Q1 2023 Nutanix Inc Earnings Call
Good day, and thank you for standing by.
Welcome to the tune of 10 X fiscal first quarter 2023 conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
I would now like to hand, the conference over to your speaker for today.
Rich Valera you may begin.
Good afternoon, and welcome to today's conference call to discuss the results of our fiscal first quarter of 2023.
Joining me today are Rajiv ramaswami who's.
He is president and CEO .
The mechanics of CFO .
After the market close today.
You had a press release announcing financial results for its fiscal first quarter of 2023.
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.
<unk> objectives and outlook.
Our financial guidance as well as our ability to execute successfully.
On the matter and the benefits and impact thereof business operations and financial results.
Financial performance targets and use of numerous different performance metrics in future periods expectations regarding profitability.
<unk> market opportunity.
The impact of our current and future business model transitions.
Factors driving our growth.
Macroeconomic geopolitical and industry trends, including global supply chain challenges in the current and anticipated impact the COVID-19 pandemic.
Thanks.
These forward looking statements involve risks and uncertainties some of which are beyond our control, which could cause actual results to differ materially and adversely.
From those anticipated by these statements.
More detailed description.
These and other risks and uncertainties, please refer to our SEC filings.
Our annual report on Form 10-K for fiscal year ended July 31, 2022, as well as our earnings press release issued today.
These forward looking statements.
Today, and we undertake no obligation to revise these statements after this call.
As a result, you should not rely on them as representing our vaccines.
Sure.
Please note unless otherwise specifically referenced all financial measures we use on today's call except for revenue are expressed on a non-GAAP basis.
To exclude certain charges.
To the extent available.
Conciliation of each non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release.
Lastly, <unk> management will be participating in the Raymond James Technology Investors Conference in New York on December six and the Barclays Global TMT Conference in San Francisco on December seven.
Tenants will also be holding an investor day in New York City on Tuesday April 4th 2043. So please save the date will be following up with more details in the coming weeks.
And with that I'll turn the call over to Ricky.
Keith.
Thank you rich and good afternoon, everyone.
Against the volatile macro backdrop, we delivered a good first quarter.
We exceeded all of our guided metrics.
And saw continued strong performance in our renewables business.
Supply chain constraints with our travel partners.
While remaining a headwind.
Somewhat compared with the prior quarter.
With respect to the macro backdrop.
First quarter, we continued to see businesses.
I think that digital transformation and data center modernization initiative.
They build by our platform.
We have seen anecdotal evidence of increased inspection of deals by customers.
Which we believe is likely related to the more uncertain macro backdrop.
We continue to factor this uncertainty into our outlook for the remainder of the fiscal year.
Taking a closer look at the first quarter.
We deliver ACB billings and revenue.
About our guidance.
Driven by strong continued performance of our renewables business.
We again demonstrated good expense management.
And slightly below our opex targets.
Top line outperformance.
By diligent expense management.
Enabled us to achieve positive non-GAAP operating income for the first time.
Another milestone in our drive towards sustainable profitable growth.
Finally, strong billings linearity and collections contributed to generation of $46 million.
Our free cash flow.
Meaning fully exceeding our breakeven target.
Continuing our strong recent free cash flow performance.
Overall, I'm pleased with our financial performance in the first quarter.
Okay.
Our first quarter is typically a stronger one for our federal business.
This one was no exception.
Our largest customer in the quarter.
The federal civilian agency.
That was already a significant user of mechanical <unk> cloud platform.
Clothing, our unified storage and database automation solutions.
As the less mechanics cloud clusters are <unk> on AWS for busting additional resource capacity into the public cloud.
This customer added additional cyber security workloads.
<unk> cloud platform.
Reflecting their confidence in the ability of our platform to handle the most business critical applications.
And resulting in a substantial expansion order for us.
We see this customer is a great example of how we're able to land and expand with some of the largest organizations in the world.
On the product in partnership.
We achieved an important milestone and realizing our hybrid multi cloud vision.
The general availability of.
<unk> on Microsoft Azure.
Now with support of AWS Azure ad.
And service provider cloud environments.
Continue to deliver on our hybrid multi cloud vision.
Our customers have the ability to rapidly and seamlessly shift their workloads between the private clouds and the largest public cloud providers.
The consistent management governance and data services.
Why is it by the new <unk> cloud platform.
All without the time and expense of refactoring workloads.
One of our early customers for Etsy towards Azure is Unum group a.
Approximately 500 financial services provider.
Who is part of our customer Premier program.
Oh, no choice in situ in Azure.
They were looking to leverage our seamless hybrid multi cloud platform for disaster recovery.
My left to migrate and run their workloads in azure without having to re factor their applications.
They're also looking to take advantage of the ability to expand that metallic cloud platform to different azure regions on demand.
Another exciting development on the product front is a recent enhancements we made to our platform.
Hello rate adoption of kubernetes based applications in the enterprise.
In keeping with our philosophy of offering customers choice throughout the stack.
We added Amazon Kubernetes service.
Already long list of supported Kubernetes container platform.
Including Red hat open chip.
Hey, Roger.
Google Anthos.
As you are.
And our own native <unk> cobot advantage.
We also added both 10 and process it has core capabilities and advanced cloud native data services for them.
Modern applications.
Both of which will enhance the mechanics truck platforms ability to efficiently run kubernetes applications at scale.
Go to market leverage is one of my top priorities.
And we saw progress across a number of partner categories in the first quarter.
And the public cloud category.
Our customers are now able to get on demand consumption of metallic software to azure marketplace.
Consolidated frictionless licensed procurement.
And movement of workloads.
Private cloud and Azure.
For our carrier partners we.
We updated our elevate partner program ecosystem.
Enhanced incentive.
And created enable these partners to sell mechanics into net new accounts.
And to drive opportunities through the entire sales cycle autonomously.
In addition.
We rolled out training designed to enable partners to speed up sales cycles.
Through rapid capacity planning.
Cody.
Order fulfillment.
Thereby generating more leverage.
Our sales tax.
Finally.
<unk>, two largest new customer wins in the quarter, what in partnership with a global leader and data Center Colocation and interconnection services.
And part of our service provider program.
We are encouraged by the early progress, we're seeing with service providers.
See good growth potential in our service provider related businesses.
We add additional partners and enhancements to our platform.
Supporting service provider business model.
One of these service provider with <unk> from an EMEA based publishing and education company.
That was looking to modernize and consolidate their data center footprint.
While having divested recovery capability in AWS.
They chose <unk> cloud platform.
Clothing metallic cloud management.
Run their business critical applications.
Leveraging its simplicity and building automation for infrastructure as a service.
They also added mechanics unified story to service that unstructured data needs.
We see this as a great example.
Okay customer adopting our full stack offering to.
To consolidate and modernize their it infrastructure.
And now I'd like to talk about the industry recognition, we continue to receive for our solutions.
For the second year in a row mechanics was named a visionary in Gartner magic quadrant for distributed file systems and object storage.
We believe our improved position, but in the visionary quadrant. This year reflects advanced percent customer traction.
To market efforts.
Enhance product capabilities.
And an expanded ecosystem.
And as Alex unified storage solutions.
With customers needing a simple and secure way to manage and protect their data.
Ignition highlights the advantages.
Off note that unified storage.
In closing I'd.
I'd like to provide some thoughts on our priorities and outlook.
First.
Our overarching priority remains driving towards sustainable profitable growth.
Through judicious investment in the business.
Execution on our growing base of renewals.
And diligent expense management.
Our achievement of positive non-GAAP operating income in the first quarter represents tangible progress towards this goal.
The strength of our business model is underpinned by a growing base of renewables.
And the strong value proposition of our platform.
In an uncertain macro landscape.
I remain confident in our.
Our ability to continue to capitalize on the vast opportunity in front of us.
While driving towards sustainable profitable growth.
And with that.
I'll hand, it over to Rick municipal dominance.
<unk>.
Thank you Rajiv.
I will first walk through our Q1 results followed by our outlook for Q2, and then finally provide an update on our fiscal year 'twenty three outlook.
Q1, 'twenty three it was a good quarter with results that came in better than our guidance and across all guided metrics.
ACD billings in Q1 was $232 million higher than our guidance of $210 million to $215 million and representing a year over year growth of 27%.
The significant majority of that growth came from growth in renewals billings.
Revenue in Q1 was $434 million.
Higher than our guidance of $410 million to $415 million and a year over year growth rate of 15%.
<unk> at the end of Q1 was $1.81 billion a year over year growth of 34%.
New logo additions what about 530 in Q1.
Contract durations decreased quarter over quarter to three years as expected, partly due to a seasonally higher mix of U S. Federal business that typically has shorter contract durations.
As described previously the percentage of orders with future start dates continue to be a key assumption in our Q1 guidance.
This percentage came in lower than it was in Q4, 'twenty, two and slightly below our expectations.
Q1 revenue also benefited approximately $12 million from the improvement in percentage of future start dates from Q4 Q1 as more license revenue was recognized in quarter been deferred.
non-GAAP gross margin in Q1 was 83% because of our higher than expected revenue performance.
non-GAAP operating margin in Q1 was positive 2%, our first quarter of positive non-GAAP operating profit and a proof point of our ongoing focus on profitable growth.
non-GAAP operating expenses in Q1 were $351 million better than our guidance of $360 million to $365 million.
And included about $2 million of benefit from favorable currency exchange rates in the quarter.
non-GAAP net income was $8 million or EPS of <unk> <unk> per share based on weighted average shares outstanding of approximately 275 million shares.
We're happy to report positive net income and EPS for the first time in the history of mechanics.
Billings linearity was very good in Q1 and better than our expectations DSO, what 18 days in Q1, a demonstration of good linearity and strong collections, we expect dsos to trend back up to historical levels going forward.
With strong billings linearity and collections contributed to free cash flow generation of $46 million in Q1.
Significantly better than our expectations. We also collected in Q1 about $10 million of invoices due in early Q2.
We are finding that while our cash collections remain strong there is a normal level of variation in timing of payments from quarter to quarter.
Going forward and given our transition into positive free cash flow generation, we expect to provide color on free cash flow on an annual basis.
A brief note on severance payments related to a reduction in force that we announced in August one we expect the severance payments to total about $17 million, but other than our previously estimated range of 20% to $25 million and do about $6 million of the approx.
At least 17 million in severance payments are being delayed to Q2, mainly in non U S region. When we had previously assumed that the full amount would be paid in Q1.
We ended Q1 with cash cash equivalents and short term investments of 1.388 billion.
Slightly from $1.3 billion to $4 billion in Q4 22.
Moving onto Q2 outlook the guidance for Q2 'twenty three is as follows.
ACB billings of $245 million to $250 million.
Flying a year over year growth rate of 13% at the midpoint.
Revenue of $460 million to $470 million, a year over year growth of 13% at the midpoint.
non-GAAP gross margin of 82% to 83%.
non-GAAP operating margin of approximately 5% to 10%.
Weighted average shares outstanding of approximately 279 million shares.
I'll now provide some more context around our Q2 guidance.
First the topline guidance for Q2 assumes the supply chain dynamics for our solar partners would remain more or less the same compared to Q1 'twenty three.
Second it assumes that contract durations would stay approximately flat in Q2 23 compared to Q1 'twenty three.
Third the revenue guidance includes approximately $10 million of revenue benefit from the decline in percentage of orders with future start dates over the last few months.
Said differently, we expect to recognize more license revenue in Q2, then it's deferred similar to the dynamic we saw in Q1.
Overtime as our partner supply chain constraints are resolved in a future start date percentages normalize we would expect this dynamic to normalize as well.
I will now provide an update on our full year 2023 guidance.
While we had a good Q1 and our renewals business continues to provide a strong foundation for growth and efficiency. The macro environment remains uncertain and we believe it is prudent to remain cautious in our full year top line guide which remains unchanged.
We also remain focused on disciplined expense management and are therefore, raising our operating margin and free cash flow outlook for the year.
Our guidance for full year.
Fiscal year 2023 is as follows.
The billings guidance remains unchanged at $895 million to $900 million.
Year over year growth of 19% at the midpoint.
Revenue guidance remains unchanged at $1 77 to $1 seven 8 billion.
Year over year growth of 12% at the midpoint non-GAAP gross margin of 82% to 83%.
non-GAAP operating margin of 2% to 4%.
I'll now provide some color on our full year guidance first similar to our comments last quarter. The full year guidance assumes that contract durations with decreased slightly compared to fiscal year 2000 to.
For fiscal year 'twenty three revenue guidance also assumes that the percentage of orders with future start dates would remain more or less the same in Q2 compared to Q1 and would start to ease slightly in the second half of the fiscal year.
Second the demand for our solutions continues and we are seeing continued new and expansion opportunities.
However, as Rajeev mentioned, we have started to see some anecdotal evidence of increased inspection on deals, which we believe is likely related to the more uncertain macro backdrop, and which could potentially lead to an increase in sales cycles.
We have considered this dynamic and the uncertain macro environment in our guidance.
We expect that the significant majority of our growth in <unk> billings for fiscal year 'twenty three will come from growth in renewables ACB billings with the uncertainty in the macro environment factored into our expectation for new and expansion ACD buildings at.
At the same time, our continued focus on expense management and operating discipline enabled us to increase our operating margin and free cash flow outlook for the year.
Which is a good segue to the third point, which is that we expect to deliver about 100 $225 million of free cash flow for fiscal year 'twenty three an increase from our prior expectation of $75 million to $100 million.
Finally, a note on seasonality as we look ahead to the second half, we expect to see a low double digit percentage decline quarter over quarter in ACB billings in the third quarter.
Followed by a low double digit percentage increase quarter over quarter at ACB billings in the fourth quarter.
In closing.
We are pleased that our Q1 results reflect our continued execution towards our stated objective of sustainable profitable growth and we expect to continue with that focus we look forward to sharing more about our medium term outlook during our Investor day in April 2023, as rich referenced with that operator. Please.
Open the line for questions.
Thank you.
As a reminder to ask a question you would need to press star one one on your telephone that star one wants to ask a question.
Please stand by while we compile the Q&A roster.
Yes.
Yes.
Our first question comes from the line of Jim Fish with Piper Sandler Your line is open.
Hey, guys great quarter in the wake of this kind of macro environment and that gets me to my question of why has demand for hyper converged really remains strong and in this kind of difficult macro spending environment and really the crux of my question here is how much of the current strength in numbers here.
Due to that backlog build in deferral from fiscal Q3 of last year versus what youre booking during this quarter.
Yeah, Tim Thank you for the question that's easier.
Yeah first of all I think you're right.
We've got a good strong and growing base of available.
And that's performing well and that certainly helped reduce the risk of the model.
And as we did say you know we have taken into account a little bit of uncertainty in the macro environment and our guidance.
We have built some conservatism in terms of spending.
And I wouldn't necessarily say that Hep C. I is completely immune from a potential.
Potential slowdown in it spending but.
HCI per se produces better TCE or competitor legacy architecture.
And it's a foundation for the hybrid cloud.
So from that perspective customers can actually save money by moving to HCI from traditional legacy architectures.
So so far when you look at the macro again, yeah, we've seen greater inspection of deal flow from customers, which could potentially lead to an increase in sales cycles, but we have factored this into our guidance.
And I think the backlog portion of that question Hi, Jim. So as you point out we had noted when we announced our fiscal 'twenty. Two a result that we ended fiscal 'twenty two with a record level of backlog.
Which combined with a growing base of renewals.
<unk> provided a foundation for our growth in fiscal 'twenty, three and helped overall reduced the risk inherent in our forecast during.
During the first quarter are consistent with our expectations and consistent with typical seasonality we did use some backlog.
And the only other comment I'd add is that given the unusually high level of backlog. We ended the year with I think some of which was related to our partner supply chain issues. We would expect that over the course of the yard we would likely consume some backlog.
Makes sense and if I could sneak in one more.
Bunch of your customer commentary kind of focus being around cloud and trying to understand how much.
Our focus on customers.
<unk>.
Optimizing cloud spending and how much that is helping new tactics this past and current quarter.
That's one of the biggest line items for it spending thanks guys.
Yeah, and again, that's a good question increasingly more and more of our conversations with our customers all around how can we efficiently help them operate in this multi cloud environment.
Many of our customers have looked at public cloud.
More to the public cloud a portion in there also that I think that it can be expensive.
And so what we tell them is that we can actually help them take their existing workloads and move it and run it very efficiently in the public cloud and we can save money and optimize how we do it for them. So yes, that's an increasing part of our conversation I think the broader theme here is almost with every customer that I talked to we are talking about how to.
Them operate well in a multi cloud world and how we can save the money how we can make it simpler for them both from a ongoing capex costs, but also in terms of the the people side of the equation.
In terms of having a consistent operating environment that you do.
Don't have to have a different team.
Operator to these cloud environments.
So I'd say, it's very much becoming a centerpiece of many of our conversation today.
Thanks, Great quarter guys.
Yeah.
Thank you.
Please standby for our next question.
Our next question comes from the line of meta Marshall with Morgan Stanley . Your line is open.
Great. Thanks.
Maybe I just wanted to see if you could give more color on just kind of the macro impact that you're seeing.
You know clearly you talked about it not impacting the renewal business, but just are there regions or customer types or just any other color as far as kind of that second set of eyes that are may be needed to get a deal across the line and then maybe just as a second question for me just kind of give in M&A.
Within the space.
How are you.
Maybe taking advantage of the acquisition of our pending acquisitions of competitors.
I think two good questions that meter and on the first one.
Yeah, there's multiple fortunate to know that you said there and it was a business that is largely a steady state.
Not impacted by the uncertain macro.
Now in terms of the uncertain macro we've taken some of that into our account into account. When we give you a kind of conservative forecast to your point, we had seen anecdotal evidence of greater inspection of beans by some customers.
And what that also means that potentially you are there.
There could be an increase in sales cycles, we haven't quite seen that that's much yes, it's happening, but this is an indication of what might be coming.
And we have factored those in terms of our guidance per se.
Now many of you may want to comment on the following foreign FX impact us.
In terms of the macro yeah, why don't I do that then I can hand, it back to you on that.
On the broader question on M&A. So on I'll say, obviously the dollar has strengthened I think as we all know our sales contracts are all denominated in U S dollars and so that relative strengthening has effectively made our products more expensive to customers in some international markets.
So anecdotally and this is not something we've seen systemically, but we've seen it sort of put pressure on some price negotiations in some transactions and we don't believe that that's causing us to lose deals, but anecdotally we've seen it show up in some transactions.
And then the other question around how other M&A activity is potentially impacting us.
Yes.
We are all reading the nuclear on Broadcom acquiring Vms.
And what we have seen is it a third of that is a significantly higher level of engagement from prospective customers.
These customers are looking to explore their options looking at managing potential risks related to the transaction.
As you know sales cycles, especially for larger deals tend to be nine to 12 months.
So we're not assuming any significant benefit from that in our fiscal 'twenty three outlook, but I can certainly tell you that the volume of conversations with customers and prospective customers around this topic has increased and we are a good alternative provider.
Great. Thanks, so much.
Thank you.
Please standby for our next question.
Our next question comes from the line of pendulum bar with J P. Morgan Your line is open.
Thank you for taking my question. This is John .
Turning to Benjamin.
So my first question is what are you hearing from customers so to speak.
Transformation projects in the current macro environment.
The us trading that it might take a back seat in people you might move back towards.
Oh Dear.
Two mbd.
Yeah. So look I think first of all accelerating digital transformation continues to be a key driver for customers and we are seeing that across all kinds of industries here.
Particularly in vertical such as financial services healthcare state local education.
With a clear mandate to modernize their operations applications improve costs.
And help the business.
Nonproductive legacy kind of spend.
Now in the current macro I would say this is intensified there's even more of a focus on cost and better PTO.
From that perspective.
Modernizing legacy Tdm infrastructure, especially when things are up for renewal right upfront cycle Youre running out of your hardware is getting old.
Ti is a very viable option for improving PCR simplifying operations.
Making things simpler.
We haven't quite seen.
A slowdown in that mindset with customers.
I think the other thing for US let me see if that.
Let's see I now also become a platform for our customers cannot all of their workloads, including all the highest performance. Most mission critical workloads. We saw an example of that here in the call where we talked about this large federal agency, but there's many other customers are doing that.
And then finally I would say we're also seeing.
More people looking at hybrid multi cloud and how they can operate efficiently in the cloud environment for which again.
A solution that says if a good option.
So.
I really can't help them run their private cloud or public cloud based on criteria on cost performance and governance. So so all of that I think is continuing to play out there even despite the macro situations.
Got it and then.
Maybe at this point.
Help us understand like what you've seen with respect to the grocer to claims in renewables portfolio.
Yes.
Yeah. Thank you for the question. So are you gotta, our gross retention rates.
In line with our stated.
Objective up into the 90 plus percent range.
Okay.
Thank you.
Yeah.
Thank you.
Please standby for our next question.
Yeah.
Our next question comes from the line of George Wang with Barclays. Your line is open.
Oh, Hey, guys. Congrats again on a strong quarter two quick questions Firstly.
It's nice to see.
You kind of raise for ICF in op income for this year.
Definitely you guys are seeing strong leverage just curious kind of going forward or are there additional operating expense, which can be taken out of the system.
Just curious kind of what area.
You guys can be targeting in terms of the lever to pull for further cost cuts whether that's in the back office, whether that's in sales support roles. Maybe you can give more color on that.
Maybe I'll just give you a high level view.
You know I I would just say that we are not as much focus on cost cutting I mean, a lot of efficiency in the model is coming from the fact that we are seeing a growing base of renewals that can be prosecuted at a significantly lower cost than R. R.
Additionally, new business now we have been focused on efficiencies already over the last few years in every area on the sales side, we are focused on increasing sales productivity on the marketing side, we have already.
Redirected optimized our demand generation dollars to be mostly digital with some hybrid events.
We have simplified our product portfolio.
So we had been doing the right things in terms of efficiency and so forth.
So that's where I believe it and open if you want to add anything.
The only thing that was a good somebody who's here.
Okay. Thanks, My follow up is just kind of looking out in terms of as a service.
Any kind of color you can give in terms of.
Future services model.
Such as the partnering with the Green Lake.
Maybe more traction there all kind of few other msp's just curious kind of what areas are you guys exploring to further its journey of as a service.
The HCI adoption, absolutely that's a that's actually a very good question because we are seeing a trend in the market where more customers who'd like to consume more offerings delivered to them as a service and there is many routes to getting there.
One of our first houses through service providers and as you saw for example, this quarter the last quarter or two largest Linux came through partnering with service providers and these are service providers in some cases, it will take us and sell through rate and provide a service to their customers. So that's one approach.
Green Lake. It's another approach that has to be Green Lake includes mechanics, as part of their offering and they can provide a combined hardware software solution delivered as a service in a subscription model because their customers.
And selectively some of our own offerings are also available directly as a service, but those are small relatively speaking in our portfolio, especially some of our management offerings.
Deliver even today as a service, but that's a small portion, but let me, but largely we are focused on enabling as a service model through our partners.
Whether they be service providers, whether they be sitting.
Strategic partners like HPE.
Okay, great. Thank you and the only other thing I would just add that sorry, I should say this.
We're also on Azure marketplace right now we're in Azure, a customer can use azure their azure spend dollars and buy any of that is through the marketplace.
Thank you.
Please standby for our next question.
Our next question comes from the line of Dan Bergstrom with RBC. Your line is open.
Sure.
Any sense on where we are from a rep head count perspective, I think you were flat in the fourth quarter expectation to grow modestly for the year focus on productivity is that still the right way to think about rep head count growth and productivity.
Yes.
Congress are roughly flat quarter over quarter, we do expect to grow our rapid car modestly from current levels. While at the same time continuing to focus on driving higher rep productivity.
Thank you.
Thank you.
As a reminder, ladies and gentlemen that star one one to ask the question.
Please standby for our next question.
Our next question comes from the line of <unk> Mohan with Bank of America. Your line is open.
Hi, Thanks for taking the questions. It's rupal filling in for Onesie today I have one question for Rukmini and one for Rajiv.
Maybe I'll ask Rukmini the first question.
I think you guided a low double digit percent decline in HCV billings sequentially for <unk>, and then low double digit increase for <unk> that seems to be a more pronounced seasonality than the last couple of years. So maybe can you give us some puts and takes.
How does that take into account is that normal seasonality or is that a worse than normal and how should we think about that.
Yes, Hi, Diablo. Thanks for the thanks for the question, Yeah, and we called it out because we wanted to get the wanted to provide some color on how seasonality would we expect seasonality show up for the rest of the year.
And so as you just said just to reiterate what I mentioned in my prepared remarks, we expect to see a low double digit percentage decline quarter over quarter and ACB billings in the third quarter.
By the way, it's seasonally we do see a decline in ACB billings from Q2 to.
Q3, but low double digit percentages is a little higher than what we normally see which is why we wanted to call. It out and then followed by in Q4, we expect low double digit percentage increase quarter over quarter in ACD billings and to answer your question or flow are available to the new pool.
That is due in Q3 is expected to be lower than it is in Q2, and then expect it to then pick back up in Q4, so that combined with our typical quarterly seasonality leads us to expect that this trend will occur through the second half of 'twenty.
Okay got it and then can I just also ask a clarification in the past you said that the sum of the four quarter ACD billings is typically 6% to 7% higher than the annual reported number does that does that rule still hold for fiscal 'twenty, three and how should we think about that going forward.
So generally the concept still holds.
Blue because effectively what we do just to remind folks on why we had that out there is that when we report our quarterly HCV numbers, we have some contracts that come in for less than a year.
Duration, and we do annualize those to report <unk> billings on a quarterly basis of course on an annualized basis, we sort of normalize for that and so that's the.
That's what took place regarding Joe and I would say that that is in the general ballpark, maybe 90, 590, 495% something or what about 6% to 7% as you said, maybe maybe it's 5% to 6%, but around that range is what I'd expect to see this year as well.
Okay. Thanks for the details there and maybe Rajiv if I can ask a question. If you can talk about the demand trends by region.
Are the shutdowns in China impacting you either directly or indirectly and if you can just touch on the business with your partnership with Red hat any any progress or any anything happening. There. Thank you. So much yeah, we didn't see any significant difference in terms of performance across our regions.
As you know our business in China is relatively small so it's not a direct impact there.
And then of course, the indirect impact that's really up to our customers we haven't seen.
We haven't really seen anything significant for us as a result of that directly.
In terms of Red hat are continuing to see good momentum with Red hat.
As this quarter as well, we continue to see a growing pipeline.
With some Vance Oh. This is the first quarter. For example, we saw government Ministry in Asia Pac.
Combining.
The two right they had open shift and our cloud platform.
So from a <unk> solution to our platform using.
Using our own Hypervisor. So this is an example of the kind of deals that we work on together with them.
And we're seeing that continue to grow grow along nicely.
Okay. Thank you for all the detail.
Thank you.
As a reminder, ladies and gentlemen that star one one to ask the question.
SAR one wanted to ask the question.
I'm showing no further questions in the queue.
Ladies and gentlemen, this concludes.
Today's conference call. Thank you for your participation you may now disconnect.
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