Good day and thank you for standing by. Welcome to Nutanix’s Fiscal First Quarter 2023 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Rich Valera. You may begin.

Good afternoon and welcome to today’s conference call to discuss the results of our fiscal first quarter of 2023. Joining me today are Rajiv Ramaswami, Nutanix’s President and CEO; and Rukmini Sivaraman, Nutanix’s CFO. After the market closed today, Nutanix issued a press release announcing financial results for its fiscal first quarter of 2023. If you would 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 hereon successfully and in a timely manner and the benefits and impact thereof on our business, operations and financial results, 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, macroeconomic, geopolitical and industry trends, including global supply chain challenges and the current and anticipated impact of the COVID-19 pandemic and related effects. 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. For a more detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K for fiscal year ended July 31, 2022 as well as our earnings press release issued today. These forward-looking statements 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 representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today’s call, except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Lastly, Nutanix management will be participating in the Raymond James Technology Investors Conference in New York on December 6 and the Barclays Global TMT Conference in San Francisco on December 7. Nutanix will also be holding an Investor Day in New York City on Tuesday, April 4, 2023. So please save the date and we’ll be following up with more details in the coming weeks. And with that, I will turn the call over to Rajiv. Rajiv?

Thank you, Rich and good afternoon everyone. Against a volatile macro backdrop, we delivered a good first quarter. We exceeded all of our guided metrics and saw continued strong performance in our renewals business. Supply chain constraints with our server partners while remaining a headwind improved somewhat compared with the prior quarter. With respect to the macro backdrop, in our first quarter, we continue to see businesses prioritizing their digital transformation and data center modernization initiatives enabled by our platform. We have seen anecdotal evidence of increased inspection of deals by customers, which we believe is likely related to the more uncertain macro backdrop. We continue to factor this uncertainty into our outlook for the remainder of the fiscal year. Taking a closer look at the first quarter, we delivered ACV billings and revenue above our guidance, driven by strong continued performance of our renewals business. We again demonstrated good expense management coming in slightly below our OpEx targets. Top line outperformance, combined with diligent expense management, enabled us to achieve positive non-GAAP operating income for the first time, another milestone in our drive towards sustainable, profitable growth. Finally, strong billings linearity and collections contributed to generation of $46 million of free cash flow, meaningfully exceeding our breakeven target and continuing our strong recent free cash flow performance. Overall, I am pleased with our financial performance in the first quarter. Our first quarter is typically a stronger one for our federal business and this one was no exception. Our largest customer in the quarter was a federal civilian agency that was already a significant user of Nutanix’s cloud platform, including our unified storage and database automation solutions as well as Nutanix Cloud Clusters or NC2, on AWS for bursting additional resource capacity into the public cloud. This customer added additional…

Thank you, Rajiv. I will first walk through our Q1 results, followed by our outlook for Q2 and then finally, provide an update on our fiscal year ‘23 outlook. Q1 ‘23 was a good quarter with results that came in better than our guidance and across all guided metrics. ACV billings in Q1 was $232 million, higher than our guidance of $210 million to $215 million and representing a year-over-year growth of 27%. A significant majority of that growth came from growth in renewals billings. Revenue in Q1 was $434 million, higher than our guidance of $410 million to $415 million and a year-over-year growth rate of 15%. ARR at the end of Q1 was $1.281 billion, a year-over-year growth of 34%. New logo additions were about 530 in Q1. Contract duration decreased quarter-over-quarter to 3 years as expected, partly due to a seasonally higher mix of U.S. federal business that typically has shorter contract durations. As described previously, the percentage of orders with future start dates continue to be a key assumption in our Q1 guidance. This percentage came in lower than it was in Q4 ‘22 and slightly below our expectations. Q1 revenue also benefited approximately $12 million from the improvement in percentage of future start dates from Q4 to Q1 as more license revenue was recognized in quarter than deferred. Non-GAAP gross margin in Q1 was 83% because of our higher-than-expected revenue performance. Non-GAAP operating margin in Q1 was positive 2%, our first quarter of positive non-GAAP operating profit and a proof point of our ongoing focus on profitable growth. Non-GAAP operating expenses in Q1 were $351 million, better than our guidance of $360 million to $365 million, and included about $2 million of benefit from favorable currency exchange rates in the quarter. Non-GAAP net income was…

Thank you. [Operator Instructions] Our first question comes from the line of Jim Fish with Piper Sandler. Your line is open.

Hey, guys. Great quarter in the wake of this kind of macro environment, and that gets me to my question of why has demand for hyperconverged really remains strong in this kind of difficult macro spending environment? And really, the crux of my question here is how much of the current strength in numbers here is due to that backlog build and deferral from fiscal Q3 of last year versus what you’re booking during this quarter?

Yes, Tim, thank you for the question. Rajiv here. First of all, I think, as we’ve said, we’ve got a good, strong and growing base of renewals. And that’s performing well and that certainly helped reduce the risk in the model. And as we did say, we have taken into account a little bit of this uncertainty in the macro environment in our guidance. We have built some conservatism in terms of IT spending. And I wouldn’t necessarily say that HCI is completely immune from a potential slowdown in IT spending. But HCI per se produces better TCO compared to legacy architecture, and it’s a foundation for the hybrid cloud. So from that perspective, customers can actually save money by moving to HCI from traditional legacy architectures. So so far, when you look at the macro again, we’ve seen greater inspection of deals by some customers, which could potentially lead to an increase in sales cycles but we have factored this into our guidance.

And I’ll take the backlog portion of that question. Hi, Jim, so as you point out, we had noted when we announced our fiscal ‘22 results that we ended fiscal ‘22 with a record level of backlog, which, combined with our growing base of renewals, as Rajiv said, provided a foundation for our growth in fiscal ‘23 and helped overall reduce the risk inherent in our forecast. So in the first quarter, consistent with our expectations and consistent with typical seasonality, we did use some backlog. And the only other comment I’d add is that given the unusually high level of backlog we entered the year with, I think some of which was related to our partners, supply chain issues, we would expect that over the course of the year, we would likely consume some backlog.

Makes sense. And if I could sneak in one more. Rajiv, a bunch of your customer commentary kind of focused on around cloud and trying to understand how much of the focus on customers is about optimizing cloud spending and how much that is helping Nutanix this past and current quarter as that’s one of the biggest line items for IT spending? Thanks, guys.

Yes. And again, that’s a good question. Increasingly, more and more of our conversations with our customers are around how can we efficiently help them operate in this multi-cloud environment. Many of our customers have looked at public cloud. They have moved to the public cloud in portions and they are also realizing that it can be expensive. And so what we tell them is that we can actually help them take their existing workloads and move it and run it very efficiently in the public cloud, and we can save money and optimize how we do it for them. So yes, it’s an increasing part of our conversation. I think the broader theme here is almost with every customer that I talk to, we are talking about how to help them operate well in a multi-cloud world and how we can save them money, how we can make it simpler for them, both from an ongoing CapEx cost, but also in terms of the people side of this equation in terms of having a consistent operating environment where you don’t have to have different teams to operate each of these cloud environments. So it’s very much becoming a centerpiece of many of our conversations there.

Thanks. Great quarter, guys.

Thank you. [Operator Instructions] Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.

Great. Thanks. Maybe I just wanted to see if you could give more color on just kind of the macro impact that you’re seeing. Clearly, you talked about not impacting the renewal business, but just are there regions or customer types – or just any other color as far as kind of the second set of eyes that are maybe needed to get a deal across the line. And then maybe just as a second question for me, just kind of given M&A within this space? How are you maybe taking advantage of the acquisition of – or pending acquisitions of competitors? Thanks.

Yes. I think two good questions there, Meta. And on the first one, there is multiple portions to this. As you said, the renewals business is largely a steady state, not impacted by the uncertain macro. Now in terms of the uncertain macro, we’ve taken some of that into our account – into account when we give you a conservative forecast. To your point, we have seen anecdotal evidence of greater inspection of deals by some customers. And what that also means is that potentially there could be an increase in sales cycles. We haven’t quite seen that as much yet happening, but this is an indication of what might be coming. And we have factored those in, in terms of our guidance per se. Now, Rukmini you may want to comment on the foreign FX impact as well here in terms of the macro.

Yes. Well I will do that and then I can hand it back to you on the more broader question on M&A. So, obviously, the dollar has strengthened. I think as we all know, our sales contracts are all denominated in U.S. dollars. And so that relative strengthening has effectively made our products more expensive to customers in some international markets. And so anecdotally, and this is not something we have seen systemically, but we have seen it sort of put pressure on some price negotiations and some transactions. And we don’t believe that, that’s causing us to lose deals. But anecdotally, we have seen it show up in some transactions.

Yes. And Meta, on the other question around how other M&A activity is potentially impacting us, yes, we have all – we are all reading the news around Broadcom acquiring VMware. And what we have seen as a result of that is a significantly higher level of engagement from prospective customers. These customers are looking to explore their options looking at managing potential risks related to the transaction. Now as you know, our sales cycles, especially for larger deals tend to be 9 months to 12 months. So, we are not assuming any significant benefit from that in our fiscal ‘23 outlook. But I can certainly tell you that the volume of conversations with these customers and prospective customers around this topic has increased, and we are a good alternative provider.

Great. Thanks so much.

Thank you. Please standby for our next question. Our next question comes from the line of Pinjalim Bora with JPMorgan. Your line is open.

Hi. Thank you for taking my questions. This is [indiscernible] for Pinjalim. So, my first question is, what are you hearing from customers with respect to new IT transformation projects in the current macro environment? Like do you think that it might take a backseat and people might move back towards the third tier architecture temporarily?

Yes. So look, I think first of all, accelerating digital transformation continues to be a key driver for customers. And we are seeing this across all kinds of industries here, particularly in verticals such as financial services, healthcare, state, local education. There is a clear mandate to modernize IT operations and applications, improve costs and help the business redirect non-productive legacy kind of spend. Now, in the current macro, I would say this is intensified. There is even more of a focus on cost and better TCO. So, from that perspective, modernizing legacy treated infrastructure, especially when things are up for renewal, right, up for a cycle, you are running out of – your hardware is getting old. HCI is a very viable option for improving TCO, simplifying operations, making things much simpler. So, we haven’t quite seen a slowdown in that mindset with customers. I mean the other thing for us we see is that, HCI has now also become a platform for where customers can run all their workloads, including all their highest performance, most mission-critical workloads. We saw an example of that here in the call where we talked about this large Federal agency, but there are many other customers who are doing that. And then finally, I would say we are also seeing more people looking at hybrid multi-cloud and how they can operate efficiently in this cloud environment for which, again, our solution is a good option. So, can help them run in the right private cloud or public cloud based on criteria on cost, performance and governance. So, all of that I think is continuing to play out there, even despite the macro situation.

Got it. And then maybe a quick one, can you help us understand like what you are seeing with expected gross retention trends in your renewals portfolio?

Yes, Rukmini?

Yes. Thank you for the question. So, our GRR or gross retention rates remain in line with sort of our stated objective of in the 90%-plus range.

Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of George Wang with Barclays. Your line is open.

Hey guys. Congrats again on the strong quarter. I have two quick questions. Firstly, just it’s nice to see kind of rate for the FCF and income for this year. Definitely, you guys are seeing strong leverage. Just curious kind of going forward, are there additional operating expenses, which can be taken out of the system? Just curious kind of what area you guys can be targeting in terms of the lever to pull for further cost cuts, whether that’s in the back office, whether that’s in the state to follow. Maybe you can give more color on that?

Maybe, Rukmini, I will just give a high-level view. I would just say that we are not as much focused on cost-cutting. I mean a lot of the efficiency in the model is coming from the fact that we are seeing a growing base of renewals that can be prosecuted at a significantly lower cost than our traditionally new business. Now, we have been focused on efficiencies already over the last few years in every area. On the sales side, we are focused on increasing sales productivity. On the marketing side, we have already redirected and optimized our demand generation dollars to be mostly digital with some hybrid events. We have simplified our product portfolio. So, we have been doing the right things in terms of efficiency and so forth. So, that’s where I will leave it. And Rukmini, if you want to add anything?

No, I think that was a good summary, Rajiv.

Okay. Thanks for that. My follow-up is just kind of looking out in terms of as-a-service. Any kind of color you can give in terms of future as-a-service model, such as partnering with GreenLake, maybe more traction there or kind of through other MSPs. Just curious kind of what areas are you guys exploring to further this journey of as-a-service in the HCI adoption?

Absolutely. That’s actually a very good question because we are seeing a trend in the market where more customers would like to consume more offerings deliver to them as a service. And there is many routes to getting there. One of our first route is through service providers. And as you saw, for example, this quarter, this last quarter, there were two largest lines came through partnering with service providers. And these are service providers, in some cases, who will take us and sell through, right, and provide a service to their customers. So, that’s one approach. HPE GreenLake is another approach where HPE GreenLake includes Nutanix as part of their offering, and they can provide a combined hardware-software solution delivered as-a-service in a subscription model to their customers. And selectively, some of our own offerings are also available directly as-a-service, but those are small relatively speaking, in our portfolio, especially some of our management offerings are delivered even today as-a-service, but that’s a small portion lately. But largely, we are focused on enabling as-a-service models to our partners, whether they would be service providers, whether they would be strategic partners like HPE.

Okay. Great. Thank you.

And the only other thing I would just add there, sorry, I should say this. We are also an Azure marketplace right now where an Azure customer can use Azure, their Azure spend dollars and buy Nutanix through the marketplace.

Thank you. Please standby for our next question. Our next question comes from the line of Dan Bergstrom with RBC. Your line is open.

So, any sense on where we are from a rep headcount perspective? I think you were flat in the fourth quarter expectation to grow modestly for the year, focus on productivity. Is that still the right way to think about rep headcount and growth and productivity?

Yes. Our rep headcount was roughly flat quarter-over-quarter. We do expect to grow our rep headcount modestly from current levels, while at the same time, continuing to focus on driving higher rep productivity.

Thank you.

[Operator Instructions] Our next question comes from Wamsi Mohan with Bank of America. Your line is open.

Hi. Thanks for taking the questions. It’s Ruplu filling in for Wamsi today. I have one question for Rukmini and one for Rajiv. Maybe I will ask Rukmini the first question. I think you guided a low double-digit percent decline in ACV billings sequentially for 3Q and then low-double digit increase for 4Q. That seems to be a more pronounced seasonality than the last couple of years. So, maybe can you give us some puts and takes? And how does that take into account? Is that normal seasonality, or is that worse than normal? And how should we think about that?

Yes. Hi Ruplu, thanks for the question. And yes, and we called it out because we want to just want to provide some color on how seasonality would – we expect seasonal to show up for the rest of the year. And so just to reiterate what I mentioned in my prepared remarks, we expect to see a low-double digit percentage decline quarter-over-quarter in ACV billings in the third quarter. Which by the way, seasonally, we do see a decline in ACV billings from Q2 to Q3 but low-double digit percentages is a little higher than what we normally see, which is the way we wanted to call it out. And then followed by – in Q4, we expect low-double digit percentage increase quarter-over-quarter in ACV billings. And to answer your question, Ruplu, our available to renew pool that is due in Q3 is expected to be lower than it is in Q2 and then expect it to then pick back up in Q4. So that, combined with our typical quarterly seasonality, leads us to expect that this trend will occur for the second half of ‘23.

Okay. Got it. And then can I just also ask a clarification. In the past, you said that the sum of the four quarter ACV billings is typically 6% to 7% higher than the annual reported number. Does that rule still hold for fiscal ‘23? And how should we think about that going forward?

So, generally, the concept still holds, Ruplu, because effectively what we do, just to remind folks on why we had that out there is that when we report the quarterly ACV numbers, we have some contracts that come in for less than a year duration, and we do annualize those to report ACV billings on a quarterly basis. Of course, on an annualized basis, we sort of normalize for that. And so that’s what Ruplu is referring to. And I would say that, that – it’s in the general ballpark, maybe 94%, 95%, I think what about 67%, as you said, maybe it’s 5% to 6%, but around that range is what I would expect to see this year as well.

Okay. Thanks for the details there. And maybe, Rajiv, if I can ask a question, if you can talk about the demand trends by region, are the shutdowns in China impacting you either directly or indirectly? And if you can just touch on the business with your partnership with Red Hat, any progress or anything happening there? Thank you so much.

Yes. We didn’t see any significant difference in terms of performance across regions. As you know, our business in China is relatively small, so not a direct impact there. And then of course, the indirect impact, that’s really up to our customers. We haven’t seen – we haven’t really seen anything significant for us as a result of that directly. In terms of Red Hat, continuing to see good momentum with Red Hat this quarter as well. We continue to see a growing pipeline with some wins this first quarter. For example, we saw a Ministry in Asia-Pac combining the two, right. They had OpenShift and our cloud platform, so, from a three tier solution to our platform using our own hypervisor. So, this is an example of the kind of deal that we work on together with them. And we are seeing that continue to grow along nicely.

Okay. Thank you for all the details.

[Operator Instructions] I am showing no further questions in the queue. Ladies and gentlemen, this [Technical Difficulty] attending this conference call. Thank you for your participation. You may now disconnect.