Nutanix, Inc. (NTNX) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Nutanix Third Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rich Valera, Vice President, Investor Relations. Please go ahead.

Good afternoon and welcome to today's conference call to discuss the results of our third 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 President and CEO; and Duston Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing financial results for its third quarter 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 outlook, including our financial performance, financial targets and performance metrics, competitive position in future periods, the timing and impact of the 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 factors, please refer to our SEC filings, including our most recent Annual Report on Form 10-K for fiscal year 2020 filed with the SEC on September 23, 2020 and our Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2021 filed with the SEC on March 4, 2021, 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 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 the William Blair Growth Stock Conference on June 1 and the Stifel 2021 Cross Sector Insight Conference on June 9. Nutanix will also be hosting a Virtual Investor Day on June 22. A link to register for this can be found in our earnings release issued today. 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. I hope you are all staying safe and healthy. We are closely monitoring the current COVID situation around the globe, particularly in India, where we've offered help and support to our local team, from healthcare assistance to fundraising for organization supporting relief efforts in the country. I'm impressed by the resilience of both our employees and customers around the world, especially in India. Now, I'll move on to our results. Q3 was a strong quarter across the board. We delivered another quarter of improved execution, continued momentum, and outperformance on all our guided metrics. Today, I'd like to highlight some of our accomplishments in the quarter and also discuss progress on some of the key priorities I outlined on our last earnings call. We continue to execute on our transition to an ACV based revenue model. And as expected, our renewal pipeline is continuing to build. These economics continue to improve due to shorter duration terms combined with uplift from our emerging products. In addition, we saw good linearity in the quarter as a result of our ongoing operational improvements through our go-to-market engine. And finally, while we typically see a seasonal decline in backlog in the third quarter, we were able to hold steady, further demonstrating the strength of demand in the quarter. Overall, we are pleased with our execution and can see that the hard work of moving to a subscription model is paying off. Duston will go into more details later on our financial performance. Last quarter, I shared my observations as a new CEO in Nutanix and outlined our priorities for driving long-term growth, including simplifying components of our product portfolio, deepening our ecosystem partnerships, continuing our shift to subscription, and nurturing our talent pool. I'd like to give updates on a couple of these priorities today, including our transformation to a subscription business model and deepening our ecosystem partnerships to provide more impact on how we go to market. Starting with our transition to a subscription model, our average contract term continues to decline coming down from last quarter to 3.3 years, helping drive higher unit economics. We also see our growing base of renewals as an increasingly important driver of top line growth and sales and marketing efficiency. With this transition well underway and with our increased focus on efficiency, we see a clear path to cash flow positivity and operating profit, and we'll go into more details at our upcoming Investor Day. Focusing on deepening partnerships of scale how we go to market, as well as creating more opportunities with larger accounts is critical to our long-term success. In April, Lenovo and Nutanix announced a complete as-a-service solution for hosted desktops to enable IT division make us [indiscernible] in the new remote hybrid workforce model. This new solution, all managed as a service with the convenience of a single monthly payment and single point of contact for support, includes Lenovo client devices, Citrix virtual desktops, and Lenovo server powered by Nutanix software. This new aspect of our extended relationship with the number one seller of PCs in the world is a great example of how we can work with a strategic partner to leverage their capabilities from the data center to the desktop in order to better serve our customers as well as give us meaningful incremental opportunity. Our partnership with Microsoft also continued to progress. During the quarter, we announced that our Kubernetes solution, Karbon, is now validated with Azure Arc Kubernetes management, with the ease of deploying and managing the certified Kubernetes Cluster on Nutanix HCI with consistent policies and governance across clusters provided by Azure Arc. Our mutual customers now have a smooth and fast path to modern containerized applications in a hybrid cloud environment. This month, we announced that the Nutanix platform now extends to AWS GovCloud, providing a unified hybrid cloud environment across Nutanix on-premises and bare metal Amazon EC2 instances running on AWS GovCloud. US public sector organization looking for strength and security offered by AWS GovCloud can now accelerate their adoption and leverage a single platform and management interface across their private and public cloud. Next, I'll talk about the momentum in our core software as well as our emerging solutions during the quarter. In Q3, we continued to acquire new customers while our existing customers expanded their engagements with us. We saw continued strength in our core solution reflected by a healthy year-over-year increase in our win rates against both our largest competitor and three-tier infrastructure solutions. We also saw continued strength in emerging products with our attach rates on a rolling four-quarter basis, increasing to 39%, up from 37% last quarter. We are seeing more examples of customers choosing our complete cloud software platform together with emerging solutions to meet all of their business needs. An example of this was the government entity in the Asia-Pacific region that chose our cloud platform software as well as our network security solutions to develop a secure, private cloud supporting their mission critical system, including security, exchange, and SQL database workloads. Our database management solution era continues to be an important differentiator for us and had good momentum during the quarter. A financial services company headquartered in Europe selected Era and other emerging solutions on top of our cloud platform to help expand their infrastructure at scale to support their banking customers requirements for performance, growth, and Financial Service Level Agreement. This customer will use our database management solution to deploy, optimize, and manage SQL databases across multiple hybrid clouds, helping to drastically simplify and standardize their overall database operations. We also saw increased adoption of clusters during the quarter with the use cases including data center consolidation, virtual desktop, disaster recovery, and the ability to burst to the cloud for additional capacity. In one case, a Fortune 500 North American financial services company selected Nutanix in a multi-million-dollar deal to replace their previous architecture and run their VDI workflows and is using clusters to burst into AWS on-demand for disaster recovery in their multi-cloud environment. Next, I'd like to touch on efficiency. This is an important part of our path to profitability. We have increased our go-to-market productivity, including more efficient digital marketing spend, increased leverage of our channel partners, and optimized headcount in geographies based on market opportunity. In connection with these efforts, we recently decreased our global headcount by 2.5% from within the sales and marketing function as we continue to refine our go-to market model. We expect these actions to yield approximately $50 million in annual savings. Finally, I'd like to highlight some industry awards that Nutanix received during the quarter which demonstrate our customers enthusiasm for our products and support. We were recognized by Gartner as a Peer Insights Customers' Choice vendor for emerging solutions for distributed file systems and object storage. In addition our core software was recognized by Trust Radius as a Top Rated Product in the HCI Server Virtualization, software defined storage and Virtual Desktop Infrastructure category. Also we recently won the NorthFace Scoreboard Service Award for achieving excellence in customer service. All of these awards are based on customer feedback. In summary, I'm very pleased with our execution across the board in the third quarter. I look forward to sharing more information at our upcoming Investor Day on June 22. We plan to go into more details about our mission to delight customers with a simple open hybrid and multi-cloud software platform with fixed data services to build, run and manage any applications. We will also provide insights on our strategies, solution portfolio, go-to-market and mid-term financial outlook. In the meantime I will hand it over to Duston Williams. Duston?

Thank you, Rajiv. Q3 was another quarter of consistent execution. In Q3 we exceeded all guidance metric and the expected benefits of our subscription transition and our ACV first focus continued to play out as planned. Our average contract term lengths compressed as expected, declining to 3.3 years versus 3.4 years in Q2 '21. Term compression is highly correlated to better deal economics and we were very pleased with the improvement deal economics during the quarter. Other key components of our subscription transition in our ACV first focus include retention rates and increased attach rates for our emerging products, which typically have shorter average contract term lengths, both of these metrics performed well in the quarter. And as average contract term lengths do begin to stabilize, we expect reported year-over-year revenue growth to move closer to ACV billings growth over time. Now, I'll move on to some specific Q3 financial highlights. In Q3, we had record ACV billings. ACV billings were $160 million, reflecting 18% growth year-over-year, above our guidance range of $150 million to $155 million. Run rate ACV as of the end of Q3 was $1.45 billion, growing 25% year-over-year compared to our guidance for growth in the mid 20% range. Revenue was $345 million, growing 8% from Q3 '20. Our non-GAAP gross margin in Q3 was 81.7% versus our guidance of 81%. Operating expenses were $361 million versus our guidance of $365 million to $370 million. We continue to benefit from overall spending reductions, including go-to-market efficiencies. Our non-GAAP net loss was $86 million for the quarter or a loss of $0.41 per share. We were pleased that our backlog position remained flat in Q3 versus Q2, despite Q3 typically being a seasonally slower quarter in which we usually experience some usage of backlog. In Q3, we experienced a solid year-over-year and quarter-over-quarter increase in our pipeline. This pipeline growth occurred with significantly less demand generation spending versus our spend in Q3 '20. Q3 represented our third consecutive quarter of good linearity. DSOs in Q3 were 37 days, down from 44 days in Q2 '21 and down significantly from 67 days in Q3 '20. Our free cash flow for Q3 was once again aided by good linearity, coming in at a negative $71 million, $15 million better than consensus. We closed the quarter with cash and short-term investments of $1.25 billion, down slightly from $1.29 billion in Q2 '21. Now turning to our Q4 '21 guidance. The guidance for Q4 is as follows: ACV billings to be between $170 million and $175 million representing year-over-year growth of 21% to 25%. Gross margin of approximately 81.5% to 82%. Operating expenses between $380 million and $385 million. Weighted average shares outstanding of approximately 212 million. Based on the Q4 '21 ACV billings guidance, we expect run rate ACV to grow in the low to mid 20% range year-over-year. Additionally based on our Q4 '21 ACV billings guidance, we expect ACV billings for FY '21 to approximate $590 million to $95 million, up from $505 million in FY '20 reflecting year-over-year growth of 17% to 18%. As a reminder, for our reported quarterly ACV billings, we annualize any deal that is less than one year in term length, therefore, the total fiscal year ACV billings are not derived from the simple addition of the four fiscal quarters. Our yearly ACV billings calculation to eliminate any duplication that happens with the renewal of a deal that occurs within the period and is less than one year in duration. We do not believe we will see any material change in average contract term length in Q4. Based on our ACV billings guidance the implied revenue for Q4 should reflect double-digit year-over-year growth. Our operating expense guidance includes approximately $15 million in severance costs related to the previously mentioned limited workforce reductions that took place in Q4. We expect some improvement in our free cash flow performance in Q4 versus Q3. 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 the call up for questions.

[Operator Instructions] Your first question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Congrats on the strong ACV results. I wanted to ask about clusters. You guys talked about in your script, it sounds like it's doing better. I wonder if you can provide a bit more detail on some adoption trends there and how is it helping I guess both with an upsell perspective, but also future-proofing existing customer spend? Is that kind of how we think about clusters in terms of extending the Nutanix stack to the cloud?

Yes, Matt. Happy to answer that. It's Rajiv here. It's still fairly early days first of all for clusters, since we [indiscernible] for AWS. But we are quite encouraged by what we're seeing from a tax perspective. If you look at the use cases, today existing use case is that customers are using clusters. For example, disaster recovery for VDI funds, we talked about a large financial services customer doing that today. There, of course, is somewhat elastic where you can actually run your media workload for any other workloads, on-prem but use the cloud as you need for disaster recovery, and that's a very cost effective and a very effective use case for clusters. We are also seeing other use cases for driving data center consolidation. You want to get out of the data center and migrate to the cloud, but the easiest way to lift and shift workloads for existing applications without needing to re-architect them. We are starting to also see organizations use this for dev test and burst capacity for seasonal demands. Now to the latter part of your question there, Matt, I think there is an equally important factor of future proofing. So, our customers vary across the spectrum in terms of cloud adoption. Some of them are of course using cloud already today. Others are thinking about it as a path to the future. And for those customers who are actually looking at this as part of their future journey, having this capability today gives them a lot more confidence in choosing Nutanix as a platform. Now the [indiscernible] our multi-cloud roadmap. We have talked about working with Azure on clusters, and we do expect that to be available for early access later this year, and we are closely partnering with Microsoft on that project.

That's great, thanks. Rajiv. And then maybe one for Duston. Obviously, strong ACV results, ACV billings throughout this quarter, and you're calling for another acceleration in Q4. I assume a lot of this is based off your pipeline and also the fact that backlog didn't decrease but - what else gives you confidence in that kind of acceleration which is certainly noticeable here?

Yes, no, we're pleased to give you that guidance, which as I said is about 21%, 25% year-over-year growth on the ACV billings. Q4 typically is a stronger quarter for us. So, you see some of that. Clearly, the pipeline and the work that has gone on with the pipeline management and the discipline in the pipeline is a big deal from that perspective. Conversion rates are doing okay and things like that. The product is doing well in the marketplace. Emerging products are continuing to do their thing. We've seen some early indications with the channels having to do a little bit more of the lift themselves with deals. So, I think it's a combination of those things. But again, Q4 is always a little bit better, but with the backdrop of a lot of good things going on behind the scenes.

Our next question comes from James Fish with Piper Sandler. Your line is open.

Kind of going off of Matt's question there. The main environment does appear to be favorable now as the business is inflecting from our vantage point. How are you feeling about the sales capacity and productivity and what are you looking to do to ensure that the first added renewals really go as well over the next 12 to 18 months?

Yes. So maybe I can start and Duston you can chime in there. So we continue to focus very much in terms of our sales productivity. Yes, we've talked about how - of course we are [indiscernible] lot of discipline in terms of pipeline management and much more predictable pipeline conversion with the sales team. We are also building out, of course, leveraging the partner ecosystem more now. We are bringing our more solution-oriented selling and then the emerging products on top of that also improve our productivity. And at the same time again compressing deal terms help our overall ASP uplift as well. Now, when it comes to the second part renewals of your question Jim, so we have been focused very much on building out the engine for being ready for all the renewals coming in. So we are building out the renewals team now to focus on a low-cost renewal mechanism. We are putting in all the tooling necessary so that we get full visibility into where customers are in their adoption and consumption cycle and we've also created the clarity around who is responsible across the sales organization and the customer success teams for driving this whole profit from the time of sales through the time of renewal. So all in all, we feel pretty good about the upcoming stream of renewals here.

That's very helpful Rajiv. And just keeping on the sales and marketing, obviously the announcement about the headcount reduction. Just any further details here, was it more kind of middle management layer or any of the reps themselves or how do we think about that reduction element? Thanks guys.

Yes, I mean -- I think it was - it wasn't done and it is exclusively in sales and marketing, but it was based more on where we saw for example excess coverage that we didn't need that many people far in specific market regions, elimination of certain functions, creating again the room to go build-out our renewal business [ph] separate from the team that's doing the ACV. So, it was fairly distributed across the spectrum. And of course, wherever possible we tried to not impact quota-carrying reps, but look at the non-quota-carrying reps in terms of this process. So, it was fairly distributed. Not specific to one particular area.

Our next question comes from Pinjalim Bora with JPMorgan. Your line is open.

Seems like a pretty good one. Rajiv, I want to double-click on the emerging products. We have been hearing a constant drumbeat about Era being a differentiation in the market and kind of pulling the core platform in some cases, maybe I think you kind of alluded in the last quarter, where is this - what's the maturity of the thinking at this point in time to sell Era as a standalone solution to kind of act of the beachhead and the other part to that is, at this point in time, what kind of an ACV uplift are you seeing from Era and maybe Files?

Yes. Good questions there. So on Era, clearly Era is a database management offering. It allows our customers to streamline holiday, install database as provision databases and then lifecycle of the databases and manage all the day-to-day operations that they need to do on their databases. And we make use of the underlying Nutanix platform to do some of these functions very efficiently. So that is the connection implied today to the underlying platform. So what we see is a very two-fold go-to-market around Era. Obviously within our installed base of Nutanix customers we can go in there and upsell them on Era on top of our platform. But also Era has been a way for us to get into new accounts, where they don't have any previous Nutanix footprint by focusing on the value proposition of Era which is differentiated and allowing us to pull in our core platform as well. So it works both ways. So I would say this is a very good product market fit at this point and is in an area that we are investing more in and our vision of course over time is to grow Era into a multi-platform, multi-cloud offering, not just tied to only Nutanix platform, and increase the range of database engine that we will support in the offering. I'll let Duston comment on the specific ACV uplift that we are seeing for Era and Flow, Files etc. Duston?

Sure. Let me talk a little bit more in a broader bucket as far as just the emerging products which flow in Era and the likes in there and as you heard 80% percent year-over-year increase in ACV for those products, 39% attach rate and from an uplift perspective, I think the best way to look at it, that we look at it also is, is just deal economics and there's two ways to get better deal economics, term compression obviously shorter terms have higher deal economics, but then just better like-for-like pricing on a three-year to a three-year deal. And when we look at deal economics without Era, Flow and the likes of that emerging bucket, and with those products, we're seeing a significant uplift in the overall deal economics and Era is front and center as far as the uplift that we're getting there. And I think we'll shed a little bit of light because there have been questions, a little bit uplift where we're getting from a five-year to a three year and a three year to a one year deal and how our emerging products helping deal economics? So I think we'll try to shed a little bit of light on that at Investor Day and give you some insight I think for the first time there.

Duston, one for you. I was wondering on - I mean at this point in time you already have motions to go back to your life of device customers and get them convert to Trump term maybe on renewals, but how has those conversations been? Those customers - are those customers weighing more towards like a three-year deal than a one-year deal? And what portion of the ACV growth is coming from that motion at this point?

Yes, not a ton. Naturally as you said, when your support renewal is up for renewal a life of device support renewals up, for renewal it's a natural time to have that discussion as far as emerging over into subscription based transaction. So those go on naturally. Our guys are all over that, and so that's a natural occurrence from that perspective. And with the shift to ACV based comp, it's got a higher likelihood that those deals, which we've pegged is five years for a life of device, gets more tilted toward three or maybe even shorter deal, because most likely have better deal economics, better higher ACV and the rest going to get more money, more commission dollars with that down tick in terms of, again its a natural occurrence. A lot of our support renewals that come up for renewals just merge, they don't renew. They'll merge into a new subscription transaction. So that's ongoing and the great news there is that we've got a big pool of that as you all know and so that's an ongoing effort over the next several years that we'll continue to tack from that perspective.

Understood. I'm sure we'll hear more about that at the Analyst Day, but, congrats on the quarter. Thanks.

Our next question comes from Jason Ader with William Blair. Your line is open.

My first question, I guess for Rajiv, there's this narrative that COVID has accelerated the shift to cloud, and I was just wondering, how you think that's impacted demand in the on-prem space generally. And then how has it impacted demand, specifically for Nutanix?

Yes, I mean I think at the top level if you look at the COVID impact a lot more customers talked about how to get their employees working remotely pretty effectively. And that certainly had a stimulus effect on terms of what's in desktop deployments and scaling those deployments. And that's a sweet spot use case for us. So we certainly benefited from that. We are also starting to use CV, the use of cloud. Now, cloud migration certainly, I think as customers look at cloud more and more customers are looking at making use of the public cloud, and we have certainly seen that being a driver for some of our deployments as well, like we've talked about here with some of the examples we provided like the financial services customer who is actually doing - meaning doing both. Doing VDI to support their remote workforce but also using the cloud for disaster recovery in a very cost effective way. So we are certainly seeing more and more of the use cases of hybrid cloud emerge as we go forward. So I think in general, when we look at COVID, I think it's isolated customers digital transformation, which means their focused also in doing more and more digital, driving application work and that generally means they're also modernizing infrastructure where it makes sense. So that helps us and the drive to hybrid cloud is going to be helping factor for us as well and then there is remote work that's here to stay. It's going to be hybrid workflows as we all come back into the offices. It will likely be people working part of the time in the office and part of the time remotely. So it will continue. So those drivers in general I think are helping us.

And you haven't seen any kind of significant shift from customers or opportunities where they've just said, we're done with on-prem data centers, we want to go cloud native and we just don't need you guys anymore, we are not really seeing that type of a phenomenon?

I mean we haven't quite seen that as you can see our business continues to grow healthily. We are seeing good demand and we are seeing in fact an uptick in demand here. So, no, I think we're not seeing that yet. But we are seeing more and more customers talking about wanting to be in this multi-cloud world. They're going to decide what they want to go in terms of their applications, some application will continue to run on-prem, some will be in the public cloud, some will be in the edge and these are newer applications as well. So we are starting to see more of that hybrid trend emerge.

Our next question comes from Jack Andrews with Needham. Your line is open.

Rajiv given your focus on partnerships and I was wondering if you could just maybe discuss how - maybe I guess the amount of awareness and maturity your channel ecosystem has for your line of emerging products relative to their awareness of your core HCI offerings? Is the channel fully up to speed in terms of just all the capabilities that you've introduced to the market or is there still an education process happening there?

I think it's very much the latter, there is still an education process. Most of our channel partners are very much selling our core offering, our core HCI, that's what they're most familiar with. These newer products such as Era and File and Flow and so forth are relatively new to our partners and only now are they building up their capabilities to be able to sell that. I think the initial product market fit for some of these products was doing very much by us and now we are deploying - they are actually scaling these products, so that we have product market fit on. And this is where the partners come in and play a very significant role. So we are certainly investing in building up the capabilities and enabling them to transact and build up their competencies in these emerging products. And I think there is a future opportunity for leveraging the partners data as well.

And then quick one for Duston. You mentioned that you're not expecting any material changes to contract term whilst here in the fiscal 4Q. Any comments in terms of how you're thinking about it beyond this and moving into next fiscal year?

Yes, I think again you will see some potential gradual decline. So I think what we see in the pipeline, there's not a whole lot of movement in those terms. Now, when it converts to actual deals, we'll see how that plays out. But I think again, I've said for a while now and we'll have to see here over the next couple of years. But what I had said previously is now probably 2.8 to 3.0 somewhere around there years, but that's over a period of time and it's pretty much now things can change, but it's pretty much played out. So far, I believe that we have expected, we thought it would be a gradual decline because you got plus or minus 80% of the existing customer base already has a set term. So you need to change that and whatever. So again, I think it's ultimately somewhere between that 2.8 and 3 years and I think that occurs over some period of time and we're at 3.3 today and we'll see how that goes over the next year or two.

Our next question comes from Wamsi Mohan with Bank of America. Your line is open.

Yes, thank you and congrats on the solid ACV results and guide. Rajiv there clearly has been a lot of change or a deal largest competitor, both in terms of leadership, ownership, etc. Do you anticipate any significant competitive changes there as it pertains to Nutanix especially with respect to either channel or pricing? And I have a follow-on.

Yes. Look, I think obviously competition is good for the customer. I feel pretty good about our position in the market, independent of what's happening at any of our competitors. We are very focused. We are focused on executing on our HCI platform, building out the emerging products on top of that and extending that to multiple clouds and we are very focused in our customers and delivering the best outcomes to our customers. And look if we do that right, I think the rest will fall in place. Now, it is worth noting that we are still the one provided at the likes of most choice in the market allowing our customers to take the hardware and the hypervisor, [indiscernible] cloud platforms, along with our software. And we remain very focused in terms of executing on that mission and also continuing to build and leverage partners where I see even more opportunity for us.

Okay, thanks Rajiv. And Duston the $50 million in annual savings, is that on a gross or net basis. And is there some that's getting reinvested somewhere else or is all of that to flow down the P&L. Thank you.

Yes, most of it flows into the P&L. There may be some minor reinvesting, but most of it all flows and probably two-thirds of that is in operating expense and the rest is in COGS, with some of our services and things like that. But, vast majority though will flow through.

Our next question comes from Katy Huberty with Morgan Stanley. Your line is open.

Yes, thank you. My congrats on the quarter too. I wanted to start with a question for Duston. Can you just give some context around the better than seasonal third quarter backlog. Is that a function of an internal strategy to just run at higher backlog levels and improve visibility or was that a bit of a surprise in a signal of strengthening demand that you weren't able to ship at the end of the quarter?

Yes, sure. Katy, I mean you always hope for higher backlog to your point there. But, pipelines have been strong. You saw the comments that we were pleased with the quarter-over-quarter increase in pipe, the year-over-year increase in pipe. So I think you definitely see something going on from a demand perspective there. And then, again, you have to layer that on with the backdrop of some pretty good execution also within the pipeline management and deal management and deal closure and things like that. So I think it's certainly a combination of both and a good indicator also was linearity, which we talked about. Quite honestly linearity surprised me a little bit in the quarter being as good as it was, just typically not like that in Q3, coming off a big Q2. So I think it's a combination of mostly positive things at play there.

And then just as a follow-up, maybe Rajiv can comment here. Today, what percentage of the business is driven by OEM partners and how does that compare to a year ago? And then which OEMs are you seeing the fastest growth with? And I just asked that in the context that clearly part of your strategic change is to build out that partner ecosystem? Thank you.

I'll comment on the second one and then Duston you can comment on the size of the business to the OEMs. So I would say, HP, clearly is the one that's been growing the fastest for us overall in terms of the OEM relationships for us. Clearly Dell continues and I would say Dell is more fulfillment as we partnered together and customers want to land our solution in Dell hardware, Dell supports that. So I would say, HP, Lenovo, to the extent that they are in markets where they are strong, continues to be from a server perspective also continuously a very good partner for us. So I would probably say those are the two big ones. Duston you want to comment on the sizing?

Yes, I don't have a whole lot to add, because we stopped giving that stat out a while ago and because it just got complicated, because most, if not all the Dell business has rolled over to the XE core, which is going to meet channel with our software running on their service, which continues to do quite well. But it's outside of that OEM bucket there.

Our next question comes from Rod Hall with Goldman Sachs. Your line is open.

I wanted to start with the kind of this question of supply. I know you're selling software not servers within your customers have to install it on a server. So I'm just curious whether you think there's any risk as you look out the next quarter or two, given all the supply shortages we keep hearing about? People want to buy your software, but then they can't find servers to install it on? And then I have a follow-up.

Yes, I mean, Rod, I could just tell you global shortage of chips out there and I think the one thing that I can say about software sales is, not all our software necessarily need serves all the time. I mean it's - people are doing more virtualization and they might deploy it even on existing ones. In some cases there are stuff that they have already procured. So we haven't quite seen supply shortages being a driver or impacting us at this point at all.

Okay, that's great. Thank you Rajiv. And then my follow-up. I just wanted to come back to this point on contract term. I think some people look at a stabilization and maybe they worry that we're stabilizing a little higher level. I'm just curious, I mean Duston you said that's tracking where you guys would have expected. I'm assuming this is just kind of puts and takes around mix on terms and I think any other color you could dig into to help us understand why that 3.3 years remained stable in Q4 in the guide and how we ought to maybe see that trajectory after probably ticks down after that or how is that kind of playing out? That would be great. Thanks.

Yes. As you know, that's not an exact science to predict how exactly what the terms are going to be in any given quarter. It could go down a 10th here or there, whatever, I wouldn't be surprised about that. My comments here is just - I just a material quarter-over-quarter change. Now it's a little bit different in Q1 when Fed pops up and they have a lot of one-year deals. So take that out of the equation, but I just don't see any rapid decline in terms and again I - we'll see how it plays out over the next couple of years. 2.8 years, 3.0 years are somewhere in that range. I think as we have more time and reps have more discussions with customers. We are naturally going to try to move them from five to three or shorter. So I think that occurs naturally over time. But I - it's not my assumption that we stay here at 3.3 years and we don't move any further. I just don't think it's a rapid decline.

We shouldn't think that maybe there is any slowing on renewals or anything like that, or would stabilize, or is it nothing like that?

No. We will give you a very good feel when we are loud and clear on the renewal front and we'll give you more visibility and all that. So you're going to - you'll see a good toast of that on June 22.

Our next question comes from Simon Leopold with Raymond James. Your line is open.

This is the Victor Chiu in for Simon. I want to draw a little more into the cloud portfolio. Hybrid cloud is kind of a generic term that encompasses a number of different approaches and solutions. So can you maybe speak about Nutanix's competitive proposition compared to more integrated cloud platforms/software defined data center solutions like VMware Cloud and Azure Stack and maybe help us understand what are the most vital factors that enterprises consider when deciding which particular hybrid cloud approach to adopt?

Yes, I think the key question there, by the way is, first of all, I mean, people operate, our customers are operating, of course, with the data center but with one or more public cloud as well. Now if you are looking at a particular public cloud provider, all the public cloud providers are also embracing hybrid strategies now. AWS has outsourced Azure Arc and so the customers is locked to one public cloud and they can also look at that particular public cloud hybrid solution. But more often than not and we showed you some more data at Investor Day, where we show that customers are interested in more than one public cloud. So they are using multiple public clouds and their on-prem and now when you start looking at this environment, they look - the value that we provide with our cloud solutions is, we provide one platform, one set of tooling, one set of management interfaces, one license that a customer can use to deploy and manage their workload on whichever cloud they want. Whether it's today is of course on-prem, edge or data center and also moving to AWS and tomorrow once we get our Azure out, and over time, hopefully we'll have more. And so that unique - think of this as a multi-cloud platform that our customers can actually get and to some extent VMware has something similar as well, right. The approach that we have a slightly different, today we essentially say customers you have your own whatever public cloud accounts you have, you can just deploy, buy the software from us that same license, you don't get where you use it. You use it wherever you want. If you want to deploy that in the public cloud of your choice, we enable you to do that and you can go out and deploy it. You can manage it all with one solution. And we also do a lot more work in terms of handling all the data services in terms of our heritage being in terms of how we manage and store data. So we do that particularly well as well. So our value proposition fundamentally is to be able to provide this platform that cuts across multiple clouds, essentially make these clouds invisible, highly underlying complexities of each of the cloud silos and provide this consistent platform for customers to go run their businesses on.

Our next question comes from Erik Suppiger with JMP Securities. Your line is open. Erik, your line is open.

Thanks for taking the question. On the Lenovo partnership, can you talk about what the competitive dynamics are there? Are there any other providers that are working with Lenovo and if they have this tied in the integration as you do? And then secondly, just curious with AHV it's kind of settled in at 52%, it's been in the 50% range for a while. Is that something that's going to change at any point down the road or is it probably where it settles in for a while?

Good questions. So Lenovo launched this offering just with us for now, right. I'm sure they may have other partners that they are bringing on board over time. But the - this particular announcement, which was April and Awards, it's called the true scale offering it is everything delivered as a subscription. So that means the hardware and the PCs, the servers, the Citrix media and the Nutanix software all put together delivered as a subscription offering, as a service offering to their customers. And so this is an example where they work with us as a first partner to go deliver this complete end-to-end, as-a-service subscription offering combining hardware and software to address this customer use case or end-to-end solution right, enabling their end users as well as to be able to consume remote desktops. So we are the first solution then. Now is your question on AHV. We expect continued growth and adoption of AHV over time. It's been a gradual continuing upshift. So customers look at the value of AHV, it's getting better and better every day to where AHV can today handle all the mission critical workloads that customers want. So customers look at this as an opportunity for them to save quite a bit of costs and over time, continue to migrate more and more of their workloads to AHV. For example, I mean one of the large deals that we announced is this Asia Pacific mission critical deployment was on AHV, right. It makes you - it made use of our major network security solution that’s build in essentially in part of the AHV, and so people are very comfortable with that assay as mainstream hypervisor that can run all workloads. So we do expect more and more. It will be a gradual uptick in terms of the deployment of AHV.

Is there any catalysts that would drive that higher?

Potentially as cloud for example, all our cloud - hybrid cloud solutions in AWS and also Azure are based on AHV, and to the extent that the customers actually start using more and more of that, that will be by AHV. As customers look at renewals of their existing software from other vendors and they look at this as potential cost savings that could accelerate as well.

Our final question comes from Nehal Chokshi with Northland Capital Markets. Your line is open.

Yes, thank you for taking my question. So, has there been a change in the way your building up the ACV guidance this quarter relative to the prior three quarters, because for the entire three quarters, you've been beating your own guidance by a healthy margin in the past. So just wondering if there has been a change in the way that you're building up this ACV guidance?

Same methodology.

Okay, great. And then when you talk about an uplift from emerging products, does it just mean the driver of the ACV billings acceleration or are you also seeing year-over-year increase in ACV core and is that what you mean by like-for-like pricing actually?

Yes, the latter. Yes. It's actually better deal economics.

And could you - I know this is somewhat difficult but can you tell us what percent of ACV billings was actually renewals in the quarter?

We have not given that on an ACV basis but highly likely you'll see a fair amount of detail again at Investor Day on that.

Okay, great. Congrats on the strong quarter and I think, what I think is fantastic guidance. Congratulations.

There are no further questions at this time. This concludes today’s conference call. Thank you for participating. You may now disconnect.