Q4 2022 Nutanix Inc Earnings Call
Top line outperformance Dylan.
Diligent expense management.
And better than expected linearity helped us achieve positive free cash flow in the quarter.
Which was substantially better than our expectations.
Given the largely supply chain driven headwinds that affected our fourth quarter.
I believe looking at FY 'twenty two.
Integrity provides a better picture of the progress we've made on our subscription business model transition.
Specifically <unk>.
We saw ACB billings growth accelerate to 27% year.
Year over year.
From 18% in FY 'twenty one.
We also saw non-GAAP operating margin improved by 15 percentage points.
Year over year to minus 5%.
Finally for the first time since 2018.
We achieved positive free cash flow for the entire fiscal year.
Beyond these financial accomplishments, we had other important achievements.
Including launching our simplified product portfolio.
Enhancing our leadership team.
Making progress with our partners.
And continuing to delight, our customers as reflected in our high NPS scores and strong renewal performance.
Overall, I am pleased with our progress and financial performance in FY 'twenty two.
As I noted our fourth quarter was bolstered by a number of large expansion deals.
Including customers, both increasing their use of our <unk> cloud platform and broadening their adoption of adjacent solutions in areas such as storage storage database as a service and cloud management.
A good example wasn't expansion deal with an existing customer who has a global fortune 100 financial services firm that placed a double digit million dollar order.
To broaden their usage of our core mechanic cloud platform.
While standardizing on the tennis database service.
We're managing and deploying their databases throughout their organization.
This customer also plans to utilize <unk> on AWS to enable bursting into the public cloud with their new tactics based workloads.
We see this customer is a great example of how we're able to land and expand with some of the largest enterprises in the world.
Our largest new customer win in the quarter was with an EMEA based financial services provider.
That we're looking to modernize their <unk> infrastructure.
With the aim of improving scalability.
Performance and management resources required to support future growth objectives.
While also providing a path for seamless access to the public cloud.
They chose our new cloud platform full stack offering as.
<unk> <unk> cloud management.
Due to its simplicity and built in automation for infrastructure as a service.
Okay.
They also added metallic unified storage and database service for the storage and database automation needs respectively.
This win is a great example of customers seeing the benefits of adopting our full stack.
On the product front.
We were excited to announce that NC two on Azure progress to public preview during the quarter.
Which will significantly broaden the pool of customers for our cloud offerings.
One of our first customers on boarded to MTS to on Azure is a leading global brewer.
Based in EMEA.
That is candidate on mechanics cloud platform for all of its business critical applications and sequel server workloads.
This customer chose mechanics.
Due to its simplicity.
<unk>.
Use of management and ability to seamlessly burst into the public cloud of their choice.
Another exciting product development was the recent release of AOS fixed dock five.
Our comprehensive and feature pack release, which reflects our continued investment and innovation in our platform.
Releasing stockpile as features focused on improving performance security and integrated data services required for demanding database workloads and business critical applications.
Go to market leverage with partners is one of my top priorities.
And we continue to see progress on this front during the fourth quarter.
Our partnership with Red hat.
With whom we have a growing number of joint wins for both open chip and Red hat enterprise workloads running on mechanics, as our platform continues to show good momentum.
One example of a giant win in Q4 is the central bank of a country in the EMEA region that.
<unk> shifted their business critical applications running on Red hat Oprah chip from a competing <unk> solution to new Calix cloud platform.
Including our <unk> hypervisor.
Due to the resiliency scalability and reduced total cost of ownership offered by our solutions.
We're excited about the growing opportunity pipeline, we see with Red hat.
Also on the partner front, we were pleased to be named 2020 to HPE Green Lake ecosystem partner of the year.
We view this award is a testament to our growing partnership with HP.
Now I'd like to comment on our recent sales leadership transition.
Following Dom Delfino is positioned to pursue an opportunity with another technology company.
On August 1st we appointed Andrew branded as our new Chief revenue Officer.
Andrew has been with us as a sales leader for over five years, most recently as our senior Vice President and worldwide sales Chief operating officer.
And then develop a deep understanding of our business model go to market strategies and sales operations.
Our sales organization is in excellent hands.
Under <unk> leadership.
And I look forward to working closely with him in his new role.
More broadly I.
I feel confident that we've got the team in place.
State new tactics to its next stage of profitable growth.
In closing I'd like to provide some thoughts on our priorities and outlook.
First of.
Our overarching priority remains driving towards sustainable profitable growth.
To enable us.
We will continue to judiciously invest.
And the growth of the business.
Execute on a growing base of renewables.
And diligently manage expense levels.
Towards this end.
As part of a comprehensive review of our business and operating model.
And along with a number of other expense reduction actions.
We made a difficult position to reduce our head count by approximately 4%.
This was not a decision we made lightly.
But it was important to ensuring that we could continue to drive towards profitable growth in a variety of macroeconomic scenarios.
However, we're also seeing businesses continuing to prioritize digital transformation.
And believe the challenging macro backdrop is providing further incentive for them to optimize their IP and cloud spend.
We see these dynamics are playing to the strength of our hybrid multi cloud platform, which enables companies to reduce the complexity and cost of their it environments.
Finally, we see the business achieving positive non-GAAP operating income and continuing to be free cash flow positive in FY 'twenty three.
We plan to do this through a combination of strong continued topline growth.
And diligent expense management.
We remain confident about the opportunity ahead of us.
And enter FY 'twenty, three with a sense of excitement and cautious optimism.
And with that I'll hand, it over to Rick <unk>.
For Penni.
Thank you Rajeev.
Fourth quarter fiscal 'twenty Q came in better than the expectations that we had set forth in our last earnings call.
Indicated earlier this month.
ACD billing for Q4.
$193 million above our guidance range of $175 million to $185 million.
The outperformance was due to both renewal.
And the new ATB bookings coming in better than expected.
Q4 also benefited from a few large deals which are harder to forecast.
New logo additions in Q4 were around 620.
At the end of Q4 was one point to $2 billion and grew 37% year over year.
Average contract duration was three two years into fourth flat from three two years in Q3.
Revenue for Q4 was $386 million.
Above our guidance range of $340 million to $360 million.
As described during our last earnings call the percentage of orders with future start dates was a key assumption in our Q4 guidance.
This percentage came in higher than it was in Q3 2002 as expected, but not as high as our forecast.
This also positively impacted ACD billings and revenue performance relative to guidance with a larger impact on revenue.
While our largest silver partner had almost no impact from supply chain challenges. During our Q4, we did see a significant percentage of orders with future start dates from other service partners.
Sales rep productivity increased year over year in Q4.
non-GAAP gross margin in Q4 was 82, 6% higher than our guidance range of 79% to 80% because of higher than expected revenue.
non-GAAP operating expenses for Q4 came in at $356 million better than our guidance range of $360 million to $365 million.
non-GAAP net loss for Q4 was $38 million or <unk> 17 per share.
Billings linearity was good in Q4 and better than our forecast.
Dsos were 30 days in Q4 down from 40 days in Q3.
Free cash flow in Q4 was significantly better than expected.
Positive $23 million, while we had previously expected a significant use of cash.
This was driven by three factors, one our bookings and billings coming in higher than expected.
To linearity of billings was better than expected and in line with historical linearity.
And three diligent expense management.
We closed the quarter with cash and cash equivalents of 1.324 billion.
Up slightly from $1 3 billion in Q3 2002.
Moving to full year fiscal year 'twenty two results.
<unk> billings in fiscal year, 'twenty, two with $756 million.
Representing strong growth of 27% year over year compared to year over year growth of 18% in fiscal year 'twenty one.
Neil ACB billing grew year over year, but came in below our expectations largely due to the challenges identified in Q4, while the nuanced ACB billings outperformed our expectations.
As we transition more fully to a subscription model with total ACB billing and revenue guidance along with disclosure around metrics such as AI are we no longer plan to share the breakdown between new ACB billings and renewals ACB billing.
Our gross retention rate, our <unk> for fiscal year 'twenty to continue debating within are 90% or greater target range.
Net retention rate for fiscal year 'twenty two was around 125%.
Revenue for fiscal year, 'twenty tool was 1.581 billion.
And grew at 13% year over year, returning to double digit growth for the first time since the start of our subscription journey.
Right.
Fact of increased future start dates in Q4 2002.
non-GAAP gross margin for fiscal year, 'twenty, two was 83% greater than our guidance of approximately 82% largely due to revenue coming in higher than expected.
We delivered meaningful operating leverage as non-GAAP operating margin went from negative 20% in fiscal year 'twenty, one the negative 5% in fiscal year 'twenty two.
We generated free cash flow of approximately $18 million in fiscal year 'twenty two.
First year of positive free cash flow since fiscal year 2018.
Since the beginning of our subscription journey.
Fiscal year 'twenty, two what a significant year as we saw the thesis around our subscription business model and diligent expense management start to bear fruit.
With renewals performing better than expected and positive free cash flow for the year.
We have demonstrated over the last couple of years, we expect to continue to make steady progress each year towards continued topline growth and profitability.
Now turning to Q1 guidance.
The guidance for Q1 'twenty three is as follows.
HCV billings of $210 million to $215 million.
Our year over year growth of 16% at the midpoint.
Revenue of $410 million to $415 million.
Year over year growth of 9% at the midpoint non-GAAP gross margin of approximately 82%.
non-GAAP operating margin of approximately negative, 6% with non-GAAP operating expenses of $360 million to $365 million.
Weighted average shares outstanding of approximately $229 million.
I'll now provide some context around our Q1 guidance.
First the topline guidance for Q1 assumes the supply chain dynamics would remain more or less the same compared to Q4 2002 at.
It also assumes that contract duration.
Approximately flat to slightly down in Q1, 'twenty three compared to Q4 'twenty two given that Q1 is a seasonally strong U S public marker, which typically has lower contract duration.
Second in line with our stated priority of driving towards sustainable profitable growth. We conducted detailed expensive you as part of our annual planning process.
Earlier this month, we made the difficult decision to reduce our head count by letting go of approximately 270 employees about 4% of our total head count, which we expect to result in estimated annualized expense reduction of approximately $55 million to $60 million.
Finally, we expect free cash flow to be around breakeven for Q1 'twenty three after factoring in approximately $20 million of one time severance payments related to the head count reductions in Q1.
Excluding those one time payment free cash flow expectations for Q1, 'twenty three would have been around $20 million.
Moving to full year expectations the guidance for fiscal year 'twenty three is as follows.
<unk> billings of $895 million to $900 million.
Year over year growth of 19% at the midpoint.
Revenue of 177 to 1.78 billion.
Year over year growth of 12% at the midpoint.
non-GAAP gross margin of approximately 82%.
non-GAAP operating margin of it.
Approximately 2% with non-GAAP operating expenses of 141 to one point or $2 billion.
I'll now provide some color on our full year guidance.
First the guidance assumes that contract duration would decrease slightly compared to fiscal year 'twenty two.
The fiscal year 'twenty three revenue guidance also assumes the supply chain dynamics would remain more or less the same through the first half of fiscal year 'twenty, three and would start to ease modestly in the second half of the fiscal year.
Growth in ACB building is expected to be greater than growth in revenue because orders with future start dates that are built are reflected in ACD billing, but revenue can only begin to be recognized in the quarter of the actual license start date.
Second while the demand for our solutions has remained solid we have considered the uncertain macroeconomic environment in our guidance.
Finally, we expect to deliver about $75 million to $100 million.
Free cash flow for fiscal year 'twenty three.
We're also happy to reiterate our previously stated target of being sustainably free cash flow positive as the first half of fiscal year 'twenty three excluding the one time severance payments.
Moving on to add some color to fiscal year 2025 expectation.
We expect free cash flow margins in fiscal year, 'twenty five to be around 10% to 15% of revenue representing at least $300 million and free cash flow. We also expect to continuing to make steady progress each year towards becoming a rule of 40 company by driving growth.
And margins.
With that operator, please open up the line for questions.
Yes of course. Thank you we will now begin the Q&A session. If you would like to submit for a question. Please press star one on your telephone keypad and for any reason you would like to remove that question. Please press star followed by two again to ask a question Thats Star one.
As a reminder, if you were using a speaker phone. Please remember to pick up your handset before asking your question.
We'll pause here briefly ask questions registered.
Our first question comes from Jamie.
James Fish with Piper Sandler James Your line is now open.
Hey, guys. Thanks for the questions and congrats on a really good quarter and bounce back here as well.
Reiteration of that 300 million of cash flow in the out year really really good to hear that.
On the upside in the quarter and on the guide for fiscal 'twenty, three though how much of that prior $90 million reduction for fiscal Q4 that you had to lower by came back into fiscal Q4 versus how much of that really flows into that fiscal 'twenty three number and what's really driving your confidence around guiding that fiscal 'twenty three revenue.
So that level, especially in.
In a macro or a change in kind of leadership at the sales level and the head count reduction that would in theory.
Lower your capacity a little bit and I know you are talking about easing.
Supply chain dynamics in the second half of the fiscal year.
Thank you. Thank you James for the question. So let me maybe its a little more context around how we thought about fiscal year 'twenty. Three so there are a few drivers here that we considered.
First there is when we think about our billings and revenue we talked about both renewables and our new and expansion business. So first talking about renewals.
As we've talked about before the renewals business continues to perform really well and given the growing base of renewals, we expect renewals to grow strongly in fiscal year 'twenty three as well.
Renewals contribute the significant majority of the growth expected from 'twenty to 'twenty three.
We're also expecting growth in new and expansion business.
But when I alluded to the comments around the macroeconomic environment, that's where it's in the new new and expansion business that we have factored in some conservatism as it relates to the macro environment.
And then we did exit Q4 and fiscal year 'twenty, two with record levels of backlog and so we're factoring that in as well into the fiscal year 'twenty three guide.
And all of that combined, especially the renewals and.
The strong and healthy backlog position helps.
It helps us reduce the risk around around the forecast and I think supply chain as we talked about Jim what we expect will stay more or less the same for first half and then maybe start to ease modestly in the second half.
But that again could evolve and we'll keep everybody updated on what we see it relates to supply chain as we go here from quarter to quarter.
It makes sense and appreciate the color and then Rajiv obviously your major competitors, having their user conference. This week and released an updated version and I know, it's only been 24 hours.
Terms of the announcements, but from that new functionality that was announced how does new tenants actually stack up in what continues to differentiate your tax versus your primary competitor are you seeing a change in that competitive landscape already given concerns around.
Vmware.
Yes.
I'll give you a couple of points there, but yes, there is definitely a higher level of engagement from customers as to what's going on out there and there are they are more open to discussions with us.
Also seeing more talent out there looking from the and then looking for new carrier opportunities now.
With respect to the portfolio itself, we feel very good about that our portfolio is at this point.
Do you have a complete cloud platform.
And if you look at our fundamental differentiation.
<unk> provides a lot of simplicity you make these problems really really simple right from the beginning we haven't put together two or three different products to build a solution actually.
<unk> had from the very beginning.
That's number one simplicity. The second is the freedom of choice that we provide to our customers no login.
Third is our focus on customer delight, which is becoming even more critical now these days in terms of how we support our customers for the long term.
And the last bit is about our architecture in how we manage all forms of data.
So from a portfolio perspective, we have a very competitive portfolio our win rates continue to increase related to our competition against both our larger competitors as well as our legacy <unk> competition. So we feel pretty good about.
The product side of it.
Helpful. Thanks, guys.
Thank you.
Our next question comes from.
Rod Hall with Goldman Sachs.
Rod Your line is now open.
Yes, hi, Thank you for taking the question.
I guess I wanted to come back to the the.
The impact of the cost reductions and just trying to make sure I understand.
What the timing on that impact is how full impact we have in the.
In the guided quarter.
Is it some proportion of the total savings that you talked about of <unk> $55 million to $60 million a year or is it that the total amount for the whole quarter.
So that's my first question and then I have a follow up to that thank you.
Hi, Rod Thanks for the question so on the $55 million to $60 million is the expected annualized savings coming from reductions and we are through most of the notifications. Several conversions are complete a little bit.
No we are a global company and so there are some notifications and exits that are still due to happen, we expect them to be largely complete by the end of Q1.
And then maybe a few that are outstanding for Q2, but that 55 to 60 as sort of an annualized number abroad with like I said most of them are expected to be complete in Q1.
Most complete in Q1, okay. Thanks, <unk>. So then.
<unk> added.
Yes, sorry go ahead finish your question.
Oh no. Please.
I'm, just going to add that the annualized operating expense and operating margin guide.
Actors in that 55 to 60 of course as you can imagine so that factors in the actual impact of $55 60 at the annualized number.
Okay, great. The other thing I was going to ask you about this or any of us if I take the annualized number and divide by four even at the high end of the savings or $15 million a quarter, but your subgroups.
Number is $20 million, which.
Suggest youre doing more of this maybe overseas not as much in the U S. There was kind of curious what the.
The balance of that is and why that.
Severance number is so high.
In the one quarter, given the quarterly savings youre kind of indicating here.
Yeah. So the.
Approximately $20 million that I mentioned is a fully loaded number that would include.
One time earnings or salaries and bonuses it includes it.
It includes the Fitbit 60 includes the benefits that includes all of that at all.
All right, so the 50%, 60% fully loaded number for the year payroll taxes.
Phone number and I alluded to it is a global action that we've taken depending on what we've seen is our priorities and really want to invest revlimid versus we don't want to are we sort of decided to optimize in certain areas. So I am not providing sort of a breakdown by geography, but I think it is fair to assume that it was a global actions.
Great. Okay. That's very helpful. It's really good to see the cost reduction in the cash flow here much better than what we expected as well. Thank you.
Thank you.
Thank you.
Our next question comes from.
Pendulum Bora with.
J P. Morgan pendulum your line is now open.
Awesome.
Everyone. Thanks for taking my question and congrats on a great quarter much better than I expected here.
I wanted to ask you about again, the ECB billings guidance seems like.
You took some conservatism into.
And to that for the new business, but it seems like.
You might not have.
Sector much into the renewals business I'm, just trying to understand what.
Yes.
What exactly are you assuming I guess you mean.
As rates do deteriorate or you are you assuming elongation of sales cycles, maybe maybe any context, there would be helpful.
Yes high single and thank you for the question Yeah. So on renewals that they said we're not assuming.
Anything beyond what we've actually delivered so I want to be clear on the renewal piece might be continuing with <unk> continued performance and the renewals business.
And to your question on the new and expansion business.
What we're assuming is that this business.
We'll be impacted in some way by supply chain again, we are seeing solid demand so far.
Pendulum. So it's not so much elongation, we haven't seen that many elongation in the cycle or anything like that so far.
We're assuming that effectively the growth in new and expansion business will be.
May be impacted by macro conditions should they happen. So that's sort of what we factored in at this point and the last piece that I talked about when I'm thinking about that.
ACB billing guidance for the full year is the backlog piece right.
The backlog number so it gives us.
An additional benefit of reduced stress thinking about fiscal 'twenty.
Understood one question for Rajiv.
The pricing and packaging earlier in the year you have noted some.
Kind of a full end to end customers adopting new tactics.
Are you starting with especially with the acquisition of one of your largest customers.
As a backdrop I guess are you seeing any meaningful change in customer conversations.
Turning more strategic.
Adopting new tactics in a broader sense.
Yes, I think thats a good question.
What I'll say is we've definitely seen a much higher level of engagement with.
Customers being much more open and of course, we are concerned.
In terms of what might potentially happen.
And so the level of engagement has definitely gone up for us.
Now in terms of what we've assumed on how quick is a centrally led by the us.
We're not assuming any meaningful benefit from this in our fiscal 'twenty outlook.
Do you expect to see some long term benefits.
From this transaction is that customers will look for alternatives.
So that's what I would say for the Vmware Broadcom situation now in terms of the portfolio to your question on the portfolio. We're certainly seeing good traction with our new portfolio.
It's helping definitely upsize deals in defense that we are seeing more of the portfolio being consumed.
For example, assess.
Mechanics cloud management, we are seeing a much higher level of attach of <unk> cloud management tool mechanics cloud infrastructure.
So some of the larger deals with customers, who are actually being transacted using the new portfolio now and they came out of the portfolio, which has <unk> and potentially also makes it easier to go faster.
Got it thank you and congrats again.
Secondly.
Thank you.
Our next question comes from.
Meta Marshall with Morgan Stanley . Your line is now open.
Okay.
Hi, Tim This is critical cargo on for Matt Congrats on the quarter.
Alright.
Sure I would transition I was wondering if you're seeing any.
Any major changes to the sales organization as part of that transition.
Then I have a follow up question.
Yeah, No I think.
Look Andrew so as a download on they made and as I've been at our new Seattle and Andrew has been with us for.
Over five years, he set a variety of sales so the user on the EMEA region for some period of time and also most importantly, he is actually being in the throes of our subscription journey for the last year or so he has been our chief operating officer inside of sales.
He has been driving the entire transformation of the sales organization.
He is very well set and we've got a very good the pilots that could continue to hear he understands the business.
He understands the product portfolio he understands our customer base.
It's been a very smooth transition.
Other thing Youll say, we just had our first.
Annual sales kick off in three years since 2019 in Boston last week.
And the team less Super energized and excited about the vision. We also invested a lot in training and enabling them to go south.
And Theyre also reinstating our annual.
What we call center of excellence for our highest performing salespeople. So all in all I think we are.
They are in a good place from a sales perspective going into FY 'twenty three.
Okay. So it sounds like other than.
Andrew not really any changes to that.
No I'm not sure that there are changes that we have.
Got some cases below that we've brought on a new person to run Americas for us.
He came over.
As it turns out you will find that enterprise business and in our leads for America <unk>. So there has been changes Anthony for sure, but there is a lot of continuity and knowledgeable of the of the base as well so.
So we feel very good about the sales leadership team. That's in place right now not just <unk>, but also the level below and a couple of levels deeper inside the organization.
Okay great.
And then just the new reps that youre, bringing on has that been able to Scott.
Turnover.
Since last quarter.
And do you happen to have.
The estimate of their productivity timeline.
Yes, I think in the fourth quarter, we did see.
Reprehension improve.
That account roughly flat quarter over quarter.
Slide 23, we do expect to grow our head count modestly from current levels on the sales side Whitehall.
While also continuing to drive rep productivity.
So there is a significant focus on that productivity.
We talk about our new portfolio of we've talked about solution selling.
Refined our segmentation going and they're investing in training and enabling our sellers and they're getting more leverage through the partners.
That combination all of which continues to improve productivity and it's been going up.
Consistently.
Great. Thank you and congrats on the quarter again.
Thank you.
Yeah.
Thank you.
Our next question comes from.
Mike <unk> with Needham.
Mike Your line is now open.
Hi team. Thanks for getting me on here I guess for my first question I know in your prepared remarks, you guys talked about the strong performance here and attributed that topline growth.
Partially to the the large I guess, a greater number of large expansion deals in the quarter as well as strengthen that renewals base.
And I just wanted to see can you help us parse through those different components as far as what they did contribute to the growth this quarter.
How much was deloitte expansion deals versus the renewals and the reason for the question first just wanted to see.
This.
The development of that renewals initiatives that you guys keep pressing on and then secondly, I think it would just help us think through our forecast when you think about potential upside that might be coming this quarter from a greater than expected number of those expansion deals does that makes sense.
And let me try and take a shot at that Mike. Thank you for the question.
So in Q4 as you alluded to and that we talked about in the scripted remarks, there were a few factors that led to the outperformance.
And the new ones for us.
It is a it's a business model that is much more than an initiative is something that we've sort of undertaken in the last few years to fundamentally change how we operate and that's we're starting to see all of that bad fruit right over the last several quarters, including in Q4. So it did come in better than better than we expected and we expect that.
<unk> to continue.
The logic is you are referring to early on the expansion side of it they were not so much on the renewal side, but really on the on the new expansion side and the.
The other contributor to the outperformance on the on the new ACB.
ACB side, and so when I think about Q4.
All of that kind of factored into into Q4 outperformance and as I alluded to we also entering fiscal year 'twenty three with a healthy level of <unk>.
Backlog.
The only thing I'll add a bit more generally for 'twenty three our renewals business continues to perform and renewals I would remind you is sort of the forecast rather than what this business is really built on what we've already sold so we looked at.
We look back at what we've already sold to our customers. We know when those contracts are up for renewal and Thats, what the renewals forecast is based on and as we've talked about our <unk> is in the 90% or greater target range and so.
<unk> Wilcox, it's very predictable as we look out to 'twenty three and we have continued to invest in new ACD growth Rajeev, just talked about sales rep productivity and so on and so we do expect new ATB to grow in fiscal 'twenty, three as well, but that's where we've moderated our assumptions somewhat in light of the uncertain macro environment.
So realized we're not quantifying it for you here, Mike, but hopefully that color helps.
It definitely Doug Thank you for providing some more detail there, especially with the predictability of that renewables bricks is very important when we're going through our thesis on our side.
If I can just ask another question I guess, it's maybe more.
Philosophical perspective, but if I just think about this past year there has been.
Some turnover, obviously when I think about these the management team.
Now have the new CFO with us finishing the seat.
We also have the announcements around the new Chief marketing officer, a new head of engineering, the new Chief revenue Officer, Most recently, which we were talking about on this call.
Can you just help us think through.
The leadership team at <unk>.
Do we have the pieces in place at this point.
When we're looking at the guidance parameters set for this year is this a team that's going to get us to those free cash flow targets that you guys have been articulating now as we think about that fiscal 'twenty five targets. Thank you yes.
Let me let.
Let me take that question.
The company has transitioned through different places in their lifecycle.
As a public company.
As we do that we think that it's natural for there to be some transitions in management.
And we look to capitalize on these and the talent market is also quite strong in terms of bringing in X X.
And so we've been quite.
Excited about the caliber of talent that some that we have hired from the outside and others that we have promoted from within.
We believe we have an expecting a decline that brings.
Significant experience and domain knowledge that will serve us well and I thought our next stage that we are focused on profitable growth.
And so that's I think that's some of the retrofit is a very natural transition.
As a company wants.
Very helpful. Thank you again, guys I'll turn it over to my other colleagues I appreciate it.
Thank you.
Our next question comes from.
Jeff Coke with Raymond James.
Your line is now open.
Yes. Thanks. This is Jeff Kochi in for Simon Leopold So specifically on the cost cuts where are you guys targeting.
Those cuts is it all coming out of G&A, sorry, if I missed that in and how do you.
Is there some reinvestment that you think you can.
That is an opportunity there specifically.
With some of your competitors.
On the sales side.
Have a follow up.
Yeah.
Yes.
At a high level view.
We of course look at every function and we looked at benchmarks across every function, but the majority of the impact was in sales and marketing.
And there have been sales it is mostly non quota carrying salespeople.
And so and then of course, the restless legs, because all the other functional areas.
Mhm.
Okay.
Secondly, where are you seeing the strength just given the macro weakness is there specific verticals that you can that.
That you can point to that are holding up better.
Our product.
Fairly broad based.
So.
I can't point to any single vertical but keep in mind, we have a very strong base of renewals.
And the renewals business of course provides a good foundation and then also as already business that we've already sold and leads to the venue than with any of that with higher renewal rates given the customer satisfaction. The NPS scores that we have so therefore, it's a very good foundation.
We of course, this particular last quarter, we saw good strength in financials as a vertical.
Question on verticals.
We saw a great strength.
In some regions of course, I think our middle East has been a high performing within consistently for a while.
So, but nothing that stands out.
Mhm.
I guess maybe.
Fit one more in here.
No.
With this higher engagement that you're seeing.
Maybe you could talk about <unk>.
Specifically, where do you think the biggest opportunity is.
For you guys, given the and where you're getting acquired.
What are you most optimistic about.
That's it you know again I think.
We're already in a market that.
We are doing relatively well in terms of gaining share and even before the news came on.
And with the portfolio and we are executing and they're very focused on this now with this news coming onboard more customers, who are concerned about what could potentially happen and it's a very broad base of customers across the world and they've all seen what what's happening <unk> heard the public.
What's been said in public and.
With more uncertainty, which means until the decrease the risk and risk means that consider that customers have to consider a more automated.
And so that's what we see and like I said earlier, it's a little too.
<unk> for us to comment on this.
And the things that we are not factoring in any major upside from this in FY 'twenty, three and what the guidance and what we're planning.
But in the long term I think this should result in some tailwind for us.
Great. Thanks.
Yeah.
Thank you.
Our next question comes from Matt.
Matt Hedberg with RBC capital markets, Matt Your line is now open.
Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking that question.
On the supply chain challenges sounded like attract better than expected that's great to hear that.
Last quarter you noted they started very late in the quarter just wondering about the timing of improvement. This quarter was it was the supply chain consistently better than you thought or was there more of a gradual improvement through the quarter.
Yes.
Yes, Thank you and thank you for the question.
I'll go ahead go ahead go ahead, yes, hi, startups, even you can you can add in I was going to say that I want to be clear that it did not improve in Q4 relative to Q3. It actually did get worse in Q4 as we expected it just didn't get to be quite as quite as bad as we thought I think it's an important point to that supply.
John just a we saw the percentage of orders that came in with future stock debt did increase in Q4 relative to Q3, but to your question. I think your question was on linearity and how do we sort of see that play out throughout the quarter.
We do have.
Just as a general practice more of our bookings coming in in the last month and in the last couple of weeks of the quarter. So that's a natural linearity for adult center.
All of the trends reflect that as well so I wouldn't say it was as backend loaded as we saw in Q3. So it was more gradual than that but it is I don't want to point out that Q4, we did see a higher percentage of purchased our data come in in Q4 than we did in Q3, but it wasn't quite as strong.
Stick in terms of the last couple of weeks like we saw in Q3.
Great. Thanks for the clarification.
Yes, and one more point I, maybe I would add to that is the linearity overall was better as well for Q4 as I alluded to in my remarks, which which you know.
With things like free cash flow.
Linearity impact.
Thank you.
Our next question comes from.
George Wang with <unk>.
Place George Your line is now open.
Hey, guys. Congrats on a quarter I have two questions. The first question is.
Any thoughts on a consumption based model versus subscription if you look at other software companies are more and more companies are adopting consumption base, which is based on usage versus sort of more fee based so just curious if you guys absolutely because his team contracts just based on consumption.
Yes, we don't have much by way of consumption at all here.
Yes.
I would say that video.
Video subscription model some of our partners of course take that and deliver that consulting base for.
For example, we have a very small, but hopefully growing managed service for that business is still really I would call incubation small but that business.
We'll be selling that as a consumption business some of the business with partners effectively might go that way, but our business is all their subscription at this point.
Okay great.
Follow up is.
Kind of curious about the cadence of the comp.
Contrary to term the compression you guys talked about kind of full for FY 'twenty three it's going to be flat to down just curious how is that tracking versus your target up to two eight to 3.2 years.
Yes, I can take that and thank you for the thank you for the question. So yeah I would say I think if I go back to what.
Dustin had outlined at our Investor day integral to 'twenty, one and last year actually enjoy playing 21. He had said that we expect the sector.
About $2 eight to three.
22 for fiscal year 'twenty, two we came in slightly higher than our internal expectation. We had some large deals that were of longer duration, but came in slightly higher than we expected in fiscal year 2022, and three we do expect DRAM linked to go down.
Slightly not by much but slightly.
And we'll watch it closely I don't think there's any will be around that three year Mark is our expectation at this point and we'll see how it plays out because what we largely due as you know, we let customers kind of choose what's ultimately they would like to do whether it's sort of a one year out of a three or five year term, obviously, making sure that.
I'll make it work for us from our standpoint, but we want to make sure that that is being that while managing for them for making sure. The economics are good right. So about three I think is what we'd expect is not too different from what we said last year and we'll keep everybody updated as that progresses.
Okay. That's helpful. Thank you.
Thank you.
Our next question comes from <unk>.
Rakers with Wells Fargo Aaron Your line is now open.
Hi, This is Jake on for Aaron.
Good morning.
If you could maybe.
On the degree of Mac macro slowdown.
You May 23 nine.
Yeah.
Yes, I can take that.
So we are not assuming sort of a.
Full blown recession, or a deep recession or anything like that would take but we are I think we believe it's prudent to consider the macroeconomic environment. As we think about just how uncertain things out right now for US that's the algorithm the newspaper and so I would say I think that's why we've talked about.
Our new <unk>, new expansion ACB and temper that somewhat tried to make sure that we are factoring that in.
So that's how I'd characterize it as kind of what we assumed in terms of in terms of micro.
Okay, Great and then just in the fall.
Maybe could you give us a little additional color on the backlog do you see that right now.
Yes.
Okay can you repeat that.
Jake I heard backlog.
Yes, I was just asking if you could give some additional color around the backlog.
How you see that going into 2023.
Sure sure, Yes, I can.
And I think just to maybe finish out actually the answer to your <unk> question I do want to reiterate this point about.
The significant growth in 2003, the majority of that growth is coming from actually our growing base of renewals, which we generally expect to be relatively resilient.
In a challenging macro environment right. So that's that's part of the.
Thought process here as well and then like I said, we've taken into account some uncertainty in the macro as it relates to <unk> spending into our new ATB billings growth and then on the backlog points.
We did exit Q4 with record backlog as I said.
And we we typically use backlog in Q1, and so we would expect that could be the case this quarter as well, but overall between the growing base of renewals.
And the backlog as it provides a good foundation for our growth in 'twenty, three and help reduce the risk of our forecast.
Great. Thank you so much.
Yeah.
Thank you.
Our next question comes from.
Eric <unk> with JP NP, Eric Your line is now open.
Yes, Thanks for taking my question and congrats on a good quarter.
Most of my questions been asked but I'm curious I assume youre still targeting kind of mid 40%.
Revenue for sales and marketing as you get into fiscal 'twenty five.
Growth assumptions are you, making for head count as you start looking out.
Yeah, maybe I will.
Answer that Eric.
Without giving a specific head count growth assumptions that because there's obviously a lot of lot of variables go into that.
Think about a global company and so on but.
I would say that look we are committed to really improving.
Overall rule of 40 score ETR right Bye bye and both focusing on growth.
And on cash flow and operating margin right, but that's how we've thought about investments.
Clearly we have.
Already taken some actions here as it relates to our overall expense profile Rajeev said the majority of the reductions that we did earlier this quarter were in sales and marketing.
So we're going to invest prudently.
Where we need to going forward keeping in mind that overall sort of pieces of sustainable sustainable profitable growth.
One of US here just to add to that Robert Thank you we will continue.
Innovation in R&D for innovation will continue to focus on continuing improvements in productivity on sales and marketing.
It was costly coming regulatory up with a lower cost base, we do expect that sales and marketing as a function of revenue will continue to drop as we've indicated in our last investor day.
But we will continue to invest prudently for the future right.
Managing cost carefully veeva.
Able to innovate and.
Investing in innovation and we will make sure that we are and nothing gets update a month in sales and marketing.
But combining that with productivity and make sure that our second they spend that is going down as a function of revenue.
Yes.
Very good thank you.
Thank you.
Our next question comes from.
And Poland with Cleveland Research. Your line is now open.
Good afternoon, thanks for taking the question.
Rajeev I was hoping we could focus a little bit about.
Into the share gain opportunity within Hypervisor and hyper converged infrastructure.
How do you think about the longer term potential from a net new customer perspective, as well as wallet share expansion.
And any thoughts on how that could influence future bundled sales opportunity and then either follow up.
Yes, I think first of all there's many levers here, it's not one instant lever right I think.
So first if you look at.
The core HCI core stagnant, because really software defined storage, regardless of whether they're running on any hypervisor right relatively on the hypervisor our own Hypervisor are three D C a market opportunity for that continuing to grow.
As we continue to displace logmein free tier.
And continue to improve our win rates, let's say vmware or other players so that market opportunity I mean, there's still a lot of <unk> out there that can be converted to HCI and run more efficiently with better. This year. So that's one piece of it.
The second of course, if we do see more I mean at this point for the folks that use our acs that more than half of them are converted over to <unk>.
And we will see that I think especially with the impetus now in terms of whats happening potentially that will probably continue to go up and.
And once we get to that spot in terms of your customers coming to our own hypervisor.
And by a Hypervisor are included in our offering and our cloud platform. They are not selling it separately.
And let me do that then we also get to attack the rest of the portfolio take them to the public cloud and so the view them expansion opportunities, we get right back on the mechanics solid management will attack and attack unified storage database service and then extend all of this into the public cloud. So when you look at that sum total of the opportunity here.
I think it's a quite significant and the today, we we have a well established position in HCI, but this is beyond Ikea purple cloud platform, including all the other pieces that we don't have that much yet and I see a lot more opportunity for share gains in those areas as well that etsy can lessen happening and again.
Now there's more given the kind of analysis.
The disruption in the industry and in this case it happens to I think be somewhat favorable to us at least long term, it's only going to help us accelerate that piece of it.
Okay.
That takes the second part.
You have a customer that makes the decision to.
The transition from.
Another party to yourselves could you share any commonality as you've seen from those experiences any thoughts on.
The average duration, how long do you think about that how long that engineering effort, how big that lift might be.
We have an idea of how long that tail could last.
Yeah, we have been doing a lot of migration.
Over time from <unk> to <unk> to be very specific task and we've gotten very good at the migration, we've gotten a lot of tools to automate that we have a tool called move actually handle that piece of it and.
And so that means that customers once they do the initial planning they qualify the workloads that run they want to run on the platform and make sure that we have the appropriate ecosystem support needed once that initial qualification work is done.
Actually we said the swipes moves we can get that done within a couple of months usually in that part of it is not difficult.
Now the other part that comes into play here is the automation and the scripts have they have potentially invested on top of their existing environment.
The integrated with the rest of that environment. So some customers don't do much of that other customers do a fair amount of custom work.
And if they have done a lot of customization that we will have to invest in some services to help migrate all of that automation that they've done over to our platform, but that's also a global and we've done that as well.
So there is no loss activity in Atlanta, the migration from happening the degree of complexity can vary depending on I guess, the simple hypervisor the hypervisor migration, that's actually quite straightforward.
A lot of automation that they've invested in it takes a little bit more time, and some services, but to make that migration happen.
Great. Thanks Rajiv.
Thank you.
Our next question comes from.
<unk> Mohan with Bank of America. Your line is now open.
Hi, Thanks for taking the questions, it's actually filling in for <unk> today.
I have a couple of questions.
Rukmini.
You talked about how the percent of orders with future start dates.
Positively impacted the ACB billings and had a larger impact on revenues is there a way to quantify what the benefit was versus the guidance ranges that you had given for ACD billings and revenue.
Yeah, Hi, Thank you for the question so.
I would say that.
As we talked about last quarter right in general.
You can only be recognized in the quarter in which the license stock that happens right, whereas ACB billings, if we do invoice and collect them. Soon after the bookings has received so that was my comment on sort of revenue being impacted more than ACB billings, even looking forward right way when you think about what you've assumed for for Q1.
And fiscal 'twenty three.
Q4, specifically, we're not breaking that out, but I would say that when what we assumed as a percentage of future start dates for Q4.
The actual percentage was lower but it was set up between what we saw in Q3 and what it assumed for Q4 right. So it came in somewhere in between those two and that's what you see reflected in kind of the revenue revenue numbers and basically building some up but to a lesser degree.
Okay. Okay. Thanks for that and then can I ask you looking at the fiscal 'twenty three full year guidance, you're guiding gross margin to 82%, but you did 83% in fiscal 'twenty two so on higher revenues year on year, Youre guiding 100 basis points lower on the gross margins. So any how should we be thinking.
What are some of the drivers for gross margins this year.
Yes.
Yeah, So I'd say on gross margin.
Our product gross margins have remained fairly fairly steady and we don't expect any changes to that one of the things. We are focused on and it's interesting because you just mentioned services like one of the things that we are looking at is making sure that we are attaching services, where it makes sense to do so in situations like the one that you just did.
Cried offer example, where there's a significant portfolio of solutions that are deployed and we want to make sure that our customers are adopting them and using them as they intend to so we might see a slight uptick in purposes. As we go through fiscal 'twenty three here, so that factored into into that 82% guidance that we provide.
It.
Okay got it and if I can just sneak one more in for.
For Rajeev.
Rajeev. This quarter you added 620, new customers I think last year in the fourth quarter, you added 700, and I think 700 was.
The average debt you've done traditionally, but then you've also talked about focusing on quality of customers for his quantity.
How should we think about new customer adds and is this even a metric to focus on going forward. Thank you.
Yeah. It's a good question. The Q4 is the seasonally stronger with respect to new customer adds are new logos in Q3, and we saw any fees up in line with that historical seasonality. This last quarter or so now to your point, we have been focused on higher quality higher ASP, new logos multiple than just raw new low.
<unk> com.
And that continued this quarter again, we continue to see year over year, new logo ASP growth.
In Q4 as well.
So now as we go forward in terms of the new logos, we do wanted to die mortgages by enabling more part of the partner base selling.
We have the we're a program internally that we call autonomy because it enables partners to go drive business by themselves and also continuing to get some leverage orthopedic partners.
And making sure that we have the appropriate sales incentives in place. So we are focused on continuing to add new logos for sure, but also making sure those are the right new logos.
Coming in with higher ASP and also the ones that we can continue to build on.
That's probably the way to think about it.
And so our business always is gonna have samples and the new logo with I mean, if you look at our rental.
Our entire fleet.
So the new business and new and expansion and then the Valuers.
The business continues to grow.
When it looks at when you look at new and expansion.
<unk> is a big chunk of what we do because in many cases our land.
The deal with customers or small and then it continues to grow a lot with many of these customers and then the land provides the new fuel to the fire of the long term right. Because you had to provide for all are important all these three legs of the two new logo expansion at existing customers and then it was.
Equally important to the business model.
Got it thanks for all the details and congrats on the quarter.
Thank you. Thank you.
Okay.
That ends today's question and answer session.
That concludes today's conference call.
Thank you for your participation you may now disconnect your line.