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Good day and thank you for standing by. Welcome to the Nutanix Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we'll open up for questions. [Operator Instructions]. Please be advised that today's conference is being recorded. I will now hand it over to your speaker, Rich Valera, Vice President of Investor Relations. Please go ahead.

Good afternoon and welcome to today's conference call to discuss third quarter fiscal year 2025 financial results. Joining me today are Rajiv Ramaswami, Nutanix's president and CEO, and Rukmini Sivaraman, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing third quarter fiscal year 2025 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. 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-K 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 predictions of future events. Please note, unless otherwise specifically referenced, all financial measures we used on today's call, except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Nutanix will be participating in the Baird 2025 Global Consumer Technology and Services Conference in New York, and we hope to see some of you there. Finally, our fourth quarter fiscal 2025 quiet period will begin on July 18th. And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Rich, and good afternoon, everyone. We are happy to report third quarter results that came in ahead of our guidance. Against a dynamic backdrop, our results benefited from the strength of the Nutanix cloud platform, demand from businesses looking for a trusted long-term partner, and go-to-market leverage from our partnerships and programs. Taking a closer look at the third quarter, we exceeded all our guided metrics. We grew our ARR 18% year-over-year to $2.14 billion and delivered strong free cash flow. We also saw another quarter of strong new logo growth, with strength seen across all our customer segments. Our largest wins in the quarter demonstrated our ability to land and expand within some of the largest and most demanding organizations in the world as they look to modernize their IT footprints, including adopting hybrid multi-cloud operating models and modern applications, as well as those looking for alternatives in the wake of industry M&A A great example is a new logo and our largest land and expand win of the quarter, with a Fortune Global 500 provider of technology and services based in the EMEA region. Our two-plus-year engagement with this customer was catalyzed by their concerns regarding the proposed acquisition of their incumbent infrastructure supplier, which were realized subsequent to the close of that transaction. This new customer was initially looking at Nutanix as a second vendor alternative but saw the value of the Nutanix cloud platform as a way to modernize their existing infrastructure and ultimately chose Nutanix to replace their entire incumbent supplier over time. Another good example is a seven-figure expansion we did with an EMEA-based IT solutions provider in the quarter. This customer was an early adopter of our GPT-in-a-box 1.0 solution, along with Red Hat's OpenShift for managing Kubernetes. With this expansion, they're adopting our GPT-in-a-box 2.0 solution, including Nutanix Enterprise AI, while also replacing OpenShift with Nutanix Kubernetes platform. They see their enhanced platform as providing a centralized infrastructure for accelerated and scalable model deployment and inferencing across different sites, with initial use cases focused on information summary and search, as well as chat agents and digital assistance solutions. Finally, a new logo win with one of the largest asset managers in the world, based in North America, demonstrated the value of the hybrid multi-cloud capabilities of the Nutanix cloud platform and our partnerships. This customer was unhappy with the recent changes with their existing infrastructure provider and was looking for an alternative that could work across their private and public cloud estate. They purchased the Nutanix cloud platform, including NC2 on AWS, through the AWS marketplace, appreciating the consistent management, self-service, and the automation it provides across private and public clouds. Early this month, we held our annual .NEXT conference in Washington, D.C., which drew over 5,000 attendees. During .NEXT, we made a number of announcements demonstrating our commitment to enhancing the Nutanix cloud platform and strengthening our partner ecosystem. We demonstrated progress on our decision to enable customers to utilize their existing external storage hardware while adopting the Nutanix cloud platform powered by our AHV compute hypervisor. Our first offering, supporting Dell PowerFlex, became generally available at the end of April, well within our stated target of the first half of this calendar year. And during .NEXT, we announced a new partnership with Pure Storage to support their FlashArray, an offering that is expected to be generally available by the end of this calendar year. We also continue to focus on helping customers build apps and run them anywhere. To that end, we announced we are expanding our cloud platform to support Google Cloud, which will be in early access this summer. We also announced a new solution, Cloud Native AOS, which is about enabling modern applications to be able to use a set of highly resilient storage and data services wherever they're running, whether it's in the public cloud, in native Kubernetes substrates, or bare metal. And finally, we announced general availability of a new version of Nutanix Enterprise AI, which adds a deeper integration with NVIDIA Enterprise AI, using their latest frameworks to speed the deployment of Agentic AI applications in the enterprise. In closing, I'm pleased with our solid Q3 results, our ongoing innovation on our cloud platform, particularly with respect to its support of modern applications and external storage, and on the progress we continue to make on partnerships. We remain focused on delivering on our vision of becoming the leading platform for running apps and managing data anywhere, and capturing the multi-year growth opportunity in front of us. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini?

Thank you, Rajiv, and thank you, everyone, for joining us today. I will first discuss our Q3 fiscal 25 results, followed by our guidance for Q4 fiscal 25, and what that implies for our updated outlook for the full fiscal year 2025. Results in Q3 '25 came in above the high end of our ranges across our guided metrics. In Q3, we reported quarterly revenue of $639 million, higher than the guided range of $620 million to $630 million, representing a year-over-year growth rate of 22%. ARR at the end of Q3 was $2.14 billion, representing year-over-year growth of 18%. We continue to see strength in landing new customers onto our platform from the various programs we have put in place to incentivize new logos from a general increase in engagement from customers, looking at us as an alternative in the wake of industry M&A, and helped by more leverage from our OEM and channel partners. NRR, or net dollar-based retention rate, at the end of Q3 was 110%, flat quarter-over-quarter. In Q3, average contract duration was 3.1 years, slightly higher than our expectations, and up slightly quarter-over-quarter. Non-GAAP gross margin in Q3 was 88.2%. Non-GAAP operating margin in Q3 was 21.5%, higher than our guided range of 17% to 18%, due to slightly lower operating expenses related to timing of hiring and higher revenue. Non-GAAP net income in Q3 was $125 million, or fully diluted EPS of $0.42 per share, based on fully diluted weighted average shares outstanding of approximately 297 million shares. A note on taxes. Historically, we calculated the non-GAAP effective tax rate by considering our sizable U.S. net operating loss carry-forwards and tax credit carry-forwards. This resulted, for example, in a 6% non-GAAP tax rate for fiscal year '24. Going forward, we believe a long-term projected tax rate of 20% better aligns with the non-GAAP measure of profitability, better reflects our long-term tax structure, and provides better consistency across reporting periods. This 20% non-GAAP tax rate is reflected in our statement starting in Q3 '25. It is important to note that we expect no meaningful change from a cash tax perspective. Our overall cash tax rate is expected to be approximately in the mid-to-high single-digit percentage range of non-GAAP profit before tax for the next few years due to our net operating loss and tax credit carry-forward balances. GAAP net income and fully diluted GAAP EPS in Q3 were $63 million and $0.22 per share, respectively. Free cash flow in Q3 was $203 million, representing a free cash flow margin of 32%. Moving to the balance sheet, we ended Q3 with cash, cash equivalents, and short-term investments of $1.882 billion, up from $1.743 billion at the end of Q2. Moving to capital allocation, in Q3, we repurchased $38 million worth of common stock under our existing sharing purchase authorization and used about $65 million of cash to retire shares related to our employees' tax liability for their quarterly RSU vesting. Moving to Q4 '25, our guidance for Q4 is as follows. Revenue of $635 million to $645 million, non-GAAP operating margin of 15.5% to 16.5%, fully diluted weighted average shares outstanding of approximately 297 million shares. Moving to the full year, and based on that Q4 guidance, the updated guidance for fiscal year '25 is as follows. Revenue of $2.52 billion to $2.53 billion, representing a year-over-year growth of approximately 17.5% at the midpoint and an increase from our previous guidance. Non-GAAP operating margin of approximately 20.5%, an increase from our previous guidance. Free cash flow of $700 million to $730 million, representing a free cash flow margin of approximately 28% at the midpoint and an increase from our prior guidance. I will now provide some commentary and assumptions regarding our updated guidance. First, we assume that the macro and demand environment remains similar to what we saw in Q3. We expect to continue to add new customers onto our platform while noting that last Q4 presents a tough year-over-year comparison for new logo additions. Second, we assume aggregate average contract duration for Q4 to be more or less flat relative to Q3, resulting in a full-year contract duration that is expected to be flat to slightly higher compared to last fiscal year. Third, as discussed in prior earnings calls, we expect to continue to increase our investment in sales and marketing and research and development into the end of the fiscal year. These investments are directed towards addressing our large market opportunity, are expected to continue to ramp in Q4, and are factored into our Q4 and implied full-year guidance. In closing, we are pleased that our Q3 results exceeded the high end of our guidance ranges and to raise our full fiscal year guidance across all metrics. We would like to thank our employees, customers, partners, investors, and stakeholders for their continued trust in us. 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.

Thank you. [Operator Instructions]. Our first question will come from the line of Jim Fish from Piper Sandler.

Hey, guys. I appreciate the questions here. Of course, I'll kick it off with the typical macro question that we're all asking on all these calls. But I guess can you just walk us through the linearity that you saw throughout the quarter and through May at this point, just given some of the tariff things back and forth, especially in the month of April? And, Rajiv, separately from that, you seem to be talking up the next act of the company across platform services like managed Kubernetes. Are we seeing an improvement yet in that sort of contribution on the third wave or act, whatever you want to call it, that's traditionally been a smaller part of the business?

Yes. Three questions in there. I'll talk about macro. We can then talk about your specific question on linearity. I think Rukmini can cover that, and then I'll comment on the Kubernetes piece. So the overall macro, Jim, it continues to be dynamic, continuing to change every day, and we've seen all these changes and recent actions from the new administration. The other related commentary on the macro is also on the federal business, right? And lots of personnel changes, people changing in the federal government, more additional reviews. So for us, what that meant is somewhat longer deal cycles and some variability across our Fed business. Now, longer term, when we look at the Fed business, we are actually reasonably optimistic on the opportunity for this business to benefit from our platform's focus. We help people modernize, and we help companies and organizations reduce their TCO, and so I think this is clearly a focus, and we can help the Fed business, Fed customers with this. So we have factored some of this picture when we look at our outlook. Let me also answer the Kubernetes piece, and I'll then turn it over to Rukmini for linearity. So the Kubernetes piece, of course, look, I think at our last user conference, we really focused on becoming this platform for applications and data, both today's applications, which are all VM-based, and tomorrow's applications, which are more Kubernetes-based, and can be running anywhere. And so our whole focus in Kubernetes is about building a Kubernetes platform to align and provide customers the choice of VMs or containers anywhere. It's still pretty early days for the Kubernetes piece. We're actually quite enthusiastic about the initial progress we are seeing in terms of the product market fit that we've seen with what we've talked about, but it's still early days, and the numbers and adoption are still pretty early. If you recall, we really got into this about a year ago with our acquisition of D2IQ, and we're building out, and we'll continue to build out this platform over the next few years. So the contribution is still small, but growing nicely. Rukmini, you want to comment on the rest, linearity?

Sure. Hi, Jim. So on a couple of things, I'll add to what Rajiv said. So on linearity, look, I would say more generally on the tariff point, Jim, we, as a software provider, as you know, we don't have a direct exposure to tariffs, and we haven't seen an impact from tariffs to date. I would also say that more generally, while linearity can move around from quarter-to-quarter, we haven't seen any meaningful sort of increase in pull-ins or push-outs more systematically over the course of Q3, other than what Rajiv alluded to, right, in terms of deal cycles lengthening and some variability with regard to the U.S. federal business specifically. And as Rajiv said, I'll reiterate that, overall, we are continuing to see solid demand for our solutions, but we have factored in some of this overall kind of micro-uncertainty into the updated outlook.

Our next question comes from Pinjalim Bora from JPMorgan.

Oh, great. Thank you so much for taking the questions, and congrats on a solid quarter. Rajiv, now that Dell PowerFlex solution is out, with themes like NCIC licensing, any way to understand the delta between the NCIC and kind of the core standard NCI license? And I know it's early, but what are you seeing around the pipeline for that product at this point? And one follow-up, I'll just spit it out for Rukmini. The operating margin guide is coming up substantially for the year. Maybe talk about what's driving that. Is there an element of timing of expenses that might have been pushed into 2026? Or are you seeing any productive improvement from kind of internal AI use cases? So just trying to understand the sustainability of that margin levels as we go into 2026.

Yes. So let me take the first part on NCIC and Dell PowerFlex. So, yes, we're happy that we were able to get it out at the end of April in line with what we talked about. We said for the first half calendar year, we were able to get it out before. Also at our conference in Washington, you heard some of the early customer feedback on that. Moody's was on stage talking about how they were an early access customer for this offering. So now the way we've gone to market is now, yes, as you said, we call it NCIC. And what it is, is the offering now includes basically the rest of the platform minus the storage, right? So it includes our hypervisor, it includes our networking pieces, right? Our security micro-segmentation offerings, and of course it includes our full management suite. And what it does not include, of course, is storage because that storage piece is the external component. And so that's how we've priced it. We still have a standard pro-advanced type of three tiers of that licensing structure in there. Now in terms of the opportunity there, of course, PowerFlex, there's a limited install base of PowerFlex, but it's at very large accounts, like customers like Moody’s, among others, where there's a large footprint of PowerFlex in those accounts. And our whole strategy with NCIC, this cloud platform minus the storage offering, is to be able to go into those environments and get traction. So we have some good early access feedback from our customers. The product is just GA. And so we expect to see some traction with it over the next several months. And really, I think, some contribution, a smaller contribution in FY'26 in terms of actual revenue.

Yes. Hi, Pinjalim. I'll take the operating margin question. So you're right. We're happy with our operating margin performance in Q3 and to be able to take up the guide for the full year. And so as I allude to in my prepared remarks in Q3, for example, I did call out a timing of hiring as one of the reasons we overachieved on op margin relative to our guidance. And so, yes, some of those people have been hired and will start in Q4. And you'll see that that's quite a meaningful step up implied in the op margin guide from Q3 to Q4 because we are sort of hiring folks and expect them to start in Q4. We expect to also continue to ramp up the investments in Q4, Pinjalim, to your question. And that's, of course, because we believe there's a big market opportunity here. And as we talked about before, we're investing in both sales and marketing and on the R&D line as we look to drive more innovation. And I think the last part of your question was around how do you think about fiscal year ‘26 and sustainability here? So, of course, we'll guide to ‘26 in the next earnings call. What I will say, though, of course, that all the folks we've hired here will be in the run rate for next fiscal year and that we've had some really nice margin improvements year-over-year. And that pace is going to be hard to sustain, of course, Pinjalim going forward. So I'll leave it there, but I think we're happy with the ability to drive leverage overall as a model. And as you know, we've talked about those levers at a high level as being continuing improvement of, not improvement, but increase, really, of renewals mix as a percent of total, and that will continue. We're driving more productivity improvements with our sales reps, and we think there's more we can do there. And then overall, kind of prudent investments in areas where we think we can see a return. And so those are some of the areas, and you're right, there is some timing here as well, and we'd expect all of that to be in the run rate going into fiscal year ‘26.

Our next question will come from Jason Ader from William Blair.

So two questions. First, a quick one for Rukmini. Can you help us understand ARR versus revenue, just given the delta and the growth rates there? Was that a timing thing? Usually ARR growth for you guys has been above revenue growth. So that's the first question.

Yes. Hi, Jason. So I'll start with a few things on the revenue versus ARR. So the first thing I'll say is revenue, of course, is a flow metric, whereas ARR is more of a stock metric. And I think a few other things to call out. So when you think about revenue recognition for us, as you know, Jason, it's not fully ratable. There is a license portion that's recognized up front, and then the support and maintenance portion that's recognized more rapidly over time, whereas ARR, of course, represents the analyzed view of our install base, therefore being more of a stock metric. Now, a few things can affect the revenue, right? So contract duration, for example, can affect those relative growth rates because revenue is impacted by duration. So longer duration would be in a higher amount recognized up front for license versus a shorter duration, whereas ARR is agnostic of that. And I talked about how contract duration came a bit higher than our expectation. The other factor here is around large deals that can have delayed or phased deployment over time, also resulting in variability. I'll give you one example deal we talked about before is this eight-figure ACV deal that we had booked in Q3 of fiscal year 24, so the year-ago quarter, and it was billed in, we collected cash for it a quarter later, and we said then that the revenue for that transaction is going to come over time. And so, for example, there's a significant chunk of that revenue from that transaction that did show up in Q3. Now, that isn't both revenue and ARR, but revenue effect is, of course, more pronounced and more lumpy on revenue, given that upfront component. So overall, look, we think both revenue and ARR provide useful information about our top line, and that's why we continue to provide both on a quarterly basis. But, yes, that revenue number because of the license upfront recognition can be a little more lumpy than ARR. So you could say manual view of revenue is a better measure than purely quarterly.

Okay, great. Thank you. And then, Rajiv, VMware historically did really well with tier-two cloud service providers and MSPs, as basically a cloud computing platform for those companies. We've heard some of those partners are not thrilled with the new licensing, and so I was just hoping you could comment on any progress you guys are seeing with these types of accounts. Is it a target type of account for you, or are you more focused just on kind of larger enterprise?

Yeah, Jason, that's a very good and appropriate question, actually, because for us, the cloud service provider or managed service provider, the CSP, MSP market, historically had not been a big focus area for us because we were just focused on working directly with our customers. Now, we do think that that market actually for us represents a significant opportunity, given the big vacuum that's out there now with VMware, as you said, making some of the changes to their licensing model. And so our business with the CSPs and MSPs, while still early, is growing. So we've introduced, specific programs for the CSPs and MSPs in terms of their -- we've actually added some resources, both in the field and centrally, to focus on those. We are adding also some product capabilities to enable these service providers to deliver multi-tenant offerings. And also, there's another interesting dynamic that's starting to emerge now around sovereign clouds and some of these CSPs, like OVH in Europe that we work with are also emerging as building these local sovereign clouds for countries. So all of these represent, in my view, a good opportunity for us to have another route to market and get more leverage. And so we are now starting to focus, like I said, on making additional investments in this space. Early days, but that business is, it's small right now, but expecting to grow.

Our next question will come from Meta Marshall from Morgan Stanley.

Maybe a couple questions for me. Just traction that you guys are having kind of with the Dells and Cisco channel partners that you kind of added last year. Just kind of any update on, where you're seeing kind of the most traction there. And then next, maybe if you could kind of give some commentary of, at your next conference, what kind of were the highest -- just where you were seeing the most activity or customer requests for kind of additional development. Thanks.

Okay. Thank you, Meta. So, first, let me comment on Dell and Cisco. So, first, I think Cisco is a little further along than Dell because we've had the relationship with them a little longer. They have been a consistent contributor to our new logo growth. And, I mean, it's still a minority contribution, but a steady contribution to our new logo growth. Cisco is, again, they have a very broad footprint. And the customers that we are winning with them cover the gamut. They cover large customers. They cover federal customers. They cover smaller customers. Cisco is quite strong in state and local education as well. So, it's a pretty broad spectrum across the board, domestic and international, from Cisco. The Dell relationship is a bit earlier in the lifecycle. There's two parts to it. There is the HCI component, where Dell resells our HCI platform. That's been in the market for a couple of quarters, but I will say that that's one of many solutions that Dell sells. Dell, obviously, would lead with their own external storage solutions first and offer up our HCI solution only if customers are interested in HCI. But then the second part of the offering, which is PowerFlex. Our solution with PowerFlex, I mean, that's very much aligned with Dell selling completely. And so we are, now that the product is in the market, we are engaging with large PowerFlex accounts. You heard from one of them at .NEXT. So that's, I think, going along well. But since the product is generally available, it's going to take some time for that revenue to build up. Now, in terms of .NEXT, I thought it was a very good show for us. We have 5,000-plus attendees. We had a good, you know, I would say one of the big things for me was also seeing the partner sponsorship growth. Two years ago, we had about 25 partners sponsoring us at this show. And then this year, we had 86 partners. So that's pretty good growth. And it's a testimony to the broader ecosystem that's building around us. Now, on your question around customer requests, I would say clearly our customers would like us to support every external storage array that's out there. They want to see how we can make migration as easy as possible for them. And there were many customers who talked about their migration experience moving from VMware to Nutanix at the conference. So I would say, enabling a broader use case for our platform, supporting external storage. There's good traction around modern applications in terms of future direction for many of these customers that were there. So I think those were some of the big things for us. Operating across a hybrid multi-cloud environment, I think, you know, the simplicity. And then specifically, given Washington, D.C., there was a fair bit of interest also in us being able to work in air-gapped or secure environments. And we saw some examples of mission-critical deployments like the U.S. Navy talked about how they're using us on some of their ships. So some of these need to be air-gapped. Some of these need to be secure environments. And some of the capabilities that we're bringing on a product also for those environments are helpful, too.

Our next question will come from Ruplu Bhattacharya from Bank of America.

Hi. Thanks. It's Ruplu filling in for [Vamsi] [ph] today. I have two questions, one for Rajiv and one for Rukmini. Rajiv, can you talk about the pricing environment? And in fiscal 3Q, can you talk about any share gains and competitive wins versus VMware? It sounded last couple of quarters that Nutanix was gaining some traction in terms of gaining VMware customers. So how did that track in fiscal 3Q? And then, Rukmini, I'll ask your question at the same time. Can you give us some commentary on how the renewals business did versus land and expand? Maybe talk about the pipeline of large deals and the available to renew pool. And in years past, you've had some pull-in of renewals. Any chance that that is happening this year as well? I mean, how are things trending, if you can give us any color on these points? Thank you.

All right, Ruplu. Hey, good questions. And so first, share gains and pricing environment. Look, I think perhaps the simplest indicator of our traction is in terms of share is perhaps the number of new customers joining us every quarter, right? And again, this quarter was a strong quarter for new logos. We had about, I think, 620 or so. And what's also changing is the AHV adoption, the hypervisor adoption. More and more of these customers are starting their journey with us, with the hypervisor. This was certainly not the case five years ago. In fact, where more and more customers were at that point consuming our storage along with VMS hypervisor. But these days, all the new logo customers, the vast majority of them, are starting their journey with our own hypervisor. And we give you some examples during our prepared remarks. We've talked about winning some large customers as well as smaller customers. So these logos are actually across the spectrum of pretty large global 2000 type accounts but also smaller accounts around the world. The pricing environment has been fairly stable. I think we've seen the competitive pricing fairly pushing customers to adopt VCF, the full VMS stack. And we have a more a la carte approach providing what customers want. And they can buy what they want and consume what they want in very flexible terms from us. So we haven't really seen any big changes from a pricing environment perspective.

Okay. Thank you.

Hi, Ruplu. I'll take your second part of your question. So for Q3 specifically, we saw good strength in landing new logos as I think both Rajiv and I mentioned in our prepared remarks that new logo growth was, again, really strong. I did mention that in Q4, the comparison started to get harder because last Q4 is when we sort of started to see this increased traction with new logos. So happy with that. Expansion was good in Q3 and renewals were solid as well in Q3. Then I think the second part of your question was around pipeline, what we're seeing with regard to large deals and perhaps they're available through a new pool. Ruplu, so on the large deal pipeline, we continue to see a greater mix of larger deals in our pipeline. We've talked about that in the past and that continues to be the case. And look, we think that will continue to cause some variability from quarter-to-quarter as those deals land. And those are also the ones where we can see occasionally more requests for deployments over time, for example, like that example I gave earlier of the eight-figure ACB deal from last year. So we do see that from time to time and we expect that those will continue in those really large transactions because customers in those instances are willing to make a large upfront commitment and it's reasonable that they can only consume it not all at once, but over time. So we're willing to structure transactions in that way. So that's on the large deal side. And then on the available to renew pool, look, I would say that's a number that we have a fairly good visibility on at the start of the year. There's some timing differences, some come in early, for example. Yes, that I think will continue to be the case. And as we've said in the past, we certainly welcome a customer willing to renew early as long as the economics are favorable because it's a commitment that they're willing to make with us earlier. And of course we welcome that. And then the ATR number, as you said, will continue to grow. As you can imagine, though, that as that ATR base gets larger and larger, the growth rate of that and naturally just large numbers will grow slower, but it is expected to continue to grow here as we add more land and expand each year and that ATR grows over time.

Our next question will come from Mike Cikos from Needham.

Just to cycle back to the competitive displacements in the VMware Broadcom. As you guys continue to monitor these deals in your pipelines, is that cohort of deals exhibiting any different behavior versus the broader Nutanix pipeline as it pertains to tariffs or the economic uncertainty out there? Or are deals progressing at a quasi-similar rate? I'm just interested in if you could unpackage that a little bit.

Yes, I think the first, Mike, it's a good question. But first of all, it's very difficult for us to separate these deals. It's not one versus the other, right? I mean, we don't have clear delineation between just, hey, this is a VMware displacement opportunity versus a business-as-usual type deal because in every deal, we are against competition. So it's hard for us to really discriminate across these two deals. But I would say we haven't seen any substantial different behavioral patterns, I think. I will say that on occasion, we've seen, I mean depending on the customer and it's kind of more anecdotal than broad basis. There are some customers who say, absolutely, I want to get out of VMware Broadcom and move. And so those customers tend to be more motivated and progressing the deals forward at a more rapid clip and with some sense of urgency. And so I would say that could potentially, in some ways, independent of the macro and the rest of the macro situation happening. But I think these are all too conflated for us to really expect separate meaningful observations. Rukmini, do you want to add anything to this?

The one thing I'd add, I think, is, Mike, part of your question was, is there any different behavior with respect to tariffs or macros specifically, Mike? And I want to reiterate that with respect to tariffs, again, as a software provider, we don't have any direct exposure to tariffs and haven't seen an impact to date, Mike. And look, the broader macro uncertainty is out there, as Rajiv said, that's sort of intertwined with some other specific situations that our prospects and customers are dealing with. And we factored through all of that as we thought about our updated guidance, Mike.

Thanks for that, for both of you on that response. And then just a quick follow-up with Rukmini. I know that we cited the timing of the hiring. If I come back to the question that Pinjalim had got at, I just want to make sure I'm clear here. So is there an expectation that during this fiscal year, we will have caught up from a hiring standpoint?

Well, I would say, look, we are hiring to our plan for this fiscal year. There's been some timing changes I alluded to between sort of Q3 and some of those folks being hired, but starting in Q4. And so that is the intent, Mike, right? So the teams all have been given out their plans and they're all hiring as rapidly as they can to bring in the right people aboard. So we're certainly driving towards that.

Our next question will come from Nehal Chokshi from Northland Capital Markets.

Yes, thank you. And congrats on the strong results, profitability, and the guidance on the profitability as well. Well done. On the ARR results, specifically the incremental ARR, which was about flat year-over-year, how would you characterize that relative to your expectations at your Q2 earnings call? And I do know that you don't guide to it, but now that it's all said and done, maybe you can at least discuss how it performed relative to your expectations.

Nehal, thank you for the question. So as you rightly said, we don't guide to ARR or to net new ARR. And so what I would say is we're happy to sort of see our net new ARR, our net NRR, net dollar-based retention rate stable at 110%. That, of course, is hard to compare directly to net new ARR, because I think the number you're referencing is a quarter-over-quarter incremental ARR versus NRR, which is more sort of a year number, right? So, yes. So we don't really comment on net new ARR. We don't guide to it. But I would say we're overall happy with our outperformance, exceeding our expectations and our guidance on both revenue and free cash flow for the quarter and to be able to raise all guided metrics for the full fiscal year.

Okay, great. And then why did service revenue go down to $1 million [indiscernible]? Was there like a reduction in the number of days in the quarter or something like that?

You mean professional services revenue, Nehal? Was that your question?

No, the maintenance and entitlements of service revenue.

Yes, so product versus support and entitlements. Is that the question?

Yes, correct.

Okay, yes. Yes, so look, support actually, I think, grew year over year. It grew at a slower pace maybe than you folks are used to seeing. I wouldn't call it anything unusual there. That, as you know, that support line item really comes off the balance sheet of the deferred revenue balance on a schedule. So it's not really reflective of anything. There is some, the old model, we have some device licenses that are still under support, and some of those can move around quarter-to-quarter. So that had a small impact there for Q3 as well, Nehal. And you can see, of course, product revenue grew really nicely, actually, in the quarter. And part of that reason for that is this large deal that I talked about, which had a significant revenue recognition in Q3.

Our next question will come from Matt Hedberg from RBC.

Hey, guys. This is Simran for Matt Hedberg. Thanks for the question, and congrats on another great quarter. Just one for me. I wanted to touch back on partnerships. Could you double-click on the progress with Dell and Cisco and other conversations with OEMs that you're having as you think about broadening these partnerships? And how should we think about contribution ramping into the second half of calendar year 2025 and into 2026? Thanks.

Yes. I think, Rukmini, you can help me on the numbers as well. But I think, first of all, I think we continue to focus on expanding our partner ecosystem. And you have to look at them in terms of -- there's multiple aspects when it comes to partners. There's the strategic partners like Cisco, Dell, and Pure that you talked about. And some of them actually are also go-to-market partners in the sense that they're reselling our products. So Cisco and Dell are reselling our product. We haven't talked specifics about Pure, but the solution is not out yet with Pure. That will be out at the end of the year. So until then, we'll have to wait. Cisco has been in the market for a while. They continue to ramp. They continue to deliver new logos to us. And again, we are focused on incremental business with these folks. Dell has been -- the first part of the Dell solution has been in the market for a couple of quarters. But again, that's not the solution that they tend to favor, right? They'll sell their own solution with external storage first before they sell Nutanix HCI solutions. Now that we also have an external storage solution, part two of that offering with Dell, which is the PowerFlex. So there again, the solution has just arrived in market. We are in trials and early engagements with many customers. And so we are seeing – it's early days, and we expect to see some revenue from that in FY26. And of course, over time, we do expect to broaden and support more of these storage array partners. And we'll talk about those in future calls at some point.

Our next question will come from Ben Bollin from Cleveland Research Company.

Rajiv, I wanted to start big picture. When you think about the discussions you're having with customers around these investments, how do you think their thoughts are evolving around traditional three-tier versus HCI? Have you seen any notable changes, more willingness to migrate? Just any big-picture thoughts. And then a follow-up would be, back in '23 prior to the VMware acquisition, it did seem like there was a large number of customers pulling forward renewals. Curious if you're seeing any top-of-funnel opportunities from those customers as they approach three-year milestones and what that might look like for visibility on a go-forward basis. That's it for me. Thank you.

Yes, both good questions, Ben, I think. On the first one, we haven't really seen a big change in terms of the three-tier storage, external storage versus HCI. We fundamentally still believe that HCI is the best way to build a private cloud foundation and a hybrid cloud foundation for our customers. But there is still a huge install base, right? If you look at the market overall, perhaps 20% of the addressable market is HCI today, and the rest is still sitting at three-tier. And we will continue to grow into the three-tier market and convert some of those customers over time. And we laid this out at our last Investor Day almost on a workload-by-workload basis. Now, that said, there is still a very large install base of three-tier storage out there. And it will, you know, it's going to be a long, long while before all of that stuff migrates or may never migrate. And so that's really the reason why, from our perspective, it makes sense to go broader and think of ourselves as not just a HCI provider anymore, but now a platform company. And as a platform, you support a broad ecosystem around you. So you can have Excel storage or you can have our own storage. And so we now let the customer decide, and we still say, look, if you want to go to HCI, you're going to get significant TCO benefits compared to a three-tier solution. But if you'd like to use a three-tier solution, here's the rest of our cloud platform, stands for storage piece, and we'll still give you the best experience when it comes to a hybrid cloud offering and a hypervisor option alternative for VMware. So that's the thinking when it comes to, you know, HCI and three-tier storage for us. Now, in terms of the VMware dynamic on renewals, yes, to your point, a lot of customers did place three years. In fact, some did three years, some did five years with VMware as soon as they heard about the acquisition or around the time the acquisition was announced or as it started getting to be closed. And I would say that, again, all of those customers, as those renewals are coming up now, let's say this year or next year, you can group them into perhaps two buckets. The first bucket are a set of customers that did say, what, I am actively going to migrate out and take steps to do that and be out of there. And in fact, we've had several customers like that who did renew, who bought themselves some window of time and then embarked on a migration with us. And in fact, we've talked about some of those on prior calls. We talked about a large North American insurance company that's been doing this and has a plan to, they're almost out of their dependence on VMware, right? And they've been doing the migration pretty actively. And we've seen that with some of the other customers who've been public about their stories there too. Now at the same time, there was also a set of customers that did not move. And for that set of customers, now they're looking at another renewal that they'll probably have to renew. And what we see, the sense we see is for those people who are not ready, they are increasingly saying, okay, boy, I think I hope this is my last renewal and I can do something about not being dependent again, say three years from now if I have to renew now. So we are seeing quite a bit of variety and variations across customers depending on how they approach this, which is why we've always characterized this, Ben, as a multi-year opportunity, right? This is not going to be just one cohort after the other cohort. It's just going to be a gradual opportunity because there's customers at many different stages in their journeys.

Our next question will come from Mehdi Hosseini from Susquehanna Financial Group.

This is for the team. As you think about ARR, especially over the next year or two, at what point should we assume there will be increased diversification of products, especially as we move from HCI to a multi-cloud? And as part of that question, would ARR growth be driven by new logos or would existing customers be the first adopters of additional products, especially as we migrate to AI inferencing? Do you have a follow-up?

Yes, I think it's a very broad question there, Mehdi. I'll try to parse some pieces of it and hopefully you can help as well. So first of all, I mean, we do have a product portfolio today. It's a full cloud platform, but again, it can be, you know, you can consume it from a cloud infrastructure perspective. We have cloud management and add-ons that our customers can consume, unified storage, which is also an add-on, and then our database platform. And then now we have our modern apps platform and our AI solutions. So these are all, so we already have a portfolio of products. Of course, the bulk of our business today is still coming from the core. But we are seeing, for example, good attachment to our cloud management solutions. And with some of the other elements of our portfolio, they're still early. So for example, our hybrid cloud solutions are still early. Modern applications is still fairly early. And over time, I think we do expect those portions of the portfolio to build up and be additive and be growth additive on top of our, the rest of our core as well. Now, in terms of the nature of the ARR itself, of course, we have new logos and then we have expansion within our current customers. And the new logos, you've seen what's happening there. We've been on a good flip when it comes to adding new customers. And the vast majority of those new logos, the new customers start with us with our core offering. And also now our hypervisor is part of that. Now, when it comes to expansion, I think we certainly look at adding the rest of the portfolio as one of the expansion levers for us, along with more of the same workloads that they were consuming or winning new workloads at the customer. So I would say we have three expansion vectors, right? Expanding with the rest of the portfolio, adding more of the same workload, expanding into new workloads. And those three also drive together expansion ARR.

And one other thing I'd add, oh, sorry, Mehdi, if I can add one other aspect of your question was contribution, I think, of expansion versus new logos to ARR. And one way to think about it is that the NRR we give you every quarter, which is 110 in the most recent quarter, that is, of course, denotes our ability to retain and expand. So if you assume that our retention is something less than 100%, then our expansion is something greater than 10%, right? To kind of get to that 110%. And then we said ARR growth of 18%, that remaining 8% over and above the NRR, that was the contribution of new logos. So in general, when you look at land and expand performance in any given quarter, the expand typically is the significant majority of that land and expand, with new logo being the smaller dollar contribution. Because of exactly what Rajiv said, people tend to start small and then continue to expand with us. That's typically what we see.

And the reason I ask the question is, I just want to make sure I understand the dynamics. And there wouldn't be a period where ARR growth would slow as we go through this transition. But correct me if I'm wrong, from what I understand from you, these three vectors are going to provide these waterfalls so that even if, let's say, market share gains come to an end, you have these two other vectors that kicks in and should help sustain the double-digit growth in ARR. Is that the way, is that the right way of thinking about this simplistically?

Well, without commenting on specific ARR expectations, Mehdi, because we don't talk about that, as you know, we don't guide to it on a quarterly, annual basis. What I will say is that we do have, we do view our business as having multiple levers of growth. That's Rajiv just outlined, whether it be portfolio, whether it be landing new logos, expanding with them and so on. So yes, we are striving to have multiple growth drivers for the business overall.

Got you. And one quick follow-up. You said the long-term tax rate of 20%. Right now we're running less than 1%. Should I assume that this is a small trajectory with the increase in the tax rate?

Thank you for that question. Let me clarify what I said, which is that if you look at our, this is only about our non-GAAP effective tax rate. There is no change to cash taxes, which we still expect to be in the mid-to-high single-digit percent of profit before tax. So I'm not sure we're getting the 1%, Mehdi. And what we are saying is, if you look at fiscal year 24, for example, the way we were previously calculating the non-GAAP effective tax rate was factoring in all of our U.S. net operating loss, NOL carry forwards and other tax carry forwards. And so that has resulted in an effective non-GAAP tax rate for fiscal year 24 for 6%, as an example. What we're saying is we're going to, starting in Q3, switch it to a 20% number, which we think is more effective of our longer-term non-GAAP effective tax rate. It also smooths out any variation from period-to-period.

Got it. Thank you. And the 1% was non-GAAP, but we take it offline. Thank you so much.