Nutanix, Inc (NASDAQ: NTNX) Q1 2023 Earnings Call dated Nov. 30, 2022
Corporate Participants:
Rich Valera — VP, IR
Rajiv Ramaswami — President and CEO
Rukmini Sivaraman — CFO
Analysts:
James Fish — Analyst
Meta Marshall — Analyst
Unidentified Participant
George Wang — Analyst
Daniel Bergstrom — Analyst
Ruplu Bhattacharya — Analyst
Presentation:
Operator
Good day, and thank you for standing by. Welcome to Nutanix Fiscal First Quarter 2023 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]
I would now like to hand the conference over to your speaker for today, Rich Valera. You may begin.
Rich Valera — VP, IR
Good afternoon and welcome to today’s conference call to discuss the results of our fiscal first-quarter of 2023.
Joining me today are Rajiv Ramaswami, Nutanix’s President and CEO; and Rukmini Sivaraman, Nutanix’s CFO. After the market closed today, Nutanix issued a press release announcing financial results for its fiscal first quarter of 2023. If you’d like to read the release, please visit the Press Releases section of our IR website.
During today’s call, management will make forward-looking statements, including statements regarding our business plans, strategy, initiatives, vision, objectives and outlook, including our financial guidance as well as our ability to execute thereon successfully and in a timely manner and the benefits and impact thereof on our business operations and financial results. Our financial performance and targets and use of new or different performance metrics in future periods, expectations regarding profitability, our competitive position and market opportunity, the timing and impact of our current and future business model transitions, the factors driving our growth, macroeconomic, geopolitical and industry trends, including global supply chain challenges and the current and anticipated impact of the COVID-19 pandemic and its effects.
These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a more detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our annual report on Form 10-K in the fiscal year ended July 31, 2022 and our subsequent quarterly reports on Form 10-Q as well as our earnings press release issued today.
These forward-looking statements apply as of today, and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as representing our views in the future.
Please note, unless otherwise specifically referenced, all financial measures we use on today’s call, except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release.
Lastly, Nutanix management will be participating in the Raymond James Technology Investors Conference in New York on December 6th and the Barclays Global TMT Conference at San Francisco on December 7th. Nutanix will also be holding an Investor Day in New York city on Tuesday, April 4, 2023, so please save the date. We’ll be following-up with more details in the coming weeks.
And with that, I’ll turn the call over to Rajiv. Rajiv?
Rajiv Ramaswami — President and CEO
Thank you, Rich, and good afternoon, everyone. Against the volatile macro backdrop, we delivered a good first-quarter. We exceeded all of our guided metrics and saw continued strong performance in our renewals business. Supply-chain constraints with our seller partners while remaining a headwind, improved somewhat compared with the prior quarter.
With respect to the macro backdrop, in our first-quarter, we continued to see businesses, prioritizing their digital transformation and data center modernization initiatives, enabled by our platform. We have seen anecdotal evidence of increased inspection of these by customers, which we believe is likely related to the more uncertain macro backdrop. We continue to factor this uncertainty into our outlook for the remainder of the fiscal year.
Taking a closer look at the first quarter, we delivered ACV billings and revenue above our guidance. Driven by strong continued performance of our renewals business. We again demonstrated good expense management coming in slightly below our OpEx target. Top-line outperformance, combined with diligent expense management enabled us to achieve positive non-GAAP operating income for the first time. Another milestone in our drive towards sustainable profitable growth.
Finally, strong billings linearity and collections contributed to generation of $46 million. Our free-cash flow. Meaningfully exceeding our breakeven target and continuing our strong recent free cash flow performance.
Overall, I’m pleased with our financial performance in the first quarter. Our first quarter is typically a strong one for our federal business. And this one, was no exception. Our largest customer in the quarter, was it federal civilian agency that was already a significant user after Nutanix’s Cloud Platform including our Unified Storage and database automation solutions as well as Nutanix Cloud clusters are NC2 on AWS for bursting additional resource capacity into the public-cloud.
This customer added additional cyber security workloads to the Nutanix Cloud Platform reflecting their confidence in the ability of our platform to handle their most business-critical applications. And resulting in a substantial expansion in order for us. We see this customer as a great example of how we are able to land and expand, with some of the largest organizations in the world.
On the product and partnership front, we achieved an important milestone in realizing our hybrid multicloud vision with the general availability of NC2 on Microsoft Azure. Now with support of AWS, Azure and service provider cloud environments, we continue to deliver on a hybrid multicloud vision. Our customers have the ability to rapidly and seamlessly shifting workloads between private clouds and the largest public-cloud providers with an consistent management governance and data services provided by the Nutanix Cloud Platform. All without the time and expense of re-factoring there workloads.
One of our early customers for NC2 on Azure is [Indecipherable] Group. A Fortune 500 financial services provider who was part of our customer preview program. [Indecipherable] choose NC2 on Azure, because they were looking to leverage our seamless hybrid multi-cloud platform for disaster recovery as well as to migrate and run their workloads in Azure without having to refactor their applications. They’re also looking to take advantage of the ability to expand that Nutanix platform, the different Azure regions on-demand.
Another exciting development on the product front is the recent enhancements we made to our platform to accelerate adoption of Kubernetes-based applications in the enterprise. In keeping with our philosophy of offering customers choice throughout the stack. We added Amazon Kubernetes Service to an already long list of supported Kubernetes container platforms including Red Hat OpenShift, Kubernetes Rancher, Google Anthos, Azure Arc, and our own native Nutanix Kubernetes Engine [Phonetic]. We also added built-in infrastructure core capabilities and advanced cloud-native data services for modern applications. Both of which will enhance the Nutanix Cloud platform’s ability to efficiently run cognitive applications at scale.
Go-to-market leverage, it’s one of my top priorities. And we saw progress across a number of partner categories in the first-quarter. In the public-cloud categories our customers are now able to get on-demand consumption of Nutanix software through Azure marketplace facilitating friction less license procurement and movement of workloads between private cloud and Azure. For our channel partners, we updated our Partner Program Ecosystem with enhanced incentives to encourage, enable these partners to sell Nutanix into net-new accounts and the drive opportunities through the entire sales cycle autonomously. In addition, we rolled-out training designed to enable partners to speed-up sales cycles through rapid capacity planning, quoting, and order fulfillment, thereby generating more leverage for our sales [Indecipherable].
Finally, our two largest new customer wins in the quarter were in partnership with a global leader in data center colocation and interconnection services. And part of our Service Provider program. We are encouraged by the early progress we’re seeing with service providers and see good growth potential and our service provider-related businesses. As we add additional partners and enhancements to our platform supporting service provider business models. One of the service provider wins was from an EMEA-based publishing and education company that was looking to modernize and consolidate the data center footprint while having disaster recovery capability in AWS. They chose our Nutanix Cloud Platform including Nutanix Cloud Management to run their business-critical applications, leveraging its simplicity and building automation for Infrastructure as a Service. They also added Nutanix Unified Storage, the service their unstructured data needs. We see this as a great example of a customer adopting our full-stack offering to consolidate and modernize their IT infrastructure.
And now, I’d like to talk about the industry acquisition, we continue to receive for our solutions. For the second year in a row, Nutanix was named a visionary in Gartner’s Magic Quadrant for distributed file systems and object storage. We believe our improved position within the visionary quadrant, this year reflects advances in customer attraction, go-to-market efforts, enhance product capabilities, and an expanded ecosystem, for a Nutanix Unified Storage Solution. With customers, needing a simple and secure way to manage and protect their data, this recognition highlights the advantages of Nutanix Unified Storage.
In closing, I’d like to provide some thoughts on our priorities and outlook. First, our overarching priority remains driving towards sustainable profitable growth through judicious investment in the business, execution on our growing base of renewals and diligent expense management. Our achievement of positive non-GAAP operating income in the first-quarter represents tangible progress towards this goal. The strength of our business model is underpinned by a growing base of renewals and the strong value proposition of our platform in an uncertain macro landscape. I remain confident in our ability to continue to capitalize on the vast opportunity in front of us while driving towards sustainable profitable growth.
And with that, I’ll hand it over to Rukmini Sivaraman. Rukmini?
Rukmini Sivaraman — CFO
Thank you, Rajiv. I will first walk-through our Q1 results, followed by our outlook for Q2 and then finally, provide an update on our fiscal year ’23 outlook. Q1 ’23 was a good quarter with results that came in better than our guidance and across all guided metrics. ACV, billings in Q1 was $232 million higher than our guidance of $210 million to $215 million and representing a Year-over-Year growth of 27%. The significant majority of that growth came from growth in renewals billings. Revenue in Q1 was $434 million, higher than our guidance of $410 million to $415 million and a Year-over-Year growth rate of 15%. IRR at the end of Q1 was $1.281 billion, a Year-over-Year growth of 34%.
New logo additions were about $530 in Q1. Contract durations decreased quarter-over quarter to three years as expected, partly due to a seasonally higher mix of U.S. federal business, but typically has shorter contract durations. As described previously, the percentage of orders with future start dates, continues to be a key assumption in our Q1 guidance. This percentage came in lower than it was in Q4 ’22 and slightly below our expectations. Q1 revenue also benefited approximately $12 million from the improvement in percentage of future start dates from Q4 to Q1, as more license revenue was recognized in-quarter then deferred.
Non-GAAP gross margin in Q1 was 83%, because of our higher-than-expected revenue performance. Non-GAAP operating margin in Q1 was positive 2%, our first-quarter positive non-GAAP operating profit and a proof point of our ongoing focus on profitable growth. Non-GAAP operating expenses in Q1 was $351 million better than our guidance of $360 million to $365 million and included about $2 million of benefit from favorable currency exchange rates in the quarter. Non-GAAP net income was $8 million or EPS of $0.03 per share, based on weighted-average shares outstanding of approximately $275 million shares. We are happy to report positive net income and EPS for the first time in the history of Nutanix.
Billings’ linearity was very good in Q1 and better than our expectations. DSOs were 18 days in Q1, a demonstration of good linearity and strong collections. We expect DSOs to trend back up to historical levels going forward. The strong billings linearity and collections contributed to free cash flow generation of $46 million in Q1, significantly better than our expectations. We also collected in Q1 about $10 million of invoices due in early Q2. We are finding that while our cash collections remained strong, there is a normal level of variation in timing of payments from quarter-to-quarter. Going forward and given our transition into positive free cash flow generation, we expect to provide color on free cash flow on an annual basis.
A brief note on severance payments related to our reduction in-force that we announced in August. One, we expect the severance payments to total about $17 million rather than our previously estimated range of $20 million to $25 million and two about $6 million of approximately $17 million in severance payments are being delayed to Q2 mainly in non-U.S. regions, when we had previously assumed that the full amount will be paid in Q1. We ended Q1 with cash, cash equivalents and short-term investments of $1.388 billion, up slightly from $1.324 billion in Q4 ’22.
Moving on to Q2 outlook. The guidance for Q2 ’23 is as follows. ACV billings of $245 million to $250 million, implying a Year-over-Year growth rate of 13% at the midpoint. Revenue of $460 million to $470 million, an Year-over-Year growth of 13% at the midpoint. Non-GAAP gross margin of 82% to 83%. Non-GAAP operating margin of approximately 5% to 10%. Weighted-average shares outstanding of approximately $279 million shares. I’ll now provide some more context around our Q2 guidance.
First, the topline guidance for Q2, assumes that supply-chain dynamics for our server partners would remain more or less the same compared to Q1 ’23.
Second, it assumes that contract durations would stay approximately flat in Q2 ’23 compared to Q1 ’23.
Third, the revenue guidance includes approximately $10 million of revenue benefit from the decline in percentage of orders with future start dates over the last few months. Said differently, we expect to recognize more license revenue in Q2, than as deferred similar to the dynamic we saw in Q1. Over time, as our partner supply-chain constraints resolve and our future start date percentages normalize, we would expect this dynamic to normalize as well.
I will now provide an update on our full-year 2023 guidance. While we had a good Q1 and our renewals business continues to provide a strong foundation for growth and efficiency. The macro-environment remains uncertain and we believe it is prudent to remain cautious in our full-year top-line guide, which remains unchanged. We also remain focused on disciplined expense management and are therefore raising our operating margin and free cash flow outlook for the year. Our guidance for full-year — fiscal year ’20 23 is as follows.
ACV billings guidance remains unchanged at $895 to $900 million Year-over-Year growth of 19% at the midpoint. Revenue guidance remains unchanged at $1.77 billion to $1.78 billion, Year-over-Year growth of 12% at the midpoint. Non-GAAP gross margin of 82% to 83%. Non-GAAP operating margin of 2% to 4%. I’ll now provide some color on our full-year guidance.
First, similar to our comments last quarter, the full-year guidance assumes that contract durations would decrease slightly compared to fiscal year ’22. The fiscal year ’23 revenue guidance also assumes that the percentage of orders with future start dates would remain more or less the same in Q2 compared to Q1, and would start to ease slightly in the second-half of the fiscal year.
Second, the demand for our solutions continues and we are seeing continued new and expansion opportunities. However, as Rajiv mentioned, we have started to see some anecdotal evidence of increased inspection on deals, which we believe is likely related to the more uncertain macro backdrop, and which could potentially lead to an increase in sales cycles. We have considered this dynamic and the uncertain macro-environment, in our guidance. We expect that the significant majority of our growth in ACV billings for fiscal year ’23 will come from growth and renewals ACV billings, with the uncertainty in the macro-environment factored into our expectations for new and expansion ACV billings. At the same time, our continued focus on expense management and operating discipline enables us to increase our operating margin and free cash flow outlook for the year.
Which is a good segue to the third point which is that we expect to deliver about $100 million to $225 million of free-cash flow for fiscal year ’23, an increase from our prior expectations of $75 million to $200 million.
Finally, a note on seasonality. As we look ahead to the second half, we expect to see a low-double-digit percentage decline quarter-over quarter in ACV billings in the third-quarter, followed by a low-double-digit percentage increase quarter-over quarter in ACV billings in the fourth-quarter.
In closing, we are pleased that our Q1 results reflect our continued execution towards our stated objective of sustainable profitable growth and we expect to continue that focus. We look forward to sharing more about our medium-term outlook during our Investor Day in April 2023 as Rich referenced.
With that operator, please open the line for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from the line of Jim Fish with Piper Sandler. Your line is open.
James Fish
Hey guys, great quarter, in the wake of this kind of macro-environment and that gets me to my question of why has demand or hyper converge [Phonetic] really remained strong and in the kind of difficult macro spending environment and really the crux of my question here is how much of the current strength in numbers here due to that backlog building and deferral from fiscal Q3 of last year versus what you’re booking during this quarter?
Rajiv Ramaswami
Yeah, Jim, thank you for the question. That’s easier [Phonetic]. Yeah, first of all. I think we’ve said we’ve got a good strong and growing base of renewals. And that’s performing well, and that’s certainly helped reduce the risk in the model. And as we did say we have taken into account a little bit of uncertainty in the macro-environment in our guidance. We have built [Phonetic] some conservatism in terms of IT spending and I wouldn’t necessarily say that HCI has completely immune from its — your potential slowdown in IT spending, but HCI per se produces better TCO compared to legacy architectures. And it’s the foundation for the hybrid cloud. So from that perspective, customers can actually save money by moving to HCI from traditional legacy architectures. So, so far, when you look at the macro again. We’ve seen greater inspection of deals by some customers which could potentially lead to an increase in sales cycles, but we have factored this into our guidance.
Rukmini Sivaraman
And I will take the backlog portion of that question. Hi, Jim. So as you point out, we had noted when we announced the fiscal ’22 results that we ended fiscal ’22 with a record level of backlog which combined with our growing base of renewals, as Rajiv said provided foundation for our growth in fiscal ’23 and helped the overall reduce the risk inherent in our forecast. During the first-quarter, consistent with our expectations and consistent with typical seasonality we did use some backlog. And the only other comment I’d add is that given the unusually high-level of backlog we entered the year with I think, some of which was related to our partners supply-chain issues, we would expect that over the course of the year, we would likely consume some backlog.
James Fish
Makes sense. And if I could sneak in one more Rajiv, bunch of your customer commentary kind of focused around cloud. I am trying to understand how much of the focus on customers, it’s about optimizing cloud spending and how much that is helping Nutanix this past and current quarter. That’s one of the biggest line items for IT spending. Thanks guys.
Rajiv Ramaswami
Yeah, and again, that’s a good question. Increasingly, more and more of our conversations with our customers, are around how can we efficiently help them operate in this multicloud environment. Many of our customers have looked at public cloud. They’ve moved to the public cloud in portions and they are also realizing that it can be expensive. And so what we tell them is that we can actually help them take their existing workloads and move it and run it very efficiently in the public cloud, and we can save money and optimize how we do it for them. So yes, that’s an increasing part of our conversation. I think the broader theme here is almost every customer that I talked to, we are talking about how to help them operate well in a multi-cloud world and how we can save the money, how we can make it simpler for them, both from a ongoing capex cost, but also in terms of the people side of the equation, in terms of having a consistent operating environment where you don’t have to have different teams to operate each of these cloud environments. So I’d say it’s very much becoming a centerpiece of many of our conversations.
James Fish
Thanks, great quarter guys.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.
Meta Marshall
Great, thanks. Maybe I just wanted to see if you could give more color on just kind of the macro impact that you’re seeing. Clearly, you talked about not impacting the renewal business, but just are there regions or customer types or just any other color as far as kind of that second set of eyes that are may be needed to get a deal across the line?
And then maybe just as a second question for me, just kind of given M&A within this space how are you maybe taking advantage of the acquisition of or pending acquisitions of competitors? Thanks. Yeah. I think two good questions there Meta. And on the first one, yeah, there are multiple portions to that. As you said the renewals business is largely a steady-state not impacted by the uncertain macro. Now in terms of the uncertain macro, we’ve taken some of that into our account into account when we give you a conservative forecast. To your point, we have seen anecdotal evidence of greater inspection of these by some customers and what that also means that potentially there could be an increase in sales cycles. We haven’t quite seen that that’s yet happening, but this is an indication of what might be coming and we have factored those in terms of our guidance per se. Now Rukmini, you may want to comment on FX impact as well here in terms of the macro.
Rukmini Sivaraman
Yeah. Why don’t I do that and then I can hand it back to you on the — on the more broader question on M&A. So obviously, the dollar has strengthened. I think as we all know, our sales contracts are all denominated in U.S. Dollars. And so that relative strengthening has effectively made our products more expensive to customers in some international markets. And so, anecdotally, this is not something within systemically but we’ve seen a sort of put pressure on some price negotiations in some transactions and we don’t believe that’s causing us to lose deals, but anecdotally, we’ve seen it show-up in some transactions.
Rajiv Ramaswami
Yeah, and Meta on the other question around how other M&A activity potentially impacting us, yeah, he was we’re all reading the news on Broadcom acquiring VMware and what we have seen as a result of that is a significantly higher-level of engagement from prospective customers. This customer looking to explore their options, looking at managing potential risks related to the transaction. Now, as you know, our sales cycles, especially for larger deals tend to be 9 to 12 months. So we are not assuming any significant benefit from that in our fiscal ’23 outlook. But I can certainly tell you that the volume of conversations with customers and prospective customers around this topic has increased, and we are a good alternative provider.
Meta Marshall
Great, thanks so much.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Pinjalim Bora with JP Morgan. Your line is open.
Unidentified Participant
[Technical Issues] thank you for taking my question. This is [Technical Issues] for Pinjalim. So, my first question is, what are you hearing from customers with respect to new IT transformation projects in the current macro-environment [Technical Issues] stating that they might take a backseat and people might move back towards the third-tier architecture temporarily?
Rajiv Ramaswami
Yeah, so look. I think first of all, accelerating digital transformation continues to be a key driver for customers and we are seeing that across all kinds of industries here. Particularly in verticals such as financial services, healthcare, state and local education. There is a clear mandate to modernize IT operations and applications. Improved cost and help the business direct non-productive legacy kind of spend. Now in the current macro, I would say this is intensified. There is even more of a focus on cost and better TCO. So from that perspective modernizing legacy three-tier infrastructure, especially when things are up for renewal rate up for the cycle. You’re running out of — your hardware is getting old. HCI is a very viable option for improving TCO, simplifying operations, making things much simpler. So we haven’t quite seen a slowdown in that mindset with customers.
I mean the other thing for us we see is that HCI has now also become a platform for where customers get [Phonetic] all their workloads, including all the highest performance, most mission-critical workloads. We saw an example of that here in the call, where we talked about this large federal agency. But as many other customers are doing that. And then finally, I would say, we are also seeing. More people looking at hybrid multicloud and how they can operate efficiently in this cloud environment for which again our solution is a good option. So you can help them run in the private cloud or public cloud based on criteria [Phonetic] on cost performance and governance so. So all of that, I think is continuing to play out there, even despite the macro situation.
Unidentified Participant
Got it. And then [Technical Issues] can you help us understand like what you are seen with the [Indecipherable] gross retention trends in your renewables portfolio?
Rajiv Ramaswami
Yeah, Rukmini.
Rukmini Sivaraman
Yeah, thank you for the question. So our GRR or gross retention rates remain in-line with sort of our stated objective of in the 90% plus range.
Unidentified Participant
Thank you.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of George Wang with Barclays. Your line is open.
George Wang
Hey guys, congrats again on the strong quarter. Two quick questions, firstly. Just it’s nice to see kind of raised [Technical Issues] income for this year, definitely you guys are seeing strong leverage. Just curious kind of going forward or are there additional operating expense, which can be taken out-of-the system? Just curious kind of what area you guys can be targeting in terms of the lever to pull for further cost cuts, whether that’s in the back-office, whether that’s in sales or support roles. Maybe you can give more color on that.
Rajiv Ramaswami
Maybe Rukmini can give a high-level view. I would just say that we are not as much focused on cost-cutting. I mean lot of the efficiency in the model is coming from the fact that we are seeing a growing base of renewals that can be prosecuted at a significantly lower-cost than our additionally new business. Now we have been focused on efficiencies already over the last few years in every area. On the sales side, we are focused on increasing sales productivity. On the marketing side, we have already redirected and optimized our demand-generation dollars to be mostly digital with some hybrid events. We have simplified our product portfolio. So we have been doing the right things in terms of efficiency and so forth. So that’s where I believe it and Rukmini if you want to add anything?
Rukmini Sivaraman
No. I think it was a good summary Rajiv.
George Wang
Okay, thanks. My follow-up is just kind of looking out in terms of as a service, any kind of color you can give in terms of who future as a service model, such as partnering with GreenLake maybe more traction there all kind of few other MSPs, just curious kind of what areas are you guys exploring to further adjust journey [Phonetic] of as a Service in the HCI adoption.
Rajiv Ramaswami
Absolutely, that’s actually a very good question, because we are seeing a trend in the market where more customers who would like to consume more offerings delivered to them as a Service. And there are many routes to getting there. One of our first route is through service providers. And as you saw, for example, this quarter the last quarter or two largest came through partnering with service providers. And these are service providers in some cases, who will take us and sell-through rate, and provide a service their customers. So that’s one approach. HPE GreenLake [Phonetic], it’s another approach that HPE GreenLake includes Nutanix as part of their offering and they can provide a combined hardware, software solution delivered as a service in a subscription model to their customers. And selectively some of our own offerings are also available directly as a Service, but those are small, relatively speaking, in our portfolio, especially some of our management offerings are delivered even today as a Service, but that’s a small portion allegedly but largely, we are focused on enabling as a service model through our partners whether they be service providers, whether they be strategic partners like HPE.
George Wang
Okay, great, thank you.
Rajiv Ramaswami
And the only other thing. I would just add there, sorry, I should say this. We are also on Azure marketplace right now, we’re an Azure customer can use Azure — their Azure spend dollars and by Nutanix through the marketplace.
Operator
Thank you. Please standby for our next question. Our next question comes from the line of Dan Bergstrom with RBC. Your line is open.
Daniel Bergstrom
[Technical Issues] So any sense on where we are from a rep headcount perspective? I think you were flat in the fourth quarter, expectations to grow modestly for the year, focus on productivity, that’s still the right way to think about rep headcount and growth and productivity?
Rajiv Ramaswami
Yes. Our rep account is roughly flat quarter-over quarter. We do expect to grow our rep headcount modestly from current levels, while at the same time continuing to focus on driving higher rep productivity.
Daniel Bergstrom
Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is open.
Ruplu Bhattacharya
Hi, thanks for taking the questions. It is Ruplu filling in for Wamsi today. I have one question for Rukmini and one for Rajiv. Maybe I’ll ask Rukmini the first question.
I think you guided low double-digit percent decline in ACV billings sequentially for 3Q and then, low double-digit increase for 4Q that seems to be a more pronounced seasonality than the last couple of years. So maybe can you give us some puts and takes and how does that take into account is that normal seasonality or is that worse than normal and how should we think about that?
Rukmini Sivaraman
Yes, hi Ruplu. Thanks for the. Thanks for the question. Yeah, and we called it out, because we want to do want to provide some color on how seasonality would — we expect seasonal additional up for the rest of the year. And so, as you just so just to reiterate what I mentioned in my prepared remarks, we expect to see a low-double-digit percentage decline quarter-over-quarter in ACV billings in the third-quarter, which by the way, seasonally we do see a decline in ACV, billings from Q2 to Q3, but low double-digit percentages is little higher than what we normally see, which is why we want to call it out and then followed by in Q4, we expect low double-digit percentage increase quarter-over-quarter in ACV billings.
And to answer your question Ruplu are available to the new pool that is due in Q3 is expected to be lower than it is in Q2, and then expected to then pick back up in Q4. So that combined with our typical quarterly seasonality leads us to expect that this trend will occur for the second-half of 2023.
Ruplu Bhattacharya
Okay, got it. And then can I just also ask a clarification, in the past you said that the some of the four-quarter ACV billings is typically 6% to 7% higher than the annual reported number, does that — does that rule still hold for fiscal ’23 and how should we think about that going-forward?
Rukmini Sivaraman
So generally, the concept still holds Ruplu, because effectively what we do is to remind folks on why we had that out there is that when we report the quarterly ACV numbers we have some contracts that come in for less than a year duration and we do annualize those to report ACV billings on a quarterly basis. Of course, on an annualized basis, we sort of normalize for that, and so that’s the — that is what Ruplu is according to and I would say that that is in the general ballpark Ruplu maybe 94% to 95%, something about 6% to 7% as you said, maybe it is 5% to 6%, but around that range is what I’d expect to see this year as well.
Ruplu Bhattacharya
Okay, thanks for the details there. And maybe, Rajiv, if I can ask a question, if you can talk about the demand trends by region, are the shutdowns in China impacting you either directly or indirectly? And if you can just touch on the business with your partnership with Red Hat, any progress or any anything happening there? Thank you so much.
Rajiv Ramaswami
Yeah, I — we didn’t see any significant difference in terms of performance across regions. As you know, our business in China is relatively small. So not a direct impact there. And then of course the indirect impact is actually up to our customers. We haven’t seen — we haven’t really seen anything significant for us as a result of that directly.
In terms of Red Hat, continuing to see good momentum with Red Hat this quarter as well. We continue to see a growing pipeline with some wins this first quarter. For example, we saw a Government Ministry [Phonetic] in Asia-Pac combining the two, right. They had OpenShift and our cloud platform, so, from a three-tier solution to our platform using our own hypervisor. So, this is an example of the kind of deal that we work on together with them. And we are seeing that continue to grow along nicely.
Ruplu Bhattacharya
Okay, thanks for all the details.
Operator
Thank you. [Operator Instructions] I’m showing no further questions in the queue. [Operator Closing Remarks]