Q1 2025 Nutanix Inc Earnings Call
Hello, and welcome to the Nutanix First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode.
After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand has been raised.
To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations, Rich Valera.
Rich Valera: Good afternoon and welcome to today's conference call to discuss first quarter fiscal year 2025 financial results.
Rich Valera: Joining me today are Rajiv Ramaswami, Nutanix's President and CEO, and Rukmini Sivaraman, Nutanix's CFO.
Rich Valera: After the market closed today, Nutanix issued a press release announcing first-quarter fiscal year 2025 results.
Rich Valera: If you'd like to read the release, please visit the press releases section of our IR website.
Rich Valera: During today's call, management will make forward-looking statements, including financial guidance.
Rich Valera: These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements.
Rich Valera: These four looking statements apply as of today, and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as predictions of future events. Please note, unless otherwise specifically referenced,
Rich Valera: All financial measures we use on today's call, except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
Rich Valera: We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release.
Rich Valera: Nutanix will be participating in the Raymond James TMT and Consumer Conference in New York on December 10th and the Barclays Global Technology Conference in San Francisco on December 12th.
We hope to see some of you at these events.
Rich Valera: Finally, our second quarter fiscal 2025 quiet period will begin on January 18th.
Speaker Change: And with that, I'll turn the call over to Rajiv. Rajiv?
Thank you, Rich, and good afternoon, everyone.
Rajiv Ramaswami: We are happy to report first quarter results that came in ahead of our guidance.
Rajiv Ramaswami: We continue to see steady demand for our solutions driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives.
Rajiv Ramaswami: and looking to optimize their total cost of ownership, or TCO.
Taking a closer look at the first quarter.
We exceeded all our guided metrics.
We deliver quarterly revenue of $591 million.
and grew our ARR 18% year-over-year to $1.966 billion.
Rajiv Ramaswami: We also saw another quarter of strong year-over-year growth in new logos and solid free cash flow generation.
Rajiv Ramaswami: Our largest wins in the quarter demonstrated the appeal of the Nutanix cloud platform to organizations that are looking to modernize their IT footprints, including adopting hybrid multi-cloud operating models and modern applications, while also managing through disruption from industry M&A.
Rajiv Ramaswami: One of our largest events of the quarter was a full-stack expansion with a global provider of IT consulting services based in the APAC region.
Rajiv Ramaswami: This existing Nutanix customer expanded with us by shifting more workloads to our cloud platform and adding additional components of our portfolio.
Rajiv Ramaswami: enabling them to increase their automation and self-service capabilities while also reducing their exposure to their other incumbent infrastructure providers.
Rajiv Ramaswami: This expansion was also aimed at strengthening their go-to-market practice with Nutanix in the areas of generative AI, modern applications, and competitive migrations.
Another notable win in Q1.
Rajiv Ramaswami: was a significant expansion with a North American-based Fortune 100 provider of food services and products. This customer was looking to implement a hybrid multi-cloud environment with the intent of running more of their workloads in the public cloud and lowering their total cost of ownership.
while also reducing their exposure to our largest competitor.
Rajiv Ramaswami: They chose the Nutanix Cloud Platform, including our Nutanix Cloud Clusters, or NC2, running on AWS.
along with Nutanix Cloud Management.
Rajiv Ramaswami: This enables them to reduce their projected TCO by nearly 50%.
while also consolidating their existing data center footprint.
Rajiv Ramaswami: On the product front, we recently announced the general availability of GPT-in-a-Box 2.0.
our solution for simplifying the deployment of generative AI applications.
A key component of this offering is Nutanix Enterprise AI.
and NAA
Rajiv Ramaswami: which helps streamline deployment, scaling, and running of inferencing endpoints for large language models.
Rajiv Ramaswami: or independently on native public cloud services such as AWS EKS and Azure EKS.
Rajiv Ramaswami: These new capabilities help further our vision of becoming the leading platform for running all apps and managing data anywhere.
Rajiv Ramaswami: A first quarter new logo with the government ministry in the EMEA region demonstrated early progress with the new generative AI and modern application capabilities of our platform.
Rajiv Ramaswami: This customer was looking to modernize their infrastructure and chose a full-stack Nutanix solution to support development and deployment of their cloud-native and generative AI applications.
They chose a GPT-in-a-box 2.0 solution.
including our Nutanix Kubernetes Platform and Nutanix Cloud Infrastructure.
Rajiv Ramaswami: as well as our Nutanix Unified Storage and Nutanix Database Service offerings.
Rajiv Ramaswami: Moving on, we also continue to make progress on the partnership front.
Signing an Expanded Strategic Partnership with AWS
Rajiv Ramaswami: that will simplify cloud migrations and offer access to AWS services for customers looking to migrate to NC2 on AWS.
Rajiv Ramaswami: As part of this collaboration, customers will gain access to promotional credits from AWS to support customer migrations and proof-of-concept trials, as well as Nutanix licensing promotions.
Rajiv Ramaswami: Customers can also gain access to promotional credits for migrating VMware Cloud on AWS workloads to NC2 on AWS.
through the AWS VMware Migration Accelerator program.
Finally,
We continue to receive industry recognition in Q1.
Rajiv Ramaswami: being named a leader in the 2024 Gartner Magic Quadrant for Distributed Hybrid Infrastructure.
alongside some of the world's leading public cloud providers.
improving from our challenge position in the 2023 Magic Quadrant.
in clothing.
I am pleased with our solid first quarter results.
Rajiv Ramaswami: Our ongoing innovation on our cloud platform, particularly with respect to its support for generative AI and modern applications.
and on the progress we continue to make on partnerships.
We remain focused on delighting our customers.
while driving sustainable, profitable growth.
And with that, I'll hand it over to Rukmini Sivaraman.
Rukmini
Rukmini Sivaraman: Thank you, Rajiv, and thank you, everyone, for joining us today.
Rukmini Sivaraman: I will first discuss our Q1 Fiscal 25 results, followed by our guidance for Q2 Fiscal 25, and an updated outlook for the full fiscal year 2025.
Rukmini Sivaraman: Revenue in Q1 was $591 million, higher than the guided range of $565 to $575 million, representing a year-over-year growth rate of 16%.
The outperformance in revenue was driven by good renewals execution.
Rukmini Sivaraman: ARR at the end of Q1 was $1.966 billion, representing year-over-year growth of 18%.
Rukmini Sivaraman: We saw strength in landing new customers onto our platform, helped by more leverage from our OEM and channel partners.
Rukmini Sivaraman: from the various programs we have put in place to incentivize new logos and from a general increase in engagement from customers looking at us as an alternative in the wake of industry M&A.
Rukmini Sivaraman: NRR, or Net Dollar-Based Retention Rate, at the end of Q1 was 110%.
Rukmini Sivaraman: Expansion with existing customers was impacted largely by our U.S. federal business, for which Q1 is a seasonally strong quarter given their September 30th fiscal year end.
Rukmini Sivaraman: Our U.S. Fed business performance was lower year-over-year relative to the strong comparison from Q1 a year ago, which we believe is due to impacts from the elongated continuing resolutions resulting in lighter spending from our Fed customers.
Rukmini Sivaraman: Based on our current view, we expect our U.S. federal business performance to return to more normal levels in the second quarter.
Rukmini Sivaraman: In Q1, we continue to see modestly elongated average sales cycles compared to historical levels, which we believe is influenced by the macroeconomic environment and continued increased scrutiny on spend.
In addition, as discussed during prior earnings calls,
Rukmini Sivaraman: We believe the larger opportunities in our land and expand pipeline continue to involve strategic decisions
Rukmini Sivaraman: and C-suite approvals, causing them to take longer to close and to have greater variability in timing, outcome, and deal structure.
These factors also impact our ARR growth.
Rukmini Sivaraman: Average contract duration in Q1 was 3.1 years, flat sequentially quarter-over-quarter.
Non-GAAP growth margin in Q1 was 87.5%.
Non-GAAP operating margin in Q1 was 20%.
Rukmini Sivaraman: higher than our guided range of 14.5 to 15.5 percent, largely due to higher revenue, and to a smaller extent, due to lower expenses, including as a result of certain non-recurring payments and credits.
Rukmini Sivaraman: Non-GAAP net income in Q1 was $122 million of fully diluted EPS of $0.42 per share based on fully diluted weighted average shares outstanding of approximately 289 million shares.
Rukmini Sivaraman: Gap Net Income and Fully Diluted Gap EPS in Q1 were $30 million and $0.10 per share respectively.
Rukmini Sivaraman: Free cash flow in Q1 was $152 million, representing a free cash flow margin of 26%.
Rukmini Sivaraman: Moving to the balance sheet, we ended Q1 with cash, cash equivalents and short-term investments of $1.075 billion, up from $994 million at the end of Q4.
Rukmini Sivaraman: Moving to capital allocation, we repurchased about $20 million worth of shares in Q1 and used about $79 million of cash in Q1 to retire shares related to our employees' tax liability for their quarterly RSU vesting.
Moving to Q2-25, our guidance for Q2 is as follows.
revenue of 635 to 645 million dollars
Rukmini Sivaraman: Fully Diluted Weighted Average Shares Outstanding of Approximately 289 Million Shares
Moving to the full year, the updated
Rukmini Sivaraman: non-GAAP operating margin of approximately 16 to 17 percent, an increase from our previous guidance.
Rukmini Sivaraman: Free cash flow of 560 to 610 million dollars, representing a free cash flow margin of approximately 24 percent at the midpoint, and an increase of 15 million dollars relative to our prior initial guidance at the midpoint.
Rukmini Sivaraman: I will now provide some commentary and assumptions regarding our updated fiscal year 25 guidance.
Rukmini Sivaraman: First, we are seeing continued land and expand opportunities and a growing pipeline for our solutions.
Rukmini Sivaraman: However, as we have discussed previously, we expect continued uncertainty in the timing, outcome, and deal structure from the growing mix of larger deals in the pipeline.
Rukmini Sivaraman: And as I mentioned earlier, we have continued to see a modest elongation of average sales cycles relative to historical levels, which we believe is related to the uncertain spending environment and which we expect to continue.
Rukmini Sivaraman: Second, the guidance assumes that renewals will continue to perform well in FY25.
Rukmini Sivaraman: Third, the full year guidance assumes that average contract duration will be flat to slightly lower compared to FY24 as renewals continue to grow as a percentage of our billing.
Rukmini Sivaraman: Fourth, the Non-Gap Operating Margin Guidance assumes incremental, prudent investments in sales and marketing and research and development, targeted towards addressing our large market opportunity.
Rukmini Sivaraman: Those investments are expected to continue to ramp through the course of the fiscal year.
Rukmini Sivaraman: Finally, a note on seasonality. Based on our current view of renewals cohorts and visibility into land and expand, we expect revenue seasonality in fiscal Q3 relative to Q2 to be similar to what we saw in fiscal year 23.
Rukmini Sivaraman: In closing, we are pleased that our Q1 performance exceeded the high end of our guidance and would like to thank our employees, customers, partners, investors, and stakeholders for their continued trust in us.
Rukmini Sivaraman: We remain committed to continued progress aligned with our stated philosophy of sustainable, profitable growth, both through durable top-line growth and expanding margins.
With that, Operator, please open the line for questions.
Certainly.
Speaker Change: As a reminder, to ask a question please press star 1 1 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 1 1 again.
Speaker Change: Due to time constraints, we ask that participants please limit themselves to one question and one follow-up.
Speaker Change: And our first question comes from the line of Pinja Limbora with J.P. Morgan.
What are you hearing from customers around the VMS offering?
Speaker Change: Pinchad and Rajiv here. I think you meant VMC on AWS, correct? You said VMS. Correct, VMC. Correct. VMC on AWS. Correct. Okay. All right. So clearly I think that seems to be an offering that Broadcom is not focused on as much.
Speaker Change: and it's created an opportunity for us for sure and customers are concerned as to what might happen with their offering. For example, the GoCloud version of that offering, the government cloud version, was apparently deprecated by Broadcom.
Speaker Change: So, this is one of the impedances for the expanded partnership that we have with AWS.
Speaker Change: where we are working together with them to provide easier migration for customers from VMC on to NC2 on AWS.
Speaker Change: We talked about one of the events last quarter, actually, leading universities that actually went.
Speaker Change: and did exactly that. And anyway, so this is really one of the impedances why AWS is partnering with us. They're offering migration credit. There's a Migration Accelerator Program and we're working together to help customers who might be interested in migrating off that offering onto something else in the public cloud.
Speaker Change: Yeah, understood. One for Rukmini. Rukmini, I'm trying to understand the guidance. Seems like a very solid Q1 beat. You took the Q2 numbers up, but the second half seems like it's an implied guide down because you didn't take the full year number up.
So I'm trying to understand, is that just...
Prudence, caution around what you're seeing on the sales cycles.
Speaker Change: Were there any deals that kind of moved from the second half into the first half that changed the seasonality a bit? And lastly, do you think we're close to a trough on NRR?
Pendulum: Thank you, Pendulum. Both good questions. I'll start with your revenue guidance first. So yes, we were happy with our Q1 revenue performance.
Pendulum: But we are only one quarter into the fiscal year and given the uncertain environment Including that related to a new administration in the US We think it's prudent to maintain our full year top-line guide Until we have a better view of how the rest of the year is going to play out
Pendulum: strategic decisions, more approvals, and causing them to take longer to close and to have greater variability in deal structure, outcome, and timing.
Pendulum: And finally, from a seasonality perspective, we've historically seen a fairly even split in revenue between the first half and second half of the fiscal year. So our current expectations aren't that different from what we've seen historically.
So that's on the revenue top line guidance.
Speaker Change: Benjalem, I think your second part of the question was around
NRR
Speaker Change: So a few things on NRR. First, I will say that given that our GRR, while we don't disclose it, we've said in the past that it has not changed significantly relative to recent levels.
Speaker Change: of Net New ARR is land and expand ACV, right? And your question specifically is on NRR, which does not, for example, benefit from the strengths that we saw in our land. So I wanna first start by clarifying that.
Speaker Change: And we did see some divergence there between sort of the strength and our land performance. Now, with respect to Xpand, with existing customers, Xpand accounts for the majority of our land in Xpand.
Speaker Change: which was impacted largely by our U.S. Fed business, which was lower year over year relative to the strong compare we had from Q1 a year ago.
Speaker Change: which we believe is due to the CR, the continuing resolutions in the U.S.
Speaker Change: And so all the dynamics we talked about on large sales cycle, larger deal sizes, elongated sales cycles, all of that does impact expand as well.
Speaker Change: So that all did going to the NRR number. Now I think your question was around, is this the, is this we hit sort of the low point for NRR. We don't guide to NRR, as you know.
Speaker Change: But we do expect that NRR will be impacted by some of these factors that we've talked about, like the sales cycles and the mix of large deals, when we expect some of that to continue. So that we believe is the case, but we don't explicitly guide to NRR.
Thank you.
Speaker Change: And our next question comes from the line of Amita Marshall with Morgan Stanley.
Speaker Change: Great, thanks. Maybe following up on the federal piece, you know, you noted in the script that you expected kind of fiscal Q2 to be better. I would expect you would need the administration change. So maybe you wouldn't expect kind of a
Speaker Change: federal to improve until fiscal Q3, but just wanted to kind of listen about what went into that commentary or if you could explain that more. And then maybe just a second question, just any update on.
Speaker Change: kind of timing of Dell PowerFlex integration, just anything there would be helpful. Thanks.
Speaker Change: So, Amita, on the federal question, I mean, we don't have visibility in terms of what the new administration is going to do.
Speaker Change: or not do. So we can't really talk about what's going to happen after the new administration comes in. So we have a near-term view on Q2, of course, which we factored in, and that's why we feel comfortable about our federal business coming back to more normal levels in Q2 based on what we know today.
Speaker Change: and of course, we'll have to see what the new administration does after they come on board.
Speaker Change: Now on the the Dell questions specifically. So, as you know, Amita, there's two parts to the Dell.
Speaker Change: relationship. One is the existing hyperconverged solution that we have, which will be an appliance sale by combining our software on their servers. That's been in the market now this quarter, and it's still early days for that.
Speaker Change: Your question on PowerFlex, we expect to have that in the market in the first half of calendar 25.
Speaker Change: and we expect to see some revenue contribution from it in FY26.
Thank you.
Speaker Change: Our next question comes from the line of Jim Fish with Piper Sandler.
Speaker Change: Hey guys, I did want to build off of Mita's questions and pendulums there a little bit.
Speaker Change: Can you just remind us how big this this federal vertical can be for you guys here in fiscal Q1 versus kind of what you saw here and what the actual impact of net retention rate was like are we talking about a point or two difference that we would have seen versus the 110 or how to kind of quantify that?
Thank you. Thank you.
I'll take that, Jim. So.
Speaker Change: First on quantification of Fed, we don't disclose that, Jim, but as you can imagine, and we've said this before, that for our Q1 is typically the seasonally strongest quarter given it's also the federal year-end, you know, which covers September 30th. So we don't disclose that number, Jim, but that is Q1 is our strongest Fed
quarter.
Speaker Change: And similarly, right, we're not going to break out NRR impact by Fed or by any other sort of segmentation at this point. But we did see the fact that overall Fed and Expand specifically was lower than last year, was a challenge for us in Q1 relative to what we saw last Q1, which was a strong, strong compare.
Go ahead.
Speaker Change: And Rajiv, maybe for you, I think we're all kind of anxious.
into other storage arrays. Obviously, you just talked about the...
Speaker Change: calendar first half of 25 seeing Dell PowerFlex, but how should we start thinking about Nutanix's relationships of getting standalone AHV integration into some of the other providers out there, and you know, why we wouldn't start to see that AHV attach go from 74% today to, you know, faster to 100. Thanks guys.
Speaker Change: Yeah, I think those are two different questions there, Jim. I think on the first question, clearly the only one that we've announced so far has been the Dell PowerFlex relationship.
Speaker Change: As you can imagine, we do have plans to expand that selectively to other storage arrays over time.
Speaker Change: I'm not going to pre-announce anything right now, but you can assume that we are working on that in a very careful way.
Speaker Change: At the same time, we also want to make sure that whatever we do is actually, you know, focusing on expanding the market opportunity for us.
Speaker Change: and doesn't cannibalize the existing HCI opportunity. So we are focused.
Speaker Change: specifically I'm working with storage array vendors that are you know workloads that would not necessarily be easier to capture with HCI because the workload we can capture with our own HCI platform we would like to do that with the full stack and over time even for those that we do go in our goal is to sell the full stack over time.
Speaker Change: So, stay tuned. I mean, we, of course, you know, will continue to explore other options in the market when it comes to other storage arrays. And you can, you know, we don't have anything more to say at this point, but the idea is to start with Dell and then over time expand to others.
Speaker Change: With respect to your question on AHV penetration, again, I think our philosophy has always been we support multiple hypervisors, and there's been a natural cadence to by which the AHV adoption has continued to grow, and we are still at where it is.
Speaker Change: I don't necessarily need it to be at 100% frankly, but our goal is to increase the AHP footprint because we also want to be able to insert into VMware accounts.
Speaker Change: where our platform is running on top of ESX, the VMware Hypervisor, and we continue to support that going forward as well. But we would, of course, like to see more and more customers start to migrate over to our AHP footprint and having, of course, third-party support, third-party storage support will only help amplify that.
Thank you.
Speaker Change: And our next question comes from the line of Jason Ader with William Blair.
Thank you. Hey, guys.
Speaker Change: So when I look at the second half and you gave basically guidance revenue per quarter for the second half, but then looking at the operating margin for the year, you raised that only slightly after having, you know, pretty significant outperformance in Q1 and also guiding to, you know, pretty robust operating margin in Q2. So that
implies the second half is going to be
Speaker Change: kind of way down on the operating margin. And I know you said you're going to be ramping expenses, but just want to make sure that there's nothing kind of idiosyncratic to the second half that we're not thinking about.
Speaker Change: And then, can you talk about where that ramp up in spending is going to come? You said sales and marketing and R&D, but could you be more specific within those buckets?
Hi, Jason.
Speaker Change: First on operating margin, so you're correct. So first I'll start with revenue. What we said was, you know, I think in response to an earlier question, that our implied revenue split, first half to second half, is roughly even based on the guide and that's similar to our historical patterns.
Speaker Change: while we expect operating expenses, on the other hand, to grow over the course of the year, much like it did last fiscal year.
Speaker Change: So, to your point, you're correct that we will expect to see lower operating margins in the second half of the year, in fiscal year 25. However, overall, we still expect to see year-over-year improvement in operating margin for the full fiscal year, relative to fiscal year 24.
Speaker Change: And then to the second part of your question on where are we spending those dollars. So first in R&D, you know, we have
Speaker Change: talked about investing, for example, in these AHV stand-alone to support the stand-alone storage arrays. So that's one area of R&D investment. Some other examples include we have ramped up our offerings around cloud-native or containerized applications.
Speaker Change: That's another area, generative AI, plus our core enterprise platform, right, so the platform and making sure that it continues to evolve. So even within our core platform, there are innovations that we continue to drive. So that's on the R&D side, some examples of where we're investing.
Speaker Change: On the sales and marketing side, we have talked about some investments we've made, some we made last year and some we'll continue into this year, for example, around product specialist sellers, folks who are focused on selling our entire portfolio and helping our main field sellers go do that.
Speaker Change: We have increased some investments around the channel, as another example. Some inside sales folks who can be focused on driving
Speaker Change: both expansion and land around the more mid-market tier. So those are some examples of areas that we're investing in both fields of marketing and in R&D.
Rajiv Ramaswami
Okay, great. Thank you. Thank you.
Thank you.
Speaker Change: And our next question comes from the line of Wamsi Mohan with Bank of America.
Speaker Change: Hi, thanks for taking my questions. It's Ruklu filling in for WAMSI today.
Rukmini Sivaraman: Rukmini, the renewables business has been strong. How should we think about the growth and available to renew pool in fiscal 25 versus fiscal 24?
Rukmini Sivaraman: And is there any danger that renewals kind of fall off a cliff in fiscal 26 or is there a large enough cohort of customers who are going to renew in fiscal 26 that, you know, that strong growth in renewals continues and it grows as a mix of the business? So just your thoughts on available to renew pool and how you see that business continuing to grow.
Rukmini Sivaraman: Thank you, Ruklu. So you're correct that we did talk about renewables doing well for Q1. In terms of ATR for
Rukmini Sivaraman: Full year fiscal year 25. I think we referred to this in our last earnings call when we gave you all the initial guide for fiscal year 25
Rukmini Sivaraman: But yes, we expect that growth and available to renew for our renewables cohorts to continue for the next couple of years.
Speaker Change: Okay. Thanks for that. And maybe for my follow-up, I'll ask you another question. Free cash flow in fiscal 1Q was very strong. It was $152 million, which I don't think over the last three, four years you've had such a strong 1Q. Were there any one-time items? I know last quarter you had said that you might get from a partner, I think you had said $30 million benefit for the full year in terms of free cash flow. So any guidance on how we should think about the progression of free cash flow first half versus second half in this year?
Speaker Change: Thank you, Rupalu. We were happy with our free cash flow performance in Q1, as you allude to.
So nothing
Rukmini Sivaraman, Richard Valera, Rajiv Ramaswami
Speaker Change: Rupalu, there wasn't any one thing I would call out, you know, for example, in Q4, in our July quarter, we did call out there was one significant...
Speaker Change: deal that we collected in that quarter, for example, there was nothing like that that I would call out for.
Q1
Speaker Change: And more generally, I think when you think about just I think the rest of the year, part of your question is 152 was a strong Q1, and our full year guide is 560 to 610. And so I'll just remind you that one, expenses are going up, expected to go up for the rest of the year. So keep that in mind. Those expenses will ramp over the course of the year, much like they did last fiscal year.
Speaker Change: So, factor that in, and we do collect multiple years of cash from our customers, typically up front.
Speaker Change: And so that does mean that depending on duration or depending on some larger deals, there can be some variation quarter to quarter in that number, which is why we continue to guide for free cash flow really on an annual basis.
only.
Thank you.
Speaker Change: Our next question comes from the line of Mike Zekos with Needham.
Thank you.
Speaker Change: Hey guys, thanks for taking the question here. I'm gonna ask a boring one on guidance and build on some of the line of questioning that Mr. Ader was going after on the operating margin and operating profit.
Speaker Change: But I just wanted to get a better understanding. Congratulations on the 20% operating margin we're seeing here in Q1.
Speaker Change: Is the view for FOTIA in any way informed, like, are we potentially behind on hiring versus where we expected to be exiting Q1? Or are you potentially...
Speaker Change: increasing your view of additional investments in sales and marketing and R&D, because I know that's something that we've plagued on the previous quarter, just wanted to wrestle those two items.
Speaker Change: Thank you, Mike. Always welcome the boring questions on the guide.
Not at all boring actually. It's very, very practical.
Speaker Change: spend and our planning cycles, Mike. So we're coming out of our planning cycle. And so as we deploy this, again, similar to last fiscal year, some of this will be ramping over the course of the year. So that is, it has been the plan. And so you'll continue to see that this year relative to last year, right? So there's nothing
Speaker Change: Unusual or different necessarily that I would call out other than of course as we hire people in Q1 or Q2 they might be there for partially for that quarter, but then for the next quarter. They're there for the full quarter Right, so there's that
Speaker Change: almost normalization that happens over the course of the year. And so that's what's baked into the op margin guide for the full year relative to what you saw in Q1.
Speaker Change: Thank you for that. And then just one other, if I could.
Speaker Change: I know that we're and I appreciate the commentary here as well as far as the Q2 versus 3Q seasonality on revenue
Speaker Change: We just wanted to make sure I'm thinking about this properly, even if I go back.
Speaker Change: beyond last year, two years ago, we tend to see COLA at 7% to 8%, 7% feels about right, as far as the sequential decline in revenue from Q2 to Q3. And I just, I appreciate your qualitative comments, but if you could further elaborate on that.
Speaker Change: what is driving that seasonal commode? Is it really tied to year end in Q2 and then maybe the sales incentive comp for your sales force in Q4? Is that why we should be thinking about that Q2 to Q3 sequential movement that we're talking to?
Speaker Change: You're exactly right, Mike. So historically, if you look at our performance, Q2 and Q4 tend to be seasonally stronger quarters from a top-line perspective, exactly for the reasons you outlined, because Q2 has the December year-end.
Speaker Change: and Q4 has our end of fiscal year and therefore some sales incentives tied to a strong finish there.
Speaker Change: What has happened also is, as we now have the renewal cohorts layering in, they tend to follow, similarly, the land and expand performance in the past, because they're just reflective of deals that were signed and when those renewals
Speaker Change: come due. So now we have the impact of historical land and expand, but the renewables cohorts are also following that pattern. So we just wanted to remind folks of that going into Q3 and give you a sense of qualitatively what to expect relative to the Q2.
guide.
Thank you.
Speaker Change: And our next question comes from the line of Ben Bolin with Cleveland Research Company.
Speaker Change: Good afternoon, everyone. Thanks for taking the question. Rajiv, I wanted to get your perspective, a bigger picture on enterprise refresh behavior, in particular around
Speaker Change: How you see customers evolving around three-tier versus HCI and any thoughts on the pace and rate of enterprise on-prem AI deployments?
Rajiv Ramaswami: Yeah, I think those two questions separately. I don't think then that much has changed with respect to three-tier versus HCI
Rajiv Ramaswami: We still continue to validate the proposition of 40-50% lower TCO if you replace your three-tier with HCI. And it also provides you the platform to really expand into becoming a hybrid cloud, which is what companies want. And so over time, I do expect to continue to see HCI gain into this legacy three-tier offering.
Rajiv Ramaswami: So, that part hasn't really changed, the dynamics really haven't changed. Of course, it's usually tied to a hardware refresh cycle because that's when you refresh your storage arrays.
Rajiv Ramaswami: and instead of refreshing storage is what we tell customers when they just buy simple servers and put HCI on it.
So no change really on that front.
Rajiv Ramaswami: On enterprise AI, what we see again is that the bulk of the spend so far has been not really in the enterprise, but in these large hyperscalers as they build out these massive clusters to train these large language models, with huge investments from a small handful of very large providers.
Rajiv Ramaswami: So we see that for sure. Now within the enterprise, most enterprises are, I would say, in the early stages of deploying generative AI, largely for RAG or Retrieval Augmented Generation and fine-tuning and inferencing.
Rajiv Ramaswami: They're not going to train these models, they're going to use models that are pre-existing and then use them to drive inferencing, but more cost-effective smaller clusters.
Rajiv Ramaswami: We think that that segment of the market is in its early stages. We have seen the first set of applications come about. Even this quarter, as you know, we talked about this government customer in India that's starting to use our GPT 2.0 offering.
Rajiv Ramaswami: I would say most enterprises are in the early stages of adoption, including ourselves.
Rajiv Ramaswami: where we are targeting to see things like a 25% productivity gain for our developers.
All improvements in how we manage legal contracts.
So
companies looking at fraud detection.
Rajiv Ramaswami: These are the kind of use cases that we're starting to see emerge. But I would say it's in the early days. Most enterprises are only now getting into the act of trying to build these applications. And I do think that this space is going to continue to grow over the next few years, but it's still largely incubation at this point in the enterprise.
Speaker Change: That's great. And Rukmini, if I could, in the past you had provided some perspective on the growth of 1 million plus deals in your pipeline relative to the remainder of the business. Curious if you have any updates on that metric exiting the quarter. Thanks.
Rukmini Sivaraman: Thank you, Ben. I will say we are continuing to see nice growth in our pipeline, including for the larger deals that we've talked about before, Ben. We're not updating those metrics specifically on a quarterly basis.
Rukmini Sivaraman: But yes, we are seeing continued interest and engagement and growth in pipeline from those million-plus cohorts and more generally.
Thank you.
Speaker Change: And our next question comes from the line of Simon Leopold with Raymond James.
Hi guys, this is Victor Chui for Simon Leopold.
Speaker Change: I wanted to drill into your commentary around the increased customer engagement from VMware base and, you know, maybe help us understand if this was an incremental acceleration relative to what you were previously observing and, you know, if so, maybe help us understand what's driving that and if you expect that to continue.
Speaker Change: So, Victor, the market continues to be dynamic, but from our perspective, it's still largely unchanged, you know, in terms of our opportunity, multi-year opportunity to gain share.
Speaker Change: So we haven't seen a significant change in that this quarter compared to the last several quarters, really. And we haven't seen any real meaningful changes in our win-loss rates either on these opportunities.
Speaker Change: I'll say what we've already said before, right? A lot of these deals.
They are tied to
Speaker Change: You know, VMware customers, their yearly renewal cycles, they try to win the install base.
Speaker Change: you know, it's coming up for a hardware refresh, although we are also expanding our ability to capture, you know, to have our solutions work on existing hardware, like for example, the three-tier work that we're doing with Dell, or like continuing to be able to deploy our software on already existing VMware HCI customers.
Speaker Change: And of course, you know, it's a dynamic market in the sense that sometimes we'll see aggressive behavior from Broadcom as well to keep those customers, especially the very large ones.
So, really, I would say, net-net, nothing much has changed.
Speaker Change: Okay and you know if an organization decides say that they wanted to move away from VMware you know kind of on average how long is that transition typically you know kind of what are the steps involved that that you know yeah required for a customer to do something like that. Correct, it depends on the scale and complexity of their deployment so if they are for example I'll give you the two bookends
Speaker Change: So on the on the small on the easy side if they're just largely just a vSphere customer and they're willing to replace their hardware It's a very easy migration We can migrate that within a month or two off in the relatively small scale a lot of that is automated as well
Speaker Change: Same goes for public cloud to public cloud. There was a question earlier about VML cloud on AWS. Those offerings are actually very easy to migrate. Again, within a month we can have those customers off and on to Nutanix software.
Speaker Change: But at the other end of the spectrum are the large customers that use multiple VMware products with massive estates.
Speaker Change: and there it can be many years, it can be three years to do a migration.
Speaker Change: Just because they can't migrate all of it at once, there is a requirement for professional services engagement to convert over some of their more complex custom scripts that they have written and custom investments they've made on top of the VML portfolio.
Speaker Change: So those migrations tend to be more complex, require professional services.
and take a few years.
So there's an entire spectrum across those.
Speaker Change: do you have maybe kind of a general ballpark kind of estimation of you know what what percentage is the easy you know kind of quote-unquote low-hanging fruit and what you know yeah I would say if you look at with the exception of I think if you go to a large tier one big global account those are the ones that are difficult right the vast majority of smaller customers are going to be more on the easy side
Thank you.
Speaker Change: Our next question comes from the line of Matt Hedberg with RBC Capital Markets.
Speaker Change: Great. Thanks for taking my question, guys. Hey, I just wanted to ask, you know, obviously it sounds like the federal business had some headwinds. Maybe just a simple question, but, you know, Rajiv, you know, did the enterprise business, do you think it deteriorated from a demand perspective versus last quarter? Because it seems like good results, but just trying to get a finer point on sort of like your thought on enterprise spending today versus maybe 90 days ago.
Speaker Change: Yeah, Matt, clearly we saw the softness in Fed for sure. We saw it, that was a very clear cut. The broader enterprise, we've actually, again, been doing quite well at landing new logos and people migrating. But of course, some of that is perhaps due to just what's happening with the Broadcom situation.
So we...
Speaker Change: haven't seen a decline in enterprise spend or a less willingness to spend. What we have seen, and we've been talking about this for multiple quarters, Matt, is a lot more inspection going on on the spend and a lot more approvals being required higher in the food chain, looking at TCO more carefully, which, of course, plays to our benefit somewhat because, you know, what we talk about in this environment is how we can reduce TCO.
Speaker Change: So that dynamic has been going on now for several quarters. We haven't seen much of a change. So NetNet, I would have to say with respect to broader enterprise demand, we haven't seen a change this quarter compared to the prior quarters.
Speaker Change: Got it. That's very clear. Thanks. And then maybe another sort of, I guess, macro question for Rukmini. Obviously, it's not your year-end, but do you typically see a December budget flush from Enterprise? I can't imagine you're baking that into guidance, but just kind of curious on historically, do you see customers...
Speaker Change: you know, kind of spend it or lose it mentality when it comes to December, your calendar year end?
Speaker Change: I mean certainly sometimes right I mean if you know they may have a budget that's available for this year we've seen that in the past we probably will see some of that this year as well right I mean I think
Speaker Change: They do have I mean if your company is on that calendar cycle, yeah, you probably will have some budget to spend
Speaker Change: But again, I would not say, I mean, we factor whatever we can see into our guide for Q2.
Speaker Change: So nothing really different this year compared to prior years. And so typically we see a seasonal increase in Q2 compared to Q1. And that's driven in part by the fact that what you alluded to, Matt, but people spending at the end of the year.
Thank you.
Thank you.
Speaker Change: And our next question comes from the line of George Wang with Barclays.
Speaker Change: Hey guys, thanks for taking my question. I just have two quick ones. Firstly, can you kind of double-click on in terms of the channel incentives?
in place.
Speaker Change: kind of what has changed versus three months ago, you know, in terms of providing the promo and the incentives to the channel, especially against the backdrop of maybe overlapping Nutanix and VMware contracts.
Speaker Change: Yeah, I mean this is a few months ago that we made the change nothing no recent changes by the way on the channel side we
Speaker Change: we made that going a while ago. But what we did, we did a couple of things there, George. First thing we did was we took a subset of our customer base, our target prospects, and handed them off entirely to the channel to go drive.
Speaker Change: And so we don't have our reps on those accounts. We leave it to the channel. And we provided more incentives to those channel partners to bring us business. So we have incentives in place for channel partners to bring new logos to us.
Speaker Change: in terms of rewards, that they will get more rewards when they bring new logos to us.
Speaker Change: We are also committed to the channel in the sense that all our deals.
Speaker Change: And so we've seen, certainly, as a result of all of that, a significant increase in channel partner engagement with us over the last year or two. Some of it is, of course, just what they're seeing with Broadcom, more channel partners coming to us. Some of it is our own incentives that we are offering for them.
Speaker Change: And we also have incentives for the end customer as well, right? So, for example, to help them tidy over migrations, we can offer them free licenses for a period of time to help them, while they're still spending money on VMware, to get going on our products until they're ready to go migrate fully over.
etc.
Speaker Change: Okay, just a follow-up if I can, just in terms of repatriation, just kind of being a theme which benefits Nutanix, just curious if anything has changed.
versus Las Plutas.
Speaker Change: Yeah, in terms of cloud repatriation, I would say we haven't seen like a massive repatriation of workloads coming back from the public cloud. We see some of that here and there, right? That's where I would characterize it. Nothing has changed compared to past quarter. But I think what we see is, again, nothing has changed. There is
Speaker Change: people are much more careful about what they go put in the cloud. So keep in mind that the vast majority of enterprise workloads are still on-prem, not in the public cloud, and now CIOs are being more circumspect about what to use the public cloud for. For example, there's a realization that if you have steady state workloads
Speaker Change: Those workloads can be run more efficiently on-prem than in the public cloud. And so this CIO is therefore saying, well, I'm going to keep that workload on-prem, I'm not going to move that to the public cloud. So that's what we're seeing.
Thank you.
Speaker Change: And our next question comes from the line of Nihal Chokshi with Northland Capital Markets.
Speaker Change: Thank you and congrats on this really strong new logo, up 50% year-over-year. That's really impressive.
But though why is ARR decelerating given this
Speaker Change: strong land that you're seeing. And then if I look at the incremental ARR, i.e. to change quarter or quarter for the October quarter,
Speaker Change: relative to the year ago quarter, that was down a lot as well. So thoughts on why are there such a weak incremental ARR characteristics, especially given the backdrop that you're having such strong land metrics.
Speaker Change: Hi Nihal, thank you. So a few things to I'll start with on your point about net new ARR. So
Speaker Change: One of the biggest drivers of net new ARR, which is simply, as you pointed out, the difference between ARR in this quarter versus the prior quarter, is land and expand ACV, and given that our GRR has not changed significantly relative to recent historical levels.
Speaker Change: And so when you think about land and expand, we did see some divergence as you point out in the performance of the land versus the expand portion of our business. So we saw strength in the new customers and we've talked about why that is and so really happy with that performance.
Speaker Change: expansion with existing customers, which actually accounts for the majority of the land and expand.
Speaker Change: was impacted largely by our U.S. federal business, Nihal, and we've talked about, you know, why we believe that to be the case.
Speaker Change: And so, and overall, by the way, right, we've talked about these larger opportunities in our land and expand pipeline, which are taking longer to close and have data variability and timing outcome and deal structure. So all of those factors also do impact our ARR growth.
Speaker Change: So that's how to think about just ARR and net new ARR.
Great, thank you. Thank you, Nihal.
Thank you.
Speaker Change: And our next question comes from the line of Michael Svetonov with Wells Fargo
Speaker Change: Hi, guys. Thanks for letting me ask a question. I'll ask one on behalf of Aaron.
Speaker Change: I just want to ask about GPT 2.0 or GPT-in-a-box 2.0 solution. I'm just curious as you think about, I guess, the positioning of that in the marketplace relative to kind of a full stack or three-tier architecture with NVIDIA's AI Enterprise software suite.
Speaker Change: how do these differ in terms of where they sit in the market? And I guess, do you see opportunity to maybe move up market as these solutions mature going forward?
Speaker Change: Yeah, I mean some of that is also a difference between training and inferencing. We are largely with GPT-in-a-Box focused on inferencing.
Speaker Change: focusing on smaller clusters, not massive compute farms to train models.
smaller clusters that enterprises can use.
Speaker Change: to deploy more cost-effective AI inferencing applications. I'll give you one example.
Speaker Change: was a customer service use case where incoming service requests from a customer, support ticket, the support engineer actually has a natural language interface, a search interface through which they enter the query and then we look through all our knowledge bases to try and accelerate the ability to answer the issue.
Speaker Change: and that AI application is running on just a small cluster, okay, using an open-source large-language model.
and that's the kind of apparatus running on GPT-in-a-Box internally.
Speaker Change: and that's the kind of use case that we're enabling for the enterprise where you have your secure data, you want to do your inferencing on it.
Speaker Change: existing models that are already pre-trained, but fine-tuned with your use cases. So that's a cost-optimized solution, and by the way, we are partnered with NVIDIA on that, because we work together with NVIDIA's inferencing solution, as well as, of course, using their GPUs to do all the hard work needed here.
Speaker Change: So, again, I just think we want to distinguish between inferencing on small clusters, which is mostly what we do, versus training on very large clusters.
Speaker Change: Okay, that's helpful and if I can sneak one more in just as we think about an improving through a traditional server You know and demand environment and we think about refresh cycles
Speaker Change: Obviously, that presents an insertion opportunity for you guys, you know, within three-tier architecture. So, I'm curious, with the new partnerships with Dell and Cisco, you know, have you seen your win rates at all changing, or do you, you know, anticipate those improving, given your kind of broader ability to enter those deals?
Speaker Change: Yeah, first of all I think having Cisco and Dell selling our products is of course positive for us.
Speaker Change: And Cisco has been a good contributor to our new logos this quarter as well as last quarter. Dell is still, I think, very early days for us. And that's independent of the server refresh cycle or not, right?
Speaker Change: Second, I would say, with respect to refresh cycles, yes, server refreshes will help, but also storage refreshes are important, right, because that's when we get the opportunity to displace those three-tier architectures with HCI footprint.
Speaker Change: So both matter. I think having Dell and Cisco as friends in the market, of course, significantly helps. And at the same time, you know, the refresh cycles, more so I would say storage refresh than server refresh, will help us insert HCI into existing CTA deployments.
Thank you.