Nutanix, Inc. (NTNX) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Nutanix Second Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Ms. Tonya Chin. Thank you. Please go ahead.

I apologize we are having some difficulties on our end. Just give us a second. Good afternoon, and welcome to today's conference call to discuss the results of our second quarter of fiscal year 2021. This call is also being broadcast over the web and can be accessed on our Investor Relations website at ir.nutanix.com. Joining me today are Rajiv Ramaswami, Nutanix's CEO; and Duston Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for its second quarter of fiscal year 2021. If you'd like to read the release, please visit the press releases section of our IR website. During today's call, management will make forward-looking statements, including statements regarding our business plans, goals, strategies and outlooks, including our financial performance, financial targets and performance metrics and competitive position in future periods; the timing and impact of our current and future business model transition; the factors driving our growth; the success and impact of our CEO transition; macroeconomic and industry trend 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 factors, please refer to our SEC filings, including our most recent annual report on Form 10-K for fiscal 2020 filed with the SEC on September 23, 2020 as well as our earnings press release issued today. These forward-looking statements apply as of today and we undertake no obligation to update these statements after this call. As a result, you should not rely on them as representing our views in the future. Please note, unless otherwise specifically referenced, all financial measures we use on today's call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Lastly, Nutanix’s management will host virtual meetings with investors at the Morgan Stanley Technology Conference on March 2. We hope to connect with many of you there. And with that, I'll turn the call over to Rajiv. Rajiv?

Thank you, Tonya, and good afternoon, everyone. Q2 was a strong quarter across the board. We exceeded guidance across all metrics, saw ACV growth, spend less than expected on operating expenses, gain momentum in our renewals engine and continued to make progress on our transition to subscription. Before I get into more details I will begin by talking about how I have spent my time since joining Nutanix in December and provide my initial observations on the business and the priorities going forward. In addition to some introductory meetings with shareholders I met with many of our major constituents including customers, partners and employees since coming on board in December. The observations lead from these meetings has provided me with a good perspective with which to form some priorities for our future. These observations include the deep value that our customers get from the simplicity of our software, the importance that our channel partners play in growing our business at scale, the significant opportunity ahead of us with strategic alliances that will help us penetrate bigger accounts and the quality and engagement of our talented employee base who are critical to the execution of our [business]. Feedback from these key constituents and collaboration with my engaged leadership team has enabled us to clarify several core priority areas to drive long-term growth. All of these priorities are part of the natural evolution for a company at scale. First, we will drive more simplification of our portfolio and how we take our solutions to market including our products and packages for the benefit of our customers. Second, we will focus on deepening our partnerships to provide more impact in how we go to market as well as create more opportunities within larger accounts. Third, we will continue our transformation of our business model to subscription with a significant focus on renewals and our part to cash flow positivity. And fourth, we will continue to nurture and grow our talent pool as well as to ensure that our employee base has a diversity of talent, thoughts and experiences to create a better workplace environment and business outcomes. Now let me provide a little bit more detail on these conversations, observations and priorities. I have had many encouraging and informative conversations with customers including our advisory boards. When it comes to our product portfolio customers love our simplicity. I think our solutions and support are exceptional and appreciate the end-to-end nature of our portfolio. They've also told me that Nutanix is a critical component of their business transformation plans. On the constructive side some have expressed that they would like us to make it easier for them to adopt and consume our software by delivering more solutions that bring our portfolio together and to simplify our pricing and packaging. We have built the feedback into our key priorities for our go-to market strategy. During the quarter I had the pleasure of presenting at a well attended global partner event where I met several key partners. They see the value that Nutanix software and solutions can bring to their business as they help customers on their multi-cloud journey. Last quarter we launched our elevate partner program which focuses on partner competencies through training to increase the quality of partners working with us and partner enabled including improving the deal registration process to increase volume. With this focus we have seen a 12% year-over-year expansion in the number of partners who transacted with us during the quarter as well as an increase in partner-led deals. Engaged and efficient channel partners will be a critical component of ensuring that we have the leverage needed to grow and scale our business through our subscription transformation. Our partnerships with HPE, Lenovo and other server OEMS remain strong. Our customers recognize tremendous value in having freedom of choice in their selection of hardware with these partners and in a broader ecosystem allowing us to address the increasingly complex needs of large enterprises. For example, we were selected by a leading financial services company headquartered in EMEA to modernize their data center and to provide virtual desktops to more than 90,000 users. This multi-million dollar one-year subscription deal was with our core software, our AHV hypervisor and our files solution. We partnered with HPE, Citrix and ETOS one of our global systems integrator partners to provide the total solution required for their used cases. I have been encouraged by the value that our customers see from our software, the variety of workloads they are deploying on our platform and our traction with our global 2000 customer base. We now count 950 global 2000 companies as our customers after adding about 20 in the quarter. We continue to progress with our public cloud partnerships and integration with both Azure and AWS and are exploring how to maximize these relationships to help our customers on their journeys to multi-cloud. Our partnership with Azure is still in its early days but we are excited about its prospects. We will focus on deepening our integration and relationships in this area. Finally, I have had the pleasure of speaking with many employees at all levels. I have been delighted to see that there is strong talent in this company and I'm highly impressed with their passion. It's no surprise to me that Nutanix was named in both the Fortune Best Workplaces in the Bay Area 2021 and A Great Place to Work in India during the quarter. I already mentioned that an area of opportunity for us is to advance our efforts to diversify our talented employee base. In addition, we will increase our focus on ESD and related disclosures. Now let me talk about the market opportunity in front of us as well as provide more color on the momentum and execution we saw during the quarter. During the quarter, industry analysts highlighted the market potential for hyper-converged infrastructure or HCI and its part to multi-cloud. IDC released reports concluding that HCI can create a consistent experience across all platforms whether on premises or in the cloud, how multi-cloud strategies are now the enterprise norm and how a large majority of IT managers plan to migrate or repatriate workloads from public clouds to an on premises for ease of management. In addition, Gartner raised its forecast for HCI Systems during the quarter to $8.1 billion a five-year CAGR of 15% from 2019 through 2024. They noticed that organizations are expanding their HCI assistance footprint on a wider set of enterprise workloads with emphasis on a new set of software capabilities such as orchestration in a multi-cloud world. Now let me provide some highlights about our performance this quarter. We delivered record ACV billings growth of 14% year-over-year which included notable strength coming from emerging products. Our OpEx was less than expected and we will continue a disciplined approach to managing our OpEx going forward. Our thesis of the benefits to a shift to term licenses continues to play out with better deep economics and reduce average tumbling driving shorter renewal cycles. As we have said, getting this right will be critical to our success both in growing the top line and in reducing our operating costs. A year into the pandemic we continue to see various industries and verticals impacted differently. While some industries face headwinds there are a number that have the resources to focus on innovation and transformation with IT as their enabler. To that end we saw strength and demand from the financial services, healthcare and state and local government sectors in the quarter. Our emerging products particularly our database management solution Era and our file storage solution Files had a strong quarter. Emerging product ACV was up over a 100% year-over-year and we had a 37% attach rate to deals on a rolling four quarter basis. We are encouraged by the fact that nearly half of the Fortune 100 have adopted our emerging products. Our Era solution is showing great momentum and market fit and I see this as a competitive differentiator for us going forward. We've seen repeat purchases from large enterprises who are early adopters. This quarter a U.S.-based financial services company purchased Era and our core software in a multi-million dollar deal. They are using Era to provide a single database management platform to enable their app developers to provision new environments, clone and refresh multiple tier one workloads and now have the ability to replicate and recover large databases in a fraction of the time that their current solution takes. Era has become a competitive differentiator for us in the telco, finance, retail and manufacturing sectors in particular and we now count three of the top 10 global 2000 customers as Era customers. We saw growing interest in our clusters of AWS solutions since its launch last quarter. One customer example this quarter is a pension services company in EMEA; an existing customer who is building on their Nutanix hyper-converged infrastructure software as they continue their journey to multi-cloud. They were looking to increase the mobility of their applications and workloads across multiple clouds as well as to have options for bursting and clusters fit the requirement. Ultimately they selected the Nutanix solution so that they could get a single solution to consistently manage their private, hybrid and multi-cloud environment. We remain focused on go-to-market sales productivity and execution. We are pleased with our progress so far which is a reflection in part on Chris Kaddaras' leadership. During this quarter Chris was promoted to Chief Revenue Officer after leading the global sales organization for the last year. We're also seeing material progress in demand gen productivity across the board including our virtual events and overall digital marketing performance all at significantly lower costs. We also continue to see benefit from our test drive which is seeing an increasing number of trials over the past year and has proved to increase conversion rates when compared to sales where best price isn't used. We are encouraged by our momentum and we will continue to focus on overall go-to-market efficiency. We continue to innovate our storage offerings with the recent release of new features enabling our customers to simplify data management and effectively manage costs, moving IT teams even closer to true hybrid and multi-cloud operating models. The new capabilities include cloud tiering for object storage, hybrid cloud file storage and simplified disaster recovery for both objects and files. Recently we also announced new features in our cloud platform to help protect customers against Ransomware attacks which are becoming even more common as a result of increased remote work. These new capabilities all natively built into the Nutanix stack add to Nutanix's rich data services for network security, files and object storage and business continuity to help enterprises prevent, detect and recover against Ransomware attacks across multiple cloud environments. We are pleased with the external recognition we continue to receive for our solutions and our market share. In Q2 we were recognized by Gartner as a leader in their magic quadrant for hyper-converged infrastructure for the fourth year in a row and by position best and execution when compared to all vendors in the report. Also Gartner released its software market share numbers for hyper-converged infrastructure and Nutanix was once again ranked number one in market share for HCI and saw our market share increase year-over-year. In addition in IDC's new software-only view of the market the software-defined infrastructure factor Nutanix is the leading vendor in the space. This new view is not influenced by hardware sales. Let me conclude by reiterating how excited I am to be leading Nutanix into its next phase of growth and execution. We remain focused on our vision of making clouds invisible and freeing customers to focus on their business outcomes and our north star continues to be our customers. We believe our mission of delighting customers with a simple, open, hybrid and multi-cloud software platform with which data services to build, run and manage any application will help us achieve that vision. Our strengths lie in our significant experience designing software that is easy to use and in our expertise in key areas for the journey to multi-cloud including storage and data services. I have confidence in our continued momentum going into the second half of the year balanced with cautious optimism about the global macroeconomic environment. I very much look forward to sharing more details with all of you at our Investor Day on June 22. I'd now like to turn it over to Duston for more details about our financial performance. Duston?

Thank you Rajiv. Our sales team executed quite well in Q2 amidst an uncertain macro environment and our ongoing ACV transition. Comparable to the quarter before last quarter we provided guidance that took into consideration the uncertain macro environment we are operating in and clearly we outperformed our expectations for the quarter while at the same time adding to our backlog. As we look forward our thesis for the business continues to be proven out that an ACV first focus will gradually compress term lengths leading to better deal economics and a shorter time to more efficient low-cost renewals. As the mix of our low-cost renewals increases as a percent of our total business we believe it will eventually add significant leverage to our go-to-market cost structure. We are also seeing the result of our ACV based sales compensation plan putting a renewed focus on sales of emerging products which typically have shorter term lengths. I have previously shared that we expected term lengths which compress slightly in Q2. Our Q2 average term length was 3.4 decreasing by 0.1 and down slightly from 3.5 years in Q1. We are also pleased with the overall deal economics in Q2. We build a record amount of subscription renewals during the quarter and while the sample size is still relatively small and we are still early in the process we are encouraged by the retention rates that we are currently seeing. We continue to sign an increasing number of one-year deals. These deals will add to the pool of low-cost renewals available to renew in FY ‘22. As we previously noted we had an outstanding quarter related to our emerging products with most of those individual products generating record ACV. Emerging products continued to play an important role in improving our deal economics during the quarter, so in summary based on our strong execution in Q2 our thesis for the business continue to play out as expected. As we move into the second half of our fiscal year we remain very encouraged with our progress to-date. Now I will move on to some specific Q2 financial highlights. In Q2, we had record new ACV, renewal ACV and total ACV. ACV billings were $159 million reflecting 14% growth year-over-year significantly above our guidance range of $145 million to $148 million. Run rate ACV as of the end of Q1 was $1.38 billion growing 28% year-over-year compared to our guidance of approximately 25% growth. Revenue was $346 million essentially flat from Q2, 20 driven by a 0.5 year decrease in average term length versus Q2, ‘20. Our non-GAAP gross margin in Q2 rose to 82.7% versus our guidance of 81.5%. Operating expenses were $354 million down 11% year-over-year and less than our guidance of $360 million to $370 million. We continued to benefit from overall spending reductions including go-to-market efficiencies. Our non-GAAP net loss was $74 million for the quarter or a loss of $0.37 per share. We also saw a good year-over-year increase in our pipeline in the quarter as well as continued improvement in overall pipeline quality. Our linearity in Q2 was outstanding resulting in one of our most linear quarters ever. Our free cash flow for Q2 was aided by good linearity coming in at negative $28 million. This performance was significantly better than our expectations. DSOs in Q2 were 45 days down from 54 days in Q1, ‘21 also driven by good linearity and we closed the quarter with cash and short-term investments of 1.29 billion down slightly $1.32 billion in Q1 ‘21. Now turning to our Q3, ‘21 guidance. The guidance for Q3 is as follows. ACV billings to be between $150 million and $155 million representing year-over-year growth of 11% to 15%. Gross margin of approximately 81%. Operating expenses between $365 million and $370 million representing a year-over-year decline of 5% to 6%. Weighted average shares outstanding of approximately 207 million. Now a few modeling assumptions our guidance for Q3 continues to have a small conservative bias based on the ongoing uncertain macro environment. As we communicated last quarter in similar to the seasonality we have experienced over the last two years our Q3 guidance anticipates a slight seasonal decrease in ACV billings in Q3 versus Q2 while at the same time reflecting year-over-year growth of 11% to 15% and a raise of 5% to 8% from the current [straight] estimates. Based on the Q3, ;’1 ACV billings guidance we expect run rate ACV to continue its strong growth trend and grow in the mid 20% range year-over-year. We believe we are now to the point in our transition that we will not see dramatic quarter-over-quarter change in term lengths with terms fluctuating by 0.1 or so per quarter going forward. As term length begins to stabilize we expect reported year-over-year revenue growth to move closer to ACV billings growth over time. We also expect our operating expenses for fiscal ‘21 to now come in up with the $50 million less than what we spent in the prior fiscal year. From a free cash flow perspective liner in Q3 is typically not liner strong which we experienced in Q2 and therefore expect our cash uses to increase in Q3. Our Q3 case uses will most likely approach our current [indiscernible] expenses numbers for Q3. We are pleased with our overall cash management efforts especially in the light of compressing terms and continue to exceed our internal plan set forth at the beginning of the fiscal year. And finally to help with your modeling we continue to include in our earnings presentation located on our IR website our historical trends for ACV billings, run rate ACV, billings term length and a bridge on how to model and convert our current and future ACV billings guidance to total billings. We will continue to include this level of detail through the end of FY ‘21. With that operator could you please open up the call for questions? Thank you.

[Operator Instructions] Our first question comes from a line of Matt Hedberg of RBC Capital Markets. Please go ahead. Your line is open.

Hey it's Dan from Matt Hedberg. Thanks for taking our questions. Rajiv welcome aboard. Maybe after your initial listening and looking tour here there's some things that really stood out to you based on your past experience. Just curious if you thought of a logical next step or logical second inning that you see here?

Sure. Happy to take that. Nutanix had a vision around making computing invisible and what I see here is growing our portfolio, we are expanding that vision to make cloud invisible, the customers are increasingly operating the multiplied world and the purpose of making cloud invisible is to really highly analyzed complexities and stream up our customers to focus on business outcomes. Now when you look at our core market itself HCI they are very focused leading that market and extending that to multi-cloud as we said earlier the HCI on-prem market alone is growing at about 15% CAGR according to Gartner. So within that I think our focus areas if you would ask me today would be a product leadership in HCI making sure we continue to be leaders there investing in network fixes and really treating cloud as a first class citizen extending everything that we do into a hybrid and multi-cloud world. And as we do that there's an opportunity for us to also simplify our packaging and our solutions in terms of how we can take all of this to market and then I think we continue the focus and shift to subscription like we've been talking about and making sure we get to the other end of that journey as a renewal packaging and we built this efficient renewals engine and we have talked earlier also about discipline the focus on cost management and driving to free cash flow break even and again the last but not the least is to really leverage our channel partners and strategic partnerships because that's what's going to give us leverage in the market.

That's great, very helpful. And then maybe for Duston. ACV billings guidance for the third quarter here slight decrease in absolute dollar value of our strong second quarter results. You mentioned that in your prepared remarks, but could you just help us think of the decline a little more quarter-over-quarter?

Sure. Yes, as you mentioned, we talked about this last earnings call. If you look at the last two Q3's there was a decline for roughly 4% to 8% in those quarters. And if you look at this decline, it's roughly 3% to 6% decline, but coming off a very big Q2, obviously and something that outpaced our expectations, but I think we set back and just look at the guidance itself, a, we came off a big Q2, we messaged this last quarter so it's completely within what we expected. The guide delivers 11% to 15% year-over-year growth, it increases the consensus on the high-end by $12 million or so, it's a 5% to 8% raise. If you look below the bottom line, there is -- or below the topline there's additional gross profit dollars that we will be delivered when you do your math for your model, revenue will go up, expenses will come down $15 million -- $10 million to $15 million from consensus and the operating loss, again we do your math will be substantially less than the consensus there. So we feel really good about delivering the guide that we did, we feel really good about Q2. And we feel really good how we're progressing and exiting Q2 with our backlog position. So when you add all that up, I think it's a pretty strong guide and then something that we feel pretty comfortable [indiscernible].

That's great. Thanks for the insight.

Our next question comes on the line of Kathryn Huberty of Morgan Stanley. Please go ahead. Your line is open.

Yes, thank you. Good afternoon, OpEx was lower in the quarter, as well as for the fiscal year. So maybe Duston can you talk about whether those savings are temporary versus more structural? And then Rajiv, if you can follow that up and just talk about the areas of investment in the business that you think you might be able to scale back or rationalize as you march toward the goal of breakeven and cash flow positive? Thank you.

On the first part there, Kat. It's a combination of both. Clearly, we've been benefited from obviously lack of travel and things like that. And travel will come back over time, I don't think we'll ever spend again as much on travel as we have in the past, we've learned that we can do things differently, we've learned that we can do things much more efficient. But having said all that, I think we've got a great opportunity and Rajiv will talk about this going forward. There is clearly a different view on operating expenses and focusing now really on efficiency. If you look at the last three years outside of -- but take FY '20, which was, kind of, a COVID year, but the three -- this current year, if you look at the three prior years, we grew expenses about 35% on average year-over-year for a three-year period. So we've got a lot of resources. Now the focus is, how do we get those resources more efficient? How do we get the go-to market model more efficient, and that's what Rajiv has brought to the table here and there'll be not only for this year, but I'm trusting for FY '22 and FY '23 you will see a renewed focus on that. And maybe Rajiv you want to follow that up a little bit.

Sure, sure, Duston. In fact on that point, I think with respect to efficiency, it's really around sales and marketing efficiency largely. I feel that we are pretty good in terms of where we are at on the R&D side and remain at the slightly look at REIT inducting some of that the newer areas, but when you look at sales and marketing let's start first with marketing. In fact COVID has been a blessing in some form, because it forced us to go virtual. But I think if that has taught us a bit of tremendous efficiencies to be gained by growing virtual, whether it be with virtual events and our demand generation being more digital and therefore far more efficient and better ROI on our cost and what we spend there. And then more recently we've been introducing Test Drive, which is a feature that allows customers to try our offerings in the cloud and convert there from just trying it to actually buying. And so there people have used Test Drive, the conversion ratios have been much higher than place they haven't. So all of these put together are starting to make our marketing more efficient in -- and even in this post-COVID world, as we come out of it, that's number one. Number two on the sales side. The fundamental thesis here is that we are still largely doing new ACV deals. Our term license renewals are still very, very early in their lifecycle. As renewal start kicking in, we are in the process of building an efficient renewal engines here, where the cost is going to be much lower than the cost of sale for new customer acquisition of new ACV. So that should fundamentally help the sales side of this from an OpEx perspective as well. And we'll talk more about these by the way at our Investor Day in June.

That's great. Thank you so much for the color. Congrats on the quarter.

Thank you.

Our next question comes from the line of Jason Ader of William Blair. Please go ahead. Your line is open.

Thank you. Hi guys. I've question for you, Duston on the comment on duration. You said, we'll not see a dramatic fluctuation on duration going forward. And I guess, I had been modeling what's call it by the end of '22. Did you guys would get down to like three years? Is that not the correct assumption anymore? I mean, I would think that if you're doing more one-year deals and you continue to see increasing mix of one-year deals then that 3.4 will continue to sort of trend down. Could you help us out with that?

Yes. No, it's a good point. When I was mentioning there is 0.1 or so per quarter. And then you're kind of there at your 3.0, so I still think 3.0 could it be 2.8, it could be 3.1 somewhere around there. I think it begins to stabilize. But I think the main point there is from everything we know now, there shouldn't be drastic changes quarter-over-quarter from a term perspective, and you kind of saw a little bit in Q1, but federal kind of did that initial push there. And I think it could be flat, maybe this quarter or whatever, but I just think in general, it's probably a point one or so here per quarter going forward. So I think your 3 is still in the ballpark.

Okay, great. And then Rajiv, I wanted to ask you, I guess, if you look over the next five years, like and I know that's a long [horizon in tech], but I think the issue at some people have with Nutanix and other companies like Nutanix, is that it's more of an on-prem infrastructure company, and that's kind of a bad word on-prem right? So how do you help investors get comfortable with this kind of -- that -- this kind of thing where Nutanix is on the, kind of, right side of history?

Yes, I think there is no doubt in the market that our customers are going to live in a multi-cloud world. Now I think it's equally clear that on-prem is not going away. Again Gartner forecast by the way with our on-prem HCI infrastructure. And they are saying that the market will grow at 16% over the next five years. And that doesn't really include multi-cloud as much, right? So we still see a lot of growth just purely in on-prem, but we are not stopping there. They are investing and making all our products really had a cloud customer -- first mentality. You saw some of our recent announcement side with Clusters, we are extending our core product offering, so that customers can buy a single license from us and use that to deploy workloads anywhere they want, whether it'd be in the public cloud of their choice or in their on-prem infrastructure. With some of the recent announcements that we saw with objects and files, any type of storage offering that we provide has natural steering into the public cloud, right? So fundamentally, we are -- we have a long-term play here in terms of helping our customers operate in this multi-cloud world. And that I think is the long-term sustainable advantage that we have.

Thank you.

Our next question comes from a line of Jack Andrews with Needham. Please go ahead. Your line is open.

Hi, good afternoon. Thanks for taking my question. I wanted to see, if we could drill down a bit more on the strength you achieved in the emerging products. Could you help us what's -- understand what's happening behind the scenes, is it -- are they helping you land new customers or these longtime Nutanix customers who are going bigger on Nutanix? Do you feel that your channel is fully educated on the capabilities of all these products. Could you just flush out maybe what's happening to drive -- help dry that strength?

Yes, I'll give you some color and then Duston can add on as well on top of this. So look first of all having a broader solution with a differentiated multi-cloud portfolio allows us to satisfy more of our customer needs and drive increased demand right? Beyond just selling core HCI, so these emerging products are starting to mature very nicely and many of them saw record billings this quarter. The top emerging products which quarter were Era, Files and Flow. And all of them have strong attached to our core product platform. So for example, flow, if security, right? So when people are deploying our core platform they will deploy security with it. File have just file storage, right? And that comes as part of the platform. Era actually preference a significant new opportunity on top, because now we are going up the management of database, and that can help us insert and find customers -- new customers that haven't used the core Nutanix platform in the past. So these emerging products in some cases can actually help us open new accounts and when new deals in other cases, they are attached to our existing Nutanix core platform. Duston do you want to add any color?

No, I think you covered really well there. I think that's [indiscernible].

Well, thanks for the perspective on that. And just as a follow-up question, Rajiv, I was wondering if you could maybe shed some more light on your comments regarding the importance of strategic alliances helping you penetrate larger accounts? Are you looking to engage with perhaps new and different types of partners? Or who among your existing relationships, do you think could help you really achieve that goal?

Yes, at this point, I think the greatest opportunity really lies with further deepening and developing the partnerships that we have already. And I'll break that across three categories, we've got OEM partners, HP, Lenovo, and many others there. Then we've got an emerging set of cloud partners like Azure that we talked about we are also an AWS bare metal. And then our ecosystem of technology partners, who are crucial, for example, Citrix, it's a key technology partner there, right? For all of burst in desktop workloads. We talked about this large deal that we won this quarter together, which was really Citrix, Nutanix and HP, all coming together to deliver the solution. And with all of these partners, I think we've got room to also continue to accelerate our go-to-market. Google is one of the partner, right? They're core selling desktop-as-a-service with Google and again, but Google ain't selling on top of our stack that would be a technology ecosystem type of partnership. So I think with each of these, like I said, across OEM partners, cloud partners and ecosystem, technology partners, we've got more room to be building solutions taking these solutions together to market.

Great. That's helpful. Congratulations on the results.

Thank you.

Our next question comes from the line of Alexander Kurtz of KeyBanc Capital Markets. Please go ahead. Your line is open.

Thanks for taking my question. Rajiv, welcome and is breaking to know your prior company excited here. What comes next the Analyst Day. Just like to your earlier comments about Test Drive, Rajiv just at a high level, a lot of your, kind of, emerging competitors in the infrastructure space are very focused on delivering software that's not traditionally sold through a sales rep, it's -- as you said downloaded premium type model and then it ramps from there? Could you envision a future where the majority of Nutanix core hyper-converged activity is done through that type of a model, where there is very low touch at the beginning of the sales process and then the reps coming at the end of -- kind of expand -- lend and expand?

Yes, I mean, Alex, you are definitely heading in the right direction there. With Test Drive that is exactly what we're trying to do with this, it's a zero touch self service for prospective customers, right. So it allows them to really go out there and tried out for themselves and that reduces our need to go, do a high touch selling process with them, right? When they're engaged by themselves and then from then on, we would like to take what they see in Test Drive and then convert that to a sales right there, right over time. It's still early days for us, but that is exactly the promise. Now [indiscernible] we can take this, I mean, for simpler offering so I think this will work now for complex solution sales they're going to actually have to do a lot of hands on selling as well. So we expect that, I think this is again a great way for us to get more efficient over time with our sales.

Okay. Thank you.

And our next question comes in the line of James Fish of Piper Sandler. Please go ahead. Your line is open.

Hey, guys. Great -- congrats on the great and to 2020 -- calendar 2020 and Rajiv, like Alex said welcome to Nutanix and congrats on becoming CEO looking forward to working with you more over here. But I did want to actually ask, Duston, first you talked about good linearity, but just wanted to understand how much of the strength and the linearity was actually due to year-end budget flush? And what you saw in -- versus kind of what you saw in January to follow-up with that?

Yes, I mean, you always get pieces of budget flush, but I don't think we saw really thing unusual there whatsoever. We had many large deals in the pipeline. The question was when those we're going to close or not close? And I'm not sure really year-end budget "flush", I mean those were planned out in advance and things like that. So from that perspective I would label it is any different than the normal.

That's helpful. And then Rajiv, as a follow-up. On the first priority you did mention more consolidation around Nutanix and customers having that desire. I know, it's kind of early, but what types of bundles are demanding solutions are really customers wanting? I mean, it sounds like Era, Files and Flow are kind of the part there, but any sense to kind of what bundles we could see from Nutanix in the coming months?

Yes. Thanks, James. So on that it's going to be around solutions and use cases for customers. So for example, you could, I mean, as we've talked about here virtual desktops and enabling remote users. That's clearly a use case for which a specific subset of our portfolio comes together to deliver that as a solution for them. Mission critical workloads, if you're going to run databases and manage databases then Era running on top of our core AOS, AHV, right? Together with management is a good solution set for that. So we're going to be focused on examples and solution sets like that, that tied directly to what customers are buying. If a customer is buying a hybrid cloud and they are looking at our journey to the hybrid cloud, then it will be AOS, AHV with clusters. So that's how we plan to package it.

Makes sense. Congrats again guys.

Thank you James.

Next question comes from the line of Nehal Chokshi of Northland Capital. Please go ahead, your line is open.

Yes, thanks. Two questions. First for Duston, I know that you guys continue to say that new ACV remains the bulk of the ACV billings. Can you actually give us the actual split between new ACV and renewing ACV? And then also how much more quarterly new ACV billings do you think you can get out of your existing sales force? I understand that the renewals is going to be largely incurred the new ACV capacity?

Yes, on the split. We haven't actually talked about the split specifically on an ACV basis. On a TCV basis, we've talked about renewals 10%, 11%, 12% range, and which really is the leverage, where Gartners leverage as a percent of TCV from a P&L perspective. So from macro, so it's still pretty small now, we're still in FY '21 as you get into FY '22 certainly into FY '23 that profile changes and that's what we've been talking about for quite some time. And then we would hope at Investor Day that we start giving you some really good views on our perspective of those renewal flows. Now we have a couple of quarters under above, we're starting to understand retention rates a little bit, we know when things are up for renewal. Obviously, I think, it would be really good to start providing the investment community little insight there to what we think from renewals, the percent of ACV, the percent of TCV. And more importantly, try to give you a view of the cost profile between new and upsell and renewals. So that is kind of a TBD something we're working on now, and which we expect to have a more wholesome discussion during Investor Day. On the productivity side, I'll let Rajiv chime in here too. But the answer is, we should be able to get quite a bit more productivity of the existing sales force. There is really no reason for that perspective, Chris has done a good job of trying to hire the right people, and once you hire those people to enable them to sell in our environment to make sure they have the right coverage, whether that's account base or geography base or vertical base. So that's ongoing and getting more leverage as Rajiv said from partners and things like that. So our view, I mean, which we are massively focused on now [efficiency] is too would do exactly that get more productivity out of the existing sales force here. So, Rajiv, you might want to add a couple of thought there too.

No, I think you covered, that the only thing I'll add there also if again what we talked about earlier in the call about portfolio of solution aligning our solutions will also help drive sales productivity increase [indiscernible] it's products industrial things, right? It helps upsize the deal and sell a broader portfolio. And second, it makes consumption by the customer review.

Yes. Great thanks, Rajiv and for you actually have you seen any change in the comparison environment and I am specifically thinking about, I believe that -- do you more recently pivoted the cloud updation as a linchpin to their hybrid cloud, which is basically HCI base. So, has that changed the competitive dynamic for you guys at all?

That's particularly not new, right. I mean, that's always been the case there. What I would say is look as the competition is always good for a customer. I feel good about where we are independent of anything happening at competition. Gartner is showing us increasing our market share year-over-year to roughly about 50% of the market. IDC shows us in the number one market share position. I do agree with the pieces that HCI is a foundational platform for hybrid cloud. And I think that's an industrywide statement not just a Nutanix statement. And from that perspective, as long as we continue to focus on delivering the best solutions and the best outcome for our customers, I think we will do just fine from a competitive perspective at that point.

Our next question comes from a line of Rod Hall of Goldman Sachs. Please go ahead. Your line is open.

Yes, thanks for the question. I guess, I wanted to start with you, Duston on DSOs, it's [indiscernible] we've seen them for five years, so really good job on that. I know you called out linearity in the quarter, it sounds like it's a really good linear quarter, but I wonder if you could dig into a little bit more on a, sustainability of that DSO level and b, I guess leading on from that, just kind of what drove the linearity if you can give us any color on that? And then I've got a follow-up.

Yes, on the linearity in the DSOs, we've always had I think good DSOs, we've always had good efforts there. They've never really gotten out of control and in any way there. So they've always been great now at, I think it was about 45 days or whatever. This quarter, it's not going to stay there, Rod, there was a really good linear quarter, if you look at past Q3's, it's just the way Q3s goal. It's just not going to be as linear now we'll do the best obviously and will go collect as much as we can and ship as linear as possible. But that's not going to continue like it was in Q2. Now the early indications for Q3 is that linearity is, kind of, going as expected. So there is nothing out of bounds there, when we look at Q3 from that perspective. And I'm sorry, what was the second part of your question?

I just -- I wondered what drove that linearity in the quarter, was it just kind of circumstantial situation or whether there something you guys did different from the execution?

Well, it always comes down to execution, right? At the end of the day and execution has improved. There is no doubt that every quarter execution gets better and that comes with discipline and it comes with pipeline management and that comes with having good pipe and not only the amount of pipe, but the quality of pipe. And we've seen the quality of the pipeline, go up a fair amount and then you layer on top of that, the ACV based comp that give sales reps a lot more optionality, if you will, to go maneuver things and things like that. So I think it's a broad reasoning, but it always starts with execution.

Okay and can I have a follow-up for Rajiv? Is it okay?

Sure. Go ahead Rod.

Yes, Rajiv, a just big picture, wondering if you could comment on where you see Nutanix is niche from a customer side point of view looking forward. VMware has been a tough competitor up in the large enterprise Nutanix seems to do really well with kind of these large-size, but maybe not a Fortune 100s. But just curious, what do you think in terms of future vision for where the sweet spot for Nutanix is?

Yes, And I think clearly, Rod as you indicate, we had historical strength and what I would say a medium smaller enterprises. I think that's our sweet spot. But we've also penetrated a good amount of the global -- a large customers as well, right? We count like 950 of the top 2000 global as customers. But what I would say is that these larger customers, if we are more focused on winning specific use cases, like we are not quite there yet in terms of being able to say we are the platform of choice for everything, although we would like to get there. So with these global, for example, yes the wins that we highlighted this quarter was okay large global complex environment, but very focused on virtual desktops and remote users. Now one thing [indiscernible] there and we are actually used, then we see opportunities to build the footprint, right? Go, what I would say one use case at a time. So that's why I think about it, I think, we've got a lots of under penetration here in the market penetration opportunities in the market. But you're right, I mean, there is -- and there are other players in the market, they're going to have to go earn our way into these customers. And then, what I would also say is, there are some areas where we are able to come in at the top, for example Era and Database Management represents the potential to go in, it's a fairly unique solution in the marketplace and we're able to go use that as a way to get into new customers.

Our next question comes in the line of Wamsi Mohan of Bank of America. Please go ahead. Your line is open.

Yes, thank you. Rajiv, can you share some more color on the first point you made around the simplification of the portfolio that you said was part of the customer feedback? And maybe some color on what has differed from your expectations as you have joined the company and I have a follow-up?

Yes, I think on the first one we covered it little earlier. I see an opportunity to really being more of these products together, right? Our portfolio has grown quite a bit over the past few years. It's no longer [indiscernible] ALS and AHV which are our core HCI platform. But we've got management around that, we've got networking and security around that, we've got Files and Optics, we've got disaster recovery. And so, and then we've got frame as for desktop-as-a-service and then we've got Era. So they brought portfolio as you can see, and then we have -- at containers with carbon, for example. So what I see, you mentioned of trying to sell each of these products as an individual product in the market. There is an opportunity to put these together into a solution, if somebody is deploying a cloud native workload, okay, I mentioned virtual desktops. Now let's talk about cloud native, whereas carbon plus, iOS plus AHV is a platform with object storage that makes sense for somebody deploying a cloud native workloads. And by packaging that together and making it easy for our customer to consume that becomes more of a turnkey solution. So we see that kind of packaging for specific use cases that I think we can go drive and simplify in the market. What was part two of the question, sorry, could you repeat that?

Yes. What's been different from your expectations as you joined the company?

Yes, largely I would say, it's -- I think pleasantly surprised actually on the upside, there's still a ton of talent, the very strong talent in the company, very strong, very passionate talent. And the team has done a lot with resources, limited resources, especially on the product and the portfolio side. So that's been a pleasant upward surprise for me and it's a really good, it makes me feel good about the strength of the product portfolio going forward. And then, no surprise, I do realize there is a lot of work ahead for us in terms of making this journey to subscription and they're very focused on execution on that front as we've been saying all along.

Thank you. And that concludes our Q&A session and conference call for today. A reminder that Nutanix has an investor day scheduled for June 22 and Nutanix would love to see you there. You may now disconnect.