Good day. Thank you for standing by. Welcome to the Nutanix Q4 Fiscal 2021 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 now like to hand the conference over to your speaker today, Richard Valera, VP, Investor Relations. Please go ahead.
Good afternoon, and welcome to today's conference call to discuss the results of our Q4 fiscal year 2021. Joining me today are Ajay Ramaswamy, Nutanix's President and CEO and Dustin Williams, Nutanix's CFO, after the market closed today, Nutanix issued a press release announcing financial results for its Q4 fiscal year 2021. If you'd like to read the release, please visit the Press Releases section of our IR website. During today's call, management will make forward looking statements, Including statements regarding our business plans, strategies, initiatives, vision, objectives and outlook, As well as our ability to execute thereon successfully and in a timely manner and the benefits and impact thereof on our business, operations and financial results, Our financial performance and targets and use of new or different performance metrics in future periods, our competitive position and market opportunity, The timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic and industry trends, and the current and anticipated impact of the COVID-nineteen pandemic. 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 detailed description of these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10 ks and 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 representing our views in the future. Please note, unless otherwise specifically referenced, All financial measures we use on today's call are expressed on a non GAAP basis and have been adjusted to exclude certain charges. We have provided to the extent available Reconciliations of these non GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release.
Lastly, Nutanix management will be participating in the Deutsche Bank Technology Conference on September 10, The Piper Sandler Global Technology Conference on September 13th and the Jefferies Software Conference on September 14th. We hope to see many of you at these upcoming events. And with that, I'll turn the call over to Rajeev. Rajeev?
Thank you, Rich, and good afternoon, everyone. I hope you and your loved ones are healthy and safe as we continue to navigate Through the COVID pandemic. Our Q4 was a strong end to an excellent fiscal year, which is marked by consistent execution and good progress across both financial and strategic Objectives. Nutanix delivered a strong fiscal 'twenty one across a number of areas. We exceeded our guidance every quarter of the year as our team consistently overachieved.
We saw good linearity within each quarter as we benefited from Ongoing operational improvements in our go to market engine. We also saw improved deal economics and the continued build out of our renewals business, which will help drive acceleration of our top line As we approach the completion of our subscription journey. Importantly, we drove these top line improvements While carefully managing expenses, leading to a substantially improved bottom line performance compared to our prior fiscal year. On the strategic front, we received a $750,000,000 investment From Bain Capital in Q1, which provided additional financial flexibility to fund our growth. And we made good progress On our alliance partnerships, extending our relationships with HPE, Lenovo And most recently, signing a new agreement with Red Hat.
Looking deeper at Q4, we outperformed On all our key metrics, seeing all time or recent records in a number of areas. We reported record revenue up 19% year over year, the best growth we've delivered in the last 3 years. We saw record ACV billings, which grew 26% year over year, Our highest growth rate in over 2 years. We again saw good linearity in Q4, which contributed to better than expected cash flow. The underlying momentum In the business gives us confidence in providing strong guidance for the Q1 of our fiscal 'twenty two and we believe Positioned us well to achieve our plan for the balance of the year.
Overall, we were pleased With our Q4 and fiscal 2021 financial results, which were delivered against the continued challenging backdrop of COVID-nineteen. We saw strong momentum across our entire hybrid multi cloud portfolio During the quarter, including both core and emerging products, our emerging products new ACV bookings grew over 100% year over year and saw a record rolling 4th quarter attach rate of 41%. One example of a complete portfolio solution was our largest deal of the quarter, a multimillion dollar ACV deal With a Fortune 100 Financial Services company that expanded their use of our core HCI software To run their mission critical applications, along with a large expansion of their Era footprint to automate and simplify their database management. Nutanix clusters, A key component of our hybrid multi cloud platform continue to see solid momentum during the quarter. One example was a global 2000 real estate e commerce company that purchased clusters On AWS to expand their Nutanix footprint and enable their lift and shift data center consolidation.
In Europe, a large government ministry chose our cloud platform along with a unified storage solution, including Files and Objects as their primary cloud platform. I'd now like to take a moment to highlight some key takeaways from our Investor Day in June. We highlighted our leadership position In the large and growing hyperconverged infrastructure market and the substantial additional opportunity we see in our adjacent markets. Specifically, we noted a combined total available market opportunity in our core and adjacent markets that we expect to exceed $60,000,000,000 by 2025. We shared our plan To focus on delivering a single platform that takes Nutanix's hallmark simplicity and performance into the hybrid multi cloud market.
We laid out a roadmap for our solution strategy and how we are streamlining our portfolio, Focusing on fewer bigger bets in the areas of database as a service, unified storage and desktop as a service. We also explained how we are expecting to see go to market leverage By executing on low cost renewals, benefiting from solution selling And from increasing our focus on partnerships. And finally, we provided a model targeting Free cash flow breakeven in the second half of calendar twenty twenty two and 25% annualized ACV billings Growth through fiscal year 'twenty five. And we are tracking well on both metrics. Next, I'd like to also provide an update on some of our previously discussed priorities.
1st, on deepening our partnerships To provide more impact on how we go to market, our recently announced partnership with Red Hat, the world's leading provider of commercial open source solutions brings together Red Hat's industry leading Red Hat Enterprise Linux Our RHEL and its OpenShift container platform with the simplicity, flexibility and resilience of our cloud platform. Nutanix is now the preferred choice for HCI on Red Hat's platform And our AHP hypervisor is certified to support rail and OpenShift on the Nutanix platform. Likewise, OpenShift is now the preferred choice for enterprise full stack Kubernetes On the Nutanix platform. Finally, the 2 companies also have a mutual support agreement and a research and development roadmap focused on ensuring customer success and enhanced integration respectively. This partnership provides customers with a full stack platform to build, scale and manage containerize and virtualize cloud native applications in a hybrid multi cloud environment.
We see it as an important proof point in our strategy of furthering customer choice and enhancing our platform by partnering with other Best in class providers. During the quarter, we also announced an expanded partnership With HPE, in which we are offering Nutanix Era, our multi database operations and management solution bundled With HPE ProLion service as a service to HPE GreenLake, in addition to our core platform, This is already a part of the GreenLake offering. Now I'd like to turn to another of my priorities, diversity and inclusion. We released our 1st environmental, social and governance or ESG report during the quarter. Detailing our initiatives in these areas and establishing a baseline we can measure ourselves against.
This is an important first step in our journey towards having greater diversity and inclusion in our workforce and enabling more sustainable businesses for both Nutanix and our customers. We also held our first Global Women's Conference in July, where Nutanix leaders and outside experts spoke to our entire employee base about how we can redefine leadership to include diverse backgrounds and perspectives. In closing, I'm pleased with the execution across the board in our Q4 as well as our full fiscal year, especially given the challenging backdrop created by the pandemic and the fact that it was the 1st year of our ACV model. We are entering our fiscal 'twenty two With a strong position. Finally, I'm looking forward to connecting with many of you at our upcoming .NEXT User conference being held September 20 through 23, where we look forward to welcoming tens of 1,000 of
Our customers and partners.
Please see our earnings press release or website for registration details. And with that, I will hand it over to Dustin Williams. Dustin?
Thank you, Rajeev. Q4 was another quarter of consistent execution as well as a great way to finish out Sales were strong throughout the entire quarter. There was no unusual deal slippage And we build backlog during the quarter. In Q4, we exceeded all guidance metrics And our overall business model continues to be strengthened by the benefits of our subscription focus. A few key highlights for the quarter included record new ACV billings, record total ACV billings, Record total billings, record total revenue, record emerging products, new ACV bookings, Record number of greater than $1,000,000 transactions in the quarter and we had the largest year over year Total percentage growth in revenue since Q4 'eighteen.
Now I'll move on to some specific Q4 And before I get into the specific details for the Q4 and FY 'twenty one financial highlights, I would like to remind you that all future financial disclosures will align with the disclosure and guidance metrics roadmap that we provided during our June 22 Investor Day presentation. For further details and clarifications about our go forward I would encourage investors to review the slide titled Guidance and Disclosure Plan FY 'twenty 2 from my Investor Day presentation. ACV billings for Q4 were 176,000,000 Reflecting 26% growth year over year, above our guidance range of $170,000,000 to 175,000,000 And ahead of The Street consensus number of $173,000,000 New ACV bookings, which includes new logo ACV As well as upsell ACV experienced the strongest year over year growth rate since Q1 'nineteen. ARR at the end of Q4 was $880,000,000 growing 83% year over year. Run rate ACV as of the end of Q4 was $1,540,000,000 growing 26% year over year Compared to our estimated growth of mid-twenty percent range.
Our average contract term length increased slightly The 3.4 years versus 3.3 years in Q3 'twenty one as our largest deal in the quarter from an existing customer was a 5 year term. We also had a few other notable 5 year deals from existing customers. At this point, we would expect our average contract term length to trend back down next quarter, most likely in the low 3 year range As Q1 usually carries a significant amount of federal business and our federal customers typically have much shorter average contract term lengths. Assuming contract term lengths do approach the low 3 year range in Q1, we would approximate the TCV The ACV billings ratio to be somewhere around 2.25 versus the 2.4 in Q4. Revenue was $391,000,000 growing 19% from Q4 'twenty, substantially above The Street consensus number $365,000,000 We have not seen this level of year over year growth rate in revenue since Q4 'eighteen.
Emerging Products new ATV bookings grew in excess of 100% year over year. Emerging Products attach rate was 41%. The Q4 sales rep productivity significantly exceeded our assumptions set forth at Investor Day. Our non GAAP gross margin in Q4 was 82.9% versus our guidance of 81.5% to 82%. Operating expenses were $373,000,000 versus our guidance of $380,000,000 to 3.85,000,000 Our Q4 expenses included approximately $12,000,000 in severance expense related to our previously disclosed Sales and marketing headcount reduction.
Our non GAAP net loss was $55,000,000 for the quarter or a loss of $0.26 Q4 linearity remained very good. DFOs in Q4 were 48 days, up from 37 days in Q3 'twenty one and down significantly from 68 days in Q4 'twenty. Our free cash flow for Q4 was once again aided by good linearity coming in at a negative $58,000,000 better than the Street consensus. We closed the quarter with cash and short term investments of $1,210,000,000 Down slightly from $1,250,000,000 in Q3 'twenty one. Before I provide The Q1 guidance overview.
Let me first do a quick recap of FY 2021. ATV billings were $594,000,000 growing 18% versus FY 'twenty and versus the $590,000,000 to $595,000,000 range we provided at our Investor Day. Once again, As we mentioned last quarter, our total fiscal year ACV billings are not derived from the simple addition of the 4 fiscal quarters. For our reported quarterly ACV billings, we annualize any deal that is less than 1 year in term length And our yearly ACV billings calculations eliminate any duplication that happens with the renewal of a deal that occurs within the period The sum of the 4 fiscal quarters of ACV billings have exceeded the adjusted annual ACV billings by 6% to 7%. We would encourage investors to account for this distinction during the modeling process.
FY 'twenty one new ACV billings, which includes new logo ACV as well as upsell ACV, were $433,000,000 growing 11% versus FY20 and versus the 430 The $435,000,000 range we provided at our Investor Day. Our renewal business performed well within our expectations. FY 'twenty one renewals ACV, including LOD support renewals, were $161,000,000 growing 38% versus FY 2020 and versus the approximate $160,000,000 estimate we shared at Investor Day. FY 'twenty one renewal TCV, including LOD support renewals, were 179,000,000 Growing 32% versus FY 'twenty. Revenue was $1,390,000,000 growing 7% versus FY 'twenty.
The yearly revenue growth was impacted by term compression during the year. Customer retention, including LOD and subscription, Closed the year at 96%. The gross retention rate for our subscription business continued to operate within the range Was 124% versus the Investor Day estimate of approximately 125%. The net dollar retention rate for our subscription based business only was 158% versus the Investor Day estimate of approximately 155%. Emerging Products new ACV bookings grew 97% In FY 'twenty one and we also added 61 G2K customers in FY 'twenty one.
Now turning to our Q1 'twenty two guidance. The guidance for Q1 is as follows: ATB billings to be between $172,000,000 $177,000,000 representing year over year growth of 25% to 28%. Gross margin of approximately 81.5 percent, operating expenses between $365,000,000 $370,000,000 Weighted average shares outstanding of approximately 216,000,000. The Q1 ACV billings guidance, which calls Year over year growth of 25% to 28% compares to the actual growth of 14% in Q1 'twenty, 10% in Q1 'twenty one and versus the Street consensus growth for Q1 'twenty two of 23%. Based on continued good execution and increasing renewal base and a robust backlog, all supported by a Strong product portfolio, we are pleased to project a Q1 'twenty two year over year ATB billings Growth rate that is on par with our strong Q4 'twenty one ACV billings growth rate of 26%.
Based on the Q1 'twenty two ACV billings guidance, we expect ARR to grow 65% or more year over year. I'd like to make one final comment regarding our ACV billings trends for FY 'twenty two. Due to our growing mix of renewals, For the second half of FY 'twenty two, we would expect a higher amount of ACV billings in Q4 And investors to carefully look at their quarter over quarter APB billings estimates to ensure that the strong growth in Q4 relative to Q3 is reflected in models. With that operator, could you please open the call up for questions?
Thank you.
Your first question comes from the line of Aaron Rakers with Wells Fargo.
Yes, thanks. Congratulations on the quarter.
I just wanted to kind
of maybe level set the discussion around the base of renewal opportunity and kind of the linearity throughout This next fiscal year. Dustin, is there any way that you can help us frame just relative in size how large the base of renewal opportunity looks like this year Relative to fiscal 2021 and what exactly that linearity does look like as a progression through the quarterly Quarterly numbers through fiscal 'twenty
here? Sure. So Aaron, we provided a fair amount of Detailed during the Investor Day, we obviously just reported on the 'twenty one numbers. We gave a 'twenty three estimate. We gave A 25 estimate during the Investor Day too.
Relative to FY 2022, Again, there won't be a, obviously a massive increase in FY 'twenty two on the renewals just because you've got some offsetting LOD Support renewals declining and then the subscription renewals increasing. I will tell you And I mentioned this in the script that the first three quarters of the fiscal year Have a slight increase, but not much. But there's a large tranche in Q4 that starts to kick in on the subscription renewals. And that's why the comment was just to kind of look at the quarterly splits there because there will be just based on the ATRs available Renew in Q4, the amount increases quite a bit relative to certainly Q2 and Q3.
Yes. And then the real quick follow on is that you Talked about the average weighted terms coming down relative to 3.4 in fiscal 1Q. Do you think that we continue to trend downward through the course, the successive quarters through fiscal 2022?
Well, probably not that much. Now, 10th here or there maybe, but Again in Q1, the federal business ends up being a much larger percent of the total business Because of the and federal terms are quite a bit lower in general. So and you saw the same thing actually From Q4 to Q3, you saw a 3 tenths over year decrease.
So
As we see it today and as we do,
we're seeing already I
suspect it's kind of be flattish a little bit, but I don't think there's any change The 2.8 to the 3.0 as we see it today as we laid out at Investor Day.
Very good. Thank you, Dustin.
You're welcome.
Your next question comes from the line of Jason Ader with William Blair.
Yes, thanks. I have 2 quick ones. First is, It seems like you're taking share in the HCI market in the first half Calendar 2021. And I just was hoping you could talk about why you think that's happening?
Yes, look, I mean, I think we've Dave said, we are seeing some nice quarter over quarter improvement in our win rates. Our DTM execution has continued to improve through the entire year and there was a very strong offering That continues to get better. We're the best in the storage, moving that to hybrid cloud today as you know. We provide the best freedom of choice across high We have a number of customers across hardware platforms and across cloud native stack and of course going forward across multiple cloud. Customers like the simplicity of what we provide and our NPS at 90 continues to be better than almost everybody else.
So we have a sustainable advantage here combined with the increasing focus and improvements in our operational execution. That's what's leading to the first half.
All right. Thanks. And then just a follow-up on that is, In terms of this whole cloud versus on prem debate, how are your conversations with customers changing over the last year? And are you seeing any pendulum Swing back towards on prem environment.
Yes. I mean, I think there's been a lot of said about this recently, right, about cloud. And I think customers are going to be more nuanced about how they go to the cloud. There's just both existing applications and new applications that come into play here. And Obviously, customers now are looking at this and saying, well, I need to be in a multi cloud world.
I don't want to be just locked to 1 cloud. I'm going to be running my applications across all clouds. And we are seeing very Specific use cases that customers are looking at, right? So one cloud of customer was people who've been on prem wanting to migrate to the cloud Our user cloud, we have seen them use us to expand and take expand in their existing footprints into the cloud, look at disaster recovery as a use case. For customers that are having more public cloud oriented historically, they're starting to look at cloud costs, they're starting to look at data governance They're starting to look at cloud lock in and see that they're also looking at More of a multi cloud environment and hybrid environment.
So I think there's definitely more conversations that are happening with our customer base around beef. And again, we're starting to see the use cases and come into play, right, in production.
Thanks very much.
Your next question comes from the line of James Fish with Piper Sandler.
Hey guys, thanks for the questions. Pretty sure that's Nutanix's biggest upside in 4 years versus our estimates. So nice to see the software side really driving that upside and Coming out of this transition at great speed. So kudos to you guys. At a high level, are you seeing a pickup or steady state For the convergence of traditional 3 tier storage architectures to hyperconverged and going back to what you just said around Any changes in the use cases for hyperconverged versus the last few quarters?
Yes. Dave, as we said at our Investor Day, the fundamental benefits of HCI continue to apply, right? Simplicity In operations management, bringing these silos together, providing good TCO compared to a traditional 3 tier. And what we're seeing now is HCI is able to address a broad set of enterprise workloads. And we're seeing that.
Example, our largest deal of this quarter was with the largest financial services customer. And they are, of course, running all the databases on our platform. And that's the high performance workload. And so we're seeing broadening adoption of And so I think that trend continues. And then second trend really is, as you go to the cloud, HCI becomes logical.
It's not just an on prem 3 tier replacement, But it also becomes a platform that they can then take.
Understood. And any further commentary you guys can provide on how sustainable this And how that compares to your analyst day Xers? And Dustin, specifically, any change to how you're thinking about that mid to high teens growth for next The year that you alluded to, I think, as
I said, we're running ahead of the Investor Day Estimates certainly in Q4 and we think the productivity will continue to be strong. We have a lot of autonomous Following that, we're trying to enable with the channel. We'll start some solution selling. Clearly, partnerships are picking up, not to mention So
lots of good stuff happening
from a Productivity perspective, I think then
if you kind of look at the market, it's
a little bit higher level there, the demand environment is good, the pipeline is strong. And not only is the pipeline strong, the quality of the pipe continues to get really stronger as we go on here. The product is performing well. Emerging products continue to increase, deal sizes and ASPs are increasing, the renewals are building and stuff like that. So when you step back on that and then you look at FY 2022, we feel good about 2022, obviously our plan for FY 2022 in meeting that.
And the modeling assumptions that we provided at Investor Day for FY 2022, that was obviously meant to be a kind of a one time thing to help With the modeling efforts, we're really happy what happened in Q4. We're really pleased with what We can have guided certainly for Q1 and the likes there. So we feel really good As we go into the fiscal year, and we'll address things as we move forward. But at this point in time, again, that was meant to be kind of a one time Look at 'twenty two, but in general, we feel very good about 'twenty two going into the fiscal year. Helpful.
Thanks, guys.
Your next question comes from the line of
Congrats from my side as well. Just taking a step back, could you maybe talk about the demand environment? Are you Kind of seeing the hesitancy around big data center transformation projects kind of fade away at this point. And how did the demand environment kind of trend through August versus expectation that you're seeing any kind of down due to delta or anything in the behavior here?
Yes, maybe I'll start there, Pindell, in here. So first of all, I think we're seeing a healthy demand backdrop. And it's being driven by this broad acceleration of digital transformation initiatives, which to some extent COVID actually catalyzed. And there is some extent of pent up demand being realized now as customers have now become used to operating in a COVID environment. Now for us specifically, I would say the demand is being driven by 4 key areas.
First is Continuing the what there was already a question about this about continuing modernization of their legacy 3 tier infrastructure, running more work Helping extend as they move to the cloud, right, we're helping our customers migrate to the cloud. And then of course, Hybrid and remote work is here to stay, and that's another driver for what we're seeing. So overall, we're certainly Delta has not Impacted demand. We're still seeing good demand environment, and people are continuing to invest
And One thing about clusters, I guess, I think it's now available in the quarter. What has been the early feedback from federal Customers, I know you're going into your biggest federal quarter, but are there conversations forming in that area? How do you
Yes, I think within as you know, FluxUp just became available here in GovCloud, AWS GovCloud. And we do expect again a number of government agencies are looking at operating in GovCloud. And so We are fairly early in our conversations with them, but essentially the same use cases apply to them as well, right? So How do I extend myself to the public cloud? How do I do disaster recovery?
How do I do capacity expansion? How do I consolidate data centers? So The exact same use cases we are starting to see also play out in government. And again, I think it's still early days for us As the offering just became available. And I hope we'll be able to talk to you about future government customers and about government customers in future
Understood. Thank you.
Your next question comes from the line of Jack Andrews with Needham.
Good afternoon. Thanks for taking my question. I was wondering
if you could unpack a little bit more the very strong net dollar retention rates you're seeing, The 158 percent, excluding life of devices, could you provide some more context on what's really driving that number?
Yes, let me take it and Rajeev might want to chime in here. But there's only a few Inputs to that output of 158. And obviously, the upsell It's continuing to get better. Again, the deal sizes are getting larger. I think as we continue to go up Stack with our product offering, that's a natural enhancement to total deal sizesupsell in the business.
And the gross retention rate, which you focus internally on that. But the gross retention rate is still a relatively small base. But what we've seen so far, we're happy with the gross retention rate. So that will come down a little bit as We showed in the Investor Day, but I think that will still be up at the top there as far as a metric from a competitive perspective. Again, the product continues to perform well.
The MPS IV still stays at 90 plus and all those things add up to a lot of upsell and Increased deal sizes and a pretty good net retention rate.
Yes. That makes sense. Appreciate that.
Yes, I would just add to that thing. I mean, all this played out in the largest deal that we had this quarter, right? Everything that Dustin said played out. Large customer went in with a Small deployment of that project continuously expanded their deployment. They're continuously buying more and buying more of our portfolio.
That's great to hear. And maybe just as a follow-up, Rajeev, just given an increasing focus on solution based selling, could you just speak to maybe How you navigate the relationships with some of your partners who also would typically look to bundle technology offerings into their own
Yes. And I think if you look at the solutions that we're focused on today, it's cloud, it's hybrid cloud being 1, It's database management being another, for example, and of course, our traditional focus on end user computing. And all of these play very nicely from a solution perspective. If you look at some examples with our switch partners, so when we go with HPE, they're looking at bundling our software from a cloud platform perspective Along with their hardware and offering all of that as a subscription with GreenLake. And they're doing that for both our hybrid cloud as well as now our database So typically what we find is our solution selling combined with what we
can do with
partners, Including like Lenovo, for example, 2 end to end virtual desktop offering, right? Server, PCs, That's the full stack from Nutanix, all delivered as a service. So it just enhances the overall value of the solution and makes it easier for Customer, the first is, whatever they need to achieve that business outcome in a simpler form.
Appreciate that context. Thanks and congratulations on the results.
Thank you.
Your next question comes from the line of Katy Huberty with Morgan Stanley.
Thank you. Good afternoon. With all the demand indicators and sales productivity metrics Tracking really well, exiting last year. What's driving the October quarter ACV billings decline of 1% Sequentially, if you look over the past 3 years, that was up about 3% on average. Is it just a function of the business is scaling and we'll see more seasonality in the business or anything else to read into that?
Then I have a follow-up.
Sure. Katie, as far as The guide, as you saw there, it's still a year over year increase of 26% compared to the 14% 10% From the prior 2 years, so it's a huge year over year increase. Q1 usually typically when you look at it It's a bit slower for us. Certainly, EMEA, when you look what the trends were there and the wild It's kind of federal and so far federal is playing out fine in Q1. So we'll see, but I think we have a lot of things going for us certainly not only in Q1 but in FY 'twenty two.
So we'll see how things play out there. And obviously a pretty robust backlog, which gives us a lot of comfort.
Got it. That's clear.
And then, Dustin, OpEx is tracking below your prior guidance of $380,000,000 to $385,000,000 Is that tied to temporary dynamics around just the timing of reopening and labor market tightness? Or is this a more reduction in what you think the spending run rate is?
Well, as we again said at Investor Day, you'll see Single what we expect in 'twenty two was at that point in time we were seeing single digit growth year over year. Clearly, one of the bigger variables is travel and that still continues to stay locked down for the most part Anyway, so we'll see some increases there. But I think the focus on expenses continues to be Pretty robust from what we're doing on the expense side of the equation. It will continue that way. We need to fund obviously reps and Engineering projects and things like that, which we're doing.
But I think we're still assuming we're still somewhere in that Single digit growth year over year, but we'll continue to try it just like we did this quarter and in the guide for Q1 to continue to drive it down, But still grow the business at our 25% plus.
And Dustin, is the 172 reduction in sales and marketing heads This quarter, which is bigger than the prior quarter, is that just the restructuring? Is that all related to the restructuring that you referenced in your prepared remarks? Clearly, restructuring is in there.
Not all of it, but clearly, restructuring is in there. And that's Some of the severance that you saw that we booked in the quarter there.
Okay. Thank you.
Your next question comes from the line of Wamsi Mohan with Bank of America.
Yes, thank you and congrats on the strong results. Dustin, you noted some seasonality in ACV billings weighted more in 4Q Given what is available to renew, is that a dynamic that carries over into quarters beyond that? And when should we expect Stabilization of that and I have a follow-up.
Well, you're not going to see ultimately stabilization for a while because it's going to continue to increase, Right. And we've given the FY 'twenty three number in the Investor Day presentation there. So you're going to continue to see an acceleration Of the renewals, that's again what we've been working on for the last 3 years or so with the transition to subscription. More tranches are going to come in for renewal. So that's what you're going to see there.
The comment I made on Q3 to Q4 was Because still it's not a massive amount in any given quarter, what I was saying there is we just had a pretty big bump up in ATR We expect from Q3 to Q4 relative to the size of Q3 and that's why we thought we'd call that out just to make sure that was clear from a modeling perspective. But again, into FY 'twenty three, you'll continue to see it will be a little bit more linear, but there'll be some bumps up and down, but More linear, certainly, we expect to see Q3 to Q4.
Obviously, try and why it will sort of not be as big of step On sequential basis?
All on this well, on a quarter over quarter, You'll still you've got a benchmark again that we're running to for FY 'twenty three. So that kind of gives you a feel for that type of growth from 'twenty two to 'twenty Okay. Thanks. But it did an increase, right?
Yes. No, I get it. I'm just questioning Like there's abnormality in those trends that you would want to call out at
a later point in time.
As a follow-up, Rajiv, on I think at the Analyst Day, you noted that VDI was 20% to 25% of workloads. I'm Curious, just given back to work in many places, if you're expecting to see any impact from that at all? I mean, on the PC side, clearly there was concerns of demand rollover and I understand the distinction between media and PCs, but just wondering if you're seeing Any signs of that business decelerating? Thank you.
No, I would say not, Wamsi. I mean, no signs of that. And I think largely the portfolio is going to continue to remain hybrid even if people come back to the offices. It's going to be a mix. And so I would say that business for us has tended to be in that 20% to 25% range Overall, so I don't see any significant changes for us as people come back to work here.
Okay. Thanks a lot.
Your next question comes from the line of Rod Hall with Goldman Sachs.
Yes, thanks for the question, guys. I wanted to Jump into the I think the comment you made, Dustin, on the 5 year deal. And then I think you had said there were other 5 year deals in there. Just curious if you can, Firstly, help us quantify that at all. Give us any idea what the billings percentage that was 5 years in that billing stack looks like.
And then also any color around why these customers are doing 5 year deals? Were they 5 years before and they're just kind of renewing it 5 years? Or You've given in better deals for 5 years. Any kind of color you can give us on why you're seeing that? Thanks.
And I have a follow-up.
Yes. So The quarterly investor presentation should be loaded on the website, Rod. So that will give you The ACV breakout by term, so that I think that answers that question for you. And on the 5 year deal, yes, these are existing customers that had been purchasing On a 5 year term. And again, once you have somebody in 5 years, it takes a little bit if we can to get them down to 3 or something like that.
This happens to be a the largest deal which has turned into What we refer to sometimes what I refer to as a chronic repeat purchaser. It's kind of a textbook example. It's a very large customer That just continues to eat away at different workloads and use cases. And in this case, there was a fair amount of Emerging products in there also, which was really nice to see. But it's yes, so there we were existing and then we had Several others that were already at the 5 year mark and they bulked up on some purchases.
So that's what we saw there In Q4 and as I said in Q1 that will reverse and come back down to the low 3s, 3 or low 3s, somewhere around there.
Right, right. Yes, I'm sorry I missed that in the presentation, but thanks for that Dustin. That's good color. The other thing is on the terms. So I know you're saying it comes back down next quarter.
What are you thinking about term length now as we look out Several quarters, I mean, we were thinking it kind of slowly slips, I think, toward 3. But do you think it are we stabilizing now at this kind of 3.3, 3 point Do you think it keeps coming down just a little bit? Kind of what are you thinking now on term length?
Yes. Same thought I had A year or 2 ago that everything I see with the mix of new business and existing business, it's still And then we put this in the Investor Day presentation, 2.8 to 3.0, somewhere around there. I think this fiscal year, it probably Remains in the 3 low 3 range somewhere around there and as we migrate into 2023 maybe get a little more tweak down there. But as Everything that we see today, that would be the continued view on terms.
Great. Okay. So yes, this quarter just kind of an anomaly and we continue on that trend we've been on. All right, great. Thanks.
I appreciate it.
Yes.
Your next question comes from the line of Mehdi Hosseini with SIG.
Yes. Thanks for taking my question. Two follow ups. It's great to see the booking. And I'm just wondering if you can help me understand, Is it a way qualitatively or quantitatively you can talk about booking by like a native data application versus Hybrid model?
Okay. Maybe I can I mean, we've tried to quantify some of these by use cases, right? So the one that I mean, I think, In general, what I would just say is today largely, first of all, the bulk of our business is What I would call on prem, right? And we are starting to see more of it more to hybrid as we see these early use cases of customers migrating to the public cloud. And that portion is still relatively small, but growing nicely, right?
So the bulk of it today is on prem, but I expect that over time we will see more and more of a mix of Public cloud based workloads, in addition to our on prem workload. So that's one piece of it. The other way to think about it is we also what kind of workloads are we running. And there, like you said, the one workload that we quantified is end user computing, and that typically runs between 20% 25% of our overall business. Jarets of it tends to be other workloads like databases, which we haven't quantified, but databases, anything other server virtualization type workloads.
So perhaps that will be a reasonable framework.
Sure. Sure. Yes. You referenced, I think I'm not mistaken, And I think the native data is the fastest growth, but perhaps is the smallest piece. It's secular, but it's going to take some time
When you say native, are you talking about cloud native or Cloud native.
I
mean for us Yes. I mean, I think when we talk about $60,000,000,000 TAM, we talked about a couple of different pieces of it, right? One is our core HCI, hyperconverged, where he says That continued to grow. It's eating into 3 tier. It's capturing more enterprise workloads and that business that continues to grow very nicely, right, over the next several years.
It extends to hybrid cloud, right, which is the public cloud component of this, which we talked about. And unified storage, which is all about files and objects and where we are gaining And then of course database as a follow-up, right? Yes. And those are the components, and we broke it down for you.
Yes. And actually, that share gain is Was premises on my question. If I just look at Slide 16, Your share gain your 53% of AHV adoption like 8 quarters ago, it was in the mid-forty. So you definitely are well over 50% and as a follow-up to 60% and where do we go from there?
Yes. I expect that our AHV adoption will continue to pick up For multiple reasons. First is that AHV is getting stronger and stronger as a hypervisor in terms of broader and broader sets of capabilities. 2nd, for example, is that partnerships such as the one that we just did with Red Hat, where now Red Hat is adopting AHV as a platform. So I do expect that it's going to continue to pick up over time as more and more customers adopt AHV for their workloads.
So it's too hard to see predict whether there's going to be ceiling On it or not at this point, a little too early, but I would expect it to continue to tick up. And it certainly has historically done.
Sure. And then if I may, just a quick scaling of your new products would complement, as I imagine, At some point, incremental share gain will be more challenged, could help sustain the growth.
Yes. I mean, I think we are very excited about our new products. As Dustin pointed out, They were 41% of our number of our deals, I think, This last quarter and they're all unlocking great opportunities for us, right? Database management and database As I said, there's a huge big market opportunity where We are relatively small but growing rapidly into that. Unified storage for us is all again growing into a large existing market Where our presence is relatively small, rapidly, and also attached to our core platform.
Yes. Great. Thank you.
And your next question comes from the line of Simon Leopold with Raymond James.
Thank you for taking the question. I wanted to ask about How we should be thinking in terms of the percent of billings coming from renewals. This quarter It was about 12% and you've provided a forecast for fiscal 2025 Getting to 40, but I'm imagining that this should not be a linear progression and I think this quarter was very similar to last. How should we think about that rate of change for that particular metric?
Yes, you'll see again that some of this buried into the Investor Day package, so you might want to re reference that, Simon. There's a 23 number in there. So that gives you a feel there. So again, you'll see it ratcheting up in 2023 As a percentage and both from ACV percentage and a TCV percentage, But that bigger increase will occur in FY 'twenty three rather than FY 'twenty two. And that's just An ATR timing perspective on these deals that average 3 plus years, it just they haven't come up for renewals yet.
But in In FY 'twenty three, there's just larger tranches that naturally come into play.
Thanks. And I guess the other question may be a little bit difficult to quantify. But in making the transition where you want to focus more on renewals and essentially spend less on sales and marketing And new customer acquisition. If hypothetically, you underinvest and underspend, how long would it take for you to observe That you've made a mistake in terms of your allocation. What's the sort of delay in the productivity?
Any way we could judge this? Thank you.
Well, yes, I can mention that and Rajeev might want to also pitch in here. But I just want to make something clear. It's not like we're taking Massive cost out of the new and the upsell part of the equation, a vast majority of the leverage is going to come from the mix, Right. As the mix of the renewals increase,
we're very pleased with our progress in the
quarter, which is working well from our
test drive and all that stuff, Which is really helping those efforts, but it's not like we're cutting significantly On the new and the upsell, this is more we'll continue to focus on that and do whatever we can, but the majority of this leverage is going to come from that Next shift.
That's helpful. Thank you very much.
And your last question comes from the line of Erik Suppiger with GMP Securities.
Yes. Thanks for taking the question. Congrats on a good quarter. I know you guys don't sell hardware, but can you comment I think your software is often tied to hardware. Can you comment a little bit on what effect do you see from many of the component constraints that are out there on the hardware side?
And then secondly, just curious if there's been any change on the competitive front, in particular with VMware?
Sure. Let me take that, Eric. So look, as you know, our software runs on a variety of hardware platforms and it's not also it's not tied 1 on 1 to new hardware sales, Right. So it's not that we're always selling along with hardware. Sometimes people buy software independent of hardware.
They'll have hardware that they've already purchased. And of course, they have a choice. So the supply chain impact on our business so far has been relatively Modest. We've seen some customers pulling forward some orders to try and ensure that they have access to the product, but the results so far has Pretty minimal for us. And that said, we're very comfortable with our 1Q forecast And we will need to continue to monitor the situation here.
So that is the first. And the second, I think you said was about the competitive dynamics in terms of what we are seeing in the market. I would say again in Q4, we saw a nice quarter over quarter improvement. So, our largest competitor, but also other HCI competitors. And There's a focus in terms of execution on in this category.
Our product is strong. We provide simplicity, freedom of choice, a great customer experience with our NPS sitting at 90. So the product Operating is really strong. Our go to market operations have continuously improved over the last several quarters, and we're benefiting from that as well. So that combination of a good product plus good strong and improving go to market execution is what's leading to these win rates.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.