Nutanix Inc (NTNX) 2022 Q2 法說會逐字稿

Hello. Welcome to the Nutanix Q2 Fiscal 2022 Earnings Conference Call. My name is Emily, and I will be the coordinating the call today. (Operator Instructions)

I will now turn the call over to our host, Rich Valera. Please go ahead.

Good afternoon, and welcome to today's conference call to discuss the results of our second quarter fiscal 2022. Joining me today are Rajiv Ramaswami, Nutanix' President and CEO; and Duston Williams, Nutanix' CFO. After the market closed today, Nutanix issued a release announcing financial results for its second quarter fiscal 2022. If you'd like to read the release, please visit the press release 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, including our financial guidance as well as our ability to execute there on 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 and factors driving our growth, macroeconomic, geopolitical 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 annual report on Form 10-K in the fiscal year ended July 31, 2021, and our quarterly report filed on Form 10-Q for the fiscal quarter ended October 31, 2021, as well as our earnings press release issued today.

These forward-looking statements apply as of today, and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today's call, except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and our earnings press release. Lastly, Nutanix management will be participating in the Susquehanna Technology Conference on March 4 and KeyBanc Emerging Tech Summit on March 8 and the Morgan Stanley TMT Conference on March 10.

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

Thank you, Rich, and good afternoon, everyone. Before we begin, I want to spend a moment acknowledging the current situation in Ukraine. Our thoughts are with all of those who are personally impacted by the situation in the region.

Now turning to our second fiscal quarter. Against the backdrop of an evolving COVID-19 pandemic, we delivered another solid quarter, exceeding all of our guided metrics and saw building momentum in our renewals business. We continue to see healthy demand for the Nutanix cloud platform driven by businesses looking to accelerate their digital transformation, modernize their data centers and adopt hybrid multi-cloud operating models.

Taking a closer look. Our second quarter reflected continued execution on our subscription model and was marked by strong top and bottom line performance. We delivered record ACV billings, which grew 37% year-over-year, our highest growth rate in 3 years. Our revenue also grew 19% year-over-year despite seeing expected term compression. Once again, we saw good linearity, which combined with diligent expense management, enabled us to generate positive free cash flow for the first time since we started our transition to subscription, approximately 3 years ago, putting us well on track to achieving our target of sustainable positive free cash flow by the second half of calendar year 2022. Overall, we are pleased with our second quarter financial results.

During the second fiscal quarter, Nutanix published its fourth Global Enterprise Cloud Index Report based on a survey of 1,700 IT decision makers around the world. Respondents noted that they're strategically choosing [right around] workloads based on security, cost and performance parameters. We see this cloud smart approach as a driver of hybrid multi-cloud adoption. As such, we're not surprised that 83% of respondents agree that hybrid multi-cloud was the ideal operating model.

The results of the survey reinforce our view that the simplicity and performance, enabled by the Nutanix cloud platform for deploying and managing workloads across a variety of on-prem and public cloud environment is what the market is looking for. Recently, we took another important step forward on our strategic priority of making our products easier to sell and consume, with the global launch of our hybrid multi-cloud solution portfolio.

With this launch, we simplified our packaging, metering and pricing and aligned our portfolio with the hybrid multi-cloud solutions our customers are consuming, supported by validated designs and deployment best practices. While still early, the initial response to the rollout from customers, partners, sales reps and industry analysts has been encouraging. We saw numerous wins in the quarter in which new and existing customers adopted Nutanix cloud clusters, or as we recently renamed it NC2, to extend our platform into the public cloud with an emphasis on disaster recovery and flexible capacity use cases.

RBL Bank in India, an existing customer who is already using the Nutanix cloud platform, including Nutanix unified storage and database service solutions added NC2 on AWS to its existing deployment as a disaster recovery solution for their mission-critical applications, going from proof of concept to live deployment in just 3 weeks. They found the simplicity, ease of deployment and seamless failover from on-prem to public cloud [setting apart] from alternative solutions.

Another win saw a government ministry in the EMEA region, consolidate workloads from its regional branches on to the Nutanix cloud platform to improve performance, cost and security while using NC2 on AWS to seamlessly support seasonal spikes in demand.

In the second quarter, we continue to receive industry recognition for our unified storage solutions. Nutanix Files was named a leader and outperformer in GigaOm’s scale-out file systems radar report. Spending on recognition received last quarter in which Nutanix was named a visionary in Gartner's Magic Quadrant for distributed file and object storage for the first time.

Our win with a U.S.-based sporting goods distributor in the quarter demonstrated the increasing traction we are seeing with Nutanix unified storage and our broader platform. This customer was unhappy with the performance of a competing HCI product and replaced it with the Nutanix cloud platform, including Nutanix' cloud infrastructure and unified storage solutions. They also adopted Nutanix database service to automate the administration of existing and new databases and facilitate migration to more modern database.

Another win with a European-based energy services provider demonstrated the growing momentum we are seeing with Red Hat, an important strategic partner. This joint customer shifted their container-based big data workload that were running on OpenShift on a competing HCI solution to the Nutanix cloud platform, including our AHV hypervisor.

We also saw a North American-based retailer deploy their business-critical workloads on Red Hat Enterprise Linux, or RHEL, running on the Nutanix cloud platform. In both of these wins, our joint customers were able to see improved performance and meaningful cost savings by running on our AHV hypervisor, assured by the recent certification of both OpenShift and RHEL on AHV. We are excited about the large and building opportunity pipeline that we see with Red Hat.

As we continue to strive for progress across all aspects of ESG, we had 2 important announcements on the governance front during this quarter. First, we eliminated our dual-class stock structure, simplifying the company's capital structure and ensuring that all shares have equal voting rights. We think this shareholder-friendly move could improve our chances of being included in additional index funds and broaden our shareholder base of both active and passive investors.

Second, we also announced that we strengthened our Board of Directors with the appointment of Gayle Sheppard, who currently serves as Corporate Vice President and Head of Global Expansion and Digital Transformation for Microsoft Cloud and AI. Gayle works closely with Microsoft's largest customers that are implementing multiyear digital innovation and modernization strategies and with governments and countries around the world driving Azure regional expansion. We believe Gayle's combination of public cloud experience and running businesses at scale is a great fit for our business. And I look forward to benefiting from her insights.

In closing, I’m pleased with the results of our second quarter. We delivered another quarter of strong growth, exceeded all of our guided metrics and generated positive free cash flow for the first time since the beginning of our transition to a subscription model. We made important progress on transitioning our hybrid multi-cloud platform towards solutions, which we think will make it easier for us to sell and for our customers to adopt. And we're starting to see the benefits of our building base of subscription renewals, which we expect will help us deliver consistent growth and substantial sales and marketing leverage. This progress makes me optimistic about our ability to deliver against the vast opportunity ahead of us.

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

Thank you, Rajiv. I will get right into some of the specific Q2 highlights. ACV billings for Q2 were $218 million, reflecting 37% growth year-over-year, significantly above our guidance range of $195 million to $200 million and ahead of the Street consensus number of $198 million.

Our renewals team is starting to hit their stride and the renewals business performed much better than expected, accounting for the ACV billings upside in the quarter. Both LOD support renewals and term-based license renewals exceeded our plan which resulted in a higher mix of renewal business. In any given quarter, our renewals performance is comprised of a certain percentage of late renewals that are executed after the renewal date, on-time renewals and early renewals that are executed before the renewal date.

We forecast renewals based on the ATR, or available to renew, and apply an estimated retention rate. We also estimate the percentage of renewals that will be transacted as late, on-time and early. In Q2, we processed more early renewals than expected, which led us to exceed our renewals projection.

Revenue for Q2 was $413 million, reflecting 19% growth year-over-year, above our guidance range of $400 million to $410 million and ahead of the Street consensus number of $407 million. The revenue outperformance for the quarter was a bit more muted than the ACV billings outperformance as early renewals did not impact current quarter revenue. Additionally, revenue for LOD support renewals is recognized ratably over the term length and the outperformance on LOD support renewals was not immediately reflected in the current quarter revenue.

Our average contract term lengths overall stayed steady at 3.1, the same as in Q1 '22. We previously thought we'd see a slight uptick in term length during the quarter since our federal business which has a seasonal high in Q1 has lower term length, but the higher renewal mix impacted the average contract term length in the quarter. ARR as of the end of Q2 was $1.04 billion, growing 55% year-over-year.

We've now fully rolled out our new solutions offerings globally. And as we've previously stated, overall emerging product comparisons to prior periods are becoming less meaningful. However, Era and Files, 2 of our historically largest emerging products, which have relatively clean comparisons to prior periods, both saw healthy year-over-year growth and record levels of total bookings in the quarter.

Q2 sales rep productivity was in line with our forecast and net sales reps were flat in Q2. We were pleased with the addition of approximately 700 new logos in Q2 '22 versus the Q1 '22 new logo count of 560 and the Q2 '21 new logo count of 730.

Our non-GAAP gross margin in Q2 was 83.8% versus our guidance of 82% to 82.5%. Non-GAAP operating expenses were $347 million, lower than our guidance of $360 million to $365 million. This is a result of continued diligence on expense management, hiring that has been a bit slower than planned and a slower return to post-COVID normalcy.

Our non-GAAP net loss was $6 million for the quarter or a loss of $0.03 per share. This was our lowest non-GAAP net loss since the company began shipping products. Q2 linearity remained good. DSOs in Q2 were 36 days, up from 28 days in Q1 '22. Our free cash flow was once again aided by the good linearity and collections coming in at a positive $17 million, over $40 million better than the Street consensus.

Although we might not quite be at the point that we will consistently generate positive free cash flow on a quarterly basis, we generated positive free cash flow for the first time in over 3 years, and we're very pleased with the progress we have made. We closed the quarter with cash and short-term investments of $1.29 billion, up from $1.28 billion in Q1 '22.

Now turning to our guidance. The guidance for Q3 is as follows: ACV billings to be between $195 million and $200 million, representing year-over-year growth of 22% to 25%. Revenue of $395 million to $400 million, gross margin of approximately 82%, operating expenses between $365 million and $370 million, and weighted average shares outstanding of approximately 222 million.

The Q3 ACV billings guidance, which calls for year-over-year growth of 22% to 25% compared to the actual growth of 18% in Q3 '21 and the Street consensus growth of 21% for Q3 '22. Our average contract term length will most likely be flattish in Q3. LOD support renewals should stay somewhat elevated in Q3. The elevated LOD support renewals, which have ratable revenue recognition, combined with a somewhat higher overall renewal mix, will have a small impact on revenue growth in Q3.

From a Q3 free cash flow perspective, we would expect a small usage of cash, which is better than the current consensus estimates of negative $25 million. The guidance for FY '22 is as follows: ACV billings to be between $760 million and $765 million, representing year-over-year growth of 28% to 29%. Revenue of $1.625 billion to $1.63 billion, non-GAAP gross margin of approximately 82.5% and non-GAAP operating expenses between $1.465 billion and $1.47 billion.

The ACV billings guidance of $760 million to $765 million compares to the previous guidance range of $740 million to $750 million and versus the current consensus estimate of $750 million. The revenue guidance of $1.625 billion to $1.63 billion compares to the previous guidance range of $1.615 billion to $1.63 billion and versus the previous consensus estimate of $1.626 billion.

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

(Operator Instructions) Today's first question comes from the line of Jason Ader from William Blair.

A couple quick ones for me. First, Duston, are you going to disclose the percentage of ACV that came from renewals in the quarter? And if you're not going to disclose it specifically, could you give us a sense of, I don't know, was it a few percentage points better than you expected when you talked about being better than expected?

Yes. So Jason, maybe the easiest way to talk about being better than expected. What we said is that basically the entire upside for the quarter. So we guided $195 million to $200 million on ACV billings. We printed $218 million. So effectively, that $18 million was the renewal upside in the quarter, which implies that new ACV was basically at the guide that was assumed in that $195 million to $200 million.

Okay. Perfect. And -- but you're not going to disclose quarterly, right, the percentage?

Correct.

Okay. All right. And then, Rajiv, just want to understand the new solutions offering and the motivation there. Was it something that where -- you had spent time with the sales reps and channels and the feedback was that there still has work to do in terms of the simplification? Because I know that's something that the company has been striving towards over the last couple of years to really kind of create bundles and simplification. But is this sort of think -- is the right way to think about this is the culmination of that multiyear effort and you feel really confident about this being a sort of go-forward picture just because it can get confusing for reps and channels and customers when you're constantly changing how the product portfolio looks?

Indeed, Jason, that's a very good question here. Yes, we talked about this at our last Investor Day in terms of changing our go-to-market from 15, 20 individual products with different pricing metering in effect to moving towards a more solution-oriented portfolio. And if you recall, we said we will trial this in about 10 regions. We did that earlier in the year. And now most recently, we went GA with it across the world. And so with this, what we've done is we've simplified our packaging, our metering and pricing. We've aligned the portfolio to the solutions that our customers want and they're consuming, and we provided validated designs and deployment best practices to help them.

Now it's still early, but the initial response from the rollout, this is actually quite encouraging from customers, from partners, from our own sellers and the industry analysts. We've seen a more rapid closure for some deals, utilizing the new simplified pricing and packaging. We've seen customers already taking advantage of this new packaging to quickly purchase more complete solutions to meet their needs. And in general, we expect to see more high-velocity transaction [choices] with both our own sales sets as well as with our partners.

And the renewal -- just to be clear, the renewals that you are doing for something, which doesn't line up with how the customer previously bought in your new solutions? How does that work?

Yes. So we will keep both the old and the new available for a period of time, and we will gradually, over time, migrate to the new and that goes for both new bookings as well as any renewals that we do.

And next, we have a question from James Fish from Piper Sandler.

I know a lot of us say congrats on results all the time, but really congrats on these great results. It's very nice to see. I do want to build off of Jason's question there. When you talk about, Duston, that $18 million of renewal upside in the quarter, you broke it down to that we had good renewal activity overall, but we also had a pull-in of early renewals. Can you break down how much of it of that $18 million was just outright early renewal activity instead of just better cross-sell, upsell that resulted in probably a better net retention rate against your Analyst Day targets?

Yes. So as far as retention rate, we're in, obviously, within that range that we laid out there. So that's clearly one point there. And as far as the upside goes, most of that were early renewals. Now little bit more LOD maybe, but effectively, almost all of that was early renewals. And I wouldn't label it a pull-in. This is more of our renewals team kind of refining their processes and back office things and we’ll provide quotes out in advance, obviously, the renewal dates and some customers opt to just to transact those renewals early. So that's what you're seeing there. And in this case, not only did we process the renewal early, but they actually paid for those renewals early also.

Understood. And just a follow-up on the operational side. I know you guys are not likely to change your Analyst Day goalpost given it's only been a few quarters. But as we think about that of your guide of $300 million to $500 million in free cash flow and you're showing much stronger cash flow than anticipated with all the efficiencies being implemented and just really strong execution. I guess what would prevent even the lower end of that range from potentially being pulled forward into fiscal '24? For example, when linearity has been really good for the last few quarters, and it seems to be holding and operationally, it does seem like you're going to get more and more renewals here in fiscal '23 and fiscal '24?

Yes. No, we're really happy with the execution all around actually. Linearity, as you mentioned, continues to be good. The operating expense discipline continues to be good and renewals are kind of playing out as planned. There's been a lot of work done there. A lot of heavy lifting with the renewals team. They've done an outstanding job, so many work to do there. So we've got -- with the backdrop, obviously, of -- have a great product and now with these solution offerings that should accelerate things into the future.

Dom Delfino just come on board as the new CRO. So we've got a lot of things pointed in the right direction. But the reality is we're only a few quarters away from that Investor Day. And we'll see how things play out, but we're really pleased with how things are going so far.

Our next question comes from Matt Hedberg from RBC Capital Markets.

It's Dan Bergstrom for Matt Hedberg. So new customer growth in the quarter was up nicely versus the first quarter. I know we've been kind of focusing more on the quality of new customers. Any change to the new customer profile here in the quarter? Or did you just simply acquire more of those quality new customers?

Yes, I'll...

Go ahead, Rajiv. Yes. go ahead.

No, I was going to say -- yes, we were -- we’ve been focused for the last several quarters on better quality and what that translates into a somewhat newer higher ASPs for new logos. And typically, between Q2 and Q3, we do get more new logos in -- compared to Q1 -- in Q2, sorry, and we did that this time as well. We're quite happy with the fact that we are now again back at around 700 or so new logos and they are of good quality. Duston, do you want to add anything?

No. Perfect. Yes, I wouldn't add anything.

Great for both of you. And then on the new product portfolio, just to be clear, are there other emerging products that are still out there to be rolled into new solution offerings we should be thinking about over the second half of the year? Or have we largely simplified that packaging and pricing at this point?

Yes, we are done. So this is it. This includes all the portfolio products. They're all part of the solution. We have Nutanix cloud infrastructure, cloud management, unified storage, database service, right, and end user computing. And that represents the entirety of our portfolio.

Our next question is from Pinjalim Bora from JPMorgan.

Great. I’ll echo my congrats on the quarter as well. Good to see. Duston, just a follow-up on the renewals uplift that you're seeing there. Does that -- the early renewals part, does that change the seasonality for Q4 in any way? Or do you say you continue to see a big jump from Q3 to Q4?

Not meaningful. No. I mean we're always going to have quarters with early renewals. So from that perspective, the ATR from Q3 to Q4 does go up, and that's not materially changed.

Got it. Rajiv, could you maybe talk about the general demand environment from a new business standpoint heading into 2022 compared to last year? Do you feel like IT modernization projects are kind of coming back on the table and might accelerate in the new year?

Yes. I think the demand environment continues to be still healthy. We are seeing customers continue to focus on using IT as an enabler. They're focused on continuing to modernize their infrastructure, go to the public cloud and, of course, continuing to drive their remote workforce. So we haven't seen that. The fundamental dynamics are still pretty much intact. In that context, what I would say is that we are a pure-play provider focused on that HCI market and transitioning legacy 3-tier storage architectures to HCI, right, and then extending that to the public cloud. So we haven't seen anything significant from a demand that change at all and customers continue to be investing at this point.

Got it. Lastly, if I can. The pricing and packaging obviously has lower pricing and metering, I think you said. Is there an underlying uplift in unit price for like-for-like if somebody is renewing?

Yes, that's a very good question. And that was not our intent, right? Our intent here with this new launch is really around -- it wasn't intended to be either a price increase or a price decrease. But it was really to make it easier for our customers to consume our portfolio and for our reps to quote our products in a way that matches their needs.

Now I'll give you some specific examples. We did simplify the metering, and we moved entirely to core-based pricing for our core offerings. Now one impact of the change is that it makes our core offering much more competitive on all-flash configuration that customers are increasingly favoring compared to hybrid with flash and disk.

We also introduced, for example, a new [middle field] in our cloud management offering. And that's catering very specifically for customers looking at a hybrid cloud operating model that includes operations, self-service and cost governance. And you -- buying this thing ala carte in the past would have required you to actually buy more products than before, right? So we have a very custom solution now that's geared towards this particular use case.

So overall, I'd say that we made it easier for customers to buy these multiproduct solutions to address their specific needs. And this will help them consume more of our portfolio and for our sales reps to be more productive. And then the feedback so far from both customers and partners, best results.

Next, we have a question from Wamsi Mohan from Bank of America.

Duston, on OpEx, you guys have been showing very strong results relative to your guide for several quarters now at least for the past 4 quarters. And those efficiencies seem to be increasing in magnitude or maybe said another way, you're coming in much lower than your guide on OpEx? Can you talk about what of that is structural versus what is more a function of maybe difficulties in the labor market and adding head count at the pace you had anticipated? And I have a follow-up.

Yes. Wamsi, we continue to have very good discipline on the OpEx and that will continue. There's no doubt about that. On the hiring front, we wish we had a few more head. It's tough for everybody where Nutanix was no exception on the hiring front. So there's clearly some underspend going on, on head count that we wish would get plugged here going forward.

A little bit of the -- just getting back to normal, travel is still down quite a bit and that hasn't returned. We assume that would return a little bit there. But the efficiencies that we continue to look on, obviously, is taking a hard look continuing at sales, even though we've done a pretty good job there. We’ve got some thoughts on how we can get it even more efficient from a sales perspective.

So I think if you look at the assumed guide -- for the guide for Q3 and then the assumed inherent guide for Q4 because that's the only quarter we haven't officially guided for, we have a step up there. So we're again assuming some return to normalcy here in Q4, and I think some increased hiring.

Okay. That's helpful. And then if I could, back to renewals. You noted these early renewals, how early are the early renewals? And why are customers choosing to do this? And I wasn't very clear why that doesn't have somewhat of a pull-in or pull-forward impact? Is it just that -- maybe you can shed some color on that?

Sure. So the impact that it has, when we do in early, as long as we collect cash, is it does accelerate ACV billings, and it does accelerate billings, total billings. But the revenue is always going to be recognized in the quarter that the renewal terms, right, or it starts again. So you never going to recognize revenue early on an early renewal, but as long as we collect cash that will go into ACV billings and total billings from that perspective.

Now your question on, I think, how much was from Q3, which kind of gets into our scores about Q3 guidance and things, roughly probably $10 million or so came from Q3. And so then you think about the difference, what's the difference related to? And a lot of that mostly relates to co-terming because the beauty of our business, we're always upselling. But that leaves the customer with a bunch of different renewal dates.

And so a customer has a fair amount of renewals in this case in Q2, and they've got renewal in Q3 and a bunch of renewals in Q4, what they may opt to do is co-term all those and just bring them into Q2, have a common term date, makes it easier for them and makes it easier for us. So that's mostly related to some of the other renewals there that are outside of Q3.

Next, we have a question from Meta Marshall from Morgan Stanley.

Great. Just wanted to get a sense of whether underlying supply chain challenges with some OEM kind of partners and whether that you saw any impact or kind of demand or ability to close new customers during the quarter? And then maybe a second, just kind of building on one of question and your kind of answer to Duston. Just getting a sense of what percentage of your customers are kind of an overall size of the revenue base that has co-term contract at this point?

Okay. Meta, Rajiv here. I'll take the first question and -- on the supply chain and Duston can do the second. On supply chain, we've noted in the past that our software runs on a variety of hardware platforms. And it's not necessarily tied one-on-one to new hardware sales. So supply chain impact so far in our business today has been relatively modest, including in this quarter. We've seen a few customers pulling forward orders in some cases to get early access hardware. We've also seen some other customers that have delayed placing orders to confirm with expected late deliveries of hardware.

So we certainly expect hardware procurement to remain challenging over the near term. What I would say though is to this -- given the choice and flexibility that we provide with our software, the net effect on our business so far has been minimal. We'll, of course, continue to watch this very, very carefully as we go forward.

And then just on the -- yes, on the percentage of co-terms, just by definition, where we're so early into the -- certainly into the term-based renewals, as far as starting to get into volume. It's not -- suspect we'll see more and more of this as these renewals start to come up and a customer has all these different renewal date, they're going to want simplicity. We're going to want simplicity. So I would suspect we'll see more and more of these as the ATR, in general, continues to elevate over the next several quarters.

Next, we have a question from Rod Hall from Goldman Sachs.

I want to come back to renewals and the renewal rate and just see what you're observing. It sounds like you're a little bit deeper into renewals now. You've done some of these co-term deals. What do you think the renewal rate is sort of running up to this point? I know you're early stage in it, but I'm just curious what that rate is running, and I have a follow-up.

Yes, sure. Duston. At Investor Day, we had put a target out there at -- from a GRR perspective of 90% or greater, and we're within that range currently. So there's no real difference really than what we've seen over the last couple quarters. We have a bigger sample size, of course, now. And we're happy where the core is. We're focusing on adoption of the total product portfolio. But so far, there's been really no meaningful change there.

Okay. Great. And then the other thing I wanted to ask is how many, like -- so of the renewals that were available, I guess, what proportion of them did this co-terming? And is that representative of what you expect to see going forward? Or I think we're all trying to get a handle on how much of this co-terming might come through in the renewals and how much the renewals kind of just will happen, I don't know, without the co-terms? So I don't know if you can give us any help on that or observation?

Yes. It's probably a little early to talk about this at this point. I think if you look at somewhat a majority was just [playing] early. And then anything out of Q3 would have more tilt or someone would have more tilt to the co-terming just because of the extension of outside of Q3. So I think it's just -- it's too early to tell. And this is all customer preference too. I mean we don't want to force a customer to do anything. We wouldn't force a customer to do something with that economics on our side. So I think this is just something we're going to have to monitor going forward. But I think just by the elevation of the ATR, we'll probably see some more of this certainly with, I suspect, the bigger customers.

Our next question comes from the line of Mike Cikos from Needham.

Just wanted to go through the billings, and I know it seems like it's the topic of the day here. But if I'm looking at the $18 million of revenue upside -- sorry, billings upside you reported this quarter, we're seeing that is almost entirely coming from the early renewals and about $10 million of that was from this co-terming maybe pull-in from Q3. If I normalize for that in Q2 results, and then normalize for that in the Q3 guide, it implies that your billings would be flat sequentially instead of, I guess, you've typically seen 3% to 4% sequential declines. And I'm just curious is there anything that you can point us to, which is helping, I guess, reduce that typical seasonality we would see in the ACV billings going from Q2 to Q3?

Sure. Let me take a shot at that. One of the thesis that we laid out at Investor Day was predictability of renewals. Because the company was always built on new and upsell, and we weren't afforded the luxury to have renewals and the 2 traits of renewals that we laid out. First, that they were very cost effective and they added leverage to the business model. And secondly, they added predictability, right? And so now we're starting to have a revenue stream that has a much higher level of predictability.

Now I wouldn't layer that too much into your comment about Q2, Q3. But clearly, as the ATR goes up, we're going to have a different profile of the business that's not dominated by new and upsell. And finally, this is what we've been talking about for the last 2 or 3 years. Finally, the business starts to change and morph into a somewhat more predictable, better leverage business.

Very helpful. And I think this probably lead into my second question, but you guys materially outperformed on gross margin, well ahead of that 82% to 82.5% that you had guided to versus the 83.8% that you delivered. Was a solid chunk of that derived from this -- from the renewals here? Or is there anything else that they that helped that gross margin outperform where we were previously modeling?

Well, I mean, any time you've got increasing top line, obviously, revenue in this case, it's going to help the margin. But we also quite honestly got a little favorableness for some underspend on head count and support. That wasn't necessarily by design. So that accounted for a little bit of it. But clearly, we're -- we've -- I think if you look at the gross margin trend over the last many, many quarters, it's been in that 82%, 83% range. And we continue, I think, to do a pretty good job managing within that range. So it popped up probably a little higher than what we expected. And primarily, the reason we're bringing it down in Q3 is the revenue base naturally shrinks a little bit as we go from Q2 to Q3.

Next, we have a question from Aaron Rakers from Wells Fargo.

Two, if I can as well. So maybe first of all, I just wanted to ask about the competitive landscape and how that's evolved now that your biggest competitor is completely spun off from Dell? And I think in that same context, how has the company evolved from a partner ecosystem perspective? Can you comment on HP? Any incremental engagements with Dell post that spin, et cetera?

Sure. So Aaron, let me take a crack at that. So first on the competitive environment and then on the partners. So we haven't seen a major change in market dynamics from a competitive perspective. I will say, fundamentally, from the market view HCI continue to grow this place, it’s additional architecture, while it becomes a foundation [for either] multicloud. And like I said earlier, it’s capable of handling all these -- all virtualized enterprise workloads, including same-size databases that are very performance sensitive.

Now from a competitive angle, if you look at some of the other players without naming names here, so many of the other players in the market have offerings in both traditional storage and HCI. And so they tend to be not -- they may be less aggressive in pushing HCI as they seek to protect margins in their traditional business. And then if you look at other classes of competitors, they have a broader portfolio that includes things like developer and security offerings without a focused go-to-market effort in just HCI.

So from that perspective, we are pure play. We are continuing to win in our fair share and more of the market because of the platform, the robustness, the scale, the simplicity, the flexibility and freedom of choice that we offer and, of course, our focus on customer delight. So that's the competitive angle.

Now when it comes to the partners, again, I think we've talked about OEM partners and then our -- and then the traditional [hotel] vendors and then we talked about our ecosystem entering the cloud. So on the OEM side, we continue to grow the partnership with HPE. There -- as you can see from their own earnings, they had a big focus on GreenLake. We are part of their GreenLake solutions, both our core platform as well as our database and service Era as well as part of their GreenLake offerings. GreenLake is small but growing rapidly. And the teams are working together in the field and continue to win deals together. So that partnership continues to develop.

Lenovo was steady state with us. We've been working together with Lenovo for a long time. And then when it comes to the ecosystem side of it. The 2 that we are very focused on right now Red Hat and Citrix. And with Red Hat we've had now -- we are now 2-plus quarters into -- since we announced the partnership, we continue to do very well on the Red Hat front. There's a number of engagements. We continue to get new wins every quarter here. For example, this quarter, there were a couple of wins that I can talk about like that continue to build on the momentum we had.

One was around OpenShift running on top of the Nutanix platform. There was this -- a European energy services provider that took all their container-based big data workloads that were already running on OpenShift, but on a competing HCI solution and moved it to the Nutanix cloud platform, including our own hypervisor. We had another retailer customer who deployed their business-critical workloads on Red Hat Linux moving to the Nutanix cloud platform. So that Red Hat relationship continues to grow.

With Citrix, we've had a long-standing relationship that just got formalized recently. So there's just a number of joint customer engagements and wins together around end-user computing and virtual desktop. That happens every quarter. This quarter, that continues and that momentum in Citrix is very much there.

The last piece was the cloud piece. There again, I think we've had our solution with AWS up for a while. We talked about some more examples of wins there this quarter in terms of customer usage. We are continuing to work jointly with Microsoft Azure to get our software solution out to market. We are in private review on that. So these partnerships are all continuing to build, and we expect to get more and more from them as we progress.

That's great. And then as a quick follow-up, Duston, I'm curious, back to Wamsi's question, you've clearly not only executed well on OpEx, but you've underperformed or you’ve had OpEx below the guided range for the past several quarters. Given that, that's reflective of some not yet back to office fully and some slower hiring, should we expect over the next couple of quarters that there could be a quarter where that catches back up given how much you've relative to guide underspent over these last couple of quarters?

Well, I mean, we guide to a range that we expect to come close to, in this case, we guided $365 million to $370 million. Now you have some just one-off things like FICA taxes reset. So that's millions of dollars in the first part of the calendar year. And we have a bigger step up in Q4, and this is the inherent and you can do the calc for the guide for $160 million, $165 million -- or $146 million to $146.5 million for the year.

So eventually, we'd like to hire more folks. We'd like to hire. We're not massively off the target of sales risk, but we'd like to hire a few more sales reps. We'd like to hire some more R&D folks. We like to hire some more support folks. And I think we'll do that over time. It's just a question of when will that happen. Now again, we've laid out an expense structure not only for this year with this guide, but we've laid it out '23 and '25. So regardless of what we end up hiring, we're still -- and the total company still marching to those parameters.

Our next question comes from Simon Leopold from Raymond James.

I wanted to ask you about the full year forecast for ACV billings. If I'm thinking about this correctly, you've put up about $200 million on average per quarter between the 2 quarters you reported and the April quarter you forecast, which seems to imply you're expecting a decline in ACV billings in your fourth quarter in July. I just wanted a little bit of help understanding what the thought process might be there.

Well, that's not correct, Simon. So let me kind of state the facts. So as you recall, we have -- we've talked about this in earnings calls, I think, for the last 3 times. We didn't this time because we talked about so much is that the 4 quarters of our ACV billing guidance don't equal the year. And the reason why that doesn't equate is because less than 1-year deals, if we do a 6-month million-dollar deal, in the quarter, we would count that as ACV of $2 million. And so you can't simply add. It's been -- historically, it's been about a 6%, 7% discount. Again, we've laid this out in earnings call. So I think if you do all that math, it would certainly not suggest a decrease in ACV billings in Q4.

Yes. No, I recall you talking about it before, but I think it certainly bears repeating. It's a point you should continue to be making.

Yes, yes, yes. So there's -- again, it's simple math to do. I don't want to talk specially about Q4 because we don't guide to Q4 at this point. But if you do that math, it would certainly suggest an uptick in ACV billings in Q4.

And then just as a follow-up. In terms of the operating expenses, have you seen a change in wage inflation in the last quarter? Obviously, you've guided to a slightly lower expense for the year. Just wanted an update on what you're thinking about wage inflation in that equation?

Yes. I think everything has gone up and salaries are certainly one of those things that have gone up. So we've built that into the forecast. We're monitoring it effectively daily, weekly. And the assumptions there is that those wages are increasing. And we have tweaked up the assumption or we will end up tweaking the assumption for FY '23 also. And this isn't just us, obviously, this is everybody. But again, regardless of what that is, we will still operate within the expense structure we've laid out.

Yes. The only thing I might add to that -- yes. I might just add that what that practically means is instead of hiring 100 people, we might hire 90 people or something like that, right, if the wages are going up and we still scale within our OpEx model.

Next, we have a question from Nehal Chokshi from Northland Capital Markets.

Congratulations on awesome ACV results. It sounds like you are adjusting up the expected percent renewals are available renews, say, 1 or 2 quarters out on a go-forward basis. But not as much as what you experienced in the January quarter. Is that what's going on between the differential -- between the year-over-year growth that you just put up on ACV billings and what you're guiding to for the April quarter?

I'm not sure I quite understood the question, Nehal. Sorry.

All right. Let me try again. So what went into the beat for the January quarter was a greater percent of renewals that renewed earlier than expected, while you expect a certain percent to renew, it was a higher percent than typically expected.

Yes. Yes.

And typically, this would represent a pull forward, but that's not what your guidance represents because you're actually raising your April quarter ACV billings guidance relative to where consensus is. And so I guess -- but it's not as much as the January quarter beat. So I guess what I'm trying to say is that the percent that was more than usual a renewal, you’re raising that, but not as much as what you could experience in the January quarter. Is that essentially what's happening here?

Yes. That's fair. Yes. We would not expect at this point, the amount of early renewals sort of around percentage basis or you can do a dollar basis that we experienced in Q2. Also got LOD renewals playing in here too that have been a little bit stronger than what we had as previously assumed on the support piece. Yes.

Great. And then there's also been a lot of questions around OpEx and whether or not this underspend is going to negatively impact future ACV billings growth. So maybe another way to address this is that where are you in terms of your new ACV per sales team's targets today? Do you see still plenty of runaway for improving that?

We do. We were on target this quarter, and there's a lot of different things going on. And Dom and team are working away and whether that's channel work there, channel autonomy, which we've talked about a lot, leveraging partners, a lot more training for the sales force and then you have the solution selling. And again, the whole -- Rajiv has talked about this a lot, but the whole -- one of the big concepts on the solutions offerings are -- it makes it easier for the customer to consume and understand and makes it easy for our sales reps to understand and sell. And so clearly, we think there's clearly more upside on the productivity piece.

Okay. Can you give me a sense as to what kind [redundancy] that we're talking about? Are we talking about 2x or like 50%, 20%?

Investor Day. We laid out the thoughts on Investor Day. There’s a slide there on not only sales reps but what we thought on productivity.

That’s all the questions we have time for today. So this ends our call. Thank you for joining us today. You may now disconnect your lines.