Q2 2023 Nutanix Inc Earnings Call

Speaker 1: You

Speaker 2: Hello, and welcome to Nutanix 2nd Quarter 2023 Earnings Conf 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 the question during the session, you will need to press star 1-1 on your telephone.

Speaker 2: You would then hear an automated message advising your hand is raised.

Speaker 2: To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker for today. Rich Valera, you may begin, sir.

Speaker 3: Good afternoon and welcome today's conference call to discuss the results of our fiscal second quarter of 2023.

Speaker 3: Joining me today are Rajeev Ramaswamy, Nutanix's President and CEO , and Rakhineesh Vibharaman, Nutanix's CFO .

Speaker 3: After the market closed today, Mechanics issued a press release announcing financial results for its fiscal second quarter of 2023.

Speaker 3: If you'd like to read the release, please visit the press releases section of our IR website.

Speaker 3: During today's call, management will make forward-looking statements, including statements regarding our business plans, strategies, initiatives, vision, objectives, and outlook, including our financial guidance, as well as our ability to execute the Iran successfully.

Speaker 3: and in a timely manner and the benefits and impact thereof on our business, operations, and financial results.

Speaker 3: Our expectations regarding the resolution of the investigation. Its impact on our financial statements, including our financial guidance.

Speaker 3: Our financial performance and targets and use of new or different performance metrics in future periods, expectations regarding profitability, our competitive position and market opportunity, the timing and impact of our current and future business model transitions, the factors driving our growth.

Speaker 3: macroeconomic, geopolitical, and industry trends, including global supply chain challenges, and current and anticipated impacts of the COVID-19 pandemic and its effects.

Speaker 3: These forward-looking statements about risks and uncertainties, some of which are beyond their control, which could cause actual results to differ materially and adversely from those anticipated by these statements.

Speaker 3: For a detailed description of these and other risks and uncertainties, please refer to our SEC filings including our annual report on Form 10-K for the fiscal year ended July 31, 2022.

Speaker 3: And our quarterly report filed on Form 10-Q . The fiscal quarter ended October 31st, 2022.

Speaker 3: as well as our earnings press release issue today.

Speaker 3: These forward-looking statements apply as of today, and we undertake no obligation to revise these statements after this call.

Speaker 3: As a result, you should not rely on them as representing our views in the future.

Speaker 3: Lastly, Nutanix Management will be participating in the Morgan Stanley TMT conference in San Francisco on March 8th, and we hope to see you there. And with that, I'll turn the call over to Rajeev. Rajeev.

Speaker 4: Thank you Rich and good afternoon everyone.

Speaker 4: Against an uncertain macro backdrop, we deliver a solid second quarter.

Speaker 4: with results that came in ahead of our guidance.

Speaker 4: and saw continued strong performance in our renewables business.

Speaker 4: With respect to the macro backdrop,

Speaker 4: In our second quarter, we continue to see businesses prioritizing their digital transformation and data center modernization initiatives enabled by our platform.

Speaker 4: However, we have seen some increased inspection of deals by customers.

Speaker 4: which we believe is likely related to the more uncertain macro backdrop.

Speaker 4: And this is driving a modest elongation in sales cycles.

Speaker 4: We consider this dynamic in our outlook for the remainder of the fiscal year.

Speaker 4: Supply chain constraints with our server partners improved compared with the prior quarter.

Speaker 4: I'd like to comment on the investigation mentioned in our press release.

Speaker 4: We recently discovered that evaluation software from one of our third-party providers was instead being used for interoperability testing, validation, and customer proof of concept over a multi-year period.

Speaker 4: Our audit committee commenced an investigation into this matter.

Speaker 4: which is still ongoing.

Speaker 4: which is still ongoing, with the assistance of outside counsel.

Speaker 4: Rukmini will provide more details on the near-term reporting implications of this matter.

Speaker 4: But I'd like to emphasize that we do not believe it will have a significant impact on the fundamentals of our business and overall prospects.

Speaker 4: Taking a closer look at the second quarter.

Speaker 4: we deliver solid top-line growth.

Speaker 4: including 23% year-over-year ACB Billings growth.

Speaker 4: driven by continued strong performance in our renewables business.

Speaker 4: We again demonstrated good expense management.

Speaker 4: which helps us generate 63 million dollars of free cash flow.

Speaker 4: continuing our strong, recent, free cash flow performance.

Speaker 4: Overall, I am pleased with our financial performance in the second quarter.

Speaker 4: Our second quarter results reflect the value our customers are seeing in both our core cloud platform and in adjacent solutions in our portfolio.

Speaker 4: with particular strength in Nutanix Cloud Management.

Speaker 5: A good example.

Speaker 4: is our largest new customer win in the quarter, which was with a federal agency looking to modernize their infrastructure.

Speaker 4: They replaced their legacy 3 tier environment with Nutanix's cloud platform.

Speaker 4: including Nutanix Cloud Management.

Speaker 4: to run their business critical applications.

Speaker 4: leveraging its simplicity and built in automation for infrastructure and internal service.

Speaker 4: They also added Nutanix Unified Storage.

Speaker 4: to service their unstructured data needs.

Speaker 4: We see this as a good example of a customer adopting our full stack offering.

Speaker 4: to modernize and automate their IT infrastructure.

Speaker 4: Another notable win in the quarter was with a bank in the APAC region who had been running a key business critical application in the public cloud on Red Hat's OpenShift.

Speaker 4: However, they were having performance issues.

Speaker 4: and we're unhappy with the incident response time of their public cloud service provider.

Speaker 5: So

Speaker 4: following an evaluation of multiple on-prem and public cloud options.

Speaker 4: the customer chose to run OpenShift and their critical application on-prem on the Nutanix Cloud Platform.

Speaker 4: including our AHV hypervisor, concluding that it was the alternative that could deliver the best performance and total cost of ownership.

Speaker 4: This deal reinforces our view that cloud is an operating model, not a destination.

Speaker 4: and that our Nutanix Cloud Platform is ideally suited to enabling the hybrid multi-cloud operating model increasingly favored by IT professionals.

Speaker 4: Following the general availability of N C 2 on Microsoft Azure, late in the first quarter,

Speaker 4: We saw solid momentum with N C 2 in the second quarter.

Speaker 4: A good example is a win we had with an EMEA Headquarter provider of Global Transportation Services.

Speaker 4: looking to accelerate the migration to the public cloud.

Speaker 4: reduce their data center footprint and optimize their public Cloud spend.

Speaker 4: Following a rigorous evaluation of alternatives, including native public cloud,

Speaker 4: This customer chose NC2 on Azure.

Speaker 4: which they found enabled a roughly 4x faster migration.

Speaker 4: lower migration cost and significantly lower operating cost.

Speaker 4: Just when the Monteface Hall or customer appreciate the ability to rapidly and seamlessly.

Speaker 4: shift their workloads from their private cloud to the largest public cloud provider.

Speaker 4: with the consistent management, governance, and data services provided by the NU'ZANIX Cloud Platform.

Speaker 4: without.

Speaker 4: the time and expense of refactoring their workloads and with lower ongoing operating costs.

Speaker 4: on the product front.

Speaker 4: During the second quarter, we delivered meaningful upgrades to our core platform with the release of AOS 6.6.

Speaker 4: which offers enhanced data services and a number of networking and security related features.

Speaker 4: further strengthening its capabilities to support business-critical applications.

Speaker 4: I like to provide some thoughts on our priorities and outlook.

Speaker 4: In closing, I'd like to provide some thoughts on our priorities and outlook. First, I'd like to provide some thoughts on our priorities and outlook.

Speaker 4: Our overarching priority remains.

Speaker 4: delivering sustainable, profitable growth through judicious investment in the business.

Speaker 4: execution on a growing base of renewables, and diligent expense management.

Speaker 4: Our strong free cash flow along with solid top line growth in the second quarter reflects the progress we made to date towards this objective.

Speaker 4: While the macro environment remains uncertain,

Speaker 4: We are encouraged that the strength of our business model, underpinned by our growing base of renewal.

Speaker 4: and our ongoing focus on profitability.

Speaker 4: allow us to raise our fiscal year top line outlook.

Speaker 4: and reaffirm our free cash flow outlook. I remain confident in our ability to continue to capitalize on the vast opportunity in front of us.

Speaker 4: while continuing to drive sustainable, profitable growth.

Speaker 4: And with that, I'll hand it over to Rukmini Sivaraman.

Speaker 6: Rukmini.

Speaker 6: Thank you, Rajeev.

Speaker 7: I would first like to note that with respect to the investigation Rajeev mentioned, we are in the process of assessing the financial reporting impact and it is likely that additional costs would be incurred to address the use cases previously noted.

Speaker 7: As a result, we have not provided financial information regarding expenses in our second quarter preliminary results or our outlook for the third quarter or full fiscal year 2023. We are not providing financial information regarding expenses in our second quarter.

Speaker 7: While we are working diligently to address this matter and finalize our financials as soon as possible, we do not expect to be able to file our 10Q on time or following the five-day prescribed extension period allowed under 12B25.

Speaker 7: Relatedly, we are rescheduling our investor day we had intended to hold on April 4, 2023 to summer of 2023 and will provide a specific date once it is confirmed. With that said, I will now move on to talk through our Q2 results.

Speaker 7: followed by our outlook for Q3, and then finally provide an update on our fiscal year 23 outlook.

Speaker 7: Q2-23 was a solid quarter with results that came in better than our guidance. ACB billings in Q2 was $268 million, higher than our guidance of $245 to $250 million.

Speaker 7: and representing a year-over-year growth of 23%. The significant majority of that growth came from growth in renewal buildings.

Speaker 7: Revenue in Q2 was $486 million, higher than our guidance of $460 to $470 million, and a year over your growth rate of 18%.

Speaker 7: ARR at the end of Q2 was $1.378 billion, a year over your growth of 32%.

Speaker 7: New logo additions were about 480 in Q2.

Speaker 7: Contract duration stayed flat quarter over quarter at three years as expected.

Speaker 7: As described previously, the percentage of orders with future start dates likely due to partner supply chain constraints continue to be a key assumption in our Q2 guidance.

Speaker 7: This percentage came in lower than it was in Q1-23 and below our expectations.

Speaker 7: Q2 revenue also benefited approximately $11 million from the improvement in percentage of future start dates as more licensed revenue was recognized in-quarter than deferred.

Speaker 7: Slightly more than the $10 million estimate we had provided on our last earnings call.

Speaker 7: Billings linearity was good and DSOs were 28 days in Q2.

Speaker 7: Free cash flow in Q2 was $63 million, implying record free cash flow margin of 13%.

Speaker 7: A couple of additional notes on Q2.

Speaker 7: One, we retired the remaining principal amount on our January 2023 convertible note of approximately 146 million dollars with cash from the balance sheet.

Speaker 7: 2. Last month, we reached an agreement to settle the outstanding Securities Class Actions Litigation, which is subject to documentation, notice to class members, and court approval.

Speaker 7: We recorded a net charge of approximately $38 million for the settlement. This is the amount inclusive of legal fees and expenses, net of our expected recovery under our B&O insurance.

Speaker 7: We expect approximately $33 million to be paid and settled in Q3, while the remainder was already paid for legal defense costs in previous quarters.

Speaker 7: We ended Q2 with cash, cash equivalence and short-term investments of $1.311 billion, down slightly from $1.388 billion in Q1-23.

Speaker 7: Moving on to Q3 Outlook, the guidance for Q3-23 is as follows.

Speaker 7: ACV buildings of $220 to $225 million.

Speaker 7: and revenue of $430 to $440 million.

Speaker 7: I'll now provide some more context around our guidance.

Speaker 7: First, the top-line guidance for Q3 assumes that supply chain dynamics for our server partners would remain more or less the same compared to Q2-23.

Speaker 7: It also assumes that contract duration would stay approximately flat to slightly down in Q323 compared to Q223.

Speaker 7: Second, the revenue guidance includes approximately $5 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 licensed revenue in Q3 than is deferred to

Speaker 7: similar to the dynamic we saw in Q2.

Speaker 7: Over time, as our partners supply chain constraints results and our future start date percentages normalize, we would expect this dynamic to normalize as well.

Speaker 7: I will now provide an update on our full year 2023 guidance.

Speaker 7: We have had a solid first half and our renewal business continues to provide a strong foundation for growth and efficiency.

Speaker 7: Those factors, combined with our continued focus on disciplined expense management, allow us to raise our ACV billings and revenue outlook for the year while reaffirming our prior free cash flow outlook. From there, the nexus function ofKA isos announcers slaves house making o dec conceive c solar

Speaker 7: Our updated guidance for fiscal year 23 is as follows.

Speaker 7: ACV billings of $905 to $915 million, year-over-year growth of 20% at the midpoint,

Speaker 7: Revenue guidance of $1.8 to $1.81 billion, year-over-year growth of 14% at the midpoint, and free cash flow of $100 to $125 million.

Speaker 7: I'll now provide some additional color on our foliar guidance.

Speaker 7: First, we are seeing continued new and expansion opportunities for our solutions despite the uncertain macro environment.

Speaker 7: However, as Rajiv mentioned, we have seen a modest elongation of sales cycles, likely due to increased deal inspection.

Speaker 7: We have considered this dynamic in our updated guidance.

Speaker 7: We continue to expect that the significant majority of our growth in ACV billing for fiscal year 23 will come from growth in renewal ACV billing.

Speaker 7: with the uncertainty in the macro environment factored into our expectations for new and expansion ACB buildings.

Speaker 7: A reminder that ACV billings for the full year is not simply the summation of four quarters ACV billings because it deals with less than one year in contract duration.

Speaker 7: We expect that FULURE ACV Billings is discounted by approximately 5% relative to the sum of ACV Billings from the QFOW quarter. Second, similar to our comments last quarter, the FULURE guidance assumes that contract durations would decrease slightly compared to fiscal year 20.

Speaker 7: free cash flow guidance of $100 to $125 million includes the impact of approximately $33 million in net cash outflow expected in Q3 from the previously mentioned litigation settlement.

Speaker 7: It also includes the impact of approximately $12 million of cash usage in Q3 for non-recurring tax obligations related to a portion of our employee RSUs vesting this month and other anticipated cash outflows.

Speaker 7: These cash outflows were not included in our prior guidance for annual fiscal year 23 free cash flow.

Speaker 7: Finally, I'd like to note that we continue to expect to generate at least $300 million of free cash flow in fiscal year 2025. In closing, we are pleased that our Q2 results will be available on our website.

Speaker 7: reflect our continued execution towards our stated objective of sustainable, profitable growth and we expect to continue that focus.

Speaker 7: With that, operator, please open the line for questions.

Speaker 2: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and wait for your name to be announced.

Speaker 2: So, withdraw your questions. Please first stop one, one again.

Speaker 2: Please stand by while we compile the Q&A roster.

Speaker 2: Our first question comes from the line of Pendulum Borah with J.P. Morgan. Your line is open.

Speaker 8: Great, hey guys, thanks for taking the questions and congrats, seems like a pretty good quarter. I just wanted to go back to the investigation that you were talking about. Could you maybe explain it in a little bit of a layman's term, what happened exactly? Sounds like it's like an underpayment to a vendor, am I understanding?

Speaker 4: And we're working diligently to resolve it as quickly as possible. And we are very focused on driving sustainable, profitable growth.

Speaker 4: Now with respect to that specific matter, Rukmini, maybe you can just explain the details behind it and what you're doing.

Speaker 7: Sure, yes. Hi, Pendulum. So what we discovered was that certain evaluation software from one of our third-party providers, somebody who provides us software, which is intended for evaluation purposes, was instead used for validation, otherwise, the dead end software andée de charne with people with the right to take Talesi software.

Speaker 7: interoperability testing and proof of concepts over a multi-year period. So that is, you know, we discovered that and as we said on the call, that matter is ongoing and because of that pendulum, we weren't able to disclose expense information on the call and we've announced that we expect to be unable to file our 10Q.

Speaker 7: are unimpacted by this. And when we look forward to guidance, we are pleased to be able to raise our revenue and ACV Billings Guide. And we are comfortable with the $100 to $125 million of free cash flow guidance for the year after factoring in the potential impact from this third-party software use that we mentioned.

Speaker 7: on the call. As I noted in my prepared remarks, the free cash flow guidance also includes the impact of $33 million approximately from the settlement of the litigation and the impact of this $12 million of cash usage in Q3 for non-recurring tax obligations related to employee refuse vesting.

Speaker 8: And these cash outflows were not included in our prior guidance for the full year of free cash flow. Yep understood. Thank you for the color. Rajiv, we had to discuss with some of our discussions with some of your partners.

Speaker 8: to suggest that the VMware opportunity is taking shape. But I wanted to ask you, one of the discussions kind of highlighted that the complexity of some very large VMware customers using tens of thousands of VMs, who might be looking at Nutanix as an alternative, it's just complex to kind of move.

Speaker 8: from one to the other, of course. So I wanted to ask you, what can Nutanix do, or what are you doing to kind of make those large companies feel a little bit at ease to move those large VMware environments over to Nutanix, and how has some of those discussions been progressing?

Speaker 4: Absolutely. As you can imagine, we are engaged with many of these customers right now. We have a significantly higher level of engagement. A lot of these are prospective customers that aren't existing ones. And they're all looking to explore their options and manage these potential risks related to the acquisition. What you should keep in mind is...

Speaker 4: For many, many years, we've been doing these things. We've been doing these migrations. In many cases, when we go out there, we insert our solution on top of a VMware platform. Customers are running vSphere. We go in there and we insert AOS, which is our software-defined storage. And over time, customers may choose to use our own hypervisor, ASP, instead of the VMware hypervisor.

Speaker 4: So we have a lot of experience with doing migrations.

Speaker 4: for customers. Now the larger the environment, the more complex it is. And we know that. And typically we will do this one workload at a time, for example. They will pick us for one use case and then over time we will expand and do other use cases. Historically, it used to be end user computing, but these days we do databases, we do all mission critical workloads, all of this.

Speaker 4: So we have a lot of experience doing these migrations. That said, Pindulam, I think what you heard, yes, this is complex, it's going to take time, and this is why we're not factoring in any significant benefit in our fiscal 23 outlook. We expect these cycles to be long, typically 9-12 months for some of the larger deals.

Speaker 8: Yep, got it. Okay, getting back in the queue. Thanks.

Speaker 9: Thank you. Thank you. Thank you.

Speaker 2: Please stand by for our next question. Our next question comes from the line of Jim Fish with Piper Sandler. Your line is open. Your line is open.

Speaker 3: Hey guys, I wanted to build off the last couple questions actually. Maybe could you talk about the push-pull effect you're seeing with the demand environment given that ability to consolidate the competitive landscape, especially on the VMware side and maybe even the traditional storage perspective?

Speaker 3: as well as just the HCI market against those traditional storage guys, versus the general macro environment, as it sounds like, Rajiv, you're talking about an increased lengthening of deal cycles. Is there a way to think about how much longer deals are also taking? So, Renata my question is…

Speaker 4: what are you seeing for the push-pull on all these kind of factors on demand? And is there a way to quantify how much longer these deals are taking? Yeah, Jim, indeed, there is a push and pull on this, as you say. So first on the macro, we see strong performance from our renewals, and that's been continuing. And of course, that helps reduce the risk in our business model and the guide that we put out.

Speaker 4: And we've seen this across both new logos or new customers and existing customers looking to expand. They're just being a little bit more careful, taking some more time to review the economics of everything and looking at the TCO benefits. Now, that said, we do have strong TCO benefits, typically compared to legacy infrastructure.

Speaker 4: So, when you look at the dynamics, we see the second piece of it, which is compared to third part of your legacy, three-tier storage, and in those dynamics are largely the same. When there is, for example, time for a refresh or any kind of modernization effort, the customers compare your HCI versus three-tier, and they're generally able to show a better TCO, a much more modern ability to...

Speaker 4: that provides a foundation on the new business, small elongation in Dean cycles. On the other side, we're seeing more engagement from a VML basis.

Speaker 3: And so we started to do a better factor in all of these dynamics into the guides that we gave you. That's helpful. You know, impressive on the free cash flow beat this quarter. Just trying to make sure here how much of this was driven by essentially the operations versus no working capital numbers and really underneath where we're trying to understand where Opex would have kind of come in barring any of these.

Speaker 7: the marketing, we are not commenting on expense. Expenses either from Q2 or on a forward looking basis. So I'll start there. But in terms of free cash flow, for Q2, as you said, we're happy with the free cash flow performance in Q2. And I will just say that I think we talked about DSOs.

Speaker 7: on the call which was 28 days. It was unusually low in Q1. And we saw it kind of come back to I would say within the range in Q2, because typically our payment terms for DSOs are 30 to 45 days. So I would expect it to be in that area. Now for your second question, so yes, we are comfortable with our fully –

Speaker 1: we discussed.

Speaker 9: Thank you.

Speaker 2: Please stand by for our next question. Our next question comes from the line of Mike Seacole with Needham & Company. Your line is open.

Speaker 10: Hey guys, thanks for getting me on here. I did have a couple of questions. Just to circle back to the audit committee, and I want to make sure that everyone has this right. So this investigation that we have right now is totally independent of the...

Speaker 10: I'm not sure I'm getting my numbers right now. The anticipated expense in 3Q that you had cited regarding the $33 million for the litigation settlement, correct?

Speaker 7: That's correct, Mike.

Speaker 10: And so if I look at the audit investigation specifically, can you provide us, like when was the issue discovered, when did the audit committee commence its investigation, when did the Nutanican gauge outside cancel? I just like to see if we can get a timeline for how these events are. However, the petition was read. Thechin Court C realistic breeder

Speaker 7: are playing out under the hood. Again, just because we have this limited guidance that we're being provided today. Yes, thank you, Mike, for the question. Yes, I understand that there's limited guidance here, Mike, and what I can say is that we have a lot of guidance from the federal government, and we have a lot of guidance from the federal government

Speaker 7: is that given this review is ongoing, what we can say is that we are working diligently with the Oracle Committee and our outside council to resolve this as quickly as possible. So we can be in a position to share more with you. At this point, we're not able to provide very specific timelines to your question, but we are working diligently to make.

Speaker 10: But I know that you guys are saying that this third-party provider was using software to evaluate

Speaker 10: I don't want to butcher it, but I think it was supposed to be Yeah, yeah, and I'm trying to see is there an impact on on revenue as a result of this or is it entirely expensive because Again, I'm trying to get it like you

Speaker 10: Is there potential for this in any way to impact your top line results? Like you're giving us the revenue and ACV Billings Guide. Is that untouched by this investigation at this point? And then the follow up is like, how is it we don't have the expenses here, but you guys are able to reaffirm the free cash flow? I think that's what I'm wrestling on my side, and I apologize for wanting to get the question, but I just wanna make

Speaker 7: that we're guiding to. So that's one part of it. And in terms of just – What was the second part of your question?

Speaker 7: Am I getting the right one? On free cash flow I think. Yes, exactly. Correct, yeah. Sorry about that. So I think on free cash flow, we reported Q2 free cash flow. That's the 63 million that we reported out. Now for the full year…

Speaker 7: I think this is important, so I'm glad you asked the question, Mike. We are comfortable with the $100 to $125 million pre-cash flow for the year after factoring in a potential impact from this third-party software use that we mentioned on the call, and the two other items. So $33 million, which is a separate matter from a previously outstanding number of

Speaker 10: Again, this is just me being naive here, or phrase it how you will, but again, I just want to make sure.

Speaker 10: with a third party provider, how were they supposed to be using the software versus what we're seeing today as far as its interoperability testing? Again, I just wanna make sure I'm aware of the different nuances here for what's causing this investigation in the first place. Yes, understood, Mike. Let me, so what this is

Speaker 7: validation and proof of concept.

Speaker 7: So that is the matter that's being reviewed right now.

Speaker 10: I see. And so because you, it was intended for evaluation, but it said you guys were using it for interoperability testing and validation. Because of the different usage of that software, there's potentially a different cost for what you have been paying that provider. Is that a very...

Speaker 7: and simple way of putting that. I know I'm probably mischaracterizing a lot of that. Yes. That's what I said. OK. OK. Yes. That's right, Mike. So it's intended to be used for evaluation software. And we discovered that it was instead being used for these other interoperability validation and proof of concept. And so that's what's under review right now.

Speaker 4: Yeah, and maybe I could say one thing to everybody. And what this means is therefore there might be some additional expense, right? In terms of usage of that product. So that's why until this is done, we can't really specifically give you expenses.

Speaker 10: I apologize. I must have been the way I was reading this, but that wasn't a parenting initially. I don't want to take up too much consults or turn it over to my colleagues here, but thank you for explaining that. Please stand by for our next question.

Speaker 2: Our next question comes from the line of Meadow Marshall with Morgan Stanley . Your line is open. Great, thanks. Maybe one question for me, or first question for me, just on kind of the beat and better outlook.

Speaker 11: I'm just trying to get a sense of the blend of how much of that is from.

Speaker 11: earlier renewals and then how much of that is from the future, you know, less future start dates kind of moving in. So just trying to get a sense of kind of what the various contributors to the upside were. And then maybe just a second question, not to delay where the point, but just is there a way to contextualize like in fiscal year 22 just

Speaker 11: how much payments were to this vendor, just to kind of get a sense of why you have confidence that even with an increase in those payments, you would still be able to kind of meet the free cash flow targets that you laid out. Thanks. Thank you for the questions, Meeta. So let me take that one by one. So I think your first question was around just the raise for the...

Speaker 7: for you in the prepared remarks around the percentage of future start dates. So that does have an impact. So you saw it had about $11 million impact in Q2. And for Q3, we expect that to be about $5 million more of license revenue that gets recognized in quarter versus deferred. And so there was some of that effect factored in. So I will hand it over to your question on

Speaker 7: that we've already done that are coming up for renewal. Now, I think the second part of your question was whether we'd be able to quantify some of these payments. And we're not able to provide any specific quantification on that at this point, Meeta, given the view is ongoing.

Speaker 7: But as I said before, no, we are continuing to work diligently to try and get this resolved.

Speaker 11: Okay, got it. I mean, just maybe following up on the renewal piece, we clearly those are doing well, but just maybe in the task quarters early renewals have been a greater contributor to up size. So just is.

Speaker 7: Just trying to get a sense that there is no early renewal component that we should be thinking of here as well. I would say it is not outside the norm. We typically do go to our customers as a lot of other vendors do as well, even 6 months in advance of the renewal date to begin those discussions. So there will be some timing movements here and there. We do some co-terming like most subscription vendors do.

Speaker 7: But nothing outside of the normal or what we would expect that contributed to the new. All right, great. Thanks. Thanks so much.

Speaker 2: Thank you. Please stand by for our next question.

Speaker 2: Our next question comes from Alana Bin Bowlin with Cleveland Research. Alana is open.

Speaker 12: Good afternoon. Thanks for taking the question.

Speaker 12: I wanted to circle back a little bit on the renewal. Could you. Speak to how much of the footprint.

Speaker 12: What was up for renewal or is up for renewal and fiscal 23 and. How that develops into fiscal 24 and then I had a follow up.

Speaker 7: Hi Ben, thanks for the question. Yes, so we haven't quite provided kind of a percentage almost of ARR that's up for renewal I think is your question. So we haven't quite quantified that Ben, but I will say that overall given where we are in our journey, right, you know really all we tell...

Speaker 7: as we layer on kind of the additional terms that we are just offered that we have sold over time. Right. So I would say that is a growing, growing base of renewals, but we haven't provided a specific number or percentages of ARR that's up in this year.

Speaker 12: Okay, excuse me. And then the other item, I look at the billing targets into 3Q in the fiscal year.

Speaker 12: It implies a pretty notable acceleration into 4Q. What are you seeing that drives that acceleration following what you're getting to in 3Q, and then what you're expecting in 4Q? That's it. Thank you. So I think I'll ask you things. So when you're accelerating as you feel me, growth, I think a couple of things I would say.

Speaker 7: that were happening in Q4 of last year. But I think when you look at the guidance for the Q3 ACB billings, and quarter over quarter what's implied for Q4, it's I would say within the range of what we would expect from Q3 to Q4.

Speaker 2: Thank you. Thank you. Thank you. Thank you, Ben. Please stand by for our next question. Our next question comes from the line of Matt Hidberg with RBC. Your line is open.

Speaker 12: Great, guys. Thanks for taking my question. You guys are coming up, I believe, about on the one-year anniversary from when you had some sales attrition issues last year. It feels like a long time ago now. I'm wondering, though, if you could talk about just how general attrition levels stand today and maybe sort of kind of overall hiring plans for the remainder of the year.

Speaker 4: Yeah, I can take that man. So in general by the way, the environment has gotten a lot better over the last year from a hiring perspective as well as a retention given what's happening out there in the markets both with respect to other large tech companies as well as a lot of the startups that that our people were potentially going to, right? So from that situation, I think things have gotten a lot better. Now to your question on the sales front specifically

Speaker 4: We are doing it again every quarter we've been seeing a reposition retention improve actually, quarter-ode quarter and our rep had gone, has been roughly flat. We do expect in a pipe when it's free to grow or rep count modestly from there we are at. And at the same time of course we are very focused on continuing to drive higher rep productively.

Speaker 12: God, it's thanks. That's helpful. And then, congrats on that large federal agency win. Maybe just expand the app-turbit and just talk about public sector spend in general. How much of a driver? Will. Because Med??, because that's momentos.

Speaker 4: Has that been for you and how do you expect that can continue for care? Yeah, so first of all, I'll just say in the US, by the way, we only have two verticals. One is public sector and the other is vertical, it's healthcare. So public sector clearly is very important for us. We are well penetrated into public sector across both civilian, defense, government agencies.

Speaker 4: across the board as well as state local education. So it's a very important market. That's why we have a vertical presence in it targeted at that market. And I would say it's it continues to be a very solid source of business for us. We continue to drive their modernization effort. We have fairly broadly deployed but we see continued opportunities there as well. So it's there.

Speaker 4: It's a good and very important sector for us with continuing spending. Now, of course, they have their budget cycles as you know every year, right? I mean, depending on, as for certain quarters where for the year and we tend to see a bump of the public sector sales during that quarter. But that again, it's all as usual, I would say. Please stand by for our next question.

Speaker 2: Next question comes from the line of iron rakers with well fog, well foggo. Yalana's open.

Speaker 3: Yeah, thanks for taking the questions. I've got two as well if I can. I just wanted to maybe first ask about the ACV piece of the of the guidance. I know that you talked about the macro dynamics, but you know, looking at the high end of the guidance range, it's still down about, you know, 15 or 16% of the quenchal.

Speaker 10: I know you also talked about possibly a slight decline in duration. So I'm curious that's definitely below what seasonalities look like over the last couple of years. Is that all just macro? Is there something else that you're factoring in or maybe quantified that slight possible decline in duration just trying to unpack that guidance for ACV to squirt?

Speaker 7: So thank you, thank you, Adam. So yeah, we were happy to be able to raise both revs new and ACV building guidance and you're right. And that sort of half over half, I guess it does imply a decline in ACV building like second half over or first half. And I would say, you know,

Speaker 7: One is what you've already pointed out and which we talked about, which is this modest elongation in sales cycles that we – that was anecdotal in Q1. We saw it. We saw modest elongation in Q2. And so we have factored in, as I mentioned in my remarks too, some conservatism as it relates specifically to the new and expansion portion about the ACB buildings portion of the overall.

Speaker 10: first half of the year, you did about 109 million of free cash flow. If I take the adjustments that you've quantified, factoring into, let's just call us a midpoint of that 100 to 125, factor back into 33 and the 12 million that you talked about, is still a particularly large decline relative to the first half. So I understand that there's an unquantified element to this investigation dynamic.

Speaker 10: So I guess the question is, is there anything changing within the free cash flow dynamic, be it working capital, that's changed in the back half of your guidance relative to what you saw in the first half? I'm just trying to understand why free cash flow is second half versus first half down, aside from just those factors that you outlined. Good question, Erin, and thank you for...

Speaker 7: it does factor in the potential impact from the use of this third party software as well, which we are not quantifying at this point. So that's how to think about the fully-afresh cash flow guide. We don't anticipate any significant material changes to working capital or anything like that for the rest of the year.

Speaker 9: Thank you very much. Thank you. Please stand by for our next question.

Speaker 2: Next question comes from the line of Chase and Ada with Wimblear. The line is open.

Speaker 10: Thank you. I'm going to have to do you guys. I wanted to ask, I think it may be confusing for folks on this third party evaluation software. I think people may be wondering, evaluation of what? What are you guys evaluating with that software? Yeah, maybe I'll give you some color, right? So evaluation software is meant for evaluation. Right?

Speaker 4: was being useful.

Speaker 10: So the email software, were you paying a very small amount because it was just the email software and therefore now you're going to have to pay a lot more because you were using it for things that it was meant for, is that the idea? Yeah, so we haven't quantified how much, right? But we can't get into that kind of a detail here, but yeah, so you're right, right? I mean, therefore there's some additional expense required, likely, for the usage in these cases that we were looking at.

Speaker 10: Okay, great. And then another question for you, Reggie, just on this whole cloud versus on prem debate. Specifically, are you seeing any slowdown in the migration of workloads to the cloud because of recent customer cost sensitivity just in this environment that we've been in over the last six months or so? Yeah, in fact we give you an example of a rebate ratio in our, in our,

Speaker 4: important part. So in the example that we showed for example this customer is actually running a production workload in the public cloud with a mission critical workload and they decided to migrate it on-prem.

Speaker 4: because they could get a better TCO, they could also get better support experience and response times from vendors by doing so. So we're seeing that definitely being much more nuanced now it's not going, not taking everything you have into the public cloud is being much more nuanced about what you put where and what it's going to cost you.

Speaker 13: Thank you.

Speaker 2: Thank you. Please stand by for our next question. Our next question comes from the line of Simon Leopold with Raymond Jane. Leilane is open. Thanks for taking the question. I wanted to see if you can.

Speaker 12: something discernible like that. And then I've got a very quick follow up.

Speaker 4: Yeah Simon, that's a good question. I don't think we have that level of visibility because a lot of this is somewhat anecdotal and we've seen it for both new and for existing customers. Right, clearly for us, typically in the past, expansion in existing customers is generally easier and quicker compared to new, right, net new prospects.

Speaker 4: But we are seeing an elongation in deals for both. But I will also say it's a very modest elongation at this point. So it's just that, for example, just anecdotally, well, you have something that a VP may have budgets for at a VP level and say, yeah, I'm going to go ahead and do it. Now it's being scrutinized at the CFO level to say, okay, do you really have to go spend this money now? Can you wait? Is there a TCO benefit that you can quantify for me quickly?

Speaker 4: So that's the kind of I think, I think dynamic that we are seeing. It's hard to parse out specifically. It varies a lot by customers, but we're seeing this with both new and for expansion.

Speaker 12: Thanks. And then just a quick one is on this third-party software issue, do you have insight into whether or not this affects your cost of goods sold or the R&D line, or you just don't know that yet? I guess I'm sort of trying to figure out where these charges would show up. Yeah, Rukmini. Thank you, Simon. Yeah, at this point, given this is ongoing, Simon, we're not able to get more specific.

Speaker 7: on the types of expenses or where the PNL it might fall.

Speaker 2: Thank you. Thank you. Please stand by for our next question. Thank you.

Speaker 2: Next question comes from Amanda Boup-Plew, Dr. Chaya, with Bike of America. Yalana Sophe.

Speaker 8: Hi, thank you for taking my questions. I'm filling in for Wamsi Mohan today. Rukmini, one question for you real quick, just to clarify on the third party software issue. Do you think that this impacts the historical, you know, last couple of years financials, and would you be restating your financials, and maybe, you know, does this impact margins lower and earnings lower? And will you be restating that when you file your statement?

Speaker 7: there's really nothing more I can add on on the specifics.

Speaker 8: Okay, maybe one for Rajiv. You talked about customers inspecting deals more and a slight modest increase in the sales cycle. When I look at the new customer ads, this quarter, it was 490, which really is the lowest quarter for new ads going back to 2017.

Speaker 8: How is the pricing environment and are you having the price lower? So just your thoughts on the number of new ads and the competitive dynamics that you're seeing and pricing? Yeah, I talked about a two of those and I let us make comment on effects. But first of all, we are focusing on higher quality, higher ASP, new logos, more so than new logo count. So we want to make sure that when we get, when we put our efforts to go winning a new logo,

Speaker 4: we make that count, right? Much more so and provides us a bigger deal, drives up our sales productivity, and also provides more expansion opportunities. So that's been our focus more so than the new logo count. The new logo count shows up in terms of what it is. It's more of a result rather than a number that we're trying to focus on in terms of trying to hit a new logo target. The second thing I would say is our VR...

Speaker 4: very much holding up our prices. Right? Unit prices have remained very stable and they're not going down in any way. And then the third part of it in terms of the West H. So if you can comment. Yes, so you know, a real question I think was that given that we'd denominate all of our transaction in the in US dollars, is it effectively a price increase? Which it is in some parts of the world right where the dollar has been.

Speaker 7: impact on that from any of these drivers.

Speaker 8: Okay, if I can speak one quick one in backlog was very high coming into this fiscal year Did you also reuse backlog in the quarter and what's the expectation for backlog for the rest of the year? Thank you so much

Speaker 7: We did say that we had record levels of backlog. And we expect during the course of the year to use that backlog over time to get to a normalized level by the end of the year. We did use some backlog in Q2 in line with our expectations.

Speaker 2: And again, we expect that we will continue to consume that over the course of the rest of this year. Thank you. Please stand by for our next question. Our next question comes from the line of George Wayne with Barclays. Your line is open.

Speaker 14: Hey guys, congrats on the quarter. Just maybe you can, Rajiv, unpack the service provider channel, any updates you have. Last quarter you talked about the SP channel as in use of an area to lend new customers.

Speaker 4: So just curious if you have any kind of updates on this. Yeah, I think George, we are certainly very excited about that route to market because we are relatively new, you know, in terms of all using this route to market for us.

Speaker 4: So it's a growing business opportunity for us. Last quarter, we said, you know, the largest deal in the quarter was done through that SP channel. And still, we have seen the very early stages in that innings there. And we continue to build up our service provider partners. We're trying to announce the product capabilities to provide a very broad and offering as possible.

Speaker 4: So we have, so it's a, it's a continued, it's a journey, and it's gonna take us multiple quarters for it to start becoming a significant chunk of our business. Right now it's still a small portion of our overall business.

Speaker 14: Okay, thanks. I have to create a follow up. Just in terms of the EHB kind of the own hypervisor, this quarter is 60-thrips and mix up two points sequentially. Can you give some colors just on the traction of your own hypervisor and how are you seeing in terms of the migration kind of for customer recession? Absolutely. And I'm afraid becoming more and more important now in the

Speaker 4: of footprints. And in fact, that's the default. It used to be, you know, if we go back many years ago, that was our default. We would insert into somebody else's hypervisor environment, like a VMware hypervisor. So we want to continue that because there's still a huge opportunity there. So the model, you know, with customers has been in some cases.

Speaker 4: We will go and start on top of a third party hypervisor with the rest of our solution stack. So our software fans story, for example. And then over time, they will choose to migrate some of that to ASV. We also have a dynamic where in many new customers, they go all in with ASV from day one as well. So we have both those dynamics and we want to maintain a balance of both because we do want to of course have customer on our own hypervisor and tell them the full stack solution.

Speaker 4: But at the same time, we want to be able to go after those customers that have other hypervisors and be able to insert into their environment as well. So I'd say that's the blend that we're trying to get comfortable with. But AHV overall continues to mature, more and more customers using it, ecosystem is becoming broader and broader. We have third party certifications like Red Hat and others on it now.

Speaker 4: So, it is becoming let us call it ready for all machine critical work work at this point.

Speaker 2: Okay, great. Thanks. Thank you. Due to the interest of time, our final question comes from the line of Thomas Blakey with Keybike.

Speaker 12: Your line is open sir. Very great. Thanks for sneaking me in guys in a nice quarter. I just wanted to maybe just simplify a lot of the questions that were asked about renewal trends. I mean, it's very important for hitting for longer term free cash flow targets. Could you be just to speak to the trend, you know, no numbers.

Speaker 7: In fiscal 22, fiscal 23, what you're seeing from a renewal opportunity, in fiscal 24 to fiscal 25 to hit those targets, is the trend moving in the right direction and just start there. Hi, Tom. Thanks for the question. So look, I think we've emphasized a few times, and I'm happy to, I think, clarify, I think for you, Tom, it's a good question on just the overall.

Speaker 7: renewal workstream. We've talked about how it's a driver both of our growth and efficiency. And it continues to perform well. And yes, we do believe it's going in the right direction not just for fiscal year 23 as we talked about seeing the majority of growth coming in in 23, but also more generally. And that's why we did mention that we re-trayed our sort of $300 million for cash flow number for 25. And so we continue to believe that that thesis.

Speaker 10: Still hoarse. Thanks for that. And given the commentary around the macro, maybe a downtick, in my opinion, from what I'm hearing from the last couple quarter calls here, and combined with the solid results, can we get some feedback in terms of what maybe the higher net dollar retention rate was?

Speaker 7: on some of these renewals, what are, you know, where are those numbers up and what was driving that? Right, so I think if you have question on NRR, our net database retention rate metric, Thomas, that's the question. Yeah, with people from the renewals, yeah. Yeah, so thank you for that. So I think I want to first clarify that when we talk about renewals, the feelings we're purely talking only about renewals, right, it does not factor in any of the expansion that is factored into a new expansion portion, right, it sort of,

Speaker 7: as it relates to the full year guide given what we're seeing in the business.

Speaker 10: Thank you very much.

Speaker 15: Thank you very much. Thank you, Tom.

Speaker 2: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker 15: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.

Speaker 1: To.

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Speaker 2: Hello and welcome to the Canon X2.2523 earnings conf call. At this time, all participants on a listen only mode.

Speaker 2: After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.

Speaker 2: To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker for today. Rich Valera, you may begin, sir.

Speaker 12: Good afternoon and welcome to today's conference call to discuss the results of our fiscal second quarter of 2023. Joining me today are Rajeev Ramaswamy, Nutanix's President and CEO , and Rakhinees Pidaraman, Nutanix's CFO . After the market closed today.

Speaker 16: The Pan Executive Press released announcing financial results with fiscal second quarter of 2023.

Speaker 16: 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, strategies, initiatives, vision, objectives, and outlook, including our financial guidance, as well as our ability to execute the Iran successfully and in a timely manner.

Speaker 16: And the benefits and impact thereof on our business operations and financial results. Our expectations regarding the resolution of the investigation. Its impact on our financial statements, including our financial guidance. Our financial performance and targets and use of new or different performance metrics in future periods.

Speaker 16: expectations regarding profitability, a competitive position in market opportunity, the timing and impact of our current and future business model transitions, the factors driving our growth.

Speaker 16: macroeconomic, geopolitical, and industry trends, including global supply chain challenges, and current and anticipated impacts of the COVID-19 pandemic and its effects.

Speaker 16: These fully looking statements about risk uncertainties, some of which are beyond our control, which could cause actual results different serially and adversely from those anticipated by these statements.

Speaker 16: For a detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K for the fiscal year ended. July 31st, 2022, and our quarterly report filed on Form 10-Q . The fiscal quarter ended October 31st, 2022. As well as our earnings press release issue today, these forward looking statements apply as of today.

Speaker 16: and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as representing our views in the future. Lastly, Nutanix Management will be participating in the Morgan Stanley TMT Conference in San Francisco on March 8th, and we hope to see you there. And with that, I'll turn the call over to Rajeev. Rajeev?

Speaker 4: Thank you Rich and good afternoon everyone. Against an uncertain macro backdrop, we delivered a solid second quarter with results that came in ahead of our guidance.

Speaker 4: and saw continued strong performance in our renewables business. With respect to the macro backdrop, in our second quarter, we continued to see businesses prioritizing their digital transformation and data center modernization initiatives enabled by our platform. However, we have seen...

Speaker 4: some increased inspection of deals by customers, which we believe is likely related to the more uncertain macro backdrop. And this is driving a modest elongation in sales cycles. We consider this dynamic in our outlook for the remainder of the fiscal year.

Speaker 4: Supply chain constraints with our server partners improved compared with the prior quarter. I'd like to comment on the investigation mentioned in our press release. We recently discovered that evaluation software from one of our third-party providers was instead being used for interoperability testing, validation, and customer proof of concept.

Speaker 4: over a multi-year period. Our audit committee commenced an investigation into this matter, which is still ongoing, with the assistance of outside counsel. Rukmini will provide more details on the near-term reporting implications of this matter. But I'd like to emphasize that the

Speaker 4: that we do not believe it will have a significant impact on the fundamentals of our business and overall prospects. Taking a closer look at the second quarter, we delivered solid top-line growth, including 23% year-over-year ACB Billings growth driven by continued strong performance in our renewables business.

Speaker 4: that we do not believe it will have a significant impact on the fundamentals of our business and overall prospects. Taking a closer look at the second quarter, we delivered solid top-line growth, including 23% year-over-year ACV Billings growth, driven by continued strong performance in our renewables business. We again demonstrated good expense management.

Speaker 4: which helps us generate $63 million of free cash flow, continuing our strong, recent free cash flow performance. Overall, I'm pleased with our financial performance in the second quarter. Our second quarter results reflect the value our customers are seeing in both.

Speaker 4: our core cloud platform and in adjacent solutions in our portfolio with particular strength in Nutanix Cloud Management.

Speaker 4: platform and in adjacent solutions in our portfolio, with particular strength in Nutanix Cloud Management. A good example.

Speaker 4: is our largest new customer win in the quarter, which was with a federal agency looking to modernize their infrastructure. They replaced their legacy 3-tier environment with Nutanix's cloud platform, including...

Speaker 4: win in the quarter, which was with a federal agency looking to modernize their infrastructure. They replaced their legacy 3-tier environment with Nutanix's cloud platform, including Nutanix Cloud Management.

Speaker 4: to run their business-critical applications, leveraging its simplicity and built-in automation for infrastructure as a service.

Speaker 4: They also added Nutanix Unified Storage to service their unstructured data needs. We see this as a good example of a customer adopting our full stack offering to modernize and automate their IT infrastructure.

Speaker 4: Another notable win in the quarter was with a bank in the APAC region who had been running a key business critical application in the public cloud on Red Hat's OpenShift. However, they were having performance issues.

Speaker 4: and we're unhappy with the incident response time of their public cloud service provider.

Speaker 4: and were unhappy with the incident response times of their public cloud service provider.

Speaker 4: Following an evaluation of multiple on-prem and public cloud options, the customer chose to run OpenShift and their critical application on-prem on the Nutanix cloud platform, including our AHV hypervisor, concluding that it was the alternative that could deliver the best performance and total cost of ownership. This deal reinforces our view that cloud is an operating model, not a destination.

Speaker 4: and that our Nutanix Cloud Platform is ideally suited to enabling the hybrid multi-cloud operating model increasingly favored by IT professionals. Following the general availability of NC2 on Microsoft Azure late in our first quarter, we saw solid momentum with NC2 in the second quarter.

Speaker 4: A good example is a win we had with an EMEA Headquarter provider of Global Transportation Services looking to accelerate their migration to the public cloud.

Speaker 4: reduce their data center footprint, and optimize their public cloud spend. Following a rigorous evaluation of alternatives, including native public cloud.

Speaker 4: This customer chose NC2 on Azure, which they found enabled a roughly 4x faster migration.

Speaker 4: choose NC2 on Azure, which they found enabled a roughly 4x faster migration, lower migration costs,

Speaker 4: and significantly lower operating costs. This win demonstrates how our customers appreciate the ability to rapidly and seamlessly shift their workloads from their private clouds to the largest public cloud providers.

Speaker 4: with the consistent management, governance, and data services provided by the Nysanix Cloud Platform.

Speaker 4: management, governance, and data services provided by the Nutanix Cloud Platform. Without the authority of a cup of tea,

Speaker 4: the time and expense of refactoring their workloads and with lower ongoing operating costs. On the product front, during the second quarter, we delivered meaningful upgrades to our core platform with the release of AOS 6.6.

Speaker 4: which offers enhanced data services and a number of networking and security-related features, further strengthening its capabilities to support business-critical applications.

Speaker 4: In closing, I'd like to provide some thoughts on our priorities and outlook. First,

Speaker 4: Our overarching priority remains delivering sustainable, profitable growth through judicious investment in the business, execution on a growing base of renewables, and diligent expense management. A strong free cash flow.

Speaker 4: along with solid top-line growth in the second quarter reflects the progress we made to date towards this objective.

Speaker 4: While the macro environment remains uncertain, we are encouraged that the strength of our hypothesis model, underpinned by a growing base of renewal, should be

Speaker 4: and our ongoing focus on profitability allow us to raise our fiscal year top line outlook and reaffirm our free cash flow outlook.

Speaker 4: I remain confident in our ability to continue to capitalize on the vast opportunity in front of us while continuing to drive sustainable, profitable growth.

Speaker 4: And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?

Speaker 4: And with that, I'll hand it over to Rukmini Sivaraman. Rukmini. Thank you, Rajiv.

Speaker 7: I would first like to note that with respect to the investigation Rajeev mentioned, we are in the process of assessing the financial reporting impact and it is likely that additional costs would be incurred to address the use cases previously noted.

Speaker 7: As a result, we have not provided financial information regarding expenses in our second quarter preliminary results or our outlook for the third quarter or full fiscal year 2023. We are not providing financial information regarding expenses in our second quarter.

Speaker 7: While we are working diligently to address this matter and finalize our financials as soon as possible, we do not expect to be able to file our 10Q on time or following the 5-day prescribed extension period allowed under 12B25.

Speaker 7: Relatedly, we are rescheduling our investor day we had intended to hold on April 4, 2023 to summer of 2023 and will provide a specific date once it is confirmed.

Speaker 7: With that said, I will now move on to top through our Q2 results, followed by our outlook for Q3 and then finally provide an update on our fiscal year 23 outlook. Q2 23 was a solid quarter with results that came in better than our guidance.

Speaker 7: ACV billings in Q2 was $268 million, higher than our guidance of $245 to $250 million, and representing a year-over-year growth of 23 percent. The significant majority of that growth came from growth in renewals billings.

Speaker 7: Revenue in Q2 was $486 million, higher than our guidance of $460 to $470 million, and a year-over-year growth rate of 18%. ARR at the end of Q2 was $1.378 billion, a year-over-year growth of 32%. New logo additions were about $480.

Speaker 7: in Q2. Contract durations stayed flat quarter over quarter at three years as expected. As described previously, the percentage of orders with future start dates likely due to partner supply chain constraints continue to be a key assumption in our Q2 guidance.

Speaker 7: This percentage came in lower than it was in Q1-23 and below our expectations. Q2 revenue also benefited approximately $11 million from the improvement in percentage of future start dates as more licensed revenue was recognized in Q1 than deferred.

Speaker 7: slightly more than the $10 million estimate we had provided on our last earnings call. Billings linearity was good and DSOs were 28 days in Q2.

Speaker 7: Free cash flow in Q2 was $63 million, implying record free cash flow margin of 13%. A couple of additional notes on Q2.

Speaker 7: One, we retired the remaining principal amount on our January 2023 convertible note of approximately 146 million dollars with cash from the balance sheet.

Speaker 7: To last month, we reached an agreement to settle the outstanding securities class action litigation, which is subject to documentation, notice to class members and court approval.

Speaker 7: We recorded a net charge of approximately $38 million for the settlement. This is the amount inclusive of legal fees and expenses net of our expected recovery under our DNO insurance. We expect approximately $33 million.

Speaker 7: to be paid and settled in Q3, while the remainder was already paid for legal defense costs in previous quarters. We ended Q2 with cash, cash equivalence, and short-term investments of $1.311 billion.

Speaker 7: down slightly from $1.388 billion in Q1-23. Moving on to Q3 outlook, the guidance for Q3-23 is as follows.

Speaker 7: ACV Billings of $220 to $225 million and Revenue of $430 to $440 million. I'll now provide some more context around our guidance.

Speaker 7: First, the top line guidance of Q3, assumes that supply chain dynamics for our server partners would remain more or less the same compared to Q223.

Speaker 7: It also assumes that contract durations would stay approximately flat to slightly down in Q3-23 compared to Q2-23. Second, the revenue guidance includes approximately $5 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

Speaker 7: more license revenue in Q3 than is deferred, similar to the dynamic we saw in Q2. Over time, as our partners' supply chain constraints resolve and our 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.

Speaker 7: We have had a solid first half and our renewal business continues to provide a strong foundation for growth and efficiency. Those factors, combined with our continued focus on disciplined expense management, allow us to raise our ACV billing and revenue outlook for the year while reaffirming our prior free cash flow outlook. Our updated guidance for fiscal year 23 is as follows.

Speaker 7: I'll now provide some additional color on our foliar guidance.

Speaker 7: First, we are seeing continued new and expansion opportunities for our solutions despite the uncertain macro environment. However, as Rajiv mentioned, we have seen a modest elongation of sales cycles, likely due to increased deal inspection.

Speaker 7: We have considered this dynamic in our updated guidance. We continue to expect that the significant majority of our growth in ACV billing for fiscal year 23 will come from growth and renewal ACV billing.

Speaker 7: with the uncertainty in the macro environment factored into our expectations for new and expansion ACV billings. A reminder that ACV billings for the full year is not simply the summation of four quarters ACV billings because of deals with less than one year in contract duration.

Speaker 7: We expect that FULURE ACV Billings is discounted by approximately 5% relative to the sum of ACV Billings from the Q4 quarter. Second, similar to our comments last quarter, the FULURE guidance assumes that contract durations would decrease slightly compared to fiscal year 22. The fiscal year 23 revenue guidance also assumes that the percentage of orders of future target

Speaker 7: would ease slightly in the second half of the fiscal year compared to the first half. Third, the reaffirmed free cash flow guidance of $100 to $125 million includes the impact of approximately $33 million in net cash outflow expected in Q3 from the previously mentioned litigation settlement. It also includes the impact of approximately $12 million.

Speaker 7: to generate at least $300 million of free cash flow in fiscal year 2025. In closing, we are pleased that our Q2 results reflect our continued execution towards our stated objective of sustainable, profitable growth.

Speaker 7: and we expect to continue that focus. With that, operator, please open the line for questions.

Speaker 2: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced.

Speaker 2: To withdraw your questions, please press star 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of

Speaker 7: pendulum bore with JP Morgan your line is open. Okay guys, thanks for taking the questions and congrats seems like a pretty good quarter. I just wanted to go back to the investigation that that you were talking about. Could you maybe explain it in a little bit of a layman's term what happened exactly and

Speaker 8: it sounds like it's like an underpayment to a vendor. Am I understanding it right? Or what, help us understand it a little bit in less legal terms. Yeah, let me start and Rukmini, you can explain the details here, right? But the one thing, the first thing I want to say is that the fundamentals of our business are unchanged. So this matter doesn't impact our market opportunity or the demand for our solutions. And we're working diligently to resolve it as quickly as possible. And we are very focused on driving sustainable, profitable growth.

Speaker 7: Now, with respect to that specific matter, Rukmini, maybe you can just explain the details behind it and what we do. Sure, yes, hi, pendulum. So what we discovered was that certain, you know, e-val software, evaluation software, from one of our third party providers, somebody who provides a software, which is intended for evaluation purposes.

Speaker 7: was instead used for validation, interoperability testing, and proof of concept over a multiyear period. So that is – We discovered that. And as we said on the call, that matter is ongoing. And because of that pendulum, we weren't able to disclose expense information on the call. And we've announced that we expect to be unable to file our 10Q in a timely manner given that we want to make sure this is resolved first. Now, I want to also provide a little bit of color that we are –

Speaker 7: As I noted in my prepared remarks, the free cash flow guidance also includes the impact of 33 million approximately from the settlement of the litigation and the impact of this 12 million of cash usage in Q3 for non-recurring tax obligations related to employee RSUs vesting. And these cash outflows were not included in our prior guidance for the full year of free cash flow.

Speaker 14: Yep, understood. Thank you for the color. And Rajiv, we had a discussion with some of the discussions with some of your partners seems to suggest that the VMware opportunity is taking shape. But I wanted to ask you, one of the discussions kind of highlighted that the complexity of some very large VMware customers using tens of thousands of VMs. Pushing.

Speaker 14: who might be looking at Nutanix as an alternative. It's just complex to kind of move from one to the other, of course. So I wanted to ask you, what can Nutanix do, or what are you doing to kind of make those large companies feel a little bit at ease to kind of move those large VMR environments over to Nutanix, and how has some of those discussions been progressing? Absolutely. I think in Imagine Pendulum, we are engaged with many of...

Speaker 8: Customers are running vSphere, we go in there and we insert AOS, which is our software-defined storage. And over time, customers may choose to use our own hypervisor, AHV, instead of the VMware hypervisor. So we have a lot of experience with doing migrations.

Speaker 8: for customers. Now the larger the environment, the more complex it is. And we know that. And typically we will do this one workload at a time, for example. They will pick us for one use case and then over time we will expand and do other use cases. Historically, it used to be end user computing. But these days we do databases, we do all mission critical workloads. All of this.

Speaker 8: So, we have a lot of experience doing these migrations. That said, Pinchalam, I think what you heard, yes, this is complex, it's going to take time and this is why we are not spattering in some, you know, any significant benefit in our fiscal 23 outlook. We expect these cycles to be long, you know, typically 9, 12 months for some of the larger mediums so that

Speaker 14: Yep, got it. Okay, getting back in the queue. Thanks.

Speaker 14: Yep, got it. Okay, getting back in the queue. Thanks. Thank you. Another couple of minutes before we leave,

Speaker 2: Please stand by for our next question. Our next question comes from the line of Jim Fish with Piper Sandler. Your line is open. We will continue to pay a hand for this one.

Speaker 3: Hey guys, wanting to build off the last couple questions actually. Maybe could you talk about the push-pull effect you're seeing with the demand environment, given that ability to consolidate the competitive landscape, especially on the VMware side and maybe even the traditional storage perspective, as well as just the HCI market against those traditional storage guys.

Speaker 3: versus the general macro environment, as it sounds like, Rajeev, you're talking about an increased lengthening of deal cycles. Is there a way to think about how much longer deals are also taking? So, Nethan, my question is, what are you seeing for the push-pull on all these kind of factors on demand? And is there a way to quantify how much longer these deals are taking? Yeah, Jim, indeed, there is a push and pull on this, as you say. So, first on the macro. We see strong performance from our renewals, and that's been continuing.

Speaker 8: And of course, that helps reduce the risk in our business model and the guide that we put out there. Now, we have taken into account the uncertain macro environment. As you say, right, in terms of the impact that we're seeing, we have been seeing this greater inspection. Now, what I would say is what that means is a very, I would say so far it's been a modest increase in the average sales cycle, right? The time it takes to close the deal goes up a bit. And we've seen this across both new logos on new customers.

Speaker 8: and existing customers looking to expand. They're just being a little bit more careful, taking some more time to review the economics of everything and looking at the TCO benefits. Now that said, we do have strong TCO benefits, typically compared to legacy infrastructure. So when you look at the dynamics, with the second piece of it, which is compared to third-party or legacy three-tier storage I think those dynamics are largely the same. When there is, for example, time for a refresh or any kind of modernization effort.

Speaker 8: The customers compare HCI versus 3-tier, and they're generally able to show a better TCO, a much more modern ability for them to go build a cloud platform. And that dynamic hasn't really changed. Clearly, the VMware dynamic certainly will help in the long term, but not in the short term. But in the short term, what I would say is increase the level of engagement. So that's clearly push and pull. We have the, to summarize, we've got the renewal business that provides a foundation on the new business, small elongation in these cycles. On the other side, we're seeing more engagement from a VMware basis. And so we've tried to do our best to factor in all of these dynamics into the guide that we gave.

Speaker 7: Thank you, Jim. All good questions. So let me try to parse that. So as I said in my remarks, Jim, we are not commenting on expense, expenses either for Q2 or on a forward-looking basis. So I'll start there. But in terms of free cash flow, for Q2, we are not commenting on expense, expenses either for Q2 or on a forward-looking basis. So as I said in my remarks, we are not commenting on expense, expenses either for Q2 or on a forward-looking basis.

Speaker 7: As you said, we are happy with the free cash flow performance in Q2. And I will just say that I think we talked about DSOs on the call which was 28 days. It was unusually low in Q1. And we saw it kind of come back to I would say within the range in Q2, because typically our payment terms for DSOs are 30 to 45 days. And so I would expect it to be sort of in that area.

Speaker 7: Now, if you are second question, so yes, we are comfortable with our full year 100 to 125 million dollar free cash flow guidance, Jim, including the potential impact from arising from this matter, right related to the third party software use that we mentioned on the call and the other sort of items are on the 33 million for the settlement and the one time 12 million tax obligations we discussed.

Speaker 2: Thank you. Please stand by for our next question. Our next question comes from the line of Mike Seacole with Needham & Company. Your line is open. Hey, guys. Thanks for getting me on here. I did have a couple of questions.

Speaker 17: Correct?

Speaker 6: That's correct, Mike.

Speaker 16: And so if I look at the audit investigation specifically, can you provide us, like, when was the issue discovered? When did the audit committee commence its investigation? When did the Nutanix engage outside camps? I'd just like to see if we can get a timeline for how these events are playing out under the hood.

Speaker 7: Again, just because we have this limited guidance that we're being provided today. Thank you, Mike, for the question. If I understand that, you know, there's limited guidance here, Mike, and we, you know, what I can say is that given this review is ongoing, what we can say is that we are working diligently, right, with the Audricamity and our outside Council to resolve this as quickly as possible, so we can be in a position to share more the deal.

Speaker 7: At this point, we're not able to provide the very specific timelines to your question, but we are working diligently to make sure we are resolving this appropriately and in a timely manner. I institutionally and efficiency]:

Speaker 18: I appreciate that. And I just wanted to see, like, one of the things I'm struggling with on my side, and again, it's probably just a misunderstanding on all of the legal comportments that are involved here. But I know that you guys are saying that this third-party provider was using SOF2 or your view to be concerned here. A more secondary clinical level won't simply be communicated in a higher state.

Speaker 18: I don't want to butcher it, but I think it was supposed to be. Is that what you're trying to do? Yeah, I can't really. Yeah, and I'm trying to see is there an impact on on relevant to results of this or is it entirely expense based because again, I'm trying to get at like. Is there potential for this in any way to impact your top line results like you're giving us the revenue and ACV billing guide. Is that untouched by this investigation at this point? And then the follow up is like, how is it we don't have the expenses here, but you guys are able to read perfect.

Speaker 18: I think that's what I'm wrestling on my side and I apologize for the long winded question, but I just want to make sure I'm being clear.

Speaker 7: Yeah, thank you. Thank you, Mike. So let me try and clarify some of those pieces. So you are correct that we do not believe that this matter has any impact on our top line metrics, specifically revenue, ACV billings, which as you point out we've disclosed and we're guiding to. So that's one part of it. And in terms of just

Speaker 7: What was the second part of your question? Am I getting there with one more question? On free cash flow I think. Yes, exactly. Correct, yeah. Sorry about that. So I think on free cash flow, we reported Q2 free cash flow. That's the 63 million that we reported out. Now for the full year, I think this is important, so I'm glad you asked the question Mike. We are comfortable with the 100 to 125 million free cash flow for the year after factoring in a potential impact from this third-party software use that we mentioned on the call.

Speaker 7: and the two other items. So $33 million which is a separate matter from a previously outstanding litigation settlement. So that's $33 million that was not factored in before. And this $12 million of cash usage in Q3 for nonrecurring tax obligations related to a portion of our employee RSUs investing this month.

Speaker 18: Okay, okay, and then maybe again, this is just me being naive here, there were phrases how you will but again, I just want to make sure. With a third party provider, how were they supposed to be using the software versus what we're seeing today as far as its interoperability testing? Again, I just want to make sure I'm aware of the different nuances here for what's causing this investigation in the first place.

Speaker 7: Yes, understood Mike. So this is the software that we were using from a third-party software provider. It was evaluation software intended to be used for evaluation purposes.

Speaker 12: and instead it was being used by us for interoperability testing, validation, and proof of concept. So that is the matter that is being reviewed right now. I see. And so because you – it was intended for evaluation, instead you guys were using it for interoperability testing and validation.

Speaker 4: because of the different usage of that software, there's potentially a different cost for what you had been paying that provider. Is that a very simple way of putting that? I know I'm probably mischaracterizing a lot of that. Yes. Okay. Yes, that's right, Mike. So it's intended to be used for evaluation software, and we discovered that it was instead being used for these other interoperability validation and proof of concept. And so that's what's under review right now. Yeah, and maybe I'll just say one thing, Gaurav. What this means is therefore there might be some additional expense, right? In terms of usage of that software. That's correct.

Speaker 18: So that's why we are, until we have this done, we can't really specifically give you expenses. Got it. And that's clear right now. And I apologize. It must've been the way I was misreading or reading the press release, but that wasn't apparent to me initially. I don't want to take up too much time, so I'll turn it over to my colleagues here, and thank you for explaining that.

Speaker 18: That's why we are until we have, you know, this is done, the country specifically give you expenses. Got it. You know, that's clear right now. I apologize. It must have been the way I was reading this, reading this press release, but that wasn't a parenting initially. I don't want to take up too much consults, turn it over to my college here, but thank you for explaining that. Thank you, Mike.

Speaker 11: Thank you. Please stand by for our next question. Our next question comes from the line of metal marshal with Morgan Stanley . He line is okay. Great. Thanks. Maybe one question for me or first question for me just on kind of the beat and better outlook. Just trying to get a sense of the blend of how much of that is from the future, you know, less future start date kind of moving in. So just trying to get a sense of kind of what the the various contributors to the upside were.

Speaker 11: And then maybe just a second question, not to delay where the point, but just is there a way to contextualize like in fiscal year 22 just how much payments were to this vendor just to kind of get a sense of you know why you have confidence that even with an increase in those payments you would still be able to kind of meet the free cash flow targets that you laid out. Thanks.

Speaker 7: Thank you for the questions, Meeta. So let me take that one by one. So I think your first question was around just the raise for the full year and what contributed to that. So clearly in Q2 we beat both on ACB, Billings, and on revenue. So I think that certainly makes us feel more comfortable raising the guide for the full year. On the revenue piece, we did try to provide some color for you in the prepared remarks around the percentage of future start dates. So that does have an impact. So you thought I'd had about…

Speaker 7: $11 million impact in Q2. And for Q3, we expect that to be about $5 million more of license revenue that gets recognized in quarter versus deferred. And so there was some of that effect factored in Meeta to your question on the full year. And I think on renewals, as Rajeev has said, and I emphasize this too, that our renewal business is doing well. And so that again, continues to underpin the significant majority of our growth and lowers the risk somewhat given all of that is based on deals that we have already done that are coming up for renewal.

Speaker 7: Now, I think the second part of your question was whether we'd be able to quantify some of these payments. And we're not able to provide any specific quantification on that at this point, Meeta, given the view is ongoing. And as I said before, we are continuing to work diligently to try and get this resolved.

Speaker 11: Okay, got it. I mean just maybe following up on the renewal piece, clearly those are doing well, but just maybe in the past quarter, early renewals have been a greater contributor to upsize. So just, you know, just trying to get a sense that there's no early renewal component that we should be thinking of here as well.

Speaker 7: Yeah, I would say it is not outside the norm, Meeta. So anything we've discussed before, we typically do go to our customers as a lot of other vendors do as well, even six months in advance of the renewal date to begin those discussions. So there will be some timing movements here and there. We do some co-terming like most subscription vendors do, but nothing outside of normal or what we would expect that contributed to the renewal. Great, thanks so much.

Speaker 7: I would say it's not outside the norm, Meeta. I think we've discussed before, we typically do go to our customers, as a lot of other vendors do as well, about even six months in advance of the renewal date to begin those discussions. So there will be some timing movements here and there. We do some co-terming, like most subscription vendors do, but nothing outside of normal or what we would expect that contributed to the renewal. Great, thanks so much. Thank you.

Speaker 2: Please stand by for our next question. Our next question comes from the line of Ben Boland with Cleveland Research. Your line is open. Good afternoon. Thanks for taking the question. I wanted to circle back a little bit on the renewal. Could you speak to how much of the footprint

Speaker 12: What was up for renewal or is up for renewal and fiscal 23 and. How that develops into fiscal 24 and then I had a follow up. Hi, Ben thanks for the question. Yes, so we haven't quite provided kind of a percentage almost of ARR right that's up for renewal I think is your question.

Speaker 7: So we haven't quite quantified that Ben, but I will say that overall, given where we are in our journey, really all we tell now is subscription software, term license software other than professional services which is a small portion of the overall business. And our renewals are starting to flow in. So we do expect to see continued growth in that base of renewals as we layer on the additional software that we have sold over time. So I would say that is a growing base.

Speaker 7: but we haven't provided a specific number or a percentage of ARR that's up in this year. Okay, excuse me.

Speaker 12: we haven't provided a specific number or a percentage of ARR that's up in this year. Okay, excuse me. And then the other item that I look at.

Speaker 12: the billing targets into 3Q in the fiscal year, it implies a pretty notable acceleration into 4Q. What are you seeing that drives that acceleration following what you're guiding to in 3Q and then what you're expecting in 4Q? That's it. Thank you.

Speaker 7: So I think a few things. So when you say acceleration, if you mean growth, I think a couple of things I would say Ben. So typically our Q4 seasonally is a better quarter for us than Q3 is. And that's because it's the end of the fiscal year for us. And so that is expected. We also have last year our Q4 ACB billing and it's a bit of a somewhat of an easier comp.

Speaker 2: Our next question comes from a lot of Matt Hedberg with RBC. Your line is open.

Speaker 12: Great guys, thanks for taking my question. You guys are coming up, I believe, about on the one year anniversary from when you had some sales attrition issues last year. It feels like a long time ago now. I'm wondering if you could talk about just how general attrition levels stand today and maybe sort of overall hiring plans for the remainder of the year.

Speaker 8: Yeah, I can take that, Matt. So in general, by the way, the environment has gotten a lot better over the last year from a hiring perspective as well as the retention, given what's happening out there in the markets, both with respect to other large tech companies as well as a lot of the startups that our people were potentially going to, right? So from that situation, I think things have gotten a lot better. Now, to your question on the sales front specifically, we are doing it again. Every quarter we've been seeing that retention retention improve actually.

Speaker 8: quarter over quarter and our rep headcount has been roughly flat. We do expect in FY23 to grow our rep count modestly from where we are at. And at the same time, of course, we are very focused on continuing to drive higher rep productivity.

Speaker 8: quarter and our rep count has been roughly flat. We do expect in FY23 to grow our rep count modestly from where we arrived. And at the same time, of course, we are very focused on continuing to drive higher rep productivity. Got it. Thanks.

Speaker 3: that's helpful. And then, um, congrats on the, on that large, uh, federal agency win. Um, you maybe just, you know, go, kind of expand the app, and just talk about sort of like public sector spend in general. Uh, you know, uh, how much of a driver, you know, has that been for you? And, you know, how do you, how do you expect that can continue from here? Yeah, so first of all, I'll just say in the US, by the way, we only have two verticals. One is public sector, and the other is vertical. It's, it's okay.

Speaker 8: So public sector is clearly very important for us. We are well penetrated into public sector across both civilian defense, government agencies across the board, as well as state local education. So it's a very important market. That's why we have a vertical presence in it targeted at that market. And I would say it continues to be a very solid source of business for us. We continue to drive them organization efforts they're fairly broadly deployed, but.

Speaker 8: We see continued opportunities there as well. So it's a good and very important sector for us with continued spending. Now, of course, they have their budget cycles, as you know, every year, right? I mean, depending on certain quarters where for the year end, and we tend to see a bump in the public sector sales during that quarter. And that, again, it's all as usual, I would say.

Speaker 8: opportunities there as well. So it's a good and very important sector for us with continued spending. Now of course they have their budget cycles as you know every year, right? I mean depending on certain quarters where for the year end and we tend to see a bump in the public sector sales during that quarter. But that again it's all as usual I would say. Got it. Thanks a lot.

Speaker 10: Thank you. Please stand by for our next question. Our next question comes from Alana with Wells Fargo. Your line is open. Thanks for taking the questions. I have two as well if I can. I wanted to ask about the ACV piece of the guidance. I know you talked about the macro dynamics. Looking at the high end of the guidance range, it is still down about 15 or 16 percent sequential. I know you also talked about possibly a slight decline in duration.

Speaker 10: So I'm curious, that's definitely below what seasonality looks like over the last couple of years. Is that all just macro? Is there something else that you're factoring in or maybe quantify kind of that slight possible decline in duration, just trying to unpack that guidance for ACB this quarter? Sure. Thank you, thank you, Aaron. So yeah, we were happy to be able to raise both revenue and ACB billing guidance. You're right, Aaron, that sort of half over half, I guess it does imply a decline in ACB billing, like second half over first half.

Speaker 7: And I would say one is what you already pointed out and which we talked about which is this modest elongation in sales cycles that was anecdotal in Q1. We saw it. We saw modest elongation in Q2. And so we have factored in, as I mentioned in my remarks too, some conservatism as it relates specifically to the new and expansion portion about the ACB buildings portion of the overall guide. So there is definitely that. And if you look at a year over year growth rate, I think there is still meaningful growth rate.

Speaker 10: So I understand that there's an unquantified element to this investigation dynamic. So I guess the question is, is there anything changing within the free cash flow dynamic, be it working capital, that that's changed in the back half of your guidance relative to what you saw in the first half? I'm just trying to understand why free cash flow second half versus first half down, aside from just the... I'm just trying to understand why free cash flow

Speaker 7: And then I think you've done the math right around just some of the items that we pointed out. And as we said, it does factor in the potential impact from the use of this third-party software as well, which we are not quantifying at this point. So that's how to think about the fully free cash flow guide. We don't anticipate sort of any significant material changes to working capital or anything like that for the rest of the year. Thank you very much.

Speaker 7: I think you've done the math right around just some of the items that we've pointed out. And as we said, it does factor in the potential impact from the use of this third-party software as well, which we are not quantifying at this point. So that's how to think about the fully free cash flow guide. We don't anticipate any significant material changes to working capital or anything like that for the rest of the year. Thank you very much. Thank you.

Speaker 10: Please stand by for our next question. Our next question comes from the line of Jason Ader with Whim Blair. Your line is open. Thank you. Good afternoon, guys. I wanted to ask, I think it may be confusing for folks on this third party evaluation software. I think that

Speaker 8: I think people may be wondering, evaluation of what? What are you guys evaluating with that software? Yeah, maybe I'll give you some color, right? So eval software is meant for eval use, right? So you go try it, you go try it out, but what are you using it for? You try it out and then at some point you purchase it.

Speaker 8: evaluation of what? What are you guys evaluating with that software? Yeah, maybe I'll give you some color. So, eval software is meant for eval use. So, you go try it. You go try it out for what were you using it for? You try it out and then at some point you purchase it. What we found was

Speaker 8: in some cases we were using the eval software for doing interoperability testing or customer proof of concepts validating. So that goes beyond the scope of what eval software was being used for. So the eval software, were you paying a very small amount because it was just eval software and therefore now you're going to have to pay a lot more because you were using it for things that it wasn't meant for? Is that the idea? Yeah, so we haven't quantified how much, right, but we can't get into that kind of a detail here. But yes, so you're right, right? I mean, therefore there is some additional expense required, likely.

Speaker 3: to, for the use case, in use cases that we were looking at. Okay, great. And then another question for you, Rajiv, just on this whole cloud versus on-prem debate. Specifically, are you seeing any slowdown in the migration of workloads to the cloud because of recent customer cost sensitivity just in this environment that we've been in over the last six months or so? Yeah, you know, in fact, we gave you an example of a repatriation in our prepared remarks here. Definitely, we are seeing, especially in many areas of the world now, customers are much, much more cost sensitive.

Speaker 8: in terms of looking at the cloud, the public cloud in particular, and saying, when should I go to the public cloud and for what? And they're starting to look at this whole cloud economics as a very important part. So in the example that we showed, for example, this customer is actually running a production workload in the public cloud, it was a machine critical workload, and they decided to migrate it on-prem.

Speaker 8: because they could get a better TCO, they could also get better support experience and response time from vendors by doing so. So we are seeing that definitely being much more nuanced. Now it's not going, it's not taking everything you have and going to the public cloud, it's being much more nuanced about what you put where and what it is going to cost you.

Speaker 2: Great. Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Simon Leopold with Raymond James. Your line is open. Thank you for taking the question. I wanted to see if you could maybe address the...

Speaker 12: the elongation of decision process, whether or not there's variation in this behavior between existing customers and new customers, or whether you're seeing any kind of patterns by by customer types, verticals, or something discernible like that. And then I've got a very quick follow-up.

Speaker 8: Yeah, Simon, that's a good question. I don't think we have that level of visibility because a lot of this is somewhat anecdotal and we've seen it for both new and for existing customers. Right, clearly for us, typically in the past, you know, expansion in existing customers is generally easier and quicker compared to new, right? Net new prospects.

Speaker 8: But we are seeing an elongation in deals for both. But I will also say it's a very modest elongation at this point. So it's just that, for example, just anecdotally, well, you have something that a VP may have budget for at a VP level and say, yeah, I'm going to go ahead and do it. Now it's being scrutinized at the CFO level to say, okay, do you really have to go spend this money now? Can you wait? Is there a TCO benefit that you can quantify for me quickly? So that's the kind of, I think, dynamic that we are seeing. It's hard to pass out specifically. It varies a lot by customers, but we're seeing this for both new and for expansion.

Speaker 12: Thanks, and then just the quick one is on this third party software issue. Do you have insight into whether or not this affects your cost of goods sold or the R&D line or you just don't know that yet? I guess I'm sort of trying to figure out where these charges would show up. Yeah.

Speaker 7: Thank you, Simon. At this point, given this is ongoing, Simon, we're not able to get more specific on the types of expenses or where the P&L might fall. Thank you. Thank you. Thank you. Please stand by for our next question.

Speaker 4: Our next question comes from Anana Buplu, out of China, with Bike of America. Your line is open. Hi. Thank you for taking my questions. I'm filling in for Wamsi Mohan today. Rukmini, one question for you real quick, just to clarify on the third-party software issue. Do you think that this impacts the historical, you know, last couple of years financials, and will you be restating your financials?

Speaker 14: diligently to make sure we're able to provide more clarity in all of this, but at this point, there's really nothing more I can add on the specifics. Okay. Okay, maybe one for Rajiv. You talked about customers inspecting deals more and a slight modest increase in the sales cycle. You know,

Speaker 14: When I look at the new customer ads, this quarter it was 490, which really is the lowest quarter for new ads going back to 2017. Can you talk about any thoughts on that, on the lower number of net ads this quarter? Any competitive dynamics you're seeing? Or any thoughts on FX, because you price in dollars and with the dollar strengthening recently. So how is the pricing environment and are you having to price lower? So just your thoughts on the number of new ads and the competitive dynamics that you're seeing and then pricing. Yeah, I'll talk about two of those and I'll let Rupinder comment on FX.

Speaker 8: But first of all, we are focusing on higher quality, higher ASP new logos, more so than new logo count. So we want to make sure that when we put our efforts to go winning a new logo, we make that count, right? Much more so and provides us a bigger deal, drives up our sales productivity, and also provides more expansion opportunities. So that's been our focus more so than the new logo count. The new logo count shows up in terms of what it is. It's more of a result rather than a number that we are trying to focus on in terms of trying to hit a new logo target. The second thing I would say is we are...

Speaker 7: very much holding up our prices, right? Unit prices have remained very stable and they're not going down in any way. And then the third part of it in terms of effects, Rukmini, perhaps you can comment. Yes. So, you know, Rupi, your question, I think, was that given that we denominate all of our transaction in the US dollars, is it effectively a price increase, which it is in some parts of the world, right, where the dollar has strengthened. And so what we're seeing is this is anecdotal, right? In some cases, we've seen it sort of put some pressure on the timing of some transactions, especially in the emerging markets. But overall, I think to Rajeev's point, our unit economics and overall pricing is in a good place. And so we haven't seen a sort of significant or systematic impact on that from any of these.

Speaker 14: If I can sneak one quick one in, backlog was very high coming into this fiscal year. Did you also reuse backlog in the quarter and what's the expectation for backlog for the rest of the year? Thank you so much.

Speaker 7: Thank you for the questions, Rupalu. So on backlog, yes, you're right. When we entered this fiscal year at the end of July , we did say that we had record levels of backlog. And we expect during the course of the year to use that backlog over time to get to a more normalized level by the end of the year. We did use some backlog in Q2 in line with our expectations.

Speaker 2: And again, we expect that we will continue to consume that over the course of the rest of the year. Thank you. Please stand by for our next question. Our next question comes from the line of George Wynne with Barclays. Thanks, Yelana. It's open.

Speaker 19: Hey guys, congrats on the quarter. Just maybe you can, Rajiv, unpack the service provider channel, any updates you have. Last quarter you talked about the SP channel as a news area to lend new customers. Just curious if you have any updates on this.

Speaker 8: Yeah, I think, George, we are certainly very excited about that route to market because we are relatively new, you know, in terms of our using this route to market for us. So it's a growing business opportunity for us. Last quarter, we said, you know, the largest deal in the quarter was done through that SP channel. And it's still, we're still at the very early stages in that, in that innings there. Again how this sequence looks like.

Speaker 8: And we continue to build up our service provider partners. We're trying to enhance the product capabilities to provide a very as-prod-on offering as possible. So we have, so it's a continuity, it's a journey. And it's gonna take us multiple quarters for it to start becoming a significant chunk of our business. Right now it's still a small portion of our overall business. Okay, thanks. I have a quick follow up. Just in terms of the EHD, kind of the home hypervisor, this quarter is 63% mix up two points sequentially. Can you give some colors just on the traction of your own hypervisor and how are you seeing in terms of the migration kind of from customer recession?

Speaker 8: Absolutely. And I would say it's becoming more and more important now in the context of the whole VMware Broadcom acquisition as well. Now for us, it's always been a blend. We would like to see, of course, more customers using AHV, on the one side, which of course will mean that our AHV as a percentage of our workloads keeps going up. But at the same time, we see there's a huge opportunity in terms of us inserting into other hypervisor footprints. And in fact, that's the default. It used to be, if you go back many years ago, that was our default. We would insert into somebody else's hypervisor environment, like a VMware hypervisor. So we want to continue that because there's still a huge opportunity there.

Speaker 8: So the model with customers has been, in some cases, we will go and start on top of a third party hypervisor with the rest of our solution stack. So our software plan storage, for example. And then over time, they will choose to migrate some of that to AHV. We also have a dynamic where in many new customers, they go all in with AHV from day one as well. So we have both those dynamics and we want to maintain a balance of both because we do want to of course have customers on our own hypervisor and sell them the full stack solution. But at the same time, we want to be able to go go after those customers that have other hypervisors and be able to insert into their environment as well.

Speaker 8: So I'd say, so that's the blend that we're trying to get comfortable with, but AHV overall continues to mature more and more customers using it. Ecosystem is becoming broader and broader. We have third party certifications like Red Hat and others on it now. So it's becoming, let's call it, ready for all mission critical workloads at this point. OK, great, thanks.

Speaker 8: the blend that we're trying to get comparable with. But as we overall, it's used to mature more and more customers using it, ecosystem is becoming broader and broader. We have third party certifications like Red Hat and others on it now. So it's becoming, let's call it ready for all machine critical workloads at this point. OK, great. Thanks. Thank you.

Speaker 3: Due to the interest of time, our final question comes from the line of Thomas Blakey with KeyBank. Your line is open, sir. Great. Thanks for sneaking me in, guys, and a nice quarter. I just wanted to maybe just simplify a lot of the questions that were asked about renewal trends. I mean, it's very important for hitting longer-term free cash flow targets. Could you just speak to the trend? No numbers in fiscal 22, fiscal 23, what you're seeing from a renewal opportunity, fiscal 24 to fiscal 25 to hit those targets. Is the trend moving in the right direction? I'll just start there. Better?

Speaker 7: Hi Tom, thanks for the question. So look, I think we've emphasized a few times, and I'm happy to I think clarify, I think for you Tom, it's a good question on just the overall renewal workstream. We've talked about how it's a driver both of our growth and efficiency. And it continues to perform well. And yes, we do believe it's going in the right direction, not just for health benefits, but for each hospital contribution great for identifying different sounding

Speaker 3: And given the commentary on the macro, maybe a downtick in my opinion from what I'm hearing from the last couple quarter calls here, and combined with the solid results, can we get some feedback in terms of what maybe the higher kind of net dollar retention rate was on some of these renewals? Were those numbers up and what was driving that?

Speaker 7: So I think it's your question on NRR, our net dollar-based retention rate metric, Tom? Is that the question? Yeah, from the renewals, yeah. Yeah, so thank you for that. So I think I want to first clarify that when we talk about renewals, we're purely talking only about renewals, right? It does not factor in any of the expansion. That is factored into our new expansion portion, right? That sort of incremental ACB. So when we talk about renewals, we're purely talking about renewals, right? So when we talk about renewals, we're purely talking about renewals, right?

Speaker 7: NRR to your point, Tom, we don't actually disclose on a quarterly basis. So what I will say though is if we look back to our last investor day, we had given some ranges in that 120 to 125-ish percent of the range. And it is still in that range in terms of the NRR number. And so yeah, we've also talked about how for new and expansion is where we are baking in some caution as it relates to the full year guide given what we're seeing in the business. Okay, thank you very much. Thank you, Tom. Thank you. Ladies and gentlemen.

Speaker 6: This concludes today's conference call. Thank you for your participation. You may now disconnect.