Nutanix, Inc. Q2 FY2025 Earnings Call

Good day and thank you for standing by. Welcome to the Nutanix Second Quarter 2025 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Rich Valera, Vice President of Investor Relations. Please go ahead.

Good afternoon and welcome to today's conference call to discuss second quarter fiscal year 2025 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 2025 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 most recent annual report on Form 10-K and 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 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 KeyBanc Emerging Technology Summit in San Francisco on March 4th and the Morgan Stanley TMT Conference in San Francisco on March 6th. We hope to see some of you at these events. Finally, our third quarter fiscal 2025 quiet period will begin on April 17th. And with that, I'll turn the call over to Rajiv.

Thank you, Rich and good afternoon everyone. We're happy to report second quarter results that came in ahead of our guidance. Against a dynamic backdrop, our results benefited from the strength of the Nutanix Cloud Platform, demand from businesses looking for a trusted long-term partner committed to innovation and customer care, and go-to-market leverage from our partnerships and programs. Taking a closer look at the second quarter, we once again exceeded all of our guided metrics. We grew our ARR 19% year-over-year to $2.06 billion and delivered strong free cash flow. We also saw our second quarter in a row of year-over-year new logo growth exceeding 50% with strength seen across all of our customer segments, including the Global 2000. Finally, we strengthened our balance sheet and increased our financial flexibility by issuing convertible notes at attractive terms and putting in place a revolving credit facility. Nutanix recently published the results of our 7th Annual Enterprise Cloud Index Survey. The report shows that implementing GenAI is top of mind for enterprises, with over 80% of them having started implementing their GenAI strategies. Respondents view infrastructure modernization as key to deploying GenAI. Challenges with respect to data security, compliance, and performance remain priorities. We believe the Nutanix Cloud Platform, including Nutanix Kubernetes platform and Nutanix Enterprise AI or NAI, is well-suited to helping enterprises quickly and efficiently deploy and run their GenAI applications on real-life use cases where the data resides. As one example, in Q2, a financial services provider in the EMEA region adopted our Nutanix Enterprise AI platform to deploy their internal GenAI applications, which include multilingual translation and a multilingual chatbot. NAI enables them to deploy their GenAI apps on their existing Nutanix Cloud Platform while benefiting from the automation NAI provides in scaling and running endpoints for large language models. Our largest wins in the quarter demonstrated our ability to land and expand within some of the largest and most demanding organizations in the world as they look to modernize their IT footprint while also managing through disruption from industry M&A. One of these wins was a new logo with a North American-based Global 2000 energy technology company, which sought alternatives due to a 200% price increase from their incumbent vendor. They were looking for an alternative solution that could also meet their cybersecurity requirements and desire for improved operational efficiency. They chose the Nutanix Cloud Platform, including the Nutanix Cloud Manager, which will enable them to streamline their operations through increased automation and reduce their existing IT footprint by over 30%. Another significant win in the quarter was an expansion with a Global 2000 provider of IT consulting services based in the APJ region. I'm pleased with the changes they had experienced with their other incumbent infrastructure vendor. This customer decided to transition a portion of their estate served by this other vendor to the Nutanix Cloud Platform, enabling them to improve their total cost of ownership while also addressing their concerns about pricing and support. They also designated Nutanix as their preferred partner for future expansion opportunities. Finally, I'd like to highlight a significant new logo win with a National Health Ministry in the EMEA region that underscores our progress in supporting modern applications natively on our platform as well as our support for hybrid multi-cloud environments. This customer was looking to deploy a national telemedicine platform using container-based applications in a multi-cloud environment, including both private and public clouds. They chose the Nutanix Cloud Platform, including Nutanix Cloud Clusters (NC2) running on AWS. They also selected the Nutanix Kubernetes Platform (NKP) and Nutanix Cloud Manager for deploying and managing their container-based applications in a standardized self-service manner while also enabling centralized observability and policy management. In closing, I am pleased that the strength of our Cloud Platform and the solid execution of our team produced strong second quarter results and enables us to raise our outlook for our fiscal 2025 year. We remain focused on delivering on our vision of becoming the leading platform for running apps and managing data anywhere and capturing the multiyear growth opportunity in front of us. And with that, I'll hand it over to Rukmini Sivaraman.

Thank you, Rajiv and thank you, everyone, for joining us today. I will first discuss our Q2 fiscal 2025 results, followed by our guidance for Q3 fiscal 2025 and an updated outlook for the full fiscal year 2025. Results in Q2 came in above the high end of all the ranges across our guided metrics. In Q2, we reported record quarterly revenue of $655 million, higher than the guided range of $635 million to $645 million, representing a year-over-year growth rate of 16%. ARR at the end of Q2 was $2.06 billion, surpassing the $2 billion ARR mark and representing year-over-year growth of 19%. We continue to see strength in landing new customers onto our platform from the various programs we have put in place to incentivize new logos from a general increase in engagement from customers looking at us as an alternative in the wake of industry M&A, and helped by more leverage from our OEM and channel partners. Expand ACV bookings also improved in Q2 relative to the challenging expansion we saw in Q1. Renewals continue to perform well, with improved on-time performance and continued discipline on economics. NRR or net dollar-based retention rate at the end of Q2 was 110%, flat quarter-over-quarter. In Q2, while we continue to see modestly elongated average sales cycles compared to historical levels, as discussed previously, we believe this to be the continuing norm in the current macroeconomic environment with continued scrutiny on spend. We also continue to see more variability in timing, outcome, and deal structure with the larger deals in our pipeline, but we did start to see more of these closed in Q2. In Q2, average contract duration, which we define in the aggregate across land, expand, and renewals, was three years, slightly higher than our expectations and down slightly quarter-over-quarter. Non-GAAP gross margin in Q2 was 88.3%. Non-GAAP operating margin in Q2 was 24.6%, higher than our guided range of 20% to 21% due to higher revenue and slightly lower operating expenses. Non-GAAP net income in Q2 was $165 million or fully diluted EPS of $0.56 per share, based on fully diluted weighted average shares outstanding of approximately 293 million shares. GAAP net income and fully diluted GAAP EPS in Q2 were $56 million and $0.19 per share, respectively. Free cash flow in Q2 was $187 million, representing a free cash flow margin of 29%. Moving to the balance sheet, we ended Q2 with cash, cash equivalents, and short-term investments of $1.743 billion, up from $1.075 billion at the end of Q1. As announced in December, we completed the issuance of $862.5 million in convertible notes due 2029 with 50 basis points of coupon. The net proceeds from that transaction were used to one, retire a portion of our outstanding 2027 convertible notes; two, repurchase $200 million in shares; and three, add cash to our balance sheet for additional flexibility and general corporate purposes, including working capital, capital expenditures, and potential acquisitions. We also closed earlier this month a $500 million revolving credit facility that was announced back in December and provides us with additional flexibility. Moving to capital allocation, in addition to the $200 million in shares that we repurchased using a portion of the net proceeds from the convertible notes offering, we used about $69 million of cash in Q2 to retire shares related to our employees' tax liability for their quarterly RSU vesting. Moving to Q3 2025, our guidance for Q3 is as follows; revenue of $620 million to $630 million; non-GAAP operating margin of 17% to 18%; fully diluted weighted average shares outstanding of approximately 296 million shares. Moving to the full year, the updated guidance for fiscal year 2025 is as follows; revenue of $2.495 billion to $2.515 billion, representing a year-over-year growth rate of approximately 17% at the midpoint and an increase from our previous guidance. Non-GAAP operating margin of approximately 17.5% to 18.5%, an increase from our previous guidance. And free cash flow of $650 million to $700 million, representing a free cash flow margin of approximately 27% at the midpoint and an increase from our prior guidance. I will now provide some commentary and assumptions regarding our updated fiscal year 2025 guidance. First, the updated guidance assumes continued strength in landing new logo customers onto our platform, steady performance of our expansion into our existing customer base, and continued good renewal performance. Second, we review aggregate contract duration for the full year to be more or less flat relative to last year. Third, and as discussed in prior earnings calls, we expect to continue to increase our investment in sales and marketing and research and development in the second half of the fiscal year. These investments are directed towards addressing our large market opportunity and are expected to continue to ramp in Q3 and Q4. In closing, we are pleased that our Q2 results exceeded the high end of our guidance ranges and to raise our full fiscal year guidance across all metrics. We would like to thank our employees, customers, partners, investors, and stakeholders for their continued trust in us. 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.

Thank you. Our first question comes from Meta Marshall of Morgan Stanley. Your line is open.

Great. Thanks and congrats on the really strong quarter. It seems like you're finally starting to see some momentum with customers coming over from competitive platforms. I guess just getting a sense of that, is this the time and it was always going to take time? Is that targeting and kind of finding the right customer type, is it finding the right use case? Just kind of what do you attribute to more success there? And then I'll just get into the second question now. Just kind of any commentary that you're seeing about the federal vertical? Thank you.

Yes. Maybe I'll take the first part, Rukmini, you can comment on the second part. I think the market continues to be quite dynamic in terms of your question around new logos. And we still call this a multiyear opportunity in terms of gaining share. Now, clearly, you've seen our new logos grow 50% year-over-year for the last couple of quarters now. And it's driven by, I would say, a couple of things. Our pipeline has matured over time. We've seen the impact from some of our recent go-to-market initiatives, seeing the benefit from our customer, sales, and partner incentive programs. We're also seeing more leverage from our OEM and channel partners who are contributing to our new logo growth as well. So, I'd say those are the factors. Now, the overall dynamics haven't changed much in the sense that it's still a multiyear opportunity. We still have, from a competitive perspective, to deal with the fact that many customers have multiyear agreements with VMware and hardware refreshes are needed in many cases to convert them over. But you've seen the results of the passage of time here with the pipeline and all these go-to-market efforts. Rukmini, do you want to comment on the federal?

Yes, hi Meta. To your question on the U.S. federal government, so in Q2, as expected, our U.S. Fed business did improve and returned to solid year-over-year growth. Now, I should say that while we don't report U.S. federal separately as a percent over the last three fiscal years, Fed has been 10% or less of our annual revenue with seasonal strength seen in our fiscal Q1, which happens to coincide with the Fed's fiscal year-end. So, just to give you a sense of relative magnitude there. But yes, Q2 was an improved performance. And then when I think about outlook for the balance of the year and what we're seeing there, we currently have a good pipeline of opportunities, but it's too early to tell if or how those opportunities may be affected by what's happening within the U.S. government under the new administration, which remains quite dynamic. However, our platform has always been about modernization and helping to lower the total cost of ownership for our customers, which may make it attractive to those looking for productivity gains or efficiencies. So, still pretty dynamic from a U.S. Fed perspective, and we factored in this overall uncertainty into our updated fiscal year 2025 guidance.

And maybe Rukmini I would also say that while we don't talk about how big federal is as a percentage of our business over the last three fiscal years, it has been 10% or less of our annual revenue, with Q1 being the big quarter.

Thanks so much.

Thank you, Meta.

Thank you. And our next question comes from Jim Fish with Piper Sandler. Your line is open.

Hey guys, nice quarter, nice acceleration. Also working off of Meta's first question as it's good to hear about some larger wins coming in here. Just on some of these Global 2000 that are out there, what's given the confidence in the pipeline for the upper part of the market in particular? Is there any sense of how much of it is waiting for sort of that AHV standalone readiness with the storage they have versus looking to move to hyper-converged? How's the feedback been thus far on PowerFlex and potential buildup of other OEM relationships?

Yes Jim, I'll take a crack at that one. So, yes, I think the Global 2000 cases, first of all, in many cases, it's a second vendor opportunity for us versus a wholesale migration. It's a mix, as you can imagine, right? There's going to be some mix of three-tier and HCI. Some of the three-tier we can convert to HCI. We've talked about some large examples in the past of where we've done that, where customers have adopted a large financial services customer running all their database workloads, for example. That's moving from legacy three-tier to HCI, bringing us in at the second vendor in that kind of an environment. So, it's going to be a mix of HCI and three-tier here. Now, to your question on the PowerFlex specifically, we do expect that the PowerFlex solutions will come to market in the second calendar quarter this year, and we have some good early interest. And again, I think we look at that as a market expansion opportunity for us, the ability to insert faster into these existing environments rather than trying to wait to convert everything over. So, I think it's going to remain a mix, Jim, and we continue to focus on our core motion of converting customers over to HCI. At the same time, we also focus on expanding our market opportunity by being able to insert these existing accounts into three-tier storage, starting with PowerFlex and hopefully, over time, to more arrays.

Makes sense. And then Rukmini, maybe for you. You talked about seeing better renewals. Obviously, I think mathematically, the dollar basis for the renewal piece moved up this quarter. But what's given the confidence that, that 110% net retention rate can be stable for the remainder of the year? And how do we think about the other aspects of net retention rate in terms of what you guys are trying to drive beyond just existing workload expansion?

Yes, there's a lot there, Jim. So, let me try and break that down. So, first on Fed, I should clarify that when we referred to Fed business performance improving in Q2 with solid year-over-year growth, we were especially talking about land and expand for Q2. So, I want to clarify that. And then I think your rest of your question was around NRR and how to think about that. So, first, NRR did stabilize to flat quarter-over-quarter at 110%. We did see overall improvements in Q2 for both land and expand. A few things to note on just NRR, and I'll get to the last part of your question, Jim, after that. So, as ARR grows every quarter, the ACV dollars required to offset the same percentage churn does grow, which makes it increasingly challenging to achieve the same NRR, just mathematically. Over the last year, if you look at our expansion within existing customers, it has been affected, as we've discussed in previous quarters, by variability we've seen around timing and deal structures in these large deals in the pipeline and the overall environment of elongated sales cycles. So, that does have an effect on current period NRR. Our NRR is a function of expansion over the past year with the same group of customers that we had at the beginning of the 12-month period. So, just some mechanics there on NRR that I wanted to clarify for everybody. As for the other aspects of expansion, we've talked about three vectors: one is selling more of the same workload to customers, selling more workloads, and around selling more of the portfolio. We think we remain focused on both retention and expansion across all of those three vectors. We said in the past that we hired more portfolio solution specialists, for example, towards the end of last fiscal year and into this year. Those folks are ramping now and have not yet called them fully ramped. Some of that is still ongoing, but we remain focused on both retention and expansion with existing customers across all of those three vectors.

Thank you. And our next question comes from Pinjalim Bora of JPMorgan. Your line is open.

Thank you for taking the questions and congratulations on a solid quarter. Rajiv, I noticed you mentioned the Kubernetes Platform a couple of times, which seems to be somewhat unclear to investors. I wanted to know if a VMware customer, who is choosing to move to the cloud instead of staying on-premise, is considering the Nutanix Kubernetes Platform as their preferred option during their application modernization process. Is this topic coming up in discussions related to VMware at this time?

Yes, I mean, I think, first of all, there's two parts to that answer there. If you look at migrating a VMware workload, one is, as you said, which is modernizing the workload itself onto Kubernetes. We are very much a part of that equation, right, whether they're choosing to run it on-prem or in the public cloud as part of the application modernization. Now, yes, there is one other option there too, Pinjalim, which is for people who are looking to migrate workloads. In fact, we have a partnership with Amazon, for example, to help migrate those VMware workloads from on-prem directly into the Public Cloud Assets on our NP2 platform. A lot of that migration is also automated. So, we have two options for these customers. One is, of course, with our Kubernetes Platform for workload modernization if they're going to redo the application, if they're going to refactor the application, then that's an option. If they want to run the application assets and migrate out, we can offer them a path to migrate it into the public cloud or run it on-prem. I would also say that our Kubernetes platform is fully standard compliant, right? It's a cloud-native compute foundation, fully standard compliant. We offer a lot of flexibility with that too, the ability, for example, for a customer who's modernizing their workload to be able to use a native Kubernetes substrate on a public cloud but also use us on top to manage all their clusters wherever they may be fitting and simplify the orchestration of those clusters. So, there's many different options for customers here. But the NKT platform, the Kubernetes platform is very much at the center of modernization of the assets.

Understood. Very helpful. Rukmini, regarding the federal sector, do you think the underperformance from last quarter has been fully recovered or is it just a partial recovery? I'm trying to grasp the reasons for your strong guidance moving forward for the rest of the year, especially considering it seems more robust than the previous results.

Yes, hi Pinjalim. Regarding the federal aspect, I would reiterate what we mentioned in our last call: we anticipate a strong quarter for Fed in Q2. However, it’s important to note that it may not necessarily be a catch-up quarter, as Q1 is typically our strongest quarter for Fed due to the fiscal year ending in September. More broadly, looking at our outlook for the full year, we are pleased with our performance in the first half, particularly in Q2, and our updated expectations reflect our current best estimates. This includes continued success in acquiring new clients, consistent growth with existing customers, and solid renewal rates. Specifically addressing your question about Fed, we acknowledge that it is still early to predict how the new administration's actions may influence us. There is some uncertainty, but it could potentially be beneficial since our platform focuses on modernization and lowering total ownership costs. We have taken this uncertainty into account in our updated guidance for fiscal year 2025.

Understood. Thank you very much.

Thank you.

Thank you. And our next question comes from Ben Bollin of Cleveland Research Company. Your line is open.

Good afternoon everyone. Thank you for taking the questions. Rukmini, you discussed variability of large deal timing. I'm interested in how you think about variability or flexibility of incentives that you're offering to these larger projects. Could you talk about how you think about the willingness to maybe subsidize or discount for takeouts or offer flexibility around the timing of billings? Just any high-level thoughts or approach that you're taking to these larger projects? And then I have a follow-up for Rajiv.

Sure. Hi Ben, so a few things. We've talked about how in this moment we want to make sure that one, we are articulating the value proposition to customers, especially to new customers who are not our current existing customers. Two, make sure they understand the value proposition in a holistic way. So, meaning they understand our approach around being a hybrid multi-cloud platform, around our approach to both virtualized machines and containerized applications around our philosophy on customer service and how we value that with our Net Promoter Score being 94 a decade now. So, that's always where we start, Ben. To your point, on structure, yes, you're right, we have talked about that, and we have seen more variability with some of our larger transactions. So, what we'll continue to do there is to make sure that we'll be thoughtful about that, right? Where people are looking to migrate, for example, you might give them some one-time incentives to do so and things like that. More generally, our standard practice is to collect multiple years of cash upfront from our customers, as we mentioned before. Many of our customers purchase our software along with third-party hardware, typically part of their CapEx plans and therefore generally pay us for those multiple years upfront. However, we do make exceptions based on special circumstances. All that said, we factored the anticipated impact of any of these deal structures and non-standard terms into our fiscal year 2025 guidance, across top line and bottom-line.

Okay, that's great. Rajiv, looking at the bigger picture, you've historically discussed how more customers are investing in three-tier systems, which presents a larger addressable market. Can you share what you're observing from customers regarding their readiness to shift towards hyper-converged solutions? Are you noticing an increase in refreshes and discussions around modernization? Does it seem like there is a significant willingness to make this migration? Additionally, how are customers perceiving the additional costs involved and their readiness to undertake these transitions?

Yes. Ben, that's a very good question. In fact, I think what's happening here with a competitive situation is that customers are now retaking the entire stack because if they're being forced to look at an alternative and migration, it's also a good time for them to reexamine the overall stack and consider what they want to do. At a big picture, that means, okay, maybe I should take some of these applications, put them in the cloud; maybe I should modernize some portion of my estate; and maybe I should move to a new stack. So, it's actually creating a bigger picture, longer-term architecture mindset. From that perspective, if there's an impetus for a customer to migrate away from VMware, then it's also an impetus for them to look at what is their long-term architectural goal, and that's exactly what we are positioning with them.

Thank you very much.

Thank you, Ben.

Our next question comes from Aaron Rakers of Wells Fargo. Your line is open.

Hi, this is Jake on for Aaron. Congrats on the quarter. I was just hoping you can maybe give an update on the momentum you're seeing around GPT-in-a-Box. Any changes you've seen in enterprise adoption there more broadly? And maybe if there's been any material change over the last quarter or two, given the proliferation of reasoning models?

Yes. Let me cover that, Jake. It's a pretty broad question overall. As you know, we have a solution for inferencing that makes deploying enterprise GenAI easy. That's our Nutanix AI platform which, by the way, is a component in the overall GPT-in-a-Box solution. An interesting point here is with DC coming on board, it shows that fairly powerful models can be trained and operated with a lot fewer resources than people previously thought. Now, we think that this is going to lead to broader and more rapid adoption of GenAI. In Computer Science, we have an existing paradox that says when you have increased efficiency of a resource, that often leads to increased consumption of that resource. We think the same will hold true here for AI because companies and organizations can use AI to deploy more complex inferencing use cases effectively, which will stimulate the demand for both compute and storage resources. When it comes to us and our platform, we have been very focused on being a platform for inferencing in real-world AI use cases. That's what GPT-in-a-Box with NAI delivers. With open licensing models coming in, it makes the whole thing better and more broadly available. What we are seeing at this point is we've seen a lot of our customers interested in looking at how they can get productivity and efficiency gains out of deploying GenAI. In some cases, they have to deploy it by their data, which can be in the data centers or at the edges, and sometimes in the public cloud as well. We continue to see increasing adoption; for example, during this call, we talked about how an EMEA-based financial services provider is using us on top of the Nutanix platform, adding NAI to their existing Nutanix platform to help them do multilingual translation automatically as well as offering chatbot services, which is significant. We are seeing more of these develop across the enterprise and more companies looking at starting to go from initial experimentation with GenAI to driving towards real-life production deployments. I believe this trend will continue over the next few years.

Great. Thanks. And then maybe just a follow-up. I was wondering if you could add some color around the investment in sales and marketing and R&D in the back half of the year. And just maybe some color around how that's being allocated?

Yes, Rukmini, do you want to take that?

Sure. Hi Jake. As we said in our prepared remarks, we are continuing to increase our investment in both sales and marketing and R&D, and I will say that we do expect that to ramp here in Q3 and Q4. To your question on specifically where we're investing it, within sales, it's across a few different areas in both frontline and inside sales. We've talked about how our frontline sales rep headcount perspective, we're fairly close to where we'd like to be, but we'll probably add a few more folks here in the second half. It's also about everybody in the supporting team that surrounds the rep, including sales engineers, channel sales, customer success, and so on. In marketing, we're allocating more to increase awareness of our platform. In R&D, we're investing across one, strengthening our core platform, but also supporting more modern applications and AI to provide clarity about how we think more about that. We're also supporting selected third-party storage, which announced PowerFlex will be the first platform coming on board in the second calendar quarter. Those are some of the areas we're investing in. We think of those as directed and targeted towards addressing our large market opportunity and areas where we see a line of sight to return on those investments.

Great. Thank you so much.

Thanks, Jake.

Our next question comes from Wamsi Mohan of Bank of America. Your line is open.

Hi, thanks. It's Ruplu filling in for Wamsi today. Two questions, one for Rajiv one for Rukmini. Rajiv, you had strong revenue growth, and you're guiding higher for the year. Have you seen any quantifiable benefit from the partnership with AWS and providing promotional credits to migrate customers to NC2? How much have your partnerships with Cisco and Dell contributed to the strong new logo growth and revenue growth this year? And I have a follow-up.

Yes, great. Let me take each of those one at a time, Ruplu. So, on AWS, we've seen early traction with some customers migrating already from VMware Cloud on AWS over to our offering and also some from on-prem into the public cloud. We've seen customers move fairly quickly, from where they were to running on a Nutanix platform, often in a matter of a month. One of the things that we don't have to worry about in a cloud-to-cloud migration is hardware refreshes; this is not an issue anymore, right? It works pretty much on the same hardware instances that AWS provides. We are seeing examples of customers moving there. It's still relatively early, but we're getting more of those Public Cloud VMware customers as well as some on-prem to public cloud migration happening there. On Cisco, they have been a good contributor for us in new logos, especially this quarter as well as over the last couple of quarters. We expect that partnership to continue to grow and are working very closely with them as we go to market. Dell is still early days. There are two parts to our relationship with Dell. Firstly, them selling our Nutanix platform in the market, and this is the second quarter they've had that in the market. We saw a small contribution from that. The other part is PowerFlex availability, which Rukmini and I covered earlier, which will be available next calendar quarter, and we will start to see customers trialing those and adopting that, but the benefits of that will only be realized in the next fiscal year.

Got it. Thanks for the details there. Rukmini, as a follow-up, last quarter, you had expected the seasonality between Q2 and Q3 to be similar to fiscal 2023, where revenue was down 8% sequentially, but your guidance for Q3 is much better than that, about half of that sequential decline. So, what is driving that? And if the demand environment is improving and land and expand is also improving, should we view this change in seasonality as permanent? Or is there something specific to this year that's driving better seasonality?

Hi Ruplu. Yes, so I think on the seasonality comment for Q3, I would say for Q2, we did see good land and expand performance and are happy to guide to Q3 where we did. I think it's too early for us to comment on how next year's Q3 might relate to Q2, Ruplu. As you know, there's also this mechanism of the renewals cohorts and how they spread out over the quarters. Yes, we're happy to guide Q3 to where we are guiding right now. We did see strength in both land and expand and renewal, as we talked about in Q2. But I'd say it's too early to extrapolate anything beyond this fiscal year at this point. Of course, we'll make sure to update you all at the right time about seasonality for next fiscal year.

Okay. Thanks for all the details. Appreciate it.

Thank you, Ruplu.

Thank you. Our next question comes from Mike Cikos from Needham & Company. Your line is open.

Thanks for taking the questions guys, and congratulations on the strong quarter and guidance that we have today. I wanted to circle up on some of the go-to-market questions that have been asked here, but maybe from a different angle. When we think about the partners that you guys have run campaigns with and how they're coming over to you potentially as a result of industry M&A, can you provide some color or maybe qualitative commentary on the different sizes of these partners or maybe the different sized deals that they're originating on your behalf? Just wondering if we can get some sense of how the big differ versus where Nutanix has historically been?

So, Mike, I think the way to think about it is if we look at our pyramid of customers, we have, of course, very large customers at the top and smaller volume customers at the bottom. What I would say is with these partners coming on board, the channel partners cover the entire spectrum, all the way from the top to the bottom of the pyramid across the board. At the very bottom of what we have is the lower portion of that tier, which we call channel-led, where we let the channel do all the work there. We just support the channel. We don't have direct sellers engaged in that area. That's seen a nice uptick over the last year or so, and that's where some of these channel partners are doing most of the lifting and where they're supporting the channel partners. As you go to the top of the pyramid, what they do is they're more healthy, right? It's a much more co-selling motion. Our folks are involved in these bigger accounts, larger enterprise accounts, working with the customer, with the partner being a big facilitator, helping, for example, we might do some proof-of-concept with the partner, right? They will bring us in, they will engage it. They have labs and are present in these accounts. What I would say is the engagement varies depending on the kind of customer. For the large customer, that's a core sell; for the smaller customers, there are more of these partners coming in and driving a good chunk of the business.

Excellent. Thank you. And just another follow-up. With the success in the upper end of the pyramid, those Global 2000 new logo lands that you cited earlier. Is there a way to think about maybe specific features or capabilities as part of the more mature Nutanix Cloud Platform that are resonating today versus where we were a year or two ago?

Definitely, Mike. We've been focusing a lot on improving our core platform in terms of scalability, supporting the ecosystem, and integrating with large customers, tailored to their specific needs like security or automation. Over the past few years, we have made significant progress in these areas. Now, when we approach major accounts, we can navigate those integrations more efficiently. Additionally, we have discovered the importance of how we engage with these opportunities; it’s not solely about product capabilities but also about our approach. We've gained a better understanding of the entire process, from proof-of-concept to commercial negotiations and being qualified as a vendor. Our dedicated deal teams are now in place to streamline and enhance our engagement with larger customers beyond just the product features.

Great. Thank you again.

Our next question comes from Jason Ader of William Blair. Your line is open.

Yes, thanks. Good afternoon. In our channel checks, we learned from a few sources that your sales cycles have actually become a bit shorter as customers feel more urgency to move away from VMware. There is a lot of older three-tier hardware that has been delayed over the past couple of years due to the macro environment. First, I wanted to get a sense of whether you've heard anything similar from your representatives. Secondly, we've also heard some frustration from partners about Broadcom putting pressure on their margins. Is this affecting you positively, especially regarding channel engagement and leverage, since channels may want to earn more by selling Nutanix?

Yes. Good question there, Jason. So, on the first one, I would say more anecdotal. I don't think we can point to a systematic shortening of sales cycles at this point. In fact, what I would say is we saw sort of the other end of that spectrum where maturing of the pipeline and some of these larger deals that we've been talking about in the pipeline for a while closing this quarter. Still, I think we have seen certainly more of those close, and not necessarily with shorter sales cycles. On the second on the partner, I think that's very real. It is absolutely true that we are a very partner-centric company. All our business pretty much goes through the partner community, and we have continued to make enhancements to our channel programs and incentives. We have a new logo incentive for these partners to bring us business. They may not be new robots for them, but the new logos to Nutanix. We've been working very hard to make it worthwhile for the channel to do business with us, and that's certainly helping and contributing.

Okay. And then one quick follow-up, Rukmini I know you're not giving guidance for FY 2026, but just given the strength in operating margins this year, non-GAAP operating margins, and I know that this particular quarter is probably not replicable at least for the next couple of quarters based on the guidance. Can you give us a sense of where you're thinking about? Do you think operating margins will expand next year? Or do you think that these levels are sort of appropriate right now?

Thank you, Jason. So, first, you are correct that Q2, we're happy with the margin performance. But as you rightly point out and as we said in the prepared remarks, we are investing more in the second half. So margins in the second half are expected to be lower than the first half. Obviously, still happy to raise the full year margin guide like we did for fiscal year 2025. Now, we are not guiding to fiscal year 2026 at this point, Jason. Look, I will say that we have always said and been consistent about this idea that we are continuing to drive towards a sustainable Rule of 40 plus and trading off growth and margins in a thoughtful and appropriate way. That approach is still the case and we expect to remain so. So yes, I'll leave it there, Jason. I think we'll continue to watch that, and of course, we'll update you when we do provide guidance for fiscal year 2026.

Thank you. Good luck.

Thank you.

And our next question comes from Param Singh of Oppenheimer & Co. Your line is open.

Thank you. I appreciate your insights. To start, could you break down the factors contributing to the strength in this quarter? Specifically, how much of it can be attributed to market share gains from the price increases at VMware compared to increased spending on existing workloads or deeper customer engagement that might have occurred without the price hikes? If you could provide any details on those aspects, I would find it very helpful. I also have a follow-up question.

I can start and Rajiv, I welcome you to add your thoughts as well. It is really hard to do that because as we've said before, we have competed with VMware for a long time. Of course, with Broadcom's acquisition of VMware, there have certainly been some changes there. So no, we actually don't think of it that way internally, either in terms of saying, well, can we parse this out the way you did. So, we don't think of it that way. We've talked about how we run our go-to-market programs and some of the incentives we've put in place. Those are all, as you saw here, like some of those starting to pay off and bear fruit here. But your short answer is we're not able to parse that out to that specificity. Rajiv, anything you would add?

No, no, I think you covered it.

Right. Maybe I can ask a different question then. If as you look to more displacement of VMware and Cloud Foundation, what are some of the challenges that your customers have come back to you with? Do they want more for price delta with VMware? Is it a better and easier ease of migration? Is it more integration with some of the legacy applications and operating systems because those are some of the challenges that the channel seems to talk about, but I want to understand from your perspective, what are some of the headwinds or issues that you're facing now and that you hope to drive in the back half with your R&D and sales and market expand?

Yes. I can take that question, Param. It's a good one. First of all, I think there's the timing of the VMware license renewals, okay? That's, of course, a big factor. Many customers have signed multiyear contracts with VMware and are not necessarily in an urgent situation to migrate. So, there's a timing element there. The hardware is certainly a key element in many cases. In fact, in most cases today, while Broadcom is selling VMware Cloud Foundation, a lot of the customers are running only the hypervisor from VMware, along with three-tier storage. That's what they have today. When they have to convert that over to Nutanix, for the most part, it's a hardware refresh. They're not typically ready to replace that immediately. It's going to take them a few years to depreciate that. There's a timing of that hardware refresh cycle that comes into play when migrating. The third, of course, is something we've gotten fairly good at, right, which is helping to migrate, reducing the risk, having the automation to migrate. Those things we have gotten quite good at over the last many years of work with VMware migration. We have automated tooling for a lot of the migration work along with the professional services needed, whatever is required to integrate with their current automation systems, etc. Those things we know how to do; they do require some work and necessitate a proper project plan and timing, but we presently handle those. The last is just an overall factor around inertia; they have something in place, and now should I keep that in place or should I move to something else? These are the challenges. They have existed for quite a while, right? Nothing has really changed there, which is why we've always characterized this as a multiyear journey. It's going to be steady. We do expect that we will win more customers, and you've seen that now; all these new customers coming to us over the last few quarters are partly a result of the Broadcom situation.

Got it. That's really helpful. Maybe one other quick one, if I could. You mentioned M&A as part of the cash usage from the convert. I want to get a sense of where you see technical gaps in your portfolio today? Is it really to fill a technical gap or to expand into some of the newer opportunities here that you would consider for M&A?

Yes, I'll just say historically, we're not going to comment on future M&A, Param, but historically, what we've done is largely focused on smaller tuck-in acquisitions and areas where it's complementing what we have or filling some of the gaps in our portfolio. We will probably continue to do those as we move forward and look at, for example, we did buy Day2IQ, which used to be called Mesosphere about a year ago, right? That helped boost our Kubernetes portfolio quite substantially. Those are the kinds of acquisitions. Those are things we are always continuously looking at and will continue to do.

No, that’s really helpful. Thank you, Rajiv. Appreciate that.

Thank you.

Our next question comes from Jeff Hickey of UBS. Your line is open.

Hi everyone. Thank you so much for taking the question. Building off a lot of just questions here on partners in general, really healthy new logo acquisition growth. Thinking about comments on - you just talked about many customers on VMware who are essentially just using the hypervisor. As you allocate more R&D investments and leverage more of these channel partners, how should we think about the potential for increased customer adds moving forward, as more come online with our PowerFlex capabilities? Is this something that we could see an acceleration towards next year? Any creative color or commentary would be helpful.

Yes, look, it's hard for me to predict the future on these things. But we are focused on expanding our overall ability to target the broader portions of the TAM, and some of these portions of the TAM are locked up with three-tier, right? The more three-tier offerings that we bring to the table, the more we can insert ourselves there. What I will say, though, is when we insert ourselves into a three-tier environment, it's going to be with a small portion of our portfolio. From a revenue size perspective, they only purchase a component of our portfolio rather than the full portfolio, which we would sell if it was a wholesale modernization into hyper-converged. So, there's some puts and takes there, but it's hard for us to talk about your new logos. We are happy with the success we're getting, and we'll continue to focus on growing those comp.

The only thing I'd add is that we are pleased with our strong level performance. The comparisons do start to become a bit more challenging starting in Q4 due to these comparisons last Q4.

Got it. We'll keep that in mind. And then one follow-up for you, Rukmini. Just is there anything that we should be conscious about? You have flat NRR this quarter at 110%. Is there any color you could share how we should think about maybe the divergences and expansionary trends you see from customers that have migrated over from competitors like VMware versus ones that have been with Nutanix for a long time? Or is it such a broad customer set that there really isn't a difference that we should take in that way?

Yes. So, look, I'll first say, we don't guide to NRR and continue to be focused on driving expansion and retention. To your question on divergence, I’d say that, we typically will land new customers for only a portion of their footprint or wallet share, especially the larger customers; if it's a more midsized system, then they might just choose to do all of their share with us even early on, but certainly, in the larger customers, you only get a portion and grow over time. I'm not sure there's any particular difference, again, we compete with VMware for a long time. So, yes, I don't think there's a difference in terms of expansion potential necessarily, other than what I previously said regarding the mechanics of NRR.

Got it. That’s very helpful. Thank you both, and congrats.

Thank you.

Thank you. Our next question comes from George Wang of Barclays. Your line is open.

Hey thanks for taking my questions and squeezing me. Just two quick ones. Rajiv, I just want to ask again over the last three months, have you seen any pickup in private cloud repatriation?

I would not say so, George. I don't think it's a systematic trend in private cloud repatriation. There are a lot of people talking about it, and we see some examples of that happening, but I wouldn't call it a trend. What I would say is the trend I see is that people are being more careful about whether to go to the public cloud in the first place; they're taking a much more measured approach to what they want to put in the public cloud in the first place; that's more what I see.

Got it. Just a follow-up. Could you unpack maybe give a little bit more color just whether that's more of a direction going forward in terms of kind of go-to-market approach?

Yes, it's always a balancing approach, George. We have to have both generalist sales as well as technical engineers to support them. In the accounts we target, we need a higher ratio of technical engineers to sellers because our product is technical. It tends to require fairly technical selling help; there are proofs of concept involved, and understanding customer environments. Whenever we hire, say, a frontline salesperson, we also look at everything that it takes to make that successful. That includes technical sellers and inside salespeople, and ensuring that there are enough people for adoption and renewals too. It’s a holistic view across the entire ecosystem, and we continue to invest appropriately in all of these.

Okay, great. Thank you.

Thank you, George.

This concludes the question-and-answer session and also our conference today. Thank you for participating, and you may now disconnect.