Q3 2021 Nutanix Inc Earnings Call
Good day, and thank you for standing by and welcome to the New 10 third quarter fiscal 2021, the earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session and I need to press star 1 on your telephone please be advised that space.
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Uh Huh, Vice President of Investor Relations. Please go ahead.
Good afternoon, and welcome to today's conference call to discuss the results of our third quarter of fiscal year 2021.
This call is also being broadcast over the web and it can be accessed on our Investor Relations website at IR Dot new panics dot com.
Joining me today are Rajiv Ramaswami, who panics as president and CEO and Duston Williams, new tenants as CFO.
After the market closed today and panics issued a press release announcing financial results for its third quarter 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 goals strategies and outlook, including our financial performance financial targets and performance metrics competitive position and future periods, and 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 factors please refer to our SEC filings, including our most recent annual report on form 10-K for fiscal year 2020 filed with the SEC on September 23rd 2020, and our quarterly report on form 10-Q for the fiscal quarter ended January 31, 2.
'twenty 1 filed with the SEC on March 4th 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 and 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.
We have provided to the extent available reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website, and and our earnings press release.
Lastly.
New tenants management will be participating and the William Blair growth stock Conference on June <unk>, and the Stifel 2021 Cross sector insight conference on June 9.
New tanks will also be hosting a virtual investor day on June 20 <unk>.
A link to register for this can be found in our earnings release issued today.
We hope to see many of you at these upcoming events.
And with that I'll turn the call over to Rajiv.
Steve.
Thank you rich.
And good afternoon, everyone.
I hope, you're all staying safe and healthy.
We are closely monitoring the current COVID-19 situation around the globe.
Particularly in India.
That'd be ballpark help and support to our local team.
From health care assistance.
Fundraising for organization supporting relief efforts and the country.
I'm impressed by the resilience of both our employees and customers around the world, especially in India.
Now I'll move on to artisan.
He was free was a strong quarter across the board.
We delivered another quarter of improved execution.
New momentum.
And our performance on all our guided metrics.
Today I'd like to highlight some of our accomplishments in the quarter.
And also discuss progress on some of the key priorities I outlined on our last earnings call.
We continue to execute on our transition to an ACB based revenue model.
And as expected.
The renewal pipeline is continuing to build.
These economics continue to improve.
You had a shorter duration and Tom.
Combined with uplift from our emerging product.
In addition.
We saw good linearity in the quarter as a result of our ongoing operational improvement to our go to market and it.
And finally <unk>.
While we typically see a seasonal decline and backlogs and the third quarter.
And we've been able to hold it steady.
Further demonstrating the strength of the men and the quarter.
Overall, we are pleased with our execution.
And can see that the hard work of moving to a subscription model is paying off.
That's true but go into more details later on our financial performance.
Last quarter I shared my observations as a new CEO and Ms. Hannah.
And our clients are a priority for driving long term growth.
Including simplifying components of our product portfolio.
Deepening our ecosystem partnerships.
Continuing our shift to subscription.
And nurturing our talent pool.
I'd like to give updates on a couple of these priorities today.
Including our transformation to a subscription business model and deepening art and ecosystem partnerships to provide more impact on how we go to market.
Starting with our transition to a subscription model.
Our average contract continues to decline.
Coming down from last quarter to 3.3 years.
Helping drive higher unit economics.
We also see a growing base of renewables and an increasingly important driver of top line growth and sales and marketing efficiency.
With the SUNFISH and well under way.
And with our increased focus on efficiency.
We see a clear path to cash flow positivity and operating profit.
And we'll go into more detail at our upcoming Investor day.
Focusing on deepening partnerships to scale, how we go to market.
As well as creating more opportunities with larger accounts is critical to our long term success.
And April Lynn.
<unk> and mechanics, and announced a complete as a service solution for hosted desktop.
To enable IP division makes us to drive and the new remote hybrid workforce model.
This new solution.
All managed as a service with the convenience of a single monthly payment.
And single point of contact for support.
Includes lenovo client devices.
Citrix virtual desktop.
And Lenovo service powered by Nucleonic software.
This new aspect of our extended relationship with the number 1 seller of P. C in the world.
Is a great example of how we can work with a strategic partner collaborate their capabilities from the data center from the desktop.
In order to best serve our customers and.
Well, let's give us meaningful incremental opportunity.
Our partnership with Microsoft also continues to progress.
During the quarter, we announced that our kubernetes solution carbon.
It's now validated with Azure arc Kubernetes management.
With the ease of deploying and managing that certified kubernetes cluster on metallic HCI.
With consistent policies and governance and cross cluster provided by Azure arc.
Our mutual customers now have a smooth and fast pot to modern containerized applications.
And our hybrid cloud and mining.
This month, we announced that the new panics cloud platform and that makes sense to AWS Gov cloud.
Providing a unified hybrid cloud environment and cross mechanics on premises.
And bad metal Amazon E. C..2 instances are running on AWS Golf club.
U S public sector organizations looking for strength in security offered by AWS Gov cloud can now accelerate that adoption and leverage a single platform and management interface across their private and public cloud.
Next I'll talk about the momentum and our core software as well as our emerging solutions during the quarter.
And Q3, we continue to acquire new customers, while our existing customers expanded their engagements with us.
We saw continued strength and a core solution.
Reflected by a healthy year over year increase and our win rates against both our largest competitor and free tier infrastructure solutions.
We also saw continued strength and emerging product.
Without attacks faith on a rolling 4 quarter basis.
Increasing to 39%.
Up from 37% last quarter.
We are seeing more examples of customers choosing a complete cloud software platform.
Together with emerging solution.
To meet all of their business needs.
And example of this what's the government entity and the Asia Pacific region.
That chose our cloud platform software as well as non network security solution to develop a secure private cloud.
Supporting their mission critical systems include.
Including security <unk> and sequel database workloads.
Our database management solution era.
Continues to be an important differentiator for us.
And had good momentum during the quarter.
A financial services company headquartered in Europe.
Selected era and other emerging solutions on top of a cloud platform.
To help expand that infrastructure at scale.
And for their banking customer requirements for performance and growth and financial service level agreements.
This customer will use our database management solution.
And deploy optimize and manage sequel databases.
Across multiple hybrid clouds.
Helping to drastically simplify and standardize their overall database operations.
We also saw increased adoption of clustered <unk> during the quarter.
With new use cases, including data center consolidation.
What are the desktop.
That's a recovery.
And the ability to both to the cloud for additional capacity.
And 1 case, a fortune 500, North American financial services company.
Selected mechanics, and a multimillion dollar deal to replace their PTO architecture and.
And run their media workflows.
And is using cluster to bust into AWS and on demand.
For disaster recovery in their multi cloud and mining.
Next I'd like to touch and efficiency.
Because and important part of our path to profitability.
We have increased our go to market productivity.
Including more efficient digital marketing spend.
Increased leverage of our channel partners.
And optimized head count and geographies based on market opportunity.
In connection with these efforts we.
And we recently decreased our global head count by 2 and a half per cent.
From within the sales and marketing functions.
And we continue to refine our go to market model.
We expect this action to eat and approximately $50 million and annual savings.
Finally, I'd like to highlight some industry awards that new clinics a fee during the quarter.
Mixed demand stayed our customers' enthusiasm for our product and support.
We were recognized by Gartner as a peer insights customers' choice vendor.
Our emerging solutions for distributed file systems and object storage.
In addition.
Our core software was recognized by trust failures and.
As a top rated product and the ACI server virtualization software defined storage and water desktop infrastructure category.
And also.
We recently won the North face scoreboard Services Award.
While achieving excellence and customer service.
All of these awards are based on customer feedback.
In summary.
I'm very pleased with our execution across the board and the third quarter.
I look forward to sharing more information at our upcoming Investor day on June 22nd.
We plan to go into more detail about our mission to delight customers.
With a simple open hybrid and multi cloud software platform with rich data services.
To build run and manage any application.
And we will also provide insights on a Saturday.
Solution portfolio.
Go to market.
And mid term financial outlook.
And the meantime, I will hand, it over to depth and winning.
That's true.
Thank you Rajeev.
Q3 was another quarter of consistent execution.
In Q3, we seeded all guidance metrics and the expected benefits of our subscription transition and our HCV first focus continued to play out as planned.
Our average contract term lengths compressed as expected declining to 3.3 years versus 3.4 years and Q2 'twenty 1.
Term compression is highly correlated to better deal economics, and we were very pleased with the improvement and deal economics during the quarter.
Other key components of our subscription transition and our HCV first focus include retention rates and increased attach rates for our emerging products, which typically have shorter average contract term lengths.
Both of these metrics performed well and the quarter.
And as average contract term blanks do begin to stabilize we expect reported year over year revenue growth to move closer to ECB billings growth overtime.
Now I'll move on and do some specific Q3 financial highlights and.
In Q3, we had record ACB billings.
And the TV billings were hunting and $60 million, reflecting 18% growth year over year.
Above our guidance range of $150 million to $155 million.
Run rate ACB as of the end of Q3 was 1.45 billion growing 25 per cent year over year.
And to our guidance for growth and the mid 20% range.
Revenue was 345 million growing 8% from Q3 'twenty.
Our non-GAAP gross margin in Q3 was 81, 7% versus our guidance of 81%.
Operating expenses were $361 million versus our guidance of $365 million to $370 million.
We continue to benefit from overall spending reductions, including go to market efficiencies.
Our non-GAAP net loss was $86 million for the quarter or a loss of 41 cents.
Per share.
We were pleased that our backlog position remained flat in Q3 versus Q2, despite Q3, typically being a seasonally slower quarter, and which we usually experienced some usage of backlog.
And Q3, we experienced a solid year over year and quarter over quarter increase and our pipeline.
This pipeline growth occurred with significantly less demand generation spending versus our spin and Q3 'twenty.
Q3 represented our third consecutive quarter of good linearity.
Dsos in Q3 was 37 days down from 44 days and Q2, 'twenty, 1 and down significantly from 67 days and Q3 'twenty.
Our free cash flow for Q3 was once again aided by good linearity coming in at a negative $71 million 15 million and better than consensus.
We closed the quarter with cash and short term investments of $1..2 5 billion down slightly from $1, 2.9 billion and Q2 'twenty 1.
Now turning to our Q4 'twenty 1 guidance.
The guidance for Q4 is as follows.
And the billings to be between 170, and $175 million representing year over year and growth of 21% to 25 per cent.
Gross margins of approximately $81, 5% to 82%.
Operating expenses between 380, and 385 million new.
Weighted average shares outstanding of approximately $212 million.
Based on the Q4 'twenty, 1 ACB billings guidance, we expect run rate HCV to grow and the low to mid 20% range year over year.
Additionally, based on our Q4 'twenty, 1 ACB billings guidance, we expect HCV billings for FY 'twenty, 1 to approximate 590 to 595 million up from 505 million and FY 'twenty, reflecting year over year growth of 17% to 18%.
As a reminder.
Our our reported quarterly ACB billings, we annualize any deal that is less than 1 year and term length.
Therefore, the total fiscal year ACB billings are not derived from the simple addition of the 4 fiscal quarters.
Our yearly ACD billings calculation to eliminate any duplication that happens with the renewal of a deal that occurs within the period and is less than 1 year and duration.
We do not believe we will see any material change and average contract term lengths and Q4.
Based on our ACD billings guidance the implied revenue for Q4 should reflect double digit year over year growth.
Our operating expense guidance includes approximately $15 million and severance costs related to the previously mentioned limited workforce reductions that took place and Q4.
We expect some improvement and our free cash flow performance in Q4 versus Q3.
And finally to help with your modeling we continue to include in our earnings presentation located on our IR website, our historical trends for HCV billings run rate ACB billings term length, and a bridge and how to model and convert our current and future <unk> billings guidance to total billings.
And <unk>.
We will continue to include this level of detail through the end of FY 'twenty 1.
With that operator could you please open the call up and questions.
As a reminder to ask a question you need to press star 1 on your telephone to withdraw your question press the pound or hash key please limit yourself.
To 1 question and 1 follow up to a lot of time for everyone to ask questions. Please standby, while we compile the Q&A roster.
Your first question comes from Matt Hedberg with RBC capital markets. Your line is open.
Oh, Hey, guys. Thanks for taking my questions. Congrats on the strong <unk> results.
And I wanted to ask about clusters, you you guys talked about it and your script it sounds like it's doing better.
I'm wondering if you could provide a bit more detail on some adoption trends there and how is it helping I.
I guess, both with and upsell percentage perspective, but also future proofing existing customer spend is that kind of how they think about clusters in terms of extending.
The new tannic stacked and the cloud.
Yes, Matt happy to answer that I gave you.
It's still fairly early days left to work per clusters are considered a day for AWS.
But we are quite encouraged by what we're seeing from attacks and perspective.
And you look at the.
The use cases today.
And at existing use cases that customers are using cluster.
For example disaster recovery for VDI debt bonds, we talked about a large financial services customer doing that debate.
And the advantage there of course is that from what elastic where you can actually a value of media workflows for any other workloads.
On Prem, but use the cloud as you need for disaster recovery and that's a very cost effective very effective use case for Baxter.
We are also seeing other use cases for driving data center consolidation.
You want to get out of a data center and migrate to the cloud.
The easiest way to lift and shift workloads.
For existing applications without needing to reactivate them.
We are starting to also see organizations and use this for Dev test and bus capacity with seasonal demand.
And now to the and.
The latter part of your question there, Matt I think there's and equally important factor of future proofing. So our.
<unk> really across the spectrum in terms of cloud adoption and some of them are of course and using cloud already today, others are thinking about it as a path to the future and for those customers who are actually looking at this as part of their future journey, having this capability today gives them a lot more confidence and choosing new tactics as a platform.
Now the last day.
Our multi cloud roadmap. So we as you know we've talked about working with Azure and clusters and we do expect that to be available for early access. There later this year and we're closely partnering with Microsoft on that project.
No.
Yeah, that's great. Thanks, Rajeev and and then maybe 1 for dust and obviously strong <unk> results and the ACB billings from <unk> this quarter and Youre, calling for another acceleration in Q4 I assume a lot of this based off your pipeline and also and the fact, the backlog Didnt decrease but I just want what else gives you confidence in that kind of acceleration which is.
And certainly noticeable here.
Yeah, No. We're pleased to give that guidance, which as I said is about 21% to 25% year over year growth on the ACD billings Q.
Q4, typically is a stronger quarter force. So you see some of that clearly the pipeline and the work that has gone on with the pipeline management and the discipline and the pipeline is.
And is a big deal from that perspective for conversion rates are doing okay, and and things like that the product is doing well and.
And the marketplace emerging products continuing to do their thing.
We've seen some early indications with the channels starting to do.
And do a little bit more of a lift themselves with deals. So I think it's a combination of those things but again.
Again, Q4 is always a little bit better, but with the backdrop of a lot of a lot of good things going on behind the scenes.
And certainly it seems that way thanks, a lot everybody.
Our next question comes from James Fish with Piper Sandler Your line is open.
Hey, guys congrats on the acceleration again kind.
Kind of going off of <unk>.
Matt's question there the demand environment does appear to be favorable mouse business is reflecting from our vantage point I guess, how are you feeling about the sales capacity and productivity and what are you looking and do to ensure the first set of renewals really goes well over the next 12 to 18 months.
Yeah, So maybe I can start investing new can chime in there.
So we continue to focus very much in terms of sales productivity.
Yeah, we've talked about how the Christmas driven a lot of discipline and tons of pipeline management and much more predictable pipeline conversion with.
And with the sales team.
We are also building out your of course, leveraging the partner ecosystem more now we are bringing on more solution oriented selling and then the emerging product from top of that also improve productivity and.
And at the same time and again the compressing deal terms help overall ESG uplift Tesla.
When it comes to the second part renewals of your question. Jim. So we have been focused very much on building out the engine for being ready for all of that and he was coming in.
So we are building out the renewals team now to focus on our low cost and it will mckinnis and theyre, putting in all the tooling necessary. So that we get full visibility into where customers are and their adoption and consumption cycle.
And we've also created the clarity around who is responsible across the sales organization and the customer success teams for driving this whole process from the time of sales to the time of renewal. So all in all we feel pretty good about the upcoming stream of <unk> than it was here.
That's very helpful Rajeev, and and just keeping on the sales and marketing.
Obviously the announcement about the head count reduction just any further details here was it more kind of middle management layer or any of the reps themselves or how do we think about that debt reduction element. Thanks guys.
Yeah, I mean, I think there was a.
It wasn't I mean it.
So suddenly and sales and marketing.
But it was based more around where we saw for example excess coverage.
And we didn't need that many people far and.
Specific market regions.
And the elimination of certain functions.
And again, a room to go build out our renewals and separate from the the team that's doing new ACB.
So it was fairly distributed across the spectrum and of course net of a possible we try to not impact quota carrying reps, but look at the non quota carrying reps and temperatures process. So it is fairly distributed not specific to 1 particular area.
Thanks.
Our next question comes from and John Baugh with Jpmorgan. Your line is open.
Oh, Great Hey, guys congrats on the quarter it seems like a pretty good 1.
Rajeev I want to double click on the emerging products, we have been hearing a constant drumbeat about.
About ore being a differentiation and the market.
Kind of pulling the core platform.
And some cases.
Maybe I think you kind of alluded last quarter, whereas.
What's the maturity of the thinking at this point and time to sell the Standalone.
Our solution to kind of act as a beachhead and and the other part to that is at this point and time, what kind of a new PV uplift are you seeing from Iran, and maybe files.
Yeah, good question and sped up.
So on <unk>.
Clearly and I, it's a database management.
Offering right it allows our customers to streamline holiday.
Installed database is published and databases, and then and lifecycle of those databases and manage all the day to day operations that they need to do on the database and we make use of the underlying mechanics platform to do some of these functions very efficiently. So that has a connection and day to day to the <unk>.
The underlying platform.
So what we see as a twofold.
Go to market around era.
Obviously within our installed base of.
And organic customers. If you can go and then and upsell them on error on top of our platform, but also and that has been a way for us to get into new accounts.
They don't have any previous mechanics footprint.
By focusing on the value proposition of era, which is differentiated and allowing us to pull and our core platform as well.
So it works both ways.
So I would say it is a very good product market fit at this 0.8.
It is and area that we are investing more in and.
And our vision of course over time is to grow era and to a multi platform multi cloud offering not just tied to only 2 and organics platform and increase the the range of database engines that we would support and be offering.
I, let the dust and comment on the specific ACB uplifts that missing from era and flow and pilots et cetera.
Sure Yeah, let me talk a little bit more and a broader bucket as far as just the emerging products, which flow and air and the likes are and there and just as you heard at 80% year over year increase and.
ACB for those products, you know 39% attach rate.
And from an uplift perspective, I think the best way to look at it.
That we look at it also as.
It's just plain deal economics, and there's 2 ways to get better deal economics term compression, obviously shorter terms of higher deal economics, but then just better like for like pricing on a 3 year to a 3 year deal and when we look at deal economics without ore flow and the likes and that emerging buckets and with those.
<unk>.
We're seeing a significant uplift and the overall deal economics and era is front and center as far as.
And the uplift that we're getting there and I think will shed a little bit of light because there's been questions a little bit uplift are we getting from our.
5 year, 2 or 3 year and a 3 year to a 1 year deal and how our emerging product helping deal economics. So.
We'll try to shed a little bit of light on that at Investor day, and and give you some insight and thank for the first time now.
I see understood Duston.
And 1 for you.
I was wondering on I mean at this point in time and you already have motions to go back to your life of device customers.
And get them.
And will convert to Trump term, maybe on renewals, but how has those conversations and those customers are those customers weighted towards like a 3 year deal debt and a 1 year deal.
And what portion of the CV growth is coming from debt motion at this point.
Yeah, not a ton.
Naturally as you said you know windows support renewals was up for renewal life of device support renewals up.
For for renewal, it's a natural time to have that discussion as far as emerging over into <unk>.
Subscription based.
Transaction so those go on naturally.
And our guys are all over that and so that's a natural occurrence from.
From that perspective.
And with the shift to a T V.
<unk> com.
Got it.
I've got a higher likelihood that those deals, which we pegged at 5 years from a life of device.
Gets more tilted towards 3 or maybe even shorter deal.
Most likely have better deal economics better higher.
ATV and the reps go and get more money more commission dollars with that downtick and term. So again, it's a natural occurrence.
All of our support renewals that come up for renewals just merge they don't renew them.
They will merge into a new subscription transactions. So that's ongoing and the great news. There is that we got a big pool of that as you all know and.
And so that Oh and ongoing effort over the next several years that will continue to attack from that perspective.
Understood that and I'm sure, we'll hear more about tenant day analyst day, but congrats on the quarter. Thanks.
Our next question comes from Jason Ader with William Blair. Your line is open.
And thank you.
Hey, guys. My first question I guess for Rajiv.
There's this narrative that COVID-19 has accelerated the shift to cloud and I was just wondering how and how you think that's impacted demand and the on Prem space.
Generally and then how has it impacted demand specifically for new tactics.
Yeah, and I think at the top level.
If you look at the Covid impact.
A lot.
Lot more customers talked a boy you know had together and employees working remotely pretty effectively and that suddenly had a stimulus effect in terms of Watson desktop deployments and scaling those deployments.
And that's our sweet spot and use case for us.
So we are we certainly benefited from that.
We're also starting to use C D and the use of cloud now cloud.
Cloud migration and certainly I think as customers look at.
Cloud more and more customers are looking at making use of the public cloud.
And we have suddenly seen that.
<unk> being a driver for from our PON deployments as well like we've talked about here with some of the examples to be provided.
Like the financial services customer, who is actually doing you know meeting doing both doing VDI to support the remote workforce, but also.
Using the cloud for disaster recovery and a very cost effective way. So we're certainly seeing more and more of these use cases of hybrid cloud and months.
As we go forward, so I think and generally when we look at Covid I think it's accelerated customers' digital transformation.
Which means they're focused also on going more and more digital driving application work and that generally means that also modernizing infrastructure.
And it makes sense so that helps us.
And the drive to hybrid cloud is going to be head, helping factor product as well and then that remote work is here to state it.
It's going to be a hybrid work both as we all come back.
And to the offices it'll likely be people working part of the diamond dialysis and part of it and remotely. So it will continue so those drivers and dental I think are helping us.
Gotcha and you haven't seen.
And he kind of significant shift from customers or opportunities, where they've just said you know what we've done with on Prem data centers, we want to go cloud and we want to go cloud native and we.
Just don't need you guys anymore, and you haven't really seen that type of a of a phenomenon.
And then we haven't quite seen debt as you can see our business continues to grow healthily are we.
We are seeing good demand and we are seeing in fact and uptick in demand here.
No I think we're not seeing that debt.
But we are seeing more and more customers talking about wanting to be and this multi cloud world, but theyre going to decide what they want to put in terms of their applications. Some applications will continue to run on Prem and some will be and the public cloud some will be and the edge.
And these are newer applications and stuff. So we are starting to see more of that hybrid trend and modes.
Very good thank you.
Our next question comes from Jack Andrews with Needham Your line is open.
Good afternoon, and thanks for taking my question.
And given your focus on partnerships and I was wondering if you could just.
Maybe discuss how maybe the I guess the amount of awareness and maturity and your channel ecosystem has for your line of emerging products relative to their awareness of your core HCI offerings.
As the channel fully up to speed in terms of just.
All of the capabilities that you've introduced to the market or is there still and education process is happening there.
I think and very much the latter debt is still an education process. Most of our channel partners are very much selling a core offering our core HCI.
And what they're most familiar with.
These newer product sets of data and files and debt.
And flow and so forth are relatively new to our partners.
And only now are they are they are building up their capability.
To be able to sell that I think the initial product market fit for some of these products. There was doing very much by us and now we're at a point, where we're actually scaling. These product. So that we have product market fit on and this is where the partners come in and they play a very significant role. So we are certainly investing and building up the capabilities and enabling them to transact.
And.
Build up their competencies, indeed M I think product and I see that as a future opportunity for leveraging the buttons data flow.
Great. Thanks, and then a quick 1 for duston.
You'd mentioned that you're not expecting any material changes to contract term lengths here and the fiscal <unk> any comments in terms of how youre thinking about it.
Beyond this should and moving into next fiscal year.
Yeah, I think again.
You will see some.
Central gradual.
Declines I think what we see and the pipeline.
And theres not a whole lot of movement in those terms now when it converts to actual deals we'll see how that plays out but I think again I've said for a while now and we'll have to see here over the next couple of years.
But.
What I said previously is probably 2.8 to 3.
3 O somewhere around there years, but that's over a period of time and it's pretty much now things can change, but it's pretty much played out so far as we are and we have expected we thought it would be a gradual decline because now you've got plus or -80% of the existing customer base.
He has a set terms so you need to change that and whatever so again I think it's you know, it's ultimately somewhere between that $2.8 and 3 and I think that occurs over some period of time and we're at 3.3 today and.
And you know, we'll see how that see how that goes over the next year or 2.
Great Thanks, and congratulations on the results.
Yes.
Yeah.
Our next question comes from Wednesday.
And from America. Your line is open.
Yes, Thank you and congrats on this holiday sales results and guide.
Rajeev there clearly has been a lot of change or idea largest competitor both in terms of leadership ownership et cetera.
Do you anticipate any significant competitive changes there as it pertains to new <unk>, especially with respect to either channel or pricing and I have a follow up.
Yeah.
Look I think obviously competition is good for the customer.
I feel pretty good about our position and the market.
Independent of what's happening at any of our competitors.
We're very focused we're focused on executing on our HCM platform building out the emerging products on top of that and extending debt to multiple clouds.
And they're very focused and and our customers and the benefits and the best outcomes to our customers.
And and.
If we do that right I think the rest will fall in place now and this was no noting that we are still the 1 provided that provides the most choice and the market, allowing.
Allowing our customers to peg the hardware and the Hypervisor and data and cloud platforms, along with our software.
And meet them and very focused in terms of executing on that mission and and and also continuing to build and leverage partners that I see even more opportunity for us.
Okay, Thanks, Rajiv and and thus and the 50 million and annual savings is that on a gross or net basis and is there something that's getting reinvested somewhere else or is all of that to flow flow down the P&L. Thank you.
Yeah, most of it flows into the P&L there may be some minor.
And are reinvesting, but most of it all flows and and probably 2 thirds of that is in operating expense and the rest is in Cogs.
With some of our services and things and things like that but.
Vast majority though.
Well will flow through.
Great. Thank you so much.
Our next question comes from Katy Huberty with Morgan Stanley. Your line is open.
Yes. Thank you Mike Congrats on the quarter 2 I wanted to start with a question for Dusty and can you just give some context around the better than seasonal third quarter backlog is that a function.
And internal strategy to just run at higher backlog levels and improved visibility or was that a bit of a surprise and a signal of strengthening demand that you weren't able to ship at the end of the quarter.
Yeah sure Katy I mean, you always hope for a higher backlog.
Point there but.
And the pipeline has been strong you saw the comments that you were pleased with the quarter over quarter increase and pipe the year over year increase and pipe.
Thank you you've definitely see something going on.
From a from a demand perspective there.
And then again you have to layer that on with the backdrop of some pretty good execution also.
Within the pipeline management and deal management and deal closure and things like that so no I think it's a it's certainly a combination of both.
And a good indicator also was linearity, which we talked about.
Quite honestly linearity surprised me, a little bit and the quarter being as good as it was.
Typically not like that and Q3 coming off a big Q2.
So I think it's a combination of mostly positive things at play there.
Great. Thank you and then just as it is that fair.
Follow up maybe Rajiv can comment here today, what percentage of that business is driven by OEM partners and how does that compare to a year ago, and then which Oems are you seeing the fastest growth with and I, just asked that and the context and clearly part of your strategic changes.
To build out that partner ecosystem. Thank you.
I'll comment on the second line and then duct and you can comment on the size of the business with these Oems.
So I would say HP clearly, it's the 1 that's been growing the fastest per us overall.
And in terms of the OEM relationships for us.
Clearly Dell continues and I would say that it is more fulfillment and we partner together and your customers want and Landa, Felicia and Dell hardware that supports that.
So I would say H b.
Lenovo to the extent that debt.
And in markets, where there is strong continues to be from a seller perspective also continues to be a very good partner for us.
And so I'd, probably say those are the 2 big ones.
And the thing you want to comment on the phasing.
Yeah, I don't have a whole lot debt, because we stopped giving that sat out a while ago and because it just got complicated because most if.
If not all the Dell business has rolled over to the C Corps, which is kind of meat and the channel with our software running on their their services, which continues to do quite well, but it's outside of that OEM.
OEM bucket there.
Great. Thank you.
Our next question comes from Rod Hall with Goldman Sachs. Your line is open.
Yeah, Hi, guys. Thanks for the question I wanted to start with the kind of the question of supply I know, you're selling software and not servers, but then your customers have to install it on a server. So I'm just curious whether you think there's any risk as you look out and the next quarter or 2 given all the supply shortages, we keep hearing about it and people want to buy yourself.
Software, but then they can't find servers to install it on and then I have a follow up.
Yeah, and then like Australia, and global chartering the ships out there.
And I think.
And the 1 thing that I would say about software sales and not all of our software and necessarily Garda and new service all the time right. I mean, it's our people are doing more virtualization and they might deploy it even on existing ones and some cases that are stuff that they've already procured.
So we haven't quite seen supply shortages being a driver impacting us at this point at all.
Okay. That's great. Thank you Rajiv and then my follow up I just wanted to come back to this point on contract term.
I think some people look at that stabilization and EMEA and.
And maybe they worry that.
We're stabilizing at a little higher level and I'm just curious I mean does and you said, that's tracking where you guys would've expected I'm. Assuming this is just kind of puts and takes around mix on tours and anything any other color you could dig into to help us understand why that 3.3 remained stable and in Q4 and the guide and <unk>.
And.
How we are and maybe see that trajectory after does it and it probably ticks down after that or.
And how is that kind of playing out and that would be great. Thanks.
Yeah, and as you know this is not an exact science to predict exactly what the terms are going to be in any given quarter.
It could go down a 10th here or there or whatever I wouldn't be surprised about that my my comment and script, but it's just I just don't see and meet a material quarter over quarter change now, it's a little bit different and Q1, when fed pops up and they have 1 and 1 year deals so take that out of the equation, but I just don't see any rapid.
Decline in terms and again.
We'll see how it plays out over the next couple of years.
2.83 point O.
Somewhere in that range I think as we have more time and reps have more discussions with customers. They are naturally going to try to move them from 5 to 3.
Or shorter so I think that occurs naturally over time, but.
And it's not my assumption that we stay here at 3.3 and we don't we don't move and any further I just don't think it's a rapid decline.
But we shouldn't think that maybe there's any floating on our renewals or anything like that.
Cause that to stabilize its nothing like that no no no no no no.
And we'll give you we'll give you a very good feel.
Loud and clear on the on the renewal.
Front and new deal more visibility and all that so you're going to you'll see a good dose of that on June 22nd.
Great. Okay. Thanks, a lot guys I appreciate it.
Our next question comes from Simon Leopold with Raymond James Your line is open.
Hey, guys. This is Victor Chu in for Simon.
I wanted to drill a little more into the cloud portfolio.
Hybrid cloud is kind of a generic turned net income pushes a number of different approaches and solutions. So can you maybe speak about butane makes us competitive proposition compared to more integrated cloud platforms Slash software defined data center solutions like Vmware cloud and Azure stack and maybe help us understand what are the most vital factors that.
And it's considered when deciding which particular a hybrid cloud approach to adopt.
Yes, I think the key question debt by the way it is.
First of all I mean people operate our customer and their operating of course with the non from data center.
But with 1 or more public cloud sales rep.
Now if you are looking at a political and public cloud provider or the public cloud providers and also embracing hybrid academies now AWS <unk> Azure arc right and.
So the customers locked the 1 public cloud and they can also look at that particular public cloud hybrid solution.
But more often than not and we can show you some more data and in rest of day and I survey show that customers are interested and more than 1 public cloud and then using multiple public clouds and their on Prem.
And now when you when you start looking at this environment.
And they look at the value that we provide with our cloud solutions that we provide 1 platform.
1 set of cooling 1 set of management interfaces.
1 license that a customer can use the day.
Deploy and manage their workload and whichever cloud they want.
Alright, whether it's today, it's of course on Prem edge data Center, and also moving to and AWS and you come out and want to get out of Azure route with Azure and over time, hopefully we'll have more.
And so.
So that and unique think of this as a multi cloud platform.
And that our customers can actually get and so to some extent Vmware has something similar as well right.
The approach that we have a slightly different the navy essentially say customers and you have your own whatever public cloud accounts. You have you can just deploy by the software from us that same life and we don't we don't care value use it use it whenever you want you want and deploy that in the public cloud of your choice and being able to do that and you can go up and deployed you can manage at all.
And with 1 solution.
Solution and we also do a lot more work in terms of handling all the data services and temper our heritage being in terms of how we manage and store data.
So we do that particularly bad assets, so our value proposition and fundamentally is to be able to provide this platform that cuts across multiple clouds.
Essentially make nice cloud invisible that hide the underlying complex the needs of each of the cloud Shiloh and provides us consistent.
1 per customer from Bull run that business alone.
Excellent that's very helpful. Thank you.
Our next question comes from Eric that's out there.
JMP Securities Your line is open.
Eric Your line is open.
Oh I'm sorry, there we go.
Thanks for taking the question on the on the Lenovo partnership.
Can you talk about what the competitive dynamics are there are there any other.
Providers that are working with Lenovo and and if if they have is tied up.
Integration is and you do and then secondly.
Just curious with a H b, it's kind of settled and at 52%.
And that's been and the 50% range for a while.
Is that something that's going to change at any point down the road orders is probably where it is.
And that settles and for for a while.
And good questions.
So and Lenovo launched this offering.
Desk with us for now right I'm sure. They may have other partners and they are bringing on board over time, but the this particular announcement and Mitchell vending and equal and awards, it's called the true scale offering it is everything delivered as a subscription.
So that means the hardware and the Pcs the servers.
The Citrix media and the new Tannic software all put together delivered as a subscription offering as I said was offering to their customers.
And so so this is an example of that and you know it.
They work with debt.
First partner to go deliver this complete end to end and.
And so subscription offering combining hardware and software to address this customer use case of that into and solutions, enabling debt and users as well as to be able to debt to consume remote desktop.
So we are depressed.
Our solution debt now even to your question on the H E.
We expect continued growth and adoption of HD overtime.
And it's been a gradual continuing up ships so customers.
And look at the value of a tree.
It's getting better and better every day to wear a tweak and do they handle all the mission critical workloads.
Customers want and so customers look at this as an opportunity for them to save quite a bit of cost.
And overtime and continue to migrate more and more of their workloads to.
2.2 and 3 quarters.
For example, I mean, 1 of the large deals and the announcement this Asia Pacific mission critical deployment of Wassa and H. We write it. It makes you made use of and native network security solution. That's built in and essentially now as part of a tree.
And so people are very comfortable with it that's a as a mainstream hypervisor that can run all workloads. So we do expect more and more it would be a gradual uptick and in terms of the <unk>.
And the deployment of <unk>.
Is there any catalyst that would drive that higher.
Potentially cloud for example, our cloud our hybrid cloud solutions, and AWS and Azure and Azure are based on H b.
And to the extent that the customer is actually start using more and more of that debt was by BHP.
Asset.
You know customer if you look at our new wealth of debt existing.
Software from other vendors and they look at this as potential cost savings that codecs the latest.
Yes.
Very good thank you.
Our final question comes from new home.
Paul.
Cox.
Northland Capital markets. Your line is open.
Yeah. Thank you for taking my question.
Let's see so has there been a change and the way you're building up the ACD guidance this quarter relative to prior 3 quarters because.
And tier 3 quarters, you've been able to beat your own guidance by a healthy margin and the past.
Wondering if there's been a change and the way that you're building up this HCP guidance.
That's the same methodology.
Same methodology.
Okay great.
And then when you talked about and uplift from our merchant product does this just mean the driver of the ECB billings acceleration.
Or are you also seeing year over year increase and the ACD core and is that what you mean by like for like pricing actually.
Yes, the latter and yes, it's actually a better better deal economics.
Gotcha, Okay, great and could you.
I know this somewhat difficult, but could you tell us what percent of AC billings was actually renewals and the quarter.
We have not given that on and HCV basis, but highly likely.
You'll see a fair amount of detail again at Investor day on that.
Okay, great and congrats on a strong quarter and I think what I think is fantastic guidance congratulations.
Thank you.
There are no further questions at this time. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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