Nutanix, Inc. Q4 FY2024 Earnings Call

Thank you for standing by and welcome to Nutanix Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Rich Valera, Vice President of Investor Relations.

Good afternoon and welcome to today's conference call to discuss Nutanix' fourth quarter and fiscal year 2024 financial results. Joining me today are Rajiv Ramaswami, Nutanix' President and CEO; and Rukmini Sivaraman, Nutanix's CFO. After we closed today, Nutanix issued a press release announcing fourth quarter and 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 risk certainties, please refer to our SEC filings including our most recent annual report on Form 10-K 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 predictions of future events. Please note, unless otherwise specifically referenced, all financial measures we use today, 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 Goldman Sachs Communacopia + Technology Conference in San Francisco on September 9th and the Piper Sandler Growth Frontiers Conference in Nashville on September 10th. We hope to see you at these events. Finally, our first quarter fiscal 2025 quiet period will begin on Friday, October 18th. And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Rich and good afternoon everyone. Our fourth quarter was a solid finish to our 2024 fiscal year. We continue to see steady demand for our solutions, driven by businesses prioritizing infrastructure modernization initiatives, while looking to adopt hybrid multi-cloud operating models, and optimize their total cost of ownership. In the fourth quarter, we are happy to have exceeded all our guided metrics. We delivered quarterly revenue of $548 million, up 11% year-over-year, and saw another quarter of strong free cash flow generation. We also saw the highest number of new logos we've seen in three years, an encouraging sign of building traction with some of our go-to-market partnerships and initiatives. Our full year 2024 results demonstrated progress on a number of fronts. Financially, we delivered solid top line performance, driven by continued strong performance from our renewals business. We saw good growth in our pipeline of larger deals as we shifted our focus up-market and saw increased engagement from prospects looking for alternatives to their existing infrastructure solutions. Even as our land and expand business underperformed relative to our internal expectations due to the longer-than-expected sales cycles we see, we delivered revenue of $2.15 billion, up 15% year-over-year and ARR of $1.91 billion, up 22% year-over-year. Our bottom line performance was even stronger. We generated free cash flow of $598 million, almost three times higher than last year, resulting in a free cash flow margin of 28% and a Rule of 40 score of 43. In FY 2024, we also saw tangible progress on the partnership front with significant new or enhanced partnerships with Cisco, Dell and NVIDIA. And I'm pleased that Dell XC Plus, our new turnkey HCI-based appliance offering with Dell is now generally available. We see these partnerships as both expanding our addressable market and providing us with meaningful go-to-market leverage. Finally, we continue to innovate in FY 2024, with important new product releases and enhancements to our Nutanix cloud platform. These included the launch of GPT in-a-box, our solution for streamlining the adoption of generative AI by enterprises. We made meaningful progress towards our goal of becoming the best platform for modern applications, including launch of Nutanix Data Services for Kubernetes or NDK, which offers consistent data services across both virtual machines and container stats, as well as the recent release of Nutanix Kubernetes Platform or NKP, to simplify management of modern applications, on-premises and in any native public cloud service. Our most significant wins in the quarter demonstrated the appeal of Nutanix cloud platform to organizations that are looking to modernize their IT footprints and adopt hybrid cloud operating models, as well as those looking for alternatives in the wake of recent industry M&A. Our largest win in Q4 was a multimillion-dollar ACV deal with a North American-based Fortune 100 financial services company. Following a roughly 1.5 year engagement with us, they chose to replace their existing solution with Nutanix Cloud platform, including our AHV hypervisor as well as Nutanix cloud manager. This customer, who had been using a competing HCI solution in much of the footprint, was able to utilize their existing hardware for Nutanix software deployment, obviating the need for a hardware refresh. We also had a number of significant wins that included our Nutanix Cloud Clusters or NC2 capability, which enables workloads to be seamlessly and efficiently run in both private and public clouds. One of these was with an existing customer, an EMEA-based provider of global research services. This customer was looking to accelerate the migration of their workloads to the public cloud, while ensuring the workloads once migrated will run as efficiently and cost effectively as possible. Having already made a commitment to Microsoft Azure, they purchased licenses for Nutanix cloud platform through the Azure marketplace with the intent of utilizing its NC2 capability to shift their on-prem workloads to Azure. Another good example was a significant new customer win, with a top North American university. Most of our customers start with our platform on-prem. However, this customer was motivated by their decision to migrate away from a competing platform they were using to run their virtual machine workloads at scale in the public cloud on AWS, due to dissatisfaction with recent changes at their existing supplier. They chose Nutanix cloud platform to migrate their applications running in the public cloud to our NC2 on AWS, while also adopting our cloud platform to run their on-prem workloads. We also plan on Nutanix cloud manager for consistent health service and automation across their private and public cloud state. A final notable example is a win with an Asia-based Global 2000 semiconductor provider. This full stack win, which is also a displacement of our primary competitor, enables the customer to streamline their operations, increase their level of automation, and reduce their dependence on more expensive proprietary storage solutions. It included adoption of Nutanix database service, or NDD to enable them to move off of their expensive commercial databases to open source databases managed by NDD. This customer also plans to adopt our unified storage solutions, replacing multiple third-party storage options. Finally, we also plan on utilizing NC2 on Azure to enable them to shift applications to the public cloud, including performing lift-and-shift of IT workloads of acquired companies. We see these wins as reflecting the value customers see in our platform as they look for seamless and efficient application portability while adopting hybrid multi-cloud operating models, as well as the value of our partnerships with Azure and AWS. In closing, I am pleased with our solid Q4 and fiscal 2024 results, and the progress we continue to make on multiple fronts, including our financial model, our partnerships, and our ongoing innovation in our cloud platform towards our goal of becoming the leading platform for running applications and managing data anywhere. We also remain focused on capitalizing on what we view as a long-term opportunity to gain share in the face of recent industry disruption and are encouraged by our early successes, including some of the wins I just highlighted. Finally, I would like to express my sincere gratitude to our investors, customers, and partners for their trust in us and to our employees for their hard work that led to these results. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?

Thank you, Rajiv, and thank you, everyone, for joining us. I will first discuss our Q4 fiscal 2024 and full fiscal year 2024 results, followed by our guidance for Q1 fiscal 2025 and for the full fiscal year 2025. Results in Q4 2024 came in above the high end of our range across all guided metrics. ACV billings in Q4 were $338 million, above the guided range of $295 million to $305 million, representing year-over-year growth of 21%. Revenue in Q4 was $548 million, higher than the guided range of $530 million to $540 million, representing a year-over-year growth of 11%. ARR at the end of Q4 was $1.908 billion, representing year-over-year growth of 22%. In Q4, we continued to see modestly elongated average sales cycles compared to historical levels. Average contract duration in Q4 was 3.1 years, 0.1 year higher than Q3. Non-GAAP gross margin in Q4 was 86.9%, higher than our guided range of 85% to 86%. Non-GAAP operating margin in Q4 was 12.9%, higher than our guided range of 9% to 10%, largely due to one, lower operating expenses as a result of higher-than-expected non-recurring payments related to one of our partnership agreements and a few other items; and two, slightly higher gross margin and revenue. Non-GAAP net income in Q4 was $76 million or fully diluted EPS of $0.27 per share based on fully diluted weighted average shares outstanding of approximately 285 million shares. DSOs based on revenue and ending accounts receivable were 39 days in Q4. Free cash flow in Q4 was $224 million, representing a free cash flow margin of 41%. Free cash flow in Q4 benefited from the collection on the 8-figure ACV transaction that was booked in fiscal Q3. Moving to the balance sheet. We ended Q4 with cash, cash equivalents, and short-term investments of $994 million, down from $1.651 billion at the end of Q3. The primary reason for the reduction in our cash balance was Bain Capital's conversion of the 2026 notes, which we announced in June. We settled the conversion in Q4 by paying $817.6 million in cash and delivering approximately 16.9 million shares of common stock. Please note that the entire conversion value had previously already been included in our fully diluted weighted average share count on an if-converted basis. The actual settlement included a portion settled in cash rather than exclusively in shares, resulting in the issuance of approximately 17 million shares, which is 12 million lower than the 29 million that we had previously included on an if-converted basis. Moving to capital allocation. We repurchased about $25 million worth of shares in Q4 and $131 million worth of shares in all of fiscal year 2024 under the share repurchase program previously authorized by our Board of Directors. Looking at our full year financial results, we exceeded the high end of all guided metrics for fiscal year 2024. ACV billings in fiscal year 2024 were $1.162 billion, higher than our guidance of $1.12 billion to $1.13 billion, and representing a year-over-year growth of 21%. A reminder that the annual ACV billings is slightly lower than the sum of the ACV billings from the four quarters due to adjustments for deals with duration of less than a year. Revenue in fiscal year 2024 was $2.149 billion, higher than our guidance of $2.13 billion to $2.14 billion and representing a year-over-year growth of 15%. We are pleased to have exceeded the $2 billion revenue threshold in fiscal year 2024. We ended fiscal year 2024 with an ARR of $1.908 billion, as mentioned earlier, a year-over-year growth of 22%. Net dollar-based retention rate (NRR) at the end of fiscal year 2024 was 114%. As the fiscal year progressed, we saw a higher mix of larger deals in our pipeline. These larger opportunities often involve strategic decisions and C-suite approvals causing them to take longer to close and to have greater variability in timing, outcome, and deal structure. And as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels. Largely due to these dynamics, our fiscal year 2024 land and expand ACV and ARR performance were below our initial expectations at the beginning of the fiscal year, and we expect these dynamics to continue. Our renewals performance continues to be good through the fiscal year, and a reminder that renewals tend to be at a lower aggregate average contract duration compared to land and expand. Average contract duration in fiscal year 2024 was 2.95 years, flattish to fiscal year 2023 and slightly higher than expected, partly due to some larger deals with greater than average duration. Non-GAAP gross margin in fiscal year 2024 was 86.7%. Non-GAAP operating expenses in fiscal year 2024 were $1.515 billion, an increase of 7% year-over-year, as we began to make additional investments primarily in research and development and sales and marketing. Non-GAAP operating margin in fiscal year 2024 was 16%, representing an improvement of over 700 basis points year-over-year. We also delivered our first full year of positive GAAP operating income of $8 million in fiscal year 2024. Non-GAAP net income was $384 million, or diluted EPS of $1.31 per share based on fully diluted weighted average shares outstanding of approximately 294 million shares. Free cash flow in fiscal year 2024 was $598 million, higher than our guidance of $520 million to $540 million and almost three times higher than last year's free cash flow. Free cash flow margin in fiscal year 2024 was 28%, implying free cash flow margin expansion of 17 percentage points year-over-year. Free cash flow in fiscal year 2024 benefited from approximately $30 million in nonrecurring payments related to a partnership agreement, as previously referenced. Overall, fiscal year 2024 was a significant year, marking our first year with positive GAAP operating income, significant free cash flow generation of $598 million and free cash flow margin of 28%, while growing ARR at 22% and revenue at 15% year-over-year. We also delivered a Rule of 40 score defined as the sum of revenue growth and free cash flow margin of 43 for fiscal year 2024, an improvement of 14 percentage points year-over-year and 28 percentage points higher compared to two years ago. Moving to fiscal year 2025. The guidance for the full year is as follows; revenue of $2.435 billion to $2.465 billion, representing a year-over-year growth of 14% at the midpoint; non-GAAP operating margin of approximately 15.5% to 17%; free cash flow of $540 million to $600 million, representing a free cash flow margin of approximately 23% at the midpoint. I will now provide some commentary regarding our fiscal year 2025 guidance. First, as previously mentioned at our 2023 Investor Day, we are signing our metrics by not reporting or guiding ACV billings starting in fiscal year 2025. ACV billings were intended as a transitional metric during our subscription evolution, and we believe that now is the time to evolve away from that metric. We are also no longer guiding to GAAP gross margin which was previously useful as we navigated our business model changes, leading to significant improvements in non-GAAP gross margin. We will continue to guide to revenue, non-GAAP operating margin, and free cash flow on an annual basis and to guide to revenue and non-GAAP operating margin for the subsequent quarter. Second, and moving on to assumptions in our guidance, we are seeing continued and significant land-and-expand opportunities and a growing pipeline for our solution. However, we continue to see a higher mix of larger deals in our pipeline, which is driving greater variability in our land and expand bookings. These larger opportunities often involve strategic decisions and C-suite approvals at the customer or prospect, causing them to take longer to close and to have greater variability in timing, outcome, and deal structure. And as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels, which we expect to continue. Third, the guidance assumes that renewals will continue to perform well in fiscal year 2025. Fourth, the full year guidance assumes that average contract duration would be flat to slightly lower compared to fiscal year 2024, as renewals continue to grow as a percentage of our billing. Fifth, the non-GAAP operating margin guidance assumes incremental student investments in sales and marketing and R&D targeted towards addressing our large market opportunity. It also factors in the annualized run rate of the incremental investments we made in fiscal year 2024. It also assumes a $20 million to $25 million headwind in operating expenses relative to fiscal year 2024 from payments related to one of our partnership agreements. Specifically, there was about $44 million of this benefit to the R&D operating expense line in fiscal year 2024, and we anticipate it to be $20 million to $25 million in fiscal year 2025. And sixth, the free cash flow guidance reflects an approximately $30 million headwind relative to fiscal year 2024 from lower interest income as a result of our lower invested cash due to the cash payment on conversion of FY 2026 convertible notes. We expect free cash flow in fiscal year 2025 to also benefit from the approximately $30 million in nonrecurring payments related to a partnership agreement, similar to the benefit we saw in fiscal year 2024. It is expected to tail off towards the end of fiscal year 2025. Moving to Q1 2025. Our guidance for Q1 is as follows; revenue of $565 million to $575 million, non-GAAP operating margin of 14.5% to 15.5%. Fully diluted weighted average shares outstanding are approximately 287 million shares. In closing, we are pleased that Q4 and fiscal year 2024 performance exceeded guidance across all metrics. We are excited about the long-term market opportunity and Nutanix's ability to deliver compelling outcomes for customers and prospects. We remain committed to continued progress aligned with our stated philosophy of sustainable, profitable growth both through durable top line growth and expanding margins. With that, operator, please open the line for questions.

Yeah, thanks for taking my question. Firstly, just curious if you have any update on the Broadcom churn, especially in the last couple of quarters, you just talked about that after the initial wave of strong engagement, the activity slowed just because of Broadcom working back some of the initial initiatives to be now more in favor of retaining some of the priority customers. Just curious if the dynamic has changed.

Hi, George. Rajiv here. Yes, it's largely an unchanged multiyear opportunity to gain share, like we said last quarter, while the sales side has been a bit longer than we had initially anticipated. Thus far, we haven't really seen any meaningful changes in our win or loss rates on these opportunities. As we talked about in our prepared remarks, we are seeing some of these larger opportunities close. We gave you a few examples in the prepared remarks. And I do expect that we'll continue to see more of these over time. Now in the midsize and smaller customer segments, we're seeing significant increased engagement and opportunity as many of these smaller companies look for alternatives and generally less competitive engagements related to the larger customer opportunities. Along with our increased leverage from our go-to-market partnerships that we've talked about as well as our programs and incentives that we have in place, this dynamic has also been one of our drivers for our larger, stronger new logo performance.

Okay. Okay, great. Just if I can squeeze in quickly, it's nice to see one customer in financial services, you guys mentioned without changing the underlying hardware, previously, the gating factor – one of the gating factor has been so the upgrading the underlying hardware to wait for the hardware refresh. I guess, can you talk about sort of a better path going forward kind of now seems especially after Dell partnership, maybe you're kind of removing some of the constraints related to the underlying hardware refresh? Maybe you can give a little bit more color on that.

No, that's a very good question, George. I think if you look at the installed base out there in data centers, a vast majority of it, I don't have the exact number, but roughly around 80% of it is what we call 3-tier infrastructure. Separate storage, compute, and networking. And as you know, we have an HCI solution today in the market. And if we want to replace the 3-tier with HCI, it's a better architecture, more cost-effective long-term, but it does require a hardware refresh. Now the remaining 20% is HCI, of which we are a market leader and our competition has some of the rest. Now in this particular case, an example that we talked about, the customer was already on HCI with a competing product. And when you're already on HCI, we've been quite successful having our software be able to run on existing hardware because it's already HCI hardware. And that's what happened in this particular account. And so for that subset or customers that are already on HCI, the migration path is easier in some subset of those cases; we don't need a hardware refresh. That's what happened here. On the 3-tier, it does require a hardware refresh. Now we're also addressing the 3-tier market, to your point, one aspect of our partnership with Dell is that we said we would support external storage, Dell PowerFlex. And now the whole idea of doing that is now we can find an easier insertion into feature deployments without having to change out the hardware. Now that solution is not available in the market today. It's only going to be available sometime next year. And over time, we anticipate being able to offer that support to a broader set of third-party storage options.

Thank you for the questions. Rajiv, would you like to elaborate on the topic of GPT-in-a-box? It seems every conference call now includes a discussion about AI. Are you observing any trends regarding the return of workloads to private cloud or core workloads? Also, do you have any updates on GPT-in-a-Box?

Yes, that's a good question, Jim. I'll answer it in two parts. First, regarding general purpose workloads, it's becoming clear that for steady-state workloads, it's much more cost-effective to run these in a private cloud on-premises. We've observed some repatriation, and there's more careful consideration about whether these workloads should go to the public cloud, given that many enterprise workloads are still deployed on-premises. Customers are realizing that they can run steady-state workloads more efficiently in private clouds. Now, looking specifically at GPT, there has been significant interest in Gen AI for creating and training large language models, much of which is being conducted in the public cloud using large GPU farms. While we don't fully participate in that space, we believe most enterprise opportunities for these technologies will likely be on-premises since Gen AI applications depend on where customer data is stored. Often, sensitive customer data is located in data centers or at the edges, so our GPT-in-a-Box offers a straightforward, secure solution for running Gen AI applications. The use cases we've observed include co-piloting, document search and analysis, customer support, and improved fraud detection. We're definitely seeing traction, though it's still early for us. This is applicable across various sectors, such as healthcare, financial services, and government. While the adoption of GPT in the private cloud enterprise is in its initial stages, we expect it to grow significantly for tasks like fine-tuning, rack retrieval, augmented generation, and inferencing.

Thank you, Jim, for that question. So in terms of contribution from the various buckets that you called out, Jim, so I'll give you some qualitative color on that. So we've talked about, in general, we are happy with our pipeline generation overall. We have talked about the growing pipeline and the fact that the pipeline from larger deals is growing faster. And that can lead to variability with respect to timing or outcome or more complex deal structures and so on. And so some of those dynamics we expect to continue next year. Similarly, with just modestly elongated sales cycles across the board, not just large deals, but across the board. And we expect that to continue next year as well. In terms of the contribution from Cisco, we do expect the Cisco contribution to grow in fiscal year 2025 relative to last year. And we do expect a small initial contribution from a Dell XC Plus, which is the new offering that's generally available now. And we expect small initial contribution from that in 2025 and expect that to grow as well over time. And so all of that is taken into account when you think about the fiscal year 2025 top line guide that we provided, Jim. The other thing you alluded to is renewals. So yes, our renewals business continues to grow nicely year-over-year. So that's factored in there as well. And I think the last part of your question was around ARR. So we will, of course, continue to report ARR on a quarterly basis. And while we noted that the underperformed for fiscal year 2024 relative to our internal expectations, we're not providing guidance for ARR.

Yes. The only thing I'll add to that, Rukmini, is that I believe Jim also had a question regarding the Broadcom opportunity. As I mentioned, this is largely being utilized, but it’s quite challenging to clearly discern that information. Historically, we have been competing against VMware in all of our deals, and that competition remains. There is some level of influence, but it’s difficult to determine exactly how much value we gain from it.

Great, thanks. I wanted to revisit some questions that were asked earlier. Do you feel like you've established where Broadcom's boundaries are and defined your customer base, or are you still refining your understanding of the most actionable opportunities? Are you still in the process of discovering what those opportunities might be? Additionally, Rukmini, I know Jim just inquired about this, but could you share any insights regarding the timing of renewals or co-terming, especially considering the early renewal dynamics and co-terming issues we've experienced over the past couple of years as we approach fiscal 2025? Thanks.

Hi, Meta. I'll start and then Rukmini can answer the second part. Yes, independent of the Broadcom situation, as we look at our addressable market, historically, Nutanix has been quite strong in what I would call the smaller side of enterprises and the higher end of commercial mid-market. But over the last few years, we have deliberately made it further upmarket towards larger enterprises because that's where we are underpenetrated and the biggest TAM opportunity sits. So we have realigned our segmentation over the past few years to focus more on that market. Now the products are ready. We have done a lot of work on the product side. The GTM side, now we're ready. We've got some good partnerships. Now we also clearly understand that when you get to the large customers, the G2K accounts, for example, or the Fortune 100-type accounts, those are going to be more competitive. And that's where clearly Broadcom is more focused on. And those engagements tend to be long, they tend to be bigger, but very fruitful if and when we do win them. And as you can see here, we are starting to win some of those. We talked about an eight-figure ACV win last quarter. This quarter, we had a multimillion-dollar ACV win. So those tend to take time but are well worth it when they do happen. So we've got a focus there, for sure. The mid-market or the smaller side of the enterprises has been historically our sweet spot. And it's also less of a focus for Broadcom, given their explicit focus on the bigger accounts. It also tends to be less competitive and easier migrations as well. So that used to be our historical sweet spot, and it continues to be a sweet spot. But the bigger opportunity for us is growth is also now sitting at the top end of the pyramid.

I'll address the question regarding renewals and our expectations for renewals in fiscal year 2025. First, I want to highlight that in fiscal year 2024, we experienced strong performance in renewals. This success was due in part to our team's disciplined approach to pricing. We also saw some early and core term renewals, which we view positively as they indicate that customers are willing to renew their commitments to us and provide cash earlier. Additionally, core term renewals help simplify their real estate management. Looking ahead to fiscal year 2025, our available renewal pool, which can be seen as a pipeline for renewals, continues to grow significantly, showing year-over-year growth similar to what we experienced in fiscal year 2024. Regarding the timing and seasonality, our fiscal Q2 and Q4 usually see a higher volume of renewals, as Q2 coincides with the calendar year-end and budget allocation. Similarly, fiscal Q4 marks the end of our fiscal year, which comes with incentives. Therefore, we generally expect greater availability in the renewal pool during Q2 and Q4 compared to Q1 and Q3. This is our perspective on the renewal opportunity for fiscal year 2025.

Hi. Thanks for taking the question. It's Ruplu filling in for Wamsi today. I have one for Rajiv and one for Rukmini. Rajiv, is the demand environment materially different from 90 days ago? And can you talk about the pricing environment? Specifically, I think you've said in the past that some customers may wait for their hardware to be depreciated. Is pricing a lever you can use to maybe drive faster share gains for example, can a smaller customer be induced more to go with Nutanix? And as a management team, how do you trade off share gain versus margins? And I have a follow-up for Rukmini.

The demand environment remains stable and has not changed significantly. Over the past several quarters, we have noticed longer sales cycles as customers seek more approvals and gain a better understanding of total cost of ownership before making purchases. When it comes to hardware refreshes, they play a crucial role in customers' timing for deals. It's important to note that hardware refreshes do not occur all at once; they happen at different times based on the size of the installation. We can capitalize on these moments to secure some business, although it may not always be a complete insertion due to staggered hardware replacement over time. We've also provided customers with promotions that offer overlapping windows for discounted licenses. However, since hardware costs are substantial, we cannot always subsidize those costs ourselves but can partner with hardware vendors who may be willing to do so. Regarding new customer acquisitions, particularly significant ones, we're prepared to be aggressive with promotions and incentives. Our aim is to win deals while protecting our margins. Overall, we are actively working with hardware partners to explore opportunities for better hardware refresh options. Additionally, we are broadening avenues for insertion without necessitating a hardware refresh, utilizing existing HCI environments and allowing for the use of servers that customers have already invested in. As we enhance our support for third-party storage, we anticipate being able to do even more in this regard.

Thank you for your question, Ruplu. To address your first point about free cash flow, we are satisfied with our free cash flow performance in fiscal year 2024 and are pleased to project free cash flow that exceeds the high end of the range we communicated last year at our Investor Day. Regarding quarterly free cash flow guidance, we do not provide that, so there may be some fluctuations. This is especially true in the past couple of quarters due to collecting cash for multiple years upfront, particularly with larger deals or longer-term transactions, which can cause variations. While we do not guide quarterly, this gives you some insight into the situation. As for the increase in operating expenses over time, you can observe the year-over-year implied OpEx growth in our margin guidance, which will be gradual as we invest in sales, marketing, and R&D over time. The OpEx includes the annualized run rate from 2024 investments for 2025, as well as salary increases for our employees that have taken effect. Some of these costs are more predictable, while others will ramp up gradually. For your second question regarding our medium- to long-term financial targets shared at our last Investor Day, we won’t provide comments on those targets for now. However, we can confirm that our midpoint guidance for free cash flow in fiscal year 2025 surpasses that range we set at Investor Day, and our initial revenue guidance for fiscal year 2025 falls within the previously provided range. We remain focused on achieving durable top-line growth, increasing free cash flow and operating margins, and aiming for sustainable operations with a rule of 40 plus over time. This is our ongoing philosophy, and while we won't comment on specific numbers at this moment, we continue to adhere to it.

Yes. Thank you. One quick one is on the eight-figure deal that you announced last quarter. Did you recognize any revenue this quarter from that deal? And then what's the kind of schedule look like on revenue recognition for that particular transaction?

Yes, thank you, Jason. As we mentioned last quarter, we received the payment for that transaction, which represents the full PCV value. However, the revenue will be recognized over several years starting in fiscal year 2025. There was a small amount from professional services that began in Q4, but the license revenue will be recorded in fiscal year 2025 and onward.

So to be clear, Jason, I don't think we're misaligned because we are focusing our go-to-market resources on where the largest dollar opportunities are. More of that opportunity is at the top of the market, which is also why Broadcom is targeting those customers. For us to grow, we are well established in the lower end of the market, and we will continue to prioritize that area. We haven't shifted our focus; that's our primary market and where we can attract more customers. We're looking at everything from school districts to retailers and similar public sector entities, all of which fit well within our strategy. However, the more significant market opportunities for us lie at the top, and for our success, we must pursue those. We have the products and the go-to-market strategy in place. Yes, we recognize these will be more challenging to secure. But when we do win them, as evidenced by the eight-figure opportunity we secured last quarter, the impact can be substantial.

Hi, this is Victor Chiu stepping in for Simon. I wanted to follow up on the previous question about customer migrations within VMware's footprint, specifically regarding the 3-tier infrastructure customers you mentioned. Can you help us understand what percentage of these customers would find it relatively easy to transition their existing application platforms to AHV, and what percentage are more reliant on VMware due to their dependence on advanced virtualization functionalities?

Yes. So that's a good question, Victor. I would say the vast majority of applications running on a VMware hypervisor on 3-tier can run very well on AHV and HCI environment. There are perhaps things at the edges, where it's not technical gaps; it's really more ecosystem certification gaps that might hinder some of them. There might be an application that's certified on ESX, but not certified on AHV. And over the last few years, we've built that out as well. So there are going to be some complications that are not certified. But for the most part, we can address pretty much anything that is running on a 3-tier infrastructure on VMware and run that effectively on Nutanix HCI on AHV. But there's the other barriers we talked about, right, in terms of hardware refresh cycles and then the timing of the renewals. Those are some of the other things that we still have to factor in, but it's not a technical barrier.

Okay. That's very helpful. And then maybe can you help us think about how the economics compare with Nutanix having an AHV, having a head of a hypervisor included in the platform? The economics, does that make the economic materially different? Or is it just kind of marginal difference in more of a capabilities kind of thing?

Yes, Victor, historically, when customers transition from a 3-tier deployment to an HCI deployment, they achieve significant savings, typically around 30% to 40% in total cost of ownership. This includes all factors such as hardware and operating costs, resulting in considerable savings. This trend remains consistent today. Also, it's important to consider that once you've invested in hardware, you’ll want to maximize its depreciation before purchasing new equipment. The savings and benefits of HCI compared to 3-tier setups are well-established and continue to hold true. Much easier. Yes, this Fortune 100 win that we talked about was exactly that situation. The customer had a lot of competitive HCI offerings deployed. It was an easier migration because for them, they didn't have to change out their hardware. We could just replace the other software without any additional hardware.

Hey, guys. This is Simran on for Matt Hedberg. Thanks for taking our question and congrats on the quarter. May just have one. Can you touch more on the linearity of large deals within the quarter? And did you see any deals being pushed out or pulled in this quarter? And then looking ahead, what early trends have you been seeing so far in August? And then maybe just general linearity for 2025, given some of the uncertainty of these large deal timing. Thanks.

I'll take that, Rajiv, you should proceed to add in. So for linearity in Q4 I would say it was more or less as we expected. I think your question specifically was on linearity with respect to large deals. And those we've talked about can be more unpredictable than other portions of the business, as given they tend to be often more strategic, involved C-suite approvals, things like that. It can be more unpredictable. But overall, I would say linearity in Q4 was largely as expected. In terms of push out or pull in, I think at the next part of the question as we think about last Q4 coming into this year. Nothing unusual there, I would note. I think it was what we think would expect for that time of year. So nothing unusual there. And then again, on August linearity, the only thing to call out in Q1 is its US federal end of fiscal year in September, of course. But again, that's all factored into how we think about our guidance and ability to collect free cash flow and things like that. But as I said earlier, I think the overall linearity can become a little more unpredictable because of the mix of the large deals as that grows over time, and it is something we're continuing to watch closely.

Thank you for taking the question guys. I just wanted to ask, I know last quarter, the company gave some great color on the number of million-dollar-plus ACV opportunities in the pipeline, growing 30% year-on-year, growing more than 50% if we look at it on a dollar basis. Did these statistics still hold in Q4? And do we have a sizable enough cohort to start really understanding how much longer these sales cycles are for these deals?

Hi, Mike. That's a good question. We won’t provide that metric on a quarterly basis. However, we are generally satisfied with our pipeline creation and are observing significant opportunities in the larger deal segments, which is encouraging for our pipeline. Regarding your second question about whether we have sufficient data points, it's still quite early. The pipeline has seen nice growth, but as we've mentioned, some of these larger deals can take quite a long time. For example, one deal took two years, and another this quarter took 1.5 years. It varies and can be lengthy. Therefore, I would say we don't have a lot of data or enough points to draw many conclusions yet. This is something we monitor closely when tracking those deals and consider whether we have multiple paths to achieve our goals. If deals X and Y close or don’t, we assess whether other deals A and B could help us reach our targets. This is definitely a topic of internal discussion and is factored into our guidance. Thank you for the question, Mike. I’m happy to clarify that we have some nonrecurring payments from this partner, and there's a timing difference between operating expenses and free cash flow. The commentary we provided indicated a $44 million benefit to the R&D operating expense line in fiscal year 2024. We expect that benefit to reduce to approximately $20 million to $25 million in fiscal year 2025. This represents the headwind in operating expenses for 2025 compared to 2024. Regarding free cash flow, there is a delay in when the cash is received. We realized about $30 million in cash benefit in fiscal year 2024 and expect another $30 million in 2025, with a gradual tapering off afterward. There may be a small amount in 2026, but it will significantly decrease as we conclude fiscal year 2025. This situation is nonrecurring, as we do not anticipate it to continue long-term. It is ongoing this year, which we didn’t fully expect three months ago, but we believe it will taper off over time.

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.