Cloud Infrastructure Companies Report Strong Growth and Positive Outlooks

Earnings call: Nutanix reports robust growth and positive outlook for FY2025 By Investing.com

Nutanix (NASDAQ:NTNX), a leader in hybrid multi-cloud computing, has reported strong financial results for the fourth quarter and fiscal year 2024. The company surpassed its guided metrics, with Q4 revenue climbing to $548 million, marking an 11% increase year-over-year (YoY), and an impressive 15% YoY revenue growth for the full year, reaching $2.15 billion. Nutanix also reported a significant rise in annual contract value (ACV) billings and a robust free cash flow. The company provided an optimistic guidance for fiscal year 2025, projecting revenue growth and continued investment in research and development (R&D), sales, and marketing. Nutanix has demonstrated a robust performance in fiscal year 2024 and is positioning itself for continued growth. The company's focus on customer acquisition, strategic partnerships, and product innovation, combined with stable demand and strong financial guidance, suggests a positive outlook for Nutanix in the coming fiscal year. Operator: Thank you for standing by and welcome to Nutanix Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers; presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Rich Valera, Vice President of Investor Relations. Rich Valera: Good afternoon and welcome to today's conference call to discuss Nutanix' fourth quarter and fiscal year 2024 financial results. Joining me today are Rajiv Ramaswami, Nutanix' President and CEO; and Rukmini Sivaraman, Nutanix's CFO. After we closed today, Nutanix issued a press release announcing fourth quarter and fiscal year 2024 financial results. If you'd like to read the release, please visit the Press Releases section of our IR website. During today's call, management will make forward-looking statements, including financial guidance. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a more detailed description of these and other risk certainties, please refer to our SEC filings including our most recent annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q, as well as our earnings press release issued today. These forward-looking statements apply as of today and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as predictions of future events. Please note, unless otherwise specifically referenced, all financial measures we use on today except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Nutanix will be participating in the Goldman Sachs (NYSE:GS) Communacopia + Technology Conference in San Francisco on September 9th and the Piper Sandler Growth Frontiers Conference in Nashville on September 10th. We hope to see you at these events. Finally, our first quarter fiscal 2025 quiet period will begin on Friday, October 18th. And with that, I'll turn the call over to Rajiv. Rajiv? Rajiv Ramaswami: Thank you, Rich and good afternoon everyone. Our fourth quarter was a solid finish to our 2024 fiscal year. We continue to see steady demand for our solutions, driven by businesses prioritizing infrastructure modernization initiatives, while looking to adopt hybrid multi-cloud operating models, and optimize their total cost of ownership. In the fourth quarter, we are happy to have exceeded all our guided metrics. We delivered quarterly revenue of $548 million, up 11% on year-over-year and saw another quarter of strong free cash flow generation. We also saw the highest number of new logos we've seen in three years, an encouraging sign of building traction with some of our go-to-market partnerships and initiatives. Our full year 2024 results demonstrated progress on a number of fronts. Financially, we delivered solid top line performance, driven by continued strong performance from our renewals business. We saw good growth in our pipeline of larger deals as we shifted our focus up-market and saw increased engagement from prospects, looking for alternatives to their existing infrastructure solutions. Even as our land and expand business underperformed related to our internal expectations due to the longer-than-expected sales cycles we see, we delivered revenue of $2.15 billion, up 15% year-over-year and ARR of $1.91 billion, up 22% year-over-year. Our bottom line performance was even stronger. We generated free cash flow of $598 million, almost three times higher than last year, resulting in a free cash flow margin of 28% and a Rule of 40 score of 43. In FY 2024, we also saw tangible progress on the partnership front with significant new or enhanced partnerships with Cisco, Dell and NVIDIA. And I'm pleased that Dell XC Plus, our new turnkey HCI-based appliance offering with Dell is now generally available. We see these partnerships is both expanding our addressable market and providing us with meaningful go-to-market leverage. Finally, we continue to innovate in FY 2024, with important new product releases and enhancements to our Nutanix cloud platform. These included the launch of GPT in-a-box, our solution for streamlining the adoption of generative AI by enterprises. We made meaningful progress towards our goal of becoming the best platform for modern applications, including launch of Nutanix Data Services for Kubernetes or NDK, which offers consistent data services across both virtual machines and container stats, as well as the recent release of Nutanix Kubernetes Platform or NKP, to simplify management of modern applications, on-premises and in any native public cloud service. Our most significant wins in the quarter demonstrated the appeal of Nutanix cloud platform to organizations that are looking to modernize their IT footprints and adopt hybrid cloud operating models, as well as those looking for alternatives in the wake of recent industry M&A. Our largest win in Q4 was a multimillion-dollar ACV deal with a North American-based Fortune 100 financial services company. Following a roughly 1.5 year engagement with us, they chose to replace their existing solution to Nutanix Cloud platform, including our AHV hypervisor as well as Nutanix cloud manager. This customer, who had been using a competing HCI solution in much of the footprint was able to utilize their existing hardware for Nutanix software deployment, obviating the need for a hardware refresh. We also had a number of significant wins that included our Nutanix Cloud Clusters or NC2 capability, which enables workloads to be seamlessly and efficiently run in both private and public clouds. One of these was with an existing customer, an EMEA-based provider of global research services. This customer was looking to accelerate the migration of their workloads to the public cloud, while ensuring the workloads once migrated, will run as efficiently and cost effectively as possible. Having already made a commitment to Microsoft (NASDAQ:MSFT) Azure, they purchased licenses for Nutanix cloud platform through the Azure marketplace with the intent of utilizing its NC2 capability to shift their on-prem workloads to Azure. Another good example was a significant new customer win, with a top North American university. Most of our customers start with our platform on prem. However, this customer was motivated by their decision to migrate away from a competing platform they were using to run their virtual machine workloads at scale in the public cloud on AWS, due to dissatisfaction with recent changes at their existing supplier. They chose Nutanix cloud platform to migrate their applications running in the public cloud to our NC2 on AWS, while also adopting our cloud platform to run their on-prem workloads. We also plan on Nutanix cloud manager for consistent health service and automation across their private and public cloud state. A final notable example is a win with an Asia-based Global 2000 semiconductor provider. This full stack win, which is also a displacement of our primary competitor, enables the customer to streamline their operations, increase their level of automation, and reduce their dependence on more expensive proprietary storage solutions. It included adoption of Nutanix database service, or NDD to enable them to move off of their expensive commercial databases to open source databases managed by NDD. This customer also plans to adopt our unified storage solutions, replacing multiple third-party storage options. Finally, we also plan on utilizing NC2 on Azure to enable them to shift applications to the public cloud, including performing lift and shifts of IT workloads of acquired companies. We see these wins as reflecting the value customers see in our platform as they look for seamless and efficient application portability, while adopting hybrid multi-cloud operating models, as well as the value of our partnerships with Azure and AWS. In closing, I am pleased with our solid Q4 and fiscal 2024 results, and the progress we continue to make on multiple fronts, including our financial model, our partnerships and our ongoing innovation in our cloud platform towards our goal of becoming the leading platform for running applications and managing data anywhere. We also remain focused on capitalizing on what we view as a long-term opportunity to gain share in face of recent industry disruption and are encouraged by our early successes, including some of the wins I just highlighted. Finally, I would like to express my sincere gratitude to our investors, customers and partners for their trust in us and to our employees for their hard work that led to these results. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini? Rukmini Sivaraman: Thank you, Rajiv, and thank you, everyone, for joining us. I will first discuss our Q4 fiscal 2024 and full fiscal year 2024 results, followed by our guidance for Q1 fiscal 2025 and for the full fiscal year 2025. Results in Q4 2024 came in above the high end of our range across all guided metrics. ACV billings in Q4 were $338 million, above the guided range of $295 million to $305 million, representing year-over-year growth of 21%. Revenue in Q4 was $548 million, higher than the guided range of $530 million to $540 million, representing a year-over-year growth of 11%. ARR at the end of Q4 was $1.908 billion, representing year-over-year growth of 22%. In Q4, we continue to see modestly elongated average sales cycles compared to historical levels. Average contract duration in Q4 was 3.1 years, 0.1 year higher than Q3. Non-GAAP gross margin in Q4 was 86.9%, higher than our guided range of 85% to 86%. Non-GAAP operating margin in to was 12.9% higher than our guided range of 9% to 10%, largely due to one, lower operating expenses as a result of higher-than-expected non-recurring payments related to one of our partnership agreements and a few other items; and two, slightly higher gross margin and revenue. Non-GAAP net income in Q4 was $76 million or fully diluted EPS of $0.27 per share based on fully diluted weighted average shares outstanding of approximately 285 million shares. DSOs based on revenue and ending accounts receivable were 39 days in Q4. Free cash flow in Q4 was $224 million, representing free cash flow margin of 41%. Free cash flow in Q4 benefited from the collection on the 8-figure ACV transaction that was booked in fiscal Q3. Moving to the balance sheet. We ended Q4 with cash, cash equivalence and short-term investments of $994 million, down from $1.651 billion at the end of Q3. The primary reason for the reduction in our cash balance was Bain Capital's conversion of the 2026 notes, which we announced in June. We settled the conversion in Q4 by paying $817.6 million in cash and delivering approximately 16.9 million shares of common stock. Please note that the entire conversion value had previously already been included in our fully diluted weighted average share count on an if-converted basis. The actual settlement included a portion settled in cash rather than exclusively in shares, resulting in the issuance of approximately 17 million shares, which is 12 million lower than the 29 million that we had previously included on an if-converted basis. Moving to capital allocation. We repurchased about $25 million worth of shares in Q4 and $131 million worth of shares in all of fiscal year 2024 under the share repurchase program previously authorized by our Board of Directors. Looking at our full year financial results, we exceeded the high end of all guided metrics for fiscal year 2024. ACV billings in fiscal year 2024 were $1.162 billion, higher than our guidance of $1.12 billion to $1.13 billion, and representing a year-over-year growth of 21%. A reminder that the annual ACV billings is slightly lower than the sum of the ACV billings from the four quarters due to adjustments for deals with duration of less than a year. Revenue in fiscal year 2024 was $2.149 billion, higher than our guidance of $2.13 billion to $2.14 billion and representing a year-over-year growth of 15%. We are pleased to have exceeded the $2 billion revenue threshold in fiscal year 2024. We ended fiscal year 2024 with an ARR of $1.908 billion, as mentioned earlier, a year-over-year growth of 22%. Net dollar-based retention rate, or NRR, at the end of fiscal year 2024 was 114%. As the fiscal year progressed, we saw a higher mix larger deals in our pipeline. These larger opportunities often involve strategic decisions and C-suite approvals causing them to take longer to close and to have greater variability in timing, outcome and deal structure. And as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels. Largely due to these dynamics, our fiscal year 2024 land and expand ACV and ARR performance were below our initial expectations at the beginning of the fiscal year, and we expect these dynamics to continue. Our renewals performance continues to be good through the fiscal year, and a reminder that renewals tend to be at a lower aggregate average contract duration compared to land and expand. Average contract duration in fiscal year 2024 was 2.95 years, flattish to fiscal year 2023 and slightly higher than expected, partly due to some larger deals with greater than average duration. Non-GAAP gross margin in fiscal year 2024 was 86.7%. Non-GAAP operating expenses in fiscal year 2024 were $1.515 billion, an increase of 7% year-over-year, as we began to make additional investments primarily in research and development and sales and marketing. Non-GAAP operating margin in fiscal year 2024 was 16%, representing an improvement of over 700 basis points year-over-year. We also delivered our first full year of positive GAAP operating income of $8 million in fiscal year 2024. Non-GAAP net income was $384 million, or diluted EPS of $1.31 per share based on fully diluted weighted average shares outstanding of approximately 294 million shares. Free cash flow in fiscal year 2024 was $598 million, higher than our guidance of $520 million to $540 million and almost 3 times higher than last year's free cash flow. Free cash flow margin in fiscal year 2024 was 28%, implying free cash flow margin expansion of 17 percentage points year-over-year. Free cash flow in fiscal year 2024 benefited from approximately $30 million in nonrecurring payments related to a partnership agreement, as previously referenced. Overall, fiscal year 2024 was a significant year, marking our first year with positive GAAP operating income, significant free cash flow generation of $598 million and free cash flow margin of 28%, while growing ARR at 22% and revenue at 15% year-over-year. We also delivered a Rule of 40 score defined as the sum of revenue growth and free cash flow margin of 43 for fiscal year 2024, an improvement of 14 percentage points year-over-year and 28 percentage points higher compared to two years ago. Moving to fiscal year 2025. The guidance for the full year is as follows; revenue of $2.435 billion to $2.465 billion, representing a year-over-year growth of 14% at the midpoint; non-GAAP operating margin of approximately 15.5% to 17%; free cash flow of $540 million to $600 million, representing a free cash flow margin of approximately 23% at the midpoint. I will now provide some commentary regarding our fiscal year 2025 guidance. First, as previously mentioned at our 2023 Investor Day, we are signing our metrics by not reporting or guiding ACV billings starting in fiscal year 2025. ACV billings was intended as a transitional metric during our subscription evolution, and we believe that now is the time to evolve away from that metric. We are also no longer guiding to GAAP gross margin which was previously useful as we navigated our business model changes, leading to significant improvements in non-GAAP gross margin. We will continue to guide to revenue, non-GAAP operating margin, and free cash flow on an annual basis and to guide to revenue and non-GAAP operating margin for the subsequent quarter. Second, and moving on to assumptions in our guidance, we are seeing continued and significant land-an-d expand opportunities and a growing pipeline for our solution. However, we continue to see a higher mix of larger deals in our pipeline, which is driving greater variability in our land and expand bookings. These larger opportunities often involve strategic decisions and C-suite approvals at the customer or prospect, causing them to take longer to close and to have greater variability in timing, outcome, and deal structure. And as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels, which we expect to continue. Third. The guidance assumes that renewals will continue to perform well in fiscal year 2025. Fourth. The full year guidance assume that average contract duration would be flat to slightly lower compared to fiscal year 2024, as renewals continue to grow as a percentage of our billing. Fifth. The non-GAAP operating margin guidance assumes incremental student investments in sales and marketing and R&D targeted towards addressing our large market opportunity. It also factors in the annualized run rate of the incremental investments we made in fiscal year 2024. It also assumes a $20 million to $25 million headwind in operating expenses relative to fiscal year 2024 from payments related one of our partnership agreement. Specifically, there was about $44 million of this benefit to the R&D operating expense line in fiscal year 2024, and we anticipate it be $20 million to $25 million in fiscal year 2025 And sixth. The free cash flow guidance reflects an approximately $30 million headwind relative to fiscal year 2024, from lower interest income as a result of our lower invested cash due to the cash payment on conversion of FY 2026 convertible notes. We expect free cash flow in fiscal year 2025 to also benefit from the approximately $30 million in nonrecurring payments related to a partnership agreement, similar to the benefit we saw in fiscal year 2024. It is expected to tail off towards the end of fiscal year 2025. Moving to Q1 2025. Our guidance for Q1 is as follows; revenue of $565 million to $575 million, non-GAAP operating margin of 14.5% to 15.5%. Fully diluted weighted average shares outstanding of approximately 287 million shares. In closing, we are pleased that Q4 and fiscal year 2024 performance exceeded guidance across all metrics. We are excited about the long-term market opportunity and Nutanix's ability to deliver compelling outcomes for customers and prospects. We remain committed to continued progress aligned with our stated philosophy of sustainable, profitable growth both through durable top line growth and expanding margins. With that, operator, please open the line for questions. Q - George Wang: Yeah, thanks for taking my question. Firstly, just curious if you have any update on the Broadcom churn, especially in the last couple of quarters, you just talked about that after the initial wave of strong engagement, the activity slowed just because of Broadcom working back some of the initial initiatives to be now more in favor of retaining some of the priority customers. Just curious if the dynamic has changed. Rajiv Ramaswami: Hi, George. Rajiv here. Yeah, we are -- it's largely an unchanged multiyear opportunity to gain share, like we said last quarter, while the sales side has been a bit longer than we had initially anticipated. Thus far, we haven't really seen any meaningful changes in our win or loss rates on these opportunities. As we talked about in our prepared remarks, we are seeing some of these larger opportunities close. We gave you a few examples in the prepared remarks. And I do expect that we'll continue to see more of these over time. Now in the midsize and smaller customer segments, we're seeing significant increased engagement and opportunity as many of these smaller companies look for alternatives and generally less competitive engagements related to the larger customer opportunities. Along with our increased leverage from our go-to-market partnerships that we've talked about as well as our programs and incentives that we have in place, this dynamic has also been one of our drivers for our larger -- our stronger new logo performance. George Wang: Okay. Okay, great. Just if I can squeeze in quickly, it's nice to see one customer in financial services, you guys mentioned without changing the underlying hardware, previously, the gating factor - one of the gating factor has been so the upgrading the underlying hardware to wait for the hardware refresh. I guess, can you talk about sort of a better path going forward kind of now seems especially after Dell partnership, maybe you're kind of removing some of the constraints related to the underlying hardware refresh -- maybe you can give a little bit more color on that. Rajiv Ramaswami: No, that's a very good question, George. I think if you look at the installed base out there in data centers, a vast majority of it, I don't have the exact number, but roughly around 80% of it is what we call 3-tier infrastructure. Separate storage, compute and networking. And as you know, we have a HCI solution today in the market. And if we want to replace the 3 tier with HCI, it's a better architecture, more cost-effective long-term, but it does require a hardware refresh. Now the remaining 20% is HCI, of which we are a market leader and our competition has some of the rest. Now in this particular case, an example that we talked about, the customer was already on HCI with a competing product. And when you're already on HCI, we've been quite successful having our software to be able to run on existing hardware because it's already a HCI hardware. And that's what happened in this particular account. And so for that subset or customers that are already on HCI, the migration path is easier in some subset of those cases, we don't need a hardware refreshes. That's what happened here. On the 3-tier, it does require a hardware refresh. Now we're also addressing the 3-tier market, to your point, one aspect of our partnership with Dell is that we said we would -- they would be the first that we would support at external storage, Dell PowerFlex. And now the whole idea of doing that is now we can find an easier insertion into feature deployments without having to change out the hardware. Now that solution is not available in the market today. It's only going to be available sometime next year. And over time, we anticipate being able to offer that support to a broader set of third-party storage ways. George Wang: Okay. Thank you. I'll back to the queue. Operator: Thank you. And our next question comes from the line of Jim Fish from Piper Sandler. Your question, please. Jim Fish: Hey, guys. Thanks for the questions here. Rajiv, do you want to ask around essentially -- you alluded to a little bit of GPT in-a-box here. I don't think we've got a conference call anymore without talking about AI, but are you seeing any sort of trend of repatriation of workloads back to private cloud or just a core workload as well as for AI, I guess, any update on the GPT-in-a-Box? Rajiv Ramaswami: Yes. So Jim, good question. I'll give you a two-point answer to that. First, in general purpose work clouds and then second on GPT. For general purpose workloads to your point, for steady-state workloads, I think people are getting to the conclusion that it's much more cost effective to run those on-prem in a private cloud environment. We've seen some repatriation. We've also seen much more deliberation in terms of whether that workload goes to the public cloud in the first place, because a lot of the deployment is still on-prem of enterprise workloads. So we're certainly seeing the trend and realization of customers to say, the steady-state workloads, we can run them more cost effectively in private clouds. Now on GPT specifically, I think a lot of visual interest in Gen AI has been in creation and training of LLMs, large language models, and a lot of that is being done in the public cloud and massive GPU farms. And we don't have -- we don't play there fully. But on the other hand, we think the bulk of the enterprise opportunity in terms of how companies are actually going to use it, is potentially going to be on-prem because at the end of the day, the Gen AI workloads, applications have we run wherever the customer data is. And in a lot of cases, sensitive customer data is either inside data centers or at the edges, and so a platform like our GPT-in-a-Box provides a very simple, easy-to-use, secure, way of running Gen AI applications. And so the use cases that we've seen so far have been around co-piloting, around document search and analysis, around customer support, around enhanced fraud detection. We are seeing certainly continued traction. It's still early days for us, but across multiple verticals, healthcare, financial services, government. So early days for DPT adoption in the private cloud enterprise, but I think that's going to be a growing market for fine tuning, rack retrieval, augmented generation and for inferencing in terms of running these AI workloads close to the data in a private and secure way. Jim Fish: Makes sense. And Rukmini, I'm sure you're anticipating this question already, but I guess how much, as we think about that 2025 guide, how much incremental contribution are you expecting either from a growth dollar perspective, however you want to put it, between the VMware (NYSE:VMW) opportunity, the Cisco and Dell partnerships, versus the expansion within your existing install base that, if memory serves me right, should be accelerating a little bit in terms of the renewals that were grabbed this year? And is there a way to think about where ARR actually exits this year? Thanks, guys. Rukmini Sivaraman: Thank you, Jim, for that question. So in terms of contribution from the various buckets that you called out, Jim, so I'll give you some qualitative color on that. So we've talked about, in general, we are happy with our pipeline generation overall. We have talked about the growing pipeline and the fact that the pipeline from larger deals is growing faster. And that can lead to variability, with respect to timing or outcome or more complex deal structures and so on. And so some of those dynamics we expect to continue next year. Similarly, with just modestly elongated sales cycles across the board, not just large deals, but across the board. And we expect that to continue next year as well. In terms of the contribution from Cisco, we do expect the Cisco contribution to grow in fiscal year 2025 relative to last year. And we do expect a small initial contribution from a Dell XC Plus, which is the new offering that's generally available now. And we expect small initial contribution from that in 2025 and expect that to grow as well over time. And so all of that is taken into account when you think about the fiscal year 2025 top line guide that we provided, Jim. The other thing you alluded to is renewals. So yes, our renewals business continues to grow nicely year-over-year. So that's factored in there as well. And I think the last part of your question was around ARR. So -- we will, of course, continue to report ARR on a quarterly basis. And while we noted that the underperformed for fiscal year 2024 relative to our internal expectations, we're not providing guidance for ARR. Rajiv Ramaswami: Yes. The only thing I'll add to that, Rukmini, would be -- I think, Jim, you also had a question on the Broadcom opportunity. And like I said, that's largely using, but it's also very difficult to explicitly pass that out, because every one of our deals, historically, we've been -- we have been competing against VMware in the past and that continue. So there's some level of influence. I only -- these are the only reason why people come to us. It's a little hard for us to piece it out separately. Rukmini Sivaraman: Yes. Thank you, Rajiv. That attribution is certainly nuanced. So, we do expect it to continue to contribute some, but we wouldn't be overly precise on that. So, thank you, thank you, Rajiv, and Jim, for the question. Meta Marshall: Great. Thanks. Wanted to get a sense of maybe kind of circling back to the questions been asked a couple of times. Just in terms of -- do you feel like you've kind of figured out where Broadcom's line is where kind of the definition of your customer is or are you kind of refining where you think the most actionable opportunities are? Or are you still kind of in that discovery mode of figuring out what are the most actionable opportunities. And then Rukmini, I know Jim just asked about it, but just kind of any of the timing of renewals or co-terming just given that we've had some kind of early renewal dynamics and kind co-terming issues over the past couple of years, we should just be mindful of as we go into fiscal 2025? Thanks. Rajiv Ramaswami: Hi, Meta. I'll start and then Rukmini can answer the second part. Yes, independent of the Broadcom situation, as we look at our addressable market, historically, Nutanix has been quite strong in what I would call the smaller side of enterprises and the higher end of commercial mid-market. But over the last few years, we have deliberately made it further upmarket towards larger enterprises, because that's where we are underpenetrated and the biggest TAM opportunity sits. So we have realigned our segmentation over the past few years to focus more on that market. Now the products are ready. We have done a lot of work on the product side. The GTM side, now we're ready. We've got some good partnerships. Now we also clearly understand that when you get to the large customers, the G2K accounts, for example, or the Fortune 100-type accounts, those are going to be more competitive. And that's where clearly Broadcom is more focused on. And those engagements tend to be long, they tend to be bigger, but to very fruitful if and when we do win it. And as you can see here, we are starting to win some of those. We talked about an eight-figure ACV win last quarter. This quarter, we had a multimillion dollar ACV win. So those tend to take time, but are well worth it when they do happen. So we've got a focus there, for sure. The mid-market or the smaller side of the enterprises has been historically our sweet spot. And it's also less of a focus for Broadcom, given their explicit focus on the bigger accounts. It also tends to be less competitive and easier migrations as well. So that used to be our historical sweet spot, it continues to be a sweet spot. But the bigger opportunity for us is growth is also now sitting at the top end of the pyramid. Rukmini Sivaraman: And I'll take the question, Meta, on renewals and expectations for renewals in fiscal year 2025. So, first, I'd say, we did have in fiscal year 2024, just overall good performance in renewals. And I think to your point, it did include really good discipline from the team around economics for the renewals in terms of pricing. It did include some early and core term renewals. And as we said, for those are good in our mind as long as they come at good economics, because the customer is willing to renew with us and renew their commitment to us earlier and often give us the cash earlier as well. And then core terms, of course, the simplification of their real estate, right? So that's both the customer and us well in terms of managing their footprint. So we did have some of that. Now when we look at fiscal year 2025 are available to renew pool, you can think about it as effectively a pipeline for renewals continues to be -- continues to grow. It's a strong year-over-year growth. And it's roughly similar year-over-year growth to what we saw in fiscal year 2024. And then in terms of timing, I think perhaps your question was around seasonality of that, Meta. It does move around a little bit. But in general, our fiscal Q2 and Q4 tend to be sort of higher quarters for us; given Q2 has the calendar year-end and budget flush and things like that. And, of course, fiscal year Q4 is end of our fiscal year and there are incentives around that. So Q2 and Q4 started to have higher in general, available to the new pools relative to Q1 and Q3. But that's how we think about the renewal opportunity in fiscal year 2025. Operator: Thank you. And our next question comes from the line of Wamsi Mohan from Bank of America (NYSE:BAC). Your question please. Ruplu Bhattacharya: Hi. Thanks for taking the question. It's Ruplu filling in for Wamsi today. I have one for Rajiv and one for Rukmini. Rajiv, is the demand environment materially different from 90 days ago? And can you talk about the pricing environment? Specifically, I think you've said in the past that some customers may wait for their hardware to be depreciated. Is pricing a lever you can use to maybe drive faster share gains for example, can a smaller customer be induced more to go with Nutanix. And as a management team, how do you trade off share gain versus margins? And I have a follow-up for Rukmini. Rajiv Ramaswami: Yeah, those are all very good questions. At a top level, the demand environment has not changed, and it's been fairly stable. As we said over the last several quarters, we are seeing some of elongated sales cycles, people getting more approvals and more awareness of TCO before they make the purchasing decision. So that part has not changed. Now in terms of how we look at the opportunity. Now hardware refresh, as you can see, right, I mean when we do need a hardware fresh, that tends to be a significant factor in terms of customers' timing on a deal. Now the key things to keep in mind is that the hardware refresh is not just at one point in time, hardware refreshes happen depending on the size of the state at various points. And we can use those points to secure an insertion. It may not be a full insertion because hardware orders gets replaced over time and multiple cycle, so we may be able to insert for one workload where a portion of the hardware is getting replaced, say, this year and maybe other portions the hardware we get refreshed in two, three years from now. So that's normal engagement. Now have offered some promotions to customers in terms of providing them some overlapping windows where we can give them discounted licenses for a period of time. Now I will say that hardware costs tend to be quite significant. So it's not that we are able to necessarily subsidize hardware costs ourselves, okay? But sometimes we may be able to work with partners, hardware partners who are more interested in doing that themselves. So that can be a possibility as well when it comes to the hardware costs. And then, look, I think when it comes to landing new customers, especially significant ones, we are willing to be quite aggressive in terms of -- we already have aggressive promotions out there and the incentives for customers. And we will do what is needed within reasonable bounds to go win these deals, while at the same time protecting our margins. So that's probably a broad answer. I would say net-net, we are being aggressive wherever needed. We are working with hardware partners to see if we can mitigate some better fresh opportunities. And at the same time, keep in mind, Ruplu, we are also working to broaden the set of places where we can insert without requiring a hardware refresh, existing HDI environments, or the ability to reuse servers that customers may already invested in. And then over time, as we get our third-party storage support, we'll be able to do more -- even more of that. Ruplu Bhattacharya: Okay. Thank you, Rajiv for the detailed answer there. Rukmini, I wanted to ask you, your free cash flow guidance for fiscal 2025 is very strong, above the prior 2023 Investor Day guidance. How should we think about the cadence of that in the first half versus the second half of fiscal 2025? And then when we look at the remaining metrics, for example, revenue is now at the lower end of what you had thought, what you had guided in the Analyst Day, is it given that, is it reasonable for investors to expect that the outer year, say, fiscal 2027 expectations should also be lower? Or could there be a material acceleration over the next two years, given the dynamics of renewables and available to renew as well as new logos that you're winning? Rukmini Sivaraman: Hi, Ruplu. Thank you for that question. So first, I think your first question was around free cash flow. And so we are pleased with our free cash flow performance in fiscal year 2024 and happy to guide to free cash flow where we did, which, as you noted, the midpoint is above the high end of the range of what we had put out last year at our Investor Day. Now in terms of the quarterly cadence there, Ruplu, we don't, of course, guide quarterly to free cash flow so there can be some variation there, including, as pointed out in the last couple of quarters where -- because we collect cash for multiple years upfront, generally, meaningful deals, right, if there are larger deals that we collect cash for upfront or if it's a longer duration transaction, then that those can cost swings, Ruplu. So yes, so we don't guide to quarterly, but that's sort of the quality of color. I will say that when you think about -- the operating expense increase over time. We've talked about you can sort of see the implied OpEx growth year-over-year on our margin guide. And that would be more gradual over time, right, because we're going to invest in sales and marketing and in R&D -- and some of that will be over time. The OpEx does include, for example, all of the annualized run rate from investments in 2024, all those are annualized into 2025, plus it includes salary raises for our employees that became effective. So some of those are more run rate and others will be more gradual as we ramp into the -- into the spend over time. So that's the first part of your question. And I think the second part was more around the sort of medium- to longer-term financial targets that we put out at our last Investor Day. So while we don't plan on commenting on those medium-term financial targets on an interim basis, we are happy to note as you just said, Ruplu, that the fiscal year 2025 free cash flow guidance at the midpoint is above the range of what we have put out at Investor Day. And our initial fiscal year 2025 revenue guide is within the range that we have provided at that time. We continue to focus on driving durable top line growth and expanding free cash flow and operating margin and driving to operating sustainably at a rule of 40 plus over time. So that's sort of been our philosophy, and we continue to drive that philosophy, and we're not commenting specifically on those numbers at this point. Ruplu Bhattacharya: Okay. Thank you for all the details, and congrats on the results. Thank you. Rukmini Sivaraman: Thank you, Ruplu. Operator: Thank you. And our next question comes from the line of Jason Ader from William Blair. You question, please. Jason Ader: Yes. Thank you. One quick one is on the eight-figure deal that you announced last quarter. Did you recognize any revenue this quarter from that deal? And then what's the kind of schedule look like on rev rec for that particular transaction? Rukmini Sivaraman: Yes. Thank you, Jason. So, as we said, I think last quarter, we did collect the cash for that transaction, the entire sort of PCV value of that transaction. But all of the revenue recognition is over multiple years starting in fiscal year 2025. So no, we didn't -- I think there was a small professional services portion that began in Q4, Jason, but all the license revenue is in fiscal year 2025 and beyond. Jason Ader: Okay. Thank you. And then, Rajiv, for you, just I think a bunch of people have asked this question around the VMware displacement opportunity. But I wanted to kind of frame it like this, which is -- do you think you have a little bit of misalignment from a go-to-market standpoint right now just because you're moving up market over the last couple of years in terms of the types of customers that you're targeting, and yet it seems like most of the low-hanging fruit from VMware disruption is coming more in that low end of -- lower end of the market and kind of low end of the enterprise? Rajiv Ramaswami: So to be clear, Jason, I don't think we're misaligned, because we are targeting our GTM resources on where we see the maximum dollar opportunity lies, right? And the more of the dollar opportunity is sitting higher up in the pyramid, better which is the same reason by Broadcom is equally focused on those customers, right? So for us to grow, I mean, we already have -- we are well penetrated in the lower end of the market, and we will continue to -- we still have very much focused there, right? We haven't moved away from that. That's our sweet spot. That's our installed base, and that's where we can go in and capture more customers. We are talking about everything ranging from school districts to retailers, to those types of public sector. These are all types, very much a sweet spot. But the bigger SAM opportunities for us, certainly, sitting in the top of the pyramid, and so we have to, as a company, to be successful. We have to go after those, right? And we have the products, we have the GTM. Yes, we know those are going to be harder fought. But when we do win them, like you saw with the eight-figure opportunity that we won last quarter, those can be pretty significant. Jason Ader: Got you. But I thought the eight-figure one that you won last quarter was like a three-year so or 2.5 year sales cycle or something that wasn't really related to the Broadcom. Rajiv Ramaswami: Well, I think it's partly related to the Broadcom thing, very much so. I mean, like, again, it's hard to attribute everything 100% to Broadcom. Yes, we were engaged with them for two years, but a lot of the big customers at the very top of the pyramid are -- were very sensitive and aware as soon as the Broadcom deal was announced, they started thinking about what they're going to do. It didn't wait for the deal to close, unlike many of the smaller customers to see what was going to happen. So this customer -- we had certainly a unique value proposition and our use cases that they were driving the thinking and then the Broadcom piece, of course, was an added boost. So it's one of these things where it's hard to attribute how much of it was Broadcom, how much of it was something else? But that's a good example. Similarly, the example from this quarter's call also is very much the same, right? This Fortune 100 financial services customer very much driven by the Broadcom situation. Jason Ader: Great. Thank you. Operator: Thank you. And our next question comes from the line of Simon Leopold from Raymond James. Your question, please. Victor Chiu: Hi, guys. This is Victor Chiu in for Simon. I wanted to follow up on that last question kind of regarding customer migrations. Within VMware's footprint -- the 3-tier infrastructure customers that you described. Can you help us think about what percentage of those would be able to fairly easily adapt their existing application platforms to AHV and kind of what percentage for better or worse kind of married to VMware because of their dependency on some of the more advanced kind of virtualization functionalities on that? Rajiv Ramaswami: Yes. So that's a good question, Victor. I would say the vast majority of applications running on a VMware high provider on 3-tier can run very well on AHV and HCI environment. There are perhaps things at the edges, where it's not technical gaps, it's really more ecosystem certification gaps that might hinder some of them. There might be an application that's certified on ESX, but not certified on AHV. And over the last few years, we've built that out as well. So there are going to be some convocations that are not certified. But for the most part, we can address pretty much anything that is running on a 3-tier infrastructure on VMware and run that effectively on Nutanix HCI on AHV. But there's the other barriers we talked about, right, in terms of hardware refresh cycles and then the timing of the renewals. Those are some of the other things that we still have to factor in, but it's not a technical barrier. Victor Chiu: Okay. That's very helpful. And then maybe can you help us think about how the economics compare with Nutanix having an AHV, having a head of a hypervisor included in the platform, the economics, does that make the economic materially different? Or is it just kind of marginal difference in more of a capabilities kind of thing... Rajiv Ramaswami: Yes, I think -- so Victor on that again, so clearly, historically, this has been the case when a customer migrates from a 3-tier deployment over to Health tier deployment. They save a lot, right? They save 30%, 40%, at least in terms of TCO costs. If we factor in everything, including the hardware cost, the operating cost, all of it is a pretty substantial savings. And so that continues to be the case today, right? I think the battery, of course, is you've got -- you've invested in the hardware, you want to depreciate it before you actually go buy new hardware. But those savings and the value of HCI related to 3-tier is very established and that continues. Victor Chiu: And is the transition for an existing VMware HCI customer to Nutanix much easier? Rajiv Ramaswami: Much easier. Yes, this Fortune 100 win that we talked about was exactly that situation. The customer had a lot of competitive HCI offerings deployed. It was an easier migration because for them, they didn't have to change out their hardware. We could just replace the other software without software. Operator: Thank you. And our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your question, please. Unidentified Analyst: Hey, guys. This is Simran [ph] on for Matt Hedberg. Thanks for taking our question and congrats on the quarter. May just have one. Can you touch more on the linearity of large deals within the quarter? And did you see any deals being pushed out or pulled in this quarter? And then looking ahead, what early trends have you been seeing so far in August? And then maybe just general linearity for 2025, given some of the uncertainty of these large deal timing. Thanks. Rukmini Sivaraman: I'll take that, Rajiv, you should proceed to add in. So for linearity in Q4 I would say it was more or less as we expected. I think, your question specifically was on linearity with respect to large deals. And those we've talked about can be more unpredictable than other portions of the business is given they tend to be often more strategic, involved C-suite approvals, things like that. It can be more unpredictable. But overall, I would say linearity in Q4 was largely as expected. In terms of push out or pull in, I think at the next part of the question as we think about last Q4 coming into this year. Nothing unusual there, I would note. I think it was what we think would expect for that time of year. So nothing unusual there. And then again, on August linearity, the only thing to call out in Q1 is its US federal end of fiscal year in September, of course. But again, that's all factored into how we think about our guidance and ability to collect free cash flow and things like that. But as I said earlier, I think the overall linearity can become a little more unpredictable because of the mix of the large deals as that that grows over time, and it is something we're continuing to watch closely. Operator: Thank you. And our next question comes from the line of Mike Cikos from Needham. Your question please. Mike Cikos: Thank you for taking the question guys. I just wanted to ask, I know last quarter, the company gave some great color on the number of million dollar plus ACV opportunities in the pipeline, growing 30% year-on-year, growing more than 50% if we look at it on a dollar basis. Did these statistics still hold in Q4? And do we have a sizable enough cohort to start really understanding how much longer these sales cycles are for these deals? Rukmini Sivaraman: Hi, Mike. Yeah, good question. So we're not going to provide that metric necessarily quarterly, Mike. But as we said, I think we are happy overall with pipe creation and are seeing meaningful opportunities with those larger deal segments. So that continues to be good in terms of pipe creation. And I think your second question around do we have enough data points, it's still relatively early. The pipeline has grown nicely. But as we've talked about here, some of these larger deals can take a really long time, I would give one example where it was two years, another one this quarter where it was 1.5 years. And so it is variable and it can take long. And so I'd say, I don't think we have a lot of that data or enough data point's under our belt to draw too many conclusions from that. And that's what -- even the previous question here that was asked in terms of it is something we watch closely in terms of tracking those deals, but also thinking about do we have multiple ways to get to the number? If deals X and Y close or don't close, do we have other deals A&B that could get us there. So that's definitely a discussion that we have internally and factor that into our guidance. Mike Cikos: Got it. Thank you for that. And I guess just for a quick follow-up. I appreciate all the color on the assumptions here. Can you help us understand that call it, $30 million benefit to free cash flow we're expecting from the partner payments this year. Again, just because we're -- this is essentially the second back-to-back year we're now receiving this kind of payment. Is it the same quarter, any other color would be beneficial? Rukmini Sivaraman: Yes. Thank you, Mike, for that question because I think it's -- I would be happy to clarify that. So there are these nonrecurring payments from this partner, and there is a timing difference between OpEx and free cash flow. And so the commentary that we had provided was we had about a $44 million benefit in fiscal year 2024 over the course of the year to the R&D OpEx line in fiscal year 2024. And we expect that same $44 million benefit, right, it becomes more like $20 million to $25 million in fiscal year 2025. So that's the $20 million, $25 million headwind that I was referring to in OpEx, in 2025 relative to fiscal year 2024. So all of that is operating expense commentary. Now, when you look at free cash flow, there's a bit of a delay in when the cash comes in relative to that payment. So we got about $30 million of cash benefit from that in fiscal year 2024. We expect another $30 million in 2025, and then it would taper off, there may be a small portion in 2026, but it will then taper off as we end this fiscal year in 2025. And it's nonrecurring because we don't expect this to be an ongoing thing. It is continuing into this year, which we didn't fully anticipate about three months ago. But we do think that over time, it will taper off. Operator: Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

Nutanix, Inc. (NTNX) Q4 2024 Earnings Call Transcript

Rich Valera - Vice President, Investor Relations Rajiv Ramaswami - President & Chief Executive Officer Rukmini Sivaraman - Chief Financial Officer Thank you for standing by and welcome to Nutanix Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers; presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Rich Valera, Vice President of Investor Relations. Rich Valera Good afternoon and welcome to today's conference call to discuss Nutanix' fourth quarter and fiscal year 2024 financial results. Joining me today are Rajiv Ramaswami, Nutanix' President and CEO; and Rukmini Sivaraman, Nutanix's CFO. After we closed today, Nutanix issued a press release announcing fourth quarter and fiscal year 2024 financial results. If you'd like to read the release, please visit the Press Releases section of our IR website. During today's call, management will make forward-looking statements, including financial guidance. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a more detailed description of these and other risk certainties, please refer to our SEC filings including our most recent annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q, as well as our earnings press release issued today. These forward-looking statements apply as of today and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as predictions of future events. Please note, unless otherwise specifically referenced, all financial measures we use on today except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Nutanix will be participating in the Goldman Sachs Communacopia + Technology Conference in San Francisco on September 9th and the Piper Sandler Growth Frontiers Conference in Nashville on September 10th. We hope to see you at these events. Finally, our first quarter fiscal 2025 quiet period will begin on Friday, October 18th. And with that, I'll turn the call over to Rajiv. Rajiv? Rajiv Ramaswami Thank you, Rich and good afternoon everyone. Our fourth quarter was a solid finish to our 2024 fiscal year. We continue to see steady demand for our solutions, driven by businesses prioritizing infrastructure modernization initiatives, while looking to adopt hybrid multi-cloud operating models, and optimize their total cost of ownership. In the fourth quarter, we are happy to have exceeded all our guided metrics. We delivered quarterly revenue of $548 million, up 11% on year-over-year and saw another quarter of strong free cash flow generation. We also saw the highest number of new logos we've seen in three years, an encouraging sign of building traction with some of our go-to-market partnerships and initiatives. Our full year 2024 results demonstrated progress on a number of fronts. Financially, we delivered solid top line performance, driven by continued strong performance from our renewals business. We saw good growth in our pipeline of larger deals as we shifted our focus up-market and saw increased engagement from prospects, looking for alternatives to their existing infrastructure solutions. Even as our land and expand business underperformed related to our internal expectations due to the longer-than-expected sales cycles we see, we delivered revenue of $2.15 billion, up 15% year-over-year and ARR of $1.91 billion, up 22% year-over-year. Our bottom line performance was even stronger. We generated free cash flow of $598 million, almost three times higher than last year, resulting in a free cash flow margin of 28% and a Rule of 40 score of 43. In FY 2024, we also saw tangible progress on the partnership front with significant new or enhanced partnerships with Cisco, Dell and NVIDIA. And I'm pleased that Dell XC Plus, our new turnkey HCI-based appliance offering with Dell is now generally available. We see these partnerships is both expanding our addressable market and providing us with meaningful go-to-market leverage. Finally, we continue to innovate in FY 2024, with important new product releases and enhancements to our Nutanix cloud platform. These included the launch of GPT in-a-box, our solution for streamlining the adoption of generative AI by enterprises. We made meaningful progress towards our goal of becoming the best platform for modern applications, including launch of Nutanix Data Services for Kubernetes or NDK, which offers consistent data services across both virtual machines and container stats, as well as the recent release of Nutanix Kubernetes Platform or NKP, to simplify management of modern applications, on-premises and in any native public cloud service. Our most significant wins in the quarter demonstrated the appeal of Nutanix cloud platform to organizations that are looking to modernize their IT footprints and adopt hybrid cloud operating models, as well as those looking for alternatives in the wake of recent industry M&A. Our largest win in Q4 was a multimillion-dollar ACV deal with a North American-based Fortune 100 financial services company. Following a roughly 1.5 year engagement with us, they chose to replace their existing solution to Nutanix Cloud platform, including our AHV hypervisor as well as Nutanix cloud manager. This customer, who had been using a competing HCI solution in much of the footprint was able to utilize their existing hardware for Nutanix software deployment, obviating the need for a hardware refresh. We also had a number of significant wins that included our Nutanix Cloud Clusters or NC2 capability, which enables workloads to be seamlessly and efficiently run in both private and public clouds. One of these was with an existing customer, an EMEA-based provider of global research services. This customer was looking to accelerate the migration of their workloads to the public cloud, while ensuring the workloads once migrated, will run as efficiently and cost effectively as possible. Having already made a commitment to Microsoft Azure, they purchased licenses for Nutanix cloud platform through the Azure marketplace with the intent of utilizing its NC2 capability to shift their on-prem workloads to Azure. Another good example was a significant new customer win, with a top North American university. Most of our customers start with our platform on prem. However, this customer was motivated by their decision to migrate away from a competing platform they were using to run their virtual machine workloads at scale in the public cloud on AWS, due to dissatisfaction with recent changes at their existing supplier. They chose Nutanix cloud platform to migrate their applications running in the public cloud to our NC2 on AWS, while also adopting our cloud platform to run their on-prem workloads. We also plan on Nutanix cloud manager for consistent health service and automation across their private and public cloud state. A final notable example is a win with an Asia-based Global 2000 semiconductor provider. This full stack win, which is also a displacement of our primary competitor, enables the customer to streamline their operations, increase their level of automation, and reduce their dependence on more expensive proprietary storage solutions. It included adoption of Nutanix database service, or NDD to enable them to move off of their expensive commercial databases to open source databases managed by NDD. This customer also plans to adopt our unified storage solutions, replacing multiple third-party storage options. Finally, we also plan on utilizing NC2 on Azure to enable them to shift applications to the public cloud, including performing lift and shifts of IT workloads of acquired companies. We see these wins as reflecting the value customers see in our platform as they look for seamless and efficient application portability, while adopting hybrid multi-cloud operating models, as well as the value of our partnerships with Azure and AWS. In closing, I am pleased with our solid Q4 and fiscal 2024 results, and the progress we continue to make on multiple fronts, including our financial model, our partnerships and our ongoing innovation in our cloud platform towards our goal of becoming the leading platform for running applications and managing data anywhere. We also remain focused on capitalizing on what we view as a long-term opportunity to gain share in face of recent industry disruption and are encouraged by our early successes, including some of the wins I just highlighted. Finally, I would like to express my sincere gratitude to our investors, customers and partners for their trust in us and to our employees for their hard work that led to these results. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini? Rukmini Sivaraman Thank you, Rajiv, and thank you, everyone, for joining us. I will first discuss our Q4 fiscal 2024 and full fiscal year 2024 results, followed by our guidance for Q1 fiscal 2025 and for the full fiscal year 2025. Results in Q4 2024 came in above the high end of our range across all guided metrics. ACV billings in Q4 were $338 million, above the guided range of $295 million to $305 million, representing year-over-year growth of 21%. Revenue in Q4 was $548 million, higher than the guided range of $530 million to $540 million, representing a year-over-year growth of 11%. ARR at the end of Q4 was $1.908 billion, representing year-over-year growth of 22%. In Q4, we continue to see modestly elongated average sales cycles compared to historical levels. Average contract duration in Q4 was 3.1 years, 0.1 year higher than Q3. Non-GAAP gross margin in Q4 was 86.9%, higher than our guided range of 85% to 86%. Non-GAAP operating margin in to was 12.9% higher than our guided range of 9% to 10%, largely due to one, lower operating expenses as a result of higher-than-expected non-recurring payments related to one of our partnership agreements and a few other items; and two, slightly higher gross margin and revenue. Non-GAAP net income in Q4 was $76 million or fully diluted EPS of $0.27 per share based on fully diluted weighted average shares outstanding of approximately 285 million shares. DSOs based on revenue and ending accounts receivable were 39 days in Q4. Free cash flow in Q4 was $224 million, representing free cash flow margin of 41%. Free cash flow in Q4 benefited from the collection on the 8-figure ACV transaction that was booked in fiscal Q3. Moving to the balance sheet. We ended Q4 with cash, cash equivalence and short-term investments of $994 million, down from $1.651 billion at the end of Q3. The primary reason for the reduction in our cash balance was Bain Capital's conversion of the 2026 notes, which we announced in June. We settled the conversion in Q4 by paying $817.6 million in cash and delivering approximately 16.9 million shares of common stock. Please note that the entire conversion value had previously already been included in our fully diluted weighted average share count on an if-converted basis. The actual settlement included a portion settled in cash rather than exclusively in shares, resulting in the issuance of approximately 17 million shares, which is 12 million lower than the 29 million that we had previously included on an if-converted basis. Moving to capital allocation. We repurchased about $25 million worth of shares in Q4 and $131 million worth of shares in all of fiscal year 2024 under the share repurchase program previously authorized by our Board of Directors. Looking at our full year financial results, we exceeded the high end of all guided metrics for fiscal year 2024. ACV billings in fiscal year 2024 were $1.162 billion, higher than our guidance of $1.12 billion to $1.13 billion, and representing a year-over-year growth of 21%. A reminder that the annual ACV billings is slightly lower than the sum of the ACV billings from the four quarters due to adjustments for deals with duration of less than a year. Revenue in fiscal year 2024 was $2.149 billion, higher than our guidance of $2.13 billion to $2.14 billion and representing a year-over-year growth of 15%. We are pleased to have exceeded the $2 billion revenue threshold in fiscal year 2024. We ended fiscal year 2024 with an ARR of $1.908 billion, as mentioned earlier, a year-over-year growth of 22%. Net dollar-based retention rate, or NRR, at the end of fiscal year 2024 was 114%. As the fiscal year progressed, we saw a higher mix larger deals in our pipeline. These larger opportunities often involve strategic decisions and C-suite approvals causing them to take longer to close and to have greater variability in timing, outcome and deal structure. And as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels. Largely due to these dynamics, our fiscal year 2024 land and expand ACV and ARR performance were below our initial expectations at the beginning of the fiscal year, and we expect these dynamics to continue. Our renewals performance continues to be good through the fiscal year, and a reminder that renewals tend to be at a lower aggregate average contract duration compared to land and expand. Average contract duration in fiscal year 2024 was 2.95 years, flattish to fiscal year 2023 and slightly higher than expected, partly due to some larger deals with greater than average duration. Non-GAAP gross margin in fiscal year 2024 was 86.7%. Non-GAAP operating expenses in fiscal year 2024 were $1.515 billion, an increase of 7% year-over-year, as we began to make additional investments primarily in research and development and sales and marketing. Non-GAAP operating margin in fiscal year 2024 was 16%, representing an improvement of over 700 basis points year-over-year. We also delivered our first full year of positive GAAP operating income of $8 million in fiscal year 2024. Non-GAAP net income was $384 million, or diluted EPS of $1.31 per share based on fully diluted weighted average shares outstanding of approximately 294 million shares. Free cash flow in fiscal year 2024 was $598 million, higher than our guidance of $520 million to $540 million and almost 3 times higher than last year's free cash flow. Free cash flow margin in fiscal year 2024 was 28%, implying free cash flow margin expansion of 17 percentage points year-over-year. Free cash flow in fiscal year 2024 benefited from approximately $30 million in nonrecurring payments related to a partnership agreement, as previously referenced. Overall, fiscal year 2024 was a significant year, marking our first year with positive GAAP operating income, significant free cash flow generation of $598 million and free cash flow margin of 28%, while growing ARR at 22% and revenue at 15% year-over-year. We also delivered a Rule of 40 score defined as the sum of revenue growth and free cash flow margin of 43 for fiscal year 2024, an improvement of 14 percentage points year-over-year and 28 percentage points higher compared to two years ago. Moving to fiscal year 2025. The guidance for the full year is as follows; revenue of $2.435 billion to $2.465 billion, representing a year-over-year growth of 14% at the midpoint; non-GAAP operating margin of approximately 15.5% to 17%; free cash flow of $540 million to $600 million, representing a free cash flow margin of approximately 23% at the midpoint. I will now provide some commentary regarding our fiscal year 2025 guidance. First, as previously mentioned at our 2023 Investor Day, we are signing our metrics by not reporting or guiding ACV billings starting in fiscal year 2025. ACV billings was intended as a transitional metric during our subscription evolution, and we believe that now is the time to evolve away from that metric. We are also no longer guiding to GAAP gross margin which was previously useful as we navigated our business model changes, leading to significant improvements in non-GAAP gross margin. We will continue to guide to revenue, non-GAAP operating margin, and free cash flow on an annual basis and to guide to revenue and non-GAAP operating margin for the subsequent quarter. Second, and moving on to assumptions in our guidance, we are seeing continued and significant land-an-d expand opportunities and a growing pipeline for our solution. However, we continue to see a higher mix of larger deals in our pipeline, which is driving greater variability in our land and expand bookings. These larger opportunities often involve strategic decisions and C-suite approvals at the customer or prospect, causing them to take longer to close and to have greater variability in timing, outcome, and deal structure. And as we mentioned previously, we have continued to see a modest elongation of average sales cycles relative to historical levels, which we expect to continue. Third. The guidance assumes that renewals will continue to perform well in fiscal year 2025. Fourth. The full year guidance assume that average contract duration would be flat to slightly lower compared to fiscal year 2024, as renewals continue to grow as a percentage of our billing. Fifth. The non-GAAP operating margin guidance assumes incremental student investments in sales and marketing and R&D targeted towards addressing our large market opportunity. It also factors in the annualized run rate of the incremental investments we made in fiscal year 2024. It also assumes a $20 million to $25 million headwind in operating expenses relative to fiscal year 2024 from payments related one of our partnership agreement. Specifically, there was about $44 million of this benefit to the R&D operating expense line in fiscal year 2024, and we anticipate it be $20 million to $25 million in fiscal year 2025 And sixth. The free cash flow guidance reflects an approximately $30 million headwind relative to fiscal year 2024, from lower interest income as a result of our lower invested cash due to the cash payment on conversion of FY 2026 convertible notes. We expect free cash flow in fiscal year 2025 to also benefit from the approximately $30 million in nonrecurring payments related to a partnership agreement, similar to the benefit we saw in fiscal year 2024. It is expected to tail off towards the end of fiscal year 2025. Moving to Q1 2025. Our guidance for Q1 is as follows; revenue of $565 million to $575 million, non-GAAP operating margin of 14.5% to 15.5%. Fully diluted weighted average shares outstanding of approximately 287 million shares. In closing, we are pleased that Q4 and fiscal year 2024 performance exceeded guidance across all metrics. We are excited about the long-term market opportunity and Nutanix's ability to deliver compelling outcomes for customers and prospects. We remain committed to continued progress aligned with our stated philosophy of sustainable, profitable growth both through durable top line growth and expanding margins. With that, operator, please open the line for questions. Operator: Certainly. [Operator Instructions] Our first question comes from the line of George Wang from Barclays. Your question please. Q - George Wang Yeah, thanks for taking my question. Firstly, just curious if you have any update on the Broadcom churn, especially in the last couple of quarters, you just talked about that after the initial wave of strong engagement, the activity slowed just because of Broadcom working back some of the initial initiatives to be now more in favor of retaining some of the priority customers. Just curious if the dynamic has changed. Rajiv Ramaswami Hi, George. Rajiv here. Yeah, we are -- it's largely an unchanged multiyear opportunity to gain share, like we said last quarter, while the sales side has been a bit longer than we had initially anticipated. Thus far, we haven't really seen any meaningful changes in our win or loss rates on these opportunities. As we talked about in our prepared remarks, we are seeing some of these larger opportunities close. We gave you a few examples in the prepared remarks. And I do expect that we'll continue to see more of these over time. Now in the midsize and smaller customer segments, we're seeing significant increased engagement and opportunity as many of these smaller companies look for alternatives and generally less competitive engagements related to the larger customer opportunities. Along with our increased leverage from our go-to-market partnerships that we've talked about as well as our programs and incentives that we have in place, this dynamic has also been one of our drivers for our larger -- our stronger new logo performance. George Wang Okay. Okay, great. Just if I can squeeze in quickly, it's nice to see one customer in financial services, you guys mentioned without changing the underlying hardware, previously, the gating factor - one of the gating factor has been so the upgrading the underlying hardware to wait for the hardware refresh. I guess, can you talk about sort of a better path going forward kind of now seems especially after Dell partnership, maybe you're kind of removing some of the constraints related to the underlying hardware refresh -- maybe you can give a little bit more color on that. Rajiv Ramaswami No, that's a very good question, George. I think if you look at the installed base out there in data centers, a vast majority of it, I don't have the exact number, but roughly around 80% of it is what we call 3-tier infrastructure. Separate storage, compute and networking. And as you know, we have a HCI solution today in the market. And if we want to replace the 3 tier with HCI, it's a better architecture, more cost-effective long-term, but it does require a hardware refresh. Now the remaining 20% is HCI, of which we are a market leader and our competition has some of the rest. Now in this particular case, an example that we talked about, the customer was already on HCI with a competing product. And when you're already on HCI, we've been quite successful having our software to be able to run on existing hardware because it's already a HCI hardware. And that's what happened in this particular account. And so for that subset or customers that are already on HCI, the migration path is easier in some subset of those cases, we don't need a hardware refreshes. That's what happened here. On the 3-tier, it does require a hardware refresh. Now we're also addressing the 3-tier market, to your point, one aspect of our partnership with Dell is that we said we would -- they would be the first that we would support at external storage, Dell PowerFlex. And now the whole idea of doing that is now we can find an easier insertion into feature deployments without having to change out the hardware. Now that solution is not available in the market today. It's only going to be available sometime next year. And over time, we anticipate being able to offer that support to a broader set of third-party storage ways. Thank you. And our next question comes from the line of Jim Fish from Piper Sandler. Your question, please. Jim Fish Hey, guys. Thanks for the questions here. Rajiv, do you want to ask around essentially -- you alluded to a little bit of GPT in-a-box here. I don't think we've got a conference call anymore without talking about AI, but are you seeing any sort of trend of repatriation of workloads back to private cloud or just a core workload as well as for AI, I guess, any update on the GPT-in-a-Box? Rajiv Ramaswami Yes. So Jim, good question. I'll give you a two-point answer to that. First, in general purpose work clouds and then second on GPT. For general purpose workloads to your point, for steady-state workloads, I think people are getting to the conclusion that it's much more cost effective to run those on-prem in a private cloud environment. We've seen some repatriation. We've also seen much more deliberation in terms of whether that workload goes to the public cloud in the first place, because a lot of the deployment is still on-prem of enterprise workloads. So we're certainly seeing the trend and realization of customers to say, the steady-state workloads, we can run them more cost effectively in private clouds. Now on GPT specifically, I think a lot of visual interest in Gen AI has been in creation and training of LLMs, large language models, and a lot of that is being done in the public cloud and massive GPU farms. And we don't have -- we don't play there fully. But on the other hand, we think the bulk of the enterprise opportunity in terms of how companies are actually going to use it, is potentially going to be on-prem because at the end of the day, the Gen AI workloads, applications have we run wherever the customer data is. And in a lot of cases, sensitive customer data is either inside data centers or at the edges, and so a platform like our GPT-in-a-Box provides a very simple, easy-to-use, secure, way of running Gen AI applications. And so the use cases that we've seen so far have been around co-piloting, around document search and analysis, around customer support, around enhanced fraud detection. We are seeing certainly continued traction. It's still early days for us, but across multiple verticals, healthcare, financial services, government. So early days for DPT adoption in the private cloud enterprise, but I think that's going to be a growing market for fine tuning, rack retrieval, augmented generation and for inferencing in terms of running these AI workloads close to the data in a private and secure way. Jim Fish Makes sense. And Rukmini, I'm sure you're anticipating this question already, but I guess how much, as we think about that 2025 guide, how much incremental contribution are you expecting either from a growth dollar perspective, however you want to put it, between the VMware opportunity, the Cisco and Dell partnerships, versus the expansion within your existing install base that, if memory serves me right, should be accelerating a little bit in terms of the renewals that were grabbed this year? And is there a way to think about where ARR actually exits this year? Thanks, guys. Rukmini Sivaraman Thank you, Jim, for that question. So in terms of contribution from the various buckets that you called out, Jim, so I'll give you some qualitative color on that. So we've talked about, in general, we are happy with our pipeline generation overall. We have talked about the growing pipeline and the fact that the pipeline from larger deals is growing faster. And that can lead to variability, with respect to timing or outcome or more complex deal structures and so on. And so some of those dynamics we expect to continue next year. Similarly, with just modestly elongated sales cycles across the board, not just large deals, but across the board. And we expect that to continue next year as well. In terms of the contribution from Cisco, we do expect the Cisco contribution to grow in fiscal year 2025 relative to last year. And we do expect a small initial contribution from a Dell XC Plus, which is the new offering that's generally available now. And we expect small initial contribution from that in 2025 and expect that to grow as well over time. And so all of that is taken into account when you think about the fiscal year 2025 top line guide that we provided, Jim. The other thing you alluded to is renewals. So yes, our renewals business continues to grow nicely year-over-year. So that's factored in there as well. And I think the last part of your question was around ARR. So -- we will, of course, continue to report ARR on a quarterly basis. And while we noted that the underperformed for fiscal year 2024 relative to our internal expectations, we're not providing guidance for ARR. Rajiv Ramaswami Yes. The only thing I'll add to that, Rukmini, would be -- I think, Jim, you also had a question on the Broadcom opportunity. And like I said, that's largely using, but it's also very difficult to explicitly pass that out, because every one of our deals, historically, we've been -- we have been competing against VMware in the past and that continue. So there's some level of influence. I only -- these are the only reason why people come to us. It's a little hard for us to piece it out separately. Rukmini Sivaraman Yes. Thank you, Rajiv. That attribution is certainly nuanced. So, we do expect it to continue to contribute some, but we wouldn't be overly precise on that. So, thank you, thank you, Rajiv, and Jim, for the question. Thank you. And our next question comes from the line of Meta Marshall from Morgan Stanley. Your question, please. Meta Marshall Great. Thanks. Wanted to get a sense of maybe kind of circling back to the questions been asked a couple of times. Just in terms of -- do you feel like you've kind of figured out where Broadcom's line is where kind of the definition of your customer is or are you kind of refining where you think the most actionable opportunities are? Or are you still kind of in that discovery mode of figuring out what are the most actionable opportunities. And then Rukmini, I know Jim just asked about it, but just kind of any of the timing of renewals or co-terming just given that we've had some kind of early renewal dynamics and kind co-terming issues over the past couple of years, we should just be mindful of as we go into fiscal 2025? Thanks. Rajiv Ramaswami Hi, Meta. I'll start and then Rukmini can answer the second part. Yes, independent of the Broadcom situation, as we look at our addressable market, historically, Nutanix has been quite strong in what I would call the smaller side of enterprises and the higher end of commercial mid-market. But over the last few years, we have deliberately made it further upmarket towards larger enterprises, because that's where we are underpenetrated and the biggest TAM opportunity sits. So we have realigned our segmentation over the past few years to focus more on that market. Now the products are ready. We have done a lot of work on the product side. The GTM side, now we're ready. We've got some good partnerships. Now we also clearly understand that when you get to the large customers, the G2K accounts, for example, or the Fortune 100-type accounts, those are going to be more competitive. And that's where clearly Broadcom is more focused on. And those engagements tend to be long, they tend to be bigger, but to very fruitful if and when we do win it. And as you can see here, we are starting to win some of those. We talked about an eight-figure ACV win last quarter. This quarter, we had a multimillion dollar ACV win. So those tend to take time, but are well worth it when they do happen. So we've got a focus there, for sure. The mid-market or the smaller side of the enterprises has been historically our sweet spot. And it's also less of a focus for Broadcom, given their explicit focus on the bigger accounts. It also tends to be less competitive and easier migrations as well. So that used to be our historical sweet spot, it continues to be a sweet spot. But the bigger opportunity for us is growth is also now sitting at the top end of the pyramid. Rukmini Sivaraman And I'll take the question, Meta, on renewals and expectations for renewals in fiscal year 2025. So, first, I'd say, we did have in fiscal year 2024, just overall good performance in renewals. And I think to your point, it did include really good discipline from the team around economics for the renewals in terms of pricing. It did include some early and core term renewals. And as we said, for those are good in our mind as long as they come at good economics, because the customer is willing to renew with us and renew their commitment to us earlier and often give us the cash earlier as well. And then core terms, of course, the simplification of their real estate, right? So that's both the customer and us well in terms of managing their footprint. So we did have some of that. Now when we look at fiscal year 2025 are available to renew pool, you can think about it as effectively a pipeline for renewals continues to be -- continues to grow. It's a strong year-over-year growth. And it's roughly similar year-over-year growth to what we saw in fiscal year 2024. And then in terms of timing, I think perhaps your question was around seasonality of that, Meta. It does move around a little bit. But in general, our fiscal Q2 and Q4 tend to be sort of higher quarters for us; given Q2 has the calendar year-end and budget flush and things like that. And, of course, fiscal year Q4 is end of our fiscal year and there are incentives around that. So Q2 and Q4 started to have higher in general, available to the new pools relative to Q1 and Q3. But that's how we think about the renewal opportunity in fiscal year 2025. Thank you. And our next question comes from the line of Wamsi Mohan from Bank of America. Your question please. Ruplu Bhattacharya Hi. Thanks for taking the question. It's Ruplu filling in for Wamsi today. I have one for Rajiv and one for Rukmini. Rajiv, is the demand environment materially different from 90 days ago? And can you talk about the pricing environment? Specifically, I think you've said in the past that some customers may wait for their hardware to be depreciated. Is pricing a lever you can use to maybe drive faster share gains for example, can a smaller customer be induced more to go with Nutanix. And as a management team, how do you trade off share gain versus margins? And I have a follow-up for Rukmini. Rajiv Ramaswami Yeah, those are all very good questions. At a top level, the demand environment has not changed, and it's been fairly stable. As we said over the last several quarters, we are seeing some of elongated sales cycles, people getting more approvals and more awareness of TCO before they make the purchasing decision. So that part has not changed. Now in terms of how we look at the opportunity. Now hardware refresh, as you can see, right, I mean when we do need a hardware fresh, that tends to be a significant factor in terms of customers' timing on a deal. Now the key things to keep in mind is that the hardware refresh is not just at one point in time, hardware refreshes happen depending on the size of the state at various points. And we can use those points to secure an insertion. It may not be a full insertion because hardware orders gets replaced over time and multiple cycle, so we may be able to insert for one workload where a portion of the hardware is getting replaced, say, this year and maybe other portions the hardware we get refreshed in two, three years from now. So that's normal engagement. Now have offered some promotions to customers in terms of providing them some overlapping windows where we can give them discounted licenses for a period of time. Now I will say that hardware costs tend to be quite significant. So it's not that we are able to necessarily subsidize hardware costs ourselves, okay? But sometimes we may be able to work with partners, hardware partners who are more interested in doing that themselves. So that can be a possibility as well when it comes to the hardware costs. And then, look, I think when it comes to landing new customers, especially significant ones, we are willing to be quite aggressive in terms of -- we already have aggressive promotions out there and the incentives for customers. And we will do what is needed within reasonable bounds to go win these deals, while at the same time protecting our margins. So that's probably a broad answer. I would say net-net, we are being aggressive wherever needed. We are working with hardware partners to see if we can mitigate some better fresh opportunities. And at the same time, keep in mind, Ruplu, we are also working to broaden the set of places where we can insert without requiring a hardware refresh, existing HDI environments, or the ability to reuse servers that customers may already invested in. And then over time, as we get our third-party storage support, we'll be able to do more -- even more of that. Ruplu Bhattacharya Okay. Thank you, Rajiv for the detailed answer there. Rukmini, I wanted to ask you, your free cash flow guidance for fiscal 2025 is very strong, above the prior 2023 Investor Day guidance. How should we think about the cadence of that in the first half versus the second half of fiscal 2025? And then when we look at the remaining metrics, for example, revenue is now at the lower end of what you had thought, what you had guided in the Analyst Day, is it given that, is it reasonable for investors to expect that the outer year, say, fiscal 2027 expectations should also be lower? Or could there be a material acceleration over the next two years, given the dynamics of renewables and available to renew as well as new logos that you're winning? Rukmini Sivaraman Hi, Ruplu. Thank you for that question. So first, I think your first question was around free cash flow. And so we are pleased with our free cash flow performance in fiscal year 2024 and happy to guide to free cash flow where we did, which, as you noted, the midpoint is above the high end of the range of what we had put out last year at our Investor Day. Now in terms of the quarterly cadence there, Ruplu, we don't, of course, guide quarterly to free cash flow so there can be some variation there, including, as pointed out in the last couple of quarters where -- because we collect cash for multiple years upfront, generally, meaningful deals, right, if there are larger deals that we collect cash for upfront or if it's a longer duration transaction, then that those can cost swings, Ruplu. So yes, so we don't guide to quarterly, but that's sort of the quality of color. I will say that when you think about -- the operating expense increase over time. We've talked about you can sort of see the implied OpEx growth year-over-year on our margin guide. And that would be more gradual over time, right, because we're going to invest in sales and marketing and in R&D -- and some of that will be over time. The OpEx does include, for example, all of the annualized run rate from investments in 2024, all those are annualized into 2025, plus it includes salary raises for our employees that became effective. So some of those are more run rate and others will be more gradual as we ramp into the -- into the spend over time. So that's the first part of your question. And I think the second part was more around the sort of medium- to longer-term financial targets that we put out at our last Investor Day. So while we don't plan on commenting on those medium-term financial targets on an interim basis, we are happy to note as you just said, Ruplu, that the fiscal year 2025 free cash flow guidance at the midpoint is above the range of what we have put out at Investor Day. And our initial fiscal year 2025 revenue guide is within the range that we have provided at that time. We continue to focus on driving durable top line growth and expanding free cash flow and operating margin and driving to operating sustainably at a rule of 40 plus over time. So that's sort of been our philosophy, and we continue to drive that philosophy, and we're not commenting specifically on those numbers at this point. Ruplu Bhattacharya Okay. Thank you for all the details, and congrats on the results. Thank you. Thank you. And our next question comes from the line of Jason Ader from William Blair. You question, please. Jason Ader Yes. Thank you. One quick one is on the eight-figure deal that you announced last quarter. Did you recognize any revenue this quarter from that deal? And then what's the kind of schedule look like on rev rec for that particular transaction? Rukmini Sivaraman Yes. Thank you, Jason. So, as we said, I think last quarter, we did collect the cash for that transaction, the entire sort of PCV value of that transaction. But all of the revenue recognition is over multiple years starting in fiscal year 2025. So no, we didn't -- I think there was a small professional services portion that began in Q4, Jason, but all the license revenue is in fiscal year 2025 and beyond. Jason Ader Okay. Thank you. And then, Rajiv, for you, just I think a bunch of people have asked this question around the VMware displacement opportunity. But I wanted to kind of frame it like this, which is -- do you think you have a little bit of misalignment from a go-to-market standpoint right now just because you're moving up market over the last couple of years in terms of the types of customers that you're targeting, and yet it seems like most of the low-hanging fruit from VMware disruption is coming more in that low end of -- lower end of the market and kind of low end of the enterprise? Rajiv Ramaswami So to be clear, Jason, I don't think we're misaligned, because we are targeting our GTM resources on where we see the maximum dollar opportunity lies, right? And the more of the dollar opportunity is sitting higher up in the pyramid, better which is the same reason by Broadcom is equally focused on those customers, right? So for us to grow, I mean, we already have -- we are well penetrated in the lower end of the market, and we will continue to -- we still have very much focused there, right? We haven't moved away from that. That's our sweet spot. That's our installed base, and that's where we can go in and capture more customers. We are talking about everything ranging from school districts to retailers, to those types of public sector. These are all types, very much a sweet spot. But the bigger SAM opportunities for us, certainly, sitting in the top of the pyramid, and so we have to, as a company, to be successful. We have to go after those, right? And we have the products, we have the GTM. Yes, we know those are going to be harder fought. But when we do win them, like you saw with the eight-figure opportunity that we won last quarter, those can be pretty significant. Jason Ader Got you. But I thought the eight-figure one that you won last quarter was like a three-year so or 2.5 year sales cycle or something that wasn't really related to the Broadcom. Rajiv Ramaswami Well, I think it's partly related to the Broadcom thing, very much so. I mean, like, again, it's hard to attribute everything 100% to Broadcom. Yes, we were engaged with them for two years, but a lot of the big customers at the very top of the pyramid are -- were very sensitive and aware as soon as the Broadcom deal was announced, they started thinking about what they're going to do. It didn't wait for the deal to close, unlike many of the smaller customers to see what was going to happen. So this customer -- we had certainly a unique value proposition and our use cases that they were driving the thinking and then the Broadcom piece, of course, was an added boost. So it's one of these things where it's hard to attribute how much of it was Broadcom, how much of it was something else? But that's a good example. Similarly, the example from this quarter's call also is very much the same, right? This Fortune 100 financial services customer very much driven by the Broadcom situation. Thank you. And our next question comes from the line of Simon Leopold from Raymond James. Your question, please. Victor Chiu Hi, guys. This is Victor Chiu in for Simon. I wanted to follow up on that last question kind of regarding customer migrations. Within VMware's footprint -- the 3-tier infrastructure customers that you described. Can you help us think about what percentage of those would be able to fairly easily adapt their existing application platforms to AHV and kind of what percentage for better or worse kind of married to VMware because of their dependency on some of the more advanced kind of virtualization functionalities on that? Rajiv Ramaswami Yes. So that's a good question, Victor. I would say the vast majority of applications running on a VMware high provider on 3-tier can run very well on AHV and HCI environment. There are perhaps things at the edges, where it's not technical gaps, it's really more ecosystem certification gaps that might hinder some of them. There might be an application that's certified on ESX, but not certified on AHV. And over the last few years, we've built that out as well. So there are going to be some convocations that are not certified. But for the most part, we can address pretty much anything that is running on a 3-tier infrastructure on VMware and run that effectively on Nutanix HCI on AHV. But there's the other barriers we talked about, right, in terms of hardware refresh cycles and then the timing of the renewals. Those are some of the other things that we still have to factor in, but it's not a technical barrier. Victor Chiu Okay. That's very helpful. And then maybe can you help us think about how the economics compare with Nutanix having an AHV, having a head of a hypervisor included in the platform, the economics, does that make the economic materially different? Or is it just kind of marginal difference in more of a capabilities kind of thing... Rajiv Ramaswami Yes, I think -- so Victor on that again, so clearly, historically, this has been the case when a customer migrates from a 3-tier deployment over to Health tier deployment. They save a lot, right? They save 30%, 40%, at least in terms of TCO costs. If we factor in everything, including the hardware cost, the operating cost, all of it is a pretty substantial savings. And so that continues to be the case today, right? I think the battery, of course, is you've got -- you've invested in the hardware, you want to depreciate it before you actually go buy new hardware. But those savings and the value of HCI related to 3-tier is very established and that continues. Victor Chiu And is the transition for an existing VMware HCI customer to Nutanix much easier? Rajiv Ramaswami Much easier. Yes, this Fortune 100 win that we talked about was exactly that situation. The customer had a lot of competitive HCI offerings deployed. It was an easier migration because for them, they didn't have to change out their hardware. We could just replace the other software without software. Thank you. And our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your question, please. Unidentified Analyst Hey, guys. This is Simran [ph] on for Matt Hedberg. Thanks for taking our question and congrats on the quarter. May just have one. Can you touch more on the linearity of large deals within the quarter? And did you see any deals being pushed out or pulled in this quarter? And then looking ahead, what early trends have you been seeing so far in August? And then maybe just general linearity for 2025, given some of the uncertainty of these large deal timing. Thanks. Rukmini Sivaraman I'll take that, Rajiv, you should proceed to add in. So for linearity in Q4 I would say it was more or less as we expected. I think, your question specifically was on linearity with respect to large deals. And those we've talked about can be more unpredictable than other portions of the business is given they tend to be often more strategic, involved C-suite approvals, things like that. It can be more unpredictable. But overall, I would say linearity in Q4 was largely as expected. In terms of push out or pull in, I think at the next part of the question as we think about last Q4 coming into this year. Nothing unusual there, I would note. I think it was what we think would expect for that time of year. So nothing unusual there. And then again, on August linearity, the only thing to call out in Q1 is its US federal end of fiscal year in September, of course. But again, that's all factored into how we think about our guidance and ability to collect free cash flow and things like that. But as I said earlier, I think the overall linearity can become a little more unpredictable because of the mix of the large deals as that that grows over time, and it is something we're continuing to watch closely. Thank you. And our next question comes from the line of Mike Cikos from Needham. Your question please. Mike Cikos Thank you for taking the question guys. I just wanted to ask, I know last quarter, the company gave some great color on the number of million dollar plus ACV opportunities in the pipeline, growing 30% year-on-year, growing more than 50% if we look at it on a dollar basis. Did these statistics still hold in Q4? And do we have a sizable enough cohort to start really understanding how much longer these sales cycles are for these deals? Rukmini Sivaraman Hi, Mike. Yeah, good question. So we're not going to provide that metric necessarily quarterly, Mike. But as we said, I think we are happy overall with pipe creation and are seeing meaningful opportunities with those larger deal segments. So that continues to be good in terms of pipe creation. And I think your second question around do we have enough data points, it's still relatively early. The pipeline has grown nicely. But as we've talked about here, some of these larger deals can take a really long time, I would give one example where it was two years, another one this quarter where it was 1.5 years. And so it is variable and it can take long. And so I'd say, I don't think we have a lot of that data or enough data point's under our belt to draw too many conclusions from that. And that's what -- even the previous question here that was asked in terms of it is something we watch closely in terms of tracking those deals, but also thinking about do we have multiple ways to get to the number? If deals X and Y close or don't close, do we have other deals A&B that could get us there. So that's definitely a discussion that we have internally and factor that into our guidance. Mike Cikos Got it. Thank you for that. And I guess just for a quick follow-up. I appreciate all the color on the assumptions here. Can you help us understand that call it, $30 million benefit to free cash flow we're expecting from the partner payments this year. Again, just because we're -- this is essentially the second back-to-back year we're now receiving this kind of payment. Is it the same quarter, any other color would be beneficial? Rukmini Sivaraman Yes. Thank you, Mike, for that question because I think it's -- I would be happy to clarify that. So there are these nonrecurring payments from this partner, and there is a timing difference between OpEx and free cash flow. And so the commentary that we had provided was we had about a $44 million benefit in fiscal year 2024 over the course of the year to the R&D OpEx line in fiscal year 2024. And we expect that same $44 million benefit, right, it becomes more like $20 million to $25 million in fiscal year 2025. So that's the $20 million, $25 million headwind that I was referring to in OpEx, in 2025 relative to fiscal year 2024. So all of that is operating expense commentary. Now, when you look at free cash flow, there's a bit of a delay in when the cash comes in relative to that payment. So we got about $30 million of cash benefit from that in fiscal year 2024. We expect another $30 million in 2025, and then it would taper off, there may be a small portion in 2026, but it will then taper off as we end this fiscal year in 2025. And it's nonrecurring because we don't expect this to be an ongoing thing. It is continuing into this year, which we didn't fully anticipate about three months ago. But we do think that over time, it will taper off. Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

NetApp, Inc. (NTAP) Q1 2025 Earnings Call Transcript

Krish Sankar - TD Cowen Samik Chatterjee - JPMorgan Steven Fox - Fox Advisors Amit Daryanani - Evercore Mehdi Hosseini - SIG Ananda Baruah - Loop Capital Wamsi Mohan - Bank of America Good day, and welcome to the NetApp First Quarter Fiscal Year 2025 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kris Newton, Vice President, Investor Relations. Please go ahead. Kris Newton Hi, everyone. Thanks for joining us. With me today are our CEO, George Kurian; and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at netapp.com. During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, including, without limitation, our guidance for the second quarter and fiscal year 2025; our expectations regarding future revenue, profitability and shareholder returns; and other growth initiatives and strategies. These statements are subject to various risks and uncertainties, which may cause our actual results to differ materially. For more information, please refer to the documents we file from time-to-time with the SEC and on our website, including our most recent Form 10-K and Form 10-Q. We disclaim any obligation to update our forward-looking statements and projections. During the call, all financial measures presented will be non-GAAP, unless otherwise indicated. Reconciliations of GAAP to non-GAAP estimates are available on our website. Thank you, Kris. Welcome everyone. We started FY25 strong, building on our momentum exiting last fiscal year. In Q1, we delivered 8% year-over-year revenue growth and set records for first quarter operating margin and EPS. These results are a testament to our strong execution in a continued uncertain macroeconomic environment, our unwavering confidence in the customer benefits of the highly differentiated NetApp intelligent data infrastructure platform, and our disciplined management of the business. As a result, we are raising our FY25 outlook for both revenue and profit. As we said during our recent investor day, we are focused on our uniquely differentiated solutions in flash, block, cloud storage, and AI. They address markets which are bolstered by both secular and company-specific tailwinds and represent our biggest opportunities to fuel revenue growth and increase market share. In Q1, we experienced notable momentum across all these areas, evidence that our value proposition is resonating. This focus, coupled with our dedication to innovation, drives my confidence in our continued success. Customers choose NetApp because we help them address their most important data challenges, leveraging the power of public and hybrid clouds to rapidly deploy new applications, unify their data for AI, simplify cloud integration, and strengthen data protection. We uniquely deliver a comprehensive and integrated storage and data management platform, giving our customers the power to unify all their data for any application, anywhere, and the ability to seamlessly and consistently manage it, while ensuring data remains secure and protected. We again delivered robust year-over-year performance in our Hybrid Cloud segment, with revenue growth of 8% and product revenue growth of 13%, driven by strength in all-flash storage. Broad-based demand across our all-flash storage portfolio propelled our all-flash array annualized revenue run rate to $3.4 billion, up 21% year-over-year. At the start of Q1, we introduced the new AFF A-series family of high-performance all-flash arrays capable of powering the most demanding environments from today's mission critical applications to tomorrow's GenAI workloads. Delivering the advanced data management, industry-leading ransomware protection, and cloud integration that modern workloads require, the new AFF A-series saw positive customer reception and performed ahead of our expectations. Both our capacity flash and block optimized all flash array families exhibited strong growth year-over-year, addressing an expanded TAM and driving share gains. In Q1, we had numerous competitive take-outs across a broad set of workloads and vertical markets as customers leveraged our C-series and ASA products to modernize their legacy infrastructures and deploy new applications like artificial intelligence. The ASA enabled us to capture a new-to-NetApp customer, displacing a legacy block storage competitor at a European-based manufacturer. The compelling price performance of the ASA, together with its modern architecture and comprehensive software capabilities, helped the customer realize savings as they refreshed their SAN environment. This is the first step in a larger relationship as the customer plans to purchase additional ASA systems to replace the remaining competitor footprint and evaluate our Public Cloud services Keystone, our Storage-as-a-Service offering was again a highlight this quarter, with revenue growing over 60% from Q1 a year ago. Keystone gives customers the operational agility and reduced financial risk they need to manage in a dynamic environment. A good example of this is a leading automotive supplier that chose Keystone to help address rapidly changing storage demands created by ongoing transformation of the automotive market. Keystone gives them the flexibility to manage rapid growth but also the ability to shrink based on changing circumstance. AI is the cornerstone of many of my customer conversations, reinforcing NetApp's position as a proven data infrastructure platform provider and thought leader in this space. Customers are selecting NetApp as their partner at every stage of the AI lifecycle because of our high-performance all-flash storage, unique cloud integration, and extensive data management capabilities. These capabilities support a wide range of needs, from data preparation, model training and tuning, to retrieval-augmented generation (RAG) and inferencing and address the requirements for responsible AI, including model and data versioning, as well as data governance and privacy. While we believe the large opportunity for enterprise AI is still ahead of us, we are seeing good momentum today, with our AI business performing well ahead of our expectations. In Q1, we had over 50 AI and data lake modernization wins. I'll give you just a couple of examples. We were selected by another of the world's largest oil and gas companies for their AI and high-performance compute workloads. Our all-flash storage will power the customer's AI environment, servicing more than 40,000 CPU cores and GPU's which run simulations and 3D virtualization workloads. Additionally, we made it practical for a leading financial services institution to consolidate petabytes of data into a single data lake for AI and analytics workloads including fraud detection, credit scoring, and portfolio management and improving the productivity of their data scientists. Both instances are examples of how our deep understanding of and experience in AI workloads together with our intelligent data infrastructure platform help drive customer preference for NetApp infrastructure to service their growing AI requirements. We continue to advance our strong position with the development of GenAI cloud and on-premises solutions in partnership with industry leaders. In Q1, in partnership with Lenovo, we announced a full-stack OVX system, optimized for GenAI and designed to support RAG. Additionally, we introduced new capabilities designed for cloud AI workloads. We integrated the NetApp GenAI toolkit with Microsoft Azure NetApp Files, giving customers the ability to generate unique, high-quality, and ultra-relevant results from GenAI projects by combining their proprietary data with pre-trained, foundational models. In conjunction with AWS, we released a reference architecture for Amazon Bedrock to help customers implement RAG-enabled workflows that bring proprietary data stored on Amazon FSx for NetApp ONTAP into their GenAI data pipelines. GenAI is a truly hybrid workload and only NetApp has the breadth of products and services to reduce the complexity, resources, and risks for customers in managing these strategic workloads across increasingly complex hybrid multicloud environments. Public Cloud segment revenue was $159 million, up 3% year-over-year. Our highly differentiated first party and hyperscaler marketplace storage services remain our focus and top priority. These services continue to grow rapidly, increasing roughly 40% year-over-year and performing ahead of our expectations at each of our hyperscaler partners. As we outlined on previous calls, we expect the headwinds from subscription services to lessen over the course of FY25, allowing the strength of first party and marketplace storage services to shine through. Our rapid innovation in cloud storage services, broadening workload support, capabilities, price and performance points, continues to solidify our leadership position. In Q1, we again enhanced the capabilities of AWS FSx for NetApp ONTAP, boosting scalability and performance to address evolving business needs. Microsoft recognized the unique value we and CapGemini bring with its 2024 Partner of the Year award in the "Migration to Azure" category for our work in moving a large Asian retail customer to Azure, which included Azure NetApp Files. Our strong Q1 performance continues the momentum from last year, paving a confident path into FY25. The robust growth in our revenue, billings, and profitability reflects the increasing alignment of customer needs with our unique solutions. We believe our highly differentiated intelligent data infrastructure platform, designed for the age of data, positions us to capture the growth potential in flash, block, cloud storage, and AI, promising continued success for our shareholders and customers. Looking ahead, our priorities are clear. We are well positioned to seize a growing market opportunity. As we grow, we will maintain our disciplined operational management to drive leverage throughout our business model. In closing, I want to thank the NetApp team for their dedication to delivering exceptional results in an uncertain macro environment. I also want to remind you that we are hosting our INSIGHT customer conference in Las Vegas next month, where we will announce advances to our innovation agenda and showcase how we help our customers make their data infrastructure intelligent for the age of AI. I hope to see you there. Before I turn the call over to Mike, I'm sure you've already seen the news of his upcoming retirement. Mike has been a great partner to me in our focus on delivering profitable growth and shareholder value. Over the course of his tenure from FY21 through FY24, he has helped drive revenue growth of 9% and EPS growth of almost 60%. In Mike, I have been blessed to have a wise partner from whom I learn much every day, a world-class human being whose trusted friendship has helped us navigate disruptions smoothly, and who has entertained us with his encyclopedic knowledge of country music. I appreciate Mike's commitment to stay through the end of the fiscal year to ensure a seamless transition. Thanks, George, I greatly appreciate the very nice comments. I'll come back to those comments after I run through the numbers. While my family and I are excited about what is to come in our next phase of life, I want to assure everyone that it is business as usual until we name a new CFO. My focus will remain on delivering our plans for this year and ensuring a smooth, seamless transition. We executed a solid quarter in an uncertain macro environment, hitting or exceeding all our guidance ranges. We are delivering on our commitments, as evident in our solid Q1 results. We made progress towards our long-term investor day targets of mid-to-upper single digit revenue and double-digit EPS growth on average through fiscal year 27. Before I get into the financial details, let me walk you through the key themes for the quarter. As a reminder, all numbers discussed are non-GAAP unless otherwise noted. Our top-line billings and revenue exceeded our expectations, growing 12% and 8% year-over-year respectively in Q1, with product revenue growing 13% year-over-year. As expected, Q1 consolidated gross margin was strong at 72%, near all-time highs. Gross margin leverage and operating discipline drove operating margin of 26% and EPS of $1.56, both Q1 records. We returned approximately 170% of free cash flow to stockholders through cash dividends and share repurchases, reducing Q1 diluted share count by 2% year-over-year. As we discussed during last quarter's call, we intend to return up to 100% of free cash flow this year. Due to our solid execution and strong operational management, we outperformed our expectations in the first quarter and expect our continued focus and discipline to deliver year-over-year revenue growth in each quarter of the year. As a result, we are raising our fiscal year 25 revenue and EPS expectations. Now, to the details of the quarter. Revenue of $1.54 billion increased 8% year-over-year, above the midpoint of our guidance range. Q1 billings of $1.45 billion increased 12% year-over-year. This marks our third straight quarter of year-over-year revenue and billings growth, even with an uncertain macro environment continuing to pressure IT spending. We are well aligned to customers' priority investments and remain confident that our innovations will drive growth through the rest of fiscal year 25. Product revenue of $669 million was up 13% year-over-year. Support revenue of $631 million grew 3% year-over-year. Public Cloud revenue of $159 million increased 3% from Q1 a year ago, driven by hyperscaler first party and marketplace storage services, offset by expected declines in subscription services. Q1 consolidated gross margin came in at 72% and was up 160 basis points from a year ago. Product gross margin was 60%, in line with expectations. As we discussed on the Q4 call and during the subsequent investor day, we have an increasing share of total revenue derived from higher margin and recurring revenue sources, which we expect to continue through fiscal year 2025. We have made strategic purchase commitments to lock-in SSD supply and mitigate rising prices in the future, which continues to give us confidence in our product gross margins for fiscal year 2025. Our recurring support business continues to be highly profitable with gross margins of 92%. Q1 Public Cloud gross margins improved to 71% from 68% in the prior fiscal year 2024 fourth quarter. During fiscal year 2025, we expect to continue to make progress on our Public Cloud gross margins towards our long-term target of 75% to 80%. Operating expenses of $714 million was up 2% year-over-year and declined 1% from Q4 fiscal year 2024. Q1 again highlighted the strength of our business model and disciplined operational execution with operating margin of 26%, ahead of expectations. EPS of $1.56 was also above the high end of our guidance, driven by higher revenues, operating margins, and interest income, and a slightly lower tax rate. Operating cash flow was $341 million in Q1, a decrease of 25% year-over-year, driven by higher annual incentive compensation payouts and payments for strategic SSD purchases, partially offset by higher customer collections from higher billings. In Q1, DSO decreased to 40 and inventory turns were 8. Free cash flow decreased 28% year-over-year to $300 million due to lower operating cash flow. During the quarter, we returned $507 million to stockholders through share repurchases and cash dividends, ending the quarter with approximately $600 million in net cash. We have approximately $1 billion remaining on our existing repurchase authorization. Our balance sheet remains healthy. We ended the quarter with approximately $3 billion in cash and short-term investments. Q1 deferred revenue was $4.2 billion, down less than half a percent year-over-year, a smaller decline than in each of the past three quarters. We expect continued improvement in our deferred revenue growth during fiscal year 2025 as we drive billings growth. We are adding RPO as a new disclosure this quarter as it is a leading indicator of future growth in our business. Keystone, our storage-as-a-service offering, continues to gain traction in the market, broadening our relevance to customer use cases and is becoming a more meaningful part of our business. RPO, which includes unbilled commitments, was $4.5 billion in Q1. Now turning to guidance, starting with the full year. While we continue to believe that macro indicators are uncertain, our continued execution gives us confidence in our business going forward. To that end, we are raising our revenue guidance for the full year to between $6.48 billion and $6.68 billion in revenue, representing 5% year-over-year growth at the midpoint. We expect fiscal year 2025 consolidated gross margin to be 71% to 72% and our operating margin to be 27% to 28%, both unchanged from prior expectations. We are raising our net interest income expectations to $50 million, driven by higher interest income. We now expect our tax rate for the full year to be 20% to 21%. As a result, we expect EPS to be in the range of $7 to $7.20, which at the midpoint, implies 10% year-over-year growth. Turning now to our second quarter guidance. We expect Q2 revenue to range between $1.565 billion and $1.715 billion, which at the midpoint, implies 5% growth year-over-year. We expect Q2 consolidated gross margin to be 71% to 72%, and operating margin to be approximately 28%. We expect net interest income to be approximately $15 million in the quarter, our tax rate to be between 20% and 21%, and EPS in the range of $1.73 to $1.83. In closing, I want to thank our employees, customers and investors for their commitment and investment in NetApp. I am confident in our ability to help our customers successfully achieve their digital and cloud transformation goals. We are well aligned to priority IT investments and are committed to deliver sustainable, long-term value for our stockholders. Finally, before we go on to Q&A, I would like to add some personal comments on my announcement. It has been an honor and a privilege to lead such a dynamic and visionary organization over the last four and a half years. I'm so proud to be part of the NetApp team and being able to play a role in helping NetApp grow and deliver on its promise of profitable growth. I am committed to ensuring a smooth transition and will continue to lead the finance organization until an appropriate successor is identified. Like all companies, NetApp continues to evolve, and I am excited to welcome a new CFO who will help take NetApp to the next level and execute against the strategic roadmap we laid out at our recent investor day. I want to thank all of you for your continued support of NetApp and look forward to the continued success in the business. That being said, I want to reiterate that it is business as usual for now and I look forward to seeing many of you at our upcoming investor events. [Operator Instructions] The first question comes from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar Hi, thanks for taking my question. And congrats on the strong results. And Mike, congrats on the retirement and thanks for all your help towards the sell side and the buy side, we're going to miss you. And my first question is for Mike on the higher NAND pricing, from a demand or top line standpoint, is that impacting the demand for all-flash? And from a cost standpoint, how to think about its impact on gross margins. Because I understand you made the strategic NAND purchases, but how many quarters do you think that lower NAND price purchase can carry you through? And then I had a follow up for George. Mike Berry Sure. Hey Kris, thanks for the question and thank you for the kind comments. I appreciate it. So let's do the last one first. So as we've talked about, we've purchased a large majority of our NAND forecasted for fiscal 2025. We feel really good about the position that we're in there. How much of it may go into next year really depends on what happens in the rest of 2025 plus, we'll keep our eye on the market. We may decide to do more pre-buys. We'll see how the market goes. Back to your first question, if I understand it correctly, is, hey, I don't at this point, as we've always talked about, customers budget in dollars and from our standpoint, the market really hasn't changed too much. So we have not seen much of a change in demand. Based on that, we'll see how it goes for the rest of fiscal 2025. But up to this point, no real changes. Krish Sankar Got it. Got it. Thanks Mike. And then George, quick question for you. Earlier this year you released the ASA series. It's like a great product as it unifies file block and object storage for customers. Can you just update us how is the product performing? And I understand new products take a while to translate into sales. How is the order flow pipeline looking like? And any kind of customer pushback for using a unified product versus their best of breed solution. Any feedback on that would be helpful. Thank you. George. George Kurian We have been very pleased with the introduction of the AFF A series, which is the unified storage product line like you talked about. We introduced a set of models at the high end of those of the product family and the adoption rates have been strong. As you note, they go through a certification process and in the largest customers that takes a little while, but we're seeing all the right activity in terms of proof-of-concepts, qualifications and certifications underway. We've had several wins in customers that are deploying new environments that would be happy to choose a new product. It complements the C-series unified storage products. The C-series is for general purpose workloads. The A-series is for high performance, demanding workloads like transactional databases, AI workloads that demand low latency consistently, and a lot of IO. And both of those in turn complement the block optimized ASA family, which serves only block workloads where we also strong uptick. So I'm very pleased. Overall, our flash business performed really, really well in the quarter, as you saw, with 21% year-on-year growth. Our next question comes from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee Hi. Thanks for taking my questions. And before I ask my question again, Mike, thanks for working with us so closely, and I know there's some time, but it was great working with you. Best of luck as well. I guess. If I can start with a question, George, I had more of a question on the comments that you had related to uncertain macro and how that's impacting storage demand. Because when I look at the progression of revenue here, which you've been doing a great job on, sort of executing to plan, the sequential trends are pretty much in line with seasonality that you've seen historically. It does look customers are back to spending in a more sort of normal fashion. So when you think about how the uncertain macro is impacting your customer's appetite to spend, what are you really seeing in terms of what would even concern you? Because you're on track to do record revenue at this point, trends look pretty sequential in line with seasonality. So just curious, like what is the, what are you seeing in terms of your customers appetite to spend in a normal fashion? Is there anything that's giving you some hesitation on that front? And I have a follow up. Thank you. Mike Berry Yes. Overall, I think there are, while the economy has progressed from this time a year ago, there are still a good amount of geopolitical risks and we are waiting the interest rate changes that seem to be nearer than they were when we entered the quarter. So I feel like overall things are progressing in the right way, though there is still a good amount of, especially geopolitical uncertainty. With regard to what we saw in the quarter. We saw a broad based strength in our product lines and in the Asia PAC and European markets where our teams did really well. We saw some slowness in the U.S. public sector, especially the federal part of the public sector business because of the continued budget challenges. With the continuing resolution. U.S. enterprise performed well. What we see across all these markets is that customers are prioritizing spend on strategic projects and so that part of our business continues to do really well. And I'm encouraged by the alignment of our solutions to that. What we haven't yet seen is large scale data center refreshes which would signal a broader base economic recovery and confidence in the business. Samik Chatterjee Got it. Got it. And in terms of when you talk about AI workloads and you talk about sort of AI is truly going to be more of a hybrid sort of environment, play with both public cloud and sort of your hybrid solutions. And you talked about in the prepared remarks ASA driving some of those wins as well. How do you think about fiscal 2025 in the context of what contribution you're expecting from these wins that are more specific to customers saying these are going to be dedicated towards their AI deployments or AI workloads, both covering sort of public cloud and hybrid. How you're thinking about what that looks like for your fiscal year. Thank you. Mike Berry Yes, let me hit on, you had two points in there. One is, I think, broadly speaking, the rate of innovation in the software applications that drive AI is very high, particularly in the public cloud, where broader frameworks that combine databases, data warehouses, data lakes, together with AI models are progressing at a really rapid rate. So what we see within our customers is many of them want to use the tools on the public cloud, the applications together with data that might sit in their data center environments or in the public cloud. And we are able to make that entire workflow much, much more secure and easy to manage, which is a part of the reason why we saw strength both in the data foundation for AI as well as in the cloud storage portfolio, where we're seeing our ability to create a no siloed, unified architecture come through for us. With regard to how we see it play out through the year. Listen, on Cloud, we have said that we've seen strong results for multiple quarters now with our cloud storage portfolio. Those have been masked by some of the challenges we have noted, and that we are seeing lessening as a headwind from the subscription part of our business. So we expect cloud to return to a pattern of consistent growth through the rest of the year. With regard to the storage portfolio, listen, we're one quarter into the year, we had a really, really strong flash quarter. I'm encouraged we've raised guidance for the full year. We are very, very confident heading to the rest of the year and we'll tell you more as the year plays out. Samik Chatterjee Okay, great. Thank you. Thanks for the responses. Thank you. The next question comes from Simon Leopold with Raymond James. Please go ahead. Unidentified Analyst Hi, this is Victor [ph] chew in for Simon. Can you just provide some color around the sequential improvement in public cloud this quarter? What was the driver behind the strike there? And how should we think about the sustainability trajectory of the improvement from this point going forward? Mike Berry Hey, Victor, it's Mike. Sure happy to do that. So, as George talked about in his remarks, we saw really strong growth in our first party and marketplace cloud storage business. We talked a lot about that at our investor day in terms of that growth. So that grew 40% year-over-year. If you take a look at the rest of the portfolio, as he talked about as well. Hey, we are expecting subscription services to still be a little bit of a headwind, though, moderating as we go through the year. So all-in-all, we do expect cloud revenue to accelerate from a growth perspective as we go through the year, led by the strength in first party and marketplace, and also the subscription services being a little bit less of a headwind as we get through some of those business changes that we are making. Unidentified Analyst Okay, so the strength is kind of largely in line with what you were expecting. Mike Berry For the most part, it was cloud and first party marketplace were what we were expecting, and even a little bit better, quite frankly. So we've seen some really nice growth in that business. And again, as we look forward, we expect that to continue and actually accelerate because of the strength of those products. Unidentified Analyst Okay, that's helpful. And just one quick follow up. How should we think about the last question? How should we think about the mix of the type of customers behind the initial AI contributions? Are you seeing demand from enterprises, or, or is it biased towards kind of a hyperscale cloud type operators? How do we think about where the demand is coming from initially and how that evolves over time as the type of AI workloads evolve? Mike Berry Most of our demand is from large enterprises, some of which operate as internal service providers, but most of the demand is from very large enterprises. There is a mix of use cases across data lakes and data foundations for AI fine tuning and model training, as well as the first phases of inferencing rag. So we've seen a good blend of all of those use cases. [Operator Instructions] The next question comes from Steven Fox with Fox Advisors. Please go ahead. Steven Fox Hi. Good afternoon. And Mike, congrats on your retirement? I guess just in terms of thinking about competitive dynamics, George, it seems like you called out, like you mentioned, a broad set of sort of positives that could be winning market share. Can you sort of give us a sense versus now versus 90 days ago where you were, you're seeing the most gains and why, and I where maybe you're more confident going forward on share gains. Thanks a lot. George Kurian Listen, I think what we've seen is our focus and execution continues to get better and better, and we made good progress on that in the second half of last year, and then that momentum continues. So I feel really, really good about where we are. With regard to the portfolio, our cloud storage portfolio continues to gain traction. Right. We've got more workloads, more price points, more customers, and integration into a broader and broader set of the hyperscalers environment. So I feel really, really good about the innovation portfolio there. With regard to the flash portfolio, really strong results across the board. We had in the block storage part of that portfolio, which is pure share gain against competition. We are demonstrating the price performance leadership against the high end product of our competitors, as well as the price performance and feature set leadership against the mid-range products of our competitors. So I feel really good about the wins that we're seeing across the board. Thank you. Next question comes from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani Yes. Good afternoon. Thanks for being my question. I have two as well. I guess, George, maybe to start with, you folks are seeing some really good growth on the all-flash array side. I think it's up 21% this quarter. Can you just talk about, is this cyclical recovery in demand, or is it share gains or you just converting your install base, perhaps more towards all-flash? Just trying to understand what's driving the strength here. And then crucially, what do you think the durability of this 20% plus growth is on the all-flash side as you go forward? George Kurian This is the third successive quarter of high rates of all-flash growth, double digits. And we feel really good about the portfolio. Just let me hit a couple of the points you raised, which is we are seeing a broad set of new to NetApp customers and new to NetApp flash customers with the broaden portfolio that we have roughly 50:50 mix of completely new to NetApp have never had NetApp, as well as a broad set of customers who are buying our flash products for the first time. So I feel that's a good leading indicator of continued momentum in the portfolio. With regard to the installed base getting upgraded, we have said that a part of the cycle of QLC flash is the refresh or the migration of a very, very large 10K install base of hard drives, both ours as well as our competitors to that flash product portfolio. And so it's a mix of new accounts, new to NetApp Flash accounts, as well as some of the install base getting refreshed. And I think if you just look at it right, the total installed base of 10K drives is enormous. It was roughly, from a volume perspective, somewhere around 35% to 40% of the total storage market for a very long period of time. And so there's a huge install base to go refresh. So if you ask me, we are in the second inning of a nine in ballgame. And you know what? In terms of our one final comment, the strength of our customer additions says that even with all of the growth of our flash, the overall installed base grew so that the penetration of flash into our installed base stayed steady, quarter-on-quarter. Amit Daryanani Got it. That's really helpful, George. And then Mike, Alex and Mike, congrats as well on your retirement. Could you just maybe, just touch on how should we think about product gross margins from the 60% zip code that you had in Q1, really, for the rest of the fiscal year? Just maybe any parameters on how to think about product gross margin we go through the year would be helpful. Thank you. Mike Berry Sure. And Amit and everybody, thanks for the comments. I appreciate it. We got a lot of work to do. You're going to see me for a little while, so I do appreciate it. On product gross margins, as we said last quarter, we do expect it to come down a little bit as we go through the quarter as we work down the pre buys. So we were right about at 60% this quarter. Again, we said for the full year that as we sit here today, we're still comfortable with that upper 50s to 60 for the full year basis. So no real change on it in the trajectory of what we expect through the rest of the year that we anything different than we talked about last quarter. George Kurian If I were to just add, during the course of the quarter, we saw, as we see in the history of the storage industry, some of our competitors did take pricing up. And so that's a leading indicator of actions that the broader industry would take in an inflationary commodity environment. The next question comes from Mehdi Hosseini with SIG. Please go ahead. Mehdi Hosseini Yes, excuse me. Thanks for taking the question. I want to go back to George's commentary you talked about, or flash array record 3400, actually year-over-year growth of 21%, another record. But George, consistent with the prior question, every time we get to this kind of 20% plus growth, the concern is, okay, when is it going to decelerate? And I understand that you laid out your targets for FY 2027, but could we see a deceleration in FY 2026, especially if overall spending environment were to remain constrained and then a more broader upgrade cycle would come in, in FY 2027, could we see that kind of a cycle materializing? Because given what we have seen over the past 20 years, every time you had this kind of a strong growth, it's followed by deceleration. I want to understand what gives the confidence, and I have a follow up. George Kurian I think two or three things, right. I think one is portfolio is a lot broader than what we've had in the past. And I would point that out by the fact that we now have flash products across all the price points in the market, as well as custom offerings for block storage, where we previously would only sell unified storage. And so I feel really good about having a much fuller product portfolio, as well as the pace of innovation and leadership that we have in areas like data security is pretty clearly underwritten in the market. The second is where we are today is in a market where the pure play storage players are outperforming the integrated system vendors. And so you look at a broad range of the integrated system vendors, they have struggled now for many quarters in their storage business, and it remains to be seen whether that is a strategic focus for them going forward. And so when I look at our position relative to other players in the market. I feel really good. I would not call the current environment a rosy spending environment. Right. And we have done well for multiple quarters now in a fairly choppy macroeconomic environment. I'm hopeful that if the macro stabilizes, especially the geopolitical environment stabilizes, we should see some more spending come through which would be benefit to our business. Mehdi Hosseini Thank you. Thanks for additional insight to a repeat question and just one quick follow up for me. How should I think about the mix of NAND that they're using in terms of QLC versus other technology, and how the QLC mix would trend over the next couple of quarters? George Kurian QLC should grow as a percentage of our total mix. It's roughly half right now as a percentage of the flash business, and so you should see that grow as a percentage of the total flash business. Mehdi Hosseini Great. Thank you. And Mike, best of luck with you in your next endeavor. Our next question comes from Aaron Rakers with Wells Fargo. Please go ahead. Unidentified Analyst Hi, this is Jake [ph] on for Aaron. Congrats on the quarter and thanks for the question. I was just hoping you could double click a little bit on the enterprise demand you're seeing for AI products. It sounds like it's still pretty early days for AI inference and wondering what ending of adoption you think we're in and what's the competitive landscape like there. George Kurian Yes, I think we are in the early innings of the AI landscape. From a storage perspective, I think you are seeing the fact that AI, so far, the AI applications requires a specific computing architecture, which is why you're seeing the compute build out happening. But from a storage and data standpoint, people are using their proprietary data with these AI models. And so, as we've said consistently, we're in the early innings. It is when that inferencing trend, as well as large scale generation of data come into play that you'll really see the inflection in data storage. I think what we are seeing right now is everybody is getting their data ready for AI, and so they're all trying to unify their data, figure out what data they need for particular types of applications, getting their hybrid cloud pipelines working so that they have AI applications in the cloud, they can connect their data to it. And so we're seeing a lot of getting data ready, which is often in the form of a data lake or some kind of data infrastructure that brings together all of their data, and we're very well positioned for that. We hold a huge amount of the unstructured data in the world, and so we are naturally a part of any generative AI use case requires data that often sits on us. And the two examples we gave you on the earnings call are classic examples. One's a large financial services institution that is trying to summarize all of the unstructured data that they have in their various applications. And so they work with us and a set of AI application vendors to feed all of that into their LLMs. We are expecting, inferencing is expected to be the preponderant majority of the storage market for AI and the enterprise AI landscapes. It's about 80%, maybe 90% of the total market. And RAG is expected to generate about 8x more data than the data that is fed into the RAG pipeline. So there's a lot of new generation going to happen when and if these applications become mainstream. Our next question comes from Ananda Baruah with Loop Capital. Please go ahead. Ananda Baruah Hey, yes, good afternoon, guys. Thanks for taking the question. And Mike, congratulations. We'll miss working with you, but job well done, obviously. I guess. George, stick him right there. I just have one. Stick him right there. Piggybacking up analyst day. So inferencing is 80% to 90% of the storage market opportunity over time. Can you, the comments you made about RAG a moment ago and the growth there, the data getting thrown out there, like, how does that, I guess, is that like in the other 10% of the opportunity, or does that actually in some way feed and amplify the inferencing opportunity. And then can you just remind us, you just mentioned access to data install base that you guys have. But can you also remind us from a capability perspective, how you stack up to the other companies that could have a place in, say, inferencing and RAG? And then also, could you include your thoughts on how, how you stack up relative to, say, [Indiscernible] and DDN just to level set that for us. Thanks. Mike Berry Yes. So let me hit, there's three questions in there. On the first one, the comment about where do we see the large multiplicative effect of RAG and vectorization of data. It is actually part of the inferencing data growth. We see that when you create structure on top of unstructured data for inferencing, it actually grows the amount of data that you store quite significantly. And so that fits into that opportunity set that we say, hey, 80% of it is probably inferencing. With regard to our capability set. Listen, we feel really, really good about our capability set. I think what we see is, first of all, we have a lot of experience in AI. We've been in the market since 2018. With Nvidia we have hundreds of customers that do AI with us. The second is to do this kind of large scale AI workloads, you need to have scale out file systems and integrated object. And so the fact that we have an ONTAP, a scaled out file system with parallel NFS and integrated S3 [ph] capabilities gives us a lot of strength in the market. We've got wins in training, we've got wins in data lakes, we've got wins in fine tuning and inferencing. So pretty much across the board. We are also unique in the market with the hybrid cloud pipelines. Right? There is no one else in the market that can do what we do, literally no one else, because of the native integration that we have. And I would just close by saying come to NetApp Insight. We have an awesome set of innovations that will showcase how real customers are using our technology to solve real AI problems today and over the next twelve months. We got an awesome set of capabilities that build on all the hard work we've done so far. Ananda Baruah That's super helpful. I'm going to just do a quick follow up. Does this mean just given all the capabilities you spoke about, George, does that suggest that you believe the company could have an amplified share position in GenAI storage when that kicks in? George Kurian With GenAI, the two market players that have the installed base, Dell and us, are super well positioned. We feel extraordinarily good about our capabilities that come to insight. You'll hear more. Our next question comes from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan Yes, thank you so much for taking the question. George, you just said that you had an all-flash new to NetApp and new to all-flash. Can you just elaborate a little bit what parts of the all-flash market are you seeing the most traction between hybrid capacity and performance flash? And who do you think you're taking the most share from? And I have a follow up. George Kurian I think if you look at the overall market, the capacity flash market is the fastest growing. It is because the technology is new, you are seeing the displacement of 10K drives and it's all year-on-year compares the capacity flash market as tailwinds. And I think that's where we see the strongest growth. The performance flash market continues to be a growing part of the business. We have done well there and I feel good about the prospects for our performance flash block products, which are a tam expanding opportunity for us. We compete in that part of the market against frame arrays. It could be the Dell power Max or a large frame array from Hitachi or HPE. And essentially the capability that we have is exceptional price performance, consistent latency, which makes it easy to run databases and other workloads on our infrastructure, plus a great set of features that allow you to unify your data landscape and take these environments and plug them into the AI workflows that you want. And so I feel good about that on the high end. We have also seen good progress in the mid-range with QLC against a broad range. Upgrading our install base of 10K drive, upgrading other installed bases of 10K drives. And so, same suspects we compete with. Our results are strong and so I feel good about the fact that we've taken share in the market. Wamsi Mohan Okay, thanks, George. And one from Mike. Mike, congrats as well. Can you talk about the drivers for the lower tax rate? And if you look at the higher interest income and lower tax rate, it does not show much increase at the operational level for operating dollars, despite the higher, slightly higher revenue. So just wondering what some of the puts and takes there. If there are anything that you'd like to call out. And are you still expecting gross margins to step down a little in the second half versus first half or does that change now because you have these pre buys that you've made during the quarter? Thank you. Mike Berry So thank you, Wamsi. Thanks for the question. So I'm going to answer the last one first and then just give me the chance to walk through the puts and takes of guidance. The answer is no. No change to what we said last time in terms of the trajectory of gross margin. So, hey, let's back up for a second. So we beat the first quarter by 11 million in revenue and 11 million in EPS because of the strength in the business and our confidence in it. We then raised it by 30 million in revenue and then $0.20 in EPS. Let's go left to right first, and then we're going to go down, because I think this is important. So based on those results and the demand that we see in the visibility into Q2, we did raise Q2 by about another 10 million. We also raised the second half in revenue as well. EPS largely follows that as you go through the year. However, we did underspend in OpEx in the first quarter. Therefore, we pushed some of that spend in the second half. That answers your question about why you don't see the operational, the throughput as much. And then let's hit your other questions. On the tax rate, it is simply a forecast of projection of income by GEO. Our tax rate in the last two years has been 20.9% 20.3%. We thought it would go up based on the mix of profitability, we now expect it to be consistent with last year. And then on the interest income the team has done a lot of great work making sure that we can invest all of our cash balances. And candidly, they didn't lower rates as fast as we thought they might. Hence we've bumped that number up as well. So those are the big movers in guidance. And then for the year we've left. Importantly, the full year gross margin percentage and operating income percentage is consistent. We're only one quarter in. We feel really good about the year, but let us get through the next quarter and then we'll take a look at that as we go through the year. So hopefully that helps. That's the outline for guidance for the year, Wamsi. Our final question today comes from David Vogt with UBS. Please go ahead. Unidentified Analyst Hi, thanks for taking the question. This is Brian [ph] on for David. I'm just wondering, on GenAI, is flash at a TCO today to drive adoption of storage, or do we need the cost curve to come down further over the next year or so? And then what percentage of shipments and installed base are flash today? Thank you. George Kurian With regard to shipments, flash is, if you look at it, roughly 60% of the hybrid cloud revenue. And so it's a little bit higher than that on product revenue. So I would just leave it there. I think with regard to the install base, it's still a small part of the total installed base. The majority is, it's about 40%. The majority is still hard drives. And we've been selling flash for how many years? So it shows the size and the fact that our overall installed base is growing. Let me get to your question about AI. With regard to AI, it depends on what part of the lifecycle you're operating in. If you are building a large repository of data, like a data lake, where you're unifying all the different data types that you want to be able to process in a large language model, the portion of that data that is actively being used with the model is going to be on flash. The sort of a practical customer that doesn't want to gold plate their environment will keep the archive data sets for models that they have run for either regulatory reasons or for business trajectory reasons. They will keep that on disk based solutions is what we've seen so far. Large scale object repositories that are typically on kind of disk based solutions. If you then move into active model training and fine tuning, that happens in an all flash configuration where the active data set is being crunched with an LLM, and then when you move to an inferencing model, inferencing happens wherever you have your business process. Right. So you could have it in a data center environment where you could run it on flash, you could have it in a small manufacturing facility where you could probably use disk or flash, and then you could also have it in the cloud. We are seeing many instances of cloud based inferencing that our tools are being used. So it's a broad mixed. I hope that gave you. There's no one answer. I hope that gave you a good sense of where the business is at. All right, thank you, Brian. I'm going to pass it back to George for some closing remarks. George Kurian Thank you, Kris. And thanks everyone. We have got FY 2025 off to a strong start because of the strong alignment of our solutions with customer's most important data challenges, coupled with our focused execution. We are delivering innovation at a fast pace and are well positioned to capture the growth potential in the key markets of flash, block, cloud storage and AI. Our relentless focus on these significant opportunities, combined with disciplined operational management continues to yield positive outcomes. I hope to see you at NetApp Insight and look forward to updating you on our continued progress on next quarter's call. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Pure Storage, Inc. (PSTG) Q2 2025 Earnings Call Transcript

Amit Daryanani - Evercore ISI Howard Ma - Guggenheim Securities Mike Cikos - Needham Jason Ader - William Blair Asiya Merchant - Citigroup Quinton Gabrielli - Piper Sandler Meta Marshall - Morgan Stanley Mehdi Hosseini - Susquehanna Jeff Koche - Raymond James Robert Mertens - TD Securities Eric Martinuzzi - Lake Street Capital Markets David Vogt - UBS Good day and welcome to the Pure Storage Second Quarter Fiscal 2025 Financial Results Conference Call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead. Paul Ziots Thank you. Good afternoon everyone and welcome to Pure's second quarter fiscal year 2025 earnings conference call. On the call we have Charlie Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie's and Kevan's prepared remarks, we will take questions. Our press release was issued after the close of market and is posted on our website where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will make forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings, and competitive, industry and economic trends. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue, remaining performance obligations or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage. Our third quarter fiscal 2025 quiet period begins at the close of business Friday, October 18, 2024. Thank you, Paul. Good afternoon everyone and welcome to our Q2 FY '25 earnings call. We were pleased with our Q2 revenue growth of 11% year-over-year. Pure continues to pick up market share, and outpace the industry, both in innovation and in growth. During the quarter, we hosted customers and partners at our annual Accelerate conference. Our Las Vegas Accelerate held in June kicked off a series of local events across the Americas, Europe, and Asia-Pacific, where thousands of customers and partners learn about our platform strategy and Fusion vision, as well as Pure's offerings in AI, virtualization, and application modernization. Specifically, we introduced the next generation of Fusion, a first-of-its-kind storage cloud architecture soon to be available as a non-disruptive upgrade to all of our global customers. Fusion allows businesses to transform their Pure Storage systems into an automated, data storage cloud that eliminates the data silos of existing enterprise data storage systems. We also unveiled the industry's first AI storage-as-a-service for GPU clouds. Growing GPU and AI clouds need flexibility in their infrastructure as they are uncertain of their future growth, and the type of workloads that they will need to address. Pure's Evergreen//One for AI provides them flexibility in both their consumption and price-performance needs, and matches cost to their revenue growth. Our Evergreen//One service offering remains strong. Evergreen//One removes the hard work, expense and risk of operating a storage environment from enterprise IT organizations. It provides flexibility. It avoids over-provisioning and rigid planning. And, it simplifies customers' operations with solid and guaranteed SLAs. It also significantly boosts efficiency in terms of capital costs, energy, and labor. Options Technology, a financial technology company, started with one small Evergreen//One subscription back in 2019 and has grown over the last five years to 18 petabytes of storage across multiple sites globally. Through EG//1, Pure regularly enhances the delivery of their SaaS services, improving resiliency, efficiency, and overall performance. While the lengthening of large enterprise deal times impacted Evergreen//One growth in the first half, we continue to see strong deal activity. Artificial Intelligence continues to be of great interest to our customers. Specifically, customers continue to study both potential areas for AI use, as well as how to accommodate AI in their infrastructure. We were pleased to have had NVIDIA join us at //Accelerate to announce our expected NVIDIA DGX SuperPOD certification by the end of this year. The AI market for data storage has progressed as we have consistently predicted. Pure sees three separate AI opportunities for our solutions. First, storage for machine learning and training environments where Pure provides high-performance storage for public and private GPU farms. This quarter we signed a deal with SoftBank corporation, one of the big four telecommunications services in Japan. Pure is providing the storage layer behind many of SoftBank's cutting-edge services including their new Generative AI platform, created specifically to develop the market leading Large Language Model for the Japanese language. The second AI opportunity we foresee focuses on tailored storage for enterprise inference or RAG environments. Many, if not most, enterprises will use commercial LLMs or other models to operate on their own proprietary data in-house. These systems will use relatively small GPU environments to provide AI insight from their data. Pure is working closely with NVIDIA on a number of vertical market offerings to satisfy this market. We continue to believe that our largest opportunity opened by AI is to address the siloed nature of enterprises' existing data storage architectures. Current data stores sit behind application stacks and generally have neither the performance nor the connectivity to serve data directly for AI engines and analytics. Customers that are the most advanced in their AI investigations all acknowledge that data access and preparation are major barriers to AI deployment. Pure Fusion will allow customers to upgrade their enterprise storage to function as a storage cloud, simplifying data access and management, and eliminating data silos to enable easier access for AI. The focus and uncertainty around AI has caused customers to begin to re-evaluate their planning on how they will invest their IT dollars. We are also seeing large organizations increase their focus on managing escalating costs from software, Cloud and SaaS services. Our Pure Cloud Block Store for Microsoft Azure VMware Solution is helping enterprises contain cloud storage costs, generally by more than 50%. Put simply, Cloud Block Store provides a more resilient and performant public cloud storage infrastructure for large enterprise cloud application deployments that is dramatically less expensive than cloud native services. Furthermore, Cloud Block Store is fully compatible with enterprise storage interfaces and services including disaster recovery and data protection. One case in point is a Fortune Global 500 Food and Beverage customer that faced a growing hyperscaler data footprint and accelerating costs with limited visibility into its overall workload performance. By leveraging Cloud Block Store, reducing thousands of cloud managed disks to just dozens of Cloud Block Store volumes, equipped with data protection, ransomware remediation features, and advanced workload performance reporting, the company is looking to save 50% of its total storage bill. Our discussions with hyperscalers to replace their core storage with Pure technology continue to progress positively. Our lead prospect has advanced from extensive evaluation of our core technology, to testing an integrated solution, and we have been engaged in detailed contractual negotiations for many months. We remain confident that we will secure our first hyperscaler design win by year-end. The longer-term opportunity for Pure with hyperscalers is significant. To provide a sense of scale, the top ten Hyperscalers are projected to buy almost 70% of all disk drives, over 600 exabytes this year alone. Because of Pure's unique Direct to Flash technology, we can offer hyperscalers better performance, reliability, and power and space savings than hard disks, at a similar or better total cost of ownership. With nearly 15 years of experience with software and hardware flash management, we continue to far outdistance the industry in energy-efficiency, density and performance. Pure holds key intellectual property and unmatched multi-vendor, multi-process flash expertise that no other vendor can match, and cannot be replicated with standard SSDs. Our latest 150-terabyte Direct Flash Module shipping later this year is but the next stop on our robust industry-leading flash roadmap. Energy and space savings generated by our Direct-to-Flash advantage are significant. We reduce space, power and cooling requirements by a factor of 5 to 10 compared to hard disks. In a world of greater power demands and limited electrical supply, the savings on electricity alone provides a compelling incentive to switch from hard disks in both hyperscaler as well as enterprise data centers. Our //E family of products, focused on replacing enterprise hard disk systems with more efficient and higher performance Pure technology, continues to grow strongly. Enterprises increasingly recognize that Pure DirectFlash technology has reached the price level where they can eliminate the last mechanical component from their data centers. As highlighted in our latest ESG report, power reduction on storage from Pure's DirectFlash technology can reduce total power usage in existing data centers by approximately 20%. Businesses are facing higher energy costs and greater power constraints while committing to higher sustainability goals. BT, the British multinational service provider, has set a target to achieve net-zero carbon emissions in its operations by the end of March 2031. As a foundational storage provider to BT, we directly support their data center energy reduction program. We have enabled BT to grow its data storage while reducing its energy usage. BT has measured Pure Storage to be about 18 times more efficient than their legacy storage benchmarks. Looking back over this past quarter, we have not seen a significant change in the overall macro environment or our customers' intentions to buy. We have, however, seen customers look to manage increasing costs in cloud, software and SaaS. We believe that the storage market will be resilient in this IT economy, but we have yet to see a positive inflection. Overall, we are well positioned in all of the segments in which we compete, and believe we will continue to gain share in our market. We know we are gaining ground as our growing strength has forced competitors to intensify their efforts and mimic our messaging. It is clear now that legacy competitors in our market see Pure as the alpha competitor and have focused their messaging and strategies on us. We appreciate the attention and look forward to the competition. We remain confident in our ability to expand our market share and maintain our strong leadership in storage. Thank you Charlie. We are pleased to have delivered double-digit revenue growth during the first half of our fiscal year and we continue to see strong sales performance for both our FlashArray//E and Flashblade //E offerings. Revenue of $764 million in Q2 grew 11% year-over-year, and both revenue and operating profit of $139 million exceeded our guidance. Subscription Services annual recurring revenue, or ARR grew 24% to over $1.5 billion, which continues to be driven by our Evergreen//One service offering, in particular, for our higher velocity business. As a reminder, subscription services ARR excludes non-cancelable Evergreen subscription contracts where the effective service date has not started. Including non-cancelable subscription contracts where the effective service date has not started, subscription services ARR grew 25%. Total RPO exiting Q2, which includes both subscription services and product orders, grew 24% year-over-year to $2.3 billion. As we have shared in previous quarters, product orders within RPO include a non-cancelable telco order from Q3 FY '24, and orders relating to a Fortune 500 financial services company from Q4 FY '24. At the end of Q2, RPO associated exclusively with our subscription service offerings grew by 21%. Additionally, total contract value sales for our storage-as-a-service offerings during Q2 reached $101 million, bringing TCV sales in the first half of FY '25 to $157 million. Our Evergreen//One as-a-service business is strong, demonstrating robust pipeline growth and consistent success in converting opportunities valued at $5 million or less. This continues to underpin our confidence in the growth potential of our storage-as-a-service offerings. Consistent with last quarter, we continue to experience extended closing timelines for larger Evergreen//One opportunities. Last year, we closed several large Evergreen//One deals in the first half, compared to three in the first half of this year. This impacts both year-over-year RPO growth and forecasted FY '25 TCV sales for our storage-as-a-service offerings which we now expect to be $500 million, reflecting a growth rate of approximately 25%. US revenue for Q2 was $538 million and International revenue was $226 million. Our new customer acquisition grew by 261 customers during Q2, and we now serve 62% of the Fortune 500. Total gross margins of 72.8% in Q2 continues to be very healthy and comparable year-over-year. Subscription services gross margin strengthened to 76.4%, as we leverage increased automation of our service logistics workflows supporting delivery of our Evergreen subscription services. Our product gross margin of 69.5% in Q2 underscores the strong sales growth of our FlashBlade//E, FlashArray//E, and FlashArray//C solutions, driven by customers increasingly shifting their cost-sensitive workloads to all-flash. As we aggressively pursue our efforts to help customers transition their workloads to our all-flash solutions, we anticipate a modest, strategic decline in product gross margins during the second half of the fiscal year. Operating profit and margin strength of approximately 18% were both positively impacted by revenue overachievement, strong gross margin performance and operating expense discipline. Our headcount increased sequentially by nearly 250, to approximately 5,700 employees at the end of the quarter. Pure's balance sheet and liquidity remains very strong, including $1.8 billion in cash and investments at the end of Q2. Cash flow from operations during the quarter was $227 million, and capital expenditures were $60 million. Our most significant capital expenditures during the quarter were concentrated in engineering for new test equipment supporting key strategic growth initiatives, including our pursuit of hyperscaler infrastructure opportunities. As part of our objective of partially off-setting dilution, we began paying withholding taxes due on employee equity awards. In Q2, withholding taxes on equity awards was $76 million, which offset dilution by approximately 1.1 million shares. We have approximately $395 million remaining on our existing repurchase authorizations. Now turning to guidance. For Q3, we anticipate revenue of $815 million, with an expected operating profit of $140 million, resulting in an operating margin of 17.2%. Projected operating profit takes into account a modest sequential decline in product gross margins that we expect during the second half of the fiscal year, driven by our expectations of continued sales growth of our //E family solutions, which are successfully targeting cost-sensitive workloads. Turning to our annual guidance for FY '25, we are reaffirming our FY '25 revenue target of $3.1 billion, representing growth of 10.5%, and our operating profit guidance of $532 million with an operating margin of 17%. The anticipated modest decline in product gross margins during the second half of the fiscal year validates our successful strategy of expanding into cost-sensitive workloads with our all-flash solutions, and has been contemplated in our annual guidance. In closing, we are pleased to deliver strong financial performance, which reaffirms the effectiveness of our strategic initiatives. Our focus on innovation and customer-centric solutions underscores our commitment to be a leader in the data storage industry. While we remain mindful of the broader macroeconomic environment, we are confident in our ability to capitalize on the growing demand for high-performance, sustainable data storage solutions. Thanks, Kevan. Before we begin the Q&A session, I'll ask you to please limit yourselves to one question consisting of one part so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue, and we'll be happy to take those additional questions as time allows. Operator, let's get started. [Operator Instructions] Our first question will come from Amit Daryanani from Evercore ISI. Please go ahead. Your line is open. Amit Daryanani Good afternoon, everyone. I guess my question really is, and I think one of the things I think folks are trying to square away is the Evergreen//One TCV target is getting lower from $600 million to $500 million. I would have thought that a downtick here would have meant perhaps better CapEx spend for your customers such that it would actually help your fiscal year revenue growth profile. Clearly, not seeing that happen based on the fiscal year guide. So hoping you just unpack what's driving the downtick on the TCV expectations and how do you see that flowing into your revenue guide really. Thank you. Charlie Giancarlo Yeah, absolutely, Amit. Well, I think your supposition would be correct if customers -- the same customer was switching from an Evergreen//One deal to a CapEx deal. What we've seen instead is large opportunities -- large Evergreen//One opportunity staying opportunities longer than we expected and therefore stretching out. A little bit whether that's based on caution or whether that's based on by the customer or whether that's based on other -- we had indicated that customers are looking very closely at their subscription expenses now given increases in software and SaaS expenses that were raised over the year. We've yet to really fully diagnose that. But what we're seeing is a lengthening of large deal size Evergreen//One opportunities. Kevan Krysler And I'll just add on to that, we did see three opportunities closed this quarter that were larger and we're defining larger as greater than $5 million. And then just to reiterate, the question was really focused on why aren't we seeing an increase to our annual revenue guide, and I will point out to Charlie's point. These larger deals that are Evergreen//One are still being actively worked and they're just taking longer to close. If we saw those opportunities flip to a traditional product sale or CapEx, that's when we would be looking at an upward view of our annual guidance for revenue. Our next question comes from Aaron Rakers from Wells Fargo. Please go ahead. Your line is open. Undientified Analyst Hi, guys. Thank you. This is [Michael Smirnoff] (ph) on behalf of Aaron. I just wanted to see if I can get any more color just on the hyperscale opportunity you guys kind of mentioned. It sounds like you're continuing discussions with the customers you expect by the end of the year. I'm curious if anything has changed, or maybe ask it another way, like what's the biggest hurdle you kind of need to overcome to get the deal done? And then separately just on other opportunities you're pursuing, if there's any kind of anything to note there in terms of progress? Charlie Giancarlo You bet. So the lead horse, it's -- I wouldn't say there's the largest hurdle. There's just lots of little hurdles. A lot of that is just aligning, aligning business models, economic improvements to them to pricing and economics for us. And there's a lot of logistical elements that go into this as well, especially when you're speaking with large hyperscalers, with large orders and large data centers and complex -- their own complex supply chains. So I would say just lots of little hurdles right now. Testing is going well, conversations are going well, but a lot of detail that has to be worked out. Rob Lee Yeah. And this is Rob. Just to add to that. I would say, overall, our engagements with our lead prospects are progressing very well as Charlie mentioned in his prepared remarks. What we've done over the last many months is really move forward on our testing in phases from initial proof of concept to testing of that core IP to now extensive testing of really an integrated, think of it as a co-engineered solution. And as you'd imagine, this involves detailed performance, operational testing, so on and so forth, and with that, as Charlie mentioned as well, accompanied with detailed contractual discussions around the commercial package. And so overall, engagement goes well and to the original question, I would say it's lots of little things as opposed to one big hurdle. Our next question comes from Howard Ma from Guggenheim Securities. Please go ahead. Your line is open. Howard Ma Great. Thank you and good afternoon, everyone. My question is, can you tell us who your lead horse is? I'm joking. That's not my question. But my question is -- it's a variation of the question that Amit asked. So by lowering your as-a-service TCV sales estimate, but keeping the total revenue outlook unchanged, that obviously, means you're getting less contribution from product sales. But Charlie, you just said that lower as-a-service sales is not because more customers are opting to buy CapEx instead. So does that mean -- if we look at the product line, does that mean there's increased risk in the product line? Or can you point to certain demand drivers that give you more confidence that, that guidance is appropriately set? Thanks, guys. Charlie Giancarlo Yeah. As we look at our sales and the pipeline, et cetera, we're seeing CapEx sales continue as we had expected. We're seeing the base, if you will, what we call the velocity sales of Evergreen//One progress as expected. But we've specifically seen deals that we've been tracking all along, large deals for Evergreen//One just length -- not coming in when we expected and lengthening out. They haven't changed in character. In other words, they've not switched, those same accounts, those same opportunities, haven't switched from an Evergreen//One intention to a CapEx intention, but they've also not closed. So that's specifically what we're seeing. So we're seeing good growth in the velocity business. And so the view there is that Evergreen//One continues to be of great interest and the activity is good. It's just the larger deals taking longer to close. Kevan Krysler Yeah. And I think it's really important, this is Kevan, to decouple what we're seeing with our larger Evergreen//One deals in a longer period of time from the demand overall that we're seeing, which, look, we're not seeing any significant change in demand that informs our annual guide, which is -- I think what you're asking as well, Howard. Our next question comes from Pinjalim Bora from J.P. Morgan. Please go ahead, your line is open. Undientified Analyst Great. This is [Jaden] (ph) on for Pinjalim. Thanks for taking the question. How has the customer interest been on the new Fusion offering? And do you see customers looking at it to unify their storage as they prepare for AI inferencing? Rob Lee Yeah, this is Rob. I'll take that one. Look, I mean, early interest has been great. As you know, we have been out talking to customers, partners alike about the Fusion vision for the last year. I think what we're really looking forward to and really what we've seen coming off of our Accelerate user conference is the demand and I think the ability for customers in the existing installed base with existing arrays to go and take advantage of that Fusion technology later this year. With our latest release of Fusion coming later this year, we'll be able to deliver all of those capabilities that Fusion was designed for, being able to fully automate the management multiple environments, allow customers to manage their Pure Storage estate through policy declaration as opposed to individual operational steps and really step back and unify that as one pool of resources, one storage cloud if you will. Later this year, customers will be able to take advantage of all these capabilities on all of their existing arrays and data storage estates. So early interest has been great. I think as we roll into the later -- the release coming out later this year, it will make it that much easier for customers to take advantage of those capabilities. Kevan Krysler Yeah, I'll also say that the beta users that have been involved in this have been very pleased and we've been very pleased by the fact that we see strong interest and utility in Fusion by both large customers and small. So even small customers are seeing a great benefit in being able to manage even their relatively smaller fleets through policy and further reduce the amount of labor that it takes to operate at a -- at almost every level. Our next question comes from Mike Cikos from Needham. Please go ahead, your line is open. Mike Cikos Hey, thanks for taking the question, guys. I just wanted to circle up because it seems like customers are continuing to choose maybe more of a CapEx-type purchase, which is a little bit counterintuitive in this environment given the macro. And I'm just trying to get a better understanding on the customer preference. Does it tie in any way to potentially customers thinking about data repatriation to their on-prem environments to help handle some of the ballooning costs behind these GenAI workloads as they move into production environments? Kevan Krysler Yeah. I'll start this and then have Charlie come on. This is Kevan. Look, I think the -- what we're seeing with our Evergreen//One demand is it's actually quite strong and we're really seeing that in our velocity opportunities. So these are opportunities that are less than $5 million and they are tracking strongly and tracking with our expectations that we set at the beginning of the year. So I really think the dynamic comes back to these larger Evergreen//One arrangements. And there's probably a few dynamics that are probably at play there, but it's less about demand signals of preference to an as-a-service offering versus a traditional offering or CapEx. And look, customers are continuing to evaluate managing their costs in the cloud, software and SaaS. And I think when customers are evaluating larger as-a-service offerings, that certainly could be part of the consideration as well and why we're seeing more time being taken as that evaluation is taking place. Charle, any other thoughts on that? Our next question comes from Jason Ader from William Blair. Please go ahead. Your line is open. Jason Ader Yeah, thank you. Hey guys. Just wanted to ask about the competitive environment. I know we've seen an increase in the QLC-based arrays from some of your competitors. Can you just comment on how that has impacted or not some of the deals and some of the opportunities? And then also, can you comment on the NAND pricing environment right now, which I know has been rising? Kevan Krysler Yeah. Let me start on that. I would say that our lead in QLC remains as strong as it ever has been. So I wouldn't say -- and that's, I think, identified by the fact that our E-family of products that is really targeting the low-end has been very, very successful. So I wouldn't say that QLC has changed the competitive environment very much at all. I would say that competition is as tough as it's ever been. And I think we are -- clearly everybody's a top competitor right now that's in this market. We really do feel that the sites are squarely on us and we are competing appropriately. But I don't think it's a QLC activity at all. I think it's a size and scale and effectiveness situation with respect to us. I mean, if you look at our progress now, we're now the number two vendor of all-flash systems into the enterprise firmly in that spot and only a few points behind the number one in that area, and I think that -- and I think everybody is feeling it at the moment. So competition is tough, but our lead in QLC remains. Rob Lee And then I'll just touch on the NAND pricing, which is really consistent with our previous commentary. And flash pricing from our lens really is affecting top line. And the volatility again is highlighting the differentiated advantages we're seeing with our Purity software and our DirectFlash technology, and that becomes more evident when we see the volatility in NAND pricing such as the current environment. And look, we're having a lot of success in winning workloads across price-sensitive workloads for our customers and that would be our E//Family as well as C, and that will have an impact on gross margins as well. Our next question comes from Asiya Merchant from Citigroup. Please go ahead. Your line is open. Asiya Merchant Great. Thank you for the question. The Evergreen ramp expected in the second half, maybe you can just again, delve back into some confidence that you have recognizing that these deals are taking longer to close given macro and other dynamics that you talked about. So what gives you the confidence that we ramp from $157 million here in the first half to $500 million for the full year? Thank you. Kevan Krysler Yeah, I appreciate the question. This is Kevan. Look, we certainly believe that the adjusted forecast for TCV sales of our as-a-service offerings at $500 million growing 25% is achievable and considers the dynamic that we're seeing with larger deals. Our current forecast of TCV sales does assume less contribution throughout the year from larger deals but also assumes the continued higher velocity business continuing to track strongly similar to what we've seen in the first half. And so the implied second-half ramp of TCV sales is only slightly higher than what we typically seen from our traditional seasonality with our CapEx sales or traditional sales. So look, there's obviously, work to do and we need to execute in the back half, but we absolutely expect to achieve this forecast. Our next question comes from Jim Fish from Piper Sandler. Please go ahead. Your line is open. Quinton Gabrielli Hey, guys. This is Quinton on for Jim Fish. Thanks for taking our question. I understand it's still pretty early, but as you think about the backlog or your order book for the 150 terabyte flash module, how is that compared to kind of what you were seeing from the last upgrade cycle at this point in time? And I know it's a little bit apples and oranges here, but it seems like we're facing scrutiny in transformational budgets you're seeing in EG//1. Is there any concern that, that would impact customers' willingness or ability to kind of transform and move to this new module or are people so focused on performance that's not really in your kind of concern list here? Thanks. Charlie Giancarlo Yeah, thanks for the question. It's an interesting question. I don't think it would be very much in our concern list for the following reason. What the 150 really does is open up new opportunity for us at lower price points and to reduce our cost -- to reduce Pure's cost at similar price points for existing E series transaction. So to put it another way, if we're satisfying a particular performance point with 75s today that we could also satisfy with 150s, the cost to us will be less even if the price is the same. So I think it's a margin enhancement for us as well as allowing us then to get into even less expensive hard disk environments. And so I think we see it as a positive, not as -- and it's not something that if we don't ship is going to hurt us in any way. It's not something customers would wait for. So I don't see it as, if you will, endangering any revenue opportunity. Rob Lee Yeah. And this is Rob. Just to add to that, I think it's important to step back and look at the 150 terabyte drive is just the next step in, as Charlie mentioned in his prepared remarks, a robust roadmap that we have on the flash -- the direct flash end of the portfolio. Each step along the way, each density improvement that we make allows us to do two things. One is more aggressively compete for lower cost-based systems on an acquisition cost basis, but also remember, it reduces the power and space requirements and obviously, the associated operating costs with those for our customers. The drivers for this are quite simple. The denser modules that we ship require less common equipment to support, removing that common equipment obviously reduces the cost structure associated with that, but also reduces the space and power associated with it. And so executing on this density and efficiency roadmap is what has allowed us to go aggressively -- so aggressively to date after the most cost-sensitive disk-based systems in the enterprise. And of course, as we've been discussing with you all, it really opens up the opportunity set as we look to the hyperscaler infrastructure environments. Our next question comes from Meta Marshall from Morgan Stanley. Please go ahead, your line is open. Meta Marshall Great. Thanks. Maybe just diving into these Evergreen//One deals, I just wanted to get a sense, are some of those kind of with Tier 2 customers or are these really kind of enterprise customers that we're talking about? Is the quantum a handful or is this really kind of just a couple of deals that are hung up? Thanks. Charlie Giancarlo Yeah, Meta, it is enterprise customers because we're talking about large deals and it does tend to be just a handful per quarter. So, because it's a handful per quarter and they're not always easily predictable in terms of exactly when they'll transact, it does make it more challenging to forecast. Our next question comes from Mehdi Hosseini from Susquehanna. Please go ahead. Your line is open. Mehdi Hosseini Yes. Thanks for taking my question. Charlie. Over the -- in the past earnings conference calls, you have talked about engaging 10 or up to 10 data centers, including hyperscalers. Could it be your traction with these data centers, large and small, be more focused on selling products which you're capturing in your product revenue? And until Enterprise and Evergreen//One and [Evergreen//Two] (ph) were to pick up to hit that $500 million run rate, you're not really going to be able to scale that subscription model, but you are penetrating data centers, large and small, and that's captured in product revenue. Is that the right way of thinking about the current dynamics? Thank you. Charlie Giancarlo Yeah. Thanks, Mehdi. I would say if we're speaking about Evergreen//One, where Evergreen//One is being sold into both large and small environments. As Kevan pointed, large deals and small deals. Actually, the run rate of -- in what I'd call the commercial market, small deals of Evergreen//One is very strong and very good. In -- it's very good as well in large environments and even into cloud environments. We're selling quite a few into MSPs and other clouds as well. So that's going well. All of that goes into our Evergreen//One -- when we classify the $500 million, for example, those are all regardless of who they sell into identified as Evergreen//One. I hope that answers your question. Our next question comes from Jeff Koche from Raymond James. Please go ahead. Your line is open. Jeff Koche Yeah, thanks. This is Jeff Koche in for Simon Leopold. Maybe you can give us an update on -- like how -- what percentage of revenue at this point is AI? And maybe more importantly, like given all the AI tailwinds, how does the order book -- like what percentage of the order book is starting to become AI related? Thank you, guys. Charlie Giancarlo Well, we've not split out AI, but let's give you a little bit of a flavor on AI. As I identified in my prepared remarks, we really do foresee three major segments. And it's really just the first one that has become real, I would say, real revenue at this point in time, not just for us, but for some other players out there as well. And that is the training environment. Now, we've been selling into training environments for over five years, probably closer to six years right now. Of course, the training environment really hit the news once it became large LLMs, right? But there's been training environments for self-driving cars, for drug discovery, for various different medical technologies as well as high-speed trading. That's all been training models, typically what are known as parameter-based models. More recently, obviously, there are generative AI models that have been getting a lot of the news. Our view is that in total, the total market for storage for large language type models -- training models, less than $1 billion a year currently. I would say that we're getting our fair share of that considering where we are. So that gives you sort of an order of magnitude, but we haven't broken it out specifically. The other two areas are the inference or RAG model inside of enterprises. That's just starting to be discussed and investigated. I think not really started yet in terms of revenue, but we expect soon. And then the third area is a general, we believe upleveling of existing storage environments to make data that's sitting currently in data silos inside of organizations much more available for use for inference. And as you might imagine, that's third -- a third on the list in terms of in terms of order of when revenue will appear, but we think it's the largest overall in the enterprise space. And a lot of what we've been working on has been in preparation to enable organizations to take advantage of that. Our next question comes from Krish Sankar from TD Securities. Please go ahead. Your line is open. Robert Mertens Hi, this is Robert Mertens on for Krish. Thanks for taking my question. Just with the reiterated full-year guide, assuming the midpoint of the October quarter outlook, that would imply the January quarter growth decelerates a bit to mid-single-digits year-on-year. Could you just speak towards some of the puts and takes in the guide, [expand] (ph) and industry inflection is mid-to-high single-digit growth the new norm? And is there any sort of seasonality headwinds to expect in the January quarter? Kevan Krysler Yeah, appreciate the question. This is Kevan. And look, glad to see that our total revenue is tracking with our expectations for the year, which again is double-digit and it's tracking as well in terms of what we saw for the first half of the year. But you got it. The primary factor in terms of what you see in terms of growth in first half and second half is largely due to seasonality. That would be the primary driver. And that's been consistent historically for many years with the exception maybe a one year following COVID. But another consideration as well is that we are expecting a sales ramp of our as-a-service offerings, especially with our higher velocity business in the second half of the year. And this would create some headwind as well to our expected total revenue growth and that's been considered as well in our annual guide for total revenue. Our next question comes from Eric Martinuzzi from Lake Street Capital Markets. Please go ahead. Your line is open. Eric Martinuzzi Yeah, I wanted to see if we can put a finer point on the gross margin commentary for the product. Kevan, I think you said that the 69.5% was down year-on-year, and then for the -- can't recall if it was the full-year or just the back-half, but a modest strategic decline in product gross margin. Would you care to comment on that? Kevan Krysler Sure. And thanks, Eric. Look, we've been talking for some time about our sweet spot for product gross margins really being in the high-60%s and it's taken us a long time to achieve that. And so I actually think this is quite a positive for us in terms of what we're seeing in the high-60%s. Now we are seeing and looking at a modest sequential decline that I talked about in my prepared remarks, and that's really coming from the strong momentum and demand from customers shifting their cost-sensitive workloads to our all-flash solutions, whether that's our family of E-solutions or FlashArray//C. And look, we'll continue to aggressively pursue this transition. And that's really what's driving our expectation of seeing a modest reduction in our product gross margin -- margins in the back half of the year. And as well, this has been considered in our annual guide for operating profit as well. Paul Ziots Thank you, Eric. We have one more question. So this will be the last question. Our last question will come from David Vogt from UBS. Please go ahead. Your line is open. David Vogt Great. Thanks guys. Thanks, Charle. Thanks, Kevan, for all the detail. I just had a thematic question about the hyperscaler opportunity. We appreciate all the color, but can you maybe talk to how the hyperscalers are viewing your solution? What I mean by that is what kind of workload, what kind of application, kind of what are the use cases that they're thinking about as you have these extensive discussions, so we can think about sort of how your product would dovetail with their existing architecture? Thank you. Kevan Krysler Yeah, let me start and I think Rob will add some color to this. Honestly, it's a very broad -- it's a fundamental architectural shift for them. And the more -- and obviously, we're at different stages in the conversation with different hyperscalers. But the further we go down the path with any one of them. They're looking to make it an architectural shift in their infrastructure, whereby it would replace not only higher performance workloads but lower performance workloads, including disk, and once implemented, no reason for it not to replace, for example, even their use of SSDs. So fairly broad. Now, yeah, knock on wood, we haven't -- nothing has been signed yet, but the longer -- the further in we are in conversations with hyperscaler, the more they test us, the more they -- we discuss terms and conditions and structures, the broader the cases are in those discussions. Rob Lee Yeah, David, and this is Rob. Just to add on to that. I really want to emphasize a point that Charlie made, which is really going after this and looking at this as a broad set of workloads targeted at various performance and architectural replacement points. And what I mean by that is these hyperscalers operate so many workloads, so many different environments, they get economies and simplicity of scale and operations by standardizing the infrastructure largely to serve all of those workloads. They generally don't build out special-purpose infrastructure for each workload one by one. And so certainly within and under that umbrella, they've got higher performance workloads typically being served by Flash today, all the way to lower performance workloads largely being served by disk. We think in the long term, we've got opportunity to go provide value across the board with our direct-to-flash technology. But certainly, as an initial step, we'd be focusing on the replacement of the disk-based environments in that infrastructure. So hopefully, that's helpful for you, David. Great question to end on. Charle, if you have some final comments. Charlie Giancarlo Yeah. I want to thank you all again as always for joining us today on today's earnings call. Our platform strategy on our innovation is once again transforming the storage industry. We empower enterprises to address their fragmented data silos, which is going to be a critical step in unlocking their full potential of analytics and artificial intelligence. And we believe that by providing a unified, versatile and energy-efficient platform, we're going to enable businesses to embrace the technical -- the technological change that they face and seamlessly integrate their data centers with their cloud environments as well. I want to thank everyone, particularly our customers, employees, partners, our suppliers and our investors. Your dedication, collaboration and trust are the driving forces behind our success. Thank you all for your continued support and commitment. Goodbye. That concludes the Pure Storage second quarter fiscal 2025 financial results conference call. Thank you for your participation. You may now disconnect your line.