Nutanix Inc (NTNX) 2021 Q4 法說會逐字稿

Good day. Thank you for standing by. Welcome to the Nutanix Q4 Fiscal 2021 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I'd now like to hand the conference over to your speaker today, Richard Valera, VP, Investor Relations. Please go ahead.

Good afternoon, and welcome to today's conference call to discuss the results of our fourth quarter and fiscal year 2021. Joining me today are Rajiv Ramaswami, Nutanix's President and CEO; and Duston Williams, Nutanix' CFO. After the market closed today, Nutanix issued a press release announcing financial results for its fourth quarter and fiscal year 2021. 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 statements regarding our business plans, strategies, initiatives, vision, objectives and outlook as well as our ability to execute thereon successfully and in a timely manner and the benefits and impact thereof on our business, operations and financial results, our financial performance and targets and use of new or different performance metrics in future periods, our competitive position and market opportunity, the timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic and industry trends, and the current and anticipated impact of the COVID-19 pandemic. 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 detailed description of these 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 representing our views in the future.

Please note, unless otherwise specifically referenced, all financial measures we use on today's call 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. Lastly, Nutanix management will be participating in the Deutsche Bank Technology Conference on September 10, the Piper Sandler Global Technology Conference on September 13 and the Jefferies Software Conference on September 14. We hope to see many of you at these upcoming events.

And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Rich, and good afternoon, everyone. I hope you and your loved ones are healthy and safe as we continue to navigate through the COVID pandemic. Our Q4 was a strong end to an excellent fiscal year, which is marked by consistent execution and good progress across both financial and strategic objectives.

Nutanix delivered a strong fiscal '21 across a number of areas. We exceeded our guidance every quarter of the year as our team consistently overachieved. We saw good linearity within each quarter as we benefited from ongoing operational improvements in our go-to-market engine.

We also saw improved deal economics and the continued build-out of our renewals business, which will help drive acceleration of our top line as we approach the completion of our subscription journey. Importantly, we drove these top line improvements while carefully managing expenses, leading to a substantially improved bottom line performance compared to our prior fiscal year.

On the strategic front, we received a $750 million investment from Bain Capital in Q1, which provided additional financial flexibility to fund our growth. And we made good progress on our alliance partnerships, extending our relationships with HPE, Lenovo and most recently signing a new agreement with Red Hat.

Looking deeper at Q4. We outperformed on all our key metrics, seeing all-time our recent records in a number of areas. We reported record revenue, up 19% year-over-year. The best growth we've delivered in the last 3 years. We saw record ACV billings, which grew 26% year-over-year, our highest growth rate in over 2 years. We again saw good linearity in Q4, which contributed to better-than-expected cash flow. The underlying momentum in the business gives us confidence in providing strong guidance for the first quarter of our fiscal '22. And we believe positions us well to achieve our plan for the balance of the year. Overall, we were pleased with our fourth quarter and fiscal 2021 financial results, which were delivered against the continued challenging backdrop of COVID-19.

We saw strong momentum across our entire hybrid multi-cloud portfolio during the quarter, including both core and emerging products. Our emerging products new ACV bookings grew over 100% year-over-year and saw a record rolling 4-quarter attach rate of 41%. One example of a complete portfolio solution was our largest deal of the quarter, a multimillion-dollar ACV deal with a Fortune 100 financial services company that expanded their use of our core HCI software to run their mission-critical applications, along with a large expansion of their Era footprint to automate and simplify their database management.

Nutanix Clusters, a key component of our hybrid multi-cloud platform, continued to see solid momentum during the quarter. One example was the Global 2000 real estate e-commerce company that purchased clusters on AWS to expand their Nutanix footprint and enable their lift and shift data center consolidation.

In Europe, a large government ministry chose our cloud platform, along with our unified storage solution, including files and objects as their primary cloud platform.

I'd now like to take a moment to highlight some key takeaways from our Investor Day in June. We highlighted our leadership position in the large and growing hyper-converged infrastructure market and the substantial additional opportunity we see in our adjacent markets. Specifically, we noted a combined total available market opportunity in our core and adjacent markets that we expect to exceed $60 billion by 2025.

We shared our plan to focus on delivering a single platform that takes Nutanix' hallmark simplicity and performance into the hybrid multi-cloud market. We laid out a road map for our solution strategy and how we are streamlining our portfolio, focusing on fewer, bigger bets in the areas of database as a service, unified storage and desktop as a service. We also explained how we are expecting to see go-to-market leverage by executing on low-cost renewals, benefiting from solution selling and from increasing our focus on partnerships.

And finally, we provided a model targeting free cash flow breakeven in the second half of calendar 2022 and 25% annualized ACV billings growth through fiscal year '25. And we are tracking well on both metrics.

Next, I'd like to also provide an update on some of our previously discussed priorities. First, on deepening our partnerships to provide more impact on how we go to market. Our recently announced partnership with Red Hat, the world's leading provider of commercial open source solutions, brings together Red Hat's industry-leading Red Hat Enterprise Linux or RHEL, and its OpenShift container platform with the simplicity, flexibility and resilience of our cloud platform. Nutanix is now the preferred choice for HCI on Red Hat's platform and our AHV hypervisor is certified to support RHEL and OpenShift on the Nutanix platform. Likewise, OpenShift is now the preferred choice for enterprise full stack Kubernetes on the Nutanix platform. Finally, the 2 companies also have a mutual support agreement and a research and development road map focused on ensuring customer success and enhance integration, respectively.

This partnership provides customers with a full stack platform to build, scale and manage containerized and virtualized cloud native applications in a hybrid multi-cloud environment. We see it as an important proof point in our strategy of furthering customer choice and enhancing our platform by partnering with other best-in-class providers.

During the quarter, we also announced an expanded partnership with HPE, in which we are offering Nutanix Era, our multidatabase operations and management solution, bundled with HPE ProLiant servers as a service through HPE GreenLake, in addition to our core platform, which is already a part of the GreenLake offering.

Now I'd like to turn to another of my priorities, diversity and inclusion. We released our first environmental, social and governance, or ESG, report during the quarter, detailing our initiatives in these areas and establishing a baseline we can measure ourselves against. This is an important first step in our journey towards having greater diversity and inclusion in our workforce and enabling more sustainable businesses for both Nutanix and our customers. We also held our first global women's conference in July, where Nutanix leaders and outside experts spoke to our entire employee base about how we can redefine leadership to include diverse backgrounds and perspectives.

In closing, I am pleased with the execution across the board in our fourth quarter as well as our full fiscal year, especially given the challenging backdrop created by the pandemic, and the fact that it was the first year of our ACV model. We are entering our fiscal '22 with a strong position.

Finally, I'm looking forward to connecting with many of you at our upcoming .NEXT user conference being held September 20 through the 23, where we look forward to welcoming tens of thousands of our customers and partners. Please see our earnings press release, our website for registration details.

And with that, I will hand it over to Duston Williams. Duston?

Thank you, Rajiv. Q4 was another quarter of consistent execution as well as a great way to finish out the fiscal year. Sales were strong throughout the entire quarter. There was no unusual deal slippage, and we built backlog during the quarter. In Q4, we exceeded all guidance metrics and our overall business model continues to be strengthened by the benefits of our subscription focus. A few key highlights for the quarter included: record new ACV billings, record total ACV billings, record total billings, record total revenue, record emerging products new ACV bookings, record number of greater than $1 million transactions in the quarter, and we had the largest year-over-year total percentage growth in revenue since Q4 '18.

Now I'll move on to some specific Q4 financial highlights. And before I get into the specific details for the Q4 and FY '21 financial highlights, I would like to remind you that all future financial disclosures will align with the disclosure and guidance metrics road map that we provided during our June 22 Investor Day presentation. For further details and clarifications about our go-forward disclosure plan, I would encourage investors to review the slide titled guidance and disclosure plan FY '22 from my Investor Day presentation.

ACV billings for Q4 were $176 million, reflecting 26% growth year-over-year, above our guidance range of $170 million to $175 million and ahead of the Street consensus number of $173 million. New ACV bookings, which includes new logo ACV as well as upsell ACV experienced the strongest year-over-year growth rate since Q1 '19. ARR at the end of Q4 was $0.88 billion, growing 83% year-over-year. Run rate ACV as of the end of Q4 was $1.54 billion, growing 26% year-over-year compared to our estimated growth of mid-20% range. Our average contract term length increased slightly to 3.4 years versus 3.3 years in Q3 '21 as our largest deal in the quarter from an existing customer was a 5-year term. We also had a few other notable 5-year deals from existing customers.

At this point, we would expect our average contract term length to trend back down next quarter, most likely in the low 3-year range as Q1 usually carries a significant amount of federal business and our federal customers typically have much shorter average contract term lengths. Assuming contract term lengths do approach the low 3-year range in Q1, we would approximate the TCV to ACV billings ratio to be somewhere around 2.25 versus the 2.4 in Q4.

Revenue was $391 million, growing 19% from Q4 '20, substantially above the Street consensus number of $365 million. We have not seen this level of year-over-year growth rate in revenue since Q4 '18. Emerging products new ACV bookings grew in excess of 100% year-over-year. Emerging products attach rate was 41%. The Q4 sales rep productivity significantly exceeded our assumptions set forth at Investor Day.

Our non-GAAP gross margin in Q4 was 82.9% versus our guidance of 81.5% to 82%. Operating expenses were $373 million versus our guidance of $380 million to $385 million. Our Q4 expenses included approximately $12 million in severance expense related to our previously disclosed sales and marketing headcount reduction.

Our non-GAAP net loss was $55 million for the quarter or a loss of $0.26 per share. Q4 linearity remained very good. DSOs in Q4 were 48 days, up from 37 days in Q3 '21 and down significantly from 68 days in Q4 '20.

Our free cash flow for Q4 was once again aided by good linearity, coming in at a negative $42 million, $16 million better than the Street consensus. We closed the quarter with cash and short-term investments of $1.21 billion, down slightly from $1.25 billion in Q3 '21.

Before I provide the Q1 guidance overview, let me first do a quick recap of FY '21. ACV billings were $594 million, growing 18% versus FY '20 and versus the $590 million to $595 million range we provided at our Investor Day. Once again, as we mentioned last quarter, our total fiscal year ACV billings are not derived from the simple addition of the 4 fiscal quarters.

For our reported quarterly ACV billings, we annualize any deal that is less than 1 year in term length, and our yearly ACV billings calculations eliminate any duplication that happens with the renewal of a deal that occurs within the period and is less than 1 year in duration. Based on this methodology, over the last 3 fiscal years, the sum of the 4 fiscal quarters of ACV billings have exceeded the adjusted annual ACV billings by 6% to 7%. We would encourage investors to account for this distinction during the modeling process.

FY '21 new ACV billings, which includes new logo ACV as well as upsell ACV were $433 million, growing 11% versus FY '20 and versus the $430 million to $435 million range we provided at our Investor Day.

Our renewal business performed well within our expectations. FY '21 renewals ACV, including LOD support renewals were $161 million, growing 38% versus FY '20 and versus the approximate $160 million estimate we shared at Investor Day. FY '21 renewal TCV, including LOD support renewals, were $179 million, growing 32% versus FY '20. Revenue was $1.39 billion, growing 7% versus FY '20. The yearly revenue growth was impacted by term compression during the year. Customer retention, including LOD and subscription closed the year at 96%. The gross retention rate for our subscription business continued to operate within the range of greater than 90% as provided during our Investor Day.

The net dollar retention rate, including the LOD business, was 124% versus the Investor Day estimate of approximately 125%. The net dollar retention rate for our subscription-based business only was 158% versus the Investor Day estimate of approximately 155%. Emerging Products new ACV bookings grew 97% in FY '21, and we also added 61 G2K customers in FY '21.

Now turning to our Q1 '22 guidance. The guidance for Q1 is as follows: ACV billings to be between $172 million and $177 million, representing year-over-year growth of 25% to 28%; gross margin of approximately 81.5%; operating expenses between $365 million and $370 million and weighted average shares outstanding of approximately 216 million. The Q1 ACV billings guidance, which calls for the year-over-year growth of 25% to 28% compares to the actual growth of 14% in Q1 '20, 10% in Q1 '21 and versus the Street consensus growth for Q1 '22 of 23%. Based on continued good execution and increasing renewal base and a robust backlog all supported by a strong product portfolio, we are pleased to project a Q1 '22 year-over-year ACV billings growth rate that is on par with our strong Q4 '21 ACV billings growth rate of 26%. Based on the Q1 '22 ACV billings guidance, we expect ARR to grow 65% or more year-over-year.

I'd like to make one final comment regarding our ACV billings trends for FY '22. Due to our growing mix of renewals, for the second half of FY '22, we would expect a higher amount of ACV billings in Q4 versus Q3 than what is currently reflected in the consensus estimates. This mix shift from Q3 to Q4 is a direct result of our growing ATR or available to renew base of renewals that show a proportionally larger increase in Q4 versus Q3.

We strongly advise analysts and investors to carefully look at their quarter-over-quarter ACV billings estimates to ensure that the strong growth in Q4 relative to Q3 is reflected in models.

With that, operator, could you please open the call up for questions?

(Operator Instructions) Your first question comes from the line of Aaron Rakers with Wells Fargo.

Congratulations on the quarter. I just wanted to kind of maybe level set the discussion around the base of renewal opportunity and kind of the linearity throughout this next fiscal year. Duston, is there any way that you can help us frame of just relative in size, how large the base of renewal opportunity looks like this year relative to fiscal '21? And what exactly that linearity does look like as a progression through the quarterly numbers through fiscal '22?

Sure. So Aaron, we provided a fair amount of detail during the Investor Day. We obviously just reported on the '21 numbers. We gave a '23 estimate. We gave a '25 estimate during the Investor Day too. Relative to FY '22, again, there won't be obviously a massive increase in FY '22 on the renewals just because you've got some offsetting LOD, support renewals declining and then the subscription renewals increasing. I will tell you, and I mentioned this in the script that the first 3 quarters of the fiscal year have a slight increase, but not much, but there's a large tranche in Q4 that starts to kick in on the subscription renewals. And that's why the comment was just to kind of look at the quarterly splits there because there will be just based on the ATR available to renew in Q4, the amount increases quite a bit relative to certainly Q2 and Q3.

Yes. And then the real quick follow-on is that you talked about the average weighted terms coming down relative to 3.4 in fiscal 1Q. Do you think that we continue to trend downward through the course the successive quarters through fiscal '22?

Well, probably not that much. Now 1/10 here or there, maybe. But again, in Q1, the federal business ends up being a much larger percent of the total business just because of the federal year-end in September and federal terms are quite a bit lower in general. So you saw the same thing actually last year, quite honestly, from Q4 to Q3, you saw -- I don't have it exactly in front of me, but I think it's a 3/10 of a year decrease something like that from Q4 to Q1, and then it kind of flattened a little bit.

So definitely will come down as we see it today and as we get through the first month, and that's what we're seeing already. But then I would suspect it kind of be flattish a little bit, but I don't think there's any change, certainly from the kind of the 2.8 to the 3.0 as we see it today, as we laid out at Investor Day.

Your next question comes from the line of Jason Ader with William Blair.

I have 2 quick ones. First is, it seems like you're taking share in the HCI market in the first half of calendar '21. And I just was hoping you could talk about why you think that's happening.

Yes. Look, I mean, I think we -- Jason, we are seeing some nice quarter-over-quarter improvement in our win rates. We are obviously very focused on this market. Our GTM execution has continued to improve through the entire year. And fundamentally, we are going in there with a very strong offering that continues to get better. We're the best in terms of managing data, offering all forms of storage, moving that to hybrid cloud today, as you know. We provide the best freedom of choice across hypervisors, across hardware platforms and across cloud native stack and of course, going forward across multiples of clouds. Customers like the simplicity of what we provide. And then our NPS at 90 continues to be better than almost everybody else. So we have a sustainable advantage here, combined with the increasing focus and improvements in our operational execution. That's what's leading to the (inaudible).

All right. And then just a follow-up on that is, in terms of this whole cloud versus on-prem debate, how are your conversations with customers changing over the last year? And are you seeing any pendulum swing back towards on-prem environments?

Yes. I mean I think there's been a lot said about this recently, right, about cloud. And I think customers are going to be more nuanced about how they go to the cloud. There's both existing applications and new applications that come into come into play here. And obviously, customers now are looking at this and saying, well, I need to be in a multi-cloud world. I don't want to be just locked to one cloud, I'm going to be running my applications across all clouds. And we are seeing very specific use cases that customers are looking at, right? So one class of customers is people who have been on-prem wanting to migrate to the cloud or use the cloud. We are seeing them use us to expand and take -- expand in their existing footprints into the cloud, look at disaster recovery as a use case.

For customers that are having more public cloud oriented historically, they're starting to look at cloud costs. They're starting to look at data governance, security. They're starting to look at cloud lock-in and see that they're also looking at more of a multi-cloud environment and hybrid environment. So I think there's definitely more conversations that are happening with our customer base around these. And again, we're starting to see the use cases come into play, right, in production.

Your next question comes from the line of James Fish with Piper Sandler.

Pretty sure that's Nutanix' biggest upside in 4 years versus our estimate. So nice to see the software side really driving that upside and coming out of this transition at great speed. So kudos to you guys. At a high level, are you seeing a pickup or a steady state for the conversions of traditional 3-tier storage architectures to hyperconverged? And going back to what you just said around use cases, any changes in the use cases for hyperconverged versus the last few quarters?

Yes. As we said at our Investor Day, the fundamental benefits of HCI continue to apply, right? Simplicity in operations management, bringing these silos together, providing a good TCO compared to traditional 3-tier. And what we are seeing now is HCI is able to address a broad set of enterprise workloads. And we're seeing that. For example, our largest deal of this quarter was with this large financial services customer. And they are, of course, running all the databases on our platform, and that's a high-performance workload. And so we're seeing broadening adoption of HCI for lots of enterprise workloads. And so I think that trend continues. And then second trend really is as you go to the cloud, HCI becomes a logical. It's not just an on-prem 3-tier replacement, but it also becomes a platform that they can then take to the cloud.

Understood. And any further commentary you guys can provide on how sustainable this productivity can be? And how that compares to your Analyst Day expectations for increasing productivity over the next few years? And Duston specifically, any change to how you're thinking about that mid- to high teens growth for next year that you alluded to at the Analyst Day?

Yes. Let me start with the productivity thing. We have so many things to help productivity going forward. As I said, we're running ahead of the Investor Day estimates certainly in Q4. And we think the productivity will continue to be strong. We have a lot of things going on in the background as far as channel enablement and a lot of autonomous selling that we're trying to enable with the channel. We'll start some solutions selling. Clearly, partnerships are picking up, not to mention renewals and things like that. So lots of good stuff happening from a productivity perspective. I think then if you kind of back up and even talk a little bit higher level there, the demand environment is good. The pipeline is strong. And not only is the pipeline strong, the quality of the pipe continues to get really stronger as we go on here. The product is performing well. Emerging products continue to increase, deal sizes and ASPs are increasing, the renewals are building a stuff like that.

So when you step back on that, then you'd look at FY '22, we feel good about '22, obviously, our plan for FY '22 and meeting that. And the modeling assumptions that we provided at Investor Day for FY '22, that was obviously meant to be kind of a onetime thing to help with the modeling efforts. We're really happy what happened in Q4. We're really pleased with what we can have guided certainly for Q1 and the likes there. So we feel really good as we go into the fiscal year. And we'll address things as we move forward. But at this point in time, again, that was meant to be kind of a onetime look at '22. But in general, we feel very good about '22 going into the fiscal year.

Your next question comes from the line of Pinjalim Bora with JPMorgan.

Congrats from my side as well. Just taking a step back, could you maybe talk about the demand environment? Are you kind of seeing the hesitancy around big data center transformation projects kind of fade away at this point? And how did the demand environment kind of trend through August versus your expectations? Are you seeing any kind of slowdown due to Delta or anything in the rear view mirror here?

Yes. Maybe I'll start there, Pinjalim here. So first of all, I think we're seeing a healthy demand backdrop and it's being driven by the broad acceleration of digital transformation initiatives which, to some extent, COVID actually catalyzed. And there is some extent of pent-up demand being realized now as customers have now become used to operating in a COVID environment.

Now for us, specifically, I would say the demand is being driven by 4 key areas. First is, of course, continuing the -- what there was already question about this about continuing modernization of their legacy 3 tier infrastructure, running more workloads on our platform, helping extend as they move to the cloud, right, we're helping our customers migrate to the cloud. And then, of course, hybrid and remote work is here to stay, and that's another driver for what we are seeing. So overall, we certainly -- Delta has not impacted demand. We are still seeing good demand environment and people are continuing to invest in these initiatives with us.

Understood. Okay. And one thing about clusters, I guess, I think it's now available in the AWS GovCloud. What has been the early feedback from federal customers? I know you're going into your biggest federal quarter. But is -- are there conversations forming in that area? How do you feel about clusters in the government side?

Yes. I think within -- as you know, cluster just became available here in GovCloud, AWS GovCloud. And we do expect, again, a number of government agencies are looking at operating in GovCloud. And so we are fairly early in our conversations with them, but essentially the same use cases apply to them as well, right? So how do I extend myself to the public cloud? How do I do disaster recovery? How do I do capacity expansion? How do I consolidate data centers? So it's the exact same use cases, we are starting to see also play out in government. And again, I think it's still early days for us as the offering just became available. And I hope to be able to talk to you about future government customers and about government customers in future calls at some point.

Your next question comes from the line of Jack Andrews with Needham.

I was wondering if you could unpack a little bit more of the very strong net dollar retention rates you're seeing, particularly the 158% excluding life of devices. Could you provide some more context on what's really driving that number?

Yes. Let me take it and Rajiv might want to chime in here, but there's only a few inputs to that output of 158%. And obviously, the upsell is continuing to get better. Again, the deal sizes are getting larger. I think as we continue to go up the stack with our product offering, that's a natural enhancement to total deal sizes/upsell in the business. And the gross retention rate, which a huge focus internally on that, but the gross retention rate is still a relatively small base. But what we've seen so far, we're happy with the gross retention rate. So that will come down a little bit as we showed in the Investor Day, but I think that will still be up at the top there as far as a metric from a competitive perspective. Again, the product continues to perform well. The NPS score still stays at 90 plus and all those things add up to a lot of upsell and increased deal sizes and a pretty good net retention rate.

Yes, I would just add to that thing. I mean, all this played out in this largest deal that we had this quarter, right, everything that Duston said, played out. A large customer went in with a small deployment to start with, they've continuously expanded their deployment. They're continuously buying more and buying more of our portfolio.

That's great to hear. And maybe just as a follow-up, Rajiv, just given an increasing focus on solution-based selling, could you just speak to maybe how you navigate the relationships with some of your partners who also would typically look to bundle technology offerings into their own solutions.

Yes. I mean I think if you look at the solutions that we're focused on today, it's cloud, it's hybrid cloud being one. It's database management being another, for example. And of course, our traditional focus on end user computing. And all of these play very nicely from a solution perspective. If you look at some examples with partners. So when we go with HPE, they're looking at bundling our software from a cloud platform perspective along with their hardware and offering all of that as a subscription with GreenLake. And they're doing that for both our hybrid cloud as well as now our database as a service offering. So typically, what we find is our solution selling combined with what we can do with partners, including like Lenovo, for example, 2 end-to-end virtual desktop offering, right, servers, PCs, full stack from Nutanix at all delivered as a service. So it just enhances the overall value of the solution and makes it easier for a customer to purchase whatever they need to achieve their business outcome in a simpler form.

Your next question comes from the line of Katy Huberty with Morgan Stanley.

With all the demand indicators and sales productivity metrics tracking really well, exiting last year, what's driving the October quarter ACV billings decline of 1% sequentially? If you look over the past 3 years, that was up about 3% on average. Is it just a function of the business is scaling and so we'll see more seasonality in the business or anything else to read into that? Then I have a follow-up.

Sure. Katy, as far as the guide. As you saw there, it's still a year-over-year increase of 26% compared to the 14% and 10% from the prior 2 years. So it's a huge year-over-year increase. Q1 usually, typically, when you look at it, is a bit slower for us. Certainly, EMEA, when you look what the trends were there and the wild card is kind of federal. And so far, federal is playing out fine in Q1. So we'll see, but I think we have a lot of things going for us certainly not only in Q1 but in FY '22. So we'll see how things play out there. And obviously, a pretty robust backlog, which gives us a lot of comfort.

Got it. That's clear. And then Duston, OpEx is tracking below your prior guidance of $380 million to $385 million. Is that tied to temporary dynamics around just the timing of reopening and labor market tightness? Or is this a more sustainable reduction in what you think the spending run rate is?

Well, as we, again, said at Investor Day, you'll see single what we expect in '22 as at that point in time, we were saying single-digit growth year-over-year. Clearly, one of the bigger variables is travel and that still continues to stay, lockdown for the most part anyway. So we'll see some increases there. But I think the focus on expenses continues to be pretty robust from what we're doing on the expense side of the equation. It will continue that way. We need to fund, obviously, reps and engineering projects and things like that, which we're doing. But I think we're still assuming we're still somewhere in that single-digit growth year-over-year, but we'll continue to try just like we did this quarter. And the guide for Q1 to continue to drive it down, but still grow the business at our 25% plus.

And Duston, is the $172 million reduction in sales and marketing heads this quarter, which is bigger than the prior quarter, is that just the restructuring? Is that all related to the restructuring that you referenced in your prepared remarks?

Clearly, restructuring is in there, not all of it, but clearly, restructuring is in there. And that's some of the severance that you saw that we booked in the quarter there.

Your next question comes from the line of Wamsi Mohan with Bank of America.

Congrats on the strong results. Duston, you noted some seasonality in ACV billings weighted more in 4Q given what is available to renew. Is that a dynamic that carries over into the quarters beyond that? And when should we expect stabilization of that? And I have a follow-up.

Well, you're not going to see ultimately stabilization for a while because it's going to continue to increase, right? And we've given a FY '23 number in the Investor Day presentation there. So you're going to continue to see an acceleration of the renewals. That's, again, what we've been working on for the last 3 years or so with the transition to subscription, more tranches are going to come in for renewal. So that's what you're going to see there. The comment I made on Q3 to Q4 was because still it's not a massive amount in any given quarter. What I was saying there was we just had a pretty big bump up in ATR we expect from Q3 to Q4 relative to the size of Q3, and that's why we thought we'd call that out just to make sure that was clear from a modeling perspective. But again, into FY '23, you'll continue to see -- it will be a little bit more linear, but there'll be some bumps up and down. But more linear, certainly, we expect to see Q3 to Q4.

Okay. So trend wise, it will sort of not be as big of step-ups on a sequential basis?

Well, quarter-over-quarter, you'll still -- you've got a benchmark, again, that we're running to for FY '23. So that kind of gives you a feel for that type of growth from '22 to '23, continue to increase, right?

Yes. No, I get it. I'm just questioning the trend sequentially if like there's abnormality in those trends that you want to call out at a later point in time.

Yes.

As a follow-up, Rajiv, on -- I think at the Analyst Day, you noted that VDI was 20% to 25% of workloads. I'm curious, just given back to work in many places, if you're expecting to see any impact from that at all? I mean, on the PC side, clearly, there was concerns of a demand rollover. And I understand the distinction between VDI and PCs, but just wondering if you're seeing any signs of that business decelerating?

No, I would say not, Wamsi. I mean no signs of that. And I think largely, of course, is going to continue to remain hybrid even if people come back to the offices, it's going to be a mix. And so I would say that business for us has tended to be in that 20% to 25% range overall. So I don't see any significant changes for us as people come back to work here.

Your next question comes from the line of Rod Hall with Goldman Sachs.

I wanted to jump into the -- I think, the comment you made, Duston, on the 5-year deal. And then I think you had said there were other 5-year deals in there. Just curious if you can firstly, help us quantify that at all, give us any idea what the billings percentage that was 5 years in that billing stack looks like. And then also, any color around why these customers are doing 5-year deals? Were they 5 years before and they're just kind of renewing at 5 years or you've given them better deals for 5 years? Any kind of color you can give us on why you're seeing that. And I have a follow-up.

Yes. Yes. So the quarterly investor presentation should be loaded on the website, Rod, so that will give you the ACV breakout by term. So that -- I think that answers that question for you. And on the 5-year deal, yes, these are existing customers that had been purchasing on a 5-year term. And again, once you have somebody in 5 years, it takes a little bit if we can, to get them down to 3 or something like that. This happens to be the largest deal, which has turned into what we referred to sometimes what I refer to as a chronic repeat purchaser. It's kind of a textbook example. It's a very large customer that just continues to eat away at different workloads and use cases. And in this case, there was a fair amount of emerging products in there also, which was really nice to see. But it's -- yes, so they were existing. And then we had several others that were already at the 5-year mark, and they bulked up on some purchases. So that's what we saw there in Q4. And as I said in Q1, that will reverse and come back down to the low 3s, 3 or low 3s somewhere around there.

Right, right. Yes. Sorry, I missed that in the presentation, but thanks for that, Duston, that's good color. The other thing is on the terms. So I know you're saying it comes back down next quarter. What are you thinking about term links now as we look out several quarters. I mean we were thinking it kind of slowly slips, I think, toward 3, but do you think it -- are we stabilizing now at this kind of 3.3, 3.2 level? Do you think it keeps coming down just a little bit? Kind of what are you thinking now on term lengths?

Yes. Same thought I had a year or 2 ago that everything I see with the mix of new business and existing business, it's still -- and then we put this in the Investor Day presentation, 2.8 to 3.0, somewhere around there. I think this fiscal year, it probably remains in the 3, low 3 range, somewhere around there. And as we migrate into '23, maybe get a little more tweaked down there. But everything that we see today, that would be the continued view on terms.

Great. Okay. So yes, this quarter, just kind of an anomaly and we just continue on that trend we've been on. All right. Great. Appreciate it.

Your next question comes from the line of [Mehdi Hussaini with SIG].

Two follow-ups. It's great to see the bookings. And I'm just wondering if you can help me understand, is it a way qualitatively or quantitatively, you can talk about booking by like a native data application versus hybrid model?

Okay. Maybe I can try. I mean we tried to quantify some of these by use cases, right? So the one that -- I mean, I think, in general, what I would just say is, today, largely first of all, the bulk of our business is what I would call on-prem, right? And we are starting to see more of it move to hybrid as we see these early use in customers migrating to the public cloud. And that portion is still relatively small, but growing nicely, right? So the bulk of it today is on-prem, but I expect that over time, we will see more and more of a mix of public cloud based workloads in addition to our on-prem workloads. So that's one piece of it. The other way to think about it is we also -- what kind of workloads are we running? And there, like we said, the one workload that we quantified is end-user computing. And that typically runs between 20% and 25% of our overall business. The rest of it tends to be other workloads like databases, which we haven't quantified, but databases, anything other server virtualization type workloads. So perhaps that will give you a reasonable framework.

Sure, sure. Yes. You referenced, I think I'm not mistaking, $60 billion TAM. And I think the native data is the fastest growth, but perhaps is the smallest piece, is secular, but it's going to take some time for it to scale, right?

When you say native data, are you talking about cloud native or?

Cloud native.

I mean for us -- yes. I mean I think when we talk about $60 billion TAM, we talked about a couple of different pieces of it, right? One is our core HCI, hyper conversion as we said, that continues to grow, it's eating into 3-tier, it's capturing more enterprise workloads. And that business, that continues to grow very nicely, right, over the next several years. And then on top of that, it extends to hybrid cloud, right, which is the public cloud component of this, which we talked about. And then on top of that, we talked about opportunities in unified storage, which is all about files and objects and where we are gaining share against traditional providers. And then, of course, database as a service, right? So those are the components and we broke it down for you, yes.

Yes. And actually, that share gain was premises of my question. If I just look at Slide 16, your share gain -- your 53% of AHV adoption, like 8 quarters ago, it was in the mid-40%. So you definitely are well over 50%. And as a follow-up, is there a cap? Is it going to like -- a year or 2 from now, is it going to be closer to 60%? And where do we go from there?

Yes. I expect that our AHV adoption will continue to pick up for multiple reasons. First is that AHV is getting stronger and stronger as a hypervisor in terms of broader and broader sets of capabilities. Second, for example, is that partnerships such as the one that we just did with Red Hat, where now Red Hat Linux is officially certified with AHV will provide more confidence to our customers in adopting AHV as a platform. So I do expect that it's going to continue to tick up over time as more and more customers adopt AHV for their workloads. So it's too hard to see particularly there's going to be a ceiling on it or not at this point. It's a little too early, but I would expect it to continue to tick up. And it certainly has historically done.

Sure. And then just if I may, just a quick follow-up. And the scaling of your new products would complement, as I imagine, at some point, incremental share gain would be more challenging, but how you scale new products could be -- could help sustain the growth?

Yes. I mean I think we are very excited about our new products. As Duston pointed out, they were 41% of our number of our deals I think this last quarter. And they're all unlocking great opportunities for us, right? database management and database as a service is a huge big market opportunity, where we are relatively small, but growing rapidly into that. Unified storage for us is all again, growing into a large existing market where our presence is relatively small. So these newer emerging products are all sizable markets where we have relatively small share and an opportunity to gain share and grow rapidly and also attached to our core platform.

Your next question comes from the line of Simon Leopold with Raymond James.

I wanted to ask about how we should be thinking in terms of the percent of billings coming from renewals. This quarter was about 12%, and you've provided a forecast for fiscal '25 of getting to 40%. But I'm imagining that this should not be a linear progression. And I think this quarter was very similar to last. How should we think about that rate of change for that particular metric?

Yes, you'll see, again, some of this buried into the Investor Day package, so you might want rereference that, Simon. There's a '23 number in there. So that gives you a feel there. So again, you'll see it ratcheting up in '23 as a percentage and both from an ACV percentage and a TCV percentage, but that bigger increase will occur in FY '23 rather than FY '22, and that's just an ATR timing perspective on these deals that average 3-plus years, it's just -- they haven't come up for renewals yet. But in FY '23, there's just larger tranches that naturally come into play.

And I guess the other question may be a little bit difficult to quantify, but in making the transition where you want to focus more on renewals and essentially spend less on sales and marketing and new customer acquisition. If hypothetically you underinvest and underspend, how long would it take for you to observe that you've made a mistake in terms of your allocation? What's the sort of delay in the productivity? Any way we could judge this?

Well, yes, I can mention that and Rajiv might want to also pitch in here. But I just want to make something clear, it's not like we're taking massive cost out of the new and the upsell part of the equation, a vast majority of the leverage is going to come from the mix, right, as the mix of the renewals increase and those come in 80% less cost in new and upsell. That's where the leverage is going to come. Now yes, we've gotten a lot more efficient on demand gen and pipeline generation. From that perspective, which is working well more from a digital perspective and our test drive and all that stuff, which is really helping those efforts. But it's not like we're cutting significantly on the new and the upsell. This is more we're continuing to focus on that and do whatever we can. But the majority of this leverage is going to come from that mix shift.

Your last question comes from the line of Erik Suppiger with JMP Securities.

Congrats on a good quarter. I know you guys don't sell hardware, but can you comment -- I think your software is often tied to hardware. Can you comment a little bit on what effect do you see from many of the component constraints that are out there on the hardware side? And then secondly, just curious if there's been any change on the competitive front in particular with VMware?

Sure. Let me take that, Erik. So look, as you know, our software runs on a variety of hardware platforms, and it's not -- also it's not tied one-on-one to new hardware sales, right? So it's not that we're always selling along with hardware. Sometimes people buy software independent of hardware. They'll have hardwares that they've already purchased, and of course, they have a choice. So the supply chain impacts on our business so far has been relatively modest. We've seen some customers pulling forward some orders to try and ensure that they have access to hardware. We've also seen other customers that delayed placement a little bit. But the results so far has been pretty minimal for us. And that said, we're very comfortable with our 1Q forecast that we guided to, and we will need to continue to monitor the situation here. So that was the first.

And then the second, I think you said what about the competitive dynamics in terms of what we are seeing in the market. I would say, again, in fourth quarter, we saw a nice quarter-over-quarter improvement of our win rates against our largest competitor, but also other HCI competitors. And I sort of said this earlier a little bit here, Erik, but fundamentally, we are very focused. We're focused in terms of execution on in this category. Our product is strong. We provide simplicity, freedom of choice, a great customer experience with our NPS sitting at 90. So the product offering is really strong. Our go-to-market operations have continuously improved over the last several quarters, and we are benefiting from that as well. So that combination of a good product plus good, strong and improving go-to-market execution is what's leading to these win rates.

And so they have increased, okay.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.