense. And just a follow-up here. You know, there's a bit of confusion out there, from what I can tell on the conversations with investors between, what VMware can do that Nutanix can't do. And so Rajiv, what differences actually exist, if any, or features or functions exist, what the differences kind of exist, if any, between vSphere, for example, and Acropolis or the VMware platform versus Nutanix platform, or features functions you plan to add in order to make it an apples to apples comparison, or is it simply just a legacy market perception thing that you guys can't address, really what most of VMware could do? And really, why wouldn't we start to see that Acropolis attach rate get closer to 100% on every deal that you signed from kind of here on forward? Thanks, guys.

Yes. So Jim, I think first of all, if you compare the full stack that Broadcom was offering with VMware Cloud Foundation, and our Nutanix Cloud Platform pretty much goes head to head against that, and we've got all the capabilities. That's a full stack that includes the hypervisor, a software-defined storage, networking, and management. So we compare very well with that full stack and we're able to go to a very comparable offering. And indeed, as you can see, right our AHP penetration, our hypervisor penetration, our install base is about 70%. And we are seeing new customers who adopt a full stack start with our own hypervisor. That part is fair. Now when it comes to the lower-tier offering, VMware does have a vSphere and now it's called, I believe, VMware Virtual Foundation. That includes vSphere, some operations management capabilities, etc. Now, what I mentioned earlier, in response to the question was that there is some amount of VMware, in fact, a big chunk of VMware is only the hypervisor that's connected to legacy storage, right 3-tier storage arrays. Now, the way we go after the market is not to just simply replace the hypervisor with our hypervisor because our hypervisor is also part of our complete solution, which includes our storage. So customers are actually making a shift from a legacy architecture that is hypervisor plus external storage to a modern HCI architecture that includes our hypervisor, but also the rest of our stack. So there, it's not just a simple life for life, but it's a conversion and modernization of infrastructure as well. So I feel pretty good about what we can do, we can handle all the workloads. We have a hybrid cloud solution, we have a modern app platform that customers can run Kubernetes applications on. We have partnerships with Red Hat for OpenShift. We have partnerships with our cloud partners like Azure and AWS. So from a capability of the portfolio perspective, we're very much there.

Thank you. One moment for our next question. Our next question comes from the line of Jason Ader from William Blair. Your line is open.

Thank you. Hi, Rajiv, hi Rukmini. I just wanted to ask on that kind of follow-up thread on the last question just on the 3-tier architectures out there. And most of those are running VMware today. Does it feel like this change with the Broadcom acquisition actually could accelerate the transition away from 3-tier architectures as customers maybe get a little bit disenfranchised and are looking for alternatives? And then it's like, well, we never really looked at HCI that closely. But now, maybe we should. Are those kinds of conversations happening?

Absolutely, Jason. You're right that there's a significant amount of VMware operating in what we call 3-tier architectures. Broadcom has done a lot with the VMware Cloud Foundation, which includes HCI, and they are positioning this as the default offering for many larger customers. This means we're not the only ones moving into the HCI space, which adds some pressure to the 3-tier storage market. We're focused on this opportunity and have been actively working on transitioning legacy 3-tier systems to HCI since we began. Additionally, it's important to note that there are now even simpler opportunities available, given the substantial presence of vSphere and VSAN HCI. Customers with existing HCI setups may be considering migration away from VMware, and we have a comparable solution ready for them. We are not staying passive; we are implementing several strategies to take advantage of this opportunity. First, we are increasing our advertising budget to raise awareness of Nutanix as a straightforward and viable alternative. Second, we have created incentives for our partners who assist in onboarding new customers to our platform. Lastly, we support end customers during their migration from VMware, recognizing that they may incur dual operating expenses temporarily, and we aim to alleviate that burden. We are taking very specific actions to pursue this opportunity.

Thank you. One moment for the next question. And our next question will come from Wamsi Mohan from Bank of America. Your line is open.

Yes, thank you so much. You drove very strong operating leverage in the quarter. Can you talk about if there were any one-time things in there? I think, Rukmini, you mentioned something around hiring I didn't really catch. But was there any one-time things in there when why is that rewarding lower next fiscal quarter? Then I have a follow-up.

Yes. Hi, Wamsi. Thanks for the question. So the reference I made in terms of our operating margin performance in Q2, which came in strong at 22% and higher than our expectation was, one revenue was higher than we expected. And expenses were a bit lower because of timing of hiring, and just overall good expense management. And we do expect that expenses will go up in the second half. So if you look at half over half operating expenses implied in the guide, that does go up in the second half, one way, and of course, Q3 compared to Q2, seasonally, the revenue is lower in Q3 than it is in Q2. So those are some of the things that are factoring into the outlook. But overall, you know, I'd say, we have continued to be focused on investing and investing thoughtfully on this growth opportunity that's ahead of us. And so that's the approach we've taken. And overall, we've been pleased to take up our full-year outlook on both top and bottom line.

Okay, thanks. Makes a lot of sense. And then, Rajiv, I mean, you made some comments already. But can you perhaps maybe quantitatively talk about the wins that are coming your way because of this M&A? And, and sort of, you know, how many points of growth potentially we should be thinking about? Or how many points of share that you think you could see shift over to Nutanix, given this disruption, or even maybe if you can talk about it in qualitative terms around rate and pace of pipeline build? Just quarter-over-quarter over the last few quarters? That will be helpful. Thank you.

Yes, Wamsi, it's challenging for me to provide specific quantitative figures at this moment. However, during our last Investor Day, we discussed our total addressable market and serviceable available market, which is estimated to be between $60 billion and $70 billion. We have consistently been increasing our market share within that segment, and this event allows us to accelerate that process. While the total addressable market and serviceable available market remain unchanged, we now have the chance to access more of it more quickly. The difficulty in quantifying this stems from the unpredictability of how fast these changes will materialize. We have customers who are interested in making changes, but the transition often takes three to five years, and they are not in a hurry. There are various factors that extend the time needed for customer conversion, such as the depreciation of existing hardware. Additionally, we typically start with a small engagement and then expand. All of these factors introduce some unpredictability regarding the timing for capturing more market share. Nonetheless, I believe this situation presents us with an opportunity to gain market share more rapidly, and we're doing our best to move quickly. Rukmini, would you like to add any insights regarding the pipeline?

Yes, I may add one thing to that, Rajiv, which is that I think Wamsi your question is specifically around what we can tell about this opportunity as a result of VMware’s acquisition by Broadcom. And I say, I think the other nuance here is we've always competed against VMware, right. And so in some cases, it's quite clear to tell, well, this door wasn't open to us before. And now it is because of what they may be seeing from our competitor. But in other cases, and we talked about an example on the last earnings call, where existing customers of ours are maybe choosing to invest more than us or go single source with us, partly influenced by this. So this idea of in some cases, it's clear, in other cases, it's more of a factor, an important factor, but one factor, and so that those situations, it's harder for us to attribute specifically dollars and pipeline and things like that to this particular disruption in the competitive market. So, all those factors combined, are what makes us feel good that this is a multi-year opportunity, as Rajiv has mentioned, but difficult to get precise in terms of magnitude and timing.

Thank you. One moment for our next question. Next question comes from Pinjalim Bora from JPMorgan, your line is open.

Great. Thanks for taking the question. Congrats on the quarter. Rajiv, one of your partners, compares the Nutanix Cisco relationship and the buzz around it to the formative years of VCE and noted how VCE was kind of a game changer for VMware at the time. Do you think the Cisco partnership could be that pivotal for Nutanix? And secondly, do you think there are any learnings from the rise and fall of the VCE that you can apply I guess, to this relationship?

Yes, I was at Cisco during the time of the VCE partnership, which was initially very cyclical. It's challenging to directly compare VCE's converged infrastructure back then with the current situation. However, I can highlight some key points. Cisco has considerable market leverage and influence, especially regarding their sales team and access to major accounts. In this specific market segment, they hold a smaller market share in servers compared to some competitors, which makes them less dominant in that area. Nonetheless, they possess a significant overall market presence. The real opportunity lies in how we can collaborate effectively to penetrate the market, and I believe there is substantial potential here, though it will take time to develop. Cisco's sales approach is complex, with both generalists and specialists involved. Currently, we are focusing on working with their data center specialists. To answer your question, it's early for us to estimate the scale of this opportunity, but I remain optimistic. This relationship will likely grow over time, and there is already substantial collaboration between our sales teams and Cisco's in the field. So, we have promising signs at this stage, but it is still in the early phases.

Understood. I guess we'll stay tuned. One question for you Rukmini, the ACV billings guidance for fiscal Q3. Seems like it calls for maybe a little bit higher sequential drawdown. I want to ask you the sales cycle elongation comment that you have made, was that versus Q1, the elongation in Q2 that you saw, was that sequential and are you assuming kind of a similar sequential? Higher elongation in the Q3 guide as well?

Hi, Pinjalim. Thank you for your question. Regarding the seasonality between Q2 and Q3, if we look back at our initial guidance for Q3 last year, it was quite similar to what we guided for Q2. However, we were able to exceed our expectations for Q3, so the actual performance was lower than our guidance. The decrease aligns with our expectations for seasonality, which is consistent with what we anticipated at this time last year. Now, about the average sales cycle and the modest increase we’re observing, it does fluctuate from quarter to quarter, but when we review historical data, it remains somewhat elevated, which is what I meant.

Thank you. One moment for the next question. Our next question comes from George Wang from Barclays. Your line is open.

Hey, guys, congrats on the quarter and the guidance, I have two quick ones. Firstly, you briefly touch on the potential, the discounts and promotions to promote VMware customers. And I just want to kind of see if you can elaborate on the approach for the fiscal partnership, the HyperFlex customers, maybe you can give some color just on the incentives you guys are providing to kind of further drive the adoption from the older HyperFlex customers?

Yes, we have seen that Cisco has phased out HyperFlex, which means they are no longer selling the product and there is limited support available. This situation creates an incentive for HyperFlex customers to migrate. Cisco has various programs in place to facilitate these migrations, and they excel at driving such initiatives. We are supporting them in these efforts, primarily through the Cisco router market.

Also Rajiv, quickly, you talked about repatriation in the prepared remarks. I'm just curious, are you seeing a more visible inflection point in terms of the repatriation to the private cloud or is still a continuation of prior trends just besides lower TCO, kind of versus expensive public cloud. Can you talk about other factors that may contribute to continue repatriation to the private cloud?

Yes, I’ll give you a two-part answer to that, George. So I don't know if I can call it a point of inflection. But certainly we are seeing more examples of people repatriating but those are examples. It's hard for me to say you know that there's a whole trend here. Yes. But some are certainly repatriating like the example I talked about. But also, I think the other thing that we should keep in mind is that the bulk of enterprise workloads are still not in the public cloud. They're still sitting in data centers. I'm talking about enterprise workloads, because what has gone to the public cloud largely have been net new applications. So for these workloads that are still sitting in the enterprise environment, CIOs are being a lot more careful about how much of that do they take to the public cloud? So there's yes, there's some repatriation happening from the public cloud back on-prem. But there's also a lot more scrutiny and forethought being applied to what should I take going forward into the public cloud from where I'm at?

Thank you one moment for the next question. Our next question comes from Mike Cikos from Needham. Your line is open.

Hey, thank you guys. And I wanted to echo my comments as well, in addition to the others as far as the great quarter and the results here. I picked a bit of a two-parter here. But the first I know coming back to the financials, specifically Rukmini. Can you help us think about the benefit to the quarter from the co-terming that occurred? And if I guess to what degree anything was pulled forward that was expected to land later this year, when we think about the magnitude of the beat and raise for guidance?

Sure. Hi, Mike. So yes, I talked about renewals outperformance in Q2, and there were three factors that I highlighted to the reason for that performance. One was better renewals economics. And by that, I mean just our team is able to get better pricing at the time of renewal, which is good. Secondly, we talked about better on-time renewal performance, which was strong in the quarter as well. And then the third piece, I think, is what you're referring to Mike, which is around I said that we did do a little better on early and quote on renewal. And those, as we've said before, we go out to our customers well in advance of a renewal being due and start that conversation early. And that's what they prefer, as well. And often, we will be able to transact those renewals earlier than when they are in an earlier quarter than when they are due. And co-terms similarly, at co-terms are beneficial both for us and for the customer because it then brings a lot of their licenses that may have been purchased at different times, to all be aligned to the same end date. And so those were generally welcome. As long as they are, you know, coming at a good economic for us, it's good for the customer, they give us cash up front. And so those are all generally things that we welcome. Now, in terms of the dynamic of the pool forwards, I think was another sort of aspect of your question, Mike, I say, you know, there is normal variation, right, between quarters, and we would expect that to continue going forward. And I would say I think we had also talked about this dynamic between fiscal year '24 and fiscal year '25. And I'm not sure if that's where you're going, Mike. But at this point, we still do see that renewals available to renew for next year, the growth in that is accelerating compared to what we saw for fiscal year '24. Because that was partly earlier than co-term was but was also just a beginner cohort that is coming up in '25, which is leading to that accelerated renewals ATR in '25, compared to '24. So overall, again, I would say, you know, pretty strong quarter from renewals perspective, and generally these are all the outperformance driven by things that we like to see, so nothing that I would sort of characterize as better than expected, certainly, but allows us to sort of suddenly manage the business on a more predictable basis going forward.

Got it. It's interesting that you're concluding your response on predictability. I've observed during this earnings season that some companies have mentioned larger deals in their pipeline, along with increased variability regarding their closure timing. I’d like to understand the magnitude of these larger deals. For instance, are they coming in with a certain percentage increase in size compared to historical figures? This would help us get a clearer picture. Additionally, how do you approach financing these deals, especially since they are more strategic and have uncertain closure timelines? Any insights on building confidence in this area would be appreciated. I recognize this as a good problem to have, but I want to ensure you are considering these aspects and hear your thoughts on them.

Yes, that's a great question. You are correct that larger deals tend to be more unpredictable. This is why renewals are generally easier to predict, despite some variability. I can't provide a specific number or percentage, but when we examine our pipeline of opportunities, we see a larger portion coming from bigger deals than we've encountered in the past. Additionally, our pipeline is growing with a greater emphasis on these larger deals. To assess our comfort level, we analyze what's in the pipeline and consider conversion rates among other factors. We assign probabilities to how many of these we believe we can convert within a certain timeframe. All of this informs the guidance we've shared. Rajiv, do you have anything to add?

Yes, just a couple of things. First of all, I think one of the reasons we're seeing these large deals is because we of course for a while we've been working on a portfolio, that product portfolio, which we think is ready for large-scale enterprise deployments. And so we have segmented our focus a bit further up the market in terms of our own sales for segmentation, and then on top of that, we've got the industry disruption with VMware where many large customers, of course, who are not necessarily engaged with us before are now engaging with us. So that's the reason for why we're seeing more of these large deals in our pipeline. Now, I think with respect to prosecuting these deals, I would say we keep getting better at going after these deals. I mean, we have a whole 360 approach towards going after this. We have executive sponsors on the big accounts where we have large deals, we have a full team assembled to go pursue these deals. And now having said that, so it's still going to be timing is going to be a bit unpredictable. And the size of the things also tends to vary over time. So it doesn't completely replace the unpredictability. But it does. It's a sea of engagement when you have these types of deals between both companies, we are investing resources, and customers are investing a lot of resources as well because there's a lot of testing certifications, go into contract negotiations, security audits, a whole bunch of things that go into this process. And so I would say we as a company are getting better and better at going after these types of opportunities.

Thank you. One moment for our next question. Our next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

Great, thanks. A couple questions for me. Maybe just on, you noted, clearly, some macro headwinds still. Just wanted to get a sense of any of the shape of that is it still things that are just a long game lead times? Are you seeing it on larger deals, smaller deals, certain verticals, certain types of projects, kind of just any change in color from the past couple of quarters, if there are any? And then maybe on the second question, you know, I would imagine you guys are getting a number of resumes in your inbox right now just kind of given the disruption, just any notable hires, or how you're finding kind of the pool of talent to add in terms of some of your OpEx ads? Thanks.

Yes, Rukmini why don’t you take number one, and I’ll take the number two question.

Yes, sure, Rajiv. So on macro, Meta, which I think was your first question. It's more or less remained stable relative to what we've seen in the last few quarters, fairly consistent with what we've seen in the last few quarters. And we characterize that as somewhat uncertain, but stable. And that's sort of what we continue to see. So no significant change from that, which again, as we talked about, did show up in the continued modest elongation of sales cycles compared to what historical levels. Now, some of that could also be driven by this high, you know, larger mix of higher, larger deal sizes in our pipeline. So that's sort of showing up now. But again, that is also a factor of just the fact that we've gone upmarket, it's not necessarily a macro point. So on macro, nothing else I would call out in terms of specific verticals seeing strength or weakness that we're noticing at this point. Somewhat uncertain, but stable is how I would characterize it.

And then regarding talent at Meta, two years ago, we faced a challenging market for talent when everyone was hiring. It was tough for us since we focus on hiring top-tier software developers. However, the situation has changed significantly. In today's market, we can attract excellent talent from various sources, including hyperscalers, not just companies like VMware. We have a favorable talent environment, and while we are hiring carefully, we are doing so selectively in both research and development as well as sales. We are seeing exceptional talent join us, which is enhancing the overall skill level within the company, and I am very pleased with this progress. This improvement is occurring at both individual contributor and management levels across the board.

Thank you. One moment for our next question. Our next question comes from the line of Erik Suppiger from JMP. Your line is open.

Sorry, there, sorry.

One moment. Let me go ahead and bring him back up. Okay, Erik, your line is open again.

All right. Sorry about that. I want to just touch on the subject of larger deals in elongated sales cycles. As previously noted, there have been other vendors that have seen similar trends and there were some discussions around consolidation, customers that are getting more focused on consolidating onto a single or a few vendors as opposed to a lot of tools out there. Is that one of the things that could be contributing to the elongated sales cycle? Or is it more of an economic uncertainty issue?

I'm not entirely certain whether the elongated sales cycles are due to customers consolidating their vendors or if they're re-evaluating their current vendor choices, particularly in our situation where many are reassessing their strategies and considering automated vendors. Previously satisfied customers are now exploring alternatives, and we offer a robust infrastructure option. Additionally, our company has developed a portfolio that can support virtually all applications across the enterprise, from small-scale to large-scale needs. This positions us as a more significant player in our customers' perception, prompting them to view us as a platform vendor capable of supporting multiple applications rather than just a single use case. Consequently, this often leads to deeper strategic engagements, which naturally take longer to finalize. Yes, first of all, I'd say it's early days for us, Erik on that for sure. But we are seeing traction across all kinds of verticals. Financial services, defense, federal, in fact, one of our first events was with the federal agency, manufacturing, pharma or medical devices, so there's just many different verticals. But the use cases tend to be somewhat similar. Document summarization, search, analytics, co-piloting, customer service, enhanced fraud detection, these are some of the same sort of use cases, but across a range of verticals.

Thank you. One moment for our next question. Our next question comes from the line of Ben Bollin from Cleveland Research Company. Your line is open.

Thank you. Good afternoon, everyone. I appreciate the opportunity to ask a question. Rukmini, you mentioned being cautious about investments for future growth. Several questions have been raised regarding hiring. I'm interested in how your hiring plans have changed since the beginning of the year, particularly in relation to the level of inbound activity you're experiencing from partners and customers. I also have a follow-up question.

There are a couple of points to address. One is related to our hiring, while the other concerns the inbound activity from partners and customers. Regarding hiring, historically, we have been very cautious about operating expenses, aside from a few years when it was necessary. As we consolidated our portfolio and increased our focus, our execution improved. This year, however, we are investing more, and our operating expenses are rising based on our planned investments to drive growth and improve our bottom line. We are focusing on building our portfolio from an R&D standpoint and improving our go-to-market strategy to effectively handle the increased demand we’ve seen from customers, partners, and managed service providers over the past year or two. We have targeted efforts to engage a larger set of customers, with a stronger focus on partners, which has been a key priority since I started three years ago. This includes enhancing our channel strategy, recruiting new partners, incentivizing them, and allowing them greater autonomy. We’re also expanding our managed service provider network over time.

Okay, that's great. Rajiv, one other question for you is, you commented earlier about some CIO scrutiny as it relates to the data center investments and public cloud investments. I'm curious if you're seeing any change in how customers are thinking about their longer-term infrastructure planning from an investment perspective, notably, because of what's happened with Broadcom and VMware? That's it for me. Thank you.

Well, I mean, certainly, Ben, so the bottom wave, I think, absolutely, it is, right. I mean, again, VMware was a great technology vendor with a lot of innovation, and customers and with a large footprint of customers, and now they have to rethink whether that's the right long-term strategy for them. And so that says, okay, well, we got to either look at alternative providers, of which we are an easy alternative. Or they could say, well, I could go more to the public cloud, okay, which is not an easy thing for existing workloads, to just take everything and move to the public cloud, that's not easy to do. And then they factor into the fact, cost regulatory aspects of it, and so forth. So, so clearly, I think, for us as a vendor, there's certainly, we see customers continue to invest in infrastructure modernization in terms of digitization, in terms of running modern applications, not just in the public cloud, but also on-prem. And like some of these new cycles that are happening now, like AI, for example. We’ll also find this path down the same route, right, which is, you know, it's starting out with a lot of training happening in the public cloud, but it's moving towards, okay, I'm going to run my AI, I'm going to fine-tune the training on my own data sets, which are proprietary that I want to keep carefully. And I'm going to have to potentially look at slightly different solutions for inferencing, which are going to be running closer to my edge locations. So these things are driving what we call hybrid multi-cloud. And I think that's very much I think, the world that many of our customers are here for the next several years.

Thank you for your patience. Our next question comes from Dan from RBC Capital Markets. Your line is open.

Hey, it's Dan for Matt Hedberg. I appreciate the opportunity to ask a question. Building off a recent response regarding the 360 approach to VMware deals, could you elaborate on the mechanics and processes involved in migrating from VMware? Specifically, what tools are available to assist with migrations, and what is the typical duration of a migration?

Yes, I mean, and the answer to that varies, but I'll go through the process Dan. So, there's clearly an assessment of what the workloads are, that our applications are, that are running on that infrastructure. That's one part of it and making sure that we can run all those workloads with good performance, which by and large is the case these days. The second is what elements of the stack have been deployed. And the more of the elements that they have deployed, the stickier or the more complex the migration becomes. So for example, for a customer that definitely deployed a hypervisor, it's a largely automated move away from the hypervisor to our hypervisor, we have automated tools. In fact, our tool is called move, we've done a lot of the VM migrations all day long. And so that's a relatively simple migration that can be done automated. Now, at the other end of the spectrum, if they've invested a lot of custom automation work, custom security work on top of the stack, then some of those will have to be converted over that requires a professional services engagement, which also as part of our offering, to help convert over some of those onto our platform or on to more open-type platforms. For example, automation, people are looking at Terraform as an example. So in those cases, it's a more complex migration. I'll give you some examples, though; in a lot of cases, actually, what happens is that the migration planning takes some time, the actual execution of the migration is very quick. There was a case study that we published recently of a healthcare system that we've been engaged with for the past three years or so. The name of pediatrics is public at this point, and they planned this migration for a few years. But when they actually came around to doing the migration, they were done within 90 days. So that's a typical example as a cycle of selling and engagement and everything and then getting everything ready. And then once it's very, they were able to migrate in 90 days, and I would call them as a medium complexity environment; they're not at the high end of the complexity, but they're not necessarily the lower, the simplest type.

That's very helpful. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Simon Leopold from Raymond James. Your line is open.

Hi, guys, this is Victor Chiu for Simon Leopold. Just really quickly, can you help us understand what's baked into your full year outlook specifically, just, you know, the current guidance reflects gains from VMware at a similar rate, or you expecting this accelerates from here?

Thank you, Victor, for the question. So the full year guide, assumes some benefit from the VMware being acquired by Broadcom as we said at the beginning of the year, and no, it does not expect any acceleration at this point, right? It just assumes it has some benefit in there. It also assumes a small benefit, as we've talked about before, towards the end of the year, from the Cisco partnership, as well, but that, again, as Rajiv said, we expect that to grow over time, and certainly in fiscal year '25. But there's a small benefit from that baked in, as well, in addition to sort of all the other dynamics we've talked about on this call, including modest elongation and average sales cycles, unpredictability with regard to large deals in the pipeline, etc.

Okay, great. That's helpful. And just lastly, I wanted to follow up on the macro question. We've been hearing through the channel that the sentiment on, you know, the HCI market overall has turned slightly more cautious. Can you help us understand what you're thinking for HCI growth overall this year, and how Nutanix performs relative to that?

I don't believe we've observed any slowdown or caution regarding adoption. The trend seems consistent with what we've experienced previously. There is an existing infrastructure, and the capabilities of HCI are progressively improving, allowing it to handle nearly all enterprise workloads effectively, often outperforming legacy architectures. It offers better performance, a lower total cost of ownership, and is easier to operate. However, the challenge we've always faced is overcoming inertia; customers have been accustomed to their long-standing methods. Transitioning to a more modern software-defined architecture requires effort, and that's been the focus of our company since its inception. In my view, there hasn't been a significant change in our customers' perspectives, certainly not in the past year or so that I've noticed.

Great, and, you know, how the growth, you know, what you're thinking for growth and kind of how Nutanix is growing relative?

Yeah, I think we, I don't have much to add beyond what we comment at Investor Day just last September, where we provided both your TAM and SAM opportunities and our growth outlook in terms of, you know, 20% ARR growth in terms of what we could drive through FY '27 is what we said there.

Thank you. And with that, this will conclude our question and answer session today. Thank you for your participation in today's conference. This does conclude the program you may now disconnect. Everyone, have a great day.