Q3 2022 Nutanix Inc Earnings Call
Good afternoon, and thank you for attending today's new panics Q3 is called 2022 earnings conference call. My name is Selena and I will be your moderator all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you'd like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to our host Rich Valera 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 fiscal 2022.
Joining me today are Rajiv ramaswami mechanics, as president and CEO , Mark Mahaney Civil Robyn mechanics as CFO .
After the market closed today <unk> issued a press release announcing financial results for its third quarter fiscal 2022.
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 and 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 result.
<unk>.
Our financial performance and targets and use of new or different performance metrics in future periods, our competitive position and market opportunity the timing and impacts of our current and future business model transitions the factors driving our growth macroeconomic geopolitical and industry trends, including the ongoing global supply chain challenges and the current and anticipated <unk>.
Fact of the COVID-19 pandemic.
These forward looking statements about 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 for the fiscal year ended July 31, 2021, and our quarterly reports on Form 10-Q. The fiscal quarters ended October 31, 2021, and January 31, 2022, 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 the 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 used 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 measure.
On our IR website and in our earnings press release, Lastly, mechanics management will be participating in the 40 <unk> annual William Blair growth stock Conference on June six and with that I'll turn the call over to Rajiv Rajiv.
You rich and good afternoon, everyone.
Against the volatile macro backdrop.
<unk> had another solid quarter.
Exceeding all of our guidance metrics.
And seeing continued strong performance.
And then it looks bad.
We continue to see solid demand for our <unk> cloud platform.
They run by businesses looking to accelerate their digital transformation.
Modernize their data centers.
And adopt hybrid multi cloud operating models.
That's it.
What I didn't finish as we had expected.
Late in the third quarter.
When we typically book a significant portion of our August .
We saw an unexpected impact from challenges that limited our upside in the quarter.
And in fact that our outlook for the fourth quarter.
Increased hardware supply chain delays that sounds good.
And an increasing percentage of our August having start date in future quarters.
Or in some cases being delayed pending availability of hardware.
This affected both our billings and revenue upside in Q3.
And we expect this trend to continue in Q4.
In addition, <unk>.
Seeing our attrition rates among three effects improved for each of the prior two quarters.
Besides Watson in Q3.
Driving a lower than expected head count entering Q4.
Rukmini, let's discuss these issues in more detail in her prepared remarks.
Overall.
Third quarter reflected continued execution on a subscription model.
It was marked by solid top line and improving bottom line performance.
We've done about ACD billings growth of 28%.
I'll start by strong execution.
On a building base of renewables.
Our revenue mix.
Which continues to be affected by term compression.
Grew 17%.
Topline growth combined with diligent expense management and leverage from renewals drove a sharp year over year improvement in non-GAAP operating income.
While the timing of collections adversely impacted our free cash flow performance for the quarter.
We continue to prioritize working.
Looking towards sustainable free cash flow generation and FY 'twenty two.
Overall, we're pleased with our third quarter financials.
Our largest deals in the quarter.
Reflected healthy adoption of our core mechanics cloud infrastructure.
My customers looking to modernize their data centers and deploy hybrid cloud operating models.
As well as good traction with adjacent solution and storage.
Debate as a service and cloud management.
A good example.
Is a seven figure deal with a large north American based energy exploration and operations company.
That was looking to modernize their traditional three tier infrastructure.
While adding the flexibility of extending their workloads into the public cloud.
This new customer has decided to adopt new calix cloud infrastructure, including mechanics cloud cluster or <unk>.
For public cloud access.
As well as mechanics drug manager for full stack self service automation.
The application lifecycle management and hybrid multi cloud management capabilities.
<unk> solution is expected to enable them to simplify their operations.
When you step support requirements.
And seamlessly extend their workloads into the public cloud.
Another example is.
In EMEA based online sports betting platform.
That are looking to quickly deploy their service in a new region.
They use <unk> cloud infrastructure with NCI to extend that service to a regional AWS location is the Asia Pacific region.
Going from proof of concepts to life deployment in just two weeks.
Using in situ.
We're able to expand operations into a new region, what's really overnight.
While benefiting from the simplicity of a single unified control plane across private and public clouds.
We recently launched our updated product portfolio.
That simplifies our packaging metering and pricing.
And aligns our offerings with the solutions, we saw customers looking for.
Roughly one quarter end.
We're very pleased with what we've seen.
It seemed like the quoting process.
Increasing our competitiveness and all flash configurations.
Enabling more high velocity transaction for a full stack offerings, comprising the tanks cloud infrastructure and cloud management.
And making it easier for customers to quickly identify solution for their specific needs.
Our largest win in the quarter.
A multimillion dollar order.
With an EMEA based company and the financial services sector.
Well the good example of a deal that.
That benefited from the adoption of our updated portfolio pricing and packaging.
This new customer who are unhappy with the performance of their business critical applications.
Their existing infrastructure.
Our new <unk> cloud platform full stack offering comprising both cloud infrastructure and cloud management.
Due to its simplicity.
Based in automation for infrastructure as a service.
Total cost of ownership advantages once this competing alternatives.
They also added metallic unified storage.
And <unk> database service for their storage and database automation needs respectively.
Be impressed by their performance and seamless integration with the broader mechanics platform.
Go to market leverage with partners has been one of my top priorities and.
And we continue to see progress on this front during the third quarter.
I'm, especially pleased with the momentum with Red hat.
As we've been seeing a building pipeline and growing number of joint wins for both Oprah chip and Red hat Enterprise Linux.
Running on mechanics cloud infrastructure.
One example is a north American based financial service provider that is looking to reduce the time and resources.
Wired to manage open check on their bare metal servers.
They decided to move their <unk> chip environment running that business critical workloads to <unk> cloud infrastructure.
<unk> is <unk>.
Hypervisor.
Looking to benefit from the simplicity and compelling total cost of ownership advantages.
Also note that nexstar platform worthless that existing infrastructure.
We are excited about a lot in building opportunity pipeline that we see with Red hat.
The third quarter, we continued to receive industry recognition for both our core platform and a unified storage solutions.
But that excellent recognized as a major player in the IGT market skate worldwide distributed scale out file system.
1022 rental assessment.
And well also named customer choice and gotten us here.
Our insights program for both hyper converged infrastructure.
And Pfizer and systems object store.
We're especially pleased with our strong performance in the customer revenue driven peer insights program.
Which we see as a reflection of our obsession with delighting our customers.
Now I'd like to talk about our recent progress.
Another one of my priorities.
<unk> and attracting talent.
First.
Following that can really is positioned to join a pre IPO startup.
Eight productive years with no panic.
We promote and Rukmini is similar.
Previously, our senior Vice President of financial planning and analysis.
To be our new CFO effective may <unk>.
In a five years with mechanics.
He has been instrumental.
And the company's growth and transformation.
By developing a unique understanding of our company and industry.
ICU Rukmini appointment as a great example of the deep bench of talent, we've cultivated at <unk>.
And believe.
<unk> financial strategic.
Operational and human capital expertise.
There will be a valuable asset as.
As we continue to execute towards our long term growth and profitability goals.
Please join me in welcoming Rukmini on our first earnings call in her new role.
Second I'd like to highlight the recent appointment of Mandy deliver as our new Chief marketing Officer and Sean.
As our new head of engineering.
What Mandy and Shar are exceptional leaders with proven technology savvy and.
<unk> unique insight into what it takes to build and deliver industry leading solutions.
ICL ability to attract and develop such high quality talent.
As reflecting belief and the opportunity that's in front of us.
And feel confident that we've got the team in place to take mechanics to its next stage of profitable growth.
In closing.
And our third quarter, we delivered another quarter of solid growth exceeding all of our guided metrics.
We continue to see solid adoption of our mechanics cloud platform from customers to say mechanics to modernize their infrastructure and enable the transition from on Prem to hybrid multi cloud operating models.
And we continue to execute well on our building base of subscription renewals, which we see as a reflection of both the strength of our team and our customers high level of satisfaction with our products.
While I am disappointed.
With a weaker Q4 outlook.
Due to the aforementioned supply chain and sales rep headcount issues.
We don't believe a reduced outlook is a reflection of any change in our market opportunity our demand for our solutions.
That said.
We are focused on mitigating the impact of these categories and continuing to drive towards profitable growth.
And with that I had.
You don't want too many similar.
Rukmini.
Thank you Rajeev I am honored to join you all today for my first mechanics earnings call.
Getting directly to Q3 performance Q3 was a solid quarter and we beat all our guided metrics.
Billings was 205 million, representing a year over year growth of 28% exceeding our guidance range of $195 million to $200 million.
Our renewals business continues to do well and the ACB billings upside in Q3 was due to renewal, it's performing better than expected.
Gross retention rate <unk> was in line with our expectations.
Revenue for Q3 was $4 4 million representing year over year growth of 17% exceeding our guidance range of $3 $95 million to $400 million.
Growth in HCV billing was greater than growth in revenue because orders with future start dates that are booked and collected are reflected in ACB billing, but revenue can only begin to be recognized in the quarter of the actual license start date.
And also because of a slight compression from three three years and Q3 'twenty one to 3.2 years in Q3 22.
<unk> at the end of Q3 was 1.114 billion.
Growing at 46% year over year.
Q3 sales rep productivity was in line with our expectations.
However, we ended Q3 with fewer reps than planned as the talent market remained highly competitive.
As Rajeev mentioned, we saw repetition worse than in Q3, resulting in lower than expected Rep head count entering Q4.
Under the leadership of our new Chief revenue Officer, Dom Delfino, our sales leaders remain focused on getting to that pet counts to our target level.
Both better attention.
And increased hiring efforts.
Our overall company headcount grew slightly in Q3.
We added 586, new logos in Q3, which is largely in line with our historical seasonal trend in new logo additions from Q2 to Q3.
As we've discussed in previous quarters, our sales teams continue to focus on higher quality, new logos, which was reflected in year over year growth in new logo ESP in Q3.
non-GAAP gross margin in Q3 was 83, 3% ahead of our guidance of approximately 82%.
non-GAAP operating expenses for Q3 were $342 million lower than our guidance range of $3 $65 million to $370 million.
This is a result of continued diligent on expense management and hiring that was a bit slower than planned.
non-GAAP operating margin for Q3 was negative 1%, which reflects our continued focus on operating leverage as we progress toward our goal of achieving sustained operating profit.
Dsos were 40 days in Q3 up from 36 days in Q2.
Free cash flow in Q3 came in at a negative $20 million and was impacted by worse than expected linearity of billings.
We closed the quarter with one 3 billion in cash and short term investments up slightly from $1. Two 9 billion at the end of Q2.
Before we move to Q4 guidance I will make a few comments regarding the supply chain.
Mechanics drawn form that appliance model to a software model starting back in fiscal year 2018, and saw our non-GAAP gross margins grow from the low sixties to our current levels of around 83% in Q3.
Our customers have drawn our software on their choice of hardware, which they purchase from silver providers, many of whom are our partners.
Because we are an infrastructure software provider customers often prefer to time their purchase of software from us with the purchase of the underlying Silva from hardware providers.
This means that when there are delays in sublet availability from hardware providers customers may choose to either one lineup. The software subscription license start dates with the expected availability date for the servers, leading to us receiving orders with start dates in future quarters.
Or two in some cases delay their orders until the hardware becomes available.
During the last several quarters and until late in Q3, we had experienced minimal impact from supply chain issues.
While we have not seen a change in the demand for our solutions. We saw these supply chain challenges impact us late in Q3, which limited our upside in Q3.
And we expect these trends to continue in Q4.
With that the guidance for Q4 is as follows.
They see the billings to be between 175 and $185 million.
Revenue to be between 340 and $360 million.
non-GAAP gross margin between 79 and 80%.
non-GAAP operating expenses between $3 60 and $365 million.
And weighted average shares outstanding of approximately $225 million.
The significant majority of the impact on our Q4, HCV billings guidance relative to our previously implied guidance for Q4 is due to the impact of increased supply chain challenges, which as I described earlier affects us in two ways one.
Can we just start date that is orders that customers book with us, but that are not yet collected and to customers choosing to delay, placing orders with us pending the availability of hardware.
Our guidance is also impacted by sales rep head count going into Q4 being lower than planned.
Because of the increased uncertainty in the macro supply chain environment, we saw towards the end of Q3 and continuing into Q4 and how rapidly. It is changing we are widening our ranges to reflect that increased uncertainty the guidance assumes that the supply chain challenges continued to worsen.
In Q4 absent the supply chain issues, we believe that we would have likely been at or close to our previously implied Q4, ACB billings guidance range.
The Q4 revenue guidance is more impacted than ACB billings guidance relative to their respective previously implied Q4 numbers because orders with future start dates that are booked and selected odd reflected an ACD billings, but that only reflected in red.
The new in the quarter of the actual license start date.
Our average contract term length is expected to be flattish in Q4.
The Q4 operating expenses guidance is well below the previously implied Q4 guidance.
Approximately $400 million, even though it includes about $6 million for an in person sales enablement event that was moved into Q4 from Q3.
Because of the billings dynamics and because we expect linearity in Q4 to remain challenging due to supply chain delays, we expect working capital needs to increase in Q4.
As a result, we expect cash usage to be significant in Q4 and higher than the current Q4 Street consensus.
Moving on to full year revenue guidance for fiscal year 'twenty. Two is as follows ACB billings to be between 735, and 745 million representing year over year growth of 24% to 25%.
Revenue of $1.535 billion to $1.555 billion.
non-GAAP gross margin of approximately 82%.
non-GAAP operating expenses of between 1.402 and $1.407 billion.
As a reminder, fully our S. T E billing is not a straight summation of the four quarters ACB billing because of the adjustment required for transactions with less than one near term lengths.
The guidance above assumes that annual ACB billings guidance is 94% of the sum of the four quarters of ACB billings.
While our Q4 outlook is lower than our prior implied guidance, we remain focused on profitable growth and continue to prioritize working towards sustainable free cash flow generation and non-GAAP operating margin breakeven in fiscal year 'twenty three.
We will look to provide more color on fiscal year 'twenty three expectations during our Q4 and fiscal year 'twenty two earnings call in August .
With that operator could you. Please open up the call for questions. Please thank you.
Absolutely if you like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.
A reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. We will pause here briefly ask questions are registered.
The first question comes from <unk> Mohan with Bank of America. Please go ahead.
Alright. Thank you for taking my questions. It's rupal filling in for Onesie today Rukmini. Congrats on the new role look forward to working with you.
My first question is for Rajiv.
The two things that impacted you in the quarter, you said, where the attrition more than expected of the sales reps and the supply chain issues that impacted hardware availability.
Rajiv do you think these are things that will resolve in the fiscal fourth quarter, specifically, when we think about sales rep.
You mean, you're going to try and replace them, but given the labor shortages do you think that you can make up the required sales reps in the quarter.
And the same question on the supply chain delays, how long do you think disciplined last and so should we expect that going into fiscal 'twenty. Three these effects linger on into fiscal <unk> as well. So just your thoughts on the timing on when you can replace two of reps as well as on the hardware issues that youre seeing.
Yes, So first of all let me start with the supply chain because that was the biggest contributor right. The vast majority of the lowered outlook because of supply chain hardware.
Constraints.
And and we saw this.
Really start to come and play very late in the a and the last in Q3.
No.
If you look at that I mean.
You know again.
Reading out loud, we were managing that right. We didn't have we didn't experience any real issues with supply chain, but of course. The late in Q3, just started to become much more significant but August being delayed.
Now with respect to the supply chain, we are working very closely with our hardware partners.
To try and improve the availability of hardware, but keep in mind that we have one step removed right because we don't directly supply the hardware.
So the ability to influence them is somewhat limited.
That said.
Based on what we are hearing from all of the server manufacturers and our hardware partners. We expect that these challenges in the supply chain are likely to persist for multiple quarters.
Now on the Rep head count, which are the smaller much smaller component of.
Off the issue that we're facing now we've you know we've been affected by the broader industry trend of greater recognition across the board right.
I noted in prior quarters that we were somewhat behind our record current package now.
Now in the third quarter.
With two quarters of improving efficiency, we saw a quarter over quarter increase in attrition.
That led to a lower than expected headcount entering the fourth quarter now.
Now in terms of what we're doing about that.
So specifically.
Our new CFO Dom Delfino is very focused on three things right rep attention.
Productivity of the reps and hiring.
Now on Reprehension.
We are continuing to refine our segmentation our coverage model.
And what that will do is it will result in improved delivery coverage and higher levels of quota attainment and that's in progress and we expect to really have that ready to go by the the first part of <unk>.
As we move into our next fiscal year.
On the Rep productivity, we are doubling down on training and enablement.
Leveraging partner based selling and of course implementing the the simplified product portfolio.
On the hiring side.
Since Q3, we've increased our recruiting efforts even more.
About previous levels.
And we are seeing early and trading with us right.
In terms of getting us back to where we'd like to be in touch with the sales rep headcount.
So I think the I think so we're working on both of these issues right and I think the supply chain is going to last.
Few quarters right I don't know multiple quarters, we don't know yet right.
On the Rep head count we are working hard to get that limited Asap.
Okay. Thanks for all the details Rajiv maybe just another question for you.
The new customer count this quarter was 580 customer new customers I know in the past you've talked about focusing more on quality versus quantity I think the average if I look at from two to two <unk>.
Over the last couple of years I think it's been around 700. So I mean are you happy with this level of customer additions and given the issues with the sales force should we focus less on the number of customers that are being added.
In the next couple of quarters. So do you think that becomes less meaningful as a metric and it should be focus more on on things like ACB billings or some other metric.
Yes, so Q3 is seasonally weaker than Q2, and we saw a decline roughly in line with historical seasonality and the <unk>.
Third quarter right when it came to new logos now as as you indicated also we have been focused on higher quality higher ASP, new logos more so than absolute new logo comp.
And on that front, we saw solid year over year, New logo ASP growth in Q3, which is what we're driving for.
So if you look go forward right now, we expect a new logo growth to be driven through enabling more partner based selling.
Continuing to drive our partner autonomy program, we're trying to get more leverage from our strategic partners and by continuing to make sure that we have the right sales incentives in place.
So yes, we are focused more on the quality of these logos going forward and the ASP is that we can capture.
Got it thanks, so much and let me just sneak one more in if I could for Rukmini.
I think you had guided average contract term to be flat I think it went up a little bit from three 1% to $3 two years in <unk>.
I think youre guiding flat again for fiscal <unk>, how do you how would you say that the growth in your renewables business.
Or would that be impacting both the ACD billing seasonality as well as the average contract terms.
And should we expect that after four Q <unk> average contract term will decline given the federal business is.
As a more significant part of your revenues in the quarter. So any thoughts you have on on the growth on the renewables business and how should we think about the seasonality of ECB billings as well as to the trend in the average contract term. Thank you.
Yeah.
Yeah. Thank you for the question. So on the first answer to your question on the on the contract.
This quarter in Q3, we had a couple of significant transactions that came in a tire terms. So that's why you saw the three point too, but I think more generally I'd say at this point, we are quite close to sort of what we think was where Thomas will eventually settle which is around two eight to three year, Mark, which we had laid out.
Previously so we're quite close to that level. So I took fluctuates a little bit as youre seeing I think here and what we're projecting for Q4 as well.
And we expect that to again, maybe trend down slightly but not not too dramatically at this point, given where we are and how close we are to the so where we think we will setup.
I think your second question was on the seasonality as it relates to renewals and what that does for ACB billings.
And what I would think in general as we've talked about I think.
In the prepared remarks that I thought it was.
It just continues to perform really well.
For us overall and I think what it does is we do see the available to renew or 80 odd, which I think we've talked about before on these calls.
Does.
Go up in general over time, but as the base of renewals continues to build so I would say.
That renewals in general is less seasonal than the new ACD overall.
But as you can as you can imagine I don't know if it's just a is at this point outflow of Windows orders came in going back right. If the new business that we booked three years ago. Two years ago is that how's that seasonality is the available to renew also has some of that seasonality right. So it's not perfectly correlated but I hope that answers. Your question that overall I think I don't know what this is doing really.
Well, where.
We're seeing slightly less seasonality in that business, but again it follows the same pattern as what new business did a few years ago, which is somewhat seasonal between between the quarters right. So this is our first full year of renewals and so we'll continue to watch that closely.
Thank you for all the detail I appreciate it.
Thank you. The next question comes from James Fish with Piper Sandler. Please go ahead.
Hey, guys. Thanks.
To continue on the supply chain challenges.
It's there.
The color you just gave but is there a way to think of the backlog you now have that should come in when supply comes back.
Put it another way is your backlog.
Boy you know roughly the 90 million that you had to guide down for fiscal Q4 understanding theres multiple ways here of how orders get booked or delayed.
Are you expecting that you know.
80, 90 million band to come in during all of fiscal 'twenty, three and do you think the persistence of these issues actually persist long enough that puts you over $300 million to $500 million free cash flow guide in the out year at risk.
Thank you Jim for that question I can take that Rajiv. So a couple of thoughts and maybe I'll add a little more color to what he said about supply chain.
So you know.
As you will recall one of the things he said with a significant majority of the Q4 ACD billings guidance relative to what was implied.
Our previous quarter when they got when we guide for Q3 and for full year. The significant majority of that Delta is coming from the supply chain challenges and it shows up in two ways. One is orders that come in.
And how should we to start basically they're booked botox, which a start date or they.
They don't get booked because customers are waiting for the availability of the hardware and the way we thought about sign estimate Q4 is we looked at the percentage of our orders in Q3.
That came in with future start dates and as soon as you've talked about and I talked about we saw late in Q3, but the percentage of those orders that came in with future start dates went up.
And what we are modeling for Q4, we are modeling that percentage of our orders to come in with future start date to go up to increase or the worst than compared to what it was in Q3. So that's how we'd definitely be approached I'm estimating.
Estimated Q4, and I do want to make the point I think to your question Jim on the revenue piece right. So if it's booked and we're able to collect it industrial was up an ACB billings and we do do that.
Even with orders with future start dates.
Whereas at revenue, even if we have booked and collected it it doesn't show up in revenue until the actual.
Eight of the license starting.
So those are some some of them sort of the nuances that and to answer your question, Jim on on backlog and deferred and so on right. So.
Because of this effect of these increased percentage of orders coming with delayed start dates we do expect to build some deferred revenue and backlog.
But until supply chain starts to improve and we see that percentage start to decrease we would really not expect to sort of see that upside or that same magnitude kind of show up in our top line.
Just yet right. So that's how I would characterize thinking about backlog.
And deferred revenue.
Got it and just on that 305 and free cash flow is that still on the table here I know that's far out but.
Yes. Thank you for reminding me of that so I think what we're you know we are in the process of planning for fiscal 'twenty three as you can.
But we are anticipating exiting fiscal 'twenty two.
Below our earlier expectations and all the uncertainty we're seeing in respect to the supply chain. So.
So we're not in a position to ride out a form those targets, we provided Jim but we do plan to update our view more generally for 'twenty three specifically in the Q4 earnings call. However.
However, I will say I think it's worth emphasizing that we remain focused on profitable growth and continue to prioritize working towards sustainable free cash flow generation and non-GAAP operating margin breakeven in fiscal 'twenty three.
That's fair enough.
My follow up would be.
Actually the new packaging modules.
Should we think about the rank order at these new packaging modules that are being adopted after the primary one what package or two are coming in second or third.
Early but you know and what kind of time frame are you expecting to get that second or a third add on especially you guys. We're one quarter into kind of a new packaging. Thank you.
Yes.
I'll take that one.
It's still early but the initial rollout here has been pretty good right. So if you look at the.
The largest deal a poor quarter last quarter was from an EMEA based financial services company.
And this was fascinated by the use of our new solution based pricing.
And by the way that gets there since you bought the entire portfolio right supporting organic cloud platform all of it now.
No more.
I think a couple of things we've been seeing process more rapid closure of deals right utilizing this new pricing and packaging.
And second to your question on add ons.
Seeing a notably higher attached offer an authentic solid management solutions to a cloud infrastructure solution.
So I think.
The new solution packaging continues to be adopted on an increased pace as might be expected to see so again high velocity of transactions and more attach of our portfolio of products. Richard has been the productivity of our sales. So that's one of our partners.
Yes.
Yeah.
Hum.
Thank you. The next question comes from meta Marshall with Morgan Stanley . Please proceed.
Great. Thanks, I wanted to just kind of briefly touch on stock based compensation as a part of attrition than just you know.
You noted that you were seeing kind of larger than expected attrition was stock based comp any part of that you know just given the reset in valuations kind of across a lot of names are there any efforts or adjustments that you guys are planning on making them as part of kind of increasing retention of.
Sales reps.
And then clearly you know it's it sounds as if kind of the the core underlying business is seeing some similar trends, but just whether in any region or any particular vertical or you've seen any kind of slowdown in activity just given macro it'd just be helpful. Thanks.
Yeah. So I think on the first two questions Amit on the first one.
Look I think it's an overall statement around competition overall read anecdotes of core equity and it includes cash compensation, there's clearly some inflationary pressure on that right and a stock price of course asset.
If you do not more salespeople very much our focus and quota attainment.
And a lot of it therefore is focused on enabling them to achieve quarters.
And so we haven't.
Work that we talked about when it came to the segmentation.
Better segmentation better coverage model better training getting them leverage through partners all of that has from a retention perspective, because ultimately it gives them a much better shot at achieving our own achieving their quota.
Right. So I think that's that's what we're really focused on that.
We're also factoring in some degree of inflation and outrageous this actually move forward and factoring that into our compensation plan.
The other thing that I do believe is that some of the companies that we compete with for talent, especially startups, maybe increasingly focus on conserving cash and slowing down hiring this kind of environment, which Richard actually help us.
And the second question I think well it wasn't on demand and whether youre seeing any changes in demand around verticals and so forth.
I would say overall, our demand remains solid.
But our ability to execute against it is being sustained by these supply chain issues, which are causing delayed start dates and delayed orders and to some extent the shorter day breakfast, but we need to focus on hiring back.
Overall on a demand perspective, we haven't seen any notable changes in customer spending, but we are watching the demand and macro backdrop quite closely.
A fundamental demand is driven by accelerating digital transformation customers are modernizing our legacy tdm infrastructure running all forms of workloads, including performance oriented databases and mission critical workloads on our platform and extending to the public cloud.
We talked about a few customer wins during our prepared remarks right that highlight these.
Got it perfect. Thank you.
Okay.
Thank you.
The next question comes from Nihon Chomsky with Northland Capital markets. Please proceed.
Yep. Thank you.
But in the quarter and as you start to notice the higher than expected sales for partition attrition.
And how could you repeat the question please I couldn't catch it.
Yes, one in the quarter as you start to notice a higher than expected sales for our attrition rate.
Very very late in the third quarter right literally the last couple of weeks of the quarter now.
Okay.
So sales and marketing.
That said, it's line item was down 10% and European I think 9% below where I think most analysts or so.
Will there be any sort of say that you're a sales rep head count is up much lower than the <unk> 10 per cent.
I mean.
Whereas our sales rep head count relative to transportation, because the type of shuttle or is 20% lower at 30% working against some of the kitchen here, what's the magnitude of yours.
Yes, we are.
We are we have not quantified exactly where we're at we are let's call it with slightly below where we would like to be and we are doing everything we can to get it back up to where we wanted to be going into next fiscal year.
Got it okay.
So the one thing I'd add.
You bet.
Sorry, I wanted to add one point that if you were referring to just sort of the Q3 sales and marketing line item I did mentioned this in my remarks, but in some cases want to highlight that there was about $6 million in it.
And opex within that line item that was supposed to be in Q3. The sales enablement in person event that got moved from Q3 to Q4.
And so that's now in the Q4 number and the guidance we gave for Q4, but it was not in Q3 I just wanted to point that out as well.
Right, Yes, very good point okay.
And then yes.
In terms of the.
Sales attrition.
Yeah.
Often it is coral.
Correlated to a weakened demand outlook those salespeople tend to walk towards where there's demand and away from where there is weak demand so pushed back on that.
Natural.
Correlation that tends to be out there.
Yeah, I think look our again I think part of this is like I said focusing in terms of making you know refining our coverage models, who are finding our segmentation to a to make sure that our sales. So if we can hit that number basically since that needs to get to that number and give them every ability to do that I don't believe it.
A reflection of demand right. The environment is also competitive right. We've had a our sales reps typically go.
The ones that end up going in many cases stood. These are you know Scott right. There in the promise of a quick idea of riches and and some of that of course is starting to potentially moderate at this point as well. So I don't believe the Saturday anything to do with demand.
Are the ability to for them to go achieve their numbers.
Okay, great. Thank you for taking my question and then the other thing.
Yeah. Thank you to all the other thing I'd add to that point.
Oh that productivity was inline with expectations in the quarter and if you recall from the policy if that'd be expect like directly to go up over time, but that was in line with with what we expected which means that our <unk> are.
Our productive in terms of bringing in and closing deals that said, we absolutely are keeping our ear to the ground on demand.
Awesome. Thank you.
Thank you. The next question comes from Rod Hall with Goldman Sachs. Please proceed.
Yes. Thank you for the question welcome aboard Rukmini good to have you aboard.
I guess, our board with the markets anyway. So first question I had for you is your comment on the renewals and the deviation on ACB billings.
Kind of representing upside to your expectations and renewals, but I wonder if you could say a little bit more about that are.
Are you talking about the high end of the ACB, a billings guidance range and then what you actually printed so $5 million and then that.
I'm, just kind of try and kind of trying to triangulate into the the renewals number from that comment I Wonder if you could give us a little bit more color on that and then I have a follow up question.
Thank you Rod I appreciate that yeah, so on and as you said I think just to.
Emphasize what we said we said the outperformance in Q3 on ACB billings was really due to water in all our performance and I think that's it.
We said this last quarter, our north business continues to do really well and they have largely not been impacted by the challenges that we've talked about.
In this call, but on the supply chain side and odd overall rep head count those are predominantly at the thing our new ACB outlook.
That all said, we don't provide the split of new ACB, because renewables on a quarterly basis. So I won't give that a rod, but hopefully that gives you some color on what I meant when I said, Oh performance for Q3, and and Danone is doing well.
Okay. Thanks, Romania, and then following up that I guess, just a little more color since there's not really an answer there on ATR. We were modeling we were modeling the lower seasonality, obviously for the quarter and we would guess that seasonality on ATR is about double a little bit more than double what it was if you look at quarter on quarter.
Development of ATR.
Little more than double what it was this quarter next quarter and you know in quarter on quarter growth terms does that is that in the ballpark for ACR.
Can you make sure that I understand it so what exactly is double in yard.
And you noticed in the quarter on quarter growth region. So if we when we talk about seasonality, we're talking about ETR at this quarter in our fiscal Q3 over the quarter before and so if we look at Q4 over physical three we'd say, it's kind of a little more than double what it was in fiscal Q3, but I just I would like to.
Triangulate that to make sure that we're kind of in the ballpark at least on that.
Yeah, it's not that high the delta, it's not double the growth in our double Rod right. Now there is as I said Q4 does have a higher APR than we had going into Q3.
But there's also I think the dynamics, we talked about last quarter, where there is some dynamics of early and so on so it's not merely is not nearly that large.
Right right, that's the trouble with water falling this stuff out and then I.
Thank you for that and then Rajiv I wanted to come back to you and just ask on the hardware attach can you guys can.
Can you quantify how much of the new software license youre selling are attached to hardware versus not is there any way to is it mostly is it most all of it or is there a proportion of is that it really isn't attached to them.
The necessity of just shipped a piece of hardware along with the software license.
Yeah, but to be clear, we are not shipping the hardware right. So we're getting just a thought.
I'm, saying for converted to take delivery of an ease of hardware along with the software license just to be clear I, we understand your model.
Alright, and I understand your question right. So it's hard for us to actually have a.
Our view on the first one on renewals and on topic right renewals are largely independent of hardware.
Pretty much so people once they have a software license from us they are likely to go to 90% on the same hardware, so that largely decoupled and our renewals business is not being impacted by the supply chain or hardware issues. So really it comes down to the new orders and out of those new orders yeah. Some of those are tied to customers buying hardware and.
A good chunk in some cases deaths than buying software and they may already have hardware available right and then they're just buying software to go around in the hardware. So it's hard for us to piece apart and make a clear pattern of much from that it tends to vary also.
So we don't have a specific proportion that I can tell you right off what portion gets to be software only independent of the hardware what portion gets to be tied to the hardware.
We began to see the stuff that is tied to the hardware we saw significant.
Uh huh.
Impact right because of the of the delay in hardware availability.
Okay, Okay, alright, thanks very much.
Yeah.
Thank you. The next question comes from Eric Selle picture with JMP Securities. Please proceed.
Yeah. Thanks for taking the question.
Yes, I was just trying to understand.
Your customers have some pretty good flexibility in terms of the different platforms that they can choose from.
Why weren't they able to.
Migrate from one platform that.
Supply chain constraints to another.
Yes, and by the way. This is a good question and exactly look until until the last quarter or this is exactly what we will manage it right and people were had the flexibility, but the problem here is essentially we're seeing future studies across many if not most of the summer platforms that we partner with.
So it's not an isolated issue and it's not like our customers can go to a different bar.
Hardware supplier and get what they want it's been across the board being at least with most of the hardware providers that we are partnered with our customers running our software on.
Okay.
Can you can you give us a sense I mean isn't the majority of our hardware solutions at this point that are seeing constraints.
Yeah, and I would say the consists of different across different provided the smart.
One item of coughing laughing issue that kind of the other providers.
Providers seem to have different.
Constraints in their supply chain.
But it seems to be pretty much across all our major partners we have seen.
Okay and is the largest.
Partner at this point still supermicro.
We have the business the ship itself supermicro still very significant for us, but we do a fair amount of business with HP.
We still do a fair amount of a Dell.
Lenovo and then we have smaller players like us.
To another.
Okay. Thank you.
Thank you. The next question comes from Aaron Rakers with Wells Fargo. Please proceed.
Hi, This is Jake on for Aaron. Thanks for the question could you talk a little bit about the competitive landscape and maybe what's giving you the confidence that you're not seeing some increased competitive dynamics versus the likes of <unk>.
Hey, VM, where others are maybe a shift in applications in the public cloud.
Yeah. So first of all industrial win rates in CQ.
We saw actually a year or improvement year improvement in our win rates both against our largest competitor.
As well as against legacy three tier solutions.
So so that I think is actually going well right and we are much more focused on that not with respect to the cloud itself I don't think the dynamics that have changed right. I mean these people are continuing to use the cloud for new applications, but we also you know theyre also looking at a water bed that is hybrid and multi cloud.
And workloads running everywhere right and so we don't we don't I mean, the dynamic of moving to the cloud has been there for a while and we don't think that's changed significantly.
And any sense recently and.
And we are participating in that I had with some of the examples that we've been showing with our solutions and are in AWS and soon to be in Azure.
So we are participating in that cloud journey that starts with our customers. So we haven't seen any significant changes on that front and on the on Prem side I would say I've been rates have been continuing to increase year over year.
Okay, Great and then maybe just as a follow up you guys noted demand remains pretty strong what about what about visibility, especially in the enterprise space are you, having any major changes in visibility.
I think the biggest question among visibility is.
When you when we have a set of opportunities or pipeline.
When is that going to be relaxed in orders and what was how much of that is going to come in with future start dates. That's the part that we don't know right than we had been assuming that that's part of it is actually getting worse this quarter compared to last quarter.
So the fundamental.
Mike.
Fundamental demand from our perspective has not changed but what bank and the demand be realized right with these hardware issues on.
The question really.
Okay, great. Thank you.
Yeah.
Thank you. The next question comes from Simon Leopold with Raymond James. Please proceed.
Thanks for taking the question I wanted to see if you had some thoughts as to whether or not the circumstances will cause your customers to accelerate public cloud adoption and potentially make opportunities for on premise business for you essentially be reduced.
Given that if they're facing these kinds of challenges just building out data centers.
<unk> list of who the supplier of the software is does it accelerate public cloud adoption.
Yeah that is.
Good question first of all I would also say that public cloud providers also have to deal with hardware issue right.
With their own but second I think cloud is a strategic initiative for our customers.
So customers are thoughtful about figuring out what they wanted to go with the cloud and it's not lost it we haven't seen them do so on a reactive manner, just because they can get hardware temporarily on France.
Right. So so clearly people have been going to the cloud for new applications.
And for customers, who have an organic platform.
We provide a very quick and simple way for them to move to the cloud right and so they have a platform. They can also move to the cloud using our platform.
And run on public cloud hardware right that's available in the public cloud.
And we haven't seen a lot of that happening yet right because what customers decided that they decided what applications that are going to run on prem and what applications are going around in the public cloud.
And those applications that they run on Prem they have good reasons to run on Prem right. They might be systems of record are they might be mission critical applications. They may have data privacy or look at it the issues.
It's not easy for them to take all of those and take it to the public cloud right. So they have been thoughtfully. So net net I think the answer to your question. Simon is no. We haven't seen this in the reactor measure of people going more to the public cloud because they can get hardware on prem.
Great and then as a follow up when Youre thinking about your strategy for rebuilding the sales reps do you think about trying to.
Essentially hire experienced sales reps, which potentially cost more money.
Or alternatively, grooming and developing new sales reps, which may cost less but take more time, how do you think about that trade off and in the rebuilding process.
Yeah, I think it's a combination of both right I mean, it's not one or the other.
So clearly there is a combination of people we are hiring with it with the experience and with the scale.
Last year for example, we graduated when many of our inside sales people to become a contract.
Their own career development.
And so that's another thing that we have done in the past right and provide career opportunities for our people to go from you know whether they're inside sales whether their customer success to potentially taking on a road right.
Contract.
And training them and taking them their forward to combined with hiring so it both together its not one or the other.
Great. Thank you for taking the questions.
Thank you that concludes today's Q&A session as well as today's call. Thank you for joining please disconnect your line.
Uh huh.
Uh huh.
Uh huh.
Yeah.
Right.
Okay.
Okay.
Okay.
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