Okay. Thank you, everybody, for joining. Tim Long here, Barclays IT hardware, equipment analyst. Happy to have Nutanix management team here with us, Rajiv and Rukmini. Thank you so much for coming.
Thank you.
No safe harbor. We're good?
Yeah.
We're good. Okay. Excellent. So yeah, we've got a bunch of stuff to discuss here, but maybe we'll start with some of the hot, you know, hotter topics. Obviously, last quarter with the RevRec dynamics, maybe we can kind of look at this in a few parts, you know, to talk about greater flexibility from customers, to talk about, you know, some of the third-party OEMs. So maybe walk us through kind of the changing dynamics that, you know, you guys experience in those aspects.
Yes. So why don't I start with that? Thank you for having us, Tim. It's good to be here. So in our October quarter, first thing to say is we saw bookings, which is sort of activity in the quarter, come in slightly ahead of our expectations. And what we said was on the revenue side, to Tim's point, we had revenue come in towards the low end of our guided revenue range. And the primary reason for that was we saw late in the quarter, we just saw more orders that came in with start dates outside of the October quarter, which meant that there was a shift out of revenue from that Q1, October quarter into future periods. Why did that happen?
There were, you know, one primary reason why that happened was we saw more migrations that customers are seeking to do, which is good news for us. We want to be doing more of these transactions. And the customers are making commitments to us. They're giving us a committed, order, a booking. And in most of these cases, we collect multiple years of cash upfront as well from the customer. And we saw good free cash flow performance in our October quarter. What they're seeking, though, is more flexibility in terms of when they would like the licenses that they're purchasing. And because these migrations can take a period of time, several months, maybe up to a year, in some cases, they are looking for flexibility to have those licenses provided to them in a phased way, so in a ramped way, if you will.
And again, we believe that this is good business. We want those customers. We want them to commit to us. Most cases, they're paying us cash upfront. And we're okay with giving them that flexibility to deploy those licenses. And what that means for us from a revenue recognition standpoint is that revenue then comes over time. So what we said was, and these deals are not new necessarily. We had some assumptions going into the quarter about that we would have some of these types of deals. What we saw late in the quarter was we had more of them than we had expected. And what we said was if those transactions had come in as we had expected, our revenue would have been above the high end of the range, versus where it came in is towards the low end of the range.
One other thing I'll add there is that ARR, as reported, would also have been higher by a smaller amount, but would also have been higher than what we reported because it has a similar dynamic, but to a lesser magnitude. Now, I'll add, maybe one other point here, where I know some folks have been trying to do some calculations around implied TCV bookings, Tim. We also provided an RPO metric, remaining performance obligations, which was up 26% year -over- year in October quarter. Current RPO or CRPO was up 17% year-over- year. These transactions where I said the revenue gets shifted out, those would be sitting in RPO. Some folks have been trying to do, I think an implied sort of TCV bookings calculation and getting a number.
I think if you just look at what we put out, that number is in the maybe mid- to- high single-digit %, and what we would say is.
Are you talking about sort of TCV growth year-over-year?
TCV bookings year-over-year. Correct. And so, the clarification I'd like to provide is RPO is a useful metric. There's a small component that's not included in RPO, which is cancelable backlog. Now, it's a small portion. It's been coming down over time. And I'll also say this cancelable tends to be customers saying us, "Give me sort of a 15- 30 days change my mind" type of approach by and large, these orders do go into revenue. So we treat them internally the same, even though they're sort of officially cancelable and so cannot be in RPO.
So, I think the additional clarification we'd like to provide is if you factor in that dynamic around cancelable as well, the TCV bookings growth year-over- year implied would have been more like in the mid-teens %, which is, I think, important for folks to know as you think about the underlying health of the business, which we believe growth, like we've said, was slightly ahead of our expectations. It remains unchanged. And our bookings view for the full year also remains unchanged relative to 90 days ago.
Okay. And then this, you know, kind of the scaling of the license purchases, have you seen a dynamic like this in the past? And what do you think? Wonder, is it macro? Is it just, you know, what's different now with, with some of these, you know, bigger cohort of customers?
Yeah. So, you know, I said earlier that we have seen this, and we've given examples, I think, in prior earnings calls about customers seeking this flexibility. So that phenomenon itself is not necessarily new. What we saw, again, in Q1 was the magnitude, the number of folks who were looking for that. And I would say that comes from this idea that our primary competitor is, you know, has changed some of the dynamics in the market where customers in the past used to say, "Look, we'll start with Nutanix on one workload and then expand over time." Now, increasingly, many of those conversations are turning into complete takeouts, right, where it's sort of they're forced to make a choice of one versus the other, which, again, we're happy to compete in those and win our fair share of that.
And we're also willing to, again, give those customers some flexibility where they do need it, to provide those licenses over time. So it was the magnitude that was maybe different. The phenomenon itself is not new.
Okay. Great. And then maybe touch on the mix of third-party OEM and impacts there.
Yeah. So we didn't. That was not a meaningful factor in October quarter, to be clear. But when we thought about the full year, there was this dynamic around start dates, which we expect to continue. There were two other factors, Tim, one of which you just called out, around more of our business expected to come through our OEM partners. These are like the folks of a Cisco or a Dell or Lenovo, where, again, we have been transacting through them. So that itself is not new. What we're seeing is they are growing nicely, which, again, is good news for us because they're bringing us into accounts that we may not have been a part of. That mix is growing over time. The dynamic there is that when it comes through an OEM partner, there's a small time lag in revenue.
Now, that, to be clear, is more in the order of, you know, months. It's not; it's probably one quarter delta, not 12 months or thereabouts. But so in that instance, typically, the motion is, let's say Cisco or let's take Cisco as an example. They book a deal. We get notification of the deal. The revenue recognition happens after they have shipped a server, a Cisco server. They notify us, at which point we provision the license to the customer. So there can be a bit of a time lag there, which, given that growing mix, we thought was important to factor into the full year guide.
The third piece, which, again, did not impact October quarter, but we thought was important to factor in for the full year, is we are starting to hear of some shortages around certain components in the supply chain. Again, this is one step removed from us. We are not directly in that supply chain as a software provider. We are hearing that from our partners. And given we are early in our fiscal year, we thought it was important to factor in some of that uncertainty into the full year guide.
Okay. Yeah. I was going to ask that with the rising mix of, you know, OEM partner business, you're now subject to more, you know, whether it's component availability or if they see demand issues because of rising component costs, not nothing to do with your solution. So how does that, you know, mix moving higher change like the strategy or the structure of the business?
I would just correct that a little bit, by the way. I don't think the supply chain issues are because we have more OEM partners now than before. It's because customers, you know, when they buy our software, they have to run it on hardware.
Yeah.
Right? And even it doesn't have to go through an OEM route. They may be buying in most cases, by the way, today, they buy servers separately, right, from their core partners of choice. So the fact that their supply issues means that they may not have hardware available to run the software, right? So that's the connection. The OEM piece is relatively still a small portion of our mix, but growing nicely. And we like that as a sell-through portion. So I just wanted to correct that particular point.
I was just saying it, you know, the bigger it gets, the more, you know, things that are out of your control somewhat if Intel or Cisco.
So yeah. So the question is, you know, what can we do about supply chain issues, right? So and if you recall, I think the last time we had this was, you know, just around the COVID time frame, right, where we had significant delays and so forth. And, so what we've done since that time to us is we've continued to diversify the set of hardware that we can run on, right, or customers can run our software on. So for example, we have Cisco as a partner now. We have them now. We didn't have them at that time. We now support external storage, right? We support PowerFlex. We support Pure Storage. As of yesterday, by the way, the Pure solution is now generally available, and we do plan to support Dell's PowerStore over time as well.
So what that means for customers is they can run our software on their existing hardware without having to go wait for new hardware to show up. The third piece is we also run on a broad, much broader variety of server configurations that are out there. So that combination means that we are a little bit more diversified than in the past. Now, of course, if there's fundamental disruptions in the supply market, I mean, that'll, of course, have an impact, from a customer management point of view, right? So we have factored some of that in as we looked at our guide for the next year.
Okay.
For the rest of the year.
Great. Great. Yeah. Yeah. A lot of activity, which is, and the diversity is great. Maybe if we, you know, another topic that comes up is AI in kind of hybrid cloud.
Yes.
Maybe give us your sense. Obviously, a lot of the AI now has been big data centers, large language model type stuff, but we're starting to see more edge and hybrid. So give us your sense on the Nutanix play there.
Yeah. And first of all, the bulk, as you said, of spending today has been in terms of these large clouds for training and also, more recently, the neoCloud for the cloud providers. But their customers are not enterprises for the most part. They're these AI-native companies as well, right? So the enterprise adoption of AI is still pretty early, in the early stages, but the opportunity for Nutanix for us is that we provide a turnkey AI infrastructure stack, right, for them to run their AI inferencing applications as well as their multi-agent applications in a very simple way, in a very secure way, with very predictable cost.
Because, you know, if you have your own GPU cluster, that we virtualize and we support and we enable, then, you know, you can actually run a lot of these applications, without having to pay on a per-token basis, right? It's a predictable cost structure. You can also run them in a secure way. You can run them where your data is present. And you talk about the edge, right? So in a lot of cases, data is not all in the cloud, right? Data can be in a hybrid scenario. It can be in your data centers. It can be in your edges. And you may not even have the time, to actually ship the data from wherever it is to the cloud aside from security and governance and data locality concerns.
So for those reasons, we think actually AI is going to be very much a hybrid use case as well, just like every other application. And all these apps today, you know, again, we are in a hybrid world, even for regular apps, right? And all of these apps over time are going to incorporate more and more of AI. And there's going to be a new generation of AI apps and agentic AI apps being built. And so as those get deployed in a broader fashion in the enterprise, I think we have a full-stack offering that provides a very simple turnkey secure predictable cost experience.
Okay. Do you think that's a type of evolution that will kind of be a creative to growth rate, or how does that? How does that kind of factor into growth?
I mean, if you look at it in very simple terms, our growth is tied to workloads that we land on our platform. And we do think there's going to be a lot of workloads or applications that are multi-agent applications. And that's why we want to be the platform that those applications can be run on. And by the way, the other thing you should note for all those applications is the underlying infrastructure is actually Kubernetes infrastructure. And so we have now a full-fledged Kubernetes platform, right? So our customers have the choice now of running modern applications with AI on top of Kubernetes. They can mix and match those applications with legacy applications that are on VM platforms. And they can get the best of both worlds and in a very flexible manner with a very simple and secure solution.
Okay. Excellent. Maybe if we pivot a little bit to obviously, it's been a topic for five years, the VMware.
Mm-hmm.
You know, displacement, and market share gains. So maybe just give us a sense of where you view we are in that continuum. And as, you know, time has gone on, has the strategy at all changed to try to, you know, do some displacements? Obviously, there's been pricing moves by VMware. There's been, you know, ignoring smaller cut. There's a lot of things that they do. So just curious where you think we are and, you know, kind of what's the path forward from here?
Yeah. I mean, I think, I would say we are about two to three years into a 10-year cycle. This is a migration that will happen over many, many years. It's not going to happen overnight, and so, you know, we are probably past the first innings of a multi-inning game here, and probably in the second innings at this point, and I think sort of the proof point I'll allude to here is that if you look at the number of customers, new customers that we are adding to Nutanix, right? It's last quarter was around 640. The prior year, we added about 2,700 customers, including over 50 Global 2000s, and that's been growing very nicely year-over-year, right?
That's just emblematic of the fact that more customers are choosing us as a platform for their future needs, not just today's needs, but also tomorrow's needs. We are. I think we still have a lot of migrations to go. I would say, again, what we've gotten good at is, of course, doing the migration itself, planning for those migrations, doing it. We can do pretty large-scale ones. For example, we've seen, you know, Fortune 500 financial services provider being able to completely migrate out significant estate size, 100,000-plus cores of applications away within a year. A lot of those migrations are automated. Now, of course, for the larger migrations, they tend to get staged, right? In this particular customer, by the way, they stage that over multiple tranches in a year.
And that's leading to some of the revenue dynamics that you see today with us. But from a migration perspective, we are the simplest option because the applications do not have to be touched. These migrations can be done by infrastructure teams without impacting the application owners, without resulting in any significant downtime for the applications. They can be done on-prem to on-prem. They can also be done on-prem to the public cloud, which is the reason why, you know, companies partner with us, like AWS, Google. By the way, our Google solution is now available as well. And also Microsoft, right? So all three of the major cloud, the same exact solution that can be used as a to migrate VM workloads both on-prem and into the public cloud.
Okay, and can you talk a little bit? I think you alluded to kind of like a learning curve. The more innings you get through this game, probably the more automation and the more seamless you can make these migrations.
Yeah.
So, is there a scenario where a year or two from now, it's easier or faster or more economical for you to have a larger displacement?
I think, first of all, we're already there from a tooling perspective. I don't think there's a technology aspect of this that's preventing anything at this point, right? We have the technology. The other aspect of it is, I would say, you know, supporting all the applications and certification of applications, which, again, we are pretty far along. The places where we can make it easier is not in that, but it's in being able to support a broader variety of hardware configurations. If you look at the market, a big chunk of the estate is sitting in external storage. About 80% of the TAM is servers connected to external storage. The more external storage that we support now with PowerFlex, Pure coming on, PowerStore coming on later, the easier it is for us to insert into those accounts because otherwise they would need a hardware refresh.
No need for a hardware refresh makes it easier for us to insert into those accounts. The broadening of the portfolio is going to help capture more of those migrations faster as well.
Okay. And there was a lot of drama around pricing when this all happened. Have we gotten to the point where there's a little bit more stability and predictability in your competitor and just industry pricing overall?
I think it's a very dynamic market, on the pricing side. We're seeing quite different responses depending on the kind of customer, you know? Larger customers, Broadcom is, of course, very focused on the larger customers at the very top of the pyramid, and they're not as focused on the smaller customers, both in terms of pricing and in terms of supporting them as well, right? So pricing continues to be an evolving thing. From our perspective, I mean, you know, when we look at landing new customers, I mean, our goal is, you know, not to be a price leader necessarily, but to be providing a much better TCO option compared to Broadcom while also providing our customers with a future-proof path for them to run their containers, to run their AI, to be in the hybrid cloud versus Broadcom's super focused just on a private cloud.
So much broader aperture that helps customers in the future.
Okay. And it sounds like, you know, the larger enterprise you mentioned, the Fortune 500 financial institution, I imagine those are heavier lifts and a little bit more difficult to do a displacement because that's kind of in the wheelhouse of what Broadcom would want.
So it's interesting, right? So this particular financial services provider was actually able to do most of the migrations in an automated way. They completed the migration in less than a year, and their IT teams were able to do this. And in fact, in this particular case, they were able to reuse a lot of the hardware that they had without requiring new hardware as well. So I think that's those kind of scales, I think we can handle. These are pretty significant migrations, right? I think at the very top of the pyramid, you're looking at even bigger estates, right? Millions, of course, not hundreds of thousands, right? So there, again, I think that it's just a much longer duration thing, right? It's going to take them a plus. They tend to have much more processes, and they tend to be regulated industries.
So it just takes longer, right, for those migrations. And those are a bit harder.
Okay. Wanted to touch on partnerships. You mentioned several of them. But if we think about maybe the AWS or the, you know, that camp of companies and then maybe the storage server vendors as a separate set, how does, you know, how does the go-to-market work there? Obviously, it allows you a lot more at-bats. So it's.
For sure.
It's giving you a lot of chances. But curious how meaningful you view these partnerships and ramping. It sounds like there's several more.
Yeah.
In the pipeline on those storage servers.
Yeah. Let me sort of break it up into three categories, perhaps. One is just OEMs where we OEM our software through these other companies. The second is public cloud. And the third, I would say, is external storage partnerships. So on the first one on the OEMs, today we have Cisco, Dell, and Lenovo reselling our product, HP to a small extent, but really these three. And Cisco is the one that's been actually the best aligned with us and continuing to grow very nicely. We do expect them to continue there now in their third year, I guess, with us. And that, that's continuing to ramp along very nicely, partly because Cisco has no conflicts, right? We are entirely complementary to what Cisco does with us, right? They have their servers. They have their networking. And we provide the infrastructure software.
So very complementary relationship, and now with Dell, it's a more complex relationship. Of course, they are a very big player in the space, but they have their own storage arrays. So for them to resell a HCI solution from Nutanix is a bit at odds, right? Now, they do have it in their price book. Their sellers are paid on it. But on HCI, they're not going to be as active. Now when it comes to external storage, it's a different situation altogether. Maybe I'll get to that and then go to the public cloud. On the external storage side, it's very synergistic with the storage providers because they allow the fact that now they have another option besides VMware that they can work with.
And so that's why you see us growing our partnership first with Dell PowerFlex, which is at the top end of their customer base, then with Pure, which the solution is now generally available as of yesterday, and then with Dell PowerStore, which is coming on next. And we do hope to expand the repertoire over time. In that scenario, again, we have two different motions from a go-to-market perspective. The first motion is just we sell our stuff, they sell their stuff, and we meet at the customer. That's the case, for example, with Pure Storage. And it also happens with the other ones. We also have an OEM route through Dell today, right, where Dell can actually resell our software. So those are the two routes to market. And I do believe this is a significant opening of the TAM for us, right?
The fact that we support these storage arrays and we can go in there and get into these customer environments easier. The third are the public cloud partnerships. And we have those with AWS, Microsoft, as well as Google, which are the most recent ones that just went GA. AWS is where we have, I would say, the tightest go-to-market alignment and relationship. We have joint programs to, again, help VMware customers migrate with migration credits being provided by AWS to migrate into AWS on top of Nutanix. And that applies for both cloud-to-cloud migration as well as on-prem-to-cloud migration. So there's, you know, VMware offerings in the public cloud that are being depreciated, deprecated, I should say, and customers are migrating from those into a Nutanix solution on top of AWS because, again, that's a very easy migration.
And then also, customers, some customers are interested in migrating from their on-prem into the public cloud, and we make those very easy. And that's why AWS is very interested in continuing this relationship and working with us. So of all of these, I think, the fact of the matter is now we have a lot more friends in the market than we had before, a few years ago. And the OEM partnerships are certainly ramping, as we speak today. And the public cloud partnerships, I think, are a bit earlier, I mean, a bit early in the go-to-market relationships that we have. But I think they're also looking promising.
Okay. Great. Shift a little. I do want to talk about kind of the renewals business and kind of the outlook there. Curious how you think that setup is into fiscal 2026.
Yeah. So I think I'll start by maybe saying when we think of the renewals business, it's simply transactions that we've done before to either land with new customers or expand with existing customers, and when those transactions come up for renewal. And so in that sense, it's mostly stuff we've already done that, you know, shows up based on the contracts and the durations that folks have had. So we expect, you know, that renewals business for this fiscal year, I think we said that in the last earnings call, to grow year-over-year. And, you know, it will continue to grow over time. And so, yeah, in that sense, we've continued to see that as a healthy foundation for us because we can say with a reasonable amount of certainty that those renewals are going to come through.
And in terms of, when you think of the top-line metrics, Tim, I would say, you know, the renewals over time has continued to be a bigger base of the total on the renewals line, again, providing a nice foundation. And on ARR, of course, it's really important for us to retain as much of our customers as possible so we can, one, protect the ARR base and then grow it as well, right, over time. So yeah, feeling good about that outlook on renewals for fiscal year 2026.
Okay. Maybe still on the financials, can you talk about kind of the moving parts around the 21%-22% operating margin target for the year, the revenue disruption, how did that play into it, and what are some of the moving parts there?
Yes. So I would say more generally, maybe, Tim, if you take sort of a broader view, that we have had meaningful improvements in our non-GAAP operating margin over time here from several years ago. That said, we also think there is room for us to continue to improve operating margins. So I think we would say we are not yet at any kind of sustainable level on operating margins. So our intent is to continue to drive leverage in that time here, in that line as we go forward. Specifically to your question on fiscal year 2026, we maintained our guide for the full year on operating margin at 21%-22%. We did take down the full year revenue, despite having our business and bookings outlook kind of remain unchanged for all the reasons we talked about earlier.
The thought process there really is I think there are a couple of factors that naturally mean our OpEx number is coming where it is, allowing us to keep that 21%-22%. One is there's commissions expenses that do flow to the operating expense line that are aligned with the timing of revenue. And so as the timing revenue adjusts, so does the commissions expense. Some of that is getting timing-wise pushed, you know, shifted out of 2026 into future period. The other piece that we had mentioned was we have some payments that we get from some of the partners that Rajiv talked about that are a credit to the expense line, so contra expense. And those we expect to be slightly higher than what we had expected earlier. And so that's now an offset to the OpEx line.
So OpEx coming in a bit lower, allowing us to maintain that 21%-22%. The last thing I'll say is one of our ongoing priorities is to continue to become more efficient as a company, as I think, you know, something that we should be doing and that we are doing. So that's all, that's how we thought about all of that as we thought about this 21%-22% reiteration of the operating margin guide. It does imply year-over-year increase in OpEx. You know, we have to obviously give raises to our people. We're making some selective investments in some areas on the go-to-market side and on the R&D side. On the go-to-market side, it's continuing to make sure we have leverage, making sure we can sell our entire portfolio, making sure that we can make our customers who are deploying us be successful in adopting the solutions.
And then on the R&D side, in addition to some of the core strengthening of our core platform, it's in areas like the external storage piece that Rajiv mentioned earlier where we are expanding our portfolio there and in newer areas like containerized applications and so on.
Okay.
So it's a balance of continuing to invest for growth because we do believe the big market opportunity while continuing to drive, improvements on the margin line.
Okay. Great. Maybe the last one I probably should, more high level, should have started with, but HCI continues to grow and take share of, you know, the environment, but still a lot of room to go.
Yeah.
So what do you think will keep that, you know, movement going? It sounds like a lot of these partnerships will help. But just high level, kind of how do you see just overall industry growth now?
Yeah. And I would say, first of all, Tim, just to anchor us, our vision is much broader than HCI at this point. I mean, we started out, of course, pioneering HCI. I would call ourselves as now a much broader platform, right? We are a cloud platform that can handle many different kinds of use cases, many different kinds of workloads, many different kinds of configurations. And the HCI component is just one option. It's, you know, you can do HCI or you can do external storage. Now, specifically in terms of the drivers there on HCI per se, HCI still provides a very compelling TCO for our customers compared to legacy architectures. And so there's typically a 30%-40% savings when you combine compute, storage, networking, all put them together, put them under one management.
The degree of automation you get, you need far fewer people to run these infrastructures at massive scale. It provides essentially cloud-like economics and cloud-like automation, for environments everywhere, right, whether it's in the data center or the edges or even on top of other public clouds. So that's a benefit of HCI. And so therefore there is still room for HCI to continue growing at its pace and displacing legacy architectures, right? That'll continue for many years. Now, on top of that, there is the Broadcom tailwind, right, that is, creating customers to, you know, move away from the VMware stack onto some other stack. We are a beneficiary from that perspective. But our platform now is broader, right? For us, the storage element of it is now an option in the stack, right?
You can either get our compute, rest of the stack, which is compute, networking, security, operations management, automation, all of that with or without hyperconverged, right? So you can do hyperconverged if you'd like, or you can also support external storage, right, Pure, etc., right, Dell PowerFlex, etc, so we have broader platform, and on top of that, you can run virtual machine applications or containerized applications and AI applications, right, so we think of our opportunity as being much broader than just HCI at this point and really representative of going after that entire landscape, and the way I would look at it is, what we've done over the past few years is the HCI SAM will continue to grow, right, serve that as a market, as we displace more and more legacy infrastructure.
On top of that, by broadening the platform, we now have access to more of the TAM, by being able to insert into a broader chunk of the available TAM with less disruption.
Okay. Excellent. I think we finished just on time, so thank you so much, both of you. Thank you, everyone, for joining. Appreciate it.
Thank you, Tim.
Thank you. Thank you very much.
Thank you very much.