Q2 2022 Nutanix Inc Earnings Call

[music].

Hello, everyone and thank you for standing by I apologize for the July to meet next Q2 fiscal 2022 earnings conference call will be beginning momentarily. During the presentation. You will have the opportunity to ask a question by pressing Star then one on your telephone keypad. Thank you for your patience, we will begin shortly.

[music].

Yeah.

Hello, and welcome to the nice mix Q2 fiscal 2022 earnings conference call. My name is Emily and I will be coordinating the call today. During the presentation you have the opportunity to ask a question pressing star and then one on your telephone keypad I'll now turn the call over to Rich Valera. Please go ahead your afternoon and welcome to today's call.

<unk> call to discuss the results of our second quarter fiscal 2022.

And me today are Rajiv ramaswami mechanics, as president and CEO and Duston Williams <unk> CFO .

The market close today.

We issued a press release announcing financial results for its second quarter fiscal 2022.

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 newer different performance metrics in future periods, our competitive position and market opportunity the timing and impact of our current and future business model transitions.

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 and fiscal year ended July 31, 2021, and our quarterly report filed on Form 10-Q with 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 in our earnings press release, Lastly, mechanics management will be participating in the Susquehanna Technology Conference on March 4th.

The Keybanc emerging Tech summit on March eight and the Morgan Stanley TMT Conference on March 10th.

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

Thank you rich.

Good afternoon, everyone.

Before we begin.

Wanted to spend a moment acknowledging the current situation in Ukraine.

Our thoughts are with all of those.

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 so building momentum in our renewables business.

We continue to see healthy demand for the new Calix cloud platform, they wouldn't buy 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 a subscription model.

And was marked by strong top and bottom line performance.

We delivered record ACB billings.

Which grew 37%.

Year over year.

Our highest growth rate in three years.

Our revenue also grew 19% year over year.

Despite seeing expected compression.

Once again, we saw good linearity.

Combined with diligent expense management.

Enabled us to generate positive free cash flow for the first time since we started our transition to subscription approx.

Approximately three 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.

<unk> published its fourth global Enterprise Cloud Index report.

Based on our survey of 1700 IC decision makers around the world.

Respondent noted that the strategically choosing where to run workloads.

Based on security.

Cost and performance about a meter.

We see this cloud smart approach.

As a driver of hybrid multi cloud adoption.

As such we're not surprised that 83% of respondents agreed that hybrid multi cloud what's the ideal operating model.

The results of the survey reinforce our view there.

The simplicity and performance enabled by the new Calix cloud platform.

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 can view.

With the global launch of a hybrid multi cloud solution portfolio.

With this launch.

Simplified packaging.

Metering and pricing and aligned our portfolio with the hybrid multi cloud solutions our customers are consuming.

Supported by validated design and deployment of best practices.

While still early.

The initial response to the rollout from customers partners.

Perfect and industry analysts.

It's been encouraging.

We saw numerous wins in the quarter.

With new and existing customers adopted mechanics cloud cluster.

Our as we've recently renamed it.

N C too.

To extend our platform into the public cloud.

With an emphasis on disaster recovery and flexible capacity use cases.

<unk> Bank in India.

An existing customer who is already using the new calix cloud platform include.

Including mechanics unified storage and.

And database service solutions.

N C two on AWS.

With existing deployment.

As a disaster recovery solution for their mission critical applications.

Going from proof of concept.

The live deployment in depth three weeks.

They found the simplicity.

Ease of deployment and seamless fail over from on Prem to public cloud.

Set it apart from all the native solution.

Another win saw a gunman ministry in the EMEA region.

Consolidated workload from its regional branches.

Onto the new Calix cloud platform.

To improve performance cost and security.

While using N E two on AWS.

Seamlessly support seasonal spikes in demand.

In the second quarter.

We continue to receive industry recognition for our unified storage solutions.

Mechanics fires was named a leader an outperformer in Giga AUM scale out file system readout report.

Building on recognition received last quarter.

And which new Calix was named a visionary in Gartner magic quadrant for distributed file and object storage for.

For the first time.

A win with a U S based sporting goods distributor in the quarter demonstrated the increasing traction we're seeing with mechanics unified story and a broader platform.

This customer was unhappy with the performance of our competing HCI product.

And replaced it with a new calix cloud platform.

Including the Calix cloud infrastructure.

And unified storage solutions.

They also adopted.

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 demonstrates the growing momentum, we're seeing with red hat and important strategic partner.

This giant customer shifted their container based big data workloads that we're running on open shift on a competing ACI solution.

Two of the new Calix cloud platform.

Including our HB hypervisor.

We also saw a north American based retailer.

Applaud their business critical workloads on Red hat Enterprise Linux Ral.

Running on the new Calix cloud platform.

In both of these wins.

Our joint customers, we're able to see improved performance.

And meaningful cost savings by running on our <unk> hypervisor.

As sure by the recent certification of both open chip and rail on H B.

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 two important announcements on the governance front during the quarter.

But we eliminated our dual class stock structure.

Simplifying the company's capital structure.

And ensuring that all shares have equal working right.

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.

The appointment of Gail Shepherd.

Who currently serves as corporate Vice President and head of global expansion and digital transformation.

Microsoft Cloud and AI.

Gail works closely with Microsoft largest customers that are implementing multiyear digital innovation and modernization Saturdays.

And with governments and countries around the world driving Azure regional expansion.

We believe this combination of public cloud experience and running businesses at scale.

He's a great fit for our business.

I look forward to benefiting from that in fact.

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.

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 benefit 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 Wassa opportunity ahead of us.

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

That's it thank you rajeev.

I will get right into some of the specific Q2 highlights.

ECB 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 ACD billings upside in the quarter.

Both L O D 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, it's comprised of a certain percentage of late renewals that are executed after the renewal date.

On time renewals in early renewals that are executed before the renewal date.

We forecast renewals based on the eight T R or available to renew and apply an estimated retention rate.

We also estimate the percentage of renewals that will be transacted. This late on time and early.

In Q2, we process more early renewals than expected, which led us to exceed our renewals projections.

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 HCV billings outperformance as early renewals did not impact current quarter revenue.

Additionally, revenue for L. O support renewals is recognized ratably over the term length and the outperformance analogy 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 'twenty two.

We previously thought we'd see a slight uptick in term lengths 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.

They are as of the end of Q2 was one point O 4 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.

<unk> M files, two of our historically largest emerging products, which has a 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.

Net sales reps were flat in Q2.

We were pleased with the addition of approximately 700, new logos in Q2, 'twenty two versus the Q1 'twenty two new logo count of 560, and the Q2 'twenty one 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.

As a result of continued diligent on expense management hiring that has been a bit slower than planned and a slower return to post COVID-19 normalcy.

Our non-GAAP net loss was 6 million for the quarter were a loss of <unk> <unk> per share.

This was our lowest non-GAAP net loss since the company began shipping product.

Due to linearity remained good D.

Dsos in Q2 were 36 days up from 28 days in Q1 'twenty two.

Our free cash flow was once again aided by good linearity in 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 with.

We generated positive free cash flow for the first time in over three years and we're very pleased with the progress we've made.

We closed the quarter with cash and short term investments of 1.2 dollars 9 billion up from 1.28 billion in Q1 'twenty two.

Now turning to our guidance.

The guidance for Q3 is as follows.

See the billings to be between 195, and $200 million representing year over year growth of 22% to 25%.

Revenue of $395 million to $400 million.

Margin of approximately 82%.

Operating expenses between 365 $370 million.

And weighted average shares outstanding of approximately $222 million.

The Q3, ACD billings guidance, which calls for year over year growth of 22% to 25% compares to the actual growth of 18% in Q3 21.

And the street consensus growth of 21% for Q3 22.

Our average contract term lengths will most likely be flattish in Q3.

<unk> support renewals should stay somewhat elevated in Q3.

The elevated L O D 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 'twenty two is as follows.

<unk> billings to be between 760, and $765 million representing year over year growth of 28% to 29%.

Revenue of 1.625 to 163 billion non-GAAP gross margin of approximately 82, 5%.

And non-GAAP operating expenses between 1.465 and 1.47 billion.

The ACD billings guidance of $760 million to $765 million compares to the previous guidance range of 740 $750 million and versus the current consensus estimates of $750 million.

The revenue guidance of $1 625 to $1 six 3 billion compares to the previous guidance range of 1.615 to 1.63 billion and versus the previous consensus estimate of 1.626 billion.

With that operator would you. Please open the call up for questions.

Thank you.

Thank you very much if you would like to ask a question. Please do so now by pressing star and then one on your telephone keypad. If you change your mind and wish to withdraw your question from the queue. Please press star followed by Chase when preparing to ask a question. Please ensure that your device and your microphone is on mute.

Lee.

Today's first question comes from the line of Jason Ader from William Black Jason Your line is open.

Yeah. Thank you hi, guys.

A couple of quick ones for me.

First duston do you are you going to disclose the percentage of ACD that came from renewals.

In the quarter, and if you're not going to disclose it.

Specifically could you give us a sense of you know.

No.

Was it a few percentage points better than you expected when you talked about being better than expected.

Yeah, So Jason maybe the easiest way to to talk.

Talk about being better than expected.

We said is that basically.

Basically the entire upside for the quarter. So we guided 195 to 200 on ACB billings.

<unk> printed 218, so effectively that 18 million was the renewal upside in the quarter, which implies that.

New ACB was basically at the guide that.

Debt that was assumed in that 195 to 200.

Okay perfect.

We're not going to disclose our quarterly right that percentage.

Correct correct, Okay alright.

And then Rajeev just want to understand the new solutions offering.

And the motivation there.

Was it something that.

Where you know you had spent time with with the sales reps and channels and.

The feedback.

What was that there still was 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 multi.

Multi year effort and you feel really confident about this being a sort of go forward.

Picture, just because you know it can get confusing for reps and channels and customers when you're constantly changing.

How the product portfolio looks.

Or indeed, Jason that's a that's a very good questions here, Yes, let me talk about this at our last Investor day in terms of changing our go to market from cooking.

Cooking to any individual products with different pricing by a metering et cetera to moving towards a more solution oriented portfolio and if you recall, we said we would file with and about 10 regions. We did that earlier in the year and now most recently, we've NGA, but across the world and so it is what we've done is we've simplified our packaging.

Our metering and pricing.

Aligning the portfolio to the solutions that our customers want and they're consuming and we've provided validate design and deployment of best practices to help them.

Now it's still early but the initial response from the rollout this affected quite encouraging from customers from partners from our own silos and industry analysts.

We've seen a more rapid closure for some deals utilizing the new simplified pricing and packaging.

Seen customers already taking advantage of this new packaging too quickly, but if more complete solutions to better meet their needs are and in general we expect to see more high velocity transactions techniques, but both our own sales as well as with our partners.

And the renewals just to be clear the renewals that you are doing for something.

Which doesn't line up with how the customer previously bought it 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 of the new work that we do.

Great. Thank you.

And next we have a question from James Fish from Piper Sandler James. Please go ahead. Your line is open.

Thanks, guys I know a lot of a second grafts on results all the time, but truly 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 Austin that $18 million of renewal oxide in the quarter you broke it down too, but 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.

You know just better cross sell upsell.

That resulted in probably a better net retention rate against your analyst day targets.

Yeah, so as far as our retention rate, we're in obviously within that range that we laid out there so.

That's clearly one one point there.

And.

As far as the upside goes most of that.

Were early renewals.

Now a little bit more L O D, maybe but effectively almost all of that was was early renewals and and I Wouldnt label. It a Poland. You know this is more of our renewals team.

Kind of refine their processes.

And back office things and we're provide quotes out in advance obviously the renewal dates in some customers.

<unk> two.

Just to transact those renewals early so that that's what you're seeing there and in this case not only do we process the renewal early but we actually.

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 state goalposts, given it's only been a few quarters, but as we think about that out your guide of $3 million to $500 million in free cash flow and you're showing much stronger cash flow better than anticipated with all the efficiencies being important.

And just really strong execution I guess, what would prevent even the lower end of that range from potentially being pulled forward into fiscal 'twenty. Four for example, when linearity has been really good for the last few quarters and it seems to be holding.

Operationally it does seem like youre going to get more and more renewals here in fiscal 'twenty, three and fiscal 'twenty four.

Yeah, No, we're really really happy with the execution all around actually.

Linearity as you mentioned and continues to be good.

The operating expense discipline continues to be good.

The 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 still more work to do there so.

So we've got you know with the backdrop, obviously of a of a great product and now with these solution offerings that should accelerate things into the future. Dom Delfino has just come on board as a new CRO. So we've got a lot of things pointed in the right direction, but the reality is we're only a.

A few quarters away from from that Investor Day, and we'll see how things play out, but we're really.

Really pleased with how things are going so far.

Outstanding Thanks, guys.

Yeah.

Our next question comes from Matt Hedberg from RBC capital markets. Please go ahead.

Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking our questions. So.

So new customer growth in the quarter. It 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 coasters.

Yes.

Oh go ahead.

Yes.

Oh go ahead I was just going to say, yes, if you ever yeah. We've been focused for the last several quarters on on better quality and what that translates into a somewhat newer higher asp's for new logos.

And typically between Q2 and Q3, we do get more new logos and Uh huh.

Back to Q1, and Q2, sorry and admitted at this time I thought I'd be quite happy with the fact that you know we are not again back at around 700, or so new logos and they are of good quality.

That's because you want to add anything.

No perfect Yep, Wouldnt, we wouldnt have anything.

Great for both of you. Thank you and then on the new product portfolio 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 packaging and pricing at this point.

Yeah, we had done. So this is it would be this includes all the portfolio of products, they're all part of the solution.

We haven't got any cloud infrastructure cloud management.

Storage.

Database service, Alright, and end user computing and that represents the entirety of our portfolio.

That's great to hear thank you.

Our next question is from <unk> from J P. Morgan. Please go ahead your line is open.

Oh, great I'll Echo my congrats on the corporate as well I'll get to see.

Dustin just to follow up on the renewals.

Uplift that you're seeing there does that the early renewals part does that change.

Seasonality for Q4 in any way or would you say.

Continuing to see a big jump from Q3 to Q4.

Not meaningful no I mean, we're always going to.

Have a have quarters with early renewals.

So from that perspective.

The ATR from Q3 to Q4 does go up and that has not materially changed.

Got it.

Rajiv could you maybe talk about the general demand environment environment from a from a new business standpoint, you know 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 in the new year.

Yes, I think the demand environment continues to be it's still healthy.

We are seeing our customers continue to focus on using ideas and enabler. They are focused on continuing to modernize their infrastructure go to the public cloud and of course, you know continuing to drive the remote workforce. So we haven't seen that.

The fundamental dynamics is still pretty much intact in the context of what I would say is that a.

Peer play provider focused on that HCI market and transitioning.

Legacy Pts storage architectures to hitch here right and then extending that to the public cloud.

So we haven't seen anything significant from a demand has that changed at all and are customers continue to be investing at this point.

Got it lastly, if I can the pricing and packaging, obviously has the word pricing and metering. I think you said is there is there an underlying uplift in unit price for like for like if somebody is renewing.

Yes, that's a that's a very good question and that was not our intent right thought intent here with.

This new launch is really around it wasn't intended to be either a price increase at a price decrease but it was really to make it easier for our customers to consume our portfolio and for our reps to cadre of products innovative matches their needs now I'll give you some specific examples.

We did simplify the metering and we more than tallied core based pricing for our core offerings.

Now one impact when the team is that it makes our core offering much more competitive on all flash configuration that customers are increasingly favoring come.

Compared to a hybrid flash and disk.

We've also introduced for example, and humidity or in a cloud management offering and that catering very specific needs of our customers looking at our hybrid cloud operating model that includes operations.

Service and cost governance.

And you you buying this thing allocated in the past would have liquidity 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 multi product solutions to address their specific needs.

And this will help them consume more of our portfolio and for our sales reps can be more productive.

And then the feedback so far from both customers and partners the best results.

Got it thank you.

Next we have a question from Ramsey Manhattan from Bank of America.

Your line is open.

Hi, yes. Thank you tussle on Opex, you guys have been showing.

Very strong.

Results relative to your guide.

For several quarters now at least for the past four 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 of a function of maybe difficulties in the labor market and adding head count at the pace you had anticipated.

All of them.

Yes.

One is the <unk> we.

We continue to.

We have very good discipline on the Opex.

And that that will continue and there's no doubt about that.

On the hiring front.

We wish we had a few more heads.

Tough for everybody.

There's no exception on the hiring front so there's clearly.

Some under spend going on on head count.

We wish.

We'd get plugged here going forward.

You know a little bit of the just.

Just getting back to normal travel is still down quite a bit and that Hasnt returned we assume that would return a little bit there.

But the efficiencies that we continue to look to arm, obviously is taking a hard look continuing at sales, even though we've done a pretty good job. There. He has got some thoughts of how we can get 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 tour, we have a step up there. So we're again assuming.

Some return to normalcy here in.

In Q4, and I think some increased hiring.

Okay. That's helpful. Thank you and then if I could back to renewals.

You noted these are early renewals how early are the early renewals and wire customers choosing to do this and and I wasn't very clear why why does it doesn't have a somewhat of a pull in or pull forward impact is it just that.

Maybe you can maybe you can shed some color on that thank you.

Sure so.

The impact that it has when we do an early as long as we collect cash as it does accelerate HCV billings.

And it does accelerate billings total billings, but.

But the revenue is always going to be recognized in the quarter that the renewal terms right or it starts again.

Never going to recognize revenue early on in early renewals, but as long as we collect cash that will go into ACB ACB billings and total billings from that perspective now your question on I think how much was from Q3.

Which kind of gets into interest who asked about Q3 guidance and things you know roughly probably.

The $10 million or so came from Q3.

And.

So then you think about the difference what's the difference related to <unk>.

A lot of that.

Mostly relates to co Germany, because the beauty of our business, we're always upselling, but that leaves a customer with a bunch of different disparate renewal date.

And so if a customer has a fair amount of renewals in this case in Q2 and.

And they've got renewal in Q3, and a bunch of renewals in Q4, what they may opt to do as co term all of those and just bring them into Q2 have a common term date makes it easier for them. It makes it easier for us.

So that's mostly related to them.

To some of the other renewals there that.

That are outside of Q3.

Okay. That's very helpful. Thank you.

Okay.

Next we have question from meta Marshall from Morgan Stanley . Your line is open.

Great. Thanks.

I just wanted to get a sense of whether underlying supply chain challenges with some OEM partners and whether or not you saw any impact to kind of demand or ability to close new customers during the quarter.

And then maybe second just kind of building on one of these.

Question, and you kind of answered to have duston.

Just getting a sense of what percentage of customers are kind of an overall.

Size of the revenue base that has co terms contracts at this point.

Okay meta I'll take the first question and on the supply chain doesn't can do the second on.

On the supply chain, we've noted in the past that our software runs on a variety of hardware platform and it's not necessarily tied one on one to new hardware sales.

So supply chain impact so far in our business to date has been relatively modest including in this quarter.

You've seen a few customers pulling forward orders in some cases to get early access hardware and you've also seen some other customers that have delayed placing orders to confirm but les you know expected late deliveries of hardware.

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.

And of course continue to watch this very very carefully.

We go forward.

And then just on the Oh, yeah on the <unk>.

Each of our 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 a hobby.

I suspect you will see more and more of that says.

These renewals start to come up in a customer has all of these different renewal dates they're gonna want simplicity, we're gonna want simplicity. So I would I would suspect we will see more and more leads.

The ATR in general continues to elevate over the next several quarters.

Great. Thanks.

Next we have a question from Rod Hall from Goldman Sachs. Please go ahead.

Yeah. Thanks, guys I appreciate the question.

I wanted to come back to renewals and the renewal rate and just see.

What.

What you're observing it sounds like Youre, a little bit deeper into renewals now you've done some of these co term deals away. 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 rates running then I have a follow up.

Yes, sure Dustin at.

At Investor Day, we had put a target out there at.

From a <unk> perspective.

90% or.

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 of 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 theres been really no meaningful change there.

Okay, Great and then.

The other thing I wanted to ask is.

How many so other 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 no. I think we're all trying to get a handle on how much of this co terming might come through the renewals.

And how much of the renewals kind of just will happen.

Without the go terms. So I don't know if you can give us any help on that Earth observations, yeah, probably a little early to talk about this.

At this point I think.

If you look at.

Yeah.

Somewhat of a majority was just plain early and then anything out of.

Out of Q3 would have more tilt or are some of them would have more tilt to the code terming just because of the.

Extension of outside of Q3.

I think it's just it's too early to tell in it and this is all customer preference to I mean, we don't want to force the customer do anything we Wouldnt force a customer to do something with that economics on our side.

So I think this is just something.

You have to monitor going forward, but I think just by the elevation of the ATR.

<unk> see some more of this certainly with I suspect the bigger customers.

Great. Okay. Thank you.

Our next question comes from the line of Mike Suitcase from Needham. Please go ahead.

Hey, guys. Thanks, Thanks for taking the question here 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.

Seeing.

That is.

Almost entirely coming from the early renewals and about $10 million of that was.

These co terming maybe pull in from Q3.

If I normalize for that.

Q2 results.

And the normalized for that in the Q3 guide it implies that your billings would be flat sequentially instead of I guess.

<unk> seen a 3% 3% to 4% sequential declines and I'm. Just curious is there anything that you can point us to which is helping our guests reduce that typical seasonality we would see in the AC do 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 up sell and we weren't afforded the luxury to have renewals and the two traits of renewals that we laid out first that they were very cost effective and they added leverage to the to the business model.

Secondly, they added predictability right and so now we're starting to have a.

On a revenue stream that has a much higher level of predictability now.

Later that too much into your comment about Q2, Q3, but clearly as the ATR goes up.

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 two or three years finally, the business starts to change and more.

Into a <unk>.

More predictable.

Leverage business.

Very helpful and I think there's probably lead into my second question, but.

You guys materially outperformed on the gross margin.

Well ahead of that 82 to 82, 5% that you had guided to versus the 83, 8% that you delivered.

Our solid chunk of that.

From this.

From the renewals here or was there anything else that day that you'd hope that gross margin outperformed where where we were previously modeling.

Well I mean any time you've got.

Increasing.

The topline obviously revenue in this case.

It's going to help the margin, but we have we also quite honestly got a little favorable nest throw some understand on.

On head count in 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 a it's been in that.

80, 283% range and we continue I think to do a pretty good job managing within that range. So.

Popped up probably a little higher than what we expected.

Primarily the reason, we're bringing it down in Q.

In Q3, as the revenue base naturally shrinks, a little bit as we go from Q2 to Q3.

Understood. Thank you very much for the time and still really answers there I really do appreciate it.

Yep.

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

Erin Please go ahead.

Yeah. Thanks for taking the questions 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 you know how has the company evolved from a.

You'll partner ecosystem perspective can you comment on HP any incremental engagements with Dell post that's planned et cetera.

Sure so.

Let me take a crack at that so first on the competitive environment and then the partners.

So we haven't seen a major change in market dynamics.

From a competitive perspective, I will say a fundamentally from a market view ACI continues to grow with Macy's traditional architecture.

Why did it becomes the foundation for either multi cloud and like I said already capable of handling all of these you know all Virtualized enterprise workloads.

Clothing things like 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 places in the market have offerings in both storage and ACI.

And so they tend to be not they may be less aggressive in pushing ATI as they seek to protect margins in the traditional business.

And then if you look at other classes of competitors. They have a broader portfolio that includes things like developers and security offerings without a focused go to market effort and guest hei.

So from that perspective, we had a book peer play me are continuing to win in a fast and more of the market because of the you know the platform the robustness of scale and the simplicity the.

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 our OEM partners and then in our and then the traditional high favor lenders and then we've talked about our ecosystem and in the cloud.

So on the OEM side, we continue to grow the partnership with HPE.

There are as you can see from their own earnings that a big focus on Green Lake.

As part of their Green Lake solutions, both our core platform as well as our database as a service platform era as well.

As part of their Green Lake offerings, we make a small but growing rapidly.

The teams are working together in the field and continuing to win deals together so that partnership continues to develop.

Lenovo is a steady state with us we've been working together with Lenovo for a long time.

And then when it comes to the the ecosystem side of it.

That said, we are very focused on right now of Red hat and a physics.

And because that had we've had now two quarters into since we announced the partnership we continue to do very well on that I had fun to identify a number of engagements we continue to get new wins every quarter here.

For example, this quarter there were a couple of things that I can talk about like that continue to build on the momentum we had.

One where there aren't open shift running on top of an identity platform.

There was with a European energy services provider that took all their container based big data workloads that we're already running on open shift, but on a competing head to a solution and moved it to the new tank car platform, including our own Hypervisor.

We had another retailer.

Retailer customer who deploy their business critical workloads on Red hat Linux are moving to the cloud platform. So that that had relationship continues to grow.

But typically we've had a long standing relationship that they've got formalized recently, so there's just a number of joint customer engagements and wins together around end user computing and virtual desktop.

That happened every quarter this quarter that continues.

And that momentum at Citrix is very much that the last piece was the cloud piece that again I think we've had out finishing with AWS.

But 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 our top destination of the market. We are in private preview on that so these partnerships are all continuing to build and we expect to get more and more from them as they progress.

That's great and then as a quick follow up that's it I'm curious.

Back to <unk> question, you've clearly not only executed well on opex, but you've underperformed or you had opex below the guided range for the past several quarters.

Given that that's reflective of some you know 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 are we.

Guide to a range that we expect to come come close to in this case, we guided 365 two to three 370 <unk> know you have some just one off things like Oh.

FICA taxes reset so that's millions of dollars in.

The first part of the calendar year and you know we have a bigger step up in <unk>.

In Q4, and there's just the inherent until you can do the calc for the guide drove on 61 65 146 to 1465 for the year.

So eventually we would like to hire more folks we liked the higher but we're not massively off the target of sales reps, what we'd like to hire a few more sales reps, we like to hire some more R&D folks who'd like to hire some more support folks and I think we will do that over time. It's just a question of when will that happen now again, we've laid out.

The expense structure not only for this year with this guide, but we've laid it out 23 and 25, so regardless of what we ended up hiring.

We're still in the total company still marching to those parameters.

That's helpful. Thank you duston.

Mhm.

The next question comes from Simon Leopold from Raymond James Your line is open.

Thank you appreciate are getting question here I wanted to ask you about the full year forecast for ACD billings, if I'm thinking about this correctly.

You've put up about 200 million on average per quarter between the two quarters you reported in the April quarter, your forecast, which seems to imply you're expecting a decline in ATV billings in your fourth quarter in July I, just wanted a little bit of help understanding what what.

The thought process might be there.

Yeah, well, that's not correct Simon So let me let me no.

Kind of state the facts.

So as you recall.

We have we've talked about this in earnings calls I think for the last three times. We didn't this time because we've talked about so much is that.

The four quarters of our ACB billings guidance.

Don equals a year.

And the reason why that doesn't doesn't equate is because less than one year deals if we do a six month.

Million dollar deal in the quarter, we would count that as ACB of $2 million.

And so you can't simply add it has been historically, it's been about it.

<unk>, 7% discount again, we've laid this out an earnings call. So I think if you do all that math it would certainly not suggest.

A decrease in ACB 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.

Yeah, Yeah, yeah, so there's a.

Again, it's simple math to do I don't want to talk specifically about Q4, because we don't do we don't guide to Q4 at this point.

But if you do that math.

It would certainly suggest an uptick in HCV billings in Q4.

Thanks, 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.

Quarter, I, obviously, you've guided to a slightly lower expense for the year just wanted an update on what youre thinking about wage inflation in that equation. Thank you.

Okay.

Yeah, 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 are those those wages are increasing.

We have tweaked up the assumption or we will end up tweaking the assumption up for FY 'twenty three 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.

Yeah, the only thing I'd add to that yeah, I might just add that what that practically mean this.

So hiring 100 people, we might have in 1990 people or something like that right. If the wages are going up and our students gave it then our opex month.

Thank you very much.

Yeah.

Next we have a question from now Chuck scale from Northern capital market. Your line is open.

Yeah, Thanks, and congratulations on awesome I see the results.

It sounds like you are adjusting up the expected percent renewals are available room, you say, one or two quarters out on a go forward basis.

But not as much as what you experienced January quarter is that what's going on between the differential between the year over year growth that you just put up on ACB buildings, and what you're guiding to 40 per quarter.

I'm not sure I quite understood the question Oh, sorry.

Alright, let me try again.

So what went into the beat for the January quarter.

Does a greater percent.

Renewals that.

Renewed earlier than expected.

Do you expect a certain percent to renew it was a higher percent than typically expect it yes.

Yes, and typically this would represent a pull forward, but that's not what your guidance represents because youre actually raising your April quarter, ACB billings guidance relative to where consensus is.

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 raising.

Raising that but not as much as what you had experienced in the January quarter is that essentially what's happening here.

That's fair Yeah, we would not expect.

At this point the amount of early renewals.

Certainly on a percentage basis or you can do it all the basis.

That we experienced in <unk>.

Q2.

Alright, great.

L O D renewals playing in here too that had been a little bit stronger.

And then what we had previously assumed.

Right right.

Yeah great.

There's also been a lot of questions around opex and whether or not.

Just understand is going to negatively impact future.

<unk> billings growth.

So.

Maybe another way to address this is that where are you in terms of your new ACD per sales teams targets today do you see still plenty of runway for improving that.

We do.

We were on target.

This quarter.

And Theres a lot of different things going on and Dom and team are working away and whether that's channel.

Our channel work their 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 on the solutions offerings are it makes it easier for the customer.

To consume and understand that it makes it easy for our easier for our sales reps to understand and sell.

So clearly.

We think there is.

Clearly more upside on the productivity piece.

Okay can you give me a sense of sort of what kind of magnitude that we're talking about we're talking about two extra maybe 50% 20%.

Investor Day, we laid out the thought Investor day, there's a slide there on not only sales reps, but what we are what we thought on productivity.

Great. Okay. Thank you.

Yep Yep.

Those are the questions. We have time for today. So this ends our call. Thank you for joining US today you may now disconnect your lines.

Uh huh.

No.

Okay.

[music].

Yeah.

Okay.

Okay.

Yes.

Yeah.

Yeah.

Yes.

Okay.

Right.

Yes.

[music].