Nutanix, Inc. (NASDAQ:NTNX) Q2 2024 Earnings Call Transcript

Nutanix, Inc. (NASDAQ:NTNX) Q2 2024 Earnings Call Transcript February 28, 2024

Nutanix, Inc. misses on earnings expectations. Reported EPS is $0.1099 EPS, expectations were $0.29. Nutanix, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Nutanix Second Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there’ll be a question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your first speaker today, Rich Valera, Vice President of Investor Relations. Please go ahead.

Rich Valera: Good afternoon and welcome to today’s conference call to discuss second quarter fiscal year 2024 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 second quarter fiscal year 2024 financial results. If you’d like to read the release, please visit the Press Releases section of our IR website. During today’s call, management will make forward-looking statements, including financial guidance. 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 annual report on Form 10-K for fiscal year ended July 31, 2023 and our subsequent quarterly reports on Form 10-Q, as well as our earnings press release issued today. These forward-looking statements apply as of today and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as 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.

Nutanix will be participating in the Morgan Stanley TMT Conference in San Francisco on March 6th. We hope to see some of you there. Finally, our third quarter fiscal 2024 quiet period will begin on Tuesday, April16th. And with that, I’ll turn the call over to Rajiv. Rajiv?

Rajiv Ramaswami: Thank you, Rich. And good afternoon, everyone. We’ve delivered a solid second quarter, with results that came in ahead of our guidance. The macro backdrop in our second quarter remain uncertain, but stable relative to the prior quarter. We continue to see steady demand for our solutions driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives and looking to optimize their total cost of ownership or TCO. Taking a closer look at the second quarter, we were happy to have exceeded all of our guided metrics. We delivered record quarterly revenue of $565 million and grew our ARR 26% year-over-year to $1.74 billion. We also had another quarter of strong free cash flow generation.

Finally, we achieved quarterly GAAP operating profitability for the first time in Q2, demonstrating the progress we continue to make on driving operating leverage in our subscription model. Overall, our second quarter financial performance reflected continued discipline execution. Our largest wins in the quarter demonstrated the appeal of the Nutanix cloud platform to organizations that are looking to adopt hybrid multi cloud operating models optimize the performance of their workloads and improve their TCO all while managing through some of the disruption from recent industry M&A. A good example is a seven figure win with a global EMEA based provider of automotive technology solutions. This new customer had an existing three tier footprint in need of a refresh, but was frustrated by the recent price increases of their incumbent vendor and was also looking to have the flexibility to potentially move some of their footprint to the public cloud in future.

They chose our Nutanix Cloud Platform, including our AHP hypervisor, as well as Nutanix Cloud Management, based on its superior TCO, built-in automation for infrastructure as a service. And its ability to seamlessly transition workloads to public cloud via our NC2 solution. We see this win as a good example of the value customers see in our cloud platform for both, modernization and providing a seamless pathway to the public cloud. A second good example is a win with a large North American based hedge fund, that was looking to mitigate the growing cost of its public cloud hosted virtual desktop infrastructure or VDI. And for a more responsive solution to meet the performance demands of its traders. They chose to repatriate their VDI onto the Nutanix Cloud Platform on GPU based servers.

Resulting in a meaningful improvement in performance and an estimated 60% plus TCO savings. We believe this win demonstrates the ability of the Nutanix Cloud Platform to seamlessly run and manage workloads wherever the optimal performance and TCO can be achieved, whether on premise, at the edge or in the public cloud. A final example if one of our largest new customer wins in the quarter, with a global airline based in the EMEA region that was looking to modernize their feature infrastructure, while enabling a hybrid multi cloud environment. This customer chosen Nutanix Cloud Platform, including Nutanix Cloud Management to run their business critical application, leveraging its simplicity and built-in automation for infrastructure as a service.

They also adopted Nutanix database service for managing and deploying their databases throughout their organization, and Nutanix unified storage to service their unstructured data needs. We see this win as evidence of the value companies see in adopting our full stack solution. Moving on, adopting and benefiting from generating AI, is top of mind for many of our customers. As such, interest remains high in our GPT in-a-Box offering, which enables our customers to accelerate the use of generative AI across their enterprises, while keeping their data secure. Last quarter, we saw our first win for GPT in-a-Box with a large federal agency. In this quarter, we saw multiple additional wins for a Gen AI ready infrastructure offering. While it’s still early days, and the numbers remain small, I’m excited about the longer term potential for GPT in-a-Box.

Finally, on the partner front, I’m happy with the early progress we’re seeing with our Cisco partnership. We continue to see good customer interest in our joint offering and saw additional wins for it in the second quarter. While it’s still early in this partnership, I’m encouraged by what we’ve seen so far. In closing, we are encouraged that the compelling value proposition of our cloud platform and the strength of our business model enable us to increase our top and bottom line outlook for fiscal 2024. We remain focused on delighting our customers while continuing to drive sustainable, profitable growth. And with that, I’ll hand it over to Rukmini Sivaraman. Rukmini?

Rukmini Sivaraman: Thank you, Rajiv. I will first review our Q2 fiscal ’24 results, followed by guidance for Q3 fiscal ’24. And finally provide an updated view of our full year fiscal year ’24 guidance. Results in Q2 ’24 came in higher than the high end of our range across all guided metrics. ACV billings in Q2 were $329 million above the guided range of $295 million to $305 million representing year-over-year growth of 23%. The outperformance was driven by better than expected renewal performance due to a combination of good discipline around renewals economics, improved on time renewal performance, as well as early and core term renewals. Revenue in Q2 was $565 million, higher than the guidance range of $545 million to $555 million and the year-over-year growth rate of 16%.

ARR at the end of Q2 was $1.737 billion representing year-over-year growth of 26%. In Q2, we continue to see modestly elongated average sales cycles compared to historical levels. Average contract duration in Q2 was 2.8 years, slightly lower than Q1, and more or less in line with our expectations. Non-GAAP gross margin in Q2 was 87.3%. Higher than our guided range of 85% to 86%. Non-GAAP operating margin was 21.9%, higher than our guidance range of 14% to 16%, largely due to higher revenue and lower operating expenses as a result of timing of hiring. Non-GAAP net income was $136 million, or fully diluted EPS of $0.46 per share based on fully diluted weighted average shares outstanding of approximately 299 million shares. Q2 marked our first ever quarter of positive GAAP operating income of $37 million and a positive GAAP net income of $33 million, with fully diluted GAAP EPS of $0.12 per share.

Given expected variability in quarterly revenue and timing of expenses, we would not expect to be consistently profitable at the GAAP operating profit level over the near term. DSOs based on revenue and ending accounts receivable were 31 days in Q2. Free cash flow in Q2 was $163 million, representing a free cash flow margin of 29%, higher than our expectations due to higher billings and lower expenses in the quarter. We ended Q2 with cash, cash equivalents and short term investment of $1.644 billion up from $1.571 billion at the end of Q1. We continued repurchasing shares in Q2 under the share repurchase program, previously authorized by our Board of Directors. Our sustainable generation of free cash flow enabled us to transition the net share settlement to pay for employees’ tax liability on RSU Vesting in Q2, and going forward from our previous method of sell to cover.

This, along with our share repurchase program will help us continue to manage dilution. Moving to Q3 ’24, our guidance for Q3 is as follows: ACV billings of $265 million to $275 million, revenue of $510 million to $520 million, non-GAAP gross margin of approximately 85%, on-GAAP operating margin of 7.5% to 8.5%. And fully diluted shares outstanding of approximately 301 million shares. The updated guidance for full year fiscal year ’24, which is higher than our previously provided fiscal year ’24 guidance across all metrics is as follows; ACV billings of $1.09 billion to $1.11 billion, representing a year-over-year growth of 15% at the midpoint of the range. Revenue of $2.12 billion to $2.15 billion representing a year-over-year growth of 15% at the midpoint.

Non-GAAP gross margin of 85% to 86%. Non-GAAP operating margin of 12.5% to 13.5%. Free cash flow of $420 million to $440 million, representing a free cash flow margin of 20% at the midpoint. I will now provide some commentary regarding our updated fiscal year ’24 guidance. First, we are seeing continued new and expansion opportunities for our solutions despite the uncertain macro environment. However, as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels. Our fiscal year ’24 new and expansion ACV performance outlook assume some impact from these macro dynamics. We are also seeing a higher mix of larger deals in our pipeline, which is driving greater variability in the timing of our new and expansion business.

Second, the guidance assumes that our renewals business will continue to perform well. Third, the full year guidance continues to assume that average contract duration would be flat to slightly lower compared to fiscal year ’23, as renewals continue to grow as a percent of our total billing. Fourth, a reminder that the full year ACV billing is not the straight sum of the ACV billings of the four quarters due to contracts with duration less than one year. We expect full year ACV billings to be about 5% to 6% lower than the sum of the four quarters ACV billings. In closing, we are pleased that our Q2 results exceeded guidance and to raise our top line and bottom line guidance for the full fiscal year. We remain focused on driving growth to capture the significant opportunity ahead of us and are investing prudently for that growth, consistent with our stated philosophy of sustainable, profitable growth.

With that, operator, please open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Jim fish from Piper Sandler. Your line is open.

Jim Fish: Hey, guys, thanks, thanks for questions. Awesome quarter here. Look, I’m going to ask the obvious, that’s on top of everybody’s mind, and I’m sure you’re totally prepared for. On the VMware opportunity and Rukmini, you even just mentioned, you know, you’re seeing a higher mix of larger deals in the pipeline. So my question to you is, is what sort of pipeline or bookings build Have you seen relative to this stage last year, between either direct customers kind of coming to you or partners coming over to you as well in terms of signups?

Rajiv Ramaswami: Yes, why don’t I start Jim, and Rukmini can give you color on the pipeline. So, first of all, I think, as you said, I mean, there are significant concerns from VMware customers regarding the Broadcom acquisition. And we think that this is a significant multi-year opportunity for us to win new customers and to gain share. Now, getting to your question a bit here, the timing and magnitude of these deals is a bit unpredictable. Our pipeline is quite substantial, and growing. Now for a number of reasons, we expect contribution for the opportunity to build gradually, and here are the reasons. First one, Jim is that many customers signed multi-year ELAs enterprise agreements with VMware prior to the deal closing three to five years.

So it buys them some time to make decisions. The second, converting from VMware 3-tier accounts or legacy storage accounts, which is a good chunk of VMware footprint, in many cases requires a refresh of their storage and our servers, right, one of the two, which could also impact the timing of the potential software purchases that they would make with us. Okay. And the last piece is like with all these accounts, we typically ever land and expand motion. So the first deal could be followed, and then there’s a lot of potential for expansion further than that. And then Rukmini, you want to take this?

Rukmini Sivaraman: Sure. Yes, I’ll add one thing, Jim, to your question is that, I mentioned in my prepared remarks about this. Higher mix of larger deals that we’re seeing in our pipeline and that is driving the greater variability, we believe in the timing of our new and expansion business, as well as potentially contributing to the longer average sales cycles, because larger deals do tend to take longer to close. And we believe that this higher mix of larger deals in the pipeline is driven by, you know, one, our segmentation of market, as we’ve talked about before, and the improved product readiness for those larger customers. And secondly, some of the dynamics that Rajiv talked about already regarding concerns from larger customers, regarding the impacts from Broadcom’s acquisition of VMware. And so we have continued and continue to factor all of the impact of some of these dynamics into our updated fiscal year ’24 outlook.

Jim Fish: Make sense. And just a follow up here. You know, there’s a bit of confusion out there, from what I can tell on the conversations with investors between, what VMware can do that Nutanix can’t do. And, so Rajiv, what differences actually exist, if any, or features or functions — exist, what the differences kind of exist, if any, between vSphere, for example, and Acropolis or the VMware platform versus Nutanix platform, or features functions you plan to add in order to make it an apple to apples compare, or is it simply just a legacy market perception thing that you guys can’t address, really what most of VMware could do? And really, why wouldn’t we start to see that Acropolis attach rate get closer to, you know, 100% on every deal that you signed from kind of here on forward. Thanks, guys.

Rajiv Ramaswami: Yes. So Jim, I think first of all, if you compare the full stack that Broadcom was offering with VMware Cloud Foundation, that, — and our Nutanix cloud platform pretty much goes head to head against that, and we’ve got all the capabilities. That’s a full stack that includes, the hypervisor, a software defined storage, networking and management. So we compare very well with that full stack and we’re able to go to a very comparable offering. And indeed, as you can see, right our AHP penetration our hypervisor penetration, our install base is about 70%. And we are seeing new customers who adopt a full stack start with our own hypervisor, okay. That part is fair. Now when it comes to the lower tier offering, VMware does have a vSphere and now it’s called I believe VMware Virtual Foundation, VVF.

That includes vSphere, some operations management capabilities, et cetera. Now, what you — what I mentioned earlier, in response to the question was that, there is some amount of VMware, in fact a big chunk of VMware it’s only the hypervisor that’s connected to legacy storage, right 3-tier storage arrays. Now, the way we go after the market is not to just simply replace the hypervisor with our hypervisor, because our hypervisor also is part of our complete solution, right, which includes our storage. So customers are actually making a shift from a legacy architecture that say hypervisor plus external storage to a modern HCI architecture that includes our hypervisor, but also the rest of our stack. So there, it’s not just a simple life for life, but it’s a conversion, and modernization of infrastructure as well.

So I feel pretty good about what we can do, we can handle all the workloads. We have a hybrid cloud solution, we have a modern app platform that customers can run Kubernetes applications on. We have partnerships with Red Hat for OpenShift. We have partnerships with our cloud partners like Azure and AWS. So from a capability of the portfolio perspective, we’re very much there.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Jason Ader from William Blair. Your line is open.

Jason Ader: Thank you. Hi, Rajiv, hi Rukmini. I just wanted to ask on that kind of follow up threads on the last question just on the 3-tier architectures out there. And most of those are running VMware today. Does it feel like this change with the Broadcom acquisition actually could accelerate the transition away from 3-tier architectures as customers maybe get a little bit disenfranchised, and are looking for alternatives? And then it’s like, well, we never really looked at HCI that closely. But now, maybe we should. Are those kinds of conversations happening?

Rajiv Ramaswami: Very much so, I would say, Jason. So in fact, you’re right. There’s a lot of VMware with what we call 3-tier. And one of the things that Broadcom itself is doing has done by the way is that the VMware Cloud Foundation that includes HCI and that their default offering to a lot of the bigger customers. So effectively now, it’s not just us doing HCI, but they’re also putting, which puts a little bit of pressure on the 3-tier storage piece of it. And so we are clearly focused on that opportunity, in terms of — and we’ve been doing that all day long, right, since we’ve started, migrating, legacy 3-tier over HCI, and potentially that this might help. Now, the other thing we should also keep in mind just so that we don’t lose track of it.

There are even easier assertion opportunities now. Because there is a substantial base of vSphere plus VSAN HCI out there. And so that’s almost the like for like. Those customers have already made the HCI decision, and they might be looking at, if they’re looking to migrate away from VMware, we pretty much have a like for like solution that that we can migrate over to. And we are doing, we’re not sitting idle here, right, we are doing a bunch of things to capitalize on the opportunity, I’d say three things that we’re doing. First is that we have been targeting some more advertising dollars to maximize the awareness of Nutanix as the simplest, easiest, viable alternative for these customers. Number two, we’ve also put in place incentives for our partners, who are helping customers get to our platform for new customers, as partners bring new customers to us, we give them more incentives.

Number three, we’re also helping end customers with migration. When they have a VMware environment, they’re looking to bring our environment on, there’s a period of time where they might have dual operating costs, and we try to help them out on that front. So we’re also taking some very specific steps to go out for the opportunity.

Jason Ader: Great, and then a real quick follow up just on your comments on Cisco, that you’re happy with early progress. When do you think, Rajiv that could start to really be a material contributor to the business?

Rajiv Ramaswami: Yes, we factored in a modest contribution this year, Jason, from Cisco. I do expect that the contribution is going to be more significant in FY ’25. And we’ll cover that when we get to, you know, when we are ready to talk about that FY ’25 guide. But, clearly, it takes time to build this up, we focused on enabling the full solution, training that sellers. And we’re happy with the progress we’re making. We are getting new customers through the cloud now. And they are motivated. So I think over time, it will build.

Operator: Thank you. One moment for next question. And our next question will come from Wamsi Mohan from Bank of America. Your line is open.

Wamsi Mohan : Yes, thank you so much. You drove very strong operating leverage in the quarter. Can you talk about if there were any one time things in there? I think, Rukmini, you mentioned something around hiring I didn’t really catch. But, was there any one time things in there when why is that rewarding lower next fiscal quarter? Then I have a follow-up.

Rukmini Sivaraman: Yes. Hi, Wamsi. Thanks for the question. So the reference I made in terms of our operating margin performance in Q2, which was came in strong at 22% and higher than our expectation was, one revenue was higher than we expected. And expenses were a bit lower because of timing of hiring, and just overall good expense management. And we do expect that expenses will go up in the second half. So if you look at half over half operating expenses implied in the guide, that does go up in the second half, one way, and of course, Q3 compared to Q2, seasonally, the revenue is lower in Q3, that it doesn’t in Q2. So those are some of the things that are factoring into the outlook. But overall, you know, I’d say, we have continued to be focused on investing and investing thoughtfully on this growth opportunity that’s ahead of us. And so that’s the approach we’ve taken. And overall, we’ve been pleased to take up our full year outlook on both top and bottom line.

Wamsi Mohan : Okay, thanks. Makes a lot of sense. And then, Rajiv, I mean, you made some comments already. But can you perhaps maybe quantitatively talk about the wins that are coming your way because of this M&A? And, and sort of, you know, how many points of growth potentially we should be thinking about? Or how many points of share that you think you could see shift over to Nutanix, given this disruption, or even maybe if you can talk about it in qualitative terms around rate and pace of pipeline build? Just quarter-over-quarter over the last few quarters? That will be helpful. Thank you.

Rajiv Ramaswami: Yes, Wamsi first of all, I think it’s going be hard for me to give you some very specific quantitative numbers at this point. But what I’d say is, is for sure, right, if you look at our last Investor Day, we talked about our TAM and the SAM as part of that right the $60 billion $70 billion TAM and SAM. And what we really expect is, I mean, we’ve always been going and continuing to grow market share and eat into that SAM, and what this event creates is an opportunity to speed that up. So it’s the same, the TAM and SAM haven’t really changed. It’s still the same, but now we’re able to get after more of it quicker. Now, the challenge with quantifying it is that it’s very hard to predict right I mean, as we bought that, how much of this is going to come out quickly?

And this is what, it’s a little early to, for us to say something there. So we’ve got, like I said, we’ve got customers who want to do something different, but they’ve got these three five year relays. They’re not in a rush. There’s some time it takes to convert customers, and they have to depreciate the hardware that they bought, for example. And then you know, the — you bring us in for a small portion and expand. So all of these things create some unpredictability in terms of timing, and how quickly can we capture it. But, I certainly think that this provides us an opportunity for us to capture more of the market quicker, and we’re trying to move as quickly as we can. I don’t know, Rukmini, if you want to provide any color on the pipeline?

Rukmini Sivaraman: Yes, I may add one thing to that, Rajiv, which is that. I think Wamsi your question is specifically around what we can tell about this opportunity as a result of VMware’s acquisition by Broadcom. And I say, I think the other nuance here is we’ve always competed against VMware, right. And so in some cases, it’s quite clear to tell, well, this door wasn’t open to us before. And now it is because of what they may be seeing from our competitor. But in other cases, and we talked about an example on the last earnings call, where existing customers of ours are maybe choosing to invest more than us or go single source with us, a partly influenced by this, right. So this idea of in some cases, it’s clear, in other cases, it’s more of A factor, an important factor, but one factor, and so that those situations, it’s harder for us to attribute specifically, dollars and pipeline and things like that, to this particular disruption in the competitive market.

So, all those factors combined, are what makes us, feel good that this is a multi-year and opportunity, as Rajiv has mentioned, but difficult to get precise in terms of magnitude and timing.

Operator: Thank you. One moment for our next question. Next question comes from Pinjalim Bora from JPMorgan, your line is open.

Pinjalim Bora : Great. Thanks for taking the question. Congrats on the quarter. Rajiv, one of your partners, compare the Nutanix Cisco relationship and the buzz around it to the formative years of VCE and noted how VCE was kind of a game changer for VMware at the time. Do you think the Cisco partnership could be that pivotal for Nutanix? And secondly, do you think there any learnings from the rise and fall of the VCE that you can apply I guess, to this relationship?

Rajiv Ramaswami: Yes, I’ve actually there at Cisco at that time, when the VCE partnership and clearly very cyclical initially. Now, I — it’s hard for me to compare VCE back then converged infrastructure with this. But I’ll tell you the, this — I’ll give you the sort of the puts and takes. So clearly, Cisco has huge market leverage and market position, in terms of their sellers, and their access to big accounts, their presence in all these accounts. Now, if you look at this particular space in the market, there are several positions, it’s not that there are small, relatively small market share player when it comes to servers compared to some of their other competitors. So it’s — so they’re not as strong in this segment of the market.

However, I mean, they certainly have a big overall market cloud. So now, what could the two of us do together really to go into the market, and that’s really I think, where I do see significant potential here. Over time, again, it has to take time to build up. And it — Cisco also has a complex sell emotion, they have generalists, they have specialists. And right now, we are more focused on the data center specialists as they have and working together with them. So to answer your question, I mean, it’s still early days for us to predict how big this could be for us. And I would say, you know, we, I am optimistic, and I think this opportunity is also going to build up over time. And certainly continuing to — and in fact there’s a lot of cooperation happening between our sellers, and Cisco sellers in the field.

So all good, good omens at this point in time, but still very early.

Pinjalim Bora : Understood. I guess we’ll stay tuned. One question for you Rukmini, the ACV billings guidance for fiscal Q3. Seems like it calls for maybe a little bit higher sequential drawdown. I want to ask you the sales cycle elongation comment that you have made, was that versus Q1, the elongation in Q2 that you saw, was that sequential and are you assuming kind of a similar sequential? Higher elongation in the Q3 guide as well?

Rukmini Sivaraman: Hi, Pinjalim. Thank you for that question. So on this — I think the first part of the question was on seasonality between Q2 and Q3. And so on that front, if you look back to sort of our initial guidance that we gave for Q3 last year, this time, Pinjalim, it was actually quite similar in terms of what we guided for Q3 versus Q2. But we were able to beat Q3 and so the actual I think, is what you’re referring to, was smaller than what we guided to. But the decrease, I would say, is more or less in line with what we’d expect for seasonality and what we expected at this time last year, as well. And then to your point on the average sale cycle, and modest elongation we’re seeing there, it moves around a bit quarter to quarter, Pinjalim, but what I was referring to is that when we look back at to historical levels, it remains somewhat elevated. And so that’s what I was referring to.

Operator: Thank you. One moment, our next question. Our next question comes from George Wang from Barclays. Your line is open.

George Wang : Hey, guys, congrats on the quarter and the guidance, I have two quick ones. Firstly, you briefly touch on the potential, the discounts and promotions to promote VMware customers. And I just want to kind of see if you can elaborate on the approach for the fiscal partnership, the HyperFlex customers, maybe you can give some color just on the incentives, you guys are providing to kind of further drive the adoption from the older HyperFlex customers?

Rajiv Ramaswami: Yes, we have, I think I would say that Cisco, with Cisco, clearly we have a, they are — they’ve end of life HyperFlex, first of all, and there’s a limited time where you know that so – they no longer selling the product, and there’s a limited support window for it. So that by itself, by the way it creates an incentive for HyperFlex customers to migrate. And we through Cisco, of course, as a whole, Cisco has a set of programs for migration. And they’re good at driving those types of migration initiatives. And we are supporting them as they do that. So this is being done largely through Cisco and through the Cisco router market.

George Wang: Also Rajiv, quickly, you talked about repatriation in the prepared remarks. I’m just curious, are you seeing a more visible inflection point in terms of the repatriation to the private cloud or is still a continuation of prior trends just besides lower TCO, kind of versus expensive public cloud. Can you can talk about other factors may contribute to continue repatriation to the private cloud?

Rajiv Ramaswami: Yes, I’ll give you two-part answer to that, George. So I don’t know if I can call it a point of inflection. But certainly we are seeing more examples of people repatriating but that those are examples. It’s hard for me to say you know that there’s a whole trend here. Yes. But some are certainly repatriating like the example I talked about. But also, I think the other thing that we should keep in mind is that the bulk of enterprise workloads are still not in the public cloud. They’re still sitting in data centers. I’m talking about enterprise workloads, because what has gone to the public cloud largely have been net new applications. So for these workloads are still sitting in the enterprise environment, I think CIOs are being a lot more careful about how much of that do they take to the public cloud?

So there’s yes, there’s some repatriation happening from the public cloud back on-prem. But there’s also a lot more scrutiny and forethought being applied to what should I take going forward into the public cloud from where I’m at?

Operator: Thank you one moment for next question. Our next question comes from Mike Cikos from Needham. Your line is open.

Michael Cikos : Hey, thank you guys. And I, I wanted to eco my comments as well, in addition to the others as far as the great quarter and the results here. I picked a bit of a two parter here. But the first I know coming back to the financials, specifically Rukmini. Can you help us think about the benefit to the quarter from the co-terming that occurred? And if I guess to what degree anything was pulled forward that was expected to land later this year, when we think about the magnitude of the beat and raise for guidance?

Rukmini Sivaraman: Sure. Hi, Mike. So yes, I talked about renewals outperformance in Q2, and there were three factors that I highlighted to — the reason for that I performance. One was better renewals economics. And by that, I mean just our team is able to get better pricing at the time of renewal, which is good. Secondly, we talked about better on time renewal performance, which was strong in the quarter as well. And then the third piece, I think, is what you’re referring to Mike, which is around I said that we did do a little better on early and quote on renewal. And those, as we’ve said before, we go out to our customers well in advance of a renewal being due and start that conversation early. And that’s what they prefer, as well.

And often, we will be able to transact those renewals earlier than when they are — in an earlier quarter than when they are due. And co-terms similarly, at co-terms are beneficial both for us and for the customer, because it then brings a lot of their licenses that may have been purchased at different times, to all be aligned to the same end date. And so those were generally welcome. As long as they are, you know, coming at a good economics for us, it’s good for the customer, they give us cash up front. And so those are all generally things that we welcome. Now, in terms of the dynamic of the pool forwards, I think was another sort of aspect of your question, Mike, I say, you know, there is normal variation, right, between quarters, and we would expect that to continue going forward.

And I would say I think we had also talked about this dynamic between fiscal year ’24 and fiscal year ’25. And I’m not sure if that’s way you’re going, Mike. But at this point, we still do see that renewal available to renew for next year, the growth in that is accelerating compared to what we saw for fiscal year ’24. Because that was partly earlier than co-term was but was also just a beginner cohort that is coming up in ’25, which is reading to that accelerated renewals ATR in ’25, compared to ’24. So overall, again, I would say, you know, pretty strong quarter from renewals perspective, and generally these are all the outperformance driven by things that we like to see, so nothing that I would sort of characterize as better than expected, certainly, but allows us to sort of suddenly manage the business on a more predictable basis going forward.

Michael Cikos: Got it. And my — it’s funny, you’re ending that response on predictability. I think one of the things that I’ve been going through on my side, this earnings season is certain companies have cited seeing larger deals in their pipeline, and greater variability based on when those deals close. So I wanted to get a sense of possible, but can you help us think about the magnitude when you’re citing these larger deals? Like, are they coming with, like an X percent increase in size from a $1 perspective versus what you’re historically seeing, just to help us get a better sense of that? And then the second piece tied to that is, how do you get financing, driving those deals again, just because they are obviously more strategic, there’s less certainty around the timing of when those close, just anything there as far as how you do gain confidence on that front?

It’s a high quality problem I have, I’ll start with that. But I just want to make sure that you guys are thinking about this and wanted to see how you respond to that?