Earnings Call Transcript - NTNX Q3 2024

Rich Valera, VP of Investor Relations

Good afternoon, and welcome to today's conference call to discuss third quarter fiscal year 2024 financial results. Joining me today are Rajiv Ramaswami, Nutanix' President and CEO; and Rukmini Sivaraman, Nutanix' CFO. After the market closed today, Nutanix issued a press release announcing third quarter fiscal year 2024 financial results. If you'd like to read the release, please visit the Press Releases section of our IR website. During today's call, management will make forward-looking statements, including financial guidance. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a more detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our 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 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 Bank of America Global Technology Conference in San Francisco on June 4. We hope to see some of you there. Finally, our fourth quarter fiscal 2024 quiet period will begin on Wednesday, July 17. And with that, I'll turn the call over to Rajiv.

Rajiv Ramaswami, President and CEO

Thank you, Rich, and good afternoon, everyone. We delivered a solid third quarter with results that came in ahead of our guidance. We continue to see steady demand for our solutions driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives and looking to optimize their total cost of ownership or TCO. Taking a closer look at the third quarter, we were happy to have exceeded all our guided metrics. We delivered quarterly revenue of $525 million and grew our ARR 24% year-over-year to $1.82 billion. We also had another quarter of solid free cash flow generation. Overall, our third quarter financial performance reflected continued disciplined execution. Our largest wins in the quarter demonstrated the appeal of the Nutanix cloud platform to organizations that are looking to modernize and improve the efficiency of the data center footprint while managing through some of the disruption from recent industry M&A. Our largest new customer win of the quarter was an eight-figure ACV deal with a North American-based Fortune 50 financial services company that was looking to streamline and automate the deployment and management of their substantial fleet of databases. This customer purchased the Nutanix Cloud platform with Nutanix database service to automate all of their internal database deployment and management needs while also modernizing the three-tier footprint previously used for running their database. This win was substantially larger than our typical land win and marked the culmination of an approximately two-year engagement. Another notable win in Q3 was a significant renewal and expansion with a North American-based Fortune 500 provider of consumer packaged goods. This customer, whose data center footprint has historically been split between Nutanix and a competitor, was looking to standardize their automation and self-service capabilities on a single class. They decided to standardize our Nutanix Cloud platform, including our A3 hypervisor and Nutanix cloud management to handle their self-service and automation needs. They also added Nutanix unified storage and Nutanix database service for their unstructured data management and database automation needs, respectively. Going forward, this customer plans on swapping out the competitive software in their existing footprint and also utilizing Nutanix cloud platform for all of their expansion needs. We see these wins as a testament to our ability to both land significantly and expand within the largest companies. We are encouraged by the substantial increase in the number of customers and partners engaging with us, including some of the world's largest companies. However, these larger opportunities tend to have longer sales cycles, can involve aggressive competitive responses, and exhibit great variability with respect to timing and outcome. Rukmini will provide more color on the impact of these dynamics. Last week, we held our annual .NEXT conference in Barcelona, Spain, where the excitement from the 4,000 plus attendees was tangible. At .NEXT, we made a number of announcements demonstrating continued progress and plans on enhancing the functionality of the Nutanix Cloud platform and broadening our partnerships especially with respect to support for modern applications and enterprise AI. On the enterprise AI front, we announced GPT in-a-box 2.0, which will deliver expanded GPU and large language model support, automated configuration and management of model inference endpoints for Gen AI applications, simplified model management, and an expanded partner program. This includes a new partnership with Hugging Face to provide access to the Hugging Face library of large language models for Nutanix customers as well as an expanded partnership with NVIDIA that includes the planned integration of NVIDIA’s inference microservices into our automated enterprise AI solution. More broadly, we continue to see a high level of interest and additional wins with GPT in a box in Q3, including a win with a large EMEA-based government agency that is looking to deploy Gen AI with fraud detection at the initial use case. On the modern application front, we announced the Nutanix Kubernetes platform to simplify management of container-based modern applications using Kubernetes, on-premises and in any major public cloud service. We also took initial steps in extending our data services for Kubernetes to cloud-native, containerized environments. This will simplify the development of resilient data-intensive modern applications in public clouds and allow customers to ultimately run them anywhere in keeping with our project Beacon vision. Finally, we announced a broadening of our partnership with Dell; while Nutanix software already works well with Dell hardware, we announced two new elements of our long-standing partnership. First, we are going to sell a tightly integrated hyper-converged solution combining the Nutanix Cloud platform software with Dell PowerEdge servers. This will provide our customers with the choice of procuring Nutanix's platform directly from Dell. We expect this solution to be available later this calendar year. Second, we will together deliver the Nutanix Cloud platform powered by AHV hypervisor for compute and Dell PowerFlex for storage. This will allow customers to reuse some of their existing IP-based Dell three-tier storage hardware, protecting their investment and giving them choice. We are in the development stage for this offering at this time and expect it to be available in calendar 2025. Now I'd like to comment on the recently published results of our sixth annual Nutanix Enterprise Cloud Index, a survey of 1,500 IT decision-makers around the world. The top three priorities identified by respondents were data security and ransomware protection, implementing the right hybrid IT operations, and implementing AI strategies. I see these results as playing to the strength of the Nutanix Cloud platform, which is built-in ransomware protection with our data lens capability and enables hybrid multi-cloud operating models. In closing, I'm pleased with our solid Q3 results, our ongoing innovation on our cloud platform, particularly with respect to its support for modern applications and generative AI, and on the progress we continue to make on partnerships. We remain focused on delighting our customers while driving sustainable, profitable growth. And with that, I'll hand it over to Rukmini Sivaraman.

Rukmini Sivaraman, CFO

Thank you, Rajiv. I will first review our Q3 fiscal '24 results followed by guidance for Q4 fiscal '24 and the implied full-year fiscal '24 guidance. Results in Q3 '24 came in above the high end of our range across all guided metrics. ACV billings in Q3 were $289 million, above the guided range of $265 million to $275 million, representing year-over-year growth of 20%. Revenue in Q3 was $525 million, higher than the guided range of $510 million to $520 million, representing a year-over-year growth rate of 17%. ARR at the end of Q3 was $1.82 billion, representing year-over-year growth of 24%. In Q3, we continued to see modestly elongated average sales cycles compared to historical levels. Average contract duration in Q3 was three years, higher than Q2. Non-GAAP gross margin in Q3 was 86.5%, higher than our guided range of approximately 85%. Non-GAAP operating margin in Q3 was 14%, higher than our guided range of 7.5% to 8.5%, largely due to: one, lower operating expenses as a result of higher-than-expected nonrecurring payments related to one of our partnership agreements and timing of hiring; and two, higher revenue and higher gross margin. Non-GAAP net income in Q3 was $85 million or fully diluted EPS of $0.28 per share based on fully diluted weighted average shares outstanding of approximately 302 million shares. DSOs based on revenue and ending accounts receivable were 39 days in Q3. Free cash flow in Q3 was $78 million, representing a free cash flow margin of 15%. We ended Q3 with cash, cash equivalents, and short-term investments of $1.651 billion, up slightly from $1.644 billion at the end of Q2. We continued repurchasing shares in Q3 under the share repurchase program previously authorized by our Board of Directors. We have repurchased about $106 million worth of shares year-to-date through Q3 '24. As a reminder, our sustainable generation of free cash flow enabled us to transition to net share settlement to pay for employees' tax liability on RSU vesting starting in Q2 and going forward from our previous method of sell-to-cover. We used $58 million of our cash in Q3 and $53 million in Q2 for a total of over $111 million of cash year-to-date for this purpose. More information on the mechanics of net share settlement and its impact can be found in the Appendix section of our earnings presentation found on our Investor Relations website. This along with our share repurchase program will help us continue to manage dilution. Moving to Q4 '24, our guidance for Q4 is as follows: ACV billings of $295 million to $305 million, revenue of $530 million to $540 million, non-GAAP gross margin of 85% to 86% and non-GAAP operating margin of 9% to 10% and fully diluted shares outstanding of approximately 302 million shares. The updated guidance for full year fiscal '24 is as follows: ACV billings of $1.12 billion to $1.13 billion, representing a year-over-year growth of 18% at the midpoint of the range, revenue of $2.13 billion to $2.14 billion, representing a year-over-year growth of 15% at the midpoint, non-GAAP gross margin of approximately 86%, non-GAAP operating margin of approximately 15%, and free cash flow of $520 million to $540 million, representing a free cash flow margin of 25% at the midpoint. I will now provide some commentary regarding our updated fiscal year '24 guidance, specifically the following four points: first, we are seeing continued and significant new and expansion opportunities for our solutions. However, we continue to see a higher mix of larger deals in our pipeline which is driving greater variability in our new and expansion business. The number of opportunities greater than $1 million in ACV in our pipeline has grown at higher than 30% for each of the last three quarters compared to the corresponding quarters last year. Relatedly, the dollar amount of pipeline from opportunities greater than $1 million in ACV has grown at well over 50% for each of the last three quarters compared to the corresponding quarters last year. 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. Our fiscal year '24 new and expansion ACV and ARR performance year-to-date have been affected by these dynamics and have been below our initial expectations at the beginning of the fiscal year. We expect these dynamics to continue in Q4. As an example, for the eight-figure ACV transaction in Q3 that Rajiv mentioned, we expect the billings and cash collection to be in Q4, while the associated subscription revenue is expected to be recognized over multiple years starting in fiscal year '25. Additionally, it is worth noting that this transaction was approximately two years in the making, taking longer to close than our prior expectations, but came in with a longer contract duration and a higher total contract value than expected. We anticipate similar variability in deal structures and longer sales cycles for some of the larger opportunities in our pipeline. Second, the guidance assumes that our renewals business will continue to perform well in Q4. Third, the full-year guidance continues to assume that average contract duration would be flat to slightly lower compared to fiscal year '23, as renewals continue to grow as a percentage of our billing. Fourth, the updated full-year free cash flow guidance includes the benefit of the eight-figure ACV transaction, which was booked in Q3. In addition, the full-year free cash flow guidance also assumes the impact of certain nonrecurring benefits over the course of the year, including approximately $40 million of operating expenses, of which we expect to receive approximately $30 million of non-recurring cash payments related to one of our partnership agreements. In closing, we are pleased that our Q3 performance exceeded guidance across all metrics and to continue to make significant progress aligned with our stated philosophy of sustainable, profitable growth. With that, operator, please open the line for questions.

Operator, Operator

And our first question comes from Pinjalim Bora from JPMorgan.

Pinjalim Bora, Analyst

Rajiv, one question for you. I want to ask you about the decision to extend AHP to support compute-only nodes. On what it seems like it could actually help you create a non-ramp to migrate workloads into the Nutanix HCI platform. But on the other hand, it could elongate the time for a customer to make that decision since AHP might increase the time they stay on their existing three-tier architectures. So maybe talk about that puts and takes there. And is there any incremental investment in that decision that we should be thinking about as we think about next year?

Rajiv Ramaswami, President and CEO

We spent considerable time evaluating this decision, and here's our reasoning. As customers transition from traditional three-tier systems to hyper-converged infrastructure (HCI), they often need to refresh their hardware, moving away from their legacy storage arrays and current drivers. This process can delay our entry into accounts since customers typically wait for their hardware to depreciate before purchasing new equipment. With our announcement with Dell, we are starting to support AHP with PowerFlex, one of their storage platforms. This approach enables us to engage with existing customers who have already invested in the storage array, allowing us to enter accounts more quickly without requiring a replacement of the storage array. Our goal is to support the ongoing mission of eventually transitioning customers to modern cloud HCI architecture, which will set a foundation for the future. Overall, this strategy allows us to gain easier access to accounts where customers aren't yet ready to depreciate their hardware, enabling us to gradually move them to HCI. Currently, we are focusing on IP storage with Dell PowerFlex.

Pinjalim Bora, Analyst

Any thoughts on the incremental investment that we should think about maybe going into next fiscal year?

Rajiv Ramaswami, President and CEO

I think it factored into our current run rate, by the way on this. We already have our engineering teams send this solution is in development currently, and it's included in our ongoing R&D expenses.

Pinjalim Bora, Analyst

One quick follow-up for Rukmini, can you provide an estimate of the size of this potential eight-figure deal? It appears that there could be a significant upside of $100 million based on the free cash flow guidance, if my calculations are accurate.

Rukmini Sivaraman, CFO

We are not disclosing the specific size of the deal beyond mentioning that it is an eight-figure annual contract value. I want to remind everyone that we collect cash upfront for all contracts, which are multi-year agreements. Additionally, this transaction has a longer contract duration than we initially anticipated, resulting in a total contract value that exceeded our expectations. We are pleased to raise our free cash flow guidance to the range of $520 million to $540 million for the full year.

Operator, Operator

Our next question comes from an unidentified analyst.

Unidentified Analyst, Analyst

Rajiv maybe for you first. I'd love to hear incremental color you have around the partnerships with Cisco. Obviously, we've announced some deployment optionalities there. But how are your win rates there? How have reps kind of adopted the selling of Nutanix platform and kind of any traction you can kind of further talk on would be great?

Rajiv Ramaswami, President and CEO

So in Q3, we saw some good additional wins for this new solution with Cisco. And we've seen good encouraging progress with respect to Cisco's ability to bring in new logos for us. Also at .NEXT last week, we announced that we are certifying our AHV hypervisor to run on Cisco UCS servers. This will enable customers to repurpose their existing Cisco servers to run our software. Connected to our storage-only nodes, right, again, running our own software. So with respect to the contribution, we expect to see a growing contribution from Cisco and of course, into FY’25. And certainly, we are encouraged by the partnership in terms of their reps, especially their specialist tracks. Because Cisco, again has a very big sales force, but a lot of those sellers are also networking sellers, but they do have a specialist team, sales team coming and focusing on data center sales, and those are the people who are more familiar with the Nutanix offering. So we're overall encouraged by the contribution. The overall contribution for this year, a small modest as we said in the past, and we expect a bigger contribution into FY’25.

Unidentified Analyst, Analyst

And then maybe touching a bit on Pinjalim's question earlier. After the AHV combination with Dell storage, is there really anything from a feature or functionality standpoint that would limit a VMware customer from being able to move to AHV now that kind of the hypervisor only has been enabled? Or is it kind of an optionality where this opens up all VMware customers to move over to Nutanix?

Rajiv Ramaswami, President and CEO

First of all, I want to emphasize that we are currently supporting only one storage platform, which is PowerFlex. However, the idea is to offer AHV standalone to work with third-party storage, addressing a significant portion of the legacy installed base that consists of separate server setups connected to three-tier storage. To clarify, we are starting with a very limited scope, as we are only supporting one IP-based storage array. It is unlikely that we will ever support every storage array available globally. We will begin with Dell PowerFlex and gradually add more IP-based storage arrays over time, but not Fibre Channel storage. I believe this will gradually expand our opportunities but will also facilitate support for third-party storage.

Operator, Operator

And our next question comes from Jason Ader from William Blair.

Jason Ader, Analyst

Just to follow up on the first two questions for Rajiv. Regarding the standalone AHV deployment option with third-party storage, how do you plan to price AHV in those environments? I understand it’s beginning with Dell PowerFlex, but should we consider that the pricing will be similar to an HCI solution?

Rajiv Ramaswami, President and CEO

Yes, Jason, the main reason for pursuing this is to offer an alternative for customers who want to reuse their existing storage while changing their hypervisor. However, we also view this as a pathway to HCI, rather than just a standalone hypervisor. We will determine the appropriate pricing to achieve this goal. We haven't established any pricing yet, as the offering is still in development and won't be available until next year. It's still early for us, and we will consider customer feedback and make adjustments over time.

Jason Ader, Analyst

And then a follow-up for Rukmini. I know you mentioned on the new and expansion business that it was below your expectations coming into the year because of the longer sales cycles. Could you comment on how the pipeline has fared relative to your expectations entering the year? Because it sounds like you gave some data points there. It sounds like the pipeline is extremely strong?

Rukmini Sivaraman, CFO

Correct. I mean, I think we have strong pipeline generation. And we gave you some qualification around the larger deal pipeline, which we did comment on last quarter as well. And the qualification I had in my script was that if you look at opportunities greater than $1 million in ACV as a threshold in our pipeline, that number of deals have grown at higher than 30%, right, for each of the last three quarters and the dollar amount of that pipeline from opportunities greater than $1 million has gone even faster at well over 50%. And so the pipeline is strong. I think what we're seeing and what in the market is a bit of a dichotomy on that versus I think what's closing and I'll let Rajiv, do you want to add more I mean.

Rajiv Ramaswami, President and CEO

To address your point, we are indeed experiencing a dichotomy. On one hand, we have a significant opportunity opening up for us, which is certain. However, concerning the deals we are closing in the near term, these larger deals are taking longer to finalize. At .NEXT last week, I noticed a remarkable increase in customer engagement, including with some of the largest companies globally, and we have one remaining business that we are willing to discuss publicly regarding their modernization and migration experiences. Additionally, we have seen heightened activity from our channel and OEM partners eager to engage with us more deeply. Nevertheless, the engagement process has been taking longer than anticipated, with more variability in timing and outcomes. This is largely due to a higher proportion of larger, strategic opportunities, some of which are affected by the Broadcom acquisition. Concerning the Broadcom opportunity, we had indicated that this will take time to unfold for reasons we previously mentioned. These include several factors: many VMware customers signed multi-year agreements with VMware before the acquisition which gives them time; much of the installed base requires a hardware refresh to run HCI, and while we address this market, the situation has become dynamic recently. Broadcom has shown considerable flexibility regarding their pricing and packaging changes, particularly given the risk of losing some of their larger customers and in response to market feedback. These factors contribute to the pressure we've faced in our recent new and expansion ACV performance.

Operator, Operator

And our next question comes from Wamsi Mohan from Bank of America.

Wamsi Mohan, Analyst

Given your commentary on the longer time to close some of these deals that you're saying will last into Q4, would you say that changes any of your outlook also around '25? I mean, why should it not sort of extend beyond Q4? Is my first question. I will follow-up.

Rukmini Sivaraman, CFO

So to date, this fiscal year, we've been outperforming our initial free cash flow expectations but have been below our initial expectations on new and expansion ACV and ARR as you alluded to. While we're not commenting on fiscal year '25 or longer-term targets today, we remain committed to driving top line growth and strong free cash flow generation, and we expect to provide our initial fiscal '25 guidance on our next earnings call as we typically do.

Wamsi Mohan, Analyst

And I guess as a follow-up, I mean, this higher mix of larger deals, right? You said like this has been tracking pretty strongly now for three quarters. What is driving the higher mix of the larger deals? Is that more competitive traction? I think Rajiv alluded to some of that? Or is there incremental attach across your stack? And would you say that the demand environment has changed materially across the last three quarters?

Rajiv Ramaswami, President and CEO

There are several reasons for this, Wamsi. First, we have access to a wider range of market opportunities with these larger accounts, which are linked to bigger deals. Second, our platform has matured to a point where we can address nearly all the workloads that companies are using, allowing us to pursue a broader range of opportunities. Third, the competitive situation, particularly concerning Broadcom, is contributing to this trend. These factors explain why we are observing an increase in large deals within our pipeline.

Operator, Operator

And our next question comes from Simon Leopold from Raymond James.

Simon Leopold, Analyst

One of the things I wanted to follow-up on was how your views have evolved regarding the opportunities to take business from VMware versus your assessment, say, six months ago? And then I've got a quick follow-up that I'll come back with?

Rajiv Ramaswami, President and CEO

I'll start with that. Rukmini, you can add more details. I believe the opportunity is primarily a multi-year one, as we've mentioned before. It's not about closing deals immediately. These processes will take several years. We see it as a long-term advantage for us for the reasons we have discussed. I think this aspect hasn't changed. The customers who sign Enterprise License Agreements do so with time involved. The hardware refresh cycle also plays a role. The most significant change we've observed recently is the rapidly evolving situation with Broadcom. They have tried various strategies and are reassessing some of their initiatives. This creates a dynamic competitive landscape. Consequently, larger deals are also taking us longer to finalize. The ones currently in the pipeline are experiencing delays for the reasons we've outlined. Overall, our view of this being a multi-year opportunity remains unchanged. In the short term, we are seeing that these larger deals will require more time, which is simply the reality we are navigating given the current dynamics.

Simon Leopold, Analyst

I appreciate that. And then maybe my follow-up is tied into this is at least the anecdotes from my perspective seem like Broadcom's price hikes and bundling were bigger than I would have anticipated. I don't know what you were expecting, but they surprised me. So I'm wondering if there's some inflationary aspects that maybe is a tailwind for Nutanix that gives you the ability to be more aggressive and potentially even raise prices up against the inflation coming from Broadcom?

Rajiv Ramaswami, President and CEO

Yes. First of all, Broadcom is certainly pursuing its strategy with bundling and subscription price increases. In terms of our pricing approach, we have always maintained a competitive edge, especially in HCI architecture. Much of the current competition is based on legacy systems, such as three-tier architectures with separate storage. Our focus has consistently been to ensure that our pricing is appealing from an HCI standpoint as businesses transition from these older systems to more modern HCI solutions. This mindset continues to guide our pricing strategy; we price based on the value we provide. We have positioned ourselves as a premium offering in the market, aiming to exceed customer expectations while being supply-driven and value-oriented. We will remain flexible in responding to competitive challenges we encounter in the marketplace.

Rukmini Sivaraman, CFO

To reiterate, while Broadcom's effective list prices for many customers may have increased significantly, the actual prices, which reflect the discount levels in the market where there is a risk of losing business or other challenges, are often lower than those list prices. As Rajiv mentioned, the market remains quite dynamic.

Rajiv Ramaswami, President and CEO

Yes. And we've seen them respond aggressively when they are faced with the sort of losing large customers.

Operator, Operator

And our next question comes from Meta Marshall from Morgan Stanley.

Meta Marshall, Analyst

A couple of questions. Maybe first, you mentioned kind of starting with PowerFlex and make insider others. Just wondering, with the time it's going to take to kind of build the solution for PowerFlex would that shrink as you added other storage or just how to think about kind of adding incremental or the time to add other incrementals? And then as a second question, Rukmini, you didn't kind of mention or at least I missed if you did anything about early renewal dynamics this quarter. I did miss that apologies, but if you could just kind of restate whether there were any dynamics there to be note full of?

Rajiv Ramaswami, President and CEO

I'll cover PowerFlex, and Rukmini will cover renewals. So on the PowerFlex equation, of course, there is an initial development effort to take our hypervisor and make it standalone ready, right? We've never had that in the past because we've always sold our hypervisor as part of our HCI solution. And now for the first time, we are disaggregating it. So there is some development work required to do that and we are doing that, and the first target is PowerFlex. Now once we do this with PowerFlex, I expect that the additional effort to bring on other IP storage, right, clearly IP, not Fibre Channel, IP storage, will be incremental. We won't have to do all of this over again. Once we have the first storage are qualified with incremental work, we should be able to bring in more IP storage array into the mix.

Rukmini Sivaraman, CFO

And Meta to your second question on renewals. So we have seen outperformance of our renewals business so far this fiscal year due to a combination of a few things. One is good discipline around renewals economics and pricing. Second is improved on-time renewal performance. And then third is some early and core term renewals setting, with respect to your specific question. And so the benefit of this stronger performance has primarily been seen in ACV billings and free cash flow. And just as a reminder, this will have a modest benefit to revenue because revenue from early renewals specifically on the early renewal piece would only be recognized in the quarter in which they are due. So yes, overall happy with the outperformance in renewals year-to-date.

Operator, Operator

And our next question comes from Mike Cikos from Needham & Company.

Mike Cikos, Analyst

I just wanted to come back to the large deals and thank you for the statistics or meaning around that $1 million ACV plus cohort. Can you help us think about, given the greater variability for the timing of those deals, has there been any change in philosophy regarding how management constructs its guidance?

Rukmini Sivaraman, CFO

In general, our guidance philosophy remains unchanged, Mike. We are focused on increasing internal visibility and enhancing our review processes regarding the opportunities in our pipeline. This is in collaboration with our sales team as they evaluate incoming opportunities, how they qualify them, and how we assess the quality of the pipeline alongside the quantity. We are also closely monitoring the duration that opportunities remain open in our pipeline and will continue to do so. As mentioned in previous calls, we have successfully closed some larger deals over the last few quarters, including an eight-figure ACV deal that we discussed with Rajiv. We will keep gathering more data points as we pursue similar deals. Overall, we are implementing more rigor into our processes on both the go-to-market and finance sides. While our philosophy on guidance has not changed, we are putting more emphasis on how we approach forecasting.

Mike Cikos, Analyst

And just to follow-up as well. I think at the end of your prepared remarks, I know you were citing some of the nonrecurring benefits and cash payments related to partnership agreements. So first, can you just run through those numbers again real quickly? And then secondly, just as a reminder, what are those payments in relation to with respect to those partnership agreements?

Rukmini Sivaraman, CFO

So I'm not going to get more specific on what the payment is. But it is a $40 million benefit to OpEx this year, it was throughout the year. And it's expected to be off that $40 million, $30 million will also be free cash flow benefited this year. The only other maybe modeling point for you all is that $40 million of OpEx that I will return in terms of benefit is sitting in the R&D line within OpEx for your reference.

Operator, Operator

And our next question comes from Matt Hedberg from RBC Capital Markets.

Matt Hedberg, Analyst

I have a question. There has been a lot of discussion about the large deals and their timing. It sounds promising that these deals are increasing in size, but you've mentioned that this creates a considerable amount of uncertainty. I'm curious if you are taking any steps to boost what I would describe as the more predictable run rate business. I assume that partnerships with companies like Dell and Cisco could be contributing to this, but are there other strategies you can employ to help mitigate the timing issues associated with larger deals?

Rajiv Ramaswami, President and CEO

Yes. First of all, we haven't observed any changes to our conversion ratio for what you might consider run rate deals. We are actively incentivizing our channels to acquire more new logos. We have migration programs aimed at competitive takeouts, and we believe that partnerships with companies like Cisco can help us secure more new logos as well. Regarding larger deals, we are working to expedite these engagements by assembling a cross-functional team that includes members from sales, finance, and product, supported by executive sponsorship for these specific pursuits. We are well-versed in the processes involved, including product qualification, customer-specific requests for larger wins, vendor qualification, and commercial negotiations. While we do our best to manage what is within our control, we must also consider the timelines and processes of our customers, as these will also impact the overall timeline.

Operator, Operator

And our next question comes from Ben Bollin from Cleveland Research Company.

Benjamin Bollin, Analyst

Rajiv, I'm curious if you could elaborate a little bit more on how you feel enterprise investigations around their own internal AI efforts might be influencing their refresh activities, your win opportunities. You mentioned data security and ransomware priorities within that. But curious if you could expand on that and speak to any sequence of investments that you see across those customers?

Rajiv Ramaswami, President and CEO

Yes. I believe there is a natural progression of hardware upgrades that is typically triggered by aging equipment on one hand and new initiatives on the other. The topic you're referring to relates to AI, which is indeed a significant part of these new initiatives. Regarding enterprise AI, there has been extensive discussion about AI in the public cloud, largely focused on training large language models. However, enterprise AI must operate where the data resides, much of which will be on-premises. That is why we introduced our GPT in-a-box 2.0, along with the partnerships we announced last week. Most of our customers are still in the early stages of this journey. Many are conducting proof of concept and initial use cases to validate the generative AI applications we've discussed, like fraud detection, customer support, and document summarization or co-piloting. They are still quite early in this process. While they are certainly investing in hardware, it is mostly for proof-of-concept purposes and experimentation rather than large-scale production and deployment. This will evolve over time as they proceed through validating their concepts before moving toward production deployment.

Benjamin Bollin, Analyst

And as a follow-up, looking at the commentary around the opportunity for larger deals, if you look at maybe more traditional deal sizes versus these larger deals. Could you speak to a little bit about who is involved and how it's different? And then any thoughts on the average evaluation duration between the two? That's it for me.

Rajiv Ramaswami, President and CEO

Yes. For smaller deals, it's pretty much business as usual. Our field representatives are actively engaging with customers on these opportunities. In certain parts of the market, our channel partners have taken the lead on some of these smaller opportunities. However, in many cases, our reps are heavily involved, and they are compensated in the same way they would be for any other deal because, for us, new business is new business, regardless of its size. As for the conversion rate on smaller deals, we haven't observed any significant changes in the last several quarters; it has remained relatively consistent. So there haven't been any major shifts in that area. Rukmini, is there anything you would like to add?

Rukmini Sivaraman, CFO

Regarding Ben's question about duration, it's related to how long these larger deals take. We've mentioned that these types of deals often require more time due to their strategic nature or the number of approvals involved. We haven't provided a specific comparison between the durations of different deals, but we did share an example of a particular eight-figure deal that took about two years to close. So, yes, these larger deals generally take longer compared to what was mentioned earlier about our standard business transactions.

Operator, Operator

And our next question comes from George Wang from Barclays.

George Wang, Analyst

Do you have any updated thoughts on the repatriation trends? Increasingly, you mentioned that there have been some examples of the repatriation kind of private cloud with additional build-out kind of in the hybrid cloud space. Just curious if you have any notable trends kind of you have seen from the quarter?

Rajiv Ramaswami, President and CEO

Yes, George. Every quarter, we notice a few instances where companies are moving workloads from the public cloud back to on-premises. While we've seen this with some of our customers, I wouldn't characterize it as a widespread trend. Instead, what's more significant is that the majority of enterprise workloads are still housed in on-premises data centers. CIOs are now facing a new reality where hybrid environments are the norm. Many are focused on how to manage these workloads on modern platforms within a hybrid cloud model, rather than simply migrating everything to the public cloud as might have been the case five years ago. This shift is largely driven by the need to run modern applications and to modernize on-premise infrastructure. This includes newer applications like Generative AI, which I believe will also see a considerable number of deployments on-premises, particularly where the data resides and even at the edge, where much of the data is being generated. So, that's the trend I would highlight rather than a large-scale repatriation.

George Wang, Analyst

I just wanted to follow up regarding the incentives for the channel to attract new customers. Do you have anything significant to share about changes quarter-to-quarter, or is it still a consistent trend in what you’re offering to the channel for upselling and cross-selling? I’m interested to know if there are any new promotions or incentive initiatives coming up.

Rajiv Ramaswami, President and CEO

Yes. I mean, we try to be somewhat neutral in terms of cloud versus on-prem. In fact, we have the same products and the same licensing, whether a customer chooses to deploy on-prem or in the public cloud. With respect to new logos, we are fine with, in fact, however, we get the new logos. In fact, it was interesting, we actually had a new logo this time. We didn't cover that in the earnings call, but it was actually an example of a customer who started with us in the public cloud and over time, they will deploy more on-prem, but they're starting out with us in the public cloud. Now that is not the norm. I would say most of our customers have started out with us on-prem and then move to the public cloud. But with respect to incentives to our field and to our channel, it's all around new logos, which are ways again.

Operator, Operator

And I'm showing no further questions. This concludes today's Nutanix Q3 conference call. Thank you for participating. You may now disconnect.

Rajiv Ramaswami, President and CEO

Thank you.

Operator, Operator

Thank you.