Nutanix Q4 2024 Earnings Call Transcript

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Provided by Quartr
August 28, 2024

Key Takeaways

  • Solid Q4 and FY24 financial performance, with Q4 revenue of $548 million (+11% YoY) and FY24 revenue of $2.15 billion (+15%), ARR of $1.91 billion (+22%), free cash flow of $598 million (28% margin) and a Rule of 40 score of 43.
  • Achieved the highest number of new logo wins in three years, including multimillion-dollar deals with a Fortune 100 financial services firm, a Global 2000 semiconductor provider, a top North American university and an EMEA research services customer.
  • Deepened partnerships with Cisco, Dell (launching the Dell XC Plus HCI appliance) and NVIDIA to expand addressable market and leverage joint go-to-market channels.
  • Rolled out key product innovations such as GPT-in-a-Box for generative AI, Nutanix Data Services for Kubernetes (NDK) and Nutanix Kubernetes Platform (NKP) to simplify hybrid-multicloud application and data management.
  • Guided FY25 revenue of $2.435–2.465 billion (+14% at midpoint), non-GAAP operating margin of ~15.5–17% and free cash flow of $540–600 million (≈23% margin), noting continued elongated sales cycles amid a growing pipeline of larger deals.
AI Generated. May Contain Errors.
Earnings Conference Call
Nutanix Q4 2024
00:00 / 00:00

There are 11 speakers on the call.

Operator

Thank you for standing by, and welcome to Nutanix 4th Quarter 2024 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. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Rich Valera, Vice President of Investor Relations.

Speaker 1

Good afternoon, and welcome to today's conference call to discuss Nutanix's 4th quarter and fiscal year 2024 financial results. Joining me today are Rajiv Ramaswamy, Nutanix's President and CEO and Rukmini Subaraman, Nutanix's CFO. After the market close today, Nutanix issued a press release announcing Q4 fiscal year 2024 financial results. If you'd like to read the release, please visit the Press Releases section of our IR website. During today's call, management will make forward looking statements, including financial guidance.

Speaker 1

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 most recent annual report on Form 10 ks and our 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, you should not rely on them as predictions of future events. 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.

Speaker 1

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. Nutanix will be participating in the Goldman Sachs Communicopiast and Technology Conference in San Francisco on September 9 and the Piper Sandler Growth Frontiers Conference in Nashville on September 10. We hope to see you at these events. Finally, our Q1 fiscal 2025 quiet period will begin on Friday, October 18. And with that, I'll turn the call over to Rajeev.

Speaker 1

Rajeev?

Speaker 2

Thank you, Rich, and good afternoon, everyone. Our Q4 was a solid finish to our 2024 fiscal year. We continue to see steady demand for our solutions driven by businesses prioritizing infrastructure modernization initiatives, while looking to adopt hybrid multi cloud operating models and optimize their total cost of ownership. In the Q4, we are happy to have exceeded all our guided metrics. We delivered quarterly revenue of $548,000,000 up 11% year over year and saw another quarter of strong free cash flow generation.

Speaker 2

We also saw the highest number of new logos we've seen in 3 years, an encouraging sign of building traction with some of our go to market partnerships and initiatives. Our full year 2024 results demonstrated good progress on a number of fronts. Financially, we delivered solid top line performance driven by continued strong performance from our renewals business. We saw good growth in our pipeline of larger deals as we shifted our focus up market and saw increased engagement from prospects looking for alternatives to their existing infrastructure solutions. Even as our land and expand business underperformed related to our internal expectations due to the longer than expected sales cycles we see, we delivered revenue of $2,150,000,000 up 15% year over year and ARR of $1,910,000,000 up 22% year over year.

Speaker 2

Our bottom line performance was even stronger. We generated free cash flow of $598,000,000 almost 3 times higher than last year, resulting in a free cash flow margin of 28% and a Rule of 40 score of 43. In FY 2024, we also saw tangible progress on the partnership front with significant new or enhanced partnerships with Cisco, Dell and NVIDIA. And I'm pleased that Dell XC Plus, our new turnkey HCI based appliance offering with Dell is now generally available. We see these partnerships as both expanding our addressable market and providing us with meaningful go to market leverage.

Speaker 2

Finally, we continue to innovate in FY 2024 with important new product releases and enhancements to our Nutanix cloud platform. These included the launch of GPT in a box, our solution for streamlining the adoption of generative AI by enterprises. We made meaningful progress towards our goal of becoming the best platform for modern applications, including the launch of Nutanix Data Services for Kubernetes or NDK, which offers consistent data services across both virtual machines and containerized apps as well as the recent release of Nutanix Kubernetes Platform or NKP to simplify management of modern applications on premises and in any native public cloud service. Our most significant wins in the quarter demonstrated the appeal of the Nutanix cloud platform to organizations that are looking to modernize their IT footprints and adopt hybrid cloud operating models, as well as those looking for alternatives in the wake of recent industry M and A. Our largest win in Q4 was a multimillion dollar ACV deal with a North American based Fortune 100 Financial Services Company.

Speaker 2

Following a roughly year and a half engagement with us, they chose to replace their existing solution with Nutanix Cloud Platform, including our AH3 hypervisor as well as Nutanix Cloud Manager. This customer who had been using a competing HCI solution in much of their footprint was able to utilize their existing hardware for their Nutanix software deployment, obviating the need for a hardware refresh. We also had a number of significant wins that included our Nutanix cloud clusters or NC2 capability, which enables workloads to be seamlessly and efficiently run-in both private and public clouds. One of these was with an existing customer, an EMEA based provider of global research services. This customer was looking to accelerate the migration of their workloads to the public cloud, while ensuring the workloads once migrated will run as efficiently and cost effectively as possible.

Speaker 2

Having already made a commitment to Microsoft Azure, they purchased licenses for Nutanix Cloud Platform through the Azure Marketplace with the intent of utilizing its NC2 capability to shift their on prem workloads to Azure. Another good example was a significant new customer win with a top North American university. Most of our customers start with our platform on prem. However, this customer was motivated by their decision to migrate away from a competing platform they were using to run their virtual machine workloads at scale in the public cloud on AWS. Due to dissatisfaction with recent changes at their existing supplier.

Speaker 2

They chose Nutanix Cloud Platform to migrate their applications running into public cloud to our NC2 on AWS, while also adopting our cloud platform to run their on prem workloads. They also plan on adopting Nutanix Cloud Manager for consistent self-service and automation across their private and public cloud estate. A final notable example is a win with an Asia based Global 2,000 semiconductor provider. This full stack win, which was also a displacement of our primary competitor, enabled the customer to streamline their operations, increase their level of automation and reduce their dependence on more expensive proprietary storage solutions. It included adoption of Nutanix database service or NDD to enable them to move off of their expensive commercial databases to open source databases managed by NDD.

Speaker 2

This customer also plans to adopt our unified storage solution, replacing multiple third party storage options. Finally, they also plan on utilizing NC2 on Azure to enable them to shift applications to the public cloud, including performing lift and shift of IT workloads of acquired companies. We see these wins as reflecting the value customers see in our platform as they look for seamless and efficient application portability while adopting hybrid multi cloud operating models as well as the value of our partnerships with Azure and AWS. In closing, I am pleased with our solid Q4 and fiscal 2024 results and the progress we continue to make on multiple fronts, including our financial model, our partnerships and our ongoing innovation in our cloud platform towards our goal of becoming the leading platform for running applications and managing data anywhere. We also remain focused on capitalizing on what we view as a long term opportunity to gain share in face of recent industry disruption and are encouraged by our early successes, including some of the wins I just highlighted.

Speaker 2

Finally, I would like to express my sincere gratitude to our investors, customers and partners for their trust in us and to our employees for their hard work that led to these results. And with that, I'll hand it over to Roopmini Sevarama. Roopmini?

Speaker 3

Thank you, Rajeev, and thank you, everyone, for joining us. I will first discuss our Q4 fiscal 2024 and full fiscal year 2024 results, followed by our guidance for Q1 fiscal 2025 and for the full fiscal year 2025. Results in Q4 2024 came in above the high end of our range across all guided metrics. ACV billings in Q4 were $338,000,000 above the guided range of $295,000,000 to $305,000,000 representing year over year growth of 21%. Revenue in Q4 was $548,000,000 higher than the guided range of $530,000,000 to $540,000,000 representing a year over year growth of 11%.

Speaker 3

ARR at the end of Q4 was $1,908,000,000 representing year over year growth of 22%. In Q4, we continue to see modestly elongated average sales cycles compared to historical levels. Average contract duration in Q4 was 3.1 years, 0.1 year higher than Q3. Non GAAP gross margin in Q4 was 86 0.9%, higher than our guided range of 85% to 86%. Non GAAP operating margin in Q4 was 12.9%, higher than our guided range of 9% to 10%, largely due to: 1, lower operating expenses as a result of higher than expected non recurring payments related to one of our partnership agreements and a few other items and 2, slightly higher gross margin and revenue.

Speaker 3

Non GAAP net income in Q4 was $76,000,000 or fully diluted EPS of $0.27 per share based on fully diluted weighted average shares outstanding of approximately 285,000,000 shares. DSOs based on revenue and ending accounts receivable were 39 days in Q4. Free cash flow in Q4 was $224,000,000 representing a free cash flow margin of 41%. Free cash flow in Q4 benefited from the collection on the 8 figure ACV transaction that was booked in fiscal Q3. Moving to the balance sheet.

Speaker 3

We ended Q4 with cash, cash equivalents and short term investments of $994,000,000 down from 1.6 $51,000,000,000 at the end of Q3. The primary reason for the reduction in our cash balance was Bain Capital's conversion of the 2026 notes, which we announced in June. We settled the conversion in Q4 by paying $817,600,000 in cash and delivering approximately 16,900,000 shares of common stock. Please note that the entire conversion value had previously already been included in our fully diluted weighted average share count on an if converted basis. The actual settlement included a portion settled in cash rather than exclusively in shares, resulting in the issuance of approximately 17,000,000 shares, which is 12,000,000 lower than the 29,000,000 that we had previously included on an if converted basis.

Speaker 3

Moving to capital allocation. We repurchased about $25,000,000 worth of shares in Q4 and $131,000,000 worth of shares in all of fiscal year 2024 under the share repurchase program previously authorized by our Board of Directors. Looking at our full year financial results, we exceeded the high end of all guided metrics for fiscal year 2024. ACV billings in fiscal year 2024 were $1,162,000,000 higher than our guidance of 1.12 $1,130,000,000 to $1,130,000,000 and representing a year over year growth of 21%. A reminder that the annual ACV billings is slightly lower than the sum of the ACV billings from the 4 quarters due to adjustments for deals with duration of less than a year.

Speaker 3

Revenue in fiscal year 2024 was $2,149,000,000 higher than our guidance of $2,130,000,000 to $2,140,000,000 and representing a year over year growth of 15%. We are pleased to have exceeded the $2,000,000,000 revenue threshold in fiscal year 2024. We ended fiscal year 2024 with an ARR of $1,808,000,000 as mentioned earlier, a year over year growth of 22%. Net dollar based retention rate or NRR at the end of fiscal year 2024 was 114%. As the fiscal year progressed, we saw a higher mix of larger deals in our pipeline.

Speaker 3

These larger opportunities often involve strategic decisions and C suite approvals, causing them to take longer to close and to have greater variability in timing, outcome and deal structure. And as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels. Largely due to these dynamics, our fiscal year 2024 land and expand ACV and ARR performance were below our initial expectations at the beginning of the fiscal year, and we expect these dynamics to continue. Our renewals performance continued to be good through the fiscal year, and a reminder that renewals tend to be at a lower aggregate average contract duration compared to land and expand. Average contract duration in fiscal year 2024 was 2.95 years, flattish to fiscal year 2020 and slightly higher than expected, partly due to some larger deals with greater than average duration.

Speaker 3

Non GAAP gross margin in fiscal year 2024 was 86.7%. Non GAAP operating expenses in fiscal year 2024 were $1,515,000,000 an increase of 7% year over year as we began to make additional investments primarily in research and development and sales and marketing. Non GAAP operating margin in fiscal year 2024 was 16%, representing an improvement of over 700 basis points year over year. We also delivered our first full year of positive GAAP operating income of $8,000,000 in fiscal year 2024. Non GAAP net income was $384,000,000 or diluted EPS of $1.31 per share based on fully diluted weighted average shares outstanding of approximately 294,000,000 shares.

Speaker 3

Free cash flow in fiscal year 2024 was $598,000,000 higher than our guidance of $520,000,000 to $540,000,000 and almost 3 times higher than last year's free cash flow. Free cash flow margin in fiscal year 2024 was 28%, implying free cash flow margin expansion of 17 percentage points year over year. Free cash flow in fiscal year 2024 benefited from approximately CAD30 1,000,000 in non recurring payments related to a partnership agreement as previously referenced. Overall, fiscal year 2024 was a significant year marking our 1st year with positive GAAP operating income, significant free cash flow generation of $598,000,000 and free cash flow margin of 28%, while growing ARR at 22% and revenue at 15% year over year. We also delivered a rule of 40 score defined as the sum of revenue growth and free cash flow margin of 43% for fiscal year 2024, an improvement of 14 percentage points year over year and 28 percentage points higher compared to 2 years ago.

Speaker 3

Moving to fiscal year 2025. The guidance for the full year is as follows: revenue of 2.435 dollars to $2,465,000,000 representing a year over year growth of 14% at the midpoint non GAAP operating margin of approximately 15.5 percent to 17 percent, free cash flow of $540,000,000 to $600,000,000 representing a free cash flow margin of approximately 23% at the midpoint. I will now provide some commentary regarding our fiscal year 2025 guidance. 1st, as previously mentioned at our 2023 Investor Day, we are streamlining our metrics by not reporting or guiding ACV billings starting in fiscal year 2025. ACV billings was intended as a transitional metric during our subscription evolution and we believe that now is the time to evolve away from that metric.

Speaker 3

We are also no longer guiding to non GAAP gross margin, which was previously useful as we navigated our business model changes, leading to significant improvements in non GAAP gross margin. We will continue to guide to revenue, non GAAP operating margin and free cash flow on an annual basis and to guide to revenue and non GAAP operating margin for a subsequent quarter. 2nd, and moving on to assumptions in our guidance, we are seeing continued and significant land and expand opportunities and a growing pipeline for our solutions. However, we continue to see a higher mix of larger deals in our pipeline, which is driving greater variability in our land and expand bookings. These larger opportunities often involve strategic decisions and C suite approvals at the customer or prospect, causing them to take longer to close and to have greater variability in timing, outcome and deal structure.

Speaker 3

And as we mentioned previously, we continue to see a modest elongation of average sales cycles relative to historical levels, which we expect to continue. 3rd, the guidance assumes that renewals will continue to perform well in fiscal year 2025. 4th, the full year guidance assumes that average contract duration will be flat to slightly lower compared to fiscal year 2024 as renewals continue to grow as a percentage of our billings. 5th, the non GAAP operating margin guidance assumes incremental prudent investments in sales and marketing and R and D targeted towards addressing our large market opportunity. It also factors in the annualized run rate of the incremental investments we made in fiscal year 2024.

Speaker 3

It also assumes a $20,000,000 to $25,000,000 headwind in operating expenses relative to fiscal year 2024 from payments related to one of our partnership agreements. Specifically, there was about $44,000,000 of this benefit to the R and D operating expense line in fiscal year 2024 and we anticipate it to be $20,000,000 to $25,000,000 in fiscal year 2025. And 6th, the free cash flow guidance reflects an approximately $30,000,000 headwind relative to fiscal year 2024 from lower interest income as a result of our lower invested cash due to the cash payment on the conversion of the 2026 convertible notes. We expect free cash flow in fiscal year 2025 to also benefit from the approximately $30,000,000 in non recurring payments related to a partnership agreement, similar to the benefit we saw in fiscal year 2024. It is expected to tail off towards the end of fiscal year 2025.

Speaker 3

Moving to Q1 2025, our guidance for Q1 is as follows: revenue of $565,000,000 to $575,000,000 non GAAP operating margin of 14.5% to 15.5 percent fully diluted weighted average shares outstanding of approximately 287,000,000 shares. In closing, we are pleased that our Q4 fiscal year 2024 performance exceeded guidance across all metrics. We are excited about the long term market opportunity and Nutanix's ability to deliver compelling outcomes for customers and prospects. 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.

Operator

Certainly. And ladies and gentlemen, we ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our first question comes from the line of George Wang from Barclays. Your question please.

Speaker 4

Yes, thanks for taking my question. Firstly, just curious if you have any update on the Broadcom kind of churn, especially in the last couple of quarters, you just talked about that after the initial wave of strong engagements, the activity slowed just because of Broadcom walking back some of the initial initiatives. So we're now more in favor of retaining some of the prior customers. Just curious if that dynamic has changed.

Speaker 2

Hi, George. Rajeev here. Yes, we are it's largely an unchanged multiyear opportunity to gain share like we said last quarter. While the sales cycles have been a bit longer than we had initially anticipated, this far we haven't really seen any meaningful changes in our win or loss rates on these opportunities. As we talked about in our prepared remarks, we are seeing some of these larger opportunities close.

Speaker 2

We gave you a few examples in the prepared remarks. And I do expect that we'll continue to see more of these over time. Now in the midsize or smaller customer segments, we're seeing significantly increased engagement and opportunity as many of these smaller companies look for alternatives and generally less competitive engagements relative to the larger customer opportunities. Along with our increased leverage from our go to market partnerships that we've talked about as well as our programs and incentives that we have in place, this dynamic has also been one of our drivers for our larger, stronger new logo performance.

Speaker 4

Okay, great. Just if I can squeeze in quickly, it's nice to see one customer in Financial Services, you guys mentioned, without changing the underlying hardware. Previously, that the gaming sector has been one of the gaming sector has been sort of upgrading the underlying hardware to wait for the hardware refresh. I guess, can you talk about sort of a better path going forward that kind of now seems to especially after GAO partnership, maybe you're kind of removing some of the constraints related to the underlying hardware refresh. Maybe you can give a little bit more color on that.

Speaker 2

No, that's a very good question, George. I think if you look at the installed base out there in data centers, vast majority of it, I don't have the exact number, but roughly around 80% of it is what we call 3 tier infrastructure, separate storage, compute and networking. And as you know, we have a HCI solution today in the market. And if you want to replace the 3 tier with HCI, it's a better architecture, more cost effective long term, but it does require hardware refresh. Now the remaining 20% is HCI, of which we are a market leader and our competition has some of the rest.

Speaker 2

Now in this particular case, as example that we talked about, the customer was already on HCI with a competing product. And when you're already on HCI, we've been quite successful at having our software be able to run on existing hardware because it's already HCI hardware. And that's what happened in this particular account. And so for that subset of customers that are already on HCI, the migration path is easier. And in some subset of those cases, we don't need a hardware refresh and that's what happened here.

Speaker 2

On the 3 tier, it does require a hardware refresh. Now we're also addressing the 3 tier market to your point. One aspect of our partnership with Dell is that we said, we would they would be the 1st that we would support at external storage, Dell PowerFlex. And now the whole idea of doing that is now we can find an easier insertion into 3 gs deployments without having to change out the hardware. Now that solution is not available in the market today.

Speaker 2

It's only going to be available sometime next year. And over time, we anticipate being able to offer that support to a broader set of third party storage arrays.

Speaker 4

Okay. Thank you. I'll go back to the queue.

Operator

Thank you. And our next question comes from the line of Jim Fish from Piper Sandler. Your question please.

Speaker 5

Hey guys, thanks for the questions here. Chief, do want to ask around essentially, you alluded to a little bit of GPT in a box here. I don't think we can be on a conference call anymore without talking about AI. But are you seeing any sort of trend of repatriation of workloads back to private cloud for just a core workload, as well as for AI? I guess, any update on the GPT in a box?

Speaker 2

Yes. I'll sorry, Jim, good question. I'll give you a 2 point answer to that. First, on general purpose workloads and then second on GPT. For general purpose workloads, to your point, for steady state workloads, I think people are getting to the conclusion that it's much more cost effective to run those on prem in a private cloud environment.

Speaker 2

We've seen some repatriation. We've also seen much more deliberation in terms of whether that workload goes to the public cloud in the 1st place, because a lot of the deployment is still on prem of enterprise workloads. So we're certainly seeing the trend and realization in customers to say, the steady state workloads, we can run them more cost effectively in private clouds. Now on GPT specifically, I think a lot of the initial interest in GenAI has been in this creation and in training of LLMs, large aggregate models and a lot of that is being done in the public cloud and massive GPU farms. And we don't have a we don't play that fully well.

Speaker 2

But on the other hand, we think the bulk of the enterprise opportunity in terms of how companies are actually going to use it is potentially going to be on prem because at the end of the day, the Gen AI workload applications have to be run wherever the customer data is. And in a lot of cases, sensitive customer data is either inside data centers or at the edges. And so a platform like ours, GPD in a box provides a very simple, easy to use, secure way of running Gen AI applications. And so the use cases that we've seen so far have been around co piloting, around document search and analysis, around customer support, around enhanced fraud detection. We are seeing certainly continued traction.

Speaker 2

It's still early days for us, but across multiple verticals, healthcare, financial services, government. So early days for DPT adoption in the private cloud enterprise, But I think that's going to be a growing market for fine tuning, RAG, retrieval augmented generation and for inferencing in terms of running these AI workloads close to the data in a private and secure way.

Speaker 5

Makes sense. And, Rukhmini, I'm sure you're anticipating this question already. But I guess how much as we think about that 25 guide, how much incremental contribution are you expecting either from a growth dollar perspective, however you want to put it, between the VMware opportunity, the Cisco and Dell partnerships versus the expansion within your existing installed base that, if memory serves me right, should be accelerating a little bit in terms of the renewals up for grabs this year? And is there a way to think about where ARR actually exits this year? Thanks guys.

Speaker 3

Thank you, Jim, for that question. So in terms of contribution from the various buckets that you called out, Jim, so I'll give you some qualitative color on that, right? So we've talked about, in general, we are happy with our pipeline generation overall. We have talked about the growing pipeline and the fact that the pipeline from larger deals is growing faster and that can lead to variability, right, with respect to timing or outcome or more complex deal structures and so on. And so some of those dynamics we expect to continue next year.

Speaker 3

Similarly, with just modestly elongated sales cycles across the board, not just large deals, right, but across the board and we expect that to continue next year as well. In terms of the contribution from Cisco, we do expect the Cisco contribution to grow in fiscal year 2025 relative to last year. And we do expect a small initial contribution from a Dell XC Plus, which is the new offering that's generally available now. And we expect small initial contribution from that in 2025 and expect that to grow as well over time. And so all of that is taken into account when you think about the fiscal year 2020 5 top line guide that we provided, Jim.

Speaker 3

The other thing you alluded to is renewals. So yes, our renewals business continues to grow nicely year over year. So that's factored in there as well. And I think the last part of your question was around ARR. So we will of course continue to report ARR on a quarterly basis.

Speaker 3

And while we noted that ARR underperformed for fiscal year 2024 relative to our internal expectations, we're not providing guidance for ARR.

Speaker 2

Yes. The only thing I'll add to that, Pupani, would be I think, Jim, you also had a question on the Broadcom opportunity. And like I said, that's largely unchanged, but it's also very difficult to explicitly pass that out because every one of our deals historically, we've been we have been competing against VMware in the past and that continues. So there's some level of influence. These are the only reason why people come to us.

Speaker 2

It's a little hard for us to tease it out separately.

Speaker 3

Yes. Thank you, Rajeev. That attribution is certainly nuanced. So we do expect it to continue to contribute some, but we wouldn't be overly precise on that. So thank you, Rajeev, and thank you, Jim, for the question.

Speaker 4

Thanks guys.

Operator

Thank you. And our next question comes from the line of Meta Marshall from Morgan Stanley. Your question please.

Speaker 6

Great, thanks. I wanted to get a sense maybe kind of circling back to the question that's been asked a couple of times. Just in terms of do you feel like you've kind of figured out where Broadcom's line is, where kind of the definition of your customer is? Or are you kind of refining where you think the most actionable opportunities are? Or are you still kind of in that discovery mode of figuring out what are the most actionable opportunities?

Speaker 6

And then, Rukmini, I know Jim just asked about it, but just kind of any of the timing of renewals or co terming just given that we've had some kind of early renewal dynamics and kind of co terming issues over the past couple of years that we should just be mindful of as we go into fiscal 2025? Thanks.

Speaker 2

Hi, Amita. I'll start and then Rukmani can answer the second part. Independent of the Broadcom situation, as we look at our addressable market, historically, Nutanix has been quite strong in what I would call the smaller side of enterprises and the higher end of commercial mid market. But over the last few years, we have deliberately made it further up market towards larger enterprises because that's where we are underpenetrated and the biggest TAM opportunity sets. So we have realigned our segmentation over the past few years to focus more on that market.

Speaker 2

Now the products are ready. We've done a lot of work on the product side. The GTM side now we are ready. We've got some good partnerships. Now we also clearly understand that when you get to the large customers, the G2K account, for example, or the Fortune 100 type accounts, those are going to be more competitive.

Speaker 2

And that's where clearly Broadcom is more focused on. And those engagements tend to be long, they tend to be bigger, but also very fruitful if and when we do win it. And as you can see here, we are starting to win some of those. We talked about an 8 figure ACV win last quarter. This quarter we had a multimillion dollar ACV win.

Speaker 2

So those tend to take time, but are well worth it when they do happen. So we've got a focus there for sure. The mid market or the smaller side of the enterprise has been historically our sweet spot and it's also less of a focus for Broadcom given their explicit focus on the bigger accounts. It also tends to be less competitive and easier migrations as well. So that continues to be our historical sweet spot.

Speaker 2

It continues to be a sweet spot. But the bigger opportunity for us in growth is also now sitting at the top end of the pyramid.

Speaker 3

And I'll take the question, Meta, on renewals and expectations for renewals in fiscal year 2025. So first, I'd say we did have in fiscal year 2024 just overall good performance in renewals. And I think to your point, it did include really good discipline from the team around economics for the renewals in terms of pricing. It did include some early and core term renewals. And as we said before, those are good in our mind as long as they come in at good economics because the customer is willing to renew with us and renew their commitment to us earlier and often give us the cash earlier as well.

Speaker 3

And then core terms, of course, is simplification of their real estate, right? So that's both the customer and us well in terms of managing their footprint. So we did have some of that. Now when we look at fiscal year 2025, our available to renew pool, you can think of that as effectively a pipeline for renewals continues to be continues to grow. It's a strong year over year growth.

Speaker 3

And it's roughly similar year over year growth, similar to what we saw in fiscal year 2024. And then in terms of timing, I think perhaps your question was around sort of seasonality of that meter. It does move around a little bit, but in general, our fiscal Q2 and Q4 tend to be sort of higher quarters for us given Q2 has calendar year end and budgets flushed and things like that. And of course, fiscal year Q4 is the end of our fiscal year and there are incentives around that. So Q2 and Q4 historically tend to have higher in general available to the new pools relative to Q1 and Q3.

Speaker 3

But that's sort of how we think about the renewals opportunity in fiscal year 2025.

Speaker 6

Great. Thanks so much.

Speaker 3

Thank you, Nikhil.

Operator

Thank you. And our next question comes from the line of Wamsi Mohan from Bank of America. Your question please.

Speaker 7

Hi, thanks for taking the question. It's Ruplu filling in for Wamsi today. I have one for Rajeev and one for Roopini. Rajeev, is the demand environment materially different from 90 days ago? And can you talk about the pricing environment?

Speaker 7

Specifically, I think you've said in the past that some customers may wait for their hardware to be depreciated. Is pricing a lever you can use to maybe drive faster share gains? For example, can a smaller customer be induced more to go with Nutanix? And as a management team, how do you trade off share gain versus margins? And I have a follow-up for Roopni.

Speaker 2

Yes. Roopni, those are all very good questions. At a top level, the demand environment has not changed and it's been fairly stable. As we've said over the last several quarters, we are seeing some other longer sales cycles, people getting more approvals and more awareness of PCO before they make the purchasing decision. So that part has not changed.

Speaker 2

Now in terms of how we look at the opportunity, now hardware refresh, as you can see, right, I mean, when we do need a hardware refresh, that tends to be a significant factor in terms of customers' timing on a deal. Now the

Speaker 3

key things to

Speaker 2

keep in mind is that hardware refresh is not just one point in time. Hardware refresh has happened depending on the size of the estate at various points. And we can use those points to secure an insertion. It may not be a full insertion because hardware always gets replaced over time and multiple cycles. So we may be able to insert for say one workload where a portion of the hardware is getting replaced, say this year and maybe other portions of the hardware will only get refreshed in 2, 3 years from now.

Speaker 2

So that's sort of normal engagement. Now we have offered some promotions to customers in terms of providing them sort of some overlapping windows where we can give them discounted licenses for a period of time. Now I will say that hardware costs tend to be quite significant. So it's not that we are able to necessarily subsidize hardware costs ourselves, okay. But sometimes we may be able to work with partners, hardware partners who are more interested in doing that themselves.

Speaker 2

So that can be a possibility as well when it comes to the hardware costs. And then look, I think when it comes to landing new customers, especially significant ones, we are willing to be quite aggressive in terms of we already have aggressive promotions out there and incentives for customers and we will do what is needed within reasonable bounds to go win these deals while at the same time protecting our margins. So that's probably a broad answer. I would say net net, we are being aggressive wherever needed. We are working with hardware partners to see if we can mitigate some hardware refresh opportunities.

Speaker 2

And at the same time, keep in mind, Ruplu, we are also working to broaden the set of places where we can insert without requiring a hardware refresh, existing HCI environments or the ability to reuse servers, that customers may already invested in. And then over time, as we get our 3rd party storage support, we'll be able to do more even more of that. Okay.

Speaker 7

Thank you, Rajiv, for the detailed answer there. Rukmini, I wanted to ask you, your free cash flow guidance for fiscal 2025 is very strong above the prior 2023 Investor Day guidance. How should we think about the cadence of that in the first half versus the second half of fiscal twenty twenty five? And then when we look at the remaining metrics, for example, revenue is now at the lower end of what you had thought, what you had guided in the Analyst Day. Is it given that, is it reasonable for investors to expect that the outer years say fiscal 20 27 expectations should also be lower or could there be a material acceleration over the next 2 years given the dynamics of renewables and available to renew as well as new logos that you're winning?

Speaker 3

Hi, Duplu. Thank you for that question. So first, I think your first question was around free cash flow. And so we are pleased with our free cash flow performance in fiscal year 2024 and happy to guide free cash flow where we did, which as you noted, the midpoint is above the high end of the range of what we had put out last year at our Investor Day. Now in terms of the quarterly cadence there, Ruplu, we don't, of course, guide quarterly to free cash flow, so there can be some variation there, including, as we pointed out in the last couple of quarters, where because we collect cash for multiple years upfront generally, meaningful deals, right, if there are larger deals that we collect cash for upfront or if it's a longer duration transaction than that, those can cause swings, Ruffalo.

Speaker 3

So yes, so we don't guide to quarterly, but that's sort of the quality of color. I will say that when you think about the operating expense increase over time, we've talked about you can sort of see the implied OpEx growth year over year in our margin guide. And that would be more gradual over time, right, because we're going to invest in sales and marketing and in R and D. And some of that will be over time. The OpEx does include, for example, all of the annualized run rate from investments in 2024, all those are annualized into 2025, plus it includes salary raises for our employees that became effective.

Speaker 3

So some of those are more run rate and others will be more gradual as we ramp into the spend over time. So that's the first part of your question. And I think the second part was more around the sort of medium to longer term financial targets that we put out at our last Investor Day. So while we don't plan on commenting on those medium term financial targets on an interim basis, We are happy to note, as you just said, Ruplu, that the fiscal 2025 free cash flow guidance at the midpoint is above the range, at what we put out at Investor Day. And our initial fiscal 2025 revenue guide is within the range that we have provided at that time.

Speaker 3

We continue to focus on driving durable top line growth and expanding free cash flow and operating margin and driving to operating sustainably at the rule of 40 plus over time. So that's sort of been our philosophy. We continue to drive that philosophy, and we're not commenting specifically on those numbers at this point.

Speaker 7

Okay. Thanks for all the details and congrats on the results. Thank you.

Speaker 3

Thank you, Roblaut.

Operator

Thank you. And our next question comes from the line of Jason Adler from William Blair. Your question please.

Speaker 8

Yes. Thank you. One quick one is on the 8 figure deal that you announced last quarter. Did you recognize any revenue this quarter from that deal? And then what's the kind of schedule look like on rev rec for that particular transaction?

Speaker 3

Yes. Thank you, Jason. So as we said, I think last quarter, we did collect the cash for that transaction, the entire sort of PCV value of that transaction. But all of the revenue recognition is over multiple years starting in fiscal year 2025. So no, we didn't I think there was a small professional services portion that began in Q4, Jason, but all the license revenue is in fiscal year 2025 and beyond.

Speaker 8

Okay. Thank you. And then, Rajiv for you, just I think a bunch of people have asked this question around the VMware displacement opportunity, but I wanted to kind of frame it like this, which is, do you think you have a little bit of misalignment from a go to market standpoint right now, just because you're moving up market over the last couple of years in terms of the types of customers that you're targeting and yet it seems like most of the low hanging fruit from VMware disruption is coming more in that kind of low end of lower end of the market and kind of low end of the enterprise?

Speaker 2

So to be clear, Jason, I don't think we have misaligned because we are targeting our GTM resources on where we think the maximum dollar opportunity lies, right? And the more of the dollar opportunity is sitting higher up in the pyramid. By the way, which is the same reason why Broadcom is equally focused on those customers, right? So for us to grow, I mean, we already have we are well penetrated in the lower end of the market and we will continue to we still have very much focused there, right? We haven't moved away from that.

Speaker 2

That's our sweet spot. That's our installed base and that's where we can go in and capture more customers. We are talking about everything ranging from school districts to retailers to those types of public sector. These are all types very much sweet spot. But the bigger SAM opportunities for us certainly sitting in the top of the pyramid.

Speaker 2

And so we have to as a company be successful, we have to go after those, right. And we have the products, we have the GTM. Yes, we know those are going to be harder fought. But when we do win them, like you saw with the 8 figure opportunity that we won last quarter, those can be pretty significant.

Speaker 8

Got you. But I thought the 8 figure one that you won last quarter was like a 3 year or 2.5 year sales cycle. So that wasn't really related to the Broadcom.

Speaker 2

Well, I think it was partly related to the Broadcom thing, very much so. I mean, like, again, it's hard to attribute everything 100% to Broadcom. Yes, we were engaged with them for 2 years, but a lot of the big customers at the very top of the pyramid are very sensitive and aware. As soon as the Broadcom deal was announced, they started thinking about what they're going to do. It didn't wait for the deals to close, unlike many of the smaller customers to see what was going to happen.

Speaker 2

So this customer, we had certainly our unique value proposition and our use cases that they were driving the thinking and then the Broadcom piece of course was an added boost. So it's one of these things where it's hard to attribute how much of it was Broadcom, how much was something else, but that's a good example. Similarly, the example from this quarter's call also is very much the same, right? This Fortune 100 Financial Services customer very much driven by the Broadcom situation.

Speaker 8

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Simeon Leopold from Raymond James. Your question please.

Speaker 9

Hi guys. This is Victor Chu in for Simon. I wanted to follow-up on that last question, kind of regarding customer migrations. Within VMware's footprint of the 3 tier infrastructure customers that you described, can you help us think about what percentage of those would be able to fairly easily adapt their existing applications and platforms to AHB? And kind of what percentage for better or worse are kind of married to VMware because of their dependency on some of the more advanced kind of virtualization functionalities on that?

Speaker 2

Yes. So that's a good question, Victor. I would say the vast majority of applications running on a VMware high provider on 3 tier can run very well on AHV in an HCI environment. There are perhaps things at the edges where it's not technical gaps, it's really more ecosystem certification gaps that might hinder some of them. There might be an application that's certified on ESX, but not certified on AHV.

Speaker 2

And over the last few years, we've built that out as well. So there are going to be some corner cases that are not certified. But for the most part, we can address pretty much anything that is running on a 3 tier infrastructure on VMware and run that effectively on Nutanix HCI on AHV. But there's the other barriers that we talked about, right, in terms of hardware refresh cycles and then the timing of the renewals. Those are some of the other things that we still have to factor in, but it's not a technical barrier.

Speaker 9

Okay. That's very helpful. And then maybe can you help us think about how the economics compare with Nutanix, having an AHV, having kind of a hypervisor included in the platform, the economics, does that make the economic materially different or is it just kind of marginal difference and more of a capabilities kind of thing?

Speaker 2

Yes, I think so Victor, on that again, so clearly historically this has been the case. When a customer migrates from a 3 tier deployment over to a head tier deployment, they save a lot, right? They save 30%, 40% at least in terms of TCO costs. If you factor in everything, including the hardware costs, the operating costs, all of it's a pretty substantial savings. And so that continues to be the case today, right?

Speaker 2

I think the barrier, of course, is you've got to you've invested in the hardware, you want to depreciate it before you actually go buy new hardware. But those savings and the value of HCI related to C tier is very established and that continues.

Speaker 9

And is the transition for an existing VMware HCI customer to Nutanix much easier?

Speaker 2

Much easier. Yes, this Fortune 100 win that we talked about was exactly that situation. The customer had a lot of competitive HCI offerings deployed. It was an easier migration because for them, they didn't have to change out their hardware. We could just replace the other software with our software.

Speaker 4

Great.

Speaker 9

That's very helpful. Thank you.

Speaker 3

Thank you, Victor.

Operator

Thank you. And our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your question please.

Speaker 3

Hey guys, this is Zimmern on for Matt Hedberg. Thanks for taking our question and congrats on the quarter. I just have one. Can you touch more on the linearity of large deals within the quarter? And did you see any deals being pushed out or pulled in this quarter?

Speaker 3

And then looking ahead, what early trends have you been seeing so far in August? And then maybe just general linearity for 2025 given some of the uncertainty of these large deal timings? Thanks. I'll take that, Rajeev, and you should feel free to add in. So for linearity in Q4, I would say it was more or less as we expected.

Speaker 3

I think your question specifically was on linearity with respect to large deals. And those we've talked about can be more unpredictable than other portions of the business, just given they tend to be often more strategic, involve C suite approvals, things like that. So it can be more unpredictable. But overall, I would say linearity in Q4 was largely as expected. In terms of push out or pull in, I think was the next part of the question.

Speaker 3

As we think about last Q4 coming into this year, nothing unusual there, I would note. I think it was sort of what we'd I think would expect for that time of year. So nothing unusual there. And then again on August linearity, okay, the only thing I'd sort of to call out in Q1 is it's the U. S.

Speaker 3

Federal end of fiscal year in September, of course. But again, that's all factored into how we think about our guidance and ability to collect free cash flow and things like that. But as I said earlier, I think the overall linearity can become a little more unpredictable because of the mix of the large deals, right, as that grows over time and it is something that we're continuing to watch closely.

Speaker 2

Great. Thank you.

Speaker 3

Thank you.

Operator

Thank you. And our next question comes from the line of Mike Sicos from Needham. Your question please.

Speaker 10

Thanks for taking the questions guys. I just wanted to ask, I know last quarter the company gave some great color on the number of $1,000,000 plus ACV opportunities in the pipeline, growing 30% year on year, growing more than 50% if we look at it on a dollar basis. Did these statistics still hold in Q4? And do we have a sizable enough cohort to start really understanding how much longer these sales cycles are for these deals?

Speaker 3

Hi, Mike. Yes, good question. So we're not going to provide that metric necessarily quarterly, Mike. But as we said, I think we are happy overall with pipe creation and are seeing meaningful opportunities with those larger deal segments. So that continues to be good in terms of pipe creation.

Speaker 3

And I think your second question around do we have enough data points, relatively early, the pipeline has grown nicely. But as we've talked about here, some of these larger deals can take a really long time. We gave one example where it was 2 years, another one this quarter where it was a year and a half. And so it is variable and it can take long. And so I'd say, I don't think we have a lot of that data or enough data points, right, under our belt to sort of draw too many conclusions from that.

Speaker 3

And that's what I even in the previous question here that was asked in terms of it is something we watch closely, right, in terms of tracking those deals, but also thinking about do we have multiple ways to get to the number, right? If deals X and Y close or don't close, do we have other deals A and B that could get us there? So that's definitely a discussion that we have internally and factor that into our guidance.

Speaker 10

Got it. Thank you for that. And I guess just for a quick follow-up, appreciate all the color on the assumptions here. Can you help us understand that, call it, dollars 30,000,000 benefit to free cash flow we're expecting from the partner payments this year? Again, just because we're this is essentially the 2nd back to back year we're now receiving this kind of payment.

Speaker 10

Is it the same partner? Any other color would be beneficial.

Speaker 3

Yes. Thank you, Mike, for that question. I think it's I would be happy to clarify that. So there is these there are these non recurring payments from this partner and there is a timing difference between OpEx and free cash flow. And so the commentary that we had provided was we had about a 40 $4,000,000 benefit in fiscal year 2024 over the course of the year to the R and D OpEx line in fiscal year 2024.

Speaker 3

And we expect that same $44,000,000 benefit, right, it becomes more like $20,000,000 to $25,000,000 in fiscal year 2025. So that's the $20,000,000 to $25,000,000 headwind that I was referring to in OpEx in 2025, relative to fiscal year 2024. So all of that is operating expense commentary. Now when you look at free cash flow, there's a bit of a delay in when the cash comes in relative to that payment. So we got about $30,000,000 of a cash benefit from that in fiscal year 2024.

Speaker 3

We expect another $30,000,000 in 20 and then it will taper off. There may be a small portion in 2026, but it will then taper off as we end this fiscal year in 2025. And it's nonrecurring because we don't expect this to be an ongoing thing. It is continuing into this year, which we didn't fully anticipate about 3 months ago, but we do think that over time it will taper off.

Speaker 10

Got it. Thank you so much.

Speaker 3

Thank you, Mike.

Operator

Thank you. This does conclude the question and answer session as well as today's program.

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