Nutanix Q4 2023 Earnings Call Transcript

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Provided by Quartr
August 31, 2023

Key Takeaways

  • Strong Q4 and FY23 Financial Performance: Exceeded Q4 guidance with $494 M revenue, 27% ACV billings growth, $1.56 B ARR and non-GAAP operating margin of 13%, while FY23 saw a 9% operating margin and $207 M free cash flow.
  • $350 M Share Repurchase Authorization: Board approved a $350 M buyback program, reflecting confidence in long-term market opportunity and financial outlook.
  • Global Cisco Partnership: Announced a fully integrated hybrid-cloud solution combining Nutanix software with Cisco UCS compute, networking and security, sold and supported by Cisco’s go-to-market organization.
  • “GPT in a Box” Launch: Introduced a turnkey AI-ready platform for on-premises generative AI deployments, enabling customers to fine-tune and run open-source LLMs with data privacy and compliance.
  • Fiscal 2024 Outlook: Guidance calls for ~13% ACV and revenue growth, 11–12% non-GAAP operating margin and $280–300 M free cash flow, while assuming modest elongation of sales cycles and variable renewal timing.
AI Generated. May Contain Errors.
Earnings Conference Call
Nutanix Q4 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day and thank you for standing by and welcome to the Nutanix Q4 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would like to introduce your host for today's call, Richard Valera, VP of Investor Relations.

Operator

You may begin.

Speaker 1

Good afternoon, and welcome to today's conference call to discuss the Q4 fiscal year 2023 financial Results. Joining me today are Rajiv Ramaswami, Nutanix's President and CEO and Rukmini Subraman, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing 4th quarter fiscal year 2023 financial results. If you'd like to read the release, please visit the Press Releases section of our IR website. During the call today, 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 on them successfully and in a timely manner and their benefits and impact on our business operations Our financial performance and targets, expectations regarding and the factors driving our growth and profitability, Our competitive position and market opportunity, customer demand, the impact of our business model transition and macroeconomic, geopolitical, industry, 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.

Speaker 1

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 ks the fiscal year ended July 31, 2022, and subsequent quarterly reports on Form 10 Q 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, we 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.

Speaker 1

Lastly, I'd like to remind you again that Nutanix will be holding its 2023 Investor Day in New York City on September 26. Please go

Speaker 2

to the Events section of

Speaker 1

the Nutanix Investor Relations website if you'd like to register. And with that, I'll turn the call over to Rajiv. Rajiv?

Speaker 2

Thank you, Rich, and good afternoon, everyone. We delivered a good Q4 with results that came in ahead of our guidance, capping off a strong fiscal 2023. The uncertain macro backdrop that we saw in our Q4 was largely unchanged compared with the prior quarter. And we continue to see steady demand for our solutions in Q4. This is driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives and looking to optimize their total cost of ownership.

Speaker 2

Taking a closer look at the Q4, we were happy to have exceeded all of our guided metrics. We delivered strong ACV billings growth and record quarterly revenue of $494,000,000 a nearly $2,000,000,000 annualized run rate. We also had another quarter of good free cash flow generation, despite some expected one time payments. Overall, our Q4 financial performance was a strong finish to our fiscal year. Our full year fiscal 2023 results demonstrate the progress we made with our subscription model.

Speaker 2

Specifically, we delivered healthy year over year ACV billings growth of 27%, led by outperformance of our renewals business. We also delivered our 1st year of non GAAP profitability in the company's history, with a non GAAP operating margin of 9%. Finally, despite the impact of several one time payments, we generated free cash flow in excess of $200,000,000 a roughly tenfold increase compared to our prior fiscal year. Beyond the financials, We made significant progress across all aspects of our business in fiscal 2023. On the product front, we delivered general availability of NC2 on Microsoft Azure, Announced meaningful new products in areas such as Kubernetes, Data Services and Cloud Management and defined our data services vision with Project Beacon to enable companies to build portable applications.

Speaker 2

We also enhanced our corporate governance profile through amendments to our bylaws and certificate of incorporation. Finally, on the go to market front, we closed multiple large deals with major enterprise and government customers. These wins demonstrate the strategic relevance of our platform to our customers' key transformation initiatives and the success of our focus on landing these larger, more strategic transactions. Overall, for fiscal 2023, we demonstrated consistent execution, Solid top line growth, strong renewals performance, sharp improvements in profitability and free cash flow, and continued progress on our longer term strategic priorities. Moving on, Gaining sales leverage by our partners has been a priority since I joined as CEO.

Speaker 2

We said we would focus on deepening our partnerships to provide more impact in how we go to market, as well as provide more opportunities within larger accounts. This week, we made a milestone announcement on this front with a global strategic partnership with Cisco. This partnership is about combining the best of breed between our two companies. Cisco will combine the Nutanix cloud platform, along with their UCS Compute and Cloud Management, deeply integrated with their networking and security. It's a fully integrated solution with joint engineering and interoperability and expanded support that will be sold by Cisco.

Speaker 2

We are excited about working with Cisco on this partnership and having them sell our leading hybrid multi cloud software, leveraging their extensive go to market reach. Now, I'd like to talk about our customer wins this quarter, which demonstrate the success we've been having in landing large multimillion dollar ACV deals. A good example is a significant expansion we won in Q4 with the U. K. Department For Works and Pensions, or DWP, the UK's biggest public service department.

Speaker 2

This win demonstrated the value customers are seeing in the broader capabilities of our platform. DWP has already adopted our cloud platform, including Nutanix Cloud Management and Nutanix Unified Storage to run its business critical workloads and was looking for a way to extend its footprint into the public cloud. In Q4, DWP chose NC2 to enable the shift of workloads from the private cloud to the public cloud. In their words, Nutanix NC2 allows DWP to seamless while avoiding the costs traditionally associated with lift and shift migrations. Furthermore, NC2's cost effectiveness and ease of use enable us to maintain a layer of abstraction for our most critical workloads that avoids both platform and vendor lock in.

Speaker 2

We couldn't have said this better ourselves and are grateful for the opportunity to partner with DWP on the cloud journey. Another notable win in the quarter was with a service provider partner in the EMEA region that was implementing a nationwide electronic health record or EHR system for a government health ministry. This partner chose Nutanix Cloud Platform, including Nutanix Cloud Management and our AHV hypervisor to host critical EHR applications across 20 strategically located sites. They also chose Nutanix Unified Storage for managing the data on GPU based image servers associated with the project. We see this win as a testament to the value our customers see in adopting our full stack offering and the growing contribution we are seeing from our service provider partners.

Speaker 2

Now, I'd like to talk about AI and what it means to Nutanix now and in the future. Today, we already have customers We're seeing the same agility, performance and TCO benefits from our platform as customers running other workloads. They're deploying us for use cases ranging from faster checkout in retail applications, ensuring compliance with safety protocols at construction sites to quality assurance in manufacturing applications. However, we see an emerging opportunity in the surging demand for generative AI. To date, there has been a lot of investment in large language models or LLMs running in the public cloud.

Speaker 2

However, as AI models become more compact and organizations become concerned with issues such as intellectual property leakage, Compliance and privacy, we expect there will be more demand to fine tune and run models on premises And at the Edge, we believe there's an opportunity to provide a turnkey solution for those looking to jump start these AI initiatives. That's why we recently launched GPT in a Box. This is a full stack software defined AI ready platform, along with services To help our customers size and configure hardware and software to deploy a curated set of LLMs using the leading open source AI frameworks on our platform. It allows customers to easily deploy AI ready infrastructure to fine tune and run generative pre trained transformers or GPTs while maintaining control of the data and applications. While it's still early, we're pleased with the initial interest we've seen to date in GPT in a box.

Speaker 2

Moving on, I'd like to highlight the recent addition of Mark Templeton to our Board of Directors. Mark's previous tenure as a public company CEO combined with the strong domain knowledge of both cloud and data center infrastructure software makes them an excellent fit for Nutanix. I look forward to working with them closely as we execute on our hybrid multi cloud vision. Finally, on the back of our strong free cash flow performance in FY2023 And in conjunction with our earnings release, we announced that our Board of Directors has approved a $350,000,000 share repurchase authorization. We see this repurchase program as a reflection of confidence in the company's long term market opportunity and financial outlook and an important milestone in our subscription journey.

Speaker 2

In closing, we are encouraged that the compelling value proposition of our cloud platform and the strength of our business model enable us to provide an initial outlook for fiscal 2024 that calls for continued solid top line growth, improving profitability and solid free cash flow growth from a strong fiscal 2023 level. We look forward to providing an update on our strategic priorities and longer term financial outlook at our Investor Day in September. And we remain focused on delighting our customers while continuing to drive sustainable, And with that, I'll hand it over to Roopini Sivanaman. Rukhmini?

Speaker 3

Thank you, Rajiv. I will first provide commentary on our Q4 'twenty three results and fiscal year 2020 results, followed by our outlook for Q1 2024 and fiscal year 2024. Q4 2023 was a good quarter in which we exceeded all guided metrics. ACV billings in Q4 was $279,000,000 higher than our guidance of $240,000,000 to $250,000,000 Revenue in Q4 was $494,000,000 higher than our guidance of $470,000,000 to $480,000,000 ARR at the end of Q4 was $1,562,000,000 a year over year growth of 30%. Similar to last quarter, we saw a modest elongation of sales cycles, likely due to increased deal inspection.

Speaker 3

New logo additions were about 500 in Q4. Average contract duration in Q4 was 3 years, flat quarter over quarter as expected. Non GAAP gross margin in Q4 was 85.8 percent higher than our expectation because of higher revenue than expected, Certain non recurring savings and timing of hiring. Non GAAP operating expenses in Q4 were $361,000,000 Non GAAP operating margin in Q4 was 13%, higher than our guidance of 9% to 10%. Non GAAP net income was $68,000,000 or EPS of $0.24 per share based on fully diluted weighted average shares outstanding of approximately 286,000,000 shares.

Speaker 3

Billings linearity was good and DSOs were 29 days in Q4. Free cash flow in Q4 was $46,000,000 implying free cash flow margin of 9%, higher than our expectations, largely due to better than expected billings and collections. We ended Q4 with cash, Cash equivalents and short term investments of $1,437,000,000 up from $1,358,000,000 in Q3 2023. Looking at our full year financial results, We exceeded all guided metrics for fiscal year 2023 as well. ACV billings in fiscal year 2023 were $957,000,000 higher than our guidance of $915,000,000 to $925,000,000 and representing a year over year growth of 27%.

Speaker 3

A reminder that the annual ACV billings is slightly lower than the Revenue in fiscal year 2023 was $1,863,000,000 higher than our guidance of 1.84 to $1,850,000,000 and representing a year over year growth of 18%. A reminder that revenue in fiscal year 2023 benefited from the normalization of orders with future start dates resulting from our partner supply chain Largely because of this dynamic, fiscal year 2023 revenue included the benefit of approximately $23,000,000 in deferred license revenue that would have been recognized in late fiscal year 2022 instead. We ended fiscal year 2023 with an ARR of $1,562,000,000 as mentioned earlier, a year over year growth of 30%. GRR or growth retention rate at the end of fiscal year 2023 was 90 plus percent At NRR, our net retention rate was 123%. Our fiscal year new and expansion ACV performance was impacted by some of the macro uncertainty we have previously discussed and performed slightly below our expectations entering the year and below what we believe its longer term potential is.

Speaker 3

The renewals business continues to perform well and it tends to be at a lower aggregate average contract duration compared to our new and expansion business. Our relative economics and renewals have also continued to improve over time as the renewals team has improved their execution. Average contract duration in fiscal year 2020 3 was 3 years, lower than the 3.2 years in fiscal year 2022 as expected. Non GAAP gross margin in fiscal year 2023 was 84.6%. Non GAAP operating expenses in fiscal year 2023 were $1,414,000,000 an increase of 1% year over year.

Speaker 3

Non GAAP operating margin in fiscal year 2023 was 9%, representing our 1st year of non GAAP operating profit. Non GAAP net income was $169,000,000 or EPS of $0.60 per share based on fully diluted weighted average shares outstanding of approximately 282,000,000 shares. Free cash flow in fiscal year 2023 was $207,000,000 implying free cash flow margin of 11%, representing a free cash flow margin expansion of 10 percentage points

Speaker 2

year over year. Overall,

Speaker 3

fiscal year 2023 was a significant year, marking our 1st year with a positive non GAAP operating margin at 9%, Significant free cash flow generation of over $200,000,000 while growing ARR at 30% and growing revenue at 18% year over year, all in an uncertain macroeconomic environment. Moving on to Q1. The outlook for Q1 2024 is as follows: ACV billings of $260,000,000 to $270,000,000 revenue of $495,000,000 to $505,000,000 Non GAAP gross margin of approximately 84%, non GAAP operating margin of 9% to 11%. The guidance for full year fiscal year 2024 is as follows. ACV billings of 1.075 to $1,095,000,000,000 exceeding the $1,000,000,000 threshold and representing year over year growth of 13% at the midpoint Revenue of $2,085,000,000 to $2,115,000,000 representing year over year growth of 13 Non GAAP operating margin of 11% to 12% and free cash flow of $280,000,000 to $300,000,000 I will now provide some commentary regarding our fiscal year 2024 guidance.

Speaker 3

First, we are seeing continued new and expansion opportunities for Our solutions despite the uncertain macro environment. However, as we mentioned previously, we have continued to see a modest elongation of sales cycles. Our fiscal year 'twenty four new and expansion ACV performance outlook assumes some impact from these macro dynamics. 2nd, the guidance assumes that our renewal business will continue to perform well. And while our available to renew Our ATR pool continues to grow year over year.

Speaker 3

It is growing at a slower pace in fiscal year 2024, but is expected to reaccelerate in fiscal year 2025 based on our current view. 3rd, the full year guidance assumes that the average Contract duration would decrease slightly compared to fiscal year 2023 as renewals continue to grow as a percentage of our billings. And regarding our bottom line guidance, we will continue to make targeted and prudent investments into our go to market and innovation engine to continue to invest in growth, while improving our profitability and free cash flow margin year over year. Overall, we remain confident in our view around a large and growing market for our solutions combined with a growing mix of renewals as a significant driver of both billings growth and margin expansion over a multi year period. We also announced today that our Board of Directors has authorized a share repurchase program of up to $350,000,000 We remain focused on investing in our business to support profitable growth and on delivering strong returns for our shareholders.

Speaker 3

This share repurchase program is consistent with these objectives and a reflection of the confidence we have in our long term market opportunity and financial outlook. In closing, we are pleased that our fiscal year 2023 results reflect our continued execution towards our stated objective of sustainable profitable growth and we expect to continue that focus. With that, operator, please open the line for questions.

Operator

And thank you. Please standby while we compile the Q and A roster. One moment please. And our first question comes from Panjamb Bora from JPMorgan. Your line is now open.

Speaker 4

Great. Hey, congrats on the quarter. Thanks for taking the questions. Rajiv, I wanted to talk about AI. The GPT in a box, help us understand, is that largely an kind of an integrated offering kind of with a bundled pricing or is there any new Functionality that you have developed and seems like it's spanned across hardware, software and services.

Speaker 4

How are you kind of thinking of going to market with it.

Operator

One moment please.

Speaker 2

Can you folks hear me now?

Speaker 4

Yes, you

Operator

can hear Okay,

Speaker 5

sorry.

Speaker 2

So, yes, so first one in terms of the platform, it's the same Nutanix cloud platform integrated with Standard several platforms with NVIDIA GPUs as part of the solution, okay. And on top of that, what we add is a curated set of MLOps Software and LLMs, largely open source models, and we put that all together with the services offering that helps customers deploy this out of the box. Now what do they use it for? So what we see with generative AI is there's been a lot of focus about training these large LLM models in the public cloud. But when it comes to the actual usage of these, what you're going to see is companies need to run these AI models where their data is.

Speaker 2

And in a lot of applications, enterprise applications, sensitive data is stored on prem or perhaps at edge locations where they're actually gathering the data in the 1st place. So with TPD in a box, they can run their AI applications, generative AI applications by fine tuning these Large NLLM models that have been trained in the public cloud using what we call foundational models and public data, they can fine tune this, make them more compact to run with their own data and use it on prem. So that's the offering. Now in terms of go to market, we have a small tiger team that's very focused on working with Our customers as we produce cases together, we are also building an ecosystem of ISVs and SI partners that can help us take this to market and expand our scale. So it's still early days, but I'm excited about where this is going.

Speaker 4

Yes, understood. Thank you. And one for Roopini. Roopini, you talked about ATR slowing this year. Maybe help us understand why would that be the case?

Speaker 4

Is that just because net new ACV was a little bit slower this year? Is that kind of adding And then are you baking in any upside from the VMware opportunity in the guidance?

Speaker 3

Hi, Sajid, and thank you for the question. So on the first question on ATR, so we expect continued growth in our Renewables ACV business in fiscal year 2024 and our GRR continues to be good at 90 plus percent. But as you noted and as we said in our prepared remarks, we do expect that the renewals ACV will is expected to grow at a slower rate in fiscal 2024 than in 2023 due to the shifting of some renewals from 2024 to 2023 largely due to Co timing and some natural variation, right, that we see in the timing of renewals as customers choose to renew based on their budget cycles or other factors. In fiscal year 2025, we expect renewals growth to reaccelerate based on our current view of our available to venue or ATR. And I think it's important to emphasize also that we continue to believe that this growing mix of renewals over time as a proportion of our Total billings continues to be a driver of both billings growth and margin expansion over a multiyear period.

Speaker 3

And I think your second question, Pendulum, was around have we baked in any benefit from the VMware Spending acquisition by Broadcom. And so we continue to see significant engagement and opportunities related to potential concerns around that transaction. And in Q4, we did see a few of these opportunities close, including a 7 figure ACV deal with a Fortune 100 company. So while it's difficult to predict the timing of these wins as we've talked about before just because of some of the dynamics in the market, We do expect some benefit from these deals influenced by this transaction and have factored that into our guidance.

Speaker 4

Got it. Thank you very much.

Speaker 3

Thank you.

Operator

And thank you. And one moment for our next question. And our next question comes from Jim Fish from Piper Sandler. Your line is now open.

Speaker 6

Hey guys, nice quarter, nice guys. Nice to also see the new customers pick up again understanding there's some seasonality here. But was anything causing that in particular in this environment to see the 500 net new customers, including anything on the competitive So the last question and appreciate the details on the net retention rate in the quarter here. But can you walk us through kind of how we should be thinking about net retention into next Year given kind of what's going on with retention rates and does this mean with the cash flow guide being close to $300,000,000 of this year that we could Be thinking about well north of $300,000,000 for fiscal 2025 or is that just an Analyst Day item that I should be patient for?

Speaker 2

Yes. I think there were 3 questions there, Jim. Maybe I'll take the first two, which is on new logos and the competitive outlook, and then Rukhmini can focus on the financial questions. So on the new logos, we've continued to focus on these higher quality, higher ASP new logos, more so than just new logo count. But seasonally, of course, Q4 is a strong quarter for us And we can be that you saw the strength in new logos there, relatively speaking.

Speaker 2

It's also we're focusing on larger, more strategic transactions, And we're seeing factors on that front, certainly. So that's the new logo piece of that. From a competitive perspective, Rukhmi, you already talked about The VMware dynamic there, clearly, we've seen the engagement level grow there. Clearly, we've seen some deals starting to close. And there's still a lot of variability in terms of how the pendulum is going to swing on this one from customers who might Just use us to get a lower price from VMware to customers who are truly serious about bringing a second vendor in and reducing their risk with an alternative provider.

Speaker 2

So We'll have to see how that plays out. The hybrid cloud piece is really starting to work in terms of customers using more of us in the public cloud. So that piece of it is working well. Our partnership with the hyperscalers is actually coming through actually also nicely in that regard. So we feel good about our competitive positioning as we get into FY Rukmini, you can perhaps address the NRR and other questions.

Speaker 3

Yes, yes. Hi, Jim. So on NRR, we were happy with the 123% that we reported for fiscal year 2023. And in terms of fiscal year 2024, Jim, what I say is, I think it's you should still assume that of our sort of new and expansion business, the majority does come from expansion, right? We've talked about that before.

Speaker 3

We're not giving out a specific number today, Jim, but more color to come on that at our Investor Day. And similarly on free cash flow, yes, we're happy to So, guide to $280,000,000 to $300,000,000 for fiscal year 2024. And again, more to comment at Investor Day. What I will say though is, We continue to be focused on all elements of that profitable growth piece, which means that we do intend to continue to evolve our grow our margins, Free cash flow margins over time while growing the top line, right. So that continues to be the intent, but I'll sort of hold on any specific free cash flow outlook beyond Before our Investor Day.

Speaker 6

Fair enough. Just last one for me, Rajeev. On that Cisco partnership, I mean, how much demand were you getting for this? Just a nice to have as Cisco UCS is a much smaller shareholder of that server market relative to Some of your other partners and understanding Cisco has one of the best sales motions out there with this, but are there any minimums to think about or how We expect the impact probably more for fiscal 2025, but any impact for fiscal 2024?

Speaker 2

Yes. So again, let me pass it out there. So Jim, first of all, yes, we have seen customer requests in the past for customers. There are many large customers with UCS deployments. They would like to see this joint solution from us and Cisco.

Speaker 2

So we are happy that we are able to announce that. Also importantly for us, it's the fact that Cisco has a go to market machine that's much bigger than ours. We today have about, call it, about 25,000 customers roughly, But our addressable market in terms of customers is at least 100,000. And so Cisco's broad market reach could help us get those initial entries. And Yes.

Speaker 2

Again, we're going to work co sell this with Cisco, right? Cisco is going to be the front in terms of selling this, but we're going to be helping them along the way. And this I look at this as an expansion opportunity It's a much larger customer base. Good for the customer in terms of them buying an integrated solution for everything they need in the data center, right? The virtual platform cloud platform from us, the hardware from Cisco, both in terms of Yes.

Speaker 2

The servers and storage as well as the networking pieces and the security aspects of this. So we are excited about this. Now in terms of the numbers, what we expect is we just literally announced it here. And we there's a whole process of training, enabling the So we are factoring in a small amount in the later half of this year, like more likely in our Q4, but we certainly expect the momentum to build here over time.

Operator

And our next question comes from Meta Marshall from Morgan Stanley. Your line is now

Speaker 7

Great. Thanks. Maybe just as a first question, understanding

Speaker 2

kind of

Speaker 7

the new customer cohort you guys have So that is kind of a focus on higher quality and larger customers. Is there any way to quantify just in terms of What that cohort just in terms of kind of initial deal size or anything that kind of Makes the point on that metric. And then just on kind of the reacceleration and kind of general Elongation of sales cycles right now, do you think that that is kind of the catalyst for that reverting in Fiscal 2025 is purely macro, do you need to kind of see more multi cloud spending? Like what is it just a matter of macro or what kind of do you think is the main catalyst for that reacceleration? Thanks.

Speaker 2

Let me take a crack at the first part, but maybe you can try to add on. So our new ASPs for these new logo ASPs are certainly up year over year for us given the focus. We haven't put a number on it, But perhaps one of the things we could do, take that as an action for our Investor Day to come back to you with looking at, for example, how many customers We have it over $1,000,000 for example of ARR. So we it's a good question, Meta. We'll come back to you with more color.

Speaker 2

But in general, yes, new logo ASPs have been going up as a result of our focus. Rukmini, you want to take the rest?

Speaker 3

Sure. Yes. Hi, Nikka. Thanks for the question. So I think you had a couple of things in there woven into your question, Meta.

Speaker 3

So one was I think around just sort of sales cycles, right, which as we've talked about in the past, Continues to we continue to see a modest elongation there and that is really affecting only our sort of new and expansion business, right? And so That's sort of what we continue to see and some of those macro factors are factored into our 2024 outlook in the new and expansion portion. Now and then you referenced, I think, the reacceleration that we talked about in 2024 as it relates to our renewals ACV growth rate. So just again to reemphasize, renewal ACV will continue to grow year over year for a while as we've talked about in the past. What we said was the 2024, the Noah's ACV growth is at a slower pace than 2023 because of just some timing Variations between 2023 2024 due to some co timing, but also largely due to just some timing as it relates to when customers choose to make their purchases because of their budget cycles and so on.

Speaker 3

And so we view that as affecting 2024. But when we look at the available to the new pool for 2025, we see that reacceleration in 2025. So that's what we were assessing and I just wanted to make sure I was clear on the new and expansion portion versus the renewal sneak. I hope that answers your question. Yes.

Speaker 3

No, that's perfect. Thank you. Thank you.

Operator

And thank you. And our next question comes from Mike Sicos from Needham. Your line is now open.

Speaker 2

Hey team, thanks for getting me on

Speaker 8

the line here. I did want to Come back to the ACV billings for a second. And I know that congrats on the outperformance on the guidance. I believe you guys cited outperformance Stemming from specifically renewals when I think about the ACV billings, what drove that outperformance? Can you put some finer

Speaker 3

Hi, Mike. Thanks for the question. So there were maybe a couple of components that I'll talk to and I welcome Rajiv for you to add anything else that you would like. So the first one is that around renewal, right, what we say when we mean renewal is outperformed is that We see some co terming as we've talked about before, which is sometimes more difficult to forecast. And we've also We've seen continued improving discipline around renewals economics, which is what we transact the renewals as compared to sort of what the original transaction Right.

Speaker 3

So those are the ones that are contributing to improvements in renewals outperformance. And so that was a big driver, I would say, Mike, of the outperformance in ACV billings, so that was really the largest driver of outperformance for Q4 ACV Billings.

Speaker 8

Great. And I guess a 2 quarter on the follow-up. 1 kind of feeds off the ACV Billings But if I think about the guidance that we have today for Q1 ACV billings, it's actually down sequentially. And if I look over the most recent 2 years, You've gone up from Q4 to Q1. Can you help us think about why it would be down sequentially?

Speaker 8

Maybe part of it has to do with this co terming effect or maybe Some of those deals that came in Q4 from, let's say, the VMware deal that was cited earlier that came to you guys? That's the first question As far as the ACV guidance guide being down in Q1 sequentially. The second is gross margins. I know we cited a benefit from Non recurring savings and the timing of hiring, can you help us unpack what or quantify What the non recurring savings were or what that dollar figure was? And then the timing of hiring, I guess, we should expect for you guys The higher into that in the out year?

Speaker 8

Or is this hiring that's been you guys can actually prove more efficient versus what you had initially anticipated?

Speaker 3

Okay. Thank you, Mike. Let me take that 1 by 1. So on the Q4 to Q1, Our typical seasonality is actually Q1 being lower than Q4, Mike, typically, because Q4 is a seasonally high quarter for us given it's a year end, right? And it's sort of sellers are motivated, right, to go and have a good Q4.

Speaker 3

Last year was a bit of an anomaly, Right. Because if you recall in Q4 2022, we saw some of this impact from supply chain disruptions that are affecting our partners and therefore also impacting To some degree, right? So the Q4 2022 number was actually probably artificially lower, which led to a sequential increase last year. This is more normal is how I would characterize that, Mike. And then to your question on gross margin, So we said a few things there, right?

Speaker 3

So one was revenue higher than expected, I think that's straightforward and your question was on the other 2. So what we say when we mean timing of hiring is I assume attrition happens, normal levels of attrition, but sometimes it takes time to backfill and so on, right? So that can sometimes cross Quarter boundaries and so we saw some of that in Q4. Those people we would be expect to be hired and backfilled in short order here, right, so really probably in Q1. And the non recurring savings were not huge amounts, Mike, but just remember that I think Q4 also is a high gross margin year as well because COGS and operating expenses don't fluctuate as much over the year, but Q2 and Q4 are seasonally higher top line quarters for us, right?

Speaker 3

So you'll see that Those margins pick up higher in Q2 and Q4 and pick a little bit lower in Q1 and Q3, which is why if you look at our overall fiscal year 2024 guide, we're saying gross margin is approximately in that 84% range.

Speaker 8

Terrific. Thank you very much. I really do appreciate all the color. Thank you.

Speaker 3

Thank you, Mike.

Operator

And thank you. And our next question comes from George Wang from Barclays. Your line is now open.

Speaker 4

Hey, guys. Congrats on the quarter. I just want to ask about any update on the repatriation trends, especially given tougher macro. Are you guys seeing sort of increased Repatriation to Elm Prime, which may benefit Nutanix?

Speaker 2

Yes. George, I can't say that we've seen increased Repatriation, certainly we've certainly seen instance of repatriation. What I would say is interesting is we've also seen stuff In the other direction, which is people have committed to some of these large public cloud spend commitments. And what they're saying, they're not able to get their applications really to the as quickly as they'd like to see. And so they're now stuck with saying I have to spend this much money in the public club because I committed to it already.

Speaker 2

And so we've seen that come to us Now they're looking at this and saying, we are available through the marketplace of Azure and AWS, and we've seen people purchasing our software through the Azure AWS Marketplace, which has been retired some of their commitment to public spend. So yes, I think we see the world being hybrid. Some workloads are being repainted I wouldn't say it's necessarily a wholesale trend. We see that on in spots versus the systemic trend yet at this point. But the world is very much higher.

Speaker 2

People are being much more conscious about how much to put in the public cloud in the first place.

Speaker 4

Okay, great. Just a quick follow-up, if I can. With simplifying portfolio kind of platform approach, can you talk about kind of The attach rate to Nutanix Cloud Platform Cloud Manager and the kind of maybe high level commentary on cross sell and up sell?

Speaker 2

Yes. So I think two questions there. On the attach rate of the portfolio, for sure the biggest change that we have seen since we launched our revised portfolio was Much higher attached for cloud management along with the cloud infrastructure. In fact, that is the easiest attach sale really, right? Everybody who builds the cloud also wants to operate the cloud.

Speaker 2

So naturally attaching cloud operations, cloud management to our infrastructure. That's the best we've seen. We've also seen, of course, NC2, which is our public cloud extension, is a natural extension, natural attach and it's really it ties together with our cloud platform very nicely. So that's another attach that It's still relatively small for us, but growing every quarter in terms of customers, number of customers and customer count. Unified Storage is the other element of the portfolio that we see reasonable attach with as well.

Speaker 2

The one that we have to actually really work with a specialist team to sell is Nutanix database portfolio because that's largely sold a level up in the stack to people who are either managing databases Our app developers and that requires more specialist skills and that's much more of a specialist say.

Speaker 4

Okay, great. Thanks. Congrats again.

Operator

Thank you. And thank you. And our next question comes from Mehdi Hosseini from SIG. Your line is now open.

Speaker 5

Yes, thanks for taking my question. I want to go back to your fiscal year 2024 guide. If I just take the midpoint, it seems like OpEx would need to grow by 7%. And I understand your answer is coming, but Would the collaboration or the deal with Cisco actually help Is some of these OpEx growth assumptions built into the model? Or does that already Baking to account or does that already account for any cost savings as Cisco scales Your product is

Speaker 3

Hi Mehdi, thank you for that question. So Let me first address the OpEx point, then we'll talk about any potential impact from Cisco. So if you look at our operating expense profile over the last several years. Since about 3 years ago, it was about $1,500,000,000 and last year it was $1,400,000,000 right. It's actually We've kind of really kept it sort of flat to down over the last 3 years, while of course continuing to grow ACV billings, ARR revenue and so on since over that time.

Speaker 3

So we've Been really sort of cautious about OpEx and in focusing on improved efficiency and productivity. Where we are now is that we are making some very prudent, I would say, and targeted investments in our go to market And in our innovation engine, as we talked about, our market we believe is large and growing in order to go and capitalize on that. So we are making some Targeted investments on that front. Now on the Cisco piece, I think what we expect The Cisco partnership for us to do is to continue to help sort of our productivity go up and really be additive to our overall top line, right? So that's how We should think about operating expenses relative to last year, but also relative to any potential impact from Cisco.

Speaker 5

Okay. And one follow-up for Rajeev. I just want to go back to your prepared remarks. And I'm just Trying to better understand. I kind of agree with you that security, privacy, compliance would actually Bode well for enterprises to scale AI, but As you think about the train models moving from a cloud infrastructure into on prem, Would that actually require your existing or prospective customer with additional one time CapEx investment or no?

Speaker 5

Yes.

Speaker 2

So that depends on what they've already I mean, obviously, this AI requires compute resources, right? It requires several platforms with GPUs attached to it. So clearly, these are new workloads for the customer. They're going to have to buy new hardware, right, so and put our software on it. What they would do, just to clarify what they would do, the models likely are foundational models that are trained on publicly available data in the public cloud.

Speaker 2

But then when they bring it on prem, they're going to fine tune this and potentially make it more compact with their own specific data. A good example just to see how this works, Mehdi, is take support as an example. Even us as a support, in terms of support, we have a lot of internal documentation that we don't put in the public cloud, internal design documents as well. So imagine using a generative AI back end to be able to go through all of that and quickly try and arrive at root cause or try and arrive at answers to customer support questions. So we'd want to run that on prem or in a secure location where our data is stored.

Speaker 2

And so we would typically run that on, again, standard servers with GPU accelerators, running these AI models with our stack.

Speaker 5

And is that where Cisco could come in actually become a partner to facilitate that additional investment required?

Speaker 2

I think the Cisco piece, by the way, just let me I think we should decouple that, right, because this AI piece works with everybody's servers. So customers can buy servers from Dell or HP or Lenovo or any of our server partners and we have a wide variety of them and we've been supporting GPUs for multiple years. So we don't necessarily need this to be only Cisco. So they can buy that from who they like their several partners. What we expect with Cisco is a significant Expansion in terms of our go to market reach, right, with their go to market, their ability to sell into a much broader customer base and their footprint, We should be able to benefit from that in the long term.

Speaker 5

Got it. Thank you for the color.

Operator

And our next question comes from Erik Suppiger from JMP Securities. Your line is now open.

Speaker 9

Yes. Thanks for taking the question and congrats on a good quarter. First off, on the GPT in the box, Are those customers developing their own large language model Or are they using 3rd party software on that box? And then secondly, in the well, go ahead.

Speaker 2

Yes. Eric, I think the answer is most of them would not build their own large language model. They would use foundational models that are available. For example, there's a new one coming out like LAMA 2 that are open source. They could, of course, use DPT if they like as well.

Speaker 2

But there are multiple models. Most customers in the enterprise, I don't think, will develop their own model, Reviews what's available out there, they would probably fine tune it with the data that they have.

Speaker 9

Okay. That makes sense. And then secondly, in the partnership with Cisco, are the Cisco sales reps getting comped on selling the Nutanix software?

Speaker 2

Yes. They're getting comped on it just as if they were selling Cisco products. So 100% compensation for their sellers.

Speaker 9

Very good. Okay. Thank you.

Operator

And our next question comes from Wamsi Mohan from Bank of America. Your line is now open.

Speaker 10

Hi, thanks for taking the questions. It's Rooplu filling in for Wamsi today. I had one question for Rajeev and one for Roopmini. Rajiv, can you comment on a couple of things, specifically demand by vertical? You talked about some share gains this quarter.

Speaker 10

How is the pricing environment? Is that holding steady or are you seeing any pricing pressure? And then can you talk about Your view on the backlog heading into fiscal 2024, has that normalized now or is it still elevated?

Speaker 2

Yes. So on the pricing, we haven't seen any Significant change in pricing this quarter compared to our last quarter. And in general, as we, for example, attach more of our product Our portfolio to our deals, our delays piece tend to go up, right, because we're simply attaching more of the portfolio. So We haven't seen any shift or big change in our pricing dynamics. Now on the backlog and with respect to verticals I can't say that there is any significant difference.

Speaker 2

I think it's more a function of volume and deal size that dictate discount and rather than any particular vertical related factors for us. Now with respect to the backlog, I'm going to let Rukmini comment on that.

Speaker 3

Yes. Thank you, Rajeev and hi, Rupalu. So on backlog, as we talked about, I think last year Fiscal year 2020 3 backlog, it did move around as expected during the course of fiscal year 2020 3. But despite that, we ended 2023 after the slight increase in absolute backlog dollars year over year. And we have factored that into the outlook for Fiscal year 2024, so we expect some backup to be consumed over the course of this year.

Speaker 3

But as is to be expected in an uncertain macro environment like the one we're in, I think the range of possible outcomes are just wider than usual. And more generally, as we continue to grow, the absolute dollar number of backlog Could also continue to increase over time.

Speaker 10

Okay. Thanks for the details there. If I can ask you, Looking at the guidance for fiscal 1Q versus the full year fiscal 2024, it looks like there's operating margin improvement as you go through the year. So what are the drivers for that? And then if you can talk about the seasonality you expect in ACV billings.

Speaker 10

Again, looking to should we think that going from 2Q to 3Q, should we expect the same level of decline your renewables business is growing? So Just any thoughts on how should we model ACV billings in fiscal 2024? Thank you.

Speaker 3

Okay. So there were a couple of questions there, Ruplu. I think the first one was on Q1 operating margin versus full year. And so I think I'll just remind folks that again Q2 and Q4 are seasonally in general seasonally stronger quarter for us. Q2 because you have December in there, which is annual budget flush for many customers.

Speaker 3

And so Q2 is Stronger for that reason and Q4 is our fiscal year end. And so Q2 and Q4 seasonally strong quarters, which means that margins, Although operating expenses and cost of goods sold don't vary as much, the top line does look stronger in Q2 and Q4 and therefore Margins in general also tend to look stronger in Q2 and Q4 compared to Q1 and Q3, right? So That's sort of one call out on the margin piece on the full year versus 1Q. And then on seasonality, I think was your second question, Ruplu, more generally. I would just say, I think, as I said, you should expect some seasonality in top line for a slight decline between 2Q to 3Q.

Speaker 3

And that follows sort of a new and expansion. Therefore, generally, Renewables ATR also does follow that pattern as well. And to the extent we expect any variation in that, We'll make sure to call that out. But as of now, you should still expect somewhat fairly normal patterns with regard to that.

Speaker 10

Okay. Thanks for the details.

Speaker 3

Thank you.

Operator

And thank you. And one moment for our next question. And our next question comes from Nehal Chokshi from Northland Capital Markets. Your line is now open.

Speaker 11

Yes. Thank you and congrats on a strong quarter. You had another one. That's fantastic. And Nice to see the buyback being announced.

Speaker 11

Could you talk about what is the priority of allocating capital to buyback relative to say paying down debt?

Speaker 3

Hi, Nehal. Yes, sure. So I'll just talk maybe more generally. Our focus continues to be on sustainable profitable growth as we've said and we continue to make prudent and thoughtful investments into our go to market and innovation engines as I said earlier in response to another question. We're happy to have generated over $200,000,000 of cash flow last year and have $1,400,000,000 of cash and short term investments.

Speaker 3

And so we think of the share repurchase authorization as a reflection of the confidence in our long term financial outlook by returning capital to shareholders, while ensuring that we have optionality to continue to invest in growth and for our best leading priorities. And to your question on paying down debt, Anil, we do take a look at that. Of course, we look at all of the alternative uses of our cash before making any decisions. And our public converts, we pay 25 basis points on those and they're not Due for another few years and so it made sense for us to think about that more holistically and sort of we believe that Doing the share reposition is sort of the best use of our cash given all of the other options available to us.

Speaker 11

So what's your anticipation of the pace of utilization of that buyback authorization then?

Speaker 3

We have not given a specific timeframe, Nehal and the auction business does not have any expiration date. And so the timing and amount will depend on a variety of factors as you can imagine, right, including just business conditions, stock prices and other factors. And so I'll leave that there.

Speaker 11

Would it be fair to say that you want to

Speaker 3

We are not giving out sort of a certain percentage at this point, Neha, but we will just talk more generally about capital allocation and how we plan to use our cash at our Investor Day as well, right? So I'd be happy to still take more talk more about that then. But at this point, we're not committing to a specific percentage.

Speaker 11

Okay, great. Thank you and congrats.

Speaker 3

Thank you.

Operator

Thank you. And I am showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.

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