Good day, and thank you for standing by. Welcome to the Nutanix Q1 Fiscal 2022 Earnings Conference Call. [Operator Instructions] And now I'd like to hand the conference over to your first speaker today, Rich Valera, Vice President, Investor Relations. Thank you. Please go ahead..

Good afternoon, and welcome to today's conference call to discuss the results of our first quarter fiscal 2022. Joining me today are Rajiv Ramaswami, Nutanix' President and CEO; and Duston Williams, Nutanix' CFO. After the market closed today, Nutanix issued a release announcing financial results for its first quarter fiscal 2022.

If you'd like to read the release, please visit the press release 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 there on 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-19 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-K filed with the SEC on September 21, 2021, as well as our earnings press release issued today.

These forward-looking statements apply as of today, and we would 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, 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.

Lastly, Nutanix management will be participating in both the fifth annual Wells Fargo TMT Summit and the 45th NASDAQ Investor Conference on December 1, and the 24th Annual Needham & Company Growth Conference on January 10. We will also be holding our Annual Meeting of Stockholders on December 10. We hope to see many of you at these upcoming events.

And with that, I'll turn the call over to Rajiv.

Rajiv?.

Thank you, Rich, and good afternoon, everyone. Our first quarter was a good start to fiscal 2022, building on the momentum we established in our prior fiscal year.

Despite ongoing challenges from COVID-19, we delivered another solid quarter, exceeding all our guided metrics, seeing better-than-expected free cash flow, delivering significant new product innovations and making progress with our strategic partnerships.

We saw healthy demand for Nutanix's cloud platform, driven by businesses looking to accelerate their digital transformation, modernize their data centers and adopt hybrid multi-cloud operating models, while ongoing supply chain challenges have made it more difficult for our customers and partners to procure their hardware.

Thus far, we have seen minimal impact on our business, but we continue to watch the situation closely. Taking a closer look. Our fiscal first quarter reflected continued execution on our ACV-based model and was marked by strong top and bottom-line performance.

We saw record ACV billings, which grew 33% year-over-year, our highest growth rate in over 2.5 years. We also grew revenue 21% year-over-year, our highest growth rate in over 3 years despite seeing expected term compression.

Once again, we saw excellent linearity, which combined with diligent expense management, enabled us to nearly achieve free cash flow breakeven in the quarter, putting us well on track to achieving our target of sustainable positive free cash flow by the second half of calendar year 2022.

We achieved these results while continuing to add to our backlog. Overall, we are pleased with our fiscal first quarter financial results and believe we remain on track to achieving our target of 25% plus annualized ACV billings growth through fiscal year 2025.

We continue to see strong adoption of our hybrid multi-cloud portfolio and solutions during the quarter. Our first quarter is typically a strong one for our federal business, and this one was no exception.

Our largest customer in the quarter what a federal civilian agency that substantially expanded their usage of Nutanix' cloud platform, including our unified storage and database automation solutions. This customer is using clusters on AWS to burst additional resource capacity to the public cloud to quickly augment their on-prem environment.

Having a unified environment between on-prem and public cloud allows them to leverage the same team to manage both environments and more readily meet their business service level agreements.

In another example, national retailer lands and purchased our Nutanix cloud platform, including clusters on AWS to enable bursting of their virtual desktop into the public cloud during the peak holiday selling season.

They are also utilizing our platform to run CPU intensive CRM applications more efficiently and support their security and compliance needs. We see last end as a great example of the natural fit of our clusters offering for businesses with seasonal workloads.

Finally, during the quarter, a European-based multinational pharmaceutical company substantially expanded their usage of our hybrid multi-cloud platform including our unified storage and database automation solutions to run a number of virtualized applications and enable virtual desktops in their branch offices.

In September, Nutanix customers prospects and partners from all over the world joined us for our .NEXT digital experience. We were pleased with the attendance and engagement at our signature event, where we saw a record number of new Nutanix provision certifications and viewership for our keynotes and breakout sessions.

We made several announcements at .NEXT, starting with the launch of a major release of our cloud platform, AOS 6.0 with new integrated Zero Trust Security, disaster recovery and virtual networking innovations.

We also introduced new capabilities that make it easier for our customers to simplify data management and optimize database and big data workload performance on a Nutanix cloud platform.

Finally, we announced a new partnership with Citrix, through which the 2 companies will deliver remote work solutions that can be deployed across private and public clouds, combining the simplicity of the Nutanix cloud platform with Citrix virtual apps and desktop services to provide secure on-demand and elastic access to apps, desktops and data from any device in any location at any scale.

Nutanix is now a preferred choice for HCI and hybrid multi-cloud solutions for Citrix virtual apps and desktop services. And Citrix is a preferred choice for enterprise end-user computing on the Nutanix cloud platform.

The 2 companies will also partner on customer support and product road maps to ensure a seamless customer experience and timely validation and interoperability, respectively. Finally, our go-to-market teams will partner to sell to new and existing customers and enable channel partners.

We see this partnership as another proof point in our strategy of furthering customer choice and enhancing our platform by partnering with other best-in-class providers. We are pleased with the industry recognition we continue to receive for our solutions.

Earlier today, Nutanix was named as a leader in Gartner's Magic Quadrant for Hyperconverged Infrastructure for the fifth time in a row. And in a testament to the growing breadth of our platform, the company was also recently named for the first time as a visionary in Gartner's Magic Quadrant for distributed file and object storage.

I am excited about our recent announcement that Dominick Delfino will be joining Nutanix as our Chief Revenue Officer on December 6. Dom brings deep and relevant domain knowledge, as well as go-to-market experience at scale. He will be a great spokesperson for us with customers, partners and the industry at large.

And we expect him to hit the ground running when he joins us in a couple of weeks. As I approach my 1-year anniversary as CEO and reflect on an eventful year, the journey so far has been unquestionably gratifying. And I'm proud of what we've been able to achieve against a challenging backdrop.

We unveiled our new vision, share our multiyear strategy and financial plan and delivered significant enhancements to our Nutanix cloud platform while reshaping it with a focus on solutions. We also made significant progress on our strategic partnerships, signing new or expanded agreements with Red Hat, Lenovo, HPE and Citrix.

Finally, we began to see the benefits of our subscription transition in the form of consistent delivery of whistles ahead of expectations, and accelerating top line and a meaningfully improving bottom line. As I look forward, I'm excited by what's ahead.

We address large and growing markets, which are benefiting from the secular tailwind of an increasingly digital world. We have a strong hybrid multi-cloud platform to address this opportunity.

Our subscription business model positions us to continue to deliver strong growth with the opportunity for substantial sales and marketing expense leverage as renewals become a larger portion of our business. We are focused on disciplined and purposeful spending to help us reach our profitability goals.

Through it all, we continue to delight our customers, and they continue to love us. In closing, I am pleased with our performance in the first quarter and optimistic about our ability to continue to deliver against the vast opportunity ahead of us.

And with that, I will hand it over to Duston Williams, Duston?.

Thank you, Rajiv. Rajiv provided a good overview for the quarter, so I'll get right into some of the specific Q1 highlights. ACV billings for Q1 were $183 million, reflecting 33% growth year-over-year, above our guidance range of $172 million to $177 million and ahead of the Street consensus number of $175 million.

Our renewals business performed as expected. ARR as of the end of Q1 was $0.95 billion, growing 67% year-over-year, slightly ahead of our expectation of 65% growth. Run rate ACV as of the end of Q1 was $1.59 billion, growing 23% year-over-year.

As expected, our average contract term lengths decreased to 3.1 years versus 3.4 years in Q4 '21, driven by our usual Q1 surge and federal business. On average, our federal customers typically have much shorter contract term lengths. Revenue was $379 million, growing 21% from Q1 '21, above the Street consensus number of $369 million.

We added approximately 560 new logos in Q1 '22 versus the Q4 '21 new logo count of 700 in and versus the Q1 '21 new logo count of 680. In the prior 3 fiscal years, our Q1 new logo count on average dropped by 115 new logos versus Q4. This year, we experienced a drop of 140 new logos from Q4 to Q1, slightly higher than the prior 3-year average of 115.

We'd note that our new logo average selling prices continued to rise, which is in line with our strategy over the last year or so to focus on the quality and efficiency of new logo ads as measured by ASP per new logo. In fact, in FY '21, a year that was influenced by the pandemic, we saw our average selling prices per new logo increase by almost 25%.

Our new logo average selling prices were also up in Q1 '22 versus Q1 '21 and versus Q4 '21. In short, we are generating more new logo ACV bookings with less new logos. Coming off a difficult prior year comparison of 86% year-over-year growth and following a very strong Q4 '21 emerging product new ACV bookings grew 11% year-over-year in Q1 '22.

We expect significant growth in emerging products, new ACV bookings in Q2 '22 although the year-over-year comps will remain difficult. In Q1, on a limited basis, we started to roll out our new solution offerings.

As we have previously stated, many emerging products will morph into these new solutions as we move through the current fiscal year, and therefore, any year-over-year comparisons will become less relevant. We have also adjusted our compensation plans accordingly no longer providing bonuses for selling most stand-alone emerging products.

The emerging products attach rate was 42%. We are mindful of the importance of quality new logo additions and emerging products, and we will continue to keep the appropriate focus on them, including adjusting our incentive plans as required. The Q1 sales rep productivity exceeded our forecast, and we increased our total net sales reps in Q1.

Our non-GAAP gross margin in Q1 was 82.1% versus our guidance of 81.5%. Operating expenses were $353 million, lower than our guidance of $365 million to $370 million. Our non-GAAP net loss was $47 million for the quarter or a loss of $0.22 per share. Our Q1 linearity remained very good and receivable collections were excellent.

DSOs in Q1 were 28 days, down from 43 days in Q4 '21. Our Q1 free cash flow was once again aided by the good linearity and collections coming in at a negative $2 million over $40 million better than the Street consensus. We closed the quarter with cash and short-term investments of $1.28 billion, up from $1.21 billion in Q4 '21.

Now turning to our guidance. With the continued progress we've made on our subscription model, we believe it's now appropriate to provide annual guidance. Additionally, having gained a better understanding of potential fluctuations in our average contract term lengths. We are guiding to revenue on both a quarterly and annual basis.

The guidance for Q2 is as follows.

ACV billings to be between $195 million and $200 million, representing year-over-year growth of 23% to 26%; revenue of $400 million to $410 million; gross margin of approximately 82% to 82.5%; operating expenses between $360 million and $365 million; and weighted average shares outstanding of approximately $218 million.

The Q2 ACV billings guidance, which calls for year-over-year growth of 23% to 26% compared to the actual growth of 14% in Q2 '21 and Street consensus growth of 21% for Q2 '22. We expect a considerable quarter-over-quarter increase in emerging products new ACV bookings in Q2.

Our average contract term length will most likely increase slightly in Q2 as our federal business will return to a lower percentage of the overall business mix. Also, just a quick modeling reminder regarding our Q3 top line performance. In Q3, over the last 3 years, we have averaged a small sequential decline in ACV billings of approximately 3% to 4%.

We would expect a similar trend for Q3 '22 for both ACV billings and revenue. We will use a bit of cash in Q2, mostly related to a slight buildup in receivables associated with higher projected Q2 billings. From a free cash flow perspective, we would expect something close to the current consensus estimate of a usage of approximately $25 million.

The guide for FY '22 is as follows. ACV billings to be between $740 million and $750 million, representing year-over-year growth of 25% to 26%; revenue of $1.615 billion to $1.630 billion; gross margin of approximately 82%; and operating expenses between $1.48 billion to $1.49 billion. And one last reminder about the annual ACV billings guide.

As we have often mentioned, 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 and is less than 1 year in duration.

Based on this methodology, over the last 3 fiscal years, the sum of the 4 fiscal quarters of ACV billings have exceeded the adjusted annual ACV billings by 6% to 7%. Some analysts have applied the required adjustment to their annual FY '22 billings estimates and others have not, resulting in an inflated FY '22 ACV billings consensus.

That said, if you apply this methodology to the sum of the pre-earnings call quarterly ACV billings census numbers, it suggests a current FY '22 ACV billings consensus of approximately $720 million to $725 million. We would once again encourage investors to account for this distinction during the modeling process.

With that, operator, could you please open the call up for questions? Thank you..

[Operator Instructions] Your first question is from the line of James Fish with Piper Sandler..

Great quarter. I appreciate all the details on guide moving forward, Duston. Maybe, Rajiv, I want to go back to your comments around the supply chain. A lot of push and pull from others around just the indirect supply chain impacts. I guess how much push or pull are you guys seeing? And if you -- it sounds like you guys were pretty insulated to it.

Why do you think this was the case that hyperconverged and specifically Nutanix really moved up in the priority list here?.

Yes, Jim. So thank you for the question. First of all, I think in our case, we run our software on a variety of hardware platforms. So our customers have a lot of choice, including, by the way, hardware platforms on AWS and soon to be Azure.

So while there's certainly supply chain issues out there that we are all aware of, our customers so far have been able to get what they need by the choice that we provide. So as a result, we've seen some pull-ins and some pushouts, but the net impact is nil so far. So we are comfortable with our forecast.

We'll continue to monitor the situation in terms of supply chain. But so far, so good, Jim..

That's great.

And maybe just on the go-to-market guys, why the decision to no longer incentivize the sales team to sell those stand-alone emerging products? And any update as to how that -- the early leads on the Red Hat partnership are going?.

Sure. So let me do that at first, and then I'll go to the emerging products. So Red Hat was a partnership is going, I would say, really well.

We got good momentum in the first quarter, which is really our first full quarter of the strategic partnership it's resulted in wins for both Red Hat Linux running on top of the Nutanix cloud platform as well as OpenShift on the Nutanix cloud platform.

And we are going forward, we are expanding our go-to-market collaboration, including bringing in channel global systems integrators and our OEM partners. I'll give you 2 specific examples. So one example this last quarter, that a fintech customer who adopted OpenShift running on the Nutanix cloud platform to deliver banking software as a service.

This is a SaaS company. So that's one example of OpenShift on our Nutanix Cloud platform. Another example here was a large bank for running their mission-critical applications. One of the important things they wanted to make sure was that application runs on rail that had Linux on Nutanix.

And the fact that we had a combined certified solution made them very comfortable to run that mission-critical applications on our platform. So that is a win that we got purely because of this relationship. So we're seeing good traction there. Now 2-year question on the emerging products and the space there and so forth.

So first of all, as we said earlier in the call, we had some difficult year-over-year comparisons in fiscal '21. We had an 86% comp in Q1 '20. And as you know, Jim, we're transitioning to social selling, and we're also changing some of the incentives, I'll tell you why. As such, we were expecting a deceleration to approximately 20% this quarter.

Now in fiscal '21, we had a sales accelerator that was tied exclusively to sales of emerging products. Now we removed that because we wanted to focus on not just selling them separately, but selling them first as part of our solutions portfolio, and we wanted to drive both sales and consumption of these solutions.

Now perhaps we should have run a more gradual transition, our emerging product incentives. In Q2, we're implementing a revised incentive program, which will be more targeted. It will include a deployment component. And that said, we continue to be excited by the market opportunity overall for our solution portfolio..

And your next question is from the line of Jack Andrews with Needham..

Congratulations on the results.

So Rajiv, when we think about your software alliances now, you've got Red Hat, Citrix, AWS, Microsoft, what other areas do you think could be of interest? Do you think that there's anything missing from, we'll call it, a Nutanix platform story perspective?.

So Jack, good question here. Obviously, we have a lot of work ahead in terms of continuing to grow those partnerships that you just mentioned. Now in addition, I think there's more opportunities for us to do more work with our global semintegrator.

We continue to use them, especially in larger accounts, where I think we can get a lot more leverage through the GSIs. And again, I think the rest of it really is on expanding these partnerships in multiple vectors. We've done that this year with many of our partnerships. We expanded our HPE partnership. We expanded our Lenovo partnership.

And now with Citrix and that had, we are at the starting early stages Azure again, I think we've got great potential here, lots of customer interest. So a lot of execution ahead of us on these partnerships. And in terms of new ones, I look forward to doing more with Global System Integrators..

And just as a follow-up question, is there any update you can provide in terms of just traction with era in particular and around the database opportunity?.

Indeed, I think this is one of our big bets as we’ve talked about, very excited. We had a big quarter for ERA in Q4. And we are actually renewing – doubling down our investment on both R&D and go-to-market for era. We have a full 360 plan that we’re executing to.

I’m still very excited about the potential for this because Truly’s vision is, it’s a multi-cloud database as a service offering that can work with a range of database engines. So we’ve got good product market fit. We’ve got large customers who have bet on this platform in a pretty substantial way.

And so we are excited about the market opportunity, continuing to invest in it and driving very hard..

Your next question is from the line of Pinjalim Bora with JP Morgan..

Great. Congrats guys on the quarter. Staying on that topic of ERA, it was -- we picked up the data point in doing our channel work that ERA is starting to drive 8-figure deals on its own might be an outlier, but I mean, I don't think people are really thinking of era to drive such big deals.

Is that -- is that what your -- I mean, is that a norm? Or do you feel like those could be large outliers?.

Yes. I think what we see with ERA, there's certainly potential of large deals. And last quarter, we talked about a large financial services company betting big on ERA.

Typically, these wins start out smaller, of course, Pinjalim, so they'll start out by looking at a particular use case for one database, and it won't be the most mission-critical database that they have, but something below that. And once they establish the use case and then they actually go down and buy a lot more.

And so usually, it's our second deal or the third deal with a customer that's going to be bigger, right? The initial deals are going to be -- let me try this out for one use case, see how it works. And if I like it, I'm going to go big. So we are excited about the potential for ERA.

And the other thing is, as you go further up the stack, it's worth more from an ACV per core that we can get, right? So there's a lot of value that we can extract from the solution.

It's -- and the use cases are very strong because customers are -- they have a huge number of databases that they manage and simplifying the operation of those databases is a massive value proposition and making that work in future in a multi-cloud world is another added value proposition on top of that.

So I think Pinjalim I'm excited about it and continue to invest and believe in its prospects..

Got it. And just taking a step back, I guess, when I look at the ACV growth, obviously really good. You are trying – I think when you guided to it, you kind of guided a sequential dip in Q1. When I look at the actuals now, it seems like the sequential is even better than 2 years ago.

What surprised you in the quarter? Is there anything that went much more positive than you thought in any particular areas to highlight?.

I would say – go ahead, Duston..

Yes. No. I think basically, things came in as planned. A couple of things ran a little bit ahead, federal as we expect in Q1 had a good quarter, which helped things out. And the renewals remain very much on track, which is good. We continue to grow and mature that team internally.

And we had some significant upsell business, as you might expect in the quarter 2. So I think it was a little bit of everything clearly as we expected, though, like every Q1 led by Federal..

The only other thing I would add there is I think we came close to breakeven on free cash flow. Again, that was a little better than we expected..

Your next question is from the line of Matt Hedberg with RBC Capital Markets..

It's Dan Bergstrom for Matt Hedberg. Really like the guidance around revenue and for the full year.

Could you expand upon that decision? What gave you the confidence and guidance and why now?.

Sure. Yes. No, I'll be happy to. From a guidance perspective, we actually talked last quarter about doing it a little bit earlier internally, and I just felt comfortable getting one more quarter under our belt before we kind of went back to annual guidance. But again, as we're coming through the subscription transition so much more is known.

We've done a pretty good job of estimating where terms fluctuate as they do a little bit quarter-over-quarter. So we're clearly more comfortable. With that, the renewals have started to play out as planned, which add predictability.

And I think with the backdrop of that, at some point, when we talk about all the improvements that's happened to the business. And as we believe it gets more predictable, I think it becomes a bit awkward not to give annual guidance, quite honestly. And so that's what we've done.

We also heard it loud and clear from investors that they were tired of doing a little math, which I completely understand. And I say with the term stabilizing a little bit, a big ask from the investment community was revenue. guidance and don't have as to the math just give us the revenue guidance.

So we also did that not only on a quarterly basis but an annual basis. So we hope that helps out shows our confidence in the business, and we'll continue to that level of guidance throughout the fiscal year..

Yes, that’s great, Duston. And then could you drill down into a little bit what you saw from the federal vertical in the quarter with fiscal year-end sounded positive from the prepared remarks. It’s been mentioned a few times, but just more details there would be helpful..

Yes. Again, federal always comes in strong. We saw a nice new customer wins, a lot of upsell business there also. Again, pretty much as we expected, brought terms down. Federal usually has shorter terms that played out basically exactly as we had expected there. But overall, a good federal performance.

And I should also mention in the quarter that EMEA, although typically not Q1 always, but EMEA showed really well in the quarter. So really our top performing region in the quarter. So that was nice to see, especially I don’t know if you’d add anything, Rajiv, about the federal business or not..

Yes. Yes. I mean, Q1 is always a strong quarter for federal. Now one thing I would say is we are seeing the federal business also starting to use our cloud offerings. So one of the largest deals this quarter was with that federal agency that we talked about on the call earlier. And again, they are using clusters on AWS.

For again, temporary capacity expansions, right, when they need it. So we’re starting to see the multi-cloud adoption, our hybrid multi-cloud platform as such being adopted in federal agencies as well..

Your next question is from the line of Aaron Rakers with Wells Fargo..

This is Michael on behalf of Aaron.

Could you provide any color or maybe quantification of possible and what your backlog currently looks like?.

We usually don’t do that. We give a qualitative version. Rajiv mentioned that it went up quarter-over-quarter, which we were pleased in Q1 because that’s not always the case. Q1 is use a little soft and Q3 is usually a little bit soft from a seasonality perspective.

But we were pleased to add a little backlog in the quarter, and it’s been several quarters now. That we’ve been able to add some backlog. So we’re happy with that..

Okay. And just looking into 2022, I’m curious how you’re thinking about the overall demand backdrop in terms of just enterprise spending environment? There’s ongoing server CPU refresh cycle.

I’m just curious if that impacts Nutanix to what degree?.

Yes. I’ll take that. In general, I think we have a good backdrop here. As customers continue to come out of COVID and invest in their strategic initiatives. They’re investing in digital transformation. They’re investing in modernizing their infrastructure and looking at cloud use cases. And -- so all of these, in general, I think, bode well to what we do.

And the last bit, of course, is everybody is now in a hybrid work environment as well, and that will continue into next year as well. So all of these lineups quite well with what we sell from a solutions perspective. And so I expect the demand environment to continue to be healthy..

Your next question is from the line of Rod Hall with Goldman Sachs..

This is RK on behalf of Rod. And congrats on the nice results.

question, could you give us an idea of how much Red Hat related revenues you saw in the quarter? And Rajiv, can you talk about your strategy on how you approach the broader highway cloud software market between your own products versus partnerships?.

Yes, I'll let Rajiv, why don't you take the Red Hat piece there..

Yes. So look, the Red Hat partnership is pretty early, right? And what we're really doing is core selling together in specific accounts, and the go-to-market most really just started. What I would say is it's still early days. This was our first full quarter. And as you can see, the wins are starting to come in now.

We talked about 2 wins here early days there. But again, those 2 categories are quite solid, right? One is just comfort with running mainstream applications on Renatlinax on our cloud platform with our hypervisor. So that's very clear. That's an immediate opportunity here. We can go out there and prosecute that independently almost.

And then the second, really, where we do a lot of co-work with that had is around OpenShift and Nutanix cloud platform providing a best-of-breed total tax solution. And both of those, I think, are solutions are worthy of and we're seeing good starting great go-to-market engagement in the feed at this point.

It's only the first quarter here, right? So of the partnership really in motion. To your second question around hybrid cloud and how we think of hybrid cloud software. Again, I think we look at this as us providing a runtime foundation, right? Infrastructure as a Service foundation with our hybrid cloud infrastructure, hybrid cloud management.

And then on top of that, once storage and then database solution, soda-based automation solutions. That's our stack when it comes to a hybrid multi-cloud. And not all of it is available on every cloud today. Our base platform is available on AWS, soon to be Azure.

And while some of the database solutions are largely today on our platform and not quite yet in native public clouds yet. But that's our vision. Now how do we complement that? For example, Red Hat delivers a fast platform, platform subscribers with OpenShift in a hybrid multi-cloud world.

So Red Hat as Nutanix delivered a complete stack, PaaS and IS, right, platform and infrastructure as is all the way in a multi-cloud world. Then we have ecosystem partners that are doing added value functions, things like backup, for example, that we partner with and they decide along with our platform.

and those also play in a hybrid multi-cloud world. We're looking at disaster recovery and working with potentially service for the partners, right, to go bring some of those capabilities to market as well. So there is a broad ecosystem. and we continue to leverage that quite in addition to providing our own stack..

Could you also talk about which emerging products you are most excited about for Q2?.

Well, I think, look, fundamentally, we piloted our new solutions offering this quarter in select regions.

And I look forward to continuing to drive that into the marketplace, right, hybrid cloud infrastructure, hybrid cloud management, unified storage, database automation solutions, right? So I’m excited about actually getting the solution sales rolling on a broader basis and really driving that into the marketplace.

Because when we do that, we sell more of our products, it’s easy for our customers to consume them. And as we’ve talked about before, database, I mean, ERA is a big bet for us. I’m excited about that opportunity and driving growth there over as perhaps one of the big bets that we are taking..

Your next question is from the line of Nehal Chokshi with Northland Capital..

Congrats on the very strong results, impressively dealing acceleration well above your long-term model be on that.

In that context, why are you guiding to 24% midpoint year-over-year growth on the ACV billings given that you just accelerated way above your target model here?.

Yes, Nehal, Duston. Yes, I've got a little different number, I think, somewhere around 25% to 26% is the number I have there so we can reconcile that offline. But that's right in line with what we've been saying -- we said it compounded through 25. We didn't really we actually gave, I think, for '22, a little bit lower expectation at Investor Day.

So now we're happy to provide that level of guidance and that growth rate year-over-year..

Okay. Great. And then you mentioned renewals did really well.

Can you dive that up between life of device maintenance and term-based licenses?.

Yes. We've got the 2 pieces there, both going in opposite directions. Life of device starts to get phased out over time, and that's getting phased out. not quite as fast, quite honestly, as we thought in the plan, but that's getting phased out.

And as we've talked about, certainly as we get in the second half of this fiscal year, the subscription renewals start to come in. And we saw a good traction in Q2. That will continue into Q3. And then we've got a bump up in Q4. So basically, both on track and performing as expected.

We still have some back-office systems work that we're doing, and we'll continue to do that. But overall, the renewals are basically playing out as planned and the LOD support not quite going away as fast but definitely coming down..

Any thoughts on why the LOD is not fading as fast as you thought it might?.

We had to kind of estimate in the plan as far as how that would transition and how fast people will do it, and some folks want to it sooner, some folks wait. And obviously, they have the optionality of increasing support 1 year, for instance, if they want, so they can run the hardware a little bit longer if they want to.

But it’s not all that different, but just a little bit stronger..

Your next question is from the line of Jason Ader with William Blair..

Yes. Quick one for Duston. Did I miss this.

I've been jumping around, but did you quantify renewal ACVs in the first quarter?.

We didn't, Jason. We said we would during Investor Day on that disclosure sheet there that we would do that on an annual basis. but well within our -- ran well within our expectations..

Perfect. Okay.

And can you remind us kind of roughly where that is as a percentage of total ACV right now?.

Well, we did that for the fiscal year, but we're not, again, breaking that out on a quarterly basis..

We're -- it ended at what percentage the year?.

Would have to get the exact -- would have to get the exact percentage. Yes, we can just reference the Investor Day there..

Yes. Okay.

And then Rajiv, have you noticed any changes in the competitive environment with VMware/Dell now that Dell has spun off VMware? Is that changing any of the dynamics around competing with VxRail?.

Not really at this point, I would say, Jason. I would say things are about the same as they were. We continue to focus on our value proposition with our customers and continuing to work with all the partners that we talk about, right? So HP, Lenovo, et cetera, and Fujitsu and many others that we continue to work.

So I haven’t seen much so far in terms of change. And again, you saw the Magic Quadrant come up, and we continue to be a leader there for the time. And then you saw the new Magic Quadrant on Pfizer objects, and we were thrilled to be visionary there. So I would say, at this point, really no change in our – in the competitive landscape.

We continue to see a higher win ratio for us. Are partly perhaps because our pipeline discipline has gone better, and we are much more disciplined in terms of our execution. But really largely no change yet..

Your next question is from the line of Wamsi Mohan with Bank of America..

It’s actually Ruplu filling in for Wamsi today. Congrats on the quarter and on giving annual guidance. I have one for Rajiv and a couple for Duston. Rajiv, sounded – in the prepared remarks, it sounded like new logo adds this quarter were a little bit weaker than expected.

Is there any dynamic to that? What – and what caused that? And how do you expect that to trend over the next couple of quarters?.

Yes. Sure.

Duston, do you want to take that? You’ve got a detail?.

Yes. As we mentioned in the call, typically, over the last 3 years, you just average them, it bounced around a little bit, but average them Q1 new logos, as I said, came down roughly 115 on average. We came down 140. So it’s not that much different from the prior Q1 – Q4 to Q1 transition there.

And then also, we’ve been, over the last year or more, really focusing again on the efficiency of adding new logos and the quality of new logos and that shows pretty clearly when you look at the – just the ASPs on new logos going up 25% year-over-year in ‘21 versus ‘20. So you can see there that we’re focused.

We’re again, basically driving more new logo ACV dollars per logo there. So we’re happy about that, and we’ll continue to have that focus. But again, we’ll continue to look at new logos and adjust comp plans. We always do that more outside of the company more pits and bonuses.

We’re always moving those around a little bit to reflect what we need to do in the business, and we’ll continue to do that. And I think the other question I had was Q2 and what that looks like potentially from a new logo perspective. So both tell you is that I believe every Q1 to Q2 new logos have increased. We’ll see how this Q2 plays out.

But every other Q1 to Q2, we’ve seen an increase sequentially in new logos..

Okay. That’s very helpful. Can I ask you on free cash flow? I mean, you were almost breakeven even this quarter in fiscal 1Q. So why is the guidance still that you’ll get to breakeven by the end of the fiscal year or by calendar second half of ‘22.

What are the dynamics happening in free cash flow over the next couple of quarters?.

Sure. Clearly, this performance and the performance over the last couple of quarters gives us more confidence in our projection of the second half of the calendar to reach free cash flow positive.

But again, we’ve done an outstanding job on 2 fronts there, linearity and collections and the combination of those 2 things are really a killer from a free cash flow perspective in a positive manner. And so this quarter, we hit both of them really nice and collections were great. And if you go back to a year ago.

We brought AR down, I believe, somewhere around 35% year-over-year, while billings have gone up 20%. So we can’t continue to keep that type of performance. We’ll continue to do very well on both those metrics.

But in Q2, just because we expect increase in just total billings, naturally, ARR is going to go up a little bit, so we’re going to pump a little bit back into the working capital that’s going to use a little cash and then that kind of bounces around.

But again, this combined with the overall performance of the business just gives us more confidence in that, again, the second half ‘22 calendar projection of reaching free cash flow positive..

Got it. If I can just sneak one more in. I wanted to ask you about seasonality of ACV billings in the sense that, I guess, you talked about 3Q being down 3% to 4% sequentially. And I think in the last earnings call, you talked about 4Q being sequentially up primarily because of the renewals business.

So I wanted to ask you, as that renewals business grows, should we expect that seasonality to become more pronounced, like would 3Q be lower more sequentially in the coming years and then 4Q sees a more expanded recovery or not.

So I just wanted to get your thoughts on how the ACV billing seasonality trends as your renewals business increases?.

Yes. It’s a good question. And it doesn’t really change it that much. The only reason why we’re seeing a pop up in Q4. It’s just the – it’s the initial wave, if you will, of renewals coming in. And there’s nothing magical about Q4. There’s – at this point, we’re not co-terming a bunch of stuff to make sure it goes into Q4.

It’s just where the ATR resides, are they available to renew on kind of the initial flow of renewals. So this isn’t a change in seasonality. It’s just how the renewals are flowing.

And eventually, once we get into a rhythm here with renewals, that kind of starts to even out use you’d see a natural progression upwards and a little bit more linear manner, probably..

And your last question is from the line of Erik Suppiger with JMP Securities..

Congrats on a good quarter. Curious about hardware constraints.

You had said they didn’t have much impact in the quarter, but I’m curious if your partners, if your hardware partners have some of them been constrained and customers are shifting from one platform to another? Or have you been pretty free of any constraints across your – across all of your partners?.

No. I would say, Eric, that’s again a good question.

We’ve certainly seen customers having to pay more attention to managing their hardware supply chain for sure, right? And so if they can’t get what they need from one vendor, they go to another vendor and try to get what they need, right? And – so definitely, the fact that we’ve got some flexibility in terms of hardware choices helps us bridge the gap or be the situation.

And our customers as well get to leverage a variety of commodity servers, right? At the end of the day, the hardware that our star runs on is a standard server. And so they have a lot of choice. And they will certainly pick – increasingly, they might pick one that’s available versus one that may be from a preferred vendor for us.

So I think the customers definitely are paying more attention to managing their supply chain for the hardware and we see that like we said earlier in the call, it hasn’t really impacted us from a software perspective in any way yet..

Do you anticipate – or did it get worse during the course of the quarter in terms of the constraints? And what do you anticipate in terms of constraints through the end of the year or through early next year?.

I mean it’s – so not for us, Erik. I mean, I think for us, it’s been essentially – we’ve seen some pull, some push for the most part the business impact has been minimal. Now it’s hard for me to predict here. Clearly, there’s significant supply chain constraints out there in the hardware space. No doubt about it.

So we are comfortable with our second quarter, I can tell you that for sure. And we’ll continue to monitor the situation here as we go by. And of course, you saw that we provided annual guidance as well, and we have confidence in the to go ahead growth as well..

If there are no more questions, we will now end the call. Thank you, everyone, for joining. This concludes today's conference call. You may now disconnect..